2020 Highlights: The Biggest News Stories of the Year in Crypto - Ep.205

Transcript

[Music] hi everyone welcome to unchained your no-hype resource for all things crypto i'm your host laura shin a journalist with over two decades of experience i started covering crypto five years ago and as a senior editor at forbes was the first mainstream media reporter to cover cryptocurrency full-time subscribe to unchained on youtube where you can watch the videos of me and my guests go to youtube.com c unchained podcast and subscribe today one inch exchange is defy's leading dex aggregator that discovers the best trade practices across all dexes one inch was launched in may 2019 by two white hat hackers at eth global's eth new york hackathon one inch has reached almost

seven billion dollars in overall volume in just over a year crypto.com the crypto super app that lets you buy earn and spend crypto all in one place earn up to eight point five percent per year on your btc and more than 20 other coins download the crypto.com app now to find out how much you could be earning today's episode is a recap of 2020's biggest crypto stories it was to say the least an eventful year with macro events intersecting with crypto in many many fascinating ways first and foremost the pandemic highlighted the unique qualities of bitcoin and that began the snowball that turned into the nasa avalanche of corporate and billionaire interest that i believe

is likely to only grow next year that came alongside some heightened and less welcomed by the community regulatory scrutiny the regulatory story is still ongoing with a particularly fraught battle playing out over the holidays over the proposed fincen role on self-hosted wallets and i'm sure regulation will continue to be a big story throughout 2021 other than that the innovation site saw both progress and setbacks and the weirdness and fun that are the hallmarks of crypto with yield farming taking off and governance experiments giving glimpses of a decentralized future but with hacks and exploits also keeping everyone on their toes i hope you and your loved ones are able

to celebrate the holidays in a safe way and that you're able to also take a moment to be quiet and grateful for all the wonderful things in your life because i expect that 2021 is going to be a rocket ship of a year for crypto so the first topic we'll explore in these highlights is bitcoin the biggest crypto story this year when the pandemic began the various stimulus packages kicked in and the having occurred and it just felt like how are these not the perfect conditions for bitcoin milton demiros of coinshares expressed it even better when she came on the show with lynne alden for the why bitcoin now series here's milton one important thing to keep in mind is

we've never really seen how bitcoin behaves during an economic recession and at this point i think it's fair to say we are in a recession after two quarters of back-to-back economic contraction so what i think is really interesting is for the first time we are actually watching bitcoin in the environment for which bitcoin was sort of designed if you will if you look at what's happening which you know lynn has alluded to and has written about in so much of her research the environment we're in right now um that is unfolding you know there's all this money printing going on when money printer go burr right we anticipate inflation will happen just because it hasn't happened yet and just because uh from a cpi or consumer price index perspective we aren't feeling inflation doesn't mean it's not rampant in the market

if we look at the facts u.s home prices are seeing their fastest quarter over quarter increase in recent history i think in 40-year history so home prices are going up at a very rapid pace um we're seeing equities right equities are trading at 2025 forward p e multiples so people are pricing in their expectations of the future today and they're looking for for growth so i think bitcoin is actually starting to find its place in the narrative we talk about narrative all the time in the crypto space and i think one of the things lynn alluded to when she talked about the having psyche you know this is one of the narratives it's also substantiated with a lot of data but the having narrative is is a consistent one we've had over sort of the last 12 years of bitcoin and

i think what we're seeing now and the reason i talk about all of these facts is this narrative that we've talked about in the bitcoin community for you know the last seven years that i've been in it is now finally unfolding in the real world and so watching bitcoin's behavior in this environment i think is really exciting um to me you know we're going to continue to test bitcoin strength i think uh bitcoin's decoupling from equities has been interesting to watch bitcoin's breakout from gold has been interesting to watch but until this actually plays out and we have the data and the evidence which again likes what i love about lynn is she's like show me the receipts right show me the receipts so until we have the receipts to prove bitcoins

behavior in this environment we've hypothesized about for so long um it'll be difficult to sort of say definitively what'll happen but my view i'm very bullish very excited and as our friend raul powell likes to say irresponsibly long mignova grants of galaxy digital and raul powell of global macro investor and real vision talked about how bitcoin is a call option on a crisis with fiat which was another angle on melton's point about how the pandemic was bitcoin's moment bitcoin really is going to disrupt one one one thing right the crypto universe was going to disrupt everything uh bitcoin really right now is being bet on to disrup disrupt central banks and so the fact that

you know backed or fidelity or real institutions are going to hold it for you and custody it uh some of the crypto junkies would be like dude that's not even the whole spirit of crypto right the spirit of crypto was to get away from those institutions well in a meta sense yes but in a specific sense the bet on bitcoin is a is a hedge versus fiat so it's disrupting one piece and so i think having those trusted names in and around uh keeping someone's bitcoin safe i mean it's shocking you know like it's because it's almost comical when when you originally started telling the story of this is going to be a disruption for the banking system but can i keep it at jpmorgan but if you think about it the first leg

here is disrupting central banks it's this fiat that's being printed like it's toilet paper yeah because if you think about it in the terms of right we've never gone through such central bank uncertainty none of us have lived through monetary printing of this kind of magnitude in fact none of us even believed it would ever happen so when you've got something that is so large and it continues i mean it doesn't go away it gets worse and worse and worse everybody has to ask the question well what could it mean and bitcoin is the call option on the what could it mean and it's as simple as that so in a big portfolio a very little bet could end up being a very big thing

if something at the central bank level i.e fiat currency come into a larger problem surprisingly chemotherapy of social capital didn't seem to think the pandemic itself was necessarily going to be a catalyst for bitcoin but he still made his case for a bitcoin as a hedge um look the government has done you know uh depending on how technical you want to get six or seven forms of quantitative easing since the great financial crisis so we could have picked any one of those moments and said this is bitcoin's moment and what i'm trying to get across to you is that you know it's there there is no seminal event and i think that people waiting for a seminal event um probably create more speculation than is healthy for bitcoin i think that

you know this is a parade of terribles it's uh it's a bunch of small things that eventually add together bring down the entire you know way in which we think the the financial infrastructure of the world works we will lose credibility in it there will not be a a single thing laura that you'll be able to point to this will be the sum of many many bad decisions um and it's the compounding of bad decisions and you know historians will try to pinpoint an event and i think it'll be not worth the time i just think that this is in a it's a pattern and um you know when you see the pattern i think you just have to be prepared to hedge it be on the other side of it

hope the pattern stops because quite honestly if your bitcoin bet pays off it will be catechismically destructive for the world um and that'll have enormous consequences to many people that we all know and care about who weren't hedged in bitcoin um and so you almost don't want it to happen um but you literally only can see one path to its success you don't see any other reason for it to succeed even in a world where um not everything else comes crashing down not really um you know i mean i think that people could claim that it's a more frictionless payment mechanism or payment rails i i don't really buy that um i think that there are

much easier to use products that eventually will become you know uh virtual payment mechanisms that connect the world whether it's whatsapp or the cash app or venmo or we pay all of these things will eventually be threaded together in an underlying framework uh that'll allow seamless money transfer uh zero cost instantaneously um you know in a ledger that's that's uh that gives you a sense of security and transparency all of these things i think will eventually happen and so the use cases for bitcoin i think uh become less and less as a product and more and more as an instrument and again then you have to think about what the underlying value of the instrument is you know people try

to make this case for gold all the time that there's an industrial use for gold and i would say maybe but overwhelmingly folks use it as as an instrument hedge other parts of their assets and other parts of their portfolio similarly we will make the case at infinitum for the industrial value of bitcoin but the overwhelming use case for the most people will be as a financial hedge and i think that that's good enough um because that's what will get our you know quote unquote the you know the proverbial sort of grandmother grandfather to buy this thing is that concept because they can understand that much more easily than they can understand distributed ledgers and you know seamless payment gateways

it's it's all a little gobbledygook at some level kathy wood of arkhanvest and dan tapiero of 10t holdings in gold bullion international broke down how corporate adoption of bitcoin could affect the price and it certainly looks like this was the year where this trend began to take off yaseen just wrote i think another blog if it's not out now it will be soon and uh it may have been part of our second paper and uh basically uh took a look at 10 years worth of data all of the assets that uh you know are available to institutions and the managed assets uh at that so those that are

actually managed by third parties um and that's about 110 trillion in the world so a 10-year study in order and and using correlations of returns and all of the the usual uh metrics um determined that the in order to minimize the volatility of putting uh bitcoin in the portfolio and still enjoy the return i think that was a two and a half percent a two percent position uh if you wanted to maximize the return and we're willing to accept more volatility that would have been a six and a half percent position and uh the punch line and this is this is going to be years away but if

that's six and a half if institutions were to um hue to that six and a half percent uh in bitcoin uh that would uh you know all of the things are equal knowing what we know about the supply out here and and the fact that more than 50 percent of all the bitcoin holders right now uh have held the bitcoin for more than a year uh and many for more than five years uh just so you have to take that out as a you know a supply constraint uh the number he came up with as a price target and i don't want this plastered all over headlines and so forth because this is just

if if lots of ifs there is five hundred thousand dollars oh wow and did he have like us by a certain time period or just if these things happen this will happen gradually and and believe me we're talking about the institutional world uh these sorts of things happen quite gradually yeah but i think that's about that's around the right number i've quoted i've been quoted at least 10 or 15 times in the past year with that kind of 300 to 500 000 number it's not it's just not too crazy i mean the market cap of bitcoin now is call it 300 billion uh if you understand what the you know the security apparatus is that is the bitcoin network and you sort of

contemplate what that kind of network is actually worth to the world i mean you can easily say it's worth two three four trillion it's certainly worth more than one company in the nasdaq and so that can get you to that number it's just that look it's it's a complex thing most people don't even realize you know that it is a network they think it's a they think it's a price bobbing up and down or flashing on their bloomberg uh or that it's magic uh money uh or what whatever it is so magic internet money regulation was one of the big news stories this year particularly threats from regulation ii crypto wallets this was first discussed on the show when dave jevins of cypher trace

disclosure a previous sponsor of my shows and sean jones of x-reg consulting came on unchained to discuss the travel rule and how it would impact exchanges and transactions dave starts talking about how exchanges also called virtual asset service providers or vasps have to send each other information on customers who make transactions between exchanges so how do i know for across all virtual currencies hundreds and hundreds and hundreds of virtual currencies and chains how do i know um whether it's a personal wallet or uh or um a custodial wallet so that's first one um do i know i have to send it or not and same on the inbound so when i get the transaction do i know that it came

from a personal wallet or do i have to wait for this information to arrive to me from some other vasp or exchange what have you to come in so that is one of the challenges another challenge is and then you know there's a lot of technical detail around it so how do you do it without creating a global list of every address that belongs to every exchange so preserving privacy is a big issue that we've been working on we believe privacy is of a dramatic importance you know this simple idea as well we'll just create a database or a blockchain of everybody this is not in or for various reasons a good idea and then you have other problems around how do i know who's of aspen how do i know who isn't and what country are they

in and how do i stop ones from spoofing each other so that i can reap all of the data pretend to be a vast who hasn't signed up yet get all the customer data from other people so there's a quite a number of security and privacy issues that have to be dealt with and of course it has to be cross-chained it has to be global and so these are the technical challenges that combined with the regulatory that you know we've been working on as an industry okay so i just want to make sure the audience um has caught on essentially anytime there is a transaction between two custodians meaning two exchanges or two wallets that are both custodial wallets

then this information will be sent and if at you know either for the sender or the recipient that it's someone transacting using their own private keys managing their own keys then the information will not be sent but then i also want to make sure so it sounds like depending on the jurisdiction that the types of information being sent will differ and it sounds like you know your identity is a key piece of it and who you're transacting with is also a key piece but then in terms of other things like when you said in switzerland that they also include your transaction history a little bit or something uh that's no they don't include transaction history but they're

extending it to um self-custodial wallets where you have to make declarations about who you are so they've taken it beyond asked to vasp they're stretching the boundary to look at you know extending it to more self-custodial wallets which is you know challenging and obviously not a great not a great thing in my opinion and and actually seemingly out of character for the famous switzerland from uh 11 or 12 years ago yes the first indication that regulation might threaten self-hosted wallets came from something known as the swiss roll here is jake trevinsky compound

explaining what that is the swiss rule basically says we are going to require financial institutions not only to collect information about transactions between uh you know customers accounts at regulated institutions but also customers transactions with self-hosted wallets so what the rule says is in order for a financial institution to allow a withdrawal of crypto to a self-hosted wallet or to allow a deposit of crypto from a self-hosted wallet the institution must verify the beneficial owner of the self-hosted wallet and to sort of step out of the legalese and tell you

what that really means what it means is if i am a customer of one of those financial institutions and i want to send some bitcoin from my account at an exchange to my ledger hardware wallet i would have to prove to the exchange that i am actually the owner of the ledger hardware wallet that i want to withdraw those assets to and the problem is it's really hard to prove that my ledger hardware wallet belongs to me right what am i going to do show a receipt that i purchased it send a picture showing that it's still in my possession i didn't give it to somebody else so this has become a very complex and difficult standard to meet and the result of that is in essence at least as i understand it

swiss financial institutions have simply refused to allow any transactions with self-hosted wallets because it is just too complicated to figure out how to comply with that rule so at this point we have this bifurcated market that kristen mentioned in switzerland where you have some crypto on exchanges or with custodians in this regulated financial institution world and that crypto can move around between those financial institutions but it can never move off of that walled garden into a self-hosted wallet and similarly any crypto that is in sort of the self-hosted world right that people have self-custody of that they're moving around through their own transactions on the

blockchain they can never get those assets into the financial institution world yeah that um somehow seems untenable to me but um i'm not a regulator one thing i wanted to ask was you know switzerland is just one place so if this were to be implemented there would it really have a ripple effect or would it simply affect people who use um some of the exchanges or wallets uh in switzerland well i'm worried that it could have a ripple effect i i worry that when you have one nation do something um then you know other countries will look

around and say oh they're being tougher on illicit finance than we are and there's sort of a race to make sure that regulations are are strong enough and meeting the strongest standards and and the reason that there is such concern about unhosted wallets is um you know for for for those who understand this space but for policy makers who might be less um less schooled on the inner workings of cryptocurrency you know that the major concern is that today you know cash is obviously the the method of choice for criminals whether it's for terrorist financing or for any money laundering that

that that is like the the preferred methodology but if i want to finance some terrorists on the other side of the world with cash i actually have to physically deliver that cash i have to put it in a bunch of suitcases and get on an airplane and at some point along the way um you know like there's a good chance i might get caught with all of that but the concern that these these regulators and policymakers have is that with self-hosted wallets you can do very large amounts of volume um almost instantaneously and so um that that is is something that they're trying to wrap their heads around and figure out what to do um you know sort of the irony is that the way that we

track down these guys today is using um you know these third these specialized firms that do forensic analysis of the blockchains and because we have information about some of the wallet addresses and don't have information about some of them we're still able to piece together you know we not me but these firms are able to piece together and many times identify who has that information but the irony is that if we get to this bifurcated world we'll have no information about the world of self-hosted wallets while having perfect information about the world of hosted wallets and so the the cure that these policymakers are coming

up with by that results in the split world is actually going to make the the more difficult to find the bad guys and not um and not stop it and so you know we were hopeful that by doing some education around this that we'll be able to prevent some of these ideas from taking off in the u.s and not make the swiss world a standard that we will see globally the story over regulation culminated late in december in a new proposed rule by fincen reportedly driven solely by treasury secretary steve mnuchin in this episode with jeremy alaire of circle and kristen smith of the blockchain association jeremy summarizes the main issues with

the proposed regulation there's so many issues with with the proposed rule there's so many issues with the process by which this is happening this is you know a midnight rule making uh you know attempt this is extremely unilateral uh from the secretary of treasury himself despite significant objections throughout the government including from within law enforcement to this so this is a highly politically motivated individual who wants to jam this through and is doing everything in his power to do that despite uh despite many many good actors in the federal government who i think realize that something like this should not be just jammed through and

requires really careful review deliberation and planning and thinking so we'll come back to that maybe but i i i do want to say you know when you when you look at blockchains like the fundamental innovation today is this this infrastructure where you can actually have programmable money the the breakthroughs that are happening this is what motivated me to get in the industry you know almost eight years ago was this idea that you could have you know money as a data type on the internet and you could program it and you could create contracts around it and that those could be enforced by code and work globally and interoperably and and that that would eventually allow

for financial services innovation and access to that financial services innovation you know globally as well um really profound stuff and you know this rule basically just completely ignores the fact that that even exists it completely ignores the fact that you know innovation in open finance is built on this idea of you know smart contracts that whether they're providing lending markets or they're providing other forms of economic arrangements are executing in code and that individuals for the first time ever have the ability to access and interact with those um that's a that's a huge breakthrough and i think you know there's obviously

like the full decentralization movement which says well the whole point is to get outside of regulated intermediaries and as long as we have access to you know to this outside of regulated intermediaries it's fine uh it doesn't matter but i think we want a world where you know financial institutions are able to offer whether it's a business or consumer are able to offer people access to this offer access to these services around the world i think we want that world and you know effectively you know this rule it's it says nothing to this issue and the the reality is that um individuals and businesses are going to want to be able to transact with

smart contracts like it's sort of like duh like that that's like so much and you know so this is essentially i think you know really really limiting and by by saying nothing to that issue um it raises very significant questions about how you know a coin base if you're on coinbase.com can you can you actually you know interact with a smart contract what is staking is staking interacting with a smart contract what are what are all these things what what can a a consumer facing or business facing institution do so that's a major issue and i think coming back to the procedural question you know what we ought to do is say okay we have these you know kind

of concerns and they're i think they are legitimate concerns you know money laundering and financial crime is legitimate um and we can you know talk about that but you know you don't jam it through over the holidays without any consideration without any thinking without any industry engagement and you know the the letter or the the the rule says oh yeah we we had an hour meeting in march with a few people from exchanges and last year we went to california for a day big deal i mean that is not industry engagement so um the the reality here is that um we need we need industry to be able to work on this and in a really material way and not just this jam through kind of situation despite the story of what the industry perceives to be unfair

and unreasonable regulation a lot of regulators in law enforcement seem to have a more industry aligned view of cryptocurrency in this episode with assistant u.s attorney jesse brooks here's what zia faruki previously a member of the doj strike force that has taken down some of the biggest cryptocurrency criminals around the world had to say about cryptocurrency being used by criminals we've given presentations on cryptocurrency and it's amazing uh particularly when you're meeting people you know very sophisticated still understand cryptocurrency when they see the uh jessie with her doj insignia they're like why don't you i mean literally had people say like why don't why doesn't the u.s government just turn off like isn't this all criminals like people don't understand that like a that's not something that's possible but b

my answer to them is always like you know people have been committing crime with traditional fiat money for a long time and no one says to ban that so like i don't there's this huge psychic disconnect that i just don't get of like okay great like someone uses money to do something bad no one's talking about banning unhosted wallets and fiat that's called cash right like that's what cash in between someone's bed is it's an unhosted wallet right and criminals do that all the time jesse and i could tell you stories from when we had you know narcotics cases where you find 200 000 and someone's hidden in the floorboards of their floor i had a case with that once where it happened right and so like no one's like we should ban cash and so it's just it's a it's a false narrative and it's a question i think that it i

hope that like you know if not you know years if not months and days from now people just stop asking like how much of crypto is um you know criminals like that's not the point right crypto is here people just need to learn to accept that and it sounds like as you point out big banks are starting to get that too right it's not just it's just not exchanges anymore and that like the problem isn't crypto it's a promise criminals and so like criminals will come commit crime with or without crypto the question is how can we you know as a society say like oh is this something that should or shouldn't be regulated i think that goes to jesse's point it's like doj is trying to find ways to follow up uh you know and i think their defense lawyers are doing a fabulous job but trying to say like wait

a minute doj you're going too far like this is not uh within that you you're using a regulatory framework for like western union sending money and that doesn't apply necessarily to someone just exchanging from one currency to another so there is this big open area right now for the law to get fleshed out um but that does not speak to the goodness or badness of cryptocurrency it's here to stay and people just need to learn to live with it crypto.com the crypto super app that lets you buy earn and spend crypto all in one place earn up to 8.5 per year on your btc download the krypto.com app now to see the interest rates you could be earning on btc and more than 20 other coins once in the app you can apply for the crypto.com

metal card which pays you up to eight percent cashback instantly reserve yours now in the crypto.com app one inch is a decentralized exchange aggregator that sources liquidity from the top decks's and liquidity sources to save users money and time on swaps one inch is capable of finding the best possible trading paths and splitting them among multiple market depths recently the one-inch team unveiled one-inch version two the main highlights of v2 are pathfinder an api that contains a new discovery and routing algorithm and a new intuitive user-friendly ui the v2 improvements ensure the best rates on swaps while dramatically cutting response time

one of the looming regulatory issues will be privacy and even as open and supportive as acting controller of the currency brian brooks is of crypto even he seemed to indicate that americans should be willing to accept more restrictions on privacy than people in other countries here's what he had to say i would say that privacy in the u.s uh financial privacy you know in the in the technical protocol looks a lot different and raises a lot of different issues compared to financial privacy and some other parts of the world so the analogy i often give is if you are a dissident in cuba or if you live in venezuela or whatever you probably care a lot more about financial privacy in your individual transactions than we do in the us and

that's because a you care a lot more about the government not knowing that you're giving money to a political dissident or that you're sending money to a disfavored relative or whatever in the u.s where we are legitimately a target of terrorism every day it feels a little bit different yes there are some things we'd probably rather buy privately but as a society we seem to have made the judgment that the threat of people using our financial system for illegal or even terrorism purposes is sufficiently tangible that we need to protect against that and thus give up some privacy in favor of that so i think that there's a little bit of schizophrenia in the united states over the these two things and which side do

we really believe there are times when we say we really believe in privacy as when we tell facebook they shouldn't be using our data for any purpose and we should have total control over what data exists and who it can be shared with but then there's another side of us when we look at things like the travel rule you know which is applicable to uh to platform-based crypto transactions where we've said no no we want the government to know about all of those transactions and send receive information has to be appended to every single transaction on a platform so i think we need to resolve those as a society we haven't done that yet so one of the great things about our interagency process is we suss those issues out we hear all the different views and then we try and balance them that's a work in

progress at this point given what's been happening with regulation on crypto wallets it's perhaps not surprising that melton damires of coin shares cited privacy as her biggest concern for crypto going forward i'm only looking at one thing and it's uh laws associated with privacy right now encryption is under attack in the united states and in most western nations most developed countries uh so there is a a number of bill there are a number of bills pardoned on the floor right now they're sponsored by republicans uh particularly mitch mcconnell lindsey graham uh the earn it bill in particular is one i'm referring to which would seek to to limit and severely curtail the use of

end-to-end encryption in consumer-focused applications and implement the effectively a back door for the nsa and other intelligence agencies and five eyes you know the this uh this organization of intelligence agencies around the world have sort of signed off on this we saw a few weeks ago there was statement from the the doj and and sort of the powers that be um that the calling for more surveillance on the crypto ecosystem travel rule is seeking to go from three thousand dollar transaction limit to a 250 transaction limit around the world privacy is under attack and that means bitcoin is under attack in many ways um governments want to tax bitcoin they want to know who holds bitcoin they want to know what you're

doing with it and i think uh this is this is an existential threat to bitcoiners everywhere um you know again i think the premise that lynn raises premise of hard money when you can be uh identified and pressured into you know having to pay taxes on these hard assets you hold um you know turkey right now is trying to implement a tax on gold they're trying to figure out how to feasibly tax gold when much of the gold there is held by retail owners um you know under their mattresses and not in bank vaults very hard to do but taxing something like bitcoin is very easy to do and you can quickly see states try to seize these assets from people this is this is my greatest fear so i'm very focused on privacy and privacy related issues

i believe it's fundamentally important that we maintain the ability for consumers around the world to use products and services that facilitate end-to-end encryption and protect their privacy another big story this summer was the yield farming craze in d5 which as tends to happen in crypto took off and also died down rather quickly haseem qureshi of dragonfly capital made the point that one of the drivers of defy has been the ease of use of automated market makers like uniswap i think there's a really amazing story about how dexa's and defy has started to look actually more convenient than centralized exchanges so in the in the post i share a story of a friend of mine who was telling me

you know uh there was there was some hot token that was that he was interested in training and you know he got listed in a few places and he was telling me like look you know i could i could go like look up on coingecko and try to see which exchanges is listed on and how many of them are legit and you know where has the most liquidity and then send up an account and send my funds there but it's just too much work and so instead like i'm going to go i'll just like click a couple buttons and like buy it on an aggregator on unit swap or run whatever that to me was a little bit of a revelation they're like oh people are going to use d5 because they're lazy not because they're ideological not because they care about non-custodial trading the other element of it that i think is

also very important especially in this latest bull run that we've seen kind of centered around d5 is that you know so much of what made binance successful in the ico craze was that binance was the first to list a lot of these assets right and so if you wanted to get in early and of course so much of crypto speculation is about getting in early uh you had to go to binance because that's just where they're what's where things got listed first and now you're seeing that actually happen on d5 d5 is worthless at first right comp first traded on on uniswap before it traded on any centralized exchange uma was trading first on on nunoswap so many of these assets are first available in defy before they're available on any centralized exchange and so if you want to get in early if you want to get in with the cool kids if

you want to get in with what all the influencers are doing they're all in d5 doing it at all direct and i think that's another thing that's driving a lot of the excitement for people to get onto d5 of course it's driving up gas fees like crazy um but it's in in a way it's part it's become part of the game that defy is now you know the cottage coolest place where all the people are making all the money and that of course incentivizing people to say hey i want a piece of that vitalik buterin expressed his concern over some of the yield farming mania he was seeing and struck a cautionary note about it i think one big one is just that a lot of people are underestimating smart contract risk and so like i remember even a year ago like there were people

on twitter i think it was making the case that you know hey if you have dollars in a regular bank account then you're making maybe two percent interest and that assumes you know like some kind of fixed deposit whatever and if it's variable then it's even less um and but if you put your dollars into uh compounds and you're getting four percent well why the hell would anyone choose two percent over four percent clearly four percent is better or even if if you put your dollars in die clearly four percent back when it was four percent clearly four percent is better and my response was well four percent is only better than two percent if those systems are exactly the same in every other way right and in fact for the four percent system

to be better than the two percent system you basically need the four percent system to have less than a two percent chance a year of breaking right because if the four percent system has a five percent chance that you're breaking then it becomes negative one percent and so i feel like there's a lot of people that are just not fully taking this into account in some of their calculations and you know they might think that oh okay it's been safe for a while it's been safe for a while and these projects are audited and i think a lot of these d5 projects really have like done a great job of auditing themselves and just doing a way better job of that and learning from the mistakes of the dow and all of those things

but at the same time you know are we safe enough that we can promise a chance of breaking of less than two percent a year i don't i don't think we can get there yet right so like that's one thing and so i think uh and if the main takeaway from that criticism i guess is that defy is still fine but like don't act like it's a place where you should advocate for a lot of regular people to put to put their life savings into now there are of course places where you know c5 and as in the traditional banking system has risks too right and like there's a lot of people who because of their specific context like their money might get seized or like their local currency might get hyper-inflated or all these things and so

if you're in one of those situations where the the risks of the centralized uh kind of stuff is uh greater than two percent a year from you then you know by all means get into d5 and it's safer um but or at least when i say d5 in this case i need stable coins right get into stable coins and they're safer um but like if you're just in uh defy to get you know four percent interest instead of two percent interest then like that's probably not something you should be doing so that's one thing the other thing is that there are a lot sometimes d5 things happening that are not very sustainable right so like one big example of this is like yield farming right so like this

has been this big hot trend that we've been seeing recently and you can often get these really high interest rates it was like 20 30 to 100 plus percent annually but the problem is that these interest rates are ultimately uh they're paid for by rewards explicitly provided by whatever protocol was uh is is uh doing the lending right like they're either provided by compound or they're provided by whoever else like i forget what the acronyms are these days and those guys are not going to just keep on printing coins for people to to entice people to get into their ecosystems forever right it's a short-term thing and like once

the enticements disappear you can easily see the yield rates that drop back down very close to zero percent so it's not a that's not something that could make d5 break but it definitely is a sign that like we should not necessarily be treating a kind of temporary advantages that we have now as reasons or as things that we should be pushing in front of out in front of the entire world as like reasons why everyone should get into d5 because if you push them out to the entire world then by the time people start getting into dfi these kind of temporary advantages are not going to be there anymore taylor monahan of my crypto and dan guido of trail of bits

talked about security and defy here is taylor talking about what it is that actually gives her confidence in a d5 protocol and why one can never feel 100 secure i think that i asked on twitter two weeks ago now you know what are the things that like every developer should do before you know having 25 million dollars in their contract on mainnet you know what are the big red flags and there's a lot of like really deep in the weeds type you know type things that i think are really really important um but it was actually interesting because that some of the responses were like very different but also really enlightening and so

you know one thing that came out of that conversation was you know if someone doesn't have an audit that's a really big red flag like if they don't get anyone to look at their code um that's a red flag you know but that doesn't just because they have it on it it does not mean that they're secure it does not mean that they're ready for mainnet uh it just means that like you know there's not a red flag in that in that area it doesn't put a green one there it's just not a red flag um and then some of the other ones that i think were really interesting you know were around uh the teams and the people and how sort of um like how much effort and time they

dedicated to the things that weren't the literal code so a lot of teams obviously love to focus on the code they love to focus on the product uh they want to build this awesome system you know but did they spec out the project before starting to write that code and figure out you know what exactly the architecture is going to look like did they document the intended behavior um you know does the white paper is it like a marketing piece or is it actually you know a technical document that dives into all the different situations um another really interesting one that i i i can't necessarily call it a red flag today because not a lot of people do it

but um certainly would would allow me to have more faith in a team is if they uh anytime they sort of acknowledge the risks of their project or their code or their system um you know if they've taken the time to especially if they've taken the time to document and share where the bad things are that could happen um that shows me that they not only have like awareness around their code base they also have awareness that bad things could happen which is something that is surprisingly missing in this earth um and it also shows that you know they've they've taken the time to write it down and that provides like an additional

level of accountability and so you know all of these sort of tools you know there's not one thing that's going to make a project trustworthy there's not one thing that's going to make a project secure but if you take them all together you know a team that is um a team that has a better chance of success is a team that you know has documents they've written tests they have a specification um you know they're engaged with the community for a long time they're open to questions they're open answering the questions um you know they're aware that not everything is perfect and glorious all the time and that bad things can and probably will happen

um and i'll say i think the first conversation i ever had with robert from compound i was very skeptical and i was like so you're just gonna have all this money on the smart contract and you know how are you ever gonna know it's secure and he literally just responded and he was like well there's always a non-zero risk like it's never there's never going to be a moment where i can go to sleep and be like everything's perfect nothing bad will happen and it really it knocked me off my feet because i had been you know talking to so many people in the space where you know the answer would have been oh well we had two audits by two different auditors and then we had it normally verified and you know we have 100 test coverage you know but it's actually

robber that gives me more faith in his team that code the compound protocol because i know that today and tomorrow and the next day you know that that culture is going to always be on the lookout you know whether that's the lookout for other hacks that may also affect the compound system whether that's awareness of um you know flash loans coming into existence whatever it is um you know they have a better chance of success than you know even someone that has had all of the audits and used all of the tools in this huge news year for crypto ethereum also reached its fifth birthday here is vitalik buterin the creator of ethereum reflecting on the last five years

ethereum's definitely come a long way in the last five years and it's definitely been really striking to just see the change uh just see how much change there has been and even just see how more and more of the change is just outside of mine and even outside of the ethereum foundation's control so like if you remember ethereum in 2014 and 2015 it was this much kind of smaller saturnate community everyone who was doing anything important and have knew each other and was coordinating really closely and there was myself there was gavin there was a the developer team other vlad some other people and everyone was

in a very closely talking to each other and then just kind of over time there just started to be more and more people coming into the community right so i remember defcon 1 in london was this big kind of coming out party for ethereum in a lot of ways and that was when microsoft announced their cooperation with ethereum for the first time and like that was huge right like in 2020 it's like you know yeah okay it's another bank another software company doing something but in 2015 it's like whoa you mean a big software company is doing blockchain things um and you know since then there are a lot of these different

banking groups doing things on blockchains uh there have been a lot of just independent individual projects that all have their own stories you know augur um is pretty big and has its own story maker is uh quite big it has its own story as do all of these other kind of communities within the ethereum ecosystem that are at this point even even themselves bigger than ethereum was uh five years ago and so just like kind of seeing that expansion and just continuing non-stop you know going from 2014 to 2016 and then the big you're going to bubble uh and then even past the bubble right it's like the hype died down but i think the communities continue to expand in a

lot of ways and just seeing that happen has been incredible and seeing the technology progress has been incredible seeing things like proof of stake progress from being you know not sure if they can even work to an idea to a white paper to a spec to now a public multi-client test network has been uh wonderful as well so you know lots of uh great things are happening and i'm very happy that lots of great things are happening the launch of ethereum speaking chain was also a milestone for the second biggest cryptocurrency it was a long time in the making here's how massari analyst ryan watkins expects the monetary policy of ethereum 2.0 will change how eth functions as an

asset chris bruniski i think back in 2017 uh introduced these this kind of uh this this paper from uh you know an academic called this name was like robert grier about the three super classes of assets that the idea is that every asset in the world that has ever existed can be classified into these three different categories uh one being stores of value with the idea being that these are assets that maintain their purchasing power throughout time uh two being capital asset with the idea being that these are assets that produce an inter-generated income and then three being commodities um which are assets that can are can be

consumed or are there transformable into something else so examples of those would be you know for a capital asset would be you know a stock or a bond in apple this is kind of this like income producing uh asset an example of commodity would be like oil uh you can use oil for a ton of different things to power your car it can turn into different um you know end products and then for a store value uh you know it could be debatably the u.s dollar uh although some people would kind of stop at that in the space or uh or gold which actually is both a commodity and a historic value so that's kind of like the high level

idea of like these these asset classes now ethereum and ethereum 1.0 is a commodity and a store value it's a commodity because it's used as uh as gas to pay for transactions and i think this relationship will be or this analogy would be especially powerful when a new erp is introduced called erp 1559 uh where uh the majority of transaction fees uh will actually be burned instead of being paid for miners so quite literally be like you know consumed by the ethereum blockchain uh for store value like that's ethereum's use as a asset in you know d5 to store value to send transactions like that's the

idea so that's theorem that's what it takes today now the theorem 2.0 it introduces uh staking and what staking allows you to do is you can post your eth as collateral to become a validator on ethereum 2.0 and now you can actually start generating uh yields on your on your heath and the amount of yield you'll get varies on the amount of uh heat that's being staked so at 524 thousand uh 288 uh uh you know that kind of like you said before like the the the rate that you'll be getting is is very high i'll be about say like 23 24 and then at about like 10 million or

16 million each state that'll be somewhere between like four and six percent uh but this idea is that uh now you're getting a yield on like a native yield on each uh so when you combine those those three things it's like well you have all these different sources of uh demand for eat the asset and ethan's being you know used for all these different things and then i'm like a little bit hesitant to say that it's impressive ended because i've not literally explored every asset in history um but from what from what i what i have seen uh is this there's nothing really like this you know something that is a a non-sovereign uh store of value you know just like bitcoin uh that is also used to you know power this you know globally scalable

computer uh and also offers a a native yields almost similar to a kind of like sovereign bond in a sense and the combination of three just makes these uh super interesting as an asset olof carlson we of poly chain capital discussed how a number of trends in d5 such as yield farming and dows show how the traditional corporate structure could transform into something else entirely this concept of yield farming or what i sometimes call network mining i think is a very interesting mechanism to sort of bootstrap network effects in an underlying system primarily in this case

it's bootstrapping liquidity in some sort of lending marketplace or or trade volume in a dex marketplace or something like that and in doing both the bootstrapping of of the liquidity you're simultaneously then distributing ownership um and control of that system to the underlying users so you're sort of accomplishing two things one is the capital formation and human coordination around what is effectively distributing what look and feel a little bit like shares of a corporation but it's not a business entity or legal entity that's based in a specific geography or jurisdiction it's rather just a pure software system that allows

those people to coordinate around capital and coordinate decision making so you're you're both sort of distributing ownership of that underlying system while simultaneously bootstrapping the network effects of that system and so today yeah that's trading that's lending uh but i think this is a very very useful structure potentially to bootstrap really theoretically any sort of platform that has network effects and so these kind of financial service applications i think make a lot of sense as a first use case but i think over time these types of liquidity mining type schemes will actually be used to bootstrap you know massively multiplayer online games bootstrap social media services you know any sort of e-commerce

marketplace really any sort of business model that has strong network effects where the user's you know kind of primary benefit is from the activity of other users so when i go on facebook right i don't go on that website in order to interact with facebook or some sort of service facebook provides i go on there because of the content that's being produced by the other users of that service and so any sort of application where those network effects exist in theory you could bootstrap those network effects and distribute ownership of the underlying service using this same mechanism which is this sort of network mining and so to me there's really two

paths of innovation happening in the cryptocurrency landscape that sort of feed on each other and are a very powerful feedback loop between the two of them one is these actual d5 products and protocols and just sort of thinking of them as a product right where i can trade a token for another token or i can get you know yield on an underlying asset or i can borrow assets you're sort of kind of seeing very very fast iteration on that product development side but simultaneously you're seeing incredible experimentation in the capital formation and human coordination side which sort of props up these corporations which are sort of sovereign to the internet rather than registered nurse specific

geography um and so i think that you know you have these two separate structures like the the dao or the decentralized organization and the d5 product and protocol um and both of these are you know we're just going through a massive step function change where the pace of iteration and experimentation is hard for anyone to keep up with then i asked him about the wi-fi token of the urine protocol and how he saw it as representative of changing corporate structures yeah i mean you know one could argue that you know every cryptocurrency sort of has this feature but it's this ability for a group of people to coordinate around a set of rules and coordinate capital together which is basically what a

corporation is right you have a pool of capital you have turnover of management so it doesn't rely on any specific individual you have secondary markets where the shares which represent an interest in that capital can trade and then you have a governance process where the underlying shareholders can vote on how to allocate that capital in order to prove improve the value of their shares right and um conceptually that's what a lot of these kind of internet sovereign corporations or dow like structures look like right they're actually replacing the corporate entity itself all of the legal documents um that are enforced in geographic jurisdictions and are regis you know a corporation is like registered with the

state that's kind of how you get it into existence you replace that entire system with pure software and so it it's it's to me conceptually a really big deal um but again yeah it looks a little bit like a toy or a meme right now and yeah i think that's a really effective mechanism for bootstrapping and managing certain types of products and it turns out specifically products that are based on smart contracts and so over time though i think you'll see this sort of bootstrapping mechanism and capital coordination and sort of taking the corporate structure and putting it on the internet replacing it with software um i think you will see that type of model applied to

like social media networks for example or massively multiplayer online game environments and i think we're still a ways out from those things but in theory i see no reason why this structure couldn't take on you know many many different types of businesses here's what the creator of yearn andre cronia himself had to say about these ideas i don't know if i'd say replaces versus a decentralized implementation thereof but but but now i'm being very specific on terminology because you you know business business structures exist because they function well so so we we we saw it with with urine governance

as well where originally everyone was just participants and it was quite chaotic and eventually sort of leaders started popping up in their respective areas you know marketing had their own figurehead and and finance had their own figurehead and eventually these people were elevated to the positions where where they're sort of the delegated decision makers and and that's very traditional business structure but instead of where in a traditional business structure it's very top down this all occurred organically bottom up so that's why i'd say you you're still going to end up with the same sort of business structures if you draw

it on a piece of paper i just think the way that you arrive at who those people are and and how they are empowered to do so it's very different because now if if one of those actors are no longer functioning appropriately you know it's not a ceo that's firing them but it's it's the people in the forum that are delegating their power to them that end up replacing them so so it's this mix of business and i mean if you look at traditional business structures you look at traditional democracy politics structures i i think they overlap a lot in in how they accomplish this and doing that all in a in a decentralized semi and non way i i think is very very cool

right i don't think it replaces it i think it's it's just a different implementation thereof but you agree that it is kind of like a new type of business structure that we're seeing except just completely different from what's been around for the last couple hundred years yes yeah yeah yeah so sorry she's thinking uh like it's it's a it's weird it being put that way but i guess which is pretty cool thanks so much for tuning in to the 2020 highlights episode i don't know about you but recapping all these big stories in crypto made me even more excited for 2021 to see what events it will bring to listen to or watch the full version of any of these clips check out the show notes for this episode which contains links to all the

interviews included don't forget you can now watch video recordings of the show on the unchained youtube channel go to youtube.com c unchained podcast and subscribe today unchained is produced by me laura shin with help from anthony yoon daniel ness bossie baker shashank josh durham and the team at clk transcription thanks for listening you