Philosophy of (DeFi) debt / Steve Fau

Transcript

hello everyone can you hear me fine awesome thank you so much so um I guess I'll do this without slides um I have super bad karma with slides this week so I was speaking on utxo this weekend and uh um I I blew up uh my my laptop so I brought my iPad I didn't realize that I'm not gonna have the reduction for that uh so I didn't have slides for the presentation and now I've I've sent over the presentation to the organizing team but because of my mistake um the presentation was locked so uh but um as compared to maybe some other presentations I'm not gonna introduce you to some super complex Concepts right

here which needs some super uh complex diagrams um I'm gonna try to provoke some thoughts uh in in uh um in our Collective Minds because uh you all are are brilliant engineers and Brilliant builders in this space so most of what I would like you to think about is actually in in your head I just want you to think about it perhaps from A New Perspective and um and and and perhaps come to maybe a new conclusions in a way um and and by the way first of all thank you so much for for showing up so early this is the first day it's like one of the first presentations uh in the day and uh there is quite a few people so

you're absolute Legends thank you for that um and so a brief interaction about myself uh I'm Steve uh uh I'm I'm a Steve and co-founder of Pawn uh protocol maybe you can see our logo somewhere on the sponsors panel yeah one of one of them there we go that's us um so uh Pawn is is a lending protocol that we've been building uh since early 2021 it's a generalized Landing protocol that essentially means uh our key Advantage is that you can literally take anything out of the box anything that is in some way standardized and uh you can use that as collateral uh and take out a loan uh get the sweet liquidity for

whatever you might need in in um in your either daily activities D5 activities whatever you need um we also do not enforce strong rules about the terms of the loan you know whatever is the interest whatever is going to be the credits so it's like a super flexible uh Landing protocol but uh I'm not here to Shield the protocol whatsoever uh I just wanted to kind of point out that everything we do is is uh revolves around the concept of lending borrowing in depth in general um when I was invited by by Joseph Yelich who's definitely somewhere around here you will definitely meet him uh as well um to co-found this company what became super super interesting to me right off

the bat was the fact that we're building something that's potentially touching like if scaled up enough and and hopefully beyond the space of of quote-unquote just defy uh into the general public uh through the fact that we deal with the depth and depth is something that um we all uh are somewhat Reliant to some degree I would even say some of us might be almost addicted actually the first slide that I have in my presentation is like that a lot of people are or like something like we all are addicted to depth in a way um so through through our product I'm hopeful that we will be able to like positively influence uh potentially everybody on the planet and uh

let me explain why why that's a thing uh so as I said the first slide says that we all are addicted to debt in a way and some of you might be uh might be reliant on the mechanism of depth uh directly because you have some loan open somewhere be it uh your your your uh Commercial Bank in the in the better scenario you have an open loan position somewhere somewhere in D5 but there might be some of you who do not have any outstanding that maybe you've been managing your your money uh so well that you don't have any outstanding debt but even then I would like to ask you uh where does your income come from so typically if you if you backtrack the

flow of money that ends up in your in your wallet um so let's say you're uh your your co-founder of uh VC backed startup then if you backtrack the flow of money uh long enough you will you will realize that at some point there is uh there is uh liquidity being sourced through some some sort of adept instrument um if you're working maybe a traditional job quote-unquote traditional job um then I'm willing to bet anything that the corporation where you work um is funding at least portion of their operations through some sort of a depth instrument as well so um and then even then if you if you uh

can claim that um you still are not uh even in this way reliant on the existence of depth um unfortunately because of the concept of national States so for example here in Czech Republic every single citizen of of uh of the of the country um owns quote unquote the share of the of the of the governmental debt which I believe at this point is something about ten thousand dollars per per person or something along those lines so um there is there is there are many ways where we are influenced by depth directly or indirectly sometimes we can do something about it sometimes we cannot do anything about it um and I for a second imagine what would

happen if uh depth as as a thing or if if uh if depth disappeared if there was no no more opportunities to get a loan from anybody no more new funding uh I think there is there we don't need to debate that much that like the societies we know it currently uh would probably very quickly just disintegrate completely so the bad news is that as I've hopefully currently demonstrated um either director indirectly we are all heavily reliant on on the on the on the concept of depth um the good news though is that um the rules are not necessarily fixed

like the rules of the game the the how the depth Works uh it's it's not fixed uh however I feel like uh lately we've come to a point where many people simply consider things to be given like um and I'm I'm gonna demonstrate a few examples where we consider something as as very much given but um if you think about it for a few seconds you'll realize that um most of the rules of the system are are rules of thumb at best so one of the concepts is that we're we're being ruled by the two percent and by that I don't mean the top two

wealthiest percent even though uh that's a that's a that's a separate debate that we could have we are ruled by uh two percent which is the target inflation rate set up by um this is the Target that most central banks in in most developed uh economies are aiming for roughly two percent so have you ever thought about why is it two percent why why specifically two percent why is everybody aligned on this goal uh why is that something that the Central Bank sometimes is following religiously sometimes is following Loosely uh but it's it's it's there as one of the one of the um I guess parameters that heavily influence how much access to credit uh a

regular person can get in a way directly or indirectly so if you go to for example the check uh check Central Bank you will you will find out that um they they describe it in like a super short paragraph As um something that they follow because every other uh developed economy follows this this rule so it's like okay interesting um so then you go to for example European union and the and the and the ECB and they they have put a little bit more effort into explaining why it's two percent but it's just a world word fluff they don't really it's a bunch of rationalizations they try to say something so it looks like they know

what they're doing but if you if you really like carefully read what they're saying it's just word fluff they say they're saying something about uh this two percent offering some sort of uh I guess reasonable buffer uh towards deflation and I I personally believe that like at least a little bit of inflation is probably better than deflation but like why specifically two percent right um is there any like uh any studies is there any mathematical formula that can like prove demonstrate why why this has been designed as two percent uh the reality is that the answer is no uh if you look at the US government for example the US government has kind of

officially adopted uh the the two percent rule um in the first half of the of the of the previous uh century um after New Zealand in 1920s roughly uh the the New Zealand government essentially came up with a set of rules that they wanted to that they essentially wanted to regulate their uh their Central Banking a little bit and they literally just made that number up they literally they were like we need to put some number here two percent looks about right let's make it two percent and then every other English-speaking country very quickly adopted this number without really asking like what does it mean what does it really influence uh

and then it kind of spread through The Narrative of like developed economy so as you can see this is one of probably the one of the most important uh uh numbers that Central Bank is working with and it's completely arbitrary it's just completely arbitrary and the other central banks are kind of like just repeating uh repeat repeating it after each other um again as I was just saying thankfully the rules are not set in stone um another super quick example of this of this principle is uh the typical mortgage duration so if you if you take out a mortgage in most again in most developed economies you will be looking at something like the the bank is typically going to push

you towards if possible towards 30 years duration of course you can get an exemption you can get a longer one you can get a shorter one um there are some banks experimenting with the concept of like multi-generational uh multi-generational mortgages but again like why is it 30 years why is it why is it kind of set up on this number and nobody's really questioning it the reality again is that very in the very early days the mortgage has been uh at least in the U.S market for example has been a five-year loan where you only paid interest for the first five years and then you repaid the entire principle on the final year at the the at the date of the expiration of the loan so and then it kind of evolved

from from 10 years to 15 years to to like 20 now and now 30. so again it's something that's like super important for uh deciding like how big of a loan we can take out what's going to be the installment that we pay back you know what's the what's the value of the house that we will be able to buy with this mortgage yet again it seems to be somewhat arbitrary it seems to be something that's been developing um over the years and again um people seem to be kind of like blindly accepting as a fact but the reality is that it is not set in stone we can change it um and that's that's essentially the um the grow of this of this presentation is

that what we what we're building here in D5 at this at this very moment um we're heavily focused or at least it feels to me like we're heavily focused on potentially uh bringing uh new super exciting technology to life which by the way uh is is a good thing in my opinion it's like a fantastic thing and uh funny enough actually I was I was talking here at the eat brow glass here and I was talking about how a lot of protocols and projects tend to attempt to uh reinvent the wheel when it comes to the user experience of the of the platform you know the UI elements that we show to the users the the flow how we how we lead the user through

um I guess the user journey of of our applications and that's like the last thing that you should be you should be trying to reinvent because a lot of those Concepts in in like ux um come from Human psychology which hasn't really developed that much over over the past I don't know like well just a handful of years right so um well we should really proactively strive to reinvent like very actively and potentially very radically all the economical mechanisms um so when you look at the when you look at the mortgage like one of the one of the uh first if you attend any class

related to corporate finance one of the very first lessons that the that the textbooks or professors are going to try to to teach you is that you should always match the duration of the of the liability AKA of the loan that you're using to finance some productive assets so let's say you're buying a you're buying a a vehicle for your business or something you're expecting this vehicle to be operational for like 15 years maybe now I'm kind of making it up but as an example it's going to serve well you you will be using this vehicle for 15 years you expect it to last for 15 years and so the the liability the loan that you take out should ideally match this duration so it should be ideally

also 15 years so why is there a thing such as house that can potentially if well maintained which of course a little bit is a little bit of a cost but the core of the house is probably gonna last I don't know like 100 plus years or something like that so why are we trying to like so hard and it's it's typically something that you you would pass on to your children or or throughout your family or something like that so why would you try so hard to like repay everything in the first 30 years and that is only if you're young enough to still apply for the 30 years mortgage right so um the I guess from the historical principle

most of the lending and borrowing has been done in like a peer-to-peer manner it was me you know lending some grain to my neighbor when uh their uh yield from their little farm was not as good this year and otherwise they would starve to death or something like that and then I personally expected to um kind of like soft expected it's not like we signed any contract usually if you actually look at the history of like how how the first steps originated it was like a favor rather than like an actual like a legal contract uh uh binding them to some repayment but I softly expected them to like provide a favor back to me whenever I am uh in a need in the future

and so uh that this is this is changing significantly because the biggest lenders in the in the world currently are becoming individual institutions with like massive capital of course like political connections etc etc yet we are getting much much closer to the model which is like way more binding uh contractually it's protecting the lender much more uh as opposed to potentially taking care of the borrower etc etc uh blockchain in a way is actually making this even worse a little bit um because obviously blockchain fundamentally is this is this immutable Ledger that's uh that's that's a publicly uh available so if we

uh if if I ever borrow something it's it's essentially forever gonna be there unless of course the protocol is for example designed in a way where there can be some sort of a jubilee and and uh and the the depth can be forget forgotten but that's not necessarily a thing in the space right now so what I'm trying to say is that we're moving into the into the era where most of the lending is done by a handful of very powerful individual institutions um I'm probably gonna get a co-speaker soon um yet we're moving towards a setup where uh the borrower is potentially getting into a lot of trouble and so what I would like to I guess uh um leave you with is is the thought of

uh the fact that whatever we build no matter how potentially small in or big innovation it is there is the concept of like path dependency you might or might not realize that but whatever we're building is gonna have such a huge impact on the future on the future generations and while we are yes we are significantly improving the technology we should also keep in mind that we need to very proactively build in the humanity uh into the protocols that uh we are building thank you very much thank you I'm sorry for the slides I'll I'll post

a a blog post that might be a slightly more coherent than my than my stream of Consciousness right now um so if you wanna if you wanna I should have like a speaker bio on the website so if you want to read that just check out my Twitter um otherwise I'll be here for D5 Summit as well as eat Prague and all the way to the after party on Sunday so I'm more than happy to talk with any of you um about the about the philosophy two questions hi thanks for the talk um so you mentioned this arbitrarily set parameters like two percent interest rate or inflation rate or 30 mortgage duration but I'm thinking okay uh doesn't it apply uh to basically any

complex systems that we design there are many parameters that just have to be set up well enough like why did Satoshi Nakamoto chose 10 minute block time for Bitcoin why did like ethereum shows 15 seconds or all these parameters they are not fundamentally explained it's just some number that was chosen reasonably well and the system works so why doesn't this apply also to Legacy Finance yeah yeah absolutely so that's a great question uh I'm definitely not gonna get in that get myself into the trouble of explaining satoshi's choices here uh but uh if you if you think about it the problem is not that there was something set up kind of arbitrarily the problem is that everybody seems to be following

is like almost religiously and that's what I'm kind of trying to imply that we should also experiment with perhaps moving around with those parameters perhaps uh you know using a completely different set of parameters just like the the previous ones were kind of set up arbitrarily I think we have the and and like this moment when we are developing the technology that inevitably the traffic space is going to adapt from us or steal from us or Fork from us or or Inspire themselves uh if we build in the inherent like uh philosophical principles as well they will kind of be forced in a way to also adopt that so it's it's kind of like a little bit of a trojan horse which we can build into whatever we're currently building and then kind of force the the

thread fire world to also adopt that foreign [Music]