Quotes“The amount of progress, measured with actual value being created, that we're seeing in #DeFi signals that lessons from the ICO era were really taken to heart in the #ethereum community.” ~@CamiRusso, founder of The Defiant Click To Tweet “The world needs an Internet of value. We can share any type of content, but the same hasn't happened with value… #bitcoin was the first step. I think #ethereum can take it further with programmable money.” ~@CamiRusso of The Defiant Click To Tweet “We're tweeting, watching YouTube videos & doing all this stuff online, but we still need to go to an executive to open a savings account. #DeFi is so much more aligned with our digital world.” ~@CamiRusso, founder of The Defiant Click To Tweet
Welcome to this conversation with Camila Russo, founder of The Defiant, a daily newsletter focused on decentralized finance or DeFi. She is also the author of the upcoming book, The Infinite Machine, on the origins and rise of Ethereum. In this episode, Camila tells the Ethereum story and discusses the exciting developments happening in DeFi, much of which runs on the Ethereum network.
This conversation is split into 3 chapters:
- Chapter 1: Her book and the early days of Ethereum
- Chapter 2: Recent developments in decentralized finance
- Chapter 3: DeFi’s bright future
Topics Discussed In This Episode
- Camila’s book, The Infinite Machine
- Why she chose to write about Ethereum
- Dramatic moments in Ethereum’s history
- The historical importance of ICOs
- The Bitcoin 2.0 movement: Colored Coins & Mastercoin
- How blockchain enables an “Internet of value”
- How DeFi has changed the conversation about ETH 2.0
- The success of decentralized derivatives trading
- Exciting DeFi projects like PoolTogether, Sablier & DeFiZap
- How undercollateralized loans could drive mass DeFi adoption
- The promise of zero-knowledge proofs
- The need for a decentralized identity system
Links Relevant To This Episode
- Popular Crypto Weekly Newsletter
- Clay Collins
- Camila Russo
- The Defiant
- Camila on Twitter
- Ethereum (ETH)
- Bitcoin (BTC)
- Vitalik Buterin
- Bitcoin Magazine
- Ethereum Classic (ETC)
- Colored Coins
- Mihai Alisie
- Bancor (BNT)
- Augur (REP)
- MakerDAO (MKR)
- Synthetix (SNX)
- Dai (DAI)
Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.
Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion [00:00:30] and do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
Welcome to this conversation with Camila Russo, founder of The Defiant, a daily newsletter that focuses on decentralized finance or DeFi.
I should note that this particular episode was recorded in front of a live audience. If you’d like to attend a live Flippening Podcast recording and directly submit [00:01:00] interview questions to guests then please go to flippening.com and subscribe. After you’ve subscribed, we’ll be sure to send you email notifications before live recording sessions, so you can join us. Space is limited to 100 attendees per recording, so go to flippening.com to subscribe and join us for the next live recording of this podcast.
With that established, let’s get back to Camila.
Camila is putting the finishing touches on her book, The Infinite Machine: How an Army of Crypto-hackers Is Building the Next Internet with Ethereum. [00:01:30] There have been several books on the origins and early days of Bitcoin (for example, Digital Gold by Nathaniel Popper), but there’s never been an in-depth treatment of Ethereum. Camila will share that story with us and speak to exciting developments happening in decentralized finance.
My conversation with Camila is split into three chapters. In Chapter 1, we discuss her book and the early days of Ethereum. In Chapter 2, we talk about decentralized finance, which has become a major use case for Ethereum. [00:02:00] And in Chapter 3, we consider D5eFi’s future.
Please note the transcript and show notes for this episode are available at flippening.com/defi. Again, if you’d to download the transcript and show notes for this episode, please go to flippening.com/defi.
We’ll get to the episode in just a second, but before we get started I’d like to pause for a moment to tell you that this episode is brought to you by the good folks at Nexo. Here’s a word from them.
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Okay back to our regularly scheduled program. Here’s my conversation with Camila Russo from The Defiant. Enjoy. [00:06:00]
Let’s start with Chapter One, which is about Camila’s upcoming book, The Infinite Machine. Can you tell us about the origin story of the book? What your personal journey was that led you to decide that, (a) this book needs to be written, (b) it needs to be written in this way, and (c) now is the time to do it?
Camila: At the time [00:06:30] when I decided to write this book, I was at Bloomberg (still). I was a Bloomberg reporter for eight years, covering markets. Most of the time, I covered emerging markets. My last two years at Bloomberg were mostly focused on covering cryptocurrencies.
I was in Bloomberg’s New York offices during the ICO boom covering the space, saw this huge bubble explode, and I had always [00:07:00] wanted to write a book. When the end of 2017 came, I thought, “Wow what just happened?” This is crazy, this is an amazing story. There’s definitely a book here somewhere.
I started to look at the space and what was the most exciting, interesting story to tell that hadn’t been told yet, and the story of Bitcoin has been told very well many times. I think Digital Gold is an amazing book. [00:07:30] There wasn’t a similar book for Ethereum and to me, Ethereum really was the most interesting story. It’s what is taking blockchain technology forward (in my opinion) with smart contracts, and it didn’t fuel this crazy bubble that we saw in 2017 with ICOs.
To me, it was clear that no matter what happened, even if Ethereum died in the future, it had already changed [00:08:00] block chain and just the technology world in general. That was definitely a worth story to tell about how it had been created.
You mentioned how to tell this story. For me, my writer idols growing up had always been Michael Lewis and Truman Capote. I had always wanted to write a nonfiction novel. That means a book that reads like fiction, [00:08:30] reads like a novel type of story, but that everything in it is factually accurate, like you’re telling actual facts and things that happened but in a way that’s entertaining and reads like a story. That was my goal with this book.
It’s a ton of work because it requires so much research and so many interviews to get all the color, details, and reporting in that type of writing, but I’m really happy I went with this approach. I think it’s going to be a really [00:09:00] fun story to read.
Clay: One of the most interesting aspects of the Bitcoin story is the first crypto asset, then you’ve got all the intrigue around Satoshi Nakamoto. A lot of those stories cover the prehistory of Bitcoin, involves the cypherpunks, various forums, and attempts to make this work. With Ethereum, what are some of the more interesting [00:09:30] human interest aspects of the story that maybe would be highlighted if this became a movie?
Camila: You mention Satoshi Nakamoto as one of the most interesting aspects for Bitcoin. I think the same is true for Ethereum with Vitalik. Vitalik is such an interesting character. The fact that he thought of this innovation and wrote this white paper [00:10:00] when he was 19 years old, his whole story getting into the Bitcoin space as a journalist (initially), founding Bitcoin Magazine, going on this world tour where he visited Bitcoin projects everywhere. That whole story is so fascinating. Seeing him as a person who evolved through the years because he was only 19 when this started. Obviously, [00:10:30] he has matured and changed as Ethereum also matured and changed. It’s really interesting to see that evolution.
Other interesting pieces of this story that would probably make it into a movie trailer, there’s a couple of very dramatic moments in the story of Ethereum. I won’t obviously tell all of their details because I want you to read my book, but one key is if this was just at the very beginning of the project in [00:11:00] 2014 when the team was consolidating, and after some tension was growing in the team and some in-fighting, especially this difference of opinion on how Ethereum should evolve whether it should be a nonprofit or a for-profit, this led into one very dramatic meeting in a house in Switzerland in Zug (where some [00:11:30] of the team was based), where there was a very contentious argument that led to two of the initial co-founders having to leave the Ethereum team.
I think that story is more or less known but I haven’t seen the details told anywhere. That’s a really interesting piece of Ethereum history to learn about. Obviously, all of the attacks that the team endured, the DAO, [00:12:00] and then the lesser-known Shanghai attack.
Clay: Hey this is Clay cutting in from the editor’s booth to explain what Camila means by the DAO and Shanghai attacks. Both occurred in 2016. The DAO was a theft of 3.6 million ETH, worth more than $60 million at the time. The breach led directly to the fork that split Ethereum and Ethereum Classic. Shanghai was a DDoS attack that coincided with Ethereum’s Devcon2 developer conference which was taking place in Shanghai.
Okay, back to the show. [00:12:30]
Camila: What happened internally during those attacks is also really interesting to see.
Clay: It does seem like in a lot of ways the Ethereum story is maybe what’s interesting or one of the things that could be interesting because in a lot of ways it’s the opposite from Bitcoin. Bitcoin has an anonymous founder, then you’ve got Vitalik who’s very much involved. Some people would say his involvement is a liability, [00:13:00] but one of the things I had not considered was just how interesting Vitalik could be as a character.
People are always interviewing him about the future of Ethereum and very technical topics. It strikes me that a deep dive or a character study on him would be absolutely fascinating. I personally have never seen him with groomed hair or styled hair.
Can you tell me a little bit about your interactions with Vitalik? Has he been willing to really peel back the curtain [00:13:30] and go deep with you on some of these topics? What’s been your relationship with him as you’ve written this book?
Camila: Luckily, I was able to interview Vitalik, and he was very forthcoming with anything I asked him. We spoke a couple of times for a long time, and he was very open and willing to tell me his stories. I also spoke with his mom, his dad, one of his university professors, [00:14:00] people around him to get the full picture.
Vitalik has had an amazing growth. His parents told me about how shy he was, painfully shy as a kid. He would rarely speak up in class and now you see him speaking, giving talks, and speaking in panels, in his own way being very charismatic, making his nerdy jokes. [00:14:30] You really saw him come out of his shell.
About his style, you mentioned never seeing him groomed. It’s also interesting how that’s filtered into the rest of the Ethereum community, having this whimsical aesthetic of rainbows and unicorns that was pretty much driven by him. It also reflects [00:15:00] what you were saying about the Ethereum community being more prone to innovation, more open to things changing.
It comes from how the blockchain, the protocol itself is built. It’s built to be flexible, to be able to support all kinds of applications, and to be this world computer. Of course, it’s debatable, whether it is or not, but it’s meant to be flexible [00:15:30] and its community is a reflection of that. And Vitalik (whether he likes it or not) is the leader and leads that ethos.
Clay: Every book about Bitcoin covers Silk Road and some of the earlier arrests, Charlie Shrem and other people. You’ve got an anonymous founder, you’ve got Silk Road, you’ve got drugs, you’ve got things that. I was trying to think what might be the corollary to those types of things [00:16:00] for Ethereum? Maybe it’s the ICO boom. There’s a lot of stories around the ICO boom that involved scandal, people stealing money, exit scams, things like that. Do you see a corollary in Ethereum to Silk Road? Or has it really had the benefit of learning from a lot of the more troubling aspects of Bitcoin’s past?
Camila: I think you’re right to say that it was probably [00:16:30] the ICO boom, but I would qualify that to say that yes, most probably most of the ICOs were, I don’t know if scams, that they didn’t work out. A portion of them were actual scams, people looking to raise money from gullible investors and then run off with it.
That was obviously a bad thing to happen that Ethereum enabled, but if you look at the innovation itself, the initial coin offering itself, [00:17:00] I don’t think it’s necessarily a bad thing to be able to enable a way to raise money in a decentralized way, without having to ask permission from Silicon Valley and the Wall Street banks. I think that’s very cypherpunk. I think that was the first step in what we’re seeing today with decentralized finance. Raising money was the first financial or at least successful [00:17:30] financial application on top of Ethereum.
There was a totally crazy boom that got out of hand because it happened at the same time of a broader cryptocurrency market rally, so people took advantage of that. But I think the space has definitely matured after that. The Ethereum community was very, very hurt after the I ICO boom and bust.
Ethereum and tokens became [00:18:00] such a bad name that people are very careful this time around to make sure that things are done the right way, that incentives are aligned, that developers and teams building these projects actually have the right incentives to follow through and deliver. The amount of measured progress, measured with actual use cases, measured with actual value [00:18:30] being created that we’re seeing in DeFi, signals that the lessons from the ICO era are really taken to heart in the Ethereum community. I think that’s great to see.
Clay: There’s just much that’s known about Bitcoin or in the general ethos, but when you think about Ethereum and Ethereum’s prehistory, what’s there other than [00:19:00] Bitcoin and then of course Bitcoin’s prehistory? What preceded and set the foundations for what would later become Ethereum? Where did Vitalik draw inspiration from and what developments do you think were required for something like Ethereum to exist?
Camila: Like I mentioned before, Vitalik had taken time off from computer science in Waterloo to travel the world and [00:19:30] see firsthand the latest developments that were being done on Bitcoin. At the time, it was Bitcoin 2.0 and it was this movement that was trying to bring more functionality to Bitcoin. Where Vitalik saw the most progress was in Israel in Tel Aviv, where he worked with the teams of Colored Coins and the Mastercoin. What he saw there was that Colored Coins and Mastercoin were trying to [00:20:00] build new functionalities and new tools on top of Bitcoin.
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Okay, back to Camila.
Camila: Vitalik was very interested in this. He offered to build some of these features for the Mastercoin team. He started building a contract for a different kind of futures contract on Mastercoin. As he was doing this he thought, [00:23:30] “What if instead of building one feature, we can build a more generalized platform where anyone can build their own feature?” His analogy was to give people the Lego box instead of giving them a Swiss knife with nail clippers, scissors and everything.
He went to the Mastercoin team and proposed this. He even had a white paper [00:24:00] with this generalized platform for people to build their own tools on Mastercoin. JR Willett, who is the author of the first ICO with Mastercoin, told Vitalik that it was a really cool idea, but he decided it would open up Mastercoin to many security breaches. He was worried that giving people this much flexibility [00:24:30] meant that they wouldn’t be able to control the code that was written on Mastercoin, which might open up potential attacks on the platform.
He also thought the team is already very focused on building all these features. It will take away time and energy from what they were already doing. It was a big undertaking. He told Vitalik, “This is great, but I don’t think it’s right, right now.” After hearing this, Vitalik decided to [00:25:00] go off and make his own platform with his generalized flexible platform for Blockchain applications. That’s basically what became Ethereum after that.
It was definitely a product of the Bitcoin 2.0 movement, what sparked in Vitalik this idea that blockchains can be more than just a way to transfer value from A to B, which what Bitcoin is great at doing, [00:25:30] but the Bitcoin community was trying to expand. Vitalik took that and ran with it like, “What if we made an even more flexible blockchain?”
Clay: That’s really fascinating. Where’s the book right now? Is the final draft submitted or you still iterating on various versions of the final draft? Where are things now?
Camila: It’s been almost three years of work in the book. I’m really happy to be almost in the final stages of it. [00:26:00] Right now, the book is pretty much finalized. I’m going over one of the two final revisions where I’m making small changes, but the major edits have already been done with my editor at HarperCollins. After this, I hope that by the end of the month or February at the most, the book will be 100% done [00:26:30] and sent to print.
Clay: Congratulations. It sounds like a huge undertaking. I think the table of contents shares a lot about how an author thinks about the subject matter and the topic. What can you share about the table of contents? How did you decide to break this up into the major sections and subsections of the book?
Camila: The book starts basically [00:27:00] right after the peak of the bubble, giving a sense for the reader to where this thing got, at its highest and craziest point. Then it goes way back to Mihai and Vitalik talking about Bitcoin Magazine. From there, it’s just chronologically telling the story. [00:27:30] It does start around 2011–2012 when Vitalik first heard about Bitcoin, first got involved with the Bitcointalk forums, then founded Bitcoin Magazine with Mihai, and how the story developed from there.
I’d say about probably more than half of the book, ¾ of the book is dedicated to the early history of Ethereum, up until the DAO is where I spend most of the time. [00:28:00] So, early history, ICO, […] launch, Shanghai attacks, DAO is most of the book. Then, then the narrative breaks a little bit from just the very core Ethereum team into the broader cryptocurrency market, to tell the story of the 2017 boom and how ICOs completely exploded (thanks to Ethereum). [00:28:30]
I focus on a couple of teams. For example, I tell the story of the Bancor team because they were one of the biggest ICOs of 2017. It’s interesting that they’re one of the projects that are still around and also part of DeFi today. I thought that was an interesting story to tell.
Also, Augur which was the very first ICO on Ethereum, and MakerDAO which (I think) is one of the most successful projects. [00:29:00] I step out a little bit from the Ethereum team to the broader Ethereum community and projects. I’m telling the story of this ICO boom.
The last couple of chapters are the bear market, the 2018 bust and how that affected Ethereans. I spent some time in the final chapter on how the community, after the bear market is [00:29:30] more mature (and I’d say stronger than ever). Yes, it was a huge crash, a huge bear market, but because of it there’s a stronger Ethereum that came out of the ashes with DeFi. I tell it in very broad terms, what the possibilities of Ethereum are in the future
Clay: Let’s transition to Chapter 2, which is about how DeFi became one of the top use cases for the Ethereum blockchain. [00:30:00] I remember listening to an interview with Vitalik back in the day. He was asked what the major use case was for Ethereum, other than ICOs. He hemmed and hawed a little bit and said that he really thought that it was a really long tail of use cases, that there wasn’t one specific application that stood out for him.
There were maybe CryptoKitties over here, there are dApps that would pop up, [00:30:30] but none of them seemed to really have much traction and the daily usage numbers weren’t that high monthly active users, things that. They just didn’t have impressive stats.
He was at a loss in this earlier interview about what people would be using this for. But then, at some point, this DeFi narrative emerged and I’d love to hear your take on how DeFi became the major use case [00:31:00] for Ethereum and when a lot of the ideas and narratives around DeFi solidified and maybe exploring what some of the catalysts for that were.
Camila: I think the reason why finance has become the main use case for Ethereum at this point is because it’s one major aspect in the non-block chain, traditional economy that feels just so [00:31:30] ancient and so ripe for disruption. We’re still depending on many intermediaries, we still have to pay such high fees, we’re still limited to where we are born, to what financial services we get. There are many barriers to how value and money can move.
I think the movement of money and the many applications surrounding [00:32:00] money is what block chain can really excel at, just facilitating the movement of value and all the applications that can derive from that. I really do believe that we that the world needs an Internet of value. We have an Internet of content, and we can share pictures, videos, and any type of content very easily. We can modify it, [00:32:30] hold it, share it across the world, and do anything we want with content. But the same hasn’t happened with value.
I think that’s because of the characteristics of money itself, it’s hard to do that without having people hack you, the double-spend problem, or the coins being replicated. Blockchain solves that very fundamental issue [00:33:00] of having a real Internet of value being created.
Bitcoin was the first step to this by being a way to transfer value peer-to-peer from two parties, but Ethereum can and is taking it further with programmable money, by allowing even more use cases for value being used in a [00:33:30] decentralized way. This is just such a huge thing that needed to happen, to have a way to really be in control of your own value. When Ethereum provided a way to do this, is when you’re seeing a real use case and fit that people are really excited about.
Clay: It felt like, not that Ethereum was lost, but that it was just struggling to find its groove, [00:34:00] its voice. It was just unclear what all this programmability would ultimately be used for other than just issuing tokens. It almost felt a sigh of relief from the community when DeFi came on the scene. This is not investment advice, please don’t purchase tokens based on this, but it does feel like Ethereum is poised for another bull run and that people are starting to make bets again on the platform [00:34:30] in a huge way.
Given that so much of the transaction volume on the Ethereum network is driven by DeFi and that a lot of engineers and developers are focused on that use case from rolling pretty deep in this community and being very involved in the conversation, do you get the sense that Ethereum 2.0 or basically that the Ethereum roadmap is being [00:35:00] primarily shaped now by the DeFi use case? Is there a focus on the product roadmap that didn’t exist before because of this use case? Or has the roadmap or the goals of the platform stayed basically the same?
Camila: The platform and the goals of Eth 2.0 has stayed basically the same. This has been a project that’s been in the works [00:35:30] for a long time. Even before Eth 1.0 was launched, Vitalik was already thinking about Serenity and proof of stake. I don’t think 2.0 has changed, but I do think that the mechanism through which Eth 1.0 is maintained and either in a separate Eth 1.0 Ethereum chain that stays alive or [00:36:00] how it can be migrated into Eth 2.0. Those kinds of debates have gained a lot more urgency and relevance because DeFi is thriving so much.
Before, there was this sense that the current Ethereum chain could be shut down with the Ice Age, there wouldn’t be huge consequences, and maybe the few teams building there [00:36:30] could easily migrate to the new chain. But with more and more value being stored in these platforms and then being so interconnected with each other, it’s becoming clear that it’s pretty unfeasible to just shut down Eth 1.0 and expect everyone to just build all over again on Eth 2.0.
Those discussions where will the current Ethereum chain be one shard in Eth 2.0 [00:37:00] or will the current Ethereum chain just live on forever as a DeFi chain, that’s all TBD at this point, but those are really important discussions right now because of the success of DeFi.
Clay: When you consider the specific DeFi use cases, it seems at the heart and soul of DeFi right now is the borrowing and lending use case with Dai, with Compound, with other players in the space. It seems there is a real need there, there is a real niche. [00:37:30] What else is major right now or you think is on the brink of becoming a major DeFi use case or application (I guess) of the DeFi capabilities of Ethereum?
Camila: What’s interesting about the DeFi space right now is that an actual parallel financial system is being built with all of the different financial applications. The first one was lending, but we’re also [00:38:00] seeing DEXs payments, asset issuance, asset management insurance, and if I had to talk about one big one that’ll grow fastest after lending, it’s derivatives.
Synthetix is the leader in this category. It overtook Compound last year as the platform with the most assets logged after MakerDAO. [00:38:30] What’s so interesting about a platform that enables the issuance and trading of derivatives is that this really lowers the barrier of entry for people to access any asset that they want to get exposure to from anywhere in the world.
Talking about the Internet of value, one way to really get this point across is if you are not born in the US, [00:39:00] with a bank account, with enough money to open a brokerage account, or I guess right now is it’s easier with fintech like Robinhood or other apps, but you at least have to be US-based to buy a lot of the most popular tech stocks, if you were someone who follows tech and startups and you want to buy a share of Apple or of Uber or [00:39:30] whatever other company that you like and you’re outside of the US, you have no way to do that. You have to start getting a US bank account, which is unthinkable for most people.
This platform makes it so that anyone anywhere from their own laptop can do that. I mean they can buy a derivative that represents a stock. Right now, they’re doing this [00:40:00] with many types of currencies, like fiat currencies, cryptocurrencies, commodities, and going forward they want to implement some basket tokens that will be similar to ETFs. The possibilities are huge and it really is a great example of how the system can really broaden access to financial services and [00:40:30] just allow people to do whatever they want with their savings.
We’ve been so restricted with what to do with our money. It’s just really hard to figure out and it doesn’t go with the current stage of things, it feels like. We’re tweeting and watching YouTube videos and doing all this stuff online, but we still need to have [00:41:00] one bank account and go to an executive to open a savings account. DeFi is so much more aligned with Internet-native, digital world that we’re living in and being able to trade derivatives from your laptop is a great example.
Clay: That’s an astute observation. We saw that play out with the exchange space at the most popular exchanges. At first, it was the fiat on-ramps, then it was the crypto-to-crypto exchanges, [00:41:30] and now the vast majority of the volume is happening on derivatives exchanges, which I personally did not expect. I see them as niche financial products.
But you make an excellent point. If you are a banker and you don’t have access to a robust financial infrastructure or a robust financial ecosystem, derivatives make a whole lot of sense because if you can’t directly own an asset or own an asset in some fractional way, through [00:42:00] some native system for doing that, then why not own an ERC-20 token or some token on top of Ethereum that is priced or is valued based on the value of another asset?
If you don’t have access to get Apple (which most people outside of the United States really can’t get exposure to Apple), but you can get an asset that’s tied to some kind of oracle that’s suggesting market data, that tells you what the price of that is, [00:42:30] it’s collateralized and all that stuff, you can benefit from making those bets. It’s a nice way or a backdoor into getting access to financial products that otherwise weren’t available to you.
It also seems there’s a lot of complexities here that even complex financial products that are available in the United States are nothing compared to what you could potentially do with programmable financial products.
Camila: Yeah and it’s crazy. That’s one thing to keep in mind. This is all [00:43:00] very early and there is a lot of risk involved. It’s untested. These projects haven’t been live for more than a year or two. Definitely, I’d suggest testing these platforms out, seeing how this works because it’s fascinating, but being very aware of all the risk and not putting in more money than you’re willing to lose for at this stage, for sure. [00:43:31]
Clay: You mentioned Synthetix, you mentioned MakerDAO. What are some of the leading companies in DeFi right now, other than maybe some of the companies that people have heard of like Compound, Synthetix, MakerDAO, 0x? Who else is out there that you think is notable in the space?
Camila: I can name so many projects doing interesting things, but a couple that I like because they are enabling use cases [00:44:00] that you just can’t get with traditional finance. One is PoolTogether, which is great because it’s a lottery that guarantees that everyone wins. It sounds too good to be true, but it actually works.
What it does is it pools together funds from lottery participants and it invests that money into DeFi. The winner [00:44:30] takes the interest that PoolTogether money made and everyone else gets their money back. I mean if you can go and put $50 or whatever you’re willing to gamble and that you’re either going to win something extra or you’re going to get your $50 back guaranteed.
This is something that would be absolutely impossible to do in traditional finance, [00:45:00] and even more considering that PoolTogether is taking money from all over the world. It would be a logistical nightmare to deal with all those transfers and the fees would eat up any of the interest gained. But because this is blockchain, gas fees are really low. Someone will get the interest and the money and the other people will get their initial deposit back. That’s one.
Another super interesting project is Sablier, [00:45:30] which is enabling the streaming of your salary. This is super interesting because we take for granted that we get paid at the end of the month. Or at the most, some people get paid twice a month. If you think about it, why does that have to be the case? Why can’t we get paid for the days we’ve worked? I’ve already worked nine days this month. [00:46:00] Why can’t I take the proportional amount of my salary and buy whatever I want instead of waiting until the end of the month? Or invest it?
This is what Sablier is doing. In traditional finance, you can’t because it’s cumbersome and the employer would have to deal with the payment of so many different bank transfers. Programmable money makes this easier and cheaper to do, [00:46:30] and this is already live.
This is something that’s really interesting because whenever I speak with my friends about DeFi or my family, this all seems like science fiction, like, “Okay, this is great. Let me know when this project is actually working.”
All of this stuff is already working. People are already using all these things. It’s really crazy. I don’t think not enough people realize that these are not some crazy dreams [00:47:00] or white papers dreamed up by some crazy developer. These are projects that are live and people are already using them. It’s really cool that we’re seeing this new financial system being built.
Clay: PoolTogether looks really interesting. It never occurred to me that you could do this. Everyone enters the lottery and the winner gets the interest from that money. That’s really fascinating.
With Sablier does your employer have to buy into this? [00:47:30] Or if you’re just kind of the average person and you’re like, “Yeah, I totally understand the time value of money,” I think about all the employers that just have salaries sitting in their balance sheets, and they really wouldn’t lose much at all by paying people in real-time, yet the recipient can benefit from that money being unlocked and available to them, probably some fun budgetary upside where you’re not getting this lumpy income. It’s just always available. [00:48:00] If you wanted to get paid in Sablier, can you do that without your employer opting in? How does it work?
Camila: You’d have to get your employer to opt-in because they have to deposit the money. The Sablier smart contract handles the streaming of that payment. That’s one platform that is intended as (I guess) a B2B platform, where the employer has to be the user in that case.
Clay: Any other interesting projects [00:48:30] come to mind, that you find to be particularly interesting, maybe ripe for mainstream adoption, or at least maybe might be a catalyst for getting more people involved in the space?
Camila: Another project that I wrote about recently on The Defiant is DeFiZap. It’s a great project for newcomers to DeFi because it really simplifies the different things that you can do in the space. What it does is it takes [00:49:00] all the different pieces, all the different protocols, and it bundles them up so that you can get access to them in one zap, they call it.
For example, some of their zaps are access to liquidity pools in (for example) Uniswap. Uniswap has different liquidity pools where you can [00:49:30] deposit your crypto, whether it be Eth Dai, Maker, different tokens, and receive a fee in exchange for providing liquidity. You’re effectively a market-maker but unlike traditional finance, you don’t need $100,000 to participate. You can just do it with whatever amount you want to allocate.
This is a process that does take a couple of transactions [00:50:00] and DeFiZap condenses everything into one quick. It does this with many different use cases. It’s different trading strategies or different ways to gain passive income that you can access through the DeFiZap website directly, rather than having to go to all the different specific DeFi protocols. I think that’s a really cool way to start playing around with these things [00:50:30] without having to do much. Just connect with your MetaMask wallet and in one click, you’re gaining (for example) fees on a liquidity pool.
Clay: I can imagine a day. Maybe that day is already here where there’s maybe a drag-and-drop interface for creating financial products. Maybe you want to short Ethereum and you can just fill in a bunch of variables, and out pops a smart contract that someone can buy into with MetaMask. [00:51:00] Or maybe it’ll be one of these zaps on DeFiZap. It’s the future.
Camila: Yeah, I think we’re very close.
Clay: That brings us to Chapter Three, the future of DeFi. How do you see things shaping up when you squint into the future? What are some of the bigger things that you’re expecting to see from the DeFi community and ecosystem?
Camila: Specifically for developments in DeFi, [00:51:30] I think coming up very important are undercollateralized loans. This will be key to gain mainstream adoption. For anyone who’s not familiar with DeFi, most loans in the system have to be overcollateralized, meaning, people have to put up more assets than what they’re taking out as a loan, to guarantee repayment and [00:52:00] to safeguard lenders.
This (of course) reduces the amount of people who want to use the system because you already have to have money, and people who want to take out loans often do it because they don’t have money. It actually reduces the use case to speculators who are in fact taking out loans to buy more crypto. So, it’s a leveraged trading kind of thing more than a loan to actually buy a car or whatever. [00:52:30]
Undercollateralized loans will be huge. We are already seeing the first steps in this. Yesterday, Aave is a lending platform that launched, and they are enabling flash loans. They’re flash undercollateralized loans or loans with no collateral. The way that they can do this is because they require the borrower to repay the loan on the same transaction. They guarantee repayment [00:53:00] because if the borrower doesn’t repay, then the transaction gets rejected and the money is returned to the pool of liquidity.
This again, is very reduced to high-frequency traders and speculators who can use these very loans, but it is the first step in unsecured loans done completely on-chain, completely decentralized, with no need of a third party. [00:53:30] At least, we’re seeing progress there. Hopefully, this will be broadened out to non-speculative use cases.
Other two things that will be key for DeFi and Ethereum more broadly are privacy, so securing users’ information. One important reason why bigger corporations don’t use public blockchains is because they obviously don’t want their proprietary information [00:54:00] and (in the case of finance) it’s very important they don’t want their trades to be open for everyone to see. Securing that information, even if the blockchain is public like Ethereum, will be very important to attract more users.
With that is scalability. One technical development on this front is zero-knowledge proofs, which is enabling both privacy and scalability. [00:54:30] There are a few teams working with this and making really great progress. Loopring is one. They’re a protocol for DEXs, and they actually released their serial knowledge booth DEX at the end of last year with amazing results. I can’t remember the exact data right now, but they are seeing several thousands of transactions per second, including more private transactions. [00:55:00] There’s definitely some encouraging progress there.
So, undercollateralized loans, privacy, and scalability, I think we’ll see really good progress in these fronts for Ethereum and DeFi.
Clay: I never thought much about collateralization and its relation to mass adoption. I’ve definitely taken out loans against crypto assets before and there’s this 2:1 ratio. If you want to borrow 10,000 you have to put in 20,000 [00:55:30] of Bitcoin or Ethereum, and then if the price rises or falls, there’ll be a margin call and you’ve got to send in more. That’s really a pain. How does under collateralization work or at least a scenario where you’re borrowing an equal amount? What are the mechanisms that need to be in place in order for that to work in a decentralized way, where lenders aren’t losing money? [00:56:00]
Camila: What will be key for this to happen is to have a decentralized identity system. That will be important for, not just this application but many more to succeed on Ethereum and public blockchains in general. Because it’s hard to connect the outside world to the on-chain world, it’s really hard for this to happen, to have decentralized identities and to make sure that it’s not [00:56:30] one person manipulating this and creating many false identities after maybe defrauding their lenders.
It’s a complicated problem, but there is progress being made on this. Maybe the key will be gathering more credit history. Right now, everyone using this platform is starting off in a blank slate [00:57:00] and that’s why we are required to put up so much collateral. The same is true in traditional finance.
If you’ve never taken out a loan or you don’t have a credit history, your rates will be really high. But as you start to build out a track record, then borrowing costs fall. Maybe something that can happen in blockchain, too, where each wallet can have a credit score depending on [00:57:30] the transactions it’s done, on the loans it’s repaid. If they default and create a different wallet, maybe the way to dissuade that is that wallets with absolutely no history will have to put up really high collateral or pay really high interest rates.
I imagine something this helping solve the identity issue, but that will be the key for undercollateralized loans. I don’t think [00:58:00] we can have fully undercollateralized loans without having a decentralized identity system on the blockchain. So, yeah, I hope to see more progress on that. Haven’t seen much yet. I think it’s a really hard problem to solve.
Clay: That makes a lot of sense. The question I ask everyone in these interviews is, if you could wave a magic wand and altruistically make something happen that would further the space, what would it be?
Camila: I guess [00:58:30] I talked about my key things I’d like to see. Those were privacy, scalability, identity. I think because of the innovation it requires, I’d love to see a good decentralized identity system. That would be super interesting to see. Or I guess now that I’m thinking about it, maybe if I could just wave my wand and have Eth 2.0 be live and perfectly working. That would be even better. [00:59:00]
Clay: That concludes my conversation with Camila Russo from The Defiant. I hope you enjoyed it. Before you go, I want to invite you to subscribe to our newsletter called Popular Crypto. With the Popular Crypto newsletter, we don’t cover token hype or announcements of announcements. Instead, the Popular Crypto Newsletter focuses on the mainstream [00:59:30] products and services taking crypto to the masses.
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