Did DeFi Just Run Its First $300M Bailout? - DITC

Transcript

So, that's actually I'm so glad you asked that question, Jesse, because it brings me to DeFi United. I feel incredibly mixed by this. So, just for those who aren't familiar, DeFi United, obviously we saw major hacks with Drift and KelpDAO. And the thing that people keep forgetting is these hackers are stealing money from human beings, from people. They're not necessarily stealing money from crypto CEOs. They're stealing money from retail investors, okay? Including and protocols and and crypto whales. So, DeFi Aave got hit really hard by, in particular, the the KelpDAO incident.

So, Aave basically coordinated a relief effort by a multitude of ecosystem participants. And in some ways it it was pretty cool. I mean, this is now raised more than 300 million dollars. And you have major places players like Avalanche, Aave, ConsenSys others Etherfy Tron Lido. And you know, these are Yeah, even Solana. Solana Foundation even joined it. It's amazing. Like, these protocols are competitors, but everyone came together to, you know, coordinate this shared financial response, you know, to effectively restore, um, you know,

Wrapped ETH's backing uh to to prop back to prop up the the stolen funds and and help the ecosystem. So, I part of me is like, this is a beautiful thing. Like, you know, it's beautiful to see everyone coming together to mitigate the damage, mitigate contagion, mitigate after-effects. But, I'm also like, is this is this a good idea? Meaning, it's like someone on your street gets robbed and then all the neighbors get together and give the the person money. Okay, good, but shouldn't we also talk about improving the security on on street and catching the robbers? So, I I'm not sure if it it's the right message.

And And the last thing I'll say is So, when I heard about this, the the first thing I thought about, and this shows me what a shows you what a history nerd I am, was the the Panic of 1907. Like, I'm a little bit of a Wall Street historian nerd. And I don't know if everyone remembers this, meaning remembers this from history class. So, good old J.P. Morgan organized a massive syndicate of leading banks to give liquidity to struggling institutions. Like, J.P. Morgan effectively acted as a central bank during this crisis cuz there was no central bank. So, J.P. Morgan locked a bunch of senior executives from banks in a room in 1907 and said, "You have to

sign this pledge like committing a certain sum for this bailout." And, you know, it was it was voluntary, but again, like the the the story is that he locked the doors of his famous Morgan Library. You can tour that today in New York. And refused to let the bankers leave until they had all agreed. So, this has happened historically, but why why? Like, does this fix anything? Does this really fix anything? Let's start with some positives that there's something being done, right? You know, instead of ranting into the abyss. So, I'm torn about it as well because like, okay, let's help people. Um and I don't I guess I wouldn't go so far back as the Panic [laughter] and like J.P. Morgan. 119 years ago. It

was like, there's mutual insurance right now. There's Lloyd's syndicate model. Like, TradFi does similar things here. I guess the thing that concerns me is the whole point of all this system and DeFi was to take centralized powerful intermediaries out of the mix, right? And with this coalition and perhaps the government one day could call it a cartel, it's an organized effort to choose who wins, right? And which protocols get to survive, and which hack is worth compensating. Because as your numbers show, I don't think there's any way they could

like compensate everybody. I mean, you we all talk about it all the time, but like I help a lot of victims whose money is stolen by crypto, and try and just help them get their money back. And they're not in a big hack news of the day, right? They It wasn't associated with hundreds of millions of dollars. Rather, they lost a few hundred thousand dollars, and that to them is devastating, and perhaps life-altering, right? And so, why are those people not being helped? And so, I think you the analogy you gave, KK, of like the neighborhood is a good one, but it's also like three people get robbed, and the neighborhood coalition decides who gets the money, right? And

maybe there's a way to do it so that everything gets spread out, and like the government right now has like a victims of terrorism fund that you can apply for. And so, maybe there's a way to do it so that there are certain rules about how you apply for the money, and and how you can demonstrate evidence, and then maybe there's something there. Um but I think like another way to tackle it is like if you talk to a Binance, and I'm not even picking on Binance, like any centralized exchange, just like many banks do, there are like millions frozen in assets right now based on suspicious activity, and they just sit there for years until someone helps to claim it, or Binance realizes that the risk of releasing it is

important or whatever. And so, maybe there's some angle there to like get at all these frozen funds anyway. Um I'm just brainstorming out loud right now, because to me having an idea is always good, but this is just like centralized decision-makers of who survives in the market. I I do think that like the reason like this effort happened was one because it was Aave, right? And Aave is so just like symbolically like it represents like DeFi. It's, you know, one of the oldest projects, the biggest like DeFi protocol out there. And I think the other thing too was like I think a lot of people really sympathetic to Aave because it wasn't actually Aave that was hacked. Like but they, you know, they're obviously suffering like

the biggest impact of this. But I I think, you know, that was unique to the situation and like this probably wouldn't have happened if it was just some other like random protocol or >> Which is disturbing because like again, that's a good and bad thing. Like we want Aave to succeed. Like one of the things I've always loved about crypto is, I mean, the the GC crypto bar, the general counsels in crypto have always been incredibly collaborative and open and transparent. And and because for the longest time, and we've all been in crypto for years, this was like this from day one. It was like this through the Gensler administration. It's still like this.

There is a sense of like we're all in this together. Like, you know, there are existential threats to this asset class. I don't ever want to see another L2 fail. Like I don't care if they're competitor, you know, the Yeah. >> You want others to succeed because it's a little bit of kind of lifting each other up and you want the growth in and out of crypto. So the to-get-togetherness again is a beautiful thing. The collaboration is a beautiful thing. But I think this really raises the question of like how far does that go? And this can't just happen every time there's a I mean, it's it's basically like a DeFi version of like a trad-fi bailout, like the kind that we kind of saw all the

time. And yes, there is a difference between like using taxpayer money to bail out, you know, like financial institutions that eff up and and something like this, but I mean, it is a bailout. Like I was That's like the Panic of 1907. Yes, exactly like that. I was having breakfast with um the DeFi lead at like a non-crypto fintech this morning, and he was like his bosses have been following like this effort and the Celtdow thing and everything. And they came to him and they were like, "What's going on here?

Like I thought this was DeFi. I thought like code is law. I didn't know this this can Oh, how precious. Right. >> [laughter] >> But I was like, it's a good question. I think honestly all of us are wondering that, too. That was a clip from Dex in the City, [music] where the wallets are cold and the takes are hot. And we've got a lot more in the full episode. Links in the show notes. I'm host Jessie Brooks. Subscribe and join us on the live stream every Tuesday at noon Eastern. You know what I do with a share of $1 million? Honestly, I'd probably buy a one-way ticket to an island, bring a good book, and invest the rest. And if I were sitting VIP at the World Football Final this summer, I'd be dancing in my seat the whole time. And both are

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