The Breakdown - Camila Russo and David Hoffman on the 2020 DeFi Outlook

Episode Date: December 27, 2019

Sometimes things are clear, and to both Camila Russo (write of The Defiant newsletter) and David Hoffman (co-host of the Crypto POV podcast), it couldn’t be clearer that the essential narrative of 2019 was the rise of DeFi as a true market force. In individual interviews as part of The Breakdown’s end of year coverage, each also makes a 2020 DeFi prediction. For David, it’s all about increased attention on the space and the power of composability, while for Camila, it’s a bet that we’ll start to see the first under-collateralized DeFi loans.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDisc. Welcome back to the breakdowns end of year extravaganza. Today we have another one of our double interviews. So I put together David Hoffman, co-host of the POV Crypto podcast with Camila Russo, who's the journalist and the writer of the defafertil defiant newsletter, was working on a book about Ethereum, because both of them wanted to talk about one key topic, which was Decentralized Finance. Both of them, for their money, it was the most essential topic of 2019, and what's more, both of their predictions related to DeFi. For David, it's a thought about composability and what it means, whereas for Kami, it's about the idea of

under-collateralized loans. So this interview gets a little bit more in-depth on D-Fi than even some of the other folks who touch on it, and I really hope you enjoy it. If you do, please subscribe so you catch all of the breakdowns end of your coverage. And until then, let's dive into this interview. All right, everyone. I am joined by Camila Russo, who has a ton of different things going on in this space. You are working on a book about Defi, I think. About Ethereum. Broadly. Yeah, about Ethereum. That's right. And I guess I've been mostly interacting with your work recently through the Defiant, your newsletter. So it seems like you've had a really great 2019. Yeah, it's been, it's been amazing and super excited for what's coming up next year.

Amazing. Well, so like I was just telling you, I love end of the year content. I think it's such a fun way to get, to get kind of check in with people about what they think the year before was and what they think is coming next. So I have two quick questions. And the first one is, what do you think was the story or narrative of 2019? So I think for me it's really clear. The most important narrative of 2019 was the consolidation of defy as a true parallel financial system. We saw these applications on this ecosystem really grow, both in size, in amount of of value transacted and held.

They also grew in amount of users, in improved user experience, improved functionality. So we really saw this space strengthen and become an actual, you know, usable financial system that's entirely independent from the legacy finance. It's 100% cyphorke punk. I mean, you can discuss how decentralized these apps are,

some are more, decentralized some or less, but in the end you can have lending, trading, insurance, derivatives, issuance, payments, like all of these pieces that fit together that are mostly open source and are completely composable and working these like very cool money legos. And that kind of came to fruition. this year. It's been amazing to watch. I've been following it in my newsletter, The Defiant, and we saw it like basically double with almost $700 million held now from around $300 million at the start of the year. So it's been a huge year for D-5. So one of the things that I notice and I think about a lot is you can almost start to tell

when a narrative goes a little more mainstream because you start to see more sufficient sophisticated critique and just more critique of it, right? And so like if you looked at the critique conversation about defy at like the end of 2018, people weren't even really like necessarily paying that much attention. It was so people debating about like, is it open finance? Is it decentralized finance? What's the name? Whereas this year you're seeing a lot more, a lot more robust debate. And I guess like what do you think, you know, because I agree that this has been such an important year for really the bringing together of the space. What do you think, and this is not FUD or anything, but like, what are the things that you think the smartest people in DFI are the most

conscientious of or worried about or just, you know, I think is the most important to figure out going forward to make it live up to its potential? Yeah, no, I think good critique is definitely necessary, especially in such a nascent space. And I think the most important thing to be aware of is the amount of risk that's, you know, involved in these applications. These are by no means safe applications to use or that can fully replace the current financial system right now. So I think the most knowledgeable people are, and as they should be, kind of digging into these protocols and finding out where the risks are where there are potential attacks.

Like we saw this week with the Maker Dow attack that's being voted on. that the fix is being voted on today. And this is basically the backbone of Defi. And there was a major potential attack there lurking. So that's just one example. And there have been tons throughout the year. And so I think the space will continue to get stronger as more smart people are looking at it and figuring out

what the risks are and what are the best ways to protect against them. Yeah, it does seem like that's one of the big differences between something like Defi and what we saw during the ICO and kind of tokenize everything days is there's not the same there's not the same like boosterism of like everyone should be involved and retail investors should be involved. There's a much more conscientious sense of how early it is and what the risks are and why to tread really softly and lightly.

Yeah, for sure. I think that's that's a good thing. It really shows how much the space has. matured. And I think ICOs were really kind of the first taste we got up DFI because in the end it is part of DFI, you know, raising money in

this kind of decentralized way, but we're seeing much more sophistication in this new iteration of decentralized finance with different types of applications and more knowledgeable users and

developers as well. One more DIPI question, I guess, before I ask you about a prediction for next year just because I was just talking about it on today's podcast. But so there's a new money on chain startup that's built on root stock that's kind of like defy on Bitcoin. And this is something that I'm seeing a lot more. A lot more people certainly are trying to build a version of defy on Bitcoin. Do you think that defy is a concept that is bigger than Ethereum?

Or do you think that it's kind of intrinsically woven in with Ethereum? Or maybe is that not the right way to break it down? And I guess it feels to me like the narrative of defy is getting even bigger in some ways than any single blockchain. Oh, for sure. I think defy is much, it's bigger than Ethereum because I think it will be part of just a larger Web 3 economy. You know, I really do believe that we're going towards a world where everything will be, will tend to be more decentralized. And finance will be obviously a big part of this. Ethereum will be one of the platforms where these applications are built on.

I think it will continue to be an important one because of the way it's structured, you know, it allows for more flexibility, you know, it was built with this purpose in mind, to have smart contracts and, you know, a more like programmable network than Bitcoin. But that's not a day that other platforms won't participate in this ecosystem. And I think it will be good for everyone that they do. And I think maximalism, whether it's ETH maximalist or Bitcoin Maximilis, don't help the space at all. I think everyone can grow together.

Awesome. Thank you so much for your insights there. So my second question, like I kind of hinted at, is what about looking forward? What is, you know, do you have predictions for next year or even just one prediction, something you think will happen next year? Yeah. So around DFI, I think, so this year we saw, as I mentioned, kind of the space consolidate. And it's all really based on collateral, right? Like everything has to be over collateralized because we really haven't solved the decentralized identity problem. and so over collateralization is the way you can kind of secure the safety of these protocols. But I think there's so much innovation in this space and so much research that,

and everyone kind of, I think it's a common conclusion that many people have come to, that for DFI to really grow and become more mainstream, it needs to offer under-collateralized products. And so my prediction for 2020 is I will see the first under-collateralized Defi products. Either maybe it will be a separate app that offers this or maybe a product within an existing app. But I do think this is a crucial next step for Defi and seeing the speed of innovation, this year. I think it will continue to next year,

and I think this will be one key development that people will be focusing in, so I'm confident that they'll solve it and will get more people getting into DFI because of these under-collateralized products. That's fascinating. That's a great prediction. I mean, I think that that is one of the most resonant critiques for people who aren't just sort of haters,

but people who are intrigued by the idea and really want it to work, but want to see it benefit, you know, people in places that can use it the most. That's kind of one of the big issues. So I think that will certainly increase the risk. So it'll be interesting to see how people address it. But it is, it does, I think that you're right

that it feels like a natural and important next step. Yeah. Yeah. Yeah, it will be exciting to see. I think it will have, as you said, more risk because we will have to deal with kind of decentralized identity and other pieces to have this work. But I think, yeah, it is a necessary next step. And I think we're getting there. Amazing. Well, thank you, Camila, so much for joining me today. Where can people find you if they want to learn more or talk about defy or yell that defy shouldn't exist and you're crazy?

Where can people find you? Yeah, so I'm mostly on Twitter at Camille Russo or, you know, just follow me on my newsletter and, yeah, shoot me an email, leave comments on the post. Yeah, I'm really open to feedback and love to discuss these topics and talk about this stuff. Well, I love your newsletter. It's one of my favorite places to go to catch up on defy and Ethereum more broad. Rodley. So thank you for all of your hard work. And thanks for hanging here today. Yeah, no, thanks for having Nathaniel. This was really fun. Welcome back. I am so excited to have David Hoffman of Twitter fame, of POV Crypto

Podcast fame. Thank you so much for joining, David. Hey, Nathan, really happy to be here. Thanks for bringing me on. So you've had a great 2019. It seems like from afar, POV Crypto has kind of had a breakout year is a different type of format where there's actual debate and discussion. And I feel like that's a really cool addition to the crypto podcast environment. So kudos to you for a good year. Hey, thanks. It's been one of the most fun things I've done with my time.

Me and my co-host Christian, we're old college buddies. And so we kind of have just a unique relationship where we can yell at each other and it's okay because we're friends. So it's been a pleasure running that podcast with him. And I really appreciate our niche that we've kind of built out as the debate-focused podcast. Yeah, I love it. I think it's so valuable and such a great addition. So as I was telling you, just before we jumped in here, I'm doing a bunch of end-of-year content. Just seeing what, you know, I think it's such a good time to get a sense of what people think, you know, happen and the significance of the year was.

And so I have two questions, which I'm sure I'll turn into more. But the first one is just, what do you think was the narrative of 2019? What was the big story of this last year, right? When we look back and tell the story of 2019. Yeah, absolutely. And of course, anyone who follows me will know probably exactly what I'm going to say. But I want to split my narratives up into two. One is that eth is money and one is the whole defy will replace,

finance. And when you kind of combine these things, it makes a pretty compelling argument for what is going on in the Ethereum world. And I want everyone to realize that defy is what makes ETH money because ETH is being integrated as the collateral for all these defy applications that allow them to run. That's what made the meme, made the narrative that ETH is money. And so the Bitcoin or thesis about how Bitcoin will be the reserve asset for the whole entire world is kind of being re-orged into this whole Ethereum context where Ether is being seen as the collateral for all of these decentralized finance applications. So regardless of your opinion of Ether or Ethereum or what you think of these Defy apps, we are seeing that Ether is being

the collateral for these applications that continue to to grow and develop in numbers. So I think the ethos money is actually really interesting. Like I kind of am interested in memes on both like the level of what their significance is in the industry, but also just almost on a meta level of understanding memes and their propagation. So I don't know if you heard it, but actually Ryan Selkis and I spent like a meaningful amount of time talking about the eth is money meme on Masari's unqualified opinions, probably like, I know, two months ago, right when you guys were, like, really digging into it.

And I think it was interesting because it does have that sort of residence where, you know, like people either they respond to it or they're so friggin annoyed with it that they, like, go ham to explain why you're wrong, but it still propagates the meme. So I think it's been interesting to watch that one in specific. And certainly, I think that you're right that the, it's the thing that makes it not easily dismissible, even if it's your inclination to dismiss it is the extent to which these defy applications are existing, right? Like, you may think that they're headed for systematic trouble.

You may think that they're, you know, problematic in some way or another, but at the end of the day, they exist and they're a little unignorable right now, right? Which is different than where we were a year ago. Yeah, absolutely. I have an article coming out in Randshod Adams's bankless in the next couple weeks, and it's about the two faces of Ethereum. And this is a metaphor I pulled from Eric Weinstein's interview with Vitalik, where he described the Dow hack in how the Dow hack was,

we were supposed to have this robot that's managing our money. But then when we did the state change in the Dow, it was like we had this robot face, rip off his face, rip off his mask, and there's a human face behind it, like, you know, playing with the system. And so I think we can kind of extend that metaphor to basically all of these. decentralized finance applications. So we have like the whole range of potential human versus computer behind the curtain apps on Ethereum. And so like for the most extreme example, like realty,

my company, we do tokenized real estate, super centralized. We can revoke your tokens. We can mint more tokens like you trust us that the property is there. And so there's total human behind the system. And then there's uniswap, which is a completely humanless application that is just robots. and there's no human that needs to be involved with the application itself. And between those two ends of the spectrum, there's a huge gamut of like, to what degree is this application computer run and to what degree is this application human run? And so, like, MakerDAO is a really interesting hybrid scenario where it has this, like, human foundation that is responsible for kind of the upkeep and the maintenance of the government.

But from a product perspective, it's all computers. And so if you come and submit your ether as collateral, because it's money, into MakerDAO, and you can mint die immediately without any human involvement and without any, you know, subjective roles to play. And so MakerDAO is really this human computer hybrid. And I think what will be explored in 2020 is to what degree that we really need these things to be fully computer managed. Bitcoin. The Bitcoiner thesis is that we should strip out all humans whenever possible to the

maximal degree because humans are subjective and they make mistakes and they mess things up. And that's a really, I think the Ethereum world doesn't really listen to that as much as they should. But at the same time, the Bitcoin world might have overreached with how much do we need humans out of these systems. And I think if we can relegate the majority of responsibility, like 80, 90% of the responsibility to computers and just have humans make the last mile, the last 5%, 10% of decisions, then I think that's pretty scalable.

And that's kind of what I see in DFI today. We have a gamut of applications that have some sort of spectrum of human to computer control. And we're going to see, we're going to see like what applications really need to be totally managed by computers and what can be managed by humans. So is that your prediction for 2020? It sounds like you segue perfectly right into it.

And what does that look like in terms of actually figuring out where those lines draw, I guess, if that is kind of what you anticipate happening over the course of the next year? Yeah, sure. So my big predictions for 2020 are that this is going to be paid attention to much more. And I think we've already started to see hints of that. One of my favorite metaphors is, and this applies to both Bitcoin and and Ethereum is that it is a hydra. And so if you kill one part of it, it'll just come up elsewhere.

And we saw that in Ethereum with Ether Delta, where Ether Delta was run by one person with one server, and it was just way too centralized. And the SEC came and chopped off that head of the Hydra. But now we have Uniswap. And Uniswap is fully autonomous. And it's this new decentralized exchange on Ethereum that fulfills the same role. And there's no humans there. And so I think we're going to, if the Bitcoins or thesis is correct that the powers that be are not going to be okay with these crypto economic systems come to life, then we're really going to see these Ethereum applications be tested with the human side of them.

And then the other part of that thesis is composability. The number of, or my predictions for 2020 is composability. The number of Defi applications out there, if that number goes up by one, well, then the permutations of possible combinations of other apps go up by an order of magnitude. If there's just one more, then there's like 10 more combinations that can be made. And so we're starting to really hit this escape velocity with Defy apps where, you know, the numbers are starting to become countless. And the permutations of how we can combine these things becomes even more infinite. And so I think 2020 will be the year of really becoming creative with the Money Lego ecosystem on Ethereum. That's fascinating.

I think one point that you made that resonates with me is that it will be really interesting to see to what extent we test the resilience of decentralized protocols to adapt to geopolitical constraints, basically, right? if you have a uniswap or any other decentralized liquidity provider or whatever, that because of their, you know, from a, the interface that they create has to play by a certain set of rules. So they, you know, geo-block or geo-fence or whatever, you know, will just alternatives, you know, alternative UIs basically for using the same underlying protocols spring up. That seems to me to be one of the things that's going to be really interesting to watch, especially is just you have to anticipate that the global regulatory infrastructure is just going to continue to catch up, you know, even if crypto continues to evolve, you know, maybe a bit faster than

they can. Every year that goes on, they're more sophisticated and their understanding there's a wider array of people and they're figuring out rightly or wrongly how to kind of integrate it into their own mental frameworks and regulatory models. Yeah, absolutely. And we're talking a couple days after uniswap geo-blocked a couple of the countries that you would expect them to, like Zimbabwe, Iran, et cetera. And that kind of created a little bit of drama on Twitter because people are talking about how defy is supposed to be open

and if you're blocking people then that's not defy. I just think it's a little bit of a hubbub because uniswap.com.com, the website URL is just one place to engage with Uniswap and honestly it's not even the best place. And so I think another thesis

of 2020 could be these aggregators, mainly Xeron and Instadap where there are actually four, five or six protocols behind the scenes, behind the UX or the UI in these websites. And because you don't need to know as a user that that's compound behind the scenes or that's Uniswap or Khyber behind the scenes or D-Y-D-X. Like you just want to get something done.

And so these aggregators that will have their own unique URL will be able to provide these services. So you don't have to go from compound to Uniswap to D-YDX to get these things done. and instead you can just go to one clean interface. And Argent is also working on this as well with Wallet Connect, where you can just keep all of your funds in your Argent wallet and then just use Wallet Connect to plug into whatever application you want. And so I actually think that 2020 is going to be bearish

for going to compound.compan.finance or uniswap.com, dot exchange and instead just using these protocols in the background as they should be. We don't need to go to every single website to get our tasks done. That's just not efficient. And so I also think that's coming. Interesting. I love it. All right.

Well, we will check back in and see how that goes. But I think there's a lot that resonates with me on that. And David, thank you so much for your time today. I really appreciate your insights. And have a great end of your 2019. Hey, thanks for bringing me on. This was a ton of fun.