DeFi Didn't Break with Dan Morehead & Joey Krug

Transcript

hey bankless nation welcome to another episode of state of the nation gonna deep dive into a topic today and that topic is a topic we've been talking about over the past couple of months that is a whole bunch of c5 lenders that is centralized finance lenders the celsiuses of the world they broke but it seems like mainstream is blaming defy like why d5 worked great that's the title of today's episode david who do we have on to talk about this we have on joey krug and dan from pantera who wrote this in fantastic investor memo on this exact subject uh and this actually really hits home for me ryan because my favorite podcast other than bankless the daily ran this show

called the collapse of a crypto company and it was all about how the visions of crypto have been completely invalidated by all these collapsing crypto companies and i'm like no no no no that's not the vision of crypto so we are here to set the record straight about what exactly broke in the last six months and what worked fantastically and we're gonna talk to dan and joey from pantera to unpack all of this story and hopefully the story breaks out into mainstream so that they can perhaps correct the record yeah i love uh you know dan and joey they're close to institutions they know they're around c5 lending they're also close to d5 so i think they're going to be able to shine some light here they also wrote a fantastic newsletter article uh recently called uh d5 worked great we're gonna talk about

that as well uh before we get into it want to tell our listeners about rhino so these guys used to be called diversify and i knew them back when they were a decentralized exchange fantastic platform built on layer two built on starkware david what are they up to now because they've really expanded what they're doing what is rhino doing these days yeah so we all know we're going into the world of multi-layer twos multi-chain uh and there's so many different things that you can do on all the different places do you exactly need to know what chain you're on to do your defy thing no not exactly whether you're on optimism arbitram zk sync whatever uh it's just d5 things at the end of the day these blockchains are supposed to be back ends and rhinophy's one of the first apps that pushes the chain

to the back end and it pushes the relevant information to the front so it's a d5 portal for your multi-chain world you can do your basic stuff like swap and swap and trade but you can also invest in liquidity pools and stake and other things that you might do in the land of multi-chain d5 yeah i think this is uh honestly the answer to c5 right if we made if d5 was more accessible and if it was easier then we wouldn't have run into the problems with trusted lending providers we would have just gone straight to the source and straight to d5 so thanks to rhinofi for fixing this and building some user experience around this go click the link in the show notes and you can sign up hear a bit about their upcoming mystery drop as well

um all right david gotta ask you the question i always start these episodes with which is what is the state of the nation today ryan well it is sad and unfortunate that we have to learn these lessons in ways that centralized companies end up having to give retail a haircut still at the end of the day the thesis is that defy takes over the world and for those that believe in the thesis in that thesis which are you and me ryan the state of the nation is we're taking victory laps man like we got the data we're taking victory laps we are taking victory laps i am like yeah well i feel like so i feel like this is applicable because uh mainstream media like they're taking victory laps and saying like it's their moment to say crypto is over it's funny you should say defy is taking a victory

lap and saying hey d5 worked fine because mainstream media is saying ah look we told you all along crypto is broken it's never going to work here's exhibit a b and c well okay mainstream media is grave dancing we are taking our thesis has been proven and now we've got the data to show it and also mainstream media get your together uh this much smaller podcast called bankless is gonna set the record straight all right we're going to do that right when we come back with dan and joey before we do we want to thank the sponsors that made this episode possible lens protocol is an open source tech stack for building decentralized social media applications it is the new era for social media we all have toxic relationships with our web 2 apps we want to break up with them but we can't these applications own our digital lives

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talking about macro at the time of course he is the a founder of pantera did the famous cryptocurrency pivot at a very good time back in 2013. dan great to have you back on bank let's how you doing great thanks for having me back we also have joey krug who's also at pantera and fun fact fun bankless fact he came on last game on the bakeless show two years ago to the day all right we were talking about defy i think at the time and here we are talking about it two years later with him again joey welcome back to bankless thanks for having me all right guys let's get into it uh i want to start here with what's happened in crypto i think since dan probably we last you know talked over the last uh three months or so and it's it's kind of rippled out

beyond the crypto bubble mainstream's caught onto this and given it lots of spotlight lots of attention and that is what david has called before crypto's 2008 moment where we saw a lot of i'm going to call them shorthand crypto banks go completely bust and get wiped out uh can you guide us through what's been happening over the last three months or so in kind of the c5 world yeah i'll do a fake joey shares you you know so we've had a long bull market in kind of everything rates equities crypto all that stuff and in bull markets people you know take on more and more leverage so there there were a handful of lending entities

in crypto uh most were started in 2017 so they kind of enjoyed the the ride we've had since uh crypto is you know in the low single digit thousands uh in price and you know just some of them uh took on excessive leverage and when the market goes down 75 or 80 percent you have any leverage you know it's it's really dangerous so uh and but you know i think the perspective everybody should have is anytime you have a super disruptive technology people are going to try all kinds of business models you know it's like the internet in the 90s you know some of them work some don't uh some get lucky you know so somehow bad luck you know it and in the end though the underlying technology is fantastic and and blockchain is going to you know be

incredibly important yeah i think the the thing i would add to that is i i remember when i first joined pantera dan said something about you know like if you think about like assets or pooled asset vehicles you know they they tend to be limited by their least liquid asset and if you look at what happened to all these lenders they started doing things like letting people borrow against collateral that they considered to be close to one to one but wasn't anywhere close to that from a liquidity standpoint and so like what i mean is if you look at gbtc you know there's two liquidity question marks there one is it takes six months to be able to sell it after you buy it there are firms that let you borrow against that in cash at very high loan value ratios um

you know even though the underlying asset couldn't be sold at all and then even once it was liquid if you look at the trading volume of gbtc versus bitcoin um it's it's kind of no match right gptc is a much more illiquid asset it trades in the over-the-counter markets and so what ended up happening is uh people just basically you know borrow against this very illiquid asset and you know when when people need to sell it starts causing cascading liquidations because if you have a lot of money in a very liquid asset borrow against something that's very illiquid um you know the market impact upon selling it's going to be you know disproportionately higher would you guys take the comparison that this is crypto like 2008 moment obviously there are some differences

we're not trading asset-backed securities that has nothing to do with the housing market but other than that like the parallels kind of seem to be pretty strong for example we have two entities centralized entities with too much exposure that are black boxes that don't have any transparency into what's going on uh not realizing that there is like a center point of contagion being three arrows capital but also a few others and now as a result of all this there's going to be a bunch of just like court dates and legal documents and a bunch of fallout is it fair to call this crypto's 2008 moment yeah i think it's a great analog right and in our letter we pointed out a newspaper article that said this was totally different than lehman brothers no it's pretty much the same you know

some very black box centralized entities you know had a business model at work for a while but when the leverage uh swung against them everyone was trying to rip their collateral back or withdraw and so like joey said you get these you know uh run on a bank where they have you know borrowed money overnight and they've lent it out for six months or in some cases you know multi-year periods of time and you know that's that's a story that's as old as banking except we didn't get bailed out it feels like wait that's important right mount cox you know bitfinex there's been a lot of issues in our industry and not one taxpayer dollar has been you know spent bailing people out hugely important

right when when everybody gets all you know excited about problems they're interesting there always will be problems but the industry just deals with it itself rather than always being backstopped by the taxpayer yeah and there's a bunch of nuances that we want to get into such as you know why did defy get paid back first before c5 companies uh what are the nuances of that where such as like the over collateralization of defy protected it um is that really a fair comparison when like you know perhaps in a future version of defy we have under collateralized loans and then we do have some of these risks there are a bunch of questions that i want to get into but we'll save that for later i really want to get into the story that mainstream media is telling uh and and dan you put this in the in the pantera letter about

the wall street journal's article titled defy's existential problem it only lends money to itself and it talked about all of these you know these crypto companies things that if you're inside the industry you would not call these d5 not in the slightest we call these things cfi uh and i alluded to this in the intro we had this daily podcast talked about the vision the the utopia vision of the crypto industry was just realized to be a bunch of like smoke and mirrors and it's actually just the same old financial system like put on new rails what was your guys's take when you guys are saw the mainstream media report on it like this and what was your guys's reaction to it joey you want to start sure yeah i mean i think i think my view on it is you know if you if you look at kind of

the space the the space of these lenders these centralized lenders it's it's not a model that makes a ton of sense from a business model standpoint because either it's a very very low margin business it's basically the the business that banks are in the big difference being that that you know banks can basically you know basically create money by virtue of lending assets out they have very low collateral requirements the assets that they're you know lending against are things like houses where you know yeah the housing market can can crash and there's been problems with that in the past but you know it's it's a bit less volatile than you know something like bitcoin or eth and so if you look at these businesses their incentive is basically to take on disproportionate risk right they're basically running prop hedge funds and

it's kind of a you know i guess it's kind of a scam model right because like imagine if like you know when you invested in pantera imagine if instead of you know us taking 20 of the upside or whatever imagine if you know we gave you 10 and then we took everything else and then you held all the risk it's a model that doesn't make any sense um and then i think if you look at the incentive of a centralized business their incentive is not to like do what's you know risk mitigating it's to do what they can do to create the largest largest kind of net interest margin possible to spread between what they're borrowing and lending at versus in d5 you know you don't have that problem released today you don't have that problem because these protocols can't rely upon uh things like you know soft

assurances they can't rely upon people saying well i do have the money i'll wire are you 24 hours you know maker has no idea whether you're actually going to pay it in 24 hours or not that's why it liquidates you pretty aggressively so i think that's kind of the big the big difference between the two that i see dan what are your thoughts yeah i think that's a great point you know one of the things that that i i would say now that um sounds easy to say but i was saying a few years ago is if an entity is paying way higher interest rates than you know banks were paying it's either there's just a new market with an arbitrage and there really is a supply and demand imbalance but there are a couple of other potential reasons one is there's credit risk or

counterparty risk another one maybe there's you know technology risk there's a flaw in the software so i think in hindsight that that is what was going on here that you know some of these entities are playing paying you know really outrageous sounding yields uh because they're trying to accumulate assets potentially to sell more stock to get a higher valuation to accumulate more assets um in potentially unsustainable business models um and again you know we're gonna have to learn from these things and there will be great centralized blockchain lending companies right it's just they're gonna have to have lower leverage pay lower rates probably grow you know at a more you know reasonable uh pace than than we were seeing um in the past

that's funny to your point like there will be great um centralized crypto lending institutions in fact even when we saw the meltdown here in the contagion we saw some that were just like absolutely um terribly managed from a risk perspective like almost like ludicrous like you couldn't you can't even believe this is this is real this is happening and others that actually weathered the storm fairly well and there was like this this wide spectrum in the middle um i want to come back and talk about more of that in in a bit but let's get back to this article right so to to david's point the daily podcast um they were very much lumping crypto and defy with the celsius of the world and the c5 companies that that failed and even you

know kind of looking at this article in the wall street journal that we were just showing up earlier the title is d5's existential problem and only lends money to itself and the image that you see is an image of alex mashinsky who is the the ceo not of a d5 protocol uh of course or a company that created one but of a crypto bank called celsius a c5 company it's nothing to do with defy and yet he is the cover story here uh and i can't um gotta acknowledge the irony of him wearing a shirt that says banks are not your friends well actually like being a bank himself and so i want to get to some of the criticism here but let me read directly from the article because you quote it in

your newsletter as well cryptocurrencies keep nosediving the chaos has spread to defy celsius a crypto lender with assets of around 20 billion was recently forced to freeze deposit withdrawals last week crypto exchange ftx said it was bailing out one of the celsius troubled rivals block five with 250 million loan not long after rescuing crypto broker voyager digital voyager block fi celsius ftx all of these are c5 companies i want to get to the first thing you address in your letter which is this weird thing that mainstream financial reporting seems to do which is equate defy and c5 together as if they're the same thing and call calling them both kind of a house of cards why does this happen why do they keep

confusing c5 and d5 and is there a cure for this dan do you well you guys know as well as i do there are super passionate people on both sides of blockchain people like us that really believes can change the world super bullish and then there's a lot of skeptics and you know being skeptical on something that goes up you know 2.5x a year for 11 years is tough business so when it actually goes down you got to make your time if you're a skeptic you have to really make this work and i was on a panel like the day after a lot of this blew up with new real robini right and that guy's predicted a hundred of the last one crashes right and so he's gotta make it happen you know when when bitcoins down a little bit

so i just think that's it it's like if you're a skeptic you just have to like pile in and go with it and you know frankly they're selling newspapers right like they're not trying to get the story right they're just trying to sell and you know destruction failure always sells right like telling everybody that 10 of all u.s to mexico remittance goes over bitcoin that doesn't sell newspapers it's good news right like it's helping two million migrants every day right like that's awesome but that doesn't sell newspapers talking about you know existential problems and all that you know that that's better for news so i think we're just going to see that but our job here is to try and help educate people on reality

i also definitely want to put a lot of blame on alex mussinski himself he was this person that was masquerading as like this celsius app as defy like break up with your bank put it put your crypto into the celsius app not like definitely realizing the discrepancy between what was true defy and what was celsius and so like there are these grifters that come into this space understand the true ethos of crypto understand the true power here and then build this old thing but with the new things narratives so i do think there's like a lot of blame as to why mainstream media can't really seem to get it right is we all know crypto's hard to learn we've all been through that but then you

also have these grifters come in and like obfuscate the true effort the true ethos of crypto by making up this like centralized centralized app with a d5 branding would you guys agree with this take joey any thoughts yeah yeah i definitely agree with that i think i mean i think if you look at kind of the the universal reporters you have some who do you know really thorough fact checking and you have some who kind of do it much lighter right and if you look at something like celsius you know they they told everyone oh work e5 you know they they raise hundreds of millions of dollars from you know what you would think were really sophisticated investors and so if you're a journalist and you're kind of doing the more you know light version of fact checking you might look at that skim over it and say oh that's a great story

i can write you know how d5 failed and not actually kind of look deep under the hood there's also an element of what dan said where you know people are trying to sell newspapers so there's a bit of a you know incentive misalignment between reporting what's 100 accurate versus what sells but i actually think a good amount of it i would say over half of the inaccuracies that you see in the media are just the reporters haven't taken the time to really you know dive deep on it uh is my view do you think partially joey it's because they're not incented to take the time so i you know i don't know what the editorial stance of the wall street journal is but i have to imagine it has to do with wall street right and where their incentives are and you know i'm not i don't know if wall

street is kind of in a war with d fire that existing banking structures in a war with defy i could imagine that being the case but certainly they're not incented to promote it and it they're very fine with with um talking about c5 bankruptcy and define the same breath because like what do they care if this crypto experiment works out that would be one take do you think that some of the mainstream financial reporting is just has no incentive to talk about the good qualities of cryptos is part of the problem i i definitely think there's some outsole on the element of that for for sure like you know if you look at like a bank as an example um you know they have this huge business that today is is going to be disrupted

you know over the next 10 to 20 years and you know it's in your incentive to muddle the waters between c5 and d5 right you know the the more you can make it muddy and make it so legislators and people in congress can't understand it the higher odds you have getting regulation passed it doesn't actually make sense i think the thing is interesting though is you know we recently a lot more congressmen and congresswomen have been talking about the space and we've talked to a lot of them and you know surprisingly actually to my surprise like people are actually taking the time to do the research um like they understand that there's a difference um and i think people realize that that like this issue of you know crypto and how it's regulated long term is actually something that like a matters and b that

voters care about um and if you look at like the average voter the average voter isn't like you know super pro bank right like you know the average voter isn't going to be like oh i'm going to go to the ballot box and vote you know because there's this you know congressman who supports you know some legislation that bank of america wants um versus you know if there was some congress person trying to you know quote unquote kill crypto they probably would go out and vote against them um and so i think people in congress are starting to realize that and so i think like even the kind of like narrative money in the waters isn't actually really succeeding um which i think is you know somewhat heartening at least in my view okay so we know that d5 and c5 are not the same thing of course even if um some

of the mainstream media is having difficulty kind of separating the two but let me come up with another criticism that was in the wall street journal article that we're just citing and i'll read a quote here defy has ended up committing all the same sins as wall street essentially becoming a vehicle for a new generation to engage in the rampant speculation typical of pre-2008 investment bankers so the charge here d5 is the same as wall street you crypto people you're saying that this is a new thing that it's more democratic finance that it's you know kind of here for the for the people well that's not true it turns out that you guys were wall street all along just with a different veneer what would you say to this criticism dan

well yeah you know any new technology has people that want to speculate on it right but there are probably you know 100 million people that actually use crypto in real world situations every day you know transmitting money across borders or whatever uh and then there are some people that are speculating on it and that's just you know it's just the nature of a new technology people are going to want to uh people who believe in are going to want to invest in the future of it so you're going to see that and we've seen that already for 12 years right there's been bubbles there's been bus but um you know blockchain prices normally end up higher than they began each cycle um you know so i don't think the fact that there are speculators is anything new or you know in any way negative it you know

happened in the dot com boom it happened and you know all kinds of booms that we've had over centuries basically so uh the fact that people want to speculate is not any of itself and negative what about this charge joey that d5 and wall street are the same thing it's kind of the same mechanism it's going to collapse where it's going to result in a similar sort of system what do you think about this yeah i mean i think i think they're you know quite different in in some really key ways right so if you look at you know historically on wall street there's often not a ton of transparency into what's actually going on and so if you look at you know 2008 and some of the classes that happened then you know no one even even people at these companies no one knew like what

their derivatives exposure was um when you had the bailouts you know the government was both guessing on how much money they needed to use to actually do the bailouts and also didn't know the derivative of exposure until long long after everything had had occurred and so you have all these weird situations and traditional finance due to kind of you know things not being transparent where you don't actually know like what's going on you don't actually know what like your actual risk is uh the the c5 companies you know built on top of e5 like celsius like they have the same problem right like if celsius had a thing on their website that showed you know in broad strokes you know what was the average of clarity horizon of of a dollar deposited in celsius i don't think we'd be talking about celsius today because they wouldn't have

they wouldn't have had customers um you know if the customers saw that well it's with all your money it's going to take you you know two years and by the way your your money is in you know assets that have 100 plus annualized fall the average person doesn't know what that means but the press would cover it and tell people what it means which is like your money is really risky it's not like you're depositing usdc and it's and it's some low risk thing and so i think that's one important difference of transparency and then two is the risk controls and there's this great like saying in software which is like worse is better and i think you can think about risk risk control systems you know on wall street people come up with these really complicated risk control mechanisms where people kind of convince

themselves that they know more than everyone else and that their risk mechanism is right you know you saw this with the you know credit default softs issue in 2008 and you see it if you look back over the last 300 years of financial history you see it a million times whether it's you know long-term capital management or or even three arrows or anyone else but if you look at d5 it's very simple you know it says if if your loans within a certain percent of a collateral threshold you start to get liquidated if you don't top up the collateral you get liquidated and it's very basic and everyone in traditional finance says oh that's super inefficient and it's like yeah it's less efficient um but it also means that if i'm depositing money in it i don't need to trust um you know compound or ave or

maker to like call some you know supposedly rich person at 3am and have on top of their collateral and you know often in these collapses what you find out is people who you as a centralized business thought were supposedly rich actually aren't or they've borrowed the same money like 10 times from 10 different venues and no one's talking to each other so no one actually knows that in d5 it's much simpler and so these problems don't exist sure it's less efficient but it's also you know much much less risky i would say about transparency that's the whole thing about blockchain right it is all out there for somebody to see and so decentralized finance um projects i'll let you see what's happening and like joey said if you really knew what was happening behind

the curtain with some of these centralized lenders you probably never would have lent them any money right and the lehman story is so interesting because when it went under nobody knew what the risks were to the firm and nobody knew what collateral they had everyone just grabbed anything they could and you know abrogated contracts didn't give back collateral it was all just a huge mess and at the beginning people like it's 120 billion dollar loss it's all terrible the world's coming to an end like six years later you know bankruptcy proceedings and all this stuff forever they lost 3.9 billion you know it was a tiny amount relative to the crazy damage it did the entire world right it would be so much better for the u.s treasury just write a check here's 3.9 billion we're done let's move on right it was

crazy because nobody knew there was you know total black box and so that's the beauty of d5 is in the future you know protocols will have all their information out there and you can make a choice you know if you want to do business on maker tower or whatever you can look at all the stats and decide if it's a good idea or not yeah you know great example uh mount gox centralized we're still dealing with bankruptcy right that was like seven years ago right like it's still going on and on and on whereas like in d5 we're already done we already did the the may crisis and it's over and we're we're on to the next thing david i've also got spirit paid a time we've also commented here that um like every every generation needs to learn the lesson of

not not your keys not your crypto right and so like every every 10 years we do something like this and this is kind of another mount gox for people depositing their crypto into centralized into centralized providers and a lot of these people to your point about the black box dan they had no idea they were actually lending money to three arrows capital that suzu was using some of these proceeds like buy yachts and stuff right like this is the craziness but with defy everyone who went to a d5 protocol got paid back it was uh orderly and efficient liquidations even celsius had to pay back their maker loans and their ave loans which is incredible let me get to another criticism that was in the in the uh wall street journal article uh and

that's the criticism that defy is too self-referential right it's like there's no real world assets so even when you're collateralizing things it's other you know defy tokens the comment is this crypto lenders exclusive focus on other crypto projects suggests their problems run much deeper than a lehman style liquidity crisis so this is the comment that even all the crypto stuff it's all kind of based on other crypto assets in a house it's a house of cards there aren't any real assets that are backing some of these loans what do you think about this comment joey yeah i mean i think i have a couple thoughts on it you know one is if you if you look through the history of of you know financial tech innovations people have

used that criticism every single time whether it's from the invention of the joint stock company a few hundred years ago to the invention of options the invention of swaps um every derivative that's ever existed people have used that criticism and what's interesting about it is it's both true and wrong right like in the beginning new technologies are used a lot for speculation they are very self referential you know when the internet first came out it was a bunch of academics and sending each other their papers for peer review pretty self-referential um you know but as time goes on people figure out new use cases for these technologies they figure out new ways to use them in the real world and you know you fast forward five ten years and you know no one makes that criticism anymore or at least you know people who

do make that criticism like nobody cares because it's so obvious that they're wrong right like imagine saying the internet's just self-referential pointless today but tons of people said that back in the 90s you can pull off videos of tons of talk shows where the hosts are like you know making fun of bill gates saying like what's this crazy thing that you call the internet kind of seems like a joke um and and the same thing is true with like the history of the automobile you know well my horse is faster so i don't i don't you don't need that car people are very short-sighted when it comes to tech innovation um and so i think that is that is so much for your day it's starting to change you know doing stuff in the real world is harder than the virtual world um but i

think we're starting to see more and more of this um i think it'll probably start to kind of take off more with derivatives that are pegged to real world assets uh we're just talking about this in our investment committee meeting yesterday like synthetics has a bunch of new traction recently um on stuff in that in that vein and then you know there already are things that take place in the real world on makered out it's you know it's pretty primitive and early but i think if we have this conversation again in five years you know it it won't look primitive and early anymore you know i was asking the question earlier of like why do they keep confusing c5 and d5 and is there a cure i actually think the cure is episodes and events like this where you saw the chinks in the armor of of cfi and you

saw it kind of melt away and you go into bankruptcy and all sorts of issues whereas d5 stood strong and i i want to go back to the kind of the title of um the the article you published to pantera investors which kind of captures it for me which is d5 worked great it did work great and maybe we could just spend a second contrasting what worked so well about defy and joey you were talking about like risk controls and transparency but how well did defy hold up through this storm and this is a pretty significant drawdown of course and a pretty good like testing of the system to see if it works i know where it's like 80 drawdown on eth or more

right 90 on many alternative layer ones you know close to 80 on on bitcoin this sort of thing um how why did d5 work great like what about it worked so well joey yeah i'd say um actually on the on the maker thing i used to always do this tweet um but i quit doing it because it just became redundant but you know back when people used to say oh maker's never gonna work doesn't work i used to periodically tweet out you know die is still a dollar um and you know you like i did i think i did it last time i did it was like in the march of 2020 crash where you know everything went down 50 in a day and you know it it bounced back pretty smoothly um and i think like if you look at you know what's

what's different about about d5 i guess the main thing i would say is like and like how it worked is it's just much faster liquidating liquidity in people um and so if you look at kind of every protocol you can think of on a compound maker um you know other kind of more obscure ones you know these centralized letters had as you pointed out earlier had to pay after loans before they got liquidated um you know users spent money deposited on these platforms juno is bringing crypto friendly then about the price to eat falling or whatever as many people were um you know they they still didn't lose their money um and i think the reason is just because of how simple liquidation mechanisms are

um you know versus the centralized companies yeah their mechanisms don't work that way um like i have friends who have to use those companies and i know that like when they're close to liquidation you know they'll often give them like 24 hours 48 hours to pop up the liquidity um and that's like even if they've you know fallen below part of value right because they just trust them as a counterparty um and there's a lot of risk in doing that and and you fight you don't really have that much too dan dan what would you add to this oh i know i think it's spot on you know and d5 it's just code and collateral right like and you can't con code you can't like lie to it you can't you know say you've got

more assets than you do you have to post the assets and the code owns the assets and controls the assets so it really is superior you know the and like joey said it's instantaneous so there's no like hey you know we're going to do a margin call we're going to wait you know 24 48 hours uh so again it can be proactive and liquidate and it does just do whatever it says it's going to do you know um where centralized lenders don't you know they they just they ghost you right like there's a lot of stories of these centralized lenders taking way more risks than people knew about and then you know just not not get being in touch for days or weeks or now months so uh you know d5 really is is superior because it's you know gonna actually do

whatever the code says it's gonna do there's an angle that i want to dive into which is that the transparency side of things and that's definitely the start con one of the many stark contrasts that we're seeing in this whole story where uh as it turns out uh suzu 3rs capital we're at like the epicenter of like 37 different lenders who all lent the money and perhaps if just a few of them got on the phone with each other and be like wait suzu just asked to borrow a billion dollars did he ask you to borrow a billion dollars like if we had that game of telephone with all the c5 lenders maybe we'd have actually been able to prevent this but by the nature of what a centralized lender is that's just not going to happen like they're not going to disclose their business practices

there's probably some uh like protections against their own clients that they also want to protect but defy apps have no such interests and not only that but they put their entire order book or position on chain which a lot of traders or other market participants have said this is actually a detriment to d5 because that transparency you know they they disclose their hand they're showing their cards like we are we are buying you know ether at thirteen hundred dollars and like that is a position that you can see on the market you can see where all the liquidity is for example you can see who gets liquidated at 1400 each and so individuals look at defy and feel a little bit

disadvantaged but the system as a whole is inherently transparent uh do you guys have any thoughts on just like is there a world where c5 can become more transparent is there a world where defy can kind of suit the needs of these individual players that would like a little bit more of obfuscation and overall just like what role did transparency have in the defy ecosystem that prevented it from looking like the c5 ecosystem is right now dan i'll start with you well yeah i know it's an important point and and the next generation of centralized lenders are going to be forced to provide more transparency right we did a five-year experiment in the total black box and didn't work great so um whether it's do you mean dan force by

regulation yeah i was gonna say whether it's uh by commercial motivations or regulators and probably both but you know people aren't going to want to lend billions of dollars you know to entities they don't know you know what they're doing so uh and we even saw that you know with credit suisse and other big lenders to you know some some big family offices and stuff they had no idea what how much leverage their clients were taking and so everybody is learning that lesson both in crypto and in their normal serious markets so they'll be forced to disclose more about how much leverage they have what the imbalance is between their uh the time frame or their liabilities and their assets um and then yeah you know regulators

probably are going to get more active and require more transparency and you know frankly more transparency would have been great you know for our industry like you know some of these firms took on too much leverage and it's unfortunately has a negative blow back to the whole industry are you in favor of this kind of regulation when it's needed for black boxes and centralized providers yeah you know i'll say a very controversial thing i'm very much in favor of sensible regulation unfortunately a lot of the things i've heard are not sensible so um and i used to say this 10 years ago about bitcoin it it suffered from a lack of regulation like when fencing and all these other entities like the irs had regulations on bitcoin it helped right it helped people

decide oh i really want to invest because i get capital gains tax treatment all that kind of stuff so um some regulation of centralized lenders would be better for industry but there definitely are some crazy you know outcomes that could happen you know some some very negative regulatory regimes that could happen there's a conversation that i want to have uh and it starts with 2008 where bitcoin was created in the in the wake of 2008 uh and it's been like marketed as like as a result uh or in response to the bailing out of the banks uh if if under a bitcoin standard we would not have bailed out the banks and we would have preserved our monetary policy and after the d5 or c5 broke in 2022 i think we

want to expand that that trajectory a little bit more like would defy have actually prevented 2008 if it had existed under a d5 paradigm i think that's a really interesting conversation but i'm going to save that for the second half of the show so we're gonna have to go to some of these fantastic sponsors that make the show possible juno is bringing crypto friendly banking straight into your trucking account with juno you can send money from your juno checking account straight on to a layer 2 like polygon optimism arbitrum and they have zk sync and stark net support on their way you can skip the ach wait times you can skip all the gas fees and go straight from your checking account to an ethereum layer two in seconds inside juno you can buy and sell crypto with zero dollar fees and your juno checking account

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which gives brave browser an extra level of security versus other wallets bravewall is your secure passport for the possibilities of web3 and supports multiple chains including ethereum and solana you can even buy crypto directly inside the wallet with ram and of course you can store send and swap your crypto assets manage your nfts and connect to other wallets and defy apps so whether you're new to crypto or you're a seasoned pro it's time to ditch those risky extensions and it's time to switch to the brave wallet download brave brave.com banklist and click the wallet icon to get started and we're back with joey and dan from pantera right before the break i was teasing this uh this trajectory that i want to unpack a little bit there's the the narrative that uh a lot of bitcoiners talk about bitcoin is that if

we had the 2008 financial crisis using the bitcoin standard we wouldn't have been able to bail out the banks we wouldn't have been able to print a bunch of money because of the bitcoin center the the sovereignty of the money would have been preserved the value of the money would have been preserved but also at the same time i remember a quote from ben bernanke saying if we hadn't stepped in in 2008 things would have been way worse things would have entered a perhaps a capital d depression not just a pretty pretty bad recession so i i'm wondering to you guys if we could just play out a scenario in our heads uh and and like just talk about this what if 2008 happened under a defy standard would defy have been able to prevent something like a 2008 financial crisis where we have perhaps uh very

like good liquidity like joey said good or good transparency as we've talked about and optimize uh transparency as to where where all the assets are uh joey what do you think about this idea that the 2008 financial crisis would have been prevented using d5 rails yeah i i think it you know certainly would have been mitigated um i i think you know if you look at if you look at the traditional financial system right like the the problem is it's kind of become addicted right like it's like if you're addicted to drugs like and then you know you can't just migrate at all the d5 overnight because you know then people would would you know die from withdrawal the market would die from withdrawal basically and so you look at the market like it's kind of

addicted to you know loose monetary policy and in low rates um what you can see is evidence that this is just like you know rates are hiking a little bit um relative to historical rates and you know the nasdaq's sounds somewhere close to 30 something like that um and so but i do think one thing that's interesting about d5 is it you know the much tighter liquidation the much tighter kind of risk policies that sort of thing it's certainly much easier to migrate over to that then like migrate everyone over to bitcoin or currency or whatever like that's that's not going to happen but i would i would not be surprised at all if 20 years from now most of the world's financial rails you know run on on top of d5 based systems under the hood and obviously people are always going to do stuff on top it's more risky

like it's just human nature people like risk you know the the core base layer though i think will be much more stable right so if you look at finance today you know the core base layer isn't always stable uh 2008 was a great example of that um also you know march of march of 2020 but once everything's on d5 at least the core base layer will be stable there will be stuff on top that blows up just like there was this year with the you know centralized companies built on top but at least the core of the financial system is like solid and i think that would help prevent the problem ben bernanke talked about right like you know it would have felt like the role of what it would have ended you know if if the government didn't bail people out in 08 versus you know if it were just a

handful of banks on top of you know rails that were really solid um where everyone was kind of sharing the same sort of risks mechanisms liquidation mechanisms transparency that e5 provides i think 08 would have been a much smaller smaller event dan any thoughts as well yeah you know all the issues like that are from excess right and in 2008 there was this whole kind of ecosystem of promoters trying to get people to accept mortgages at crazier and crazier terms until when they got to low docks no dock loans 100 ltv you know people that weren't even residents or citizens getting these loans

because the person doing the origination wasn't going to keep it they were going to sell it to another guy who's gonna bundle it sell it to another guy who's gonna put in the cdo and sell it to a fourth guy and so that would be avoided if you had direct borrowers and lenders matching up on d5 right that you know you're not gonna have that kind of craziness uh and then you know on the monetary thing is uh it's amazing how quaint satoshi is he was pissed or she at 50 billion bailout wow i mean that's so 2008 man they did 50 billion the fed does 50 billion every four days now right like that's a tiny amount of money compared to these days right and

it was such a problem that it riled up a couple hundred million people to get involved in the bitcoin project right and now uh the fed to 200 of all mortgage lending in the us in the last two years i mean it's just absolutely insane and so that's created i think another massive bubble that has to be worked out and again i think it was all if we all got to vote on monetary policy or we all got to decide you know how much money to lend people in the mortgage market we wouldn't have gone to these extremes and the markets really started to gyrate i saw a really cool graph i can't remember who wrote it uh i'll try and remember and i'll send you to you guys of the average rate in the us the fed funds and 10-year average

together times the amount of debt the u.s has and it is gyrating more and more wildly and i just think it's going to come delaminated you know we're producing so much debt and now rates are going i think pretty high um and all those things probably wouldn't happen if we had you know kind of more of a decentralized process where everybody gets to vote because nobody asks me to vote on whether the fed should do 200 mortgage lending in the last two years like i would have said no but nobody asked me to vote uh in a d5 world or a world that's more monetarily oriented with blockchain you know each person gets to vote with their wallet i want to ask you guys the devil's advocate question here right and so i i'm you're putting on my crypto uh

skeptic hat for a minute and hearing this podcast would you say okay point taken um d5 is different than c5 okay we'll give that a chance you're right that's d5 protocols held up good for you win win for defy and crypto and yet you in the crypto industry talking to us maybe bankless maybe pantera maybe others don't you bear some responsibility here for not warning people about celsius about voyager about three era's capital do we have a role to play is there some responsibility we should we should feel to educate retail as to the risks and maybe like taking c5 aside how about things like luna for example that was just you know a month

or so earlier before the the c5 collapse and some might argue probably precipitated a lot of this and luna itself was um marketed and advertised as like d phi and there's some elements of like 20 yields you know like what role do we play in helping to educate about proper proper risk management to unsuspecting retail um dan what do you think about this yeah i mean you know our responsibility to kind of give you know sober advice about the markets the one thing i would say is nobody had a crystal ball right if uh the nasdaq didn't drop 30 percent bitcoin is still being at 60 000 and

we'll all be going on and all these models would work right like so you know you don't want to be running around you know say say the sky's falling if maybe it wasn't going to fall so you do really have to strike that balance of trying to give people advice but there are definitely extremes of things that could happen what do you think about this joey yeah i think i think there's a couple things so you know one is in when you have these black box systems it's hard to know what the actual risk is right like you don't want to go out there and tweet you know celsius you know celsius seems like a you know like a ponzi or whatever if you don't actually know what they own right um you know maybe there is some you know legit prop market making strategy that

they have that's the ceiling 20 it's unlikely but you know you don't want to go out and you know disparage someone unless you actually know what's going on so i think maybe you know one thing you know the community can do you know all of us concluded it's like a lot of people that like you know hey if you're using a black box none of us know what's going on you know you don't you don't that's the problem with black boxes and so you know i think kind of telling people to look into d5 is one thing and i think the other thing is you know at the dance point no one no one has crossed the wall like for instance you know pantera we own we own some luna um you know if we if we known it was gonna blow up you know we would have we

would have sold a position right um and and so i think no one has to crystal ball this is the other important thing it's just the classic rule of investing which is like don't invest more than you have to lose and stuff right if you look at celsius you know people were were borrowing you know mortgages on their house and then putting that all in celsius thinking they were getting a safe field in the history of finances whenever something looks like a risk-free investment uh it probably just means you don't understand the risk and sometimes no one in finance understands the risk right like if you look like you know long-term capital management there weren't a lot of people screaming you know that that their strat was gonna blow up before it did um you know most people didn't have any idea that that wasn't gonna work

um and so i think that's the other thing it's just like you know encouraging people like hey like you know be cautious like you know pantera we own like in our liquid funds we own you know 14 15 positions you know sometimes up to 20 positions um you know we even we can't predict exactly what's going to happen right and so you know if we could we would just own one position right and you would just always rotate exactly into the one position that's going to be the best there's a reason why funds like us don't do that there's a reason why you guys probably don't do that and i think those reasons are good you know it's kind of the classic diversification story absolutely well said um dan just two more questions for you and i want to ask this one to you did all of this surprise

you i mean you've been you've been a fun manager you've got a lot of experience under your belt but like i gotta admit you know i know crazy things can happen in crypto but i was legitimately uh surprised by theo's capital doing the thing that it did i did not have that on my bear market bingo card i didn't were you surprised like i mean how did this how did this uh catch you well like joey said you know we we don't have any more information anybody else on the inner workings of those types of firms so you know we wouldn't have been able to predict which ones were going to fail but if you had told me that uh ethereum may be down 80 other things down 90.

i would have said something's going to break right like it's not that is not surprising at all that if you have any leverage uh and then a bunch of these people doing the grayscale arbitrage you know that that it's not going to be an arbitrage if the market comes off a ton and so the you know thing that used to be a eight billion dollar premium one to a six billion dollar uh discount like all those things if if you had told me which i didn't predict that the market would go down 80 but if you had told me that or if i hadn't believed that what actually happened isn't that surprising so guys right before we started recording uh we're wrapping up that part of the show we're turning to macro real quick uh

right before we started recording it was uh the announcement of the fed fed rates whatever the fed rates was going to be i actually haven't looked at what number it is i'm assuming 0.75.7 it is 0.75 ryan yeah prices are up bigly uh we're up like uh 20 10 in ether six percent in bitcoin uh just like quick takes on the state of the fed the state of the crypto markets and the state of the macro markets and what you guys are looking at in the next few months and quarters uh dan i'll start with you well the other thing that did surprise me is how tied crypto has been to the fed right like it shouldn't be tight either way like the fed not tightening as much as people expect shouldn't make crypto go up 20 and vice versa like you know so my main

view for the next 12 months is crypto's gonna decouple from the macro story and trade on its own fundamentals right a lot of people using it you know uh d5 worked all that stuff um the only thing i would say on the macro side is i think people are still totally crazy about the fit um they're gonna have to hike a lot more than people are talking about and um i think people are starting to get their heads around the fit is hiking but i think everyone thinks their reaction function as a fed's job is to hike until they cause a recession unfortunately that isn't their mandate their mandate is the hike until they get core cpi below two percent and that's going to take a couple of years um there's a bunch of reasons why owners and stuff

are going to make it take forever so i think rates will keep going up and crypto is going to go up joey do you have any hot macro takes as well i mean on the on the rate hike i was actually surprised that the market moved as much as it did just because i think the odds of 75 dips were like you know priced in something like 95 97 you know it it seems unlikely that they would you know be so aggressive enough to do a hundred so i'm surprised the market's actually up so much you know i thought it would have been kind of flatter up a few percent um and then on in terms of like what we're looking forward to though i think a lot of interesting stuff is happening in d5 um i think we're kind of finally maybe starting to see um you know d5 numbers

like tvl and stuff start to get back in an uptrend um you know dan and i are talking about the other day like the total market cap of defies on the order of 20 billion depending on what things you count and don't but um you know the crypto market cap's like a trillion and and i think it's absurd for d5 to be anything less than 10 and and i would argue actually you know much much higher than that 20 30 of the total crypto market um and so yeah i think over the over the long run we're very bullish on d5 and then the last thing i'd say is you know you look at like what's what's up coming with each two in all the you know roll ups on top of eth uh things like arbitrage optimism um you know other solutions like starkware i think i think eath is going

to look really interesting coming into the next bull market because it's it's gonna be the first time that it actually like scales right like yeah you could argue in the last cycle you could sort of use stuff like matic or polygon or whatever but here there's like a bunch of different solutions they all actually work i think people will be able to work out a lot of the ui ux kind of issues over the next six to nine months and then as we go into the next cycle over the next few years you know d5 is actually going to scale um which is you know something that we've been talking about forever but we'll finally actually be here and so you know we're super excited for that yes we share your excitement uh dan joey it's been fantastic to have you i think this is uh probably the most bullish

thing that happened during this this bear mark in the last few months is how well defy worked and i think that is uh you know a testament to what's been built and the future that we have here thank you dan and joey for uh talking about this with us today on bankless thanks thanks action item for you bankless listener we'll just include a link to d5 worked great the investor newsletter from pantera in the show notes as always risks and disclaimers none of this has been financial advice never is crypto is risky so is defy so rc5 lenders you could lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bankless journey thanks a lot you