Bankless - DeFi Didn't Break with Dan Morehead & Joey Krug

Episode Date: July 27, 2022

Many things have broken in the last few months during crypto's bear market. However, DeFi didn't break. Dan Morehead and Joey Krug explain why. Dan founded Pantera in 2003, then pivoted into cryptocurrency in 2013 and went all in on crypto, and is the firm's CEO. Joey joined Pantera in 2017 as co-CIO and is a seasoned builder/investor in the crypto space. Both repeat Bankless guests and both know more than a thing or two about crypto and investing. ------ 📣Rhino.Fi | Massive Mystery Airdrop https://bit.ly/3o9trRE  ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: 🌱 LENS | ACCESS CODE: WAGMI https://bankless.cc/Lens  🚀 ROCKET POOL | ETH STAKING https://bankless.cc/RocketPool  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  🌉 JUNO | BRIDGE FIAT TO LAYER 2 https://bankless.cc/Juno  ⚡️ ZKSYNC | THE LAYER 2 SCALING ENDGAME https://bankless.cc/zkSync  ------ Timestamps: 0:00 Intro 6:15 The Past Few Months 10:28 Crypto's 2008 Moment 12:40 The Mainstream Media Story 16:45 CeFi vs. DeFi Confusion 21:45 Media Incentives 24:00 DeFi vs. Wall Street 30:45 DeFi is Too Referential Critique 33:38 DeFi Worked Great 37:05 Transparency Thoughts 43:15 2008 Prevented with DeFi? 49:35 Educating Retail 53:39 Was This Surprising? 55:00 Quick Macro Takes 58:20 Closing & Disclaimers ------ Resources: Dan Morehead https://twitter.com/dan_pantera  Joey Krug https://twitter.com/joeykrug  DeFi Worked Great https://panteracapital.com/blockchain-letter/defi-worked-great/  Pantera https://panteracapital.com/  ----- 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 

Hey, Bankless Nation, welcome to another episode of State of the Nation. We're going to deep dive into a topic today. And that topic is a topic we've been talking about over the past couple of months. That is a whole bunch of C-Fi lenders that is centralized finance lenders, the Celsius of the world. They broke. But it seems like mainstream is blaming D-Fi? Like, why? Defi worked great.

That's the title of today's episode. David, who do we have on to talk about this? We have on Joey Krug and Dan from Pantera, who wrote this fantastic investor memo on this exact subject. And this actually really hits home for me, Ryan, because my favorite podcast, other than bankless, the daily ran this show called The Collapse of a Crypto Company. And it was all about how the visions of crypto have been completely invalidated by all these collapsing crypto companies. And I'm like, no, no, no, no. That's not the vision of crypto. So we are here to set the record straight about what exactly broke in the last six weeks.

months and what worked fantastically. And we're going to talk to Dan and Joey from Pantera to unpack all of this story. And hopefully the story breaks out into mainstream so that they can perhaps correct the record. Yeah, I love, you know, Dan and Joey, they're close to institutions. They know they're around CFI lending and they're also close to DFI. So I think they're going to be able to shine some light here. They also wrote a fantastic newsletter article recently called DFI Worked Great. We're going to talk about that as well. Before we get into it, want to tell our listeners about Rhino. So these guys used to be called Diversify.

And I knew them back when they were a decentralized exchange, fantastic platform, built on layer two, built on Starkware. David, what are they up to now? Because they've really expanded what they're doing. What is Rhino doing these days? Yeah, so we all know we're going into the world of multi-layer twos, multi-chain. And there's so many different things that you can do on all the different places. Do you exactly need to know what chain you're on to do your defy thing?

No, not exactly, whether you're on optimism, arbitram, ZK Sync, whatever. It's just defy things at the end of the day. These blockchains are supposed to be backends. And RhinoFi is one of the first apps that pushes the chain to the back end and it pushes the relevant information to the front. So it's a defy portal for your multi-chain world. You can do your basics off like swap and trade, but you can also invest in liquidity pools and stake

and other things that you might do in the land of multi-chain defy. Yeah, I think this is honestly the answer. to C-Fi, right? If we made, if DeFi was more accessible and if it was easier, then we wouldn't have run into the problems with trusted lending providers. We would have just gone straight to the source and straight to DeFi. So thanks to RhinoFi for fixing this and building some user experience around this. Go click the link in the show notes and you can sign up here a bit about their upcoming mystery drop as well. All right, David, got to ask you the question I always start these episodes with, which is, what is the state of the nation today?

Ryan, well, it is sad and unfortunate that we have to learn these lessons in ways that centralized companies end up having to give retail a haircut. Still, at the end of the day, the thesis is that defy takes over the world. And for those that believe in the thesis, in that thesis, which are you and me, Ryan, the state of the nation is we're taking victory laps, man. Like, we got the data. We're taking victory laps. We are taking victory laps. I am. Like, yeah. So I feel like this is applicable because mainstream media, like, they're taking victory laps and saying like it's their moment to say crypto is over. It's funny you should say defy is taking a victory lap and saying, hey, defy worked fine because mainstream media is saying, oh, look, we told you all along, crypto is broken. It's never going to work.

Here's exhibit A, B, and C. Well, okay. Mainstream media is grave dancing. We are taking our thesis has been proven and now we've got the data to show it. And also, mainstream media, get your shit together. this much smaller podcast called Bankless is going to set the record straight. All right, we're going to do that right when we come back with Dan and Joey before we do.

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In order to experience Defi and NFTs, the way it was always meant to be fast, cheap, secure, and fiction-free. All right, guys, we are back talking about C-Fi, the busts, the bankruptcies, and also contrasting that with D-Fi. joined by two fantastic guests, Dan Moorhead, whom we had on the podcast, just three months ago, I believe we were talking about Macro at the time. Of course, he is the founder of Pantara, did the famous cryptocurrency pivot at a very good time back in 2013. Dan, great to have you back on Bankless. How you doing? Great. Thanks for having me, Ben. We also have Joey Krug, who's also at Pantera. And fun fact, fun bankless fact, he came on, last came in the Bankless show two years ago to the day. All right. We were talking about Defi, I think, at the time.

And here we are talking about it two years later with him again. Joey, welcome back to Bankless. Thanks for having me. All right, guys, let's get into it. I want to start here with what's happened in crypto. I think since Dan, probably we last, you know, talked over the last three months or so. And it's kind of rippled out beyond the crypto bubble. Mainstream is caught onto this. And given lots of spotlight, lots of attention. And that is what David has called before, Crypto's 2008 moment, where we saw a lot of, I'm going to call them shorthand, crypto banks go completely bust and get wiped out. Can you guide us through what's been happening over the last three months or so in kind of the CFI world? Yeah, I'll do it take on. I'll let Joey shares you.

You know, so we've had a long bull market in kind of everything, rates, equities, crypto, all that stuff. And in bull markets, people, you know, take on more and more leverage. So there were a handful of lending entities in crypto. Most were started in 2017. So they kind of enjoyed the ride we've had since crypto is, you know, in the low single-digit thousands in price. And, you know, just some of them took on excessive leverage.

And when a market goes down 75 or 80 percent, you have any leverage, you know, it's really dangerous. So, but, you know, I think the perspective everybody should have is anytime you have a super disruptive technology, people are going to try all kinds of business models. You know, it's like the internet in the 90s, you know, some of them work, some don't, some get lucky, you know, some have bad luck, you know.

And in the end, though, the underlying technology is fantastic and blockchain is going to, you know, be incredibly important. Yeah, I think the thing I would add to that is I remember when I first joined Pantera, Dan said something about, you know, like, if you think about like assets or pooled asset vehicles, you know, they tend to be limited by their least liquid asset. And if you look what happened to all these lenders, they started doing things like letting people borrow against collateral that they considered to be close to one to one, but wasn't anywhere close to that from a liquidity standpoint. And so like what I mean is if you look at GBTC, you know, there's two liquidity question marks there.

One is it takes six months to be able to sell it after you buy it. There are firms that would let you borrow against that in cash at very high loan to value ratios, you know, even though the underlying asset couldn't be sold at all. And then even once it was liquid, if you look at the trading volume of GBTC versus Bitcoin, it's kind of no match, right? GBTC is a much more illiquid asset. It trades in the over-the-counter markets. And so what ended up happening is people just basically, you know, borrowed against this very illiquid asset. And, you know, when when people need to sell, it starts causing cascading liquidations because if you have a lot of money in a very liquid asset borrowed against something that's very illiquid, you know, the market impact upon

selling it's going to be, you know, disproportionately higher. Would you guys take the comparison that this is crypto like 2008 moment? Obviously, there are some differences. We're not trading asset back securities that has nothing to do with the housing market. But other than that, like the parallels kind of seem to be pretty strong. For example, we have two, entities, centralized entities, with too much exposure that are black boxes that don't have any transparency into what's going on, not realizing that there is like a center point of contagion being three errors capital, but also a few others. And now as a result of all this, there's going to be a bunch of just like court dates and legal documents and a bunch of fallout. Is it fair to call this? Crypto's 2008 moment.

Yeah, I think that's a great analog, right? In our letter, we pointed out a newspaper article that said this was totally different than Lehman Brothers. No, it's pretty much the same. You know, some very black box centralized entities. You know, I had a business model of work for a while, but when the leverage swung against them, everyone was trying to rip their collateral back or withdraw. And so, like Joey said, you get these, you know, run on a bank

where they have, you know, borrowed money overnight and they've lent it out for six months or, in some cases, you know, multi-year periods of time. And, you know, that's a story that's as old as bank. except we didn't get bailed out it feels like that's still on the table so that's important right Mount Cox

you know BitFinex there's been a lot of issues in our industry and not one taxpayer dollars been you know spent bailing people out hugely important right when everybody gets all you know excited about problems

or an issue there always will be problems but the industry just deals with it itself rather than always being backstop by the taxpayer Yeah. And there's a bunch of nuances that we want to get into, such as, you know, why did DFI get paid back first before CFI companies? What are the nuances of that where such as like the over collateralization of DFI protected it? Is that really a fair comparison when like, you know, perhaps in a future version of DFI, we have under collateralized loans and then we do have some of these risks? There are a bunch of questions that I want to get into, but we'll save that for later. I really want to get into the story that mainstream media is telling. And, and, and, And Dan, you put this in the in the Pantara letter about the Wall Street Journal's article titled, Defi's Existential Problem. It only lends money to itself.

And it talked about all of these, you know, these crypto companies, things that if you're inside the industry, you would not call these defy. Not in the slightest. We call these things C-Fi. And I alluded to this in the intro. We had this daily podcast talked about the vision, the utopia vision of the crypto industry was just realized to be a bunch of like smoke and mirrors. and it's actually just the same old financial system, like put on new rails. What was your guys' take when you guys saw the mainstream media report on it like this? And what was your guys' reaction to it?

Joe, you want to start? Sure. Yeah, I mean, I think my view on it is, you know, if you look at kind of the space, the space of these lenders, these centralized lenders, it's not a model that makes a ton of sense from a business model standpoint because either it's a very, very low margin business. It's basically the business that banks are in. The big difference being that banks can basically, you know, basically create money by virtue of lending assets out. They have very low collateral requirements.

The assets that they're, you know, lending against are things like houses where, you know, yeah, the housing market can crash and there have been problems with that in the past. But, you know, it's a bit less volatile than, you know, something like Bitcoin or Eath. And so if you look at these businesses, their incentive is basically to take on disproportionate risk, right? They're basically running prop hedge funds. And it's kind of a, you know, I guess the word I say, it's kind of a scam model, right? Because like, imagine if like, you know, when you invested in Pantera, imagine if instead of, you know, us taking 20% of the upside or whatever, imagine if, you know, we gave you 10% and then we took everything else.

And then you held all at risk. It's a model that doesn't make any sense. And then I think if you look at the incentive of a centralized business, their incentive is not to like deal with, you know, risk mitigating. It's to do what they can do to create the business. the largest kind of net interest margin possible to spread between what they're borrowing and lending at versus in defy you know you don't have that problem release today you don't have that problem because these protocols can't rely upon things like you know soft assurances they can't rely

upon people saying well i do have the money oh why are you in 24 hours you know maker has no idea whether you're actually going to pay it in 24 hours or not that's why it liquidates you pretty aggressively and so i think that's kind of the big the big difference between the two that i see Dan, what are your thoughts? Yeah, I think that's a great point. One of the things that I would say now that sounds easy to say, but I was saying a few years ago is if an entity's paying way higher interest rates than banks for paying, it's either there's just a new market with an arbitrage

and it really is a supply and demand imbalance. But there are a couple of other potential reasons. One is there's credit risk or counterparty risk. Another one, maybe there's, you know, technology risk. There's a flaw in the software. So I think in hindsight that that is what was going on here that some of these entities are paying, you know, really outrageous sounding yields because they were trying to accumulate assets, potentially to sell more stock to get a higher valuation to accumulate more assets in potentially unsustainable business models. And again,

you know, we're going to have to learn from these things. And there will be great centralized blockchain lending companies, right? It's just they're going to have to have lower leverage, pay lower rates, probably grow at a more reasonable pace than we were seeing in the past. That's funny to your point, like there will be great centralized crypto lending institutions. In fact, even when we saw the meltdown here and the contagion, we saw some that were just like absolutely terribly managed from a risk perspective, like almost like ludicrous. Like you couldn't, you can't even believe this is real and this is happening.

And others that actually weathered the storm fairly well. And there was like this wide spectrum in the middle. I want to come back and talk about more of that in a bit. But let's get back to this article, right? So to David's point, the Daily Podcast, they were very much lumping crypto and DFI with the Celsius of the world and the CFI companies that failed. And even, you know, kind of looking at this article in the Wall Street Journal that we were just showing up earlier, the title is defy's existential problem and only lends money to itself.

And the image that you see is an image of Alex Machinsky, who is the CEO, not of a defy protocol, of course, or a company that created one, but of a crypto bank called Celsius, a C-Fi company. It's nothing to do with defy. And yet he is the cover story here. And I can't, you got to acknowledge the irony of him wearing a shirt that says banks are not your friends, well, actually, like, being a bank himself. And so I want to get to some of the criticism here, but let me read directly from the article because you quote it in your newsletter as well. Cryptocurrencies keep nosediving. The chaos has spread to defyceals. Celsius, a crypto lender with assets of around 20 billion was recently forced to freeze deposit

withdrawals. Last week, Crypto Exchange, FDX said it was bailing out one of the Celsius troubled rivals, Block 5 with a $250 million loan, not long after rescuing crypto broker Voyager Digital, Voyager, BlockFi, Celsius, FTX, all of these are CFi companies. I want to get to the first thing you address in your letter, which is this weird thing that mainstream financial reporting seems to do, which is equate DFI and CFI together, as if they're the same thing and calling them both kind of a house of cards. Why does this happen? Why do they keep confusing CFI and DFI?

And is there a cure for this? Dan, to you. Well, you guys know as well as I do. they're super passionate people on both sides of blockchain. People like us that really believes can change the world, super bullish, and then there's a lot of skeptics. And being skeptical on something that goes up, you know, 2.5x a year for 11 years is tough business.

So when it actually goes down, you've got to make your time. If you're a skeptic, you have to really make this work. And I was on a panel like the day after a while I was blew up with Nehriel Rubini, right? And that guy's predicted 100 of the last one crashes, right? right? And so he's got to make it happen, you know, when Bitcoin's down a little bit. So I just think that's it. It's like, if you're a skeptic, you just have to like pile in and go with it. And, you know, frankly, they're selling newspapers, right? Like, they're not trying to get the story right. They're just trying to sell. And, you know, destruction, failure always sells, right?

Like telling everybody that 10% of all U.S. to Mexico remittance goes over Bitcoin, that doesn't sell newspapers. It's good news, right? Like, it's helping two million migrants every day, right? Like, that's awesome. But that doesn't sell newspapers talking about, you know, existential problems and all that. You know, that's better for news. So I think we're just going to see that. But our job here is to try and help educate people on reality.

I also definitely want to put a lot of blame on Alex Crosinski himself. He was this person that was masquerading as like the Celsius app as defy, like break up with your bank, put your crypto into the Celsius app, definitely realizing the discrepancy between what was true defy and what was Celsius. And so, like, there are these grifters that come into this space understand the true ethos of crypto, understand the true power here, and then build this old thing, but with the new things narratives. So I do think there's, like, a lot of blame as to why mainstream media can't really seem to get it right is we all know crypto's hard to learn.

We've all been through that. But then you also have these grifters come in and like obfuscate the true effort, the true ethos of crypto by making up this like centralized centralized app with a defy branding. Would you guys agree with this take? Joey, any thoughts? Yeah, yeah, I definitely agree with that. I think, I mean, I think if you look at kind of the universal reporters, you have some who do, you know, really thorough fact checking. And you have some who kind of do it much lighter, right? And if you look at something like Celsius, you know, they told everyone, oh, we're defy, you know, they raised hundreds of millions of dollars. from what you would think were really sophisticated investors. And so if you're a journalist and you're kind of doing the more, you know, light version of fact checking, you might look at that, skim over it and say,

oh, that's a great story. I can write, you know, how defy failed and not actually kind of look deep under the hood. There's also an element of what Dan said where, you know, people are trying to sell newspapers. So there's a bit of a, you know, incentive misalignment between reporting what's 100% accurate versus what sells. But I actually think a good amount of it, I would say over half of the inaccuracies that you see in the media are just the reporters haven't taken the time to really, you know, dive deep on it, is my view. Do you think partially, Joey, it's because they're not incented to take the time?

So, you know, I don't know what the editorial stance of the Wall Street Journal is, but I have to imagine it has to do with Wall Street, right, and where their incentives are. And, you know, I'm not, I don't know if Wall Street is kind of in a war with defy or the existing banking structures in a war with defy. I could imagine that being the case. But, Certainly, they're not insented to promote it. And they're very fine with talking about C-Fi bankruptcy and defy in the same breath, because, like, what do they care if this crypto experiment works out? That would be one take.

Do you think that some of the mainstream financial reporting just has no incentive to talk about the good qualities of cryptos is part of the problem? I definitely think there's some out-sellment of that for sure. Like, you know, if you look at like a bank as an exchange, example, you know, they have this huge business that today is, is going to be disrupted, you know, over the next 10 to 20 years. And, you know, it's, it's in your incentive to muddle the waters between C-Fi and defy, right? You know, the more you can make it muddy and make it so legislators and people in Congress can't understand it, the higher odds you have

getting regulation passed, it doesn't actually make sense. I think the thing is interesting, though, is, you know, we recently a lot more congressmen and congresswoman have been talking about the space and we've talked to a lot of them. And, you know, surprisingly, actually, to my surprise, people are actually taking the time to do the research. Like, they understand that there's a difference. And I think people realize that, like, this issue of, you know, crypto and how it's regulated long term is actually something that, like, A, matters and B, that voters care about. And if you look at, like, the average voter, the average voter isn't like, you know, super pro bank, right? Like, you know, the average voter isn't going to be like, oh, I'm going to go to the ballot box and vote, you know, because there's this, you know, congressman who supports, you know, some legislation that Bank of America wants.

Versus, you know, if there was some congressperson trying to, you know, quote unquote kill crypto, they probably would go out and vote against them. And so I think people in Congress are starting to realize that. And so I think like even the kind of like narrative money in the waters isn't actually really succeeding, which I think is, you know, somewhat heartening, at least in my view. Okay, so we know that defy and CFI are not the same thing, of course, even if some of the mainstream media is having difficulty kind of separating the two. Let me come up with another criticism that was in the Wall Street Journal article that we're just citing. And I'll read a quote here. Defy has ended up committing all the same sins as Wall Street, essentially becoming a vehicle for a new generation to engage in the rampant speculation typical of pre-2008 investment bankers. So the charge here, defy is the same as Wall Street.

You crypto people, you're saying that this is a new thing, that it's more democratic finance, that it's kind of here for the people. Well, that's not true. It turns out that you guys were Wall Street all along just with a different veneer. What would you say to this criticism, Dan? Well, yeah, you know, any new technology has people that want to speculate on it, right? But there are probably, you know, 100 million people that actually use crypto. in real world situations every day, you know, transmitting money across borders or whatever.

And then there are some people that are speculating on it. And that's just, you know, it's just the nature of a new technology. People are going to want to, if people who believe it are going to want to invest in the future of it. So you're going to see that. And we've seen that already for 12 years, right? There's been bubbles. There's been bus. But, you know, blockchain prices normally end up higher than they began each cycle.

You know, so I don't think the fact that there are speculators is anything new. or, you know, in any way negative. It, you know, happened in the dot-com boom. It happened in, you know, all kinds of booms that we've had over centuries, basically. So the fact that people want to speculate is not in itself a negative. What about this charge, Joey, that defy and Wall Street are the same thing? It's kind of the same mechanism. It's going to collapse where it's going to result in a similar sort of system.

What do you think about this? Yeah, I mean, I think they're, you know, quite different. in some really key ways, right? So if you look at, you know, historically on Wall Street, there's not often not a ton of transparency into what's actually going on. And so if you look at, you know, 2008 and some of the collapses that happened then,

you know, no one, even people at these companies, no one knew, like, what their derivatives exposure was. When you had the bailouts, you know, the government was both guessing on how much money they needed to use to actually do the bailouts and also didn't know the derivatives of exposure until long, long after everything had to have, occurred. And so you have all these weird situations in traditional finance due to kind of,

you know, things not being transparent where you don't actually know like what's going on. You don't actually know what like your actual risk is. The CFI companies, you know, built on top of DFI like Celsius, like they have the same problem, right? Like if Celsius had a thing on the website that showed, you know, in broad strokes, you know, what was the average of clarity horizon of a dollar deposited in Celsius? I don't think we'd be talking about Celsius today because they wouldn't have, they wouldn't have had customers. You know, if the customers saw that wealth, withdraw all your money, it's going to take you, you know, two years. And by the way, your money is in, you know, assets that have 100% plus annualized well, that person doesn't know what that means. But the press would cover it and tell people what it means, which is like your money is really risky. It's not like you're depositing USDA and it's some low risk thing. And so I think that's one important difference to transparency. And then two is the risk controls. And there's this great like saying in software, which is like worse is better. And I think you can think about risk, risk control. systems, you know, on Wall Street, people come up these really complicated risk control mechanisms

where people kind of convince themselves that they know more than everyone else and that their risk mechanism is right. You know, you saw this with the, you know, credit default softs issue in 2008, and you see it, if you look back over the last 300 years of financial history, you see it a million times, whether it's, you know, long-term capital management or even three arrows or anyone else. But if you look at defy, it's very simple. You know, it says if your loans within a certain percent of a collateral threshold, you start to get liquid. If you don't top up the collateral, you get liquidated. And it's very basic.

And everyone in traditional finance says, oh, that's super inefficient. And it's like, yeah, it's less efficient. But it also means that if I'm depositing money in it, I don't need to trust, you know, compound or Avey or maker to like call some, you know, supposedly rich person at 3 a.m. and have them top up their collateral. And, you know, often in these collapses, what you find out is people who you as a centralized business thought were supposedly rich actually aren't. Or they borrowed the same money like 10 times from. 10 different venues and no one's talking to each other so no one actually knows that.

In Defi, it's much simpler and so these problems don't exist. Sure, it's less efficient, but it's also much, much less risky, I would say. I want to follow on to Joey's point about transparency. That's the whole thing about blockchain, right? It is all out there for somebody to see. And so decentralized projects all let you see what's happening. And like Joey said, if you really knew what was happening behind the curtain and some of these centralized lenders, you probably never would have. lend him any money, right? And the Lehman story is so interesting because when it went under, nobody knew what their risks were to the firm and nobody knew what collateral they had.

Everyone just grabbed anything they could. And, you know, abrogated contracts didn't give back collateral. It was all just a huge mess. And at the beginning, people like, it's $120 billion out loss. It's all terrible. World's coming to women in. Like six years later, you know, bankruptcy proceedings and all this stuff forever, they lost $3.9 billion. You know, it was a tiny amount relative to the crazy damage it did the entire world, right? It would be so much better for the U.S. Treasury and just write a check. Here's $3.9 billion. We're done.

Let's move on, right? It was crazy because nobody knew. There was, you know, total black box. And so that's the beauty of defy. Is in the future, you know, protocols will have all their information out there. And you can make a choice. You know, do you want to do business on Maker Dow or whatever. You can look at all the stats and decide if it's a good idea or not.

Yeah, that's fascinating. You know, great example. Mount Gox centralized. We're still dealing with the bankruptcy, right? That was like seven years ago, right? Like, it's still going on and on and on. Whereas, like, in DeFi, we already done. We already did the May crisis, and it's over, and we're on to the next thing.

David and I have also... We've also commented here that, like, every generation needs to learn the lesson of not your keys, not your crypto, right? And so, like, every 10 years, we do something like this. And this was kind of another Mount Mount... gox for people depositing their crypto into centralized providers. And a lot of these people, to your point about the black box, Dan, they had no idea they were actually lending money to Three Arrow's capital that Suu was using some of these proceeds

to buy yachts and stuff, right? Like, this is the craziness. But with defy, everyone who lent to a defy protocol got paid back. It was orderly and efficient liquidations. Even Celsius had to pay back their maker loans and their AVE loans. which is incredible. Let me get to another criticism that was in the Wall Street Journal article. And that's the criticism that defy is too self-referential, right?

It's like there's no real-world assets. So even when you're collateralizing things, it's other, you know, defy tokens. The comment is this. Crypto lenders exclusive focus on other crypto projects suggest their problems run much deeper than a Lehman-style liquidity crisis. So this is the comment that even all the crypto stuff, It's all kind of based on other crypto assets and it's a house of cards. There aren't any real assets that are backing some of these loans.

What do you think about this comment, Joey? Yeah, I mean, I have a couple of thoughts on it. You know, one is if you look through the history of, you know, financial tech innovations, people have used that criticism every single time, whether it's from the invention of the joint stock company a few hundred years ago to the invention of options, the invention of swaps, every derivatives ever existed people have used that criticism. And what's interesting about it is it's both true and wrong, right? Like in the beginning, new technologies are used a lot for speculation. They are very self-referential.

You know, when the Internet first came out, it was a bunch of academics sending each other their papers for peer review. Pretty self-referential. You know, but as time goes on, people figure out new use cases for these technologies. They figure out new ways to use them in the real world. and you know, you fast forward five, ten years, and, you know, no one makes that criticism anymore. Or at least, you know, people who do make that criticism, like, nobody cares because it's so obvious that they're wrong, right? Like, imagine saying the Internet is just self-referential pointless today. But tons of people said that back in the 90s.

You can pull up videos of tons of talk shows where the hosts are like, you know, making fun of Bill Gates saying, like, what's this crazy thing that you call the Internet? It kind of seems like a joke. And the same thing is true with, like, the history of the automobile, you know, well, my horse is faster. so I don't need that car. People are very short-sighted when it comes to tech innovation. And so I think that is somewhat true today. It's starting to change. You know, doing stuff in the real world is harder than the virtual world.

But I think we're starting to see more and more of this. I think it'll probably start to kind of take off more with derivatives that are pegged real-world assets. We're just talking about this in our investment committee meeting yesterday. Like, synthetics has a bunch of new traction recently on stuff in that vein. And then, you know, there already are things to take place in the real world. world on MakerDoubt. It's, you know, it's pretty primitive and early. But I think if we have this conversation again in five years, you know, it won't look primitive and early anymore. You know, I was asking the question earlier of like, why do they keep confusing CFI and DFI

and is there a cure? I actually think the cure is episodes and events like this, where you saw the chinks in the armor of CFI and you saw it kind of melt away and, you know, go into bankruptcy and all sorts of issues, whereas DFI stood strong. And I, I want to to go back to the kind of the title of the article you published to Pantara investors, which kind of captures it for me, which is Defi worked great. It did work great. And maybe we could just spend a second contrasting what worked so well about Defi. And Joey, you were talking about like risk controls and transparency. But how well did Defi hold up through this storm? And this is a pretty significant drawdown, of course, and a pretty good like testing.

of the system to see if it works. I don't know where it's like 80% drawdown on ETH or more, right? 90% on many alternative layer ones, you know, close to 80% on Bitcoin, this sort of thing. How, why did DFI work great? Like, what about it worked so well, Joey? Yeah, I'd say, actually on the maker thing, I used to always do this tweet, but I quit doing it because it just became redundant. But, you know, back when people used to say, oh, Maker's never going to work,

doesn't work. I used to periodically tweet out, you know, dye is still a dollar. And, you know, like I did, I think I did it. Last time I did it was like in the March of 2020 crash where, you know, everything went down 50% in a day. And, you know, it bounced back pretty smoothly. And I think, like, if you look at, you know,

what's different about, about defy, I guess the main thing I would say is like, and like how it works is it's just much faster at liquidating people. And so if you look at, kind of every protocol you can think of, a compound maker, you know, other kind of more obscure ones, you know, these centralized lenders had it, as you pointed out earlier,

had to pay back their loans or they got liquidated. You know, users who had money deposited on these platforms. Juno is bringing crypto-friendly. And it's added up price to eat falling or whatever, as many people were. You know, they still didn't lose their money. And I think the reason is just because of how simple liquidation mechanisms are. you know, versus if you look at the centralized companies, you know, their mechanisms don't work that way. Like, I have friends who have to use those companies, and I know, like, when they're close to liquidation,

you know, they'll often give them like 24 hours, 48 hours to pop up the liquidity. And that's like even if they, you know, fall in below bar of value, right? Because they just trust them as a counterparty. And there's a lot of risk in doing that. And if you don't really have that issue. Dan, Dan, what would you add to this? Oh, I know, I think is spot on. You know, and Defi, it's just code and collateral, right? Like, and you can't con code. You can't, like, lie to it.

You can't, you know, say you've got more assets that you do. You have to post the assets, and the code owns the assets and controls the assets. So it really is superior, you know, and like Joey said, it's instantaneous. So there's no, like, hey, you know, we're going to do a margin call. We're going to wait, you know, 24, 48 hours. so it can be proactive and liquidate, and it does just do whatever it says it's going to do. Whereas centralized lenders don't. They just, they ghost you, right?

Like there's a lot of stories of these centralized lenders taking way more risks than people know about and then just not being in touch for days or weeks or now months. So, you know, Define really is superior because it's, you know, going to actually do whatever the code says it's going to do. there's an angle that I want to dive into, which is the transparency side of things. And that's definitely one of the many stark contrast that we're seeing in this whole story, where as it turns out, Suzu Three Ro's Capital, we're at the epicenter of like 37 different lenders who all lent them money.

And perhaps if just a few of them got on the phone with each other and be like, wait, Suu just asked to borrow a billion dollars. Did he ask you to borrow a billion dollars? Like if we had that game of telephone with all the C-Fi lenders, maybe we'd have actually been able to prevent this, but by the nature of what a centralized lender is, that's just not going to happen. They're not going to disclose their business practices. There's probably some protections against their own clients that they also want to protect. But defy apps have no such interests.

And not only that, but they put their entire order book or position on chain, which a lot of traders or other market participants have said this is actually a detriment to defy because that transparency, you know, they disclose their hand. They're showing their cards. Like, we are, we are buying, you know, ether at $1,300. And like, that is a position that you can see on the market. You can see where all the liquidity is, for example. You can see who gets liquidated at $1,400 ETH. And so individuals look at DFI and feel a little bit disadvantaged, but the system as a whole is inherently transparent. Do you guys have any thoughts on just like, is there a where C-Fi can become more transparent? Is there a world where D-Fi can kind of suit the needs of these individual players

that would like a little bit more of obfuscation? And overall, just like what role did transparency have in the D-Fi ecosystem that prevented it from looking like the C-Fi ecosystem is right now? Dan, I'll start with you. Well, yeah, no, it's an important point. And the next generation of centralized lenders are going to be forced to provide more transparency, right? We did a five-year experiment in the total black box.

and didn't work great. So whether it's, do you mean Dan forced by regulation? Yeah, I was going to say whether it's by commercial motivations or regulators and probably both. But, you know, people aren't going to want to lend billions of dollars, you know, to entities.

They don't know, you know, what they're doing. So, and we even saw that, you know, with Credit Suisse and other big lenders to, you know, some big family offices and stuff. They had no idea what, how much leverage their clients were taking. And so everybody is learning that lesson, both in crypto and in the normal securities markets. So they'll be forced to disclose more about how much leverage they have, what the imbalance is between the timeframe of their liabilities and their assets. And then, yeah, you know, regulators probably are going to get more active and require more transparency. And, you know, frankly, more transparency would have been great, you know, for our industry.

Like, you know, some of these firms took on too much leverage and it's unfortunately, has a negative blowback to the whole industry. Are you in favor of this kind of regulation when it's needed for black boxes and centralized, you know, providers? Yeah, you know, I'll say a very controversial thing. I'm very much in favor of sensible regulation. Unfortunately, a lot of the things I've heard are not sensible. So, and I used to say this 10 years ago about Bitcoin, it suffered from a lack of regulation.

Like when FinCEN and all these other entities like the IRS had regulations on Bitcoin, it helps, right? It helped people decide, oh, I really want to invest because I get capital gains, tax treatment and all that kind of stuff. So some regulation of centralized lenders would be better for our industry, but there definitely are some crazy, you know, outcomes that could happen. You know, some very negative regulatory regimes that could happen. There's a conversation that I want to have. And it starts with 2008, where Bitcoin was created in the wake of 2008. And it's been marketed as a result or in response to the bailing out of the banks. If under a Bitcoin standard, we would not have bailed out the banks and we would have preserved our monetary policy.

And after the D-Fi or C-Fi broke in 2022, I think we want to expand that trajectory a little bit more. Like, would Defi have actually prevented 2008 if it had existed under a Defy paradigm? I think that's a really interesting conversation, but I'm going to save that for the second half of the show. So we're going to have to go to some of these fantastic sponsors that make the show possible. Juno is bringing crypto-friendly banking straight into your checking account. With Juno, you can send money from your Juno checking account straight onto a layer two, like Polygon, Optimism, Arbitrum, and they have ZK Sync and StarkNet support on their way. You can skip the ACH wait times.

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extensions and it's time to switch to the Brave wallet. Download Brave at brave.com slash bankless and click the wallet icon to get started. And we're back with Joey and Dan from Pantera. Right before the break, I was teasing this trajectory that I want to unpack a little bit. The narrative that a lot of Bitcoiners talk about Bitcoin is that if we had the 2008 financial crisis using the Bitcoin standard, we wouldn't have been able to bail out the banks. We wouldn't have been able to print a bunch of money because of the Bitcoin standard. The sovereignty of the money would have been preserved.

The value of the money would have been preserved. But also at the same time, I remember a quote from Ben, Bernanke saying if we hadn't stepped in in 2008 things would have been way worse things would have entered perhaps a capital D depression not just a pretty pretty bad recession so I'm wondering to you guys if we could just play out a scenario in our heads and just talk about this what if 2008 happened under a defy standard would defy have been able to prevent something like a 2008 financial crisis where we have perhaps like good liquidity like Joey said good or good transparency, as we've talked about, and optimize transparency as to where all the assets are.

Joey, what do you think about this idea that the 2008 financial crisis would have been prevented using defy rails? Yeah, I think it certainly would have been mitigated. I think, you know, if you look at the traditional financial system, right, like the problem is it's kind of become addicted, right? It's like if you're addicted to drugs, like, and then, you know, you can't just migrate at all a defy overnight because, you know, then people would, would, you know, die from withdrawal. The market would die from withdrawal, basically. And so you look at the market, like, it's kind of addicted to, you know, loose monetary policy and in low rates. Which you can see is evidence of this is just like, you know, rates are hiking a little bit relative to historical rates and, you know,

the NASDAX down somewhere close to 30%, something like that. And so, but I do think one thing interesting about defy is it you know the much tighter liquidation the much tighter kind of of risk policies that sort of thing it's certainly much easier to migrate over to that than like migrate everyone over to bitcoin or a currency or whatever like that's that's not going to happen but i would i would not be surprised at all if 20 years from now most of the world's financial rails you know run on on top of defy based systems under the hood and obviously people are always going to do stuff on top it's more risky like it's just human nature people like risk you know the core base layer though i think will be much more stable, right? So if you look at finance today, you know, the core base layer isn't always

stable. 2008 was the great example of that. Also, you know, March of 2020. But once everything's on defy, at least the core base layer will be stable. There will be stuff on top that blows up, just like there was this year with the, you know, centralized companies built on top. But at least the core of the financial system is like solid. And I think that would help prevent the problem Ben Bernanke talked about, right? Like, you know, it would have felt like the role of what it would have ended, you know, if the government didn't fail people out in 08 versus, you know, if it were just a handful of banks on top of, you know, rails that were really solid, where everyone was kind of sharing the same sort of risks mechanisms, liquidation mechanisms, transparency that DFI

provides, I think 08 would have been a much smaller, smaller event. Dan, any thoughts as well? Yeah, you know, all the issues like that are from excess, right? And in 2008, there was this whole kind of ecosystem of promoters trying to get people to accept mortgages at crazier and crazier terms. So when they got to low doc slash no doc loans, 100% LTV, you know, people that weren't even residents or citizens getting these loans. Because the person doing the origination wasn't going to keep it. They were going to sell to another guy who was going to bundle it, sell to another guy who's going to put in the CDO and sell it to a fourth guy. And so that would be avoided if you had direct borrowers and lenders matching up on DFI, right?

That, you know, you're not going to have that kind of craziness. And then, you know, on the monetary thing is, it's amazing how quaint Satoshi is. He was pissed or she at 50 billion bailout. Wow. I mean, that's so 2008, man. They did 50 billion. The Fed does 50 billion every four days now, right? Like that's such a tiny amount of money compared to these days, right?

And it was such a problem that it riled up a couple hundred million people to get involved in the Bitcoin project, right? And now the Fed to 200 percent of all more it's lending in the U.S. than the last two years. I mean, it's just absolutely insane. And so that's created, I think, another massive bubble that has to be worked out. And again, I think if we all got to vote on monetary policy or we all got to decide, you know, how much money to lend. people in the mortgage market, we wouldn't have gone to these extremes. And the markets are really starting to gyrate. I saw a really cool graph. I can't remember who wrote it. I'll try and remember it. I'll send you to you guys of the average rate in the U.S. the Fed Funds and 10-year

average together times the amount of debt the U.S. has. And it is gyrating more and more wildly. And I just think it's going to come delaminated. We're producing so much debt. And now rates are going I think pretty high. And all those things probably wouldn't happen if we had, you know, kind of more decentralized process wherever he gets to vote. Because nobody asked me to vote on whether the Fed should do 200 percent of mortgage lending in the last two years. Like I would have said no, but nobody asked me to vote.

In a defy world or a world that's more monetarily oriented with blockchain, you know, each person gets to vote with their wallet. I want to ask you guys the devil's advocate question here, right? And so I'm putting on my crypto skeptic hat for a minute. And hearing this podcast, which you say, okay, point taken, DFI is different than CFi. Okay, we'll give that a chance. You're right.

The DFI protocols held up. Good for you. Win for DFI and crypto. And yet, you in the crypto industry, talking to us, maybe bankless, maybe Pantera, maybe others, don't you bear some responsibility here for not warning people about Celsius, about Voyager, about three hours capital, do we have a role to play? Is there some responsibility we should feel to educate retail as to the risks? And maybe like taking CFI aside, how about things like Luna, for example, that was just, you know, a month or so earlier

before the CFI collapse. And some might argue probably precipitated a lot of this. And Luna itself was marketed and advertised as like defy. And there's some elements of like 20% yields. You know, like what role do we play in helping to educate about proper risk management to unsuspecting retail? Dan, what do you think about this? Yeah, I mean, you know, our responsibility to kind of give, you know, sober advice about the markets.

The one thing I would say is nobody had a crystal ball, right? if the NASDAQ didn't drop 30%. Bitcoin is still being at 60,000 and we'll all be going on and all these models would work, right? So, you know, you don't want to run around, you know, say the sky's falling if maybe it wasn't going to fall. So you do really have to strike that balance and try to give people advice, but there are definitely extremes of things that could happen. What do you think about this, Joey?

Yeah, I think there's like a couple things. So, you know, one is in when you have these black block systems, it's hard to know what the actual risk is, right? Like you don't want to go out there and tweet, you know, Celsius, you know, Celsius seems like a, you know, like a Ponzi or whatever. If you don't actually know what they own, right? You know, maybe there is some, you know, legit prop market making strategy that they have. It's the ceiling 20%. It's unlikely. But, you know, you don't want to go out and, you know, disparage someone unless you actually know what's going on.

So I think maybe, you know, one thing, you know, the community. can do, you know, all of us included. It's like alert people that like, you know, hey, if you're using a black box, none of us know what's going on. You know, you don't, we don't. That's the problem with black boxes. And so, you know, I think kind of telling people to look into defy is,

is one thing. And I think the other thing is, you know, at a dance point, no one, no one has crystal ball. Like, for instance, you know, Pantera, we own, we own some Luna. You know, if we'd known it was going to blow up, you know, we would have sold a position, right? And so I think no one has crystal ball.

And so the other important thing, it's just the classic rule of investing, which is like, don't invest more than you have to lose in stuff, right? If you look at Celsius, you know, people were borrowing, you know, mortgages on their house and then putting that all in Celsius thinking they were getting a safe yield. In the history of finances, whenever something looks like a risk-free investment, it probably just means you don't understand the risk. And sometimes no one in finance understands the risk, right? If you look at the like, you know, long-term capital management,

there weren't a lot of people screaming, you know, that there's, that was going to blow up before it did. You know, most people didn't have any idea that that wasn't going to work. And so I think that's the other thing. It's just like, you know, encouraging people like, hey, like, you know, be cautious. Like, you know, Pantera, we own like in our liquid funds. We own, you know, 14, 15 positions, you know, sometimes up to 20 positions. You know, even we can't predict exactly what's going to happen, right?

And so, you know, if we could, we would just own one position, right? And you would just always rotate exactly into the one position that's going to be the best. And there's a reason why funds like us don't do that. It's a reason why you guys probably don't do that. And I think those reasons are good. It's kind of the classic diversification story. Absolutely. Well said.

Dan, just two more questions for you. And I want to ask this one to you. Did all of this surprise you? I mean, you've been a fund manager. You've got a lot of experience under your belt. But like, I got to admit, you know, I know crazy things can happen in crypto. But I was legitimately surprised by three hours capital. doing the thing that it did.

I did not have that on my bare market bingo card. I didn't. Were you surprised? I mean, how did this catch you? Well, like Joey said, you know, we don't have any more information than anybody else on the inner workings of those types of firms. So, you know, we wouldn't have been able to predict which ones were going to fail. But if you had told me that Ethereum would be down 80%, other things down 90,

I would have said something's going to break, right? Like, you know, it's not, that is not surprising at all. That if you have any leverage and then a bunch of these people doing the gray scale arbitrage, you know, that that's not going to be an arbitrage if the market comes off a tonne. And so the, you know, thing that used to be an $8 billion premium, one to a $6 billion discount, like all those things, if you had told me, which I didn't predict, did the market go down 80%, but if you had told me that or if I have believed that, what. actually happened isn't that surprising. So guys, right before we started recording, we're wrapping up that far of the show. We're turning to macro real quick. Right before we started recording, it was the announcement of the Fed rates, whatever the Fed rates was going to be.

I actually haven't looked at what number it is. I'm assuming it is .75, Ryan. Yeah. Prices are up bigly. We're up like 20%, 10% in ether, 6% in Bitcoin. Just like quick takes on the state of the Fed, the state of the state of the crypto markets and the state of the macro markets and what you guys are looking at in the next few months and quarters. Dan, I'll start with you. Well, the other thing that did surprise me is how

tied crypto has been to the Fed, right? Like, it shouldn't be tied either way. Like the Fed not tightening as much as people expect, shouldn't make crypto go up 20% and vice versa. Like, you know, so my main view for the next 12 months is crypto is going to decouple from the macro story and trade on its own fundamentals, right? A lot of people using it, you know, defy work, all that stuff. The only thing I would say on the macro side is I think people are still totally crazy about the fit. They're going to have to hike a lot more than people are talking about. And I think people are starting to get their heads around the Fed is hiking, but I think everyone thinks their reaction function as a Fed's job is to hike until they cause a recession. Unfortunately, that isn't their mandate. Their mandate is to hike until

get core CPI below 2%. And that's going to take a couple of years. There's a bunch of reasons why owners promote rent and stuff are going to make it take forever. So I think rates will keep going up and crypto's going to go up. Joey, do you have any hot macro takes as well? I mean, on the rate hike, I was actually surprised that the market moved as much as it did

just because I think the odds of 75 bibs were like, you know, priced in something like 95, 97%. You know, it seems unlikely that they would, you know, be so aggressive as to do 100. So I'm surprised the market's actually up so much. You know, I thought it would have been kind of flat or up a few percent. And then on, in terms of like what we're looking forward to, though, I think a lot of interesting stuff's happening in defy.

I think we're kind of finally maybe starting to see, you know, defy numbers like TVL and stuff start to get back in an uptrend. You know, Dan and I are talking about the other day, like the total market cap of defy is on the order of 20 billion depending on what things you count and don't. But, you know, the crypto market cap is like a true. And I think it's absurd for defy to be anything less than 10%. And I would argue actually much, much higher than that 20, 30% of the total crypto market. And so, I think over the long run, we're very bullish on defy.

And then the last thing I'd say is, you know, you look at like what's upcoming with Heath 2 and all the roll-ups on top of ETH, things like Arbitrum, optimism, you know, other solutions like Starkware. I think ETH is going to look really interesting coming into the next bull market. because it's going to be the first time that it actually scales, right? Like, yeah, you could argue in the last cycle, you could sort of use stuff like Maddoch or Polyon or whatever. But here there's like a bunch of different solutions.

They all actually work. I think people will be able to work out a lot of the UI, U.S kind of issues over the next six to nine months. And then as you go into the next cycle over the next two years, you know, defy is actually going to scale, which is, you know, something that we've been talking about forever,

but we'll finally actually be here. And so, you know, we're super excited for that. I share the excitement. Yeah. So we share your excitement. David. Dan, Joey, it's been fantastic to have you. I think this is probably the most bullish thing that happened during this bear market in the last few months is how well defy worked. And I think that is a testament to what's been built and the future that we have here. Thank you, Dan and Joey,

for talking about this with us today on bankless. Thanks. Thanks. Action item for you, Bankless listener. We'll just include a link to Defi Worked Great, the investor newsletter from Pantera in the show notes. as always, risks and disclaimers. None of this has been financial advice. Never is. Crypto is risky. So is defy. So are C-Fi lenders.

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 a lot.