The Wolf Of All Streets - Rich Rosenblum On What Really Stops Your Grandma From Entering DeFi

Episode Date: July 14, 2022

What’s stopping DeFi from mass adoption? A major UX/UI problem. Rich Rosenblum, co-founder and President of GSR, joins us today to talk about that friction and how we’ll overcome it. We cover inflation and its relationship with risk assets, whether or not NFTs will make a comeback, and the path forward through this bear market.  JOIN THE FREE WOLF DEN NEWSLETTER 📩 https://www.getrevue.co/profile/TheWolfDen EPISODE LINKS Rich Rosenblum: https://twitter.com/rich_gsr Production & Marketing Team: https://penname.co/ FOLLOW SCOTT MELKER • Twitter: https://twitter.com/scottmelker • Facebook: https://www.facebook.com/wolfofallstreets • Web: https://www.thewolfofallstreets.io • Spotify: https://spoti.fi/30N5FDe • Apple Podcasts: https://apple.co/3FASB2c

The impact of the pandemic of people working remotely, it's made it more okay for it to be that you don't have to be in the office on the weekends. Also, just a more tech-forward landscape. You don't necessarily need as many humans to monitor. And it doesn't mean we're going to have the same liquidity Saturday at midnight, but I think markets should probably be open a bit more, living on real time, since events do happen on the weekends at nights and we're living in a more international landscape as well so it would be you know easier for markets if the us is open you know at least when asia is open Most people don't understand how the crypto market actually works, especially when it comes to institutions trading and institutions trading with size. Well, Rich Rosenblum was one of the first to become a market maker and to really solve these problems coming over from trading oil and other legacy assets and has a great perspective on exactly what it takes to make efficient markets in crypto.

There's a great conversation you don't want to miss. So right now, the story obviously is global macro. What's happening in the world? And crypto has not been immune at all. We had sort of the narrative that it was going to be an idiosyncratic asset class would do well, potentially in this environment. That hasn't been the case. What do you think? Yeah, certainly. I think that people would have thought that crypto and Bitcoin specifically is going to be a hedge to inflation. So it's got to be pretty confusing for retail, especially, which you're just going to have less of an understanding of

the nuances of what the macro landscape is caused by. I think the rally already happened. We're still 3x where we were a couple of years ago. I think the problem is now that while inflation has arrived, it's what central banks are going to have to do to stop inflation. That's going to hurt all risk assets. And I think when Bitcoin was just an idea and has inflation protection qualities, there's a lot of room for it to run. But now that you're at the trillion type quantum, it's become a risk asset. It's going to have some correlation to other risk markets. Is that something that you expected to happen? I think that similar to when I was in oil a decade ago, and actually 2007, 2008,

started seeing a lot more macro participants. It was great on the way up, but then 2009 on the way down, that same risk went away. So certainly if there's going to be a stagflation or a period where the inflation is damaging risk assets, I certainly would assume crypto would go with it. I just didn't really predict this level of inflation. I think it's the confluence of events finally with Russia's invasion of Ukraine,

which also I think was heavily unexpected. It's caused the more persistent inflation. Well, you have the oil background, actually, which is something that I don't think anyone else I've spoken to has. So it's an opportunity. I mean, that's obviously driving a lot of this, right? Oil being well over $120 a barrel at certain points. Do you think that that was sort of the straw that broke the camel's back to some degree with a potentially bubble that was ready to pop already and and that was the pin. Absolutely. I think that it's commodities overall. Food and energy are the parts that they say, oh, don't look at that.

They get to exclude those. Exactly. But that's the part that's going to impact retail investors the most, arguably. And I think the reason why they don't include it is because it is the most volatile, and there could be these short-term impacts. But if Ukraine exports a third of the world's wheat, and Russia is one of the top exporters of oil in the world, and we don't know when the situation is going to fix itself, there's going to be continued volatility and higher prices

until I think something's fixed on geopolitics. I think it's interesting and extremely surprising to a lot of people, though, is the performance of the ruble during all of that. It absolutely skyrocketed. People thought that the currency would get crushed. Do you think that that's tied to the fact that they control so much of the commodity market? Absolutely. Oil specifically. I think that even if the U.S. has commandeered hundreds of billions of their

fiat, of their dollars that are held offshore, the amount they've made from oil doubling has more than fulfilled that level. That didn't work out exactly as planned, I would say. And I would say also potentially adding to all of this is the fact that this is one of the only markets that's truly 24-7, 365, being the crypto market, obviously, not necessarily oil. Do you think that the fact that people can run to this liquidity is part of the reason that it's traded down so much? Yeah, I think that's probably more the story in the short term. Like we saw in March 2020 when Bitcoin went to below $4,000 briefly, and I think Ethereum into the hundreds

of dollars. But at this point, you've had time to get out. But I think there is the sense that anytime there is a new margin call, you're going to sell what's most liquid. So Bitcoin futures, I think it's going to take some punishment. But if you've had two months to get out, at least a lot of that damage has already been done. Yeah, that makes sense. Three or 24-7, 365, there's now a push, largely, I guess, led by FTX and SBF sort of to bring other markets to that paradigm rather than crypto remain the only one that's that way. Do you think that that's legitimately possible? I think we all agree that would be better. Do you think that's possible? I think it's a system people are so ingrained in. It might take more than a few meetings with the CFTC to get it through. It could take three to five years, but at the same time,

I do think that's the direction things are going. I think also the impact of the pandemic of people working remotely, it's made it more okay for it to be that you don't have to be in the office in the weekend. It's also just a more tech-forward landscape. You don't necessarily need as many humans to monitor and it doesn't mean we're gonna have the same liquidity at Saturday at midnight, but I think markets should probably be open a bit more living on real time since events do happen on the weekends at nights and we're living in a more international landscape as well. So it would be easier for markets if the U.S. is open, at least when Asia is open. And then you'd be able to actually manage risk in real time

as opposed to waiting till Monday morning to panic and sell everything. Yeah, exactly. So for you, though, you were one of the first, certainly, to focus on crypto and sort of take the same approach that perhaps you would have, you know, to other markets, your market making. How do you do that 24-7, 365? So I think we were one of the first to have a real follow the sun model. So we have people across all three regions. Our offices are London, New York, Singapore, in that order. And so I think that if we were just trading on the top venues, I think we could probably have just one of those regions. But because we're very

client service oriented and we are on some of the second and third tier exchanges, we need to make sure that we're able to fix problems in real time as well. So I think it's been having a strong tech focus, but also there's a lot of just blocking and tackling brute force, making sure that we're available for our own risk as well as for our clients 24-7. Does it feel like there are a lot more problems right now than there have been in the past? It does to me. It feels like things are breaking left and right. I think that from the DeFi side, I think after what happened with Aluna, it's hard to say I disagree, but I think that the market is a lot more mature now. The infrastructure is light years better than it was two years ago versus one year ago.

So things are working rather smoothly overall. I think actually the story that's sort of not being told is the lack of contagion from that event. Absolutely. Because when it happened, you had Janet Yellen on TV saying that it could collapse the entire financial system effectively. And nobody bothered to update the story two weeks later when Bitcoin's trading back basically at the same price and everything continues to operate. So isn't that kind of a positive in some way, maybe a silver lining? Maybe that's a testament to the real-time trading and the transparency and making it so that things can be compartmentalized to a bigger degree.

It's not like in the credit crisis where you'd have all this opaque risk where it takes years and lawsuits to know who owes who what. There's less entanglement when it's fintech. Yeah, but do you think with a situation like that, I mean, I think we've all talked Luna to death, but do you think that there will be sort of these second order effects six months later finding out some fund that you didn't know was massively exposed to USD or something and that we can, I mean, it just feels to me like we're having these endless sort of hacks and exploits. Maybe it's not more so than before. Maybe it's just more in the public eye.

But that we're just sort of shooting ourselves in the foot repeatedly here. And we don't really know what the effects are as of yet. There's always going to be, you know, secondary, tertiary effects. But I think here the groups that had the most risk, I think, were pretty thoughtful and that's money they could lose. I don't want to say house money, but I think that it's not as if there was groups that were leveraged longs and now they're owing money to an exchange. No margin at all, right? Yeah, exactly. Yeah. So what have you guys been focusing on primarily? I mean, are you somewhat agnostic to what you're trading and you're just making sure that, you know, there's a tight spread

or are you focused specifically on certain, you know, facets of this market? I mean, last year it was like everyone was on NFTs for a while. Everyone was on DeFi the summer before and everybody was on Metaverse. Is there anything like that right now or is it? So we have a handful of different business lines and we try to think holistically and make sure that the groups are working thoughtfully together. But to some degree, it's the size of the market opportunities. So I think we were highly focused on NFTs six months ago. And I still think that that's going to be one of the hottest areas and one of

the areas with the most growth that the fundamentals are still there. But if the level of trading activity has dropped by 75 percent instead of maybe gone up by five X and what we would have expected, it's harder to deploy as much of our risk and trading technology prowess towards it. So I think it's still a very exciting area, but it's taking a little bit less of our mind space this quarter than otherwise would have. I mean, NFTs, flipping NFTs, I don't know how you guys are approaching it. It seems so left field for your business model or anything institutional. I mean, were you able, is that literally like you guys are flipping apes?

Yeah, so I think it's more about looking for ways where, you know, a computer can better solve the problem. So we're not looking at the ones that are, you know, five, 10 million and thinking how we could broker them. It's more about ones where there are 10,000, you can have a matrix work through the correlations to see where one price spot gives you an idea of where one should be trading and use that to recalibrate our models. And if you think about it, it's been so much value created by OpenSea. A lot of the exchanges are looking to recreate that value. They already have the technology to a degree. They already have the users. So they think what's missing, a lot of it's liquidity. And so it's been partly us wanting to be pioneers and look at this

interesting area, but also just a lot of our existing partners tapping us in the back and saying, hey, this is an area where you can really help us. I mean, everything not named OpenSea has effectively flopped massively. I mean, I don't remember the numbers, but Coinbase's NFT platform is a ghost town. I think that if we were trading 100,000 Bitcoin right now, maybe there'd be a lot of other success stories. But once liquidity is drying up, people are less looking at new venues and more want to stick to where there's a core set. Do you think then that, I mean platforms like ftx finance these huge platforms that have been focusing on ft nfts do you think that those models disappear or you think they just sort of keep these on a low burn until the next bull market i think that a lot of it can say

is that the funding like i don't think that uh coinbase or ftx are going to give up. Yeah, so it's a bit early to think either it's going to be in the mud. But thinking of NFTs in general, if you compare it to crypto and the lack of adoption over a dozen years, people laugh at the comment that, oh, it's still early. It's like the dot-com boom in the early to mid-90s. But here with NFTs, it's truly very early. I think that the level of attention they've gotten from so many different areas of focus is certainly inspiring. And I have very much confidence it's going to continue to grow. Yeah, I think you could argue that the current iteration is maybe a half of 1% of the actual

use case of NFTs that most people who have been in NFTs for years are focusing on. Like the real nuts and bolts applications of it for, well, any transfer of value, but like your deed or your mortgage or your car. I mean, that's a little more, I would say, impactful in the future than a cartoon with an alliterative name, a pudgy penguin or Lazy Lion or whatever. And that to me was like the clearest bubble we've pretty much had in crypto as of yet. I don't know if you agree, but it seemed like.

No, I think that the prices of the assets, you know, someone says, should a drawing of a rock, a crude drawing of a rock be worth a million? Some of these we might look back on and think it's ridiculous, but as opposed to looking at TradFi and the level of services for retail, there have been already challenger banks and ways so that you don't have to use a Citibank or a JP Morgan and you'll get an alternative service. But I think about artists and the creator economy really just has been a negative force over negative force. And it's just been, well, it is what it is. You have to play concerts if you want to make

money. There's no more money in that industry. And the artists really have to be not benefiting from the technology, but suffering from the technology. so i think this is one that you know really is a game changer for the creator economy since they can uh you know if software can do the work of the uh promoters and all the middlemen then there's a there's a very fat margin if it's you know art or music it's 30 to 70 percent so there's there's there's plenty of fat that can be taken out yeah that makes perfect sense so now just shifting back sort of to the larger i guess picture i'm assuming you have uncomfortable calls with clients when things start to go bad what what's the most challenging part for you and i guess interfacing keeping them calm explaining to them the context of everything that's going on? I mean, do you have people that don't understand that what's happening in crypto

is largely a function of the greater environment who are panicking? I think it's somewhat bifurcated. There's some groups that are really focused on the optics and the levels of adoption, whether it's TVL or volumes. And those groups, it's like when the tide goes out there they're left naked and if they were doing very well in terms of the optics when the optics hour if they didn't have much behind it I think they're the most concerned versus the groups that weren't really ever focused on the optics they're more focused on a building I think those groups are like oh here's our

opportunity we're finally going to get noticed and And the competitors that didn't have as good tech or as good teams, they're now more easy to compete with. What kind of clients are you guys servicing now? Who is the bulk of your clientele? So I think today about 250 issuer clients, so groups that create coins or tokens, and I think about 15 exchanges that contract us, basically pay us to help them light up the board and fill up the gaps. We're very much a crypto-native focused trading firm. And while we do have some prop-oriented trading, the bulk of our 300 people today are mostly servicing these crypto-native type clients. We do have some high net worth and some tradfi type clients,

but I think that maybe from being so early and really having a deep understanding of what the crypto natives have needed, that's where we've buttered our bread. I think you've told the story before, but I still think it's worth going into why crypto for you in the first place. You were doing quite well and had a pretty nice comfortable probably existence in the legacy financial system before this. Yeah I think that having a excitement seeking type personality was what brought me to oil. It had that you know volatile derivative sense to it where it's you know complexity and there's a lot of

action going on and geopolitics element. And after a decade of that, there's always more to learn. But I think a whole new world where there's a different set of geopolitical, socioeconomic philosophy involved, as well as even more volatility. And it brings in a lot of different actors since technology now as you mentioned entertainment. So I think it's that idea of learning and excitement which really brought me in. Yeah it was a big risk. I think you seriously rolled the dice. That said through that time I think most of the necessary infrastructure to service, I guess, institutional clients, big money has probably been built.

But are there things you see that are glaringly lacking still that need to exist, even if it's like a certain kind of contract or, you know, ways to manage risk, custody? Is there anything glaring you think that we still haven't built that was probably just not going to get past the risk managers of this sort of big wall of money that we still believe is coming? I'd say it's the simple stuff, the user experience and the customer relationship management. Because we have strong relationships with major exchanges, it's on a near daily basis that someone will say, hey, XYZ Exchange, they owe me $100,000 or $5 million. It's been a few weeks. We're not getting feedback on where it is. It usually does get resolved, but I think that clearly things have been moving too quickly and some consolidation is probably good. Right. In the bull market, just from the consumer side, had talked to cz on the podcast and a couple other

exchange ceos and they said that there was it would have been physically impossible no matter how large they were to ever scale customer service to the amount of signups that they were getting yeah i think a lot of them probably look forward to the bear market to catch up quite right yeah right i mean i think they mean they mean well and um in the end do right by their their clients, since they know that having that good client service is what's brought them to the level today. But, you know, I'd agree, probably the market needs to catch up. Right.

I mean, that answers the question, I guess, on the sort of infrastructure side and what needs to be built. You touched on sort of the UX UI side, I think we're probably further away from grandma being able to use and buy crypto than we are from institutions being able to come in. Do you think that's true? Grandma could go on Coinbase or use the app. I think that side is palpable, but I think it's more DeFi. Like some of the things happening in DeFi today, it really feels like it's magical where you press a button, you're on MetaMask, it goes from your browser to suddenly providing liquidity in the cloud. But as far as like you're not seeing any of that happening, you're more just pressing a button and you have to understand the theory around it. I think if there was more of a visual interface and dialogue in terms of what's happening in real time,

do you think that would make people feel more comfortable? I think just opening a MetaMask wallet and actually knowing what to do with your keys is challenging. Oh, 100%. Right, and that's just not something I think, well, either people are daunted by it and don't want to try it, or they do it completely wrong and they're the ones who are the victims of these phishing scams and such. I mean, it really does. I know there's scams in every industry. It just feels like, obviously, with the popularity is expected, but it feels like we've seen a major uptick. Yeah, if you're on Instagram, it's like most of my inbounds are crypto scams. It's a pretty sad state where we are today. My Instagram account is gone.

So I was getting five to 10 imposters a day messaging every single person that was following me, like Scott Melker with two L's or something. How's your trading going? But it got to the point where some of them actually convinced Instagram that my account was the fake one. Now I have no Instagram account. I'm lucky I don't have as many followers. No, it wasn't even that many on Instagram, but it shows you how much sort of, I guess, bad actors are focused on this because it's pretty low-hanging fruit. Totally.

So how do we get to the point where you log onto a platform and you can do all of this without those second and third steps and worrying about your keys and having to open a separate wallet and then having to send Ethereum from that wallet to somewhere else to do it? Yeah, I think there's different communities. Like when you think about the crypto insiders and this might be into the hundreds of thousands of people going, you know, not your keys, not your crypto. But I think for most people, they don't want to have to know what a key is. They just want things to work and be simple. So I think you're going to continue to have different communities that have different levels of knowledge. If you're a real builder in the

space, you want to know all the idiosyncrasies and probably want to be staying cutting edge and have regulations stay a little bit further away or keep it offshore, versus for your average user, I think we just need more regulations because time will bring better products, and those better products might just have better fidelity or less likely to get scammed on them. But I think it helps to have regulators come in and push out some of the bad actors and celebrate the good players. Do you think that's what's going to happen? I think it happens over time, but I think they might accidentally push out some celebrate the good players. Do you think that's what's gonna happen? I think it happens over time but I think they might accidentally push out some of the good actors and I think that they have limited resources especially

the SEC so they're often going after the the biggest groups rather than the smaller groups and it might be the biggest groups create a lot of the innovation and are generally doing things well. But I definitely see the SEC as a tough job since there's just the speed of things are moving so quickly. They can't vet 20,000 assets and determine individually which one is a security or not, and which one is powered by bad actors, and which one is sufficiently decentralized. But I guess we're all hopeful for some regulatory framework that makes sense. But you have to imagine with how slow they move, that it'll be a completely different space

they're regulating by the time they even decide. Also, it's just their scope is that it's based on the Howey test or it's not 1940s. It's also not based on whether it's a good investment or not. You could be completely legitimate from a regulatory perspective, but just have a really bad idea and people shouldn't be investing in it. So I think having the public be more informed and knowing, you know, what is the types of areas they should be investing in and what are the things to look for even outside the regulatory look. Do you think that's why the industry seems to be pushing towards the CFTC instead of the SEC? Yeah, I've certainly thought that because you have commodity participants,

you don't have commodity investors as much. So I think the CFTC is a bit more pragmatic in terms of being more broad and focused versus the SEC has a history of really specifically looking out for retail. I mean, but retail does need to be looked out for to some degree. I mean, you said. Yeah, no, it's true. Right. But I think we've even seen. Creators want to mute it a bit.

Right. But I think we've seen actually an evolution of people who sort of had this like F-regulation feeling. Now even are like, maybe some regulation wouldn't kill us. Well. Which is, it's a really interesting sort of paradigm shift because I think there's just so many people waiting for any sort of clarity to be able to operate. Certainly from companies, right? Nobody's touching the U.S. I mean... That's where all the investment's coming from. So they certainly want to have a dialogue with U.S. investors. But as far as the builders, from a tax perspective, from regulatory

screening perspective, a lot of people are offshore from the entrepreneurial perspective. You have to be nuts to try to operate in the United States, especially as your core base. But that hasn't stopped money from pouring in, sort of as you said i mean certainly vc andreason 4.5 billion not too long ago yeah dragonfly noted 650 million there's still absolutely massive money pouring into this space it just seems to be pouring in through venture capital yeah no i i do think that um you know if you if you look at what's happening in the the global macro economy you know crypto despite prices falling more than other assets, still continues to be one of the brightest spots.

Yeah. So do you have any fear now in this sort of bear market and macro environment that we might get the worst-case scenario, panic mode, that there's one side that's been screaming about the Great Reset or another Great Depression, or do you think that this time it isn't different and we move on? I think there's sort of two paths. It's either going to be a pretty blah environment

and not very sexy to trade or live through, where we have some pretty persistent inflation. But for political reasons, it's difficult for central banks to hike. But, you know, that could last several years. The other way is that it actually hike up interest rates and signal that they're going to be a bit higher and stay there longer than currently bond markets expecting. And, you know, maybe that'll be six months to a one-year span of risk assets really getting hit, but get inflation down to 2%. Then we could move on with a more normal type of investing.

So you're not seeing a scenario where the Bitcoin maximalist, the world melts down and it's all over and Bitcoin becomes a global reserve. Of course, I don't either. This is just another sort of bear market. And I mean, historically, Fed tightening cycles have actually not been that bad for markets. Yeah, I think the world keeps getting wackier each year that passes. So I want to say something's an impossibility. But I think that we've seen inflation before.

Maybe it was 30, 40 years ago where it's really been this much of a threat. I'm sure we'll get past it and crypto will as well. But I think that it's going to be an ugly path along the way. I mean, I'm always confident that things will end up going up in an election year. It may be a really long summer like last year, but maybe it's my pessimistic side, says that they'll pump markets in October, November, December, because they, I don't know, want to keep their jobs. Yeah, it's a really short-term, greedy decision, though, because if we continue pumping more money in,

then it's just going to look really bad two years out. Right, but, I mean, do you think that there's really a path to where they're going to stop printing money long term? I think that in front of going to wear our bed, that's generally what happens when you have a popular driven political regime globally. Yeah. Print more money. Yeah. Yeah. It's really hard to keep your job if you do austerity or send the world into a depression. Also, once you have all this borrowing, the way to make it cheaper to pay it back is to devalue the value of those dollars that you borrowed. Right.

So there has to be an endgame to that eventually, though, right? Yeah. What is that? More and more borrowing. I don't know. Endless money printing. So, yeah, it's a really interesting environment. More and more borrowing. I don't know. Endless money printing. So, yeah, it's a really interesting environment. And I have to say I'm a bit surprised at just how bad and quick it's been with solely really inflation being the only story.

Yeah. I mean, three years ago, we'd probably be talking about deflation now and demographics of all the first world countries not having enough births and technology keeping the level of wages too low. So, you know, hard to know what's going to happen in a few years. Yeah. So is there anything like before we conclude that's really exciting to you in the crypto space that's happening? Or do you think we're just sideways and choppy and waiting for the next moment?

I think that taking a bit of the fog away, it's easier to see top projects and top builders. And they'll probably attract just as much, or if not more money to them. So I think that there's some silver lining to what's happened now. As you mentioned, some of the top funds are still attracting capital, which is multiples of what it was a couple years ago. So I think that the people that were in this industry more for the short-term winnings or more because it was the hot thing to do, yeah, they might be leaving.

But I think the real core builders are going to be nose down. I think a lot of the best stuff really gets built in bear markets anyway. So maybe we won't have 20,000 coins by the time this is done. Maybe it will be down to like 16,000 or 17,000. Essentially.

Huge culling. Thank you for taking the time. I really appreciate it. Always a pleasure to talk. Thank you so much for listening to this episode. If you haven't already left a rating or a review on Apple Podcasts or Spotify, please do that now. Spotify just added ratings, so please go ahead and click that five star. I'll see you guys next time.