About this episode
In this Episode Dan Elitzer joins host Samuel McCulloch to discuss the growth of Ethereum & Defi, different approaches to coding languages, liquidity and modern business systems.
Where to find the show
What to listen for
- Whether building on each other in DeFi creates fluidity between apps when it comes to Ethereum, or does it increase the fragility of the whole ecosystem?
- Why how we approach building smart contracts needs to be different from software coding, and more akin to hardware design.
- Why formally verified smart contract languages need to happen.
- Why we are moving from an infrastructure phase to an application phase right now in Ethereum, and this requires cross-chain protocols that work.
- Why liquidity is more important than long-term price stability, and this is liquidity maximalism in action.
- Why greater control over our data is going to take more ‘moon math’ to make this happen.
- Why we help our portfolio companies focus on their user experience and design first.
- Why DeFi projects need robust go-to-market strategies, not just traction through creativity and technology execution.
- How East Coast/West Coast viewpoints within Crypto differ depending on the narrative arc and why San Francisco is still the centre of innovation in the US despite its regressive land-use policies.
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I wanted to address something that we have seen with the evolution of DeFi: platforms and apps being built on each other. You have Maker which is used in Compound, which is used in bZx which is then used in a whole host of other programmes. You begin to see multiple derivatives of single products being built out. The safety and the security of those products are tied to the underlying products and programmes they are using.
One of the things I have been wondering is this fluidity between apps when it comes to Ethereum, or is it just an increase in the fragility of the whole ecosystem? In some ways, it is both. A year ago, I wrote a piece about superfluid collateral where I wrote about how we were going to see a lot more interaction between these protocols and the apps, with assets flowing through multiple protocols and the idea of C token before they were created. We have seen these play out and this what we refer to as these money Legos but at the same time, it is a weakness. There are a lot of dependencies, and these can be scary when pretty much every major smart contract has had some flaw in it. Security researchers have been crushing contract after contract; do I think these things are safe yet for the general public? Most of them probably not. Certainly, once you start compounding this risk together, I think we come to a place where we have to start hardening this.
We really need to think about Nick Szabo, who wrote a great piece about the fiduciary code. The approach to how we are building these contracts needs to be different from normal software. It needs to be akin to designing something like hardware; the difficulty of modifying it after it is set in stone, thinking through how this is running and so many tasks through situations. This is not just people’s money; if we are successful, this is about the whole financial system. If you are trying to build a whole new financial system, and you are building a critical piece of hardware for the structure, then a failure in your code or a piece of it could bring down the whole system, so we really need to be applying a very high bar to how we are auditing these things and what we are doing before launch.
Is it a weakness in the coding language when you are not using formally verified languages? Tezos is very focused on this. There have been attempts to formally verify on Ethereum. It is a step in the right direction. People should be looking for some kind of formal verification on the contracts when we get to a certain size. Couldn’t that be added into Ethereum in some way?
Yes, people are working on this in Ethereum to see how this issue is addressed. We are moving towards superfluid protocols, and Bitcoin is coming to Ethereum this year. Is this an argument or a good multi-chain environment? Or is this a monopolistic play where Ethereum will suck liquidity from other chains?
I think we are moving from an infrastructure phase to an application phase right now. We need cross-chain protocols that work. There are lots of interesting things happening in Cosmos to be able to move across chains. I think when one Chain like Ethereum becomes dominant, we should see consolidation onto Ethereum, which will make cross-chain platforms less appealing. Bitcoin is a separate thing as it is meant to be just money.
Why is there a sub-case for Bitcoin? If there is no other use for these other coins as ‘money’ or as a user application layer? I think because those things are out there and they are saying use our platform to build out your applications, and value will accrue there. This means that there is value that will follow, or that is the assumption.
Bitcoin started off with historic value approach, and it is different in that the power of money is people’s belief in it. You can fork Bitcoin, but it is about people’s belief in the social contract around that asset, and that is hard to overcome. Bitcoin is the ultimate thin protocol, which is a differentiator. Globally, Bitcoin is leaps and bounds ahead of Ethereum. I am hopeful we can build useful applications on Ethereum. Ethereum was the first to create dollars out of other things; this is much more powerful than a store of value. I am more of a dollar maximalist.
The ability to have a stable asset like a stable coin is so much better than any regular cryptocurrency. I find much more interest in these trustless stable assets rather than Layer 1 solutions themselves. There are more use cases for these assets; however, it also layers on additional risk on top of these protocols by building on them. Do you want all the logic handled on-chain or do you want to keep this off-chain instead?
Liquidity, in some cases, may actually be more important than long-term price stability when you are talking about flows of money. This is my liquidity maximalism in action. Yes, I would also classify myself as a liquidity maximalist; we need to get more activity happening in Crypto rather than on legacy rails and we are all going to win if we can move more stuff into the system.
Micro-payment options are useless without being able to move into dollars. Any payment system only shines when you get people in there and keep them there. I came into Bitcoin as an open-source payment rail; rather than its anti-government anarchy thread. I am really concerned about our monetary policy and at what point we hit hyper-inflation?
There is a clear path to accepting cryptocurrencies without getting involved in the cyberpunk/libertarian religions surrounding Bitcoin et al. There are still a lot of open questions. I have worked as a signals intelligence analyst in the marines. We worked with the NSA to work through metadata to find people and send special forces to hunt them down. I can see the use cases when applying them to Crypto.
We really need much stronger privacy solutions within Crypto going forward to address how we make financial transactions private. My question for Crypto in the 2020s is, can we break the business models of surveillance capitalism by the FAANGS? I think there are benefits of ad-based businesses. Google takes all your communications and processes them through algorithms, to come up with new ways to sell you stuff, and they extract value from you.
What do individuals care about and what Google the company cares about? I don’t think they are about extracting value from you to sell to other people. If they are not providing value to you and me, for our information, we are not going to give it to them. I am not sure if the way the value is accruing is fair, I don’t know. I am not convinced the model of giving users things without paying for them in exchange for their data is broken. Having the cost of delivering those services being subsidised by advertising revenue is not necessarily a bad thing. I think you can strip out the surveillance aspects of this system by giving them ownership of their data. If you have greater control over what is given out, that is going to take more moon math to make this happen.
I will store this data locally and then get an app to verify that they are not extracting a copy of that data. Google/Facebook should be data guardians and not show it to anyone else. They should act as a shield between all those advertisers who want our data and us.
Do you think it is time to democratise them? Should there be an oversight panel that is elected and oversees them? I find this idea uncomfortable, and we do need to fix things we see in big tech companies. I think this is not somewhere Crypto should be heading in the next few years. If we can’t get digital money, assets that are not centralised, then we don’t have a chance on any of these Web 3.0 issues. I think the bigger questions are about implementation and how you are going to go to market. There seems to be this mindset in teams across the space that they get lost in the technical and philosophical questions of their project rather than actually talking to users and who they are trying to serve and getting their feedback. There seems to be this assumption in Crypto that if you build it, they will come, but we know this is not true. You really need a go-to-market strategy.
I guess this also ties into what you are doing as a portfolio company, and how do you position yourself with the companies you are working with? What kind of operational support are you giving them on a day to day basis? We are trying to make sure our portfolio companies stay focused on their users and that they are interacting with them on a daily basis. In some cases, we are very hands-on with some projects to help them at the user level, and with others, we are pointing them in the right direction. Our help can take many different forms. Just technical creativity and execution is not enough, and it hasn’t been enough for years. What we need now is that folks are thinking from the beginning, how are we going to get users using our project. There is a lot of liquidity hacking stuff that we are going to start seeing that will let these DeFi projects get that initial traction and their go-to-market strategy.
You need to get over an initial liquidity threshold to make these protocols really useful for a large number of people and in order for them to be successful, this threshold is necessary. One of the projects you are working with Handshake has just launched. They have a really interesting token distribution model – including 80% token distribution in the form of token developer grants. It needs to be in the hands of developers and users. We need to give it to the people who are going to use and develop it. They are optimising for adoption. Did you have any hand in helping them structure their token? We helped them design their logo, front end and onboarding. We helped them with some technical issues too. Their token structure was already their idea.
What is the process of finding new companies to add to your portfolio? It is not a one size fit all kind of process. Our funnel is based on myself and other team members knowing builders in the space. We are based in San Francisco and the beauty of the space being distributed around tech and Crypto. Our process for vetting companies is focused on DeFi and other aspects of Web 3.0. We all bring different backgrounds to the table. The design has always been a part of the conversation rather than just the technology itself. Our team has been working together for the last five years. We have developed our expertise together. We haven’t gone out and added people to the team at this stage.
Do you see differences between what is being built East versus West here in the USA? Yes, I think this is accurate. There is an East Coast/West coast view of Crypto. The East Coast is more bitcoin oriented, and the West Coast is more Ethereum focused.