Bankless - 68 - Bull Case for DeFi II | Vance Spencer

Starting point is 00:00:00 Welcome to bankless where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. I'm Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, I know I say this at the front of every episode. How to front run the opportunity. It's literally what we say in the intro every single time. I feel like this episode truly is front-running the opportunity. I know that because if you listen to episode number 28 with our guest, Van Spencer,

Starting point is 00:00:51 that was truly a time to front-run the opportunity in Defy and Eath. If you listened to him even earlier, it would have been even better. And now here again is a fantastic episode and an opportunity for bankless listeners, those who are about that life, the crypto natives in the space, to get ahead of the massive monumental shift that is happening in the global money system. Super exciting, man. I love this episode. Yeah, we are bringing you Van Spencer back onto the podcast, more or less because he got things right. We had him on it nine months ago, episode 28, the Bull Case for Defi. It was one of Bankless's really big, first big episodes. And Van Spencer, he held

Starting point is 00:01:35 the number one spot for the most downloaded episode for, I think, the longest time in bankless podcast history. People really, really like that episode. And basically, because he predicted everything that he said more or less came true or is in the process of becoming true. So we're bringing him on nine months later to get an update as to how his mental models have updated, where he's shifted, where his focus is now. Because, you know, if you talk to one person who got it right one time, he's probably going to get it right again. And overall, You can tell Van Spencer comes from a place of first principles, and he has a very thesis-driven mentality about the space.

Starting point is 00:02:13 And that's why he can talk a little bit about everything, right? We talked about D-5. We talked about D-5. We talked about D-5s. We talked about enterprise blockchain and roll-ups and MEV. And he's got to take for everything. And every single thing is interesting. And so we wanted to bring Vance back on the podcast to give him another shot to get an episode

Starting point is 00:02:32 back into the number one downloaded episode. episode of the bankless podcast. It's a little harder these days. Because he has been overtaken by Vitalik and Justin Drake and a few others. And it is a little bit harder these days, but I think he can do it. And guys, if you like Van Spencer and you like talking about Defi, we are also bringing Vance back on to a panel and Ask Me Anything panel this coming Wednesday. So this podcast is coming out on Monday. Maybe you're listening to it on Monday or Tuesday. We have Van Van Spencer, Spencer Noon, and Santiago Santos on a Defi eating the bank. panel this Wednesday at 1 p.m. p.st. So mark that on your calendars. We are going to put

Starting point is 00:03:10 Vance in with the other like big, big brain defy thinkers and just talk about what it means to be a part of defy and do we really even need banks anymore these days. And so, you know, make sure you watch that when it comes time. That's going to be on YouTube. So go to bankless YouTube and find that. I think you should be able to set a reminder for that event. We'll have it in the show notes and there'll be an event up. Yeah. So I mean, look, the big. monumental shift this time. Last time we had Vance on, it was all about like defy tokenization and Defy Summer. I feel like this time, it's all about layer two. Layer two is going to be absolutely massive for crypto in this space. And so we spent a lot of time unpacking what layer two actually

Starting point is 00:03:54 means and playing that out in real time, what it means for other competing Heath Killer Layer ones, what it means for users in the space, what it unlocks as far as new applications. So the focus is really on layer two and trying to play that out is where you're going to find the opportunities. And Vance said some things that are like kind of contrarian. I mean, when's the last time you heard someone talk about in Defi, enterprise blockchain, right? Or like the verticalization, the fintech layer of Defi.

Starting point is 00:04:27 Like these are some topics that seem controversial at the time. and like don't seem to fit at the time. But I remember thinking that when... The fact that they're coming out of left field means that Vance is paying attention to them for some reason. It's interesting because I remember thinking about that at the time when he was bullish in like 2017, 2018, in particular 2018 on Chainlink, right?

Starting point is 00:04:47 And, you know, at a time when all tokens were kind of dead or dying. And that turned into a really good call. Also synthetics, you know? So anyway, listen to this podcast, listen to this episode. Definitely a way to front run the opportunity that is coming. We want to thank the sponsors that made this bankless episode possible before we get into it. Here they are.

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Starting point is 00:06:16 want to earn yield on your collateral, go to www.synthetics.io where you can stake your SNX or and earn fees from synthetics. Avey is a borrowing and lending protocol on Ethereum. And just recently released AVE version 2, which has a ton of cool new features that makes using AVE even more powerful. With AVE, you can leverage the full power of defy money Legos, yield, and composability all in one application. On AVE, there are a ton of assets that you can deposit in order to gain yield, and all of those same assets can also be borrowed from the protocol if you have deposited collateral. Here you can see me getting a 200 USDC loan against my portfolio of a number of different defy tokens and eth.

Starting point is 00:07:05 I'll choose a variable interest rate because it's a lower rate than the stable interest rate option, but I could choose the stable interest rate option if I wanted to lock that interest rate in permanently. One of AVE's V2 features is the ability to swap collateral without having to withdraw your assets, trade them on Uniswap and then deposit them back into Avey. Avey does all of this for you all in one seamless transaction, so you don't have to repay loans in order to change the collateral you have backing them. Check out the power of AVE at AVE.com. That's AAVE.com. Okay, bankless nation, we are super excited to have Vance Spencer back on the program. Vance is the co-founder of Framework Ventures. Framework and Vance have been really pioneers in establishing a crypto-native venture fund. That's why we had him on the first time back in August. He's got these incredible methods of discovering Alpha, particularly in DeVE,

Starting point is 00:08:01 defy and applying a really unique investment thesis. I think the thesis is getting active in protocols, actually using them, investing in crypto-native founders. We did this monster episode with Vance back in August of 2020. It's episode number 28 if you want to go back and listen to it. I recently listened to it. Well worth, it holds up, guys. It's one of the episodes. It was our number one episode for a really long time. It was like our first gangbuster episode. And I remember saying after this episode, like just tweeting is like 90 minutes of listening, but you got $1 million worth of value at least, depending on what you did with the knowledge. So we've got to bring Vance back for an update.

Starting point is 00:08:44 It's been nine months later. Vance, welcome back to Bankless. How are you doing, sir? Doing great. Yeah, it's been too long. Thanks for having me back. What have you been up to, man? I know you haven't been busy at all.

Starting point is 00:08:55 Just chilling. What have I been up to? You know, raise second fund for, framework, kind of saw the thesis gradually play out in the first fund, have kind of doubled down on being super active, you know, just being kind of on chain in all shapes and forms. And just being good stewards of the protocols that we support and just trying to push the space forward. But, you know, through the pandemic, Defi really didn't take a break or stop at all. And so it's been, you know, nonstop for, you know, almost since we last spoke. Are you feeling like things

Starting point is 00:09:27 have accelerated even more since we last spoke? Because we were just coming off of, DeFi Summer. We're at like the tail end of it. We didn't know at the time, but August 2020 was sort of the tail end of what we now called DeFi Summer. Have things accelerated since then? Definitely. I would say the progress in defy and crypto is not super linear. We kind of like kind of progressed to the point where we kind of bump up against either limitations of, you know, the base layers or kind of the infrastructure or the tooling or even kind of the level of of developer talent in the space. But it feels like, you know, we've had kind of that expansion from DeFi summer. We had like a little bit of a defy winter. We kind of even led the way

Starting point is 00:10:05 forward with, you know, more TVL, things like derivatives, things like, you know, layer twos that are now kind of coming to fruition. And it feels like we're now kind of about to realize that next step change in terms of just usability and functionality and just usefulness as these things launch, like Arbitrum and Optimism and, you know, ZKSync. So it feels like we're about to enter another exponential period of growth for the space. Okay, yeah. So we're going to ask you about that. second exponential period of growth because at the end of the August 2020 episode, we asked for your predictions. And you're one of the few guests who was just like, yep, here are my predictions. Like, no hedging. Like, these are the numbers. Anyway, I want to just recap for folks

Starting point is 00:10:47 who haven't listened to that. But basically at the time, this was August 2020, at the time, we asked, hey, Vance, during the next bull cycle, which we think we're entering into, the next 24 months, what's the total locked value of defy going to look like? At the time, it was $8 billion, something like that, total locked billion. You said it was going to hit $100 to $500 billion total locked value. And I think David and Mize head almost exploded when you said that. But here we are less than a year later, and we're at $88 billion total locked value. So like creeping up to your bottom bound, $100 billion. And you also said Ethan Bitcoin might get into the trillions, trillions plural. ETH was at 40 billion when we recorded that. It's now at four,

Starting point is 00:11:35 it's gotten as high as 480 billion. So a nice little 10x there, not quite the trillions. Bitcoin did hit trillion dollar Bitcoin. So we had like 1.1 trillion or so at the time Bitcoin was 200 billion. So we're getting close to your estimates, Vance, which like seemed pretty heady, I would say, seem pretty incredible nine months ago, maybe not so incredible now. And I say all this to like, I guess maybe tee up your credibility, that you're not afraid to make big, bold predictions and to invest with conviction on those predictions. But I also say this because I want you to be ready, Vance, at the end of this episode, we're going to ask you those same questions.

Starting point is 00:12:21 We want more predictions. Give us more predictions. So I want you be ready for the predictions at the end. Don't give them now. Let's build the suspense. Let's talk about some deeper topics. But be ready, sir. You going to be ready?

Starting point is 00:12:32 I'm ready. Of course. All right. Well, let's talk first about this drawdown. Because recently, there have been 11 days in May where we saw 60% some odd drawdown, 70% plus in some defy assets. 66% I think maybe more down in ETH. Bitcoin's been slumping.

Starting point is 00:12:54 Some people are saying this is the end of the bull run. So we might not hit those heady predictions that you were thinking of earlier. So like, what's your take on that? Is this the end of the bull run? Is this a pause? Or we doing something else here? I don't think it's the end of the bull run at all. And like I kind of have trouble defining what like a bull run is in crypto.

Starting point is 00:13:17 I think there's a bull run kind of at any given time in any place. You know, Bitcoin has probably a 10 or 20 year adoption cycle that it's going to live through, but it's already, you know, a good way through that story. Ethereum is just the beginning, and there's going to be these periods of volatility and drawdowns, but the story on a longer time frame is just that adoption is increasing. Institutional financial, you know, places are able to actually use in custody of this stuff, and Wall Street and, you know, basically all institutional allocators are now considering this a real asset class. And so, you know, saying that the bull run over doesn't really take those things, you know, into kind of mind.

Starting point is 00:13:53 And the thing that we learned kind of going out and raising for our second fund was that there's probably, you know, we're underestimating by one to two orders of magnitude the amount of capital that's on the sidelines that's waiting to come off and into some productive and interesting assets. And it kind of just depends on, you know, how far away are they from being convinced of, you know, your given asset or whatever you prefer, you know, to allocate to. And I think the reality is that Bitcoin is amazing in times where things are really pessimistic and, you know, when the world seems to be going to shit. But, you know, not that many people own gold, you know, that are institutional investors. The people who have gotten rich over the past 20 years have gotten rich allocating to venture funds, buying the dip on technology stocks, you know, looking at productive assets that have a high growth rate in a large tam. And, you know, those things just look and feel like Ethereum. And they look and feel like DeFi. And so, you know, when people say the bull runs over, it's like I just kind of feel like they spend too much time on Twitter and not talking to people.

Starting point is 00:14:55 And I'm fully aware that people don't have the privilege of talking to these large institutional allocators. But, you know, those people are very bullish. And it's just about kind of form fitting the story of Ethereum and the form fitting of the story of defy to kind of what they want. Would you say that people have gotten rich on, like, wealthy, on optimism rather than pessimism historically? And do you draw that distinction between sort of the Bitcoin? investment thesis and maybe the Ethereum DeFi investment thesis. One is optimistic. The other is pessimistic. I think it would have been very hard to analyze Ethereum through a cynical lens. Same with DeFi. You just have to be optimistic when you look towards the future. And I think

Starting point is 00:15:32 that's, you know, one of the principles that we have a framework is just like, you know, being a perpetual optimist, believing in what you're doing, you know, that is a force multiplier when you kind of, extend that across multiple projects or investments or even things that you're doing generally. And so we always kind of strive to take that forward-looking optimistic approach. But I think the converse can be said about, you know, Bitcoin in a lot of ways. You know, it's a hedge for, you know, the worst of times. You know, it's largely a finished product that has no endogenous catalysts on the roadmap. Really, everything that's happening to Bitcoin right now, in my view, and this is a little bit biased, is, you know, people waiting for exogenous catalysts, you know, people coming off the sidelines

Starting point is 00:16:10 and allocating to Bitcoin. And for us, it's just a little bit difficult to kind of, you know, see something as a roadmap and a future and catalyst and pick Bitcoin over that. And I think a lot of institutional allocators are realizing the same. And if you look at the ETHBTC ratio, it's almost triple, you know, in the past, I think, and it's easy to kind of be in the space and to think that, you know, because Bitcoin is consensus within the space, you know, other people will realize that. But not everyone else is coming in with the same set of shared values in context as those early kind of, you know, libertarian leaning people. Like a lot of people want to see something. something that looks and feels like traditional technology. And I think that's very much where the world

Starting point is 00:16:51 is heading. See, David, it's okay that we're optimistic permables. It's fine. Vetsets, it's fine. Yeah, Vance, I want to actually dig in on this subject. And this is actually not something that we had in the agenda, but it's intrinsically interesting to me. And I think for the listeners as well, because we've had some back and forth with some Bitcoiners lately about just, you know, about the whole, you know, ETH-BTC debate, right? And I can't remember who said this, but they said something along the lines of like it's really baked into your genetics what side you fall on. Do you fall on like the Ethereum defy side or do you fall on on the Bitcoin side? And some people just they find resonance with one side or the other and that's where they call home. And so how do you see with you and how

Starting point is 00:17:31 you invest at framework in like the culture that you've created at framework, how does your personal disposition direct what you choose to focus on and how you choose to invest? And how do you think that becomes also true for other, you know, venture investments and speculators in the space as well. Yeah. So, you know, framework has, has never invested in Bitcoin. And, you know, I just don't think that's in our mandate. You know, we're a venture fund that invest in founders the earliest stages. And that's really kind of what we'd like to do at the end of the day is invest in people. And, and, you know, there's a lot of meat on the bone when you look at DFI, whether it's the kind of primitives or the aggregators or just the different kind of, you know, consumer applications

Starting point is 00:18:10 that people are building on top of it. And it's inspiring to work with those people. And, you know, there is an ecosystem around Bitcoin, albeit a lot smaller. You know, it's concentrated around the lighting network. It's concentrated around, you know, basically different forms of hyper-bitcoinization for developing countries. And I think kind of what I've been seeing is that stable coins are really taking a lot of wind out of that sale.

Starting point is 00:18:32 You know, depending on how you think of the U.S. dollar or, you know, Bitcoin's kind of feed a store value properties. the evidence is relatively clear in these developing countries that people are choosing stable coins over Bitcoin just because it's a little bit more functional. And things trend towards utility over time. And that's kind of where we kind of seek to play. And I think any potential flippinings will be bullish long term for both Bitcoin and Ethereum. I think Bitcoin is burdened by the expectations of having to carry the entire space,

Starting point is 00:19:04 which props to Bitcoin, it's fulfilled over time. there were times where we needed the coherent narrative of Bitcoin to tie the space together through the bare market. Even though Ethereum was building, like, you know, it was kind of an open question as to whether ETH would be a real project, you know, a couple of years down the road. But Bitcoin really did hold the space together. And now it feels like, you know, just as this number one asset, it has the burden of expectation of doing basically everything, being technology, being money, being all these things to everyone.

Starting point is 00:19:33 And, you know, if there is a flippinging and ETH proves to be just this massive technology layer, Bitcoin can settle into a bit of a more comfortable, albeit smaller Tam, as just being digital gold. And I think that's a perfectly amazing outcome for all the Bitcoiners out there because it's still a gigantic market and there's still probably 10 to 100x upside. But it's not going to be the end all beyond. And that's totally fine. And getting past that event horizon, I think in getting past the fear will be really bullish for Bitcoin itself. I think the community will become a lot less striking. That would be how to put it. Angry. Let's get back to the conversation of market dynamics. And I want to get your take on this as well, Vance. People have speculated that

Starting point is 00:20:13 as we, quote unquote, go mainstream as an industry, the way that these markets are structured and the way that these markets play out is also going to change. No longer will we have four year long boom and bus cycles where the peaks are really high and the troughs are really low. Some speculate about the nature of a super cycle where we never actually get a deep prolonged bare market. And instead we kind of just rebound over and over and over again and stare step our way up to the top. There's other speculations that we just have the same boom and bus cycles, but they're smaller and quicker, where, you know, we hit blow off top sooner. We do it bounce quicker and then we just also keep on going.

Starting point is 00:20:52 And how do you expect these market dynamics to change from what people are previously expecting, which are these four-year-long megacycles versus where do you think this is going now that we've kind of hit like this mainstream adoption? How do you see these markets changing? So, I mean, generally, I have the pleasure of thinking on longer time scales just because, you know, we run 10-year funds. So, you know, my perspective is basically like, you know, we're going to invest in these things. And, you know, I'll call you in a decade. I'll let you know how we did.

Starting point is 00:21:23 And, you know, fortunately, with a lot of asset class, you can tell early, you know, there is liquidity. You can understand how the markets are working if the technology is valuable. But I think over the longest time horizon, the math is just. very clear and on our side. You know, there's a generational preference for digital versus physical. You know, largely digital assets in and of themselves are a phenomenon that is, you know, in the under 30 cohort, which will become the majority population cohort in the next five years. You know, those types of statistics just mean that, you know, the financial gravity of these generations maturing is just on our side and their preference will manifest and, you know, the prices

Starting point is 00:22:01 of assets that they like going up. And, you know, it's both because they've liked them and it's also because on a lot of them, they're fundamentally productive. And so while I still do see the case for boom and bust cycles for things that are more store value-esque, because they tend to trade around these kind of credit cycles, things that are productive, it just feels like there's really kind of no stopping the growth because it's a lot of reflexivity. There's more TBL. There's more fees. The things are more productive.

Starting point is 00:22:31 They're more useful. There's more capital to bootstrap projects in the ecosystem. I'm like, that will really never go away once that flywheel is spinning fast enough. And I think we've now kind of reached that escape velocity. Does that mean, you know, there won't be 60 or 70 percent drawdowns? Like, I don't really know. I mean, there was one, you know, two weeks ago. But I think the thing about drawdowns is like, you know, when when you lose money and

Starting point is 00:22:57 things aren't going exactly how you planned, you know, you can kind of dig the hole as arbitrarily deep as you want it kind of emotionally or, you know, however. you're kind of choosing to respond in the situation. But as long as you kind of have good assets and you understand the thesis and you're willing to wait long enough, there really is no cause for a concern. And I think the amazing thing about this space specifically defy is that you're able to delay things like tax liabilities. You're able to borrow against your assets. Like, you know, the actual functionality and utility is baked into this asset class,

Starting point is 00:23:25 which doesn't put a lot of the same pressure on things like, you know, traditional stocks or commodities or even Bitcoin. So, you know, when in doubt, zoom out is. kind of, you know, my personal mantra, and I think it's good advice. It is so funny. Like, once you cross the bridge from the legacy bank system to this new defy ecosystem, you don't tend to cross it back the other way, right? So, like, even if you sell your crypto-native assets, what are you selling to? Staple coins, right?

Starting point is 00:23:53 Like, am I going to sell back to my Wells Fargo bucks and earn, like, 0.01% in a savings account? No, of course not. So it's, to your point, it's staying in the defy economy and the crypto economy for the utility of things. But like, so part of me is optimistic on everything you just said, Vance, but like also part of me feels like, my God, though, it does feel like crypto investors, maybe I'll just name retail, haven't actually gotten smarter versus 2017. Maybe it's a new crop. Because, like, we're still pumping doggie coins, aren't we? Like, what's up with that? Is that a counter argument to our defy is going mainstream?

Starting point is 00:24:39 People are understanding this asset class argument? Or, like, what would you say? I mean, I'm very much a fan of people doing what they want with their money. And I don't think Ethereums get to have it both ways or, frankly, anybody in crypto where, you know, they preach economic freedom, but only in the subset of assets or things that they like and consider valuable. that doesn't mean that I don't think that Dogecoin is basically financial napalm and that a lot of these guys will get torched. But, you know, I came from, you know, a technology job where I was just speculating on these assets in my free time. And if anybody had told me that I couldn't do that, I kind of would have just laughed at them. And I think, you know, that's kind of the same response that we get from a lot of people that want to trade things like Dogecoin or Shiba or really whatever the coin is, is that they're just kind of expressing their own personal preference.

Starting point is 00:25:29 And they're using things like Uniswop to do it. And so anything that gets them onboard and interested is a win in my book. Do I think these things are really good long-term investments? Like, you know, I don't, but everyone has a right to speculate. And I think, you know, generally I am on board with things like accredited investor rules and things like that. But, you know, the history of the U.S. at least is rife with we're really good at speculation. That is one of the core tenets of what we do economically other than just kind of labor. And, you know, I like to see that that is back in the markets, albeit it's a little bit frothy, but, you know, to step in the right direction towards getting people another kind of economic leg to hold up their kind of stool.

Starting point is 00:26:08 So I'm actually, you know, pretty bullish on the fact that that's happening. And it just brings more attention to crypto as well. So, you know, it's not all bad. Fans, I want to hang on the 60% drawdown that we had recently because I think there's some lessons that we could parse out from there. Defi kind of took it like a champ. We had cascading liquidations left and right. We had arguably the spike all the way down from below $2,200 ether down to $1,700 ether was really just liquidity just drying up as people had to get liquidated. But then buyers did step in.

Starting point is 00:26:43 Stablecoin stayed relatively close to their peg. What lessons can we draw from this 60% drawdown about where Defi is in its level of maturity? Yeah, I would probably give, I would. give, I would give different grades to different parts of defy. I think base layer defy did really well. The, you know, gas prices, you know, increased as the volatility got worse and worse. And that primarily acted as a decelerant to the moves. You know, anyone with, you know, under X or Y amount of ether capital really couldn't do anything. And we run a lot of kind of market making, you know, operations to just basically keep markets in line, both across spot and derivatives exchanges in

Starting point is 00:27:25 defy. And, you know, that allowed us to really kind of have some room to maneuver and stabilize the markets that we were in. So that was, you know, really positive. The things that I didn't really like seeing were, you know, people who had, you know, created a loan on layer one on Maker, Ava, withdrawn it to Polygon, and, you know, we're getting closer to their collateralization ratio, you know, being liquidated. And they couldn't get back over the Polygon Bridge. You know, that was kind of like just something that happened that didn't really. feel right. And so I think the learning there is that, you know, things like the virtual dive bridge and things like, you know, the Polygon Bridge just need to be, you know, just less

Starting point is 00:28:05 idiosyncratic. They need to be more generalized. People need to understand them better. And they can't just go down for three hours in the midst of a collapse. So I think that was, was a negative. You know, at the same time, Binance Futures went down. I think FTCS was down for a little bit as well. So I think those exchanges actually fared worse than Defi. But yeah, I mean, overall, all, you know, a 70%, 60% drawdown in, you know, a period of two days is about as bad as you will get, like, almost by any, you know, measure the amount of liquidations, you know, the total amount of capital that was, you know, liquidated in DFI as well. Like, you really don't get much worse than that. And to see DFI, you know, actually thrive, actually, you know,

Starting point is 00:28:45 during the incident compared to last year where pretty much everyone just got worked, you know, it was definitely a positive to see. The other concern that I have is like, it's, it's a It's great that Defi held up and everything continued to chug on as normal, especially when we have the COVID March crash that happened maybe a year and a couple months beforehand to really compare and contrast, like what Defi was like then versus what Defi was like now. And so that's a great learning lesson. But at some point, institutions or just people at large don't like assets that fall 60% in a day. It doesn't really matter how fast it climbed. falling 60% no one wants to see that. Did that event like spook people and scare people or way? Is this something that we have to like come to terms with as an asset class that, you know,

Starting point is 00:29:33 we are just going to have these just massive periods of volatility where just the numbers next to our assets could be any different number the next day? Like did we spook institutions away? Did this scare ETFs away? Like what are your opinions about just like how the world is going to be able to stomach these massive drawdowns and if it's actually headwinds to this asset class? I mean, I think that institutions who started down this path, you know, call it six months ago with the Elon purchase or even the kind of later sailor purchases, you know, they've now, you know, gone through Investment Committee. They've gone to their board. You know, they've maybe, you know, edited their mandate to allow them to invest in crypto assets. Like, because this is such an esoteric asset class that has, you know, implications across custody, across, you know, is it taxed as property?

Starting point is 00:30:23 or is a tax to stop. Like, there's so many different things. People have had to do like work to get into this asset class. And so that work has just compounded over time. And now those institutions are kind of finally on the finishing line and ready to allocate and things like this don't really dissuade them. If anything, it makes them more bullish. Like, it's hard to buy an asset that's up 5x, you know, 6x like Bitcoin was at the very

Starting point is 00:30:47 top because just the chance it goes down is pretty high. And, you know, these are all just people working at these endowments and pension funds. and institutions, and, like, they don't want that. But buying it, you know, 50, 60% off the highs, like, while you may not have that same euphoria and excitement about the asset class, like, odds are that's probably a better entry point. And, you know, it's, there's something that's strange about human nature where, you know, the more something goes up, it's like the more confident you get and the more euphoric you get, you know, and the more something goes down, it's like the more you hate the asset, you're trying to fight yourself to not sell it. And you just kind of

Starting point is 00:31:21 have to realize that those are things that, you know, you should generally counter trade. And at the highest levels of professional investing, those people are paid and trained to do that. And so this does not dissuade them at all. I think the more damaging thing is, is potentially, you know, these ESG concerns about Bitcoin. But, you know, every Fortune 500 company has gone through this ESG cycle where, you know, there's been a guy or there's too much pollution or they poised the environment somehow. And, you know, they fire the guy, they buy the carbon credits. they remake the program, and generally they spin it as a bullish catalyst.

Starting point is 00:31:54 You know, now with improved corporate governance and, you know, environmental costs has been dropped. And, like, that is something that even as I got off the plane in Miami two days ago, I saw someone offering, you know, carbon neutral bitcoins that I could buy. And so, like, this thing is already happening. People are already spinning up narratives to counteract it. And, you know, it still hasn't really dissuaded anybody. I think there's something to, like, making the case that volatility is a feature of free markets and not above. And free markets, as you said, like when we're talking about doggie coins, I mean, we can't dictate

Starting point is 00:32:25 what people decide to value and what they decide to buy, right? It's just sort of a feature of free markets. But I'm curious to dig more into your ESG, like thoughts, right? So that is definitely a narrative that has taken hold recently. And it's primarily in kind of like Bitcoiner circles, right, obviously. And now I feel like Ethereum can't really say too much because, look at, it's still on proof of work and has been for the last five years. But if the roadmap plays out how the Ethereum community anticipates in nine months or so, that could no longer be

Starting point is 00:33:03 the case, right? Transition fully to proof of stake. What do you think that does to the narrative? Because I've just, when I've looked at mainstream headlines, I just see the, it's still a focus on Bitcoin, proof of work consumption. There's really no recognition. There's really no cognition or knowledge that something like proof of state could be coming, at least for Ethereum, 99.9% reduction in like energy costs. Do you think that narrative will be a big one for institutions, or do you think this is just like short-term noise and over the long run, none of it will really matter? I think I think that'll stratify the space, you know, even more than we've seen historically when, you know, the two biggest assets are in kind of diametrically opposed sides of the spectrum in

Starting point is 00:33:48 terms of proof of work or proof of stake. And it also, and this is, you know, a little bit of a reach, I think Ethereum maps very clearly to, you know, more liberal values, you know, ESG solved by proof of stake, you know, maybe staking becomes some form of UBI where we can all stake our piece of Ethereum and, you know, you're getting some sort of check of money, you know, every month or week or so. You know, it's it's an open development platform that really espouses the values of transparency and auditability and composability that's open to anyone. And, you know, you look at Bitcoin and, you know, the main values that it espouses to me looking at it are strong property rights and, you know, just, you know, basically a lot of historical context via this proof of work mining

Starting point is 00:34:38 scheme that has expended a ton of energy, which kind of, again, maps closer to, you know, the rights out of the spectrum. And so I do see that there will be kind of this ideological spread between these two assets. And, you know, that will only continue over time as, you know, Bitcoin is largely a finished product and Ethereum continues to develop and can, you know, potentially be co-opted by, you know, institutions, by governments, by things like that to use in ways that they kind of may. And so I definitely think to prove a stake merge is going to be, you know, a really big thing for the space. And it'll, you know, just. just being able to solve that ESG catalyst with something that's forward-looking and productive

Starting point is 00:35:16 rather than buying carbon credits is just an entirely different kind of view of the space for a lot of allocators as well. Fans, our last podcast with you, I think really what landed in my head and stuck with me was this line that defy is just this sandbox for possibility, right? You got one defy app, plugs right into another defy app. And not only that, but finally we have a place for developers to play around and tinker with in a world of finance, not just a world. world of software, right? You know, software finance. And that's really the thing that

Starting point is 00:35:46 Defy has really unlocked for the world is it gives developers a chance to play and tinker. And when you give developers like the sandbox, naturally innovation just explodes. That was your insight and prediction back when we did our first podcast back in August of 2020. How have you seen that money Lego system play out over the next nine months? What did the developers do? What did you expect? What was a, surprise to you? And how would you illustrate the, and how would you characterize the nature of defy money Legos in its current state and form? So, you know, what did we do over the past year? I feel like the first thing we did was just a ton of creative destruction, which is really

Starting point is 00:36:31 bullish. You know, you're creating a lot of things. They're all incentivized by tokens. It's, it's kind of like War of the Worlds with these different token communities. And I think we saw a lot of projects, you know, fail, get hacked, you know, have bad outcomes. We also saw a lot of projects kind of get battle tested, you know, grows communities, you know, morph into different things and extend their use cases. We also saw, you know, the rise of DAOs again, you know, Maker kind of pivoting away from its foundation model, which I think is really smart and going more into a pure Dow. And now I think we're at the point where most of the major DFI protocols, you know, there are no bank accounts. There's no gusto website for them to set up their benefits

Starting point is 00:37:06 if you work there. You're getting paid through a multi-sig in stable coins or native tokens, and that's kind of really a different form factor of work, similar to kind of when people invented the joint stock corporation. I think that will be something that persists over time and people continue to iterate on. And, you know, there's a ton of growth in the defy area in terms of just battle testing. The main things that launched that, you know, we're really excited about were derivatives and options.

Starting point is 00:37:35 And I think kind of what we learned in hindsight is that these things need layer two to really work. Like you just literally cannot have a fast enough Oracle to prevent things like front running and back running. You can't build a custom AMM to kind of trade options on without layer two. And so, you know, the things that we thought would really take off on layer one, you know, were kind of just, you know, a little too expensive, the gas was too high, the oracles were too slow. And so I think those were the things that didn't work as much as we would have wanted. But overall, just the growth of the ecosystem has been, you know, absolutely insane. You know, I think AVE has $21 billion of TVL on it.

Starting point is 00:38:12 You know, Uren has seven. Synthetics is trading a ton of volume and issuing a ton of debt. And so, you know, things have been really bullish. I think collectively we're all waiting for layer two and what that is, you know, going to hold. And I think it's just going to be, you know, more than we can expect. One of the big themes of defy is capital efficiency and being able to tap into to the value of your assets. And that is definitely a theme that I have been particularly paying attention to, right? Like Uniswap 3, it advertises capital efficiency, capital efficiency,

Starting point is 00:38:43 balancer, fee 2, capital efficiency. We have liquidity and their new LUSD for zero percent interest with 110 percent collateralization ratio on your ETH, capital efficiency. And naturally, Avey has kind of led the charge with being able to tap into the value of your assets where you deposit your assets and then you can tap into the capital efficiency of your assets. Where where is the logical conclusion of a defy, you know, ecosystem that is really competing at the highest degree to provide its users with capital efficiency? Like what, what is this, is this a new paradigm about like how people engage and interact with their assets? Like, what does this mean over the long term? Yeah, it's, it's, uh, when, when uniswap went in,

Starting point is 00:39:29 in the V3 direction, I think a lot of people were, we're pretty surprised. you know, there is this idea that, you know, there's going to be a curve instead of an order book, and that means that everyone is going to get to participate. And I think, you know, that dream was probably a little bit oversold relative to reality. And, you know, now you have things like sushi that are still kind of on that same curve. But, you know, all the people that can't set up these bots to do V3 are now kind of in the sushi, you know, curve. And that just means that there's less fees, there's more people, there's more mouths to feed. And that's probably not the version of the future that plays out.

Starting point is 00:40:05 And the version of the future that plays out, at least to me, is where there is some sort of either intermediary protocol that is basically doing the LPing for people on things like V3. Or we get to a point where, you know, basically the people who have, you know, some technical ability are the ones that are able to capture those fees. And I strongly think it'll be the first one. Like, there is just a market opportunity and people will come and fill that. But I think the really interesting thing about V3 and just this trend of capital efficiency in the context of a bunch of different layer 2s and a bunch of different exciting ecosystems is that with a couple hundred million dollars of capital and four to five smart people, you can go off and dominate any L2 you want with something that looks like V3.

Starting point is 00:40:50 You don't need to port all of your liquidity there. And so just like this idea that people can be in multiple places at multiple times is really interesting from a product standpoint, because it kind of begs the question as to, you know, if capital efficiency is going to be the new thing that drives space forward, you know, where is uniswock.org routing liquidity through, like, if there's multiple layer twos? You know, are they building more of an aggregator? Like, does the folks become more and not consumer product and less on these liquidity pools? Or, like, how does that work? And so I think there's a lot of unanswered questions for me about, you know, the future of front ends

Starting point is 00:41:22 on the space as it relates to kind of this theme of capital efficiency and the fragmentation of different market makers and pieces of capital across layer two's. But yeah, it's, I think it's going to be a trend that impacts, you know, basically every market. You know, derivatives markets will need to get more efficient. So we'll lending markets. And this idea that, you know, everyone's earning these fees and these AMMs, you know, may come under question at some point or maybe kind of routed through a second order primitive. Vance, I think there's a whole discussion that we want to have in just a couple of minutes about layer two, because that layer two does. feel like a huge unlock for the industry. I mean, you just talked about options being only really

Starting point is 00:42:02 possible in sort of a layer two scenario. And that's been a learning of yours over the last nine months. And so let's talk about layer two in a minute. But before we do, I want to ask your more general thoughts on this. So David and I have often said on bank lists that defy is basically we're speed running the last 1,000 years of financial history, right? Like we're just speed running it, right? Now we're at the point in the 1800s where we have like this store of value and we have like these proto banks, but it's all code. And then we have things like collateralized loans, right? That's cool.

Starting point is 00:42:35 These are some of the money legos that have been built. What I want to ask more generally before we get to the layer two discussion is what's kind of next? What do we need to build next? Okay, we have uniswap. We've got permissionless trading. We've got that function. That's our NASDAQ. That's our New York Stock Exchange.

Starting point is 00:42:52 Cool. we've got collateralized lending, some building blocks there and borrowing. That's cool. We have some other early primitives too. But what do you think defy really needs to build next and what will be next? What other money Lego should we be looking at now? So the first trend that I think is going to happen in the next couple of years is basically a verticalization. You know, taking these liquidity pools that are on chain, taking these, you know, borrow lend or money markets that are on chain, putting them in a front end that is either specific to an industry or a geography. And just running that playbook as an entrepreneur, you don't need to build the entire

Starting point is 00:43:29 financial services stack that you would as a financial services startup. You can leverage a lot of the open source code and liquidity that exists on chain and just build a tailored user experience to whatever industry or geography you're in. Can I ask a question of that? Is that sort of like what fintech has done with like the traditional banking system? only this is like fintech on defy primitives. Exactly. Right.

Starting point is 00:43:51 And, you know, this is this is a playbook that fintech started, you know, deploying in kind of like 2013, 2014, but it's still been pretty slow to roll out just because the legacy rails that are on are so slow and restrictive. But, you know, we are hyper-focused on funding these different kind of vertical ideas because, you know, if you have a white listing service that can, you know, basically wrap a piece of real estate, voted in his collateral on maker, and then start to draw die against that, you know, that's a business. And, you know, the business is some function of the white listing of the wrapping of the real estate, the governance votes that you need to

Starting point is 00:44:25 pass it as collateral and maker, and generally kind of the entire consumer experience of getting die back into your bank account. But that's a financial service that, you know, probably worth a few billion dollars if someone builds into a full company. Taking the defy products, like a high yield savings account, like a borrow-lend functionality, and bringing it to a country like Chile or Argentina or Brazil. Those people have, you know, pretty terrible financial services at this point. They're, you know, inclined towards Bitcoin. They already know crypto. That's another kind of mass market project that we're looking at pretty heavily. Let's camp here for a second, because that is super interesting to me. David and I have talked about this concept of like the

Starting point is 00:45:00 defy mullet, which is like, you know, fintech in the front and defy in the backs or like traditional bank in the front. But I'm curious what you think. Do you think that it will be new startups and crypto natives who start using this defy infrastructure for their quote-unquote fintech? Or do you think some existing fintech players will jump in and start capturing these markets, you know, the PayPal's and the squares of the world? It's going to be new teams. The incumbents have a very, very slow motivation to really kind of innovate or build anything that does not exist on their payment rails.

Starting point is 00:45:32 And so that limits a lot of what they can do from a defy perspective. And so the teams that we're looking at are, you know, a couple of engineers. from MongoDB and Facebook that grew up in Argentina, spent four or five years in the Bay Area, and are now playing around with Ethereum for the first time. And they're moving back to their home country because they're interested in living there, but they want to take a lot of what they've learned and played around with on the Internet back with them. And so, like, you know, those are the prototypical teams that we're looking for. You know, they have kind of some of the Web 2 talent.

Starting point is 00:46:01 They're engineering focused, their product focused, and they have the local context to be able to, you know, build and market a product. And there are, you know, hundreds and hundreds of these stories. both across industry and geography. And you're just going to see this play out over and over and over again. I think the reality is like we're naturally inclined to like look for like, you know, let's find all these new primitives and let's go fund them. And like we're very much in that business.

Starting point is 00:46:24 But like we are really like an inch deep in terms of the actual amount of traction that we've gotten with the services that we have. And just the ability to, you know, doesn't matter if it's Christmas Eve at on mid at midnight. You know, if you have some form of crypto collateral, you can go and get a loan from Avey, from maker, from synthetics. Like it just is a better financial experience. And porting that is just basically instant margin for whatever startup does it. That is awesome.

Starting point is 00:46:48 That verticalization idea. So that sounds like a big theme. And I guess, you know, what that means is there are going to be all these defy fintechs that pop up in these different verticals all like around the world. But it also means maybe a swelling of TVL and usage and capital for existing defy protocols. Is that how you see it? Yeah. And if you look at the architecture of a lot of the major DFI protocols right now,

Starting point is 00:47:15 you know, AVE is, you know, in many ways it's a company. You know, it has, you know, a full staff. It has an office. Like, you know, they have people leading the day to day. They are not focused on building the protocol right now. They're focused on, you know, mainstream adoption. And they've chosen the vertical of institutions. I don't know if you've seen their kind of institutional pools,

Starting point is 00:47:36 but like that's one example of this thesis playing out in real time. And so oftentimes, if there still is that core group of people and there is a company around the protocol, that's going to be the first people to do this thesis. But, you know, it's just such an easy way to build a startup where you don't need to build the financial services rails. And people are going to pick up on this. It's just a matter of time. Vance, explain really quickly Avey's institutional pools for people who aren't familiar. Yeah. So institutional pools are effectively a sidecar pool where all participants in the pool are KYC.

Starting point is 00:48:09 They know each other and they're, you know, basically have been vetted to not be on an O-Fact list, which is the office for an asset control, which kind of stipulates that there's certain countries and people that are not allowed to interact with kind of the traditional banking rails. And so, you know, for people like retail, you know, it doesn't really matter that much having those assurances because, you know, you're trading, you know, some coin and a youth soft pool and, you know, you're pretty sure you're not doing anything nefarious. But for institutions, you know, they need that higher level of insurance just because, you know, they have a higher level of expectation from their board, their fiduciaries, people like that.

Starting point is 00:48:40 So, you know, I very much see AVE leading the way in kind of the institutionalization or at least that vertical with their financial services. But, you know, there are hundreds of those industries that would like access to these financial services, but just have no idea how to do it. And currently their best way of, you know, thinking through it is like, should I buy ethon coin base? But like, in reality, there's just so much more depth, you know, when they actually start using it. Would you call this new version of AVE as, like, KYC AVE or, like, permissioned AVE? Just because of the nature of the clientele that needs to have those assurances.

Starting point is 00:49:14 Is that how you would describe this? I would say it's probably, like, you know, I wouldn't say it's, like, regulated AVE because it's self-regulated. Like, no regulator is forcing them to do this. They're doing this at their own behest. I would say that, you know, this is probably, like, KYC Light Ave. we've been looking a lot into the reg tech space and different approaches to, you know, at least some sort of KYC or some sort of, you know, regulation in the space. Because I think over the long term, it's coming and it's a good thing. And it'll probably be, you know, less painful than we all think.

Starting point is 00:49:48 But my thing with reg tech is that the solution can't be worse than the problem. Like the solution to KYC can't be giving the government our money in a custodial smart contract. Like, that's just not going to work. And so like the self-regulation at the liquidity pool layer, while I understand the backlash from people on Twitter that don't like it, the bottom line is that it's just a far better way of doing this than putting our assets in a smart contract from the government. Yeah, to me it's like less KYC AVE and more like that the pool itself is KYC'd, KYC light, right? The protocol and the code is still completely permissionless, uncensurable Ethereum tech, right? And that's not the part that's being KYC'd. Bankless is proud to be supported by Uniswap.

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Starting point is 00:52:37 So whenever I buy something, I get a little bit of ETH bonus back to me at the same time. You can open up a free account in under three minutes at Gemini.com slash go bankless. And if you trade more than $100 within the first 30 days after sign up, you'll be gifted a free $15 Bitcoin bonus. Check them out at Gemini.com slash go bankless. Okay, so speed running, again, that was a whole segue on verticalization, which is super cool. Great insight, guys. Alpha to bankless listeners, I think, look for these opportunities.

Starting point is 00:53:10 Look maybe for DFI protocols that are speed running these verticalization opportunities. That's maybe some other insight that Vance just dropped. What else besides verticalization? What are some other future trends as we build out this D5 money? stack that you guys are thinking about? Future trends. It's going to sound cringe to a lot of people, but I think enterprise blockchain is going to be back at some point.

Starting point is 00:53:39 And this time it will actually be fundamentally productive at some level. You know, a lot of the investors in our fund are our software service companies that are looking for ways to integrate, you know, blockchain technology. And I think we've gotten past this like goofy. private blockchain, proof of concept, where, like, you know, everyone's holding hands running a node. And, like, you know, like, that's how the service runs. And, like, I think we're now kind of more into the land of, like, you know, like, hey, you know, one of these SaaS companies, like, let's launch a, let's launch a roll up. You know, let's just use it as our native sandbox.

Starting point is 00:54:14 Like, let's have a token. If other companies want to join, you know, we'll kind of incentivize them to just build things in this sandbox. And I think that there's going to, you're going to need a lot of kind of developer evangelization, you know, which is like a traditional Silicon Valley strength. But at the end of the day, you know, there's just a lot of superpowers in crypto that, you know, even if it's, you know, earning two or three percent, you know, yield on your cash every year, like startups have been built on far less than that. And so, like, you will see, like, the slow kind of enterprise blockchain movement picking up again. And I think, you know, the things that make me really bullish on that are talking to people that work at, you know, the big four consultancies that sell these technology solutions as a service to these massive Fortune 500 companies. And they look at Ethereum. They see it as incredibly new. kind of sediment layer. And they also see it as a revenue opportunity because that's just something that they can sell through to their consumers. And I think a lot of the work that people like Paul Brody are doing is really interesting and important because at some level, you know, those for consultancies are the ones that really determine, you know, what is the technology

Starting point is 00:55:12 of the future. So I think those are really bullish as well. So I think that will be a big one eventually as well. Is that specifically enabled because of roll-ups? You added roll-ups in your answer. And I think people who aren't like paying detailed attention to rollups, maybe are missing the power behind them and the ability for anyone to just, you know, quote unquote, spin up your own blockchain. Like, here's your blockchain, except it's also, you know, super fast and secured by Ethereum, you don't have to worry about consensus because Ethereum takes care of that for you. Now everyone can have a roll up, right? Like Coinbase can manage it. It's accounting on a rollup. It could be public. It could be private. Wells Fargo

Starting point is 00:55:50 could be on a rollup. Is the reason why you are now bullish on a, enterprise blockchain stuff is because of specifically roll-ups? So I think the reason why I'm bullish is because roll-ups give kind of like this modular way for people to interact with blockchains. It isn't just like you're on the base layer of Ethereum. It's public. It's super expensive. You know, there's very little room and creative license to maneuver.

Starting point is 00:56:13 I think the roll-up gives them that creative license and it gives them just a little bit more flexibility in terms of, you know, deploying a solution that's form-fitted to their needs. So I think that's kind of the first thing. I think the second thing is, you know, building these developer sandboxes, whether it's, you know, like an in-person accelerator, an online hackathon, you know, whatever, you know, having a native incentivization layer of a token, like in being able to distribute this to people that are also kind of like-minded, maybe in the same enterprise, you know, software cohort, you know, that's something else that's powerful with a roll-up where you can have that token incentivize usage and just testing of things. And so, you know, my good friend John, who's an investor in the fund, he runs a company called Stream, which is a data replication service where, when you're moving your data from one SQL database to another, he will replicate it and put it in the cloud, and you can access it whenever.

Starting point is 00:57:00 That's probably a billion-dollar business they just raised from Goldman Sachs. It's really an incredible company, but it's built on a very specific premise. At some level, these roll-ups will be used for either data replication, just experimentation with kind of internal transfers or cash management, or just kind of general ideas about how to kind of streamline workflows. And so at some point, you know, enterprises will come to blockchain and use it for things that are productive, but it's not going to be in the private blockchain concept that we're kind of used to.

Starting point is 00:57:28 And, you know, that idea is still probably a few years away, but I do think it's coming at some level. Vance, you mentioned Paul Brody, and he's at E&Y, and I just saw some headlines that they just received another $100 million investment in their kind of blockchain crypto business unit heavy into Ethereum. I think a lot of stuff is going unnoticed that might. just become, start to become visible with the advent of cheaper block space on layer two. One thing I do feel like, though, is you mentioned enterprises, maybe marshalling and using tokens. It does feel like we need to have some more regulatory clarity, perhaps, before the legal teams of large enterprises to, like, get comfortable with this. We had Hester Purse in the podcast a couple months ago, and she's very much like, I wish we could.

Starting point is 00:58:20 have sandboxes for Defi, and we were like, Hester, we think that's great. We do too. Can you, can you convince the SEC and Gary Gensler and those in regulatory bodies to go do that? Do you think maybe now it's not so much the scaling technology? It's maybe the regulatory clarity that is the, I guess, like the blocker right now? I think a lack of regulatory clarity is kind of both a feature and a bug. I, I, I guess, I think the perspective of regulators, and this is, you know, me interpreting public comments and, you know, private conversations is basically they don't want to hamper innovation and they don't know what the space is going to become. So they don't want to put any rules in place that will, you know, inherently block a lot of the innovation that's happening in the space. At the same time, they're very concerned with things like consumer protection, which, you know, they're given their mandate is right at the top of the list.

Starting point is 00:59:13 But I think they're really smart people working in these agencies. and so, you know, it's not like they hate our industry and they don't want to give us rules. I think it's more of a forward-looking, you know, we don't really want a kneecap what's happening right now. And so they're punting on a lot of things. This does put enterprises in a weirder, you know, kind of area from a regulatory standpoint. But, you know, what's the difference between custodying something like BTC on your balance sheet or other tokens?

Starting point is 00:59:40 Like, what's the difference between selling a software subscription license versus, you know, having some sort of, you know, token denominated payment mechanism like, any of the crypto-native startups that have today. And I think these questions are less further afield than you might think. And, you know, well, do I see these enterprises like turning their business models inside out in the next few years and adopting tokens en masse? Like, I probably don't see that. But I do see there's going to be this slow edging towards using these blockchains for

Starting point is 01:00:08 things that are fundamentally productive. Like a good example of a use case that I was talking to someone at Deloitte about is just a volume rebate, where, you know, based on the amount of orders that are coming through, you know, a smart contract can automatically tell, adjust the pricing, and then continue on with that customer at a different rate, you know, based on their volume, you know, into the future. And those are the things that, you know, as long as there's a couple counterparties that are interacting in public on a blockchain that have, you know, that logic programmed into that interaction, perfect for a blockchain. And I think, you know, part of that is going to be, you know,

Starting point is 01:00:41 enticing the other side onto something like a roll-up with some sort of token incentive. but a lot of these companies, you know, are, you know, they're not that far away from doing things like that. I think, you know, like things happen quicker than you expect. Like the institutions were coming for so long and it didn't seem like they were in crypto and then all of a sudden one day they showed up. You know, Ethereum scaled like, you know, almost overnight, similar to Polygon. These things are nonlinear and they come in lumps. So I think there's a lot of the, there's a lot of people in the software as a service industry looking at blockchain as a revenue stream. or working towards a future where they can build application on the top of it.

Starting point is 01:01:17 And it's just a matter of kind of incentivizing things. And that's why I think things like roll-ups are going to be powerful in providing those cohorts in. Let's turn the L2 conversation towards, I think, what the average listener might be more familiar and excited with, which is how L-2s are going to impact them. And I've been articulating this thesis of the L2 D-Fi Summer Round 2 that could, in theory, be right around the corner. And so, Vance, I want to get your gut take on this possible version of the future that

Starting point is 01:01:44 may be coming. And, you know, we just had Arbitrum launch last Friday. Optimism seems to be around the corner. Polygon is already doing absolutely fantastically. And all this new real estate is becoming made available, right? Like Ethereum as the central hub is getting all these different spokes unlocking. And developers are rushing out to like all this new real estate to build all these new apps because they know that once they build all these new apps, they're going to attract, you know, all the tourists, right? Everyone's going to come and move and spend. money at their, you know, DeFi app attraction. And so all of a sudden there's this massive amounts of new real estate that's really, really valuable for DeFi apps to claim. And so

Starting point is 01:02:25 defy apps want to, you know, Sushi Swap wants to beat Uniswap to adoption on Arbitrom. And Uniswap wants to beat Sushi Swap as adoption on optimism. And in my, in my mind, how are we going to get this done? Well, to me, the answer is liquidity mining, just because, like, what do we know and love in this space and we know that it works and it works because you know there's this massive incentive and and we've already done this before we already had you know the og version of defy summer which was all done on the ethereum main chain but now it's not just incentivizing user participation and just usage of these apps on the main chain it's getting people out into the l2s out into arbitram out into optimism and not only do these defy apps need to incentivize people

Starting point is 01:03:08 but the actual L2s also need to incentivize people to use their L2. And so we'll have an possible version of the future. We will have all these DFI apps incentivizing their usage via traditional liquidity mining like we know and love. But they will also be boosted by the native tokens of Arbitrum, which is complete speculation if they have a token. I have no idea. Same thing with optimism. No idea if they're having a token. But it would fall in line with the nature of this industry if people like tokens and people like issuing tokens.

Starting point is 01:03:37 And so not only are the liquidity mining incentive is going to be juiced by, you know, sushi releasing out sushi rewards and uniswap releasing uniswap rewards, but optimism, arbitrum, and we're already seeing this with Polygon, issuing tokens for their own native asset in order to distribute those hands in the hands of the users. So we have this dual liquidity mining possibility ahead of us where both the apps and the L2s are incentivizing usage of the L2s, and we can finally have DFI Summer Round 2 later, or two edition, except this time it's actually even more awesome because there won't be any fees, or at least it will be significantly less fees because it's on L2s.

Starting point is 01:04:16 That's my perceived theory of what could happen over the next three to six to nine months. How does that land with you? I think you're probably right. If you look at something like Maddoch, which has seven, I think seven or eight billion in TVL, it's basically the size of Binance Smart Chain. You know, a lot of that is Maddoch itself. Maddox is now the 11th most valuable cryptocurrency in the world, which is, just absolutely wild to me.

Starting point is 01:04:39 You know, not because I don't think it should be. It just has been a meteoric rise. I think you'll see, you know, three or four of these same style of tokens, you know, by probably mid to late summer. And you'll see a lot of kind of the same things where, you know, a lot of the TBL in Maddoch is reflexive, where it's either incentivized by Madic tokens or trading Maddoch for Rap Bitcoin or, you know, other tokens that are on that chain. You'll also see a ton of kind of these, you know, roll-up native,

Starting point is 01:05:07 projects, you know, come into play where things like quick swap is like the, the decks of polygon, you know, something like a slingshot is the aggregator of polygon. You'll probably see kind of like these different tribes kind of form and a line around these different layer two ecosystems. But I think, you know, generally no, no problems with that thesis. I think that will generally play out. There will be a ton of tokens. It'll be very euphoric. People will be on these roll-ups. It'll be awesome. But I think the main thing that's going to happen is the people who've been waiting to try stuff that's too expensive on the base layer. we'll now go for it on layer two.

Starting point is 01:05:39 And there is just so much pressure of those projects. You know, things like fractal, things like future swap, that, you know, base layers are just too slow and too expensive. You know, hundreds of dollars per trade, you know, $40,000 to $50,000 to deploy contracts. Like, that just doesn't work. And so, you know, getting to this lower cost environment will just be really rich soil for experimentation. And that's probably the thing that I'm most excited about. I think the con of a lot of that, and what I've heard frequently, is like, you know, these things aren't interoperable and, you know, how are we going to get liquidity from one chain to the other?

Starting point is 01:06:13 I think there's reasonable solutions like Hop Network or Connects that will be able to route liquidity from roll-up to roll-up or back to the base layer. Market makers will serve some sort of bridge kind of functionality from the base layer to roll-ups as well. But I also think that it's, you know, somewhat bullish for these things not to be able to interact. Like, you know, diversity is the device of life. like having these ecosystems that are forced to grow their own identities and their own first principles is something that, you know, is really bullish, at least for me. Like, you know, if you kind of zoom out and you look at, you know, Bitcoin and Ethereum and all the early cryptos, you know, you could kind of make the same argument like, oh, these things are too

Starting point is 01:06:50 heterogeneous. There should just be one crypto that does it all. But like really kind of that variety built that maximalism, which built, you know, interesting cultures over time. And I think we're going to see the same thing play out with these layer twos. And I've, no idea who will win in the short term. I think there's definitely, you know, talking to developers, there's a real difference between asking users to pay dollars for a transaction versus a fraction of a penny, which is, you know, kind of what Polygon is. But, you know, I think people will generally realize the security tradeups of Polygon versus Rollup are very real over time. And my guess as to who wins, you know, the roll-up wars in, you know, two or three years is basically the person

Starting point is 01:07:28 who captures and utilizes MEP to the best extent for their own ecosystem. Right now, MEP is something that is basically a societal cost of doing business on the base chain, people taking one or two or three percent of your transaction, back running, front running, sandwich bots. And right now the problem with MEV is basically who gets it. And who gets it are the miners. And those are kind of a fundamentally misaligned participant set. because, you know, I don't know how much, you know, people running heavy electricity miners

Starting point is 01:08:02 have to do with what I'm doing on a daily basis. Like, I feel like if we had a conversation, we probably wouldn't be speaking the same language. But in a roll-up, what happens is that MEV is basically the business model of that roll-up. And you capture it and you basically either distribute it back to everyone who's using the roll-up or you can, you know, allocate it to a token. And that token now has a lot of value because it's a very good. accruing those cash flows. And so, you know, there is some business model dependency that comes from MEP, but I think the chain that wins long term will be the one that productionalizes and

Starting point is 01:08:35 utilizes that the most to bootstrap their ecosystem. And I think like drilling down into like what cultural alignment with Ethereum means, it probably means like some sort of high level alignment with, you know, who gets MEV and why. And that will be probably the determining factor of who wins this, you know, this roll up war. That's so fascinating on MV. We just had arbitrariness Shremont and we had a discussion about at M.E.V. And they talked about their plan to try to create some sort of like fair protocol distribution mechanism for the MEP. Optimism has a different approach where they're maybe auctioning it. Do you have any insights into like what the best design would be? Are you just like, let's try all the experiments and we'll see. But certainly the winning one will

Starting point is 01:09:21 have some way to marshal MEV into something valuable and productive. Like any other I guess deep takes on MEV and the experiments that you're seeing that are about to go live in the real world. We just need to experiment with it. Like right now it's just going to the wrong participant set. I think that's the biggest problem with MEV. Like not only are you losing money, it's like it's going to someone who you don't really like that much. But like as long as we can capture that and make it part of a roll-up, I think all of these things have a reasonably strong chance at being successful over the long term.

Starting point is 01:09:50 But I do like the optimism role where they're auctioning off the sequencer or the role of the sequencer. So it's kind of like a proof of stake blockchain where, you know, say you have, you know, X amount of the optimism or X percent of the optimism token, you have an X percent of winning that sequence role at any given time and that sequence role has, you know, Y amount of MEP in it for kind of the, you know, the Z amount of time that you have the role. And so, like, that is interesting to me as just like a primitive to kind of bootstrap and use this MEV. I still kind of really biased towards the fact that the MEV should go to the native token of the roll-up, because if that native token is accruing cash flows and everyone is

Starting point is 01:10:31 kind of earning those tokens in some way, shape, or form from being on the roll-up, it's not really like you're losing any money from any potential MEV exploit. It's more of kind of like you're redistributing this wealth towards, you know, a more common and equitable set of participants that's on the roll-up, and you just assume that that has, you know, positive externalities down the road. And so that's kind of how I would like to see it productionalize. But, you know, those are pretty loose thoughts. fascinating takes and guys if you're not familiar with the term MEV go back and listen to the bankless podcast we just did a couple weeks ago with Phil diane and company we had a whole m evi v panel

Starting point is 01:11:05 m evi stands for maximum extractable value of course and also listen to the arbitram episode we just did vans you talked about like layer two's opening up new things and there's certainly like we we have a somebody writes for for bank lists from time to time uh you kid in college. He's like, I couldn't afford transactions on Ethereum. So all of these D5 protocols you guys were talking about on bank lists, like I just couldn't use them because it costs like 20, 30 bucks. And like I'm playing with $100 here, right? Like I'm in college. But he's like, Polygon just open this thing wide open for me. And now I actually get to test an experiment. And so like what you're saying about a new set of defy users being able to be onboarded, who are less kind of like

Starting point is 01:11:51 OG Defi whales, Ethereum whales. and are like a newer set of people totally resonates with what we're seeing. I'm curious, though, with what some of the apps. So like the mental model here is, it's like if you've ever played a game like civilization, something like that, right? Like there's a tech tree. And like the civilization unlocks, you know, writing and then math. And that leads to like physics.

Starting point is 01:12:16 And eventually you get like the nuclear bomb. And the whole goal of the civilization is to like go through this tech tree and unlock these various things. We've said before on bank lists that crypto and defy is almost like a tech tree. Now we have this big unlock, which is layer two. So we've just unlocked something new. And that's going to lead to all of these other technologies and applications. What are some of those do you think? You mentioned options, maybe being one, something we couldn't do on Ethereum main chain,

Starting point is 01:12:43 but in layer two we can. Is that one? What are the others? I think, you know, options, derivatives, perpetuals, those are all the kind of obvious candidates that will launch and pretty much immediately do well once these layer twos are cheap and fast enough to use. You know, there's no kind of existential question as to like, you know, are those going to be valuable businesses? It's just kind of a question of when. The things that, you know, I'm, you know, kind of, that are further feel that I'm, you know, even more excited about are things like games where, like,

Starting point is 01:13:13 in the gaming industry, you have this kind of moment where you know have open source developer platforms like Unity and Unreal, you have pressure on the free-to-play business model, which is, you know, 80 or 90% of the revenue in that industry, kind of coming under question as it just gets more competitive. And then you have blockchain developers or gaming developers looking over at blockchain developers and they see them selling 20, 30, 40 million dollars virtual land. And it's just kind of a moment where they look over the fence and like, like, I wish I could get some of that. How do you do that? Yeah. And, you know, it's a new business model for games. You know, major studios really have no incentive structure to go in, experiment with something like this.

Starting point is 01:13:52 And so you have kind of like this, all these indie studios that are in the gaming world that are now looking for this alternative or new form of just, you know, business. And so those are the people that we've spent a lot of time talking to, both in terms of like, here's what a blockchain is, here's how you would do this. And also developing a playbook as to like, here's how you can build a game that has all these mechanics and is more of an economy than just kind of a free to play game. And so I think a lot of those people are going to come over, and they're going to come over quick, because, you know, people have been funding these startups for the past two years, and they're finally ready to release things. And so I'm really bullish on games as kind of a use case that will merge on layer two, really in the context of either immutable X or polygon itself. Anything else in that is a little bit too expensive.

Starting point is 01:14:38 So that's definitely another area that we're excited about. Fence, there are still some L2 skeptics or L2 holdouts out there. And I was wanting to get your take on what do you think is the most viable bear case or pessimistic case for L2s? And is there any like FUD out there that you want? I hate the word FUD. Not everyone likes the word FUD, but are there any issues that you'd like to clear up that you have in your head? Yeah, I think the main one that I've heard is basically like, you know, if you have a 50 million monthly active, or 50 million registered user application, like you need 100,000 transactions per second to port that over to a blockchain.

Starting point is 01:15:17 You know, that's just not how these companies think. And I don't think we need to get to that level of transaction throughput to make a lot of these real-life use cases, you know, real on a blockchain. So, you know, an example of that is Visa. You know, their max throughput on their network is 22,000 transactions per second. They use about 1,400, you know, at their peak. And so, like, that's a worldwide payment network, you know, that people are transacting on. It's not that far afield from where arbitram is or optimism is, which is kind of in the realm of three to five thousand transactions per second at the peak.

Starting point is 01:15:49 And it's also not really in the scope of how people develop products because, you know, like what is putting 50 million users on chain actually mean? Like if it's a social media app is like every time you scroll on the app like something you're putting on chain, like how does that work? And the answer is basically no. You know, only the highest value use cases will really interact with these blockchains. just like Netflix wouldn't use their payment processor to store their content. You know, people aren't going to use, you know, a blockchain to store things that, you know, either belong in file storage or just don't need to be on chain. And so I think, you know, the hybrid world of using these blockchains is really what we're trying

Starting point is 01:16:25 to get to with these layer twos. We're not trying to build a thing that has billions of people transacting, you know, billions of times per second. That's just not really in the context of reality of blockchain applications. I think that's kind of the main piece of fud that I've heard that just seems. like totally out of line with like if you've ever worked at a technology company, that's just not how you build a product. The other part that I think is a risk is, you know, one of these things going down. I think the cool thing about roll-ups is that you kind of have this escape

Starting point is 01:16:52 patch back to your main net if things really go sideways. Things like Polygon get me a little bit nervous, especially when I see things like bad blocks or like an almost fork that happened, I think, last week. And still in confidence in people, you know, is a force multiplier. And if one of these things were to go down, that would probably a very negative setback for the space that would, you know, be sad in terms of, you know, money and users loss, but it would also highlight kind of the longer term ramifications of why you would do something like roll up versus a side chain. So, you know, it's very hard to see a bare case for layer twos right now. You know, I think, you know, the other, the other one I've heard is like, you know, all of these

Starting point is 01:17:34 little zones won't work. But I've kind of gone over that. And I think it's just a good thing that these things will be inherently separated at some level, although loosely interoperable. And I think we'll also realize that, you know, there's diminishing marginal returns to more and more composability. Like not everything needs to be on the same chain at the same time, you know, using the same applications. Again, that's just not how these applications are built. And, you know, most of the value of composability is historical composability.

Starting point is 01:17:58 It's, you know, things that have built before you, using it die, using the set of smart contracts. It's not kind of like every second, every block interacting with them. So I think that's something we'll also kind of realize coming down the stretch. So if this thesis plays out and like the advancement of layer two continues to play out, what does this mean for other layer ones? I read an article recently by Kyle Simani. It was called Social Scalability versus Technological Scalability.

Starting point is 01:18:26 Talked a little bit about the lack of composability with Ethereum Layer 2 strategy, which I think you just talked about and addressed. I think the other thing it talked about was basically transaction throughput, like being transaction throughput layer one, like maximalist. What's your take on all of the other layer ones if your thesis is bullish layer to Ethereum? What does this mean for them? Yeah, I think I was probably more worried about Solana a couple months ago than I am today. And I think part of that is just kind of like coming to the event horizon where you realize that, you know, this chain, you know, won't be dying or going anywhere anytime soon. And,

Starting point is 01:19:07 and it's just kind of going to look a lot like the people who are involved in it, you know, in the next two or three years. And what do I mean by that? I think it's going to be a lot of people like jump trading and a lot of people that trade on FTX, that are doing things like real-time trading on Slana. And I think that'll be a perfectly fine use case in market for them. But I think, you know, Ethereum will also shift. Like, Ethereum won't always be about retail defy, you know, that will move to layer two, it'll move to side chains, it'll move to roll-ups. The base layer of Ethereum will be used by things like CBDCs, you know, government projects, enterprises that really need something on chain that's really secure, you know, high shifts of

Starting point is 01:19:44 stores of value. That'll also be what it's used for. And so, you know, like, as Solana tries to catch Ethereum, Ethereum will be changing. And it'll look a lot different in the next, you know, a couple years. And Salon will probably be where Ethereum is today in two years, focusing on these, like, really low common denominator retail use cases of speculative defy. I think, and I, you know, I really hope that Ethereum develops into something that's bigger than that. That's certainly on the roadmap with most of the large kind of enterprises that are building on it. But what does it mean for layer two's interoperate with other layer ones? You know, there probably will be, you know, Solana's coming out with wormhole. They're coming out with, you know, EVM compatibility for smart

Starting point is 01:20:24 contracts written in C++. And so I think there will be a, you know, a good amount of kind of cross-pollination. I do think composability is largely off the table with that ecosystem, but that's probably a benefit for Ethereum, to be honest. You know, kind of constricting that activity, focusing on Ethereum, I think that's what we kind of want in the near term. So Chris Berninski asked this question on Twitter recently. I'm going to ask it to you, Vance,

Starting point is 01:20:48 which is like kind of related to what we're talking about. It's kind of a question of multi, is there going to be a multi-chain defy, or is there going to be more an eth with layer two defy? right? And he asked this, will ETH Defi, in quotes, get replaced by multi-chain D-Fi competitors? Or will EFDIPi become multi-chain D-Fi as Ethereum becomes the most interconnected network, almost like a settlement network idea? What's your take on how this all evolves? I think that's probably right.

Starting point is 01:21:18 Like I feel like it'll be like multi-chain ETH first. It'll be Polygon, Arbitrame Optimisms. Like those ecosystems are vibrant enough where something like Polygon can be the size of BSC. And so, like, I really do think the data is pointing towards a multi-chain Ethereum future, whether it be uses a settlement network or, you know, for other layer ones or for other layer twos. So I do think that is probably the most likely case, especially given where we are with throughput on Ethereum right now.

Starting point is 01:21:46 And I think that, you know, I would say, you know, guessing with an order of magnitude, we'll get 100x increase in throughput on the base layer at some point in the next year or two. And that'll probably be good enough with charge. with roll-ups to get to, you know, the 50 to 100,000 transactions per second that, you know, like we need to kind of compete with something like Solana. So multi-chain will be real, but, you know, the advantages of this high transaction throughput, those have kind of diminishing marginal returns. And I think Ethereum gets there faster than people expect. What would all this mean for ETH as an asset or the Ethereum network? Some people ask the

Starting point is 01:22:27 question of if Ethereum layer two is successful, then a block space demand will just migrate off of Ethereum and go directly to layer two. And then layer twos might increase in a competition with Ethereum layer one. They're just not sure how that pans out. What's your take on how that all pans out for ETH as an asset for Ethereum? Yeah, I think, you know, we want a smaller share of a bigger pie. Like, I think that's where Ethereum goes, you know, philosophically over time. extracting maximum amount of fees on the base layer is just not a sustainable business model. And so I think we want this proliferation of different security tradeoffs and different layer twos of different side chains to push the business forward, knowing that ETH is used as the

Starting point is 01:23:11 transaction medium of exchange or it's used as some sort of economic substrate for the entire ecosystem. And so, you know, I think that's, you know, fundamentally bullish and where we're headed. Yeah, and, you know, I think the most scary part of this will be, you know, kind of, things go to layer two. People are wondering if Heath has enough fees. Like, there's kind of like that lag in terms of like demand for block space. And then maybe the fees on the base layer dip. But over time, you know, just the demand for block space is super high anecdotally. Like seeing things like Big Cloud where, you know, the person who built it literally had to build their own blockchain do it, that just tells me that there's a ton of these people that are waiting to

Starting point is 01:23:55 try these things that are just not able to do them right now. And so I'm very, very confident in the demand for block space. And just Ethereum being able to capture a smaller share of that over time, but these markets will grow, you know, so, so quickly. If you look at, you know, Goldman's report on software as a service cloud sales this year, there were, you know, $80 billion dollars of cloud services sold worldwide this year. You know, Ethereum has $8 or $9 billion of transaction fees forecasted for this year. And so it's like these things are growing extremely quickly. And I wouldn't be as concerned with the margins, given that we're already so sizable. It's just about the tan exploding, which means that we have to really fully embrace these layer

Starting point is 01:24:34 twos in all ways, shapes and forms. We can't be selective about, you know, what scaling solutions we like or don't like. We just have to try things. Vance, on a recent podcast you were on with Frank from the block, you said this line, that you think that being Ethereum first is in short supplies these days. What did you mean by that? Yeah, I mean, we, you know, we're very public when we started our fund. We didn't invest in Ethereum killers and we didn't invest in Bitcoin. And to a lot of people that seemed like we were tying one hand behind our back as we, you know,

Starting point is 01:25:04 tried to jump a motorcycle over like 12 school buses that were on fire. But like, you know, basically what that meant to us is basically putting a flag on the ground and saying like, these are the values that we're interested in. It's about open, permissionless innovation. It's about a culture of mentorship and bringing people into the space. And that was kind of what we identified with first and foremost, because, you know, that was really what got Michael and I into the space. And, you know, putting those values first was harder when Ethereum was down, when, you know, competitors were hotter when other people were investing in base layers, which were pumping. But, you know, it really has given us some credence with the Ethereum developers who like what we're doing.

Starting point is 01:25:41 And, you know, just being able to play those long-term games is, I think, a home-mer. and what we do at framework. And what that has meant is just being Ethereum first and embracing those values. And so, you know, it's paid off for us pretty well. And yeah, I mean, we have no plans to embrace kind of any other chains in the future. We're not maximalist by any stance, but I do think, you know, people will say this is a biased view, but, you know, bias becomes conviction in many different ways. And I think this is just our path to getting there.

Starting point is 01:26:11 Fance, I want to get your take on the ultrasound money meme. Is it a meme for the insular Ethereum community for the defy power users or is it a meme for the world? I think right now it's probably a meme for the Heath guys. And, you know, like ultrasound money, eth, like, do I think that is the best framing of the narrative? I think it's a pretty good one. But I think the probably the better one or maybe a different one is it's just like, you know, Ethereum is Amazon Web Services for the next web. Like, people want that clean technology comp.

Starting point is 01:26:46 And I don't think they're latching on. Like, the thing that people don't identify with really in crypto is like this idea of, like, private currencies. Like, that's just something that people haven't really interfaced with before. You know, putting this is something that's technology first and framing it in that kind of lens for allocators in retail. I think is, you know, the direction that I tend to go naturally. But, you know, once you use the financial services and you understand that, like, oh, I can stake this. I can also borrow against it. Like, this is something that it can be a medium of exchange.

Starting point is 01:27:14 It's deflationary. Like, that is when that meme kind of like really the rubber meets the road for me. So I think you want a little bit of the hook and then you want a little bit of like, you know, go down the rabbit hole meme. And right now the ether's money meme is a little bit of the rabbit hole for me. Where would you say institutions are at with this rabbit hole with regards to ETH? There's been a ton of excitement over the last like, you know, four or six weeks about institutional allocation into ether the asset.

Starting point is 01:27:38 Are we, where are we in that phase of cycle? Are we still at the beginning of overall institutional allocation? or maybe towards the mid, where are institutions in the Ethereum rabbit hole, would you say? I would say we're at the very beginning. You know, the ETH-BTC ratio change felt like, you know, probably myself and a couple other people being loud about this thesis. You know, you guys included about why Ethereum is relatively more interesting and all the things that are happening and all the cattle that are going on.

Starting point is 01:28:05 I think that initial, you know, reprice of that ratio was basically all funds in the space coming to that same conclusion. But, you know, things like the ETH trust in Canada, things like, you know, institutions really starting to allocate off their balance sheet. Those are just starting to happen. And it's a lot easier of a conversation than telling them about Bitcoin. Telling them about Bitcoin, you have to kind of set the pretense. We're going into hyperinflation.

Starting point is 01:28:28 The U.S. dollar is failing. Like, you need to, like, it's kind of like this, like, ever-increasing, crazy set of assumptions that you need to get people to buy into. Ethereum is much more of a relaxed conversation, talking about technology, talking about the future, talking about reasons to be optimistic. you don't need to get to that same headspace that you do to pitch Bitcoin, which makes the institutional conversations a lot easier. When you have that and you can couple it with some sort of valuation methodology that is not

Starting point is 01:28:54 based on stock to flow, that is not based on the size of a comparable asset, it's just really easy. It does make our job a lot, lot easier. You don't even have to have the, like, what really is money anyway conversation that makes you look at the weird of the party. we don't want to have. It's just like two lives. They're not ready for the like the pill, like taking all of that at once. And this is also what Matt Hogan from Bitwise says. He's been on and they're doing more with defy tokens. Do you think this also carries over with defy tokens? I mean, his commentary is basically this. Look, institutional investors, capital allocators in the space,

Starting point is 01:29:34 they've seen massive transformation through software. They've seen software eating the world because They saw it eat media, they saw it eat commerce. They're seeing it eat music every single industry, right? And, okay, now it's coming for banks. Like, okay, we understand defy in a nutshell. And what are defy tokens? Well, these are capital assets. What are stocks?

Starting point is 01:29:54 Oh, similar to capital assets. Oh, we can actually value these things. We don't have to have it like this weird, what is money conversation about valuation. Are you seeing the same kind of things play out with defy tokens? It's like, this is actually an easier discussion. with institutional investors once they wrap their head around the narrative, then having the like, what is sound money conversation? The defy, the tokens themselves are still really esoteric to allocators,

Starting point is 01:30:20 but like we're starting to build the kind of, you know, the myth-making process of like, let's talk about traditional fintech, let's comp them to defy startups. Like, let's look at the actual financials. Like once they see those things, it becomes a lot easier. I think the things that they really have question marks about are like, you know, what is the organizational slash governance? construct that's happening on this. Like, what is a Dow? I've never heard of this before. Like,

Starting point is 01:30:43 generally the revenue, the expenses, all that stuff makes sense. But like, the organizational concepts are a little bit esoteric. And so educating them on those is a little bit more difficult. But, you know, the fundamentals, once people realize the fundamentals of Heath, which I still think is not really happened. You haven't really seen, like, you know, Ryan Alice put one together. Ryan Berkman's put one together. But like a good discounted cash flow the models out of Ethereum while the fees are actually accruing. like post-1559, I think that will be the first time that people realize the fundamentals of Ethereum. And then that will just lead them to realize the fundamentals of other things.

Starting point is 01:31:17 And so it'll be a process, but, you know, I think by the fall, people will be in a, in a headspace where, you know, they can actually buy and allocate towards these tokens off an institutional balance sheet. I think the big question that people will probably still have is, like, how persistent is this revenue? And this kind of comes back to the idea of a super cycle, like, you know, is maker only printing cash when we're in a super cycle. But, you know, if this whole like super cycle meme is kind of like predicated on like these four-year Bitcoin boom and bus cycles, if ETH flips, you know, Bitcoin, like that materially de-risks the super cycle meme because like if we're just like building things and winning and users

Starting point is 01:31:57 are onboarding, like we don't need to have the super cycle meme. It just, you know, we can just have like, you know, there was no super cycle in mobile technology. There was no super cycle in social media. It's like we can just kind of redefine this asset class, and that flippinging would de-risk that question of, you know, are these persistent revenues, you know, quite significantly. This is a thing, Evans, I'm still stunned that investors still haven't fully like understood defy tokens. And so Matt, once again, he wrote this in our newsletter recently. Imagine for a moment that Uniswap was not a decentralized crypto product protocol, but let's just say it was a well-funded

Starting point is 01:32:33 Silicon Valley startup. Investors would literally be falling over themselves to sing its praises. Like, look at this business. It was nothing two years ago. Now it's generating 250 million in revenues per month. That's like an incredible story. And, I mean, we just saw last week, Hayden Adams making the Wall Street Journal for the first time. But like, I can't believe this story is still underground. Why if I? It's price to earnings ratio for May, 12. Like, with this kind of growth, it's just insane. So you still think there's a ways to go. and it's mostly because investors don't understand still what defy tokens are, and they can't grok the organizational structures of these things. Is that sort of why? Yeah, and I think we're at the very

Starting point is 01:33:17 top of the informational total poll, and like we realized all these things, we can tell the difference between Dogecoin and Maker and Bitcoin. Like, they kind of lump all this stuff into one, and they assume that, you know, it's only because Bitcoin is up, is that everything has interest. And that is true to some extent. I think, you know, if we see a flippeting, if we see some other asset carry the day with a more productive, you know, narrative, like, we can just assume that these cash flows will go on forever because this is just new fintech. Like, there is no super cycle. And so as much as I am a believer in the super cycle, I think, like, almost the abandonment of that meme, like, after we have some sort of flippening will be really healthy for this

Starting point is 01:33:55 space because we're not relying on, like, the happening to generate these cash flows. Like, these aren't tied to some weird esoteric, you know, Bitcoin, you know, narrative. Like, if these are just endogenous, it becomes a lot easier to tell that story. Fance, to me, the story of 2020 was all about on-chain DAOs with Yearn, YerN, YerN Dow, sushi, Dow, all these organizations that have smart contracts baked into the Ethereum protocol that is generating fees and all of a sudden there's a group of people focusing around building out that structure on-chain DAOs. Lately, we've seen a bunch of off-chain Dow's come about. Meta-factory comes to mind, Gitcoin Dow, bankless Dow. All of a sudden, we have these things that are DAOs because they have a token, but there's nothing on chain about them.

Starting point is 01:34:41 Where do you see this trend going over the next, you know, one year and then also one decade? And you just mean kind of DAWS generally? Yeah, Dow's generally that aren't necessarily protocols, but are just more digital organizations. Yeah, I think, you know, so we made an investment in a company called satellite, which basically is a non-custodial Discord. You know, none of your information is stored on Discord servers. It's all managed on IPFS and textile. It runs on Ethereum and Solana.

Starting point is 01:35:09 It just kind of is like a better version of Discord in a lot of ways. And one of their first primitives is going to be just like the ability to tokenize and Dow your community very effectively. And I just think these things are just like a new organizational construct, just like the joint stock company enable a lot of innovation. Like you're going to see Dow's just proliferate and be some sort of function of, you know, like either a NOSIS multi-s or like a general Dow framework. and those are just going to kind of explode the design space for how you interact with communities,

Starting point is 01:35:39 how you manage a certain set of initiatives, how you incentivize people. And I think it's just going to be inherently bullish for just human coordination. The more you can kind of get people in a room, get them in a good mood, get them incentivized, like good things tend to happen. I think that's kind of been a lot of the headline, through line for a lot of the things in crypto. And, you know, I think that'll just continue to proliferate, whether it's off-chain or on-chain. I don't really have a perspective on which one is best. It seems like off-chain comes with a lot of risks in terms of just, you know,

Starting point is 01:36:08 how do you set it up legally? How do you kind of manage things? But, you know, very bullish on both versions of the future in terms of Dows. Van, so far we've seen crypto-native Dows really take off. Do you think there will be other non-crypto-native communities that start to come on board or non-traditionally crypto-native? I'm thinking what you just said of one of the next bull cases for Layer 2 is really the gaming community. You think we'll have like gaming guilds form DOWs or where do you think the

Starting point is 01:36:36 next generation of DOWs might come from outside of crypto? I mean, you know, the three main areas are defy, their games and then they're kind of these like social constructs. In social constructs or kind of like things like BitCloud or just kind of further afield Web3 ideas. I generally do think that, you know, in 10 years we'll probably see north of 10% of world GDP come from Dows. I do think it's that big of a transformational shift. And I think a lot of the products that were built, you know, over the past two or three years were just ahead of their time. Like things like Aragon, like, you know, if they would have built that with a little bit different branding

Starting point is 01:37:13 and a little bit more streamlined and a little bit more enterprise use case, like I think they really could have pulled that off and built a big business. And I think there will be second comings of those that are more enterprise oriented and probably a bit more streamlined with the tooling that we have today. But, you know, these things are going to get adopted in. mass just because it is, you know, you can layer in identity permissions, you know, all the things that you would traditionally expect from an enterprise and just have a much more streamlined and effective on chain.

Starting point is 01:37:39 Vance in our first podcast, we talked about a bunch of these defy native founders, Donnie, Kane, and we were comparing and contrasting what does it mean to be a startup founder of a traditional startup, you know, tech startup, C-Corps startup versus what it's like to be a defy founder. And you said that when you are talking to these founders who have visions of issuing a token and then handing over governance to the community, you say that you ask them, are you really about that life? And I thought that was a great line. But I also want to expand that same sort of vibe to a broader set of people, rather than just defy founders, maybe just defy users. How would you illustrate or classify what it means to be about that life just as a defy user these days? What does it

Starting point is 01:38:25 mean to be about the defy life? Being your own bank is terrifying, you know, straight up. Like, I don't think we need to sugarcoat it for anybody that's on a crypto, but, you know, the access to financial services that you get is, is one to two orders of magnitude better than what you would receive in a traditional banking environment. And so for me, it's just, it's about accepting those straightoffs and realizing that you can get to this, you know, alternative financial services stack where, you know, you have NFTs, if you want something visual.

Starting point is 01:38:54 You have defi as your financial services rails. You can buy Bitcoin if you're not that into the U.S. dollar. And together, this kind of like comprises this very complete, very interesting, you know, alternative financial services stack, but only if you're willing to go there. And, you know, the risk is you send your money the wrong address. The risk is your computer gets hacked. The risk is, you know, your mom gets on your computer, hits a few keys and deletes, you know, your Ethereum or something. Like, there are non-zero risk to using defy that don't exist in traditional finance. And so for me, it's just kind of like about, you know, being about that life in the retail

Starting point is 01:39:31 defy context is like mostly about your path of getting there. Like you usually heard about it from someone that you know or trust or, you know, there was some asset that got you hooked and you kind of, you know, went into the breach to go explore it. And, you know, you were uplaid on your laptop trying to figure it out or troubleshoot issues with metamask. And that's really kind of what that means to me, you know, alongside accepting that, yeah, it's a lot scarier and it'll get easier, but like, you know, you're kind of on the other side of,

Starting point is 01:39:57 of this divide and the grass is just much greener over here. Why are you about that life, Vance? You know, I was, I think, you know, I just have a very particular kind of set of skills and temperament that really kind of made this space just a natural fit for me. I was always looking for something in technology that had a lot of, you know, both optimism and a lot of edge. And this is something that really kind of satisfied, you know, both of those aspects of my personality, just by being involved in. And crypto has always been just so welcoming to people like me that, you know, really kind of that's what it's meant for me, at least, it's just like the inclusive nature of open and permissionless innovation. And, you know, if you think that

Starting point is 01:40:38 you are made of the right stuff, like you can go out and try. Like, there's no one that's going to stop you. And, you know, that kind of gets to my point about Dogecoin. Like, I'm never going to tell anybody to not speculate on that stuff. I think it's awesome in a lot of ways. But it's just about kind of being able to choose your own destiny. And that's certainly compared to being, you know, stuck in a Web 2 company where your box is this big and, you know, you can only, you know, do the things that are in your role. Like, this is pretty much infinitely interesting and inclusive, which is just very welcome. A pioneer, a particular set of skills, Liam Niesm style. That's what Vance is saying. All right, let's use those set of skills,

Starting point is 01:41:14 Vance, because we promised the listener this toward the end of this podcast, we would do some predictions at the end. Let's start where we left off. So total locked value in Defi, I think your original estimate in the next 12 months, let's say, was between 100 to 500 billion. Let's start there. Would you revise that estimate? That was nine months ago. Would you revise that estimate? Or where do you think we will be in the next one to three years' time for total locked value in Defi? Yeah. So I think when I guess things I try to guess within orders of magnitude, I find that if I get within, you know, in order of magnitude, I'm usually correct when I'm investing in it.

Starting point is 01:41:56 You know, just point being like, if I assume that defy will get between $100 billion to $1 trillion, like, you know, and I invest in defy, like, I'm just going to be right on the financial side. So that's why I try to kind of employ that methodology. And so still have three months left. I think we'll get over $100 billion. So I think I'll probably rewrite on that one. Yeah. So, you know, I think, you know, I think.

Starting point is 01:42:17 you know, we're just going to see this accelerate from like 100 to 500 to a trillion. Like the trillion mark will be when we are kind of just, you know, too big for regulators not to no longer ignore us. Like things will change. Like we will have some sort of KYC. You know, there will be some sort of, you know, regulatory jurisprudence over the space. But that will be really bullish because we'll be able to interact with the legacy and its institutions and that will just in turn accelerate the flywheel of more TVL.

Starting point is 01:42:47 And I think we could be there, you know, probably in the next two years. I mean, guys, like, you know, everyone expects ETH to go up a lot. Same with Bitcoin. You know, most of the collateral is in those two native assets. Okay, we're going to have more stable coin flows. You know, there are probably, there's $3.2 trillion of cash sitting on the sidelines right now in institutional allocators that are trying to allocate to, you know, everything from real estate to startups to crypto, like some fraction of that will come in, maybe not fully a third, like a full trillion, but, you know, I'd be willing to bet something like,

Starting point is 01:43:25 you know, a fifth or a six comes into crypto. So I think there's good, you know, rationale for that, that to be the case. I think the even bigger one is just like things like monthly active users, daily active users. Yeah. Where are we now, monthly active users? I mean, MetaMask is saying like, like, five million. I don't know if that's the way to measure it. I've also seen estimates of like, you know, there's maybe 2 million or so active addresses on Ethereum. So within an order of magnitude, we're in the single digit millions, probably. Some might argue a little lower in the hundreds of thousands still.

Starting point is 01:44:00 Like that's where we are now, maybe with monthly active users. Where do you think we'll be in the next, you know, one to three years? So I think Uniswap is probably close to having their first, you know, million monthly active user month. You know, things like ZAPR are not far behind. And so I think we're going to get to, you know, the first app with with 10 million monthly active users, probably in the next year. I just like the main thing and what we talked about earlier was like, I mean, what needed to stop on Ethereum was not being able to onboard people, you know, me having to send someone $20,000 of Ethereum just to get them like trading and interested. Like with Polygon, not only is it the things become cheaper, we can just onboard millions.

Starting point is 01:44:45 and millions and millions of new people. And so I think we're going to see like our first 10 million monthly active user app at some point in the next year. And it may be something that has like this really interesting hybrid front end, which is an app, you know, in a protocol on the back end, maybe something like Dharma, but like we'll get there pretty pretty handle it. What about total locked value on layer two? Any predictions for that? I'm not actually sure where we are right now. I think you mentioned some stats around Polygon, which is like in the, billions already, maybe close to double digit billions. So where are we now and where do you think we will be on layer two for total act value. Yeah, we're basically at 10 billion. I'm just going to

Starting point is 01:45:21 round up, you know, seven or eight to 10. And I think we're going to get to probably, you know, 100 in the next year. And, you know, just the nature of Ethereum will change a lot. I think most TBL will still be concentrated on the base layer, but there's a large cohort of people that will never interact with base layer Ethereum. So I think a lot of the retail deposits end up living on layer two, on a roll-up. And, you know, exchanges are just able to do withdrawals and deposits automatically. There's no need to bridge or withdraw to a layer one. So I think that will probably be, you know, a hundred billion would probably be my guess as to where we are by the end of the year in terms of TVL just on layer two's, probably a little bit more.

Starting point is 01:46:03 Hundreds of billions on layer twos in a year or so. Getting total locked value in DFI into the trillions in a three-year time horizon. Sounds like both ETH and Bitcoin. are headed to trillions and maintaining that in three years is what Vance is saying. Cool, man. Good predictions. Look, we are front-running the opportunity here on bank lists, and every time we've had you on, we've managed to front-run some pretty significant opportunities. You've dropped a lot of insights for us here, Vance.

Starting point is 01:46:34 I'm curious, what is framework up to these days? Because you guys seem to be doing a lot, like, growing. In addition to having these institutional conversations, you're also, like, growing. headcount, and I know you've got a labs and a venture side. Tell us what you guys are doing in this space. I see you very much as a crypto-native fund VC firm. So what does a crypto-native VC firm look like and do at this junction in time? Yeah, you know, a lot of ventures is where I spend most of my time. But, you know, as things like, you know, you see someone like Sam, Bankman Fried and Salana, you know, it kind of, you start to reason through like, what do I need to

Starting point is 01:47:14 compete with someone like that. And what we need to compete with someone like that is, it's just an entity like labs that, you know, can trade, you know, hundreds of millions of dollars, billions of dollars per day on these markets, keep them in line, keep them healthy. And so a lot of our focus and our efforts have been towards building out, you know, a lot of kind of the active participation stuff that we do on chain. And just being kind of one of the arbiter stewards of just keeping the space, you know, safe when, when things are really volatile. Even if it's not the highest and best use of our own capital at the moment. Like, you know, we're willing to take kind of take one for the team in terms of helping, you know, protocols stabilize the pegs of their,

Starting point is 01:47:51 their staple coins, stabilize their derivatives markets. That's definitely something that we've really kind of leaned into recently. So that's been a big effort of ours. And then also just building out, you know, just the venture firm that we wish we had as founders in Defi, you know, all these services that you would need, you know, recruiting, smart contract auditing, you know, those are things which really are, you know, the first audit you can get right now for Open Zepelin is in September. So, like, you know, helping solve that bottleneck is a big part of what we're trying to think through right now, and we have the talent to do it. But, you know, really, I think of framework less as a venture fund and more as just of a company. You know, venture is one of many things that

Starting point is 01:48:30 we do to kind of push the space forward, but we're hyper-focused on just adding as much value to kind of both the on-chain ecosystem and the founders that are building the products, you know, off-chain as we can. Well, Bankless Nation, I think you can tell. why we brought Vance Spencer back on to the podcast to hear his takes. And if you are listening to this on Monday the 7th when this podcast gets released, we are having Vance on a DFI panel on Wednesday at 1 p.m. PST with Spencer Noon and Santiago Santos from Parify Capital. And so that is going to be live streamed on the bankless YouTube. And so we are going to put Vance in a couple of the other, in my opinion, just absolute leaders of DeFi thought on a panel together and see you.

Starting point is 01:49:11 what happens when we put all their brains into one spot. So put that on your calendars. It's coming Wednesday at 1 p.m. And I'm really looking forward to it. Thank you guys so much. It's been, it's been amazing. Always a pleasure to be on bankless. And thanks for all that you do. Really appreciate it. Awesome, Vance. Thanks again, man. It's great to keep up with you doing a lot of awesome things in this space. Bankless listeners, we've got three action items for you. First is tune into that YouTube panel on Wednesday, 1 p.m. PST. You'll find that on bankless YouTube. You can probably set a reminder for yourself. We'll try to include a link in the show notes to that episode. Also, go back in time. Listen to episode number 28 again with Vance. It was a

Starting point is 01:49:53 fantastic episode. Holds up very well. It holds up. Just recently listened to it. And then, of course, third action item, relisten to this episode, because there's a ton of gleanings. I think you'll get on a second listen as well. Of course, risks and disclaimers. You got to ask yourself, If you're going crypto native, are you about that life? That is the question that Vance posed because ETH is risky. Crypto is risky. So is Defi. You can always lose what you put in, but we are headed west.

Starting point is 01:50:21 This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.

Bankless - 68 - Bull Case for DeFi II | Vance Spencer

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