Defi 3.0 & The Future of Innovation with Katie Talati, Tegan Kline, Matt Leising, and Rahul Sethuram

5 3.0 and the future of innovation my name is Matt leising I'm the co-founder and editor-in-chief of dissential media where we focus on the stories of the people who are building web 3 and blockchain I spent 17 years at Bloomberg News before that where I started covering crypto in 2015. so I wanted to just run down and eat we're going to use a quick introduction to everybody and then get going yeah GM everyone my name is Rahul I'm co-founder of connects protocol which is a cross chain interoperability protocol team behind the graph and I also lead business at genot hi my name is Katie schlotti I am the head of research at ARCA we're a crypto asset management firm and I oversee all the investment Research into our funds all right great um I thought to kind of set the context here we could go and talk about everyone could give an example of a current D5 protocol or app that you like that you that works and so we can just sort of set the stage there and then talk about the future yeah this one's kind of hard because there's so many cool protocols it's really hard to choose one but for the purposes of this talk about like the future and I where I think things are headed I'm gonna say frax Finance just because I really like the way that they've like both vertically and horizontally integrated themselves to really like look like a player that has the most liquidity to do kind of like the most interesting different things with their liquidity and eventually get to the point where they can attract and onboard some of these bigger institutions and players cool I really like Rubicon Finance I think what's interesting right now is kind of getting away from amms and moving towards order books and I think that the transition to layer twos have really enabled that order book movement uh I'm gonna say uniswap just because they were really like the you know Pioneer in the field of uh pretty much every you know D5 primitive they were the starting point um and since you know just releasing an initial amm they've clearly built on the technology they've made pools more efficient um so liquidity has gotten better um and they you know they're also looking to the Future like hey if we're gonna be an amm that's cool but we're gonna also try to build beyond that um and allowing projects to also use our smart contracts to build their own interfaces in the future yeah that's really interesting I was thinking about this earlier when I was watching an amm presentation and it occurred to me you know in the wake of FTX and a lot of other centralized failures I think amms need to get better um and I think there's a long way to go there but do you think that that's happening or you know you mentioned more like order book trading um is it is the future you know like a decentralized automated Market making system do you think yeah I mean I think definitely both will win right amms are super efficient you can make a lot of money as an LP with the pools but I think you know when you trade on a centralized exchange what do you look for you look for limit orders and that's really what you're going to get with the order books um so I think that you know the ux and the UI can really improve and we're starting to see it improve over time and to your point Matt you know with the FTX the wake of FTX we've learned an important lesson which is not your keys not your crypto I think we relearned this over and over again and as new people come into the space it's really important that they understand that you need to self-custody yeah I think one thing on that note too I think it's really interesting because you know amms are like one of the initial D5 Primitives right it's like it's so beautiful really it's like you just trade against a smart contract it gives you a formula and it works really well for certain use cases like long tail assets and like you know low volume but once you get into these like bigger volumes and more efficiency needed then amms don't scale and now we have the tooling with like layer twos and some of these other really cool infrastructure pieces to actually make buyable order book exchanges yeah and I'm definitely not the first person to say it but all the failures last year were centralized entities and the things left standing like uniswap and other amms are decentralized and I think that shows the power um one of the other lessons that we should be taking from last year and a lot of the um the failures and the frauds and as we think about defy and the future I think yeah um I think you know the biggest thing is just transparency right like I think with any of the deep projects for the most part their treasuries are on chain you can see activity on chain you have a real idea of what's going on um versus with centralized exchanges at the end of the day it's a block box like we do get reports of like hey this or what coinbase's volumes are but there's no way that we're like necessarily proving that we also don't know about their solvency or their credit worthiness um but you might more and more about a D5 protocol because they're usually publishing their treasury balance and if you're you know if you look at any of the big projects like maker Tau um figured out like Wi-Fi any of those they're all like every month or quarter they're usually putting out a report with their p l on top of transparency I'll say of course self-custody which we mentioned but also censorship resistance I think you know the bitcoiners really got this right they cared about censorship resistance from day one with ethereum we were a little bit more optimistic we thought Regulators were just gonna do the right thing and I think we're starting to see that that's not always the case and our what we build in this space it needs to be censorship resistant and you mentioned maker what happened recently with Wormhole it with maker Oasis rolled back the transaction and got jumped back the crypto from that attack so that is not censorship resistance so I think it's really important and it's something we need to focus more on yeah and I think what you guys are kind of saying in the end is decentralization matters like we're building this world of decentralized Finance we're not here to rebuild these Financial rails of the old system where we can have these actors that just come in and do whatever they want behind the scenes and end up like blowing up themselves and blowing up the users in the end it just becomes like a worse version of the traditional Finance system because it's not properly regulated anyways yeah I would add um security to that I think people need to take security seriously and take it first it's not you know that should be the first thing you're concerned with um and with that in mind I'm just wondering you know play Devil's Advocate I guess are we ready for Defy is this ecosystem ready to do this yeah I mean it's it's a good point I think people are getting burned left and right people are losing money but at the same time we are seeing these like battle tested protocols Forge themselves through the fire like uniswap right now anybody can trust that with like any amount of money and you know you're never gonna get wrecked of a compound some of these like really Blue Chip Protocols are the ones that have shown that they are ready and I think you know it just takes time to get to that point takes a lot of experimentation people are going to lose money along the way which really sucks and I don't know if there's like you know better ways to to kind of test this stuff out beforehand but it really seems like testing prod is the name of the game but I think you know at the end of the day you do end up getting these protocols that become battle tested through this process so yeah and I will say you know we're more ready today than we were during D5 summer when Gatsby's were super high now we have layer twos we're scaling we've reduced costs but to your point we do you always need to audit your code time and time again the white hat hackers in this space are so great um but yeah as a Founder it's really important to audit before you send it into the wild yeah I actually I'm sorry I disagree with the test and prod like um you know I guess vibe that everybody in the space has I think it was great when we were new and we were just trying to push ahead and say hey like look what all of this can do and you just pushed it live people were you know jumping into pools and stuff like that but if you really are talking about like what brings the next like million billion people into crypto into defy you can't have them losing money in a rug pull or in a smart contract failure or a faulty Oracle or a governance attack like that's just not gonna be like widely acceptable the the reason that the corporates that have like not come into the space big corporations they they are in the same page they don't they don't think security is there yet they would want to you know um trust their customers funds to these protocols so I do I think that security testing is a huge um you know thing that we need for this next iteration I'll also add to your point earlier just decentralization is so crucial and there are pieces of these defy applications that are not yet fully decentralized and there are many uh applications on the graphs decentralized Network like sushi swap that have decentralized their open API layers so those applications can live forever yeah just to be clear I'm not advocating for testing and prod at all I don't think that's a good thing that we should be doing yeah um but at the same time you know like I I build protocols I know how hard it is to test every single thing before and inevitably something gets found out in prod and you know it's just about reducing that surface area as much as possible and then also like building on top of these foundational Primitives that we have built that have been battle tested like right now I would build on uniswap because I'm comfortable with that and I know the wrist there's but you know I wouldn't build on some random new decks or something like that that just came out is not audited or anything no I agree with that I mean I think the bigger issue is not that the teams need to be doing a better job of testing their code we need more tools so they can better test their code that's like at least for us that's what we're looking for that's the beautiful thing about smart contracts right is we almost have self-regulation because it's all public and everyone is constantly testing battle testing the code and just like with regulations how people circumvent the regulations and then they have to patch up those regulations the smart contract does that itself so there's it's almost like self-regulatory in that sense yeah and just to add to that too that's like such uh adversarial environment right like any hack that can happen will happen so like you know once you've gone through this sort of like layer of being live and being online then you kind of like know at a certain point that like nothing else can really happen hopefully yeah I think I think it comes as a shock to developers coming into this from traditional software development that all of your code is going to be online and you know you can see it and I think that's something that a lot of devs need to deal with and get used to um so we've talked about some of the impediments um another one is our friend Gary Gensler at the SEC if as he says everything but Bitcoin is a security to me my first reaction is like that kills defy I haven't been in the U.S it doesn't kill it overseas okay but do we want it to be killed in the U.S or what can we do but if we want to have a you know this regulatory regime that wants to push Innovation out of the country it's going to go out of the country it's already started to is there anything that the community can do about that or is it just something that we're beholden to him to a pine on I think pushing this like decentralized censorship resistance it's like if you push this stuff in and just put it out there you kind of make it so like people can use it anybody can use it if it's just out there yeah you might have to like tornado cash and VPN yourself or whatever but like people can still use this stuff if it's out there and hopefully eventually maybe when like a new regime comes in they will see that be like this stuff is out there this stuff is used we've already pushed out all the US developers and teams out so like how do we focus on bringing that back and maybe that's just something that is inevitably going to happen in this the way things are going yeah I've been covering the SEC for a long time and I that whether it's the SEC or the commodity Futures Trading commission they always try to expand their remit so this doesn't shock me that Gensler is doing this but I really think Congress needs to get involved and kind of lay down some new rules um so let's um talk about you know people talk about okay we're in a bear Market that's when people build Let's uh let's get some Alpha here and what are you guys hearing are you getting any um you know kind of early signs of where the next D5 Innovation might be coming from I think there's a lot of room when it comes to options trading I think perps have found product Market fit with amms with order books but I'm really excited to see what comes out and I kind of on the Opera operation side or the option side but also you know you can always use more perps as well so yeah I'm excited excited to see what comes out yeah um I guess two things one thing definitely is uh actual you know either off-chain order books but projects that act or look much more like um centralized exchanges um whether it's just like an interface interacting with uniswap or one inch or other you know liquidity protocols bringing that in um and then kind of a more like infrastructure level um is in general like the biggest issue I think we faced um during the last cycle was a liquidity Crunch at the end of the day if like you're an institution and you're trying to like trade around in crypto it's very Capital inefficient like we have no true Prime brokerage um and so whatever that looks like I do know a couple projects that are working on kind of more like infrastructure aggregating liquidity and stuff across different different places for people trading and I think that's like kind of The Next Step because at the end of the day people need credit people need to be able to take out leverage and when I say leverage I do not mean 100x you know perps on binance um I mean like you know two three x normal leverage amount to make sure that you have Assets in one place and it's going to cover you if you're trading in another yeah one thing I'm personally excited about especially walking around and seeing everything here is like all the focus on zero knowledge stuff like you know especially for the scaling layer like ZK evm ZK Roll-Ups but then also this extra privacy layer which you know gets back to the point that you're bringing about like us and all these regulations right once things get really private yeah of course it's going to piss off the us but at certain point they can't really do anything about it anymore um and how are you seeing things here in Dubai how are things in the Middle East in this area and like innovation-wise yeah in terms of Dubai I live in Dubai by the way but it's it's kind of like a different atmosphere compared to the US because it's almost like you don't feel like the government is actively working to like push back on you and really like shut you down like they they have kind of embraced it more openly of course there's still regulations they're trying to always be involved at every step of the way but at least it's something like they're trying to attract the talent they're trying to sort of take advantage and step in where like the US is pushing back they realize that and they see the opportunities so they're being more open and they know that that is going to end up attracting Talent towards that area so where do we stand on token design is as tokens is a token the way to go or do you think it's too much in The Regulators crosshairs at this point is there an innovation that's coming that could make it more palatable or how does how does that work now I think that you know utility tokens are a new asset class you can't kind of put them into Commodities or currencies or Securities uh and I think that it's really important to thoughtfully design your token economics within the graph we spent about two years designing our token economics before we ever put engineering resources behind the network and that's what's really powerful about web3 and crypto is we're thinking about the incentive structures before we are finding product Market fit and that's kind of the opposite of what the the web 2 did right they found product Market fit and then they're like oh shoot how do we make money from this and that's why it's become a very extractive place yeah I would 100 agree with that I think in general the space has a lot of products doesn't necessarily have a business and I think that that's so if you are thinking of building something we always wanted to talk about like who who's going to use this who's going to need it can it make money yeah to some extent that's true but I'll say there is another layer which is the public good infrastructure side you know like stuff like the graph is building and we're also building it connects it's like we're building to be public good infrastructure we're building to be a protocol that is around forever non uh censorship resistant like completely decentralized so in order to do that properly you need the right kind of token you need the right kind of governance you need to think about all that stuff you need to incentivize the actors in your protocol in a way that the protocol can live forever you know long pass like any of us are here money and getting paid public goods is you can contribute and you get compensated commensurate to the value that you're bringing to these protocols so in the graph you can earn as an indexer if you're serving queries you can earn as a delegator if you're giving GRT to indexers to serve queries so there's a lot of ways to participate and to earn in these protocols so the thing about D5 though we've got to keep in mind is that it has revolutionized a lot of how we interact with Finance um it started with the Ico boom where now you had a brand new way of raising Capital which is a huge function of the traditional Financial world then we got into D5 summer where there was lending and collateralized um you know interest payments and that's another huge reason that Banks exist you mentioned options um what are some other you know just spitballing but what are other Financial areas they think that are ripe for a new sort of peer-to-peer approach to um how that the traditional markets work yeah one thing I'm really bullish on is identity Solutions like you know it's not really Financial but I think you know polygon is going the right direction with their polygon ID thing and they're taking privacy seriously during that identity piece so like you don't just dox yourself every time you show your ID you basically prove that you are the owner of some part of that identity and then it keeps you yourself secure and I think that's like revolutionary and could like change the way that any of our identity systems work in the real world yeah no I'm definitely on that train with you um and even just like if we actually had a real identity solution within crypto it would solve so many of the issues that I think are blocking us from like the widespread adoption um but yeah I mean just the idea of even having privacy when you interact with like a smart contract like they know your kyc'd they know you're not a bad actor but they also don't get all that information on you like my home address and I would add to that I think um real world assets that are going to get tokenized and and traded digitally I think is something that I keep hearing more and more about I know like at ARCA you guys are you have a treasury fund right where you're tokenizing treasuries and then you get paid the yield through that coin um is that something that you think we're going to see more of I mean definitely we're already seeing a bunch of projects that are kind of uh trying to work in that direction you've got like ondo Finance they're you know they're issuing tokens backed by treasury bonds there's also um I believe frax is trying to open an account with the Federal Reserve so they can directly buy treasuries and trade them on chain so there's and there's a lot of other projects too like working in the real world asset you know space there's um centrifuge um credits uh Goldfinch the whole idea here is like you're trying to figure out a way to bring what is in this trillion dollar market over here in traditional finance and how do we bring it on chain or how do we off chain get access to that market yeah I'm really waiting for the day where I could kind of put my house into a vault and borrow against it or like you know tokenize it split it up sell half of it something like that I think there's a lot of really cool things you could do and one really interesting uh real world asset that I recently learned about is a small business Merchant loans so like you know you could have basically kyc borrowers but then you could you could have anyone in the world like lending to this pool and then you have a certain like list of borrowers who meets a certain risk criteria actually borrow from that pool so we've talked about ways to grow this Market um and for when you know people come back in after the winter is over what um do you think we should it the focus should be retail folks here or should it be institutional larger money asset managers I mean crypto is a Bottoms Up movement and what's exciting is The Regulators are actually allowing individuals to get in ahead of the institutions which I think is really powerful and I think we should try to onboard as many people from around the world on the retail side before the institutions catch up with this industry I'm half and half I um I mean look at the end of the day the institutional dollars represent way more than the retail and it's a numbers game like would you rather go after a million people who each have a hundred dollars or would you rather go after 10 people that have 10 million dollars each um so if we're just talking about growing the asset class growing the infrastructure and growing this um you know asset class in this ecosystem I think going after kind of like the big whales as like a top-down approach is maybe you know something we need to consider after we've kind of gotten the you know more grass Grassroots part of crypto you know going yeah I think you know what we've seen is like liquidity rules everything right you need liquidity big liquidity deep liquidity for any of these protocols to work so I think you know to your point we do need to onboard these institutions to get that kind of liquidity but at the same time we need to make this fair and accessible to everyone so we need to make retail always have the option to get in no matter what no matter if they don't have a bank account if they're located anywhere in the world they should be able to access like this open and free financial system so what are some of the impediments there to bringing in new folks like in that institutional investors what what needs to change before the Goldman sachses and the black rocks of the world are comfortable you know funding an automated automated Market making pool so the big one is kyc and I know a lot of people like kind of see that as a bad word in this space but basically kyc or AML is um there's a law called the banker secrecy act here in the United States and basically it requires any financial institution if you're doing business with somebody to know who they are so you can trace their funds and make sure they aren't a terrorist and that they're funding you know terrorism overseas or they're funding any other kind of like um any type of uh business or group that is on the ofac list now the problem is is that institutions if they if they go against those kyc AML laws they get fined in a huge way and in some cases they can lose their licenses for banking um for brokerages and so they have to take those regulations very seriously the number one complaint I hear from institutions were like oh yeah like we can't do that because we have no idea how to we don't know where the money in this liquidity pool came from we have no idea who we're borrowing against so back to the point of centralized identity if we all had wallets that had kyc'd us even though they were anonymized interacting with these um D5 protocols that's what institutions need they need to know that they are not you know breaking any of the existing laws basically I'm okay with institutions being the last to join this ecosystem but I'll say like the number one limiting factor is on the regulatory side and you know The Regulators are you know they're part of the problem as to why FTX was able to grow as big as they did because there was so much demand for these products no one in the US was allowed to do it so FTX did it overseas and then everyone lost their money so I think that you know regulations are a big blocker when it comes to institutions so one of my friends actually gave me an interesting take today around like the institutional onboarding around the fact that like institutions are afraid of the non-reversibility of the blockchain itself and because of that they're extremely afraid to like put in a lot of dollars especially into immature protocols that might suffer exploits or something but then I was thinking I don't necessarily agree with that and I you know I'm very much a public blockchain Maxi like you know high security you find finality but the cool thing about this public blockchain is you could even build like a custodial layer on top that like escrows all funds for like seven days or something before it goes on chain so I think that's interesting talk I'll also add you know I used to be in Investment Banking and the tech stack inside of banks it's atrocious it is so bad everything always breaks it's supposed to be t plus two it ends up being a lot longer because something breaks Downstream and so these banks are ripe for this Tech Innovation and over time eventually they will adopt Deep by intern finally but they're going to fight it as much as possible because it impacts their margins well it was interesting what you said about um the like the non-reversibility of blockchain and I also think part of that comes from like the user experience level two like we you know their mistakes get made entering like private key public key um you know we it needs to be a lot more seamless but that comes from kind of like the app layer and any infrastructure layer that's coming on top of these Primitives that we've created yeah exactly I use my credit card for everything because I know I can just reverse the charge if anything gets messed up right so we almost need that in defy too it's also worth noting I learned this just last week broadridge financial group they've been running crypto or repo trades repurchase agreement trades on chain and they're doing um more than a trillion dollars in real volume per month um JP Morgan has another similar system where Goldman Sachs is working with them they're they're doing billions of dollars a day in real trades so you know the banks are starting to come in here where they see it to their advantage and it saves them a lot of cost and it's a like you said the tech stack is a is a nightmare um so I guess I wanted to ask um another thing we've been writing about at the central recently and is getting a lot of attention is Central Bank digital currencies and whether is that defy or should we be worried about that or what what is the what do you what your guyses take on cbdc yeah cbdc's are the surveillance state right that's not defy that goes against everything that D5 believes in and you know cash you have cash and it's illegal not to take cash right you you have the right to have privacy when it comes to cash and adopting cbdcs will be total Invasion and surveillance of all of your financial data yeah I don't like the idea of of my tokens and my wallet being able to be shut down or pulled for me at any time or like you know anybody looking in and the government's seeing exactly what I'm transacting anywhere I guess I mean I agree with you guys and I guess the good news for us is that they're so afraid of the irreversibility that we aren't going to get a cbdc for a long time at least here in the states so is something like US dollar coin is that an acceptable alternative or should the government partner with a private firm to administer that from the treasury or something like that so that there's maybe a layer in between so that the government can't see what I'm buying every day I mean honestly at least in the states like we're tree that's like pretty pretty privacy laws um I mean if you look at any of the um you know cases that have gone to the Supreme Court even recently you can see that the right to privacy in the states though is something that I think like if you do create like a cbdc and you're putting it out there it should come with a very strict set of regulations about the surveillancing of U.

S citizens um and and I think that's honestly the best way to do it you're not going to get that somewhere like China the central banks need to create the mess that they created with Fiat and I think that Bitcoin is giving them a run for their money by giving them competition to actually make change and the wealth income inequality Gap is 100 the fall of the Federal Reserve of the central banks the U.S dollar has declined by 98 since the creation of the central banks so fix them as you created and you know Bitcoin wouldn't be where it is today if they had didn't create that mess for us okay just to wrap up I'm going to put you guys on the spot a little bit um D5 summer of course happened a couple years ago we're now in another bear Market when are we going to get out of this winter and what's your uh prediction on kind of the new thing that grabs everyone's attention I mean just look around this is insane like this event has been growing every single year no matter what bull Bears so we can just see like you know it's just a flywheel right now of just Unstoppable energy that is just keep going on and on and on like you know as much as I pay attention to prices I don't really care because I'm going to keep building no matter what and I know eventually one day we will disrupt everything we will get through all this and like like you said all the institutional banks will run this stuff in their back ends and like you know once we get to that point it's just like to the Moon yeah and to that point like East Denver I've never seen so many side events like Layer Two scaling zero knowledge proofs data availability layer like the network effects are insane and you know like you said we're in a bear Market but bear markets are the best time for building and the Market's kind of irrelevant and it's kind of nice as a Founder to be able to just stay heads down and build through this without nine million distractions during a bull market yeah I mean I agree with you guys and it very broadly on the market I do think that you know we are kind of past the worst of it at least for this cycle I think in unfortunately looking forward crypto has become very um a bit more mainstream to the point where macro and kind of like the broader Financial landscape is impacting our asset class so it's hard why it's hard to kind of predict like when will the next cycle start for me it's when do we see that next Innovation that really brings in new users that really you know spreads crypto um to like the next billion people I think six to 12 months we'll be out of it all right cool um so it's really about you guys the dgns you're keeping it going so thank you and thanks for coming to this talk really appreciate it thank you so much cheers thank you foreign [Music]