Bankless - From TradFi to Internet Finance: A New Era of Global Capital | Felipe Montealegre

Episode Date: April 2, 2025

Felipe Montealegre, co-founder of Thea Capital, joins us to unpack a new vision for global finance—what he calls the Internet Financial System. Felipe makes the case that today's financial world still runs on siloed, permissioned databases—slow, expensive, and riddled with gatekeepers. But blockchains and smart contracts offer something radically different: a unified, open system where capital can move efficiently across borders and property rights are stronger than ever. This episode is a must-listen for anyone wondering how crypto is building the financial infrastructure of the 21st century.------📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium------BANKLESS SPONSOR TOOLS:🪙FRAX | SELF SUFFICIENT DeFihttps://bankless.cc/Frax 🦄UNISWAP | SWAP ON UNICHAINhttps://bankless.cc/unichain 🛞MANTLE | MODULAR LAYER 2 NETWORKhttps://bankless.cc/Mantle 🌐SELF | PROVE YOUR SELFhttps://bankless.cc/Self 🏦INFINEX | THE CRYPTO-EVERYTHING APPhttps://bankless.cc/Infinex ------TIMESTAMPS0:00 Intro5:29 Internet Financial Systems12:03 Frictions in Financial Systems20:33 Innovations in Internet Financial Systems28:42 Server with Laws40:02 Incompatibilities within Systems50:17 Absence of Financial Laws57:34 Potential of Finance in Crypto1:09:59 Server Compatibility with Governments1:16:18 Different Laws for Investing in Crypto1:26:26 Building Protocols 1:29:52 Closing & Disclaimers------RESOURCESFelipe Montealegre https://x.com/TheiaResearchInternet Financehttps://x.com/TheiaResearch/status/1876618725547233417------Not financial or tax advice. See our investment disclosures here:https://www.bankless.com/disclosures⁠ 

We don't have internet finance. We have finance inside the databases that communicate over the internet occasionally. What we're seeing on the internet financial system is a lot more innovation and experimentation than we've seen in the legacy financial system over the last 30 years. Welcome to Bankless, where we explore the frontier of internet money and internet finance. Today on the show, we are going right to the heart of that exact subject. The internet financial system is being built right before our very eyes. It's not crypto. It's not blockchain.

It's all of those things, but the idea and the power behind all of those things are best expressed as the internet financial system. Today on the show, I have Felipe Monte Alegre who is driving this idea forward, the idea that we are all familiar with, but we need better words to express. And Felipe has those words. Bankless Nation, the episode that you're about to hear today will be how the power of what we call crypto will be explained and expressed to the rest of the world. For all the crypto natives out there, we all know how blockchains work, we understand cryptography, we know Defi, but those are our words. And to help the world go bankless, we will need new words.

In order to help the 8 billion people go bankless, it's not enough to try and bring them on chain. For the vast majority of users, we're going to have to bring the chain to them. And they are not going to understand blockchain or tokens or whatever, but they will understand internet finance. On the episode with Felipe today, we talked about the permissioned siloed server problem and the frictions and the economic malaise that siloed server financial systems impart upon the global economy. We talk about the idea of a server with laws, a server with rules, which you might know as

blockchain, and how that inverts the relationship between finance and servers. Rather than the millions of siloed servers across the globe, blockchains represent single unified servers that unlocks financial efficiency and access and strong property rights for the world. We also talk about the lack of access to property rights and how it is one of the largest single things that prevents people from accessing wealth and growing their local economy. And we talk about the differences between investing in protocols versus investing in companies and why that actually might be a false distinction. I really enjoyed this episode with Filippe. And if you appreciate this episode as well, if you appreciate this podcast generally, please subscribe. Or if you already subscribe,

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store. Visit self.xyz and follow self protocol on X. Bankless Nation, very happy to introduce you to Felipe Monte Alegre. He's a co-founder of Thea Capital. Felipe, welcome to the show. Thank you for having me. And you nailed it on the name. Perfect. Perfect. Felipe, I want to start off this podcast by reading off an excerpt from something I'm quite sure that you're familiar with since you wrote it. You wrote in an article that I thoroughly enjoyed, we are collectively building the internet financial system, a better financial system on the cloud that can hold the world's assets and provide financial services to 8 billion people. We believe the internet financial system is a paradigm shift in global financial activity like Gutenberg's printing press was a paradigm shift in the production

and dissemination of knowledge. Now, I think every listener of this podcast is going to be intimately familiar with the subject matter that we are going to discuss here on the podcast today, but I think not the words that we are going to use. And I think that's going to be the key difference. I think why I'm really excited for this episode. So let's start just first with this new name, Internet Financial System. Why these words? Not blockchain, not Defi, not crypto, but instead Internet Financial System. Let's start the conversation off there.

Why this name? Yeah, absolutely. Good question. We've been pushing, and a few people have been pushing the name Internet financial system for a while now. I think it captures certain elements that other names don't capture. Like, Defy, as an example, you know, decentralized, It's a good name, but it really does limit the scope of what you're talking about.

Because something like Circles UCC, probably the best example of product market fit in the market, is that decentralized finance? Or is that much more efficient, lower cost centralized finance happening in blockchains? Right. Other names, blockchains, I think there's been a lot loaded onto the word. Right. And there's been ideas of reimagining nation states, reimagining money, internet finance, finance for us is more narrow than that, right? It's just lower cost financial services for everybody

around the world so that capital can flow better through borders and people can get financial services at low fees in an efficient manner. So I think it just captures kind of more than defy less than blockchain and crypto, which obviously crypto, cryptography is a huge, a huge discipline in itself. It's how the internet works. It includes things like privacy, money, etc. It just kind of captures what we want to talk about, which is replacing the traditional global financial system with better rails through unified, permissionless servers.

So I'm going to put on my Gary Gensler hat and say that even before blockchain, we already had internet finance. You can log into your Wells Fargo and access your bank account on the internet. And so why are we even invoking this new name in the year 2025? Why is this even a post-blockchain phenomenon in the first place?

Can you unpack that part of the conversation? Yeah. What I would respond to Gary Gensler is that's like saying that, you know, saying that your financial transaction in the legacy system is made on the internet or happens on the internet is akin to saying that the pizza that you order through Grubhub is made on the internet. It's not. The internet is a communication mechanism from you to the analog pizza shop that then

kind of cooks your pizza, delivers it all in the analog world with the communication layer through the internet. And that's how finance happens now. You send a message to Wells Fargo, then they go to their permissioned silo database that is not on the open internet in any way and make a transaction and let you know that they made that transaction. So the internet's only there for communication. What we're talking about with internet finance is that the actual databases and ledgers that hold assets exist on the open internet and anybody in the world has root access to those databases. And I think the way to make sense at this point is just thinking about the concept of ownership, which is really what, like, it's the heart of the article, I'd say, and it explains why you can't

call the traditional banking system internet finance. If you think about what it means to own something. You know, we use a few examples to kind of make the point of permission disparate servers around the world. If you think about what it means to like do a seed round, for example, you invest, you invest in a startup, you wire the money. They get the money. They have a spreadsheet. The team has a spreadsheet where they put your name, David, next to the amount of money that you invested, right? And your ownership of that startup's equity lives in that Excel sheet. And maybe they replicated it by saying it to the lawyer. Maybe they're replicated by putting it on Carta. But it's the spreadsheet has your ownership.

There's no other place in the world that records your ownership, right? It's a spreadsheet ownership. The same is true for most stocks that people own, even in advanced economies, like the U.S. So if you think about owning Apple stock on Robin Hood, right? If I have 100 stocks of Apple on Robin Hood, Robin Hood has a server that says, you know, Felipe 100, Apple, right? It's like a database entry. But my ownership lives on their databases. Apple does not know that I'm an owner of Apple stock.

and neither is anybody else outside of the Robin Hood database. Then they work directly with a DTC company, depository trust company, and that company works with Apple. So that's the link, right, the DTC, where you say Apple CFO can say, who are my owners? Okay, Robin Hood's one of my owners. B&Y Mellon is one of my owners. B&Y Mellon actually does this service on an outsource basis for hundreds of brokers around the world. And then there's countries that are less advanced, right? Like Robin Hood's the most advanced example of this possible.

But if you own land in like a Guatemalan town, your land is literally a rolled up map where you have like latitude and longitude laying out the piece of territory that you own with the right signatures by the right government officials. And like your ownership exists in that physical office. So what I'm trying to paint is this like system of silo databases around the world that need to communicate it with each other. And we'll get into us. But that communication is cumbersome, expensive. It's a slow morass of paperwork because you don't have this server or database on the open Internet where everyone records their assets. And that's why I would tell Gary, we don't have internet finance.

We have finance in silo databases that communicate over the Internet occasionally. I really like this kind of visual. The visual that I'm getting is this like topology of silos. It's like circles around the world. And they all kind of inter, they communicate with each other. and each sort of asset registry, this analog pen and paper logic-based system, asset registry system, is loosely cohered via communications. Generally communication is on the internet, which is why we have like pseudo internet finance but not real internet finance. But let's really just go into just like why this like in mesh network loosely cohered topology of siloed servers.

why does that, why does that create so much friction and growth and friction and constraint on growth and innovation in the structure of like finance as we've known it before crypto? Like why is this just like an inferior system? Yeah. And all these are points that we'll delve into. But I think one reason is it's very high transaction costs to communicate across servers. Right. If you need to, if you want to send your Apple stock from Robin Hood to Fidelity, again, this is the most advanced low friction example possible. you need to get Fidelity and Robin Hood to communicate at the DTC level, right?

And then you're already talking about multiple layers and approvals to be able to have that communication happen with well-paid financial, you know, system employees that wear suits to work, making that happen and giving the appropriate signatures. If you want to talk about buying something in a less sophisticated, less well-connected system, the land in Guatemala, you have to like fly there, get lawyers. and involve yourself in, you know, the legally laid out steps to have that piece of land transfer from one person to another, right, which is going to involve dozens of signatures and steps. That's really expensive, right? That's, you have these kind of like, well-trodden corridors.

Like, you know, if you're sending money from the U.S. Europe, okay, you're using ACH. There is the Bank of International settlements. You may have specific systems between two countries that are closer. But again, just imagine white-collar workers who do this all day making these steps happen just to move database entries, right? That's all that's happening in the back end. If you have a unified server like we're building an internet finance that adheres to certain rules, then sending your stock from Robin Hood to Fidelity isn't a concept. We just, I just send you a token and the single unified database updates and entry, right? sending money from one country to another isn't this long process that you need to do for remittances of disparate steps, but it's just a database entry, like a database entry for, you know, minus one for me plus one for David.

So that's one really big issue. It's the high transaction cost problem. I'd say the other two really big issues we talk about are one, because these servers are permissioned, right? There's no way for you to update Apple's like CapTable without their permission, or there's no way for you to move around your equity in a startup without the legal team and startup team, like actually change the database themselves, right? You can't change that database. You have this permission entry problem that leads to high barriers to entry. So we have a graph in there that shows the number of new FDIC insured commercial banks,

and it basically drops to zero after 2009. and there are reasons why that happens. But basically the point is, you know, you can't stop the number of people who interact with the base layer of the U.S. financial system from expanding. And you can send it to zero overnight.

And that's what happened here over the last 15 years. And the same, it just kind of shows the point that all these systems are permissioned. And if you don't have the appropriate permissions, you cannot innovate or try new things. What we're seeing on the internet financial system

is a lot more innovation and experimentation than we've, we've seen in the legacy financial system over the last 30 years. And the last system, just to kind of go through it, is the local banking oligopoly's problem. So banking has really good economies to scale. And if you are dealing with permission systems within a country, what ends up happening in basically every country is that five banks take the whole market because it's efficient to be big and you have kind of local gatekeeper access. So this chart that you're showing is just emerging markets sorted by population. So there's no kind of preferential cherry picking or sorting here.

And the five largest banks have over 50% market share in all but two of these countries. And the two exceptions are 45 and 48%. Right. So the point is kind of is compelling here. But what happens is that these countries become, these banks become local oligopolis. They become gatekeepers. And they do what oligopolis always do, which is under provision and overpriced. So they under provision loans and they overpriced the loans.

And we'll get into some examples of that. but we lay out quite a bit of evidence that the net interest margin, the spread between what these banks borrow at and what these banks lend at, which is kind of the cleanest proxy for pricing power in banks, can be as high as five to ten points. I mean, on average, it's five to ten points higher in less developed financial systems than in more developed, more well-connected financial systems. And the numbers can go as high as 20 points, right? And again, that's a really, really big issue because the capital is the basic input to everything in an economy. So if you're looking at loans that are 10 points higher because of the structure of your local banking system, that means mortgages are 10 points higher, fewer houses are sold, housing prices are lower because there's less of the market and fewer houses are built, right? Small and medium business loans are 10 points higher. fewer people can actually make the model work to start a new business.

There's less employment in the economy. Maybe somebody wanted to buy a car to get a job an hour away, but auto loans are 10 points higher. The math no longer works, and they take a lower paying job nearby. So just all across the board, this local banking on the Goppa's problem is pernicious and kind of shows up in significantly lower GDP employment and development. I really see a one to punch with these two charts that we're showing on screen. the market share for the five largest banks, which we're just showing that, like, the highest

one in South Africa is 82%. So in South Africa, the top five banks own 82% of the market. And we're really just seeing, and like you alluded to it just the benefits of being a larger bank increase with size, right? You just get more and more economies of scale as a bank the larger that you are. And so you just are more advantageous to be a large bank. And so I want to, I want to like have this context of large banks own the vast majority of the market with this first graph that you showed, which ever since 2008, 2009, the new introduction of new banks, of new potential disruptors of that oligopally is not happening. And so going back to that idea of like there's this topology of interconnected, this mesh network, loosely coherent mesh network of financial ledgers,

aka banks. There's no, there's no new way to like enter your new ledger into the system. It's very hard to enter this financial system. And the reason as to why this is true is probably one part because some of the banks are just getting so big that they're hard to compete with, but then also regulation as well. Like why did this happen in 2008 post-2008 crisis? Well, there was new regulation that made it really, really hard. And when it comes to long-tail financial access, there is no new service of that end of the market. Things are like calcified, they're rigid, and there's no one really thinking about like trying to create new opportunities here. And so in terms of just like, just for the innovation side of the financial industry,

we have these like one, two punch problems where like there's just not much innovation happening inside of, you know, analog finance, non-internet based finance. Yeah, that's right. And you know, that it's the the high nims can only exist under a condition of of very high barriers to entry because if you had 10 point higher names and and free bearish entry which is you know what we have with permissionless databases those names would be compressed you can argue that that you know there's still economies of scale in banking but the economies of scale kind of pale relative to the benefit of having very high barriers to entry for for the for the incumbents right like you know And that's why, and we kind of see similar market structure in a lot of parts of the market.

Exchanges also have a very concentrated market structure. You know, it kind of reverberates across the financial services industry. And what you see with crypto and low barriers to entry is immediately we see experiments that people have been trying to do within TradFive, but have been unable to do for a very long time. So there's one story that we point out there, the story of Eric Buttig, a professor, a University of Chicago professor, who, basically discovered the batch auction as a solution to high frequency trading. You know, he discovered this in the early 2000s. He wrote a paper. The paper was widely claimed, kind of no disagreement, and then tried to get a few exchanges

to integrate this technology because he had to ask for permission to try out his idea, right? The conversations really went nowhere. Exchanges did not implement batch auctions because high frequency trading is a very profitable segment for all exchanges. And what ended up happening is that a team, A crypto team approached Professor Guddish, the Kalswop team, and implemented his design. And they've done over $90 billion of trading volume, right? And you just see the difference.

Somebody had no interest in Internet finance at all, but sees the ability to try a new idea in a permissionless system. You talked about NIMS. Can we just really trace over that conversation about what a NIM is? Net income margin from your article, you say less developed financial systems will see much higher NIMs. typically 5 to 10%, but the numbers can be much larger. Let's just like once again define a nym and then also illustrate like why it represents like just putting breaks on the development of an economy. Net interest margin is, you know, banks taking money, they pay you some percentage on

the money that take in and they lend that money out for local business, real estate loans, auto loans, that type of thing on the lower risk side. And then they make a spread between those two, you know, that borrow in that lend. And that's the core of the business. That's the net interest margin is the difference between what a bank borrows at and what it lends at. The reason it's a very, it's the best proxy we have for pricing power in banks is that, you know, any country risk and any currency risk would be reflected on both sides. So if the entire Brazilian market should be five points higher because of country risk, that will be reflected on both sides of the nym. So the spread actually just accurately reflects

like the pricing power of the banks. And it also is it is kind of the profit margin that new entrants would seek to disrupt. When you say your profit margin is my opportunity, you're talking about a system with low barriers to entry or the ability to entry. So if banks were all earning 10% NIMS

in an open financial system, like plus 10% NIMS, that would be such a juicy opportunity for people to fund new banks into and go compete into. And the existence of, these higher nims really signals that that's not happening, right? And the market's kind of been co-opted by the leaders. There is one really good graph that I think is worth showing. It's titled

Less Developed Financial Systems, Extract Higher Rents. It's kind of a one, you know, it's as clean as a regression can be between domestic credit to private sector, which is a very useful proxy for financial system development integration to global economy and net interest margins. And what you see is the less integrated a system is to the global economy, the less outside banks can really compete with the existing system, the higher than the interest margin is. And you can see that the, I mean, you see the spread here again, five to ten points, but they can be much higher. One of the big opportunities for internet finance is true global capital flows. So right now, because of the disparate server problem, if you have a fund in Dubai that wants 8% on, you know, has an 8% cost

capital and you have a Colombian auto dealers issuing loans at 20% returns like risk adjusted loan you know kind of default adjusted 20% net that there's an opportunity for for capital allocation to be made there where both sides are happy but if you want to if the Dubai fund wants to get access to the Colombian auto loans they will have to pay multiple intermediaries to get access to those loans and ultimately they won't even get access because what they'll do is they'll have to buy the equity in a Colombian bank or pay, you know, give, give a loan to a Colombian bank. So the Dubai fund won't even get a spread. They'll get like a small portion of the spread. The lion's share of the profit goes to the local bank that acts the gatekeeper to the permissioned database.

But if you have, you know, in the world of the internet finance, you have a unified database where people can trade, can can communicate on the open internet. The Colombianolity that can go directly to the internet to raise loans. obviously you need the legal structure to exist for this to be able to happen. But they go to the open internet. They raise loans. They say we're willing to pay 20. The Dubai fund is willing to receive eight. And they meet somewhere in the middle.

And both sides are better off without having to pay all the intermediaries who position themselves. It's kind of gatekeepers to these permission databases. I think to really drive the point home as to like why the economics of the banking layer impacts so much of world GDP downstream comes from this idea of like the NIM. and the spread that these banks are taking. When like the, there's like some sort of notion of a legal, financial, social tech stack or just stack generally when there's a country, you know, you have a country, then you have the government and the laws. And on top of those laws is the banking layer.

And that banking layer comes first. Like that banking layer works because of contracts and laws and a judicial system and property rights. And then on top of the banking layer comes like the rest of the economy. Maybe the Fentec layer is on top of that. But then you have startups, you have mom and pop shops, you have Main Street, all built on the very top of that. And when something that's decently low in the stack, which is the net interest margins of banks taking a high take rate without there being able to be an incumbent disruptor to come in and compress those spreads, then that just comes out. A 5% take rate out of the banking layer comes out of 5% of the GDP.

of the whole entire economy that's built on top of it. So it's a very pernicious layer for there to be excess rent extraction there. And I think with your metaphor that you're talking about, there's this, there's capital in Dubai that wants to invest in this opportunity in Brazil. And with the traditional financial system, there is this like route finding, like difficulty, this route difficulty finding problem. How do we get the capital in Dubai to find its way over to Brazil without losing so much of it along the way that it even makes it worth it. There's capital out there and capital loves to

find opportunities, but there's this like archaic pen and paper, like siloed server problem where you have to find your right way through all the silos in order to get money to the end destination. And when there's, you know, five, 10 percent spreads taken along the way, then all of a sudden the capital cannot find a way to be best expressed. And the whole entire global economy suffers as a result of this. That's right. Yeah. It's it's it's it's it's it's it's worse than having high electricity costs because capital is truly the base input for all things that happen in an economy. Right. The system is called capitalism for the reason that that is the single base layer for how everything works. In your article, you talk about a patchwork of silo servers, which is what we've been talking about. That's like the problem. We have this patchwork of silo servers. It's inefficient. There's different communications. It's hard to add your new server into the existing incumbent set of servers. but then we are trying to migrate to something new, which is something you call a server with laws. Can you illuminate this idea of a server with laws?

So I think that a lot of the language that we've had in the industry, you know, decentralized, permissionless, kind of flagness, safety, all the things we talk about with state machine replication. I think they kind of hint, like for our purposes, they all kind of lead to the same thing, which is scalable servers that interact with laws and smart contract code. those are the two kind of fundamental unlocks.

The reason you need the server to interact with laws, its own laws, right, is because, or like follow the laws that have been set in the system, is because otherwise you can't trust people not to double spend. You know, you can't trust people to not move the ledger so that, you know, the person in charge puts his family, you know, gives his family assets. Like you need these servers to be subject to a set of laws. Otherwise, they would just be corrupted. and misuse.

And that's a reason why we have not been able to develop a unified server for all assets prior to blockchain and prior to crypto. Right? That's kind of what the – when Satoshi solved double spend, he puts on the path to permissionless servers with loss. And then smart contract code, you know, everyone in the audience will know this, but it is truly magical. Like the ability to be able to put assets into a contract and how. have the contract execute logic like a vending machine that gives you a Coke when you put in a dollar unlocks so many efficiencies that that help the internet financial system cut costs and and develop design space for for new applications that are not possible without the smart

contract code layer in the in our industry I'm trying to not use the word crypto in this episode because I think it's a good exercise so in our industry we have this term called uh or that some of the gigabrains use is like credible commitments. And it's this loose, very broad term that we use for a lot of things that we talk about in crypto, including smart contracts, but more expansive than that, like credible commitments. And really what that means is that the system that you are interacting with can give you, like credibly give you some sort of commitment. And there's a variety of different ways to do that. ZK. Proofs, a smart contracting blockchain. There's a variety of different ways. But basically this industry is,

is this industry of credible commitments. And this power of credible commitments where there's an institution out there, there's a bank out there, there is a fund out there, there's this, because of blockchain, there are these servers in the cloud that are offering potential users credible commitments. And that is what we're calling a server with laws.

And that really actually inverse the relationship between a patchwork network of siloed servers to where everyone, where everyone has their own siloed server and we are all trying to figure out how to talk to each other versus let's just compress everything into this one server that we all understand is credible, that we all believe is credible because it is technologically proven to us that it is giving us credible commitments. And now all of a sudden, like our relationship with a server is different. And I think it's a little bit like the dawn of the internet or the

dawn of cloud computing where everyone had a mainframe computer and then all of a sudden, once we established the cloud, it was much easier to have these central servers that coordinated everything. And that's kind of the same pattern that I think you really exhibit in your laws. Maybe you can take this metaphor from here about just this central unified servers with laws and how can this mesh network of interconnected siloed servers begin to actually trust this unified server with these commitments that our industry is able to, give users of these servers. Yeah. And I think that it's really important to put person at this point because it explains the question, you know, why now, why hasn't the world been able to develop

a unified server with all assets up until this point? It's because nobody trusted, you know, people didn't trust one party with the entire world's assets, right? The Brazilian government does not want to trust one party in the U.S. or Sweden to record all their land registries because they don't know if if the commitments are credible enough, given all the kind of vicissitudes of politics and power and, you know, things are, things are complicated at the ownership level, right? We hit on that a lot when we talk about appropriations and property rights. But yeah, I think you nailed it. It's the credible commitments really unlock the technology. And then the, the credible commitments also, you know, they unlock the ability

to have everything on a unified server because you believe the property rights guaranteed by the their credible commitments, but they also allow you a lot of design space to do things that are just not possible in the traditional banking system. So this is a little bit of optimism and speculation on the things you can do with smart contract code. But I think that's, it's always fun. It's the kind of thing that brought me into the industry. And I think, you know, on the kind of optimism cynicism spectrum, I think we maybe shifted a little too much towards cynicism in the past year as an industry, and it's good to remember kind of what got us all in here. But

you know, just some examples that we lay out in the piece, like having royalty contracts that receive stream payments every time a song is played is not possible in the traditional system. Right? It's not possible. It's having stream dividends to shareholders is not possible on

the legacy system because you have, because of the high, high transaction costs that would include. Right? Having kind of easy, cheap to develop bespoke capital-raising instruments, like having Starbucks issue a revenue share token for 200 stores in the Pacific Northwest, as an example, right? Or Apple issue a dividend that pays, you know, 1% of a penny every time a share class that pays 1% of a penny every time that Apple sells an iPhone. These things are possible and easy with a permissionless server that interacts with smart contract code and to your point, has credible commitments.

but they're not possible in the high transaction costs, silo the server world that we call the legacy financial system. I think even we can even go back in time in the era of our industry and talk about Bitcoin as the first credible commitment server. Like what does Bitcoin do? Why is Bitcoin valuable? It makes a credible commitment that there is this asset out there that we call Bitcoin. And the commitment is that there's only 21 million of them.

And you can totally just imagine some nation state trying to, to do this and obviously failings. Like imagine if any nation state said, hey, we're going to make this brand new asset. And we commit, we pinky promise that we're only going to make 21 million of them or however many numbers. And without a blockchain, there is no credibility to that commitment. It is a commitment that's not credible.

And the credibility of Bitcoin's commitment to his 21 million supply is what makes Bitcoin valuable. So without the nature of the technology of a blockchain, and it's, I think, out of scope for this episode to really talk about the, architecture of a blockchain and why the credibility is actually credible because I think people can at this point in time just understand that if Bitcoin wasn't actual credible, it wouldn't be worth $90,000. But really, every innovation in crypto is downstream of what Bitcoin first unlocked, which is a credible commitment to a supply. And then Ethereum unlocked, like, oh, we can

open, we can make that more open-ended. We can make more credible commitments about anything that software developers can create. And this is what unlocks some inversion in that relationship between a patchwork of silo servers to a unified server with laws in the cloud. You know, I do think the last few years have been necessary to scale, but now we're there, right? Like, everything discussed in the paper is possible.

The final mile is really regulatory cooperation and product market fit. And we now have, you know, Ethereum's not, it's not like Ethereum's failing to make credible commitments, and we need to solve that problem. Ethereum's making credible commitments. Blockchings are making credible commitments.

there's more than enough TPS today, and these things are on a path where they're kind of scaling naturally, thanks to the roadmaps that each team has advised. We have everything we need to get onto the S-curve of adoption for Internet finance. And I don't think that was true five years ago, but it's true today. I want to talk about the relationship between the idea of sovereignty and servers with laws, because this word law does a lot of work. The word law means a lot. having laws implies some innate characteristics, mainly sovereignty.

Like, for example, the laws that govern a World of Warcraft server or the rules that dictate a Wells Fargo database entry are not of the same caliber of laws that we are talking about when we talk about a server with laws. Like, can we talk about the higher order nature of the word law when we discuss the concept of a server with law? Like, to what dimension are we talking about law? Just that the server won't reflect. an entry that isn't contemplated in rules set out, you know, prior to the transaction being made.

So with Bitcoin, to your point, it's that there won't be double spend and there won't be more than $21 million. In Ethereum, it's that the contract will function as written. You know, that's not always as intended by the writers. There are hacks and things like that, but it always functions as written. We're not seeing invalid transactions according to the smart contract code being made. And I think one thing that you kind of hinted on the question is, obviously this needs to interact with local laws, right, and kind of government laws. And, you know, we're not, we're not kind of extreme cipher fonts in any way.

I think we're saying, you know, sometimes things come along that have capabilities and governments need to adjust to them, right? Like the car came out and there were no driving laws. And the reality is if you drive a car, you can crash, you can kill people, you can drink and drive. you can do all the things that are illegal. And governments come out and, you know, no one kind of said, well, I can do it with the car so I can do it. Right. Like you can do it, but then the law can punish you if you're not driving according to kind of state driving laws. And the same thing is true with the internet finance.

Like you can design a contract to pay for illegal goods or to send money sanctioned entities. You know, you can design, you know, in this system, you know, in this system, You have a lot of design space, but a lot of that design space will break local laws. And then what happens is that governments will adapt and kind of layer on the legal system on top. And as long as you have a physical presence, you're subject to kind of local jurisdiction. I think the metaphor of, well, we didn't have laws for cars and then we invented cars and now we had to update our laws. I think that metaphor works. But also, I don't want to also diminish how profound this idea of a server with laws is because I think one of the, one of the,

big things that nerdsnipes so many people in our industry is that people understand that these servers with laws, Bitcoin, Ethereum, any smart contract platform, the laws that they have are actually of a more, are stronger than nation state laws in a way. They operate at a higher level than the nation state laws. And this, I think, has created some friction. The idea that there is code-based technology out there that can write laws that have unparalleled level of guarantees is a very like big idea. The idea of like laws and human to human contracts, I think it goes like all the way back to when we were just like primitive apes. And we had this nebulous unspoken concept of a social contract that held a tribe of like primitive humans

together. Like maybe even before we had language, we had this notion of a social contract. And if you broke the social contract, you were ostracized from the tribe. Now fast forward to today, innovation and like formalization of something that just like starts off as a primitive social contract has evolved into large-scale nation states with judicial and legislative systems that formalize and codify laws in pursuit of just having larger and more coordinated tribes, which we call nations. But now we have servers with laws in the cloud. And these servers and the laws that they uphold have proven to be above nation state laws. Because the power of the nation state, even with all its guns, its tanks, its planes.

They can't change the laws of Bitcoin. They can't change the laws in Ethereum or any other sufficiently decentralized online server. And this creates friction. The nation state is not used to having things that are outside of its control. Like parts of the state, parts of the nation state, like, complex, are just not comfortable with this fact.

So having two independent sets of laws can create incompatibilities between these two systems. So, like, how do you think we deal with this friction? And how will blockchains and nation states just learn to live with each other? One angle that I can take that question is talking about the states where laws have not been that's wrong. There's a lot of nation states with lower quality property rights. So we're used to property rights in the U.S., in Europe, in Australia, where a lot of people are based being very good. And if you look at, you know, if you kind of quantify this, property rights scores in those countries, according to Heritage Foundation,

and like, you know, their famous property rights index are 95. So, you know, we're kind of used to 95, property scores of 95 mean that, like, if you invest in an asset and you own it, like you own that asset, no one's going to expropriate you. No one's going to arbitrarily take that asset from you without really going through the rule of law. And even then it's difficult. If you invest in a company as a minority shareholder, according to a certain set of rules, majority shareholders can't just ram something in through the, you know, governance that will, that will delete your rights or impair your asset significantly. If you're kind of using the

judicial system, you will, you know, a jury will or a judge will rule on the merits of the case. They won't just work through bribes and favoritism. But the reality is that the majority of the world does not live under 95 property rights score, right? There's a, There's a graph in the piece where we show global property rights by country. And in that piece, in that graph, we just rank countries by population. So again, no kind of preferential sorting and show the property rights of most of the world. And the scores are abysmal, right? It's the average number is 43.

So, you know, you're talking about laws on chain being stronger than laws of countries. that is certainly true between, you know, what we can build the internet finance and the property rights score of 43. 43 means majority shareholders do whatever they want, regardless of what the paper says. It means that, you know, cases will often be decided by bribes of favoritism. It means, you know, people can be expropriated. And we've given out a long list of famous appropriations. But the reality is a lot of people, you know, just live under this paradigm, right? Like, there's a famous book called The Mystery of Capital by Hernando de Soto, where he, he thinks $9.3 trillion

of assets are locked in this kind of shadow world where they don't have the right claims. You know, they can't trust. The legal system isn't trustworthy enough for those to be transferred or mortgaged against. So we have so many people and so much capital living under weak rule of law. And I think the, you know, we will look at this kind of conflict between strong rule of law. countries and and blockchains occasionally. But I think the more interesting thing for our perspective is how it's going to deal with weak rule of law countries, which we're seeing already, right?

You know, I think there's kind of three steps to that interaction. You know, the first was Bitcoin. You kind of have this 21 million, no double spend property right where someone, you know, in 2010, somebody in Turkey or Brazil, Nigeria could buy Bitcoin and that's a real property right. Right. Like you have it. You're on the ledger. No one, no one can can take that from you. Right. And that might be the first real property right that those people had access to, right, the real strong property right. I think we're actually getting here. This gets a little bit into U.S. regulation into the next step where I, you know, the stable coin bill looks very likely to pass in a way that's favorable to the industry.

Maybe not all players, but at least the industry. I think, you know, most of D.C. is seeing the stable coin bill as a way to, you know, to open up the stage for real world asset tokenization. And the most important step of that second property rights bucket will be when Larry Fink or someone like Larry Fink puts Apple stock on chain. Because then the whole world is able to access U.S. property rights by buying U.S. dollars or buying Apple stock on Ethereum or buying Nvidia or S&P, right? And that has kind of profound, profound implications for saving rates of people across the world. So, like, if you look at any currency against USD, they've been deflating at 65% relative to US dollar every 15 years. And again, this is just average weight of population across 50 years. Now we're talking about people having access to the U.S. stock market, which is actually appreciated 8% to 10% a year on average over, over.

decades, right? You're going from minus 65 to plus 10. That's a huge difference for these people because of what you said, because you can have stronger laws on Ethereum than you do in Nigeria, you know, Brazil. Again, 5 billion people live under these regimes. It's not some offshoot like niche market. It's the majority of the world lives with wheat property rights. And then I think the third step will be that countries will have the chance to respond and try to to strengthen their own laws, their own property rights, using the tools of internet finance. So we often see, like, you know, we've seen these examples given, but like putting your land registry on chain as a set of NFTs means that the local governor's brother can't just

go in and put the right signatures in and take your property, right? Or if he does, everyone will be able to see it. Putting a company's like stables on chain and governance on chain, and governance on chain means that a majority shareholder can't just funnel shares to himself or if they can, it would have to be in a way that circumvents the rule of law written into the code. Right. So I think there's kind of the three steps. There's like what we have now is all digital assets, Bitcoin Ethereum, others. What we're going to now is I think the U.S. vampire attacking the rest of the world

because of its high property rights and embracing of crypto. And then what we'll get to, I hope, it's an optimistic hope, is the reaction function to that. Or countries say, all right, we're not going to get any capital into our own assets unless we strengthen rule of law. We have these incredible tools through smart contracts, through this unified server that interacts with stronger laws and we've been able to create through our own political systems. And let's use those to strengthen property rights and pull capital into our, you know, usually very high returning opportunity. Because emerging markets have very high ROI opportunities. They're just impeded by the flow of capital and by weak rule of law. And then to your question now, kind of going all the way around, when very strong states like

the U.S. interact with Ethereum or Bitcoin or in a way that has, and you have the kind of two strong laws interacting, I don't know exactly how that'll shake out. It really depends on the politics at the moment. luckily we have the U.S. administration embracing crypto. I don't think that any nation state can attack Bitcoin really or sufficiently decentralized layer one, but they can always get the people, right? So I do think that there's, it's, you have to play out each scenario on its own there. And I think that that's, at that level, it's easy for blockchain to beat Nigerian law.

It's, you know, I don't think it's as clear cut when you talk about like the blockchain will do it was programmed to do, but then the people might be arrested like we saw with with Renato Cash, right? So I think that's where it gets kind of fuzzy. I think there's maybe to summarize some of what you're saying is like there's this idea of like archetypical law, just like this, the best form of law that we could have. And some countries and their legal systems are closer to that ideal than others. And even with despite laws, there are instances of corruption or laws that. that are just incomplete or just not strong. And as a result of those weaknesses in the legal system, capital can't form.

There's no capital formation or there's no even like financial industry that can really blossom on top of that weak legal structure. Kind of going back to that legal, financial, social, like country tech stack. Well, we've already talked about how sometimes and frequently the banking layer is just famished and incomplete and entrenched and not fully express. Well, you can go even lower and talk about like, well, what if the legal system isn't even there yet? And I'm really happy that you brought up Hernando de Soto. We've actually had him on the podcast a little over a year ago.

I think it was our oldest guest that we ever had at like 81 or 82 years old. And he's really into Web 3. He's really into blockchains because he gets it. And I think the most profound part of that story, the mystery of capital was really linking. He did this experiment or this like study of some developing country in the third. world and asked like why why is there no strong financial system in this country? It might have been Peru where he's from. And he did the study where he tried to go get a real estate loan based off of somebody, some individuals and the house that they owned. And he just came to this realization that

there's no linkage between this house that this person is living in to an actual court verified thumbs up of approval statement contract saying that this individual does actually own this house, which means that the bank can't give that person a loan because there's no way to verify that the person actually owns the house. And in order to actually get a document from the nation state, from the legal system that actually shows that this one individual owns this house, it was this extremely convoluted process that took beyond five years because of bureaucracy and just paperwork and it's confusing. And the system, the legal system isn't really even set up to even serve that need of being able to verify with a contract, a document that this individual owns this house and therefore a bank can give a loan to this person. That whole part of a social legal financial tech stack is just missing from developing countries. And then I think the number that you estimated is just like, well, what is the cost of that for entire countries? And the answer to that is an entire financial system. And he says like one of the big

conclusions of the book is why is America America? Like, why is Wall Street in America? Like, what did America do right? And his statement is, well, they offer very strong property rights. And when you offer very strong property rights, you can allow for assurances, commitments, credible commitments, that a financial system can actually work there. Because you can imagine, like, it's one of the reasons why DFI works so well. Ether and AVE works so well. because AVE knows that ether, the asset that's deposited into Avey, is not going anywhere. And banks or systems like banks like Ave need assurances that the collateral inside of their vaults have strong property rights because they need that value to be valuable so they can offer

loans off of it. And I think like, I think that this is probably the single biggest, check my opinion on this, this is probably the single biggest reason why there's not more wealth in the world. Like if there was more wealth in the world, it would be because we have. have systems of strong property right guarantees that allow the legal layer to produce a strong banking layer, which can produce a strong economy on top of that. That is the number one thing I think that is actually holding like wealth and GDP growth across the globe, holding it back. Do you agree with that take? I strongly agree. So just one little personal anecdote.

I went to college to kind of become an economist because I thought there was a link between kind of good economic policy and development of the underdeveloped world. And, you know, within the first kind of two years, I just realized that there was nothing an economists could do, which was a policy, to improve, like, wealth outcomes in underdeveloped countries because what matters is rule of law. So in Arnold & So does book was a famous book there. Why Nations Fail, they just won the Nobel Prize, I think, last year, makes the same point, just goes over every single country.

It's the level of the quality of rule of law in those countries and their development. right and the kind of the first page of the book just shows North Korea South Korea same same literal same population right but different quality of rule of law in each country

and kind of economic system the politics are different and then you have that image of North Korea South Korea at night and the level of development in one versus the other and then like halfway through college I realized I gave up I was like all right so there's nothing I can do on policy it's all just politics

and kind of legal system rule of law everything is downstream with that. When I found about about blockchains a few years ago, the light ball went off. I was like, all right, this is actually what can make the difference on the rule of law and property rights. And that's everything is downstream. Like, all wealth is downstream of those who thinks. But there's a lot of, I mean, there's, I strongly agree with you. There's a lot of, there's a lot of good books that kind of detail that relationship and are very compelling.

There's a headline in your article saying the internet financial system is a step forward for our civilization. I think we started to like color in some of the parts of that conversation, but I really want to approach that head on. Let's zoom all the way back out. Let's get out of like developing countries. Let's talk about again, these servers with laws in the cloud that, you know, can be, if you have internet, you can access this. And I think this is why maybe the beginnings of our industry is marked by these like techno libertarians out there who think that we can coordinate as a civilization using technology outside of the nation. state. And I think this is just why so many people in crypto are so ideological is because they see that this is a civilizational coordination technology. This is something bigger than

the largest coordination that we've ever been able to do is good, strong legal systems inside of nation states. And this is something new that is potentially even like larger than that. So when we zoom out and we talk about, you know, free flow of capital across borders, we talk about even we can even talk about like identity systems on the internet. Talk about just like why this is a step function forward for civilization as a whole. Focus on the financial aspect. I think that having one global financial system that works with Trump property rights is just going to increase GDP, like going to increase GDP growth and going to increase the development of underdeveloped countries

and it's going to increase what's possible through finance in so many ways that you can only see it That's kind of one of these big breakthroughs that we've, you know, we had many before, right? Like we talk about Gutenberg in the article, obviously in the internet, but I do think it's of that scale. So, Felipe, I think any listener of bankless is already, like, very inspired about what we can potentially do here. And, you know, crypto, like nerds snip them forever ago. We think we can create a better, a better world, a better civilization, a more coherent civilization, global population. But then, yeah, you know, let's look back on the last, like, two years, three years of crypto's history. We had the FTX blow up.

We had meme coins and an incredible amount of grift and extraction. The optics and branding and level of success around crypto doesn't seem to match, I think, some of the ideological beliefs that many in the industry have. There's a disconnect. There's a dislocation there between, I think, what our industry is perceived to have done and succeeded and achieved versus what we are hopeful of what it can do. How would you explain this gap? Like, why haven't we done all of our

and achieved all of our hopes and dreams by the year 2025? It's a good question. I think it has been disappointing so far in terms of, you know, I've been in industry for five years. I'm very happy with the progress, honestly. But I can understand how somebody

who's been in it for 15 years with the same thesis that we have might think it's taken too long. And I think part of that is because, one, you know, we kind of front ran the technology to some extent. Like, the scalability wasn't there five years ago. And I think we're actually quite optimistic of what's happened over the past five years

because we run a fully on-chain fund. And we've been able to see firsthand the improvements in on-chain technology over that period. So when we started like, you know, unotwap transactions were like 80 basis points to do a spot trade. Right. Now you're talking about low single digit basis points to do a spot trade. interacting with on-chain as a fund was impossible. Like you were signing these hash codes, there was kind of a risk of a hack or an exploit at every corner.

Now you have really nice software that helps you interact with the on-chain world easily, natively, quickly, and in a way that's actually significantly easier than interacting with the traditional system. A lot of ideas were white papers, right, on the financial side. like, you know, perps are still above 50 basis points of trade. All these, like, you know, not a single options protocol worked on chain. We had one borrow lend kind of that was doing two assets.

You didn't have ways to do really interesting structured, structured trades. It was inferior to the legacy financial system in terms of what was there to do. Like, you know, we've argued about why the rails are better. But you kind of went, you know, maybe the land was better, but the built, there weren't buildings there and the land was still not that much better because you were paying kind of $80 for a transaction at one point on ETH right now I think it's very different I think what's happened over the last five years if you're really tuning in he's exceptional all of these ideas that people came up with in defy summer have been tried refined and are now many of them are now in a very good place

not all but that's fine we talked about scalability you know it seemed like we have more than enough TPS right now to do a lot of these applications, and it's only going one way, right? Like, we are on well past the S curve of scaling between Ethereum, Solana and other blockchains, but even just on Ethereum, you can see people that's going all the way on scale. The U.X has gotten two orders of magnitude better, especially for funds, which I think is kind of the main condition you want to bring in. And then we had this problem with regulations, where most people, you did have that, you did have a lot of the people who were true, truly ideological, didn't care about like what the

regulations said. You had a fair number of those people in the industry, right? And they made a lot of money over the past 15 years. But the majority of the world does really care about having regulations on their side because you have to care. Like if you're going to raise capital, that really matters. Most people who grow in funds raise capital. And if you don't have, you know, institutional pools of capital, you don't really have the scale. to develop interesting lending platforms to raise corporate debt on chain. You know, if you, this like example of

the Guatemalan like house, you need a government to put that NFT on chain. So we do need at the end of the day, like we need the, the repo layer to agree to the technology. And when I say the repo layer, like the repossession layer, like you can put a house, you can put a house on chain.

But if someone just goes, like goes to your house and lives there and no government will go and take, like the police won't take them out of the house. The on-chain representation doesn't mean anything, right? You can invest in a Colombian auto loan, but if you can't report the car because you're in Dubai, it doesn't mean anything. So we do need that layer. And that's why it's just an exciting time right now, because we're kind of meeting both.

The technology is more than there for us to meet, to hit a lot of these use cases, right? And we have a favorable regulatory environment in the U.S., which is the single most important country. for this technology. And then I think we're kind of hitting, as we discussed, the two lowest-hanging fruit PMS, which are stable coins and U.S. assets on chain. So, you know, I do think that that will change over the next four years. I think the reason the last few years I've looked the way they have is because, one, we had, the technology wasn't there as I discussed. Two, we had zero interest rates, which, and this is like just very good technology to speculate with. And I think that those two things work together and actually work together. And actually work together.

in a way that has been very bad for the crypto DNA. I think we're weeding that out now, but like a lot of the crypto, you know, crypto Twitter DNA became, you know, grew up too much around speculation and what zero interest rate policy while speculation could achieve. And like they want to bring that back,

but it's gone, right? Like we always talk about the, and we can get into this later, but we talk about like the Silicon Valley meme people like to publish, where the team is talking about, developing revenue, building revenue. And the radio and internet guy says, whoa, whoa, whoa, don't talk about revenue.

You want to have no revenue to be like a big company. That was done in 2015, seven years after zero interest rate policy started and seven years before it ended. So that was a very good thing at the time. It's just no longer true. And I think we need to make that transition to have to be a healthier industry. And then I think the last point is innovation goes to underserved markets, right? Like, that is a way that it always happens.

PCs did not start out for companies. They started out for gamers and hobbyists because companies had mainframes. Hobbies used PCs for a while. That was enough of a base for them to get better. And they grew up to cover the whole world, right? Square did not go to big companies with their product. They went to small companies that couldn't afford like a regular solution or paying too much for it. And then grew from that underserved market to be, you know, to being the company in this today.

Southwest went for people who couldn't afford American Airlines and Delta flights and gave them a service. The underserved market for a bad U.X, inefficient, high-fee financial system has been speculators and unsavory characters. And that's why we've seen so many of those people in the industry. I think as the U.X and regulatory barriers, you know, U.S. is better regulatory barriers disappear, that will become a smaller and smaller percentage of the industry. And we're already seeing it happen now. That's actually a really new, a new connection for me that I haven't made before that I really enjoy is the idea that the coming of age of blockchain technology happened in this zero interest rate like era and like kind of towards the end of it where capital was the most abundant.

And so you take that paradigm of just the financial world. You mix that with like modern day financial nihilism where the younger generations, millennials, zoomers feel like they have no ability to get ahead. And so they need to truly gamble in order to have any chance of having sort of successful lifestyle. And if they lose their bet, then nothing happens. They still have to go to their nine to five job for the rest of their lives. And so it's actually not really that much of a loss. And if they win their bet, they get out of the rat race.

And so we have that financial nihilism. And then we have like a technology that also happens to cater to like lawlessness because of the kind of the structure that we've talked about of a server in the cloud with laws that is truly. immune from nation-state laws. Now, the humans are not immune, but the server is. And you kind of combine these things together, and all of a sudden you have, like, a recipe for financial speculation and really pushing the boundaries of what is, like, legally acceptable by characters like Sam Bankman-Fried. Yeah, I really appreciate that connection. And I think what is, what is done to the capital allocation layer is pretty important. Like, capital allocation determines

resource allocation. That's why it's just an important job in our, in our society. Like, there's two paradigms, right? There's the capitalist paradigm where capital allocators decide what resources are spent how. And the end goal of that is to kind of find product market fit, earn revenue, and return revenue to LPs. So like a fund, you know, like a private equity fund, that's where I used to work. Like you go, you find out where customers are. You build a business. Like you say, hey, you know, this geography needs a new dermatology clinic. Let's build one. If you're right and you're right about projecting demand, you make cash flow from that. and you can pay out a dividend to your LPs and you have good returns and you can raise more money.

If you're wrong, you break the link, you lose money, you show bad returns, you can't raise more money. So the whole system is built around tying capital, which has resource allocation to demand and to demand by kind of consumers and users. Then the other paradigm is kind of the central planning paradigm. We joke, we call it like Stalinism where one person or small people decide what gets capital. and there's no link between reality and that person, right? They just decide. They can decide however they want, but basically that's how the capital moves.

And I think that the zero interest rate DNA that I'm talking about led us into a highly speculative kind of stalinist's paradigm on research allocation. If you could control the narrative, you could get the financial analyst to buy up a token. It would trade at billions of dollars. and then other people would see that that token trading on have valuation and go build copycats, right? And maybe it was a product that nobody wanted, right? Or a service that did not, you know, maybe it was a piece of infrastructure that did not deserve $400 million of cash that then go beat, and that were then spent at ETH Denver in a big party.

So like we also just been, because of this ZERP kind of DNA issue, we've been misallocating capital, I think, and not going as fast. we can be. That makes a ton of sense to me. And all of a sudden, I, as a crypto person, I've been, you know, like many other crypto people looking at the Federal Reserve being like, all right, let's cut. Let's do some QE. And now I think for the first time, I'm kind of seeing the benefits of like, oh, no, maybe if we like want to rid this industry of meme coins and like VC narrative games and capital mismanagement, maybe higher interest rates are actually our friend to, like you said, purge the ZERP DNA out of the crypto industry and actually start to build real products. Because I think that meta has been the meta for so long that it actually does take a

true purging to actually get that DNA out of the crypto industry and start to actually reformat, restructure capital allocation, the crypto to focus on useful products because this is something that the crypto industry has been asking for decades. And very rarely do we get a new product because there's a shiny new speculative asset, speculative tool that just got built and we're all going to go play fun games over there. People are just following their incentives. Trying to make money. Yeah.

And then the other thing that you said is with the repo layer connecting to the server with laws layer. And to me, I'm just hearing like, okay, we need government, like enforcement to actually work with our servers with laws, not against our server with laws. And there are some servers with laws that I want to never ever work with a government, working compatibility with a government. And that is Bitcoin and also the Ethereum layer one. Like I do not want Bitcoin to ever change its rules according to what a nation state wishes it does. And so there's like a spectrum here of like some servers with laws I think I want to be completely immune from the nation state.

And then there are some ends of that same spectrum where I actually want a nation state legal system and government system, judicial system, legislative system to actually work with servers. Let's work with the technology. And I think we had an easier time with the internet. there because the internet, it wasn't creating like lawlessness in the cloud. It wasn't penetrating incumbent financial big banks, which are basically extensions of the state. And so there's differences here. But I think when we figure out ways, and you identify like the legislation that's currently going through the United States with the stable coin and market structure bills, then we're going to actually get these two sets of independent legal

systems, the blockchain legal system and then the nation state legal system. When they start to actually cooperate, I think is when there is a huge blossoming of potential and value here. Is that what you see? Yeah, exactly. And I think it's honestly, it's a miracle that we have regulatory support from the United States. Like if you asked me, you know, two years ago, what is the single most important thing for this technology to work out in the way that you, that, you know, that we think it should and we laid out in the internet finance piece, I would have said cooperation from the U.S.

because one, it's in the U.S. interest to export its assets abroad, right? Like, stable coins, people weren't talking about this two years ago, but everyone's talking about it now. Like, stable coins increased dollar dominance around the world, right? So it is kind of this like high ROI, low-hanging fruit for, you know, for a U.S. government to export its currency because it's so much stronger and more demand than every other fiat currency in the world, right? Everybody wants U.S. stocks.

everybody wants Apple, NASDAQ, S&P. So, and it's in the interest of the U.S. to further lower its cost of capital by exporting that to the rest of the world. Like, if you have the rest of the world, if you give them the ability to buy Apple stock, Apple's valuation will go up all else being equal, right? And that's true for every American company.

American companies will be able to raise at lower cost of capital and trade at higher valuations. It's a miracle for the U.S. It wasn't preordinated that would see it that way. But now we have an administration that's seeing it that way. I think it's kind of genius out of the bottle. I think that that will continue to happen in politics because it's such an obvious game for the U.S.

And now we're kind of looking at, you know, a couple, like, you know, we're at less than one basis point of global financial assets in the industry, right? We have not gotten on the S curve of adoption. You know, it's been a cyclical industry because you have the same 100,000 people coming in, speculating, getting a wealth effect, taking the speculation as far as it will go. to the level where you're seeing kind of AI agents being coins and token farms, trading supply bills of dollars, and then eventually collapses because there's no marginal buyer, and we repeat cycle all over again. Once we get on the S-Curber global adoption, that cyclicality, I believe, is over. Because if you're going from one basis point of global financial adoption to 70%, which we think is going to happen over 20 years, and that's the vision that we lay out, there will be cycles, but the trend is up for the whole thing.

And the U.S. You know, supporting Internet finance with stable coins and world wealth assets gets us on that S curve because they're the two largest buckets. You know, the three largest buckets of assets are gold, U.S. dollars, and U.S. debt and equity market, like debt inequity. If the three of those, you know, the three of those are now on chain as of, you know, the stable coin bill and RWA bill, which, again, I think I'm very highly likely to pass. we're kind of on the S-curve. And then, you know, every other country matters, but it matters a lot less. Imagine a world where your day-to-day banking

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Felipe, I think this is where I'm ready to wrap up this part of the conversation, which I think was targeted at broadly technologists, you know, government workers, you know, hobbyists, a very broad audience. And I want to actually start to talk to in this next part of the conversation, just, you know, capitalists and investors and fund managers, especially in the world of traditional finance fund managers. Maybe you could share a little bit about what you do at Theo Research because I want you to talk about how law,

of investing are the same or different inside of the crypto industry. And so there are tokens out there. DeFi tokens specifically, I think, is really the target here, tokens like AVE, tokens like MakerDAO, that I think exhibit some of the same rules of finance that you can apply. You can do a dollar cash flow analysis of all of these things. And maybe just from your experience at Thea, how is the rules of investing different in crypto? And how is it the same? If people are interested in just getting started in investing in the on-chain world. What should they know is exactly the same and what should they know is different? So Ithea, we're a liquid token fund. We've been operating for, this is year four of operation for us. You know, we take a fundamental approach to investing.

That's due to kind of the background of the team. We were all in mid-market private equity prior to investing. And what you do in private equities, you buy companies based on a cash flow model, you hold them for five to 10 years, and then you make your return based on the revenue growth and cash flow growth of the underlying company. And basically, your job as investors to predict whether customers will like the product, pay revenue, and you'll be able to pay more out and cash flow to the holders of the company. We strongly believe that that core principle, which is kind of the, you know, the DCF principle of investing, discounted cash flow of matters for valuation, apply.

in in crypto markets as well. You know, the reality is that there's only two paradigms in investing, you know, for 99% of assets, you know, there's always the exception. You're talking about gold, Bitcoin, Ether, but most assets do not fall under that exception. They fall under the discounted cash flow paradigm, which is the fundamentals paradigm. The other paradigm is the greater full paradigm. And you've heard this from people in Tradfai. You buy something, not because.

because it's going to give you cash flows back, but because you think somebody else will buy it from you. And that's been the entire paradigm for narrative assets and for and for meme coins, which are actually the same thing, right? And the way you can differentiate between whether you're buying on a fundamentals paradigm or whether you're buying on a narrative meme coin paradigm is,

would you buy the asset if the market shut down and you couldn't sell it? And the answer is, you know, would you buy, would you buy all of Coinbase for $100 million? The answer to that is obviously, yes, you would, because they're making $5 billion of revenue this year. You'd get all of your investment paid back very quickly unless a company went away tomorrow, right? Would you buy all of WIF for 1% of its market cap?

The answer is no, you wouldn't because if you couldn't sell it, you wouldn't do that because you can't sell the asset and you're not going to get a dollar of cash from it. So you just burn that capital. So we like to look at things on the basis of whether we can hold it and make our money back plus the cost of capital purely based on the future cash flows of the business. I think the fact that you have to explain this at all illustrates the speculative zero interest rate policy DNA that is built into the crypto industry. Because I think if some individual from Wall Street is listening to this podcast episode and they are just trying to learn about crypto for the first time, they're like just obviously you are, that's a lot. the case. I don't understand why you are even talking about that. And then in the crypto world,

the reason why we're talking about this is because this has not been the case. The investment, that has actually been a suboptimal investing strategy for the early era of the crypto industry. Because it, I mean, I think if you are a serious professional investor, you went to Wall Street and you took your serious investor like academia learnings and applied it to Wall Street. And then anyone, like, I was a psych major. And so when I got into crypto, I was learning about finance for the first time. And so I was, learning this like patterns of behavior from internet finance, not like Wall Street finance. And so this, this, the reason, like, it seems so simple, but because of the paradigm shift

in crypto and the different types of people who invest and how they invest and this is different market structures for how it's emerged, like this actually is like a very strong difference for how this industry has emerged. It's, it's funny to say that because, you know, all of my friends are still in Tradfai, all my college friends. And we'll talk, you know, I'll talk about, like smart contract code way you can do with smart contracts or or like cryptography concepts ZK proof credible commitments and they think it's impossible moon math like everyone must be so smart that they can even think about these topics in the industry and then I'll show them some article on like fundamentals and cash film they'll be like this is the baby level like how is this even

something worth writing about so it's kind of funny that that that's the inversion right yeah they think it's moon math they think it's gigabrain stuff and then we have like these 80 IQ DGens Even smart people who are dragged down the IQ curve to be on the ADIQ side in order to get returns, because that's just like how this industry works. I think it's fair. You know, the market has been rewarding different behavior. So spotting that transition in paradigm is hard. I want to ask you about this concept between an inert protocol and an alive business.

I think in the early days of crypto, I don't really think this has really become expressed, but in the early days of crypto, there was this idea that we would create application, protocol applications, and that was the magic of Ethereum. With smart contracts, with open code, you could write up an application, and this application could provide some service, some value, and that application would generate revenue. And the first example that we had of this is MakerDAO in the MakerDAO system. And it would generate cash flows for the MKR token. But in the early days, the idea of MakerDAO was like, well, this is actually just going to be

the protocol. we're going to polish it, we're going to harden it, we're going to build it, and then we're going to let it go and tie ourselves to the mast, make it immutable because we love these immutable protocols because we have servers with laws and we can just build these things that stand forever, stand the test of time. And so that's an inert protocol. It generated cash flows, but it was an inert protocol. Maker Dow has since expanded and developed. And I want to contrast that was something like, something like an actual business where when you invest in an equity, like Coinbase, for example, you're not just investing in the cash flows, but you're also

investing in the future cash flows and hoping that the business expands, opens up new product lines, open up new business opportunities. And there's, so there's something out there that's unique about we have these decentralized protocols on the internet that generate cash flows that are supposed to be generally immutable, generally hands off, generally like, like self-autonomous. And then we're investing in those protocols. And that actually truly is different than investing in some sort of equity, even if it's a token, like an equity token where the business is alive.

It's expanding. It's trying to penetrate new markets. It's trying to open up new business lines. And it has no interest of being this like immutable and their protocol. It actually wants to like kind of grow and be aggressive into the market. And so how do you think about this contrast between these two styles of investment opportunities when it comes into the world of crypto? Yeah. So first principles, all that matters is future cash flows for both, right? As an investor, that's the, that's the main determinant of what would be interesting. I think that the protocol thesis has so far largely failed where every business that's exciting today or every protocol that's exciting today is a business. Right? You mentioned MakerDAL. Obviously, that is very actively managed business by the founders and people around.

the founders, right? Like, you know, with and without Roon, it's, it's completely different, right? Like, it's, it really matters what Roon's thinking, what he's thinking for, for endgame, how he's acting. And the businesses that were protocols at the time, like Uniswap, Abe as well, they're actually managed. And they've gone on to V2, V3, you know, building their own chains and, and largely doing the things that are helpful for the underlying business, right? I think we're, I mean, we're not really seeing many protocols at all today that just want to be permissionless ship and let that run, because one, you never know if the code is perfect, right? Like there are still hacks in unforeseen corner cases, and this market will just exploit them relentlessly if it finds them.

And two, more importantly, the market's still in the early phases of growth. So the best strategy or the best product in 2021 is so much worse than the best product we can build in 2025. And that will continue to be true five years from now. Because we're kind of in the exciting Cambrian explosion part of this market where things are growing, competing. You're discovering new efficiencies, new ways to go to market. And if there's no team to find those things and exploit them, I mean, it's a really tough position to be in. And I won't like name names, but like the recent attempts at being permissionless protocols have basically gone to zero or fail or failed. like, you know, we're definitely not investing any of those, at least not now. Maybe in 10 years

I can come back and like we really optimize everything and then you can be a protocol and there's something interesting about that. But in this market, I don't think it's interesting. I think this really marks a difference between what I came into the crypto industry as as an investor versus like what I'm seeing now because in 2017 during the ICO mania. And the ICO mania is as warped as any other investment cycle that we've seen in crypto. But there was still. nonetheless, this relentless, like, commitment towards I'm only interested in this token if it is fully decentralized, fully permissionless. And I want the team to step away, like, you know, lock the door, throw away the key. And that's the protocol. And that's what I

want to invest in. And that was the investing meta in 2017. And now I think what you're saying is, I'm not interested in that at all. We can build protocols. But I want it to grow like a business. And I think maybe that is the new investment opportunity here is these teams, these companies, these startups are building protocols and that is their product. And they always kind of guide the protocol. And there's some level of commitments that they are making. AVE makes a commitment to its users that it's not going to liquidate a user's collateral outside of the actual instantiated rules of the code.

But the AVE team, the AVE organization will always be with AVE. And so it ought to be familiar with traditional investors. This is just like investing in equity. But the product is different. The product is a protocol, which is unique, a protocol on top of a server with laws. The products are protocols, for the most part. But you expect that there will be continuous innovation so they can stay ahead of the market. And that there will be new products.

And this is very important that will accrue value to the same original token. Right. And we actually had a situation over the weekend where, AVE thought about launching a new, a new protocol and launching a new token to go along with it. And the market just erupted. And every kind of liquid fund that's in Avey, every person who either holds Aver has an opinion was kind of unilateral on the side of you can't do this. Because so much of a business value comes from unforeseen product lines, right? The best example is Amazon. You know, AWS is the majority of the value for Amazon. And if you just have, you just. invested, you know, if you invested at the very beginning, but Bezos kept launching new,

new equities for new product lines, and all you have is the book business, you'll be very sour and disappointed from the way that you got paid for being early to support his vision, right? So we're dealing with, we're dealing with the transition phase between the protocol world that you're talking about in 2017, and even in 2020, and the business phase, which is what I think every large player in the market now demands, you know, because they want to be paid, like, people have lost a lot of money in tokens, right? People made a lot of money like one year, but for the most people have lost a lot of money in tokens. And there hasn't been as much PMFs as the market expected. Funds are getting, you know, are being asked from very high cost of capital,

like very high returns to justify investing in the space. And funds are kind of as a group, and I think it's the largest group in this market, demanding kind of token holdings. their protections from these businesses and and startup like, you know, mentality where you're working hard, you're shipping new products and you're being responsible. So I've really enjoyed this conversation, I think, zooming back out from, you know, blockchain crypto, defi words and reorienting the crypto vernacular, the cryptoverbiage, the way of expressing what we do in this industry and updating it for a more modern, more modern way of communicating.

I think it's the perfect time because I think you are right. We must enter a newer phase of investing. You can see it in like VC retail relations. You can see it in conversations around meme coins. And you can see it in Capitol Hill in Washington and in the legislative branch. And so I think a new era of crypto maturity is what we need in order to take the technology to the next phase. And I really appreciate you helping to really codify this into a fantastic essay. Bankless Nation, if I didn't explain it earlier enough, this is all of an essay that we are talking about,

thoroughly unpacking that Felipe wrote. We will link that in the show notes. So I highly encourage you to give it a read. Felipe, one last question for you just before we go. Pretty open-ended, though, like, what excites you about crypto? What is nerd sniping you lately? Why are you bullish on the next two, three years about crypto? Just open-ended. What gets you going? You know, it changes every now and then every few weeks. But right now, I am pretty interested in this token holder protection question and the concept of futarchy. And the, the concept of futarchy. and how that can be implemented. So, you know, I know you know what it is, but for the audience,

Futurkey is the idea that you can trade conditional markets to make governance decisions. So like the classic example is Uniswop thinks about implementing a fee switch. You can buy Uniswap conditional on the fee switch being implemented. And if it's not implemented, you get your money back. Or you can buy Unoswap conditional on the fee market on the fee switch not being implemented. So the proposal fails. And if the proposal fails, you buy a UnoSwap. And if it does, if it passes,

you just get your money back. So you're kind of splitting up the price into these two markets where the market is pricing the event if it does happen and it's pricing it if it doesn't happen. The idea is to feed the higher price into the decision.

So, you know, if the USwop fee switch, yes, market is trading higher than the USWOP fee switch, no market, then the fee switch will be implemented. It's kind of a crazy idea, but it really solves a lot of these Dow problems that we're seeing in the market.

So, like, you know, Dow looting is a very big problem. We all know that people give, you know, give tokens to delegates. The delegates can be bribed or, or persuaded into voting for something. It's not for the interest of the token holders, but only the interests of a few select people. And under a few Turkey, that would never pass, right? Future market markets would just send that vote to zero and stop it from happening.

Same thing with, like, splitting up to a new token. Future key markets would never let a new token ship. They would send that market to zero immediately. and you'd have this shareholder token order protections that we're kind of trying to enforce through the social layer because we're not able to enforce it through the legal layer right now,

enforced through smart contract code. So kind of links to the whole conversation. The future key market gives you that very important token order protection through credible commitments. So I'm excited about that right now. I think there's a lot of corner cases to think through, but it's definitely nerdsite me over the past few weeks. Bankless nation, you guys know the deal.

Crypto is risky. You can lose what you put in. But nonetheless, we are headed west into the frontier of credible commitments. It's not for everyone, but we are glad you are with us on the bankless journey. Thanks a lot.