18 - COMP Growth Hacking DeFi | Dan Elitzer

Episode: #18 June 22, 2020 A DeFi token called COMP gained over 900% last week. DeFi going parabolic. What in the world is going on? Are these DeFi tokens real? If they are, is this the start of the another 2017 style bull market? How much can you money as a yield farmer? We bring on Dan Elitzer a Venture Capitalist, writer, DeFi futurist, yield farmer and the absolute best person to tell us what's going on. Covered: Why COMP went parabolic Why DeFi tokens are real this time The spark for the next bull run DeFi tokens as rocket fuel Why ETH is getting left behind (so far!) The best yield farming opportunities Superfluid yield farming The downside of DeFi tokens Where this is taking us next Join us next Monday for a fresh episode! ----- Tools from our sponsors to go bankless: Multis http://www.multis.co/ - bank your business without a bank (1 mon. trial https://multis.co/!) Ramp https://ramp.network/ - the fiat onramp for DeFi (mention Bankless!) Monolith https://monolith.xyz/ - holy grail of bankless Visa cards Aave https://aave.com/ - money lego for lending & borrowing ----- Resources discussed: (Article) Superfluid Collateral in Open Finance https://tokeneconomy.co/superfluid-collateral-in-open-finance-8c3db15efac (Article) Meet the SAFG https://medium.com/ideo-colab/meet-the-safg-defis-emergent-framework-for-participatory-investing-and-protocol-development-62286a576fb5 (Article) Voting for cash flows https://bankless.substack.com/p/voting-for-cash-flows-market-monday-b13 (Listen) Episode 12: Protocol Sink Thesis https://bankless.substack.com/p/12-the-protocol-sink-thesis (Listen) Episode 11: Going Bankless with Compound https://bankless.substack.com/p/11-how-to-go-bankless-with-compound ----- Episode Actions: Subscribe to Bankless newsletter to get Dan's next article https://bankless.substack.com/ Read Gavin's article on SAFG https://medium.com/ideo-colab/meet-the-safg-defis-emergent-framework-for-participatory-investing-and-protocol-development-62286a576fb5 ----- Subscribe to podcast on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 | Spotify https://open.spotify.com/show/41TNnXSv5ExcQSzEGLlGhy | YouTube https://www.youtube.com/c/bankless | RSS Feed http://podcast.banklesshq.com/ Leave a review on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Watch Bankless shows and tutorials on YouTube https://www.youtube.com/c/bankless Visit official Bankless website http://banklesshq.com/ for resources Follow Bankless on Twitter https://twitter.com/BanklessHQ Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState

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

• 0:14Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, we've got a really exciting guest. This is going to be a fantastic podcast, and it may be our most timely podcast yet. Can you tell us about it?

• 0:37David Hoffman?

  Yeah, Dan Elitzer, a personal hero of mine in the DeFi space, DM'd me the other day, and he said, "I've got a lot of stuff on my mind," obviously around what's been going around in DeFi with these new emergence of governance tokens. And when Dan messages me and says that he's got a lot of stuff on his mind, I give him a platform. And so we bring him on to the Bankless podcast to hear what Dan is thinking about when it comes to this new emerging, apparently emerging, class of tokens that Compound has established with their Comp token. But the concept of this token is much greater, right? We are now being able to use our imaginations and see what happens into the future with this.

• 1:19Ryan Sean Adams?

  Yeah, so what I love about this is Dan really answers what's happening, like, what is going on? Are these new DeFi tokens for real? Or is this sort of a repeat of 2017? And will we see another boom-bust cycle? We talk about all of those things. We also talk about how to yield-farm to get the highest returns, and Dan has some practical strategies that he's sharing about yield-farming and how to actually get access to some of these assets that I think listeners will like, too.

• 1:52David Hoffman?

  Dan wrote the very prophetic piece, "Superfluid Collateral in Open Finance", a little over a year ago, which talked about how you can deposit collateral in one application and receive a token that you can then deposit as collateral in another application. And that really just superdrives, overcharges the efficiency of collateral in DeFi. And we've seen a lot of applications use that sort of theory, that concept as foundation for that design. And so we asked Dan about the concept of superfluidity when it comes to yield farming, which is another super interesting topic that I expect to see play out in some form into the future.

• 2:33Ryan Sean Adams?

  I also love that we talked about some of the downsides in the future of these DeFi tokens and what to look out for as we enter into what I think is going to be a new chapter in the DeFi space.

• 2:47David Hoffman?

  I always look to Dan to see what is coming on the horizon of DeFi. He is in the weeds, talking to the teams. He's a venture capitalist, so he always inspects things with a closer eye than everyone else. And so Dan's perspective is always super valuable to have. And getting him onto the Bankless Pod to talk about this emerging topic of governance tokens was both really valuable to me and I'm sure it will be really valuable to you.

• 3:14Ryan Sean Adams?

  You know what else I love about Dan, the last thing, David?

• 3:17David Hoffman?

  What's that?

• 3:18Ryan Sean Adams?

  He listens to State of the Nation. He watched our new show, State of the Nation, which comes out on Tuesdays on YouTube. He took a look at the first episode and loved it. So that's what you have to do, too. If you have not taken a look at State of the Nation, we publish it every Tuesday on YouTube, and we also publish a podcast version of it on Wednesday. So make sure you check that out.

• 3:42David Hoffman?

  Yeah, we listen to Dan to learn all about what's happening in DeFi, but Dan listens to us about what's happening in the Bankless Nation. So you should also tune into the Bankless Nation. Before we get into the podcast with Dan, let's talk about our sponsors.

• 3:57Ryan Sean Adams?

  Multis gives you the ability to run your business without a bank. That is the dream. It is the first ever bankless bank account for entrepreneurs who want to run their business, both on crypto and traditional currencies like stablecoins. So it features a multi-sig wallet. That means you can have team access, not just individual access, which is necessary for a business. So you can implement access controls. You can also earn interest on your crypto using money protocols inside of Multis like Compound, Danave and others. You can streamline payments as well. Multis has been featured on Bankless. We're huge fans of the product. They're adding Fiat Onramp soon.

• 4:36Ryan Sean Adams?

  And as you are listening to this, on June 22nd, they are launching a completely revamped app. You've got to check it out. If you're starting a business, want to run a business in crypto, check out multis.co and their revamped app. We're going to be doing a video pretty soon and publishing it on the Bankless YouTube channel as well. All right. So you need to go to multis.co, that's M-U-L-T-I-S.co and check it out. When you mention Bankless, they'll put you ahead of the queue. They'll give you better priority and let you sign up quicker.

• 5:09David Hoffman?

  When you get your value off of your bank account and into the world of crypto, you pass through what Ryan and I call a crypto bank, where you send your money to an exchange so you can swap it for crypto and then send it to your Ethereum wallet. However, it doesn't have to be like this.

• 5:25Ryan Sean Adams?

  Getting value onto these systems doesn't always require a crypto bank, and that's where Monolith comes in. Coming soon on Monolith is an on-ramp into your Monolith smart contract wallet directly from your bank account. So you don't need to pass through any sort of crypto exchange, crypto bank to get your value on into Ethereum. Monolith, for those that don't know, is a smart contract wallet that also connects to a crypto Visa card. So you can go to the store, swipe your Visa card as you normally do, and instead of pulling out dollars from your bank account, it pulls out DAI from your smart contract wallet.

• 6:02David Hoffman?

  So this is a way to live a bankless life without having it impact you and your daily livings with with your friends and family. And you don't have to be that weird person that only has crypto money and no real money. So it wraps your Ethereum address in a Visa card and Visa is accepted basically all over the world and you still get to have access to your DAI earning that interest rate in DeFi at the same time. So check them out at monolith.xyz to get your bankless Visa card today.

• 6:32Ryan Sean Adams?

  Okay, we've got a special guest today. I want to intro you to Dan Elitzer. He's an investor at IDEO Colab Ventures. He's a writer as well. We're actually going to get him to do some writing this week on the bankless newsletter. So very excited about that. He's also a yield farmer, and he's going to tell us a lot more about what the heck is going on with these governance tokens, in particular, the comp governance token, balancer and others. Dan, it is fantastic to have you. I know this is a last minute episode for you, but we're glad we could snag you.

• 7:04Speaker 02

  Thanks for having me. It's exciting to have this conversation with you guys. You've been really leading this bankless community and been at the forefront of a lot of the trends that are really now starting to explode in this space. So excited for the conversation.

• 7:18Ryan Sean Adams?

  Well, we want to keep the bankless community at the forefront, and we know you are at the forefront of what's going on with these DeFi tokens, these capital assets, as we've called them previously, or like soon to be possibly capital assets. Can you just maybe tell us like what your day to day looks like and how you're involved with these governance tokens? So we can get some context. And then we want to dig into them deeper and we want to figure out what exactly is going on here. But why don't you start with some of that background for us, Dan?

• 7:50Speaker 02

  Sure. So my day to day is that I'm an early stage investor with IDEO Colab Ventures. We have a traditional venture fund that is focused on investing in what we call distributed web technologies. So blockchains, crypto, and increasingly DeFi. Personally, I've been

• 8:10Speaker 02

  Closing in on 100% of a DeFi focus for the past year or so. And we've made a lot of pre-seed investments in that space. Some of our more well-known portfolio companies include Instadap and Pool Together. And there's some really exciting stuff that's been been happening over the past year. But I think things have just taken off in the past week with the launch of the Compound Finance Governance Token, COMP. So we can, we can talk a little bit about that and some of the trends that are showing up there.

• 8:44Ryan Sean Adams?

  Oh, yeah, we are going to get into that. I'm just curious for, from my perspective, was, was the shift to more 100% DeFi, was that kind of a, you know, a calculated bet? Or did it just sort of happen to, to happen? Can you tell us how you went from just general crypto blockchain to more 100% DeFi now?

• 9:02Speaker 02

  Yeah, well, so our whole fund, we've actually got five people who work on the team. And, and to be clear, I'm one of the people on the team that is most far down the DeFi rabbit hole. So we did recently launch this product validation day for DeFi teams, which actually happened yesterday with 30 top DeFi teams. We've got an upcoming DeFi residency. But our, our fund is still more broadly focused. We do still invest in other things in the space. Largely, this has happened just kind of following my passion in my nose over the past year. You know, you guys know I wrote that Superfluid collateral piece in February 2019. As I was just starting to get really excited by some of the possibilities here.

• 9:45Speaker 02

  But DeFi represents why I got interested in this whole space in the first place. Prior to joining IDEO and prior to being into crypto at all, I worked in microfinance. And when I, I saw Bitcoin and started actually paying attention to it in 2013. What clicked for me was the idea of a bank account that was accessible to anybody with an internet-connected device. And it was the first time in the history of the world that you've been able to have one person send value to another person. Who was physically distant from them without any intermediary. And I, I think that still just alone is a huge, huge game changer.

• 10:30Speaker 02

  But what got very exciting was thinking about, okay, just being able to send and store money is, is a superpower. But what we're starting to see the glimpses of is the ability for anybody, anywhere in the world to create or access any imaginable financial product on the same terms as anybody else. So it doesn't matter where you're based. It doesn't matter a- anything that we can bias by it, it doesn't matter, right? It's just reduced to pure open source software. And of course, there are all of these regulatory hurdles and there's always

• 11:12Speaker 02

  things that you can do that are going to make more sense when you have more capital than when you have less. But there's now kind of a global base rate that you can get on exchange, on borrowing, on lending, on all these things. That as long as you have a wallet, a digital wallet, an open source wallet, you can now start to access these things. And so that just got me incredibly excited at seeing that this ecosystem was starting to reach a place where there was real diversity in it and a lot more capabilities were becoming real. And not just for people who were comfortable getting down to the command line,

• 11:49Speaker 02

  but for as much as, you know, everybody likes to hate on MetaMask and, and some of the, the painful UX flows that exist today. They're still a lot better. They are, you know, graphical user interfaces that a non-technical person can interact with if they care enough. And, and we're getting to a place where things like Argent and. Dharma are really just taking up to another level where I think very soon we're going to see this be something that really anybody can use.

• 12:23David Hoffman?

  Dan, your article, "Superfluid Collateral in Open Finance", was one of the, was how I figured out who you were and how you think. And it really told me that this particular individual is seeing things earlier than than everyone else, really seeing the writing on the wall of what is possible, even though we are not yet seeing that being developed on a technical level in some of these DeFi applications. And it was one of the main, the core pieces that I used to, to stand up my Ether is a Triple Point Asset article. And, and then over the next 12 months, we saw a lot of that, a lot of the content that was in that article become true and is continuing to show itself as an extremely prophetic piece

• 13:06David Hoffman?

  as we see different DeFi apps be designed in a way that fits that, the thesis of that article. And you've been, we've been messaging each other on Twitter and you've been throwing the, these articles about the concept of like governance tokens and what turned into like liquidity mining tokens. And you were sending these to me like months ago, like three or four months ago, trying to, to get me on the ship of like, this is the next big thing. This is the, the thing that is going to wake up the movement once again. What writing on the wall did you see with this liquidity mining phenomenon that we are seeing so much hype by? Like what were, what were the things that really alerted you as to why this was such a big deal?

• 13:49Speaker 02

  Well, I want to give full credit to my colleague Gavin McDermott. He, he wrote up this piece about what he called the SAFG, Simple Agreement for Future Governance, that was really getting into these concepts. And I think he did the same thing with that piece as what inspired me for the superfluid collateral piece, which was neither of us came up with a new concept. We just took these trends that we were seeing other people circling around and just called attention to them. And Gavin did a great job laying out how this is something where it's unlike the ICO boom in that you've got a real working protocol and you're giving out tokens that

• 14:32Speaker 02

  Are necessary. You're not forcing people who interact with the protocol to use the tokens. These aren't payment tokens. These are governance tokens. And so 99.9% of people are going to eventually be interacting with these protocols and not caring about the governance token. The the ability to just have them be useful and have them be live today really separates them from what we saw in 2017. And the governance tokens are a way that you can actually make these things credibly decentralized and distribute it in a way that is actually proportional to the use and is is encouraging the growth and hopefully eventual dominance of some of these protocols in a global way.

• 15:18Ryan Sean Adams?

  Can we just recap for those who haven't read it, like Gavin's article, Dan? So like, like the concept, as I understand it is, is, you know, there's this idea, there's this legal document in VC, in the VC space called a simple agreement for future tokens, right? Which is based on, you know, the a simple agreement for future equity, which, you know, angel investors, Y Combinator, etc., have been using for a long time. And then kind of, you know, the the tokenization movement and almost the ICO movement created this simple agreement for future tokens where accredited investors can buy a contract, essentially, that that yields them tokens in the future.

• 15:59Ryan Sean Adams?

  But, you know, Gavin's article was sort of a riff on this, saying it's essentially like a simple agreement for future tokens, except what you're getting is a governance token. So this is not a token that necessarily yields cash flows in any way. There's no promise necessarily of future profit, but it does enable the token recipients to some sort of governance stake in the decision making process. Is that essentially what the what the article was? Is there more to it? How would you talk about it?

• 16:31Speaker 02

  Yeah, that's, that's what the, the article was. And I think the, the other piece to it was, right? This is giving you governance rights. Governance is also a responsibility. And if people are going to take this responsibility seriously, at some point, it's likely that they will decide that to support the governance and support the long-term health of the protocol, the token holders may decide to vote in some sort of value capture mechanism, right? There's no promise of that. There's no way to guarantee that. But if you think about it and you think about how human motivations work and wanting these protocols, honestly, to be long-term sustainable, right?

• 17:14Speaker 02

  And to actually be able to be inclusive and allow anybody to participate in this process, you're probably going to need to eventually get to a place where there is some, some sort of value capture backing it. And what form that takes and when it happens or anything is totally up in the air. But we're going to see that experiment play out over the coming months and years. Will some things go and stay pure governance for years? Maybe will some of them try to stick value capturing there sooner? Most likely, but we, we just don't know. And it's going to be a fun experiment to watch.

• 17:53Speaker 02

  Now, I think one of the things that he pointed out was really different was the two examples that he called attention to was Compound. Because Compound had said they were going to be doing this governance token distribution to users of the protocol, but they had not yet started it. And the other one was Future Swap, which is a on-chain perpetual swap protocol. Lets people go up to 20x leverage, long or short on ETH and ERC20 tokens. And that team had done an alpha release and had just gone completely bonkers, right? They, they planned to be in the market for a couple of weeks.

• 18:34Speaker 02

  Within three days, they'd done $17 million in volume and closed it down just to be safe. Uh, cause they they learn what they need to do and they were like, guys, this is an unaudited contract, which wasn't fully on it, right? They didn't want, they want to do more because they really care about the safety of their users. And, and we've worked closely with the team. And so we saw how they were thinking about this. We, we worked with them on product. Uh, but what we, what we saw there was they promised from day one, usage of the protocol would result in receiving a governance token. And they actually want to step further though in one direction than compound in that they said, and by the way, this token is non-transferable. So they don't want, you know, speculation on this token. They're saying, hey, if you're

• 19:19Speaker 02

  using this from day one, you get a voice from day one. Um, and you know, as you gain that voice at some point, will those likely, you know, governors choose to make them transferable? They may, uh, but there's no way to guarantee that. Compound went the other way and they said, you know, we're not doing a governance token from day one. We're going to build up a useful product to a certain size and then we're going to layer on the governor's token on top. I don't think one is right or wrong, but Gavin did call attention to how these are too, too similar, but slightly different models. Like one is bootstrapping from zero and one is get yourself to a certain level and then, you know, dump a whole bunch of rocket fuel on it.

• 20:01David Hoffman?

  So what I'm really seeing here is I'm seeing a clever way to get around, uh, some of the regulations that have really been holding the, the industry back lately. Um, specifically with regards to like securities and the Howie test, right? Uh, the MKR token has always kind of just been dubiously assumed that if the regulators took a closer look and were more public about it, then they would call MKR a security because it was issued by a central party and it fit, and it fits the, the Howie test, et cetera. And it had, and it had the profit mechanism baked in from the start. However, what we're seeing with, with the, uh, the comp token is that what these, and the model of, uh, you know, the, the few, uh, enabling future governance and

• 20:43David Hoffman?

  enabling the ability to govern over where cash flows are directed. What people are, uh, what these token issuers are doing is they're issuing just a governance token, but it is a

• 20:56David Hoffman?

  I guess it's not really assumed by anyone, but why would you not assume this? That the nebulous set of stakeholders, which are almost by definition decentralized by nature of how the token is distributed, is they they would just ultimately vote themselves into the security aspect of the token after it had been like fairly issued and fairly distributed. Is that how is this clever engineering of of distribution and issuance and governance? Is that how you are seeing this?

• 21:29Speaker 02

  Well, I think it's it's hard to look at these tokens the on the day that they're released and say that, you know, they they pass the Howey test, right, which meaning meaning that they are securities, right? There there's there's not, I think, basis for really saying that. But, you know, it is a question, right? I think this this is a different take. And, you know, it's possible that some of these things will remain forever governance tokens. One of the the interesting things about COMP, I D O Colab Ventures is a delegate for COMP. We don't own any COMP as a fund.

• 22:07Speaker 02

  I I've been doing a little bit of kind of farming COMP tokens like on a on a personal basis, on a very, very, very small personal basis. But I don't have anything meaningful, like maybe I if I have $100 in COMP right now, I'll be pretty excited. But, you know, it's not something that we have an interest in directly as a fund. And yet we've still been one of the most active governance participants. We've been administrators on the camaraderie forum where proposals are discussed. We've been talking about it on Twitter. We're we're in a number of chats with like other people who are delegates. And we do this because we think like, A, it's just one of the most interesting things happening in the space. So I want to be involved.

• 22:50Speaker 02

  But B, we've got multiple portfolio companies that are highly dependent on compound. And so as part of our fiduciary responsibility and part of, you know, being good investors and supporters of those companies and those protocols, we want to help make. Make sure that the protocol they rely on is in a position of strength long term and is taking their needs as other companies and protocols building on top of Compound into account when governance decisions are made. And so from that perspective, like I look at Comp and you know, I do not care if Comp actually uh has a value capture mechanism for me to want to be involved in governance because

• 23:36Speaker 02

  I'm hopefully going to make money as an investor on these other things built on top of it. And so I'm willing to spend that time and do that. How does that translate to people who like have chosen to pay money for Comp? Like I could see a potential future in which we cared enough and it was important enough that we saw it as responsible to also directly have ownership uh instead of just receiving delegation, like that's possible. Uh but honestly, I don't know exactly how that ends up playing out.

• 24:03Ryan Sean Adams?

  You know what's cool about these assets to me? And so like to recap for everyone, what we're talking about is basically DeFi protocol assets that have tokens associated with them, um essentially being released and going through possibly a couple of stages of transformation. You know, the first transformation stage is basically they become these governance tokens. So you can vote on decisions in the protocol. And then later, possibly the governors of the protocol may decide to add a value accrual mechanism on top of it too. And transform these DeFi protocol assets into capital assets, right? So you know, securities aside, these are, these can potentially become cash flowing assets

• 24:46Ryan Sean Adams?

  that are associated with a protocol that has a tremendous amount of of value capture on top of it. What's super interesting to me, Dan, is that what we're essentially creating for the first time is crypto native governance and crypto native capital assets in that when you, if you're a shareholder in a publicly traded company and you do a proxy vote of some sort, you know, that vote is governed by essentially the the nation state uh by you know, kind of the the laws of the land. In meat space or whatever jurisdiction you reside in, whatever country you reside in or state or what have you. But when you vote on Compound, your jurisdiction is essentially Ethereum. And the vote you cast is binding on chain on Ethereum.

• 25:31Ryan Sean Adams?

  And if, you know, if some sort of a capital is issued, if fees are added to the protocol, then these are also fully settled on Ethereum too. So they become like crypto native capital assets. And to me, that is the first time that we've seen these types of assets come into existence. I want to contrast this though, because we've had an absolutely crazy week in DeFi this week with, you know, Compound. I don't know what it was trading at, Dan. Did it start the week at 20 or something like that?

• 26:04Speaker 02

  Yeah, well, I think I've heard rumors that, you know, the valuation like on the last private round was like 150 million, 250 million, something like that.

• 26:13Ryan Sean Adams?

  Okay.

• 26:14Speaker 02

  I think initially, when I first glanced at where it was trading Uniswap on, I think Monday, it was around like the $50 mark.

• 26:23Ryan Sean Adams?

  Right.

• 26:23Speaker 02

  And I think it's gotten as high as, I saw it as high as like 230. It's 223 right now.

• 26:29Ryan Sean Adams?

  Yes.

• 26:29Speaker 02

  I think.

• 26:30Ryan Sean Adams?

  Yes. Yes. So the, so to, and that's like a market cap of over 2 billion, right? I mean, so.

• 26:37Speaker 02

  A fully diluted market cap, right?

• 26:39Ryan Sean Adams?

  Yes.

• 26:39Speaker 02

  Fully diluted market cap.

• 26:40Ryan Sean Adams?

  So people see that and they see like a 900% growth just this week. And they start to think about 2017 because they start to think about the ICO bubble. Is it different this time?

• 26:54Speaker 02

  In some ways, yes. In some ways, no, right? History rhymes. And so is it similar in that there is a lot of speculation? And valuation is just going up.

• 27:07Speaker 02

  Really rapidly and look at manias around this. Yeah, yeah, absolutely. People see an opportunity where things are moving quickly and generally in an upwards direction and they want to get rich. So yes, it does have that similarity to it. I don't think there's any way that most of the people buying into comp either, you know, through Uniswap or by liquidity mining. I'm guessing a lot of them are not doing some kind of formal valuation methodology that supports it being at a certain price. That said, the difference here is that we already had a protocol that had more than $100 million in value locked in it, right? And was doing significant, essentially loan origination volume.

• 27:52Speaker 02

  And it's not hard to look at that and say, okay, well, I can reasonably say I expect it to grow at this rate. And so, you know, five years from now, I expect it to have how many billions of dollars in assets in there and loans originated? And if you take 10 basis points, 25 basis points, 50, 100 basis points, who knows? Then I can discount back that cash flow into the protocol, assuming there is some way to capture out of it. But like, since you control governance, you can figure out any number of potential ways to value capture. And I think that's one of the next stages that I'm just excited about because I nerd out about this stuff is like, what are the best ways to

• 28:37Speaker 02

  capture value on cash flows coming through some of these protocols? And there's different things you can optimize for. And I think we're going to see a lot of different experiments playing out, right? The most simple being in some ways the Maker MKR buy and burn model as a way of essentially paying, doing share buybacks effectively. And then you can look at something like Synthetics, which is a much more complicated model, but you're essentially able to stake your SNX and then claim fees every, I think it's a couple of weeks. And they're very different models, but I think we're going to see. All sorts of different experiments happen around value capture with these.

• 29:18Speaker 02

  But the core difference is it's not trying to be application specific money. Right. These are intended, I just said more towards capital assets, whereas in 2017, everyone was talking utility tokens. And, um, you know, honestly, that took me, that's one of the reasons why I, I think I was a little actually late. Given I had been crypto for a while, but it was late getting on the, the bandwagon in terms of tokens was I looked at this and said, this makes no sense. Why do I want to manage different types of money for all these different applications? Like, that's terrible UX. And even assuming that like we can fix the UX, because fixing UX would probably mean just automate that in the backend.

• 29:58Speaker 02

  And I hold, uh, you know, stable coins or I hold, you know, Bitcoin or ETH on the backend. And then I just like swap into exactly the number of that asset that I want when I need it. And that leads to this crazy velocity problem. And then those tokens aren't really worth very much and they have trouble capturing value because there's no reservation demand. Um, and, and the model just didn't make sense. And now we're saying, you don't need to hold this token. People can use the protocols if they are getting value from using the protocols. And, uh, they don't even need to think about that. They don't even need to know there's a token involved. Um, for those who, who are aware, this kind of model of giving out tokens to users of the protocol

• 30:43Speaker 02

  can be a very powerful incentive to onboard new users and new capital. Um, and then it will be very valuable, I think, to govern this and allow it to be truly decentralized over time. But, uh, I, I, I'm still very hopeful that we get to a, a point where, again, like 99.9% of users will not.

• 31:05Speaker 02

  Care or potentially not even know that there is a token involved in the product they're using at all.

• 31:12David Hoffman?

  You said why the ICO mania didn't work, right? But there are also a lot of, you know, there was a lot of optimism as to why the ICO mania or any ICO, the ICO model at large was why people were hopeful that that would work at all. And I see still a lot of those same fundamentals in this new governance token model, right? Where like the token was meant to be this sort of a community gathering incentive mechanism where, you know, people, you are incentivized to work for the, for the protocol, work for the product because you are paid in this token or you receive rewards in this token somehow. And it was supposed to generate this positive feedback loop of building out the protocol from the ground up

• 31:57David Hoffman?

  using a token as a distribution mechanism.

• 31:59Speaker 02

  Well, I think the problem with that was there wasn't a feedback mechanism for those, right? It was, as a token purchaser in an ICO, I would give money to a team and say, okay, here's, here's money. Now, now build this out, make it useful so my, so the number will go up, right? And that's, that's not a feedback loop. And as we saw, it's very, very broken model, right? There's a reason why venture funding has developed in a way where you don't just give people millions of dollars upfront and be like, okay, I hope in a few years you ship something. And, and what happens now, there is a feedback loop, right? With this new model in that I, I contribute capital, but it's, it's being put to work in the protocol.

• 32:43Speaker 02

  And by putting the money into the protocol, it actually makes that protocol more useful for other people. And it, and then, okay, so it's more useful for other people. That means the value of the perceived value of these governance tokens should go up. And so that will attract more capital and make it more useful or attract people trading and are doing other things, right? It gets more use in the protocol. And I think if you look at what's happening on Compound today, it's very hard to say that the majority of the, what is it, 400 million that has kind of flowed in over the past five days? That the majority of that is like.

• 33:25Speaker 02

  Doing something other than mining comp or farming comp, right? Like a lot, but it gets it up to a level. It is getting more capital in there and there's already a bunch of proposals on the table to, you know, fix some of the problems with how things are currently structured because the folks involved genuinely do want this to work. They don't want it to be some stupid game where people are just, you know, farming a governance token and then selling it and getting high yield. The goal is to make Compound global financial infrastructure. And so this hype is good initially to get attention and bootstrap and like people are paying attention to it again. But, you know, having been part of these governance discussions,

• 34:09Speaker 02

  people are taking this very seriously and they want to tamp down some of that excitement. They want to get it to a place where it's building measurable value for people who are driven to use the protocol for things other than just collecting comp. And it already got into a hundred million plus in deposits prior to comp, just because people did find it useful. So I don't think it's hard to say that this can be done, like it absolutely can be done. We just need to get it to a level and you guys talked about this in your State of the Nation, right? That, that the goal here is not just to collect a lot of assets in protocols. The, that, that's something that we do.

• 34:50Speaker 02

  It's a means to get to the end, which is if you get, the means is, you know, getting all this liquidity in there. And the end is, okay, great. Now it's useful to many, many millions, hopefully billions eventually of people who can tap into this huge amount of liquidity in these protocols and make it really cheap for them to access credit or to do exchange and hedge their risk and do all these other things. But until you get that large base of capital, that base of liquidity, you can't enable all these other use cases, right? When I mentioned working on microfinance products, you can't create these microfinance products on top of

• 35:35Speaker 02

  blockchains that, that don't scale yet because we don't have robust live L2 systems. And we don't have enough liquidity so that you can have people, you know, shifting hundreds of millions of dollars in one direction or the other. Like it just doesn't exist. But we're building that up and if we need to play. Some things that kind of feel like ridiculous games that are all about money. We play ridiculous games that are all about money in service of eventually getting these protocols to the place where they are providing financial tools and financial freedom to billions of people.

• 36:13David Hoffman?

  So there's this feedback mechanism that's going on right now. And the fact that this new token model started off with Compound, one of the biggest, was already one of the biggest DeFi apps on Ethereum, is really allowing us to really see this experiment play out in a relatively like isolated manner, right? Like, one of the biggest apps on Ethereum is experimenting with one of the biggest new shifts in token models. And we're seeing the price of the Compound token, I'm looking at it on DeFiMarketCap.io right now, at $223 a token, which is basically its all-time high. And, I mean, it's only been out on the market for a few days, but it's pushing up its all-time high, which we're seeing a just a massive influx of capital of different types of tokens

• 36:57David Hoffman?

  and value being deposited into the Compound protocol in order to access this token, right? Like, that's the whole point of the token is to incentivize those deposits. And so we're seeing Compound at $418 million worth of value locked, not far behind Maker Dow, which is just under 500 million. And so the value of this token is based on the cash flows of all the value that's deposited. So the token value goes up, but then there's more incentive to deposit more assets into the Compound protocol, which makes the token value go up, which makes incentive go up. So there's this feedback mechanism, right? And no other application is doing this, right? And it's the also the biggest borrowing and lending application on Ethereum.

• 37:40David Hoffman?

  And I think that what this is, this is planting a flag, saying like, if you are a borrowing and lending application, you have to do one of these tokens. Like, there's no way you can compete. Why would you submit your capital to, you know? Some small borrowing and lending application, which doesn't issue you a governance token, and that doesn't issue a token that gives you upside potential based on the application, when you could instead submit it to Compound. And so what I kind of want to turn this conversation to is talking about where does this put us? Or where, what has Compound done to the other applications on Ethereum? Like, is this the now, the new status quo? Is every single application that can do this, do they now have to do this?

• 38:21Speaker 02

  Yeah, I mean, I think it's likely true, yes. And there will be some cases where it's not true, but for most things, if you need to attract liquidity, then if you're not paying a competitive yield, then people aren't going to put capital into your protocol. And there are ways you can do it, right? If you, you could raise a lot of venture capital, and you could directly subsidize the yield. You could, you know, pay people out USDC or whatever you need to pay out, to pay for them to provide that liquidity to you. That's one way to do it. But what I think is actually happening, like, let's, let's get under the hood

• 39:03Speaker 02

  and talk about what do these tokens really represent, right? Let's, let's assume that at some point in the future, the Compound token holders will use the governance process to vote in some sort of value capture. So we can assume that there is going to be a future cash flow that somehow token holders will have access to. Now, let's take a, a super simple example. Assume that, you know, the Compound Labs team had been entirely self-funded, there were no VCs, whatever, right? They, they own 100% of comp tokens day one. And Compound has gotten some usage, and I say, okay, we want to supercharge this.

• 39:46Speaker 02

  So we're going to start giving out these comp tokens now. They could, like I said, they could, they could raise money from, from VCs, they could sell a comp token to somebody and then directly subsidize yields to attract more capital to be deposited into Compound.

• 40:06Speaker 02

  Alternatively, they can give out these, these tokens. And what these tokens actually represent is you can think about them as a probabilistic, like, or yeah, there's, there's some element of it where you can discount the likelihood that, that, you know, it may never capture value, but let's say it does have eventually a claim on future cash flows. You can then discount back the present value of those future cash flows and say, okay, um, one comp token is worth, you know, the, the, the net present value and NPV of those future cash flows is $5, $10, $100, whatever it is.

• 40:50Speaker 02

  And now I'm giving that out and that's a way of subsidizing now. So what I'm actually doing is I'm saying, if I were Compound Labs, right, I'd be saying, I'm going to take some of my future cash flow and I'm going to pay it out now as a kind of user acquisition, as a capital acquisition strategy. And this is not unlike, you know, PayPal in the early days or any number of bank, banks, right, who'll pay you a signup bonus because they expect to make that money back off you at some point in the future. Giving out comp now is saying like, we're paying to acquire customers, to acquire capital. But what's kind of beautiful is it's not just a cash payment, it's actually giving them ownership. And I think that's, that's amazing, right?

• 41:34Speaker 02

  That's one of the exciting things that gets into what a lot of people were inspired about and what the best pieces of 2017 were kind of hoping to be, which was really create something that is owned by the people who use it. That's, that's what we're enabling, but at the same time. You can create models where you're saying, I'm just essentially time shifting some of those future earnings and using them now to subsidize growth. And the nice thing is, as we talked about, that actually creates this virtuous cycle, right? Because as you attract more capital and people say, oh, this could be big, that implies more future earnings, which raises the, the value of the token.

• 42:18Speaker 02

  And so now each individual token, um, which sort of like, you know, a fixed percentage of the future, future earnings, but it's worth more dollars today. So you're providing a greater subsidy, which will in turn attract more capital. Uh, and it's just a very, very positive cycle. Um, but it, what it, what it really is, what it comes down to is you are, you know, time shifting, you're, you're pulling future earnings forward to the present and using that to subsidize your user acquisition.

• 42:50Ryan Sean Adams?

  So we want to pause the interview and tell you about two more of our sponsors. The first is Ramp. What's holding crypto back? Getting fiat into the crypto system. In order to get fiat into a DeFi application, you have to create an account with an exchange. You have to wire funds. That's the same thing that's holding your DeFi app back. Users drop off, off in the signup process because they don't have crypto. So what you're doing is you're limiting your market to the hardcore crypto people. But with Ramp, that no longer has to be the case. Ramp is a delightfully easy fiat on ramp. It lets first time crypto users get ETH, DAI, USDC. This takes five minutes or less. This reduces

• 43:30Ryan Sean Adams?

  the dropout rate. So you can build products for the real world. It's free for developers. It takes 10 minutes to implement. You can 100x your addressable market size if you have a DeFi app. So this is the ultimate growth hack. What you need to do is go to ramp.network to check it out. That's R A M P dot network to check it out. See how easy this is. And when you mention Bankless, they will on-ramp the first 100K in US dollars for free. So make sure you go to Ramp, mention Bankless and get that set up today.

• 44:02David Hoffman?

  Aave is a DeFi protocol that you just have to check out. It is a borrowing and lending protocol on Ethereum, but with a few more tricks and tools than what you may be used to. So you can put assets inside of it and supply assets and then get your interest rate base off those assets. And then you can also borrow those assets. But the cool thing is you can borrow assets at a fixed interest rate, which is a really important money Lego in order to expand what the Ethereum nation can really offer the world around it. Having a fixed interest rate where you can borrow assets and not have that interest rate change under your feet is going to be a crucial feature for enabling more tools coming out of the Ethereum economy. In addition to that, there's also A tokens,

• 44:47David Hoffman?

  which are tokens that represent the underlying collateral, but has that interest rate baked into it. Aave is climbing the leaderboards of the value locked in DeFi, about to cross 100 million locked. They're currently at 98.3 million. So they are just absolutely crushing it. Developers, you can check out their flash loan protocol, which can really help the UX of your application. A flash loan is when you borrow assets from the protocol without any collateral, so long as you pay back those assets in the same transaction. And this can help your users move their debt positions, either a compound debt position or a make or die of all position. It allows you to swap out collateral instantaneously in one transaction,

• 45:32David Hoffman?

  which really is going to be a blessing for your users and their UX. Go to ave.com and you can deposit crypto to start earning or borrowing today. Any Ethereum wallet works, so check them out.

• 45:45Ryan Sean Adams?

  So Dan, we talked about 2017 and how the model was these futility tokens that didn't have a good claim on net present value of future capital. Now it seems like we have better assets in this start of 2020. David and I have talked a lot on the Bankless Podcast about feeling like we're sometime in 2016, right? Like things are building, like there's a forest bed and there's dry leaves. And debris and the tinder is being laid. And like over the last two years, all of this development has happened. DeFi has matured, DeFi has grown and and people outside who aren't as into it don't see it. Is this going to be the spark that lights all of that tinder?

• 46:30Speaker 02

  I I think so. It's hard to look at what's been happening over the last five days and and say the tinder hasn't been lit.

• 46:38Speaker 02

  It it's I I I don't think I know any teams in the space who aren't watching what's happening with Compound and watching what what's happening with FutureSwap and and saying, uh, no, we're not going to do one of these. Right? It it makes sense. It's what you're going to need to do to be competitive. Assuming that you are competing heads on with with other protocols who also care about attracting liquidity, which everyone will be.

• 47:05Speaker 02

  So, yeah, I think I think we're off to the races and and I just hope that we do it in a way where we don't lose sight of what we're really trying to build for the long term and that teams put appropriate kind of warnings and protections in place, right? Like, I'm very, very impressed by the FutureSwap teams' decision to shut down their their betics, right? They could have kept it going and and grown to even more unbelievable numbers, but they felt like the risk wasn't worth it and they were worried about, you know, users losing funds and getting hurt because they didn't feel like it was really ready to be tested with that kind of capital. And so I I hope we see more teams show that kind of care where they realize they do have

• 47:48Speaker 02

  this rocket fuel that they can pour on whatever little bit of traction they start to get. But that they do so in a way that is responsible as we don't, we don't have people in the getting hurt. Right? I I do think some people will inevitably get up hurt. There will be hacks. There will be things that go wrong. But hopefully, uh, the voices in the community that are watching out for users and aware of the risks will be a little louder this time and a little larger percentage of the overall community, given how many of us saw what happened when things got out of hand last time.

• 48:25Ryan Sean Adams?

  So if we think that we are on the cusp of a

• 48:29David Hoffman?

  Governance token triggered bull market, if I just want to be blunt. What is the actual mechanism that would cause price appreciation? So we're seeing, you know, Compound has its assets under management increased by 60%. And then we saw, we saw FutureSwap suck in a ton of value when it was just in its, you know, in its alpha and its beta, right? And then they had to shut it down because it got too successful, too fast, based off of the same fundamental token, right? Is the reason why this could be a trigger for a bull market? Just the fact that it sucks up assets off of the secondary market and puts them to good use? Or is there other stuff going on as well?

• 49:07Speaker 02

  Um, I'm not sure I completely understand.

• 49:12David Hoffman?

  What? Why is number going to go up?

• 49:15Speaker 02

  For, for, for the entire space or for like ETH and like Bitcoin? And like, or like, what, like, what are we talking about? Which number are we talking about going up?

• 49:22David Hoffman?

  Uh, yeah, I guess just Ether and DeFi related assets. Like, why is this if we are interested? If we are thinking that this is going to trigger a bull market of sorts? I would expect to see this in Ether, right? As the fundamental native currency that it powers all of these things. But then also the tokens on Ethereum, in the same way that we saw tokens on Ethereum also go through a hype cycle three years ago. I just kind of want to peel back the layers as to like, what is the mechanism behind this governance token model? And why it may, uh, may cause assets to appreciate?

• 49:56Speaker 02

  Yeah, that's, so that's a great question. I think we've, we've already seen a meaningful appreciation, you know, two, three, four X or more in some of these DeFi related tokens. And I think it's other people also catching on to something and maybe being as slow as I've been on, on the uptake with, with some of the stuff, which was, I, I used to be really a stickler for, I want to see a good value capture mechanism. I want to see a good reason why this token should exist. And looking at the mechanism designed for it. And I think, uh, one thing that Synthetix, um, you know, very clearly taught people and AVE has very clearly taught people is,

• 50:42Speaker 02

  if you have the right, uh, team working on this, if you've got the right community around it. All of that stuff is subject to change. And so you can't overly focus on what are the mechanisms built in today? Everyone's looking at and saying, well, is there a community around this? Is the overall problem space that they're going for a very valuable one? And do I see, can I imagine that there is a reasonable path to accrue a lot of value in the long term? And in many cases with DeFi, the answer is yes. And I think it is narrowly, more narrowly focused, right? The ICO boom, people were going very wide and looking at all sorts of different use cases, many of which didn't make sense. Here we're saying, okay, this is primarily a financial technology.

• 51:27Speaker 02

  And so we're sticking more narrowly focused in finance where there are much clearer paths to value capture. So I think that's people being able to draw those lines is why those numbers will go up. As to the question about, you know, Ether, right? Ryan, you posed that to the to the bankless community today. You know, why has Ether not gone up in value along with all these DeFi tokens? And I wish I knew the answer to that for sure. But I think one possible explanation is that Ether in the previous round, in some ways ETH was more money back in 2017 because it was the only option.

• 52:09Speaker 02

  And so that created just a lot of demand for Ether to participate in ICOs. Now we've got a lot of stable coins. And so when people want money, they want something that they already conceptually position in their head as money that they're using in these systems. And so I'm not disagreeing with your kind of, you know, you guys pounding the drum on ETH as money. I think, you know, that's been a very, very smart thing to do. And I think it is with what I would use as a definition of money. But I don't think your definition of money and my definition of money is what the average person thinks of today as money.

• 52:51Speaker 02

  And so the fact that we do have a closer analogy to what they think of as money in the form of stable coins, that's which can, you know, especially for like USDT and USDC.

• 53:04Speaker 02

  They can just like easily flex to many more billions in additional value without causing any movement in their price, right? They stay pegged to the dollar because you can, certain parties can easily mint new ones and redeem existing ones. So there's not the need for Ether to play that role and expand and contract its market cap by moving the token value up and down to meet that demand.

• 53:34Ryan Sean Adams?

  Yeah, it's funny. I posed that question today. So we're recording this Friday for listeners and got an assortment of different answers on why does ETH seemingly, why is ETH seemingly left behind of at least, you know, this explosive week for DeFi tokens? And one of the answers was exactly what you're saying, which is there's now substitutes for ETH as money in the form of stable coins. That was one answer. In the ICO 2017, it was just Ether. So if you wanted to raise an ICO with funds, you were definitely using Ether. So it positioned itself in that gateway. I've got some other thoughts on this too.

• 54:14Ryan Sean Adams?

  And I'm probably going to publish some of those next week. But I do want to, we might come back to this topic, Dan, but I do want to ask you another question because one of the contrasts that we've often been running on bankless is DeFi versus centralized crypto exchanges. We call them crypto banks often in our nomenclature. So it has been the case that crypto banks have kind of dominated the first, call it 10 years, decade of crypto, right? In that it's easier UX, right? They do custody, but it's easier user interface. They're very close to fiat on-ramp. So they have that advantage. And they've really dwarfed

• 54:57Ryan Sean Adams?

  anything that's been built on DeFi so far. So DeFi in terms of volume, in terms of, you know, collateral, in terms of however you measure it, has been a sliver of what crypto bank volume for derivatives, for trading, for everything is. Now, that's starting to change and has started to change. This year in 2020, where DeFi is starting to gain on crypto exchange market, market value and you know, market share in general. I want to ask you this question. Do you think that these DeFi tokens, these rocket fuel, as you've called it? Will these be the slayers of crypto exchanges? Will these allow DeFi to really catch up and possibly exceed the volumes and value going through crypto exchanges today?

• 55:43Speaker 02

  That's a great question. My, my simple answer is in the near term, no. Right? These don't, don't directly take us to a decentralized thing that's bigger than Coinbase, that's bigger than Binance like today. I do think it, it helps them get to a size where they're able to compete in a, in a closer league. But it doesn't, it doesn't fully get us there. That said, um, you know, I'm not, uh, I guess I am a power user compared to most people, but probably not compared to many of the people in the bankless community. And, uh, what I've found though is I, man, I hate going to centralized exchanges now.

• 56:28Speaker 02

  Like it's just so much easier for me to use a DEX and, and I will, I'm, I'm happy to pay, you know, some premium, right? Like a, you know, a point or two to, to not have to like go log in somewhere and like, think about like the, the delays until when they're going to credit my account and then withdrawing it. And like, am I obscuring things in the right way? If I don't want, you know, them to then be observing everything else that I'm doing on chain. Like it's just, it's, it's such a pain. And so I found myself moving more towards DEXs and I think there will be other people who will do it too, because it's, it's getting so easy. And the, the other signal that I think is really interesting is looking at what's happening with Nexo.

• 57:14Speaker 02

  And this is a, a centralized crypto lending platform. And they first got on my attention when, uh, basically. WBTC was introduced as collateral for Maker and and there was, you know, rates got pushed on to zero or 1% maybe and Nexo minted a whole bunch of, it feels like $8 million worth of WBTC deposited and took out a loan and die. And that's, that's great. They were like arbitraging C-Fi rates and DeFi rates. And I thought that was, that was amazing seeing this hybrid start to happen. And now they

• 57:55Speaker 02

  just put like $25 million of like, you know, Tether into Compound to Mine it, which I believe I saw on Twitter that like the CEO or someone there had responded that like this was not customer funds and that like unbeknownst to their customers, they were putting stuff into Compound. It was like, there were, there were some specific like large customers who asked them to do this on their behalf. And so I feel a lot better about that than what, what most people's perception of it likely was. But I do think we're going to start to see this melding. And I think one of the biggest opportunities that I'm most excited about, and so if you're building this, please come talk to me, is companies that are straddling the, the C-Fi and DeFi boundaries and can play to the

• 58:40Speaker 02

  strengths of both approaches. I think we're going to see a lot of, the future is, is hybrid DeFi/CFi for, I believe, the majority of users. There will be some that want to operate in a pure, pure DeFi world. But I think that's largely going to be the way that, you know, we, we, we think about, you know, Bitcoin maximalist in some places. I was like, yeah. I used to think like Bitcoin was going to be like the big, the one thing. I still think Bitcoins would be absolutely huge. I still, I, I'm still very, very bullish on it. But you're saying like, look, realistically, there,

• 59:19Speaker 02

  there's a lot of other stuff going on. And the people who, who stay solely Bitcoin only, I think it's going to be relatively small number of people. And similarly, I think the people who are purely DeFi only and don't touch any C-Fi, I think that also likely ends up being a relatively small number of people.

• 59:40Ryan Sean Adams?

  So Dan, have you heard our Protocol Sync thesis before articulated?

• 59:45Speaker 02

  Uh, I remember the graphic especially for that. You had a really good piece of, piece for that.

• 59:51Ryan Sean Adams?

  We've, we've got to send you some info about that because I think it's describing exactly what we're seeing. And we've got a podcast about this to listeners, so we'll include in the show notes, but I think it's describing what we just saw this week and what you just described with Nexo, right?

• 1:00:04Speaker 02

  Yeah.

• 1:00:04Ryan Sean Adams?

  So Nexo is a crypto exchange and they're actually doing their own yield farming. Do you say it was like $30 million they're doing this in compound?

• 1:00:12Speaker 02

  I think it was like there was a 22 million slug and they'd already done like a 3 million slug prior to that.

• 1:00:16Ryan Sean Adams?

  Okay, so close to $30 million. And anyway, the Protocol Sync thesis is basically like crypto banks and DeFi will merge. And the way they'll merge is the most credibly neutral protocols will essentially sync to the bottom of the stack and be used by all of the DeFi crypto banks and exchanges.

• 1:00:34Speaker 02

  Yep.

• 1:00:35Ryan Sean Adams?

  And it's just kind of a bullish thesis on DeFi, but also everything bankless. It's bullish on Bitcoin. It's bullish on Ether because those are credibly neutral protocols essentially that everyone needs to tap into, right? Nexo is not going to go to Coinbase and start depositing into Coinbase's yield, yield protocols, right? But both Coinbase and Nexo will happily do so to Compound because they understand the rules of the Compound game and they are much more credibly neutral and they're not competitors. Does that kind of resonate with what you're seeing?

• 1:01:11Speaker 02

  Absolutely. And I think, you know, that's, that kind of gets to, you know, why I'm bullish on DeFi and some of these protocols and AMMs in particular, right? Automated market makers. When you think about automated market makers and liquidity pools, you know, one of the, the things that people have pushed back against to saying, well, you know, these are not as efficient as order books once you reach a certain scale. And that may be true. Like there are, there are a lot of markets where eventually, hopefully they go to a place where order books are more efficient for certain types of users in certain scale. But it creates a kind of a reserve, a floor where you're going to be able to say, anybody can access this floor. And one of the rules of these

• 1:01:54Speaker 02

  C5 organizations or some of these hybrid organizations is they're going to arbitrage. They're going to get better rates. They're going to, they're going to do things, but they can always as like essentially a lender borrower of last resort, a liquidity source of last resort. They will also tap into these pools. Um, and, and so I think, you know, that's, yeah, I think, I think, I think your thesis is absolutely right.

• 1:02:18Ryan Sean Adams?

  Okay. So before we get through all of the material, we've got a few more things we want to cover with you, Dan. But I, I think our listeners are dying to know what yield farming is and how they can become good yield farmers. How can they harvest some of the crops that are out there, Dan, from the yield perspective? Cause there's some weird stuff going on. It's happening really quickly. Uh, do you have any insights or, or tips for folks listening?

• 1:02:43Speaker 02

  Yeah. Well, I mean, the first thing is to balance, um, your excitement about yield farming with the risks that are implied by it. The, the highest yield, uh, yield farming opportunities are generally at the very beginning when, uh, it, it appears, uh, first. But that's also the riskiest point because nobody else has gone first. There's not a lot of assets in there. There may be, uh, you know, bugs that haven't discovered yet. So, so be careful, right? And figure out personally where you are on that risk spectrum. But assuming you start going in, one of the things that we've seen is right now, the rate model for tether, uh, for both the supply interest rate that you earn and the borrow interest rate that you pay,

• 1:03:25Speaker 02

  uh, are just wildly out of whack, specifically with the other stable coins, but, but really all other assets on compound. And so the result has been that, uh, tether went from being, uh, like a few hundred thousand dollars in deposits, uh, to the largest asset on compound. Uh, because people were just using it to yield farm. Uh, and one of the ways you can do that, um, is you can't borrow against tether. So you could deposit tether, um, and earn interest and was paying, it's pretty attractive rates, like, you know, 10% or so.

• 1:04:01Speaker 02

  But, uh, you actually were better off borrowing it because the amount of additional comp you would earn would, would just dwarf the interest you were paying. And so it created this, what in my mind, a perverse incentive where actually you, Get a better rate borrowing than on lending. Um, and, and everyone's just pouring into, to tether. You can deposit, say, DAI or USDC. Borrow tether. Um, so you're earning a little bit on your DAI or USDC. You're earning a lot on borrowing tether. But then you trade that tether generally on via curve. Um, and because there's very low slippage for that for stablecoins.

• 1:04:46Speaker 02

  And then you, you get more USDC or DAI, you deposit that, you borrow more tether. You keep cycling it through. And Instadap, um, which, you know, we're, we're investors and then I, you know, love, love the team there. Um, they built a fantastic tool that lets you basically automates that, that process of levering up. And they're using flash loans and running it through and doing an all in one transaction. So you can, um, use their DeFi smart accounts to select your desired level of, of leverage. Um, and, you know, it's, it, it's pretty easy to use from a, you know, DeFi perspective. Let's copy out it that with that. Um, but it lets you, you know, choose your desired level of yield farming, uh, for, for comp.

• 1:05:31Ryan Sean Adams?

  So Instadap is essentially creating an easy button to automate that yield farming for you.

• 1:05:35Speaker 02

  Yeah, absolutely. Um, and it's, uh, yeah, I think it gets like a Forex multiple pretty, pretty easily. Um, you know, as always, there are risks to, to using these things, um, but they, they do make it really easy.

• 1:05:52Ryan Sean Adams?

  Well, you, you talked about rocket fuel and I'm looking at compound right now, like the total, uh, value locked in compound. And it's just like a line straight up. Um, it's, it was like, it's, it's, so it's, the rocket fuel is working. It was a hundred million, uh, at the beginning of this week and it's now 500, oh, you know, 418 million locked in compound.

• 1:06:12Speaker 02

  And the locked is, is the supply minus the borrow. So if you just look at how much has been supplied, it's now over 600 million supplied. Right? And so there's actually more that's been deposited into compound than is currently deposited into maker. Because the maker, you, you can't, you don't borrow any assets that other people have contributed. You borrow DAI by new DAI being issued. Um, so in some ways, like, there's actually more capital that's poured into compound than into maker already.

• 1:06:43Ryan Sean Adams?

  I know David wants to ask you a question just a second, Dan, but one more thing on this because I think our listeners might not understand this. And I want to make sure I wrap my head around it too. So it seems like Tether is yielding far higher returns in terms of comp tokens, in terms of this yield farming for comp tokens than DAI is, right? So I was looking earlier this week and you know, you can deposit DAI and with the interest rate that comp, that compound gives you plus compound tokens, you're doing like, you know, at least earlier this week it was eight or nine percent. But at the same time, you could do the same with Tether and you were doing like a hundred percent.

• 1:07:22Speaker 02

  Oh, you're doing like 200% at that point, right? It was like, it was nuts.

• 1:07:26Ryan Sean Adams?

  Why is Tether so out of whack with these other assets?

• 1:07:31Speaker 02

  Look, I think there's a lot of ways to explain it, but I think there were some considerations around Tether where it was handled separately because of some of the risks, the perceived risks around Tether versus some other stablecoins. But honestly, just like, there's no real reason why the rate model for Tether should be so different from USDC. And so the Dharma team has actually put forth a written proposal, not yet a proposal in code, in the Compound Governance Forum, which is, you know, community started and managed. The Compound team isn't, you know, I don't think any of them are actually admins there.

• 1:08:09Speaker 02

  And they're proposing to normalize the, or standardize the rate curves used for, across all different stablecoins. And so that will, that will help address it. That's going to take a little while to get into place, probably, you know, a couple of weeks. There have been multiple proposals right now just to, to help rein that in to increase from zero to either 10 or 20% the reserve factor, which basically means the amount of interest, the percentage of the interest that's being paid by Tether borrowers and play it into a reserve pool. And so most, if not all, of their assets have some reserve factor. I think it's usually like 10%. In this case, it's at zero. So, so, you know, one party proposed raising 10%.

• 1:08:54Speaker 02

  Dharma came and said, you know, let's go over the top. Let's rein this in by going to 20%. I don't support using it in a kind of a blunt manner like that. I think 10% is right. But I think that, you know, while it may be out of whack for another week or two. Letting it be out of whack for that little period is better because this is a four year distribution, right? That that comp is happening over. So I'd rather be out of whack for a couple of years and not set the precedent of we will abuse a certain variable by by pushing it to do things that it wasn't, it's not really intended to do to fix things. Let's actually fix it the way we should be fixing it, which is to fix the the the curves on the the borrowing and lending rates.

• 1:09:35David Hoffman?

  So Dan, I want to get into the concept of super fluidity and with and in the valence of this new token model that has come out like the like I said at the beginning of this article, you're or the at the beginning of this podcast, the article that I first recognized you for was that super fluid collateral in open finance, which talks about how collateral in one application can be repurposed and placed in a different application. And you use the example of you can submit ether and die to the uniswap ETH die pool and you receive a token that represents a claim on those assets. And then you can use that token as collateral in other applications. And the the reference to super fluidity is is one of my favorites, always a comparison to

• 1:10:18David Hoffman?

  chemistry as to how things in the physical world work. So how does the concept of super fluidity with this new yield farming work? What is the connection between yield farming and super fluidity?

• 1:10:32Speaker 02

  Yeah, so I think what's what's going to happen here as I was proposing there was that, you know, assets will flow and kind of find their level, you know, across these different containers of contracts. And I think what is starting to happen now is we've actually seen a number of different protocols either launch or announce they will launch some kind of governance token. Balancer is one, Curve is another. Synthetix actually, you know, shout out to them as being the ones to kind of pioneer the idea of subsidizing liquidity and it's

• 1:11:12Speaker 02

  incentivizing liquidity in liquidity pools and in a market. They did this subsidizing, I believe, is the synthetic ETH ETH liquidity pool or this synthetic synthetic SUSD pool. They kind of gave SNX rewards for that. And now there's this this new pool where it's ren

• 1:11:36Speaker 02

  Synthetix.

• 1:11:38Speaker 02

  Balancer and Curve and by putting ren BTC WBTC SBTC into this like balancer pool or a curve pool, you're able to liquidity farm all of those tokens at once. And it was, you know, this partnership they all came together and they're like, you know, in some cases, right? With like the balancer piece and with the curve piece, you know, they naturally have already mechanisms to be able to farm those tokens. And then ren and Synthetix will be just like subsidizing this because they want to get ren BTC and SBTC to have more liquidity.

• 1:12:22Speaker 02

  And I think that just they announced it yesterday, it kicked off, I think in the early hours this morning. I don't know what level it's at, how quickly, but I would imagine it's probably going pretty fast. And I think that's going to be like, that's fascinating for a number of reasons, right? First, being able to farm all these different types of governance tokens at the same time is really cool. Interestingly though, you can't farm comp that way. And that's for how some of these protocols have been constructed. If you want to farm comp in a balancer pool, you, if you just have like two stablecoins or two equivalent assets or any assets,

• 1:13:07Speaker 02

  the comp is going to get stuck there. So you can't use like CDI and CUSDC and CUSDT in a pool. The comp will sit there and just be dead. But what you can do is put like a 2% allocation to comp in the pool. And then that gives you a mechanism that will pull the comp out. So because this is a product where they're trying to like get it to be a pure like different forms of BTC pool, there is no comp element. And so it doesn't make sense to try to use like CW BTC in the pool.

• 1:13:39David Hoffman?

  So it's using your deposited assets in something like Compound and putting it in another application like Balancer to generate liquidity while also capturing the value of the comp token or the X governance token that's issued by the relevant application.

• 1:13:56Speaker 02

  Yes, and the people jumping through these hoops and doing this are probably like they're looking to essentially farm all these other tokens, but the goal, the reason the teams are incentivized this, right, the reason Synthetix and Ren in particular are doing this is they just want to build up liquidity and get people to start using their versions of Bitcoin on Ethereum. Because right now, they don't really have wide adoption and anybody who wants to use them, there's just not a lot available. And so their goal here is to just make a lot of it available. So if people will provide that liquidity for others because they're being incentivized to do so, great. Now, other people who just, they don't care about farming yield, they just want to have

• 1:14:40Speaker 02

  a representation of Bitcoin that they can use in some meaningful amount on Ethereum. Well, hey, great. Now you can do it. And so I think that's, that's really powerful and that's, that's the intended purpose of, of these tokens or of the distribution mechanisms of these tokens.

• 1:14:59David Hoffman?

  So for the people, the users of DeFi that aren't crazy farmers that are squeezing out yield in every single corner of Ethereum and they're just normal users who are just sending back and forth assets and maybe they're, maybe they've deposited to Compound just to generate a little interest here or there, just the typical 101s. How does this meaningfully impact them? Is it just that the things on Ethereum, the assets, the tokens are given more reason and more purpose and more to be deposited into these liquidity generating mechanisms like Uniswap or Balancer or Compound? Is really just the impact upon the end user liquidity or is there other benefits to the average user of Ethereum as well?

• 1:15:43Speaker 02

  Um, well, I guess the question is like, what are the average user of Ethereum looking for?

• 1:15:52Speaker 02

  You know, I'd say probably the average user of Ethereum is, you know, as much as, you know, might not want to admit it in the Ethereum community, it's the same as Bitcoin. It's, you know, waiting for number to go up on the native asset. And so, you know, for that perspective, if there is more activity happening on Ethereum, then, you know, hopefully that makes the value of Ether go up. And so that's, that's good for those users. The way that it benefits though, with people who are not just sitting there waiting for number to go up, who actively want to use Bitcoin on Ethereum or do other things is it enhances usability and composability because there is just now more assets that can be tapped into in these various protocols.

• 1:16:34Ryan Sean Adams?

  By the way, Dan, we are not among that ilk. We are very happy for number to go up. We think economic bandwidth is very important.

• 1:16:41Speaker 02

  Yes, yes.

• 1:16:43Ryan Sean Adams?

  So, you know, number go up. But, you know, okay, so there's one last maybe meaty topic to dive into, Dan, and then, and then we'll let you go. And that's, can we talk for a minute about downsides? So, we are really excited about this right now. To be clear, we do think it's rocket fuel, but I was thinking about a few of the downsides that we may have hinted at, or, you know, listeners may have kind of seen through as we've been talking about this. And in my mind, there are three. One is this could cause another speculative mania. And for the good and the bad, there is some bad there, right? So, you know, that's one possibility. Another is this concept of time shifting, where you're basically front-loading some

• 1:17:27Ryan Sean Adams?

  of the, almost like DeFi token equity at the beginning. So Compound, for example, they're going to distribute comp tokens for four years. But after four years, there's nothing left to distribute, I would assume. So, is this rocket fuel, I guess, going to run out at some point? And is that a problem? And then the third thing I was thinking was, one thing that these protocols are doing essentially is They are selling their governance, so they are selling some of their future decision making. You know, and they're incented to essentially sell it. We've been talking a lot about bankless, about the value of non-subjective, almost governance-free protocols.

• 1:18:09Ryan Sean Adams?

  Uniswap has been mostly one of those so far, but something like this could incent a Uniswap to now release a governance token and inject governance into a protocol that doesn't necessarily need it. And maybe that subjective governance is not as healthy as a governance-free, fully DeFi robot type of protocol. So any comment on those three things? Those are just a few of the potential downsides that I see at the top of my head. What's your take on downsides?

• 1:18:41Speaker 02

  Okay, wow. So there's so much to talk about within each of those. One, quickly, you mentioned Compound having a fixed supply.

• 1:18:51Speaker 02

  And you guys have often talked about Bitcoin having fixed supply as kind of like a meme, right? Everything is subject to social governance decision. This is explicitly so, right? So at four years, if the community, the governance token holders decide to, they can issue new shares, right? They can issue more comp tokens. Anywhere along the line, the distribution schedule could be changed and stretched that out to 10 years or longer, or however long you want. You can create tail inflation, should you so choose. So none of this stuff is locked in. That's the kind of the beauty of governance.

• 1:19:31Speaker 02

  The danger is like, part of the reason it works is probably the story that people like the idea of a fixed supply, especially I think for some of this governance stuff. And so it's just easier to wrap your head around. And so we're opening a bit of a can of worms by talking about the fact that maybe these things aren't fixed. But you know, I strive to be on the list and as you guys do, explore the trade-offs in this space. So you know, wanted to kind of mark that off here.

• 1:20:03Speaker 02

  There are risks, right? And I think actually, one of the biggest risks here that isn't often talked about is, you know, looking at who's in the space and who has a lot of ownership in the space now and right like, we are, you know, three white men who are having this conversation here and we're having this conversation on Juneteenth, right, which is kind of the anniversary of effective abolition, the end of the Civil War in the United States. And we're seeing on a national stage and a world stage, some of the problems with the existing systems and power structures in the world.

• 1:20:43Speaker 02

  And I think if we are going nuts now with this stuff and it's growing and it's building a new system that just replicates existing power structures and existing, or even accentuates the imbalance in existing capital allocation in the world. That that leads us to a scary place and not a positive place that I want to be part of building. So I think it's important that as we're building these systems, we are doing so with care and keeping an eye and really intentionally building towards the end goal, which is that this, the this new financial system that we are trying to help bring into the world

• 1:21:24Speaker 02

  should be one where it empowers everybody and is not merely a tool for those who are currently in power and who have financial resources to continue to extract financial resources from others. And so that's, you know, apologies for like the kind of a little bit like a soapbox moment there, but I do think that we need to pay attention to, if we succeed, what is the impact of these systems in the real world?

• 1:21:55Ryan Sean Adams?

  I think that was well said.

• 1:21:56David Hoffman?

  In my, the Bankless Nation Part Two essay that I just released, I included a section that I labeled world building, which was supposed to be a reminder as to the

• 1:22:08David Hoffman?

  That this is a blank slate of a world and is going to, the future of it is going to be dictated as to how we build it today. And kind of a call to action is just to be cognizant and reflective of when we make decisions today that they could impact the all future societies, all future generations based off of the world. So I'm glad, Dan, that people like you are thinking about that today. So Dan, what is next for the grand scheme of governance tokens and DeFi? If at a very macro level view, at a very high level view, how do you think this, in a concise way, how do you think this changes the game for Ethereum and DeFi? And what can we predict will happen as a result of the emergence of these new governance tokens?

• 1:22:51Speaker 02

  Yeah, so I think in the near term, we're, we're going to go through a hype cycle. I think we're, we're going to see a lot of people doing these governance tokens. I think there's going to be a period of just kind of copycat activity. I think there is going to be rapid experimentation and trying to get to improved models around this kind of SAGG governance token distribution framework.

• 1:23:19Speaker 02

  I do think that we're going to start to see more of these mashups between different protocols, right? To the extent that one of the things that's gotten us most excited about this space has been the composability between different protocols. This is incentives for composability between protocols. So we're going to see, I think, a lot more things like that incentivized Bitcoin on Ethereum pool. And I think, you know, from there, one of the next phases is going to be as we get into the question of value capture, right? These things start as governance tokens. They may remain as governance tokens, but I think there's a very high probability that the governors of these systems will move to implement some form of value capture.

• 1:24:04Speaker 02

  And I think we're going to, we're going to start to shift the conversation to what is the right form of value capture? What are the trade offs in different approaches? And how should they best be structured for different types of systems? So I'm. I'm very excited for that conversation to open up. I think there's going to be talk through this as to maybe during the bubbly part also is like, what is the amount of real usage versus just liquidity farming usage? And I've already got some ideas in terms of how we might start to address that and separate that out and create better incentives that even the stuff that is inflated, we can at least see which is inflation and which is more quote unquote real.

• 1:24:47Speaker 02

  And, you know, then ultimately, hopefully we get to this place where there's enough assets in this and I'm talking, you know, billions of dollars, tens of billions of dollars that have been in these protocols for years. And that's when I think it starts to become more appropriate to start trying to mainstream this and expose people who are living paycheck to paycheck, if they even receive paychecks and say, and being able to say with confidence, yes, this is worthy of your trust. You should put some money into it because it will be better for you than the existing

• 1:25:28Speaker 02

  financial tools that you're using. And maybe it won't be just a year or two from now. Maybe that's even further down the line. But I think, you know, at a high level, those are the, some of the different steps and things that I see coming down the line.

• 1:25:43Ryan Sean Adams?

  Dan, it has been exceptionally great to chat with you today. Thanks for making the time. It was a crazy week in DeFi. And like, it's hard for folks to make sense of it. I think if somebody took vacation this week and came back, they would see yet again, another new slew of products and a bunch of events that they have to wrap their head around. So thank you for helping us make sense out of it today.

• 1:26:08Speaker 02

  Absolutely. And I'm looking forward to continue the conversation in the bankless community and on Twitter and, you know, wherever else.

• 1:26:16Ryan Sean Adams?

  Excellent. Thanks so much, Dan. So you heard it here, guys. Dan predicts there could be another speculative mania that there are yield farming opportunities right now that these governance tokens/future capital assets on DeFi could be quite a big deal. So what you should do as far as actions is dig into this stuff further. We've got a few actions for you today. The first is you need to subscribe to Bankless so you catch Dan's article. It's coming out on Wednesday. This is going to be like a super fluid collateral part two, his very influential article, but I think this chapter is going to be about yield farming. I don't quite know the title yet, but Dan is going to publish a draft here

• 1:26:57Ryan Sean Adams?

  shortly, so I can't wait to read it. Also, take a look at the opportunities for DeFi tokens that are available. There are opportunities in Compound to govern. There are opportunities to yield farm. We talk about those a lot in the Bankless Discord. There are opportunities to front run everyone who's not paying attention to this space, so check that out. And lastly, we will include an article to Gavin's, we'll include a link to Gavin's article where he talks about the, called the Safji, which you absolutely have to read for a glimpse into the future here. As always, risks and disclaimers. ETH is risky. DeFi, including the yield farming

• 1:27:39Ryan Sean Adams?

  opportunities that we talked about, is absolutely risky. Be careful out there, guys. You could lose what you put in, but we are headed west. This isn't for everyone, but this is the frontier, and we are glad you are with us on the Bankless journey. Thanks a lot.