The Current State of DeFi | Vance Spencer, Santiago Santos, Spencer Noon

Transcript

hey bankless nation we've got exciting 60 minutes planned for you we are doing a current state of defy panel with three of the biggest d5 brains that we know david i know you're excited about this man because it's all you've been talking about for the past two weeks what excites you about this panel why uh why is this so interesting yeah the uh the context for this panel is that i went on to a a different panel a couple weeks ago and it didn't really it wasn't what i wanted it to be when it was a what is the current state of defy panel uh and so i got uh i got teased by what i thought was gonna be a really dope panel but we are now we are actually doing it i think banqus can do it better uh so banqus is

doing what is the current state of defy panel and we have brought on three big brain guests to give us their perspective as to what they see on the frontier we've got santiago santos of parify capital we have vance spencer from framework ventures and we have spencer noon from the variant fund and these guys are both defy investors and so they think like investors but they are importantly also defy users and so they know about it from both sides like they use this stuff and they invest in this stuff uh and so i think this is going to be a fantastic panel to go through a ton of topics really quickly uh if you have consumed bankless content since you're viewing this i'm assuming you have uh

you know that we kind of tend to really take our time and distill stuff this is gonna be a little bit quicker this is we're gonna we're gonna move really quickly through a lot of subjects it's gonna be zippy yeah and so if you guys like this content like this panel content let us know we have other ideas about panel content this is kind of in contrast to the ama stuff that we do and so if you like this panel content leave a comment in the show notes also like and subscribe to the youtube because we do these at least every single week uh so ryan without any further ado shall we just go ahead and get right into it yeah and uh guys of course like any other ama you can leave questions in youtube we will get to those questions if we have time as uh the the panel has

an opportunity to before we get into the panel though we want to thank the sponsors that make this episode possible synthetics is ethereum's decentralized derivatives liquidity protocol what does that mean synthetics is a platform for creating and trading synthetic assets which are assets that are priced via an oracle rather than bids or asks traders can use the quenta exchange which hosts and trades all of the synthetic assets created by synthetics traders on cuenta can trade synthetic tokens like sbtc s oil or sd5 because quenta is powered by synthetics traders experience zero slippage on their trades no i didn't mean low slippage i meant no slippage

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spencer from framework ventures guys how are you doing today it's great to have you that's great to be here thanks ryan awesome thank you all right everyone looks good you guys are looking good ready to talk some defy i'm sure uh you don't do this on a regular basis i'm sure this is a rare event for you but let's let's start with this because i think this is important um the definition of defy how do we define defy iowa's team call this thing open finance i felt that was a bit more fluid lost that battle this ended up being called defy how do we define what it actually is spencer can we start with you uh yeah so thanks for having me guys um

i mean this is obviously pretty difficult i think the crypto community generally sucks at coming up with names for things i think one thing is for sure d5 is not bitcoin um so just want to get that out there first but i would say you know we have this these financial applications these primitives that are that are built for me d5 is that and principally i think their cash flows being on chain is the core thing that kind of defines them and unites them so um when it touches something that's on chain i think of it as being defy it's a spectrum um but that's a that's probably the litmus test so touch is something on chain on chain cash flows but bitcoin is not defy vance would you add anything to that do

you disagree is bitcoin not d5 um i i think that uh bitcoin is a subset of d5 um i i don't think the two are necessarily mutually exclusive i kind of build up my understanding of blockchains and of d5 kind of from from three steps number one you know blockchains are something that are built for a trust trustless transfer of value number two blockchains are an open development platform that anybody can write logic on and so anything that's on a blockchain that has logic built on on top of it is defy um you know whether that's an escrow contract whether that's trade you know from one address to another whether that's a complex

derivatives protocol um that's how i kind of build up the definition of defy in my mind santiago we we haven't yet very much used the term decentralization uh and maybe that's intentional from our other two panelists but is decentralization part of d5 what is defy yeah i i think um for me what i think about d5 is embedding a logic in a smart contract that executes in a very predictable reliable and trustworthy manner it's certainly like the sediment layer which is ethereum or some other chain you're relying on some degree of decentralization to make sure that that smart contract executes the way that that

you know it makes that state transition if you will but for me defy is you as vance said you are transferring some value and that might not just be you know tokens it might be nfts might be other things that have value via some sort of digital scarcity attached to it but generally speaking um yeah it is for me the most exciting thing about d5 is the predictability of a smart contract to do a specific logic if then statements that um and you can apply that to any money verb if you will so when we talk about like defy what it is and what it isn't can we apply that to any specific platforms right so vance thinks that bitcoin is maybe a subset of of d5 spencer might disagree uh another

investor might call solana or binance chain defy some other people might disagree are what about these platforms is solana d5 is binance chain d5 what's your take on that where do you draw the line i think the space is exploring all these trade-offs right now and so i i think a lot of it is you know we will see um but a lot of things will trend towards kind of either side of the spectrum so like i'm sure at some point someone will build an interoperable google sheet with ethereum and they'll be transferring money around on a spreadsheet that settles on each and they'll call that d5 to me that that falls outside the kind of scope of what is d5 because it's you

know naturally kind of decentralized um and so you know the criteria for you know what is enough decentralization to qualify as d5 is kind of the heart of the question and i think with with decentralization you only really find out that you need it when the chips are down when things are breaking when you know regulations come in when you know there's adversarial actors on a network that's when decentralization really matters and so oftentimes you only find out what's decentralized when you know things are breaking or things aren't going that well and you know i think you can see that on things like finance where it shuts down uh you know where that would never happen with ethereum or you know the polygon bridge which you know isn't operable for hours on end when there's a market crash

those things are not defy just because they've kind of fallen under that exclusion criteria and i think more of these blockchain platforms that are not ethereum will eventually not be d5 as well santiago do you have an opinion on what is and is not d5 yeah very succinctly it is minimizing counterparty risk because that's really the only reason why you want to do d5 otherwise you know if you're doing uh bsc or some other chain you know you might go there for yield you might go there for some other reason if you're especially if you're like a binance user um and and but but largely i think where this space really is going when you have large financial institutions aggregators where a lot of retail will end up

interacting uh with these platforms and they might not even know that they're interacting with d5 context is i think when you're providing liquidity uh when you're interacting in the system you want to make sure that you're minimizing counterparty risk right yeah i'll give you an example in a day like black thursday where you have a market collapse the first thing i thought when i woke up is i didn't think i wasn't concerned about ave or compound being insolvent i mean you could have looked at the state of liquidations in real time and defense said okay things are working of course it's congested of course the keeper system is a little bit flawed but things are working in a very predictable way the thing that i wasn't 100 sure on was are arc centralized counterparty solvent

and to me that's the most important thing and you see that over and over again in the in the normal financial system in 2008 um in robin hood like in these instances of market failure i think traditional finance is quite fragile and d5 time and time again has proven to be a very anti-fragile system that is very adversarial and is by design can't be insolvent not only can they not be insolvent but a frequent uh line that i like to i like about d5 and i hear a lot about d5 is uh can't be evil protocols can't be evil uh and so uh let's turn to to spencer what does the the phrase can't be evil mean to you inside the context of defy uh

yeah i i think it's it kind of goes to this idea that anyone can audit um the code of the platforms that they're using right so um the code is deterministic it's being you know executed and you as a user have kind of like all of the tools at your disposal to figure out if it's evil or not it can like be evil right there are there are smart contracts that can do things that are antagonistic to users um so i don't know if i like necessarily agree with that but um yeah does that answer your question yeah totally uh maybe it's it's more like uh we can all audit the evilness right we can all exactly check on how exactly evil these applications are um vance or santiago and i think or spencer well i

would just add one thing too i think is important is that users in d5 have agency and that they can exit the system if uh the the set of rules changes right so you have i think like we were saying before decentralization obviously it's a spectrum there are some um protocols where there are only a few parameters if any that can be changed there are others where their smart contracts are like truly upgradable um in you know a very wide uh kind of amount of um changes that can be made and for that you you can leave and so i think it's it's it does also one thing that you always have to come back to with d5 is that the users have the agency to leave yeah yeah totally like you saw yesterday's statement by the cfdc one of the commissioners saying well you know

in d5 you know things can be manipulated and can't be enforced i'm like wait wait a minute that's that's not true i mean the traditional financial system goes back to what spencer's saying you don't have agency right people understand that when you deposit your money in a bank you have no idea what they're going to use it for now you rely on regulators to kind of have some sort of oversight into what banks are doing but the only oversight that they're doing is like top like what is it like bank efficiency ratios and making sure that they're quasi-solvent uh but they're stress deaths and those tend to fail whereas in d5 you kind of you are your own bank you control your assets right uh and so that's where um you know i would challenge when when someone says you know in d5 things are

perfectly transparent you're in real time evident for anyone can be a watchdog and anyone can infer if if there's a change to a smart contract if there's a change if it validates you're down we're not executing things in the way that things are are intended to then you can exit the system and i think it's that ability for anyone to be a watchdog that keeps the system uh much more resilient something that we've seen lately is we've seen brian brooks being hired by binance u.s and we've also seen a coinbase also hire a particular regulator who you know used to be part of regulation and now is part of coinbase and one thing that really concerns me and ryan when we chat about this on the weekly rollups or just

privately is this is kind of what we've seen before uh is d5 perfectly antagonistic to this is is defy the counterpart towards all this revolving door politics that uh we're trying to escape from or is that is that is there something else there um vance let's turn that to you and and uh do you mean that you know people from the government wouldn't come work for a d5 protocol or in what sense well even if they did is does it really change the nature of the protocol right can can a regulator uh even perhaps a benefit benevolent regulator or perhaps a corrupt regulator does the d5 protocol actually uh absorb corruption in the same way that you know uh the traditional nation-state

regulating body does that that we've seen throughout the end of time yeah i mean you know blockchains don't have a wi-fi connection they can't tell uh who's good or who's bad and uh you know smart contracts are the exact same and so their ability to be um you know kind of taken over is relatively small i will say that um because tokens are you know governance votes and and those are effectively purchasable or borrowable there is that attack vector and there's also the attack factor of you know regulators regulating by decree um a lot of their power in this space comes from the fact that uh you know one statement one speech one indication can send prices downwards um and regulators oftentimes

will do everything they can not to kind of draw formal lines in the sand um and instead kind of rule by by kind of uh you know public speaking and so i think that's kind of one of the bigger tools that they have in d5 where they don't have elsewhere but ultimately i think regulation is going to be good for the space and it might not kind of break exactly the way we want to see it but the total addressable market of this stuff is so large and it's moving so quickly that if we're able to embrace regulation in a way that's constructive you know it's going to be a positive that's where we want to get to you next van so maybe we'll uh we'll we'll stick with you for a minute um we often talk about you know chris berninski has used this

phrase infinite white space to describe sort of the frontier that is d5 the frontier that is uh crypto what i want to know from from our panelists is how big is this frontier exactly you just use the word tam total addressable market size but like quantify this for us we we all remember the birth the birth of the internet or we were young when when it was uh birth but it's a big deal right and i think a lot of institutional investors harking back to the early days of the internet is defy as big as the internet how do we quantify its size advanced to you yeah so in the us there are about 3 trillion in market cap of financial

services providers that exist within the traditional ecosystem and if you add banks to that it's more you know maybe double or triple and so you know you're talking about and i just always go in orders of magnitude probably 10 trillion to 100 trillion dollars of market cap opportunity assuming that dfi doesn't just reinvent the stack it actually makes it better um and i think with all kind of you know digital transformations that's proven to be the case and so i think it's that large of an opportunity um and maybe that encompasses the base layers and the apps or just the apps but you know i think it's probably all-encompassing and so 10 to 100 trillion is about as large as i think it is um which would make it bigger than the internet 10 to 100 trillion okay and so like are we talking their advance about like

bitcoin as well being incorporated in this like often bitcoiners talk about the total addressable market of gold 8 trillion to 10 trillion is that something different when you're doing the quantification of the d5 market size it's different um i think uh you know if you think about so say the tam for defies is a hundred trillion um and you say the tam for for bitcoin is is you know 12 trillion which is the market cap of gold i think bitcoin has a better chance of fulfilling more of the tam just because it's it's you know relatively a neutral technology um you can cleanly put it into a regulatory bucket there's not things building on top of things that you need to regulate um so i think bitcoin will probably you

know have all of that tam were exceeded at some point i think these financial apps it largely depends on regulations you know what percentage of that tan it increases does the world look like all of these d5 protocols are offshore and you know we're doing this regulatory hopscotch or is it kind of you know embedded into the traditional financial ecosystem i think that's the determinant of of the tam um or the percentage of that that it occupies but um i think you know they're both going to be absolutely gigantic and there's definitely no lack of opportunity spencer what do you think about this yeah i think i think defy is a like a super set of everything basically so i would think about it um all of the world's value will be instantiated on blockchains it will clear on different layers of you know

blockchains whether that's ethereum because it's um you know like requires an extremely secure blockchain or a layer 2 or a sidechain or any other smart contract platform where there's like some type of financial activity happening i think like zooming out right um the internet allowed us to kind of send packets of information crypto and d5 allows us to send for the first time packets of value and that's the most disruptive thing that has kind of like happened i would say so um i think it eats everything it eats the world santiago defy eating the world tell us about this but also how are the traditional financial systems going to act what's wall street got to say about

this what do traditional banks have to say about this what about our friend wells fargo what's wells fargo going to say when all this transformation starts eating their core business yeah i mean like ultimately they won't have a choice uh because a consumer will demand it right when you can earn higher yield on chain uh when i was at jp morgan this was rap poison and now they're banking crypto why i don't think jamie diamond woke up one day and said in the board meeting we we have to do this it's if we don't do it you know crypto banks are going to eat our lunch and so look i mean the global financial services industry is 20 trillion and events like to go off of what vance has said you know it's very antiquated it's very uh there's a lot of friction in the

system and it's not capturing the all of the value right and um and nor is it capturing all of servicing all of the tamp right there are many people that are on bank they don't have access to credit and so really d5 for me is about not only making doing things that spencer said in a much like faster better cheaper way than the traditional financial system so by virtue of that you expand right what it is today from 20 to maybe 40. but it's also capturing anyone that has an internet connection can now transfer value and that has never happened in the history of the world and so when you connect all of that and you leverage the infrastructure the internet and the distribution of smartphones then you start getting to i think advances saying more to closer to 100 or 100 plus now you layer on top of that the metaverse

and things like nfts where you're capturing essentially you're combining global capital markets with digital scarcity and creating new forms of non-sovereign like stores of value and mediums of exchange if you combine all of that you get 100 plus in my mind guys i remember and i think the rockets are i was just going to say i think the rocket fuel here is that smart contracts offer developers unprecedented leverage you have never had more kind of um value that you could pack into a line of code than you can with a smart contract and i think the prime example is uni swap i looked at this calculation maybe in march and i think where we came out was that

every line of uni-swap code based on its market cap um was something like 18 million dollars right and and all that is to say that there are very few lines of code in in wait wait every every line of code was worth kind of uni market cap was right so if you took the the market cap of uni right yeah and you divided it by the number of lines of code in the new swap smart contracts you got to you know it was like 18 million at the time and and all that i mean obviously it's not this is not perfect science but it just shows you kind of the relative level of um programming that is necessary i mean think about coinbase versus uni swap you have dozens of people working at one protocol versus you know hundreds you know thousand plus

at um a company and they're doing roughly the same order of magnitude of volume that is the opportunity right everything is about to be disrupted because of smart contracts and i think that's why like it's it's i don't like to um value like the addressable market just because it's like so so big that it like would make my head explode it also sounds silly i think to some like outside investors when they hear us talk about these things like 10 to 100 trillion is the is the tam the tam is everything like like the whole world but yes i think there's uh one thing i think about is that um like the internet was invented in the mid 90s like around the time that you know probably most of us were born

and like that is such a huge development and i don't think that has even been fully you know appreciated or explored in terms of the time of what that means to to have a hyper-connected world like it would be like being kind of born within 20 years of the wheel being invented or you know fire being invented like i'm sure you know all almost all measures of of uh of you know life quality were went up over the next kind of 200 years and i think that will be a very similar thing with not only the internet but but also defy um and i see those things as very intertwined guys i remember in 2017 everyone was really really stoked because the institutions were coming the institutions were coming or at least that was the narrative at the time turns out uh that took about four years to

actually become true but 2021 does seem to have been the year that institutions put bitcoin on the balance sheet institutions starting to allocate to ether and perhaps now also looking into defy and nfts and understanding the excitement there so why in your mind would you say our institutions here today what do we have in 2021 that we didn't have in 2017 that are enticing institutions to finally come um spencer let's start with you uh large amounts of liquidity it really comes down to that right like institutions can access these markets and put on size in them and that's kind of a testament to

um yield farming liquidity mining right like the the the innovation happening through a lot of the the core low-level um d5 protocols i think um for me i don't get excited about institutions with defy at all i think they uh are just not the right users for this this is about again um kind of giving just individuals financial tools that they've never had before such that they don't have to go to an institution who rips them off right or um takes a massive cut and so um yeah i think i think the idea of an institution is is being challenged as well right with things like dows

investment clubs yeah there's a long way to go this is a huge battle but um yeah i totally understand why they're here spencer i was talking to you david when we were preparing notes for for what questions to ask the panelists and when we got to the institutions question like part of my discussion was like uh whether the institutions come or not doesn't really matter because what defy is actually doing is we're building new institutions right so come aboard if you guys want but back to santiago's point like they're going to be forced into it whether they come early or they come late uh so echoing yeah

no i think that's a great point that santiago made like um you you talk to any trad by person and you explain them compounder abe and they eat it up and get it immediately right and and they're starting to use it um but i just yeah again i just think that's not like the end goal so santiago what would you add to that so your background is is jp morgan so you've seen the the institutions from the inside are they coming or is this more about building new institutions or is it a bit about it's definitely both i mean i i do think that there's two things that are different this time 2017 one there's much more infrastructure in place and much more lindy to the space um there's also covet certainly i think was an accelerant to for instance stable coin adoption and if you look at the

circle i think put out a metric last summer that said like there's been like a 600 700 increase uh and i think it was like you know year to date in the number of non-crypto businesses using stable coins and you ask why well because people can't go to a bank and so digital money becomes much more it becomes the solution right um so anyone that has used a stablecoin doesn't want to go back to a wire transfer so if your starbucks of your walmart and you can pay your you know coffee growers in sumatra with stable coins well why why else would you do something differently right so it really challenges the operating flow why the only reason why technology's ever gone adopted is because it's faster it's better and it's cheaper right and so stable coins fulfill that criteria relative to a wire transfer so

i think code was an accelerant to a digital transformation like you would have looked at asia and the way that they've like totally leapfrog financial infrastructure and no one in asia ever thinks of like brick and mortar banks everything is just sort of very native with a smartphone like wechat and cacao like so i think like you extend that further in the u.s and other places and people become much more um uh you know in tune i think stable coins are a gateway drug to crypto to define and so i think that's different and for banks look i mean the only the only department keeps growing in banks is back office and compliance and operations all of those three can be totally like collapsed if you operate through a smart contract now you look at what avi is doing with a

permission market like white list of market where jp morgan can underwrite loans and borrow from another counterparty and interact with the customer directly what does that do to their operation well all of a sudden they can process order a magnitude or two of mortgages and service a much wider audience and so you know going back to this thing like finance is perhaps the only sector that hasn't truly cut off to the internet and for the first time banks are realizing that and i think they are much much more um friendly and welcoming to this technology than most people assume they are uh because they appreciate that they can any anything any technology that can strip away fat from their p l they're going to be very incentivized to adopt

vance what's your take on whether or not we can just build our own defy native institutions and if we can what is what is really different about these that are um that are built on the inside rather than coming from the outside in what what does this new era of institutions look like uh i think it's i think it's path dependent based on on the regulatory landscape like i can see a version of the future where um consumer banking apps are able to interact with all d5 protocols and i think that things like coinbase wallet which has you know a million users is largely a representation of that future and that is a future where we can build our own institutions and we use the crypto exchanges as the on-ramps and that's kind of our banking stack

um you know and i think that will be kind of the way that the world plays out i think the other version of the world is um where uh regulations are are uh onerous and protocols are basically kind of separated into this kind of like shadow banking institutional world um where you know maker and nave and all those things are kind of these these offshore uh you know banks um and i think that's also a gigantic market but it looks a lot more like you know kind of how finance developed and their kind of restrictions on a regulatory or jurisdictional basis and in that case i think that it's going to be harder for these things to grow um so i think you know i'm optimistic and i

think that you know regulators will come around and realize that these things are not positive but it's extremely path-dependent and you know it's just worth acknowledging that you're almost implying vance that there's a possibility we kind of go through a brief winter period of time in d5 as regulators maybe come down on it relatively harshly or at least regular day regulators in some countries do you think that's a likely path i mean it's it's i don't think it's a likely path i think all of all of this will take years and years and years to to kind of sort out and there's going to be you know regulators taking out kind of the worst actors like you look at the icos of 2017 they went off they went off and got the worst people the big connects of the

world you know in the scam icos and i think they will will go after those and then the question is you know how far do they want to take it do they want to use that as precedent for further regular reaction or is that kind of the amount of of uh you know kind of uh regulation that they want to see in the market and i think ultimately it will end up being the former um like you don't want to get bad actors out of this space they'll want to kind of you know honor what consumers are already using what they want to use in the future and that there won't actually be a winter and so i'm super bullish on on the regulatory future of the u.s i know that that's probably a minority opinion but you know we talk to regulators and for the most

part they just want to see this space grow in a way that is helpful to consumers and it's constructive ultimately and so i think there's really important work going on and it will continue to happen and ultimately it'll be successful i think just to add to that a good parallel is how they try to regulate the entertainment industry things like youtube and and and like certainly you have like the early instantiations of that like limewire and casa that announcers that obviously like you know there were challenges with that but ultimately you couldn't stop this this train um and and i think like we we've been at this for 10 years uh d5 is certainly like younger it's two three years but um i think regulators like are using that as a parallel and we've used them when we talk them it's like think about

how you try to regulate something youtube well you have to maybe create certain standards that if a youtube video has certain amount of time you can only use like you define how you redefine like ip and copyright in a similar manner i think regulators appreciate that there's a lot of innovation here and they want to be competitive on a global scale so um i think they want to sensibly regulate this technology with with new regulation not old regulations that apply to an antiquated financial system yeah well one other thing that i would just quickly add um is is that there are a lot of people working behind the scenes in our industry to interface with regulators and other people that kind of work for the government there is

no like doom gloom black swan that's coming from out of nowhere to be like oh man the industry is canceled like that's not happening and so but it's funny how like you go on crypto twitter right on any given day and it's like oh man this sec commissioner said that or whatever and and it's just one data point i just think it's worth kind of all of us um just kind of understanding that that this is an evolution of the financial system ultimately it will be you know folded into society it's going to require a lot of collaboration from many different stakeholders and it's happening um so yeah guys i want to turn the conversation to crypto dollars because crypto dollars i think kind of took everyone by surprise

in 2018 and then continue to take everyone by surprise in 201 2019 was with their immense growth in supply in 2021 crypto dollars alone went from 29 billion to 105 billion dollars in total supply and also in 2020 2021 alone we went from 308 billion dollars in monthly volume to 766 billion dollars in monthly volume just last may guys where are all the crypto dollars coming from why are they here uh spencer let's turn to you first uh well for starters um self plug i run a newsletter called our network it's about on-chain analytics and kind of data analysis and if anyone wants to dig into this topic uh we would fund it so reach

out to me um i think my hypothesis and what i've seen on chin is that um it's to chase yield right like they're going to d5 protocols they're farming uh they're being used on exchanges for trading or as collateral um and and that number is growing because the the appetite is you know only continuing fans any opinions about crypto dollars why are they here is it is there other stuff other than yield or is it all about the yield um [Music] there there's uh there's a few different trades that you can put on that are just yield generative that are you know within the strike zone of what kind of

most institutions and hedge funds do and i think a good portion of the of the stable coin growth has been for for things like cash and carry trade where you're basically harvesting the yield of dated futures on exchanges um you know probably that i would say that's you know a quarter i would say another quarter is kind of like you know emerging markets uh people that are using um us dollars uh instead of through their current uh native currency um an interesting anecdote there is that uh when you go to the fornix foreign exchange counter in uh cowone in hong kong they don't quote you us dollars they'll quote usdt and so it's just remarkable the extent to which that's grown to be a real phenomenon in emerging markets um and then you know the other kind of

half it's uh it's a mystery i don't think anybody knows but it's just a global phenomenon where people are putting cash in and it's not once it goes on blockchain it's not leaving and they're doing yield farming with it they're having fun they're using it to pay people um and so i think you know if we were really digging the data we'd find out it's a lot more international than we think and it also has a diverse array of participants from huge hedge funds to people that are just sitting in their basements guild farming santiago what do you think about this uh especially what vance was saying at the end of uh crypto dollars being relatively sticky once the dollars the fiat crosses that bridge into this new frontier it tends to stay there is that the case or like some critics would say look guys

once all the yield evaporates in the next bear cycle all these dollars are going to just disappear along with the yield they came because of the yield they're going to go when the yield disappears what's your thought on how sticky crypto dollars are as a use case and the growth potential there yeah well i would challenge the assumption that yields will go down just full stop and i can get in y but no no i think look again it goes back to the usability of a digital coin versus having dollars in a bank account you know not only is it just your your own bank but there is you know people people continue to criticize d5 because it is all speculation coins and all this stuff and yield farming at the end of

the day like i think more and more people are waking up this idea that depositing your ustc in ave or compound forget about the yield for a minute even if there was no yield you're in control of that and there's greater certainty and i think people outside the us where you have different regimes and not as strong of a systems appreciate the certainty the higher degree of security that you can have by having a digital dollar um now of course i would like to see more truly decentralized stable coins i think that is a frontier in d5 that has a lot of it experimentation but you know i think that's the next sort of

wave where you see something like you know faye or some other project that are trying to experiment at this frontier right okay tell us why yields aren't going down well first of all where they're coming from because some people don't even know that where the yields coming from and then make the case for why they're not going down well a number of reasons yields are either subsidized by sort of a combination of like native tokens right when you're yield farming that's one element where protocols might issue you their own governance their own token and so that has value um the other component is just by virtue of utilization there is a lot of demand of perhaps borrow these stable coins so for instance you know a subset of participants are looking to go levered long for instance or borrow stable coins

to go farm and do other things with them uh so that's another you know when you think about the utilization curve what determines yields in these money markets that's another component um and and and the third piece of why yields are not necessarily coming down one there's always a risk premium attached and there will continue to be a risk premium attached to this industry because it's younger it has smart contract risk it's just more in the frontier and the other is the ability to do derivatives right and create much much like yield generative opportunities like credit default spots and like and like uh you know something like barbridge or saffron like the ability to like trunch risk and create much and interest-bearing opportunities i think that is a whole area that is

very nascent d5 today but will uh you know i think create um increasingly will create opportunities to capture yield in space okay i yeah if you wouldn't mind um okay so one i don't purport to be like a trader we definitely don't at variant we don't know where the market is going tomorrow i think we make kind of like long-term bets i would say um you know yields are very much as we know predicates on the price of the governance tokens that people are farming right but i think for the reasons that santiago um said and two more that i'll give that in equilibrium i i believe that d5 yields will be higher than c5 yields and and um the two

others are ones like a lower cost of capital right like if you're lending on um the the difference between that and interfacing with an institution like jpmorgan or something like that they have businesses and compliance and um people to employ right like all those things are costs that protocols do not have um and and number two is composability right if you are an actor in the system you can stack yield in a way that is just kind of unimaginable in um the financial system for most basically all participants except for the the very few sophisticated ones awesome i i really like that take uh the bureaucracy is one of the most

attractive or lack of bureaucracy is one of the most attractive features of this space and since we have all these crypto dollars on chain like i said uh over 100 billion of them how has that impacted market structures right um back in 2017 2018 when we were dipping people had to flee to fiat on exchanges on centralized exchanges and then maybe one step away from their bank account but nowadays uh people can just exit into uh into crypto dollars on chain and keep them on chain how does that change the properties of the tokens that are proximate to all of these crypto dollars i would assume ether has the most surface area to crypto dollars but al also defy tokens as well um vance how do

you i see this the such as large supply of crypto dollars being so close um in d5 to all these crypto assets how does that change the market yeah so relative to 2017 bitcoin has become less important as a medium of exchange just because that was kind of your like it would go all to bitcoin or youth to us dollars on an exchange like you can kind of just cut out one of those legs now and so bitcoin has kind of had to evolve as a result as it's not kind of the the reserve currency of a lot of these these kind of alternative coins um so that would be kind of one of the biggest ones but i think just the idea of user persistence and the fact that people are sticking around and it's not

you know you withdraw to your bank it's three to five days out like it comes into your bank account if you want to get back in like you're making a conscious decision to wire money to coinbase like that you know removing user friction means that people can use these things more and i would say that's kind of a general benefit of market structure as well um but just the ability for people to you know actively use those stable coins earning more governance tokens on things like ave or compound or curve or synthetics like that that's a huge use case and i think that actually helps the liquidity of those underlying protocols and allows them to to you know fend off a lot of the downwards reflexivity that they see in times of stress um so i think it's ultimately a huge positive i do think

that with stable coins like we've only seen the very beginning of the story um and you know i'm very bullish on things like dying it's usd and more decentralized alternatives to things like usdc um which i think will eventually just kind of come to be neutered in a lot of ways as that blacklist kind of gets more expansive and the list of protocols that they're allowed to interact with becomes you know more and more diminished over time so um we'll see on on what that looks like in time but the people think that the centralized stable coin race is like you know been one or you know it's already finished but we're really at the very beginning of that that industry well here here's another maybe new beginning and this goes to kind of current events which is el salvador talking about making uh bitcoin

a um a like a a legal uh legally accepted currency inside of their economy and el salvador is as i understand based on the dollar today um you just said something super interesting i think vance which is what we've seen in the crypto economy is that crypto dollars have started to replace bitcoin as a medium of exchange i'm wondering if we might start to see this on the nation state level right so like one thing you might get with crypto dollars is an entire financial system in a box right and that could service entire countries in the future that's a hypothetical and also a question mark santiago what do you think about that well i'm from mexico as you guys know

and to me like um yeah most people don't want to hold their savings in pesos you want to do it in a dollar now you can do that the digital dollar and interface with an entire as you said out of the box so much utility i mean mexicans can't even invest in this in the us stock market you can't invest in things like tesla now you can't right through synthetic products i mean that the level of usability of this system right usability i'm not talking about speculation just pure usability and access to new financial products that otherwise it would impossible to get access to is huge um you know i think you look at the turkish lira you look at the venezuelan peso you look at the zimbabwe dollar their volatility it you know you think coins on uniswap have volatility you haven't seen i mean these

things like lose value time and time again right and so in my mind you know it's it's it's that is what really is exciting about d5 is the usability most people talk about speculation but don't appreciate the level of usability and what that truly means for you know most of the world's population guys we are going to oh go ahead go ahead no just say in reality like why why do you need to have fiat like local fiat currency or tokens if you will when you can i mean you can do you know a stable coin um or or something like e guys there is so much left in this d5 conversation we're going to get to the topics of a layer twos that we all think and

some are already here some of the rest are coming i want to talk about uniswap v3 and who is most capable of winning the uniswap v3 liquidity providing competition is it defy apps or is it institutions and individuals uh and then there's some other conversations i want to get to such as what does it mean to be about that life it's this vance spencer quote that we got out of the first podcast with him and stuck in my brain but first before we get to all those questions we're gonna have to take a moment to talk about some of these fantastic sponsors that make the show possible bankless is proud to be supported by unit swap uniswap is a new paradigm in asset exchange infrastructure instead of a cumbersome order book system where trades are matched with other humans

uniswap is an autonomous piece of software on ethereum which is what ryan and i call a money robot no human counterparties or centralized intermediaries just autonomous code on ethereum input the token you want to sell and receive the token you want to buy something brand new in the uniswop ecosystem is the uniswap grants program is now accepting applications for grants we have been saying this for a while and we'll say it again dows have money and they are in need of labor if you think that you have something to contribute to the uniswap dow apply for a grant to uniswap just look at the size of the uniswap treasury it's almost 3 billion dollars this mountain of capital is looking for labor do you have something of value to contribute to the uniswap

dial no matter how big or small your idea is you can apply for a uni grant at unigrants.org and help steer unit swap in the direction that you think it should go that's exactly what we did to get uniswap to be a sponsor for bankless and you can do the same for your project thank you uniswap for sponsoring bankless gemini is the world's most trusted cryptocurrency exchange i've been a customer of gemiini since i first got into crypto in 2017 and it's been my main exchange of choice to make my crypto buys and sells gemini is available in all 50 states and in over 50 countries worldwide and on gemini there are markets for over 30 various different crypto assets including many of the hot defy tokens and it's one of the few exchanges that has liquid dye

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hundred dollars within the first 30 days after sign up you'll be gifted a free 15 bitcoin bonus check them out at gemini.com go bankless guys we are back with our d5 panelists and i want to start off the second half of this show with unit swap v3 because uniswap v3 and concentrated liquidity has really kind of changed the game with what it means to provide liquidity in amms amms already changed the game but then uni swap v3 changed the game again where it used to be this lazy liquidity providing paradigm submit your assets call it a day now we're kind of getting back into the world of competition and now we're kind of seeing these order

books form these four order books that look like pyramids rather than you know inverted pyramids like we would see on traditional order book exchanges and so i have i want to ask you guys the question who is most capable of generating the most fees and yield in unit swap v3 what parties of institutions are we individuals who can move really quickly or funds who can have dedicated strategists or defy apps that are really yield optimizing yield aggregating defy apps like yearn who's the best party that's most situated to win the liquidity providing game in uniswap v3 uh santiago let's turn to you yeah i think it's defy apps uh um you you've started to see a few uh we're actually investors and we're investing

in in one incubating one and i think it's going to be urine like strategies that really automate this for all kinds of users not just retail but also like sophisticated institutions it for what it's worth it is very time-consuming and and uh processed to manage liquidity provisioning in v3 and i think uh this is this is better suited for something like like urine to do van same question what do you see on the horizon of who's going to win the lp game moving into the future uh it's not going to be passive lps and projects that don't adapt to this new kind of regime of capital efficiency are really going to struggle partly because they're not going to be

able to get best execution but also because they're just going to be basically hiring other people's lps that are lazy and you know there will just be less fees there will be more people lping there's kind of less of a pie to go around and so i'm kind of bearish on those but um i think there will be protocols that sit on top of uni-swap and basically democratize access to market making again and those will be relatively profitable but yeah i mean there's also kind of like this you know kid in the basement factor that's just figured it out and and there's tens of thousands of those types of people that can do it themselves i think the question will be ultimately whether they want to or whether they just want to pay a year and you know one percent

uh spencer same question got any opinions on the the v3 game yeah i have strong opinions um i think i think everyone wins uh and i think it's really really early so right now um you know we don't have much of an ecosystem of apps that help you know the quote lazy liquidity providers right now but but that's going to happen and i think um people will organize they will find a way to to i guess equip themselves with strategies that um like more sophisticated participants have today so i think that's really cool something i'm seeing behind the scenes with teams but i think like taking a step back unit

swap is permissionless anyone can add a pair to uni-swap right and so with that you have um a long tail of assets that frankly institutions are never going to touch right they're going to touch them when they get bigger and they become a top pair or part of like the middle market and so i think the beauty of uni swap is like it is the exchange for we believe all the world's value and so um i think there is there are fees to earn for literally everyone it just it comes down to um kind of what pairs you're playing with i'm going to ask a quick question on uh unit swap to each of the panelists just to get your your quick gut reaction opinion do you think we'll live in a

world where uniswap is the dominant amm or will we have many amns what do you think spencer uh i would say it's it's probably a um like a power law i wouldn't be surprised if uni swap um was the dominant player i i actually believe it will be i mean look at the market share now right um there are i mean yeah so you know we just have a 60 market share right now everyone has tried everything in terms of liquidity mining programs different amms different curves and yet vampire attacks with that yes even without all of those things uni swap is still winning and i think it's worth interrogating why um i think obviously first mover advantage was huge

right liquidity begets more liquidity you have users that are coming and trading that's more trading fees for the lps i think brand and trust is also a big thing right so when you're a liquidity provider or a user you want to be somewhere you want to participate on a platform where you have you know the assurances that your money's not going to go away and you're going to get the best price so yeah it's um it's really interesting we'll have to see vance what do you think are you as bullish as spencer on uniswap do you think there's many amms um [Music] i think it's it's uh like if you look at polygon right now there's an amm called quick swap which basically does all of their volume and um they dominate that

area and that's honestly where a lot of retail is being onboarded right now um and use swap is is really amazing and it's capturing you know most of the market share of these amms but like they're they're kind of too principled to go and deploy there because you know polygon is not really permissionless innovation it's it's kind of like a federated side chain um so i think it's kind of path dependent in terms of which l2 ends up winning but you know uniswap being able to go on or being willing to go on to arbitram makes me more bullish on on you swap kind of winning out you know in the end game um but you know there is a world where we explore these decentralization trade-offs and another layer two or another blockchain ends up winning and you swap is not the amm of

that chain uh so you know pretty path dependent but we're extremely bullish on you to swab um we hold unit spot so disclosure but uh yeah we're gonna get more to layer two in just a minute but i wanna ask santiago the same question about uniswap versus a world of many amms yeah i i would think that uh there there is possibility to have you know sort of like a duopoly or like two or three dominant amms uh you know i think like sushi for instance like look i love unit swap what they're doing and uh but certainly like sushi is is one that they're the areas of d5 that need more solving are like capital efficiency and certainly uni v3 like starts to

accomplish that by being you know allowing consumer preference to say hey where what continuum of the curve do you want to provision liquidity based on your interpretation of correlation of set assets right at the pair but you know sushi's approach to capital efficiency is much different through like options and like koshi and bento box and so in my mind it's just sort of a different a different approach to capital efficiency ultimately what the consumer most and the liquidity provider most cares about is you know being able to maximize fees and certainly that might be possible in b3 but i think there is still a lot of room for innovation in this field of capital efficiency and we've you know i'm personally interested in seeing different approaches to that um and so i think by virtue of that you're gonna

there is a possibility to have potentially competing mm's and look it's a vast area right and so i think what you i think need to understand is that uh from a liquidity provider's standpoint you know you might value certain things right if you're a retail lp different than if you're a treasury lp if you're a like you know a much more institutional lp and so i think there's different uh approaches and and for that reason you're going to see perhaps multiple amounts spencer it's been woven throughout this conversation today but we talked about polygon and other layer twos right and polygon maybe as a side chain less of a layer too but the layer twos are coming it's really interesting to see those of us all of us here have been in the space for a bit through the trajectory of

ethereum the beginning they said smart contracts would never work no one would use them right then ethereum got so full and so successful that that became sort of the the problem is how are we going to scale ethereum and now we have things like binance chain launching with an evm smart contracts instant massive uh you know transaction polygon kind of the same now we're on the cusp of what david and i have been calling layer two summer we've got arbitram we've got optimism we've got lots of experimentation with the starkware stuff going on talk to us about what you see ahead for the next three to six months in layer two is it here is it common is going to make a big difference what do you think

spencer um yeah i i definitely think we're it's it's going to be it seems like a lot of these projects are kind of marching towards a main that all around the same time and i think to polygons credit and even bsc um they've kind of showed the playbook of how to get users um at least to to like take a tour of their blockchain right and it starts with some type of um fork of a you know battle tested defy app that lives on ethereum and it's you know either juiced with liquidity mining rewards and even sometimes subsidized by the underlying chain itself right so like giving matic rewards on top of sushi rewards that's a

great incentive for people to come over and try it um and then you kind of couple that with the infrastructure if it's an evm chain you can use things like metamask you have block explorers that kind of plug in and it's a it's a user experience that feels very very similar to ethereum so yeah i think it's it's going to be madness frankly um i'm i'm curious about what happens after that right when when the dust settles what was sticky and what was not which users actually stayed were they mercenaries and just going to wherever the hottest yield farm was or um you know are they a different type of user kind of entirely so yeah it's it's um

it's going to be fascinating spencer you use the word madness which i think is very proximate to the word mania and then you also just indicated that there's going to be a bunch of yield farms around and so one of my uh things that i've been speculating about is uh people tend to issue tokens in this space uh and so i'm kind of thinking that every single l2 will have a token uh and if they have a token that means they'll need to distribute it uh and so uh santiago how do you think all these l2s are going to distribute the tokens what's the distribution plan the logical distribution plan that you see coming for all of these l2s yeah i think uh well first of all i

think there's uh some like uncertainty if some l2s will issue tokens i think i can't think of any network that has been successful without a token so like you know uh for that reason i think every lt will have a token um purely for governance or for other reasons on the distribution side i think like we can look at precedence on what has been a successful like uh distribution strategy i think most recently you've seen projects like badger and others and git coin distribute tokens in a much more sensible manner based on certain criteria not just providing liquidity but also what are going to be good stewards of governance uh that are going to be active community active in the community active governance and i think uh you know for an l2 what is most important right well you have you want to attract partners

right you want to attract apps to come on board and so distributing to those treasuries and those users might be good um as well as you know the underlying users so i think uh obviously as we all know and are in for the space you know being able to distribute those tokens um you know widely is is also important and so um yeah i think um you you will probably see some like guild farming opportunities uh purely to distribute this to a wide variety of users vance we just had you on the podcast so i know you're bullish later too right and i know you've got some stuff to say about it um i want to ask this question right i feel like in crypto if you zoom out we've seen a couple of eras we've

seen first the the era of bitcoin where we discovered digital scarcity then we saw the era of ethereum where we discovered sort of smart contracts and d5 was born is layer 2 unlocking a another new era is it that big is it that important is it that impactful how would you characterize layer two it's unlocking a lot i think it unlocks both good and bad so you know the the good is you know high transaction throughput a means to kind of port ethereum culture you know forward in a way that doesn't you know crush the base layer um and just new primitives that we can all build and enjoy um in this new financial system that that's definitely the good

the bad is basically um you know and i was talking to some friends from china last night i was like you know how is bsc doing is it still interesting you know do you guys trade on it they're basically like no you know people got rubbed too much retail stopped coming out of the platform in weibo you know people in chinese you know calling for consumer protection against finance and cz like the these things uh i i think player twos oftentimes think that they are competing against each other but really they're competing against not blowing themselves up and developing the wrong culture that turns users off and so i think that's kind of the bad unlock that a lot of these layer twos will have to grapple with um and i think you know bsc and kind of the relative death of that has has largely been indicative of

that trend and so i think you know there's like this idea that we're just going to open up the theme park and people are going to come in and have a blast but like in reality you know we have to make sure the rides are constructed the right way you know people aren't getting their heads chopped off on a roller coaster like that's kind of how we lose their two battle um in the near term in the really long term i think the the big thing is how do you productionalize and utilize mev um that is basically the the financial where the rubber meets the road in terms of porting ethereum culture are you giving it to people that are not supportive to the ecosystem are you giving it to the lowest common denominator developers so they can you know keep building their little dinky

defy app that may one day become something big and i think that's where kind of you know we end up long-term but uh there's gonna be a lot of tokens issued before we get there guys i wanna i would go ahead sometimes just stop some of that i mean for me l2s are really like you know not finance marching like i appreciate like definitionally like they might be included in that but for me like lt's are like arbitrary and optimism um and and uh like starkware like these are things that you know are provide the same sort of security guarantees from l1 but also allow for much higher throughput and and i think for that reason ethereum is migrating from dial-up to broadband and i think most people don't appreciate how explosive that will be so if you think about like you know when you have those brick

phones people want to pay tons of money for like dial-up internet and your d5 has largely been that you know you're paying high transaction fees but it provides a lot of utility now imagine a world where that collapses orders of magnitude what's that going to do like finance smart chain was just a foreshadowing event of what will happen in ethereum guys this has been a really awesome panel and i want to finish off with a more high level question uh you guys have all been in d5 since defy was created in in december of 2017 with maker dow that's kind of when i think defy was really created how has defy changed your life as in like we all have these insanely awesome defy protocols right at our fingertips right if they're inside our computer they're just a few

ledger presses away uh how has that changed your life spencer let's start with you yeah i think um for starters it's it's changed my life because um d5 kind of offers frankly investment opportunities that were otherwise unimaginable to me and other participants right i think there is so much low-hanging fruit but also just kind of meaty projects out there to take on where anyone in in the world can can access these opportunities too right like and that's really important um but i think the biggest thing is probably just the mission um we

the idea that we are creating a financial system that is owned and operated by users i think is really important and it kind of transcends even making money or um you know we're talking about how like society is going to change and so i think that's given me a mission because we now have a blueprint to get us there it's very very early but it's definitely changed my life santiago how has defy changed your life yeah for me it's sort of been a privilege to be part of a space where you know one it doesn't discriminate no one cares where you come from who you are what you look like if you went to harvard or

community college or didn't even go to college and i've seen that firsthand like i feel like interacting with these developers like hate someone like hayden no experience coding and then teaches himself how to code and just built the most powerful like the most popular one of the most valuable d5 applications that is rivaling coinbase like just think about that to me blows my mind and i think it's very emblematic of web 3 and open source systems where it really is the best way to express human ingenuity and creativity at a global scale and then you latch on top of that the ability to transfer value and i think the combination of that and you're seeing with nfts and artists being discovered we just hired a guy who's 18 years old was anonymous on twitter and i found him on twitter and now he works at perify

and to me that's that's the most explosive thing of look if v5 works great if it doesn't work i think generally this idea of open source systems where human talent is matched by capital in the most efficient way is here to stay and that's very explosive and that's like why i'm here vance same question how has deep changed your life um for the better for sure um dance doesn't sleep yeah but less sleep for sure i think like the financial returns have been cool um and i always thought like you know once i made x amount of money i would like go and chill on an island or something um but like that has kind of

caused me to kind of reflect on like what i actually want to do and you know what is actually the purpose of what we're doing and just like working a framework every single day you know with michael the rest of the crew and actually doing something that you know if you work in a big tech company it kind of feels like um you're just like in this little cog you're this little like box that you can't really get out of um the d5 is basically infinitely expansive and inclusive and you can really make it your own or what you want out of it and i think just you know echoing what spencer said just that purpose and that mission is really kind of the thing that's that's really changed the most um you know from from kind of the the pre-d5 days uh yeah guys uh these stories are so cool uh

david i hope you scratched your itch this was an incredible panel just want to thank all the panelists for hanging out with us and sharing your stories and your insights we appreciate it yeah thanks guys thanks guys thanks guys yeah it look guys uh you know i decided the same thing as these these panelists about five years ago i was like i missed the early days of the internet there's no way i'm going to miss the next financial revolution that's why we are all here that is why you are watching bankless if you enjoyed this panel make sure you smash the like button and subscribe david i said it this time for the first time we got it of course uh risks and disclaimers

everyone none of this was financial advice eth is risky crypto's risky so is defy you could certainly lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bankless journey thanks a lot like and subscribe