DeFi and Self-Driving Banks

While 2020 represented an enormous growth year in crypto assets on the whole, the defining theme that drove so much of both the innovation and economic opportunity was driven by DeFi. The rapid growth of Compound Protocol and the launch of the COMP governance token sparked enormous growth in the entire category of decentralized protocols for financial market infrastructure. A year ago there was just $800M in value locked in DeFi smart contracts, and today has mushroomed to over $23B. But this is just the start of mega-trend that will eventually upend multi trillion dollar capital markets.

Joining us this week is repeat guest and Compound Founder and CEO Robert Leshner, where we will explore this mega-trend and what 2021 will bring in DeFi, as well as a long-term view on the transformation of capital markets that is at our doorstep.

[00:00:08] I'm Jeremy Allaire and welcome to the The Money Movement show, where we explore the issues and ideas in this brave new world of digital currency and Blockchains. 2020 was an enormous year in crypto and it was obviously incredible growth across the board and in crypto assets on the whole. But I think, you know, a defining theme that drove so much of both innovation and economic opportunity in this space was driven by DeFi. And in particular, you know, what sort of sparked a lot of this was the rapid growth in compound protocol and the launch of the governance token, which sparked kind of enormous growth in the entire category of decentralized protocols for financial market infrastructure. So I think a year ago I took a look and there was about eight hundred million dollars in value locked in these smart contract. And today that's mushroomed to around twenty three billion, give or take. But this is obviously just the start of a mega trend that will eventually upend, I think, multi-trillion dollar capital markets. So previously had Robert Leshner on the show and we talked about DeFi. We talked about the sort of concepts of programable money and what people can do with with Stablecoins and Smart contract. Recently, there was a really cool editorial from former OCC interim head Brian Brooks, who talked about this idea of self-driving banks. And I really liked it to part of the title this week is sort of defining self driving banks. But this sort of concept here is like self-driving cars where automotive machines are are are sort of governed and operated entirely in software. And how that poses new challenges for how people think about risk, how people think about rules, how how people think about a lot of things. DeFi in many ways really is this kind of similar thing. But in what banks do, self-driving banks, so fundamental building blocks of finance are governed and operated entirely by machines and software on the Internet, which is super exciting. So joining us this week is repeat guest compound founder and CEO Robert Leshner. We're going to explore this megatrend what twenty twenty one will bring in DeFi and then I think a long term view. I want to talk a little bit about the sort of transformation of capital markets that's on our doorstep doorstep as we explore this. Welcome back, Robert. Thanks, Jeremy. Great to be here. Awesome. So, yeah, maybe we can just start and I'm sure you're sick of this, but just talk about the last year for compound. It's just been incredible. But maybe just give it a couple of minutes on on on what's happened. It's it's staggering and super impressive. [00:03:23][194.6]

[00:03:23] So congrats as well. Thank you. [00:03:25][1.5]

[00:03:25] So compound is a protocol for users interest rate or crypto assets and borrow crypto assets against them. Most popularly users are using crypto collateral to borrow Stablecoins. [00:03:37][12.1]

[00:03:38] And the system has been running for a couple of years. But in twenty twenty, what we did is we transitioned from being a series of smart contracts that are overseen by humans and centralized units that our company being the ones responsible to oversee the protocol, to transition the protocol to decentralized community governance. So allowing the entire crypto community at large, the opportunity to upgrade the computer code that runs compounds and to be able to collaboratively set the different parameters of the markets. So Compound is now running as a decentralized protocol on a blockchains. It's a financial market that doesn't need any one person in order to run it. It can run independent of the original team and it can ideally run for the next century. It's autonomous and these markets will hopefully operate forever. [00:04:41][63.0]

[00:04:43] So unlike self-driving cars that maybe need to go to a charging station, this is as long as like the Internet's running and and I guess people are validating blocks on these computer engines, like it will just it will just run as a self-driving bank. [00:05:02][19.0]

[00:05:03] Yeah. The best way to sort of explain it is this started off as a mostly autonomous vehicle, right, where there was a driver behind the wheel just in case something went wrong. And that was Compound Labs, the team that built it. Nothing ever really went wrong. It didn't require too much touching of the steering wheel. [00:05:22][19.1]

[00:05:22] And we've replaced the human driver with Internet hive mind that people in Phenix yet. Not yet. So, you know, now there's essentially a self-driving vehicle. And when the steering wheel needs to be touched, there's an Internet collective. And so with this structure, it is essentially autonomous. And all of the logic of how the markets work and how balances function, it's all computed using these computer programs. [00:05:54][31.3]

[00:05:54] So there's a lot going on there. And I think to the uninitiated, it's sort of like what? Like what are you talking about? Like, what do you mean? I mean, there's a lot I want to explore here and maybe, you know, maybe first actually is is. You know, the sort of functions that a bank might provide traditional intermediation in, in borrowing and lending as an example, you know, just talk through a little bit of their sort of where compound is today. But what are all of the different dimensions of intermediation that you think can be self driving that can be entirely machine operated and governed in the space? And obviously we see a lot of building blocks, compatibility, et cetera, et cetera, that that's out there today. But when you think about the primitives that that you're you're working on and kind of compare that against interest rate markets or other things, like how do you see that? [00:06:53][58.6]

[00:06:55] A great question. So, you know, fundamentally, compound allows two different counter parties to participate in the financial market. One side is earning an interest rate and the other is using collateral to borrow assets and paying interest rate. And there's so many functions that would exist in a sort of traditional bank just to create this economic function. You would have, you know, people building systems to accept funds from one group of users. Right. This is like a liability side where you're building systems that go into that and so on. [00:07:30][35.6]

[00:07:30] You just ride on stablecoins and crypto assets exactly like there'd be so many pieces of work in order just to accept funds from users. And with compound, you know, it's purely crypto there. And all of the rules for the transfer and settlement of cryptographic assets are defined on a blockchains and that part is completely abstracted away. And there's no humans necessary for users administer their own transfer of funds and the settlement, the record keeping for that is also autonomous and stripped away. The entire history of transactions is transparent and accessible on the blockchains. You know, you don't need all sorts of like bookkeeper's to reconcile it, like always reconciled. Basically in real time. As users submit transactions, anyone can audit or inspect the state of the Kurds and can see how we got to the current books. And so that completely abstracted away. Then you have the calculation of know balances. And like if users are earning an interest rate, you know, traditionally you would also have entire systems of record. You have you would have entire banking databases and software packages for that economic behavior. With a system like compound, it's all encapsulated just in very simple code running on the blockchains. And there's no humans necessary when it comes to the other side, which is people borrowing assets. This is where you have huge quantities of operations, systems and people involved in a traditional organization. You would have the evaluation of collateral, you would have the communication with customers. You would have the transfer of collateral in the transfer of borrowed funds. You would have, you know, nonstop reconciliation. You would have, you know, massive systems, let alone when market conditions change. And the, you know, the value of the collateral changes in a system know running on a blockchains like compound. All of that is replaced with smart contract where, you know, it basically strips away all of the steps that would fail if the humans mess up or if the software messes up or if people don't show up to work one day. And all of these systems of analyzing collateral, you know, monitoring the market risk of them, you know, enforcing liquidity requirements and risk requirements, all of that that would take teams of humans is placed with a computer program. We call them Smart contract. But a computer program running on a blockchains that anyone can inspect, everyone can see the rules of the program, how it operates, that it's operating, that it's working correctly, and can see that instead of meeting scores of people and databases and records and spreadsheets, it can all be done with a computer program. [00:10:37][186.9]

[00:10:38] It's obviously super exciting, you know, there's there's. [00:10:42][3.3]

[00:10:45] You know, if you look at traditional banks, right, there's some fundamental differences, you've outlined a lot of those that have to do with human intermediation and sort of this and how the counterparty is themselves, the kind of experience that they're going to have. I think, you know, one of the things that comes to mind is the effectively risk management, you know, such a huge part of what a bank does. And and bank examiners, if you like, go get the OCC bank examiners manual and you look at what that's about, like an enormous amount of it is like capital liquidity, risk management, underwriting, all this sort of stuff like these these incredible amounts of things there. And and so in this world, one obviously major difference is, you know, this is all you know, it's all management software. Right. And so if I were a bank examiner in the quote unquote, self driving bank world, like, I'm going to basically be examining the smart contract and examining how effective they are. And there are kind of incontrovertible, right, by definition. And seems like another major difference here is compound can't create money. It just it does not have the ability to create money. Banks do create money. They say, I have this collateral, I have this assets and I'm going to create commercial deposits with it. I'm going to basically create money. And and so Krypto obviously as a sort of full reserve system, do you think that that that particular dimension, credit kind of credit creation, how do you think about that relative to the way that these sort of nascent capital markets exist in crypto? Is there is there an equivalency there somewhere that can take place? What does that look like? [00:12:33][107.7]

[00:12:34] It's a great question. So, you know, traditionally banks, in effect, increase the money supply by lending out money, which then becomes a deposit in another bank or their own bank. There are similar principles, even with crypto assets where there's a finite supply. So take Bitcoin, as everyone knows that there's going to be twenty one million Bitcoin. But, you know, Bitcoin also can be moved on to other Blockchains and tokenizing in new ways. So a great example of this is an asset called wrapped bitcoin. So the custodian bingo holds a bunch of bitcoin. I think it's like one hundred and ten thousand. It's a lot at this point. And they issue a token on the Ethereum Blockchains called wrapped bitcoin so that users on Ethereum can send bitcoin interact with DeFi protocols like compound. You know, add programable logic to Bitcoin on a Ethereum. And in effect, you can see the ledger of Bitcoin. There's only ever going to be twenty one million. You can see the location of all of those, but one hundred and ten thousand of them are held in Bitcoin and they've issued a tokenizing Ethereum against. And they in effect, you know, you can say it increased the total quantity of Bitcoin with this transformation, although the original hundred ten thousand reserve model is always there. [00:13:55][81.4]

[00:13:55] Yeah, it's always there to not move. And if it were to move, everyone would scream bloody murder on fire more. Yeah, yeah. [00:14:03][8.1]

[00:14:04] They basically in effect said there's still the same twenty one bitcoin usable on a theory and Ethereum in effect through a system like compound. You know the number of people who believe that they hold bitcoin can also increase. A user might borrow wrapped bitcoin from a system like compound and then user hazarat bitcoin and somebody else has supplied it and believes it own the claim to that. And so through decentralized finance, you know, you can see how an asset can spread through an ecosystem is in fact a little bit of this, you know, multiplicative effect on assets. But that's through finance in general. If I were to lend Jeremy my car, I would say I own one car and Jeremy would have a car. Right. [00:14:57][52.6]

[00:14:57] Even if later he's going to give me my car to me, you know, after the weekend, there's like a obviously like there's there's a lot of dimensions to this. And I'm really curious about how you think about how I'll come back later to a little bit to kind of tokenization of assets more broadly and how that flows to define. We're already starting to see that and and we'll see a lot more of it. But but very specifically, you know, compound protocol today, right? It's secured lines of credit, you know, essentially. Right. It's entirely secured. It's over collateralized. And so it's it's safer. Right. So we have a lot more comfort in terms of the risk management that goes along with that. And so I think the sort of value at risk models are are are safer just. But do you see a. [00:15:44][46.9]

[00:15:44] A world of unsecured lending in the crypto in DeFi specifically, it's almost it's conceptually challenging, but essentially people showing up and basically say I'm I'll give you some USDC or I'll give you some BTC and you're not giving me anything. And I guess the overlay question on that is and I want to come back to this from a regulatory perspective, too, but, you know, identity, reputation, how do you think about identity and reputation emerging and interacting with these five protocols? [00:16:19][34.8]

[00:16:20] Because that really seems like the only way it gets us to unsecured lending. [00:16:23][3.4]

[00:16:24] So that's a great question. There's a lot there. So I'll start by going back to the sort of concept of autonomous banking. So the reason why a system like Compellent works is because it's replacing what otherwise is a relatively simple banking function with code. So it's using fungible liquid assets as collateral to borrow against fungible assets or ones in which they all look and feel the same. There's no nuance between one Rapp's Bitcoin and another Bitcoin or one or another Ethereum or the exact same. Unlike two houses where each house is fundamentally different to borrowers that are fundamentally different, compounder relies on fungible collateral that's liquid. And so it's very easy to build a system that knows how to value that collateral and allow for the liquidation of that. So it's very easy to build a system like compound that requires excess collateral and liquid fungible collateral to borrow to build a computer program that can administer this safely. It's why the very first five applications are probably the simplest and the safest and probably perceived as the most conservative right. Like what compound creates is not very dangerous. Right. And it's easy to administer. Eventually, teams will figure out how to replace human judgment with, you know, code running on a blockchains. But that's a significantly more challenging problem to replicate and replace. It makes sense why the very first protocols like compound, we're just taking the easiest loing, low hanging fruit. [00:18:08][104.3]

[00:18:09] We're seeing that obviously today, like. Right, Max Levchin and AFIRM just IPO today or yesterday. I don't know what it was like. Doubled in price. It's an incredibly valuable company, but that's basically machine governed. It's I it's obviously deploying and computing. I on a blockchains is hard, but you can imagine through Oracle's and other means, like ways to to have like highly automated machine governance decision risk decisioning. Right. But that's still sit inside of an underwritings smart contract that is interacting with some form of kind of verifiable, attested identity that's interacting with the smart contract. [00:18:50][41.2]

[00:18:52] And so, you know, as you start to look at how do systems. You know, manage and take on credit risk compound starts with the lowest credit you're using a lot of liquid collateral to back risk is extremely low. [00:19:06][14.2]

[00:19:07] But as you start to move into, hey, this is an extension of credit based on someone's reputation or other data points or other parameters, it starts to increase risk. And really intelligent systems like a firm or other can manage those risks, can be extremely good at it. But as you start to extend the amount of risk, that's where I think you need to start to extend, you know, oversight and regulation of the system because it's very possible that you have a bad parameter and you extend money to a huge swath of people that could never repay. [00:19:39][32.6]

[00:19:40] Yeah, yeah, totally. I guess a follow up question to that is, how do you think about and it ties into regulation. And again, it's a theme I want to come back to. But how do you how do you think about decentralized identity models interacting with kind of smart contract protocols like like compound? Do you see that emerging? What do you think that looks like? [00:20:06][26.0]

[00:20:07] So I think it's going to be slow to evolve because, you know, I think it's one of the harder problems in the space. I do think eventually the market structure is going to evolve in general is going to be in which, you know, there's large, you know, products and institutions that are built on top of DeFi protocols and offer and all of the on and off ramps to that. And those types of institutions are, you know, phenomenal at standardizing and aggregating information. [00:20:38][30.4]

[00:20:38] Right. In a good way and a bad way about their users. So I can I mean, they're actually required by law to do so as well. I mean, some of it. Yeah. Yeah. [00:20:49][10.2]

[00:20:50] So I think as DeFi evolves, the sort of structure that will be in place is you'll have defined protocols which themselves are relatively it's hard to get lots of data into them. It's hard to do complex decision making, their best equipped for very simple things like. We'll start to have a whole market structure built on top of them exchanges that integrate these protocols, banks that integrate these protocols, institutions and wallets and prime brokers and hedge funds and all of these things on top of it, that over time will be able to provide identity and either it on behalf of their customers, whether they are willing to take on risk of their users or provide information to the rest of the network. But I think it's not going to sort of take place when we're living this defined structure where users interact with contracts directly ideal. [00:21:43][52.9]

[00:21:45] So this is I mean, this this is it's one of the places where the rubber meets the road in that obviously, while we saw news today, of course, that the fence has extended the notice and comment period for some of their rules around. Institutions and their users interacting with cell phones, and while it's one of the critical issues in that which I commented on publicly, lots of other people did as well, which is that, you know, as stated, it would make it impossible for a bank or a financial institution to enable its users through its own software to enable its users to interact with, you know, different protocols. Because as I used as an example, like what's the name and physical address? There's no name and physical address. There's a contact on the Ethereum Blockchains. Is that the address? Put that in my. But but in any case, like clearly like this is becoming an area that regulators are going to care about. And obviously, like the OCC guidance that came out last week and sort of giving banks permission to use Stablecoins as a payment infrastructure, interact with public blockchains like we're just like a step away from regulated financial intermediaries, sort of embedding DeFi into their infrastructure and enabling entities, i.e. individuals or firms to interact with that. And so it does seem like between kind of the way that regulators are trying to think about, like, how do you how do you kind of deal with record keeping and identity? And then similarly, like, how to how to like how does mainstream finance, like, plug into this infrastructure? We're like we're kind of triangulating on this and it seems like we have to those issues are going to kind of kind of come to the fore faster than we realize. [00:23:37][111.9]

[00:23:37] Maybe they will. And I personally think that there's a lot of properties of divide that make it extremely well suited for institutions and for regulators. [00:23:48][10.4]

[00:23:48] There's a lot of virtues. So, you know, the first is that it's fair. The second is that it's transparent. The third is that there's less room for human error. These are all virtues that I think both the institutions and the regulators, what seem like these are it's better limits than what currently exists right now. You know, most financial institutions keep their own records, right? You're keeping your own records. That's where you can get into trouble of sending money to the wrong place or the wrong person or allowing someone to use your institution. Nefarious, right. Like every institution maintaining its own ledger and then interacting with other institutions. It's a structure that's ripe for disaster and intentional or inadvertent money laundering or abuse, which is why it has to be regulated so carefully versus an open ledger like a blockchains to conduct transactions and store value. It's like a huge blast of sunshine and. And you won't necessarily have to regulate the exact same way. We'll need to regulate it in the exact same way because it's almost going to be a thousand times harder to use, you know, the device system to launder money or to use it in various just because, you know, you have a shared ledger where everybody sees all of the transactions in the state of the world. Pretty hard to lie about. [00:25:19][91.1]

[00:25:21] Well, I said to like an institution facing another institution through an intermediary, like, you know what what is counterparty risk is just like the fundamental inherent problem in in the way that much of the financial system is organized. And so it's just fundamentally about that. Yeah. Increasing transparency, reducing counterparty risk. Like what institution doesn't want that that who doesn't want to face a market where you're just systematically eliminating counterparty risk? [00:25:50][29.6]

[00:25:51] Right. In the existing market structure, every single institution has its own books and records. And of course, they have to be inspected and audited and analyzed because something can go wrong at any institution and those go wrong at many institutions constantly versus using financial infrastructure. But there is one set of books and records everybody can see transparently and clearly. It's an order of magnitude better. [00:26:18][27.1]

[00:26:19] And obviously there are not proofs and privacy. Preserving technology will make it possible for people, for four individuals and and corporations to be able to kind of transact and not have their books and records be visible to to everyone, but still actually have to be provable on chain and still have an auditor, whoever it is, be able to kind of look at that an automated way. Exactly. Yeah. So the other thing in addition to that came to mind is like, you know, like there's no such thing as a drunk self-driving car. And that's kind of like, you know, who's at the wheel. And if you have self-driving banks that have this this automation and transparency, you don't you don't have to worry about the human operator, which which is maybe a good Segway into this. This, I think, just enormous, transformative shift that you made to the governance token to really turning over quite literally the keys to what what is the administration and operation and upgrading and and and ultimately governance of risk management kind of parameters. It's just really tremendous. One of the themes that that I've been exploring, we did last week with the biology as well as, you know, these new corporate forms that are coming into existence. And I really look at the work that you guys have been pioneering. There's many others, too, but you guys have been pioneering, which is this is a new corporate form that exists entirely on the Internet, entirely in software. Just talk a little bit about the inspiration for that. And and and then kind of how how it's going, how it's operating. And and maybe I have some follow ups. [00:28:02][103.0]

[00:28:03] And so it's a great question and thank you. So, you know, we chose to transition from a system in which our team was able to upgrade the contracts as needed to one in which anyone with the buying of the broader community can upgrade the contracts as needed. And this makes it so that No. One, our team can't mess it up accidentally or deliberately. I no longer worry about getting kidnaped because I have private keys. And two, by increasing the amount of people that are able to upgrade the system and maintain the system or the parameters, it leads to more and better ideas and a larger throughput of, you know, intelligence and work able to maintain the system, you know, instead of one person with their hands on the wheel. Now, there's a lot of people with their hands on the wheel. And this was a complex transformation where one of the first projects to really go from one party has decision making to body, has decision making. [00:29:13][69.7]

[00:29:13] And, you know, I think it's the sort of arc that many project in this space will have where, you know, when it's small and when it's not widely used and widely understood, there should probably be only one team working on something. And as it starts to become widely used and you start to have a variety of businesses built on top of it, depend on it and know how it works, it it really doesn't function well to have one party still in control. When there's many stakeholders, you start to have a you know, you need a higher standard of reliability and permanence that by removing a single stakeholder from control. I think you can give to the community, so at this point, you know, everyone who uses compounds can have confidence knowing that if they need or want to make a change to it, there's a process the community can make a change to. The protocol still requires the Buy-In and the support of the broad ecosystem, but it's much more of like federated decision making. And I think that's a really powerful model because, you know, at this point, we can step away in the protocol, will continue to function in perpetuity. [00:30:27][73.5]

[00:30:28] I think, you know, there are so many interesting analogies like credit unions or community banks who are never coming back to this self robbing banks concept for a minute, which is, you know, community ownership and governance is so powerful and it's and it's truly global and it doesn't require some really hairy multinational corporate thing with all kinds of international jurisprudence. [00:30:56][28.6]

[00:30:57] It's just software and participants that can participate in that tokenizing corporate form. You know, it's a it's a pretty radical shift, though, to go from like there's a board of directors and a single corporation that makes decisions to the community as a whole. And this is one of the, I think, great laboratories of experimentation. What has it been like to be community governed for whatever it's now been? I think it's over six months. [00:31:27][29.9]

[00:31:29] Yeah, so it's been quite an exciting six months, so one of the things that we did before the six months is we actually tested sort of the mechanisms publicly with like a limited stakeholder group. So instead of there being one party, there was like 20 others, 20 thousand. But over the last six months, we've started to see some really exciting things. I mean, community developers, just like folks who love compounds, saying, I have an idea to make it slightly more efficient or to lower the cost of interacting with it or to add a new feature which will increase the safety of it. And, you know, I think that, like, it's opened up ideas that weren't possible just when one team was overseeing a protocol. And I think that's a real, you know, virtual use case. The downside is that there's not one party in control. There's not like one person leading it or it's it's been awkward that everyone's sort of like always constantly looks back to me and says, well, what do you think we should do? [00:32:30][61.1]

[00:32:30] And I say, I'm like number six on the list of stakeholders, less of a voice than most others in the community at this sort of open source has a wide variety of modes of governance, some formal, some informal, standard setting, same kind of thing. And so you're you're in that pool of experimentation and feels like we are. [00:32:53][23.0]

[00:32:53] And like, you know, most organizational structure of the last couple hundred years has evolved to like a pyramid like structure where there's one key decision maker drives, you know, organizations and systems. And, you know, in crypto, we're really saying, well, it's not a corporation. Right. It's a financial market. It's going to run forever. And it probably doesn't need too many modifications to it. What best way to continue to drive it? And we really stepped back from the single decision maker approach. And it's you know, it's too early to say if it works or it doesn't work. Know our original team is not just one developer among many. And we're actually working on a separate project which can hopefully connect back to the compound. But it's really been interesting to see how folks are stepping up to become involved. [00:33:43][50.0]

[00:33:44] Yeah, it's amazing. The other piece to these sort of new corporate forms and obviously is is is related to this, which is economic incentives. Right. So if I think of traditional equity. Right, it's got votes and it's got it's got dividends or whatever other other features, it may have various coupons or whatever it is and and sort of these decentralized community governance protocols, it actually interacts with the the underlying economics of the protocol itself, which is really a breakthrough. Right. To be able to effectively enable that economic participation. How has that been going? Has it been going for composers themselves? And, you know, sort of this deployment of the fee structure into that would be great to hear you talk a little bit about some of those things. [00:34:35][50.9]

[00:34:36] Yeah. So to start off with, you know, one of the biggest experiments that we conducted and now it's starting to emerge was like a trend within defined crypto. But it really wasn't all of six months ago is, you know, we've been distributing ownership and governance of the protocol to the users. You know, it would be like if Nike gave a share of Nike stock to everyone who bought a pair of shoes and everybody was able to sort of like set the future direction of. The reason why that isn't technologically possible is, you know, Nike doesn't have a way of officially transferring ownership to it, but with a defined protocol like compound that's sort of built on a blockchains by definition, all of the users of it have crypto wallets and they're interacting with, you know, a piece of software. And so it's very straightforward and technologically possible for the first time for the protocol to very directly sort of like distribute ownership of itself to users. And it wasn't technologically possible up until very recently. So the things that are even possible for, like in a modern organization might evolve, right? [00:35:50][74.0]

[00:35:51] Maybe Nike would have made every one of its shoe purchasers not too late, if not too late right now, maybe buying it on a blockchains, right? Yeah, but. [00:36:00][9.4]

[00:36:04] Yeah, it wasn't even technologically possible, so now it is, and so, you know, it's. A very early experiment, we're one of the first to try this, and, you know, we're starting you know, there's still a couple of years left of distributing this ownership control to users. But just like you can distribute the ownership directly to the users, the governor's tokens can interact with the protocol in new and interesting ways. And users can upgrade the protocol. They could change the economics of it. They could change the cash flows. I've actually been surprised that this is actually one of the things I didn't anticipate since launching the distribution actually haven't been any proposals to send cash flows to the users in any way. And this actually surprised me because I actually assumed that the second that the users had, you know, governance, they'd say the first thing we're going to do is pay ourselves. And that hasn't happened. I'm actually delighted by that. But I had assumed that the very first thing that people would say is we're going to pay ourselves from the protocol. [00:37:05][61.6]

[00:37:06] Yeah, fascinating. Really, really fascinating. So a couple of things that this kind of connected to that I want to talk about, too, is, you know, the Nike example is an interesting one. You know, we we own and operate Cenovus, which is an equity crowdfunding platform with people directly sell equity to individuals on the on the Internet. And, you know, the the rules are that are really expanding. And and we had the OCC at the end of the year finally issue some clarity and guidance around how broker dealers can clear custody, settle digital assets. So you kind of are seeing this opening where the sort of between kind of crowdfunding rules and sexy clarity on digital assets where, you know, effectively like tokenized assets. And when we think of financial assets, I'm talking about equity in a corporation or or a debt instrument or physical property or other things. Really, there's an opening for those things to happen. Now, how do you you know, what role do you see for, you know, tokenized real world assets? Like if someone had a a valid form of Tokenizing equity in a Nike or whatever, like do you see compound, you know, interacting with liquid markets in an equity tokens in a physical asset, tokens in other things? [00:38:34][87.8]

[00:38:36] The answer is, I think obviously eventually there's going to be lots of digital assets that represent more and more often real world things, you know, represent stock in a business or they represent a bond or they represent currency or they represent the house. [00:38:51][15.3]

[00:38:52] There's this currency thing called USDC I heard about. [00:38:54][2.7]

[00:38:55] Exactly. Yeah. It's great. I love you, but I think it's going to be more and more assets like this administered on Blockchains and Blockchains are a better place to administer any us versus just in a database or using paper. Right. It's has tremendous advantages for transparency and settlement and all this. So every asset will wind up on a blockchains. Yeah. Whether or not all of those assets interact with something like compound is a broad question and it's hard to understand. But will they interact with DeFi absolute right in general, you know, COMPOUND specifically relies on very large liquid fungible assets where, you know, an early stage company stock probably isn't that right. But, you know, the dollar Tokenizing is or the yen is. [00:39:45][50.1]

[00:39:46] Yeah, yeah. It's interesting. Like, you look at liquidity pools and ATMs in in in various decentralized markets. [00:39:54][8.3]

[00:39:55] And I mean, markets exist for highly illiquid tokens. I mean, and in some ways, like there's ways to parameterize the the those markets to deal with the fact that these are highly like when you get someone who can stand in there and say, no, I'm actually going to I'm going to stand in these trades to provide whatever that baseline of liquidity is. And I've I've always been interested in this idea that, you know, defy and in particular defy and blockchains will enable longtail capital markets. [00:40:26][31.3]

[00:40:26] Right. We have long tail advertising. We've long tail content, long tail, everything. Right. But long term capital markets, we're actually a illiquid, quote unquote, private company stock or a debt obligation of a farmer in a market somewhere in the world. All these things could actually have the ability to participate in markets like these. [00:40:46][19.4]

[00:40:47] Absolutely. And, you know, I think you the quantity and type characteristics of different products that emerge, we'll start to cater to that long tail because it's all possible when you replace, you know, these systems with. Programable ones in which it's really the creativity of developers, the ingenuity of them to create new financial services and products out of the barrier like anything is possible. So I think eventually there will be, you know, assets like seed invest companies tokenizing living on a blockchains that are able to interact with all new financial systems. [00:41:22][35.4]

[00:41:23] Yeah, yeah. So it sort of ties into another question I want to get your thoughts about, which was. [00:41:28][4.9]

[00:41:29] You know, this is inherently global, anyone connected to the Internet can can participate, that's causing a lot of heartburn for for for national governments who are like, wait a minute, you know, we look over some of these things. Is this is this going to be a market? And I don't just mean about compound, but I think about this more broadly. Is this going to be a market where like it's like 10x better and society just says, we want this, we want this. And so, like governments, you guys need to adapt versus technology. You need to adapt to governments. Like where do you think that does that happen? Is there is this like I mean, I hesitate to use these examples, but like Uber and Airbnb or Disney or Tencent or these these companies that make these 10x better products and then society is just like that's what I want. And the government needs to adapt or what do you see happening? [00:42:27][57.7]

[00:42:28] Well, I think we're already seeing where you're starting to see a massive volume and massive interest in open financial products and services, and they truly are in some ways just categorically 10x better than existing financial market analogs right there. [00:42:50][21.8]

[00:42:51] That comes with dangers and risks. Like, you know, is a self driving bank a good thing? Yes. Is it dangerous? Of course. Is it is the very first one even more dangerous? Absolutely right. But over time, would we rather have, you know, extremely advanced autonomous financial markets open to everybody that are transparent, that are cheap, that are fast, that are one hundred percent gross margin? [00:43:18][26.7]

[00:43:18] Absolutely. So I think society will pull us forward. And I think at the end of the day, the benefits of enabling this technology will shine through. I think regulators will over time embrace this for the amount of innovation that it can on that. There's obviously risks and there's obviously, you know, dangers. Right at the end of the day, everybody wants to protect retail investors, which is a good thing. And everyone wants to prevent nefarious activity. Right. And, you know, DeFi done correctly, you know, is a massive, massive net benefit for retail investors and from, you know, from the cost of banking to the cost of investment to everything else. [00:44:06][47.3]

[00:44:06] And the net benefit from that, we see that with Stablecoins, obviously, like our our ultimate mission here is like ubiquitous value exchange at no cost on the Internet. [00:44:15][9.2]

[00:44:16] Right. And like, who doesn't want that? Any person, any business anywhere. So we're certainly moving there and they want it for good reason. [00:44:23][7.7]

[00:44:24] Right. It's extremely important. It's just so much better than what they're used to. And so I think it's like, you know, a market, it's a virtuous one for, you know, the public. And it's not a great system for abuse, like traditional financial markets are so much better for nefarious activity, cash, opacity and all that. [00:44:50][26.3]

[00:44:50] And so I'm going to end with with with sort of a two part question. The first is obviously like Stablecoins and USDC play a significant role in the ecosystem and certainly would compound. And so we've enjoyed the collaboration and seeing that, you know, so just first, just like kind of high level comments on on what you see in terms of the role of Stablecoins and DeFi. And then I have a follow up question. [00:45:18][27.7]

[00:45:19] Yeah, well, Stablecoins are one of the first real killer apps, in my opinion. You know, the reason being that DeFi, it's two words combined, decentralizing finance. The real word is finance. Right? Like, you know, people like to conduct financial transactions in a currency. They're familiar with the MANZOOR stand, which is why Stablecoins have become sort of like the bedrock of decentralized finance. It's much easier to conduct, you know, a financing activity or a trade or anything when it comes with predictable value. So Stablecoins are a killer use case there. And I think it's sort of obvious why. And I think they'll continue to be. I think it's possible that what is a stablecoin starts to evolve. We're going to possibly see other currencies, you know, in crypto, we might see central bank issued currencies. There's a lot of different directions that this might evolve. But I think at the end of the day, people continue to sort of like mentally rely on Stablecoins for finance. [00:46:20][60.8]

[00:46:21] Yeah, we agree. So last question. I like to ask guests various predictions. So so I'm going to ask you. So obviously, you know, USDC grew from grew eight hundred percent last year and ended the year literally on December 31st, around midnight at four billion USDC. It's already increased by nine hundred million in the first two weeks. So it's it's growing, you know, TVO 800 million to twenty three billion. What do you think, end of twenty, twenty one USDC in circulation and total value. Lockton Devi. [00:46:59][37.5]

[00:47:00] So I'm bad at these games. So if you just discounted heavily, you know I would say we'll probably end twenty twenty one at about 60 to 70 billion dollars and define, you know I, I think the rate of growth will decline a little bit, but the numbers will be staggering. [00:47:19][18.7]

[00:47:19] So that's think so you know, I'll put my money at sixty and I think USDC will probably be at about. Fifteen, fifteen. [00:47:29][9.8]

[00:47:29] All right. Consensus seems to be consolidating around 15 to 20. [00:47:33][3.4]

[00:47:34] You know, I could be way off, so it'll be fun. You know, maybe I'm getting anchored there, but I'm awesome. [00:47:40][5.0]

[00:47:40] Robert, thank you so much for joining us today. Great to have you. We'll certainly have you again and look forward to the continued collaboration. [00:47:47][6.8]

[00:47:48] Thanks for having me on Thanksgiving. Cheers. Bye bye. [00:47:50][2.0]

[00:47:52] So exciting. Exciting times in Stablecoin land, land, self driving banks. [00:47:56][4.8]

[00:47:57] Things are moving along very, very quickly here. So really exciting to see. And looking forward to next week until next time. Stay well, stay safe and stay informed. [00:47:57][0.0]


Robert Leshner
Founder & CEO, Compound Finance