6 - DeFi Trust Spectrum

Episode: #6 April 6, 2020 Different Ethereum applications require different amounts of trust, depending on how each app is designed. This episode discusses how to think and measure the trustlessness of each app, and where the humans and computers meet. ----- 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 Zerion https://zerion.io/ - portal to your DeFi portfolio ----- Resources Mentioned: (Article) Ethereum will eat Wall Street https://bankless.substack.com/p/ethereum-will-eat-wall-streets-settlement (Article) Two Faces of Ethereum https://bankless.substack.com/p/the-two-faces-of-ethereum (Article) The Great Protocol Sink https://bankless.substack.com/p/the-great-protocol-sink-market-monday-194 ----- Episode Actions: Give this podcast 5 stars in iTunes! Evaluate protocols on the DeFi Trust Spectrum Read these: The Two Faces of Ethereum https://bankless.substack.com/p/the-two-faces-of-ethereum (Article) The Great Protocol Sink https://bankless.substack.com/p/the-great-protocol-sink-market-monday-194 (Article) ----- 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, 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 excellent episode today. I'm super excited about it. The DeFi Trust Spectrum. Give us a tease of what we're going to talk about today.

• 0:38David Hoffman?

  Ethereum is an agnostic platform that allows anyone to come and build anything on it. Depending on how you build that thing, you can place it on a different part of the trustless spectrum. So some applications on Ethereum are very trustless, and some applications on Ethereum are completely trusted. The trustlessness or trustedness of an application on Ethereum is a way of illustrating how much human responsibility there is in the operation of the application. Why Bitcoin is so powerful is because of how it is a very human-free application on the internet. It is this thing that is internet-native

• 1:21David Hoffman?

  and does not need humans really to maintain it. The power of Bitcoin is its lack of human maintainers of the system. The system perpetuates, and so therefore Bitcoin is a very trustless system because its operation is entirely computer-run. And that same illustration is found on Ethereum applications. Ethereum applications can be completely trustless and completely unmaintained by humans. Ethereum itself is unmaintained by humans. However, some applications can be trusted or human-maintained. And that means that when you use these things, that you are trusting the people that maintain each application to some degree. And so that's

• 2:03David Hoffman?

  why you can lay these things out in a spectrum of trustlessness, where some applications are more trusted. than others and sometimes you can actually get completely trustless applications. And so, for example, Uniswap is the example that everyone uses to talk about the most trustless application on Ethereum. It's maximally simple and it requires no human coordination or input. It's humans at the edges and code in the center. And this is kind of like different websites around the Internet 2.0, where some websites you can go to like Wikipedia and access, you know, basically the entire website and other websites, other IP addresses you go to,

• 2:45David Hoffman?

  and then you are asked for an admin like login and login credentials. You know, some applications are open to everyone and completely trustless and some applications are closed. And like Realty, for example, my company, we have a whitelisted tokens, you need to sign up with us, etc. And so we talk about that spectrum, what it's like to be on either end of the spectrum, what it's like to be in the middle. A really fascinating topic. There is so many other lines of conversation that spawn out of this. For example, at the trustless end of the spectrum, I believe, and I think you agree with me, Ryan, that things gravitate towards that end of the spectrum. The more applications we have on the trustless end of the spectrum,

• 3:28David Hoffman?

  the easier it is to build further applications there. And so in the long term, you know, 10, 20, 50 year time horizon of Ethereum, I expect all the applications to be kind of grouped up there and bundled there on the trustless end.

• 3:42Ryan Sean Adams?

  We've been wanting to talk about this for a long time. And there's three kind of takeaways or concepts that we're going to touch on. The first is what you're talking about is the machine versus man on Ethereum. What that, what that looks like. Some are more machine robots, some are more human oriented people. The fact that in many cases, the machines will win out, they will become the base layer. And what happens to ETH when all of this is going on, when all of these trusted and trustless tokens start appearing and money protocols start appearing on Ethereum? How does ETH win? Does it win? We're going to talk about all of that. But let's dive into some housekeeping first. You had some thoughts. I know you mentioned me, David.

• 4:27Ryan Sean Adams?

  After thinking about our previous episode on memes, what have you been thinking about? What have been the reflections after we did that last episode, episode number five?

• 4:35David Hoffman?

  Yeah, so far, every episode we've recorded, the next week, I'm thinking about it and I'm like, hmm, I should have said that, should have brought up that. And so this is a housekeeping section, I think, we're going to test out to see if whether people like it, but just kind of go over our thoughts over the last episode and the conversations from the community that have given us feedback. So memes, we talked about memes as a communication mechanism, a communication vehicle across time and across generations, right? So good memes last throughout generations. Memes travel from brain to brain and they can latch on and live across time. And that's really why memes are so powerful. And money is a meme, right?

• 5:17David Hoffman?

  So the paper bill that you have in your pocket, it's a meme that we all accept as money. Except the way that, if you go back to, I think, our very first episode, we talked about how money is created, or one way that money is created, where there is a farmer toiling in his field. He collects a bunch of wheat, he goes to the granary and he deposits it and he is returned a receipt, a paper receipt. And that paper receipt is a credit on whatever is in the granary, or you could also call it a bank. And then that farmer can go and take that paper receipt and take it to a local store, a local whatever, blacksmith, and redeem an equal amount of value

• 6:00David Hoffman?

  for what he needs. And so that's how, that's how money is created. And that money, when that money is handed from person A to person B, the person B can then hand it to person C, D, E, F, you know, and then this gets carried out throughout time. And so money, in the same way that memes are communication vehicles through, from our ancestors, it is our ancestors telling us our stories. One of the, one of the lines that I gave in that episode was that the Bible is a collection of memes that our ancestors have learned to pass on. Money, and the money in the bank and the money of the world is this collection of our ancestors' blood, sweat and tears as they worked and as they produced value. So that receipt that the farmer got for depositing his wheat.

• 6:45David Hoffman?

  Is a receipt of his work. It's his energy that he put into creating value. And the way that we transcend, we pass on value throughout generations is money. And I think that when we are talking about hyperinflation or Argentina or Venezuela hyperinflating the value of their currency away, it's a lot more impactful when we think of it as they are deleting the value of our ancestors, because that is what's happening. That is the, the value and work of our ancestors is being forgotten. It's being washed away. And that's why Bitcoin and Bitcoiners from their perspective is so important as a hard

• 7:28David Hoffman?

  asset that cannot be inflated away or printed because it retains the work of our ancestors across time. So that's just something I thought about in the last week since we released that episode.

• 7:39Ryan Sean Adams?

  One, one thing I was reading this week was actually about the, the birth of the greenback. So that is the, the US dollar is called the greenback. And Lincoln actually created this during the civil war in an effort to win the civil war. He knew in fighting the Confederacy that it was also an economic war and he would need lots of money in order to do this. And so it was proposed internally and, and he accepted the idea that they would actually have to create a fiat that wasn't really backed by gold. It was somewhat through a couple of steps removed, redeemable by gold eventually. Basically it was, it was sort of a, a non-backed new money that was being used to, to finance the, the war.

• 8:25Ryan Sean Adams?

  So financing security through issuance, which is, which is pretty interesting. And it was laughed at at first. I mean, you know, the, the idea that a government that the US would create its own non-backed currency, the inflation rates during, during the civil war, the, the greenback rose in terms of its, its price relative to gold quite high when the union was losing and started to do better when, when they were winning. It's just. Really fascinating history, and I think we are like, what, five, six generations removed from that. But we forget that our ancestors worked very hard to establish money memes.

• 9:09Ryan Sean Adams?

  And at the very beginning, they weren't very established at all. You know, they had to bootstrap their meme off of, off of things like gold by putting imprints on the dollar like, "In God We Trust," or "This is redeemable for, for gold at the Federal Reserve." They put a lot of work into establishing those memes. When we do inflate them away, when, when our government sort of issues more and we, we see hyperinflation, we're kind of destroying all of that previous work. A super interesting perspective.

• 9:39David Hoffman?

  It maybe makes the, the reason why no one should have the ability to print money. It makes that a little bit more tangible, in my opinion.

• 9:48Ryan Sean Adams?

  Yeah, absolutely. There's also some other cool stuff going on. We published a post on, on Bankless this week about Ethereum on Bloomberg terminals. So did you get a second to check that out, David?

• 10:00David Hoffman?

  Yeah, I did. I thought it was great.

• 10:01Ryan Sean Adams?

  So something that cool that's going on is that we are starting to see some of the real world assets. This is a restaurant company. They own about 400 restaurants called Fat Brands. And they're a publicly traded NASDAQ company. And they have actually issued through, through a third party, a bond on Ethereum. And so you can log into a Bloomberg terminal. And Bloomberg terminals, those are the user interfaces of Wall Street, of traditional finance. And you can now log into a Bloomberg terminal and actually see this bond being settled on Ethereum to an ETH address. And the payments from this bond are being paid to ETH addresses too, in stablecoins.

• 10:47Ryan Sean Adams?

  I saw this about a month ago that this was happening. And it kind of blew my mind that we're already getting to the place where Wall Street is starting to settle transactions on Ethereum. And kind of a thesis that what's going to happen is over time, Ethereum and networks like Ethereum will become the base settlement layer for Bloomberg terminals, for Wall Street. And it's simply because closed permission systems can't compete against open neutral systems. It's like closed source software competing against open source software. It's like Microsoft trying to compete against the internet in the 1990s.

• 11:29Ryan Sean Adams?

  Open generally wins, permissionless generally wins. You know, 500 bankers ruling the world really can't compete against millions of developers and folks who are building on the ecosystem. And it's exciting to start to see some of those early seeds of what's going on there, too. So if you get a chance, check out that article, see what's going on in the Ethereum Bloomberg terminal space where Wall Street is starting to settle on this open permissionless network.

• 11:59David Hoffman?

  Looking at the image in your article, I think it's so funny because it's just a normal Bloomberg terminal image with all the normal things that you would see there. And then in the bottom right corner, there's a notes section with an Ethereum address labeled Ethereum contract. They just didn't have any like field or place to put the relevant information there. So they just had to manually put it in in the notes section like, oh yeah, by the way, this is on Ethereum.

• 12:25Ryan Sean Adams?

  Yeah. And in the future, hopefully that, you know, that's like a link out to EtherScan where you can see it, where you can see the address in real time. One other thing that we were talking about as an open thread this week on Bankless is about the price that you'd sell your crypto. So, you know, the question is, I'm not selling my crypto until what happens. Do you have like a date or a timeline or an event that needs to happen for you to sell your crypto, David?

• 12:54David Hoffman?

  Uh, no, not at all. Um, and that's because I think that that is a silly question. Uh, because every person has their own time horizon and their own personal demands to sell their money for the things that they want. Uh, and so I am planning on holding my ether because that's my savings. That's my, that's my money, right? And so I'll sell my savings when I need to buy something like perhaps a house. Uh, but as far as a date goes or a time, uh, I don't think that, uh, I don't, I don't think in those terms. I think that, uh, I'm just gonna stack my Gue and at some point in time when it feels right for me, because I want to buy something, I'll dip into my savings and sell it.

• 13:38Ryan Sean Adams?

  So you're not waiting for like, you're not, you, you don't have like a, a 10 year time horizon? You don't have like a, if ether hits a thousand or 10,000, that you're, you're gonna sell a portion and dollar cost average out? Nothing like that?

• 13:52David Hoffman?

  Well, I think if ether hits like a really high number, like $10,000, it'll be because ether is being used as money for the world. And so what, when you ask me if I'm gonna, when I'm gonna sell it or what I'm, what I'm gonna sell it for, that my question is what am I gonna sell it into? What, selling it implies that I'm exchanging it for something else. Am I gonna be selling it back to the dollar? Well, if ether is $10,000 per ether, what, what is the role of the US dollar in the world? If ether is like $10,000, it's probably because there's a whole bunch of economic activity on Ethereum. So like, why would I sell my ether when I just might, when all of my economic activity might be on Ethereum?

• 14:36David Hoffman?

  Like, that's where I go to buy all the things. Like, I'm moving my, my money elsewhere and it might be less useful there. And so I'm, what I'm questioning is, what do I, what am I actually selling that ether for? And is that ether good for that? Like, do I want whatever I'm selling it for?

• 14:53Ryan Sean Adams?

  Yeah, that's a really good point. Whenever you are selling Bitcoin or selling Ether, you're also buying something else, right? So to sell Ether is also to buy US dollars if you're exchanging it for that. And that's the question is, do you want to hold US dollars at this point in time? Yeah, that's a super interesting perspective. I'd be interested to hear from other Bankless podcast listeners what they think. Are they waiting for a specific date like ETH2 to come out? Or proof of stake? Or are they waiting for Bitcoin to hit 100K before they're selling? Or are they like you? Are they just like going to hold until they don't really have to sell? Until this thing becomes money?

• 15:36Ryan Sean Adams?

  I'm probably a bit more in that camp too. But yeah, it's interesting to hear the time horizons from different folks in the community.

• 15:47David Hoffman?

  I'm reminded of this very old meme that I've seen in the crypto space, where it's the Neo talking to Morpheus meme. And Neo asks, "What are you trying to tell me? That I can trade my Bitcoins for millions someday?" And then Morpheus replies, "No, Neo. I'm trying to tell you that when you are ready, you won't have to."

• 16:05Ryan Sean Adams?

  That's a great meme. And I think there's a lot of truth to that, for sure. I mean, as these crypto money assets become financialized, the question is, why sell? Maybe you can lend instead, right? So you don't have to sell. You can lend a portion and start receiving interest. Maybe you can stake ETH instead of selling and receive interest. Maybe you don't want to sell for an inferior money like Euros or Yen or US dollars, because the world essentially has come to crypto. And you no longer need to sell. That is the banking system. That's kind of the Bankless vision. So we'll see how that plays out. We should jump into our sponsors.

• 16:49Ryan Sean Adams?

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• 17:31Ryan Sean Adams?

  Rocket Dollar can help with that. They can help you with all the paperwork, break your retirement account out of jail. If you go to rocketdollar.com right now, you can use the code BANKLESS and get $50 off. It's a fantastic deal. It's a good time to start thinking about your future and start thinking about your crypto retirement.

• 17:50David Hoffman?

  If you are looking for a solid footing in the DeFi world, you need to go to zerion.io. Zerion is DeFi made easy. It's way better than your bank and it is the gateway to the world of decentralized finance. If you are used to logging into your bank accounts front page in order to access your personal finance services, Zerion is the DeFi alternative for that. Zerion is the place where you can go and get a summary of your DeFi portfolio all in one space and access all of the DeFi's financial services that DeFi has to offer. You can go to Zerion, add all of your wallets, get a summary of your portfolio and the

• 18:34David Hoffman?

  assets that you hold, as well as all of your borrowing and lending positions. You can also exchange assets through Uniswap and you can also pull out a loan from Maker all in the same spot. So if you are tired of going to all these different DeFi protocol URLs like uniswap exchange, compound.finance, etc., and you just want everything all in one spot in a slick and easy UI and UX, go to zerion.io. That's Z E R I O N dot I O.

• 19:05Ryan Sean Adams?

  All right, let's dig into the subject today. This is the DeFi trust spectrum. That's what we're going to be talking about. I think this is a super important subject because a lot of people make the quip. DeFi isn't really decentralized. They'll talk about a protocol like Compound, maybe, having some ability to access the contract and edit the contract. Or they'll talk about a protocol like Set, which has some administrative rights as well. But I'm looking right now, David, at a spectrum diagram that you came up with, which I think is really good.

• 19:48Ryan Sean Adams?

  And I'll just describe this for listeners. So on the far left, there's this picture of just a human, right? Normal guy on the left side of the spectrum. On the far right side of the spectrum, there's this Terminator-style machine. And in the middle, there's a cyborg. And what you have below the spectrum are various DeFi protocols, money protocols, that range from human to cyborg, all the way to full machine. It's really a spectrum of protocols that are run by humans, the man protocols, and all the way to the other end of the protocols run by machine, the machine protocols.

• 20:32Ryan Sean Adams?

  And there are a few on the left that are like Realty, like God's Unchained, and there are many on the right that are more full machine, like Uniswap. Can you kind of talk about the concept behind that, David? Like, why'd you put together that image and why is it relevant?

• 20:51David Hoffman?

  The DeFi trustless spectrum is something that we should all have in the back of our heads, and that's why I put that spectrum together. It's supposed to be a visual representation of what and where these DeFi applications are in relation to each other and relation to their trustlessness. And so it's hopefully a quick cheat sheet for you to go and be able to review where on the spectrum of trust do these things lie. When you use these applications, how much trust are you putting on the operators of the system, right? So if you go to Uniswap, there is No trust, it is completely trustless. If you go to Realty and buy property, there is trust.

• 21:35David Hoffman?

  Humans are at the helm of Realty and you are trusting that they are steering that ship in the right direction. Uniswap, you don't have to have that trust. And it's important to understand where trust comes in at each of these protocols. And so that's kind of what this article was about. It's an article I published forever ago. It's called "The Two Faces of Ethereum." I definitely recommend it as a read. There's a video of me on the Bankless YouTube, reading it to you if you prefer that instead. And it kind of illustrates what different behaviors and applications are found on different ends of the spectrum.

• 22:09Ryan Sean Adams?

  So we're saying Ethereum as a network, right? And remember, we've talked about this before on previous episodes. There's the difference between Ether, the asset, and Ethereum, the network. What we're saying is Ethereum, the network, it is a permissionless platform that can host really any money application, any DeFi protocol that ranges. They don't all have to be completely trustless, but they can be trustless, as Uniswap is. But some can be still trusted.

• 22:41Ryan Sean Adams?

  Can we talk about what we mean by trust a little bit more? So like, what are we actually trusting? When you say something like Realty, and for those that don't know, maybe you should describe what Realty is. But can you talk about why, what we're trusting? What systems or what sort of people we're trusting in Realty versus something like Uniswap, where we've said that's trustless? And how they've removed the humans from the equation?

• 23:11David Hoffman?

  And this is different for every single application on Ethereum, right? Like, each application has its own vectors or surfaces of trust or trustlessness. So with something like Realty, where we tokenize real-world assets, real estate, and put them on Ethereum as ERC20s, you are trusting a number of things. First off, you're trusting that the legal structure actually links the token that we put on Ethereum to the property. Now you can go- And look at the documents that we send you when you purchase. And you can say, yep, these documents link the ownership to the token. But then you're just trusting the legal system to actually honor that commitment, right? So then you're then you're just trusting the United States legal system, which is a decent thing to trust.

• 23:55David Hoffman?

  But it's a trust nonetheless. And then you're also trusting us to appropriately collect the rent from the tenants, turn it into Thai and send it into your address. You're trusting us to do all of those things. Now with Uniswap, Uniswap has done, it's gone in the furthest opposite direction where there is absolutely no trust. And that is enabled specifically by the way that Uniswap is architected. There are no humans at the center of Uniswap for its operation. There is only code at the center. And the definition of a DAO, in my opinion, is something that is code in the middle and humans on the fringes.

• 24:36David Hoffman?

  And so the DAO, the decentralized autonomous organization, things that we're used to calling Maker DAO or Moloch DAO, in my opinion, aren't actually DAOs because there are humans at the center. Uniswap is a really good example of the OG definition of a DAO because there are no humans at the center for the operation. There's no place for a human to, you know, mistype a number. There's no place for a human to route a trade wrong. It's only computers, it's only code. And so Uniswap, there is no vector of trust, whereas Realty, there's a lot of vectors of trust.

• 25:11Ryan Sean Adams?

  So maybe I'm kind of picking out three things from from what you said, which which, you know, range the spectrum of of trustlessness. So the first is settlement. So with something like Realty, settlement occurs in meatspace. It's settlement on the legal system, right? So it's not settlement in this alternate crypto universe. That's the first thing. The second is issuance, right? With Realty, we have to trust an issuer, right? So the company behind this tokenized security issues and sets supply. And and the third is the mechanism itself can either be code or sort of human run. We've got settlement, we've got issuance, and we've got mechanism.

• 25:54Ryan Sean Adams?

  And what you're saying is with Uniswap, all three of those things are code, right? So settlement, that occurs purely on Ethereum. There's no legal system involved at all. It doesn't rely on the US legal system. And issuance as well, well, that that occurs native to Uniswap. The asset itself, I suppose, there's no asset in Uniswap. It's more mechanism. But many of the assets inside of it, like Ethereum or like DAI, their issuance happens in crypto as well. And then the mechanism. So the rules of engagement, the rules of exchange and trade, that's all happening in code as well.

• 26:35Ryan Sean Adams?

  And that code is entirely present on the Ethereum chain. So it can essentially exist if some of the developers behind Uniswap go away. It continues, it continues moving, it continues humming. It can exist if, you know, the US legal system falls apart, God forbid. It can exist as long as Ethereum exists and as long as the internet itself exists. So that is kind of the definition of of trustlessness, it seems. Unstoppability, uncensorability, like no reliance on humans, just pure machine, just pure code.

• 27:17David Hoffman?

  Yeah, that's totally right. And to go back to your your part about settlement, realty with our tokens, we can burn tokens, right? And so by definition, it does not completely settle on Ethereum because we have the ability to arbitrary change ownership values. Now, we would never ever do this in a way that is malicious to our customers, right? Because, you know, our customers are, you know, the whole point of realty. But at the end of the day, if something quote unquote goes wrong and doesn't line up with the outside settlement, the legal system settlement, we can burn tokens in order to make sure that things do line up. And that's not something, having that guarantee of ownership, asset ownership is only possible with.

• 28:00David Hoffman?

  Completely decentralized, trustless assets like DAI or Ether, right? So the, the real estate tokens that are ERC 20 tokens are not the same as DAI, which DAI doesn't, DAI doesn't know who owns it or how it's being used. It just goes with it, but real tokens, we, we do, it does know that. It does know who is being, who is transacting in real tokens and, and making sure that everyone is KYC'd at the same time. So, you know, completely trusted.

• 28:30Ryan Sean Adams?

  Yeah, so there's actually white lists attached to tokenized securities like, like Realty, right? Where you have to have your ETH address KYC'd or it actually can't buy or sell one of these tokens on Uniswap, like the transaction literally doesn't go through. So that is, that is trusted. It's a trusted asset like a traditional financial asset, only it exists on this Ethereum open finance layer. So, you know, we've talked about maybe the, the far left, which is the pure, pure, like, you know, man, right? Pure, pure human trust, which is a lot like the existing system.

• 29:10Ryan Sean Adams?

  So we'd see tokenized real estate, tokenized securities, the Bloomberg example, terminal example where they had this tokenized bond in a Bloomberg terminal. We talked about that in, in the intro. That would be on the far left side, this very human trusted thing. On the far right side, pure machine, we've got things like Uniswap, and that might be the most trustless protocol that the Ethereum DeFi ecosystem has ever created. But there's lots of space in between too, right? Maybe we should talk about some of the projects that fall somewhere in between those ranks. Let's start with Maker.

• 29:48David Hoffman?

  Yeah, Maker is a really important example because Maker itself has parts of it that are completely trustless, and then it also has parts that are trusted. So when you combine all of these things, you, you end up in the middle of the spectrum. But I, I think it's also important to differentiate between the parts of Maker that are completely trustless and completely code-driven. And then the parts of Maker that are human driven, right? So CDPs or vaults or loans or whatever, however, whichever terminology we're using these days. That part is completely trustless. So you can deposit your Ether, you can get a DAI loan, you can go and do whatever you want with that DAI.

• 30:30David Hoffman?

  There's no KYC involved, there's no permissioning involved, you don't have to apply. And you get to do whatever you want with that DAI and then you pay it back later and all of that, all of that financial activity is completely trustless, is completely automated, completely managed by computers.

• 30:46Ryan Sean Adams?

  Yeah, great, great point, David. So like these, these vaults, these are, or these CDPs, these are actually loans. So for people who haven't used Maker, you, you actually, what you do is you go to the Maker website. You don't need a bank, you don't need any intermediary, you just need an ETH address and, and some Ether. What you can do is you can deposit that Ether into a smart contract. So again, into a machine like David's talking about, there's no human in the middle, there's no trusting Maker for custody, it's all in code. And then you can mint DAI, that's a stablecoin, against the Ether that you've put in the contract.

• 31:29Ryan Sean Adams?

  So effectively what that is, is it's like a collateralized loan, almost like a mortgage, where you have an asset, like a house, and you're able to get a loan based on the value of that asset. That's what you're doing, only with, with Ether. So you're putting Ether in and you're getting a loan that's based, not in US dollars, but based in this stablecoin that's pegged one to one with the US dollar called DAI. And you could do that purely with a machine, nothing in between, and you can do that completely autonomously. So there's, there's no need to trust any individual, you're just trusting a protocol and just trusting a system. And, you know, you mentioned KYC, just, just in case folks aren't familiar, that means know your customers.

• 32:12Ryan Sean Adams?

  So these are basically laws that are required by the financial system in the US to Identify everybody who's transacting with money. So it's basically like tying your government public identity to a financial transaction. And that's how the existing traditional system operates. Everything has to be KYC'd, as we say. And with this trustless system, you don't have to do any of that.

• 32:41David Hoffman?

  And then there is the trusted side of MakerDAO. And trusted, it's not 100% trusted. Being trusted is its own spectrum, right? There's a measure of how trusted these things actually are. So it's a difficult thing to talk about when we actually want to talk about how, to what degree something is trusted or not. But with MakerDAO, there are human required elements to keep the system running. The MakerDAO system has levers and dials that need to be adjusted and tinkered with in order to keep the MakerDAO system up and running. And so that's things like the stability fee, the die ceiling, the die debt ceiling,

• 33:23David Hoffman?

  how much die can be issued, what collateral types to accept as collateral in MakerDAO. Right now, there's just Ether and Basic Attention Token. Basic Attention Token has a much lower debt ceiling and Ether has a much higher debt ceiling. And these parameters are decided by humans. Humans that own the MKR token, which is the token, the governance token, the voting token, come to the MakerDAO governance system and vote on what they think the parameters of the MakerDAO system should be. And when these people vote correctly and choose the correct parameters,

• 34:04David Hoffman?

  then the trustless side of MakerDAO is enabled to continue to operate, right? So it's all about enabling the products and services of MakerDAO to be maximally successful, maximally used, increasing die adoption. And the way that they do that is that the MakerDAO governance, the people that hold the MKR token, come to the MakerDAO system and vote on what the parameters are. parameters should be in order to keep the the vaults and die and all of the the products of MakerDAO up and running. And so this this voting system is very much a human centered system. And now that can even itself be split into trustless and trusted.

• 34:47David Hoffman?

  The the idea is that MKR voting is a trustless phenomenon because there are so many voters voicing so many opinions with all the different MKR out there. That you as a mass incentive system, they automatically come as a wisdom of the crowds effect, come to the right decision in order to choose the right parameters. And so that itself is also supposed to be this automated thing that happens. But it's very different than, you know, Uniswap where it just goes and goes and goes. It does require human input at some point in time to choose the correct parameters.

• 35:25Ryan Sean Adams?

  So you've got this set of decisions that are completely trustless made by machine. You've got this other set of decisions in Maker that are still made by humans who act essentially as a as a currency board of sorts, adjusting interest rates and that sort of thing. And those decisions made by humans are essentially made by vote. And this is vote of Maker holders. So in a lot of ways, this kind of represents and resembles shareholder governance, at least to me, where you've got a bunch of folks with with capital. And the capital votes on whether they want to support a decision or not. But there are some other pieces of centralization in Maker too. So there is the the foundation that maybe we should talk about.

• 36:10Ryan Sean Adams?

  There are the physical offices of of Maker. There is the website UI, which is also partially centralized, even though you can access the backend of Maker. The part of the UI itself.

• 36:25Ryan Sean Adams?

  Is centralized right now. There are some of the leaders like Rune, for instance. You know, what are some, how should we think about some of these other pieces of centralization?

• 36:35David Hoffman?

  No project just starts decentralized. That can't happen. Bitcoin, at one point in time, was running on only one person's computer before it spun out and was adopted by more computers and then more computers. And MakerDAO follows that same path. Every project starts centralized, and that's, and MakerDAO is no exception. The MakerDAO Foundation is this, this group of people that are responsible for spinning out Maker into this self-sustaining platform, this self-sustaining protocol. But it's not there yet because of the demands and complications of MakerDAO. We need to create the infrastructure before we let

• 37:20David Hoffman?

  it go and be completely humanless. We need to make sure that we are setting it up for success, and that's what the MakerDAO Foundation does. The MakerDAO Foundation is funded by the sale of the MKR Governance Token, because when the MKR Governance Token was minted, it was minted in the same wallet. It was minted and controlled by the same small group of people, and they've used the sale from the MKR Token to fund out the development of Maker, which is good, which is what we want from the protocol perspective. But it does give some people more control than others. For example, like you said, the website of

• 38:02David Hoffman?

  Maker, where people come to vote in governance protocols. I don't know about you, Ryan, but I am not very technical. I can't code. And so if I wanted to voice my opinion as to what the stability fee should be, I would need somebody to make it really easy on me. I couldn't go and take my MKR and vote directly on the blockchain, even though that is possible because the protocol, at the end of the day, is trustless in that way, where if you have MKR, you get to vote. The UI- On the website for submitting votes and submitting proposals, that is centralized. That is managed by the foundation. And so that is one of the big obstacles that they are trying to overcome.

• 38:46David Hoffman?

  So that it reduces dependence on the foundation. There are physical offices for the foundation. There's New York offices, there's Copenhagen offices, they're all over the world. But at the end of the day, there are a central group of people that are helping build out the protocol into existence into the future. And so this has created the Maker DAO protocol versus the Maker Foundation. The DAO versus the Foundation. The decentralized part of Maker versus the centralized group of people that are helping spin it out. And this centralized group of people represents some degree of trust. We are trusting that the foundation has the best interests of Maker at its heart

• 39:30David Hoffman?

  and is doing the right things to help both DAI and MKR grow into fruitful, long living protocols.

• 39:41Ryan Sean Adams?

  There are probably two other pieces that make Maker a bit more centralized. The first is the oracle. So the way debt is liquidated in the mechanics of the system are based on a price feed oracle. So these are managed by 10 to 20 or so different entities. Some of these are known, some of these are unknown. But having an external price feed in an oracle is not a purely decentralized solution. That is potentially a centralization vector and potentially a point of failure and something that they are working to continue to decentralize. So there's that.

• 40:25Ryan Sean Adams?

  There's also the assets that are put inside of Maker itself. So some of these assets are what we've called, what we called in episode four, trustless economic bandwidth, like Ether. And some of these assets are more trusted. So the basic attention token is a more trusted asset than Ether is it, you know, has an issuer that issuer can, you know, potentially change things. It's certainly not as liquid, doesn't have as much economic bandwidth. Maker has also recently added a stablecoin token called USDC. So a portion

• 41:03Ryan Sean Adams?

  of all DAI is mostly Ether, partly basic attention token, and now also USDC, which is a much more trusted bank issued stablecoin. It's issued by Coinbase and Circle. And so, some of the assets inside of Maker can make Maker itself and DAI itself less trustless, so less settled completely on Ethereum on-chain, and a bit more settled in the legal system. So all of these things, you know, show where Maker really is on that spectrum of trust.

• 41:41Ryan Sean Adams?

  And they're certainly not as far to the right as Uniswap, but they're not, they're certainly not as far to the left as tokenized securities might be. They're somewhere in the middle. They're almost like a new crypto-specific bank, not pure protocol, but not pure bank, something in the middle. And I think there's absolutely room in the Ethereum open finance ecosystem for applications like these. And Maker is still an extremely exciting project. But it does make me wonder, I don't know if you've thought this, David, but it does make

• 42:21Ryan Sean Adams?

  me wonder if there is room for potentially a more decentralized and completely trustless stablecoin system that maybe is only purely backed by ETH or something like that. Have you given that thought?

• 42:36David Hoffman?

  Yeah, that's a really hard problem. And the reason for that is because stability is a reference. If we want a stable ERC 20 token, we need to define what we are being stable against. And DAI just takes the quick and easy route in saying, all right, we're going to be stable with the dollar. While there could be, there are other ways of having stability. It's simply changing that price feed to something else. But no matter what, stability comes from outside of Ethereum, not from inside of Ethereum. So we need to get data from outside of Ethereum onto the chain. And that requires some level of human coordination.

• 43:19David Hoffman?

  So it's, it's very, very difficult to have stability without sacrificing some sort of trustlessness or decentralization because they're getting data from off of the chain to on the chain requires human input. That's not really something that we have really solved when it comes to being fully computerized code. Now, you, you talked about the different collaterals inside of Maker and how that kind of taints DAI, if you will, because USDC could be burned from the Maker Vault. So that's a risk vector. The Brave Foundation could say that they're abandoning BAT. So that's a risk vector. However, I think this is a really good illustration as to why Ether is so powerful.

• 44:05David Hoffman?

  Because of what it is. Ether itself is a permissionless asset. And because it is the main permissionless asset of Ethereum, it will always have characteristics and qualities about itself that make it better collateral than any trusted collateral. Right? So at Realty, we're working on getting our tokens into Maker DAO. But real tokens, you know, real estate is great collateral, but there's centralization risk and there's also liquidity risk, right? Because we both, it's not native to Ethereum. And so that is qualities that Ether does have. Being native to Ethereum, being inherently trustless and being inherently liquid.

• 44:46David Hoffman?

  I think will make Ether the the leading collateral and maker Dow forever. Ether is the first class citizen of Ethereum and anytime companies like Realty that bring off chain assets that could be good collateral to Ethereum. They make Ethereum and therefore Ether more valuable, which increases its value, which increases its liquidity. Ether will always be more liquid than any off chain asset on Ethereum. And so I think on the spectrum at the very beginning of this episode, I talked about how things gravitate over time towards the trustless end of the spectrum. And this is one illustration of of why that is because it's hard to compete with Ether because of its trustlessness as collateral.

• 45:31Ryan Sean Adams?

  Yeah, I think that's a that's a really great point, you know. The fact of the matter is credibly neutral, trustless protocols tend to be the ones that the world builds on top of. Have you ever run one of those experiments, David, where you put like different density liquids in a glass and sort of, you know, see where they see where they end up. You might put a corn syrup or a honey, some kind of a an oil and water inside of a glass. And you pour them in sort of one by one. And what what tends to happen?

• 46:12David Hoffman?

  Yeah, they stratify, right? So the dense stuff falls to the bottom and the light stuff rises to the top. And then you can even drop in physical objects in there, right? So you can drop in like a metal metal ball, ball bearing, and it'll fall to the bottom. Or you could drop in, you know, something else and it will find itself, find its balance between those two layers. But what are you getting at?

• 46:33Ryan Sean Adams?

  Yeah, that's what that experiment teaches us is that, you know, dense materials sink. It's like, you know, the center of the earth is is iron because in the early formation of the earth, the dense material sank to the bottom. And that same effect happens, I think, with with protocols. I've called this the the great protocol sink of to kind of describe it. The the credibly neutral, the more machine like protocols tend to sink to the bottom of the money stack. So they tend to be the base layer that everything else builds on top of. Why? Because they're the most dense. And here's what I mean by that. So Let's say, you know, China released its blockchain.

• 47:17Ryan Sean Adams?

  They're working on a central bank digital currency right now. We don't know what that's going to look like. It'll probably have some blockchain-type characteristics. Would the US ever build on China's blockchain, on its settlement layer? Of course not. They never would. I mean, the US would lose its sovereignty by doing that. You could see it at a more minor scale. Binance has a chain, the Binance blockchain. Binance, for those who don't know, is a large crypto exchange. One of their main competitors, Coinbase, would never issue assets to the Binance chain. Why? Because it gives Binance the power and Coinbase loses sovereignty in the process.

• 48:02Ryan Sean Adams?

  What would both of these countries and both of these exchanges do? Well, both of them would be fine with issuing on a credibly neutral platform that neither of them control. That's fine, because they don't have to trust their adversary. That's generally how the game theory around these things work out, is if there are a lot of different options, and some of those options are controlled by individuals, or countries, or groups, and others of those other options are not controlled, they're credibly neutral, well, everyone's going to build on the most credibly neutral foundation and protocol and platform. That's why the world adopted gold.

• 48:47Ryan Sean Adams?

  You can think of money as a platform. Gold wasn't issued by a nation-state, by a king, by an emperor. So, nations built on top of it as their money system. And that's why the...

• 49:03Ryan Sean Adams?

  I think what's going to happen is the more machine-like protocols on Ethereum will become the base layer. So it's very safe to build your liquidity exchange on top of Uniswap right now. Why? Because no one controls Uniswap. Because the rules of the Uniswap game are completely embedded in code and everyone knows what those rules are in advance. And everyone knows that no one can edit those rules without essentially forking the project and starting over. So it's very safe for other money protocols to build on top of Uniswap. It's not as safe to build on top of a crypto bank.

• 49:45Ryan Sean Adams?

  And so I think what we might see is that crypto banks and exchanges like Coinbase and Binance, right now, they are kind of the... for a lot of money applications, they're sort of the base layer. If you want to lend, if you want to borrow, if you want to exchange, you can do all of those things inside of these crypto banks. But what I think's going to happen is these money protocols, these higher-density, credibly-neutral protocols, will sort of tend to sink to the bottom and they will essentially become the base layer even of exchanges. So ways we might see this practically happen, I expect in the next year or so for an exchange

• 50:27Ryan Sean Adams?

  like Coinbase to start picking up the DAI savings rate. So that means they will include an option, maybe a button, that says, "Click here and deposit your DAI in the DAI savings rate." And the DAI savings rate, of course, once DAI is deposited there, it allows the depositor to receive some interest on that deposit. And so they will... exchanges will start to incorporate these more credibly-neutral protocols instead of competing with them. And effectively, they'll start building on top of them. Does that make sense?

• 51:03David Hoffman?

  100% I resonate with that so much. And there's two different subject matters that are related that I want to bring up. One, you talked about fairness and the other you talked about dependability. People, humans, we have in our brains a very strong fairness detector. Kids at a very young age, as they are growing up, learn what fairness is and what is fair at a very, very early age. We have this built into the way that we are, the way that we are wired. And you can see this in other species as well. There's this experiment that I love where two monkeys are being fed by someone and one monkey is,

• 51:46David Hoffman?

  they're both fed cucumbers, which are okay treats. And then one monkey is starting to be fed a grape while the other monkey is fed another cucumber. And grapes are way better treats than cucumbers. Now, in these experiments that have gone on, the monkey that is on the raw end of this deal, the one that is still getting the cucumber while the other monkey is getting the grape, doesn't eat the cucumber. It throws it back at the, at the experimenter, saying that this isn't fair. Like he's getting a cucumber and I'm getting a, or he's getting a grape and I'm getting a cucumber. This fairness meter is built into us. And that's why it makes so much more sense for people to like, to go back to money, to like a money that is completely fair.

• 52:29David Hoffman?

  That's why money and fairness are really, really important to have together. And that's why we're probably going to build on a credibly neutral platform like Ethereum, rather than a, a company chain like Binance.

• 52:45Ryan Sean Adams?

  Wouldn't you say, David, if a money loses its fairness, that's when it tends to hyperinflate? And that's when it tends to lose its meme status as a money?

• 52:53David Hoffman?

  Inflation is unfairness instantiated in money, right? And so that's, that's again, why it's so important to have money that no one can print, that no one has its hands on the lever. And so the other topic you talked about was dependability. At Realty, we use Uniswap. For our liquidity and we do that because of the assurances that Uniswap offer us. Because we understand that it's going to be, it's going to exist into the future. Uniswap is a durable platform. There's nothing about it that, from what you can see from the code, indicates that it's going to go away at any point in time.

• 53:35David Hoffman?

  And this assurance for us as a company, this assurance that we get from Uniswap is really, really valuable. We can use Uniswap as we see fit and it will always be there for us into the future. And so going, and you talked about Coinbase using the DSR. The way that these things work and going back to your, your density topic. The, the systems and applications that are completely computer run are dependable. You can depend on them being there for you into the future. And that's why humans stack on top of computers, not the other way around. Computers are always at the bottom end of the stack. They don't mess anything up. They run exactly as programmed.

• 54:21David Hoffman?

  And they, they can be coded to be inherently fair. They can be coded to be inherently neutral. And, and so for that reason, I think we are always going to see computers being relied on rather than humans, because that's what Ethereum is for. That's what the blockchain is, that's its main purpose as a blockchain is to enable financial activity that's managed by computers.

• 54:45Ryan Sean Adams?

  It's the permissionless aspect too, right? Like, so you didn't have to, in order for Realty to issue property tokens on Uniswap and put them inside liquidity pools, pools rather, you didn't have to ask any permission. It's a completely neutral protocol in terms of what assets it accepts and what it denies. No, no one can gatekeep you, no one can say no.

• 55:10David Hoffman?

  Binance charges a quarter million dollars for a listing fee.

• 55:13Ryan Sean Adams?

  Right. And what, do you think Binance would, would ever allow Coinbase to, to list some asset on, on Binance that it didn't want? Of course not. I mean, it's not going Allow its chief competitor to do that sort of thing. So it makes Binance Chain a no-go from the beginning. It's not credibly neutral. It has a gatekeeper. It's permissioned. It is low-density. It's at the top of the glass rather than the bottom of the glass. That's what we mean by the great protocol sync. We should talk about our sponsors, talking about excellent protocols and fantastic protocol syncs. There is a protocol called Aave that you absolutely have to check out.

• 55:56Ryan Sean Adams?

  This is a much more trustless protocol on the spectrum. It's probably somewhere in the middle, more towards the Uniswap side of things. It's a lending and borrowing protocol on Ethereum. So what does that mean? It means you can put DAI inside of it and it will magically transform that DAI into an interest-bearing DAI token. You can look at the interest rates on ave.com. You can also borrow against it. So you could deposit ETH inside of it and then actually take out assets against that ETH. The lending that you do can be fixed rate rather than variable. So you know exactly what you're going to pay in advance. Developers, you've got to check out their flash loans.

• 56:40Ryan Sean Adams?

  This is a powerful protocol that's going to be the basis of a lot of cool things in DeFi. Deposit crypto, start earning and borrowing. Check out their flash loans. Go to ave.com and try it out. That's A-A-V-E dot com to try it out.

• 56:55David Hoffman?

  Talking about how Ethereum is replacing trusted systems with non-trusted systems. Check out Monolith, who uses Ethereum as its backend for DAI management. So you can use your Monolith Visa card to spend your DAI everywhere in the world. And instead of using your bank account to hold your money, you can trust Ethereum and Monolith to hold your DAI and you can see it on-chain. This is a great example of how computers are always going to be better trusted than humans. And so if you want to have a little bit of Ethereum in your pocket, go to monolith.xyz and sign up and get the DeFi card that allows you to spend your DAI anywhere in the world, anywhere where Visa is accepted.

• 57:41Ryan Sean Adams?

  Okay, so we've talked about the trust spectrum a lot. We've talked a bit about the great protocol sync, low-density protocols sinking to the bottom. Let's talk about another subject that I think has been on the minds of DeFi folks for a while, and that is the subject of backdoors. So some of these protocols, not a Uniswap on the far right, but some of them more towards the middle, actually have the ability, their developers have the ability to edit contracts. Is that right?

• 58:12David Hoffman?

  Yeah, and each protocol is different. While what you can say that Protocol X has a backdoor, that doesn't actually answer many questions. You need to ask the question, well, what does that backdoor enable them to do? So for example, DYDX, a favorite protocol of mine, has a backdoor, but that backdoor doesn't allow them to steal my tokens, steal my assets. And so it does enable them to change other things, like Oracles and matching engines, I believe. And for other protocols, like Compound, I believe the admin keys, the backdoor for Compound, does allow the team to take your assets and run. However, I wouldn't ever expect them to do this because that would be theft,

• 58:56David Hoffman?

  and they are a centralized company that ultimately must answer to some legal system somewhere. Also, they would be sabotaging their own business. However, it is important to know what protocols have backdoors and what those backdoors can do. Now, backdoors aren't inherently evil. Most protocols, I would say, that have a backdoor, I prefer them to have that backdoor rather than just to rush to plug it up, just in the name of trustlessness or decentralization. Backdoors are really useful. Teams that are building applications on Ethereum, they aren't done as soon as they deploy it to Ethereum. That is just the first step. It needs to be iterated, expanded, developed, improved. And that's what the backdoor allows them to do.

• 59:38David Hoffman?

  If they plugged that backdoor too soon, they would be fixing their application the way that it was, without any further development and upgrade. And so while backdoors do represent centralization and Trust, they also represent a commitment to improve and iterate and make a better product. I believe that most Ethereum teams that have applications on Ethereum that are building in the DeFi space have a inherent social contract, that they are trying to make everything trustless as possible. And perhaps in that same social contract is a commitment to plug that backdoor when the time is right. However, every single application is different and every team has their own vision.

• 1:00:21David Hoffman?

  And so everyone should be doing their own research as to what DeFi applications they use, what that backdoor does and what that backdoor enables the team to do.

• 1:00:31Ryan Sean Adams?

  Yeah, it's certainly a trade off, isn't it? So you know, you mentioned Compound, I believe they've recently implemented a time delay. So that any admin access to their contracts, and again, these are contracts that are deployed on Ethereum that some set of developers has the ability to edit them or change them around and have specific functions. Compound has implemented a 24 hour delay, so any changes that they put in place, 24 hours has to occur before those changes take into effect. And all of that is highly visible. That's one way to manage it. Maker's done something similar, but at the same time, that's also a trade off. Because if there is a bug, an emergency situation that requires a developer team

• 1:01:16Ryan Sean Adams?

  to get in there and make some changes and save the system potentially. Well, they can't do that right away. It takes some time. It takes, there's a 24 hour delay in place.

• 1:01:27David Hoffman?

  That 24 hour delay also, however, protects against the $5 wrench attack. So if you are known to be the operator of a backdoor of the admin keys, you might be susceptible to the $5 wrench attack.

• 1:01:41Ryan Sean Adams?

  What's the $5 wrench attack?

• 1:01:43David Hoffman?

  The $5 wrench attack is where someone comes to your door and beats down your door with a $5 wrench that they bought in a hardware shop. And so they don't need, you know, thousands and thousands of dollars of collateral or hacking skills or anything. They can just come to your house and hold a $5 wrench to your head and make you do something with your admin keys. So the mere existence of admin keys makes the $5 wrench attack a possible attack. But that 24 hour delay can help mitigate the $5 wrench attack.

• 1:02:13Ryan Sean Adams?

  Yeah, absolutely. And you know, I hear a lot of criticism about these backdoors, the ability for teams behind some of these protocols to upgrade the protocol, to edit it. Some folks say, well, that means DeFi is not really decentralized, right? And to which we would say, well, of course, it's not all completely decentralized. This is an open, permissionless financial system. There are organizations that are going to build more centralized protocols on top of it, and some that are going to build pure machine protocols on top of it. So it's important to understand that there is a spectrum of these things.

• 1:02:55Ryan Sean Adams?

  The second thing I would say is this, is when people complain about DeFi protocols not being as decentralized as their ideals, they often don't compare them to exchanges and crypto banks. You could pull off a $5 wrench attack against Coinbase, potentially, if you knew who held the multi-sigs of all of the contracts. Coinbase itself, with a shareholder vote, they might be in some legal trouble if they did this, but with a shareholder vote or with the leaders of the protocol could find a way into their own vaults and steal the funds. So at some level, it kind of annoys me when we compare DeFi

• 1:03:40Ryan Sean Adams?

  to this perfect end-state vision, rather than compare it to the systems that we have, like crypto banks and like the traditional system, where we don't even have the option to be non-custodial and to have any degree of trustlessness.

• 1:03:56David Hoffman?

  Yeah, it riles me up so much. I get so angry when people forget to make this accurate comparison. It's simply a choice of what you are using as your reference point to compare to what is DeFi or not. Somehow, people have decided that Bitcoin is the ultimate version of DeFi, and all other teams that are building on projects like Ethereum, crypto, economic...

• 1:04:23David Hoffman?

  Protocols like Ethereum, they are comparing it to Bitcoin and saying, well, if you're not like, if you're not to Bitcoin's degree of trustlessness, then you're not DeFi. But you, the more, much more helpful and accurate and realistic anchor to compare it to is all the centralized counterparts of the, the centralized finance world. So when it comes to compound finance, how not, let's not compare it to Bitcoin, but let's compare it to SoFi or some other borrowing and lending platform from, from Silicon Valley. That is completely DeFi. And so instead of comparing it to the, the maximal possible version of decentralized finance, which isn't even an, an anchor point that we have available to us.

• 1:05:08David Hoffman?

  Bitcoin is not the ultimate representation of decentralized and trustless. It's, there's, there's further areas of trustlessness and decentralization that you can go beyond Bitcoin. Bitcoin is just the thing that we know about. It's really just far more helpful to compare it to the other end of the spectrum and to compare DeFi applications to their legacy counterparts. And in that sense, Realty is DeFi because if, in a world where Realty, uh, real token assets, real estate are on Ethereum, you can, and you can go to, uh, different DeFi protocols and use real estate in them, like MakerDAO or Compound. You are permissionlessly getting a loan from MakerDAO or borrowing and lending with Compound with real estate.

• 1:05:51David Hoffman?

  And you are doing that without permission. Now you KYC'd with Realty to get your real tokens, but that line of credit that you got through MakerDAO was totally DeFi. And so I think even companies like Realty are DeFi companies, even though there is significant amounts of trust there because we are built on this DeFi universe with DeFi financial services available to you.

• 1:06:13Ryan Sean Adams?

  Yeah, if you go back to the memes episode too, I mean, we prefer to call this whole thing, this whole experiment, open finance or permissionless finance, because that better encapsulates the spectrum. But I think what we're saying to Bankless listeners here is, don't be a binary thinker, guys. Like, you know, it's not just black or white. There is a full spectrum of shades and colors of things that can be created on top of the base layer decentralized protocol here. The core protocol, Ethereum itself, the base money system, that is the thing that we want to preserve the decentralization in. And

• 1:06:53Ryan Sean Adams?

  above that, we'll have applications across the spectrum. And what will inevitably happen is the protocols that have higher trustlessness, that are more credibly neutral, that hit product market fit, those will sink to the bottom. Those will become the foundation of this system. And that will happen organically and naturally. Now, one last question, I think, David, that we should answer before we wrap up. So we've kind of painted this world of a variation. That also means variation in terms of the assets that are deployed on Ethereum. So some will be tokenized securities that are completely trusted. Others will

• 1:07:34Ryan Sean Adams?

  be more like DAI that have a mix of trustlessness and entrusted aspects to them. But if Ethereum sucks in all of these assets, these traditional world assets, these trusted assets into its gravity well, what does that mean for the role of Ether in this world? Does Ether not matter? Does it become a lesser collateral? Do we essentially replace every loan in a system like Maker with USDC as collateral rather than ETH? What's your take?

• 1:08:10David Hoffman?

  This is a discussion that we will spend multiple episodes on because it's such a long story and there's so many different things to talk about. In a summary, all things, all roads... lead to Ether at the end of the day. It's it's pretty impossible to build something on Ethereum without positively impacting the value of Ether as a result. And so even if you are on Ethereum and you are doing things in the most limited ways, you are still positively impacting the price of Ether. If if all you are doing is buying block space, if whatever you have on Ethereum, whatever piece of of economic infrastructure you have

• 1:08:54David Hoffman?

  is only doing one thing, which is buying a small amount of block space. Well, then you're still paying fees to Ether and Ether holders and Ether stakers. And I think we're starting to tease what might be next week's episode, which is it's going to be an episode that talks about Ether value accrual mechanisms. But at the very least, the bare minimum of putting economic activity of any kind onto Ethereum pays fees to Ether. And to whatever degree that Ethereum runs on trustless assets, that weight of that that percentage of the Ethereum economy always converges on Ether. And so this is a very long conversation that I think we're going to peel back the layers of in future episodes.

• 1:09:39Ryan Sean Adams?

  Absolutely. I do think this black hole analogy is is right because as a black hole sucks in matter, other financial assets in this case, it gets bigger, gets more massive, and it has the ability to to suck in even more matter. And Ether certainly has that value accrual mechanism, both in terms of it being required to do run any transaction on Ethereum. A burning mechanism that we're going to talk about in the next episode is called EIP 1559, where a portion is of Ether is actually burned in the future for every transaction that takes place. Staking, which means a lot of these transaction fees also go to the holders of ETH.

• 1:10:22Ryan Sean Adams?

  And then just the fact that as people start to embrace these systems more and more, as people start to use even tokenized assets like USD.

• 1:10:33Ryan Sean Adams?

  Or tokenized securities that will bring them further into the bankless crypto financial system. And some of them in the sales funnel are going to purchase some of the crypto native assets like Ether and like Bitcoin as part of that. And that might be the the primary value accrual mechanism that we see. But we're going to talk about some of those things in the next episode, which we're super excited about. Just a quick recap of today. We talked about the the two faces of Ethereum. On the far left, the human protocols, and on the far right, the machine protocols. We talked about how the machines will win. The the protocols that have

• 1:11:14Ryan Sean Adams?

  the highest density, highest credible neutrality will sink to the bottom. We talked a little bit about how ETH can win in that scenario as well, not just Ethereum, the network, but ETH, the asset. So guys, here's what we want you to do. This has been a action packed episode. We want you to take some actions home with you as well. Subscribe to the podcast. I know you've done that already. We also need five star reviews, right, David? Why do we need those five stars?

• 1:11:39David Hoffman?

  We need those five stars so that everyone can listen to us. The more five stars that we have, the higher we show up in in generic term search rankings such as crypto, or Bitcoin, or Ethereum. If you type in bankless, we show up. But if you type in generic crypto words, we don't. There are some podcasts that show up ahead of us that, in my opinion, don't deserve to be there, especially when they haven't released an episode in nine months. And so if you could help us out by giving us a five star review in iTunes, it would be extremely helpful for spreading the bankless message.

• 1:12:14Ryan Sean Adams?

  Yeah, guys, let's get bankless to the top of the charts. That's how we take on this revolution. Last thing, check out the show notes. So we'll include some of the articles that we mentioned here today. Bankless is not only an audio format, there's also some great supporting reading material that you should absolutely check out. Risks and disclaimers, guys, ETH is risky. Crypto is risky in general. DeFi, all the protocols we talked about today, Maker, Compound, Uniswap, these things are risky. If you put money into them, understand what you're going into. This is the Wild West. This is the frontier. It's not for everybody. Make sure you know the risks going in. This has been the DeFi Trust Spectrum, episode 6. Thanks for listening.

• 1:12:59David Hoffman?

  Thanks everyone.