On The Brink with Castle Island - Weekly News Roundup 6/26/20 (Paypal rumors, Telegram settles with the SEC, the Compound situation demystified) (EP.95)

Episode Date: June 26, 2020

Matt and Nic cover the top stories of the week. In this episode:  More Proof of Reserve chatter OmiseGo's parent company raises $80m Bitmex backs a new options exchange Paypal plans to roll out crypto products KPMG announces Chain Fusion USDC goes multi-chain We explain the COMP situation Telegram finally settles with the SEC Jay Clayton eyes the SNDY job An explanation of Bitcoin as a synthetic commodity money Our favorite and least favorite regional Fed branches Why a US CBDC has troubling privacy implications Our breakdown of the Compound situation

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of Concentive Easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called a Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And it was a busy week. You moved this week. Yeah, I moved.

How'd that go? It was okay. I bet the bullet and I hired movers because I had no desire to move a large couch, several flights of stairs. Did you get it in the door? That was a big concern. Yeah, so we got in the door. We did have to dismantle a large part of the staircase. to get it up.

So old buildings in Boston and couches do not appear well. They don't. Well, it looks like you have a good setup. You did have some interference here. We're starting this about 15 minutes late because there's an FM Latin station that was just somehow appearing on this podcast. Yeah, I don't know how it happened,

but there's like reggaeton music bleeding into the audio here, I think, from radio. So if you hear any, we just have like a festive atmosphere in here. I would just enjoy it. If you hear something other than our voice, just enjoy it. This was a problem we had in the early days of the pod, too. It was. I think we had the MIT pirate radio station coming in for the first couple weeks.

We didn't know about that. These are the things you don't learn about, you know, in podcasting school. You can only learn about that on the streets. Trial by fire in the podcast game. We have a ton of stuff to talk about this week. So let's get into it. But before we do, let's talk about some crypto tax deadlines. And I guess just tax deadlines in general.

So July 15th is tax day in the United States. And the best place to do your taxes for cryptocurrency investors or really anyone that holds blockchain-based assets is Zenledger. So zenledger.io and head over there, they will help you aggregate all of your positions across all of the venues that you've bought or sold or transacted or done anything with crypto-based assets. Zen ledger is your source. And if you use the coupon code Castle 15, you'll get 15% off.

So go support Zen Ledger, one of our portfolio companies. Speaking of Zen Ledger, we had Pat Larson, the co-founder and CEO on the pod this week. I guess we didn't plan this, but it was an audit and tax-based podcast this week. Yeah, yeah, this is going to be a recurring theme. So the other one we had was with two of the folks from Arminino, which is accounting and audit firm covering one of our favorite topics, proof of reserves, proofs of the of reserves. Basically, if you listen to the podcast, you're probably familiar with this idea, making exchanges more accountable, making them prove to their depositors that they actually have the assets that they claim they own. Yeah, I guess it's funny that in a week of the biggest

story of the week was compound, which we're going to talk about later, compound in the DFI space, just were the glamorous stories of the week. And here we are doing podcasts about audits and taxes. But hey, there's some big opportunities there. And, you know, this is just like a central plumbing that needs to exist. And, you know, like I find some of the audit stuff pretty interesting, actually. I think it might be one of the only people on the planet that does. But, you know, I think Proved Reserves in particular is pretty essential for the industry to actually, you know, ascend. And for custodial intermediation to actually get to a level where I would actually

recommend that anyone use an exchange. Yeah, I mean, so the big idea here with proof of reserve is that you can do these processes, these audits really periodically, and you can hold these exchanges more accountable so that if there were a big hack that they were covering up or if they had been doing something nefarious, going fractional reserve with your assets, you would know about it. I mean, this is the type of thing that it would be great if you could do this in the real world, but you can't because you don't have blockchains. Yeah. So, you know, these assets are natively auditable. That's kind of the whole point. That's something that really differentiates them from gold or commodities or other monetary assets or even fiat currency. You know, like the U.S.

government can't do a full accounting of where all the dollars are. They don't know. They only do these vague estimates. We know down to the last Satoshi where all the Bitcoins are, right? So this cheap verification is one of the best properties of the thing. But our exchanges aren't taking advantage of it. And, you know, it's not like it's an edge case to have these long-running insolvencies. Quadrigo was a multi-year insolvency. If depositors had demanded that they instituted proof of reserve, that would have been discovered much sooner, right? Mount Cox, that was a multi-year insolvency. When it was sold to Mark Carpellus, it was already insolvent. Little known fact. In 2012, it had a 50,000 Bitcoin shortfall at the time of it.

sale. So this is basic bread and butter stuff, guys. The good news is more exchanges are doing it. So it's kind of happening. Well, it's catching on in large part because some of the audit firms are actually getting involved in it. So it's becoming more prevalent. Yeah, and that was a missing piece too because the exchanges kind of need third parties to help them do it. It's not 100% mandatory, but it definitely helps, especially the liability side is the tricky part. So it is better to have an audit firm involved and helping you generate that full liability accounting. It's one of the interesting things about this industry is that one of the reasons that people are so excited is the disintermediation of trusted third parties. But the other thing that's

going on here is that you can just hold those trusted third parties more accountable and have certain things be provably fair by using these public blockchain. So I think it's a big design space and I'm glad to see that people are doing this proof of reserve. Yeah, I mean, people will say it's paradoxical to recommend reintermediation, but this is intermediation with less requirements of trust. So it is still kind of a net good. And ultimately, it's easy to take physical delivery of these assets, which again, is not the case with gold, right? If you want to withdraw your gold from your custodian, you have, I don't know, you have to drive to the vault in Switzerland or something and get these really heavy bars, you know, and you need a minimum amount. I don't think there's very

few gold ETSs, which are actually redeemable for gold. I think there might be one, the Vanek one. But yeah, you know, the assets themselves are very amenable to being withdrawn from these trusted third parties, which is a good feature. Right. All right. So moving on, a bunch of deals this week. So the first deal of the week is from the parent company of OMG Network, which is a public protocol, but the company is called S-Y-N-Q-A. Pronounce that, I have no, like, how do you pronounce that? No, no idea. But they raised $80 million in a Series C.

They had all sorts of names in this. So Thailand's Siam Commercial Bank, they had Toyota, Sumitomo, SMBC, venture capital. So this one sort of flew below the radar that this protocol really is somewhat owned by a parent company, but, you know, I guess they are. Yeah, Omis Go, they did this big ICO, I believe in 2017, a lot of fanfare. They were meant to be working on plasma. And then there is a huge amount of disillusionment, if you recall, over the subsequent, you know, three years. And everyone thought it was kind of a zombie or a dead project.

And then they like Tether launched on Omis Go and I guess they went to Maine that. And all of a sudden they're back in favor again. So it's kind of a hell of a turnaround. I mean, I for one thought they were completely defunct. And here they are. And so I guess this is kind of like one of those ripple-style deals where the equity, you know, probably represents a claim on the value of the tokens. The second deal is another protocol deal.

So Khyber protocol, these guys did an ICO in 2017, I think, and they've done all sorts of things to rejigger the token economics. They received an investment from Parify, which is a crypto asset management firm this week. And I guess while we're on the token deals, won't we hammer out all the token ones first? So Ava Labs raised another $12 million via a private token sale from Galaxy, Bitman, initialized, Dragonfly, and a couple of others. So a bunch of things going on in the token world this week. I guess actually the third one was open.

So a crypto asset derivatives network. I don't know if this was an equity deal or a token deal, but this is another defy network. So defy is really, there's a lot going on in defy, huh? Yeah, it's been a big, big week for defy. You know, give them some credit. The compound situation has sent the whole crypto industry into a tizzy, although most people probably still don't know exactly what's going on there. It's funny.

I've had so many fun conversations this week. I've listened to a ton of podcasts just talking about defy. and we're I was on a panel with um hasib from dragonfly at david nage's conference yesterday which was really good uh the family office conference that arka and david put on and have put on for a few years and hasib was saying that you know if you took like two months off and then you know had been looking at defy and then came back it's you can't even like recognize it anymore things have just moved so quickly in that corner of the market and now at the same time if you talked about defy with someone who maybe just reads our newsletter every week and doesn't pay too, too much attention to the industry,

they have no idea what you're talking about. Yeah, but it's okay because we're here to explain the compound situation, assuming no prior knowledge. We are. We're going to explain it to everyone at a very basic level, including you're going to explain it to me at a very basic level. So I'm looking forward to that part of the podcast. Yeah, I did some homework and everything because in truth, I didn't fully understand it either.

So another deal this week, Cross Tower, which is a crypto asset exchange, they raised $6 million in a seed round. It was led by Gerard Lopez. And another exchange, actually, Sparrow, Options Trading Platform based in Singapore, they raised $3.5 million. And that was led by HGR Group, which is Bitmax and a few others there. So these exchanges continue to be really attracting just a lot of capital in this space. Yeah, I found the sparrow deal to be interesting because Bitmex had options on their platform, and then they delisted the options, right, because they didn't really get critical mass or liquidity. Meanwhile, Deribit is killing it in the world of options, right?

They're just crushing it right now. Yeah, they're the unquestioned market leader. And so now we have Bitmex's pairing companies funding what looks like effectively a competitor to Deribit. So they're taking another bite at the apple. If you just look at what the size of the options market is now relative to spot and relative to the futures, I think you make a case that the options market should be another 100 times bigger than it is, you know, right now. So I think we're just going to see some explosive growth there. The CME has a product that I'm sure is going to continue to grow in popularity.

So there's a lot going on. There are a lot of traders that are starting to work their way into this industry, like really reputable traders that have traded. institutional kind of great assets before are now moving in with some of this new infrastructure being possible. So it's exciting. Yeah, and options give you more creative ways to express your opinion on the price. And if you're a minor, they're very relevant. You know, a lot of minors would want to use options to hedge. That's going to be one of the most efficient ways to do it. So there's a real angle whereby they're not just for speculation purposes. They are also

pretty relevant to the producers of these goods. That's a great point, really. You have to remember beyond the financial speculation who some of these products are geared towards. Why don't we hop into some news? So one of the biggest stories this week was CoinDesk has reported that PayPal, which has Venmo, remember, under their umbrella, they're going to be rolling out cryptocurrency purchasing capability to all of their users. And they have 325 million users. So it looks like it'll be a buy, sell functionality if the report is to be believed, which would be very similar to the cash app product that Square launched, I guess, six months ago, a little bit more than that ago. So, I mean, talk about a big deal. If you look at who has gotten into this space from a wallet infrastructure standpoint,

the ability to buy cryptocurrency you're going to have probably in the next year here, Facebook, Square, PayPal, Venmo. I mean, combined it, that's got to be what half the world that is covered by those products. It's crazy. Yeah. This announcement, kind of blew my mind actually because PayPal has never been a particularly pro crypto corporation, you know, quite the opposite. You know, PayPal executives have often dismissed Bitcoin. I don't know if this is the cash app effect where they see that they're losing market share. You know, cash app has outpaced Venmo really significantly in the last year. Or if it's a reaction to Libra, maybe, you know, when there's a lot of intersection between Libra and PayPal.

I don't know, but this one was completely unexpected. This is one of those situations where the crypto industry can just surprise to the upside. Oh, this is huge, but you don't have to love crypto. They probably just love making money. And they're looking at cash app, which is publishing its financials, obviously, and you're seeing who's engaging with these products, who's buying them. Remember that PayPal also dropped out of the Libra Consortium. So I'm sure that they were sitting in the direction that was going and saying,

Look, we might have a play here. We have tremendous coverage just in terms of individuals across the world. We know all their identities. We can handle all the compliance things. If they want to buy Bitcoin or if they want to hold U.S. dollars, like stablecoins, crypto dollars, whatever we're calling them these days, just do it in PayPal. PayPal could be a monster player here in stable coins. I think that could be a part of it.

And I think there's probably a bit of a dawning awakening that crypto dollars are a completely viable independent segment here. People are using them outside the crypto industry. They're kind of an alternative transactional rails. So yeah, this is kind of shocking. I mean, I guess we'll see how far along they are. This seems quite early to me in terms of the way that this news came out. But yeah, a very unexpected and happy surprise. Yeah, really good to see. And then speaking of big companies, KPMG had a product released this week, and we're going to talk more about this in the coming weeks, but they released a product called chain fusion. And I guess the way to think about this is it's a product that helps large enterprises manage digital assets, whether that be the custody

of those assets, the movement of them, the monitoring of them, you know, how you audit them, how do you understand these networks, how do they engage with your legacy systems? So it's a pretty comprehensive new product. And KPMG is, you know, obviously really entrenched with some big firms and they're, you know, they could be a service provider here that really expands the pie in terms of the firms that are engaging with public blockchain assets. So I love this announcement. We had Sal Turnolo on the podcast a couple weeks ago to talk about what KPMG is up to. He couldn't talk about chain fusion at the time, but maybe we'll have him back on in the coming weeks to hear more about this. Yeah, we'll cover this in more detail for sure because I think it's worth it. But it is

really interesting you see the big kind of audit and accounting firms have come a long way in terms of their proximity to the crypto industry. You know, it used to be the case that the big exchanges just couldn't get an audit opinion done because they were too poorly understood, you know, too early and they didn't have enough accumulated credibility yet to engage with the big four. And now we have dedicated product lines from the most credible these audit firms. specifically involved in helping exchanges interact with the blockchain itself. So really, really cool to see. Yeah, and whereas KPMG's competitors are largely focused on doing proof of concepts on private

blockchains, KPMG is actually putting production ready products in the hands of their customers that are actually launching business units. So it's hard to see from a high level. But if you get into the weeds, you can really tell that KPMG is way far ahead of all their competitors in terms of the audit tax consulting firms. So hopefully that continues. Yeah, so another interesting piece of news was actually local company Liberty X. They do Bitcoin ATMs. I've used them before. And kind of Bitcoin powered remittances, they partnered with CVS 711 and write aid to let users buy Bitcoin at checkout counters, which is pretty cool. Just more.

diversity, more ways to get on ramped onto Bitcoin. Chris and Kyle, shout out, real OG below the radar Bitcoin people in Boston. So they had a Bitcoin ATM and Selt Station in 2013 or 14. It was right next to the Fidelity Office. And so, you know, some Fidelity folks used to go over there and buy Bitcoin. And these guys used to be just standing there, like, you know, helping people out. It was awesome. Customer service, yeah.

And then their business has, you know, has evolved. and now they're doing all of these other ways to acquire Bitcoin, and they have a remittance business as well. But below the radar company, but good for them. This is, talk about a distribution advantage, CVS 7-E11 and Rite Aid. Yeah, we've a bit of a Boston theme. There's a few Boston crypto companies making moves. There's another vintage Boston deal this week.

So we have, the USDC is now launching on Al-Grand. So obviously, Circle and Al-Gran are both. local Boston companies. USDC is doing, they're straddling multiple chains now, following in the footsteps of the tether, which is on seven chains. So I think it makes sense.

It's the same reason you might want to have multiple bank partners on the fiat side. You might want to have more options on the on-chain side in terms of where you can move your coins. Yeah, I was excited to see this and I'm very bullish on the center consortium. And I think they're hiring a CEO right now.

That's a big time job. Actually, USTC has had the fastest growth in percentage terms of any major stable coin over the last month. Wow. Which also seems related to the compound situation, which we're getting closer and closer to talk about compound. We're teasing the hell out of that compound story. Yeah, but we have some other news items to get through first. So this was a really big one. which people for some reason aren't really covering a lot.

But so the telegram story is finally over. It's done. So, and this is the second biggest token sale ever. So 1.8 billion dollars. So to me, this is enormous news. And for some reason, it's been completely ignored in the industry. But so they got a pretty harsh settlement, it looks like. They have to pay, you know, $18.5 million in a penalty.

and they obviously have to give back the funds that they have left. Yeah, things pretty much went south for them. Yeah, is this really the end of it? I don't know. It looks like. The leadership seems disillusioned. You know, they published some code. They said they're not going to work on it anymore.

I don't see how this thing could be resurrected. Well, I sort of meant the end of the stories and the legal processes. It just seems like a mess. but maybe this is the final one. Well, there might be more lawsuits between the investors. What's interesting is that Signal is launching their kind of version of telegram. They're going to be launching mobile coin. So to me, that seems like a carbon copy.

It's like a messenger app launching a token, which is meant to be, you know, is meant to circulate as money on that app. So I wonder if they'll be able to escape this fate. Yeah, I mean, the big question there is the SEC. And, you know, I guess one story speaking of the SEC that we haven't covered on the podcast, but that happened late on Friday night is that the U.S. attorney in the Southern District of New York was fired on Friday night or stepped down. I don't know what technically actually happened there at the end of the day, but has left.

And Jay Clayton from the SEC could potentially be taking that over, which would be, I guess, a really good, you know, we've talked about this on the podcast. Yeah. You know, Jay Clayton, talented guy. We were talking him up on the podcast like three episodes ago saying someone should hire him. And then he got the SDNY job. I mean, that's a huge job. That's a big, big job, yeah.

And so. That's probably the most important, you know, litigation job in the U.S. That's Chuck Rhodes job. So if he does that, then the big question for the industry is who gets his job. and everyone wants Hester Pierce. Yeah, we all know who we want. I happen to think that she's the best. Oh, she's in all seriousness.

She's probably the most qualified. And she definitely understands the crypto industry at a very, very high level. She does. All right, well, let's move on. You wrote another opinion piece for Coin Desk this week. So you rebutted the New York Federal Reserve's blog post. Their blog post is Bitcoin is not a new type. of money and spoiler alert you disagreed with that actually I didn't disagree with that part so I think

Bitcoin is a synthetic commodity money which they are actually historical analogs that match that so you know commodity money is a thing that starts life as a useful or consumable good you know like aluminum or something and then obtains monetary qualities for just on a market driven basis. So you'd say gold is a classic example of a commodity money because gold has commodity usage, but then most of its value is actually just the monetary premium. And so then Bitcoin is a peculiar form of that because it's all monetary premium because there's no consumable use for Bitcoin, right? So you'd say it's a synthetic commodity money because it never even had that consumptive angle to it. But if you look, there are some sort of historical analogs there.

So, for instance, in Iraq, there was a, the Iraqi dinar before the U.S. invaded. You know, that was the official currency. And then after the invasion, the plates to make it, I think were destroyed or basically stopped being manufactured. And even after the government had collapsed, you know, Saddam's government, these Iraqi dinars in some parts of Iraq kept circulating as money and actually they appreciated and retained their purchasing power. So you could say that that, in the sense, is a synthetic commodity money. It's not Fiat money at that point because it's not guaranteed by the government. So its monetization

is market-driven and kind of spontaneous. And the value comes from the scarcity because nobody was making new versions of it. So, you know, George Saldon has a great paper about this, about synthetic commodity money. Anyway, this is a long way of saying that, yeah, I very much disagreed with what the New York Fed had to say. I think fiat currency is specifically currency, which is guaranteed and enforced locally by a government. And obviously, that does not describe Bitcoin, you know. There's no element of a decree or government authority. There's no mandate.

Bitcoin is just something that was chosen by the market to spontaneously monetize. So there's no coercive element there. These guys need to read their Nick Zobb. bow. Yeah, the whole time I was thinking like, come on, just re-chelling out. Like, what about the Wampum? Yeah. What about Venetian patterned beads? You know, what about the glass beads? Come on. Well, I guess if you, you know, if you're under the age of 50, you really, I mean, 60, 70, even, you really haven't seen that type of thing. You'd have to, you know, especially if you live in the United States. So it's, you would have to do a lot of research. Yeah. But, you know, you know,

we've like the the dangers of fiat currency are very evident you don't have to look far to find them that's the thing that gets me is you know they're clearly fragile systems we saw it in lebanon right now lebanese savers have been effectively expropriated by the government who is defaulting and devaluing the hell out of the lebanese currency argentina just went through their ninth default so it's not like, you know, it's a harmonious world out there in Fiat Currencyland. There are collapses pretty much all the time. So you really don't have to look far to find them. Yeah. And then we didn't put this in last week, but a really good profile piece, Fortune Magazine did an extensive spotlight on Zvi Moskowitz. So he is the co-founder of Coase, which is one of our portfolio

companies, co-founded it with Kathleen Brightman of Tezos fame. And, This was a great piece. It talks about digital collectible card games and how COSA is aiming to disrupt really the way that whole industry works using public blockchains to create these provably scarce in-game assets. So what do you think of this piece? Yeah, I thought it was really well done. And we're going to cover this some more for sure in the near future. The story is really interesting. You know, COSA is kind of a very principles-driven company.

And that was one thing I liked in the article. you know, Zvi is extremely value-driven and he's desperate to introduce new monetization models to games, which, you know, which don't rely on the loopbox model, which is basically a form of gambling. Or we have a lot of these games that are yet to launch that do these big pre-sales. And, you know, potentially that's very harmful to the buyers there. So Coase introduces pretty much brand-new models. So they rely on bonding curves. Another piece that I read this week and I think you sent this one to me is the Bank of Canada put out a research note on privacy in the context of central bank digital currencies.

So speak a little bit about this one. Yeah, so this is probably the most comprehensive note I've seen on privacy in a digital currency context. So they evaluate a whole bunch of different models for moving money over the internet, including Bitcoin. and they ascertain the level of privacy at the transactional layer at each step in kind of the lifecycle. So it's a really great reference piece. I'm always impressed by the Bank of Canada. I don't know why, but they've written so much stuff about digital currency, cryptocurrency,

Bitcoin. They do surveys on Bitcoin ownership in Canada. They wrote a piece about what a Bitcoin standard would look like in practice. You remember that one from 2016? They're just incredibly progressive on the topic of Bitcoin. There's something in the water up there in Canada. Well, yeah, it's similar to the St. Louis Fed, right? We see a lot of the same coming out of St. Louis in our countries.

Yeah, St. Louis Fed totally gets it. New York Fed. Not so much. It does not get it. Shout out to the Boston Fed, though. You've got some really great people over there that do you understand crypto. Boston Fed gets it big time. I mean, they have some real talent over there.

Bob Bench from. circle. Yeah, so I guess it really does depend which regional Fed you're at. Some of them, you know, deeply understand this stuff. So speaking of the Fed, actually, so there was an article I like this week by Larry White, who's one of my favorite academics who appeared on this show. And he was talking about privacy in the context of Fed coin. Sorry, there's a truck driving by really loudly. and he's being pretty critical on privacy grounds, basically saying that in the U.S., as the law is currently interpreted, you can't have any reasonable expectation of privacy from online banking or digital transactions. And he's worried that if it's not specifically enshrined in the law,

a Fed coin or retail-facing digital currency issued by the central bank would have no privacy protection whatsoever for users, and it would actually allow any federal agency to request information on end users. So you could imagine Department of Homeland Security, ICE, the FBI, all plundering this database of financial information, which could get pretty ugly, pretty quickly, I think. I don't think the future is very bright for online private transactions in that context. I'm maybe more pessimistic than most. I think that the overwhelming incentive will be for the government to have surveillance capability there. Well, that's why his conclusion is similar, and he stresses that this is why private digital currencies are important. So non-government sanctioned,

or currencies that aren't actively administered by the government, like crypto dollars, stable coins, or even Libra. So potentially that's where the stronger, privacy is going to come from from the from the private sector could be could be but those are surveillable as well i mean you can imagine a chomian bank um you know for instance tether on liquid that has confidential transactions built into it so uh i think it's just a question of whether regulators allow that model transactions to exist all right so why don't we talk about compound so this was by far the biggest story of the week in certain pockets of the crypto industry. I guess the whole industry really.

But I think there's a lot of table setting here to even get into it. So why don't we just start with what is compound? Yeah. So compound is a way to lend and borrow tokens on the Ethereum network. And so it basically involves pooling tokens together and then figuring out an interest rate. and making a market there. So it's probably one of the more popular DFI projects. Even before they issued their token,

it was one of the more popular and kind of credible DFI projects. And so what are people using compound for? Effectively to borrow crypto assets. So in particular, if you wanted to borrow, let's say basic attention token because you wanted to short it, right? You might use compound for that. And in particular, it's useful in a permissionless context where you don't have to do KYC. So you could think of it like how on BitFenex you can do bilateral borrowing for margin purposes.

This is similar to that, but without any identity information, no KYC. So I think for the majority of the volume did have to do with, you know, non, you know, permissionless lending effectively for trading purposes. And so the big story this week was, that they launched the token part of comp. So the comp token, that went up pretty dramatically in price. It was listed on Coinbase, tons of activity. Talk a little bit about what happened there. And maybe the place to start is, why does this have a token? What is the token? And, you know, what happened this week? Yeah. So I don't think this project strictly needs a token to exist,

but the leadership of the project wanted there to be a way to effectively decentralize control. in the long term so that the company that administers it right now would not be in control in the in the long distant future which makes sense if you think that they might be anticipating the government to come knocking on their door I would caveat that it remains to be seen if this can actually be a meaningful way to decentralize control over the project TBD on that but so effectively this is a governance token that contains no other obligations to token holders. And it doesn't endow token holders with any particular rights aside from being able to vote on proposals. So it's kind of like if you took equity and you stripped out the claim on the corporate assets and you just left the governance function.

Now, that's not to say that it can't change. And a lot of people would say this is the beauty of the token is that it could change. And in the future, contain an entitlement to the cash flows that the compound system is spitting off because they do generate cash flows in the form of fees. But that's not the case today. That would have to be instituted in the future. One of the ways that someone described it to me this week, which I thought was maybe not a perfect analogy, but it was helpful, was to say, imagine if Uber was giving out stock in the company to the drivers. And you got more stock, the more rides you took or the more rides you gave. And so you'd just have this flurry of people that were, you know, on the Uber network and using it and taking rides just arbitrarily across the city so that they could get more stock. Is that a reasonable analogy?

Yeah. So we didn't mention the way it's being distributed. So basically to acquire the compound token, it's a little bit like proof of work, except instead of buying miners and burning electricity, all you have to do is just use the compound platform. So you have to borrow or lend on the compound platform. platform and you get a pro rata share of tokens released that day based on what, you know, fraction of borrowing or lending activity you represent. So the moment that they started issuing these tokens, which they're doing in a rate of about 2,800 tokens per day, which will eventually add up to just over 4 million tokens out of 10 million total. The moment they started doing that the usage on the platform absolutely spiked because all of a sudden you could get tokens in exchange for lending or borrowing on the platform. So predictably, the usage rate skyrocketed because people realized there's this trade where you could borrow, you know, ERC 20s,

stable coins, particularly from elsewhere, redeploy them on the compound platform and receive compound tokens. So kind of an arbitrage situation. So that drove a huge amount of volume to defy this week. You know, pretty shockingly high numbers. And it got people very, very excited. So I continually want to go down the rabbit hole. But I think it's important to just pull out and put this into a broader context of what is being attempted here in terms of what people are trying to build. I don't think that this is something that is going to engage with legacy financial services anytime soon. I think there's a ton of open questions around regulatory, around just technical risk. But these are really exciting projects.

We're seeing a ton of talent work on these things. And if you think about the future use cases, what this could potentially be used for, it's kind of crazy. I mean, you could imagine a world where people just go to the internet for a loan, as opposed to a bank, you know, just access this. open source protocol and loan into it and loan out of it. Am I think about that the right way? Well, the piece that's missing is there's no element of maturity transformation right now and there's no notion of credit worthiness. So none of these DFI protocols can assess, you know, your income and say, okay, you qualify

for a mortgage. So they haven't reached that level of sophistication. if they can. You know, I don't know if they can reach that level of quality in terms of underwriting. But in terms of collateral, that can really easily be understood by a algorithm and a protocol, defy excels of that. And there is genuine usage for these things. That much can't be denied. I would say most of it is probably related either to acquiring tokens like compound or for, you know, getting margined up, getting leverage, or for short selling purposes. But there is genuine usage here. Yeah, I mean, people are using this to speculate. People are going levered long on tokens.

And people are using it because they think they can make money is kind of what's happened at least this week, right? Yeah, and the thing that I actually find quite interesting is the emergence of a new set of tokens that are qualitatively different from the old ones. So the first wave of ICOs, the tokens really had no, the token holders had no claim on anything at all, and they were completely at the whims of the issuers. So now we're seeing very early signs that there's actual value, cruel potential in the form of cash flows which are being generated by some product or service, which exists on chain. And that's potentially what's going to happen here with compound. I would say that's not the case today. Again, a lot of people say, you know, the compound token is a price to earn P-E ratio of X.

That's not true. There's no earnings attributable to the token in its current form. It would have to change. So I don't think we put ourselves out there as the, you know, the folks that are explaining defy at a super technical level here on this podcast. But if you do want to go down and spend about 90 minutes just hearing about this and how it works, I'd recommend listening to Dan Ellitzer's podcast with the bankless guys.

So Dan is a VC at IDO CoLab and probably the most active VC in the space just in terms of DFI. So I would recommend checking that out. Yeah, one of the kind of genuine experts on the topic for sure. So what do we have coming up next week on the podcast? So we have a really great episode, one that I think people are going to derive a ton of value from. So we got the macro commentator, macro analyst Lynn Alden to come on to talk about quantitative easing, modern monetary theory, the U.S. as the world's major reserve currency, and then her evolving views on Bitcoin.

So I'm a big fan of her work, and it was a real privilege to get her on. I'm super excited to publish this one. I'm really excited about that. Yeah. And the last thing is I will be part of the Real Vision, Crypto, gathering on the 30th of June. I'll be taking part of that. And so if you want to get a ticket, you can use our code. So you can use the code RV Brink, all caps. You get 10% off that. You're a Real Vision subscriber, right? Huge fan, huge fan of Real Vision. Fairly recently I started

subscribing. The paid content is fantastic. So Real Vision is Raul Paul. real legend in the hedge fund space. So they've been getting much more crypto proximate, and now they're doing a full-on crypto event. So I was lucky enough to be invited to participate. So, yeah, use our code RV Brink. RV Brank. All right.

And we'll put that in the show notes as well. All right. So thanks everyone for listening, and we'll see you next week.