11 - Going Bankless with Compound | Robert Leshner

Episode: #11 May 11, 2020 Your savings account, your high-yield bank deposits, a CD. Can we replace these bank functions with a protocol? Compound seems to think so. Compound is a two-sized money robot that provides borrowing and lending to create something new: interest. Learn what it does, why it's powerful, and how it's evolving as we talk with Robert Leshner. We even ask if there's a way for the community to get its hand on some Comp tokens and start shaping the future of the protocol. We cover: What you can do w/ Compound Power of programmable interest How Compound's different than: WellsFargo (traditional banks) Maker (other procotols) BlockFi (crypto banks) If crypto banks will out-compete DeFi How you can get COMP tokens Future of protocol politicians The protocol sink thesis Robert's biggest fear for DeFi How the Bankless community can help This is our final of three episodes in the "King Money Protocols Series" where we talk through the three most important DeFi protocols. Catch up on Episode 10 http://podcast.banklesshq.com/10-going-bankless-with-uniswap-w-with-caleb and Episode 9 http://podcast.banklesshq.com/9-going-bankless-with-maker-w-mariano-conti if you missed them. Before the episode begins we also talk about: Tron stealing our tax money What wBTC backing means for DAI ----- Tools from our sponsors to go bankless: Rocket Dollar https://www.jdoqocy.com/click-9261763-13920047 - tax shelter your crypto ($50 w/ "BANKLESS https://www.jdoqocy.com/click-9261763-13920047") Monolith https://monolith.xyz/ - holy grail of bankless Visa cards Aave https://aave.com/ - money lego for lending & borrowing DYDX https://trade.dydx.exchange/r/bankless - trade, margin, BTC perpetuals (10% off with this link https://trade.dydx.exchange/r/bankless) (trade.dydx.exchange/r/bankless) http://trade.dydx.exchange/r/bankless ----- Resources discussed: Compound protocol https://compound.finance/ - interface Dharma https://www.dharma.io/ - build on Compound Compound governance https://compound.finance/governance - interface Ryan's voting record https://compound.finance/governance/address/0xfdaae0c5a7a56c8265b9f86cf8cd934a494e3733 - two votes! Read: How to get a Dai savings Rate https://bankless.substack.com/p/how-to-get-a-dai-saving-account - include Compound ----- Episode Actions: Try earning interest on Compound https://compound.finance/ Stay tuned for governance opportunities: Here's how Bankless plans to govern https://bankless.substack.com/p/lets-govern Give Bankless a 5-star review on iTunes right now! ----- 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/ Visit official Bankless website http://banklesshq.com/ for resources Follow Bankless on Twitter https://twitter.com/BanklessHQ | YouTube https://www.youtube.com/c/bankless 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 have an absolutely fantastic episode with Robert Leshner from Compound today. This is going to be an episode on how to go bankless with Compound. What did you learn from this episode, man?

• 0:41David Hoffman?

  There were so many topics that got dropped in this episode that I haven't heard anywhere else, and so it was really a treat to get Robert Leshner on to talk all about Compound. I really enjoyed learning about the kind of the design ethos and parameters of the Compound protocol, how it came to be, and why some of the decisions were made in the way that they were. And so, you know, Robert, he's the founder of Compound, and so he goes all the way back and kind of explains some of the choices in the Compound protocol, the ethos of the system at large, and how and where Compound is going to go into the future. And so, Robert's a really smart guy, sharp as a tack, really saw the vision for DeFi,

• 1:26David Hoffman?

  I think, earlier than most people, and he has led Compound with that vision, and I think he hit that vision, that nail on the head, really, really well. So, you know, tip of the hat to Robert for building something really powerful in this space. We touch on topics such as the Protocol Sync thesis, which me and Ryan are harping on more and more and more, and Robert really, really resonated with that. And so, we're going to, we talk about that. And we also talk about what it means for a system like Compound to be fully autonomous, but also governed by, you know, a set of community stakeholders. You know, these are topics that we all, we always knew were coming in the horizon with Compound, and it's starting to look like the arrival of these things, like Compound

• 2:11David Hoffman?

  Governance is just right around the corner. So, I'm really glad to have recorded this episode with Robert and gotten it into your guys' ears.

• 2:19Ryan Sean Adams?

  I even felt like we got some insider information here that's actually dropping in this episode about how compound tokens could be distributed in the future. So stay tuned for that, guys. You will not want to miss it. But before we get into that, David, we should talk about our sponsors today. So the first is a favorite, Rocket Dollar. This is for our US listeners. So if you have an IRA or a 401k, chances are it's inside of a brokerage like a Fidelity or a Schwab account. That means inside the brokerage, you don't have good access to crypto. If you want to buy crypto, you have to pay 5X the price. That is crazy. You're getting ripped off by doing that. What you need to do instead is break your retirement account out of jail.

• 3:04Ryan Sean Adams?

  We've got a post on how to do this on Bankless. It's one of our most popular posts. I will include that in the show notes. But you could go to Rocket Dollar. They can help you get what's known as a self-directed retirement account, either an IRA or 401k. They help you with the paperwork. They help you with all of the pain. They help you break your retirement account out of jail. Once it's out of jail, you can buy crypto wherever you want, on Gemini, on Coinbase, in a tax-free account. Super powerful. You could go to rocketdollar.com to check that out. Use the code BANKLIST to get $50 off. That's BANKLIST to get $50 off at rocketdollar.com.

• 3:43David Hoffman?

  DYDX is one of my favorite DeFi applications on Ethereum. And that's because of just the magnitude of things that you can do on DYDX. You can spot trade, margin trade, you can borrow and lend, and coming soon are perpetual swaps. DYDX has originated over $1 billion in loans over the last year and has $0.5 billion in trading volume. I personally, I like to use DYDX to leverage long when I'm feeling particularly bullish. But other people I know in the crypto ecosystem lend out their DAI inside of DYDX to people like me who are borrowing it to go leverage long. Like many applications on Ethereum, there are two sides.

• 4:26David Hoffman?

  There are the speculators, and then there are the people that are lending the funds. To those speculators. And so DYDX can be what you need it to be based on of your own personal finance needs. And so if you are bullish, you can leverage. And if you are looking just to save your die, you can lend. And something that's coming new is bringing Bitcoin to DeFi through perpetual contract markets. And so soon you'll be able to have price exposure to Bitcoin inside of the DYDX exchange. This is launching at the end of this month in May. You can sign up for the alpha right now. And a special offer for the bankless listeners, you can get 10% off of trading fees on DYDX if you sign up using the bankless referral

• 5:10David Hoffman?

  link, which is trade dot DYDX dot exchange slash R slash bankless. It's a long one. So it's also in the show notes. You can get it there. So sign up with that link. So you can get 10% off trading fees.

• 5:24Ryan Sean Adams?

  David, we're going to get started with the episode in just a few minutes. But first, I want to talk about something that's that's really just pissed me off. I found out today, there's an article published by by crypto publication called Decrypt, that Tron is actually getting some taxpayer dollars, US government taxpayer dollars from the PPP program. You know, that loan program that was supposed to go to small businesses. Well, the Tron, a Tron subsidiary company based in the US, applied for it, and they're getting $2.5 million worth of loans from the US government. These are forgivable loans. Like, what's up with that? What's going on, man?

• 6:06David Hoffman?

  If this doesn't illustrate why money and value systems should be put onto public utility systems like Bitcoin and Ethereum, then I don't know. I don't know what's what. The money printer just went fur. There's a bunch of money being handed out for small businesses. But because money and money value transfer systems are inherently political, people like Tron can, you know, pay their accountants overtime with their TRX that they also just printed out of nowhere to fill out the forms faster than all the small businesses who are To pay their employees and have other things that they need to tackle. So, once those accountants filled out those forms super fast and get them submitted, the Tron Foundation can get those money printer bucks.

• 6:50David Hoffman?

  So, if this doesn't illustrate why we are trying to be a bankless system, turning money and value transfer and value management systems into public utilities that are credibly neutral and inherently apolitical, then I don't know what will.

• 7:05Ryan Sean Adams?

  So, for those of you who are not familiar with Tron, it is a copy and paste of Ethereum. It's run by a self-obsessed marketing guru named Justin Sun. I mean, really, we never talk about it on Bankless because there's no reason for you to really know much about it. And we don't like tarnishing the bankless movement with projects like Tron. They're just not worth your time. But this one infuriated me enough that I thought we had to talk about it because it's more of an example of being in the money spigot and getting access to government funds. When there's a fiat system and it's set up to distribute funds, it's not set up in a credibly neutral, fair way.

• 7:49Ryan Sean Adams?

  And whoever is closest to the money spigot, as you were saying, David, whoever has the banking relationships, they're the ones that are going to get the funds. The funds aren't even going to the small businesses necessarily. Public companies are getting them in some cases. And Tron, companies like, organizations like Tron, which are complete scam projects, are getting them in other cases.

• 8:11David Hoffman?

  The super ironic thing about this is that Tron can print their own money too. Like, they also have their own TRX money printer. So, like, they're going to the other money printer and just collecting those funds. But they could have printed their own TRX anyways. And so, like, and the other thing that I think we should all really just be aware of is like, the federal government and the political organization behind the US dollar money printer couldn't identify that maybe perhaps Tron wasn't a viable candidate to receive these funds. Like, we're not vetting people enough to... Identify that maybe Tron doesn't, Tron, the owner of their own money printer, doesn't

• 8:54David Hoffman?

  need funds from the federal government that could have been much more suited to other small businesses. There are, there are thousands, hundreds of thousands of small businesses throughout the United States that actually are desperate for funds. There's a, a story I heard on Planet Money, which is a fantastic legacy podcast about a local business that I'm very familiar with called Molly Moon's. It's a local ice cream shop here in Seattle, and they interviewed the founder who applied for a $300,000 business loan through this program. And because they ran out of money, they gave, they gave her a loan for $15,000. And when she, when she got that notice, she said on the podcast that she just opened

• 9:35David Hoffman?

  that up and laughed because $15,000 would do her absolutely nothing. She had, she has multiple change, multiple employees and, and it's just, it's laughable. And then meanwhile, Tron, this, this, this chain run by this self aggrandizing, like, like borderline scam artist is getting money from the federal government. And like, maybe perhaps this whole federal government controlling the central, the money of the United States isn't working the way that we hoped.

• 10:04Ryan Sean Adams?

  Yeah, I'm, I'm kind of with Ben Hunt from the Epsilon Theory Newsletter. He says, burn it the F down. Like, that's how, that's how I feel when I see stuff like this. And I think the reason there aren't protests in the street is because most people don't know that this kind of thing is what's going on. They don't know that their government fiat system is basically getting looted by organizations like this and by those that are printing money. And it's not even that, you know, the Fed or the bankers who, who gave these funds are the ones necessarily at fault. I mean, they're all part of a system that incentivizes and leads to this outcome.

• 10:47Ryan Sean Adams?

  So guys, I mean, that's why we're on the the bankless mission is because there should be a separation between money and state, because we think there is a need for credibly neutral protocols to play a role in our financial system. We think that fair finance and fair money should be accessible to anyone with an internet connection. Just another reminder of that. Let's talk about something different, David, because I know you have some opinions on this. So we talked about the Maker Protocol in episode nine a little bit, how to go bankless with the Maker Protocol. And that time, we talked about some collateral that was used to back die a collateral. The primary collateral is ETH and was ETH and still is ETH and other tokens as well.

• 11:32Ryan Sean Adams?

  But a new token has just been added recently called WBTC. So that is a wrapped custodial version of Bitcoin. So it's not as trustless, of course, as something like Ethereum, not even close. It's actually custodied by a crypto bank of sorts, BitGo, sort of a custodian provider that is custoding the assets. It's not very trustless. What's your take on this, David? Is this a good thing or a bad thing for Maker? And is it a good thing or a bad thing for DeFi?

• 12:08David Hoffman?

  So I think we should all take a step back and look at the fact that there is now Bitcoin inside of Maker DAO. And when we view the crypto industry and especially the DeFi industry from a bird's eye view, like, that's incredible. That's a really incredible like innovation. We finally got Bitcoin inside of Maker DAO. Is this the final form of Bitcoin in Maker DAO? Probably not, definitely not. I hope not. And so is this a good thing? Absolutely, it's a good thing for today's version of DeFi. If this is still the way that it is in two years, five years, 10 years, then definitely not. The truth is that centralized centralization makes things

• 12:52David Hoffman?

  Go faster. And so, you know, WBTC wrapped Bitcoin by BitGo inside of DeFi is not necessarily the trustless crypto economic protocol future that we're envisioning. But how else are we going to get there if not, you know, dipping our toes in experimental ways by using centralized, centralized mechanisms first. And so, you know, and at the end of the day, people, people, at the end of the day, like, we need to realize that this is a journey that we're going on, and not the final destination doesn't happen tomorrow. In fact, the final destination never actually ever happens. It's DeFi is always going to get better and improve and get stronger.

• 13:33David Hoffman?

  And this is just the first step of many to this maximally successful MakerDAO protocol.

• 13:39Ryan Sean Adams?

  Okay, David. So now, like, 80% of DAI is still backed by ETH, right? But let's say, you know, 2%, maybe 5%, maybe even 10% at some point in time, starts getting backed by these more trusted assets. What does that do to the banklessness of DAI in your mind?

• 14:01David Hoffman?

  Yeah, this is, this is a really good question. So, you know, DAI that's backed by Ether is like the most pristine, most trustless version of DAI. But I wouldn't say that, and now, and then, right now, there's 99 million DAI that's backed by Ether. There is 12 million DAI that's backed by USDC, half a million DAI from BAT, and 100,000 DAI backed from WBTC. So it's, it's, yeah, like, it's largely Ether, but you know, this, this trend is trending away from Ether. Now, I think people need to remember what the whole point of MakerDAO is. The MakerDAO

• 14:40David Hoffman?

  protocol is a risk filtration system, as in, you put assets in, and then MakerDAO takes the risk from those assets, and it puts it into MKR. And then the remainder is what you get is DAI. So with DAI, you get no upside, you get complete stability, and you get no risk. You get minimal risk. And then all that risk is Put into MKR and that if the Maker DAO system is working well, then DAI should be as risk free as possible. Risk is something that you can engineer out of a token and that's what happens with DAI.

• 15:16David Hoffman?

  And so when we talk about, you know, DAI is issued by the centralized asset WBTC that can be burned as as seen fit by the BitGo system. Or same thing with USDC, then people are saying, look, well, then this this these characteristics of the collateral are then exemplified in DAI. That's not true. It's exemplified in MKR. That's where those centralization risk is. MKR holds all the risks from all the collateral inside of its system. And the whole point of MKR of Maker DAO is to appropriately manage risks with the skin in the game, which is the MKR token.

• 15:55David Hoffman?

  And so when people say that, you know, MK DAI is now centralized, what they really should be saying is MKR is now centralized. Uh, and it's it's taking all of the centralization risk and putting it into MKR. And so if you don't want, if you don't like that centralization risk, the answer isn't to not buy DAI. I think the answer is to not buy MKR because you are saying you're you're making an opinion that the the centralization risk is bad. And so I you don't want that risk. And so then don't buy MKR, but DAI should still be okay. DAI should still have the qualities of a a risk free, stable asset.

• 16:31Ryan Sean Adams?

  I suppose with with DAI, if, you know, one of those assets got got seized, for example, BitGo decides to seize all of the Bitcoin. And the value of that decreases to zero, then what's going to happen is is Maker holders pay the price, right? Because Maker gets inflated. So as you're saying, it's it does sort of shift that risk, you know, back over to to Maker. And not necessarily in the the hands of a DAI holder. That that said, you know, we talked about it so often here, David, that this is sort of a, I mean, this is going to be a Darwinistic survival of the fittest. Emergent ecosystem of stable coins and assets. Uh, I do think that it's going to open the possibility for a.

• 17:17Ryan Sean Adams?

  More a single collateral, completely trustless, maybe more money robot, maybe less governance type of stablecoin on Ethereum at some point. I'm not sure what way, shape or form that takes. I'm aware of a few projects that are kind of working on something. But what will happen is another asset will emerge that that might be a bit more trustless than DAI and those assets will kind of battle it out. And I think net-net, the bankless community wins from these experiments being pursued from multiple vantage points and in multiple ways. So that's a good thing.

• 17:57David Hoffman?

  Yeah, I definitely agree. Like, there seems to be this really strong demand for this maximally decentralized, maximally trustless version of DAI. I would remind everyone that the Black Friday or the Black Thursday events that occurred happened very much because DAI was only backed by Ether. I mean, there was some DAI from BAT, but negligible negligible amount. And so this trustless and decentralized, totally maximally decentralized version of DAI comes with its drawbacks, comes with its weaknesses. You know, a DAI that can be backed by real estate, WBTC, USDC, basic attention token, you know, real T-tokens,

• 18:39David Hoffman?

  hopefully in the future, that version of DAI is going to be far more liquid and far more stable, which is the whole point of DAI in the first place. You know, DAI is first and foremost supposed to be stable money and stable money is liquid money. You need to have liquidity in order to be good money. And the DAI that has a large set of distributed collaterals will always have less risk and more stability than any other stablecoin. And it's also it's also worth noting that like, say, DAI has like, say, DAI has like 10, 15, 50, 100 different centralized assets inside of the MakerDApp protocol that's backing it. Well, if they're all centralized, they're all going to be centralized in a different

• 19:24David Hoffman?

  way. And so the centralization risk From one doesn't bleed into the other. And this kind of goes with like the oracle system, right? Like if Coinbase, the centralized company Coinbase has an oracle, and then the centralized company Binance has an oracle, and then the centralized company Circle has an oracle. The oracles are themselves decentralized, even though they're propped up by a bunch of centralized actors. The same phenomenon works in DAI. If DAI is propped up by, you know, a thousand different centralized collaterals, well, then DAI is still decentralized. Because that's, it isn't just this one single homogeneous centralization risk. Right? It's, you don't get to add those things together. Those are separate centralization risks, which makes them somewhat decentralized.

• 20:08Ryan Sean Adams?

  Yeah, absolutely. And whatever happens, I am looking forward to seeing the stablecoin asset wars in the coming years. I think it'll be a net benefit for the community. Hey, maybe even Compound might, through its governance process, might through, throw a hat in the ring there. We'll have to see.

• 20:27David Hoffman?

  All right, we're going to get into our episode with Robert. But first, we got to talk about our sponsor, Monolith. Monolith gives you the ability to spend DAI wherever Visa is accepted all over the world. The DeFi card by Monolith allows you to have DAI in a smart contract wallet, but then be able to swipe your card at any store and then spend that DAI in the real world. It allows you to have a little bit of the Ethereum network in your pocket as you go about and do your daily, your daily business. You know, crypto, it's not really the most intuitive platform. It's not really that, something that's very easy to use. But things like the Monolith DeFi card make Ethereum very tangible and very integrated into the world at large.

• 21:12David Hoffman?

  This way, you can live a bankless life without having to compromise with the tools that you use. So you can download the app at monolith.xyz and get your bankless Visa card today and start putting some of the economic activity of the world on Ethereum with your Monolith Visa card.

• 21:32Ryan Sean Adams?

  Another bankless tool you absolutely have to check out is Aave. Aave is a sponsor of the podcast and they are a lending and borrowing protocol on Ethereum, similar to Compound in some ways, because you could lend to it, you could put your dye into it. It will take that dye, it will transform that dye into an interest-bearing asset that you can carry around with you. You can do that with dye, you can do that with Ether, other ERC20 protocols as well. You can also borrow from Aave. Now, when you borrow from Aave, you can select an option to convert your variable rate loan into a fixed rate loan, so you know exactly what you're paying on a given time interval. Developers, you've got to check out their flash loan protocol, that's being incorporated

• 22:17Ryan Sean Adams?

  in all sorts of developer tools right now and in all sorts of other interfaces. Go to ave.com and deposit your crypto to start earning and borrowing. That's Aave, A-A-V-E dot com, and check it out. All right, guys, let's go ahead and get right into the episode with Robert Leshner of Compound.

• 22:44Ryan Sean Adams?

  Welcome to episode 11. Dave and I are really excited about this. We've got Robert Leshner, who is the founder of the Compound Protocol, one of the big three king protocols, DeFi protocols, as we've called them in this series. Robert, welcome to Bankless.

• 23:01Speaker 02

  Glad to be here.

• 23:02Ryan Sean Adams?

  You know, Robert, I think it would be super useful if you just give our listeners an overview of how you got into the Compound project. Like, why'd you start it? What was the need that you saw and the interest that you had?

• 23:16Speaker 02

  Well, it's funny that you asked the interest that I had. When I looked around at the space, one of the things that I saw, and this was in 2017, was that everybody was focused on the speculative and trading sides of crypto, focused on the price of given assets. And there was less of a focus on how those assets would be used, exchanged, and transferred over time. And interest, when you boil it down, is the ability to use an asset. In a capital efficient way to use it for a productive purpose. And an interest rate is really the, you know, price between two different counterparties and how they each value its usage over time. And we saw everyone focused on the spot or the current value of an asset and very little

• 24:01Speaker 02

  on the future value of the asset and using the asset. And so we decided to build an interest rate protocol because we saw it as a very important missing building block in this space. And three years later, we're finally at the point now where there's starting to become this concept of, you know, crypto assets having interest rates and being able to participate either as a supplier of the asset or a borrower of the asset very frictionlessly.

• 24:26Ryan Sean Adams?

  So, Robert, you wanted to create, essentially, you saw a need to create sort of a, we might call it a money Lego, but a money Lego for interest then. And, you know, you didn't see that need being fulfilled. Maybe we could just level set for our listeners too on, you know, just some compound 101. So what can people actually do with compound? So if I'm somebody who's interested in going bankless, I have an Ethereum wallet, what can I actually do with the compound protocol today?

• 24:55Speaker 02

  So, compound creates a short-term interest rate for different crypto assets. So if you have Ether or the stablecoin DAI or a token like basic attention token or 0X, you can supply it to the compound protocol to earn an interest rate. Now, this is not a loan and there's no duration of this interest rate. You're earning a short-term variable interest rate. So as supply and demand in the market change, if there's more people trying to earn interest or there's more people borrowing, the interest rate available to you changes as well. So what you are receiving as a user is a variable interest rate that you can participate in whenever you want and for as long as you want.

• 25:40Ryan Sean Adams?

  So this variable interest rate, how is the interest rate for any two assets decided?

• 25:46Speaker 02

  For a given asset, the interest rate is set based on an interest rate model, which is an algorithmic approach to coming up with the appropriate interest rate. The alternative approach that some systems may use is an order book, where people essentially negotiate through trading on what they find to be an efficient price. Compound doesn't work that way. There's a model. The first models for the different assets were originally designed for by our team. And over time, these models are going to be increasingly generated by the community. But there's basically a model that runs each interest rate for each asset. The interest rate on Ether is different than the interest rate on the stablecoin DAI,

• 26:29Speaker 02

  which is different from the interest rate on a different asset. And these models take into account really just two things, supply and demand. It's similar in some ways to how, you know, the Federal Reserve takes into account the supply and demand for money in an economy when they set the interest rate. In this case, though, it's just a math formula. And it runs completely autonomously. And every 15 seconds, which is an Ethereum block, in which the conditions in one of these compound markets changes, the interest rate will change ever so slightly.

• 27:02Ryan Sean Adams?

  So, Robert, you said autonomous, and you said that users are actually interacting with a smart contract, some code, rather than with an order book, almost interacting with a money robot. And we talked about this in episode 10 with Uniswap, but I'm noticing sort of a trend across our big three DeFi protocols, you know, Maker and Uniswap and now Compound, that none of these are actually order book type protocols. It's all sort of an interaction with some sort of a money robot, interaction with some code. Is that really the killer app for DeFi? Why is that? Why does that seem to always rise to the top and be so successful?

• 27:44Speaker 02

  Yeah, so I think one of the reasons why we're seeing this succeed is that it works in what I would call single-player mode. You know, if the system is built and the money robot is coded correctly, it doesn't necessarily require the participation of many other users for you to be able to have the financial service that you would like. It allows you to sort of play on your own, to see the service being offered and to interact with it. It doesn't, you know, necessitate other users with the exact opposite view at the exact opposite time, coming in to match with you in any way. So it's significantly more efficient for, you know, the level of DeFi that we're at today.

• 28:23David Hoffman?

  The way I view this is that DeFi has definitely settled on a peer-to-contract model as opposed to a peer-to-peer model. And back, way back when, all the way back in 2018, there was Dharma, which was going for a peer-to-peer model of lending, where two parties would find each other with an exact agreement of the exact inverse agreement. So, you know, one person was lending at 3% and other, somebody else was borrowing at 3%, and those people would get matched. And we found that Dharma, that was just not in a very efficient model. And so it seems to be that the peer-to-contract model, where there's one person, as you, I really like the single-player

• 29:04David Hoffman?

  illustration, one single person interacts with a contract, and that contract, to me, is operating as Mr. Market, right? Mr. Market comes every single day and knocks on your door and says, "This is the rate that I have for you today. Take it or leave it." Is that the way that you view it?

• 29:23Speaker 02

  Yeah, that's exactly right. I think you summarized it well. The contract, you know, aggregates a lot of market activity from many different users and standardizes it into a format by which a single user or participant can interact with it instantaneously, right away, where the second the Ethereum transaction is mined, the interaction with the system is effective. You don't have to sit around waiting for anybody else.

• 29:47David Hoffman?

  So that's a really efficient model because not having to wait for a counterparty to take your trade just Means that you can get your get your trades executed instantly. But ultimately, at the end of the day, a human does have to be in the process somewhere. Right. And this is true for for MakerDAO and for Uniswap as well. So even though that the algorithm for determining the rates is autonomous and runs autonomously, designing that algorithm is a human based endeavor. And so can you talk about some of the decision making that goes into designing the algorithm? To and what would what makes a good algorithm versus a bad one?

• 30:29Speaker 02

  Yeah, that's a great question. So, you know, the compound algorithm itself hasn't really changed too much over the last couple of years. At its heart, it's relatively primitive, where there's a very basic concept where when there's more demand to borrow an asset, the interest rate goes up. And when there's less demands to borrow an interest rate, an asset, the interest rate goes down. That's at its heart, what it does. The design of this, you know, to get to something so simple was actually quite a lot of work. You know, earlier, you know, visions of how a compound would work were actually significantly more complicated. But what we found was that, you know, over time, we're able to strip away everything except the most basic,

• 31:12Speaker 02

  you know, simple formula, which is essentially a straight line, where interest rates increase as a function of demand.

• 31:20Ryan Sean Adams?

  So, Robert, it is funny that David mentioned Dharma, because now Dharma is actually building a smart contract wallet, and they're they're leveraging Compound in order to do that. They're almost a onboarding service to the Compound protocol. Is that is that by design? Are you guys making compounds so that other protocols and other money Legos can plug into it? And like, what are the most interesting, I guess, projects that you've seen being built on Compound?

• 31:51Speaker 02

  Yeah, that's a great question. So when I think about who the user of Compound is, I actually don't visualize a person with an Ethereum wallet, you know, sitting at home at their office computer, you know, interacting directly with the protocol. We envision that the users of Compound are actually other developers and people building applications themselves. One of the great things about smart contracts is the users can be people or other smart contracts or other applications or other financial products. And, you know, Compound, when you boil it down, it's just an interest rate. And it's a series of interest rates. And anyone can incorporate those. We think that the best products are ones

• 32:33Speaker 02

  that developers can build on that simple concept. Take the Compound interest rate and build it into a larger, smoother, better product for a consumer. And we're starting to see that with applications like Dharma. We're starting to see that with people building Compound into other tools and other services where it's just an interest rate. We're seeing it wind up in automated market makers like Curve. We're seeing this interest rate evolve from being something that you as an individual access directly to something that you access indirectly through other products. And that's really exciting. Since day one, that's always been our vision is that, you know, the primary users of Compound would be developers.

• 33:15David Hoffman?

  Would you say that that was the motivation behind the C tokens? Where, you know, in Compound V1, if you wanted to get interest on your DAI, you would submit it to Compound. But now with V2 and the introduction of C tokens, which are Compound tokens, which are tokenized versions of what is in the Compound contracts, you can, instead of depositing DAI and getting interest rates, you can just buy C DAI. And then that's basically using Compound, but as a token. Is that kind of the design motivation? Or was there something else with that as well?

• 33:48Speaker 02

  That's exactly right. So what's really funny is, you know, as a developer, you know, Compound version one, which did not have C tokens and Compound version two, which does have C tokens, are functionally very similar. It's just that C tokens make the programmatic ability to transfer and manipulate balances easier. It makes it easier to understand and easier to visualize. You could always, you know, build an application on top of Compound that had complex routing of balances. C tokens just make it easier. In a lot of ways, you know, when you screen, you say, wow, Compound, you know, V2 is totally different because you've tokenized balances. It's almost no different at all. You know, you could always manipulate balances. This just makes it simpler and easier to

• 34:31Speaker 02

  understand. And it's exactly why we designed C tokens. We wanted it to be easier to transfer and program the balances inside Compound, so that, you know, it could be more easily adapted as a building block in other people's products.

• 34:45Ryan Sean Adams?

  So just so listeners are understanding this, who might not be familiar, I'm familiar with C tokens, right? So if you take a token, you could take a token like ETH or take a token like DAI. You deposit it in Compound and you get back this C token, which is the exact same asset. It's an ETH or a DAI, only it's now interest-bearing. So it's got that interest money robot that you've been talking about, Robert. It's got that feature attached to it. So as long as you're holding the asset, you're always accruing interest. You know, to me, this is kind of like a paradigm shift, because in the traditional banking system, outside of programmable money and outside of crypto money systems, it doesn't work like that at all. So if I have a savings account at Wells Fargo, you know, and maybe

• 35:30Ryan Sean Adams?

  I'm receiving, I don't know, point, point one interest, a point one percent interest rate sadly, because interest rates are so low, but my savings account is tethered to Wells Fargo. Like, that interest rate is very much tethered to my account, my relationship with Wells Fargo. It's not composable. I can't take that interest rate and that asset out and, you know, move it somewhere else. Is that the killer feature of all of this programmable money stuff?

• 36:00Speaker 02

  I think it's one of many killer features. You know, if, you know, other developers and startups were able to, you know, program and manipulate your Wells Fargo balance, you might see some radically interesting new financial products emerge. But it's just too difficult to do that. You know, you'd have to first withdraw it to another account, you know, potentially belonging to, you know, the software developers or, you know, their new product in order to manipulate the balance. You know, C token is just, it's a great analogy. It's like as if your bank account balance was able to be used by other applications more easily.

• 36:38David Hoffman?

  So Wells Fargo is a place that receives deposits from users and then gives them an interest rate. And then it also allows people to take credit and then it charges them an interest rate. And in, in some way, some of the, some of the credit or some of the interest being charged upon people taking out a loan is paying people that are depositing their money inside of Wells Fargo. However, with my credit card, I'm paying, you know, 24% APR. And then on my bank account, I'm receiving 0.1%. And like, there are other loans that aren't so egregious, like a credit card, like, you know, a small, a small business loan, that's four to 8%. But the point is like Wells Fargo has this insane discrepancy

• 37:20David Hoffman?

  between the payments being laid, being paid to the depositors versus the payments being paid or charged to the, to the people that are borrowing. And so Compound, I see as this, this, it's a money market, right? So it's connecting borrowers and lenders directly with a protocol. And it's totally being, it's intermediate, this intermediating, this whole system, cutting out the middleman and just connecting borrowers and lenders directly in this bankless system. Is that right?

• 37:55Speaker 02

  In a lot of ways. There's a couple of other differences that sort of explain, you know, why there's not like a 20% spread between, you know, what somebody's paying to borrow an asset and what someone is earning to supply to the market. The first one is that there's, you know, unlike a credit card loan, there's lower or no expectation of defaults. So with a credit card loan, you know, There's a lot of risk involved in the borrower. You know, making sure that they, you know, continue to have a job and are able to meet all of their payments. There's always an expectation of losses. The borrowing that occurs in Compound is actually, in some ways, some of the safest borrowing that we were able to design.

• 38:35Speaker 02

  So there's, the way it works is you can borrow any asset from the Compound protocol as long as you supply and maintain more collateral than what you've borrowed. And this allows people to interact with Compound very quickly, very easily, and in a very standardized format. There's extremely low risk of default because the users are maintaining more value in the system than what they're taking out. And so the interest rates don't have to be punitive because they don't have to accommodate, you know, the expectations of defaults and losses in the same way as lending to a consumer. You know, in the same way that the interest rates on mortgages,

• 39:15Speaker 02

  which are secured by houses, which are great collateral, are significantly lower than unsecured loans. So, you know, having great collateral that's extremely liquid and accessible is the first thing that brings down costs. The second is really the automation. A money robot, as you guys say, is replacing all of the operations, real estate, processes, and costs of, you know, other approaches to borrowing assets. It's completely programmatic, it's completely automated, and it's completely standardized, and it's instant. So the cost is essentially zero to, you know, facilitate somebody borrowing from the protocol.

• 39:56Speaker 02

  And those are the things that really, you know, start to disintermediate existing processes.

• 40:02Ryan Sean Adams?

  So, Robert, you, you mentioned something in there I want to zone in on because I think we're going to spend some time later talking about the, the comp token and governance and that sort of thing. But you, you use the phrase, uh, good collateral, right?

• 40:13Speaker 02

  Yep.

• 40:13Ryan Sean Adams?

  So what, what makes good collateral for Compound?

• 40:17Speaker 02

  So good collateral is one where there's a transparent value. Everyone generally agrees on what it's worth. Two, there's liquidity. If the protocol has to, you know, incentivize people to seize the collateral, then it's able to be sold. It should be relatively liquid. And lastly, it should be relatively stable. An asset that doesn't move in price that much is significantly better collateral than an asset whose price, you know, jumps around in extreme fashions. So those are the three things that make good collateral. Right now, in terms of Ethereum and what's occurring on chain and DeFi, you know, Ether is currently, in a lot of ways,

• 41:02Speaker 02

  the best collateral. It's very liquid. It's very easy to agree on what the price is. And it's a standard that everyone can sort of agree on. And so, you know, that's the best collateral we have today. Over time, as more assets become tokenized on Ethereum, there's going to be other assets that might be just as good, if not better collateral. We see stable coins rapidly emerging. You know, they also meet the criteria of, you know, being transparent, being liquid, and having a price that's actually quite stable. We might see more traditional assets and securities over time emerge on chain. We might see, you know, bonds and, you know, equities emerge on chain. Those things are

• 41:46Speaker 02

  also great collateral. I think we're going to be surprised by all the things that wind up being able to be accessed by a protocol like Compound as collateral. And so, you know, this is going to evolve over time. I think the assets we have today will not be the assets we're using in 10 years. And as long as something meets those criteria of being transparent, liquid, and stable, it's great collateral.

• 42:09Ryan Sean Adams?

  Very interesting. I want to earmark that to come, to come back to it when we talk about governance, because I know governors of the Compound, the Comp token specifically, have a role in actually selecting what collateral goes into the system. So let's bookmark that and come back to it later. But what we're kind of tying this off for folks that are just, you know, learning about Compound, there's maybe two other systems I'd like for you to compare it to, Robert. So we talked a little bit about traditional banks and Wells Fargo and how Compound is different there. I think listeners probably grasp that. But we've also talked in a couple of episodes, episode nine, about the Maker Protocol. And there is borrowing and lending, of course, with Maker. What are the differences between Maker and Compound?

• 42:55Speaker 02

  Yeah, it's a great question. So the key difference comes down to actually the name of their protocol maker. So they're actually making an asset that doesn't otherwise exist and they're making the the stablecoin DAI. This is sort of created by the protocol out of thin air and this is the superpower of maker. It doesn't have to already exist in order for their protocol to lend it out to a user. So in maker, a user provides collateral and then the maker protocol creates DAI using the collateral as something to ensure that the DAI is repaid

• 43:35Speaker 02

  over time. In Compound, we're not actually making an asset. There's no new asset that doesn't exist because of Compound. It simply facilitates liquidity for all of the assets that already exist in the world, one of which is the stablecoin DAI. In Compound, in order for an asset to be borrowed, somebody else or many other people or thousands of them are supplying the assets of the protocol as liquidity. And so that's the biggest difference is that, you know, maker is creating an entirely new asset, whereas Compound facilitates an interest rate for assets that have already been created.

• 44:11Ryan Sean Adams?

  So if we were kind of stacking the money Legos, you'd say maker is more the it's really the money Lego of DAI of stability, right? And the way it gets there is through, you know, credit and borrowing and lending and those sort of functions. And that's different than Compound. The heart of Compound, the money Lego of Compound is really interest, right? And so that's that's how they're different. There's there's no asset that's being produced in Compound, as you say. But what about folks might be familiar with, we call them crypto banks on on Bankless as part of the program, but these are like centralized exchanges and centralized third parties that take custody of your assets

• 44:52Ryan Sean Adams?

  and also provide interest as a function. So like a BlockFi comes to mind or a Celsius or even a crypto.com. How is Compound different from those crypto borrowing and lending services?

• 45:08Speaker 02

  Yeah, that's another great question. So Compound is run entirely on a blockchain. Everything inside is automated through smart contracts and the entire system is transparent. You can very easily go on Compound's website, you can very easily go on the Ethereum blockchain and you can see every transaction that's ever occurred. You can see the state of all of the markets, you can see exactly how much the protocol is holding and how much has been borrowed by other users. It's basically radically transparent. A crypto banker or centralized business facilitates a lot of the same activity. The biggest difference is it's not run on a blockchain using a smart contract, it's

• 45:52Speaker 02

  run with a traditional business. In some ways, this is spreadsheets and custom software. It's, you know, it's facilitating this off-chain in a lot of ways. And the economic functions are very similar. You can go to one of them and earn an interest rate and you can also go to them and borrow an asset using crypto as collateral. The biggest difference is automation and transparency.

• 46:15Ryan Sean Adams?

  Yeah, I really want to hammer this home for listeners because, you know, folks in the bankless community ask us all the time, like, what is the difference between a BlockFi or a Celsius or a Crypto.com? And you know what I have to tell them is like, I don't really know. You know, of course, they each have a reputation and I might trust one more than another with my assets. But the reality is, once I deposit my crypto in those crypto bank lending services, it's a black box to me. I really can't see the assets on-chain that are backing the loan that I've just provided, that I've lent out.

• 46:55Ryan Sean Adams?

  I have no transparency as to what their risk management functions are. Essentially, I have to trust the chief investment officer and the compliance team not to screw things up. Whereas with Compound, I get to see everything on-chain. I see all of the assets that back each of the loans. That I provide, I see even the liquidation process, which is a function in Compound, it's all completely transparent. It's like having the view source capability of a banking system. And that to me is the magic and that to me is like the paradigm shift of this whole open finance system. Would you agree with that?

• 47:41Speaker 02

  Oh, I agree completely. I think, you know, one of the superpowers of any crypto asset, whether that's Bitcoin or Ethereum or Compound, you know, the advantage is transparency. The advantage is inspectability, auditability. You know, it provides a level of comfort if you know how it works that you'll never get from a traditional business, that you'll never get from a bank or a crypto bank, because that's just not the way they work. And, you know, this leads to, I think, radically different outcomes. I think it makes it significantly safer to build

• 48:23Speaker 02

  your own business on top of Compound or your own application on top of Compound, then on top of a system that you don't know how it works or where the money is or whether or not, you know, it's solvent. It should facilitate, you know, a significantly better experience to build on top of.

• 48:43Ryan Sean Adams?

  So let's talk a little bit more about how new collateral is included in Compound, because I think this gets to the heart of some really interesting features that the Compound protocol is rolling out around governance. So there is now a token, a governance token, a voting token, if I'm understanding it correctly, called Comp, that can be used by Comp holders to actually vote on collateral that goes in the system or not. There are other voting. Features as well, there are proposals that can be voted on, but can you sort of describe what Compound is and some of the new governance features you guys are rolling out and how

• 49:26Ryan Sean Adams?

  that intersects with, you know, new collateral that might be added to the system?

• 49:31Speaker 02

  Yeah, absolutely. So there's two long-term principles that we have in mind as we create a new governance framework for the protocol. The first is that we want the protocol to be able to run forever. What this means is that the likelihood that any one party can take down the system approaches zero. You know, in Bitcoin circles, they call that censorship resistance. We want Compound to be able to run forever. And this is good for users and this is good for developers that are building on top of the protocol. The easiest way to do that is to remove power from ourselves, you know, to reduce the likelihood that, you know, anything can go wrong if, you know, keys are mishandled, etc. So that's the first

• 50:16Speaker 02

  piece, is reducing risk of someone screwing up the system. The second is increasing the upgradeability of the protocol. And this is making it easier for new assets to be added to the protocol or new functionality to be added to the protocol. A centralized team has limited resources, limited bandwidth, and limited focus. If you can design a framework for the community to be able to upgrade the protocol, instead of, you know, one team being able to upgrade Compound, you have a thousand teams being able to upgrade Compound. And this is also great for users that want to interact with the protocol and applications built on top. It allows an application built on top of Compound to improve the protocol

• 51:00Speaker 02

  that it's built on. So we see this as an extremely important virtue as well. And we've designed Compound Governance to achieve both of those things. One is reducing the risk that a mistake is made intentionally or accidentally by a team. If you have one private key that runs the entire protocol, it's very easy for something to go wrong. And the second is we want upgradability to be in more hands. So we've designed a governance system, which is now running the protocol, called Compound Governance. The way it works is relatively simple. We've created 10 million Comp tokens, and instead of 100% of the Comp tokens being held by one address, which could lead to the first issue,

• 51:43Speaker 02

  We're distributing those 10 million tokens over many, many, many addresses. First to a group of stakeholders, that's about, you know, 60 stakeholders who originally built the protocol. And later to all users of Compound, so it's gonna be 20, 30,000 users. Think of this as like the largest multi-signature wallet in the world. And with Comp in the hands of tens of thousands of stakeholders, then these stakeholders can come together to both approve changes to the protocol and upgrade the protocol. So the way it works is you can vote your own Comp or you can delegate it to anybody else.

• 52:26Speaker 02

  We see this as a very powerful feature because it, you know, enables you to have a more, you know, liquid democracy. If you want to participate directly, great. I think very few people want to stay up all night learning about Compound mechanics and, you know, spending time thinking about how they're gonna vote on protocol changes. There's a small group of people that are wildly fanatical and I think this is exciting for. And there's a lot of people that don't. And so by delegating your tokens, you can pick somebody else to represent you, to vote for you in protocol decisions. And this can be an expert in the community. You know, you can delegate your tokens to Ryan Adams. This could be an application built on top of the protocol that you trust to make good decisions for the protocol.

• 53:10Speaker 02

  You could delegate your tokens to Dharma. Or this could be your own address, you know, whether it's, you know, a hot wallet that you use for, you know, interacting with experimental new systems, or it could be, you know, any other address that you choose. And this is the basic interaction. You can vote or let someone else vote for you. And from there, proposals are then created by the community. Anyone with meaningful support in the community. Who's not a stranger, who has a meaningful number of comp votes delegated to them can propose an upgrade and then the rest of the community is able to vote on it.

• 53:50Speaker 02

  And this allows, you know, going back to the two points, one, a massively reduced realm of ever and ability for any one party to destroy or corrupt the protocol and two, upgrade ability by a much larger audience. And we're starting to see the very first interactions in compound governance go live. We had our first two proposals last week and I think we're going to see a lot more activity over the coming weeks and months.

• 54:16David Hoffman?

  Part of these blockchain crypto economic systems, starting with Bitcoin and then also moving into things like MakerDAO and Uniswap, all these things have tokens with them, right? So Uniswap, for every exchange, it has a token, Bitcoin has its token and Bitcoin's token was issued via this immaculate conception story and then after that it's been issued on this competitive seniorage basis and that's been considered very fair. The MakerDAO MKR token issuance has had its criticisms of its lack of fairness and in my opinion fairness goes down to the very essence of the beginnings of every single

• 54:57David Hoffman?

  blockchain crypto economic protocol, compound being one of those protocols. And if, if the comp token is issued, you know, 50% to, you know, a million people and 50% to one person, the fairness is obviously questioned and it breaks down what, it turns a compound into something that could be a public utility into something that is like a private for-profit entity. And so how are you guys thinking about the token distribution and fairness, ensuring that compound is something closer to a public utility rather than like a for-profit application?

• 55:35Speaker 02

  Yeah, that's a great question. So this goes to the design goals of the system. We want to make it where, you know, no one address can, you know, let's say destroy the protocol intentionally or unintentionally and that the protocol is upgradable by a large number of people. You know, fairness really comes down to those things, ensuring that it runs forever and that it's upgradable. Beyond that, you know, we don't really have any other design goals. And so the way we're structuring this is we're, you know, ensuring that about half of the voting authority is broken up amongst many independent stakeholders. And the other half is distributed to the users.

• 56:18Speaker 02

  And we think that over time, it's going to achieve both of those objectives.

• 56:23Speaker 02

  You know, and from there, the comp token holders can evolve. They can change, they can upgrade the protocol in an entirely new direction that hasn't been conceived of yet. But, you know, the company that originally built Compound is going to retain zero of the tokens. And the protocol is hopefully going to run forever.

• 56:42Ryan Sean Adams?

  So, Robert, I've actually had the opportunity to vote in the first two proposals that you mentioned. And it was really seamless and it was really fun. We could, you know, talk about what those proposals are and kind of the outcomes, whether you're surprised or not. But, you know, first I want to ask a question that's probably on listeners' minds right now is, like, many folks that are in the bankless community use Compound.

• 57:08Ryan Sean Adams?

  How can they get Compound tokens? How can they get comp tokens? You talked about distribution to the, you know, tens of thousands of users. Is that, is that distribution in place yet? Is it coming soon? What plans do you have? I think a lot of folks are going to be interested in participating. They just want to know how.

• 57:26Speaker 02

  That's a great question. So we haven't announced the exact mechanism yet. It's still in the building, auditing and testing phase. But the basic premise is that we want all of the users of the protocol to wind up becoming stakeholders in the protocol. You know, I don't want to tease you guys, but that's as far as we can go with this question today. But over the next couple of weeks, I think there's going to be a lot more information that starts to come out. And I think it's going to be very exciting for the users of the.

• 57:57David Hoffman?

  So in Compound's current form, where it's centralized around like a specific team, a specific set of people. I'm sure you guys have hired people that are more, more knowledgeable than the average person. When it comes to designing a protocol, gearing up the economics to fit right, how do you trust or how do you think that this distributed network of hundreds of people across, hundred thousands of people across the world actually have the competency to understand compound at a deep technical level and make adequate and appropriate changes that are in the best interest of the protocol?

• 58:35Speaker 02

  Yeah, that's a great question. So I think in a lot of ways, this is going to evolve rapidly, but it's the responsibility of those who have compound governance rights to ensure that the protocol is upgraded in responsible ways. I actually think that based on some of the design decisions we've made, it's going to lead to slow governance. I think one of the absolute best things about both Bitcoin and Ethereum is that they move relatively slowly. It's easy to understand how they work and that they're not going to radically change without a whole bunch of people knowing about them. And a lot of the actual governance mechanisms are in place, so it's very easy to say no to proposals. It's designed to

• 59:20Speaker 02

  be hard to get something through compound governance. And I'm going to hope that the community over time helps enforce strict standards for the protocol, demands that meaningful changes are audited, demands that they've been analyzed from an economic perspective, etc. I know that I'll personally vote against proposals that don't meet those criteria. I hope that others take a similar perspective. And over time, I do think it's going to lead to slow governance. Hopefully, it looks like Bitcoin, where there's a couple major changes over the years and not a cadence of weekly updates. But we'll see. And one of the things that can also change through governance is actually how governance works.

• 1:00:05Speaker 02

  So if it needs to evolve further to slow things down, that's a possibility, too.

• 1:00:10Ryan Sean Adams?

  So, Robert, given what you see, so the community gets comp tokens and they have the ability to either vote themselves or delegate their vote to knowledgeable experts, do you see the rise of what we might call protocol politicians that kind of aggregate votes and they get delegates on board and they sort of vote almost like party platforms? Is that going to be the end state here?

• 1:00:39Speaker 02

  Yeah, I think there's a lot of different phrases for this. Protocol politician is a great one. I think of them more as protocol, you know, members of a board of directors. But I do think there's going to be professionals who are skilled at understanding suggested proposals and changes to the protocol and representing a wider audience. You know, we see this all the time in, you know, traditional corporate governance. You know, every shareholder can vote, you know, in a annual meeting of a publicly traded company, yet few do. In general, there's experts involved and it winds up, you know, with people that spend a lot of time thinking through proposals where you get to this best of both worlds, where you always have the right to participate on your own. Anyone who has comp tokens can vote.

• 1:01:24Speaker 02

  Anyone can research it. Anyone can make their voices heard. And for those that don't want to put in the time, they're going to want to find experts. Whether you call that a protocol politician or a protocol expert, I think you're going to naturally see a gravitation towards, you know, individuals representing many stakeholders. Some of these individuals might form DAOs, right? I could see, you know, a bunch of people delegating their votes to a DAO, which is, you know, has its own experiments. And I could see a lot of people being individuals who participate. I could see, you know, you, Ryan, you know, becoming popular in compound governance and having members of the community say, you know, let's form the bankless alliance or whatever it winds up being.

• 1:02:09Speaker 02

  And I think this is going to emerge rapidly. Once we open the doors to 20,000 users having comp tokens and being able to participate in governance, I think we're going to see some wild results.

• 1:02:20Ryan Sean Adams?

  Oh, yeah. David and I have given a lot of thought to what the Bankless United Political Action Group might look like, Robert, so you'd be pleased to know we're thinking about it.

• 1:02:28David Hoffman?

  We've been chewing on this.

• 1:02:30Speaker 02

  That would be super cool.

• 1:02:31Ryan Sean Adams?

  Yeah. And, you know, it's very exciting to get the community involved in that way. I'm glad that you mentioned sort of some kinship with shareholder governance because this is sort of what it strikes me as. Some folks say, well, you know, voting with capital. In this way, that's a plutocracy, right? And, you know, I think that's right. I think that it is a plutocracy, but companies are organized in that way, right? It's very good that our democratic republic protocol is not a plutocracy. It's very good that the base layer Ethereum and base layer value chains like Bitcoin are not plutocracies.

• 1:03:11Ryan Sean Adams?

  But for DeFi protocols, I'm not certain that that is the wrong model. I think it could be a good model, but there seems to be a piece that might be missing. And I want your thought on this. So with a more mature, it's been out there longer governance token like Maker, for example, it ties two things together. So there's the voting right that you have with Maker, but you also have the skin in the game aspect where Maker, you know, receives some upside from fees that are burnt in the Maker platform, right? So there's some upside there. And if a mistake is made, if the wrong collateral is added, well, Maker inflates. And so the value of Maker is essentially destroyed.

• 1:03:56Ryan Sean Adams?

  So governors don't just have the right to inability to govern, but they also have some skin in the game. Do you think that that compound is lacking that? Or do you think that that's not an essential piece of the puzzle here?

• 1:04:11Speaker 02

  That's a great question. So, you know, I do think that over time, the way the token works may evolve based on the will of the community. But when we launch compound governance to the community, it's strictly a governance token. There's no economics tied directly to the token. I'll go on the record and say, please do not speculate on comp token. It is, you know, not meant to be an economic vehicle. It is purely a governance token. All it does is enable you to vote and participate in compound governance. And I think that's really exciting because it keeps the system simple. And I hope that it leads to a system that's easy to understand and easy to participate in and, you know, is open to a very large audience. And

• 1:04:57Speaker 02

  Over time, you know, the comp token holders may upgrade the protocol to change that. But I'm very excited to start off with just a clean governance foundation and, you know, be in a position for people to get increasingly involved with it. I think that those who wind up holding the comp token are going to want to see Compound succeed. I think, you know, giving a token to the users and, you know, the folks that helped get it off the ground, everyone is sort of rooting for the same thing, which is to see a protocol continue to scale, survive, and evolve. And I don't necessarily think there has to be economics for that to work.

• 1:05:35Ryan Sean Adams?

  So what's stopping comp holders from just voting themselves into profits from the borrowers of the Compound protocol?

• 1:05:44Speaker 02

  They could. The entire administration of the protocol is run by Compound governance and the Compound governance token holders. And the protocol may evolve in unexpected ways. I'm actually most excited by how much power Compound token holders have. It's really quite exciting. I think over the next couple of years, we're going to see all sorts of proposals, some simple, some advanced, some complex, some bewildering. And it's going to be really fun to watch the community debate them and implement the ones they think are best. I just hope that, you know, governance evolves in a relatively slow fashion for major changes and can be nimble for small changes.

• 1:06:25Ryan Sean Adams?

  So the proposals that we've seen, I'm wondering if they are going to be kind of recipes for cookie cutters for proposals that we'll see in the future. I know Maker Governance, for example, 95% or so of the Maker Governance votes really surround changing a few core variables, parameter changes and that sort of thing, or even, you know, collateral types, that sort of thing. The first two votes that we saw in Compound, one was about a parameter change. So that was adjusting the div parameter to something a bit more efficient. And the second was a collateral change, adding USDT. Can you talk about those two proposals and whether you see them as sort of emblematic

• 1:07:10Ryan Sean Adams?

  of the types of proposals that we'll see moving forward? Or even thoughts on the types of governance issues that will be voted on in the future?

• 1:07:19Speaker 02

  Yeah, absolutely. So out of the two proposals, what's interesting is one of them was written by our team and one was written by an application that's built on top of the Compound protocol. So our team did the work to propose the addition of a new asset tether to the protocol based on the community's prior interest in seeing the asset added. To be clear, it wasn't added as collateral. You can't use it to borrow any other asset and it was designed such that it's as low risk to the protocol as possible. But we did do the work of creating a template for how to add a new asset to the protocol. And the second protocol improvement was created by Dharma,

• 1:08:02Speaker 02

  which did the work of writing and deploying a new interest rate model smart contract. It was only one line of code different from the existing contract, but it set a great example of the fact that the protocol is upgradable by the community. Our team that originally built it doesn't have to write the code to upgrade Compound. There's no foundation, there's no middleman. Anyone out there is able to write a new contract for the protocol or simply change one parameter of the protocol. And I think it's gonna be really exciting because the first two demonstrate how easy it is to get involved.

• 1:08:38Speaker 02

  You know, our contract was, you know, hopefully a cookie cutter for other assets in the community you might want to add and debate, you know, how they are used as collateral. And the second was, you know, done as an example of creating an entirely new contract by a third-party team. There's gonna be additional proposals, some of which require zero smart contracts to be deployed. We're simply changing a parameter. You know, the community doesn't know this yet, but there's actually a very simple drag-and-drop GUI to create proposals.

• 1:09:11Ryan Sean Adams?

  Wow.

• 1:09:12Speaker 02

  You only see it when you have enough comp votes. It's a hidden feature unless you have 100,000 comps delegated to you. But there's actually tools to create proposals that require no code. And so I think what we're gonna see is the community over time learning how to create proposals and how to... Garner support for them and deploy them. And I think over time, we're going to see both more of the simple stuff as well as ideas that are significantly larger.

• 1:09:41Speaker 02

  You know, I, you know, I think, you know, there's a suggestion before that maybe the way that, you know, the token interacts with Bard rewards could change. Who knows? I've no idea what the future of compound governance holds. I just know that anything is possible.

• 1:09:54Ryan Sean Adams?

  Well, I know the, the bankless community is absolutely excited about getting involved in governance. Have had a lot of interest that I've seen in, in various channels that, that we monitor. So we will be waiting with, with bated breath on the plans to distribute to, you know, comp users and be looking for ways to plug in. So hopefully a follow up on that at some point, Robert.

• 1:10:19Speaker 02

  Excellent.

• 1:10:20Ryan Sean Adams?

  You know, one other, one other question that's sort of been on my mind a lot lately is this interplay between what we call kind of the crypto banks, the exchanges and the block fives of the world and the DeFi protocols. Because sometimes it feels like they're very much competing with the DeFi protocols. So Binance, for example, while they're rolling out the, a Binance smart contract chain, they are replicating some of the functionality of, of DeFi protocols inside their own Wald Garden exchange. That's on one side of the, the spectrum. The other side of the spectrum, you have exchanges like Coinbase that are actually, last week, we talked about this in, in the front of episode 10.

• 1:11:01Ryan Sean Adams?

  Coinbase is actually rolling out their own DeFi price oracle to help support the ecosystem. Like, what does this interplay look like to you, Robert? Are crypto banks competing against DeFi protocols like Compound? Are they helping you? What, what's the interplay?

• 1:11:20Speaker 02

  Yeah, it's a great question. So I think it's a little bit of everything. I think the industry as a whole is still extremely early. You know, when I say extremely early, I mean, we're all of, you know, 10 years into crypto. I think DeFi is about, you know, two years old. You know, it's so early that I, I think it's too soon to tell what the landscape looks like. Six, 12, 18, 24, 72 months from now. I mean, I think there's going to be a lot of experimentation from crypto banks, from exchanges, from custodians, from every type of platform possible.

• 1:11:56Speaker 02

  My goal and vision is for Compound to be neutral territory. For any exchange custodian wallet application to feel comfortable integrating the protocol. Knowing that it's unkillable by the legacy team and knowing that they have the ability to upgrade the protocol if they choose or would like to. It can be very stable ground to build on and integrate. And that's the goal. And I think some crypto banks, exchanges, whatever you want to call them, will experiment with integrating Compound. Because, you know, they're able to then build on top of it and feel excited about that and know that, you know, the protocol does what they want. And others will compete with it.

• 1:12:40Speaker 02

  You know, you might see someone like Binance saying, you know, why integrate into sort of a shared resource? Let's go our own way inside of a walled garden. And we'll see things in the middle. I would love to come back to this question in two years and see how it's evolved because I think however it did evolve will have surprised present day.

• 1:12:58Ryan Sean Adams?

  Yeah, absolutely. Yeah, so you're probably just about to say it, David, but like David and I have this this thesis and David's actually giving a presentation about it. Called called like the the Protocol Sync thesis. Maybe David, you should describe that.

• 1:13:12David Hoffman?

  The Protocol Sync thesis references that the more decentralized, the more money robot like, the more robotic like, the less subjective a a protocol is. The the more it it acts as infrastructure for people or companies or anybody to to leverage. And like the best example of this is like the internet, right? Like the internet is this ultimate agnostic platform that treats everyone fairly. And because of that truth, it's it's this platform that every, in addition to all the other features that are wonderful about the internet. It's this place of neutrality that everyone can go to access fairly and equally. And so like businesses come and and we we're starting to see this with Gemini.

• 1:13:55David Hoffman?

  Gemini is starting to become really crypto friendly or DeFi friendly. And Coinbase is already pretty DeFi friendly. And so the theory is that, you know, we're going to start seeing these centralized. Companies start to leverage the returns or the features or the products that DeFi offers inside of the company's service, inside of the company's offering. And so the company is able to leverage the value of DeFi for their own benefit. And you would never really see this on a company to company basis, right? You would never see one company leverage another company in order to produce a new product inside of their own walled garden, because there's two walled gardens. It doesn't really work like that. And so the protocol sync thesis is that the more agnostic, the more robotic

• 1:14:41David Hoffman?

  protocols sync down to the bottom and have things built on top of them. And I see that with Compound with your guys' efforts to be not really something that you directly into interact with on a peer to peer to contract basis, but rather it's obfuscated or abstracted away from the user and leveraged by other teams or other developers. And so how do you think about that? Do you think that that is a valid prediction? Or do you see any problems with that?

• 1:15:11Speaker 02

  I love the protocol sync thesis. Thank you for sharing that because I think it describes exactly what we're hoping to achieve, which is very neutral, unopinionated, independent infrastructure for others. And it has been sort of the guiding direction for how we've thought about rolling out governance and transitioning from developer-led product and protocol to one that's community maintained. Huge fans of the thesis. It'll be really cool to see which other projects sort of fit in and sync down to the bottom and wind up being sort of like the bedrock of other projects.

• 1:15:43David Hoffman?

  The most credibly neutral protocols win is kind of the heart of that thesis. Robert, what's kind of the end game here for Compound? I mean, where do you see maybe, we'll start with Compound. Where do you see Compound in the next two years and then five years and then maybe a decade out? Then I want to ask you about Ethereum and then crypto writ large in open finance.

• 1:16:05Speaker 02

  Yeah, that's a great question. So I think over the next couple of years, the community is going to be able to upgrade Compound in entirely new ways. So I think, or at least I hope that the community can start to bridge Compound with other blockchains. I would love to see better bridges between Compound on Ethereum and

• 1:16:29Speaker 02

  You know, other platforms like Cosmos and Bitcoin. Um, I think there's a lot of really exciting stuff that can emerge there. So, you know, that's one that I'm excited for the community to pursue. Um, I'm excited for the community to improve the underlying contracts that compose Compound. I think applications will want to see improvements made to the gas costs and efficiency of the protocol. I'd love to see, you know, the community start to upgrade just the, you know, the sort of core of the protocol itself. And I'm excited to see the community debate, propose and implement new assets on Ethereum. Um, there's quite a few and DeFi is moving so quickly that

• 1:17:10Speaker 02

  there's probably going to be some DeFi, you know, tokens that are, you know, fantastic additions to the protocol. So it's going to be really interesting to see Compound, but I think two years from now, the protocol is a little bit faster, more efficient and cheaper to use. There's more assets and there's possibly the early uh, traction on integrating Compound with other blockchains. So that, that's what I think the future of Compound looks like. Um, in terms of the community and the governance and the interactions, I absolutely think you're going to start to see some, you know, whether you call them politicians or experts emerge that take

• 1:17:48Speaker 02

  sort of an unstructured process and turn it into a structured process that's sort of, you know, through the organized chaos that is the blockchain create, you know, essentially, you know, like a board of directors or a parliament, you know, that helps govern the protocol. Um, and I think there's going to be some really great evolution there. And lastly, I think that there's going to be more applications built using Compound that experiment with what you can do with being able to instantaneously earn an interest rate on any Ethereum asset or borrow any Ethereum asset and package them in entirely new ways. I think, you know, we're going to see, you know, the continuation of this golden era of DeFi experimentation play out.

• 1:18:30Speaker 02

  And I think there's going to be products built with Compound that just don't even exist yet.

• 1:18:35David Hoffman?

  One thing I think is interesting is, is with this comp token, the, with the maximal success of the comp token, doesn't that mean the end of, you know, Compound Labs, the centralized company? And so like, you know, Jake Cherniski, him and I chit chat in Telegram and he was on my other podcast. So he's a good friend and it's kind of weird just to see like, well Jake, if you get this right, if you get this COM token right, like you're going to be out of a job. So what, what's the future for COM, for Compound Labs after COM token is successful?

• 1:19:05Speaker 02

  Yeah, it's a great question and you know, the community should know that our goal is to not be involved in maintaining and managing the protocol. We want you, the community, to step up and own that. I think in a lot of ways, you know, it's kind of like if Satoshi first made Bitcoin and then once Bitcoin was successful Satoshi then went out and created Coinbase. In a lot of ways, that's how we see our own role. It's creating this underlying protocol that's neutral, that has all the tools it needs to grow and then building out the next thing on top of it. You know, and that's exciting, you know, being able to move on, being able to allow the community to sort of focus on making the protocol as great as possible and then

• 1:19:45Speaker 02

  being, you know, a team with no advantages over everybody else that's able to then build on the protocol. So that's exciting and I think that's the future.

• 1:19:55Ryan Sean Adams?

  There's kind of two camps in the, I guess, maybe I'll say the digital asset space writ large, Robert, right? There's the one side which are kind of crypto anarchists. Let's get all the centralized parties out of the money system, you know, government out, banks out, you know, I'd confess that the bankless movement is probably a little more on that side. There's another side of the movement, of the digital asset movement that is a bit more Facebook, Libra, you know, Central Bank of China, digital currency. No question in my mind that, that our future is going to be digital. But how do these two sides intersect? Like, does one side have to win and the other lose?

• 1:20:40Ryan Sean Adams?

  Do you see a more blended world? What's your take?

• 1:20:44Speaker 02

  You know, me personally, I'm somewhat in the middle.

• 1:20:48Speaker 02

  You know, I believe that Ethereum and blockchains have given us superpowers that allow us to reinvent finance for the better, to make it faster, cheaper, more fair.

• 1:21:04Speaker 02

  Better. And in some cases, that means, you know, it's going to look extremely cooperative with existing financial services and existing financial products. You know, I'm not sad if a bank wants to leverage a blockchain to do things better. I don't think it has to be a system in which, you know, it's just an us versus them type mindset where, you know, it's our way or the highway, or, you know, it's only for, you know, a libertarian bent. I think, you know, this is a tool for good to make financial products out of thin air. You know, some will look like old products and some will be entirely new. And I think there's going to be everything in the middle. So I'm actually just most excited for tools like Compound to be embraced by,

• 1:21:48Speaker 02

  you know, traditional participants. I think one day, you know, you might see a bank integrating the Compound protocol as a means of, you know, interacting with users, you know, in Ethereum land. And I might see some people say, hey, I don't want to use a system that, you know, isn't just for us. And I don't think there's a right answer. You know, I just want to see more products come to life that you know how they work. You know that they work. It's fair, it's transparent, and it's affordable. And I think that's exciting. So I'm kind of in the middle. I think neither camp is right. And I think, um, I think we still have a long way to go.

• 1:22:27David Hoffman?

  So Robert, one last question before we wrap this up. What about DeFi or Ethereum or Compound keeps you up at night? What are you scared of?

• 1:22:36Speaker 02

  So my biggest fear is apathy. I think this has always been the primary threat to DeFi and to Ethereum, which is it stays a tool for

• 1:22:50Speaker 02

  a select group that are really excited, really aware, really educated, really bought in. And it fails to break out into the mainstream. That people don't recognize the superpowers and the tools that we've been given. And the thing that keeps me up at night is that DeFi today is the same size as DeFi in two years. That's the fear that, you know, I get sweats just thinking about. And I, you know, I'm grateful that there's bankless and, you know, people that are looking to change that. And my biggest fear is that, you know, we don't succeed fast enough and far enough, and that two years from now, DeFi is still a niche where it's for a group of people that

• 1:23:30Speaker 02

  just love, you know, new, faster, better, more fun financial products, and they're not yet adopted by our friends or relatives in the public at large.

• 1:23:39Ryan Sean Adams?

  Robert, that was such a good answer. I have to ask another follow-up, sir. How can the bankless community help you with that? That's our mission, too. There's about 150,000 DeFi users today, maybe if we're being generous. How do we get to a million? And how can the bankless community help you?

• 1:23:57Speaker 02

  Yeah. So the first thing you can do is, you know, as we start to roll out Compound governance, just get involved. Help make Compound safe enough and useful enough for a larger, more mainstream audience. Ask tough questions, you know, try new products. And, you know, as products become hardened and stable, you know, start to encourage others to build on them. Start to use the products built on them. And, you know, just stay excited.

• 1:24:27Ryan Sean Adams?

  Those are things we can definitely do. Bankless community, you've heard it from Robert. That's what he wants you to do. Stay excited, keep trying these protocols, keep listening to the Bankless Podcast, keep reading the Bankless newsletter, guys. We can achieve what Robert's talking about as a community. Robert, David and I want to thank you. It's been an absolute pleasure. I've really enjoyed this conversation. So thanks so much for joining us.

• 1:24:50Speaker 02

  Yeah, thanks, Ryan. Thanks, David. Really enjoyed being on the show.

• 1:24:53David Hoffman?

  Thanks, Robert.

• 1:24:54Ryan Sean Adams?

  Fantastic. Well, action items, guys. So a few things I think you can do following up on this episode. The first is actually try Compound. Go to the Compound website. We will include it in the show notes. Actually dabble with it. So use your MetaMask wallet or even an Argent wallet. Take out a loan. Or blend some assets to Compound, see how it works. Also, second action item, in the future, we'll have more information about Compound governance and how the bankless community can get involved, both in the newsletter and hopefully in the podcast too. So stay tuned for that. David, we still need some five-star reviews, don't we?

• 1:25:35David Hoffman?

  We absolutely do. In order to grow the bankless political party, we need people to listen to it and help govern Compound when it comes time to govern it. So in order to do that, we need more people to listen to the bankless podcast. And the way that we get that done is by giving us those five-star reviews. And so if you want to make sure that Compound is adequately governed, make sure that we show up on the top of the crypto podcast charts. So when you type in search terms like DeFi and Ethereum, and the way that we get that done is by giving bankless five-star reviews. So if you could go to iTunes or wherever you listen to podcasts and give us those five-star reviews, we would really appreciate it.

• 1:26:17Ryan Sean Adams?

  Awesome. All right, guys, risks and disclaimers. So everything we've talked about today is not financial advice. Ethereum is risky, crypto is risky. DeFi protocols, including Compound, have risk associated with them. You could lose what you put in. Be careful out there. We are headed west. This is the frontier. It's not for everybody, but we are excited that you are here with us. This has been episode 11, How to Go Bankless with Compound. Thanks for joining us.