The Breakdown - Katherine Wu on DeFi and the Inevitability of the Digital Yuan

Episode Date: December 30, 2019

Katherine Wu was a founding team member at Messari before moving into a VC role at Notation Capital, but is perhaps best known in crypto for her epic annotations of key regulatory enforcement actions. In this end of year interview with The Breakdown, Katherine argues that decentralized finance is the narrative of 2019, but also that when it comes to 2020, the emergence of a Chinese digital yuan is likely to have a huge impact on the crypto space.

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 Breakdown's end-of-year extravaganza, and today we have a great interview with Catherine Wu. Catherine Wu was a founding team member at Masari. She's now a VC at Notation Capital. But for crypto folks, she's probably best known for her epic annotations. of SEC enforcement actions that come out seemingly hours after the decision has. Catherine is a really, really broad thinker, so I was really excited to get her perspective on the narratives of 2019 and predictions for 2020.

And we touch on some of the things that you might expect, Defi and things like that, but I think Catherine's thoughts around Chinese Digital Yuan and what it means for the year going forward are really, really important. With that, I really hope you enjoy this interview. And if you do, please subscribe so you, don't miss any of our end of year coverage. So without further ado, let's dive in. All right, we are back with Catherine Wu, formerly of Masari, now at Notation Capital. Catherine, thank you so much for joining today. Hi, Nathaniel, good to, I guess we're not actually

seeing each other, but good to speak with you as always. Yeah, absolutely. So 2019 has been a big year for you, a little bit of change and transition from the Masari entrepreneurial life to the other side of the venture capital table, huh? Yeah, I know. It's been a crazy, crazy year. Amazing. Well, it has been, like, in some ways, a crazy year and in other ways, a quiet year in crypto.

So I'm interested to see what you think. So, you know, I'm doing these end of year interviews. And basically the first question I'm interested in is what you think the story of 2019 will be, right? Like, when we look backwards, what is the biggest or the most important overarching narrative for last year? Yeah. I mean, I don't think I'm going to be.

the only person saying this just because it's been so overwhelming. But I think main narrative of 2019 is really this like, you know, defy eats the world sort of movement, right? Sorry, I know that's like cheesy, but, but you know what I mean. It's defy basically, I feel like took over 2019, right? Like between, you know, maker and compound and synthetics and uniswap and set and like all the tooling that have propped up around these defy protocols and DAPs. And, you know, I actually was checking DeFi's, uh, DeFi Pulse right.

before I got on the phone with you, and they're showing like $644 million as a total value that's locked into smart contracts of these popular defy applications and protocols. And there is room, by the way, for it to double. Like, this is going to go into 2020 and beyond, but there's room for it to double, maybe even triple. And I feel like 2019 has been just a lot of building and a lot of movement around, you know, defy. Yeah, it's really fascinating how, you know, Ethereum, like if you looked at like 2017 and early 2018, you had people like Eric Torrenberg writing these articles like tech

crypto versus money crypto, right? And the whole like thesis of that argument was that you had the money crypto side, which is basically the Bitcoiners, who got into this game because of a desire to have, you know, a non-debaseable, non-sovereign global store of value that could turn into the to a global money, right? That wasn't under the control of any government actor. And that was such an important and overwhelming mission that they couldn't imagine focusing on anything else, whereas you had the tech crypto folks who were like represented by the Chris Dixon's of the world and the why decentralization matters posts that he was writing back then, that were really looking at these Web 2.0 monopolies in the way that they controlled user experience, the way that they were extracting things

from users, the way that they compromised privacy and all this sort of stuff. And tech crypto was going to basically replaced those companies with networks that were decentralized and offered similar services, but in a way that was more less controllable and more kind of owned by the users. And that was what prompted the whole idea of DAPs, right, and the decentralized everything. Of course, over 2018, we saw a fleeing from the, you know, tokenize everything apps and adapts into what by the end of the year had started to emerge as open finance or decentralized finance. And this year, I think to your point, it just completely, it ate first the Ethereum world. And then it really, I think, has even started to expand from that.

But it's fascinating to me because it's like that tech crypto, money, cryptohoristic is a little bit broken because it turns out even in the context of Ethereum, you know, the non-Bitcoin or whatever, it's still about money. It's still about a new financial system. Yeah. Yeah. And part of it, though, is also that there are a lot of protocols that are maybe better at building other things other than defy that are not launched yet. Like, for example, like, you know, I think this was actually in Ryan Selkis's like cryptothesis, which is that Ethereum is really good for defy. And like maybe that's best application. And, you know, whatever. This might be like a controversial opinion. But I think just like seeing what we've seen in 2019, like maybe Defi really is a breakout case for Ethereum. And maybe in 2020, with these other main net launches from other protocols is where we'll start seeing other things. Who knows, though, right?

But I can sort of buy into that argument. Yeah. Well, there's a couple parts of that argument. One is that an important part that he was making is like, yo, dude, this is a really big total addressable market. You know, you're not like, you didn't realize that digital cats is your only market. You realize that like the reinvention of the financial system might be your only market. So part one is don't stress that much about that. Like, that's big.

Part two is like also, I think that we are the more mature that each of these, that this industry as a whole gets, but also that each of these protocol communities gets, the more they understand like actual product market fit in terms of what it's supposed to be, you know? And I think that because of the concentration of energy that came around the ICO movement or the boom, everything got just mashed together. And it was like all part of one big thing, whereas now finally we're starting to peel them back and actually be able to figure out, well, like, okay, for this use case, what needs to be actually decentralized and how much? And, you know, whereas over here, can that be a little bit different? And it's just, I think that in a lot of ways, a lot of the story of 2019 is like figuring more stuff out about what we're actually working on. Yeah. And that's okay. Like, we're a baby industry. Totally.

Yeah. I, I sort of feel like, you know, having talked about, you know, tech, you know, and first is the money thing, like, and then moving. But all of this common core is that, like, how do we make things more open? How do we make things? like less dependent on one central body. And actually part of, and I hope you don't mind me just like totally like moving ahead to like 2020. No, go ahead. But I do feel like, you know, one thing in 2020, which is on the other side of the world, and by which I mean China, I think every major Chinese tech company will launch a blockchain solution. And all of their payment platforms will incorporate the Chinese D7.

which is their digital currency electric payment system. And I think like, you know, I've always long thought that the only state-backed stable coin or digital currency or whatever you want to call it that will gain adoption and wide usage would be a China state-backed currency instead of something like Libra. And, you know, we sort of saw the announcement of DeSep like sort of this fall, but I think this reality will gain fruition in 2020. because, you know, every app in China, I think eventually is or will become a super app, which we don't really see here in the U.S.

I think maybe with the accession of like Uber that's trying to be a super app, which basically means that like, you know, you could be an app that primarily focuses on online shopping, but maybe you also do food delivery and you also are in the micro mobility space. And maybe you also sell movie tickets. And like I think that means that the potential for DSEP is huge, right? And I think China will, and is pouring huge amounts of resources into research as well, you know, largely maybe starting from building out academics. But it's just super interesting to consider, you know, because I think in 2019,

we just talked about it was so much about like opening up the financial system, like decentralizing this and that. But I think in 2020, where we'll see on the other side of the world is more of a constraint around this and sort of making this technology to fit what, what makes sense there. Like, it's going to be a very kind of big boom of blockchain, not crypto, in China in 2020. Yeah. Well, it's interesting, too, because I think that, like, we've had these debates.

I mean, even the thing that I was just mentioning, this tech crypto versus money crypto. Ultimately, this is, they share, and this is kind of your point, this common core of trying to open things up, right, trying to move from a system that is relatively closed and controlled to a system that is relatively more open, decentralized, and permissionless, you know, whatever degrees there are. And we, we, we have sometimes intense fights about what we should be spending our limited time and intention and resources on and what the stakes of the game are. But ultimately, there's a, if you put everyone in the room, they're, they're mostly all looking for a more open permissionless. Yeah, exactly. Like, no matter how much

you're fighting, you know, it doesn't matter what camp you're in within crypto. Like, largely, you're, you're sort of fighting along similar veins, right? Or at least similar, like, ideals. We could argue over the nuances of it, but like directionally, I think it's like largely in sync. So it's just, I think it'll be really like interesting to consider. And then, you know, today there was an announcement that Paradigm and Dragonfly put like 27 or 28 million into Maker. And Dragonfly, as you know, is like a cross border like crypto fund, right? So so they're obviously, and cross border as in like US China crypto fund. So it's, yeah, I.

just don't really know how that's going to play out. Of course, Asia is bigger than China, but China also is like the, you know, big player there. And so can you introduce maker into China, like with, with, even though they have DSEP, even though they have all these other agendas are pushing? Like, I, I don't know. I feel like that's going to be, like, that's the real sort of test for whether DFI can survive in a place with a closed economy. And like, with a close economy that, by the way, is very, very technologically advanced in terms of like digital payments. Well, so this is the thing that's so fascinating to me is that, you know, if we're, what we're saying is that the infighting is kind of ultimately in the scope of things relatively insignificant, the introduction of China using similar technologies to do something that on the surface looks similar, but actually from the, is like fundamentally more controllable, more close. Like, that's actually a polar opposite implementation of this technology. You know, this is like a forces for good, forces for bad type of thing. And, you know, maybe that I don't know what to add moral. into it or whatever. But like it is a fascinating, it's kind of like if we thought we were fighting before, the next phase could be quite a different level of significance. And I think the, you know, can maker actually function in that context? I mean, I guess though the hard thing with the maker question is that it's also just about, you know, trying to displace tether or trying to scoop some of that, the, you know, market share as well, too. Yeah. Or maybe let's last say maker, let's just say defy in general, right? We don't argue, I think, here in the U.S., I'm like, okay, whatever, you guys don't get defy because you don't need to defy. Look at other countries. And sure, maybe that's played out with some other countries, but can that survive in a country like China? Can that even get adopted? Do people even care? Like, do people care as much as we think they do? Is it open financialism really that important to everyone in the world? Like, I think that's like a thesis that will be tested in 2020 and the year beyond if you take China as a case study. I think.

that's like an easy or interesting example to examine. Yeah, I think that right now, my guess is that if we go zoom way out, we're going to look at this little period right now as a real inflection point, this 2019-2020 period where the fundamentals of what the future of money looks like, it's like finally actually being played out on a global stage. It's been brewing, it's been percolating, but I think that the introduction of Libra and then China's response to it in particular, we're a starting gun for this in a way that no other event and no other time has had.

Yeah, totally. And it's not just China. Like, let's bring it back home for a second, like back to the U.S. Like, I think we've sort of seen enough like, you know, SEC or IRS, like, and Vincent, like, guidances and predictions and this and that to properly strike enough fear in founders and investors in the U.S. I think in 2020, like in the U.S. at least, we are probably going to see more crypto companies and project geo-defense, U.S. users and customers at launch. Although I don't necessarily think it's going to slow down the desire for people to continue building.

I just think that you do have to be more thoughtful around like, how is it going to look at launch? There are more questions around that. Like what Uniswap did this month, right? Like the geo-offense, they had the geo-offense a couple of countries because they are still in the U.S. they're under O-FAC sanctions. But what's important to know here is uniswap, what the UNISWP team controls is the front-end and not like the underlying protocol. So the underlying protocol, I mean, sorry, the front end is okay as long as you can copy

and, like, access their code. And what we did end up seeing is like various front-end versions of UNISPWP, like, pop up, right? But that was built underlying on this same protocol. Like the open front-end was built on like IPFS or something. And so that's still able to survive, even. if like, you know, and that's not really something that like I think you can say, oh, well, you know, the team had too much control or whatever.

It's like, no, like, I feel like they were a little bit more thoughtful and careful around their growth and the way they like launched. And we're probably going to see more like companies do that. I think that there's, I mean, this is getting a little into weeds, but there is this whole other dimension of exactly what you're talking about, which is the specificity of a application of decentralization, what that means, right? So like what you're talking about is in the context of these. you know,

decentralized liquidity type companies figuring out that, that front end experience, you know, that's a, that's ultimately that's going to need people to be able to build that on top of a, of a protocol because as soon as you employ that front end, you're running a foul of whatever jurisdiction you're, you know,

but that's not like how decentralized really argue, like if I shut out your front end, can someone else somewhere else like built a backup again? Like, the front end, it doesn't matter. Like, if you've thought about this and you're really like launching it with with that in mind, it's like, who can shut down Bitcoin, nobody, right? Like, I think there's more projects sort of be more mindful around, around that. Like, if someone shut us down today, like, can our protocol, can our whatever, things still run? Like, maybe. And

I think 2020, I'm excited to see more companies maybe like think around that, that scenario. Yeah. Do you think they'll have to? Do you think that this will actually be? be a requirement of the times, basically? Yeah, exactly. Amazing. All right. Well, this is so fun. I could talk to you about this for hours, but I really appreciate the time. And yeah, I'm looking forward to seeing what the next year holds. I think it's going to be interesting and eventful, if nothing else. Agreed. Well, I'm excited for the next year. I think it'll hold some pretty big developments. Yeah. Awesome.

All right. Thanks, Catherine.