Bankless - 73 - Building a $500M DeFi Fund | Arthur0x

Episode Date: July 12, 2021

Arthur_0x is a massively successful investor in DeFi, and leads DeFiance Capital. His story is fascinating, as are his takes on the ecosystem and the crypto space from a global perspective. GET THIS EPISODE'S EXCLUSIVE DEBRIEF: https://shows.banklesshq.com/p/exclusive-debrief-building-a-500m  ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  🎖 CLAIM YOUR BADGE: https://newsletter.banklesshq.com/p/-guide-2-using-the-bankless-badge  ------ BANKLESS SPONSOR TOOLS: 💰 GEMINI | FIAT & CRYPTO EXCHANGE https://bankless.cc/go-gemini  🔀 BALANCER | EXCHANGE & POOL ASSETS https://bankless.cc/balancer  👻 AAVE | LEND & BORROW ASSETS https://bankless.cc/aave  🦄 UNISWAP | DECENTRALIZED FUNDING http://bankless.cc/uniswap  ------ Topics Covered: 0:00 Intro 6:00 Arthur 0x 12:55 The Secret Ingredient? 19:30 Show Up and Do Something 26:00 An Investing Thesis 33:48 Fundamentals Win 38:05 Token Value Capture 46:40 How to Evaluate 50:18 Undervalued Projects 56:35 The AMM Competition 1:00:13 ETH Killers 1:05:43 Layer 2 Scaling 1:14:00 A Global Perspective 1:20:13 Culture and Language 1:24:05 China BTC Mining 1:29:30 What Arthur’s Excited About 1:33:58 Closing & Disclaimers ------ Resources: Arthur on Twitter https://twitter.com/Arthur_0x?s=20  DeFiance Capital https://www.defiance.capital/  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

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 at David Hoffman, and we're here to help you become more bankless. David, what an episode, Arthur Zero X. What did we cover today? We covered a little bit of everything. And we started off with the story of how Arthur ZeroX and Defiance Capital came to be. And it's already one of my favorite stories in Defi, favorite stories in Ethereum. And it's something that I feel really passionate about is that if you are coming into the space and you see things and you notice things and you start to execute on the things that you noticed, you, too,

just like Arthur Zero X might be able to turn $100,000 into a hundred million dollar plus fund. Like that option and that choice is available to you if you have the grit and the patience and the foresight to be able to see the things that Arthur Zero X saw and why he was able to turn Defiance Capital into the gargantuan that it is in this space. We covered much more than that. And so I'll leave that to you, Ryan, to explain to the listeners. But that was my favorite part. You're going to give that back to me. Yeah, look, man, it was my favorite part, too. This story is amazing. Six figures to nine figures, right? And the thing I would add to that is you also have the grit to stick with this during a bear market. I think that's key. If you're looking at you.

for that like 50x, 100x type of return, you have to believe in something when no one else does, right? Right now we're in a, you know, we're in a hot-ish, warmish bull market. It was not that way in 2018 when Arthur was growing up in defy. And when he was investing in things, no one else was touching. These tokens were like, everyone hated tokens at the time. Tokens were out. Tokens were totally out. Anyway, we covered that. That story is amazing. We talk about Defiance Capital has focused on fundamentals, which is really cool to hear, not just narratives, not sentiment, but actual fundamentals of tokens and ignore the rest. Listener, that is an option for you.

You don't have to go chase all of the narratives that you hear and see in crypto. You could just focus on fundamentals, refreshing hear that. We did an automated market maker comparison. Why are sushi and Uniswap value differently? How about Curve? How about Bankor? How about Balancer? Will one automated market maker win the network?

effect, will there be many? We also talked about ETH killers. I will not give away Arthur's conclusion there, because I think he had some great conclusions. I even asked him if he had to pick one non-Etherium layer one, which would he be and why he answered that question. Then we talked about and concluded this with D5 from an Asian perspective, so from the perspective of Asia, I should say. And Arthur had a great kind of categorization of different areas. in Asia that aren't like jurisdiction based, but are more kind of cultural alignment that I think was super useful and will be useful to listeners as well. And of course, we concluded with price predictions because, you know, we just had to because it's bankless and it's fun. Well, we also concluded with

what Arthur is really excited about towards the end of 2021. And he actually gave a really interesting answer. And well, I'll tease it real quick here because it was actually the elaboration, I think, was the cool part. He thinks he's really excited for scale, as we all. are. We've been beating the layer two summer drum here on bank lists. But Arthur thinks that once we have scale, the floodgates for users just absolutely open. And so we dive into that a little bit as well towards the end of the conversation. But as a recap, that was the whole episode. Really cool story. Guys, you are going to enjoy this. So before we get into the episode, we want to thank the sponsors that made this possible. The AVE protocol is a decentralized

liquidity protocol on Ethereum, which allows users to supply and borrow certain crypto assets. AVE version 2 has a ton of cool features that makes using the AVE protocol 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 supply to the protocol in order to gain yield, and all of those same assets can also be borrowed from the protocol if you have supplied collateral. One of my favorite AVE features is the ability to select a stable interest rate. Once I've selected a stable interest rate, I'm protected against any interest rate volatility that may happen in DFI, and allows me to plan my DFI finances for the long term.

V2 also features the ability for users to swap collateral without having to withdraw your assets, trade them on Uniswap, and then deposit them back into AVE. With AVE, users can do this in one seamless transaction, saving you time and gas costs. Check out the power of AVE at AVE.com. That's Aavee.com. Balancer is a powerful platform for flexible automated market makers. Typical AMMs just have two tokens inside of one liquidity pool, which can lead to fractured liquidity across the many pairs in Defi.

With Balancer, you can access the full power of multiple tokens inside of one single AMM, which unlocks an entirely new playing field of possibility. This makes Balancer an awesome building block for so many different use cases. Balancer pools can make asset indices, but instead of paying fees to portfolio managers, Balancer lets you collect the fees from traders who use your portfolio for liquidity. Additionally, Balancer SmartPools can be programmed to have properties that change according to predetermined rules, such as changing the swap fees based on market conditions, or even liquidity bootstrapping pools, which can help you launch and distribute your token with day one liquidity.

At Bankless, we use a liquidity bootstrapping pool to sell our BAPT teachers to much success. V2 brings powerful new features that makes your money work. work even harder for you. In V2, idle tokens are capable of generating yield in DeFi without sacrificing liquidity in the pool using asset managers. Balancer's vault architecture lets you trade between Balancer pools at a fraction of the cost versus other platforms. And you can even take advantage of dynamic fees which automatically adapt to changing market conditions. Balancer's mission is to become the primary source of liquidity in Defi by providing the most flexible and

powerful platform for asset management and decentralized exchange. into the balancer pools at app.balancer.fI. Bankless Nation, we are super excited about our next guest. Arthur ZeroX is one of the most successful defy investors in the entire crypto space. He runs Defines Capital, which is the largest defy-focused fund in Asia. He's based in Singapore, funded by tons of investors, maybe most notably by the Three Arrow's Capital folks, Suu and Kyle Davies. Arthur, we have so much to talk about, man.

I'm glad you joined us today. How are you doing? I'm doing well. I've been a listener of Bangladesh since day one and it's my pleasure to be here. That's awesome. Well, very cool. Well, we have been a follower of yours for a long time as well. And I want to kind of start with this story, which is kind of your story of getting into defy and getting into crypto. I understand that you went full time into crypto in 2018. So lots of folks managing funds have been in crypto for longer. You tweeted this out, and I think this is incredible. 500 million and 50K followers. What comes next?

5K, eth, I hope so. Maybe 10K, eth. Yeah. So it's a long story, but I think there's some useful takeaway, so I'll share a bit more. I started in the space in 2018. Initially, I want to run a crypto research startup because I think initially, when I came into the space, I realized that there's a little. lot of focus on the hype and the promises, but there is lack of focus on what's really

happening and how to value this thing properly. So I initially want to run a crypto research startup, but I didn't find product market fit. So what happened is I decided to focus on investing instead, but that was the bare market. So 2018, you know, Bitcoin went to $3,000, if went to the lowest point, I think it was $80 plus. But I think during that period of time, I was always asking myself, so besides just trading and speculation, what other use case can we get from crypto? And coming from someone who went through the ICO bubble, I think that's very important because during that period, everyone who have experienced it must have realized that we can literally see all the different use cases being experimented, travel, or AB&B on Block. blockchain, Spotify and blockchain, etc. And etc.

Uber on the blockchain. Yeah, exactly. But I think none of them are really being realized or achieved in a major way, except for financial use cases. I think at the end of 2018, I think the first time I heard about D5 was in, I think January 2019, but I know the term was coined in late 2018 by a group of early DeFi teams such as, I think, the set protocol, Dharma, and a few others.

They just joined together and say, why don't we create a term for this new movement? And then the term defy was born. Yeah, so I think, and this is also part of the extension of my stable coin thesis, because when I was helping some of the new crypto startup initially, a lot of them want to introduce their own token as a payment mechanism. but it has shown not to be working well. In fact, it just doesn't work at all

because nobody wants to use a new token to pay for any services. People want to use a common currency. In crypto world, that will most likely be Eiff or Bitcoin. But right now, I would say that Stable Coin is actually the most suitable payment. Just that people want a stable unit of account. And I think that time Stablecoin just started to talk off

because bare market, people want to find a safe haven. and stable coin become a natural selection. And I think that being bullish on stable coin also lead me to bullish on D5 as well because DFI allowed this whole exchange of crypto assets between stable coin and the volatile one. And this is a very obvious use cases. And after that, the extension of lending and borrowing,

after being a user of this, I can just see how important is to the entire space. So that's why I started to did more research into Defi, start being a power user and early supporter. And obviously, being a very early user of synthetics community helps a lot as well. And that kind of lasts me through most of the 2019, being an early Defi user and community member, especially in the synthetics.

And I think what really changed is, I think so I think the DeFi market, synthetic start to did quite much. well around there. And I think around 2020, the whole space before Dubai summer started to grow pretty well on an organic level. But then after the defy summer, it was just like an explosive moment. Everyone realized that defy is not a fat.

A lot of people start to really recognize that there's a lot of potential in this. And yeah, and I think at that moment, I raised Defiance capital. And we have grown very fast since then. So with the support of Three Arrow's Capital, we have raised around mid-eight figures of capital. But Trieroos and myself are the largest investor. And throughout the after 2020, second half of 2020 until now, we have grown tremendously to around low to mid-night figures of capital right now. Obviously, the figures change a lot depending on the market condition.

But yeah, that's where we are right now. Yeah, I think that's a, we can go deeper into any part view you would like to. Arthur, that's a pretty incredible story. And bankless listeners, I want you to draw out a few things that Arthur said there is he started with kind of a thesis, but then he also became a defy super user, which is interesting there, and then turned kind of investor turned fund manager. But the amounts that you're managing are pretty incredible, Arthur. and I'm just like curious because I think a lot of people listening are defy super users, also defy investors,

and they're pretty excited about your trajectory because they, you know, want a similar trajectory. They're interested in the path that you've taken. So like, what is it? Was it just this combination of right place, right time, you being a defy super user, you applying a thesis at a time when the market was bearish and then it flipped bullish. What's kind of the secret ingredient for your success here? Because I think a lot of listeners want to emulate this. I would say that I think there's no secret. It's more like after doing your research or so-called homework, a really strong belief in your research, in your understanding. And obviously that is based on the, that your research is the

right research. And I think that a lot of time people are very affected by what is happening now, but not on what has happened or the last, what is the previous trend and what is the ongoing trend. So if you always focus on the current point of the market, you're always going to draw a very different conclusion because crypto can be in a boom market in two months, in the bear market in two months, which is what we have experienced recently. But if you look at the crypto in 2018, yes, there was the bubble and a lot of the misallocation of capital, but the usage of crypto actually has been increasing.

And even that time, we see a very small glimpse into the potential of NFT. I was also the very early player of crypto QD as well. So I think, yeah, obviously the NFT whole thing really come off around early this year, right? But the whole, the first gleam into the potential already happened two years ago. And for DeFi is actually, you can also argue

that you see the potential of Dexas when Ether Delta came on the scene, but it just also was two years too early until Uniswad really changed the game. So I think that by looking into the previous usage and the early style of market market and you look at where the world want to go next, I think you can really the so-called cliché zoom out, that gives you a lot more confidence on where the world is going. So I think that the biggest factor for me is really persistent because I think a lot of people drop out to the brand market, but I've been. believe that what we are doing is just not all hype and just speculation. There's actually something bigger that we are building. And obviously, I think being early helps a lot, but I think the entire

space is still incredibly early. There are some D5 project where investors, when I invested, is around less than 100 million market cap. And right now, I think there's still quite a lot of promising D5 protocol that are trading at below 100 million market cap as well. And I have no doubt some of them will become a billion dollar D5 protocol in the future. And the, the, are most of them are... Can you tell us which ones? I mean, there's... Because we want to get those ones, Arthur.

I don't want to be this like a top-my-back section, but I think most of them, which I mentioned, they're actually publicly listed already. Like, you can buy them from Uniswap, from some of the centralized exchanges. So, yeah, you don't even need to, like, get into private sale to get in.

Here's the other thing that you were doing at a time when it wasn't popular because in 2017, it was there of futility tokens, like pointless tokens that were injected in protocols, right? But in 2018, it was not popular to make a bet on a token. Like, tokens were out. They were dead. I mean, they were useless, right? This is what the market sentiment held. And that's why we saw even while there was early traction in D5 protocols, tokens just weren't

being valued probably the way they should be valued. Was that a core part of your thesis at the time that, hey, these tokens are actually worth something, even though the market is highly discounting them? Yes. So I think that's where I was quite different with most of the consensus back then, because I think first of all, my, I used to be very adamant. And I think right now I'm still have a very strong focus, if it's just on token value accrual. I think especially in the bear market, there's really, during the 2018, there was really no bottom, especially for so-called outcoins. After they drop 90%, they can still drop another 80%. So I think at that point of time, value accrual become extremely important because there should be some base flaw in the value

if the product is being used and people are using it. So if the product is being used, there should be some value being captured and this value should provide like a flaw to the value in the token. So you know that it will not go to zero and that give the token holder a lot more confidence in holding during the bad time. So that was the way I approached it during the bear market. And I think that this actually extend to most of the token. I think that some form of value accrual has to be because else what are we really investing? I mean, the so-called futility token, yeah, is the investor doesn't need to hold them. We only need to purchase them where we need to pay for certain token services, which is why the demand factor would be so weak.

Yeah, so I think that's a very major difference. And I think that the unique thing about token is because I personally did a lot of research. So what is the best way to design a good token and how do we make it like integrated in? the platform. I think that there's two main purposes, a token should serve. First, it has to have a strong value accrual. The second thing is, it should serve as a growth catalyst for the protocol and the community, because I think this is the advantage of token compared to the traditional equity, because you can't really freely give out the equity to your user and community member due to various regulatory restriction. For token, you have a lot of leeway to in no way with this.

And this is actually a very strong advantage that the crypto community should not give up on. Arthur, one thing I think is really cool about your story. And I want to go more into fundamentals. And we're about to get into that intersect. But I want to still talk about the story of Defiance Capital and you, Arthur. You came into this world in 2017. You go through the bear market with us in 2018, 2019. With me, we're both students of the 2017 era.

And I want to impress upon the listeners that you came out of just your first cycle, starting to manage a fund. But I also, Arthur, I want to ask, how old are you? How old are you? And yeah, how old are you? I'm currently 29 years old. And you're managing a fund that's somewhere between $200 and $500 million, depending on the emotions of the crypto markets.

Does that ever scare you? Does that, is that a scary thing? Because that's a lot of money. And you're 29 years old. That's a crazy thing that I think we could only find in crypto. Do you ever reflect on just the magnitude of the discrepancy between the size of the fund and how young you are? Yeah, actually, yes.

But I think there's actually another factor I'm more impressed and surprised by. Actually, I think even in traditional finance, you do have some of the successful trader managing a few hundred million dollar of capital. But I think most of these are not that capital. But I think for crypto, I'll say it's not just for our fund, but a lot of other funds as well. Like the principal capital is probably a majority of the, investment fund, same for Defiance. So I think in that sense, yeah, it's quite amazing that how

how people at our age can accumulate such an amount of capital and just managing such an amount of swing. I think this is really brings to the fact that crypto is a major level playing field and for everyone from different background because I didn't come from like a very wealthy family and it was like actually I came to Singapore only 10 years ago so I think that's a crypto just really give everyone the opportunity to who are willing to put in the effort and the and meaning willing to make it happen so I think that that's the fact I'm definitely impressed by I think that's what listeners should really walk away with right now is you know when Arthur is telling his story about just the formulation of his thoughts in 2017-2018 as

as somebody that also came into the world of crypto around that same time, I very much resonated with these thought structures or thought patterns that Arthur was having about what he thought about the market at the time. And so I think listeners should understand that, like, it's possible to come into the world of crypto and look around and formulate an opinion as to what's going on and then turn that into a fund or turn that into something. Arthur here turned it into a fund. Other people can turn it into something else. But how far are you? How far? How are you? How to go into this industry to start really making a difference and doing something cool is not as deep as what people thought.

And that's the opportunity that I think a lot of listeners should come to or conclusion that they should come to is that you can come in and figure out what's going on in the world of crypto. You've got to do your homework for a year or two. But then you look around and start formulating an opinion and start to test that and turn that into something viable. And so Arthur, maybe you could just go in a little bit more into just the details of how you established your own confidence in your ability to call the shots or your own confidence that your

theses and your beliefs about the crypto world were the right world. Did you ever have like doubts or did you ever have like concerns or just tell us the story of just like coming into uh the shoes of a 500 million dollar fund? Sure. I think uh I used to say that uh in the tweets a few days ago confidence is the memory of winning and I believe that it should be the same for everyone like when you're doing something and you keep getting certain form of validation from your action and then your confidence

will just increase and I think that in the initial phase I think it took a while because I think my first major bad was synthetics and it took a while for the thesis to be realized but I think that it's also a come from a fact that

sometimes you have to do it yourself. I think the early stage where people wasn't recognizing the potential of synthetics. I actually, and it was during the bear market, I took upon myself and spent, I think, close to one and a half month to write a really comprehensive report. And actually that report was not perfect. And I think even if you look at it right now,

it's already outdated. So I don't suggest people to go and search it out. But I think you have to do something, a billion for yourself and make it happen. to just really put it out there and see what kind of result you get. And I think the result was actually overwhelmingly positive. And then I think after a few months, the market started reacting to that. And then I just keep applying the same approach to the different D5 protocol,

which I invested in, you know, spend time in the community, help out and, you know, have to popularize them. And also just communicate with the team and see if any value we can add as much as possible. And I think this approach is actually quite universal. It's just that not many people are doing in the crypto. that time. I think when you look at a traditional venture capital, they also like land a lot of support to their community. And I think this probably also brings my experience from the stock investing because I think in a stock investing world, there's something called the activist

investing. Actually not just stock. I mean, there's something, there's this in the bond market as well. Like the investor will really try to affect some changes in the companies or like the stuff they're invested in and to get value out of it. I think that in crypto, similarly, you can actually apply this concept and actually do a bigger extent because most of the crypto on D5 protocol are very early stage and the team will very happily interact with most of the community members. So you can really make your, have a lot of influence on the future, on how the protocol is being run. Yeah. So I think just keep doing this and the feedback you get will just help you to build a lot of confidence and this is how you get to get to that level. Arthur, was there a moment where it just became obvious that the next step for you needed to be starting a fund?

Or did you always want to start a fund? What was the inflection point where defiance capital became a thing? What was the signal that you got from the market that you needed to start a fund? I think the signal was the success we have been getting, the growth we've been getting even before the fund was formed. It was a very strong validation of our investment thesis and approach. Yeah, so although we started from a very low base, but our return was pretty insane for most of 2019 and 2020 because, I mean, when you look at it most fun,

even a small one, they don't really outperform Bitcoin for until 2020. I think the outperform Bitcoin part only started this year where you see stuff like Pocador and all the stuff start going like 20X or 15X. but I think 2020 2019 to 2020 was quite hard to outperform Bitcoin because just Bitcoin dominance was so strong

during that period but we have managed to did that and then just keep doing that for most of the time and we have been seeing our investment thesis being validated like some of our call it was actually quite public because I was quite active on Twitter fairly early on and most of our call was validated in a

very convincing way. So let's talk a little bit about that investment thesis, Arthur. I think we want to spend some time here. So Defiance Capital, you guys say we invest in Defi eating traditional finance. That is something definitely bankless listeners are quite familiar with. We talk about it all the time. Defy is going to eat traditional finance. But I find it striking as you as kind of a crypto super user, a crypto native, have sort of started Defiance as a crypto native fund. So you're able to do things like invest directly in Dow's. There was an interesting post by Kane, Warwick, who's one of the founders of synthetics. You wrote a post on Dow first capital formation. I thought it was really interesting because he makes the point, and this was, I believe, addressed to founders where he says,

hey, founders, like, why go their traditional VC route and legal structure route when you're going to decentralize all of those things anyway? Why not just start with a Dow first and start with that structure? You know you're going to end up in that structure to begin with. So why not save some time? What's interesting about, I believe the way defiance is structured is, you can more easily invest and are more comfortable, maybe prefer to invest in crypto-native Dow-type vehicles like that. Can you talk about the edge that that gives defiance and how important it is for investors

to look at crypto-native capital coordination vehicles like Dow's? Yeah. Yeah, I think that, yeah, I think we are one of the crypto-native fund that are able to invest in Dow directly because we just that because we have been in the space for a very long time so we are comfortable comfortable with this kind of structure and Dow also in a way that there is some protection to the investor as well because most DAO are structured by the way that you need some majority to make some major decision and sometimes the most of the time the investor will also have some decision making responsibility as well and I think the importance is

especially crucial for defar protocol because I think that there's a reason it's called decentralized finance. And I think with the recent regulatory action, especially the latest, I call it FATF guidance, it was recently being delayed to October, but it's still not 100% sure that how is it going to be. And there's the potential to be a very strict interpretation of that which is going to regulate D5 protocol the same, way as a centralized crypto company. But the DeFi industry is obviously trying to lobby for a much more sensible guidance. But regardless, I think that it's important for the Defy protocol to find a way to gradually decentralize.

And I think Dow is one of the best structure to do that. So, yeah, this is why we really support this Dow capital structure formation. Yeah. Arthur, something else you guys have emphasized, and we even started talking about it when you talked about token value accrual, is this focus on fundamentals. And we've talked to a ton of different crypto-native funds and traditional kind of crypto funds on bankless. And I haven't quite heard the emphasis on fundamentals from the others, as you seem to have. A lot of them talk about sentiment, a lot of them talk about narratives, a lot of them talk about narratives, a lot of them talk about, community. Can you tell us what you mean when you talk about fundamentals? What are fundamentals in crypto? And why are they important in this industry that seems like it's sometimes just based on memes? Yeah. That's a great question. So there's, I think every fund actually do look at fundamentals, but they will probably define fundamentals in a different way. So for us, fundamentals means the team quality, the valuation of the protocol, and an extension to the team quality is that

the execution track record, have they built something valuable, what's their previous history, the technical architecture, because sometimes we find that the whole thing, the design to be unfeasible, or sometimes the design is superior, the community involvement, and the token value accrual, and the last but not least, the near-term catalysts. So these are most of the fundamental factors we look at. And to us, fundamental matters a lot because I think in crypto, right, the core revision very often go to one when the market is dropping. So actually in a sense, if you are talking about downside protection, there is not that much reason to be very diversified. Like you want to avoid the risk where one of the protocol got hacked and then you lose 100% of your

investment. But if you want to diversify just to prevent the correlation risk, there's not much reason in that because everything go down at the same time. But when in the bull market, where the token is rallying, you can see a lot more dispersion. Like some will do a lot better. Like some did like 500% in the Q1 this year, but some only like less than only did like 100%. So I think that by focusing on the fundamental, you can capture this kind of positive divergence when the market is rallying. And I think that market do pay attention to the fundamentals, but often it can get crowded out by the very noisy stuff.

And I think this is part of the extension of the current world we are being in. There's a meme coin investing in the stock market as well. And at a certain extent, there's like a meme stock investing in the stock market and a meme coin investing in the crypto world, like the Dodgecoin and the Shiba and all the stuff. But I think that ultimately there's a very different kind of. audience looking at this stuff. Like the smart money will always look at the fundamental. It's just how they interpret it.

Everyone has a slightly different way of interpreting it. Arthur, I just looked at coin market cap like some time earlier today. There was some sort of coin dashboard. And Shiba was at over $4 billion in fully diluted valuation. And that just blew my mind first. And second, it made me a little bit sad, right? Just a little bit sad because like there are so many. interesting assets in crypto, so many capital assets with cash flow, so many defy assets

with protocols behind them that are going to change the world and eat the rest of finance. But people out there are out chasing like meme coins. And that just kind of makes me sad, I guess, for crypto. But you're saying you have hope. You're saying that in the longer term that crypto markets are going to value fundamentals so highly. I guess, my question is, how do you explain things like light coin or XRP or the Shibas of the world in that context? Are they going to ultimately just diminish while the fundamental assets are going to increase? Or are we just in a world like of funhouse mirrors and narratives and maybe like fundamentals are kind of pushed aside in this new market that we live in? Like give me some more hope here on why

fundamentals matter more than narratives. Yeah, I think that it's a it's a gradually changing process. I want to draw an analogy from the stock market. So before Benjamin Graham published the book called Security Analysis, the market for the larger period of time doesn't know how to value a stock properly. So I think the stock like 70, 80 years ago was actually quite similar to crypto now. like there was a lot of hype and speculation and people don't really know how to evaluate properly. And the discounted cash flow model will only popularize, I think, around like 19,

sorry, I probably get a year's around like 50 or 60s. And then graduate the process are being refined and people start to talk about the discount rate and what is the equity risk premium. So all this thing take time to develop. I think we're in a similar phase in crypto where there was, there's no consensus on how to value crypto asset yet. And as a result, and people also have a very, like a very surface view,

like normal people have a very surface view on what is crypto, because when they come into crypto, they always have a bit coin first. And this is called cryptocurrency, right? And then to the extent they think all, most of it are like currency, currency-ish crypto. But I mean, you guys have talked about it, like a lot of the crypto, especially in the D5 space, are capital asset. They produce cash flow, they're what we call the productive asset. So the way you look at them is very different from the way you look at the currency. I think that unfortunately that there's still a lot of education we need to do.

I think that the D5 community over the last few years is really a lot more focus on building the right product and because the scalability is not software so we don't want to onboard the mainstream user too early. But unfortunately that the blue market came and then the retail was always on boarded to the more exciting stuff and where the opportunist actor was always trying to capture the attention.

like look at Shiva swap right i mean i think this is my view and my research but i think that there are some group of people behind that and they are not doing it for altruistic reason i think they are you know they probably have some game plan behind it and then these people are always at the market deal right they always know how to capture the retail's attention and a lot of d5 people are really want to build a good product and they want to make sure their product is good enough before they really start to market it out to the wider audience so i don't think this is going to change immediately but i think it's a gradual process where market is just slowly getting smarter and smarter through various cycle. It might not happen as fast as we hope to be, but I think it's definitely changing because

this is how the fundamental investment approach, we are able to use to generate so much return for us and our investor, right? Let me, we went from like a low six figures of capital to around like nine figures of capital, and all these are done through a fundamental investment process. Hey guys, I hope you are enjoying the conversation with Arthur Zero X thus far. In the second half of the show, we ask Arthur's opinion about Ethereum killers, Eith killers, and whether he thinks that there is room in the market or not for them. I thoroughly enjoyed his take there.

He's got a very specific opinion about this. And then we also ask Arthur about the different ways that the East approaches Ethereum, Bitcoin, DFI, versus the West and how different areas inside of the East the Chinese speaking languages, the English-speaking Asian countries, or Japan and Korea, how they all approach Ethereum and DFI separately. And a little hint there is that they each kind of approach this industry as a reflection of the culture that they have at home. You know, shocker, the culture dictates the way that we approach things.

And Arthur goes in and talks about the way that different areas of Asia have a stance towards DFI and Ethereum. Really enjoy the second half of this conversation, so don't go anywhere. but first we have to take a moment to talk about some of these fantastic sponsors that make this show possible. Bankless is proud to be supported by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system where trades are matched with other humans, Uniswap is an autonomous piece of software on Ethereum,

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slash go bankless. A frequent metaphor we use on the bankless program is that we are speed running the history of money and finance. And I guess when Arthur, you say that previous markets had equal amounts of trouble valuing fundamentals, I guess we should incorporate that as knowledge when we say that crypto speed running the history of money and finance, well, it's not doing it in one year. Like, it's not going to happen that fast. It's going to happen in, you know, 10, 20, 30 years. And so we are still likely going to go through a phase where the market is having trouble understanding what the hell it is, what is the assets that are inside of these things. And Arthur, one of the fundamental metrics or fundamental drivers that you say that you pay attention to

over at Defiance is a token value capture and does the token actually capture value. Now, there's a wide range of token models that exist out there that we don't have the time to go through every single one. But I want to ask you to pull apart two examples. that you have seen in the defy space of one token that has a really strong token value capture mechanism that you just really, really like or a handful, and then some other tokens that, while you like the project and maybe the project adds value to the world, the token just doesn't capture any value. Can you compare and contrast some winners and some losers in this category, just for examples

for our listeners? Yeah, sure. I think I was a very big proponent of the synthetic token economics from the beginning because I think they are the one that pioneer using like a token inflation to incentivize the community and also incentivize the early adopter because the inflation starts from a pretty high level but it's gradually tapered down so it reward the early user who really believe in the protocol and took the initial risk. So I think this is a very good design and also there's a very obvious value capture

where by taking the risk of staking in the synthetics protocol, the token holder are rewarded by the fee generated by the protocol at the same time, both in the native token and also in the extra fee income that was generated by people trading on the synthetics protocol. So I think that by taking some of our risks, they are also rewarded in some sort of income. So I think this is usually the pretty universal principle. And I still think that is a pretty good design. Obviously that when it come to hedging the depth exposure, it was always quite problematic. Other design, I think it was very well designed.

But until right now, I think not enough people have understood it, which is Bank Call. So actually, Bank Call, they went through a lot of iteration. I think right now they finally arrive at the token economic model that make a lot of sense. So out of so many Dex's protocol, actually Bank Call capture the most value for the token holder. I think 40 to 60% of the fee actually go to the bank called token holder. But it doesn't come in the form of income. It actually come in the form of the burning. And there's also consistent of the so-called inflation or to support a new liquidity pool as well. But actually, it was quite complicated. I think most people don't really realize that. So as a result, they are

still not really value highly. But actually, our team wrote a blog post on that one, explaining how the mechanism works. So I think for the more detailed-minded people, they're happy to take a look. So I think both these have a very good design. And I think for landing and borrowing protocol, RV and Compound, the value accrue is quite similar. They both take a small percentage from the interest-owned accrue to the depositor and go to the treasury. I think in the future, the token holder can vote on how the treasury is,

accumulated reserve is going to be used. It can be returned to the token holder or it can be a further investment into the protocol. And I think for Awe, the token holder is quite similar for Maker as well. The token holder is also acting as a backstop to the solvency of the protocol as well. So I think this is a very sound economic design. So yeah, it took them a while to actually come to this design as well. So I think that in terms of a And then you have a lot of the D5 protocol

that just doesn't capture value at all, right? And they also have no very, they don't have a very concrete plan how to get there as well. I think, yeah, so I think those are just the team and community need to figure it out. So I think another more controversial point I have is I think at this stage,

buy back and burn is probably not the most optimal solution because in a way, I think the placeholder have published a blog post called Buy Back and Made and They actually argue that buy back and burn when the protocol still have a lot of growth potential is actually destroying capital And I really agree with that Because when you look at an early stage startup in the traditional world

Nobody is just like doing share buyback or like giving out dividend that early Actually, I mean giving dividends sometimes But usually is one-off, it's not like a consistent dividend policy like you when you have a lot of growth potential you always want to reinvest in the growth and that's actually fine so yeah i think that buy back and burn for most of the defypire protocol right now it's a bit too early that they should actually find a way to reinvest this protocol or even just give back to the token holder that is i think it's still better than like burning the capital directly and although if i understand there's some tax implication for the

returning the token the dividend so-called dividend to the token holder but i think that a better way can still be designed. So, Arthur, so you don't love the buyback in Byrne or probably the distributing cash flow too early back to token holders because your argument is like should reinvest back into the protocol. I'm curious about this because we have some protocols sitting on now billions of dollars worth in treasury, right? So like one that comes to mind is the Uniswap team. We talk about it often. billions in their treasury, and they've got like 15, 20 people on their team. And so like, what could they possibly invest back into? Like those billions of dollars, they're not like a large bank where they have office floors and physical infrastructure and tons of employees and,

you know, in suits and in ties and, you know, travel expenses and all of these things. It's just like 20 people in a protocol. So what about that argument that, hey, if the protocols don't have anything to do with the money, what should protocols spend on? Maybe they should push some of those funds back to the token holders. Any thoughts there? Yeah, I think that is a very sensible point. I think that, but I don't think that most Defi Protocol

would not find a way to utilize their capital effectively. I think UninShot is an outlier just because of how highly valued they are. and as a result, their treasury is massive because the token is worth a lot. But I think most DeFi protocol do not have that huge amount of capital. And, I mean, setting aside some as a reserve for future usages, I think that most of them can find a good way to invest those capital. Like you can invest in more education. I think this is always like, you're always fighting attention against the meme coin, right?

So why don't the Defy protocol invest in more educational channel, more outreach effort, more translation, more in the local community so that not just the English speaking community, understand what DFI is about, but the community from all the other world as well. I think that I think some protocol did it better, but I think generally most of the D5 protocol we are speaking to are because they are early stages, well, are a lot more focused on improving their product instead of reaching out of the new community because, yeah, and I think that you guys actually, that bankless did a very good job by translating your content to multiple

languages to reach out to more community. I think this is what a lot of the protocol could have done better. And actually, it just takes a lot of effort and you might just need to hire a lot more people. Arthur, we want to keep on going down the fundamentals rabbit hole. And I ultimately want to get to kind of an AMM comparison because I think there's a lot to be learned, a lot to be gleaned from talking about all the different deckses and how we see the market valuing these things. But before we get there, we need to talk about all the different metrics that one could use to evaluate. a protocol. So Arthur, say you are coming up upon this new up and coming, you know, defy protocol that you want to evaluate. What are the metrics that you really look to first?

Is it, you know, market cap, fully diluted cap, you know, capital efficiency ratios? What are the basic metrics that you look at first? And then maybe some of the more advanced ones as well. I think the basic one, okay, so I think it depends on whether the protocol already have a working product. So I think if you do not have a working product, so I think if you do not have a working product yet is really similar to how most VC look at it. The team, the track record, the concept, the vertical they are boarding, like, are there any precedent and can you value them? So I think these are pretty standard. I probably will not go too much into it because this is really on like how the traditional VC think about investment. And in the crypto, you have a token

part. You want to think about how the team is planning to distribute the token and what do they plan to do with the token. So I think for those with already a working product, There's a few metrics, I think, matters a lot. There's also a very good post on the Messari recently, talking about which D5 fundamentals of D5 protocol matter the most. I think that what we look at, first of all, if it's the dexas, we look at the volume. I think that's very universal, how much volume are they generated?

And then after that, we look at the fee value capture, if there's a few value capture. So I think right now it's pretty standard, like most protocol captic, like, for the non-stable coin protocol, they take 0.05% of the trading volume as a fee. And for the stable coin, they take slightly lower. I think curve took like 0.04% of the trading volume or actually the fee as an income. And then you look at the total value log.

And this actually represents how much capital this protocol is a security. I think this is a very popular ratio in the D5 space right now. and I think capital efficiency is on a case-by-case basis where I think some protocol is just optimized for more capital efficiency I think that matters but we still look at the fee generated I think that matter the most against the market cap of the protocol so I think this is ultimately how a capital asset is being valued in the traditional finance like a price to earning ratio

and to that extent the discounted cash flow how much cash flow you're generating should dictate how highly value you are. And after factoring the growth rate and the discount rate of the protocol. So these are the universal factor. But I think one factor that really drive a lot of the price action

is the user and the user growth. Because I think that at this stage, people understand the cash flow might not come in really because, for example, Uniswap have no cash flow because they just don't have any value capture at the moment. But they have value the most

among the DefyProtocop because they have a tremendous user base and the user growth is also one of the best in the industry. So I think this is a metric that, although there's no direct correlation with the value accrual, but it's something that the market is placing a lot of emphasis on. So what are some of the assets that you see out there, the protocols or projects that you see out there that would you say are undervalued based on the metrics that you look at?

Are there any things that really just stand out as a complete outlier between their valuation and the actual fundamentals that the project holds? Yeah, I mean, disclaimer, I think this asset might be something that defiance whole position in. I think that if you look at the pure metrics level, you can actually just go to token terminal and then you can just sort the asset by price to sale ratio and then you can just see or price to earning ratio. I think they're coming out with that as well. Then you can just see what is the most undervalue.

I think we have always maintained that sushi salt as very undervalue because, I mean, given the volume they are doing, they should not deserve some. such a huge disparity. A lot of people argue that, you know, Unisot V3 is going to kill Sushi Swat because SushRot is just like an older version like V2 design. But the fact that that hasn't happened, because I think that what we have seen over the last one to two months is Uniswifuble V3 is really optimized for the active liquidity provider, which right now means like the professional market makers.

I think it's very hard for retail to be a passive liquidity provider on V3. and I think there are some back text being run although the sample size is not big enough that they actually did not perform better than the V2. So I think there's passive LP still have its place and as a result

I think that at this ratio that Sushi Sonsu Sons is trading at there's market is basically pricing like zero growth you know, the market that Sousu So Sosu Sons is just not going to grow further which I think that's not the case and I think from a growth stage level

not looking beyond just the ratio. I think both R-Way and compound is undervalue by the market because I think among all the different D5 verticals, lending and borrowing are the segment with the most defensible mode. So in a sense that I don't think there is any new lending and boron protocol using the similar design building on Ethereum can come in and disrupt them within a year. I think it's just not possible because it takes a long time to build the trust and build the safety.

Because both of them have operated for more than one year and there was no security incident as well. So I think these take time to build and it's also the vertical with the most obvious liquidity and network effect because it's like if you do not have sufficient deposits in the platform, people can't borrow a huge volume and vice versa. So it take a long time to build out the network effect. And also because the token is worth a lot more, the liquidity incentive they give out is more effective as well. So it's just very hard for the early stage protocol to compute, RVA and compound in this regard. Arthur, let's go into a little bit of a case study with all of the AMMs that are out there

because there's a lot. There's uniswap, curves, sushi swap, bankor. We've already talked a little bit about some of these. But I want to go into more detail about specifically the sector of AMMs because I think that can really be an illustrative example. Uniswap, you talked about how it has really high growth. Sushi swap, you said, how it is being valued as if it's not going to grow. Then you also earlier talked about Bankor and how it has captured a lot of value for its token holders.

How do you see the market valuing these things differently? It seems to be that each one of them has their own fundamentals, right? Each one of them is capturing some sort of fees. But it seems to be that the market is telling different stories based off of each of these different AMMs. Do you have a rationale or an explanation of why the market values these things so differently? I think that it's just like,

right now market is in a way of, like the most of the investor, when they look at DFI, they want to invest in the growth. And I think that as a result, that Uniswap just captured the lion's share of the attention in the market and they are the pioneer of that model as well.

So market have a lot of confidence on Uniswap being able to maintain, that dominance and being like the most cutting edge team as well. So I think as a result, their model is always being placed a lot of premium. And I think for other AMM model, the more unique one, it would be Balancer and Bangkok, because Sushi Shop is just like the same design as a Unisov V2. I think the market is, it's one to see like the, what better the differences can make up, can compete with the V3 design.

I think so we are invested in both Bankroll and Balancer because we think that there is a value to their design and the way they present to the user. But I think it takes time for the market to learn about it and to be convinced, right? Because Balancer was actually, I think the second major DeFi protocol to kick off the liquidity mining. But after that, the traction got taken away by Unisot instead.

And then it always takes time for the market to spend time to understand a specific protocol. So you need some catalysts as well. So it can become in the form of fundamental, let's say like I think XC infinity and it's not a D5 protocol, but recently the price have done very well,

outperform most of the defypire protocol. It's just that because the revenue they're generating is just way too big to be. So this can be a catalyst event that your fundamental is so superior that the market just can't ignore it. Or you have some catalysts where people are really amazed by the design.

So I think both bank coin and balancer, they need this kind of event for people to really spend time understanding their design and to come to a conclusion that this design actually is really a very good design and the market should value them in a different way. So I think, yeah, you usually need some event to capture the market attention and for market to value you in a different way. I'd also throw maybe curve into the mix here. And I'm curious, Arthur, just one other follow up on the AMS. portion of this conversation is the market also seems to be somewhat divided and some folks believe that the AMM exchange world will be dominated by sort of a power law winner. One automated market maker will dominate, say, 80% of the exchange market. Others believe that there will be many different automated market maker designs. And you with an investment in Bankor and also

the balance are kind of more the long tail automated market makers at this point. Maybe that's more indicative of your belief. How do you think this shakes out? Will there be one power law winner or will we live in a world with many different automated market makers? I think that there's no power law because liquidity is very fungible in this space. And we have to see the scene have changed over the last one to two years. well. I think Idex used to be the largest decentralized exchange until they decided to I think make some changes. I think implementing KOC probably affected their fortune quite a fair bit.

And then, yeah, Unisop came to the scene and then maintain their dominance since then. But it's just that when you look at the centralized exchange, the fate has always changed, right? I mean, Binance wasn't that dominant until 2018. and then you have Bitfinex was used to be dominant and Polonix and the older time the Chinese exchanges was the most dominant as well so liquidity is very fungible and I think in that sense that there's always possible for some AAM to come with a new design and improve it and then just be more dominant

for a certain period of time so I think it's actually good for the end user because everyone is just trying to come with a better design and compete with overtime and I think that you will see a power law for a certain period of time but not forever. So I think that the situation can always change and you might end out in an equilibrium where just that there's no dominant M, that everyone just have a certain market share

that's not changing too much. And I think that if you subscribe to the aggregation theory, what matters is the aggregator anyway because they are going to, for any order there are more than a certain size, you will always use aggregator to get the best pricing rather than just go to one AMM to get the to trade there.

So I think in that sense, I believe that the power law is less likely to apply in the AMM because liquidity is very functional. They will always move to the to the AMM that give them the most best trade-off for them. I think right now for passive LP,

Bangkok is probably one of the best place because there's an impermanence protection. If you can stick for 100 days, you are not going to get any impermanent loss and you get some extra reward as well from the fee. So I think that for passive LP, these actually are, in most cases, not all cases, are better decision that providing in a V3.

Because V3, you need to actively manage it and you need to change the range, depending on market condition. Yeah. Yeah, this is interesting. So Arthur, you're saying liquidity doesn't necessarily have loyalty. We could live in a world with many different automated market makers.

And if people believe in sort of aggregation theory, then maybe some of these aggregation, aggregators are more important, the machas of the world, the one inches of the world. I want to ask you another question with respect to network effects and power laws. And this is the question about Ethereum and Heath Killers. Or some people call them Eith attempted murderers. What's your take on Eve killers? My take on Eif Killer is most of them are not going to be able to chip away at Ethereum's dominance, except for a very selected field protocols. I think my view, if I were to put a number, I would say there's probably less than

five that will be able to chip away Ethereum's dominance, but they will not be able to kill Ethereum. So I think I've said to a few, a lot of different people, so I think that Ethereum's dominance will probably come down a little bit. Like, I think let's talk about D5 dominance, right, or NFT dominance. like 95% of the D5 and NFT are built on Ethereum right now. And in the next two years, we might see that coming down to 80% just because that other protocols start from ground zero.

So their growth rate will always be faster than Ethereum. Because Ethereum is already the majority of the economic activity. So on a growth rate percentage, it's always going to be slightly lower because you're already bigger. Bigger stuff always grows slower, right? So I think Ethereum's dominion is still going to stay at probably around 80%. just because the network effect is so entrenched and Ethereum itself is also constantly improving as well like we have the optimism and later in the year

like the ZK rub deploying as well and then we have EVE 2.0 likely going to happen within the next three years as well so I think that the dominance is going to maintain but I do I would not write off the fate of all the so-called EVE killer completely because I think some of them they are trying to carve like what we call the Blue Ocean strategy,

they're trying to target a completely new user. They are not onboard into Ethereum right now. And I think the world is big enough for some of them to do well, but I don't think any of them will overtake Ethereum. So I'm curious about this, just digging into this, because you don't believe in a single dominant automated market maker, right? Because you think liquidity doesn't have loyalty and is somewhat fleeting. But you seem to believe that a smart contract platform, a open financial platform like Ethereum, has more ability to maintain dominance.

Why is that? Does Ethereum have like deeper moats than a uniswap? And like, why do you think that Ethereum can achieve its dominance and retain its dominance, whereas an automated market maker can't? Yeah. I think, yeah, that's a very good question. I think that when you look at the multiple factors, which I were going to go through, the network effect of a base layer is just a lot stronger

because I think when you look at the most successful so-called scaling solution or other chain to gain a lot of user recently, it was a Binance Smart Chain. So what did Binance Smart Chain? did well, that allow them to gain so much user in a short amount of time. It's using the same block as well, which is ether scan. They use the same team built for them called BSC scan, and they use the same wallet, which is the metamask, and use the EVM so that they can

plug in with a ether scan and a metamask. So this is the network effect of Ethereum right now. And why did Binance previously try to build their own decks before? But it failed, like, which is called the Binance chain, and they have their own decks built in, because they did not inherit that network effect. And Binance right now is likely the largest crypto company with the crypto company with the largest user base. Even with that, they cannot boosts up their own chain successfully without relying on Ethereum's network effect.

So I think that's a very good case study on how strong the network effect of Ethereum is. And I think the infrastructure that on a base layer, it's just a lot harder to migrate on, because when you talk to the technical guy, you have the subgraph you need to build, you have the DevToolings, all this thing. It's not like you build like a Defy App on a If Layer 1, the user can easily migrate because it's just like a front end,

they just have the MetaMass, but using a new layer 1, it's like a totally new user experience and the infrastructure that you need to use. It's also very different. It's like using to, I think the best analogy will be like an app store analogy. Right now the two most dominant app store is like a Google and Apple.

So a very big tech company, Microsoft, try to compete in this. They try to have their own app store as well. But even a company of this size couldn't do it and they just retreat in the end. They're just no longer doing this. Right now the market is just between Apple and Google. So I think this is probably the best analogy to understand the network effect of a base layer like Ethereum. And while the app is a lot easier to like, you know, to migrate between different layer one platform, right? Yeah.

I think perhaps to expand upon the answer, we could also include Ethereum layer two's where once you have your protocol built, as you said, like once you have AVE builds, once you have uniswap builds, it's easy for you to just deploy that on Binance smart chain or any EVM compatible app. And it's also easy for you to build that on Ethereum's own layer two, right? And so Ethereum as a base protocol can have Ethereum flavor derivatives, one of which could be Binance Smart Chain, another one could be Polygon, another one could be optimism or arbitraum. And these are all different chains that you're apt to be deployed upon, but you're stuck inside of the EVM ecosystem. While building the actual AVE the application or uniswap the application or any of the other defy apps that we know and love, building that from scratch is actually. the hard part. And once you do that hard part and you do it on an EVM compatible chain,

then you're kind of stuck inside the EVM compatible world no matter what chain you're on. And, you know, usually Ethereum itself obviously benefits from EVM compatible stuff, but also most importantly, Ethereum L2s also benefit from EVM compatible stuff. Arthur, how do you view Ethereum L2s as playing into the Ethereum moat conversation? I think that, um, it's just very obvious that they are major help to the Ethereum, especially on a scaling roadmap. And I think this is also come from the community, wanting to find a way to solve the scaling issue

before EF2.0 is live. And I think all these are actually just a very entrenched, further entrenched Ethereum's network effect, because all this layer two solution will need to adopt Ethereum's based infrastructure, EVM-compatible will make their adoption happen much faster and also having a very supporting similar infrastructure and depth tooling will just help them go a long way

so this definitely helped to entrench the network effect of Ethereum so actually I actually want to come back a bit on something that I didn't mention on why do I think the network effect of Ethereum is so entrenched I think there's also two another two things which I think is very specific to layer one one is the distribution of the ownership. I think right now most of the new smart contract platform is proof of stake base. And I think that I think most people agree that a proof of stake there's a lot advantage over proof of work,

which I'm not going to repeat that. But I think one thing, there is one slight disadvantage which I think is it's harder to decentralize the ownership of the proof of state block. chain over time compared to pro-of-work because pro-of-work the miner will always need to sell that coin to cover the operating expenses but for proof-of-state the selling pressure is a little bit lesser the holder will still sell that I think everyone have a take-profit point I think for people like us like we say that when Ethereum is at 20,000 20K or 50K or 100K then we will start to sell a little bit more of our Ethereum I think it's the same for pro-of-stake if they will gradually decentralize over time but the selling pressure would not be as strong

as a proof of work base. So any new proof of state blockchain will take a much longer time to decentralize and distribute their ownership compared to Ethereum. And I think that is part of the advantage of Ethereum compared to other proof of state blockchain because when the ownership is very concentrated,

it always lead to a slightly less censorship resistant, because a few token holder have most of the stake. And it also takes a time for a lot of the proof of state platform to achieve what I call the minimum viable censorship resistant level because I think that I think

decentralization is a spectrum but what really but you can't have to be like the extreme end of the spectrum like we only have 10 nodes and half of the nodes are run by the same parties so I think that is definitely you didn't even cross a minimum

threshold but I think for when you cross a certain threshold then I think people can start to trust that there's some form of sensor resistance built in and people can really start to see where is it going on the decentralization roadmap. And I think on both this factor, it's very hard to compete Ethereum because Ethereum has a very clear roadmap on how they plan to decentralize further and this whole ownership distribution. It's just a very strong mode that's very hard to overtake. So you think Ethereum will continue to be dominant.

but other layer ones will still have some role to play. I'm curious about this. If you had to pick one non-Etherium layer one to bet on, what would it be and why? Yeah, I think I'm going to get a lot of hate for this. But as an investor, I have to say, after doing our research, I believe that Solana right now has some potential. Because I think that if you want to compete Ethereum,

you can't compete on factor, where Ethereum is the strongest at. I think that you can't compete with Ethereum on being the most decentralized, and you can't compete with Ethereum on the same design and architecture. So I think if I really want to bet on the Eve competitor, I want to bet on a protocol

that is taking a completely different approach. And I think a lot of the other Eve killer, they actually are just making some minor tweaks to the Ethereum and have some marginal improvement. I think that alone is not sufficient. So I think what I think Solana has a potential is because they are taking a very different approach. They will not be as decentralized as Ethereum and they actually accept that trade off. But they do have a roadmap on how do they decentralize it, but they actually accept the fact that they would not have like no 300,000 notes running their 300,000 notes in the future because they require a certain level of hardware requirement.

But they want to find that the more endosives. hobbies, they're willing to spend like a few thousand dollars to run their notes and they accept that as a fine trade-off and their skilling is really a lot rely on the hardware and which I think is a very different approach compared to Ethereum so if I want to bet on something I want to bet on something

that's totally different not where you're making a marginal improvement to Ethereum, yep. Arthur I want to turn the conversation to a more global perspective about crypto and DeFi and Ethereum and while we are this global internet base industry, we all come from our specific parts of the globe. And we come into DFI. We come into crypto with our specific backgrounds and specific ways of viewing things. And one thing I've always

been curious about and never really been able to get my finger on the pulse of is how the East, generally at large, views crypto and Ethereum differently than the West. And I'm assuming the East is a very large place. There's subdivisions inside of the East. Overall, how is the East viewing this industry perhaps differently or just prioritizes things in this different industry differently than the West. And again, how is the East also subdivided into different sectors that view this industry differently? Yeah, that's a great question. So, yeah, I was categorized the Asia or the East community into different parts. First of all, you have the English-speaking region, which basically counts India and most

of the Southeast Asia. So I think these are actually, I think, due to the language, the lack of language barrier. So the adoption of Defi actually has been, I think, fairly, fairly common. I wouldn't say common, but among the crypto community, I think they are one of the fastest to understand Defi and actually use it in a pretty significant way. So actually, from our understanding, a lot of the Southeast Asia country have a pretty decent DeFi community. They might be a bit localized, but yeah, they are using Defi.

in a pretty major manners. And then you have the Chinese speaking region, which is basically China, Hong Kong and Taiwan. And these countries, I think initially, they were a bit skeptical because

I think China back then in 2018 have a big transaction mining trend among the central exchanges, which is quite similar to liquidity mining currently. And as a result, they were quite skeptical for most period of time.

But I think 2020, after the D5 summer, a lot of them have actually started to use D5 app in a major manner. And I think there's a lot more user up as a result of that. And then you also have the, I think the two other major crypto user, which is Japan and Korea. But I think largely due to language barrier

and a cultural factor, these two regions have not really been using D5 that much, compared to the other places. So this is how I would categorize them. And yeah, when you come to China, I think the Chinese-speaking region, what we have seen is they are usually a lot more practical and I think slightly less focused on the ethos.

I think what they really cherish about the defy is the self-custody of the asset because I think that they have seen the trouble of OKEX recently, which nobody can withdraw any balances for like, I think, two months. And I think that by using D5, they really prevent this issue from happening again. But I think on the decentralization aspect on like how's decentralized this protocol is, I think they assess a lot more trust in the, in a team and to the player itself. But I think for the English speaking community, we just want to have a lot more built-in check and balances.

So I think this is probably some of the more obvious difference we can see. But I think most of them have accepted the benefit of using D5 apps compared to like a central exchange. And I think everyone just like the fact that they are being rewarded by being an early adopter and user of D5 protocols. I think that's really interesting. There is a common ethos of crypto that you. you're going to find no matter what culture or background that you come from. But I think in your answer, I think it's, and maybe I'm hopefully not trying to just create something out of nothing.

But I think what I'm seeing is that everyone is coming to crypto for the reasons of the merits of crypto. They're the same universally. But different regions of the world or different regions of Asia emphasize something that their legacy financial system that they're coming from is really lacking. For example, you talked about how in China people really, really value that bearer asset nature being able to hold your own keys. Well, China is a top-down authoritarian region. You would want that power to be able to control your own keys, especially coming from that region. And you talked about how Japan and Korea don't really go into the protocols as deep as maybe what

we might do in the West, and they kind of stay focusing on exchanges. And that also makes sense from countries that don't have that deep of a history of financial markets or financialization. they aren't too comfortable going that deep into the world of crypto because that's just not where they came from their legacy markets. Am I reading too far into this or do you agree with that take as well? I think I largely agree with that take. I think the historical and cultural factors likely will dictate the pace of adoption. Yeah, I think that's definitely true. How much of this is just like language translation stuff though to Arthur D.3.

think. I don't know what Defi actually looks like in, say, Mandarin, for instance. Are there defy interfaces that are created in native Chinese, or is that something the defy community can work on more? Is internationalization and non-English speaking education, communication, interfaces? I think that it has to be taken as a holistic approach. I think by just doing a translation, that's a very good start. But I think ultimately, it makes sense to have some people in the community to speak to them and just graduate build that. So I think I want to bring an example. I think Maker Dow is probably one of the most successful Defy Protocol when you come to adoption in the Chinese speaking region. So I think one of the results is because they

hire a very strong Chinese community lead that really know the market there very well and as a result are able to communicate with a lot of the crypto user in China. But actually most of the other D5 protocol do not have such a person to sit on the ground and able to do that to their community. So I think that that is probably a more important factor. You have someone in that area to like a promo and evangelize

the stuff. I think this also happened in Ethereum, right? I mean, Vitalik at the very early days went to China a lot to evangelize Ethereum. And as a result of it, you still have a very big community in China. But a lot of the other protocol just did not do that. As a result, they just do not get the same mindshare. Yeah. So I think that you always need a few evangelists to help to promote the protocol.

So I think language translation is a good start. Having a good interface is a good start. But you always need some local evangelists. It's funny. It always comes back to people as the layer zero in crypto. That's what this entire industry is based on. Yeah. Yeah.

fascinating. So really quick, before we leave sort of the Asia perspective here, I'm curious your thoughts, Arthur, on all of the Bitcoin mining stories that we've heard from China, you know, legislation regulations, Chinese government coming down hard on Bitcoin mining. How should we interpret that? And what does that mean for crypto in China and Defi? Good question. I think that the interpretation should be fairly straightforward. I think right now China, they just want to have a lot more control over the financial market and in their view crypto is part of the financial market and actually it might affect their ability to further regulate or control the financial market as well so as a result they want to prevent this activity from happening so the

exodus of chinese miner is real so we know a few major Chinese miner and the mining pool, they are all going overseas to find, I can look for a new home. So yeah, I think that you can also see from the hash rate as well. I don't think these are coming back because it took a long time to build

all this infrastructure. So I think the exodus will just continue and they're going to find a new home elsewhere. And you're going to see the concentration of hash rate in China becoming a history. That's my prediction. Because I think even if, let's say, this is relax in the further, the uncertainty will just prevent all this big miners from reinvesting back in the region.

That's my view. And I think that another big factor is the Fiat on RAM in China is being curtailed further. So it will become harder and harder to convert the local currency, which is Remingbee into crypto, vice versa going forward because they just want to clamp down on all the OTC trading activities. In fact, one of the biggest OTC trader was actually put into jail, I think. Yeah, yeah, he was the, I think a guy called Zhao Dong. So, sorry, I might get the fact wrong, but that's what I heard. And so, yeah, but I think so we can expect, I think it's reasonable to expect the growth from the Chinese side to slow down a little bit. Because they just have a harder time to fiat on ramp.

But I think that the community that those that are initiated will continue to stay. like the sound of them, they will just always keep some of their balances in the crypto space, like some of their net wealth in the stable coin, in some Bitcoin and Ethereum. And some of them, they probably just, they will know that it will be hard to like convert this money into Fiat, but they will okay with it. And I think this is what going to happen going forward. I will say, Arthur, it seems like your jurisdiction, Singapore is absolutely crushing it when it comes to response to crypto, like the Singapore,

government seems to be handling crypto with a very open mind and also very soberly. Is that what it's like on the ground? Are you impressed with what Singapore is doing? Or are there more subtleties there? I have to say I'm definitely impressed. But there's some subtlety there as well. So I think that first of all, the regulator, even up to the top one, really try to understand what is it about. And I think right now their understanding is probably one of the top when they come to from a global regulated point of view. So they understand what DFI is. They understand the advertised benefit of DFI. They also understand the problem right now. But whether they fully buy into the so-called the benefit of D-Fi, we are not 100% sure yet.

They do know the benefit that we've been talking about. But whether they believe it or not, I think that remain to be seen. So I think they are waiting to see more evidence because I think the key thing to convince them right now is most of the traction in Defi is just restricted to the crypto space. It doesn't touch the mainstream user yet. So I think in that regard,

they are still skeptical that whether the benefit of DeFi can translate to the real world activities, which I think all of us believe will be, but I think just the roadmap towards that happening. But I think when it comes to regulation, Singapore ultimately is not a very big, country. So it will follow the FATF guidance and the major key law being drafted by the major, like the bigger country like US and EU. So in that sense, yeah, it's definitely a lot

friendlier and their understanding. But the subtlety is like that that doesn't mean that they're going to regulate this thing in a completely opposite manner compared to the guidance issue by the global financial policy setting body. Yeah. So I think that's a. subtly there. But I think the entire approach is also a lot less prosecutorial and less aggressive in the sense that when you're doing something, there's not 100% compliant and in great area, the first action is not to, you know, going after you, but instead of trying to understand what you're doing and make you compliant. So, yeah, so is, yeah, so I think that's the difference in the approach there. Arthur, as we come down to the close in this conversation, and thank you so much for giving

as some of your time, this has been, I've already learned so much. I want to ask you what you are looking for out of the crypto industry in the second half of 2021. What is really missing that you really think needs to be here as a part of this industry? What are the next innovations that you see coming that you are really looking forward to? I think it's really about scaling. I think we have seen the success of Polygon and also Binance Smart Chain. I think more scaling solution will just help Ethereum to scale and more D5 app to be able to onboard more user as well. I think the D5 protocol on Ethereum just cross, I think, I think two million, sorry, I think definitely have crossed one million user over time.

I'm looking forward to this crossing $5 million and $10 million probably by the end of the year. I think it's possible if we have a very successful scaling solution and it's just more and more users starting to use the D5 application. Yeah. So I think we went beyond the zero to one. phase in D5. I think next step is really about growing the user phase, growing the user base and just

getting more and more product to the hand of the normal crypto user and just the main chip user. Wait, so did you say that you think that we can 5 to 10x the users of this industry by the end of this year? Yes, I think it's possible. If the scaling solution is, yeah, it's good enough. I think it's definitely possible. Why is scale?

such a crux, why is everything hinge on scale? Because I think that you can look at this from like a traditional tech company, right? I think the initial user experience matters a lot. So I think if you do not have a good scaling solution, the initial, like, if users are being turned off by the first impression, they're just not going to come back. So I think it's important that we are able to onboard them with a very good first impression and then they continue to stay. That is a pretty bold prediction.

And I also love it. So five to 10 million defy users by the end of the year is possible. Just let's end with a couple more predictions, Arthur, if you're willing to indulge us, sir. We love predictions, so please indulge us. What do you think the total locked value in defy is going to be? And then how about the price of ETH at the end of 2021? Again, fun predictions. Maybe right, maybe wrong.

Sure. Just fun. Okay, so do you count BSC TVL? As part of the TVL, do we want to count that? Do we count it, David? I kind of count D5. Whatever is on DFI Pulse is close to being counted. Okay.

So probably not Binance March. Okay, let's use D5Pulse as the Oracle. Unless they added, though. If they added it, then we'll count it. I think we will hit... I think we'll hit 80 billion. Yeah, 80 billion by the end of the year. 80 billion.

So just a little bit up. That's a bit less. That's not very bullish. Okay, let's 200 billion. There's got to be a bullish. Okay, how about give us price of ETH? Price of Eif. I think it's very possible we will hit...

Can I give a range? Oh, absolutely, please. Yeah, yeah. Yeah, give a range. I think 5 to 10,000. Ooh, all right. Retaken new highs. Wow, that's bullish.

That's nice. Yes. Do you guys hold Eith? Is that part of the D5 portfolio? Yes, we hold if. because if it's money and if it's a major asset within the D5 space, we hold it a lot of time to provide liquidity to the protocol that we are supporting. Because most of the pair, even with the dominance of stablecoin, are still against if.

Like, yeah, like for, let's say for balancer, it's against if. And for a lot of the other liquidity provision we do, it's all against if. So we always hold if in our fund for various reasons and also from investment reason as well. to hold it. You hear it first. ETH is money. And not the first time you've heard it here. You definitely heard it here first. Well, Arthur, it has been an absolute pleasure

to chat with you. You're just full of insights, man. I wish you best of luck. Getting to a billion dollar mark with Defiance Capital. That seems like the next milestone. Congrats on all your success. And thanks for joining us on bankless. Thank you for having me, guys. Really appreciate that. And yeah, I hope you guys

have probably one million subscribers. and listener soon as well. There you go, guys. That's what's in store. In order to make that happen, let's get to action items. Give us that five-star review. David, how are we doing

on five-star reviews on iTunes? We could always use more. We don't have a million yet, so we definitely need a few more five-star reviews. Wherever you listen to podcasts, if you could go into that podcast player and give us those five-star reviews, that is how bankless climbs up the charts

in the worlds of finance and investing on iTunes and Spotify and how the bankless journey reaches as many ears. as possible. So if you have enjoyed your journey westward on the bankless journey, help share it with more people by giving us those five-star reviews. The other action item I have for you today is go follow Arthur Zero X on Twitter. Arthur, could you give us your Twitter handle? Make sure we get that correct? Sure. My Twitter handle is Arthur underscore ZeroX. All right, guys, give that Twitter

handle a follow. Arthur is always tweeting out insightful Defy Intelligence. Of course, risks and disclaimers guys, defy is risky. ETH is risky. All of crypto is risky. All of Crypto is ski, you could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks to.