Odd Lots - Hayden Adams Explains Uniswap and the Rise of DeFi

Episode Date: May 6, 2021

There's an irony with crypto. While so much of it is ostensibly about circumventing legacy finance, many of the most important pieces of crypto infrastructure are centralized financial entities. For example, the newly public Coinbase holds fiat currency and is subject to numerous regulations. Enter decentralized exchanges. A new breed of trading venues has been built to enable trading directly upon a blockchain, allowing assets to be exchanged without any custodial requirements, permission, or even accounts. It's a totally different model of trading and market structure. On this episode, we speak with Hayden Adams, the creator of the Uniswap Protocol, which powers the world's largest decentralized exchange, to explain how it all works.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa, play the podcast, OddLots on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Jill Wisenthal. And I'm Tracy Alloway. So Tracy, you know, we recently had the Coinbase IP. Yes, we did. A big moment for crypto that was, I think the analogy I most saw used was that it was like Cryptos coming. out party. Yeah, I think that's fair. I saw it compared to the Netflix IPO, maybe some comparisons to the launch of the CME Bitcoin futures in late 2017, but certainly quite a big moment for the crypto world. Yeah.

It's sort of, I guess it capped a really big year for crypto in the sense that we've seen this massive institutional adoption, or at least a lot more than an old. A lot of people had expected. We saw PayPal saying that it would allow its users to buy and sell crypto. We've seen parts of Wall Street start to get more interested. We seem to be very, very close to getting that long-awaited Bitcoin ETF. And so it really feels like all of that momentum sort of built up and then exploded in the Coinbase IPO. Yeah, that's exactly right.

But there is an irony with Coinbase and you mentioned crypto, ETS. But there is an irony with Coinbase, which is that, you know, with crypto, it's supposed to be cutting out legacy financial institutions. Like, that's a big part of the sales pitch. But, A, Coinbase just went public on legacy exchanges. But beyond that, Coinbase itself is kind of in a weird way, a legacy financial institution itself. It handles fiat currency. People send in their dollars or euros or whatever. And from there, they could trade various digital currencies, but they're holding dollars.

And all kinds of, they're a gatekeeper. And they have to do, you know, anti-money laundering regulations and knowing your customer. And they have all kinds of personal information on their customers. And you have to tell them your name and upload an ID and everything. So although it's like kind of like a crypto exchange, it's very much like it is a legacy financial institution in some very real way. Well, it's also a centralized order book, which kind of flies in the face of a lot of crypto ethos about decentralization and, you know, trading between parties without a third party in between them. Yeah, exactly right. Like, it bears many resemblances to a traditional exchange or traditional prime brokerage for its institutional customer or traditional online brokerage, like maybe a Schwab for retail trader.

So it's only like partially new. But that being said, there is a phenomenon that's growing in the crypto world, and I don't think we've talked about it yet, but it's been growing for the last couple of years, and that is attempts at creating markets that are truly, truly decentralized. So no company handling the trade. Right. And so this is a really interesting project from a market structure perspective, because normally you would have a third party who's stepping in to provide liquidity as needed, But if you just have market participants who are trading with each other in a truly decentralized environment, then you have to figure out other ways to encourage liquidity. And I think that's where

this aspect of crypto actually becomes very, very creative. It's also where weird stuff tends to happen. And I think we're going to get into that. It's super weird. It's super different. It's a very different structure. Obviously, if there's no company, there's no one to send your cash to, but that, so that also is its own weird thing, how you solve that, but there's also no gatekeepers, there's no setting up accounts. It's just a very different thing, but there is an argument to be made that a sort of decentralized trading environment is much more true to the crypto ethos. All right.

Let's get into it. Yeah, I'm super excited to talk about this, to talk about defy, how decentralized trading works. We are going to be speaking with Hayden Adams. He is the founder and CEO of Uniswap Labs. He is the inventor of the Uniswap protocol. And this is basically a trading system that runs on top of the Ethereum blockchain. And it is a very big deal. As of right now, we are recording this April 27th.

Over the last 24 hours, $1.5 billion of trading volume. has been done over uniswap. That's about half of Coinbase. So here is this decentralized exchange that's half as big already as the preeminent crypto exchange. It's a very big deal, growing extremely fast, but I don't think most people have any understanding

about how this all works, and I would include myself in that. And so we are going to learn about uniswap and decentralized trading and what decentralized finance is with Hayden. And so Hayden, thank you very much. Thanks for joining coming on an odd lot. Thank you for having me on.

I'm really excited to be here. How did we do in that introduction? Fantastic, actually. I'm extremely impressed. Okay, okay. It's all downhill from here, I promise. But if you're impressed with the introduction, then I'm happy. But, you know, let's just start really big picture.

It's like defy. I see that all over the place. It's a super popular buzzword. I'm sure if I looked at Google Trends, it'd be a straight lineup. How would you describe what is defy? Yeah, I think a good place for starting talking about defy is Bitcoin. You know, Bitcoin is this decentralized, you know, system for storing and transferring value, right, over the internet. So it's, you know, you can think about it as magic internet money.

And it has these properties that people care about and people like about it. You know, it's provably fair. It's secure. You know, there's no single centralized party that controls it. And it's this global system. that can be accessed from anywhere in the world. But, you know, it's also still limited in being money, right? It's limited to storing and transferring value.

And early on in the blockchain days, you know, people started to think about what are other applications of blockchain. And so Ethereum was born. And Ethereum makes it easier to build, you know, various other applications that have some of these properties people care about, about Bitcoin, that, you know, it's provably fair, that anyone can, you know, audit its entire history. history, that no one controls it, and apply that to other types of applications. And it does this with what are called smart contracts. And smart contracts is essentially code that is run on a blockchain.

And so the same way that, you know, every Bitcoin node verifies every transaction on Bitcoin, every Ethereum node verifies the execution of every program running on Ethereum. And so Defy is essentially the idea that finance goes far beyond just money and storing and transferring value. There's an entire other world of lending, borrowing, exchange, insurance, you know, synthetics and options and other types of derivatives. There's an entire financial system. And we can take some of what we've learned from Bitcoin and apply, you know, and build systems that have some of the properties that we care about in Bitcoin to this broader class of financial use cases. That's essentially defy. Uniswap is an defy application living on Ethereum.

It's the most popular application, and it applies basically this to decentralized exchange. So I'm going to jump right into something that you guys do that's different to some other exchanges, but you have basically every coin in existence able to trade through your platform, including ones that I think are probably jokes or scams. I think that's fair to say. Why did you decide to do that? And how does that differ from some other competing platforms? Yeah.

So I think that what's really interesting about Uniswap is it makes it incredibly easy to create new markets and trade on markets. And so it ends up being extremely good for the long tail of assets. And that gets into this kind of unique infrastructure that Uniswop. So Uniswap is not a traditional order book exchange. Uniswop is what's called an automated market maker or it uses automated market making. And what that means is it essentially allows anyone to spin up their own market. And so in a traditional exchange, you essentially have two main types of participants. You have professional market makers who are constantly putting up buy and sell orders.

And then you have, you know, retail traders or takers who are executing against those orders. And it can be extremely hard to create liquidity in the long tail of assets because the professional market makers that are necessary to the function of order bucks, you know, they don't necessarily. it's not worth it for them to maintain inventory or to bootstrap longer tail markets. Because one way that they think about it, right, it's only really worth it for them to kind of market make on the largest, most popular assets. And so with Uniswap, it adds what's called automated market making, which allows basically anyone who wants to create these markets and deposit assets into a smart contract. And that smart contract will automate the process of market making for them, such that for

them, it's basically a passive experience. And so, you know, in two minutes, someone can spin up a new market, create liquidity in it, and they don't need to be, you know, they don't need to be extremely sophisticated. They don't need to have this, you know, market making background. They don't need to, you know, work with other professional market makers. And so it kind of removes this gatekeeper in the creation of liquidity. So let's talk about how automated market makers work, as you pointed out, in a traditional market. There's someone in the middle. They always are posting. a bid and an ask, and there's a little gap between them, and that anyone can come and take either side of it. It works very different in the sort of liquidity pools of an automated market maker.

Explain the basic functioning of it. Essentially, each market on Uniswop is a smart contract on Ethereum. What that means is it's a little program. It runs on Ethereum. And something that's really interesting about smart contracts is its code that can hold funds. And it's, and it's a little And it's code so you can basically create arbitrary logic, and then that logic dictates how the funds stored in that smart contract behave. And so an automated market maker is a way of coordinating market participants within Uniswap. So, you know, there's two classes of users, right? We call them traders and then liquidity providers, or takers and liquidity providers.

And then there's also, and creating a new market on Uniswap is incredibly easy. The same way that anyone can kind of create a new account on Bitcoin or on Ethereum, and anyone can deploy new code to Ethereum and anyone can transfer value on Ethereum, anyone can create a new market on Uniswap. So there's basically a smart contract that dictates the creation of new markets. Anyone can basically create new assets, right? You can also create new assets on Ethereum very easily. So anyone can create a new asset on Ethereum and then they can add that asset to Uniswap.

And in the same way that Ethereum is decentralized and permissionless and can be accessed anywhere in the world, the same exists for uniswap markets. And so anyone can create a new market by calling what's called a factory smart contract, which deploys a new market for two tokens. And then they can create liquidity in those two tokens by basically depositing some of two assets into that smart contract. So you might deposit some USDC, which is a stable coin and some ETH. And then that creates a marketplace between ETH and USDC. And then what's very different is that rather than having just, you know, market makers,

is posting bit and asks. Essentially, the smart contract manages the market making for you. So you just deposit capital into the contracts. The contract automate the pricing, the price updating, the rebalancing, and then people can immediately start trading against it. And so you're not matching up buyers and sellers. You'll have this smart contract, which will always buy and sell in either direction, in either asset, and then people who trade against that. And so you're not coordinating between people, but you're actually coordinating people to a smart contract. So this is where the liquidity provision becomes quite important, right, and different to other types of traditional exchanges. So you have to incentivize people to contribute to the liquidity

pool in order to be able to provide liquidity for, as you put it, the sort of long tail of crypto assets, things that people might not naturally make markets in. Yeah. So what's really interesting thing is in a traditional order book structure, essentially all market makers are competing against each other. You know, basically the first person to put up an order is executed. In a AMM or an automated market maker, you know, it essentially pools liquidity across thousands of different liquidity providers and together they function as a single market maker in sort of sharing the same strategy in this automated market maker. And so you might put in $100, someone else might put in $1,000, someone else might put it in $100,000.

And that's all pulled together. And market makes us a single unit. Uniswap basically has built in fees. And so every time someone makes a trade, there's a fee taken on that trade. And that's paid out to liquidity providers, as are called. And so liquidity providers are taking on some price risk because, you know, the automated market maker is managing their liquidity for them and buying and selling tokens. And there is some price risk being taken on.

But that's compensated for in fees being paid. paid by people who want to trade against it. Right. So explain that. So you mentioned, for example, a pair trade between ETH and USC. And if I look at the website Coin Gecko right now, that is actually the number one. It looks like that's the highest volume traded pair. So if I had some Eith and I had some USDC, I could put both into this pool. And then what? I'm locking it up for a defined period of time or for a period of time? And then how much am I getting paid?

Like, explain to me, like, exact the mechanics of what my incentive is to lock them up there. You lock it up for as long as you want, essentially, right? So you can lock it up for a second, a day. Well, I mean, the time is a block. So 15 seconds is the minimum, or, you know, a day or a year, however long you want. And while you're, let's say you put in $1,000,

and the entire pool is $100,000. Great. You are now 1% of that liquidity pool. And so you are earning 1% of the trading fees. on that pair. And so in terms of like the profits, right now there's a 0.3% fee taken on every trade. And, you know, there's about 1.2. So today's volume was $1.2 billion. And so, you know, 1.2 billion times I can just do the math right now. But so it's a 0.3% fee, you know, you're getting about $3.6 million in fees today on un-swap distributed to liquidity providers. And so

one way to think about it is, you know, if a pair is earning $1,000 in fees per day and you're 1% of that pair, then you're earning about $10 in fees per day. If you're, you know, 10% of it, you're earning $100 per day. And so, you know, the returns are very kind of different across different pairs. There's tens of thousands of different trading pairs and they're all doing different volumes. And so, you know, returns have been all over the place. So just to be clear, the trading fees for end users, so you don't, not everyone has to lock up. Some people might just want to go from one coin to another. Those are constant. But what determines how much, you don't, you don't, the liquidity providers get ultimately is based on their share of the pool. So in theory,

is that how like the, is that how the remuneration structure works for the liquidity provider? Just like how much of their, the whole pool of their stake is? You know, what we're calling fees is actually very, it's much closer to what a spread would be on a order book. Okay. And there's no, you know, exchange fee, right? There's, the whole point, right, is it's decentralized. And so you have, you know, participants who are creating these liquidity pools. And then there's this spread essentially, which is what the 0.3% is, which is, you know, collected on every trade and those are paid out to liquidity providers proportional, pro rata proportional to their portion of the liquidity pool. What's the downside of providing liquidity in this way?

Because I imagine without someone sort of in between the trades or a traditional market maker, you could, for instance, see quite a big spread, I guess, or at least like prices move before a trade is actually executed on? Well, so there's risks to being a liquidity provider, right? Being a liquidity provider is similar to being a market maker, which is that you take on price risk. Basically, you take on risk in the divergence between the two assets, right? Because you're putting up two tokens and you're getting out two tokens, but you're not getting them out at the same ratio if there's been a price change. And so, you know, Uniswap is constantly being arbitraged against other markets, if there's a very large price movement, you might have sold some of

your token. Unisop essentially sells on the way up and buys on the way down. And so if there's a very large price movement, you might have sold some tokens at a suboptimal price and lose some money there. But you know, you're earning fees along the way and, you know, very frequently or very often that makes up for it. So someone could put in 10 Heath and 10 USDC and, okay, I'm going to forget about it for a year and collect some yield, but I do run the risk of if it crashes in the meantime. Yeah, basically. But, you know, it could crash and it could still be profitable in a world where enough fees have been collected. Right. One thing to think about here is, you know, if you're thinking about maybe like the biggest market pairs in the world, right, Uniswap still can

compete on these, but as I kind of highlighted before, for kind of, you know, let's say some new asset gets created. Yeah. It's just got created today, let's say, and, you know, they can't, they can't, they can't immediately just reach out to a professional market-making firms and say, hey, we created this new asset. You know, we're one of 5,000 assets that got created today on Ethereum. You know, how do we, and I'm barely exaggerating there in the numbers. Essentially, all the creators of that asset need to do is they basically can deposit some of that one token and some of another token into uniswap,

and there's immediately a, you know, a trading pair that people can trade against immediately. So it's kind of one thing to think about, one analogy is almost like the user-generated content, like Netflix versus YouTube, but for liquidity. Netflix, you kind of have this limit in the amount of content you can create. And they sort of, whereas this is like user generated content, but for liquidity. So just on that note, I guess one of the problems with decentralized user generated content is that it could migrate somewhere else. And I have to admit, like I just heard a little bit about this. I had some people actually asking if we could do an all-thought's episode entirely on this.

But could you please explain what happened with sushi swap and this idea that they siphoned off your liquidity? Oh, we're getting this is the good stuff here. Yeah. So this is like people call this a vampire attack, which immediately means we must ask you about it. Yeah. Yeah. So funny enough, you know, the siphoned off thing is really funny because before sushi swap launched, Uniswap had $300 million in its liquidity pools. And after sushi swap, it had about $1.6 billion.

And today it has about $9 billion. It definitely hasn't siphoned off liquidity. But essentially, Uniswap is a decentralized protocol, right? And, you know, something that's sort of core to smart contracts on Ethereum is the idea of open source software. Uniswap was basically built entirely open source, right? So all the code is publicly available so that people can verify the kind of workings of it. But basically the whole idea, right, is users don't need to trust anyone with their money.

They're just trusting the code that's being run. And so all the code of Uniswap is publicly available. And so essentially what we saw is with Sushi Swap was, you know, someone created a fork of Uniswap, the same way we've seen forks of Bitcoin and forks of other crypto platforms. And they released a new token. And they basically said, you know, anyone who uses our version of this protocol will be earning sushi tokens. And so they kind of incentivize people to basically put their liquidity in Sushi Swap instead of Uniswap to kind of try to compete with Uniswop and grow their own liquidity.

And for a while, that had an effect where, you know, there's a little bit added context here, which is that when you create liquidity on Uniswap, you get a token that represents your portion of that liquidity pool, right? I had kind of mentioned that, you know, if you're earning, if you're 1% of the pool, you're earning 1% of the fees, there's actually a token that says, you know, I own 1% of the die and USDC in this contract. So what SushiSwap did is they basically incentivized people to deposit their Uniswap liquidity tokens.

while they were deposited, they were earning fees. Basically, they were earning sushi tokens. And then at the very end of this, I think it was like a 10-day period, basically they, you know, migrated all the liquidity over to their own system. The actual result, though, was, funny enough, a huge increase in Uniswap's liquidity during that period of time. And post-migration, actually a huge amount that liquidity stayed and the overall system has grown. So it's been quite beneficial in the long run for Uniswap. But it was a very interesting time. for sure. So what were you actually thinking when this was happening? It's sort of like a 10-day period

when people have basically, you know, they're leaching off the protocol that you created in order to steal your liquidity. How did that feel? I'm just curious, like, what you were doing during that time frame. For some context, right, I had been working on this project for over three years at that point. So I know the first two years was I was the only person working full-time on Uniswap. And then I've kind of built out of a company over the past year and a half, two years. Someone came along, right, and probably in five days, they created a new token and they forked the entire protocol and said, hey, you know, use this one instead and have a huge portion of those tokens, right, reserved for the people who created it.

This open question in Defi generally, right, which is like, you know, how do creators capture value and how are creators rewarded for their efforts? And there did, there was this element. It was maybe a little bit personal to it. But at the same time, that's also part of, you know, the fact that it. it was open source, it's also fair game, right? It's part of the ethos is the fact that you can kind of have competitors spin up. And then in the long run, it's worked out.

There are so many questions, but I will make a, so many things, I'm trying to think which way to go next. But I will say, so Uniswap on May 5th, so I don't know exactly what day people are going to be listening to this, but right about now, but on May 5th, according to something, you're launching a version 3. and we can talk about some of the upgrades and why you launch new versions, but you are releasing that code under a different license. Am I correct?

Yeah, correct. We're using something called the business source license, which essentially, you know, all the code is public, it's all verifiable, you know, people can build on top of it and integrate it.

And for the first, you know, two years, or two years at a maximum, could be less, but two years is sort of this hard cap. Essentially, you can't, you can't fork it in a production So in theory, you can't be sushi swapped. You can't be vampire attacked for at least two years. In theory. Does that sort of fly in the face of the decentralized ethos? Like, I get that it's always a

balancing act, but it feels like one of the big selling points of uniswap was that it was truly a decentralized exchange. And if you move away from open source ideals, then maybe it isn't. I think that it's truly decentralized in that it's all completely verifiable. It's all, you know, no one controls it, right? There's still this no control. Even the kind of license, there's this sort of this community governance system that I haven't even mentioned. We haven't gotten into, but the community governance system actually does have, and so the Unispop community does have the ability to grant exemptions to that license or even, you know,

reduce the kind of two-year period where it can't be forked. One of the kind of funny things is that there is this sort of community of users and developers around Uniswap. And when we were releasing the Uniswap V3 code, there was kind of this feeling of, you know, what would the Uniswop community want? Does it want, you know, to be Sushi Swap Day 1? Does it want to be Sushi Swap Day 2? Or does it, you know, does it want to have time? You know, the kind of long-term modes almost, if you think about it, of decentralized protocols.

The best example would always be Ethereum for these types of things. but the long-term value is in the network effects in the community, the build-up around it. And so the idea here is essentially to kind of protect the Un-Swap community in the short-term, and in the long-term, there'll be this sort of massive network effect built up around it. Explain the role of the Uniswap token in the network, because there is, in addition to the exchange, the protocol,

like everything, there is a token associated with it. My understanding right now is that the token doesn't really confer anything. It's not equity. I don't think, from what I understand, the token holder actually collects any of the trading fees or the spread or anything. And yet, the token has gone absolutely nuts. And if you bought it a year ago or when it came out, you'd be sitting on a fortune right now. What is the role of the uni, the coin? Yeah. So I think that, you know, it might even be helpful here to back up and give some added context about, you know, what are like, you know, the value of defy and the value of Uniswop is in its decentralization.

Yeah. Right? And there's decentralization, there's kind of a lot to even unpacking that word, right? You know, does it mean that no one controls it? Does it mean that, you know, there's no kind of central points of failure? And there's different ways of achieving decentralization, right? One way of achieving decentralization, and we've seen a lot of people talk about it, is, you know, through kind of automation, right?

And so what that means is basically relying entirely on code essential. Right. So smart contracts can have logic that's built in and, you know, that logic can basically lead to a very decentralized world, right? Where, you know, you're not relying on any people or any company to follow its word. You're just relying on the code to execute as defined. And so, you know, at its core, uniswap is decentralized in that the logic for uniswap, the protocol is entirely in these on-chain smart contracts. And one of the benefits, right, is that there is, you know, it's not custodial. So, you know, people who, put their tokens in, they're not trusting any third party. Like, if you deposit liquidity into uniswap, that liquidity, the sort of right to claim, that liquidity sits in a smart contract. And that smart contract is not controlled by anyone or anything other than kind of, you know,

Ethereum's consensus. Your private key, right, if you have an Ethereum private key, that gives you the right to claim your portion of the liquidity. And no one else can claim it and you're not, you don't need to trust anyone else. This type of system, right, that's the most important version of decentralization. But there are things that can't be decentralized in that same way. Another way of achieving decentralization is relying on almost market dynamics. And so a really good example would be like proof of stake in Ethereum is basically achieving decentralization and proof of work, I guess, in Bitcoin, is achieving

decentralization through economic incentives, essentially, you know, people have an incentive to act in a good way or they're losing money. That's another version of decentralization. an incredibly important one. But when you talk about a decentralized ecosystem, but there are still things, there are still sometimes decisions that can't be perfectly made and don't have perfect answers from a market incentive standpoint. Those types of decisions are still important towards building out this decentralized finance ecosystem. The way that I think about Uniswap, the Uniswap token, which is a governance token, essentially its role is

taking on decision-making in the best way possible, in the most decentralized way possible, making decisions that can't be immediately automated and can't be, you know, it's essentially coordinating the human element of the decentralized finance movement and and of uniswap, which, you know, can't just be perfectly automated or, and it can't perfectly rely on market incentives. That's essentially the role of the unitoken. And so something that's really cool is that Unitoken holders can't, for example, just withdraw all the funds from the Unspot protocol, right? That's a decentralized, you know, it makes it more decentralized, right? But there are kind of these other things, right? Like long-term community ecosystem growth and development. There's a lot of value that can be kind of created by the Un-Spotorotroth. And there's a lot of sort of human work and effort that can be coordinated towards building value and growing the protocol. That's sort of the role of the Unitokin. So the only kind of or the main kind of governance action that it's taken so far, is basically spitting out this grants committee. So what the UNISWOP governance is, is it's an on-chain governance system.

So UNI token holders can vote on actions from a smart contract. And that smart contract has a treasury. Just to be clear, could at some point the UNI token holders vote to pay a de facto dividend to UNI token holders down the road? I mean, so UNITOP governance is a smart contract. And it's very broad in what it can do. And so definitely Uniswop token holders or Uniswop governance has this thing that we call the fee switch, which is a sort of built-in kind of fee that can be taken off the, you know, basically it can come out of liquidity provider fees. So right now, liquidity providers are 0.3%. But this unit token holders could vote to

add, you know, up to a 0.05% fee, which is a pretty low fee. Yeah. Kind of coming out of that, that could theoretically be kind of given, you know, it's sort of a governance system. So it can do whatever want with the fees that it goes. And so, or whatever the UniToken holders want and whatever the community wants. So the Uniswop governance system has its like built in treasury. And so it has kind of, yeah. And so far it's, it's basically the main things that it is done is basically fund other teams and projects and developers building on top of the Uniswop ecosystem.

So, you know, there's other kind of teams building analytics platforms and other interfaces and those kind of get, have been funded out of Uni token holders who voted to fund that. So there's this community treasury. It technically has a $14 billion. worth of unitokens in it. And so it doesn't necessarily need trading fees either because it can sort of use the uni tokens for disbursement. But in the future, it could theoretically collect fees. So, I mean, it does seem like you guys are working on quite a lot at this moment in time. We spoke a little bit about the new protocol. But what do you think is next for you in terms of

your own company's development, the technology and the wider crypto market? So we've just seen this big moment for Coinbase, which we talked about a little bit in the intro, but where do you see Uniswap actually going over the next, you know, a couple of years? Yeah, I think that it's, you know, something that's really important to think about when you're thinking about Defi is how early on we're in Defi. And, you know, defy is essentially what we're trying to do is modernized financial infrastructure. And so there's all these, you know, these benefits, right, that are kind of inherent. You might have seen stuff like, you know, very centralized exchanges, uh, whether it's crypto exchanges like Coinbase and finance, uh, or, you know, non-cryto exchanges, uh, like Robinhood or

America trade. They all have these sort of downtime. And, you know, there's these like inherent benefits to defy, but, you know, it's also early. And so there's also sort of these, uh, early downsides. One way to think about it is we're in the early days of the internet, right? And so, you know, people who there's sort of transaction fees can be high at times. It doesn't have, it can't process that many transactions in the early days. Right. So it's kind of like, you know, AOL days where things are still a little bit slow, but they're getting built out very rapidly.

And I think that over the coming years, we should expect Defy and Ethereum to scale up from being able to do what it can do today, which is 10, 15, 20 transactions per second, to, you know, being able to do hundreds or thousands or millions of transactions per second. We've seen a kind of explosion in the usage of Defi. Yeah. So, you know, Uniswap didn't exist two years ago, right? Today is doing $10 billion in volume. Six months ago, it was doing per week.

Six months ago, I was doing about $2 billion. And a year ago, it was doing about $50 million. So we've kind of seen this explosion. I think it's attracting a lot of new users. We've seen that kind of similar explosion in users, but it's still in the like maybe 500,000 users range. But I think over the coming years, these sort of inherent benefits of defy are going to become more apparent,

and the downsides are going to be slowly worked out. Let me ask you a question. Because you talk about users and you talk about the benefits of Defi. And I have to admit, like, the technology, the sort of rethinking of what a market maker can be is really cool and the liquidity. I'm super impressed by it. However, when you think about like a traditional stock exchange, one of the nice things about a stock exchange is you can raise money there and then go do something. So, for example, you could be a company like GameStop and raise money on the stock market and then go build physical. video game stores, which may not be the best business these days, but whatever, it is what it is,

or you could build something really exciting. When I look at what's taught, when you refer to, like, using defy, it just seems like, okay, you have a bunch of people who are trading, that's cool. And you have people who are sort of lending or staking and earning yield. That's cool. But, like, who's doing the borrowing? In other words, like, where are you competing with TradFi, I guess, for like actual people who need liquidity or people who want to raise money. It seems like a bunch of trading and lending, but where is the like sort of like end user who's getting something out of the system that isn't just more trading? Because also when I look at all the top coins, everyone just seems to be it's like this like

Russian doll of, well, this is the thing that it's just more coins. That's a really good question. And I think that that gets to what I was saying about it being in the early days. And so, you know, where a defy is now won't necessarily be where it is in a couple of years. I think that in, you know, five, ten years, it won't be called defy, it'll just be called finance. So in part what we're trying to do is build better financial infrastructure that has inherent benefits to it. That will sort of benefit the entire class of existing financial use cases.

There is a lot. Right now it is sort of living, like there is kind of this almost closed ecosystem or closed system of crypto. And crypto, like, you know, like within crypto, right, Uniswap already kind of works better than most centralized exchanges, right? And, and these decentralized lending systems are far more used than other ones. But outside, it's still not, it hasn't quite penetrated. And in the early days of anything, right, it's more as kind of diehard users and kind of early adopters. And that's definitely the phase where we are. And over time, though, basically the kind of UX barriers will be reduced and the kind of security will increase and the kind of throughput

will increase, the more people will be exposed to the very real benefits that underlie it. Because there are, so there's sort of like fundamental benefits and value to defy. It's true that those are not all being accessed by a wide enough audience. And what we're expecting over the coming years is for that to change. And we're expecting for more people to get brought in. But that's like a, you know, an ongoing process. And we're still in the early days of that. But can you give me an example of how someone who needs to raise money for something that's not just more tokens or someone who needs to borrow for something that's not just a token development thing gets value from financing in the defy system as opposed to all the traditional?

One kind of really easy example is people in kind of, you know, like we have this sort of nice advantage of living in the U.S. And having, at least mostly trusting our banks and, you know, having a lot of access. you know, we still have pretty good access to financial tools, but there's definitely, you know, a huge portion of the world that doesn't have as good, uh, access and, you know, probably would love to even be able to open a U.S. bank account. A very probably early use case that I could see, um, growing is, first of off having a U of U.S. bank account would be great, just being able to store dollars and in U.S. dollars, uh, but then beyond that, being able to earn, you know, a return on them. And so these, you know, decentralized, uh, money markets that we're seeing, uh, along with these

kind of decentralized stable coins that we're seeing could give people, you know, in their world countries and in developing economies, you know, exposure to less risky assets and even yields on those assets, which I think will be a pretty big early use case. Do you worry at all that as DFI becomes more accepted by traditional finance or more incorporated into traditional finance, that it loses, I guess, some of the ethos or culture that began it? Like, I'm thinking this idea of generating yields and things like that, there are people out there who would see this very much as a money-making opportunity. One thing that's kind of important is, you know, what infrastructure is the global economy

run on? And right now it's sort of run on these kind of siloed, centralized systems that people are bridging across. And there is these inherent benefits to running everything on this sort of shared globally accessible infrastructure. And there's still benefits. I said the defy, in the long run, not everyone wants to self-custody their own funds, plenty of people don't want to think about private key management, all this stuff, right? People, you know, many people want to use a bank. But what are banks using as their rails?

Are they using kind of these siloed closed-off systems or are they using this sort of global infrastructure that is kind of inherently accessible and shared. And I think that's part of the idea here. Like there's these inherent benefits, right? So one thing to think about is downtime, another is like centralized exchange hacks, right? You know, a lot of the problems that Defi solves, users don't really care about until it affects them personally. But when it does, it's like catastrophic.

And so, you know, a lot of people have held funds and, you know, not been able to withdraw them, or your bank shuts you out, or all these different things that happen, right? The kind of in the long run, right, people, you know, if Defi is successful, the sort of amount, the kind of these types of events should be much more rare. And users should have a much better kind of experience using financial tools in a way that, you know,

they might not even think about it in the moment, but they're sort of benefiting it from it indirectly. And so, yeah, I do agree that, you know, it's incredibly important as we build Defi. To some extent, right, It's a chance to correct some of the wrongs that were made the first time in the kind of creation of the existing financial system. One really interesting example of that is, you know, incentive alignment. There's sort of this principal agent problem that we see.

If you think about even like the subprime mortgage crisis where, you know, a lot of the people who were kind of creating these risky mortgages, right, they didn't have personal risk and personal accountability if something went wrong. And our hope in building out defy as an ecosystem is essentially the people who are making the decisions, right? They're directly accountable financially for if something goes wrong. And, you know, the hope is that that kind of benefits everyone. You know, yeah, there'll be a lot of people kind of making money and in it for themselves. And, you know, that's sort of just part of how kind of capitalism works. But I think that there is these sort of inherent benefits that can be built into the systems. if the people who are building them care to do so.

And that's sort of my hope. So on these big, you know, you talk about some of the benefits of decentralization. So on these, like the big blockchains like Bitcoin and Ethereum, it would be extremely hard for anyone to hack them or take control of them or block transactions. But conversely, they're computationally expensive. And that translates into monetarily expensive. fees for if you want to send a Bitcoin transaction are fairly high. If you want to send an Ethereum transaction are fairly high, they're not particularly fast. There are other decentralized exchanges

that exist. The second biggest one right now is I think something called pancake swap, which runs on the Binance smart chain, which is its own blockchain. And their selling point is, from what I understand, way faster, way lower fees. probably somewhat less decentralized. But if you're just sort of a random retail trader, you're someone who wants to spin up a project, why go to Uniswap where a trade or a connection could cost like $50 in Ethereum

when you can go way cheaper and faster on something like serum or pancake swap? Something that I said before is, people don't care about the benefits of decentralization until it affects them. Right. Pancake swap is simple. essentially is saying like, yeah, you get all the benefits of Uniswap except, you know,

except it's run on, you know, 12 servers owned by Binance, right? And so it kind of, and that sort of gets at this, like, what is the fundamental value of Uniswap? The fundamental value of Uniswap is that it's decentralized. And, you know, there are hundreds of people around the world working really hard to kind of scale up, you know, decentralized protocols. But it's a sort of long, I think that some of them are going to be coming to the market very soon, but it's still like a very kind of intense technical problem. And if you're kind of just say, oh, well, you know, we can we can centralize it and everything will be fine.

I mean, some people don't, you know, some people don't care. And, you know, centralized exchanges probably will always have market share. But in the long run, right, they still still have this same problem, right, which is that what happens if finance decides to kind of change everyone's balances? You know, they kind of change, change their 12 nodes to running, right? They can kind of rewrite history, whatever, right? And so you sort of lose these kind of fundamental value. And so, yeah, you can always scale up by sacrificing decentralization.

But what is really hard is scaling without sacrificing decentralization. And, you know, the main kind of solutions there, which are in the works and are coming are, you know, Ethereum 2.0 with sharding, but also, you know, Ethereum Layer 2 solutions, such as roll-ups. Those are kind of the real solutions that are much more decentralized and retain more of the properties that I think are fundamentally valuable about defy. So there's one other big thing, which we haven't really mentioned. And I guess it's, again, a sort of tension or risk that's inherent in defy. And this is the response of the regulators.

Do you worry at all that someone like the Securities and Exchange Commission is going to come in and take a hard look at the tokens trading on your platform and decide that you are, in fact, dealing registered securities or unregistered securities, I should say. Yeah, I mean, I think that, you know, one interesting thing here, right, is, you know, you can almost look at Bitcoin and you can look at Ethereum as leading examples where, you know, I think it took time for regulators. But I think over time, you know, regulators have slowly become more comfortable with Bitcoin and with Ethereum as these infrastructure layer,

decentralized infrastructure layer platforms and sort of recognize that people can build you know, regulatory compliant or non-compliant applications on top of them, right? You can build a compliant token on Ethereum and you can build a non-compliant token on Ethereum. And you can build, right? And Ethereum is sort of this lower level infrastructure underlying it.

And, you know, Uniswap, while there are stuff like interfaces to it that exist on top of it, and those interfaces kind of feel more. like traditional exchanges in terms of what they look like, you know, visually, the infrastructure underlying it, right, is still this sort of low level infrastructure and platform that supports, you know, regulated and, you know, that can kind of, people can spin up a, you know, a regulated, compliant market on top of Uniswap, right? And we've seen that happen. And there's still value in DFI, even with that being the case. And so I think that, you know, as the same way that sort of regulators

became comfortable with Ethereum over time, seeing it as this infrastructure layer. I think that all the same things, Uniswap kind of hits the same bars of decentralization that Ethereum itself does because it runs entirely on Ethereum and is entirely composed to Ethereum smart contracts, right? And so, you know, the hope is that in much the same way that Ethereum is understood to be infrastructure, it will be recognized that Uniswap is also. So is this... You say it's infrastructure, but is this is the argument therefore that in the end, there's no

there's no securities being traded? It's just infrastructure all the way down or up. I mean, you know, I don't know how many apparently you have 2,000 coins. Are some of them, what are they? Are they securities? There's tens of thousands. Sorry. There's about 200 per day.

Oh, sorry. Yeah, yeah. It's not that. The idea is basically that, you know, much like the, you know, the internet, right? people can do illegal or not illegal things on the internet, right? People can do illegal or non-illegal things on Ethereum. People can do illegal or not illegal things on Bitcoin. In that same way, people can do illegal or non-illegal things on Uniswap.

And it's a decentralized protocol that no one controls, right? And so the idea is basically that, you know, maybe, and I don't want to, you know, speculate where, you know, where regulation should occur, right? But, you know, it could be, you know, the issuers of assets, right? It could be, you know, you can build a token that's compliant, right? You can, it could be the kind of, it could be interfaces built on top of it. It could be, you know, specific, like, you know, who knows, right? But the, you know, Uniswop is kind of fundamentally decentralized.

Someone could come to me a letter that says, hey, didn't shut off Uniswap. And I'd say, I can't do that, right? I have no ability to shut off uniswap. You could shut off uniswap.org, right? I could shut off uniswap.org, which is a, well, app. Unswap.org is a specific trading interface that exists on top. But, you know, there's also something like 30, 40 other trading interfaces that let you access unit swap. And so there are, you know, the portion of trading volume that comes through the one interface is actually a relatively

small portion. More than, you know, something like 75, 80 percent of trading happens on other interfaces or in other smart contracts. You know, something we didn't really get into is that, you know, Uniswap is this, because all the liquidity exists on chain, it can be used very easily within other smart applications. And so a lot of trading on Uniswap doesn't even happen on any interface, but happens directly on chain in other applications. And so, yeah, maybe, maybe, you know, app.combe.org could be shut down or it could be kind of run in a way, you know, where it kind of restricts assets, specific assets. In fact, it already does limit what you see in a way that is kind of designed to protect users. But there are alternate interfaces.

and the code is all open source, and so people have even forked the interface and spun up their own versions that do other things, and we don't really have any control over that. Hayden, I mean, is there anything else that's sort of like you want to make sure our listeners understand about it before we go? One really interesting aspect is what I would call almost like permissionless innovation and sort of the ease of building applications.

Traditionally, right, if you wanted to build, let's say you wanted to build a like a, I don't know, like a margin trading platform. The kind of amount of things that you would need to build to do that, right? You would need to build an exchange. You would need to build a lending system or integrate with one. You would need to kind of, right? There's sort of all these different things that you need to build. But in crypto, we sort of, you know, there's sort of this like what we call interoperability.

Right. Between applications. There's, you might have heard the phrase money like those. Yeah. And essentially what that means is that, you know, in a single day, right, Someone could basically spin up a new application that, and they don't need, and they could source, you know, liquidity from uniswap, right? They don't need that application.

It might need exchange as a component, but it doesn't, they don't need to build their own. They can just access liquidity from uniswap. And, you know, maybe they spin up and they use compound for, for, for lending, right? And you could kind of build, you know, a new system that lends an asset on, on compound and, and trades it for another asset on uniswap. And you can kind of create these sort of, you can kind of compose applications in this sort of really powerful way where things that take years to build outside of defy can be built in days. And one of the reasons that we've seen so much, you know, so many different things and it can

be almost hard to even keep up with what's happening is how much is getting built and how quick people are building it. And there's kind of a lot of noise, but beneath that noise, there's like a lot of value being built. And, you know, I think that that will become a more in sort of, I think that the really valuable applications will become more apparent over time. I guess that's one other thing. Awesome.

Well, I really appreciate it. I learned a lot from this. And, you know, I know there's a lot more to, like, defy. We didn't really get into, like, compound and lending and yield farming and all that. But this was great. Yeah, appreciate you having me on. Thanks a lot, Hayden. Thanks so much, Hayden.

That was great. So, Tracy, I found that conversation to be really fascinating. I find Uniswap to be fascinating. I find the whole like rethinking of market structure and this automated market maker model to be super fascinating. I have to say though, like the thing I'm like still hung up on is like it's great to trade and it's great to have liquidity. But I'm still like hung up on the like, yes, but liquidity for what? You know, and like at stock exchange, at least in theory, you like go raise money and you do something with it. With defy, it still just seems like liquidity for the sake of liquidity or trading for the sake of

trading. Yeah, I agree that's still like, I guess a big hurdle to the market really getting accepted or incorporated into traditional finance. The other thing I was thinking about was this idea of Uniswap basically having to completely, or completely is unfair, but you know, reinvent itself every once in a while and evolve and respond to new developments in the market and things like the sushi swap vampire attack. And I think in technology, that kind of experimentation or adaptation is the usual thing. Like people change their products and they kind of experiment with what they're doing. But I think the difference with crypto is that you're always doing that with money.

And that seems to make it so much more difficult, right? Like you're experimenting with people's money. and for a lot of people at the moment, crypto is still this fun thing. It's just something they kind of do on the side. But it is more sensitive. And I think that makes it more difficult over the long run. Yeah, and it's a lot of money. Like all the coins added together, I don't know, as of right now, it's somewhere like around $2 trillion.

And so, A, it's a lot of money. And two, you have a lot of people who have become like insanely wealthy by buying some coin. and then it goes up 100x over the next year, and it's just great. But it's a little weird when it's that much money. And as Hayden basically seem to admit, there's no one, like at the other end, like, no one is, there's still, it hasn't actually, like, found its end market for what DFI serves.

And so it's like, okay, maybe it's going to be something in emerging markets and people have access to something or other. But it's kind of weird, like, A, how much money there is, and B, how much money people. have already made, well, there's still this, like, ambiguity of like, okay, well, like, what's it going to be used for? Yeah, I mean, defy contains multitudes, I think, and it means different things to different people for sure. It's kind of a shame that we didn't touch more on the yield farming aspect

of it on that note, because, yeah. Let's do a yield farming one, too, because I know that's like a big thing and, like, you like put your money in here and then you get a coin, and then you put the coin in another thing, you'd collect more yield. You're like, I know a yield farmer. Maybe it will, well, have a yield farmer on the show. Yeah, let's do it. Let's do like opposing ends of the defy movement. Let's do that.

Yeah. Like it's, there's something for sure super interesting there. And like the whole like it is very inventive. So I, I don't know. I'm super interested. It's fun. I went on uniswap. It's fun to like look at how these things work and the ease.

It's like, you know, you don't have to set up an account. You just start like dragging down things. You can theoretically trade. But, uh, yeah, it's, uh, it's fascinating to see where it's going. Should we leave it there? Yeah, let's leave it there. This has been another episode of the Allotts podcast.

I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Wisenthall. You can follow me on Twitter at The Stallwart. Follow our guest, Hayden Adams. He's at Hayden Z. Adams. Follow our producer, Laura Carlson. She's at Laura M. Carlson.

Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. and check out all of our podcasts at Bloomberg, onto the handle at Podcasts. Thanks for listening.