Deconstructing DeFi - What to Know About the Future of Finance

[Music] okay so we are live with the next session deconstructing d5 what to know about the future finance we have four experts here very very glad to welcome the four of you you saw patrick yesterday from crypto finance on our opening panel he's back welcome we have francisco from bba welcome you were with us in last edition lex from consensus you've also been in one of our previous editions welcome and stephen welcome from fireblock your ceo was with us yesterday and great to have you today so the stage is yours lex i'm gonna give you the microphone awesome thank you so much and uh welcome everybody to the session uh we are going to talk about decentralized finance finance that has been atomized decentralized tokenized open sourced and made available for all of us to um to enter the the next stage of fintech infrastructure uh together uh i'm lex i'm the head economist at a firm called consensus we're behind metamask and infira and i'm excited to have this panel uh we'll do introductions in just a second we've got about 45 minutes 40 minutes to go we'll leave about 10 minutes for questions and uh first we'll get our definitions down and open up these topics so with that maybe patrick francisco stephen if you could do a little bit of an introduction on you and your firm and then we'll hop into the questions sure um it's glad i'm glad to be again on one of these panels and it's always quite refreshing to speak to other people and hear their opinions um my background is interest rate derivatives trading i worked for almost 20 years for um for a large investment bank and then i sort of um tumbled into the crypto rabbit hole i'm now four years at crypto finance which is a company that does brokerage asset management and as well um storage so wallet solutions for the crypto trading business and i'm the head of trading at the crypto finance brokerage fantastic hello everyone so i'm glad to be back here in european blockchain convention and looking forward to to next year to see if we can see each other in impressions and not visually but for this year this is what we have i'm very happy to be in this panel and to talk about d5 my background is similar to patrick's nearly 20 years of experience in banking in different positions around the bank operations technology corporate and investment banking and since four or five years ago i am leading the blockchain efforts within bbva defining the strategy and executing the different project programs and projects that we have within the bank great uh my name is steven richardson i'm based out of singapore i work with fireblocks we're a secure digital asset infrastructure company i had our business for apac as well as lead our product strategy and business solutions teams at firebox my background is i come from strategy consulting working with financial services institutions as they engage in innovation in digital within the financial services space for a number of years uh and then i jumped into uh the digital asset uh space uh working first startup uh in 2016 uh and i've been in digital asset space ever since uh now with firewatch for uh the last two plus years so very excited to talk about dfi and to be on the panel with everyone today awesome so um as uh you can tell people have um a combination of an institutional background and uh kind of being engaged in the crypto ecosystem it's tough to do virtually this like uh we're all in the zoom metaverse wonderland um but it's always fun to like get a sense for um how deep in the rabbit hole people are so i'm gonna do a quiz it's a pop quiz surprise quiz um first off how many if raise your hand if you if you have ever transacted in bitcoin okay we're good so far how about some computational blockchains anybody got ethereum or you know solana or no they're getting me okay all right uh now we're gonna go we're gonna go a little bit deeper we're gonna go into have you ever made a trade on uh uni swap or on ave okay oh okay um uh let's see uh collateralized stable coin borrowing okay okay so what what uh um where else can we go how about uh put put assets into a layer 2 bridge to transfer them into a different protocol all right there we go okay so we've got we do have a panel of folks deep in the rabbit hole and so let's switch to the rabbit hole which is decentralized finance a little bit of a salad in terms of the words but there's the word decentralized and then there's the word of uh finance i'd love to just open up uh what those words mean and why they they even matter and so patrick maybe we can start with you to just kind of flesh out uh what defy does and what it is sure um [Music] first i i would like to say that i think the terms defy are getting misused quite a bit sometimes or the perception of people is quite different but what defy actually is for me defy is that i can access a protocol permissionless and i can do it trustless so i don't need to know with who i trade or who is on the other side of it but then i just want to throw that into the ring how much decentralized is the finance protocol if i use a stablecoin that is centrally backed like usdc or if i bridge my tokens from one ecosystem to the other and the bridge is centralized so how defy is that i just want to throw that in but um my first statement is clear it says trustless and permissionless um the question i guess to building on that for for steven around the primitives the components uh within d5 market infrastructure like what are the types of things the types of machines or or businesses or asset classes that you know one could access on this sometimes centralized sometimes decentralized financial infrastructure yeah look i i think the the mechanism is to recreate a lot of centralized services that we see in this space today so uh whether it be trade and execution basis off of the decks or maybe lending and borrowing infrastructure or yield generation we're seeing the development of protocols uh that allow that in in in patrick's terms uh a decentralized mechanism right so the ability to access it at a permissionless level um and do it without necessarily uh the concern around who's on the other side so you know i think the the main mechanism is a replication of functionality that generally generally has been centralized in order to access those services before in the space uh you have to go to different institutions whether it be folks like genesis and galaxy and crypto finance and others or you had to go on to centralize exchanges right and the points of access into those systems sometimes could be burdensome for for folks uh and sometimes inefficient right and so what you're seeing now is this kind of layer or kind of technology application layer that enables uh in effect uh an efficiency play and a kind of an open access play to all these different services and allows people kind of uh this this open level or same level of access if they're able to utilize technology to access it so um you know that's that's the broader premise in my mind so um in crypto we have uh so many words uh and they're all so magical um and i wanna slow us down a little bit and just open up the words what is a dex uh what is a stable coin what is an amm assume those are mysterious voodoo language words that aliens shoot out of their eyes and let's try to explain it to people from scratch so and i i may start with this one and it's not easy because it's bringing something very complex to you know a very simple way of explaining it but i would say that that defy is a different way of doing things as as steven was introducing one's relevant thing is that we are now operating peer-to-peer or period institution we are operating peer-to-contract okay so this is one of the first changes that we see in this ecosystem we are operating against a smart contract that has assets okay and you you're exchanging your assets against the assets of this smart contract this is what's called a liquidity pool okay this is a smart contract which is enabling this exchange of assets between you and the pool that it controls is what we could call um um an automated market maker so in the end the price is set up by the amount of assets in that pool depending on the amount of assets on that pool you have one price of the other okay and this is totally automated okay there is no intervention of humans or anyone in the process just you against the construct and in these liquidity polls normally you operate in pairs and these pairs mainly are a stable coin against crypto and this is where we introduce a stable consistency stable coins we can see it as the oil that lubricates all the d5 ecosystem and stable coin is nothing nothing more than a token which has an underlying underlying behind it that it could be a u.s dollar in the case of tether or usdc or it could be gold or any other kind of assets so then we have other type of you know algorithmic stable coins but i won't go into that ones because the ones that we mainly use are the ones that are that have some real collateral behind it such as dollars or euros so we have stereo coins we have contracts with liquidity pools and then we need liquidity providers that are the persons that are able to provide liquidity to these pools and in this case of d5 decentralized finance as patrick was introducing before anyone can be a liquidity provider in the traditional markets we have big institutions that are the ones generated operating the market by providing liquidity in the big market infrastructures in this new market you don't need you may have them because we see you know exchanges like coinbase or others that may have excess objective that are willing to provide liquidity to defy but anyone could be a liquidity provider and provide liquidity to difficulty force so that these smart contracts can offer uh trades to the users that operate within and i don't know if i am making myself understood yeah i know you're you're doing you're doing great yeah so if the rest of the panel uh built on top of this and try to bring it to a simplest way of explaining it uh no that's that's great and so i think we've steven helped us establish that like it's the it's the same things that finance always does which is pay save trade invest and capital markets just kind of recreate these patterns um as as well as you know human behavior around value just gets recreated in different venues we've got a computational blockchain which uh process is uh validated peer-to-peer and hosts information uh in a peer-to-peer manner and is quote-unquote trustless and permissionless which which allows one to feel confidence about the data that you're interacting with because of lots of math and so on this infrastructure you've got we started talking about some of these primitives so we've talked about the stable coin which is like a you know crypto dollar it's a cash equivalent people should be familiar with what a money market fund is you know so there's various shapes of cash sweeps and crypto dollars and so on very familiar animal and that's the stable coin and it has both the payment and the capital markets uh utility and then you've described the automated market maker which is like hey there's citadel they do some market making um six billion per quarter worth of revenue of market making but you know give or take um and then there's market makers on this network on this blockchain network and because we're in early days they're much more compressed they're they're really pixelated and sort of janky but very interesting and performant and have billions of assets in them and that allows people to become market makers for particular uh trading pairs um let's let's do one more maybe as to establish a little bit more ground um this one to to patrick can you talk about um some of the the lending markets you know things like compound and ave and you know if we want to get sort of more hairy than that with maker and and stuff we can but you know there's lots of interest rates if you come to crypt you get 20 interest rates what what is the interest rate what is the lending market how does that work sure um the well first of all the decentralized finance markets are very hard for me as a regulated entity to access but compound and even ave they have or they try to make versions where the institutional players can actually access it where you have permission pools or you have um guardians that make sure that the wallets that interact within that permissioned version of the d5 market is um um are allowed to do so uh coming back to again to this is not really defy then because it's actually permissioned and people have to people know who it is and they have to follow certain rules but you mentioned interest rates and especially for clients on our ends where their their token holders their long these tokens and at the moment they just pay something to store them safely with us they would love to get some interest on their holdings and this is where are they and compound um as one of the two oldest and largest protocols on the boring and landing side would come in handy if i can actually connect with them and put clients money at work on these on these protocols maybe also um regarding interest rates and there is always the question popping up by quite a few of our clients and um and investors why is the dollar interest rate so much higher in crypto than in the traditional world and there is no clear or um or probably satisfying answer i can give them but mostly it is because the the crypto eco trading ecosystem is still uh very much in need of these on and off ramps for fiat and it's still not that easy to move money in and out um some of the larger banks are blocking these payments or you have certain um rules how how much money you can move up or down and this this basically creates a bit of a shoulder dollar shortage within the system hence the dollar rate is always a bit higher than inter traditional market and this is also something which could be highly profitable or interesting for clients that do not own bitcoins or ethereum but they own usdc for example and they can lend it out to very favorable rates so these protocols are actually showing real added value to the investment or investor base that is um that is brave enough to move capital into the space um interesting framing um i i agree with a lot of it you know i think one mental shortcut is just to say it's a big margin desk um you bring a thing somebody wants to borrow it they pay you interest um and so these money markets are kind of equilibrating uh supply and demand for going long or going short you know so again something very familiar for anybody that has worked around a trading desk you know so i i wanted to kind of establish that that we have these primitives which uh are configured differently because they're much more automated um but are doing things that we should be familiar with from financial services and so we touched on this already a little bit but i wanted to talk about the challenges of getting um like exposure of getting connection into these assets like why is it hard who who is who bothers to stop me who creates the challenges um you know it's 20 21 uh why is it still well it's almost 2022 why is it still sort of a problem uh stephen could we give you that question to pull apart yeah no not a problem so so i think there are two components to look at right the first is uh the technological right so the idea of creating wallet infrastructure and secure access for uh you know getting into d5 right there's a lot of risk that comes with uh allocation of funds right and generally those risks are in some ways mitigated against centralized institutions right you're able to evaluate counterparty risk of exchanges like coinbase and kraken and bitstamp and you know a whole host of other ones and assess you know the risk that you take against putting your funds uh on those different exchanges and you're able to really manage how funds go into those exchanges and all all the different components when you look at d5 right you're looking at the basis of allocating funds against sets of contract calls uh and the governance mechanism that you can have against those at points and times tends to be limited so you have folks like metamask institutional that develop solutions around that uh we have firebox's infrastructure provider are doing quite a bit to you know link the governance models that folks can use uh against the walls that they deploy these assets to against you know the different defy applications right there's there's that piece i think the second one that patrick mentioned is regulation right i'm a large institution um i have lots of capital at my disposal but i can't really uh enter or participate in a market where i don't know who is on the other side in terms of receiving those assets do i know if it's terrorist financing do i know if it's illicit gambling i have no real idea right and so uh obviously you know firebox is involved with ave art which is this permission d5 pool right but you know the basis is to solve some of those problems in terms of uh enabling the utilization of the technology from an application perspective but ring fencing some of the risks that that occurs right so i think those are the two big risks like that i see in terms of of entering that i'll give you just an example i mean i i used a second layer bridge to move some funds across and the first time i did it my money got stuck right so and i work uh in crypto um and so i think there's obviously you know the ease of use you know understanding what the different applications are understanding you know what it means to switch from one set of wallets or technology stack to another right and then being familiarizing yourself with that right and i think there a lot of different technology applications are looking to simplify that process you know fire blocks included um and and you know once you kind of solve that issue right then i think the next becomes like the regulatory governance perspective uh that needs to be solved and i think you know folks like ave and compound and others are making a pretty active attempt at being able to do that to them broaden the ecosystem right it doesn't you know just because someone is participating in a permission pool does not mean that they won't just turn around and leverage you know uh permissionless polls right so there there's still this this mechanism by which liquidity kind of makes itself available in the whole in the whole ecosystem uh and we think you know creating different avenues for folks to be able to access that is important um from the the perspective of from a from a banking perspective or like a large institutional perspective uh you you know where this is going um you know question about bbva uh and and the asset class more broadly you know one thing to kind of note is that over the last three four years there's been all this attention around blockchain software and banks have gotten around uh being comfortable with tokenizing and integrating blockchain software and designing a cache leg and this experiment and it's it's roped off and it's permission blah blah blah but here we're talking about an asset class that is you know two to three trillion depending on the day uh and live and doesn't really care about the comfort that banks have or don't have you know it exists and it it transacts and so um i guess the question francis goes how how do you see the bank or or banks more generally taking steps on the revenue generation side of the business saying this is an asset class that we we see uh us distributing uh that we see us providing to our customers and like what's the path there okay so so well it depends on entity and and of course we always have to take into account regulation as patrick and steven have have been mentioning but you can see it as a challenge or as an opportunity and we in it as an opportunity and we want to be in that new market and in both in both ways so we want to to leverage on the technology and then use it as the new rails as you were mentioning it from from tokenizing cash to canadian financial assets but we also see it as a new market where we want to provide access to our customers to this new market in an easy way in a simple way in a secure way and removing all the complexities that steven was mentioning just before this question what we have been doing we have been starting by providing access to trading and custody of bitcoin and if from our bbva switzerland branch or bank and our private banking customers can now buy sell and custody bitcoin and it with us so we have initiated the journey by providing trading and custody services to our customers once we have initiated this journey we are now looking towards the possibility of expanding the offer of tokens so now we have bitcoin on it but we want to have more not only security tokens but also other cryptocurrencies that we can be compliant with regulation and have in our offering and we are starting to see what geographies of our footprint we can offer these services so not only from bvd switzerland but also from other banks in the group that's the journey we are following and of course one we have started with trading and custody once we have the custody the next step the next frontier would be providing yield and this could be through d5 but we see defy further away we are starting to to work with trading and custody and as soon as we can start operating securely and in a compliant way we will try to to get involved in defy and maybe through partners like steven or patrick that can help us breach and access that new world and offer the service to our customers awesome thank you i think there's also um a framing potentially around um you know like portfolios and asset allocations uh of it's like yes there's access to trading but there's also like a place for this thing you know and the from an institutional perspective i think there's a lot of value that's true lex and i forgot to mention it i was talking about direct access to crypto the other leg would be indirect access and we are also working in that space with our asset management team in enabling our customers to access you know ndfs or or other derivatives options and direct exposure to crypto and this is another another way that we are exploring and that's easier from a compliance regulatory perspective um yeah absolutely so patrick i think we've got just this one last question before we go to um to audience double clicking on the asset management point how do you think about um you know first maybe if you could tell us about what options are there for uh d5 uh connected asset management right you got urine on the one side and then you've got etfs of futures and there's all this confusing nonsense out there um so like what are what is the what is on the menu for asset management and then for your business and and the things that you do how do you make decisions to to move forward that operationally um it's a it's a twofold question because um from our company side to to basically answer it is since i cannot interact with any of the d5 protocols so i cannot use urine finance or i cannot use the melon protocol to deploy assets in different worlds that are generating yields what i can offer or what we rs management can offer is for example a fund that has a set of different tokens that is and i always say it's basically the the full menu of d5 so you have some tokens in there that earn yields which is um yearn finance and rv compounds but you also have tokens in there that are decentralized exchanges like uni swap or sushi swap where you know they generate cash flows and the token should um get some revenues back on on these cash flows then we also have infrastructure tokens because i the d5 system cannot live without oracles for example or graph indexing and all these i call them service providers to the the d5 industry they make a good mix in a d5 fund if you talk um about me as a as a private investor when i move around capital in the d5 sector i think and that's the real cool thing the the the possibilities are almost limitless i can do so many things and put different strategies together monitor them or move the capital very swiftly around if somewhere is a better yield opportunity it's uh it's something i i struggle to explain even to my former um trading colleagues that are not um in crypto it's very hard to to grasp and the speed of it to how it changes but again there are a few platforms that that offer that combination and like they call them vaults where you just put capital into a strategy and there is a very complex code behind that is basically managing your capital in there and is trying to earn a decent reward which is pretty cool as well so passive income made by d5 absolutely and and hopefully our audience is connecting the dots to steven's earlier point that again we're recreating a number of our industries um uh in in finance except using architecture that is a lot more modern and also interoperable so you can go from market making in the middle of a giant market venue to asset management to options trading to uh sort of as risk-free cash uh cash-based interest payments as uh you can get in crypto you know within a series of four trades and without any barriers of any kind and that that is um it's not it's unusual that the retail experience is so much easier that the than the institutional experience because in the past of course the institutional experience was far more fully featured than um the retail experience yeah yeah i mean i i think there's one thing to to kind of be aware at least in my mind around d5 right like you you see this basis of like replication of um you know traditional financial products in this decentralized way right and and then this easing of use right it's this evolution that's occurring i actually think the real thing that becomes interesting is like how things when things like tokenized securities and other assets come into play like how d5 will impact those right like i i think we're seeing this continuous evolution you know for example i'll i'll give an example in germany right you have the crypto securities registry right that basically has changed the model to allow folks to uh not have to use the central securities depository for issuing securities uh in a crypto basis well that becomes interesting because you can have anyone that's a regulated custodian theoretically tokenize an asset and allow it to be traded right under a regulated basis which then could lead to the utilization of things like defy applications and pools of liquidity for purchasing of these different things without central intermediaries right so i think there's these like graduated steps that defy is doing right that then become more applicable to more and more financial products and i think that's the the beauty of it all right is like where that disruption will start to exist and what new markets that are have been previously highly regulated uh will be impacted by this new technology and allow folks like patrick and you know folks like francisco and others to be able to leverage in a more efficient model so i think all of this is is pretty interesting in terms of you know how it starts to shape up over the next few years in my mind absolutely thank you for that very eloquently put um we've got a couple of questions here in chat um [Music] let's it's there's a rug pull question and a token burning question so i'm gonna i'm gonna uh we'll have a little bit of fun with these uh francisco can i give you the rug pull question um if uh how should we feel about uh defy when you know uh there's some anonymous team that can just take your money and defraud you and scam you like what what do you think about minimum standards um of uh of regulation of uh behavior of self-policing uh and how how does that trade off with the user experience you know cert and in part i'm asking this for you because you know in the banking world it's almost the opposite way where the the user experience suffers so much because of the regulatory frameworks yeah so in the end we i think that that defy is very new so it's a maturing space as was crypto maybe five six years ago that needs to evolve and and improve and mature and mature in every sense so from the regulatory perspective i think up to a point a regulation will appear if not institutional money will not enter the space and it would be i mean and the risks underlying d5 will remain awesome we see several risks some of them mentioned in the question no we see technical risks and depending on the development team they can do things correctly or not correctly and there can be scans or even hacks in the protocol and there are the risks of volatility and this is may need you to to immature markets with lots of risks or have lots of volatility um speculation is also around and it's removing interest from from very interesting projects and proportions and value propositions and it's you know introducing lots of of noise in the industry so there are several risks that these projects have and there are ways of mitigating them of course you have to be very careful of who are the development team of that protocol who is backing that project adventure frames or institutions that are behind the developer team how is the governance of that protocol defined and who is able to make decisions or not the amount of decentralization or not decentralization as patrick was introducing before so there are several metrics that you have to evaluate before deciding uh getting your metamask and interacting with this type of protocols you have to see that this is a reliable protocol with a great team with a relevant venture capital behind that has gone through security audits or code audits to make sure that the code is correct and there's not going to be any problems that it has enough liquidity so that you don't have very much slippage when operating so there are several things that the gas price at that moment i mean it's a very very complicated world so in if you are not very into it and understand very well the different risks the impermanent laws the different problems that you can have with the different protocols it's better to rely on a third party that has that expertise and that can target you to the to the to validated or audited or or reliable uh protocols and where to operate or interact with absolutely if i could um just land it land the point um i think the end of the day these are still human relationships in human markets and i want to uh frame one of the the questions here in chat uh that i think connect and the question is um you know about distribution about direct access like what's the impact on underprivileged uh or unbanked populations and then another question about is the relationship to the machine or between borrowers and lenders and to me i sort of read this like who am i uh transacting with question um and i'd love to just leave uh leave that question with you to discuss i've gotta hop off it's been a pleasure go to metamask.io and uh and download the crypto wallet and then i think pondering the human nature of d5 is a very interesting place for us to end thank you everybody thank you thanks go ahead patrick i'm sorry i might just want to pick up again on that defy and regulatory question this is one of the the things i said at the beginning um they don't go together so d5 is unregulated and it will stay unregulated because regulation is centralized so it's it's for me it's a bit like you want all the rewards but no risks and defy is just the unregulated space and i hope i really hope it will always be that way yeah look i i think i think to that question of direct access and all those other components right i i think i look at d5 maybe it's slightly different right as like the technological like advancement without general human intervention at its core right maybe that's how i'm looking at it it's abstract and wrong but uh you know i look at it and say like generally on a basis you have centralized operations teams you have all these components that are built in place that rely on human intervention uh large-scale institutions right in order to execute and run and function right i mean every bank has massive operations teams back office teams uh reconciliation teams etc right to me defy is the basis of using a technology application to replicate and execute all those functions right which inherently to me also means there's lower cost of service there is ability to extend those services to uh different realms right to to put them in institutional wallets to you know connect whatsapp wallets to different pools right so such that you have a stable coin where a person utilizing remittance funds can earn some level of yield through a validated protocol right and you're able to do it in a way that hopefully passes more value to a consumer right so i see it as a as a basis of being able to extend the financial ecosystem right and i see it as ability to just intermediate or disrupt a lot of you know core let's say fmi infrastructure right that's been in place for a long time right that theoretically in my mind can be disrupted with the technology application right there's generally no need for that i think as more things become tokenized so um i i maybe look at it not necessarily in terms of distribution of of risk and the permission unless i agree with that component i think that's where innovation continues to occur but i i didn't think about it as like the disruption of operational processes that today exist in legacy systems uh and how those get moved and shifted over time i i am i quite agree on that um maybe to add to the point or the the question vincent is having regarding direct access means more banking available for the underprivileged um it always sounds good that crypto enables you to have um if you're on the bank that you have um better access to the the finance sector but there is still a bridge needed so even if you have no or if you have no bank account so how do you move any of your capital into the crypto or d5 world so you need the help of whatsapp or any other sort of um social social network system that is opening up a ramp for you and even then how do you get your money that is in your pocket right now up to whatsapp or any social platform up to the crypto up into the crypto world what it does um do though is if you have money in the system in the crypto system no one can tell you what to do with it your your um it's your responsibility and you have all the options none of the banks and francesco you might add something to that but none of the banks or bankers will tell you i'm sorry you cannot buy this bond because you're not a u.s citizen or whatever so then yes your privileges will be better than if you just normal retail banking customer but but yes he has to finish patrick following on that you're free to do everything but you need capabilities and that capabilities means custody means understanding means having a you know quite a good pc or mobile phone in order to do all the interactions with smart contracts so in the end i think that it's not easy for this and you know and bank normally are people with very low resources to have the technology and the knowledge enough to be able to operate in this space so i don't see it as as so the democratization in that space and also the gas fees you need to operate in d5 are normally very high so maybe it's not that suitable for for underbanked thank you guys thank you steven thank you patrick thank you francisco thank you lex amazing panic discussion just one quick question when will d5 be by what year patrick when will d5 be what 5 just finance choose finance i hope it will never happen d5 will stay defy even personally i see i see uh more more adoption happening in the next two to three years at least from what we're talking with institutions around two three years francisco well i don't have the answer because we will see if the regulators want to to start entering the space and looking for people accountable in the defense space and maybe they kill it i don't know but if it continues to evolve maybe five ten year time frame and i hope that we are able to leverage all the new good stuff that it's appearing in the space and use it in the traditional finance world thank you so much guys fantastic so thank you for this panel discussion and for the audience please go to the next session we have a keynote with jordan from stella foundation thank you guys bye bye [Music]