The Breakdown - Genius or Grifter: World Liberty Financial

Episode Date: September 19, 2024

Earlier this week, the crypto world got more direct information about the new DeFi platform backed by the Trumps, World Liberty Financial. NLW brings the highlights of the Twitter Spaces plus the community's reaction. Plus more pressure on Gensler around Airdrops. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Wednesday, September 18th. And today we are talking about World Liberty Financial, as well as a congressional urge for clarity on air drops. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, on Monday night, former president and current presidential candidate

Donald Trump took to Twitter spaces to launch his defy application, World Liberty Financial. If you're wondering why we're covering this, it's because a presidential candidate is launching a defy platform, and you kind of have to take it seriously just by virtue of that alone. So over the two-hour live stream, Trump discussed his experience with the crypto industry so far and what drove him to get involved with the project. Referring to crypto payments for his NFT projects, Trump said, Because so many people paid this way, I was blown away. I wasn't overly interested, to be honest, but I was surprised by the massive amount.

Speaking to the crypto ecosystem in general, he commented that it was, quote, big and yet it's a fledgling compared to what it will be. I think my children open my eyes. He also used the opportunity to sell his crypto credentials to voters, warning, since the hostile SEC heard I was involved, they're treating people much better. If we don't win the election, there will be a huge crackdown on crypto people. they will be living in hell. Donald Trump Jr. took over to sell the actual project, speaking to the need for disruption in the lending market. He said, quote, this is the start of a financial

revolution. While the project is endorsed by the Trump family, they seem to be solely involved as promoters. The founders of Doe Finance, Zach Folkman and Chase Harrow are handling operations. During the Twitter spaces, Folkman said the plan is to, quote, take the best of defy and bring it to the everyday person. The announcement was very thin on details, however, CoinDesk reported extensively on the platform after gaining access to the leaked white paper and source code. The platform offers defy functionality like borrowing, lending, and trading on the Ethereum network. Under the hood, it seems to be an AVE front end, offering simplified access to defy primitives. The code is a modified version of Doe Finance, which was launched in April of this year but failed to gain traction.

That platform suffered a flash loan attack in June, which caused around $1.8 million in losses, wiping out everything on the platform. Functionally, Doe Finance gave users a simplified interface to loop deposits in order to lever up yield generation strategies. Users could borrow stable coins or eth against collateral, redeposit the borrowed assets as additional collateral, and loop that process to achieve higher leverage. These strategies have been packaged before, with the most successful examples being Uren Finance and Abercadabra's Digen box. The strategies are fairly high risk and prone to liquidation during high volatility periods, especially if users don't manage their position well. We don't know exactly how World Liberty Financial will be structured,

but it seems like a safe bet that these loan looping strategies will be a component of the offering. The other component of the project is the sale of a governance token. 63% of the supply will be sold to the public but limited to accredited investors, 17% will be reserved for user incentives, and 20% will be used for team compensation. This distribution differs from what was listed inside the leaked white paper, which had 70% earmarked for inside investors and the team. The token will be non-transferable at launch, but this can be changed by a governance vote at a later date. Making the tokens non-transferable could reduce regulatory scrutiny, however in practice, it's

sometimes a little misleading. Nothing can stop an investor from selling the tokens by an external agreement, which is settled on chain at a later date. While linked, the token and the platform are kind of two separate products that both bear a little analysis. Based on what we know so far, the defy platform is something that could add value for users, assuming that controls are in place to prevent a repeat of the attack that brought down Doe Finance. Much of the criticism has revolved around the idea that this does nothing novel. Defi users can go to AVE directly to access lending markets, and there's a number of competing products that automate looping yields strategies. Then again, if the platform does have a user-friendly front-end, theoretically it could expand

access to Defi protocols to a new group of customers. Of course, the risk here, which will be blaring for many of you, is that if this is presented as a way to safely access defy but pushes new users to take on more risk than they can manage, then it's obviously a recipe for disaster. When it comes to the token itself, it's the same problem that we always have. Is the token going to be purchased largely by crypto DGens, who have been on this roller coaster for years and know exactly what they're getting into? Or will it be sold to a broader cross-section of Trump supporters? Limiting it to accredited investors certainly takes out some of the risk, but ultimately, like all tokens, everything is going to depend on whether insiders figure out a way to evade the token lock to dump

their positions early. One interesting point is that the team seems to have adjusted their token distribution in response to public criticism. Prior to that change, Nick Carter used the controversy as a jumping off point to discuss token allocations, tweeting, unpopular opinion. I don't agree with the common believe that insiders retaining a high percentage of the float is necessarily bad. See, for example, the discourse around World Liberty Financial Insiders reportedly retaining 70% of the supply. It's common for an IPO on NYSE to only float 20 to 30% of shares. There's nothing inherently bad with low float. If the objective of the project is to decentralize and co-sign ownership over the user-based community in Dow style, then yes, high insider ownership inhibits that. But I don't think that's the

case here. Is there something extractive about insiders holding a lot of the supply? Not really. When companies are starting, the founder holds 100% and gradually gets diluted as he raises round. Does anyone complain that a founder quote-unquote only sells 10% of his shares in a seed round or an IPO? No, he created the company and the shares are his. Conversely, it would be very unwise to sell 70% of shares right off the bat, as the founder would immediately lose control. One of the ways then to read this is as a blur between crypto projects and traditional companies. Where people draw those lines in the future could be different. In terms of the response, the most positive aspect of this was people saying,

seeing the idea of Defy being validated and it being brought to a new audience. Preston Eckhart, the CIO of Coin Tactical, wrote, listening to this World Liberty Financial Spaces with the Trumps make me realize how niche our skill set within Defi really is. These people are just now discovering the tip of the iceberg that is AVE, insanely bullish long term. Hello, friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless.

Permissionless is the conference for Cryptonatives by Cryptonatives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political party's platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption.

Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders, and perhaps more. More importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.co. There will be links to register for the conference, and again, you can use code breakdown 10 to get 10% off. Across crypto Twitter, however, on average, the reception was far less generous.

Wayne Vaughn, the CEO of Tierraon, was underwhelmed by the two-hour session which was missing key details. He commented, we actually got a little bit of color on why the Trump family wants to build this product. They gave anecdotes about being denied credit and being unbanked after they got involved in politics. This was a missed opportunity. They spent two hours and 23 minutes discussing big concepts about defyy-five and then read written statements about an upcoming token sale. Others went even farther, basically viewing this as a rambling session devoid of useful content. Jesse Koglon, a deputy editor at Coin Telegraph wrote, this is a tough, tough listen. We're nearly an hour and a half in and zero details on World Liberty Financial between marketing

and how it is for the Everyman. A unit of account tweeted, World Liberty Financial sounds like a business Will Ferrell and John C. Riley brainstormed from Stepbrothers. Bitcoin Maxi Silva-Hawdle writes, Is World Liberty Financial just an elaborate crypto scam positioned to harm gullible Trump supporters right before the election? It's most definitely a scam, but I don't think Trump is prepared for that outcome. He's too much of a crypto nob to understand what's happening. Ultimately, rambling or not, 1.2 million people tuned in to hear this. And as I discussed with Scott Melker on the Friday 5 last week. If nothing else, this represents one of the

first times this cycle, we've seen something have a chance to break into some sort of mainstream consciousness outside of the crypto circles. Now, whether this is the project that you would choose to have do that, I think probably for many people is somewhere between absolutely not and remains to be seen, but it's still notable. Now, jumping from presidential campaigns to the current Congress, The other story I wanted to share today was that House Financial Services Committee Chair Patrick McHenry and House Majority Whip Tom Emmer have urged the SEC to come up with clear rules for airdrops. In a letter to chair Gary Gensler, they wrote, by creating a hostile regulatory environment,

including making assertions about airdrops in various cases and increasing warnings for additional enforcement actions, the SEC is putting its thumb on the scale and precluding American citizens from shaping the next iteration of the internet. End quote. Token air drops became a popular way to distribute tokens to early users following the ICO crackdown. There was a widespread belief that rewarding platform usage with tokens would get around the Howie test as there was no contribution to money. The SEC disagreed, stretching the definition of money to include anything of value, including the time spent using a platform. This led crypto projects

to geoblock U.S. citizens from receiving airdrops in recent years. This legal position was questioned earlier this year when the Defy Education Fund filed impact legislation seeking clarity around airdrops. They put forward a small Texas backpack retailer as a model plaintiff. The retailer airdropped NFTs that provided a discount on backpack purchases. They sued the SEC seeking a declaration that their AirDrop didn't run afoul of securities law. McHenry and Emmer suggested that the SEC's position had done little to slow down airdrops, but had merely walled U.S. citizens off from the crypto economy. They wrote, by prohibiting Americans from participating in AirDrops, the SEC is preventing crypto users from fully realizing the benefits of blockchain technology. The latter question how the SEC

could distinguish between AirDrops and other legal rewards games like Airline Miles or Credit Card points. Bankless co-host Ryan Sean Adams tweeted, Thank you. Tom Emmer and Patrick McHenry sent a letter asking Gensler why he's blocking U.S. citizens from air drops. Has the SEC considered the cost to GDP and tax revenue? Absolutely ridiculous that Gensler wants to protect you from free money. McHenry and Emmer seemed to be putting Gensler on notice ahead of a pair of hearings set to take place over the coming week. As I record, the House is questioning industry and academic witnesses in a hearing titled, Dazed and Confused, breaking down the SEC's

politicized approach to digital assets. The panel, including includes one former SEC Commissioner and another who previously held a high-ranking position in the agency. Next Tuesday, the SEC will be brought in for a routine oversight hearing, but during Gensler's time as the head of the agency, these hearings have seen him grilled by pro-crypto congressmen. Then again, they produce very little besides satisfying soundbites. This hearing, however, is set to be anything but routine. For the first time since 2019, all five commissioners will be present to testify. In other words, instead of spending all their time listening to Gensler weasel out of giving a straight answer, lawmakers will be able to question commissioners Hester

purse and Marguereta on the failures of the SEC's crypto regulatory strategy directly. Interesting stuff. Lots more to catch up on there as that happens. But for now, that is going to do it for today's breakdown. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.