Unchained - Nadav Hollander on How Dharma Could Create New Forms of Debt - Ep.80

Episode Date: September 4, 2018

Nadav, founder of Dharma protocol, explains how it enables the borrowing and lending of crypto assets, what would happen in the case of default, and why it would make sense to do it in a decentralized fashion rather than using one of the many fintech companies in the lending space. He talks about what effect he thinks decentralized credit markets could have on the market capitalization of all debt, why it will likely enable forms of debt currently unimaginable, and who could benefit most from this protocol. He also dives into why Dharma doesn't currently have a token, how or whether it could work on a non-Ethereum blockchain and ways the for-profit company could someday make money. Thank you to our sponsors! StartEngine: https://www.startengine.com/unchained The Sun Exchange: https://thesunexchange.com Episode links: Nadav Hollander: https://twitter.com/NadavAHollander Dharma protocol: https://dharma.io The Dharma white paper: https://github.com/dharmaprotocol/WhitePaper/blob/master/DharmaWhitepaper.pdf To understand the similarities with Dharma, check out the 0x interview with Will Warren: http://unchainedpodcast.co/will-warren-of-0x-on-why-decentralized-exchanges-are-the-future New types of debt possible with Dharma: https://twitter.com/NadavAHollander/status/1032754247341756416 Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. If you've been enjoying Unchained, pop on iTunes to give us a top rating a review. That helps other listeners find the show. Sun Exchange is a solar power marketplace for the crypto economy. Sun Exchange members all over the world are earning cryptocurrency for helping to deliver solar power generation to businesses and communities in emerging markets. Visit the SunExchange.com to start earning.

solar powered money today. StartEngin is a regulated ICO platform with a community of 155,000 plus registered users that's focused on issuing tokenized securities. Go to startengin.com slash unchained for a 20% discount on setup services to launch your regulated ICO. This is not legal advice. My guest today is Nadav Hollander, founder of Dharma Protocol. Welcome, Nadav. Thank you so much, Laura. It's good to be here. What is Dharma Protocol? So, Dharma is a protocol that enables borrowing and lending of crypto assets on blockchains like Ethereum. So you can basically kind of think of it as this infrastructure layer that sits on top of the Ethereum blockchain that enables any internet connected application to programmatically tap into a line of credit or a vehicle of savings in the form of crypto assets. And so kind of our general goal here is to build the infrastructure today that in, you know, five years or so will power the financial services of the so-called open financial system.

So how does Dharma work? Walk me through an example of how someone might borrow money using the Dorma protocol. So there's a couple of things that are worth clarifying. So first of all, Darmah is a protocol and not an end user application in and of itself, right? So our users aren't necessarily borrowers and lenders per se, but more so application developers that kind of tap into our infrastructure and build the actual online storefronts for these experiences. Now, if we're going to kind of walk through this from the borrower perspective, like what it would look like for them to tap into a line of credit that was originated via Dharma, basically, at least today, the majority of volume on the protocol is sourced by, what we call relays.

So essentially, like, if you're going to have a debt agreement, there's kind of two things that need to happen, right? On one hand, you need some way of administering that debt agreement. So you need some way of actually kind of tracking how many repayments have occurred, of making sure repayments are sort of funneled to the correct beneficiary at any given time. And then you also need some way of actually like, essentially like bringing that debt agreement into fruition, like somehow matching the borrower and lender, finding a, essentially a source of credit for that borrower. And so in order to solve that latter problem,

we've introduced this concept called essentially reliers, which are these kind of like centralized actors that host some sort of order book online that you can kind of imagine is looking like a bulletin board where borrowers can essentially post requests for different types of loans. And then if a creditor comes in and decides that they want to invest in one of those loans, then that relayer is going to earn a fee essentially. This might sound very familiar if you're familiar with the with the zero X protocol. It is a highly analogous concept. And basically the idea there is that anybody in the world can start one of these relays. You don't need permission from from Dharma Labs. If Dharma Labs is to go like bankrupt tomorrow, this mechanism could still function essentially. Yeah. For listeners who

have not heard my episode with Will Warren of Zero X, you should definitely go back and check that out because he did describe very similar concepts. So what problems are you trying to solve? Like, what problems in debt or lending can be resolved using this protocol rather than a centralized service? So, yeah. I mean, first of all, at like a higher level, I'd say that just in general, if you've been in the blockchain industry for a while, basically, like, there's always been this concept of quote-unquote banking the unbanked that's been very popular as a supposed use case for

blockchains, i.e., like building financial services that are fundamentally globally accessible and more equitable and transparent, et cetera. Realistically, like, that utopic vision of like, you know, we're going to bank the $2 billion on banked using cryptocurrency. Like, that's probably a little far right now. But if you kind of start there and work like backwards in terms of the things that we need in order to enable that, there's a lot of fundamental building blocks that need to be created. This includes things like stable coins, aka tokens that are in some way pegged to a stable fiat asset. Or this includes things like having like good derivative markets or good mechanisms for actually trading tokens. And crucially, one of those pieces is having a robust,

decentralized credit market. Because if we zoom into the future and imagine one day that a, you know, a borrower in Ghana is on an application on their first. phone and they press a button and they're instantly able to access some sort of line of credit in the background that like application needs to somehow be able to tap into a decentralized credit market in order to actually source that liquidity. And so essentially the problem that we're trying to solve is basically to fill that gap. We're trying to basically build a both a decentralized manner of matching borrowers and lenders for credit liquidity and a decentralized manner of actually administering a loan

throughout its life cycle without having to have any sort of intermediary standing between the borrower and the lender. And there are actually a lot of fintech companies now that do this kind of thing. You know, maybe a lot of the ones I'm thinking of actually mainly serve the U.S. markets, but I do think there are ones that are maybe more international as well. So why is it better to do this in a decentralized fashion rather than on some of these really big services like Lending Club or SoFi or whatever it might be? So I think it's crucial to remember that while the internet has kind of evolved in a manner where it's kind of, it has no real conception of borders and is kind of like globally accessible, you know, with an asterisk there for like certain despotic countries. It's not like if you're in Ghana or in Karnatica, India or in, you know, name X country. It's not like you can go to lending club.com and take out a loan from that website, right? And the reason for that is that while,

the internet doesn't necessarily have like robust concepts of borders. The banking system, which pretty much any sort of financial service today is heavily coupled to, very much so has a concept of borders and very much so is kind of coupled to geographic locales. And so that means that it's like, it's, it's not like if you're a lending club and you're trying to expand operations,

it's not like it's trivially easy to turn the lights on on, you know, enabling support for like, Ghana or something like that, right? Because there's this like highly friction laden bottleneck at the point of the actual banking infrastructure. And so the argument that I would make is that with something like a decentralized credit market where there's no sort of centralized institution that needs to kind of stand as a cog in the middle, there's so much less of a regulatory burden that needs to be undertaken by some sort of central party that's going to kind of bring together the world's credit

markets because there is no central party, right? And it's kind of like, it's kind of like imagining, like, what would the internet have looked like if like instead of being created on top of open standards, it looked more like an AOL or instead was kind of like this like closed network that, you know, people had to be permissioned onto. And so I would argue that by having a decentralized network for actually sourcing credit liquidity, you kind of, it's almost like a regulatory arbitrage in some senses. Well, in that regard, if there's, are certain regulations around like who can lend to whom or under what conditions, then could those be circumvented using this? And so in that sense, is this a way around those regulations?

Like, is this, you know, basically going to lead to illegal lending? I don't necessarily think that that is the express purpose of it. And I don't think that that's like what will represent the majority of what happens on this platform. Look, in general, when you're when you're touching cryptocurrencies, the whole, the whole idea, idea of this asset class is that like with permissionless innovation, a lot of use cases become essentially a lot more user friendly and a lot more globally accessible. And that's great. But permissionless innovation is very much like a double-edged sword. And this is, you know, I'm sure you've been in this industry for a long time. This is discussed in pretty much like every

use case that's ever been discussed in cryptocurrency has its dark side. I feel like this is like a question that comes up in every one of my podcast episodes. Yeah, no, no, definitely. And I think that it's like it's something that that us as technologists in the space have to like wrestle with, which is like what are the negative consequences of what we're building. I would argue, however, that much like the internet itself, which had its terrorist chat rooms back in its heyday, and back in its salad days rather, and that was an easy way to write off, you know, a permissionless information networks capabilities. I would argue that as a nice heuristic, like empirically, these things tend to turn out net positive.

And so I think that the amount of people that would benefit from being able to access a line of credit online who may not have previously been able to will outweigh the drug dealers and traffickers who may be able to access credit when they were prior not unable to. One thing I thought you might say there was that the underwriters and the real errors themselves could kind of like impose those, you know, regulatory restrictions. But but you, but they actually can't. Is that what you're... They actually can, right? So, I mean, that's actually a very fair question. So I think it's worth, like, taking a step back and perhaps, like, giving a much more, like, step-by-step overview of how the protocol works. I think I gave a very glossy, high-level explanation earlier.

So maybe I'll, like, dive into more of the nuts and bolts. So essentially, there are two different actors, classes of actors in the protocol, right? There are what are called underwriters and relays. And so relators, as I explained previously, are essentially these centralized actors that host orders. from borrowers and essentially match them with lenders in some capacity and earn fees for that. Now, naturally, the question that comes up is like, okay, like who, like how am I supposed to know as a lender on this network that a borrower is credit worthy when they're just, you know, an address of letters and numbers with no kind of prior history.

And so this is essentially where the concept of underwriters comes in. Underwriters are centralized actors that basically vouch for. their belief of a borrower's likelihood of default. So essentially a borrower is going to come to them and the underwriter is going to say, I believe borrower X has a Y percent chance of defaulting of their loan. And they're going to cryptographically attest to that. And the idea is that similarly to the relays, they could, they would like earn a fee essentially if that loan is filled.

So taking a step back to your question, yes, that is correct. As in like, like the relators and underwriters, if, they were to have somehow facilitated, you know, a transaction, let's just say, to an OFAC sanction individual, like somebody who's like in Iran, let's just say, then yes, they could face legal consequences to that. And so it's likely that they would have to implement some sort of check to make sure that that doesn't happen. But I think in the abstract, like, if we're talking about a network in which anybody can build a relay or anybody can build an underwriter, that doesn't necessarily categorically mean that every relayer and underwriter is going to be

benevolent and compliant. I find this to be kind of analogous to just like Bitcoin in general, right? It's like you can buy and sell Bitcoin on many different exchanges. Those exchanges very much lie on a spectrum of how much they respect the sanctity of, you know, various money transmission and securities laws. Huge spectrum. In a very, very large spectrum. Right. So I think that it's a similar sort of dynamic. And our philosophy is that it's like these like jurisdiction-specific compliance protections don't necessarily belong at the core protocol layer. And that it makes a lot more sense for those to be essentially enforced at the application layer instead.

Let's go back to the underwriters. How do Dharma underwriters assess potential borrowers creditworthiness? Is it just each has their own method of doing it? So, yeah. I mean, so we don't necessarily define exactly how they're supposed to do it. The whole idea is that it's basically, there's this marketplace for underwriters, right? And these underwriters are kind of like known centralized institutions. And if they do a particularly good job of underwriting loans, then that will be like

markedly visible on chain, right? Because you, let's just say, like I am considering. making an investment in a loan that a certain underwriter has vouched for. I can look up all loans that are associated with their address. I can see the sort of predictions they had made as to the borrowers creditworthiness every single time. And I can compute kind of a heuristic score of that underwriter's quote unquote trustworthiness. And so at the protocol layer, we don't necessarily define, like, you know, the underwriter has to pull a FICO score or they have to go and, you know, like, I don't know, like get a blood test done on, like,

the borrower or, you know, use some crazy data points. Like, you know, these things, like, these things lie completely and defined at the protocol layer because essentially the incentive mechanism is set up such that, like, underwriters by whatever, like, by whatever magic method, if they're really good of their job, they're going to get more business. And if they're really bad at their job, they're going to get less business. And do you imagine that the underwriters will be, like, existing underwriters or new types of underwriters that try to take advantage of this protocol? So I think that's a really interesting question. So, you know, like, I find it less likely that these will be kind of traditional debt underwriters

and much more likely that these will be upstart lending businesses, particularly trying to underwrite classes of debt that don't really even exist in the real world right now. And I'll give you a couple examples. So there's a lot of like use cases for lending that are like highly specific to the cryptocurrency industry and wouldn't have made sense in a sentence like if you were to talk about them 10 years ago. So, so one example is like, there's this emerging class of crypto collectibles, right? The most notable example of being crypto kitties, but, you know, there's, there's tons of these nowadays. I think, I think if you go on OpenC, which is an exchange for buying and selling these,

there's something like, you know, like a million different NFTs listed on there. It's something crazy. And so something that, something that we're really interested in is like, these, these non-fundable assets can become extremely valuable, right? And essentially with Dharma, you can actually, take a loan out against one of those assets. So you could like almost in the same way that a mortgage is a loan backed by a house, like you can take like, you know, your extremely rare crypto kitty that's worth $100,000 and take out a line of credit against it. Now, you know, you might be wondering why I'm talking about this in the context of underwriters. What's kind of funny about that is that if you're a creditor and you're thinking about investing in this kiddie backed loan per se, somebody needs to

appraise the value of that crypto kitty, right? Somebody needs to, like, come in and actually be able to, like, assign, like, what would be the fair market value of this crypto kitty today? And insofar as that's the case, like, what is the likelihood that, you know, this lender would not be made whole if, like, the borrower defaulted? And so I give that example because it's like, you can imagine that an underwriter emerges that focuses essentially on appraising the value of digital collectible assets. And personally, I find those sort of niche classes of crypto-native debt to be much more likely to emerge than for a kind of traditional underwriter of like, you know, unsecured personal loans or like, you know, credit card refinancing or what have you jumping into this market.

Because like it's, you know, like the U.X in this space is so difficult. Like all around, right? Like it's like like like like even just even interacting with the D.S. in any capacity, requires you to, like, do crazy stuff, like install MetaMask and, you know, save your seed phrase and all this sort of stuff. So we find it much more likely that the use cases that are going to be compelling in the short term are going to be people who want to borrow crypto assets and are like comfortable interacting with crypto assets. And so I think naturally as a result of that, that means that the sorts of underwriters that

will be attracted to the network will similarly be kind of crypto-native. What happens in that case where someone puts up a cryptocurrency as collateral? But then the value of the CryptoKitty falls. How does that work? Well, so it's interesting you say that. So we're actually at the moment working on adding margin calling functionality to the network. This is perhaps more relevant with like fungible assets, like with like say something like if you had ether up for collateral. And, you know, you have like a regular spot price for that ether.

So with a crypto kitty, it's a little bit harder to say, but I can tell you that in the concept of that if you're talking about a loan that is backed by a fungible asset, essentially when the collateral drops below like a certain threshold, then the collateral becomes eligible for liquidation. And so I guess you'd have to, in the crypto kitty example, you'd have to get some sort of like rolling notion of like what the crypto kitty's value is. But that's kind of hard to do because it's a non-fungible asset. and not necessarily like something that you can pull a spa price on like ether. Okay. So what happens if a borrower defaults? So this is very case by case, right? Intentionally, we've built the protocol to be like very flexible and unopinionated.

And so essentially you can kind of think of it as like there's like an open source set of loan templates that people can use in the protocol. And they define everything from like super simple unsecured loans to loans that are collateralized with some sort of non-fungible token to loans that are, you know, very, like, very much oriented towards speculative use cases and are like, you know, intended for, say, like, shorts and things like that. And essentially, like, the, each of these classes of loans has their own sort of default deterrence mechanism associated with them. So right now, you know, we've been live on May net since around May. The vast majority of volume in Dharma is represented by,

like loans that are overly collateralized by some other asset, right? So it'll be like, I put up $100 of die and borrowed like $50 worth of ether against it. And the basic default deterrence mechanism there is that if I don't pay back my $50 worth of ether, then my die is going to get seized by the lender. So it's very simple. But there are other classes of loans in which the penalties for defaulting could be very different, right? Like, you could imagine that there would be an underwriter that essentially originated the borrower, right? They kind of, the borrower comes to their website, applies for a loan. The underwriter approves them, kind of assigns a sort of score of them.

And then in addition to actually, you know, taking their order and forwarding it off to a relay in order to kind of complete the lending process, they actually have the borrower sign like a meat space like lending contract, right? like a real legal contract that has some like real legal stipulations as to what might happen to them if they were to default on the loan. And the underwriter has an incentive to do that because they are, you know, they're going to get compensated on the basis of how good of a job they're doing because if they, you know, if they underwrite a lot of good loans, they're going to get more business.

Right. So, so, you know, in short, we've intentionally kind of left that portion undefined and instead try to define the incentives of the protocol at large such that if you're underwriting and originating good debt, then you're going to get compensated more by the market. Okay. And to take a step back, how are debts paid back? So this is actually kind of like one of the beauties of the protocol is that in the traditional financial system, there's this construct of what are called paying agents, right? where essentially like if a loan like let's just say you take out of mortgage that bank like now owns like

that loan right they own the right to be repaid or to you know foreclose on your house and what tends to happen in the financial system is that they're going to go and then you know sell that loan to some other bank and then that bank is going to go and you know package that loan with a bunch of other loans and then take that package and sell it and so on and so forth and the problem is is that if you're the borrower like you this is totally unknown to you. in the background. And it's not like you know who like the end user is that actually is the final beneficiary of your loan at any given time. All you know is that you need to like, you know, pay back a certain, you know, through a certain portal on the bill that got sent to you in the mail.

Right. And so the person who's taking that buck is a paying agent, right? They are a person that's whose job is to basically take the money and, you know, by some way, shape or form funnel it to its correct beneficiary as stipulated in like various legal contracts. Now, the way that Dharma works is that essentially we do away with the concept of there being any sort of individual that has to keep track of who owns the loan. And instead, we have a smart contract that administers the entire lifecycle of the loan. So, so you can imagine that in the Dharma example, if Alice were to lend $100 to Bob and then Alice were to go off and sell her loan to, you know, Charlie, Bob doesn't need to have any sort of knowledge of that. If Bob wants to

repay his loan, he basically sends his money back to like the loan smart contract. And the loan smart contract automatically routes it to whoever is supposed to be the given beneficiary at that time. And so essentially, you kind of get to add a lot of the efficiencies of essentially like cryptocurrency trading, but to the world of debt capital markets. And so basically the borrower needs to put the payments into whatever address it is that is, you know, delineated in the smart contract to make those payments from. And if they don't, then it goes into the default mode and whatever it happens and the default is determined by the underwriter? It's determined by the loan contract itself. And that can sometimes be adjudicated by the underwriter,

but often it can be some sort of penalty that has nothing to do with like any sort of underwritten agreement, right? Like the majority of the loans in Dharma today, there is no underwriter even involved in them. It's just a contract that holds the collateral and that if the borrower does not repay, then the collateral gets seized. Okay. And earlier you talked about serving these kind of unbanked populations, but you were mainly naming ones abroad. Are, like, can you just tell me all the populations you think that could be served by this protocol now that are not served by the traditional credit markets? Yeah, super good question. So, so I think I can answer this in like kind of like two tiers, like one which is like more realistic like today use cases as in like, you know, not pie in the

sky sci-fi sort of stuff. And then like the kind of like five years out or 10 years or whatever the time horizon is that we think it is, that's realistic. So so in the long term, I think like yes, like there are, you know, something like two billion unbanked people in the world and all of them are rapidly coming online, and though they can go onto Facebook.com and make a social networking account, they can't necessarily go onto Lending Club and take out a loan. So I think, like, in the long term, like, these are the people that were really excited about. There's a lot of credit markets in the world that have just, like, totally insane conditions that aren't even necessarily like third world countries per se. That would benefit a lot from things like this. For instance, Brazil has some of the

highest APRs in the world. And, you know, is solidly like a developed country. very technology literate, very modern, but just because of just the way the like, like, socioeconomic reality on the ground has developed, like APRs are just like totally insane. Now, that's all like long-term stuff. And I think like it's, you know, it's fun to think of that sort of stuff, but like realistically until cryptocurrencies are more scalable and easy to use, that's like probably not what's going to happen. I'd say in the short term, the people who we think most about are either people who are, like very much on the margins of the current Western financial system, or are people in the

cryptocurrency industry specifically who for some reason need to access a line of credit? So in the latter category, the kind of line share of it is basically people who are trying to borrow and lend for speculative purposes, right? It's people who are essentially like, I need to, you know, I feel bearish about a certain token and I want to short it. And so I'm going to borrow that token and then sell it and then purchase it back later and return it. Or it's people trying to get leverage on their assets in some capacity. But I think that like that category of crypto native use cases actually has a lot of facets that aren't necessarily speculative,

but that just kind of like solve problems that are niche to that actually crypto ecosystem, right? So I'll give you a certain example. Are you familiar with what plasma is? Yeah. So plasma is this kind of frame. framework for scalability on top of Ethereum. And essentially, like, the way the concept works at, like, a really high level is that you take your tokens on the main chain, you deposit them onto a plasma chain.

The plasma chain is, you know, presumably much more efficient. And then once you want to, like, go back to the main chain, you need to, like, withdraw your coins out of there, right? The problem is, is that for a whole bunch of different reasons, when you're withdrawing those coins, there's kind of like this, like, seven, to 14-day, like, thawing period, at least in the current designs that they have for it. And that's kind of a crappy U-X if you're like, you know, a normal user of any application ever. Like the normal thinking system.

Yeah, like the normal, yeah, exactly. And we're trying to build things that are better than the normal banking system, right? And so I think there's like, this is an example of somewhere where there's a really interesting use case for debt, right? Because essentially, if you had somebody that just fronted you the money, like, right off the bat and kind of was able to like buy the risk of that, you know, of you defaulting essentially because of, you know, X, Y, Z technical reasons in the plasma specification, then we can make U.X like much, much better, right? Right. And so I like to list that as an example of, like, they're being crypto-native use cases

for borrowing and lending that aren't even like underserved now. They're just entirely unserved right now because they, like, don't exist. And they aren't even necessarily speculation-related themselves. Now, and before I forget, I wanted to go into the kind of other category of what I view as being use cases that are viable in the short term, which are like people who are kind of on the edges of the financial system, even in like the Western world today. And this is like a really interesting category of people, right? So one example would be like gray market businesses. So for instance, like if you are a marijuana dispensary, right, it's not necessarily you can go over to a Wells Fargo and take out a loan from them. because they have a million and a half different compliance requirements that are going to

forbid them from doing that. And so I think it's really interesting to imagine a world in which the sort of like this emerging cannabis industry, which is projected to be like bigger than the wine industry and is just growing at this like unbelievably rapid rate is able to access credit financing in a manner not unlike how people raise ICOs right now. And so I think a lot of use cases on the kind of margins of the financial system. like that are interesting as well. Interesting. Yeah, I feel like every conversation I have is somewhat similar where people

are saying, like speculation is one use case and then sort of these kind of regulatory gray areas. We're going to discuss why Dharma doesn't have a token and how Nadov got into crypto. But first, I'd like to take a quick break for our fabulous sponsors. Interested in raising capital through a security token offering, Start Engine is your full-stack solution. Start Engine, a regulated ICO platform with a community of over 150,000, 55,000 registered users was founded in 2014 by Howard Marks, co-founder of Activision Blizzard. Since the implementation of the Jobs Act, StartEngine has helped over 160 companies raise capital. In fact, StartEngine can help a company build its own tokens and is creating a secondary

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places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us because local news is big news. Choose news, not noise. CBC News. Actually, when I was reading about all the things you can do with Dharma, there were a couple things that you had written about or spoken about on podcasts that interested me. And I just want you to like briefly describe them. Yeah, totally. Initial debt offerings or tokenized SAFs. Yeah. Trustless savings accounts and tokenized municipal bonds. Yeah, definitely. So, um, okay, what was the first one on there? The tokenized SAFs. Yeah, the tokenized SAFT. Yeah. So something that, this is something that we're like pretty

interested in. We haven't seen anybody do it yet. But basically it's like, like the, the ICO boom that happened in 2017 was almost entirely based around like selling tokens to the public that had like equity like properties to them, right? Like, you know, people buy these things because they think they have like a certain chance of going to the moon or they're going to go to zero. And what's kind of interesting is that in the real world, like, equity-like assets are actually a much smaller of the global economy, a much smaller portion of the global economy than like debt, right? Like, I think, like, the, you know, I'm going to pull these numbers out of my head right now, and they might be a little bit inaccurate. But I think, like, the global market cap of, like, equities is, like, somewhere around, like, 70 trillion, whereas, like, the market cap of global debt assets is, like, $210 trillion or. something like that. And so it's kind of interesting to imagine of like, what if we could take

the ICO model and apply it essentially to like debt fundraisers, right? So essentially, you could benefit from selling tokens that like plug natively into this kind of infrastructure for this global infrastructure for either custody or trading or, you know, building on applications on top of or whatever crypto assets and have them be debt assets like, you know, that look much like, say, a corporate bond would. So one use case that we're pretty excited about is just really like allowing companies of all shapes and sizes to be able to like raise debt from the general public in a way that has a very low kind of initial fixed cost to get set up.

And what about I'm interested in these trustless savings accounts and the tokenized municipal bonds as well? Oh, yeah, yeah, okay. So trustless savings accounts. So again, this is this probably falls into the, the, a bit. more sci-fi category, but we're really excited to see somebody build this out. Essentially, if you have, once you have like a good decentralized credit market, right, and you have all these different, like, classes of debt that an application can kind of go in and source liquidity from,

you can imagine that we created a savings account that was entirely administered by a smart contract. And so you could imagine like savers would put their funds into this smart contract, and the smart contract would automatically invest in certain classes of loans of a certain risk threshold from the Dharma Credit network. And so it's this really interesting concept where you're like, you can imagine basically like banks existing that have no person at the helm of them and have no marketing budget and have no compliance budget. And there's no person that has to like sit there in a suit and shake hands with you. And so like a tremendous amount of inefficiency is kind of like shaved out of the system. And so we're really excited about seeing that that concept come to fruition. Though I would argue that it's kind of like a, that's like we're at step one right now.

That's like step five or six, right? Yeah. And the last one, tokenized municipal bonds. And then tokenized municipal bonds. Yeah. So I think this is a really interesting concept. There's a lot of municipalities in the world who aren't necessarily. So sorry, let me take a step back for a second. Municipalities raise debt all the time, right?

Like municipalities need to like build parks and they need to like invest in schools. and they need to invest in public infrastructure in different capacities. And so they'll often go to an investment bank and have that investment bank help them issue a municipal bond. And this is how some like the most iconic infrastructure in the world was built. And that's great. And this system functions fantastically. But it doesn't necessarily function equally well for everybody. Right. Like there are a lot of people or a lot of municipalities, particularly outside of the Western world that may not have access to the same friendly credit conditions that, say, a San Francisco might or, you know, an Oakland might or what have you. And so it's interesting to imagine, you know,

the concept that I kind of outlined earlier of like a business doing a debt ICO, taking that and kind of extrapolating it to the next step where you have a municipality or even a sovereign nation issuing debt on chain and selling it as a token. So it's, you know, again, this goes back to like the double-edged sword conversation because, like, there's a lot of municipalities and sovereign nations that like, rightfully so, we don't want having access to the financial system, right? But I would make an argument that I think that if you open up this market more, the benefits will outweigh the cons.

Yeah, that's been a theme in some recent podcast because we've been talking about like what's been going on in Venezuela and stuff like that. Right, right. Exactly. Yeah. It's like what happens when in Venezuela, like, tries to like raise a bond on the blockchain. Right. Right. In addition to their petro. Yeah, yeah. I'm speaking with the Dov Hollander, founder of Dharma Protocol. If Dharma Protocol takes off, how will that change the way people borrow and lend? And what other impacts do you think it could have, you know, maybe on the size of the debt markets or anything else like that? Yeah. So I really, I pretty strongly. feel that if Dharma is going to actually kind of like, you know, if the rubbers are going to,

if the rubber is really going to meet the road and we're going to have a lot of traction, I don't necessarily, I find it less likely that that the use cases that will take off will be like the traditional sort of like use cases of debt that we imagine today, right? Like I find it unlikely that like that the way people are taking out mortgages is going to like entirely shift onto Dharma's infrastructure. in the next five to ten years. Because at the end of the day, like, in the Western world, like, credit markets function, like, pretty well. Like, it's a pretty saturated market already. Right. And so I think that if we are successful, it's going to be in use cases that are initially

very niche and are very specific to the crypto world. And as that world expands and kind of bleeds its way into various aspects of people's day-to-day life, then I think we're going to serve use cases and classes of debt that are really, really hard to imagine right now. But that make a lot of sense in that sort of crypto or digital native context. And so it's kind of like you imagine like, yeah, like the, the borrowers who, I gave you the example of like collateralizing a crypto kitty earlier, right? And a crypto kitty is a type of non-fungible token. Another type of non-fungible token is, you know, like this, there's this project called

Decentraland, where they're basically like, they basically sold like plots of virtual reality land on chain, which is this kind of kooky concept. But if you kind of take that and you look at what one of those decentralized land plots are, like that is similarly a non-fungible token, right? Right. And so you can imagine like literally borrowing against that decentral land plot

in order to finance like a, you know, virtual reality real estate development on top of it. And then to sell, you know, tickets to people who want to like put on their headsets and like walk through it or something like that. Wow. And so, and so, like, I give that example because it's like, it's like, I view that as like a class of debt that makes like no sense in the current, like, real world, but that makes a lot of sense in a totally digitally native or crypto native context. And I think that there will be many of those sorts of use cases, things that are very difficult for us to imagine right now. And I would

conjecture that that means that like in the future, like the market cap of global debt will be much, much larger because debt will essentially kind of bleed its way into markets that it previously has not because we never really had the ability to like super cheaply spin up debt assets and super cheaply raise debt for different use cases. Interesting. Yeah, what you just described, it was like Monopoly meets VR or something like that. That's a great way of money. A couple of things I wanted to ask you about, you know, you talked about zero X law. You talked about how the real layer's idea is, you know, very similar to zero X. I know, So Dharma is built on Ethereum.

What is the relationship between Dharma and things like X and Ethereum? Could you switch to another blockchain or how easy would it be to add other blockchains? Yeah. Yeah, that's a fantastic question. So I'll answer first of all the question about zero X. Because I think there's kind of two answers here about like our relationship to something like a zero X versus our relationship to the Ethereum blockchain. So X, I would put them in a category of like a, a, you know,

being a crypto financial primitive, as in like sort of a basic primitive operation that is a building block for a whole lot of different types of financial instruments and eventually financial services. And I would put us in a kind of a similar bucket in that like we're kind of like this building block that will eventually be used likely alongside things like zero X or DYDX or set or, you know, there's a whole bevy of these different crypto financial primitive protocols in order to construct financial services that are globally accessible and fundamentally transparent. So, yeah, so that's kind of how I describe our relationship vis-a-vis zero-x. As opposed with respect to the Ethereum blockchain, right now, there's not really any other,

like, show in the game in terms of, like, a blockchain that you can meaningfully build an application on top of. That will likely change. And we are not, like, dogmatically wedded to being built on top of the Ethereum blockchain, it's just like extremely unclear what the multi-blockchain future looks like and how these sort of meta-protocols like 0-X and Dharma will be structured in that multi-blockchain future, right? Because you can imagine on one side of the spectrum

that there will be many different blockchains and that these blockchains will kind of have a distribution like operating systems, right? It's like Android and iOS, right? And so, like, every application developer will make their Android app or their iOS app. So, you know, if you stretch that analogy to blockchains, you can imagine, like, every X or Dharma will have a deployment on DFINITY and have a deployment on Ethereum and have one on Tesos and, you know, you name it.

So that could be the way that it pans out. But it could also be the case that these kind of interchane interoperability protocols really take off and the whole concept of individual blockchains is just so heavily abstracted away that it doesn't even necessarily matter that like, you know, that a zero X or a Dharma basically sits a layer above that and operates across blockchains and there's not really any sort of concept of like what chain you're on at any given time because these interoperability protocols make these seems so things so abstracted and seamless. And so in summary, I'd say like, I could try to like, you know, prognosticate here and like tell you like,

like what exactly is the way that this is going to pan out for like a Dharma zero X? But the truth is like nobody really knows. And at this point in time, like really the only viable option for building on top of Ethereum. Okay. Yeah. Sounds like a wait and see type of answer. Yeah.

That's not a cop out. No, no. Not at all. Not at all. I think it's smart. So you guys could have easily done a token sale, you know, in the height of the ICOM mania last year, but you chose not to. Why not?

Yeah, so I have always, I've been, I've been very fond of the token kind of model in general. I do think there's a lot of promise to it. I do think that it's very possible that tokens are kind of like the future of capital formation and yada yada. But circa back when we were, you know, potentially considering doing something like a token sale, everything was super murky. And everything still is super murky right now. And when I say everything, I mean like not just, you know, regulatory aspects. like that's that's one issue but even if we were to put aside the sort of regulatory murkiness of

these things it's like it's not entirely clear yet how and when tokens capture value from the projects that they uh you know espoused to be tied to even ether mind you um and the the kind of economics we used to explain these things are highly highly unproven and i think like like cynically we could say that like right now like the crypto markets are much more reflection of people's like loose thoughts of like how successful a project or protocol is, then it is actually like some sort of fundamental valuation of what these assets actually are. And so from our perspective, like we didn't really want to like raise money on a token. If we in our heart of hearts didn't even really know if that token would accrue value if like what we built was successful.

And so our approach is similarly to the kind of wait and see approach that I mentioned earlier is like, you know, we're not dogmatically opposed to doing a token maybe one day, but right now the market is just so nascent and young, and it's just so unclear how these things operate and how these things accrue value that we think it just makes a lot more sense to focus on just building a core ecosystem and getting a lot of people essentially borrowing and lending on Dharma and figuring out our value capture later down the line. And do you make money now, or do you have a plan for how you will

eventually make money? We do not make money right now. No. So we aren't taking any sorts of fees in the actual protocol level. We have no plans of inserting fees at the protocol level at any given time. Even if we wanted to insert fees at the protocol layer, everything is open source, so it could just be forked away. As for what our plans are in the future, like, you know, we are not a non-profit. We are a for-profit company. So we do intend on in some way, shape, or form capturing value. We just are very much like, we kind of take a deliberately ambiguous approach to it now, where it's like there are many different routes we could take to capture value in the future, ranging from, you know, providing basically like consulting services to enterprises who are trying to build on Dharma, a kind of like the red hat model with respect to their open source distribution. Or it could take a route of us essentially building products and services that in some way serve constituents in the actual. actual ecosystem and that, you know, give us revenue in some capacity that way.

And I think, like, an analogy I like to use is that, like, imagine if, you know, SMTP, the protocol for email, right? So SMTP is a protocol that makes it so that if you send an email from Outlook to Gmail, you know, it's all going to go through fine. You can imagine, like, if Google had developed SMTP originally and then built G Suite on top of it and kind of monetize it in that capacity, I think. think that's a great example of what it could look like for an open source protocol to be developed in a manner that's totally free. And then for a company to come and build services

and products on top of it that serve users of that protocol in some capacity. Yeah. I imagine your VC's like PolyChine Capital and Y Combinator and some of the others will be interested to know what your future plans are. I think we've been lucky enough to have investors that are quite comfortable with this ambiguity. And we think that it's just, we're at a point right now that's too early, at least in my opinion, to try to shoehorn a business model onto this when we're really just kind of like getting the race started right now. Okay. Yeah, I want to let people know what your background is because when we first met, I was shocked to find out that you had just graduated from Stanford in 2017.

And it's similar to when I, you know, first discovered how young Joey Krug was. I could not believe in. He was recently on the show. So tell us your background and how you got in a crypto. Yeah. So I got into the crypto. So I used to be a student in Stanford. And I was, you know, studying computer science. And it was like 2015. And I took a class or I was sitting in on this talk that Eric Schmidt from, from Google had given. And this is like really at the peak of like kind of like blockchain, not Bitcoin stuff. And at one point, somebody in the audience asked Eric Schmidt about like Bitcoin. And and, you know, he basically gave like the blockchain, not Bitcoin. He was like, yeah, you know, Bitcoin's interesting, but like the technology behind it is like super, super interesting, blah, blah.

And so I kind of came away from that being like, huh, like blockchain, like what does that mean? And lo and behold, in the fall of 2015, was it 2015 or 2016? Sorry, I'm getting mixed up. Anyways, in the fall of what was then my junior year, I took a class to Stanford called Bitcoin and Cryptocurrencies. and it was the first time that it was taught. And I just totally fell in love with the space and just completely just thought that this was like the most exciting thing happening in technology.

Ended up meeting Fred from Coinbase because he came in and gave a talk at that class. And kind of as a result, ended up working at Coinbase for a while as an engineer kind of as I was finishing up school. And then on the side, I'd started working on Dharma. And as soon as I graduated, I kind of turned that into a full-time profession.

And how did you come up with the idea for Dharma? So when I was at Coinbase, I was pretty struck by the fact that Coinbase just like sits on so much crypto assets. Like, then like for the most part, they're just entirely stagnant. Like, it's not like when you put your money in a bank account, it's, you know, accruing interest for you because the bank is presumably lending that money out to other people. Whereas if you put your kind of Bitcoin and Coinbase, it's just kind of sitting there, riding the waves of the Bitcoin market.

So, you know, in my head, I was like, wow, we have borderless currency. Like, how cool would it be if we had, like, a borderless bank? Turns out that's, like, really hard for a centralized institution like Coinbase to do because there's just, like, nine gazillion different regulatory issues that they have to be concerned with. And this is, like, not their number one priority. But this had kind of jiggered the idea of, like, wow, we have, you know, a decentralized borderless currency. What if we had, like, a decentralized borderless credit market? And so I kind of started tinkering with that idea there.

And it's evolved into what it is today. And why the name Dharma? Like I, you know, I am a former yoga teacher and am interested in meditation. So I was like, that's a Buddhist word. I was like, what does that have to do with anything? Well, I mean, it really depends on how, on how you cut it. It's both a Hindu and Buddhist concept. Okay.

But so the reason why I chose, chose the name Dharma. So I'm, like, deeply fascinated with Indian culture. I've spent like a good amount of time living there. and I think like Dharma is this concept that doesn't really have like a single English word for it, but at least in Hindu culture generally refers to like acting in accordance with one's like obligations and duties. And I thought that that was sort of fitting to the kind of concept of what a debt is in that a debt is basically like an obligation. And so if we're talking about like kind of like creating a universal comprehensive system for

settling these obligations, I thought that Dharma would essentially be kind of a fitting title. Interesting. I like it. I actually want to go back to Stanford now and just ask one question. Yeah. You kind of mentioned sort of like what the atmosphere was around like blockchain versus Bitcoin back in 2015. Yeah. And just out of curiosity, how did the attitude around Bitcoin and crypto change within Stanford during the years you were there? Oh, man. Not tremendously, but I also like literally graduated right before this whole explosion of interest in and cryptocurrencies happen. So I know now things are different in that like like, you know, I've gone back to campus now

and like there's, you know, a big like blockchain club and there's, you know, like all sorts of people from like the GSB and stuff that are like trying to like get into like blockchain and cryptocurrency. So, you know, it's very much like it's changed from this thing that was like a bit of like an off-kilter technical curiosity to being like very front and center. which I'm sure is the case in probably most universities. Yeah. Katie Hahn and Susan Ate.

They taught a class of the GSB in crypto in this spring. And I think it was like oversubscribed. Oh, yeah, yeah, yeah. So, um, so you guys recently launched. What kinds of volume and behaviors have you been seeing in terms of the loan activity on, on Dharma? Yeah. So, so there's been around something like, like, almost 150K in loans that have been issued via Dharma since we launched in May.

The vast, vast majority of these, I'd say, fall into the kind of like speculative camp as in like they're basically people who are trying to either like leverage their existing assets or like short certain assets. And because right now there's not for a lot of ERC 20 tokens is not really a good way of doing either of those things. Like I think that that's kind of the primary driver of volume right now. But we've been seeing a lot of really exciting and interesting development interest and in terms of like companies that are like in the. pipeline right now for use cases that aren't necessarily speculative per se. And, you know, we can dive into some of those if you're interested, but, you know, they kind of fall into a lot of the buckets of the things that I, that I kind of listed earlier in terms of things like NFT-based loans or or even like, you know, credit to facilitate plasma withdrawals and things like that. Okay. Well, because

you started off by talking about people in the developing world, are able to, do you have any plan for kind of extending this out? It sounds like it's probably a lot of Westerners that are big in this speculative mania right now that are using it. But, you know, how do you plan to kind of reach the audience that you feel like could really use this? Yeah. I mean, I think like the sober realistic answer here is that it's like, I think that like that will, those use cases will come, but there are a lot of other bottlenecks that kind of need to be ironed out before that happens. and a lot of them are kind of like outside of our general control. Like, you know, we just came back from India, actually.

We were there for the ETH India Hackathon. And we were talking to people on the ground there who were interested in building out, you know, like, you know, microlending underwriters or something like that in the Darmu Protocol. And the fundamental problem that they have is that it's like, okay, unless the people are totally willing and able to accept cryptocurrency, they're going to want to convert it back to rupees. and currently that's really hard to do in India because like the Indian government has like heavily

clamped down on exchanges. And so and I think that's like just an example that's indicative of like there's just a lot of like bottlenecks and making crypto adoption happen and like the third world that are just totally out of our control right now. And so like you know, we can academically talk about the things that we can do to like make make Dharma like more accessible for like developing world use cases. But I think that realistically in the short term, as I kind of stated earlier, it's going to start with very crypto-native use cases and kind of expand concentrically from there. Yeah, yeah, that makes sense. So are there any other developments that are forthcoming or new apps or anything that are

being built that you're excited about? Oh, man. Not a lot that I can share publicly. But all I can say is that if you are interested in building a business in the cryptocurrency industry and you're looking to get involved in a way that doesn't require you to have deep technical knowledge. We think that building a relay or underwriter in Dharma is a very low-hanging fruit in terms of being able to capture value from this nascent industry. And so we'd love to kind of get in touch if you're interested and support you. Well, great. This has been a fabulous discussion. Where can

people learn more about you and Dharma? So if you go to Dharma.com.com. D-H-A-R-N-S-E-S-E-R-N-S. may.io, that's our website. You can find our blog there. You can find all of our technical materials there that should kind of walk you through what it's like to build an application on top of Dharma. And we'd love to have you join our telegram, telegram channel. It's, you know, the most classic cryptocurrency statement ever. But that's kind of where you can find the whole team and pick our brains on anything. And yeah, that's it. Okay. Great. Well, thanks for coming on Unchained. Awesome. Thank you so much, Laura. Thanks so much for joining us today.

To learn more about Nadav and Dharma, check out the show notes inside your podcast episode. New episodes of Unchained come at every Tuesday. If you haven't already, rate review and subscribe on Apple Podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn. And if you're not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, with help from Raylene Gallipali,

Fracture recording, Jenny Josephson, Rahul Singhibati, and Daniel Nuss. Thanks for listening. Thank you.