DeFi Didn't Break with Dan Morehead & Joey Krug

Many things have broken in the last few months during crypto's bear market. However, DeFi didn't break. Dan Morehead and Joey Krug explain why. Dan founded Pantera in 2003, then pivoted into cryptocurrency in 2013 and went all in on crypto, and is the firm's CEO. Joey joined Pantera in 2017 as co-CIO and is a seasoned builder/investor in the crypto space. Both repeat Bankless guests and both know more than a thing or two about crypto and investing. ------ 📣Rhino. Fi | Massive Mystery Airdrop https://bit.ly/3o9trRE ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: 🌱 LENS | ACCESS CODE: WAGMI https://bankless.cc/Lens 🚀 ROCKET POOL | ETH STAKING https://bankless.cc/RocketPool ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave 🌉 JUNO | BRIDGE FIAT TO LAYER 2 https://bankless.cc/Juno ⚡️ ZKSYNC | THE LAYER 2 SCALING ENDGAME https://bankless.cc/zkSync ------ Timestamps: 0:00 Intro 6:15 The Past Few Months 10:28 Crypto's 2008 Moment 12:40 The Mainstream Media Story 16:45 CeFi vs. DeFi Confusion 21:45 Media Incentives 24:00 DeFi vs. Wall Street 30:45 DeFi is Too Referential Critique 33:38 DeFi Worked Great 37:05 Transparency Thoughts 43:15 2008 Prevented with DeFi? 49:35 Educating Retail 53:39 Was This Surprising? 55:00 Quick Macro Takes 58:20 Closing & Disclaimers ------ Resources: Dan Morehead https://twitter.com/dan_pantera Joey Krug https://twitter.com/joeykrug DeFi Worked Great https://panteracapital.com/blockchain-letter/defi-worked-great/ Pantera https://panteracapital.com/ ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:03Ryan Sean Adams?

  Hey Bankless Nation, welcome to another episode of State of the Nation. Get a deep dive into a topic today and that topic is a topic we've been talking about over the past couple of months. That is a whole bunch of C-Fi lenders, decentralized finance lenders, the Celsius's of the world. They broke, but it seems like mainstream is blaming DeFi? Like, why? DeFi worked great. That's the title of today's episode. David, who do we have on to talk about this?

• 0:31David Hoffman?

  We have on Joey Krug and Dan from Pantera, who wrote this fantastic investor memo on this exact subject. And this actually really hits home for me, Ryan, because my favorite podcast, other than Bankless, The Daily, ran this show called "The Collapse of a Crypto Company." And it was all about how the visions of crypto have been completely invalidated by all these collapsing crypto companies. And I'm like, no, no, no, no. That's not the vision of crypto. So we are here to set the record straight about what exactly broke in the last six months and what worked fantastically. And we're going to talk to Dan and Joey from Pantera to unpack all of this story. And hopefully this story breaks out into mainstream so that they can perhaps correct the record.

• 1:12Ryan Sean Adams?

  Yeah, I love, you know, Dan and Joey, they're close to institutions. They know they're around C-Fi lending and they're also close to DeFi. So I think they're going to be able to shine some light here. They also wrote a fantastic newsletter article recently called "DeFi Worked Great." We're going to talk about that as well. Before we get into it, want to tell our listeners about Rhino. So these guys used to be called Diversify and I knew them back when they were a decentralized exchange, fantastic platform built on Layer 2, built on Starkware. David, what are they up to now? Because they've really expanded what they're doing. What is Rhino doing these days?

• 1:48David Hoffman?

  Yeah, so we all know we're going into the world of multi-layer twos, multi-chain, and there's so many different things that you can do on all the different places. Do you exactly need to know what chain you're on to do your DeFi thing? No, not exactly. Whether you're on Optimism, Arbitrum, ZK Sync, whatever, it's just DeFi things at the end of the day. These blockchains are supposed to be backends and RhinoFi is one of the first apps that pushes the chain to the backend and it pushes the relevant information to the front. So it's a DeFi portal for your multi-chain world. You can do your basic stuff like swap and trade, but you can also invest in liquidity pools and stake and other things that you might do in the land of multi-chain DeFi.

• 2:27Ryan Sean Adams?

  Yeah, I think this is honestly the answer to Seifi, right? If we made, if DeFi was more accessible and if it was easier, then we wouldn't have run into the problems with trusted lending providers. We would have just gone straight to the source and straight to DeFi. So thanks to RhinoFi for fixing this and building some user experience around this. Go click the link in the show notes and you could sign up, hear a bit about their upcoming mystery drop as well. All right, David, got to ask you the question I always start these episodes with, which is what is the state of the nation today?

• 3:01David Hoffman?

  Ryan, well, it is sad and unfortunate that we have to learn these lessons in ways that centralized companies end up having to give retail a haircut. Still, at the end of the day, the thesis is that DeFi takes over the world. And for those that believe in the thesis, in that thesis, which are you and me, Ryan, the state of the nation is we're taking victory laps, man. Like, we got the data, we're taking victory laps.

• 3:23Ryan Sean Adams?

  We are taking victory laps?

• 3:24David Hoffman?

  I am, like, yeah.

• 3:25Ryan Sean Adams?

  So I feel like, so I feel like this is applicable because mainstream media, like, they're taking victory laps and saying like, it's their moment to say crypto is over. It's funny, you should say DeFi is taking a victory lap and saying, hey, DeFi worked fine, because mainstream media is saying, oh, look, we told you all along crypto is broken, it's never going to work, here's exhibit A, B, and C.

• 3:46David Hoffman?

  Well, okay, mainstream media is grave dancing. We are taking, our thesis has been proven and now we've got the data to show it. And also mainstream media, get your shit together. This much smaller podcast called Bankless is going to set the record straight.

• 3:59Ryan Sean Adams?

  All right, we're going to do that right when we come back with Dan and Joey. Before we do, we want to thank the sponsors that made this episode possible.

• 4:05David Hoffman?

  Lens Protocol is an open source tech stack for building decentralized social media applications. It is the new era for social media. We all have toxic relationships with our web two apps. We want to break up with them, but we can't. These applications own our digital lives and all the relationships that we've made. We need to break through to a new paradigm of social networking applications that we control, rather than them controlling us. Lens isn't a social media app, it's a protocol to let a thousand web three social apps bloom. Lens is a permissionless and transparent social graph that is owned by the user. In crypto, we say not your keys, not your crypto, and on Lens, we say not your keys, Your keys, not your profile. With Lens, your followers go with you to whatever social media application you want to use. And instead of being trapped by an algorithm chosen by that app, Lens lets you choose the way you want to experience your social media.

• 4:49David Hoffman?

  Lens is the last social media handle that you'll ever need to create. So in order to get started, there's a secret code word in the show notes. Enter that code word in the Google form link and you'll be well on your way to entering the world of Web3 social. Rocketpool is your decentralized Ethereum staking protocol. You can stake your ETH in Rocketpool and get our ETH in return, allowing you to stake your ETH and use it in DeFi at the same time. You can get 4% on your ETH by staking it with Rocketpool, but you can get even more by running a node. Rocketpool is the only staking provider that allows anyone to permissionlessly join their network of validating Ethereum nodes. Setting up your Rocketpool node is easier than running a node solo, and you only need 16 ETH to get started. You get an extra 15% staking commission on the pooled ETH that uses your node to stake. You also get RPL token rewards on top.

• 5:34David Hoffman?

  So if you're bullish ETH staking, you can boost your yield by adding your node to the decentralized Rocketpool network, which currently has over 1,000 independent node operators. It's yield farming, but with Ethereum nodes. You can get started at rocketpool.net. And you can also join the Rocketpool community in their Discord. You can find me hanging out there sometimes in the chat, so I'll see you there. Arbitrum is an Ethereum Layer 2 scaling solution that is going to completely change how we use DeFi and NFTs. Some of the coolest new NFT collections have chosen Arbitrum as their home, while DeFi protocols continue to see increased liquidity and usage. You can now bridge straight into Arbitrum for more than 10 different exchanges, including Binance, FTX, Huobi, and Crypto.com. Once on Arbitrum, you'll enjoy fast transactions with cheap fees, allowing you to explore new frontiers of the crypto universe. New to Arbitrum, for a limited time,

• 6:17David Hoffman?

  you can get Arbitrum NFTs designed by the famous artists Ratwell and Sugoi for joining the Arbitrum Odyssey. The Odyssey is an eight-week-long event where you complete on-chain activities and receive a free NFT as a reward. Find out more by visiting the Discord at discord.gg/Arbitrum. You can also bridge your assets to Arbitrum at bridge.arbitrum.io and access all of Arbitrum's apps at portal.arbitrum.1 in order to experience DeFi and NFTs the way it was always meant to be: fast, cheap, secure, and fiction-free.

• 6:47Ryan Sean Adams?

  All right, guys, we are back talking about C-Fi, the bust, the bankruptcies, and also contrasting that with DeFi. We are joined by two fantastic guests, Dan Morehead, whom we had on the podcast just three months ago, I believe. We were talking about macro at the time. Of course, he is the founder of Pantera, did the famous cryptocurrency pivot at a very good time back in 2013. Dan, great to have you back on Bankless. How you doing?

• 7:12Speaker 02

  Great. Thanks for having me back.

• 7:14Ryan Sean Adams?

  We also have Joey Krug, who's also at Pantera. And fun fact, fun Bankless fact, he came on, last came on the Bankless show two years ago to the day. All right, we were talking about DeFi, I think, at the time, and here we are talking about it two years later with him again. Joey, welcome back to Bankless. Thanks for having me. All right, guys, let's get into it. I want to start here with what's happened in crypto. I think since Dan, probably we last, you know, talked over the last three months or so. And it's kind of rippled out beyond the crypto bubble. Mainstream's caught on to this and given it lots of spotlight, lots of attention. And that is what David has called before, crypto's 2008 moment,

• 7:58Ryan Sean Adams?

  where we saw a lot of, I'm going to call them shorthand, crypto banks go completely bust and get wiped out. Can you guide us through what's been happening over the last three months or so in kind of the C-Fi world?

• 8:11Speaker 02

  Yeah, I'll do it. Take, I'll let Joey share his view. You know, so we've had a long bull market in kind of everything, rates, equities, crypto, all that stuff. And in bull markets, people, you know, take on more and more leverage. So there were a handful of lending entities in crypto. Most were started in 2017, so they kind of enjoyed the ride we've had since crypto is, you know, in the low single-digit thousands in price. And, you know, just some of them took on excessive leverage. And when a market goes down 75 or 80%, you have any leverage, you know, it's really dangerous.

• 8:51Speaker 02

  So, but, you know, I think the perspective everybody should have is anytime you have a super disruptive technology, people are going to try all kinds of business models. You know, it's like the internet in the 90s, you know, some of them work, some of them don't. Some get lucky, you know, some have bad luck, you know. And in the end, though, the underlying technology is fantastic and blockchain is going to, you know, be incredibly important.

• 9:15Speaker 03

  Yeah, I think the thing I would add to that is I remember when I first joined Pantera, Dan said something about, you know, like, if you think about like assets or pooled asset vehicles, you know, they tend to be limited by their least liquid asset. And if you look at what happened to all these lenders, they started doing things like letting people borrow against collateral that they considered to be close to one to one, but wasn't anywhere close to that from a liquidity standpoint. And so like, what I mean is if you look at GBTC, you know, there's two liquidity question marks there. One is it takes six months to be able to sell it after you buy it. There are firms that will let you borrow against that in cash at very high loan to value ratios, you know, even though the underlying asset couldn't be sold at all. And then even once it was liquid, if you look at the trading

• 9:58Speaker 03

  volume of GBTC versus Bitcoin, it's it's kind of no match, right? GBTC is a much more illiquid asset. It trades in the over the counter markets. And so what ended up happening is people just basically, you know, borrowed against this very illiquid asset. And, you know, when when people need to sell, it starts causing cascading liquidations because if you have a lot of money in a very liquid asset borrowed against something that's very illiquid, you know, the market impact upon selling it's going to be, you know, disproportionately higher.

• 10:30David Hoffman?

  Would you guys take the comparison that this is crypto like 2008 moment? Obviously, there are some differences. We're not trading asset backed securities that has nothing to do with the housing market. But other than that, like the parallels kind of seem to be pretty strong. For example, we have two entities, centralized entities with too much exposure that are black boxes that don't have any transparency into what's going on, not realizing that there is like a center point of contagion being three arrows capital, but also a few others. And now, as a result of all this, there's going to be a bunch of just like court dates and legal documents and a bunch of fallout. Is it fair to call this crypto's 2008 moment?

• 11:09Speaker 02

  Yeah, I think that's a great analog, right? And in our letter, we pointed out a newspaper article that said this is totally different than Lehman Brothers. Uh, no, it's pretty much the same, you know, some very black box centralized entities, you know, had a business model to work for a while, but when the leverage swung against them, everyone was trying to rip their collateral back or withdraw. And so like Joey said, you get these, you know, uh, run on a bank where they have, you know, borrowed money overnight and they've lent it out for six months or in some cases, you know, multi-year periods of time. And, you know, that's, that's a story that's as old as banking.

• 11:45Ryan Sean Adams?

  Except we didn't get bailed out, it feels like.

• 11:52Speaker 02

  So that's important, right? Malkox, you know, Bitfinex, there's been a lot of issues in our industry and not one taxpayer dollar's been, you know, spent bailing people out. Hugely important, right? When, when everybody gets all, you know, excited about problems or anything, there, there always will be problems, but the industry just deals with it itself rather than always being backstopped by the taxpayer.

• 12:14David Hoffman?

  Yeah. And there's a bunch of nuances that we want to get into such as, you know, why did DeFi get paid back first before C-Fi companies? Uh, what are the nuances of that where such as like the over collateralization of DeFi protected it? Um, is that really a fair comparison when like, you know, perhaps in a future version of DeFi, we have under collateralized loans and then we do have some of these risks. There are a bunch of questions that I want to get into, but we'll save that for later. I really want to get into the story that mainstream media is telling. Uh, and, and Dan, you put this in the, uh, in the Pantera letter about uh, the Wall Street Journal's article titled DeFi's Existential Problem. It Only Lends Money To Itself. And it talked about all of these,

• 12:54David Hoffman?

  you know, these crypto companies, things that if you're inside the industry, you would not call these DeFi, not in the slightest. We call these things C-Fi. Uh, and I alluded to this in the intro, we had this, uh, daily podcast talked about the vision, the, the utopia vision of the crypto industry was just realized to be a bunch of like smoke and mirrors and it's actually just the same old financial system like put on new rails. Uh, what, what was your guys' take when you guys are saw, saw the mainstream media report on it like this? And what was, what was your guys' reaction to it? Joey, you want to start?

• 13:25Speaker 03

  Sure. Yeah, I mean, I think my view on it is, you know, if you if you look at kind of the space, the the space of these lenders, these centralized lenders, it's it's not a model that makes a ton of sense from a business model standpoint, because either it's a very, very low margin business. It's basically the the business that banks are in. The big difference being that that, you know, banks can basically, you know, basically create money by virtue of lending assets out. They have very low collateral requirements. The assets that they're, you know, lending against are things like houses, where, you know, yeah, the housing market can can crash, and there've been problems with that in the past. But, you know, it's it's a bit less volatile than, you know, something like Bitcoin or ETH. And so if you look at these businesses, their incentive is basically to take on disproportionate risk, right?

• 14:09Speaker 03

  They're basically running prop hedge funds. And it's kind of a, you know, I guess the word I say it's kind of a scam model, right? Because like, imagine if like, you know, when you invested in Pantera, imagine if instead of, you know, us taking 20% of the upside or whatever, imagine if, you know, we gave you 10%, and then we took everything else. And then you held all the risk. It's it's a model that doesn't make any sense. And then I think if you look at the incentive of a centralized business, their incentive is not to like do what's, you know, risk mitigating. It's to do what they can do to create the largest largest kind of net interest margin possible to spread between what they're borrowing and lending at. Versus in DeFi, you know, you don't have that problem, or at least today, you don't have that problem, because these protocols can't rely upon things like, you know, soft assurances.

• 14:54Speaker 03

  They can't rely upon people saying, well, I do have the money, or why are you 24 hours? You know, Maker has no idea whether you're actually going to pay it in 24 hours or not. That's why it liquidates you pretty aggressively. And so I think that's kind of the big the big difference between the two that I see.

• 15:08David Hoffman?

  Dan, what are your thoughts?

• 15:09Speaker 02

  Yeah, no, I think that's a great point. You know, one of the things that that I I would say now that sounds easy to say, but I was saying a few years ago is if an entity is paying way higher interest rates than, you know, banks were paying, it's either there's just a new market with an arbitrage, and there really is a supply and demand imbalance. But there are a couple of other potential reasons. One is there's credit risk or counterparty risk. Another one, maybe there's, you know, technology risk, there's a flaw in the the software. So I think in hindsight, that that is what was going on here, that, you know, some of these entities are playing, paying, you know, really outrageous sounding yields, because they're trying to accumulate assets.

• 15:52Speaker 02

  Potentially to sell more stock to get a higher valuation to accumulate more assets in potentially unsustainable business models. And again, you know, we're going to have to learn from these things and there will be great centralized blockchain lending companies, right? It's just they're going to have to have lower leverage, pay lower rates, probably grow, you know, at a more, you know, reasonable pace than than we were seeing in the past.

• 16:15Ryan Sean Adams?

  That's funny to your point, like there will be great centralized crypto lending institutions. In fact, even when we saw the meltdown here in the contagion, we saw some that were just like absolutely terribly managed from a risk perspective, like almost like ludicrous, like you couldn't, you can't even believe this is, this is real and this is happening. And others that actually weathered the storm fairly well. And there was like this, this wide spectrum in the middle. I want to come back and talk about more of that in a bit, but let's get back to this article, right? So to David's point, the daily podcast, they were very much lumping crypto and DeFi with the Celsius's of the world and the C5 companies that that failed.

• 16:59Ryan Sean Adams?

  And even, you know, kind of looking at this article in the Wall Street Journal that we were just showing up earlier. The title is DeFi's existential problem and only lends money to itself. And the image that you see is an image of Alex Mashinsky, who is the, the CEO, not of a DeFi protocol, of course, or a company that created one, but of a crypto bank called Celsius, a C5 company, it's nothing to do with DeFi. And yet he is the cover story here and I can't, you got to acknowledge the irony of him wearing a shirt that says, banks are not your friends. Well, actually like being a bank himself. And so I want to get to some of the criticism here, but let me read directly from the article because you quote it in your newsletter as well.

• 17:43Ryan Sean Adams?

  Cryptocurrencies keep nosediving, the chaos has spread to DeFi. Celsius, a crypto lender with assets of around 20 billion, was recently forced to freeze deposit withdrawals. Last week, crypto exchange FTX said it was bailing out one of the Celsius troubled rivals, BlockFi with a $250 million loan, not long after rescuing crypto broker Voyager Digital. Voyager, BlockFi, Celsius, FTX, all of these are C-Fi companies. Want to get to the first thing you address in your letter, which is this weird thing that mainstream financial reporting seems to do, which equate DeFi and C-Fi together, as if they're the same thing, and calling them both kind of a house of cards. Why does this happen? Why do they keep confusing C-Fi and DeFi? And is there a cure for this?

• 18:28Ryan Sean Adams?

  Dan, to you.

• 18:30Speaker 02

  Well, you guys know as well as I do, there are super passionate people on both sides of blockchain, people like us that really believe it's going to change the world, super bullish, and then there's a lot of skeptics. And, you know, being skeptical on something that goes up, you know, 2.5x a year for 11 years is tough business. So when it actually goes down, you gotta make your time. If you're a skeptic, you have to really make this work. And I was on a panel like the day after a lot of this blew up with Nuriel Rabini, right? And that guy's predicted 100 of the last one crashes, right? And so he's gotta make it happen, you know, when Bitcoin's down a little bit. So I just think that's it. It's like, if you're a skeptic, you just have to like pile in and go with it. And, you know, frankly, they're selling newspapers, right?

• 19:15Speaker 02

  Like, they're not trying to get the story right. They're just trying to sell. And, you know, destruction, failure always sells, right? Like, telling everybody that 10% of all US to Mexico remittance goes over Bitcoin, that doesn't sell newspapers. It's good news, right? Like, it's helping 2 million migrants every day, right? Like, that's awesome, but that doesn't sell newspapers. Talking about, you know, existential problems and all that, you know, that's better for news, so I think we're just gonna see that. But our job here is to try and help educate people on reality.

• 19:48David Hoffman?

  I also definitely want to put a lot of blame on Alex Krzyzewski himself. He was this person that was masquerading as like this Celsius app as DeFi, like break up with your bank, put it, put your crypto into this Celsius app, not like definitely realizing the discrepancy between what was true DeFi and what was Celsius. And so like there are these grifters that come into this space, understand the true ethos of crypto, understand the true power here, and then build this old thing, but with the new things narratives. So I do think there's like a lot of blame as to why mainstream media can't really seem to get it right, as we all know crypto is hard to learn. We've all been through that.

• 20:31David Hoffman?

  But then you also have these grifters come in and like obfuscate the true effort, the true ethos of crypto by making up this like centralized, centralized app with a DeFi branding. Would you guys agree with this take? Joey, any thoughts?

• 20:43Speaker 03

  Yeah, yeah, I definitely agree with that. I think, and I think if you look at kind of the, the universe of reporters, you have some who do, you know, really thorough fact checking and you have some who kind of do it much lighter, right? And if you look at something like Celsius, you know, they, they told everyone, oh, we're DeFi, you know, they, they raised hundreds of millions of dollars from, you know, what you would think were really sophisticated investors. And so if you're a journalist and you're kind of doing the more, you know, light version of fact checking, you might look at that, skim over it and say, oh, that's a great story. I can write, you know, how DeFi failed and not actually kind of look deep under the hood. There's also an element of what Dan said where, you know, people are trying to sell newspapers. So there's a bit of a, you know, incentive misalignment between reporting what's 100% accurate versus what sells. But I actually think a good amount of it, I would say over half of the inaccuracies

• 21:28Speaker 03

  that you see in the media are just the reporters haven't taken the time to really, you know, dive deep on it, is my view.

• 21:36Ryan Sean Adams?

  Do you think partially Joey, it's because they're not incented to take the time? So I, you know, I don't know what the editorial stance of the Wall Street Journal is, but I have to imagine it has to do with Wall Street, right? And where their incentives are. And, you know, I'm not, I don't know if Wall Street is kind of in a war with DeFi or that existing banking structure is in a war with DeFi. I could imagine that being the case. But certainly, they're not incented to promote it. And they're very fine with with talking about C5 bankruptcy and DeFi in the same breath. Because like, what do they care if this crypto experiment works out? That would be one take. Do you think that some of the mainstream financial reporting is just has no incentive to talk about the good qualities of cryptos is part of the problem?

• 22:22Speaker 03

  I definitely think there's some sell element of that for for sure. Like, you know, if you look at like a bank as an example, you know, they have this huge business that today is is going to be disrupted, you know, over the next 10 to 20 years. And, you know, it's it's in your incentive to muddle the waters between C5 and DeFi. Right? You know, the the more you can make it muddy and make it so legislators and people in Congress can't understand it, the higher odds you have getting regulation passed. It doesn't actually make sense. I hate the thing is interesting, though, is, you know, we recently a lot more congressmen and congresswomen have been talking about the space and we've talked to a lot of them. And, you know, surprisingly, actually, to my surprise, like, people are actually taking the time to do the research. Like, they understand that there's a difference.

• 23:07Speaker 03

  And I think people realize that that like this issue of, you know, crypto and how it's regulated long term is actually something that like, A, matters and B, that voters care about. And if you look at like the average voter, the average voter isn't like, you know, super pro bank, right? Like, you know, the average voter isn't going to be like, oh, I'm going to go to the ballot box and vote, you know, because there's this, you know, congressman who supports, you know, some legislation that Bank of America wants. Versus, you know, if if there was some congressperson trying to, you know, quote unquote, kill crypto, they probably would go out and vote against them. And so I think people in Congress are starting to realize that. And so I think like, even the kind of like narrative muddying the waters isn't actually really succeeding, which I think is, you know, somewhat heartening, at least in my view.

• 23:51Ryan Sean Adams?

  Okay, so we know that DeFi and C-Fi are not the same thing, of course, even if some of the mainstream media is having difficulty kind of separating the two. But let me come up with another criticism that was in the Wall Street Journal article that we're just citing. And I'll read a quote here. "DeFi has ended up committing all the same sins as Wall Street, essentially becoming a vehicle for a new generation to engage in the rampant speculation typical of pre-2008 investment bankers." So, the charge here, DeFi is the same as Wall Street. You crypto people, you're saying that this is a new thing, that it's more democratic finance, that it's kind of here for the people. Well, that's not true. It turns out that you guys were Wall Street all along, just with a different veneer.

• 24:35Ryan Sean Adams?

  What would you say to this criticism, Dan?

• 24:38Speaker 02

  Well, yeah, you know, any new technology has people that want to speculate on it, right? But there are probably, you know, 100 million people that actually use crypto in real world situations every day, you know, transmending money across borders or whatever. And then there are some people that are speculating on it. And that's just, you know, it's just the nature of a new technology. People are going to want to, and people who believe in it are going to want to invest in the future of it. So you're going to see that. And we've seen that already for 12 years, right? There's been bubbles, there's been busts. But, you know, blockchain prices normally end up higher than they began each cycle. You know, so I don't think the fact that there are speculators is anything new or, you know, in any way negative.

• 25:21Speaker 02

  It, you know, happened in the dot com boom, it happened in, you know, all kinds of booms that we've had over centuries, basically. So the fact that people want to speculate is not in and of itself a negative.

• 25:32Ryan Sean Adams?

  What about this charge, Joey, that DeFi and Wall Street are the same thing? It's kind of the same mechanism, it's going to collapse, or it's going to result in a similar sort of system? What do you think about this?

• 25:44Speaker 03

  Yeah, I mean, I think I think they're, you know, quite different in in some really key ways, right? So if you look at, you know, historically on Wall Street, there's often not a ton of transparency into what's actually going on. And so if you look at, you know, two thousand eight and some of the collapses that happened then, you know, no one, even even people at these companies, no one knew like what their derivatives exposure was. Um, when you had the bailouts, you know, the government was both guessing on how much money they needed to use to actually do the bailouts. And also didn't know the drivers of exposure until long, long after everything had occurred. And so you have all these weird situations in personal finance due to kind of, you know, things not being transparent. Where you you don't actually know like what's going on, you don't actually know what like your actual risk is.

• 26:29Speaker 03

  Uh, the the C five companies, you know, built on top of E five like Celsius, like they had the same problem, right? Like if Celsius had a thing on their website that showed, you know, in broad strokes, you know, what was the average liquidity horizon of of a of a dollar deposited in Celsius? I I don't think we'd be talking about Celsius today because they wouldn't have, they wouldn't have had customers. Um, you know, if if they if the customers saw that, well, it was all your money, it's going to take you, you know, two years. And by the way, your your money is in, you know, assets that have a hundred percent plus annualized. Well, that person doesn't know what that means, but the press would cover it and tell people what it means, which is like your money is really risky. It's not like you're depositing USDC and it's and it's some low risk thing. And so I think that's one important difference to transparency. And then two is the risk controls.

• 27:11Speaker 03

  And there's this great like saying in software, which is like worse is better. And I think if you think about risk, risk control systems, you know, on Wall Street, people come up with these really complicated risk control mechanisms. Where people kind of convince themselves that they know more than everyone else and that their risk mechanism is right. You know, you saw this with the, you know, credit default soft issue in two thousand eight. And you see it, if you look back over the last three hundred years of financial history, you see it a million times, whether it's, you know, long term capital management or or even three arrows or anyone else. But if you look at D five, it's very simple. You know, it says if if your loan is within a certain percent of the collateral threshold. You start to get liquidated. If you don't top up the collateral, you get liquidated. And it's very basic. And everyone in traditional finance says, oh, that's super inefficient. And it's like, yeah, it's less efficient.

• 27:56Speaker 03

  Um, but it also means that if I'm depositing money in it, I don't need to trust, um, you know, compound or Ave or Maker to like call some, you know, supposedly rich person at 3am and have them top of their collateral. And, you know, often in these collapses, what you find out is people who you as a centralized business thought were supposedly rich actually aren't. Or they borrowed the same money like 10 times from 10 different venues and no one's talking to each other. So no one actually knows that. And DeFi, it's much simpler. And so these problems don't exist. Sure, it's less efficient, but it's also, you know, much, much less risky, I would say.

• 28:28Speaker 02

  I wanted to follow on to Joey's point about transparency. That's the whole thing about blockchain, right? It is all out there for somebody to see. And so decentralized finance, uh, um, projects all let you see what's happening. And like Joey said, if you really knew what was happening behind the curtain, some of these centralized lenders, you probably never would have lent them any money, right? And the Lehman story is so interesting because when it went under, nobody knew what their risks were to the firm. And nobody knew what collateral they had. Everyone just grabbed anything they could. And, you know, aggregated contracts didn't give back collateral. It was all just a huge mess. And at the beginning, people like, it's 120 billion dollar loss. It's all terrible. It was coming to an end. Like six years later, you know, bankruptcy proceedings and all this stuff forever.

• 29:14Speaker 02

  They lost 3.9 billion, you know, it was a tiny amount relative to the crazy damage it did the entire world, right? It would have been so much better for the US Treasury to just write a check. Here's 3.9 billion. We're done. Let's move on, right? It was crazy because nobody knew. There was, there was, you know, total black box. And so that's the beauty of DeFi is in the future, you know, protocols will, will have all their information out there and you can make a choice. You know, if you want to do business on Maker Dow or whatever, you can look at all the stats and decide if it's a, a good idea or not.

• 29:44Ryan Sean Adams?

  Yeah, it was fascinating.

• 29:44Speaker 02

  You know, great example, uh, Mount Gox centralized. We're still dealing with bankruptcy, right? That was like seven years ago, right? Like it's still going on and on and on. Whereas like in DeFi, we're already done. We already did the, the May crisis and it's over and we're, we're on to the next thing.

• 30:02Ryan Sean Adams?

  David and I have also.

• 30:03Speaker 02

  And no taxpayer paid a dime.

• 30:05Ryan Sean Adams?

  We've also commented here that, um, like every, every generation needs to learn the lesson of not, not your keys, not your crypto. Right? And so like every, every 10 years we do something like this. And this was kind of another Mount, Mount Gox for people depositing their crypto into centralized, into centralized providers. And a lot of these people, to your point about the black box, Dan, they had no idea they were actually lending money to Three Arrows Capital. That Suzy was using some of these proceeds to like buy yachts and stuff, right? Like this is the craziness, but with DeFi, everyone who lent to a DeFi protocol got paid back. It was orderly and efficient liquidations. Even Celsius had to pay back their maker loans and their AVE loans, which is incredible.

• 30:47Ryan Sean Adams?

  Let me get to another criticism that was in the, in the, uh, Wall Street Journal article. Uh, and that's the criticism that DeFi is too self referential, right? It's like, there's no real world assets. So even when you're collateralizing things, it's other, you know, DeFi tokens. Um, the comment is this crypto lenders exclusive focus on other crypto projects suggest their problems run much deeper than a Lehman style liquidity crisis. So this is the comment that even all the crypto stuff, it's all kind of based on other crypto assets and a house, it's a house of cards. There aren't any real assets that are backing some of these loans. What do you think about this comment, Joey?

• 31:26Speaker 03

  Yeah, I mean, I, I have a couple of thoughts on it. You know, one is if you, if you look through the history of, of, you know, financial tech innovations, people have used that criticism every single time. Whether it's from the invention of the joint stock company a few hundred years ago, to the invention of options, the invention of swaps. Um, every derivative that's ever existed, people have used that criticism. And what's interesting about it is it's both true and wrong, right? Like in the beginning, new technologies are used a lot for speculation. They are very self referential. You know, when the internet first came out, it was a bunch of academics sending, sending each other their papers for peer review. Pretty self referential.

• 32:04Speaker 03

  You know, but as time goes on, people figure out new use cases for, for these technologies. They figure out new ways to use them in the, in the real world. And, you know, you fast forward five, 10 years and, you know, no one makes that criticism anymore. Or at least, you know, people who do make that criticism, like nobody cares because it's so obvious that they're wrong. Right? Like imagine saying the internet's just self referential point was today, but tons of people said that back in the nineties. You can pull up videos of tons of talk shows where the hosts are like, you know, making fun of Bill Gates saying like, what's this crazy thing that you call the internet? Kind of seems like a joke.

• 32:35Speaker 03

  And, and the same thing is true with like the history of the automobile, you know, well, my horse is faster. So I don't, I don't, you know, need that car. People are very short sighted when it comes to tech innovation. And so I think that is, that is somewhat true today. It's starting to change, you know, doing stuff in the real world is harder than the virtual world. But I think we're starting to see more and more of this. I think it'll probably start to kind of take off more with derivatives that are pegged to real world assets. We were just talking about this in our investment committee meeting yesterday, like Synthetix has a bunch of new traction recently on stuff in that, in that vein. And then, you know, there already are things that take place in the real world on Maker Dout. It's, you know, it's pretty primitive and early, but I think if we have this conversation again in, in five years, you know, it, it won't look primitive and early anymore.

• 33:19Ryan Sean Adams?

  You know, I was asking the question earlier of like, why do they keep confusing C5 and DeFi? And is there a cure? I actually think the cure is, is episodes and events like this where you saw the chinks in the armor of, of C5. And you saw it kind of melt away and, you know, you go into bankruptcy and all sorts of issues. Whereas DeFi stood strong. And I, I want to go back to the, kind of the title of the, the article you published to Pantera investors, which kind of captures it for me, which is DeFi worked great. It did work great. And maybe we could just spend a second contrasting what worked so well about DeFi and Joey. We were talking about like risk controls and transparency.

• 34:01Ryan Sean Adams?

  But how well did DeFi hold up through this storm? And this is a pretty significant drawdown, of course, and a pretty good like testing of the system to see if it works. I know where it's like 80% drawdown on ETH or more, right? 90% on many alternative layer ones, you know, close to 80% on Bitcoin, this sort of thing. How, why did DeFi work great? Like, what about it worked so well, Joey?

• 34:27Speaker 03

  Yeah, I'd say, actually, on the, on the Maker thing, I used to always do this tweet. But I quit doing it because it just became redundant. But, you know, back when people used to say, oh, Maker's never going to work, doesn't work. I used to periodically tweet out, you know, Dye's still a dollar. And, you know, like I did, I think I did it last time I did it was like in the March of 2020 crash where, you know, everything went down 50% in a day. And, you know, it bounced back pretty smoothly.

• 34:53Speaker 03

  And I think like, if you look at, you know, what's, what's different about, about DeFi? I guess the main thing I would say is like, and like how it work is it's just much faster liquidating, liquidating people.

• 35:07Speaker 03

  And so if you look at kind of every protocol you can think of, Ovay, Compound, Maker, you know, other kind of more obscure ones. You know, these centralized lenders had it, as you pointed out earlier, had to pay back their loans or they got liquidated. You know, users who had money deposited on these platforms. Juno is bringing crypto-friendly. And sad about the price of ETH falling or whatever, as many people were.

• 35:31Speaker 03

  You know, they, they still didn't lose their money. And I think the reason is just because of how simple the liquidation mechanisms are.

• 35:39Speaker 03

  You know, versus if you look at the centralized companies, you know, their mechanisms don't work that way. Like I have friends who have to use those companies. And I know that like when they're close to liquidation, you know, they'll often give them like 24 hours, 48 hours to pop up the liquidity. And that's like even if they, you know, fall in below bar value, right? Because they just trust them as a counterparty. And there's a lot of risk in doing that. And in DeFi, you don't really have that issue.

• 36:06David Hoffman?

  Dan, what would you add to this?

• 36:09Speaker 02

  Oh, I know, I think it's spot on, you know, in DeFi, it's just code and collateral, right? Like, and you can't con code, you can't like, lie to it, you can't, you know, say you've got more assets than you do, you have to post the assets and the code owns the assets and controls the assets. So it really is superior, you know, the, and like Joey said, it's instantaneous. So there's no like, hey, you know, we're gonna do a margin call, we're gonna wait, you know, 24, 48 hours. Uh, so again, it can be proactive and liquidate. And it does just do whatever it says it's gonna do, you know? Um, whereas centralized lenders don't, you know, they, they just, they ghost you, right? Like, there's a lot of stories of these centralized lenders taking way more risks than people knew about.

• 36:53Speaker 02

  And then, you know, just not, not get, being in touch for days or weeks or now months. So, uh, you know, DeFi really is, is superior because it's, you know, gonna actually do whatever the code says it's gonna do.

• 37:06David Hoffman?

  There's an angle that I want to dive into, which is the transparency side of things. And that's definitely the stark, well, one of the many stark contrasts that we're seeing in this whole story where, uh, as it turns out, uh, Suzu, Three Hours Capital, we're at like the epicenter of like, 37 different lenders who all lent them money. And perhaps if just a few of them got on the phone with each other and be like, wait, Suzu just asked to borrow a billion dollars, did he ask you to borrow a billion dollars? Like, if we had that game of telephone with all the SeFi lenders, maybe we'd have actually been able to prevent this. But by the nature of what a centralized lender is, that's just not gonna happen. Like, they're not gonna disclose their business practices. There's probably some, uh, like protections against their own clients that they also want to protect.

• 37:50David Hoffman?

  Uh, but DeFi apps have no such interests. Uh, and not only that, but they put their entire order book or position on chain, which a lot of traders or other market participants have said, this is actually a detriment to DeFi, because that transparency, you know, they, they, they disclose their hand, they're showing their cards. Like, we are, we are buying, you know, Ether at $1,300. And like, that is a position that you can see on the market, you can see where all the liquidity is. For example, you can see who gets liquidated at, at $1,400 ETH. Uh, and so individuals Look at DeFi and feel a little bit disadvantaged, but the system as a whole is inherently transparent.

• 38:31David Hoffman?

  Do you guys have any thoughts on just like, is there a world where SeFi can become more transparent? Is there a world where DeFi can kind of suit the needs of these individual? Players that would like a little bit more of obfuscation? And overall, just like, what role did transparency have in the DeFi ecosystem? That prevented it from looking like the SeFi ecosystem is right now. Dan, I'll start with you.

• 38:55Speaker 02

  Well, yeah, no, it's an important point and the next generation of centralized lenders are going to be forced to provide more transparency, right? We did a five-year experiment in the total black box and didn't work great, so.

• 39:09David Hoffman?

  Do you mean Dan forced by regulation?

• 39:11Speaker 02

  Yeah, I was gonna say whether it's by commercial motivations or regulators and probably both. But, you know, people aren't going to want to lend billions of dollars, you know, to entities they don't know, you know, what they're doing, so. And we even saw that, you know, with Credit Suisse and other big lenders to, you know, some, some big family offices and stuff. They had no idea what, how much leverage their clients were taking. And so everybody is learning that lesson, both in crypto and in their, the normal securities markets. So they'll be forced to disclose more about how much leverage they have. What the imbalance is between their, the timeframe of their liabilities and their assets. And then, yeah, you know, regulators probably are going to get more active.

• 39:56Speaker 02

  And require more transparency, you know, frankly, more transparency would have been great, you know, for our industry, like, you know, some of these. Firms took on too much leverage and it's unfortunately has a negative blowback to the whole industry.

• 40:09David Hoffman?

  Are you in favor of this kind of regulation when it's? Needed for black boxes and centralized providers?

• 40:16Speaker 02

  Yeah, you know, I'll say a very controversial thing. I'm very much in favor of sensible regulation. Unfortunately, a lot of the things I've heard are not sensible, so. And I used to say this 10 years ago about Bitcoin, it suffered from a lack of regulation, like. When FinCEN and all these other entities like IRS had regulations on Bitcoin, it helped, right? It helped people decide, oh, I really want to invest because I get capital gains, tax treatment, all that kind of stuff, so. Some regulation of centralized lenders would be better for our industry, but there definitely are some crazy. You know, outcomes that could happen, you know, some, some very negative regulatory regimes that could happen.

• 40:55David Hoffman?

  There's a conversation that I want to have, and it starts with 2008, where Bitcoin was created in the wake of 2008. And it's been marketed as a result or in a response to the bailing out of the banks. If, under a Bitcoin standard, we would not have bailed out the banks and we would have preserved our monetary policy. And after the DeFi or C-Fi broke in 2022, I think we want to expand that trajectory a little bit more. Like, would DeFi have actually prevented 2008 if it had existed under a DeFi paradigm? I think that's a really interesting conversation, but I'm going to save that for the second half of the show. So we're going to have to go to some of these fantastic sponsors that make the show possible. Juno is bringing crypto-friendly banking straight into your checking account.

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• 43:54David Hoffman?

  And we're back with Joey and Dan from Pantera. Right before the break, I was teasing this trajectory that I want to unpack a little bit. The narrative that a lot of Bitcoiners talk about Bitcoin is that if we had the 2008 financial crisis using the Bitcoin standard, we wouldn't have been able to bail out the banks, we wouldn't have been able to print a bunch of money because of the Bitcoin standard. The sovereignty of the money would have been preserved. The value of the money would have been preserved. But also, at the same time, I remember a quote from Ben Bernanke saying, "If we hadn't stepped in in 2008, things would have been way worse. Things would have entered perhaps a capital D depression, not just a pretty bad recession." So I'm wondering to you guys,

• 44:36David Hoffman?

  if we could just play out a scenario in our heads and just talk about this. What if 2008 happened under a DeFi standard? Would DeFi have been able to prevent something like a 2008 financial crisis, where we have perhaps good liquidity, like Joey said, or good transparency, as we've talked about, and optimize transparency as to where all the assets are? Joey, what do you think about this idea that the 2008 financial crisis would have been prevented using DeFi rails?

• 45:08Speaker 03

  Yeah, I think it certainly would have been mitigated. I think if you look at.

• 45:15Speaker 03

  If you look at the traditional financial system, right, like the the problem is it's kind of become addicted. Right. Like it's like if you're addicted to drugs like and then you can't just migrate it all to DeFi overnight. Because, you know, then people would would, you know, die from withdrawal. The market would die from withdrawal, basically. And so you look at the market like it's kind of addicted to, you know, loose monetary policy and and low rates.

• 45:37Speaker 03

  What you can see is evidence of this is just like, you know, rates are hiking a little bit. Relative to historical rates and, you know, the Nasdaq's down somewhere close to 30%, something like that. And so, but I do think one thing that's interesting about DeFi is it, you know, the much tighter liquidation, the much tighter kind of risk policies, that sort of thing. It's certainly much easier to migrate over to that than like migrate everyone over to Bitcoin or a currency or whatever like that's that's not going to happen. But I would I would not be surprised at all if 20 years from now, most of the world's financial rails, you know, run on on top of DeFi based systems. Under the hood and obviously people are always going to do stuff on top. It's more risky, like it's just human nature. People like risk, you know, the the core base layer, though, I think will be much more stable.

• 46:21Speaker 03

  Right. So if you look at finance today, you know, the core base layer isn't always stable. 2008 was a great example of that. Also, you know, March of March of 2020. But once everything's on DeFi, at least the core base layer will be stable. There will be stuff on top that blows up, just like there was this year with the, you know, centralized companies built on top. But at least the core of the financial system is like solid. And I think that would help prevent the problem Ben Bernanke talked about, right? Like, you know, it would have felt like the role of what it would have ended, you know, if if if the government didn't bail people out in 08. Versus, you know, if it were just a handful of banks on top of, you know, rails that were really solid. Where everyone was kind of sharing the same sort of risks mechanisms, liquidation mechanisms, transparency that DeFi provides. I think 08 would have been a much smaller, smaller event.

• 47:06Speaker 02

  Dan, any thoughts as well? Yeah, you know, all the issues like that are from excess, right? And in 2008, there was this whole kind of ecosystem of promoters trying to get people to accept mortgages at crazier and crazier terms. So when they got to low doc slash no doc loans, 100% LTV, you know, people that weren't even residents or citizens getting these loans. Because the person doing the origination wasn't going to keep it. They were going to sell it to another guy who was going to bundle it, sell it to another guy who's going to put it in the CDO and sell it to a fourth guy. And so that would be avoided if you had direct borrowers and lenders matching up on DeFi, right? That, you know, you're not going to have that kind of craziness.

• 47:50Speaker 02

  And then, you know, on the monetary thing is, it's amazing how quaint Satoshi is. He was pissed or she at 50 billion bailout. Wow, I mean, that's so 2008, man. They did 50 billion, the Fed does 50 billion every four days now, right? Like, that's such a tiny amount of money compared to these days, right? And it was such a problem that it riled up a couple hundred million people to get involved in the Bitcoin project, right? And now the Fed did 200% of all mortgage lending in the US in the last two years. I mean, it's just absolutely insane. And so that's created, I think, another massive bubble that has to be worked out.

• 48:32Speaker 02

  And again, I think if it was all, if we all got to vote on monetary policy or we all got to decide, you know, how much money to lend people in the mortgage market, we wouldn't have gone to these extremes. And the markets are really starting to gyrate. I saw a really cool graph. I can't remember who wrote it. I'll try and remember it and I'll send it to you guys. Of the average rate in the US, the Fed funds and 10-year average together times the amount of debt the US has. And it is gyrating more and more wildly. And I just think it's going to come delaminating, you know? We're producing so much debt and now rates are going, I think, pretty high.

• 49:10Speaker 02

  And all those things probably wouldn't happen if we had, you know, kind of more decentralized process where everybody gets to vote. Because nobody asked me to vote on whether the Fed should do 200% of mortgage lending in the last two years. Like, I would have said no, but nobody asked me to vote. In a DeFi world or a world that's more monetarily oriented with blockchain, you know, each person gets to vote with their wallet.

• 49:33Ryan Sean Adams?

  Want to ask you guys the devil's advocate question here, right? And so I'm putting on my crypto skeptic hat for a minute. And hearing this podcast, would you say, okay, point taken.

• 49:46Ryan Sean Adams?

  DeFi is different than C-Fi. Okay, we'll give that a chance. You're right, the DeFi protocol is held up. Good for you. Win for DeFi and crypto. And yet, you in the crypto industry, talking to us, maybe Bankless, maybe Pantera, maybe others, don't you bear some responsibility here for not warning people about Celsius, about Voyager, about Three Arrows Capital? Do we have a role to play? Is there some responsibility we should feel to educate retail as to the risks? And maybe like taking C-Fi aside, how about things like Luna? For example, that was just, you know, a month or so earlier before the C-Fi collapse. And some might argue probably precipitated a lot of this.

• 50:31Ryan Sean Adams?

  And Luna itself was marketed and advertised as like DeFi. And there's some elements of like 20% yields, you know, like what role do we play in helping to educate about proper, proper risk management to unsuspecting retail? Dan, what do you think about this?

• 50:52Speaker 02

  Yeah, I mean, our responsibility to kind of give, you know, sober advice about the markets. The one thing I would say is nobody had a crystal ball, right? If the Nasdaq didn't drop 30%, Bitcoin is still being at 60,000 and we'll all be going on and all these models would have worked, right? Like, so, you know, you don't want to be running around, you know, saying the sky's falling if maybe it wasn't going to fall. So you do really have to strike that balance and try to give people advice, but there are definitely extremes of things that could happen.

• 51:25Ryan Sean Adams?

  What do you think about this, Joey?

• 51:27Speaker 03

  Yeah, I think, I think there's like a couple of things. So, you know, one is in, when you have these black box systems, it's hard to know what the actual risk is, right? Like, you don't want to go out there and tweet, you know, Celsius, you know, Celsius seems like a, you know, like a Ponzi or whatever. If you don't actually know what they own, right? You know, maybe there is some, you know, legit pop market making strategy that they have. It's ceiling 20%, it's unlikely, but you know, you don't want to go out and, you know, disparage someone unless you actually know what's going on. So I think maybe, you know, one thing, you know, the community can do, you know, all of us included, it's like alert people that like, you know, hey, if you're using a black box, none of us know what's going on, you know, you don't, we don't, that's the problem with black boxes. And so,

• 52:09Speaker 03

  you know, I think kind of telling people to look into DeFi is one thing. And I think the other thing is, you know, to Dan's point, no one, no one has crystal ball. Like, for instance, you know, Pantera, we own, we own some Luna. Um, you know, if we, if we'd known it was going to blow up, you know, we would have, we would have sold the position, right? Um, and, and so I think no one has crystal ball. And so the other important thing is just the classic rule of investing, which is like, don't invest more than you have to lose in stuff, right? If you look at Celsius, you know, people were, were borrowing, you know, mortgages on their house, and then putting that all in Celsius, thinking they were getting a safe yield. In the, you know, the history of finances, when, whenever something looks like a risk-free investment, it probably just means you don't understand the risk. And sometimes no one in finance understands the risk, right?

• 52:53Speaker 03

  Like, if you look to like, you know, long-term capital management, there weren't a lot of people screaming, you know, that, that their strat was going to blow up before it did. You know, most people didn't have any idea that that, that wasn't going to work. Um, and so I think that's the other thing. It's just like, you know, encouraging people like, hey, like, you know, be cautious, like, you know, Pantera, we own like in our liquid funds, we own, you know, 14, 15 positions, you know, sometimes up to 20 positions. You know, we, even we can't predict exactly what's going to happen, right? And so, you know, if we could, we would just own one position, right? And you, and you would just always rotate exactly into the one position that's going to be the best. And there's a reason why funds like us don't do that. There's a reason why you guys probably don't do that. And I think those reasons are good. You know, it's, it's kind of the classic diversification story.

• 53:36Ryan Sean Adams?

  Absolutely. Well said. Dan, I just two more questions for you, and I want to ask this one to you. Did all of this surprise you? I mean, you've been a fund manager. You've got a lot of experience under your belt, but like, I gotta admit, you know, I know crazy things can happen in crypto, but I was legitimately surprised by Ethereum's capital doing the thing that it did.

• 53:58David Hoffman?

  I did not have that on my bear market bingo card.

• 54:00Ryan Sean Adams?

  I didn't. Were you surprised? Like, I mean, how did this catch you?

• 54:07Speaker 02

  Well, like Joey said, you know, we don't have any more information than anybody else on the inner workings of those types of firms. So, you know, we wouldn't have been able to predict which ones were going to fail. But if you had told me that Ethereum would be down 80%, other things down 90%, I would have said something's going to break, right? Like, you know, that is not surprising at all. That if you have any leverage, and then a bunch of these people doing the grayscale arbitrage, you know, that that's not going to be an arbitrage if the market comes off a ton. And so, the, you know, thing that used to be an $8 billion premium onto a $6 billion discount,

• 54:48Speaker 02

  like all those things, if you had told me, which I didn't predict, that the market would go down 80%, but if you had told me that, or if I had believed that, what actually happened isn't that surprising.

• 55:00David Hoffman?

  So guys, right before we started recording, we're wrapping up that part of the show. We're turning to macro real quick. Right before we started recording, it was the announcement of the Fed rates, whatever the Fed rates was going to be. I actually haven't looked at what number it is. I'm assuming it's .75. It is .75, Ryan?

• 55:17Ryan Sean Adams?

  Yeah.

• 55:17David Hoffman?

  Prices are up bigly. We're up like 20%, 10% in Ether, 6% in Bitcoin. Just like quick takes on the state of the Fed, the state of the crypto markets, and the state of the macro markets, and what you guys are looking at in the next few months and quarters. Dan, I'll start with you.

• 55:34Speaker 02

  Well, the other thing that did surprise me is how tied crypto has been to the Fed, right? Like it shouldn't be tied either way, like the Fed not tightening as much as people expect shouldn't make crypto go up 20% and vice versa, like, you know, so my main view for the next 12 months is crypto is going to decouple from the macro story and trade on its own fundamentals, right? A lot of people using it, you know, DeFi worked, all that stuff. The only thing I would say on the macro side is I think people are still totally crazy about the Fed. They're going to have to hike a lot more than people are talking about. And I think people are starting to get their heads around the Fed is hiking. But I think everyone thinks their reaction function as a Fed's job is to hike until they cause a recession.

• 56:19Speaker 02

  Unfortunately, that isn't their mandate. Their mandate is to hike until they get core CPI below 2%. And that's going to take a couple of years. There's a bunch of reasons why owners put more rent and stuff are going to make it take forever. So I think rates will keep going up and crypto is going to go up.

• 56:36Ryan Sean Adams?

  Joey, do you have any hot macro takes as well?

• 56:39Speaker 03

  I mean, on the, on the rate hike, I was actually surprised that the market moved as much as it did just because I think the odds of 75 bps were like, you know, priced in something like 95, 97%. You know, it seems unlikely that they would, you know, be so aggressive as to do 100. So I'm surprised the market's actually up so much, you know, I thought it would have been kind of flat or up a few percent.

• 57:01Speaker 03

  And then on, in terms of like what we're looking forward to, though, I think a lot of interesting stuff's happening in DeFi. I think we're kind of finally maybe starting to see, you know, DeFi numbers like TVL and stuff start to get back in an uptrend. You know, Dan and I were talking about the other day, like the total market cap of DeFi is on the order of 20 billion, depending on what things you count and don't. But, um, you know, the crypto market cap is like a trillion and, and I think it's absurd for DeFi to be anything less than 10%. And I would argue actually, you know, much, much higher than that 20, 30%. Of the total crypto market. And so I think over the, over the long run, we're very bullish on DeFi. And then the last thing I'd say is, you know, you look at like, what's, what's upcoming with ETH two and all the, you know, rollups on top of ETH.

• 57:44Speaker 03

  Uh, things like Arbitrum, Optimism, um, you know, other solutions like Starkware. Uh, I think, I think ETH is going to look really interesting coming into the next bull market. Cause it's, it's, it's going to be the first time that it actually like scales, right? Like, yeah, you could argue in the last cycle, you could sort of use stuff like Matic or Polyon or whatever. But here there's like a bunch of different solutions. They all actually work. I think people will be able to work out a lot of the UI UX kind of issues over the next six to nine months. And then as you go into the next cycle over the next two years, you know, DeFi is actually going to scale. Um, which is, you know, something that we've been talking about forever, but we'll finally actually be here. And so, you know, we're super excited for that.

• 58:20Ryan Sean Adams?

  I share that excitement. Yes, we share your excitement. Uh, Dan, Joey, it's been fantastic to have you. I think this is, uh, probably the most bullish thing that happened during this, this bear market in the last few months is how well DeFi worked. And I think that is, uh, you know, a testament to what's been built and, uh, the future that we have here. Thank you, Dan and Joey for, uh, talking about this with us today on Bankless.

• 58:43Speaker 03

  Thanks.

• 58:44Ryan Sean Adams?

  Thanks. Action item for you, Bankless listener. We'll just include a link to DeFi Worked Great, the investor newsletter from Pantera in the show notes. As always, risks and disclaimers. None of this has been financial advice, never is. Crypto is risky, so is DeFi. So are C5 lenders. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.