A New Era of Global Capital: How Blockchains Can Fix Broken Finance

Transcript

we don't have internet finance we have finance in silo databases that communicate over the internet occasionally what we're seeing on the internet financial system is a lot more innovation and experimentation than we've than we've seen in the in the legacy financial system over the last 30 years welcome to Banklist where we explore the frontier of internet money and internet finance and today on the show we are going right to the heart of that exact subject the internet financial system is being built right before our very eyes it's not crypto it's not blockchain it's not DeFi it's all of those things but the idea and the power behind all of those things are best expressed as the internet financial system today on the show I have Felipe

Montilgre who is driving this idea forward the idea that we are all familiar with but we need better words to express and Felipe has those words bankless Nation the episode that you're about to hear today will be how the power of what we call crypto will be explained and expressed to the rest of the world for all the crypto natives out there we all know how blockchains work we understand cryptography we know DeFi but those are our words and to help the world go bankless we will need new words in order to help the 8 billion people go bankless it's not enough to try and bring them onchain for the vast majority of users we're going to have to bring the chain to them and they're not going to understand blockchain or tokens or whatever but they will understand

internet finance on the episode with Felipe today we talk about the permissioned siloed server problem and the frictions and the economic malaise that siloed server financial systems impart upon the global economy we talked about the idea of a server with laws a server with rules which you might know as a blockchain and how that inverts the relationship between finance and servers rather than the millions of siloed servers across the globe blockchains represent single unified servers that unlocks financial efficiency and access and strong property rights for the world we also talked about the lack of access to property rights and how it is one of the largest single things that prevents people from accessing wealth and growing their local economy and we talk about the differences between investing in

protocols versus investing in companies and why that actually might be a false distinction i really enjoyed this episode with Felipe and if you appreciate this episode as well if you appreciate this podcast generally please subscribe or if you already subscribed please re leave a rating or review if you want to help get 8 billion people on chain this is how we help the world go bank list let's go ahead and get right into the episode with Felipe but first a moment to talk about some of these fantastic sponsors that make the show possible in the wild west of DeFi stability and innovation are everything which is why you should check out FRA Finance the protocol revolutionizing stable coins DeFi and Rolex the core of FRA Finance is FRAXUSD which is backed by BlackRock's institutional biddra designed FRAUSD for best-in-class yields

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self-verifies authenticity with zero knowledge proofs each passport creates one unique identity second you can share proofs privately third party apps request identity proofs like confirming you're over 18 you can also link proofs securely to public wallets for airdrops or governance participation and then last secure verification apps validate your proofs instantly onchain like on Cello or offchain audited by ZK security the self app is live on iOS and Play Store visit self.xyz and follow self protocol on X banklist Nation very happy to introduce you to Felipe Montlegre he's a co-founder of Thea Capital felipe welcome to the show thank you for having me and you nailed it on the name perfect perfect uh Felipe I want to start off this podcast by reading off an excerpt

from something I'm quite sure that you're familiar with since since you wrote it uh you wrote in an article that I thoroughly enjoyed we are collectively building the internet financial system a better financial system on the cloud that can hold the world's assets and provide financial services to 8 billion people we believe the internet financial system is a paradigm shift in global financial activity like Gutenberg's printing press was a paradigm shift in the production and dissemination of knowledge now I think every listener of this podcast is going to be intimately familiar with the subject matter that we are going to discuss here on the podcast today but I think not the words that we are going to use and I think that's going to be the key difference and I think why I'm really excited for this episode so let let's start just first

with this new name internet financial system why these words not blockchain not DeFi not crypto but instead internet financial system let's start the conversation off there why the why this name yeah absolutely good question we've been pushing um and a few people have been pushing the name internet financial system for for a while now i think it it captures certain elements that that other names don't capture like DeFi as an example you know decentralized finance is a good name but it it really does limit the scope of what you're talking about because something like circles USC probably the best example of product market fit in the market is that decentralized finance or is that much more efficient lower cost centralized finance happening on blockchains right

um other names blockchains I think there's been a lot loaded onto the word right and there's been ideas of reimagining nation states reimagining money internet internet finance for us is is is more narrow than that right it's just lower cost financial services for everybody around the world so that capital can flow better through borders and people can get financial services at at at at low fees in an efficient manner um so I think it's just it just captures kind of more than DeFi less than blockchain and crypto which obviously crypto cryptography is a huge a huge um discipline itself it's how the internet works it it includes things

like privacy u money etc it just it just kind of captures what we want to talk about which is replacing the traditional global financial system with better rails through unified permissionless servers so I'm going to put on my Gary Gendler hat and say that even before blockchain we already had internet finance you can log into your Wells Fargo and access your bank account on the internet uh and so why why are we even invoking this new name in the year 2025 why is this a even a postlockchain phenomenon in the first place can you unpack that part of the conversation yeah I would what I would respond to to Gary Gensler is that's like saying that you know saying that your financial

transaction in the legacy system is made on the internet or happens on the internet is akin to saying that the pizza that you order through Grubhub is made on the internet it's not the internet is a communication mechanism for from you to the analog pizza shop that then kind of cooks your pizza delivers it all in analog world with a communication layer through the internet and that's how finance happens now you send a message to Wells Fargo then they go to their permissioned silo database that is not on the open internet in any way and and make a transaction and let you know that they made a transaction so the internet's only there for communication what we're talking about with internet finance is that the actual databases and ledgers that hold assets

exist on the open internet and anybody in the world has root access to those databases and I think the the way to make sense of this point is just thinking about the concept of ownership which is really what um like it's the heart of the article I'd say and it explains why you can't call the traditional banking system internet finance if you think about what it means to to own something you know we use a few examples to kind of make the point of permission disparate servers around the world um if you think about what it means to like do a seed round for example you you invest you give you invest in a in a startup you wire the money they they get the money they have a spreadsheet the team

has a spreadsheet where they put your name David next to the amount of money that you invested right and your ownership of that startup's equity lives in that Excel sheet and maybe they replicate it by sending it to the lawyer maybe they replic replicate it by putting it on Carta but it's the spreadsheet has your ownership there's no other place in the world that records your ownership right it's it's a spreadsheet ownership the same is true for most stocks that people own even in advanced economies like the US so if you think about owning Apple stock on Robin Hood right if I have a 100 uh stocks of Apple on Robin Hood Robin Hood has a server that says you know Felipe 100 Apple right it's like a database entry but my ownership lives on their

databases apple does not know that I'm an owner of Apple Shock and no neither is anybody else outside of the Robin Hood database then they work directly with a DTC company depository trust company and that company works with Apple so that's the link right the DTC where you say Apple CFO can say who are my owners okay Robin Hood's one of my owners bny Melon is one of my owners bny Melon actually does this service on an outsourced basis for hundreds of of brokers around the world um and then there's countries that are less advanced right like Robin Hood's the most advanced example of this possible but if you own land in in like a Guatemalan town your land is literally a rolledup map where you have like like latitude

and longitude laying out the piece of of of territory that you own with the right signatures by the right government officials and like your ownership exists in that physical office so what I'm trying to paint is this like system of siloed databases around the world that need to communicate with with each other and we'll get into this but that communication is cumbersome expensive it's a slow morass of paperwork because you don't have this server or database on the open internet where everyone records their assets and that's why I would tell Gary we don't have internet finance we have finance in silo databases that communicate over the internet occasionally i really like this um kind of visual the visual that I'm getting is this like topology of uh silos like

circles around the world and and they all kind of inter they communicate with each other and each sort of asset registry this analog pen and paper logicbased system asset registry system is loosely cohered via communications like generally communications on the internet which is why we have like pseudo internet finance but not real internet finance but let's really just go into just like why this like in mesh network loosely cohered topology of siloed servers why why does that why why does that create so much friction and growth uh and friction and constraint on growth and innovation in the structure of like

finance as we've known it before crypto like why is this just like an inferior system yeah and all these are points that we we'll we'll delve into but I think one reason is it's very high transaction costs to communicate across servers right if you need to um if you want to send your Apple stock from Robin Hood to Fidelity again this is the most advanced low friction example possible you need to get Fidelity and Robin and Robin Hood to communicate at the DTC level right right and then you're already talking about multiple layers and approvals to be able to have that communication happen with well- paid financial you know system employees that wear suits to work making that happen and and giving the appropriate signatures if you want to talk about

buying something in a in a less sophisticated less well-connected system the land in Guatemala you have to like fly there get lawyers and involve yourself in you know the legally laid out steps to have that piece of land transfer from one person to another right which is going to involve dozens of signatures and steps that's really expensive right that's you have these kind of like welltrodden corridors like um you know if you're sending money from the US to Europe okay you're using a a there is the bank of international settlements you may have specific um systems between two countries that are closer but again just imagine white collar workers who do this all day making these steps happen just to move

database entries right that that's all that's all that's happening on the back end if you have a unified server like like we're building an internet finance that uh adheres to certain rules then sending your your stock from Robin Hood to Fidelity isn't a concept we just I just send you a token and the single unified database updates an entry right sending money from one country to another isn't this long process that you need to do for remittances of disparate steps but it's just a database entry like a database entry for you know minus one for me plus one for for David so that's one really big issue it's the high transaction cost problem i'd say the other two really big issues we we

talk about are one um because these servers are permissioned right there's no way for you to to update um Apple's like like cap table without their permission um or there's no way for you to like move around your your equity in a startup without the you know the the the the legal team and the startup team like actually changing the database themselves right you can't change that database you have this permission entry problem that leads to high bearish entry so we we have a we have a a graph in there that shows the number of new FDIC insured commercial banks and it basically drops to zero after 2009 and there are reasons why that happens but basically the point is you know you

can't stop the number of people who interact with the base layer of the US financial system from from expanding and you can set it to zero overnight and that's what that's that's what happened here over the last 15 years and the same it just kind of shows the point that all of these systems are permissioned and if you don't have the appropriate permissions you cannot innovate or try new things what we're seeing on the internet financial system is a lot more innovation and experimentation than we've than we've seen in the in the legacy financial system over the last 30 years and the last system just to kind of go through it is um the local banking igopolis problem so banking has really good economies of scale and if you are dealing with permission systems within a country what ends up happening in

basically every country is that five banks take the whole market because it's it's it's efficient to be big and you have lo you have kind of local gatekeeper access so this chart that you're showing is just emerging markets sorted by population so there's no kind of preferential cherrypicking or sorting here and the the five largest banks have over 50% market share in all but two of these countries and the two exceptions are 45 and 48% right so the point is kind of is compelling here but what happens is that these countries become these banks become local igopies they become gatekeepers and they do what igopies always do which is underprovision and overpric so they underprovision loans and they overpric the loans and we'll get into some

examples of that but but we we lay out quite a bit of evidence that the net interest margin the the the spread between what these banks borrow at and what these banks lend at which is kind of the cleanest proxy for pricing power in banks can be as high as 5 to 10 point i mean on average 5 to 10 points um higher in less developed financial systems than in more developed more well-connected financial systems and the numbers can go as high as 20 20 points right and and again that's that's a really really big issue because the capital is the basic input to everything in an economy so if you're looking at loans that are 10 points higher because of the structure of your local banking system that means mortgages are 10

points higher fewer houses are sold price housing prices are lower because there's there's less there's less of a market and fewer houses are built right small and medium business loans are 10 points higher fewer people can actually make the model work to start a new business there's less employment in the economy maybe somebody wanted to buy a car buy a car to get a job an hour away but auto loans are 10 points higher the math no longer works and they take a lower paying job nearby so just all across the board this um local banking problem is is pernicious and kind of shows up in in significantly lower GDP employment and development i really see a one-two punch with these two charts that we're showing on screen the the market share for the five largest banks

which we're just showing that like the highest one in South Africa is 82% so in South Africa the top five banks own 82% of the market and we're really just seeing and like you um you alluded to it just the the benefits of being a larger bank increase with size right you just get more and more economies of scale as a bank the larger that you are and so you just are more advantageous to be a large bank and so I want to I want to like have this context of large banks own the m vast majority of the market with this first graph that you showed which ever since 2008 2009 the new introduction of new banks of new potential disruptors of that igoperally igopoly is not is is not happening and

so going back to that idea of like there's this topology of interconnected this mesh network loosely cohered mesh network of financial ledgers aka banks there's no there's no new way to like enter your new ledger into the system it's very hard to enter this financial system and the reason as to why this is true is probably one part because some of the banks are just getting so big that they're hard to compete with but then also regulation as well like why did this happen in 2008 post 2008 crisis there was new regulation that made it really really hard and when it comes to longtail financial access there is no new service of that end of the market things are like calcified they're rigid

uh and there's no one really thinking about like trying to create new opportunities here and so in terms of just like just for the innovation side of the financial industry we have these like one-two punch problems where like there's just not much innovation happening inside of you know analog finance non-inb based finance yeah that's right and you and you nailed it the the high NIMS can only exist under a condition of of very high bearish entry because if you had 10 point higher NIMS and and free bearish entry which is you know what we have with permissionless databases those NIMs would be compressed you can argue that that you know there's still economies of scale in banking but

the economies of scale kind of pale relative to the benefit of having very high bearish to entry for for the for the incumbents right like um and that's why and we we kind of see similar market structure in a lot of parts of of the market exchanges also have a very concentrated market structure um you know it kind of reverberates across the the financial services industry and what you see with with crypto and and low barriers to entry is immediately we see experiments that people have been trying to do within tradi but have been unable to do for a very long time so there's one story that we point out there is a story of Eric Bddish a professor a University of Chicago professor who basically

discovered the batch auction as a solution to high frequency trading um you know he discovered this in the early 2000s he wrote a paper the paper was widely acclaimed kind of no disagreement and then tried to get a few exchanges to integrate this technology because he had to ask for permission to try out his idea right the the conversations really went nowhere exchanges did not implement um batch auctions because high frequency trading is a very profitable segment for all exchanges and what ended up happening is that a team a crypto team approached approached uh professor Budish the cow swap team and implemented his design and they've done over $90 billion of trading volume right and you just see the difference somebody had no

interest in in internet finance at all but sees the ability to to try out a new idea in a permissionless system you talked about NIMS uh can we just really trace over that conversation about what a NIM is net income margin from your article you you say less developed financial systems will see much higher NIMs typically 5 to 10% but the numbers can be much larger let's just like once again define a NIM and then also illustrate like why it represents like just putting breaks on the development of an economy net interest margin is you know banks take in money they pay you some percentage on on the money they take in and they lend that money out for local business real estate loans auto auto loans that type of thing on the

lower risk risk side um and then they make a they make a spread between those two you know that that borrow and that lend and that's the core of the business that's the net interest margin is the difference between what a bank borrows at and what it lends at the reason it's a very it's the best uh proxy we have for pricing power in banks is that you know pe there any country risk and any currency risk would be reflected on both sides so if um the entire Brazilian market should be p five points higher because of country risk that will be reflected on both sides of the NIM so the spread actually just accurately reflects um like the pricing power of the banks and it also is it it is kind of the the profit margin that new

entrance would seek to disrupt right when you say your profit margin is my opportunity you're talking about a system with with low bears to entry or the ability to entry so if banks were all earning 10% NIMS in an open financial system like plus 10% NIMS that would be such a juicy opportunity for people to fund new new banks into and and go compete into and the existence of these higher names really um really signals that that that that's not happening right and the market's kind of been co-opted by by by the leaders there is one really good graph that I think is worth showing it's titled less developed financial systems extract higher rents it's kind of a one you know it's as clean as a regression can be between domestic credit to private sector which

is a a very useful proxy for financial system development and integration to the global global economy and net interest margins and what you see is the less integrated a system is to the global economy the less outside banks can really compete with the with the existing system the higher the net interest margin is and you can see that the um I mean you see the spread here again 5 to 10 points but they they can be they can be much higher one of the big opportunities for internet finance is um true global capital flows so right now because of the disperate server problem if you have um a fund in in in Dubai that wants 8% on you know has an 8% cost of capital and you have

Colombian auto dealers issuing loans at 20% c you know 20% returns like risk adjusted loan you know kind of default adjusted 20% net that there's an opportunity for for capital allocation to be made there where both sides are happy but if you want to if the Dubai fund wants to get access to the Colombian auto loans they will have to pay multiple intermediaries to get access to those loans and ultimately they won't even get access because what they'll do is they'll have to buy the equity in a Colombian bank or pay you know give give um give a loan to Colombian bank so so the Dubai fund won't even get a spread they'll get like a small portion of the spread the lion share of the profit goes to the local bank that acts as a

gatekeeper to the permissioned database but if you have you know in in the world of internet finance you have a unified database where people can trade can can um communicate on the open internet the Colombian dealer can go directly to the internet to raise loans obviously you need the legal structure to exist for this to be able to happen but they go to the open internet they raise loans they say we're willing to pay 20 the Dubai funds willing to to receive eight and they meet somewhere in the middle and both sides are better off without having to pay all the intermediaries who position themselves uh as kind of gatekeepers to these permission databases i think to really drive the point home as to like why the economics of the banking layer impacts so much of

world GDP downstream comes from this idea of like the NIM and the spread that these banks are are taking when like the the there's like some sort of notion of a legal financial social tech stack or just stack generally when there when there's a country you know you have a country then you have the government and the laws and on top of those laws is the banking layer and that banking layer comes first like that banking layer works because of contracts and laws and a judicial a judicial system and property rights and then on top of the banking layer comes like the rest of the economy maybe maybe the fintech layer is on top of that but then you have

startups you have mom and pop shops you have Main Street all built on the very top of that and when something that's decently low in the stack which is the net interest margins of banks taking a high take rate without there being able to be an incumbent disruptor uh to come in and compress those spreads then that just comes out a 5% take rate out of the banking layer comes out of 5% of the GDP of the whole entire economy that's built on top of it so it's a very pernicious layer for there to be like excess rent extraction there and I think with with your metaphor that you're talking about there's this there's capital in Dubai that wants to invest in this opportunity in Brazil and with the traditional financial system there is this like

route finding like difficulty this this this route difficulty finding problem of how do we get the capital in Dubai to find its way over to Brazil without losing so much of it along the way that it even makes it worth it there's capital out there and capital loves to find opportunities but there's this like archaic pen and paper like uh siloed server problem where you have to find the your right way through all the silos in order to get money to the end destination and when there's you know 5 10% spreads taken along the way then all of a sudden the capital cannot find a way to be best expressed and the whole entire global economy suffers as a result of this that's right yeah it's it's it's it's worse than having high electricity costs because capital is

truly the base input for all things that happen in in an economy right that the system is called capitalism for the reason that that is the the single base layer for how everything works in your article you talk about a patchwork of silo servers which is what we've been talking about that's like the problem we have this patchwork of silo servers it's inefficient there's different communications it's hard to add your new server into the existing incumbent set of servers but then we are trying to migrate to something new which is something you call uh a server with laws can you can you illuminate this idea of a server with laws so I think that you know a lot of the the language that we've had in the industry you know um decentralized permissionless uh kind of flaggness safety all the things we talk

about with with state machine replication i think they kind of hint like for for our purposes they all kind of lead to the same thing which is scalable servers that interact with laws and smart contract code those are the two kind of fundamental unlocks the reason you need the server to interact with laws its own laws right is because or like follow the laws that have been set in the system is because otherwise you can't you can't trust people not to double spend all the you know you can't trust people to not move move the ledger so that you know the person in charge puts his family you know gives his family assets like you need these servers to be subject to a set of laws otherwise they'll just be corrupted and and and

um and misused and that's a reason why we have not been able to develop a unified server for all assets prior to blockchain and prior to crypto right that's that's kind of what the the when when Satoshi solved double spend he put us on the path to permissionless servers with loss and then smart contract code you know everyone in the audience will know this but it is truly magical like the ability to be able to put assets into a contract and have the contract execute logic like a vending machine that gives you a Coke when you put in a dollar unlocks so many efficiencies that that help the internet financial system cut costs and and and develop design

space for for new applications that are not possible without the smart contract code layer in the uh in our industry i'm I'm trying to not use the word crypto in this episode because I think it's a good exercise so in our industry um we have this term called uh or that some some of the gigab brains use is like credible commitments and it's this loose very broad term that we use for a lot of things that we talk about in crypto including smart contracts uh but in more expansive than that like credible commitments and really what that means is that the system that you are interacting with can give you like credibly give you some sort of commitment and there's a variety of different ways to do that zk proofs uh a a smart contracting blockchain there's a

variety of different ways but basically this this industry is this industry of credible commitments and it this power of credible commitments where there's an institution out there there's a bank out there there is a fund out there there's this because of blockchain there are these servers in the cloud that are offering potential users credible commitments and that is what we're calling a a server with law a servers with laws and that really actually inverts the relationship between a patchwork patchwork network of siloed servers to uh where where everyone has their own siloed server and we are all trying to figure out how to talk to each other versus let's just compress everything into this one server that we

all understand is credible that we all believe is credible because it is technologically proven to us that it is giving us credible commitments and now all of a sudden like our relationship with a server is different and I think it's a little bit like uh the like the dawn of the internet or the dawn of cloud computing where everyone had a mainframe computer and then all of a sudden once we established that the cloud it was much easier to have these central servers that coordinated everything and that's kind of the same pattern that I think you really exhibit in your laws maybe you can take this metaphor from here about just this central unified servers with laws how can how can this mesh network of interconnected siloed servers begin to

actually trust this unified server with these uh commitments that our industry is able to give uh users of these servers yeah and I think that it's it's it's really important to press on this point because it explains the question you know why now why hasn't the world been able to develop a unified server with all assets up until this point it's because nobody trusted you know people didn't trust one one party with with the entire world's assets right the Brazilian government does not want to trust one party in the US or Sweden to record all their land registries because they don't know if if if the commitments are credible enough given all the kind of vicissitudes of politics and and

power and and and and you know things are things are complicated at the ownership level right um we hit on that a lot when we talk about appropriations and property rights but um yeah I think you nailed it it's it's the credible commitments really unlock the technology and then the the credible commitments also you know they unlock the ability to have everything on unified server because you believe the property rights guaranteed by the the credible commitments but they also allow you a lot of design space to do things that are that are just not possible on on within the traditional banking system so this is a little bit of um optimism and and and speculation on on the things you can do with smart contract code but I think that's it's always fun it's the kind of thing that brought me into the industry and I think you know on the

kind of optimism cynicism spectrum I think we've maybe shifted a little too much towards cynicism in the past year as an industry and it's it's good to remember kind of what got us all in here but you know just some examples that we lay out in the piece like having royalty contracts that receive stream payments every time a song is played is not possible in the traditional system right it's not pos it's having stream dividends to shareholders is not possible on the on the on the on the legacy system because you have um because of the high high transaction cost that that would include right having kind of easy cheap to develop um bespoke capital raising instruments like having Starbucks issue a revenue share

token for 200 stores in the Pacific Northwest as an example right or Apple issue a dividend that pays you know 1% of a penny every time a share class that pays 1% of a penny every time that Apple sells an iPhone these things are possible and easy with with a permissionless server that interacts with smart contract code and to your point has critical commitments but they're not possible in the high transaction cost siloed server world that we're that we call the legacy financial system well I think even the we can even go back in time in in the uh era of our industry and talk about Bitcoin as the first credible commitment server like what what does Bitcoin do why is Bitcoin valuable it makes a credible commitment that there is this asset out there that we call Bitcoin and

the commitment is that there's only 21 million of them and you can totally just imagine some nation state trying to do this and obviously failings like imagine if any nation state said "Hey we're going to make this brand new asset and we commit we pinky promise that we're only going to make 21 million of them or however many numbers." And it without a blockchain there is no credibility to that commitment it is a commitment that's not credible and the credibility of Bitcoin's commitment to its 21 million supply is what makes Bitcoin valuable so without this without the nature of a technology of a blockchain and it's I think out of scope for this episode to really talk about the architecture of a blockchain and and why the credibility is actually credible because I think people can at this point

in time just understand that if Bitcoin wasn't actually credible it wouldn't be worth uh $90,000 uh but really every innovation in crypto is downstream of what Bitcoin first unlocked which is a credible commitment to a supply and then Ethereum unlocked like oh we can open we can make that more open-ended we can make more credible commitments about anything that software developers can create and this is what unlocks uh some inversion in that relationship between a patchwork of silo servers to a unified server uh with laws in the cloud you know I I do think the last few years have been necessary to scale but now we're we're there right like everything discussed in the paper is possible the final mile is really regulatory uh cooperation and product market fit and

we now have you know Ethereum is not it's not like Ethereum's failing to make credible commitments we need to solve that problem ethereum is making credible commitments blockchains are making credible commitments there's more than enough TPS uh today and these things are on a path where they're they're kind of scaling naturally thanks to the road maps that each team has devised we have everything we need to to get onto the scurve of adoption for internet finance and I don't think that was true 5 years ago but it's it's true today i want to talk about the relationship between between the idea of sovereignty and servers with laws because the this word law h it does a lot of work that that the word law means a lot having laws implies some innate characteristics mainly sovereignty like for example the

laws that govern a World of Warcraft server or the rules that dictate a like Wells Fargo database entry are not of the same caliber of laws that we are talking about when we talk about a server with laws like can we talk about the the higher order nature of the word law when we discuss the concept of a server with law like to what to what dimension are we talking about law just that the server won't won't reflect an entry that isn't contemplated in the rules set out you know prior to to the transaction being made so with Bitcoin to your point it's that there won't be double spend and there won't be more than 21 million in Ethereum it's that the contract will function as written you know that's not always as intended

by the writers there are hacks and and things like that but it always functions as written we're not seeing invalid transactions according to the smart contract code being made and I think one thing that you kind of hinted at in the question is obviously this needs to interact with with with local laws right and kind of government laws and you know we're we're not um we're not kind of extreme cyber funs in any way i think we're say you know sometimes things come along that have cilabilities and governments need to adjust to them right like the car came out and there were no driving laws and the reality is if you drive a car you can crash you can kill people you can drink and drive you can do all the things that are illegal and

governments come come out and you know no one kind of said "Well I can do it with a car so I can do it right?" Like you you you can do it but then the law can can punish you if it's if if you're not driving according to kind of state um driving laws and the same thing is true with with um the internet finance like you can design a contract to pay for illegal goods or to send money to sanctioned entities you know uh you can you can design you know in the system you can't design you have a lot of design space but a lot of that design space will break local laws and then what happens is that governments will adapt and and kind of layer on the legal system on top and as long as you have a physical presence you're subject to kind

of local local jurisdiction i think the metaphor of well we didn't have laws for cars and then we invented cars and now we had to update our laws i think that metaphor works but also I don't want to also diminish how profound this idea of a server with laws is because I think one of one of the big things that nerd snipes so many people in our industry is that people understand that these servers with laws Bitcoin Ethereum any smart contract platform the laws that they have are actually of a more of are stronger than nation state laws in a way they have they operate at a higher level than than nation state laws and this I think has created some some friction uh the the idea that there is codebased technology out there that can write laws

that have unparalleled level of guarantees is a very like big idea the idea of like laws and humanto human contracts i think it goes like all the way back to when we were just like primitive apes and we had this nebulous unspoken concept of a social contract that held a tribe of like primitive humans together like maybe even before we had language we had this notion of a social contract and if you broke the social contract you were ostracized from the tribe now fast forward to today innovation and like formalization of something that just like starts off as a primitive social contract has evolved into largecale nation states with judicial and legislative systems that

formalize and codify laws in pursuit of just having larger and more coordinated tribes which we call nations uh but now we have servers with laws in the cloud and these servers and the laws that they uphold have proven to be above nation state laws because the power of the nation state even with all its guns its tanks its planes they can't change the laws of Bitcoin they can't change the laws in Ethereum or any other sufficiently decentralized online server and this creates friction the nation state is not used to having things that are outside of its control like parts of the state parts of like the nation state like complex are just not comfortable with this fact so having two independent sets of laws can can create

incompatibilities between these two systems so like how do you think we deal with this friction how will blockchains and nation states just learn to live with each other one angle that I can take that question is is talking about the states where laws have not been that strong let's you know there's a lot of nation states with with um with lower quality property rights so we're used to um property rights in the in in the US in Europe in in in Australia where a lot of people are are based uh being very good and if you look at you know if you kind of quantify this the property rights scores in those countries according to Heritage Foundation uh like you know their their famous property rights index are 95 so you know we're kind of used to 95 property scores of 95

mean that like if you uh invest in an asset and you own it like you own that asset no one's going to expropriate you no one's going to arbitrarily take that asset from you without really going through the rule of law and even then it's difficult um if you invest in a in a company as a minority shareholder according to a certain set of rules majority shareholders can't just ram something in through the you know governance that will that will delete your rights or or impair your asset significantly if you're kind of using the judicial system you will you know the a jury will or a judge will rule on the on the merits of the case they won't just work through bribes and favoritism but the reality is that the majority of

the world does not live under 95 um property rights score right there's a there's a graph in the in the in the piece where we show global property rights by country and in that piece in that graph we just rank countries by population so again no no kind of preferential sorting and show the um the property rights of of most of the world and it's scores are abysmal right it's the average number is 43 so you know you're talking about laws on chain being stronger than laws of countries that is certainly true between you know what we can build with internet finance and the property right score of 43 43 means

majority shareholders do whatever they want regardless of what the paper says um it means that you know cases will often be decided by bribes or favoritism it means um you know people can be expropriated and we we we've given out long list of famous expropriations but the reality is a lot of people you know just live under this under this paradigm right like um there's a famous book called the mystery of capital by Ernando doto where he he thinks 9.3 trillion dollars of assets are locked in this kind of shadow world where they don't have the right claims you know they can't trust uh the the legal system isn't trustworthy enough for those to be transferred or mortgaged against so we

have so many people and so much capital living under weak rule of law and I think the you know we we we will look at this kind of conflict between strong rule of law countries and and blockchains occasionally but I think the more interesting thing for from for for our perspective is how it's going to deal with weak rule of law countries which we're seeing already right you know I think there's kind of three steps to that interaction you know the first was Bitcoin um you kind of had this 21 million no double spend property right where someone you know in 2010 somebody in Turkey or Brazil or Nigeria could buy Bitcoin and that's a real property right right like you have it you're on the ledger no one no one can can can take

that from you right and that might be the first real property right that those people had access to right the real strong property right i think we're actually getting here uh this gets a little bit into into US regulation into the next step where I I you know that the stable coin bill looks very likely to pass in a way that's favorable to to the industry maybe not all players but at least to the industry uh I think you know most of DC is seeing the stable coin bill as a way to to open up the the stage for real real world asset tokenization and the most important step of that second second property rights um bucket will be when Larry Frink or someone like Larry Frink puts Apple stock on chain because then the whole

world is able to access US property rights by buying US dollars or buying Apple stock on Ethereum or buying Nvidia or S&P right and that has kind of profound profound um implications for saving rates of people across the world right so like if you look at any currency against USD they've been deflating at 65% relative to US dollar every 15 years and again this is just average weighted by population across 50 years now you're talk now we're talking about um people having access to the US stock market which has actually appreciated 8 to 10% a year on average over over decades right you're going from - 65 to plus 10 that's a huge

difference for these people because of what you said because you can have stronger laws uh on Ethereum than you do in in Nigeria you know Brazil again 5 billion people live under these these regimes it's not some offshoot like niche market it's the majority of the world lives with we property rights um and then I think the the the third step will be that countries will have the chance to respond and try to strengthen their own laws their own property rights using the tools of internet finance so we often see like you know we've seen we've seen these these examples given but like putting your land registry on chain as a set of NFDs means that the local governor's

brother can't just go in and put the right signatures in and take your property right or if he does everyone will be able to see it putting um a company's like stables on chain and governance on chain means that a majority shareholder can't just funnel shares to himself or if they can it would be have to be in a way that circumvents the rule of law written into the code right so I think there's kind of the three steps there's like what we have now which is all digital assets Bitcoin Ethereum um others what we're going to now is I think US the US vampire attacking the rest of the world on because of its high property rights and embracing of crypto and then what we'll get to I hope it's an optimistic hope is the reaction function to that

where countries say all right we're not going to get any capital into our own assets unless we strengthen rule of law we have these incredible tools through smart contracts through this unified server that interacts with with with stronger laws than we've been able to create through our own um political systems and let's use those to strengthen capital strengthen property rights and pull capital into our you know usually very high returning opportunities because emerging markets have very high ROI opportunities they're just impeded by the flow of capital and by um weak rule of law and then to your question now kind of going all the way around when very strong states like the US interact with with Ethereum or Bitcoin or in in a way that has um and

you have the kind of two strong laws interacting i don't know exactly how that'll shake out that's it it it really depends on the politics of the moment luckily we have the US administration embracing crypto um I don't think that any nation state can attack uh Bitcoin really or sufficiently decentralized layer one but they can always get the people right so I I do think that there's it's you have to play out each scenario on its own there and I think that that's uh at that level it's it's easy for blockchain to beat Nigerian law it's you know I I I don't think it's as clear-cut when you talk about like the blockchain will do what it was programmed to do but then the people might be arrested like we saw with with

Reato Cash right so I think that's where it gets kind of fuzzy i think there's maybe to summarize some of what you're saying is like there's this idea of like archetypal archetypical law just like this the best what the best form of law that we could have and some countries and their legal systems are closer to that ideal than others and even with despite laws there are instances of corruption or laws that are just incomplete or just not strong and as a result of those weaknesses in the legal system capital can't form can't there's no capital formation or there's no even like financial industry that can really blossom on top of that weak legal structure kind of going back

to that legal financial social like country tech stack well where we've already talked about how sometimes and frequently the banking layer is just famished and incomplete and entrenched and not fully expressive well you can go even lower and talk about like well what if the legal system isn't even there yet and I'm really happy that you brought up Hernando Dodto we he we've actually had him on the on the podcast a little over a year ago i think it was our oldest guest that we've ever had at like 81 or 82 years old uh and he's really into web 3 he's really into blockchains because he gets it and I think the most profound part of that story the mystery of capital was really linking he he did this experiment or this like study of

some developing country in the third world and asked like why why is there no strong financial system in this country it might have been Peru where where he's from uh and he did this study where um he tried to go get a real estate loan based off of somebody some individuals and the house that they owned and he just came to this realization that there's no linkage between this house that this person is leave living in to an actual court verified thumbs up of approval statement contract saying that this individual does actually own this house which means that the bank can't give that person a loan because there's no way to verify that the person

actually owns the house and in order to actually get a like a document from the nation state from the legal system that actually shows that this one individual owns this house it was this extremely convoluted process that took beyond 5 years because of bureaucracy and just paperwork and it's confusing and the system the legal system isn't really even set up to even serve that need of being able to verify with a contract a document that this individual owns this house and therefore a bank can give a loan to this person that that whole part of a social legal financial tech stack is just missing from developing countries and then I think the the number that you estimated is just like

well what is the cost of that for entire countries and the answer to that is an an entire financial system and he he says like one of the big conclusions of the book is why is America America like why is Wall Street in America like what did America do right and his his statement is well they they offer very strong property rights and when you offer very strong property rights you can allow for asurances commitments credible commitments uh that a financial system can actually work there because you can imagine like it's one of the reasons why uh DeFi works so well ether and a work so well is because a knows that ether the asset that's deposited into a is not going anywhere and banks or systems like banks like a need as

assurances that the collateral inside of their vaults have strong property rights because they they need that val that value to be valuable so they can offer loans off of it and I think like I think that this is probably the single biggest uh check my opinion on this this is probably the single biggest reason why there's not more wealth in the world like if there was more wealth in the world it would be because we have systems of strong property right guarantees that allow the the legal layer to produce a strong banking layer which can produce a strong economy on top of that i think that that is the number one thing I think that is actually holding like wealth and GDP growth across across the globe holding it back do do you agree with that take i strongly agree so just one little

personal anecdote i went to college to kind of become an economist because I thought there was a link between kind of good economic policy and development of the underdeveloped world and you know within the first kind of two years I just realized that there was nothing an economist could do in terms of policy to improve like wealth outcomes in in underdeveloped countries because what matters is rule of law so Ronaldo doto's book was a famous book there why nations failed they just won the the new world prize I think last year makes the same point just goes over every single country it's the level of the quality of rule of law in those countries and their development right and kind of the the first page of the book just shows North Korea South Korea same same literal same population right but different quality

of rule of law in each country and and and kind of economic system the politics are different and then you have that image of North Korea South Korea at night and the level of development in in one versus the other and then like halfway through college I realized I gave up i was like "All right so there's nothing I can do on policy it's all just politics and kind of legal system rule of law everything is downstream of that when I found about about blockchains a few years ago the light bulb went off i was like "All right this is actually the what can make the difference on the rule of law and property rights." And that's everything is downstream like all wealth is downstream of those two things but there's a lot of I mean there's there I strongly agree with you there's a lot of

there's a lot of good books that kind of detail that relationship and are very compelling there's a a headline in your article saying the internet financial system is a step forward for our civilization i I think we started to like color in some of the parts of that conversation but I really want to approach that head-on let's zoom all the way back out let's get out of like developing countries let's talk about again these uh servers with laws in the cloud that you know can be act if you have internet you can access this and I think this is why maybe the beginnings of our industry is marked by these like uh technol libertarians out there who think that we can coordinate as a as a civilization using technology outside of the nation state and I think this is um just why so many people in crypto are so

ideological is because they see that this is a civilizational coordination technology this is something bigger than we we the the largest coordination that we've ever been able to do is good strong legal systems inside of nation states and this is something new that is potentially even like larger than that so when we zoom out and we talk about you know free flow of capital across borders we talk about even we can talk even talk about like identity systems on the internet talk about just like why this is a step function forward for civilization as as a whole focus on the financial aspect i think that having one global financial system that works with strong property rights is just going to increase GDP like going to increase GDP

growth and going to increase the development of underdeveloped countries and it's going to increase what's possible through finance in so many ways that you can only see it as kind of one of these big breakthroughs that we've you know we've had many before right like we talked about Gutenberg in the in the article obviously in the internet but I do think it's of that scale so Felipe I think um any listener of bank list is already like very inspired about what we can potentially do here uh and you know crypto like nerd sniped them forever ago we think we can create a better a better world a better civilization a more more cohered civilization global population um but then yeah you know let's let's look back on the last like two years three years of crypto's history we had the FTX blow up uh we had meme coins and an

incredible amount of grift and extraction uh the optics and branding and like level of success around crypto doesn't seem to match I think some of the ide ideological beliefs that many in the industry have there's a disconnect there's a dislocation there between I think what what our industry is perceived to have done and succeeded and achieved versus what we are hopeful of what it can do how would you explain this gap like why why haven't we done all of our achieved all of our hopes and dreams by the year 2025 it's a good question i think it has been disappointing so far in terms of you know I've been in the industry for for for 5 years i I'm very happy with the progress honestly but I can understand

how somebody who's been in it for 15 years with the same thesis that we have might think it's taken it's taking too long and I think part of that is because one you know we we kind of front ran the technology to some extent like uh there the scalability wasn't there 5 years ago and I think we're actually quite optimistic over of what's happened over the five past 5 years because we run a fully onchain fund and we've been able to see firsthand the improvements in onchain technology over that period so when we started like you know unis swap transactions were like 80 basis points to do a spot trade right now you're talking about single digit low single digit basis points to do a spot trade

interacting with a fund with with onchain as a fund was impossible right like you were assigning these hash codes there was kind of a risk of a hack or an exploit at every corner now you have really nice software that helps you interact with with the onchain world easily natively quickly and in a way that's actually significantly easier than interacting with a traditional system um a lot of a lot of ideas were white papers right on the financial side like you know pers were still above 50 basis points a trade um all these like you know not a single options protocol worked on chain we had one borrow lend kind of that was doing two assets you didn't have ways to do really

interesting structured structured trades it was inferior to the legacy financial system in terms of what was there to do like you know we've argued about why the rails are better but you kind of went you know you know maybe the land was better but the build there weren't any buildings there and the land was still not that much better because you you were paying kind of $80 for a transaction at one point on ETH right now I think it's very different i think what's happened over the last five years if you're really tuning in is exceptional all of these ideas that people came up with in DeFi summer have been tried refined and are now many of them are now in a very good place um not all but that's fine we talked about scalability you know it seemed like we

have more than enough TPS right now to do a lot of these applications and it's only going one way right like we we are on well past the scurve of scaling between Ethereum Salana and other blockchains but even just on Ethereum you can you can see this going uh all the way on scale um the UX has gotten two orders of magnitude better especially for funds which I think is kind of the the main condition you want to bring in and then we had this problem with regulations where most people you did have that you did have a lot of the people who were true truly ideological and didn't care about um like what the regulations said you you had a you had a

fair number of those people in the industry right and they made a lot of money over the past 15 years but the majority of the world does really care about having regulations on their side because you have to care like if you're going to raise capital that really matters most people who grow funds raise capital and if you don't have you know institutional pools of capital you you don't really have the scale to develop interesting lending platforms to raise corporate debt on chain you know if you this like example of the Guatemalan like house you need a government to put that NFT on chain so we we do need at the end of the day like we need the the the repolet layer to agree to the technology and when I say when I say the repo layer like the repossession layer like you can

put a house you can put a a house on chain but if someone just goes go like goes to your house and lives there and no government will go and take like the police won't take them out of the house the onchain representation doesn't mean anything right you can invest in a Colombian auto loan but if you can't repo the car because you're in Dubai it doesn't mean anything so we do need that layer and that's why it's such an exciting time right now because we're kind of meeting both the technology is is is more than there for us to meet to hit a lot of these use cases right um and we have a favorable regulatory environment in the US which is the single most important country for this technology and then I think we're kind of hitting as we discussed the two

lowest hanging fruit um PMS which are stable coins and US assets on chain so I you know I do think that that will change over the next four years i think the reason the last few years have looked the way they have is because one we had the technology wasn't there as I discussed two we had zero interest rates um which and this is like just very good technology to speculate with and I think that those two things work together and actually work together in a way that has been very bad for the crypto DNA i think we're weeding that out now but like a lot of the crypto you know crypto Twitter DNA became you know grew up too much around speculation and what zero interest rate

policy what speculation could achieve and like they want to bring that back but but it's it's gone right like we we always talk about the um and we can get into this later but we talk talk about like the Silicon Valley meme people like to publish where the team is talking about developing revenue building revenue and the radio and internet guy says whoa whoa whoa don't talk about revenue you want to have no revenue be like a like a like a big company that was done in 2015 7 years after zero interest rate policy started and seven years before it ended so that was a very good move at the time it's just no longer true and I think we need to make that transition to have to be a healthier industry um and then I think the last point is innovation goes to underserved markets right like that is

the way that it always happens pcs did not start out for companies they started out for gamers and hobbyists because companies had mainframes hobbyists used PCs for a while that was enough of a base for them to get better and they grew to cover the whole world right square did not go to big companies with their with their product they went to small companies that couldn't afford like a like a regular solution or paying too much for it and then and then grew from that underserved market to to to be you know to being the company it is today southwest went for people who couldn't afford American Airlines and Delta flights and gave their service the underserved market for a bad UX inefficient high fee financial system has been speculators and unsaavory

characters and that's why we've seen so many of those people in the industry i think as the UX and the regulatory barriers you know UX is better regulatory barriers disappear that will become a smaller and smaller percentage of the industry and we're already seeing it happen now yeah that's actually a really new a new connection for me that I haven't made before that I really enjoy is the idea that the coming of age of blockchain technology happened in this zero interest rate like era and like kind of towards the end of it where capital was the most abundant and so you take that that paradigm of just the financial world you mix that with like modern day financial nihilism where the younger generations millennials zoomers

feel like they have no ability ility to get ahead and so they need to truly gamble in order to have any chance of of having sort of a successful lifestyle and if they lose their bet then nothing happens they still have to go to their nineto-ive job for the rest of their lives and so it's actually not really that much of a loss and if they win their bet they get out of the rat race and so we have that financial nihilism and then we have this is like a technology that also happens to cater to like lawlessness because of the kind of the the structure that we've talked about of a server in the cloud with laws that is truly immune from uh nation state laws now the humans are not immune but the server is and you kind of combine these things together and all of

a sudden you have like a recipe for financial speculation and really pushing the boundaries of what is like legally acceptable by characters like Sam Bankman Freed yeah I I really appreciate that that that connection and I think what it's what it's done to the capital allocation layer is pretty important like capital allocation determines resource allocation that's why it's such an important job in our in in our society like there's two paradigms right there's the capitalist paradigm where capital allocators decide what resources are spent how the end goal of that is to kind of find product market fit earn revenue and return revenue to to LPS so like a fund you know like a private equity fund that's where I used to work like you go you find out where customers

are you build a business like you say hey you know this this geography needs a new dermatology clinic let's build one if you're right and and you're right about projecting demand you make cash flow from that and you can pay out a dividend to your LPS and you you know have good returns and you can raise more money if you're wrong you break the link you lose money you show bad returns you can't raise more money so the whole system is built around tying capital which is resource allocation to demand and to demand by by kind of consumers and users then the other paradigm is kind of the central planning paradigm we joke we call it like stalinism where one person or small group people decide what gets capital and there's no link between

reality and that person right right they just decide they can decide however they want but but but basically that's how the capital moves and I think that the zero interest rate DNA that I'm talking about led us into a highly speculative um kind of stalinist paradigm on resource allocation if you could control the narrative you could get the financial analyst to buy up a token it would trade at billions of dollars and then other people would see that that that token trading at high valuation and go build copycats right and maybe it was a uh maybe it was a product that nobody wanted right or a or a service that did not you know maybe it was a piece of infrastructure that did not deserve $400

million of cash that then go be that were there then spent at ETH Denver in a in a big party so like we've also just been because of this ZER kind of DNA issue we've been misallocating capital I think and not going as fast as we can be yeah that that makes a ton of sense to me and all of a sudden I as a crypto person I've been uh you know like many other crypto people looking at the Federal Reserve being like "All right let's cut let's do some QE." Uh and now I think for the first time I'm kind of seeing the benefits of like oh no maybe if we like want to rid this industry of meme coins and like VC narrative games and capital mismanagement maybe higher interest rates are actually our friend to like you said purge the Zerp DNA out

of the crypto industry and actually start to build real products because I think that meta has been the meta for so long that it actually does take a true purging to actually get that DNA out of the crypto industry and start to actually like reformat restructure capital allocation in the crypto to focus on useful products because this is something that the crypto industry has been asking for decades uh and very rarely do we get a new product because there's a shiny new speculative asset speculative tool that just got built and we're all going to go play fun games over there people are just following their incentives and trying to make money yeah and then the other thing that you said is um with the repo layer connecting to the server with laws layer uh the and to me I'm just hearing like

okay we need government like enforcement to actually work with our servers with laws not against our servers with laws and there are some servers with laws that I want to never ever work with a government work in compatibility with a government and that is Bitcoin and also the Ethereum layer 1 like I do not want Bitcoin to ever change its rules according to what a a nation state wishes it does and so there's like a spectrum here of like some servers with laws I think I want to be completely immune from the nation state and then there are some ends of that same spectrum where I actually want the nation state legal system and government system judicial system legislative system to actually work with servers let's let's work with the technology and

I think we had an easier time with the internet there because the internet it wasn't creating like lawlessness in the cloud it wasn't um penetrating incumbent financial big banks which are basically extensions of the state and so there's differences here but I think when we figure out ways and you identified like the legislation that's currently going through the United States with the stable coin and and market structure bills then we're going to actually get these two sets of independent legal systems the the blockchain legal system and then the nation state legal system when they start to actually cooperate I think is when there is a huge blossoming of potential and value here is that what you see yeah exactly and I think it's it's it's honestly it's a miracle that

we have regulatory support from the United States like if you asked me you know two years ago what is the single most important thing for this technology to work out in the way that you that you know that we think it it it should and we laid out in the internet finance piece i would have said cooperation from the US because one it's in it's in the US interest to export its its assets abroad right like stable coins people weren't talking about this two years ago but everyone's talking about it now like stable coins increase dollar dominance around the world right so it is kind of this like high ROI low hanging fruit for a you know for a US government to to to export its its currency because it's so much stronger and in more demand than every other fiat currency in the world

right everybody wants US stocks everybody wants Apple NASDAQ S&P so and it's in the interest of the US to further lower its cost of capital by exporting that to the rest of the world like if you have the rest of the world if you give them the ability to buy Apple stock Apple's valuation will go up all else being equal right and that's true for every American company American companies will be able to raise at at lower cost of capital and trade at higher valuations it's a miracle for the US it wasn't pre-ordained that they would see it that way but now we have an administration that's seeing it that way i think it's it's kind of genius out of the bottle i think that that that will continue to happen in politics because it's such an obvious um gain for the US and and now we're kind of looking at you

know couple like we're you know we're we're at less than one basis point of global financial assets in the industry right we have not gotten on the S-curve of adoption you know it's it's been a cyclical industry because you have the same 100,000 people coming in speculating getting a wealth effect taking the speculation as far as it will go to the level where you're seeing kind of AI agents memecoins and token farms trading super bills of dollars and then eventually collapses because there's no marginal buyer and we repeat cycle all over again once we get on the escort of global adoption that cyclicality I believe is over because you're going from one basis point of global financial adoption to 70% which we think is going

to happen over 20 years and that's the vision that we lay out there will be cycles but the trend is up for the whole thing and the US you know supporting internet finance with with stable coins and real world assets gets us on that S-curve because the two largest buckets you know the three largest buckets of assets are gold US dollars and US debt and equity mark like debt and equity if the three of those you know we the three of those are now on chain as of you know the stablecoin bill and RWA bill which I again I think are very high highly likely to pass we're kind of on the S-curve and then and then you know every other country matters but it matters a lot less imagine a world where your

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is all in addition to their already launched products like Mantle Network ME and FBTC ready to step into the future of finance follow Mantle onx at mantle official and join the onchain revolution today you may have already heard about Infinex infinex has in my opinion the nicest crosschain swap and bridge feature that you will find anywhere it is called Switch Swap and Bridge and we're going to show you what it looks like first we're going to log into my Infinex account with a pass key now there's no seed phrases in Infinex this is a one-click setup with biometric pass keys but in addition to that my Infinex account is fully non-custodial so bam I just logged in it was two clicks and I'm already into my Infinex account so let's go make a switch i'm going to go switch my USDC that is on base and I'm going to

buy Barachchain which is a completely different chain uh so we're going to switch this i'm going to press that button and then Infinex is going to execute this order this crosschain order for me and now it is done but actually I'm not really feeling bearish anymore so I'm going to go from Barra uh to Penguins i'm going to buy a Penguin on Salana so I'm going from the Barra chain to Salana see no transaction signing no gas to worry about you just switch across whatever chain that you want with Infinex that was so easy go check out Infinex and try your first switch today felipe I think this is where I'm I'm ready to wrap up this part of the conversation which I think was targeted at broadly technologists you know government workers um you know hobbyists a very broad audience and I want to

actually start to talk to uh in this next part of the conversation um just you capitalists and investors and and fund man managers especially in the world of traditional finance fund managers um maybe you could share a little bit about what you do at the research because I want you to talk about how laws of investing are the same or different inside of the the crypto industry and so there are tokens out there DeFi tokens specifically I think is really the target here tokens like a tokens like Maker Dow that I think exhibit some of the same rules of of finance that you can apply you can do a dollar a cash flow analysis of all of these things and maybe just from your experience at Thea uh how how is the rules of investing different in crypto

and and how is it how is it the same if people are interested in just getting started in investing in the onchain world uh what should they know is exactly the same and what should they know is different so at Thea we're a we're a liquid token fund we've been operating for this is year four of operation for us um you know we we take a fundamental approach to investing that that's that's due to kind of the the background of the of the team we all we were all in mid-market private equity prior to to to investing and what you do in private equity is you buy companies based on a cash flow model you hold them for 5 to 10 years and then you make your return based on the revenue growth and cash flow growth of the underlying

company and basically your job as investor is to predict whether customers will like the product pay revenue and and and you'll be able to pay more out in cash flow to the holders of the of the company we strongly believe that that core principle which is kind of the you know the DCF principle of investing discounted cash matters for valuation applies in in crypto markets as well um you know the reality is that there's only two paradigms in investing you know um for 99% of assets you know there there's always the exception you talk about gold bitcoin ether um but but most assets do not fall under that exception they fall under the discounted cash flow

paradigm which is the fundamentals paradigm um the other paradigm is the greater fool paradigm and you've heard this in in by from people in tradi you buy something not because it's going going to give you cash flows back but because some you think somebody else will buy it from you and that's been the entire paradigm for narrative assets and for and for memecoins which are actually the same thing right and the way you can differentiate between whether you're buying on a fundamentals paradigm or whether you're buying on a on a narrative memecoin paradigm is would you buy the asset if the market shut down and you couldn't sell it and the answer is you know would you buy would you buy all of Coinbase for $100 million the

answer to that is obviously yes you would because they you know they're making 5 billion of revenue this year you'd get all of your investment paid back very quickly unless the company went away tomorrow right would you buy all of whiff for 1% of its of its market cap the answer is no you wouldn't because if you couldn't sell it you wouldn't do that because you can't sell the asset and you're not going to get a dollar of cash flow from it so you just burn that capital so we like to look at things on the basis of whether we can hold it and make our our our money back plus the cost of capital purely based on the future cash flows of the business i think the fact that you have to explain this at all illustrates the the speculative zero interest rate policy

DNA that is built into the crypto industry because I think if some uh individual from Wall Street is listening to this podcast episode and they are just trying to learn about crypto for the first time they're like just obviously you are that's the case i don't understand why you are even talking about that and then in the crypto world the reason why we're talking about this is because this has not been the case the investment that has actually been a suboptimal investing strategy for the early era of the crypto industry uh because it I mean I think if you were a serious professional investor you went to Wall Street and you took your serious investor like academia learnings and applied it to Wall Street and then anyone like uh I was a psych major and so when I got into crypto I was learning about finance for the first

time and so I was learning this like patterns of behavior from internet finance not not uh not not like Wall Street finance and so this this the reason like it seems so simple but because of the paradigm shift in crypto and the different um types of people who invest and how they invest and this different market structures for how it's emerged like this actually is like a very strong difference for how this industry has emerged it's uh it's funny you say that because you know all of my friends are still in in Trafi um all my college friends and we'll talk you know I'll talk about like smart contract code what you can do with smart contracts or or like cryptography con concepts zk proof credible commitments and they think it's impossible moon math like everyone must be so smart that they can

even think about these topics in the industry and then I'll show them some article on like fundamentals and cash flow they'll be like this is the baby level like how is this even uh something worth writing about so that's it's kind of funny that that that's the inversion right yeah they think it's moonmath they think it's gigabrain stuff and then we have like these ADIQ dggins even smart people who are dragged down the IQ curve to be on the ADIQ side in order to get returns because that's just like how this industry works i I think it's fair you know the market has been rewarding different different behavior so So spotting that transition in paradigm is is hard i want to ask you about um this this concept between an inert protocol and a an alive business i think in the early

days of crypto I don't really think this has really become expressed but in the early days of crypto there was this idea that we would create application protocol applications and that was the magic of Ethereum we could you with smart contracts with uh with open code you could write up an application and this application could provide some service some value and that application would generate revenue and the first example that we had of this is Maker Dow and the Maker Dow system and it would generate cash flows for the MKR token but in in the early days the idea of Maker Dow was like well this is actually just going to be the protocol we're going to polish it we're going to harden it we're going to build it and then we're going to let it go and tie tie ourselves to the mast make it immutable

because we love these immutable protocols because we we have servers with laws and we can just like we can just build these things that stand for forever stand the test of time uh and so that's an an inert protocol it generated cash flows but it was an inert protocol maker Dow has since like expanded and developed and I want to contrast that with something like um something like uh a like an actual business where when you invest in equity like Coinbase for example you're not just investing in the cash flows but you're also investing in the future cash flows and hoping that the business expands uh opens up new product lines open up new business opportunities and there's so there's something out there that's like unique about we have these decentralized

protocols on the internet that generate cash flows that are supposed to be generally immutable generally uh handsoff generally like self uh autonomous and then and then we're investing in those protocols and that actually truly is different than investing in some sort of equity even if it's a token like an equity token where the business is alive it's expanding it's trying to penetrate new markets is trying to open up new business lines and is has no interest of being this like immutable inert protocol it actually wants to like kind of grow and be aggressive into the market and so so how do you think about this contrast between these two styles of investment opportunities when it comes into the world of crypto yeah so first principles all that matters is future cash flows for both right as an as as an

investor that's that's the that's the the main determinant of of what would be interesting i think that the protocol thesis has so far largely failed where every business that's exciting today or every protocol that's exciting today is a business right you mentioned maker dal obviously that is very actively managed business by the by the founders and people around the founders right um like the you know with and without run it's it's completely different right like it's it it really matters what run's thinking what he's thinking for for endgame how he's act how he's acting and the businesses that were protocols at the time like unis swap a as well

they're actively managed and they've gone on to v2 v3 you know building their own chains and and largely doing the things that are helpful for the underlying business right and I think we're inc I mean we're not really seeing many protocols at all today that just want to be permissionless ship and let that run because one you never know if the code is is is perfect right like you you there are still hacks and unforeseen corner cases and this market will just exploit them relentlessly if it finds them and two more importantly the market's still in the in the early phases of growth so the best strategy or the best product in 2021 is so much worse than the best product we can build

in 2025 and that will continue to be true five years five years from now because we're kind of in the exciting Cambrian explosion part of this market where things are growing competing you're discovering new efficiencies new ways to go to market and if if there's no team to find those things and exploit them I mean it it's it's a really tough position to be in and I won't like name names but like the recent attempts at being permissionless protocols have basically gone to zero or failed or failed like you know I'm I'm we're definitely not investing any of those uh at least not now maybe in 10 years that can come back and and like we really optimized everything and then you can be a protocol and there's something

interesting about that but in this market I don't think it's interesting i think this really marks a a difference between um what I came into the crypto industry as as an investor versus like what I'm seeing now because in 2017 during the ICO mania and the ICO mania is as warped as any other investment cycle that we've seen in crypto but there was still nonetheless this relentless like commitment towards I'm only interested in this token if it is fully decentralized fully permissionless and I want the team to step away like you know lock the door throw away the key and that's the protocol and that's what I want to invest in and that's was the investing meta in 2017 and now I think what you're saying is I'm not

interested in that at all we can build protocols but I want it to grow like a business and I think maybe that is the new investment opportunity here is these teams these companies these startups are building protocols and that is their product and they always kind of guide the protocol and there's some level of commitments that they are making you know a makes a commitment to its users that it's not going to liquidate a user's collateral with outside of the actual instantiated rules of the But the A team the A organization will always be with A and so it's famili it ought to be familiar with traditional investors this is just like investing in equity but the the product is different the product is

a protocol which is unique a protocol on top of a server with laws the products are protocols for the most part um but you expect that there will be continuous innovation so they can stay ahead of the market and that there'll be new products and this is very important that will acrue value to the same original token right and we actually had a situation over the weekend um where a thought about launching a new a new a new protocol and launching a new token to go along with it and the market just erupted and every kind of liquid fund that's in in a every person who who either holds up or has an opinion was kind of unilateral on the side of you can't do this because so much of a

business's value comes from unforeseen product lines right the the best example is Amazon you know AWS is the majority of the value for Amazon and if you just invested you know if you invest at the very beginning but Bezos kept launching new new new equities for new product lines and all you have is the book business you'll be very sour and disappointed from the way that you got paid for being early to to support his vision right um so we're dealing with we're dealing with the transition phase between the protocol world that you're talking about in 2017 um and even in 2020 and the business phase which is what I think every large player in the market now demands you

know because they want to be paid like people have lost a lot of money in tokens right and people made a lot of money like one year but for the most part people have lost a lot of money in tokens and there hasn't been as much PMF as as Mark expected funds are getting you know are are being asked for very high cost of capital like very high returns to justify investing in the space and people and funds are kind of as a group and I think it's the largest group in this market um demanding kind of token holder protections from from these businesses and and startuplike you know mentality where you're working hard you're shipping new products and you're being responsible philippe I've really enjoyed this conversation i think uh zooming back out from you know blockchain crypto DeFi words and

reorienting the crypto vernacular the crypto verbiage the way of expressing what we do in this industry and updating it for a more modern more modern way of communicating i think it's the perfect time because I think you are right we are we must enter a newer phase of investing you kind of you can see it in uh like VC retail relations you can see it in conversations around memecoins and you can see it in Capitol Hill in Washington and in in the legislative branch and so I think a new era of crypto maturity is is what we need in order to take the technology to the next phase and I really appreciate you helping to really codify this into a fantastic essay uh Bank if you didn't if I didn't explain it earlier enough this is all of an essay that we are talking

about thoroughly unpacking that Felipe wrote we will link that in the show notes so I highly encourage you to give it a read felipe one last question for you just before we go pretty open-ended though like what excites you about crypto what is nerd sniping you lately why are you bullish on the next two three years about about crypto just open-ended what what what gets you going you know I it it changes every now and then um every few weeks but right now I am pretty interested in this token holder protection question and the the concept of of future key and how that how that can be how that can be implemented so you know I know you know what it is but for the audience future key is the idea that you can trade conditional markets to make governance decisions so like the classic example is

unis swap thinks about implementing a fee switch you can buy unis swap conditional on the fee switch being implemented and if it's not implemented you get your money back or you can buy unis swap conditional on the fe market on the fee switch not being implemented so the proposal fails and if the proposal fails you buy unis swap and if it does if it passes you just get your money back so you're kind of splitting up the price into these two markets where the market is pricing the event if it does happen and it's pricing it if it doesn't happen the the idea is to feed the higher price into the decision so you know if the unis swap p switch yes market is trading higher than the US swap p switch no market then the p switch will be implemented it's kind of a crazy idea but it it really solves a

lot of these dowo problems that we're seeing in the market so like you know dow looting is a very big problem uh we all know that people give you know give tokens to to delegates the delegates can be bribed or or persuaded into voting for something that's not for the interest of the token holders but only the interest of a few select people and under future key that would never pass right future markets would just send that that vote to zero and and stop it from happening same thing with like splitting up into a new token futur markets would never let a new token ship they would send that that market to zero immediately and and you'd kind of have you'd have this shareholder token protections that we're kind of trying to enforce through the social layer because

we're not able to enforce it through the legal layer right now enforced through smart contract code so it kind of links to the whole conversation the future market gives you that very important token protection through credible commitments so I'm excited about that right now i think there's a lot of corner cases to think through but it's it's it's definitely nerds sighted me over the past few weeks bankless Nation you guys know the deal crypto is risky you can lose what you put in but nonetheless we are headed west into the frontier of credible commitments it's not for everyone but we are glad you are with us on the bankless journey thanks a lot