Bankless - 6 - DeFi Trust Spectrum

Episode Date: April 6, 2020

Episode: #6 April 6, 2020 Different Ethereum applications require different amounts of trust, depending on how each app is designed. This episode discusses how to think and measure the trustlessness of each app, and where the humans and computers meet.  ----- Tools from our sponsors to go bankless: Rocket Dollar - tax shelter your crypto ($50 w/ "BANKLESS") Monolith - holy grail of bankless Visa cards Aave - money lego for lending & borrowing Zerion - portal to your DeFi portfolio ----- Resources Mentioned: (Article) Ethereum will eat Wall Street (Article) Two Faces of Ethereum (Article) The Great Protocol Sink ----- Episode Actions: Give this podcast 5 stars in iTunes! Evaluate protocols on the DeFi Trust Spectrum Read these: The Two Faces of Ethereum (Article) The Great Protocol Sink (Article) ----- 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 Visit official Bankless website for resources Follow Bankless on Twitter | YouTube 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 started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, we have an excellent episode today. I'm super excited about it. The defy, trust, spectrum. Give us a tease of what we're going to talk about today. Ethereum is an agnostic platform that allows anyone to come and build.

anything on it depending on how you build that thing you can place it on a different part of the trustless spectrum so some applications on Ethereum are very trustless and some applications on Ethereum are completely trusted the trustlessness or trustedness of an application on Ethereum is a way of illustrating how much human responsibility there is in the operation of the application. Why Bitcoin is so powerful is because of how it is a very human-free application on the internet. It is this thing that is internet native and does not need humans really to maintain it. The power of Bitcoin is its lack of human maintainers of the system. The system perpetuates. And so therefore, Bitcoin is a very trustless system because its operation is entirely computer run.

And that same illustration is found on Ethereum applications. Ethereum applications can be completely trustless and completely unmaintained by humans. Ethereum itself is unmaintained by humans. However, some applications can be trusted or human maintained. And that means that when you use these things, that you are trusting the people that maintain each application to some degree. And so that's why you can lay these things out in a spectrum of trust. where some applications are more trusted than others, and sometimes you can actually get completely trustless applications. And so, for example, Uniswap is the example that everyone uses to talk about

the most trustless application on Ethereum. It's maximally simple, and it requires no human coordination or input. It's humans at the edges and code in the center. And this is kind of like different websites around the internet 2.0, where some websites you can go to like Wikipedia and access, you know, basically the entire website and other websites, other IP addresses you go to, and then you are asked for an admin, like login and login credentials. You know, some applications are open to everyone and completely trustless and some applications are closed. And like Realty, for example, my company, we have a white listed tokens, you need to sign up with us, etc. And so we talk about that spectrum, what it's like to be on either end of the spectrum, what it's like to be

in the middle. A really fascinating topic. There is so many other lines of conversation that spawn out of this. For example, at the trustless end of the spectrum, I believe, and I think you agree with me, Ryan, that things gravitate towards that end of the spectrum. The more applications we have on the trustless end of the spectrum, the easier it is to build further applications there. And so in the long-term, you know, 10, 20, 50-year time horizon of Ethereum, I expect all the applications to be kind of grouped up there and bundled there on the trustless end. We've been wanting to talk about this for a long time. And there's three kind of takeaways or concepts that we're going to touch on.

The first is what you're talking about is the machine versus man on Ethereum, what that looks like. Some are more machine robots. Some are more human-oriented people. the fact that in many cases the machines will win out, they will become the base layer, and what happens to ETH when all of this is going on, when all of these trusted and trustless tokens start appearing and money protocols start appearing on Ethereum, how does ETH win? Does it win?

We're going to talk about all of that. But let's dive into some housekeeping first. You had some thoughts. I know you mentioned me, David. after thinking about our previous episode on memes, what do you been thinking about? What have been the reflections after we did that last episode, episode number five? Yeah, so far, every episode we've recorded the next week, I'm thinking about it,

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

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

then hand it to person C, D, E, F, you know, and then this gets carried out throughout time. And so money, in the same way that memes are communication vehicles from our ancestors. It is our ancestors telling us our stories. One of the lines that I gave in that episode was that the Bible is a collection of memes that our ancestors have learned to pass on. Money and the money in the bank and the money of the world is this collection of our ancestors' blood, sweat, and tears as they worked and as they produced value. So that receipt that the farmer got for depositing his wheat is a receipt of his work. It's his energy that he put into creating value. And the way that we transcend, we pass on value throughout generations is money. And I think that when we are

talking about hyperinflation or Argentina or Venezuela hyperinflating the value of their currency away, it's a lot more impactful when we think of it as they are deleting the value of our ancestors because that is what's happening. The value and work of our ancestors is being forgotten. It's being washed away. And that's why Bitcoin and Bitcoiners from their perspective is so important as a hard asset that cannot be inflated away or printed because it retains the work of our ancestors across time. So that's just something I thought about in the last week since we released that episode. One thing I was reading this week was actually about the birth of the Greenback. So that is the U.S. dollar. It was called the Greenback.

And Lincoln actually created this during the Civil War in an effort to win the Civil War. He knew in fighting the Confederacy that it was also an economic war and he would need lots of money in order to do this. And so it was proposed internally and he accepted the idea that they would actually have to create a fiat that wasn't really backed by gold. It was somewhat through a couple of steps removed, redeemable by gold events. eventually. Basically, it was sort of a non-backed new money that was being used to finance the war. So financing security through issuance, which is pretty interesting. And it was laughed at at first. I mean, you know, the idea that a government that the U.S. would create its own non-backed currency, the inflation rates during the Civil War, the greenback rose in terms of,

It's price relative to gold quite high when the union was losing and started to do better when they were winning. It's just a really fascinating history. And I think we are like, what, five, six generations removed from that. But we forget that our ancestors worked very hard to establish money memes. And at the very beginning, they weren't very established at all. You know, they had to bootstrap their meme off of things like gold by putting imprints on the dollar like in God we trust or this is redeemable for gold at the Federal Reserve. They put a lot of work into establishing those memes. When we do inflate them away, when our government sort of issues more and we see hyperinflation, we're kind of destroying all of that previous work.

A super interesting perspective. It maybe makes the reason why no one should have the ability to print money. It makes that a little bit more tangible, in my opinion. Yeah, absolutely. There's also some other cool stuff going on. We published a post on bankless this week about Ethereum on Bloomberg Terminals. Did you get a second to check that out, David? Yeah, I did.

I thought it was great. So something cool that's going on is that we are starting to see some of the real-world assets. This is a restaurant company. They own about 400 restaurants called Fat Brands. And they're publicly traded NASDAQ company. And they have actually issued through a third party a bond on Ethereum. And so you can log into Bloomberg Terminal. And Bloomberg terminals, those are the user interfaces of Wall Street, of traditional finance.

And you can now log into a Bloomberg terminal and actually see this bond being settled on Ethereum to an eth address. And the payments from this bond are being paid to eth addresses too in stable coins. I saw this about a month ago that this was happening, and it kind of blew my mind that we're already getting to the place where Wall Street is starting to settle transactions on Ethereum. And kind of a thesis that what's going to happen is over time, Ethereum and networks like Ethereum will become the base.

settlement layer for Bloomberg terminals, for Wall Street. And it's simply because closed permission systems can't compete against open neutral systems. It's like closed source software competing against open source software. It's like Microsoft trying to compete against the internet in the 1990s. Open generally wins, permissionless, generally wins. You know, 500 bankers ruling the world really can't compete against millions of developers and folks who are building on the ecosystem. And it's exciting to start to see some of those early seeds of what's going on there too. So if you get a chance, check out that article, see what's going on in the Ethereum Bloomberg terminal space where Wall Street is starting to settle on this open permissionless network.

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

that's like a link out to EtherScan where you can see it, where you can see the address in real time. One other thing that we were talking about as an open thread this week on bankless is about the price that you'd sell your crypto. So, you know, the question is, I'm not selling my crypto until what happens. Do you have like a date or a timeline or an event that needs to happen for you to sell your crypto, David? No, not at all. And that's because I think that that is a silly question. because every person has their own time horizon and their own personal demands to sell their money for the things that they want.

And so I am planning on holding my ether because that's my savings. That's my money, right? And so I'll sell my savings when I need to buy something like perhaps a house. But as far as a date goes or a time, I don't think that, I don't think in those terms. I think that I'm just going to stack my way. And at some point in time, when it feels right for me because I want to buy something, I'll dip into my savings and sell it. So you're not waiting for like, you don't have like a 10-year time horizon.

You don't have like if ether hits a thousand or 10,000 that you're going to sell a portion and dollar cost average out, nothing like that. Well, I think if ether hits like a really high number, like $10,000, it'll be because ether is being used as money for the world. world. And so what when you ask me if I'm going to when I'm going to sell it or what I'm going to sell it for, that my question is, what am I going to sell it into? What selling it implies that I'm exchanging it for something else. Am I going to be selling it back to the dollar? Well, if ether is $10,000 per ether, what is the role of the US dollar in the world?

If ether is like $10,000, it's probably because there's a whole bunch of economic activity on Ethereum. So like, why would I sell my ether when I just might, when all of my economic activity might be on Ethereum? Like, that's where I go to buy all the things. Like, I'm moving my, my money elsewhere and it might be less useful there. So what I'm questioning is, what do I, what am I actually selling that ether for? And is that ether good for that? Like, do I want whatever I'm selling it for? Yeah, that's a really good point. Whenever you are selling Bitcoin or selling ether, you know, you're also buying something else, right? So to sell ether is also to buy US dollars if you're exchanging it for that. And that's the question is, is, you know, do you want to hold US dollars

at this point in time? Yeah, that's a super interesting perspective. I'd be interested to hear from other bankless podcast listeners what they think. You know, are they waiting for a specific date, like ETH2 to come out or proof of stake? Or are they waiting for Bitcoin to hit 100K before they're selling? or are they like you? Are they just like going to hold until they don't really have to sell until this thing becomes money? I'm probably a bit more in that camp too. But yeah, it'll be, it's interesting to hear the time horizons from different folks in the community. I'm reminded of this very old meme that I've seen in the crypto space where it's the Neo talking to Morpheus meme.

And Neo asks, what are you trying to tell me? that I can trade my bitcoins for millions someday, and then Morpheus replies, no, Neo, I'm trying to tell you that when you are ready, you won't have to. That's a great meme. I think there's a lot of truth to that for sure. I mean, as these crypto money assets become financialized, the question is why sell? Maybe you can lend instead, right? So you don't have to sell. You can lend a portion and start receiving interest. Maybe you can stake Heath instead of selling and receive interest. Maybe you don't want to sell for an inferior money like euros or yen or US dollars because the world essentially has come to crypto and you no longer need to sell. That is the banking system.

That's kind of the bankless vision. So we'll see how that plays out. We should jump into our sponsors. So let's start with Rocket Dollar. Rocket Dollar was actually the very first tactic that was released on bankless. And it's part of the reason I started bankless, honestly, saw this amazing opportunity for a self-directed IRAs that basically no one was talking about. And I wrote a bit about self-directed IRAs and Rocket Dollar. So if you're in the U.S., you don't have to be jailed inside of your brokerage

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All right. Let's dig into the subject today. This is the defy trust spectrum. That's what we're going to be talking about. I think this is a super important subject because a lot of people make the quip. You know, Defi isn't really decentralized. They'll talk about a protocol like compound, maybe, having some ability to access the contract and edit the contract, or they'll talk about a protocol like set, which has some administrative

rights as well. But I'm looking right now, David, at a spectrum diagram that you came up with, which I think is really good. And I'll just describe this for listeners. So on the far left, there's this picture of just a human, right? Normal guy on the left side of the spectrum. On the far right side of the spectrum, there's this Terminator-style machine. And in the middle, there's a cyborg. And what you have below the spectrum are various defy protocols, money protocols, that range from

human to cyborg all the way to full machine. It's really a spectrum of protocols that are run by humans, the man protocols, and all the way to the other end of the protocols run by machine, the machine protocols. And there are a few on the left that are like real tea, like God's Unchained. and there are many on the right that are more full machine like uniswap. Can you kind of talk about the concept behind that, David? Like, why did you put together that image and why is it relevant? The defy trustless spectrum is something that we should all have in the back of our heads.

And that's why I put that spectrum together. It's supposed to be a visual representation of what and where these defy applications are in relation to each other and relation to their trustlessness. And so it's hopefully a quick cheat sheet for you to go and be able to review where on the spectrum of trust do these things lie. When you use these applications, how much trust are you putting on the operators of the system? Right.

So if you go to Uniswap, there is no trust. It is completely trustless. If you go to realty and buy property, there is trust. Humans are at the helm of realty and you are trusting that they are steering that ship in the right direction. Uniswap, you don't have to have that trust. And it's important to understand where trust comes in at each of these protocols. And so that's kind of what this article was about. It's an article I published forever ago.

It's called The Two Faces of Ethereum. I definitely recommend it as I read. There's a video of me on the bankless YouTube reading it to you if you prefer that instead. And it kind of illustrates what different. different behaviors and applications are found in different ends of the spectrum. So we're saying Ethereum as a network, right? And remember, we've talked about this before on previous episodes, there's the difference between ether the asset and Ethereum, the network.

What we're saying is Ethereum, the network, it is a permissionless platform that can host really any money application, any DFI protocol that ranges. They don't all have to be completely trustless, but they can be trustless, as you. Uniswap is, but some can be still trusted. Can we talk about what we mean by trust a little bit more? So, like, what are we actually trusting? When you say something like Realty, and for those that don't know, maybe you should describe what Realty is, but can you talk about what we're trusting, what systems or what sort of people were trusting in Realty? versus something like Uniswap where we've said that's trustless and how they've removed the humans

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

but then you're just trusting the legal system to actually honor that commitment, right? So then you're just trusting the United States legal system, which is a decent thing to trust, but it's a trust nonetheless. And then you're also trusting us to appropriately collect the rent from the tenants, turn it into thy and send it into your address. You're trusting us to do all of those things. Now, with Uniswap, Uniswap has gone in the furthest opposite direction where there is absolutely no trust, and that is enabled specifically by the way that Uniswap is architected.

There are no humans at the center of Uniswap for its operation. There is only code at the center. And the definition of a Dow, in my opinion, is something that is code in the middle and humans on the fringes. And so the DAO, the decentralized autonomous organization, things that we're used to calling MakerDAO or Molok DAW, in my opinion, aren't actually DAO's because there are humans at the center. Uniswap is a really good example of the OG definition of a DAO because there are no humans

at the center for the operation. There's no place for a human to mistype a number. there's no place for a human to route a trade wrong. It's only computers. It's only code. And so Uniswap, there is no vector of trust, whereas Realty, there's a lot of vectors of trust. So maybe I'm kind of picking out three things from what you said, which, you know, range the spectrum of trustlessness. So the first is settlement. So with something like Realty, settlement occurs in Meetspace. It's settlement on the legal system, right? So it's not settlement in this alternate crypto universe. That's the first thing. The second is issuance,

right? With realty, we have to trust an issuer, right? So the company behind this tokenized security issues and sets supply. And the third is the mechanism itself can either be code or sort of human run. So we've got settlement, we've got issuance, and we've got mechanism. And what you're saying is with uniswap, all three of those things are code, right? So settlement, that occurs purely on Ethereum. There's no legal system involved at all. It doesn't rely on the U.S. legal system. And issuance as well, well, that occurs native to uniswap. The asset itself, I suppose, there's no asset in uniswap. It's more mechanism, but many of the assets inside of it, like Ethereum or like dye, they're issuance.

happens in crypto as well. And then the mechanism. So the rules of engagement, the rules of exchange and trade, that's all happening in code as well. And that code is entirely present on the Ethereum chain. So it can essentially exist if some of the developers behind Uniswap go away. It continues moving. It continues humming. It can exist if, you know, the, those.

the U.S. legal system falls apart, God forbid. It can exist as long as Ethereum exists and as long as the internet itself exists. So that is kind of the definition of trustlessness, it seems. Unstopability, uncensurability, like no reliance on humans, just pure machine, just pure code. Yeah, that's totally right. And to go back to your part about settlement, realty with our tokens, we can burn tokens, right? And so by definition, it does not completely settle on Ethereum because we have the ability to arbitrary change ownership values. Now, we would never, ever do this in a way that is malicious to our customers, right? Because, you know, our customers are, you know, the whole point of realty. But at the end of the day, if something, quote unquote, goes wrong and doesn't line up with

the outside settlement, the legal system settlement, we can burn tokens in order to, make sure that things do line up. And that's not something, having that guarantee of ownership, asset ownership is only possible with completely decentralized trustless assets like die or ether, right? So the real estate tokens that are ERC 20 tokens are not the same as die, which die doesn't under, die doesn't know who owns it or how it's being used. It just goes with it. But real tokens, we do, it does know that. It does know who is being. who is transacting in real tokens and making sure that everyone is KYC at the same time.

So completely trusted. Yeah, so there's actually white lists attached to tokenized securities like Realty, right? Where you have to have your eth address KYC'd or it actually can't buy or sell one of these tokens on uniswap, like the transaction literally doesn't go through. So that is trusted. It's a trusted asset like a traditional. financial asset, only it exists on this Ethereum open finance layer. So, you know, we've talked about

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

Yeah, Maker is a really important example. because Maker itself has parts of it that are completely trustless, and then it also has parts that are trusted. So when you combine all these things, you end up in the middle of the spectrum. But I think it's also important to differentiate between the parts of Maker that are completely trustless and completely code-driven,

and then the parts of Maker that are human-driven, right? So CDPs or vaults or loans or whatever, however whichever terminology we're using these days, that part is completely trustless. So you can deposit your ether. You can get a die loan. You can go and do whatever you want with that die. There's no KYC involved.

There's no permissioning involved. You don't have to apply. And you get to do whatever you want with that die. And then you pay it back later. And all of that financial activity is completely trustless. It's completely automated, completely managed by computers. Yeah, great point, David. So like these vaults, these are these CDPs, these are actually loans.

So for people who haven't used Maker, you actually, what you do is you go to the Maker website. You don't need a bank. You don't need any intermediary. You just need an ether address and some ether. What you can do is you can deposit that ether into a smart contract. So again, into a machine like David's talking about. There's no human in the middle. there's no trusting maker for custody. It's all in code. And then you can mint, die. That's a stable coin

against the ether that you've put in the contract. So effectively what that is, is it's like a collateralized loan, almost like a mortgage where you have an asset, like a house, and you're able to get a loan based on the value of that asset. That's what you're doing only with ether. So you're putting ether in and you're getting a loan that's based not in U.S. but based in the stable coin that's pegged one-to-one with the U.S. dollar called Die. And you could do that purely with a machine, nothing in between, and you can do that completely autonomously. So there's no need to trust any individual.

You're just trusting a protocol and just trusting a system. And you mentioned KYC, just in case folks aren't familiar. That means know your customer. So these are basically laws that are required by the financial, system in the U.S. to identify everybody who's transacting with money. So it's basically like tying your government public identity to a financial transaction. That's how the existing traditional system operates. Everything has to be KYC'd, as we say. And with this trustless system, you don't have to do any of that. And then there is the trusted side of Maker Dow. And

trusted it's not 100% trusted it's being trusted is its own spectrum right it there's a measure of how trusted these things actually are so it's a difficult thing to talk about when we actually want to talk about how to to what degree something is trusted or not but with maker dow there are human required elements to keep the system running the maker dow system has levers and dials that need to be adjusted and tinkered with in order to keep the MakerDAO system up and running. And so that's things like the stability fee, the dye ceiling, the die debt ceiling, how much dye can be issued, what collateral types to accept as collateral in MakerDAO. Right now there's just ether and basic attention token. Basic attention token has a much lower debt ceiling and the ether has a much higher

debt ceiling. And these parameters are decided by humans. Humans that own the MKR token, which is the token, the governance token, the voting token, come to the MakerDAO governance system and vote on what they think the parameters of the MakerDAO system should be. And when these people vote correctly and choose the correct parameters, then the trustless side of MakerDAO is enabled to continue to operate, right? So it's all about enabling the products and services of MakerDAO to be maximally successful, maximally used, increasing dye adoption. And the way that they do that is that the MakerDAO governance,

people that hold the MKR token, come to the MakerDAO system and vote on what the parameters should be in order to keep the vaults and dye and all of the products of MakerDAO up and running. And so this voting system is very much a human-centered system. And now that can even itself be split into trustless and trusted. The idea is that MKR voting is a trustless phenomenon because there are so many voters voicing so many opinions with all the different MKR out there, that as a mass incentive system, they automatically come as a wisdom of the crowd's effect, come to the right decision in order to choose the right parameters. And so that itself is also supposed to be this automated thing that happens,

but it's very different than uniswap where it just goes and goes and goes. It does require human input at some point in time to choose the correct parameters. So you've got this set of decisions that are completely trustless made by machine. You've got this other set of decisions in Maker that are still made by humans, who act essentially as a currency board of sorts, adjusting interest rates and that sort of thing. And those decisions made by humans are essentially made by vote. And this is vote of maker holders. So in a lot of ways, this kind of represents and resembles a shareholder governance, at least to me,

where you've got a bunch of folks with capital and the capital votes on whether they want to support a decision or not. But there are some other pieces of centralization in Maker too. So there is the foundation that maybe we should talk about. There are the physical offices of Maker. There is the website UI, which is also partially centralized, even though you can access the back end of Maker, part of the UI itself is centralized right now.

There are some of the leaders like Rune, for instance. How should we think about some? of these other pieces of centralization? No project just starts decentralized. That can't happen. Bitcoin at one point in time was running on only one person's computer before it spun out and was adopted by more computers and then more computers. And Maker Dow follows that same path. Every project starts centralized and that's, and Maker Dow is no exception. The Maker Dow Foundation is this group of people that are responsible for spinning out Maker into this self-sustaining platform, this self-sustaining protocol.

But it's not there yet because of the demands and complications of Maker-Dao. We need to create the infrastructure before we let it go and be completely humanless. We need to make sure that we are setting it up. for success. And that's what the MakerDAO Foundation does. The Maker Dow Foundation is funded by the sale of the MKR governance token, because when the MKR governance token was minted, it was minted in the same wallet. It was minted and controlled by the same small group of people. And they've used the sale from the MKR token to fund out the development of Maker, which is good, which is what we want from the protocol perspective, but it does give some people more control than others. For example,

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

offices for the foundation. There's New York offices. There's Copenhagen offices. They're all over the world. But at the end of the day, there are a central group of people that are helping build out the protocol into existence into the future. And so this has created the Maker Dow Protocol versus the Maker Foundation, the Dow versus the Decentralized part of Maker versus the centralized group of people that are helping spin it out. And this centralized group of people represents some degree of trust. We are trusting that the foundation has the best interest of Maker at its heart and is doing the right things to help both die and MKR grow into fruitful, long-living protocols. There are probably two other pieces that make Maker a bit more centralized. The first is the Oracle. So the

way debt is liquidated in the mechanics of the system are based on a price feed oracle. So these are managed by 10 to 20 or so different entities. Some of these are known. Some of these are unknown. But having an external price feed in an Oracle is not a purely decentralized solution. That is potentially a centralization vector and potentially a point of failure in something that they are working to continue to decentralize. So there's that.

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

Maker has also recently added a stable coin token called USDC. So a portion of all dye is mostly ether, partly basic attention token, and now also USDC, which is a much more trusted bank-issued stable coin. It's issued by Coinbase. and circle. And so some of the assets inside of Maker can make Maker itself and die itself less trustless, so less settled completely on Ethereum, on chain, and a bit more settled in the legal system. So all of these things, you know, show where Maker really is on that spectrum of trust. And they're certainly not as far to the right as Uniswap, but they're not

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

decentralized and completely trustless stable coin system that maybe is only purely backed by Heath or something like that. Have you given that thought? Yeah, that's a really hard problem. And the reason for that is because stability is a reference. If we want a stable ERC 20 token, we need to define what we are being stable against. And die just takes the quick and easy route and saying, all right, we're going to be stable with the dollar. While there are other ways of having stability, it's simply changing that price feed to something else.

But no matter what, stability comes from outside of Ethereum, not from inside of Ethereum. So we need to get data from outside of the Ethereum onto the chain. and that requires some level of human coordination. So it's very, very difficult to have stability without sacrificing some sort of trustlessness or decentralization because they're getting data from off of the chain to on the chain requires human input. That's not really something that we have really solved when it comes to being fully computerized

code. Now, you talked about the different collaterals inside of, of, maker and how that kind of taints die, if you will, because USC could be burned from the maker vault, so that's a risk vector. The Brave Foundation could say that they're abandoning bats, so that's a risk vector. However, I think this is a really good illustration as to why ether is so powerful because of what it is. Ether itself is a permissionless asset, and because it is the main permissionless asset of Ethereum, it will always have characteristics and qualities about itself that make it better collateral than any trusted collateral,

right? So at realty, we're working on getting our tokens into MakerDAO, but real tokens, you know, real estate is great collateral, but there's centralization risk. And there's also liquidity risk, right? Because we both, it's not native to Ethereum. And so that is qualities that Ether does have. Being native to Ethereum, being inherently trustless, and being inherently liquid, I think will make Ether the leading collateral and Maker Dow forever. Ether is the first class citizen of Ethereum. And anytime companies like Realty that bring off-chain assets that could be good collateral to Ethereum, they make Ethereum and therefore Ether more valuable, which increases its value,

which increases its liquidity. Ether will always be more liquid than any off-chain asset on Ethereum. And so I think on this spectrum, at the very beginning of this episode, I talked about how things gravitate over time towards the trustless end of the spectrum. And this is one illustration of why that is, because it's hard to compete with ether because of its trustlessness as collateral. Yeah, I think that's a really great point. You know, the fact of the matter is credibly neutral trustless protocols tend to be the ones that the world builds. on top of. Have you ever run one of those experience, David, where you put like different density liquids in a glass and sort of, you know, see where they, see where they end up. You might put a corn syrup

or a honey, some kind of an oil and water inside of a glass, and you pour them in sort of one by one. And what tends to happen? Yeah, they stratify, right? Right. So the dense stuff falls to the bottom and the light stuff rises to the top. And then you can even drop in physical objects in there, right? So you can drop in like a metal, metal ball, ball bearing, and it'll fall to the bottom. Or you could drop in, you know, something else. And it will find itself, find its balance between those two layers. But what are you getting at? Yeah, that's what that experiment teaches us is that, you know, dense materials sink. It's like, you know, the center of the earth is iron because in the early formation of the earth, the dense material. sank to the bottom. And that same effect happens, I think, with protocols. I've called this the great protocol sync to kind of describe it. The credibly neutral, the more machine-like protocols tend to sink to the bottom of the money stack. So they tend to be the base layer that everything else builds on top of. Why? Because they're the most dense. And here's what I mean by that. So let's say,

you know China released its blockchain. You know, they're working on a central bank digital currency right now. We don't know what that's going to look like. It'll probably have some blockchain type characteristics. Would the U.S. ever build on China's blockchain on its settlement layer? Of course not. They never would. I mean, the U.S. would lose its sovereignty by doing that.

you could see it at a more minor scale. Binance has a chain, the Binance blockchain, Binance, for those you don't know, is a large crypto exchange. One of their main competitors, Coinbase, would never issue assets to the Binance chain. Why? Because it gives Binance the power, and Coinbase loses sovereignty in the process. What would both of these countries and both of these exchanges do? Well, both of them would be fine with issuing on a credibly neutral platform that neither of them control. That's fine because they don't have to trust their

adversary. That's generally how the game theory around these things work out, is if there are a lot of different options, and some of those options are controlled by individuals or countries or groups, and others of those other options are not controlled, they're credibly neutral. Well, everyone's going to built on the most credibly neutral foundation and protocol and platform. That's why the world adopted gold. You can think of money as a platform. Gold wasn't issued by a nation state, by a king, by an emperor, so nations built on top of it as their money system. And that's why the, I think what's going to happen is the more machine-like protocols on Ethereum will become the base layer. So it's very safe to build your liquidity exchange on top of uniswap right now.

Why? Because no one controls uniswap. Because the rules of the uniswap game are completely embedded in code. And everyone knows what those rules are in advance. And everyone knows that no one can edit those rules without essentially forking the project and starting over. So it's very safe for other money protocols to build on top of uniswap. It's not as safe to build on top of a crypto bank. And so I think what we might see is that crypto banks and exchanges like Coinbase and Binance right now, they are kind of the, for a lot of money application, they're sort of the base layer. If you want to lend, if you want to borrow, if you want to exchange, you can you can do all of those things inside of these crypto banks. But what I think is going to happen is these money

protocols, these higher density neutral, credibly neutral protocols, will sort of tend to sink to the bottom and they will essentially become the base layer even of exchanges. So ways we might see this practically happen, I expect in the next year or so for an exchange like Coinbase to start picking up the die savings rate. So that means they will include an option, maybe a button that says click here and deposit your die in the die savings rate. And the die savings rate, of course, once die is deposited there, it allows the depositor to receive some interest on that deposit. And so they will, exchange will start to incorporate these more credibly neutral protocols instead of competing with them. And effectively, they'll start building on top of them. Does that make

sense? A hundred percent. I resonate with that so much. And there's two different subject matters that are related that I want to bring up. One, you talked about fairness and the other you talked about dependability. People, humans, we have in our brains a very strong fairness detector. Kids at a very young age as they are growing up learn what fairness is and what is fair at a very, very early age. We have this built into the way that we are, the way that we are wired. And you can see this in other species as well. There's this experiment that I love where two monkeys are being fed by someone and one monkey is, they're both fed cucumbers, which are okay treats. And then one monkey is starting to be fed a grape while the other monkey is fed another cucumber. And grapes are way better treats than cucumbers.

Now, in these experiments that have gone on, the monkey that is on the raw end of this deal, the one that is still getting the cucumber while the other monkey is getting the grape, doesn't eat the cucumber. It throws it back at the experimenter saying that this isn't fair. Like, he's getting a cucumber and I'm getting a, or he's getting a grape and I'm getting a cucumber. This fairness meter is built into us. And that's why it makes so much more sense for people to like, to go back to money, to like a money that is completely fair.

That's why money and fairness are really, really important to have together. And that's why we're probably going to build on a credibly neutral platform like Ethereum rather than a company chain like Binance. When you say, David, if a money loses its fairness, that's when it tends to hyperinflate. And that's when it tends to lose its meme status as a money. Inflation is unfairness, instantiated. in money, right? And so that's, that's, again, why it's so important to have money that no one can print, that no one has its hands on the lever. And so the other topic you talked about was dependability.

At realty, we use uniswap for our liquidity, and we do that because of the assurances that uniswap offer us because we understand that it's going to be, it's going to exist into the future. Uniswap is a durable platform. There's nothing about it that, from what you can see from the code, indicates that it's going to go away at any point in time. And this assurance, for us as a company, this assurance that we get from Uniswap is really, really valuable. We can use Uniswap as we see fit, and it will always be there for us into the future. And so going, and you talked about, you know, Coinbase using the DSR, The way that these things work, and going back to your density topic, the systems and applications

that are completely computer run are dependable. You can depend on them being there for you into the future, and that's why humans stack on top of computers, not the other way around. Computers are always at the bottom end of the stack. They don't mess anything up. They run exactly as programmed, and they can be coded to be inherently fair. They can be coded to be inherently neutral. And so for that reason, I think we're always going to see computers being relied on rather than humans, because that's what Ethereum is for. That's what the blockchain is, that's its main purpose as a blockchain is to enable financial activity that's managed by computers. It's the permissionless aspect too, right? So you didn't have to, in order for realty to issue property tokens on uniswap and put them inside liquidity pools,

rather, you didn't have to ask any permission. It's a completely neutral protocol in terms of what assets it accepts and what it denies. No one can gatekeep you. No one can stand up. Binance charges a quarter million dollars for a listing fee. Right. And do you think Binance would ever allow Coinbase to list some assets? asset on Binance that it didn't want? Of course not. I mean, it's not going to allow its chief competitor to do that sort of thing. So it makes Binance chain a no-go from the beginning. It's not credibly neutral. It has a gatekeeper. It's permissioned. It is low density. It's at the top of the glass rather than the bottom of the glass. That's what we mean by the great protocol

sink. We should talk about our sponsors talking about excellent protocols and a fantastic protocol sinks. There is a protocol called Ave that you absolutely have to check out. This is a much more trustless protocol on the spectrum. It's probably somewhere in the middle, more towards the uniswap side of things. It's a lending and borrowing protocol on Ethereum. So what does that mean? It means you can put dye inside of it and it will magically transform that dye into an interest-bearing dye token. You can look at the interest rates on AVE.com. You can also borrow against it, so you could deposit ETH inside of it, and then actually take out assets against that ETH. The lending that you do can be fixed rate rather than variable, so you know exactly what you're going to pay in advance. Developers,

you've got to check out their flash loans. This is a powerful protocol that's going to be the basis of a lot of cool things in DFI. Deposit crypto, start earning and borrowing, check out their flash loans, go to AVE.com and try it out. That's Aavee.com to try it out. Talking about how Ethereum is replacing trusted systems with non-trusted systems, check out Monolith, who uses Ethereum as its backend for dye management. So you can use your monolith visa card to spend your dye everywhere in the world. And instead of using your bank account to hold your money, you can trust Ethereum and Monolith to hold. your dye and you can see it on chain. This is a great example of how computers are always going

to be better trusted than humans. And so if you want to have a little bit of Ethereum in your pocket, go to monolith.xyz and sign up and get the defy card that allows you to spend your die anywhere in the world, anywhere where Visa is accepted. Okay, so we've talked about the trust spectrum a lot. We've talked a bit about the great protocol sink, low density protocols sinking to the bottom. Let's talk about another subject that I think has been on the minds of D5 folks for a while, and that is the subject of backdoors. So some of these protocols, not a uniswap on the far right, but some of them more towards the middle, actually have the ability, their developers have the ability to edit contracts. Is that right? Yeah. And each protocol,

is different. While what you can say that, you know, Protocol X has a backdoor, that doesn't actually answer many questions. You need to ask the question, well, what does that backdoor enable them to do? So, for example, D-Y-D-X, a favorite protocol of mine, has a backdoor, but that backdoor doesn't allow them to steal my tokens, steal my assets. And so it does enable them to change other things like oracles and matching engines, I believe. And for other protocols, like, a compound. I believe the admin keys, the backdoor for compound, does allow the team to take your assets and run. However, I wouldn't ever expect them to do this because that would be theft, and they are a centralized company that ultimately must answer to some legal system somewhere.

Also, they would be sabotaging their own business. However, it is important to know what protocols have backdoors and what those back doors can do. Now, backdoors aren't inherently evil. Most protocols, I would say, that have a backdoor, I prefer them to have that backdoor rather than just to rush to plug it up just in the name of trustlessness or decentralization. Backdoors are really useful. Teams that are building applications on Ethereum, they aren't done as soon as they deploy it to Ethereum. That is just the first step. It needs to be iterated, expanded, developed, improved. And that's what the backdoor allows them to do. If they plug that backdoor too soon, they would be fixing their application the way that it was without any further development and upgrade.

And so while backdoors do represent centralization and trust, they also represent a commitment to improve and iterate and make a better product. I believe that most Ethereum teams that have applications on Ethereum that are building in the DFI space have an inherent social contract, that they are trying to make everything trustless as possible. And perhaps in that same social contract is a commitment to plug that backdoor when the time is right. However, every single application is different and every team has their own vision. And so everyone should be doing their own research as to what defy applications they use,

what that backdoor does and what that backdoor enables the team to do. Yeah, it's certainly a tradeoff, isn't it? So, you know, you mentioned compound. I believe they've recently implemented a time delay so that any admin access to their contracts. And again, these are contracts that are deployed on Ethereum that some set of developers has the ability to edit them or change them around and have specific functions. The compound has implemented a 24-hour delay. So any changes that they put in place, 24 hours has to occur before those changes take into effect. And all of that is highly visible. That's one way

to manage it. Maker has done something similar. But at the same time, that's also a trade-off. Because if there is a bug, an emergency situation that requires a developer team to get in there and make some changes and save the system potentially, well, they can't do that right away. It takes some time. It takes, there's a 24-hour delay in place. That 24-hour delay also, however, protects against the $5 wrench attack. So if you are known to be the operator of a backdoor of the admin keys, you might be susceptible to the $5 wrench attack. What's the $5 wrench attack? The $5 wrench attack is where someone comes to your door and beats down your door with a $5

wrench that they bought in a hardware shop. And so they don't need thousands and thousands of dollars of collateral or hacking skills or anything. They can just come to your house and hold a $5 wrench to your head and make you do something with your admin keys. So the mere existence of admin keys makes the $5 wrench attack a possible attack. by that 24-hour delay can help mitigate the $5 wrench attack. Yeah, absolutely.

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

and some that are going to build pure machine protocols on top of it. So it's important to understand that there is a spectrum of these things. The second thing I would say is this is when people complain about DFI protocols not being as decentralized as their ideals, they often don't compare them. to exchanges in crypto banks. You could pull off a $5 wrench attack against Coinbase potentially if you knew who held the multi-sigs of all of the contracts. Coinbase itself, with a shareholder vote, they might be in some legal trouble if they did

this, but with a shareholder vote or with the leaders of the protocol could find a way into their own vaults and steal the funds. So at some level, it kind of annoys me when we compare, you know, defy to this perfect end-state vision rather than compare it to the systems that we have, like crypto banks and like the traditional system where we don't even have the option to be non-custodial and to have any degree of trustlessness. Yeah, it riles me up so much. I get so angry when people forget to make this accurate comparison.

It's simply a choice of what you are using as your reference point to compare to what is defy or not. Somehow people have decided that Bitcoin is the ultimate version of defy and all other, you know, teams that are building on projects like Ethereum, crypto economic protocols like Ethereum, they are comparing it to Bitcoin and saying, well, if you're not like, if you're not to Bitcoin's degree of trustlessness, then you're not defy. But the much more helpful and accurate and realistic anchor to compare it to is all the centralized counterparts of the centralized finance world. So when it comes to compound finance, let's not compare it to Bitcoin, but let's compare it to SOFI or some other borrowing and lending platform from Silicon Valley.

That is completely defy. And so instead of comparing it to the maximal possible version of decentralized finance, which isn't even an anchor point that we have available to us, Bitcoin is not the ultimate representation of decentralized and trustless. There's further areas of trustlessness and decentralization that you can go beyond Bitcoin. Bitcoin is just the thing that we know about. It's really just far more helpful to compare it to the other end of the spectrum and to compare defy applications to the, their legacy counterparts. And in that sense, realty is defy. Because if in a world where realty, real token assets, real estate are on Ethereum, you can, and you can go to different defy protocols and use real estate in them, like MakerDAO or compound. You are permissionlessly getting a loan from MakerDAO or borrowing and lending with compound with real estate. And you are doing that

without permission. Now, you KYC'd with Realty to get your real tokens. But that line. of credit that you got through MakerDAO was totally defy. And so I think even companies like Realty are defy companies, even though there is significant amounts of trust there, because we are built on this defy universe with defy financial services available to you. Yeah, if you go back to the memes episode too, I mean, we prefer to call this whole thing, this whole experiment open finance or permissionless finance because that better encapsulates the spectrum. But I think what we're saying to bankless listeners here is don't be a binary thinker, guys. Like, you know, it's not just black or white. There is a full spectrum of shades and colors of things that can be created on top of the base layer

decentralized protocol here. The core protocol, Ethereum itself, the base money system, that is the thing that we want to preserve the decentralization in. And above that, we'll have applications across the spectrum and what will inevitably happen is the protocols that have higher trustlessness that are more credibly neutral that hit product market fit those will sink to the bottom those will become the foundation of this system and that will happen organically and naturally now one last question i think david that we should answer before we wrap up so we've kind of painted this world of of variation. That also means variation in terms of the assets that are deployed on Ethereum. So some will be tokenized securities that are completely trusted. Others will be more like

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

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

And I think we're starting to tease what might be the next week's episode, which is it's going to be an episode that talks about ether value accrual mechanisms. but at the very least the bare minimum of putting economic activity of any kind onto Ethereum pays fees to ether. And to whatever degree that Ethereum runs on trustless assets, that weight of that percentage of the Ethereum economy always converges on ether. And so this is a very long conversation that I think we're going to peel back the layers of in future episodes.

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

Staking, which means a lot of these transaction fees also go to the holders of ETH. And then just the fact that as people start to embrace these systems more and more, as people start to use even tokenized assets like USDC or tokenized securities, that will bring them further into the bankless crypto financial system. and some of them in the sales funnel are going to purchase some of the crypto-native assets like Ether and like Bitcoin as part of that. And that might be the primary value accrual mechanism that we see. But we're going to talk about some of those things in the next episode, which we're super excited about. Just a quick recap of today, we talked about the two faces of Ethereum. On the far left,

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

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

Yeah, guys, let's get bankless to the top of the charts. That's how we take on this revolution. Last thing, check out the show notes. So we'll include some of the articles that we mentioned here today. Bankless is not only an audio format, there's also some great supporting reading material that you should absolutely check out. Risks and disclaimers, guys, ETH is risky. Crypto is risky in general.

defy all the protocols we talked about today maker compound uniswap these things are risky if you put money into them understand what you're going into this is the wild west this is the frontier it's not for everybody make sure you know the risks going in this has been the defy trust spectrum episode six thanks for listening thanks everyone