Bankless - 18 - COMP Growth Hacking DeFi | Dan Elitzer

Episode Date: June 22, 2020

Episode: #18 June 22, 2020 A DeFi token called COMP gained over 900% last week. DeFi going parabolic. What in the world is going on? Are these DeFi tokens real? If they are, is this the start of the another 2017 style bull market? How much can you money as a yield farmer? We bring on Dan Elitzer a Venture Capitalist, writer, DeFi futurist, yield farmer and the absolute best person to tell us what's going on.  Covered: Why COMP went parabolic Why DeFi tokens are real this time The spark for the next bull run DeFi tokens as rocket fuel Why ETH is getting left behind (so far!) The best yield farming opportunities Superfluid yield farming The downside of DeFi tokens Where this is taking us next Join us next Monday for a fresh episode! ----- Tools from our sponsors to go bankless: Multis - bank your business without a bank (1 mon. trial!) Ramp - the fiat onramp for DeFi (mention Bankless!) Monolith - holy grail of bankless Visa cards Aave - money lego for lending & borrowing ----- Resources discussed: (Article) Superfluid Collateral in Open Finance (Article) Meet the SAFG  (Article) Voting for cash flows (Listen) Episode 12: Protocol Sink Thesis (Listen) Episode 11: Going Bankless with Compound ----- Episode Actions: Subscribe to Bankless newsletter to get Dan's next article Read Gavin's article on SAFG ----- Subscribe to podcast on iTunes | Spotify | YouTube | RSS Feed Leave a review on iTunes Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program Watch Bankless shows and tutorials on YouTube Visit official Bankless website for resources Follow Bankless on Twitter Follow Ryan on Twitter Follow David on Twitter

Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get starting, how to get better, and how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, we've got a really exciting guest. This is going to be a fantastic podcast, and it may be our most timely podcast yet. Can you tell us about it? Yeah, Dan Ellitzer, a personal hero of mine in the DFI space, DMD me the other day, and he said, I've got a lot of stuff on my mind all obviously around what's been going around in DFI with these new emergence of governance tokens.

And when Dan messages me and says that he's got a lot of stuff on his mind, I give him a platform. And so we bring him on to the bankless podcast to hear what Dan is thinking about when it comes to this new emerging, apparently emerging class of tokens that compound has established with their comp token. but the concept of this token is much greater, right? We are now being able to use our imaginations and see what happens into the future with this. Yeah, so what I love about this is Dan really answers what's happening, like what is going on? Is this new, are these new defy tokens for real? Are they, or is this sort of a repeat of 2017?

And will we see another boom bust cycle? We talk about all of those things. We also talk about how to yield farm to. get the highest returns. And Dan has some practical strategies that he's sharing about, that he shared about yield farming and how to actually get access to some of these assets that I think listeners will like to. Dan wrote the very prophetic piece, super fluid collateral in open finance a little over a year ago, which talked about how you can deposit collateral in one application and receive a token that you can then deposit as collateral in another application. And that really just super,

drives overcharges the efficiency of collateral in defy. And we've seen a lot of applications use that sort of theory, that concept as foundation for that design. And so we asked Dan about the concept of super fluidity when it comes to yield farming, which is another super interesting topic that I expect to see play out in some form into the future. I also love that we talked about some of the downsides in the future of these defy tokens and what to look out for as we enter into what I think is going to be a new chapter in the defy space. I always look to Dan to see what is coming on the horizon of defy. He is in the weeds talking to the teams. He's a venture capitalist, so he always inspects things with a closer eye than everyone else. And so Dan's perspective is always

super valuable to have and getting him onto the bankless pod to talk about this emerging topic of governance tokens. It was both really valuable to me and I'm sure it will be really valuable to you. You know what else I love about, Dan, the last thing, David? What's that? He listens to State of the Nation. He watched our new show, State of the Nation, which comes out on Tuesdays on YouTube. He took a look at the first episode and loved it. So that's what you have to do too. If you have not taking a look at State of the Nation. We publish it every Tuesday on YouTube, and we also publish a podcast version of it on Wednesday. So make sure you check that out. Yeah, we listen to Dan to learn all about what's happening in D5, but Dan listens to us about what's happening

in the Bankless Nation. So you should also tune in to the Bankless Nation. Before we get into the podcast with Dan, let's talk about our sponsors. Maltus gives you the ability to run your business without a bank. That is the dream. It is the first ever bankless bank account for entrepreneurs who want to run their business both on crypto and traditional currencies like stable coins. So it features a multi-sig wallet. That means you can have team access, not just individual access, which is necessary for a business. So you can implement access controls. You can also earn interest on your crypto using money protocols inside of Maltis like Compact. Donave and others. You can streamline payments as well. Maltes has been featured on bankless. We're huge fans of the product. They're adding Fiat on ramp soon.

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All right. you need to go to Maltus.co, that's M-U-L-T-I-S dot co, and check it out. When you mention bankless, they'll put you ahead of the queue, they'll give you better priority, and let you sign up quicker. When you get your value off of your bank account and into the world of crypto, you pass through what Ryan and I call a crypto bank, where you send your money to an exchange so you can swap it for crypto and then send it to your Ethereum wallet. However, it doesn't have to be like this.

Getting value onto these systems doesn't always require a crypto bank, and that's where Monolith comes in. Coming soon on Monolith is an on-ramp into your Monolith smart contract wallet directly from your bank account. So you don't need to pass through any sort of crypto exchange, crypto bank, to get your value on into Ethereum. Monolith, for those that don't know, is a smart contract wallet that also connects to a crypto visa card. So you can go to the store, swipe your visa card as you normally do. And instead of pulling out dollars from your bank account, it pulls out die from your smart contract wallet. So this is a way to live a bankless life without having it impact you and your daily livings with your friends and family.

And you don't have to be that weird person that only has crypto money and no real money. So it wraps your Ethereum address in a visa card. And visas accepted basically all over the world. And you still get to have access to your. die, earning that interest rate in Defi at the same time. So check them out at monolith.xyZ to get your bankless visa card today. Okay, we've got a special guest today. I want to intro you to Dan Elliser. He's an investor at IDEO co-lab ventures. He's a writer as well. We're actually going to get him to do some writing this week on the bankless newsletter. So very excited about that. He's also

a yield farmer. And he's going to tell us a lot more about what the heck is going on with these governance tokens, in particular, the comp governance token, Balancer and others. Dan, it is fantastic to have you. I know this is a last minute episode for you, but we're glad we could snag you. Thanks for having me. It's exciting to have this conversation with you guys. You've been really leading this bankless community and has been at the forefront of a lot of the trends that are really now starting to explode in the space. So excited for the conversation. Well, we want to keep the bankless community at the forefront. And we know you are at the forefront of what's going on with these defy tokens, these capital assets,

as we've called them previously or, like, soon to be possibly capital assets. Can you just maybe tell us, like, what your day-to-day looks like and how you're involved with these governance tokens so we can get some context. And then we want to dig into them deeper and we want to figure out what exactly is going on here. But why don't you start with some of that background for us, Dan? Sure. So my day to day is that I'm an early stage investor with IDEOColab ventures. We have a traditional venture fund that is focused on investing in what we call distributed web technologies, so blockchains, crypto, and increasingly defy. Personally, I've been closing it on 100% of a

defy focus for the past year or so. And we've made a lot of precede investments in that. space. Some of our more well-known portfolio companies include Instadap and pool together. And there's some really exciting stuff that's been happening over the past year. But I think things have just taken off in the past week with the launch of the compound finance governance token com. So we can talk a little bit about that and some of the trends that are showing up there. Oh yeah. We are going to get into that. I'm just curious from my perspective. Was the shift to more 100% defy? Was that kind of a, you know, a calculated bet? Or did it just sort of happen to happen? Can you tell us how you went from just general crypto blockchain to more 100% defy now? Yeah, well, so our whole fund, we've actually

got five people who work on the team. And to be clear, I'm one of the people on the team that is most far down the defy rabbit hole. So we did recently launch this. product validation day for Defy Teams, which actually happened yesterday with 30 top defy teams. We've got an upcoming Defi residency. But our fund is still more broadly focused. We do still invest in other things in the space. Largely, this has happened just kind of following my passion and my nose over the past year. You know, you guys know I wrote that superfluid collateral piece in February 2019 as I was just starting to get really excited by some of the possibilities here. But defy represents why I got interested in this whole space in the first place.

Prior to joining IDEO and prior to being into crypto at all, I worked in microfinance. And when I saw Bitcoin and started actually paying attention to it in 2013, what clicked for me was the idea of a bank account that was accessible to anybody with an internet connected device. And it was the first time in the history of the world that you've been able to have one person that send value to another person who was physically distant from them without any intermediary. And I think that still just alone is a huge, huge game changer. But what got very exciting was thinking about, okay, just being able to send and store money is a superpower. But what we're starting to see the glimpses of is the ability,

for anybody, anywhere in the world, to create or access any imaginable financial product on the same terms as anybody else. So it doesn't matter where you're based. It doesn't matter anything that we could bias by it. It doesn't matter, right? It's just reduced to pure open source software. And of course, there are all of these regulatory hurdles, and there's always things that you can do that are going to make more sense when you have more capital than when you've less.

But there's now kind of a global base rate that you can get on exchange, on borrowing, on lending, on all these things that as long as you have a wallet, a digital wallet, an open source wallet, you can now start to access these things. And so that just got me incredibly excited at seeing that this ecosystem was starting to reach a place where there was real diversity in it and a lot more capabilities were becoming real and not just for people who are comfortable getting down to the command line. But for as much as everybody likes to hate on metamask and some of the painful Ux flows that exist today, they're still a lot better. They are graphical user interfaces that a non-technical person can interact with if they care enough.

and we're getting to a place where things like Argent and Dharma are really just taking up to another level where I think very soon we're going to see this be something that really anybody can use. Dan, your article, Super Fluid Collateral in Open Finance was one of the, was how I figured out who you were and how you think. And it really told me that this particular individual is seeing things earlier than everyone else, really seeing the right. on the wall of what is possible, even though we are not yet seeing that being developed on a technical level in some of these defy applications. And it was one of the main, the core pieces that I used to stand up. My ether is a triple point asset article. And then over the next 12 months, we saw a lot of that, a lot of the content that was in that article become true and is continuing to show itself as an extremely prophetic piece as we see different defy apps.

be designed in a way that fits the thesis of that article. And you've been, we've been messaging each other on Twitter, and you've been throwing these articles about the concept of like governance tokens and what turned into like liquidity mining tokens. And you were sending these to me like months ago, like three or four months ago, trying to get me on the ship of like this is the next big thing. This is the thing that is going to wake up the movement once again. And what writing on the wall did you see with this liquidity mining phenomenon that we are seeing so much hype by?

Like what were the things that really alerted you as to why this was such a big deal? Well, I want to give full credit to my colleague Gavin McDermott. He wrote up this piece about what he called the SAFG Simple Agreement for Future Governance that was really getting into these concepts. And I think he did the same thing with that piece as what inspired me for the superfluid. collateral piece, which was neither of us came up with a new concept. We just took these trends that we were seeing other people circling around and just called attention to them. And Gavin did a great job laying out how this is something where it's unlike the ICO boom in that you've got a real working protocol and you're giving out tokens that are necessary.

You're not forcing people who interact with the protocol to use the tokens. These aren't payment tokens. These are governance tokens. And so 99.9% of people are going to eventually be interacting with these protocols and not caring about the governance token. The ability to just have them be useful and have them be live today really separates them from what we saw in 2017. And the governance tokens are a way that you can actually.

make these things credibly decentralized and distribute it in a way that is actually proportional to the use and is encouraging the growth and hopefully eventual dominance of some of these protocols in a global way. Can we just recap for those who haven't read it? Like Gavin's article, Dan. So like the concept, as I understand it, is, you know, there's this idea, there's this legal document in the VC space called a simple, agreement for future tokens, right?

Which is based on, you know, a simple agreement for future equity, which, you know, angel investors, Y, combinator, etc. have been using for a long time. And then kind of, you know, the tokenization movement and almost the ICO movement created this simple agreement for future tokens where accredited investors can buy a contract essentially that yields them tokens in the future. But, you know, Gavin's article was sort of a riff on this. saying it's essentially like a simple agreement for future tokens, except what you're getting is a governance token.

So this is not a token that necessarily yields cash flows in any way. There's no promise necessarily of future profit, but it does enable the token recipients to some sort of governance stake in the decision-making process. Is that essentially what the article was? Is there more to it? How would you talk about it? Yeah, that's what the article was. And I think the other piece to it was, right, this is giving you governance rights. Governance is also a responsibility. And if people are going to take this responsibility seriously, at some point, it's likely that they will decide that to support the governance and support the long term health of the protocol, the token holders may decide to vote in some sort of value capture mechanism. There's no promise of that.

There's no way to guarantee that. But if you think about it and you think about how human motivations work and wanting these protocols honestly to be long-term sustainable, right? And to actually be able to be inclusive and allow anybody to participate in this process, you're probably going to need to eventually get to a place where there is some sort of value capture backing it and what form that takes and when it happens or when it happens or anything is totally up in the air. But we're going to see that experiment play out over the coming months and years. Will some things go and stay pure governance for years? Maybe. Will some of them

try to stick value capture in there sooner? Most likely. But we just don't know. And it's going to be a fun experiment to watch. Now, I think one of the things that he pointed out was really different was the two examples that he called attention to was compound, because, compound had said they were going to be doing this governance token distribution to users of the protocol, but they had not yet started it. And the other one was Future Swap, which is a on-chain perpetual swap protocol, lets people go up to 20x leverage long or short on ETH and ERC 20 tokens. And that team had done an alpha release and had just gone completely bonkers, right? They planned to be in the market for a couple weeks.

Within three days, they'd done $17 million in volume and closed it down just to be safe because they learned what they need to do. And they were like, guys, this is an unaudited contract, which wasn't fully out of it, right? They didn't sponsor. They wanted to do more because they really care about the safety of their users. And we've worked closely with the team. And so we saw how they were thinking about this.

We worked with them on product. But what we saw there was they promised from day one usage of the protocol would result in receiving a governance token. And they actually want a step further, though, in one direction than compound, in that they said, and by the way, this token is non-transferable. So they don't want speculation on this token. They're saying, hey, if you're using this from day one, you get a voice from day one. And as you gain that voice at some point, will those likely, you know, governors choose to make them transferable?

They may. But there's no way to guarantee that. Compound went the other way. And I said, you know, we're not doing a governance token of day one. We're going to build up a useful product to a certain size. And then we're going to layer on the governance token on top. I don't think one is right or wrong. But Gavin did call attention to how these are too similar, but slightly.

different models. Like one is bootstrapping from zero and one is get yourself to a certain level and then, you know, dump a whole bunch of rocket fuel on it. So what I'm really seeing here is I'm seeing a clever way to get around some of the regulations that have really been holding the industry back lately, specifically with regards to like securities and the how we test, right? The MKR token has always kind of just been dubiously assumed that if the regulators took a closer look and were more public about it than they would call MKR a security because it was issued by a central party and it fits the Howie test, et cetera. And it had the profit mechanism baked in from the start. However, what we're seeing with the comp token is that what these

and the model of enabling future governance and enabling the ability to govern over where cash flows are directed, what people are, what these token issuers are doing is they're issuing just a governance token, but it is, I guess it's not really assumed by anyone, but why would you not assume this, that the nebulous set of stakeholders, which are almost by definition decentralized by nature of how the token is distributed, they would just ultimately vote themselves into the security aspect of the token after it had been like fairly issued and fairly distributed. is that how is this clever engineering of distribution and issuance and governance is that how you are

seeing this well i i think it's it's hard to look at these tokens the on the day that they're released and say that um you know they they pass the how we test right which meaning meaning that they are securities right there there's there's not i think basis for really saying that um but you know it it is a question right i think this this um is a different take and, you know, it's possible that some of these things will remain forever governance tokens. One of the interesting things about comp, IDOCOL Adventures, is a delegate for comp. We don't own any comp as a fund. I've been doing a little bit of kind of farming comp tokens, like on a personal basis on a very, very, very small personal basis. But I don't have anything

meaningful. Like maybe I have $100 in comp right now. I'll be pretty excited. excited. But it's not something that we have an interest in directly as a fund. And yet we've still been one of the most active governance participants. We've been administrators on the camaraderie forum where proposals are discussed. We've been talking about it on Twitter. We're in a number of chats with other people who are delegates. And we do this because we think like, A, it's just one of the most interesting things happening in the space. So I want to be involved. But B, we've got multiple portfolio companies that are highly dependent on compound. And so as part of our fiduciary responsibility and part of, you know, being good investors

and supporters of those companies and those protocols, we want to help make sure that the protocol they rely on is in a position of strength long term and is taking their needs as other companies and protocols building on top of compound into account when governance decisions are made. And so from that perspective, like, I look at comp and, you know, I do not care if comp actually has a value capture mechanism for me to want to be involved in governance because I'm hopefully going to make money as an investor on these other things built on top of it. And so I'm willing to spend that time and do that. How does that translate to people who, like, have chosen to pay money for comp? Like, I could see a potential future in which,

we cared enough and it was important enough that we sought us responsibility to also directly have ownership instead of just receiving delegation. Like that's possible. But honestly, I don't know exactly how that ends up playing out. You know what's cool about these assets to me? And so, like to recap for everyone, what we're talking about is basically DeFi protocol assets that have tokens associated with them essentially being released and going through possibly a couple stages of transformation. You know, The first transformation stage is basically they become these governance tokens. So you can vote on decisions in the protocol.

And then later, possibly, the governors of the protocol may decide to add a value accrual mechanism on top of it too and transform these D5 protocol assets into capital assets, right? So securities aside, these can potentially become cash flowing assets that are associated with a protocol that has a tremendous amount of value capture on top of it. What's super interesting to me, Dan, is that what we're essentially creating for the first time is crypto-native governance and crypto-native capital assets. If you're a shareholder in a publicly traded company and you do a proxy vote of some sort, that vote is governed by essentially the nation state,

by kind of the laws of the land in meat space or whatever jurisdiction, you reside in whatever country you reside in or state or what have you. But when you vote on compound, your jurisdiction is essentially Ethereum. And the vote you cast is binding on chain on Ethereum. And if some sort of a capital is issued, if fees are added to the protocol, then these are also fully settled on Ethereum too. So they become like capital, crypto-native capital assets. And to me, that is the first time that we've seen these. types of assets come into existence. I want to contrast this, though, because we've had an absolutely crazy week in Defi this week with compound. I don't know what it was trading at,

Dan. Did it start the week at 20 or something like that? Yeah, well, I think the, I've heard rumors that, you know, the valuation, like on the last private round was like 150 million, 250 million, something like that. Okay. I think it, you know, initially, when I first glanced at where it was trading uniswap on, I think, Monday, it was around like the $50 mark. Right. And I think it's gotten as high as, I saw it as high as like 230. It's 223 right now. Yes.

I think. Yes. Yes. So, and that's like a market cap of over $2 billion, right? I mean, so. A fully diluted market cap, right? Yes. So people see that and they see like a 900% growth just this week.

And they start to think about 2007. because they start to think about the ICO bubble. Is it different this time? In some ways, yes, in some ways no, right? History rhymes. And so is it similar in that there is a lot of speculation and valuations just going up really rapidly and like kind of manias around this?

Yeah, yeah, absolutely. People see an opportunity where things are moving quickly and generally in an upwards direction, and they want to get rich. So yes, it does have that similarity to it. I don't think there's any way that most of the people buying into comp, either through Uniswap or by liquidity mining, I'm guessing a lot of them are not doing some kind of formal valuation methodology that supports it being at a certain price.

That said, the difference here is that we already had a protocol that had more than $100 million in value locked in it, right? And it was doing significant essentially loan origination of volume. And it's not hard to look at that and say, okay, well, I can reasonably say, I expect it to grow at this rate. And so, you know, five years from now, I expected to have how many billions of dollars and assets in there in loans originated. And if you take 10 basis points, 25 basis points, 50, 100,

basis points, who knows, then I can discount back that cash flow into the protocol, assuming there is some way to capture out of it. But like, since you control governance, you can figure out any number of potential ways to do value capture. And I think that's one of the next stages that I'm just excited about because I nerd out about this stuff, is like what are the best ways to capture value on cash flow is coming through some of these protocols. And there's different things you can optimize for. And I think we're going to see a lot of different experiments playing out, right? The most simple being, in some ways, the maker, MKR buy and burn model

as a way of essentially doing share buybacks effectively. And then you can look at something like synthetics, which is a much more complicated model, but you're essentially able to stake your SNX and then claim fees every, I think it's a couple weeks. And they're very different models, but I think we're going to see all sorts of different experiments happen around value capture with these. But the core difference is it's not trying to be application-specific money, right? These are intended.

I just said more towards capital assets, whereas in 2017, everyone was talking utility tokens. And, you know, honestly, that took me, that's one of the reasons why I think I was a little actually late, given I had been in crypto for a while. But it was late getting on the bandwagon in terms of tokens was I looked at this and said, this makes no sense. Why do I want to manage different types of money for all these different applications?

Like, that's terrible UX. And even assuming that like we can fix the UX, because fixing the UX would probably mean just automate that in the back end. And I hold, you know, stable coins or I hold, you know, Bitcoin or Eith on the back end. And then I just like swap into exactly the number of that asset that I want when I need it.

And that leads to this crazy velocity problem. And then those tokens aren't really worth very much. And they have trouble capturing value because there's no reservation demand. And the model just didn't make sense. And now we're saying, you don't need to hold this token. People can use the protocols if they are getting value from using the protocols. And they don't even need to think about that. They don't even need to know there's a token involved.

for those who are aware, this kind of model of giving out tokens to users the protocol can be a very powerful incentive to onboard new users and new capital. And then it will be very valuable, I think, to govern this and allow it to be truly decentralized over time. But I'm still very hopeful that we get to a point where, again, like 99.9% of users will not care or potentially not even know that there is a token involved in the product they're using at all. You said why the ICO mania didn't work, right?

But there are also a lot of, you know, there was a lot of optimism as to why the ICO mania or any ICO, the ICO model at large was why people were hopeful that that would work at all. And I see still a lot of those same fundamentals in this new, governance token model, right? Where like the token was meant to be this sort of a community gathering incentive mechanism where, you know, people, you are incentivized to work for the protocol, work for the product, because you are paid in this token or you receive rewards in this token somehow.

And it was supposed to generate this positive feedback loop of building out the protocol from the ground up using a token as a distribution mechanism. Well, I think the problem with that was there wasn't a feedback mechanism. for those, right? It was, as a token purchaser in an ICO, I would give money to a team and say, okay, here's money. Now, now build this out, make it useful so my, so the number will go up, right? And that's, that's not a feedback loop. And as we saw, it's very, very broken model, right? There's a reason why venture funding has developed in a way where you don't just give people millions of dollars up front and be like, okay, hope in a few years you ship something.

And what happens now, there is a feedback loop, right, with this new model in that I contribute capital, but it's being put to work in the protocol. And by putting the money into the protocol, it actually makes that protocol more useful for other people. And then, okay, so it's more useful other people. That means the value of the perceived value of these governance tokens should go up. and so that will attract more capital and make it more useful or attract people trading and are doing other things, right? It gets more use in the protocol. And I think if you look at what's happening on compound today, it's very hard to say that the majority of the, what is it, 400 million

that has kind of flowed in over the past five days, that the majority of that is like doing something other than mining comp or farming comp, right? Like a lot. But, it gets it up to a level. It is getting more capital in there, and there's already a bunch of proposals on the table to fix some of the problems with how things are currently structured because the folks involved genuinely do want this to work.

They don't want it to be some stupid game where people are just farming a governance token and then selling it and getting high yield. The goal is to make compound global financial infrastructure. And so this hype is good. initially to get attention and bootstrapping, like, people are paying attention to it again. But, you know, having been part of these governance discussions, people are taking this very seriously and they want to tamp down some of that excitement.

They want to get it to a place where it's building measurable value for people who are driven to use the protocol for things other than just collecting comp. and it already got into 100 million plus in deposits prior to comp, just because people did find it useful. So I don't think it's hard to say that this can be done. Like, it absolutely can be done. We just need to get it to a level. And you guys talked about this in your stay of the nation, right?

That the goal here is not just to collect a lot of assets in protocols. That's something that we do. It's a means to get to the end, which is if you get, the means is, you know, getting all this liquidity in there. And the end is, okay, great, now it's useful to many, many millions and hopefully billions eventually of people who can tap into this huge amount of liquidity in these protocols and make it really cheap for them to access credit or to do exchange and hedge their risk and do all these other things. But until you get that large base of capital, all that base of liquidity, you can't enable all these other use cases, right?

When I mentioned working on microfinance products, you can't create these microfinance products on top of blockchains that don't scale yet because we don't have robust live L2 systems and we don't have enough liquidity so that you can have people, you know, shifting hundreds of millions of dollars in one direction of the other. Like, it just doesn't exist. But we're building that up. And if we need to play some things that kind of feel like ridiculous games that are all about money, we play ridiculous games that are all about money in service of eventually getting these protocols to the place

where they are providing financial tools and financial freedom to billions of people. So there's this feedback mechanism that's going on right now. And the fact that this new token model started off with compound, one of the biggest, was already one of the biggest DFI apps on Ethereum is really allowing us to really see this experiment play out in a relatively like isolated manner, right? Like one of the biggest apps on Ethereum is experimenting with one of the biggest new shifts and token models. And we're seeing the price of the compound token. I'm looking at it on DFI Market Capital I.O right now at $223 a token, which is basically its all-time high. And I mean, it's only been out on the market for a few days.

but it's pushing up its all-time high, which we're seeing just a massive influx of capital of different types of tokens and value being deposited into the compound protocol in order to access this token, right? Like that's the whole point of the token is to incentivize those deposits. And so we're seeing compound at $418 million worth of value locks, not far behind MakerDA, which is just under $500 million. And so the value of this token is, based on the cash flows of all the value that's deposited. So the token value goes up, but then

there's more incentive to deposit more assets into the compound protocol, which makes the token value go up, which makes the incentive go up. So there's this feedback mechanism, right? And no other application is doing this, right? And it's also the biggest borrowing and lending application on Ethereum. And I think that what this is, this is planting a flag saying, like, if you are a borrowing and lending application, you have to do one of these tokens. Like, there's no way you can compete. Why would you submit your capital to, you know, some small borrowing and lending application, which doesn't issue you a governance token and that doesn't issue a token that gives you upside potential based on the application when you could instead submit it to compound? And so what I

kind of want to turn this conversation to is talking about where does this put us or where, what has compound done to the other applications on Ethereum? Like, is, Is this the now, the new status quo, is every single application that can do this? Do they now have to do this? Yeah. I mean, I think it's likely true, yes. And there will be some cases where it's not true. But for most things, if you need to attract liquidity, then if you're not paying a competitive

yield, then people aren't going to put capital into your protocol. And there are ways you can do it, right? If you could raise a lot of venture capital and you can directly subsidize the yield, you can pay people out, USDC or whatever you need to pay out to pay for them to provide that liquidity to you. That's one way to do it. But what I think is actually happening here, like let's get under the hood and talk about what do these tokens really represent, right?

Let's assume that at some point in the future, the compound token holders will use the governance process to vote in some sort of value capture. So we can assume that there is going to be a future cash flow that somehow token holders will have access to. Now, let's take a super simple example. Assume that, you know, the compound labs team had been entirely self-funded. There were no VC as whatever, right? They own 100% of comp tokens day one.

And compound has gotten some usage. And I say, okay, we want to supercharge this. So we're going to start giving out these comp tokens. Now, they could, like I said, they could raise money from VCs. They could sell the comp tokens, somebody and then directly subsidize yields to attract more capital to be deposited into compound. alternatively, they can give out these tokens. And what these tokens actually represent is you can think about them as a probabilistic, like, or, yeah, there's some element of it where you can discount the likelihood that, you know, it may never capture value. But let's say it does have eventually a claim on future cash flows.

You can then discount back the present value of those future cash flows and say, okay, one comp token is worth, you know, the net present value and PV of those future cash flows is $5, $10, $100, whatever it is. And now I'm giving that out, and that's a way of subsidizing now. So what I'm actually doing is I'm saying, if I were compound labs, right, I'd be saying I'm going to take some of my future cash flow and I'm going to pay it out now as a, kind of user acquisition as a capital acquisition strategy. And this is not unlike, you know, PayPal in the early days or any number of banks, right, who pay you a sign-up bonus

because they expect to make that money back off you at some point in the future. Giving out comp now is saying, like, we're paying to acquire customers, to acquire capital. But what's kind of beautiful is it's not just a cash payment. It's actually giving them ownership. And I think that's, that's amazing, right? That's one of the exciting things that gets into what a lot of people were inspired about and what the best pieces of 2017 were kind of hoping to be, which was really creates something that is owned by the people who use it. That's what we're enabling.

But at the same time, you can create models where you're saying, I'm just essentially time shifting some of those future earnings and using them now to subsidize growth. And the nice thing is, as we talked about, that actually creates this virtuous cycle, right? Because as you attract more capital and people say, oh, this could be big, that implies more future earnings, which raises the value of the token. And so now each individual token, which sort of it's like a fixed percentage of the future earnings, but it's worth more dollars today. So you're providing a greater subsidy, which will in turn attract more capital.

And it's just a very, very positive cycle. But what it really is, what it comes down to is you are, you know, time shifting, you're pulling future earnings forward to the present and using that to subsidize your user acquisition. So we want to pause the interview and tell you about two more of our sponsors. The first is Ramp. What's holding crypto back? getting fiat into the crypto system. In order to get fiat into a defy application, you have to create an account with an exchange,

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So Dan, we talked about 2017 and how sort of the model was these futility tokens that didn't have a good claim on, you know, net present value of a future capital. Now it seems like we have better assets in this, you know, the start of 2020. David and I have talked a lot on the bankless podcast about feeling like we're some, sometime in 2016, right? Like things are building. Like, there's a forest bed and there's dry leaves and debris and the tinder is being laid. And like over the last two years, all of this development has happened. Defi is mature. Defi has grown. And people outside who aren't as into it don't see it. Is this going to be the spark that lights all of that Tinder? I think so. It's hard to look at what's been happening over the last five days and say

the Tinder hasn't been lit. It's, I don't think I know any teams in the space who aren't watching what's happening with compound and watching what's happening with Future Swap and saying, no, we're not going to do one of these. It makes sense. It's what you're going to need to do to be competitive, assuming that you are competing heads on with other protocols who also care about attracting liquidity, which everyone will be. So yeah, I think we're off to the races. And I just hope that we do it in a way where we don't lose sight of what we're really trying to build for the long term and that teams put appropriate kind of warnings and protections in place, right?

Like I'm very, very impressed by the FutureSwap teams and decision to shut down their beta. They could have kept it going and grown to even more unbelievable numbers, but they felt like the risk wasn't worth it. And they were worried about, you know, users losing funds and getting hurt because they didn't feel like it was really ready to be tested with that kind of capital. And so I hope we see more teams show that kind of care where they realize they they do have this rocket fuel that they can pour on whatever little bit of traction they start to get,

but that they do so in a way that is responsible. And so we don't have people into getting hurt. I do think some people will inevitably get up hurt. There will be hacks. There will be things that go wrong. But hopefully the voices in the community that are watching out for users and aware of the risks will be a little louder this time and a little larger. this time and a little larger percentage of the overall community, given how many of us saw what

happened when things got out of hand last time. So if we think that we are on the cusp of a governance token triggered bull market, if I just want to be blunt, what is the actual mechanism that would cause price appreciation? So we're seeing, you know, compound has its assets under management increased by 60%. And then we saw a future. swap suck in a ton of value when it was just in its, you know, in its alpha and its beta, right? And then they had to shut it down because it got too successful, too fast, but not based off the same fundamental token, right? Is the reason why this could be a trigger for a bull market, just the fact that it sucks

up assets off of the secondary market and puts them to good use? Or is there other stuff going on as well? I'm not sure I completely understand. Why is number going to go up? for the entire space or for like eth and like bitcoin and like we're like what like what are we talking about which number are we talking about going up uh yeah i guess just ether and d5 related assets like why is this if we are interested if we are thinking that this is going to trigger a bull market of sorts uh i would expect to see this in ether right as the fundamental native currency that

it powers all these things but then also the tokens on ethereum in the same way that we saw tokens on Ethereum also go through a hype cycle three years ago. I just kind of want to peel back the layers as to like what is the mechanism behind this governance token model and why it may cause assets to appreciate. Yeah, so that's a great question. I think we've already seen a meaningful appreciation, you know, two, three, four X or more in some of these defy related tokens. And I think it's other people also catching onto something and maybe being as slow as I've been on the uptake with some of the stuff, which was, I used to be really a stickler for, I want to see a good value capture mechanism.

I want to see a good reason why this token should exist and looking at the mechanism design for it. And I think one thing that synthetics, you know, very clearly taught people and Avey has very clearly taught people is if you have the right team working on this, if you've got the right community around it, all of that stuff is subject to change. And so you can't overly focus on what are the mechanisms built in today. Everyone's looking at it and saying, well, is there a community around this? Is the overall problem space that they're going for a very valuable one? and do I see, can I imagine that there is a reasonable path to accrue a lot of value in the long term?

And in many cases, the defy, the answer is yes. And I think it is more narrowly focused, right? The ICO boom, people are going very wide and looking at all sorts of different use cases, many of which didn't make sense. Here we're saying, okay, this is primarily a financial technology. And so we're sticking more narrowly focused in finance where there are much clearer paths to value. you capture. So I think that's people being able to draw those lines is why those numbers will go up. As to the question about, you know, ether, right? Ryan, you pose that to the bankless community today.

You know, why has ether not gone up in value along with all these defy tokens? And I wish I knew the answer to that for sure. But I think one possible explanation is that ether in the previous round In some ways, ETH was more money back in 2017 because it was the only option. And so that created just a lot of demand for Ether to participate in ICOs. Now we've got a lot of stable coins. And so when people want money, they want something that they already conceptually position in their head as money that they're using in these systems. And so I'm not disagreeing with your kind of, you know, you guys pounded. the drum on, ETH is money. I think, you know, that's been a very, very smart thing to do. And I think

it is with what I would use as a definition of money. But I don't think your definition of money and my definition of money is what the average person thinks of today as money. And so the fact that we do have a closer analogy to what they think of as money in the form of stable coins, that's which can you know especially for like us d t and us dc they can just like easily flex to many more billions in additional value without causing any movement in their price right they stay pegged to the dollar because you can lose certain parties can easily mint new ones and and redeem existing ones so there's not the need for ether to play that role and expand and contract its market cap by moving the token value up and down to meet that demand.

Yeah, it's funny. I pose that question today, so we're recording this Friday for listeners and got an assortment of different answers on why does ETH seemingly, why is ETH seemingly left behind of at least this explosive week for DFI tokens? And one of the answers was exactly what you're saying, which is there's now substitutes for ethos money in the form of stable coins. That was one answer. In the ICO 2017, it was just ether. So if you wanted to raise an ICO with funds, you were definitely using ether. So it positioned itself in that gateway. I've got some other thoughts on this too. And I'm probably

going to publish some of those next week. But I do want to, we might come back to this topic, Dan, but I do want to ask you another question. Because one of the contrasts that we've often been running on bankless is defy versus centralized crypto exchanges. We call them crypto banks often in our nomenclature. So it has been the case that crypto banks have kind of dominated the first, call it 10 years, decade of crypto, right, in that it's easier U.S. They do custody, but it's easier user interface. They're very close to Fiat on-ramp, so they have that advantage. And they've really dwarfed anything that's been built on defy so far. So defy in terms of volume, in terms of collateral, in terms of however you measure, it has been a

sliver of what crypto bank volume for derivatives, for trading for everything is. Now, that's starting to change and has started to change this year in 2020, where defy is starting to gain on crypto exchange market value. And, you know, market, share in general. I want to ask you this question. Do you think that these defy tokens, these rocket fuel, as you've called it, will these be the slayers of crypto exchanges? Will these allow defy to really catch up and possibly exceed the volumes and value going through crypto exchanges today? That's a great question. My simple answer is in the near term, no. These don't directly take us to a decentralized thing that's bigger than Coinbase, that's bigger than Binance, like today.

I do think it helps them get to a size where they're able to compete in a closer league, but it doesn't fully get us there. That said, I'm not, I guess I am a power user compared to most people, but probably not compared to many of the people in the bankless community. And what I found, though, is I, man, I hate going to centralized exchanges now. Like, it's just so much easier for me to use a Dex. And I will, I'm happy to pay, you know, some premium, right? Like a, you know, a point or two to not have to, like, go log in somewhere and, like,

think about, like, the delays until when they're going to credit my account and then withdrawing it and like, am I obscuring things in the right way if I don't want them to then be observing everything else that I'm doing on chain? Like, it's just, it's such a pain. And so I found myself moving more towards Dexas. And I think there will be other people who will do it too, because it's, it's getting so easy. And the other signal that I think is really interesting is looking at what's happening with Nexo. And this is a centralized crypto lending. platform. And they first got on my attention when basically WBT was introduced as collateral for Maker. And there was, you know, rates got pushed down to zero or 1% maybe. And NXO

minted a whole bunch of, it was like $8 million worth of WBTC deposit it and took out a loan and die. And, you know, that's great. They were like, like arbitraging C-Fi rates and defy rates. And I thought that was, that was amazing seeing this hybrid start to happen. And now they just put like $25 million of like, you know, tether into a compound to mine at, which I believe I saw on Twitter that like the CEO or someone there had responded, like, this was not customer funds and that like unbeknownst their customers, they were putting stuff in the compound.

It was like there were some specific like large customers who asked them to do this on their behalf. And so I feel a lot better about that than what most people's perception of it likely was. But I do think we're going to start to see this melding. I think one of the biggest opportunities that I'm most excited about, and so if you're building this, please come talk to me, is companies that are straddling the CFI and DFI boundaries and can play to the strengths of both approaches. I think we're going to see a lot of the future is hybrid. defy-c-fi for, I believe, the majority of users. There will be some that want to operate in a pure, pure defy world.

But I think that's largely going to be the way that, you know, we think about, you know, Bitcoin maximalists in some places. I was like, yeah, I used to think like Bitcoin was going to be like the big, the one thing. I still think Bitcoin's be absolutely huge. I'm still very, very bullish on it. but you're saying like, look, realistically, there's a lot of other stuff going on. And the people who stay solely Bitcoin only, I think it's going to be relatively small number of people. And similarly, I think the people who are purely defy only and don't touch any CFI,

I think that also likely ends up being a relatively small number of people. So, Dan, have you heard our Protocol Sync thesis before articulated about? I remember the graphic especially for that. You had a really good piece for that. We've got to send you some info about that because I think it's describing exactly what we're seeing. And we've got a podcast about this to listeners. So we're including the show notes. But I think it's describing what we just saw this week and what you just described with NXO, right? Yeah. So NXO is a crypto exchange and they're actually doing their own yield of farming. Do you say it was like $30 million?

They're doing this in compound? It was like there was a 22 million slug and they'd already done like a $3 million. million sling prior to that. Okay. So close to $30 million. And anyway, the protocol sync thesis is basically like crypto banks and defy will merge and the way they'll merge is the most credibly neutral protocols will essentially sink to the bottom of the stack and be used by all of the defy crypto banks and exchanges. And it's just kind of a bullish thesis on defy, but also everything bankless. It's bullish on Bitcoin. It's bullish on ether because those are credibly neutral protocols essentially that everyone needs to tap into, right?

Nexo is not going to go to Coinbase and start depositing into, you know, Coinbase's yield yield protocols, right? But both Coinbase and Nexo will happily do so to compound because they understand the rules of the compound game and they are much more credibly neutral and they're not competitors. Does that kind of resonate with what you're seeing? Absolutely. And I think, you know, that's, that kind of gets to, you know, why I'm I'm bullish on defy and some of these protocols and AMMs in particular, right? Automated market makers. When you think about automated market makers and liquidity pools, you know, one of the things

that people have pushed back against to saying, well, you know, these are not as efficient as order books once you reach a certain scale. And that may be true. Like there are a lot of markets where eventually, hopefully they go to a place where order books are more efficient for certain types of users in certain scale. but it creates a kind of a reserve, a floor where you're going to be able to say anybody can access this floor. And one of the roles of these C-Fi organizations or these hybrid organizations is they're going to arbitrage. They're going to get better rates.

They're going to do things. But they can always as like essentially a lender, borrower of last resort, a liquidity source of last resort, they will also tap into these pools. and so I think, you know, that's, yeah, I think, I think your thesis is absolutely right. Okay, so before we get through all of the material, we've got a few more things we want to cover with you, Dan, but I think our listeners are dying to know what yield farming is and how they can become good yield farmers. How can they harvest some of the crops that are out there, Dan, from the yield perspective, because there's some weird stuff going on. It's happening really quickly. Do you have any insights or tips for folks listening?

Yeah, well, I mean, the first thing is to balance your excitement about yield farming with the risks that are implied by it. The highest yield yield farming opportunities are generally at the very beginning when it appears first. But that's also the riskiest point because nobody else has gone first. There's not a lot of assets in there. There may be, you know, bugs that haven't discovered yet. So be careful, right, and figure out personally where you are on that risk spectrum. But assuming you start going in, one of the things that we've seen is right now, the rate model for tether for both the supply interest rate that you earn and the borrow interest rate that you pay

are just wildly out of whack, specifically with the other stable coins, but really all other assets on compound. And so the result has been that tether went from being like a few hundred thousand dollars in deposits to the largest asset on compound because people were just using it to yield farm. And one of the ways you can do that is you can't borrow against tether. So you could deposit tether and earn interest and was paying pretty attractive rates like 10% or so. But you actually were better off borrowing it. because the amount of additional comp you would earn would just dwarf the interest you were paying. And so it created this, in my mind, a perverse incentive where actually you get a better rate borrowing than on lending.

And everyone's just pouring into tether. You can deposit, say, die or USDC, borrow tether. so you're earning a little bit on your die or your STC, you're earning a lot on borrowing tether, but then you trade that tether generally on via curve because there's very low slippage for that for stable coins. And then you get more USTC or die, you deposit that, you borrow more tether,

you keep cycling it through. An Instadap, which we're investors, and then I love the team there, they built a fantastic tool that lets you basically automates that process of levering up, and they're using flash loans and running it through and doing an all one transaction. So you can use their DeFi smart accounts

to select your desired level of leverage. And it's pretty easy to use from a, you know, DFI perspective, let's caveat with that. But it lets you, you know, choose your desired level of yield farming for comp. So Instadap is essentially creating an easy button. to automate that yield farming for you. Yeah, absolutely.

And it's, yeah, I think you get to like a 4x multiple pretty, pretty easily. As always, there are risks to using these things, but they do make it really easy. Well, you talked about rocket fuel, and I'm looking at compound right now, like the total value locked in compound. And it's just like a line straight up. It was like, so it's, the rocket fuel. is working. It was 100 million at the beginning of this week, and it's now 500, you know, 418 million locked in compound. And the locked is the supply minus the borrow. So if you just look at how much has been supplied, it's now over 600 million supplied, right? And so there's actually more that's

been deposited into compound than is currently deposited into Maker because the Maker, you can't, you don't borrow any assets that other people have contributed. You borrow die by new dye being issued. So in some ways, like, there's actually more capital that's poured into compound than into maker already. I know David wants to ask you a question just a second, Dan, but one more thing on this, because I think our listeners might not understand this. And I want to make sure I wrap my head around it, too.

So it seems like Tether is yielding far higher returns in terms of comp tokens, in terms of this yield farming for comp tokens. than die is, right? So I was looking earlier this week, and you know, you can deposit die, and with the interest rate, that compound gives you plus compound tokens, you're doing like, you know, at least earlier this week, it was 8 or 9%.

But at the same time, you could do the same with Tether, and you were doing like 100%. Oh, you're like 200% at that point, right? It was like, just nuts. Why is Tether so out of whack with these other assets? look, I think there's a lot of different ways to explain it, but I think there were some considerations around Tether where it was handled separately because of some of the risks, the perceived risks around Tether versus some other stable coins. But honestly, just like there's no real reason why the rate model for Tether should be so different from USDC. And so the Darmah team has actually put forth a written proposal, not yet a proposal in code,

in the compound governance forum, which is community started and managed. The compound team isn't, you know, I don't think any of them are actually admins there. And they're proposing to normalize the, standardized the rate curves used for across all different stable coins. And so that will help address. That's gonna take a little while to get in place,

probably a couple weeks. There have been multiple proposals right now just to help bring that in to increase from zero, from zero to either 10 or 20% the reserve factor, which basically means the amount of interest, the percentage of the interest that's being paid by tether borrowers and played into a reserve pool. And so most, if not all other assets,

have some reserve factor. I think it's usually like 10%. In this case, it's at zero. So one party proposed raising 10%. Darmar came and said, let's go over the top. Let's rein this in by going to 20%. I don't support using it in a kind of a blunt manner like that. I think 10% is right.

But I think that while it may be out of whack for another week or two, letting it be out of whack for that little period is better. This is a four-year distribution, right, that comp is happening over. So I'd rather be out of whack for a couple years and not set the precedent of we will abuse a certain variable by pushing it to do things that it's not really intended to do to fix things. let's actually fix it the way we should be fixing it, which is to fix the curves on the borrowing and lending rates. So, Dan, I want to get into the concept of superfluidity and in the valence of this new token model that has come out. Like I said at the beginning of this article, or at the beginning of this podcast, the article that I first recognized you for was that

superfluid collateral in open finance, which talks about how collateral in one application can be repurposed and placed in a different application. And you use the example of you can submit ether and dye to the uniswap, eithyth, die pool and you receive a token that represents a claim on those assets. And then you can use that token as collateral in other applications. And the reference to superfluidity is one of my favorites, always a comparison to chemistry as to how things in the physical world work.

So how does the concept of superfluidity with this new yield farming, work. What is the connection between yield farming and super fluidity? Yeah. So I think what's, what's going to happen here as I was proposing there was that, you know, assets will flow and kind of find their level, you know, across these different containers of contracts. And I think what is starting to happen now is we've actually seen a number of different protocols, either launch or announced they will launch some kind of governance token. Balancer is one. Curve is another.

Synthetics actually, you know, shout out to them as being the ones to kind of pioneer the idea of subsidizing liquidity and incentivizing liquidity in liquidity pools and in a market. They did this subsidizing, I believe, is the synthetic ETH liquidity pool or this. synthetic S-U-S-D pool. They kind of gave SNX rewards for that. And now there's this new pool where it's Ren, synthetics, balancer, and curve.

And by putting RenBTC, W-BTC, SBTC into this balancer pool or a curve pool, you're able to liquidity farm all of those tokens at once. And it was this partnership, they all came together. And they're like, you know, in some cases, right, with like the balancer piece and with the curve piece, you know, they naturally have already mechanisms to be able to farm those tokens. And then Wren and Synthetics were just like subsidizing this because they want to get RENBTC and SBTC to have,

more liquidity. And I think that just they announced it yesterday, it kicked off, I think, in the early hours this morning. I don't know what level it's at how quickly, but I would imagine it's probably going pretty fast. And I think that's going to be, like, that's fascinating for a number of reasons, right? First, being able to farm all these different types of governance tokens at the same time is really cool. Interestingly, though, you can't farm. comp that way. And that's for how some of these protocols have been constructed. If you want to farm comp in a balancer pool, if you just have like two stable coins or two equivalent assets or any assets, the comp is going to get stuck there. So you can't use like C-D-I and C-U-S-D-T in a

pool. The comp will sit there and just be dead. But what you can do is put like a two percent allocation to comp in the pool, and then that gives you a mechanism that will pull the comp out. So because this is a product where they're trying to get it to be a pure, like, different forms of BTC pool, there is no comp element. And so it doesn't make sense to try to use like CWVTC in the pool. So it's using your deposited assets in something like compound and putting it in another application like balancer to generate liquidity while also capturing the balance.

value of the comp token or the, you know, X governance token that's issued by the relevant application. Yes. And the people jumping through these hoops and doing this are probably like they're looking to essentially farm all these other tokens. But the goal that the reason the teams are incentivized this, right? The reason synthetics and rent in particular are doing this is they just want to build up liquidity and get people to start using their versions of Bitcoin on Ethereum. Right. Because right now, those, they don't really have wide adoption. And anybody who wants to use them, there's just not a lot available. And so their goal here is to just make a lot of it available.

So if people will provide that liquidity for others because they're being incentivized to do so, great. Now, other people who just, they don't care about farming yield, they just want to have a representation of Bitcoin that they can use in some meaningful amount on Ethereum. Well, hey, great, now you can do it. And so I think that's really powerful. And that's the intended purpose of these tokens or these distribution mechanisms of these tokens. So for the people, the users of defy that aren't crazy farmers that are squeezing out, yield in every single corner of Ethereum.

And they're just normal users who are just sending back and forth assets. And maybe they're, you know, maybe they've deposited to compound just to generate a little interest here or there. just the typical 101s. How does this meaningfully impact them? Is it just that the things on Ethereum, the assets, the tokens, are given more reason and more purpose and more to be deposited into these liquidity-generating mechanisms like uniswap or balancer or compound? Is really just the impact upon the end-user liquidity, or is there other benefits

to the average user of Ethereum as well? Well, I guess the question is like, what are the average user of Ethereum looking for? You know, I'd say probably the average user of Ethereum is, you know, as much as, you know, might not want to admit it in the Ethereum community. It's the same as Bitcoin. It's, you know, waiting for a number to go up on the native asset. And so, you know, for that perspective, if there is more activity happening on Ethereum, then, you know, hopefully that makes the, the, the best of it.

value of ether go up. And so that's good for those users. The way that it benefits, though, with people who are not just sitting there waiting for a number to go up, who actively want to use Bitcoin on Ethereum or do other things, is it enhances usability and composability because there's just now more assets that can be tapped into in these various protocols. By the way, Dan, we are not among that ilk. We are very happy for a number to go up. We think economic bandwidth is very important. Yeah, yeah. So, you know, number go up.

But, you know, okay, so there's one last maybe meaty topic to dive into, Dan, and then we'll let you go. And that's, can we talk for a minute about downsides? So we are really excited about this right now, to be clear. We do think it's rocket fuel. But I was thinking about a few of the downsides that we may have hinted at or, you know, listeners may have kind of seen through as we've been talking about this. And in my mind, there are three.

One is this could cause another speculative mania. And for the good and the bad, there is some bad there, right? So, you know, that's one possibility. Another is this concept of time shifting where you're basically front-loading some of the, almost like, defy token equity at the beginning. So compound, for example, they're going to distribute comp tokens for four years. But after four years, there's nothing like. left to distribute, I would assume. So is this rocket fuel, I guess, going to run out at some point?

And is that a problem? And then the third thing I was thinking was one thing that these protocols are doing essentially is they are selling their governance. So they are selling some of their future decision making, you know, and they're incented to essentially sell it. We've been talking a lot about bank lists about the value of non-subjective, almost governance-free protocols. Uniswap has been mostly one of those so far, but something like this could incent a Uniswap to now release a governance token and inject governance into a protocol that doesn't necessarily need it. And maybe that subjective governance is not as healthy as a governance-free, fully, you know, defy robot type of protocol. So any comment on those three things? Those are just a few of the potential downsides that I see at the top of my head. What's your take on that? downsides. Okay, wow. So there's so much to talk about within each of those. One quickly, you mentioned compound having a fixed supply. And you guys have often talked about, you know, Bitcoin having fixed supply as kind of like a meme, right? Everything is subject to social

governance decision. This is explicitly so, right? So at four years, if the community, the governance token holders decide to, they can issue new shares, right? They can issue more comp tokens. Anywhere along the line, the distribution schedule could be changed and stretch that out to 10 years or longer, however long you want. You can create tail inflation should you so choose. So none of this stuff is locked in. That's the kind of the beauty of governance. The danger is like part of the reason it works is probably the story. that people like the idea of a fixed supply, especially, I think, for some of this governance stuff. And so it's just easier to wrap your head around. And so we're opening a bit of a can of

worms by talking about the fact that maybe these things aren't fixed. But I strive to be honest. And as you guys do, you know, explore the tradeoffs in this space. So, you know, wanted to kind of mark that off here. There are risks, right? And I think actually one of the The biggest risks here that isn't often talked about is, you know, looking at at who's in the space and who has a lot of ownership in the space now. And right, like, we are, you know, three white men who are having this conversation here. And we're having this conversation on Juneteenth, right, which is kind of the anniversary of effective abolition, end of the Civil War in the United States. and we're seeing on a national stage and a world stage, some of the problems with the existing systems and power structures in the world. And I think if we are going nuts now with this stuff and it's growing and it's building a new system that just replicates existing power structures and existing or even accentuates the imbalance and existing capital allocation in the world, that leads us to a scary place and not a positive place.

that I want to be part of building. So I think it's important that as we're building these systems, we are doing so with care and keeping an eye and really intentionally building towards the end goal, which is that this new financial system that we are trying to help bring into the world should be one where it empowers everybody and is not merely a tool for those who are currently. in power and do have financial resources to continue to extract financial resources from others. And so that's, you know, apologies for like a little bit like a soapbox moment there. But I do think that we need to pay attention to if we succeed, what is the impact of these

systems in the real world? I think that was well said. In my, the Bankless Nation Part 2 essay that I just released, I included a section that I labeled world building, which was supposed to be a reminder as to the, that this is a blank slate of a world and is going to, the future of it is going to be dictated as to how we build it today. And kind of a call to action is just to be cognizant and reflective of when we make decisions today that they could impact the all future societies, all future generations based off of the world.

So I'm glad, Dan, that people like you are thinking about that today. So Dan, what is next for the grand scheme of governance tokens and defy? At a very macro level view, at a very high level view, how do you think this, in a concise way, how do you think this changes the game for Ethereum and Defi? And what can we predict will happen as a result of the emergence of these new governance tokens? Yeah. So I think in the near term, we're going to go through a hype cycle. I think we're going to see a lot of people doing.

these governance tokens, I think there's going to be a period of just kind of copycat activity. I think there is going to be rapid experimentation and trying to get to improved models around this kind of SAFG governance token distribution framework. I do think that we're going to start to see more of these mashups between different protocols, right, to the extent that one of the things that's gotten us most excited about this space has been the composability between different protocols. This is incentives for composability between protocols. So we're going to see, I think, a lot more things like that incentivized Bitcoin on Ethereum pool. And I think, you know, from there, one of the next phases is going to be as we get into the question

of value capture, right? These things start as governance tokens. They may remain as governance tokens, but I think there's a very high probability that the governors of these systems will move to implement some form of value capture. And I think we're going to start to shift the conversation to what is the right form of value capture, what are the tradeoffs in different approaches, and how should they best be structured for different types of systems? So I'm very excited for that conversation to open up. I think there's going to be talk through this as to maybe during the

bubbly part also is like what is the amount of real usage versus just liquidity farming usage. And I've already got some ideas in terms of how we might start to address that and separate that out and create better incentives that even the stuff that is inflated, we can at least see which is inflation and which is more quote unquote real. And then ultimately hopefully we get to this place where there's enough assets in this. And I'm talking billions of dollars, tens of billions of dollars that have been in these protocols for years. And that's when I think it starts to become more appropriate to start trying to mainstream this and expose people who are living paycheck to paycheck if they even receive paychecks and being able to say with confidence,

yes, this is worthy of your trust. You should put some money into it. it will be better for you than the existing financial tools that you're using. And maybe it won't be just a year or two from now. Maybe that's even further down the line. But I think, you know, at a high level, those are the some of the different steps and things that I see coming down the line. Dan, it has been exceptionally great to chat with you today. Thanks for making the time.

It was a crazy week in Defi. And like, it's hard for folks to make sense of it. think if somebody took vacation this week and came back, they would see yet again another new slew of products and a bunch of events that they have to wrap their head around. So thank you for helping us make sense out of it today. Absolutely. I'm looking forward to continue the conversation in the bankless community and on Twitter and wherever else. Excellent. Thanks so much, Dan. So you heard it here, guys. Dan predicts there could be another speculative mania that there are yield farming opportunities right now that these governance tokens slash future capital assets on defy could be quite a big deal.

So what you should do as far as actions is dig into this stuff further. We've got a few actions for you today. The first is you need to subscribe to bankless so you catch Dan's article. It's coming out on Wednesday. This is going to be like a super fluid collateral part two is very influential article. But I think this chapter is going to be about yield farming. I don't quite know the title. yet, but Dan is going to publish a draft here shortly, so I can't wait to read it.

Also, take a look at the opportunities for defy tokens that are available. There are opportunities in compound to govern. There are opportunities to yield farm. We talk about those a lot in the bankless discord. There are opportunities to front-run everyone who's not paying attention to this space. So check that out. And lastly, we will include an article to Gavin's, we'll include a link to Gavin's article where he talks about the staff G,

which you absolutely have to read for a glimpse into the future here. As always, risk and disclaimers, ETH is risky. Defi, including the yield farming opportunities that we talked about, is absolutely risky. Be careful out there, guys. You could lose what you put in, but we are headed west. This isn't for everyone, but this is the frontier, and we are glad you are with us on the bankless journey. Thanks a lot.

Thank you.