SUMMARY:

In this week’s episode Peter is joined by Arca CIO, Jeff Dorman to discuss the volatile state of traditional financial markets and its impact on the digital asset ecosystem. They discuss the gradual shift to a decentralized exchange and how it could offer protection from geopolitical events we’ve seen unfold over the past couple weeks.

IN THIS EPISODE:

1. Peter kicks off the episode by discussing what's going on in the market and then asks Jeff about what he's seen in the digital asset ecosystem and decentralisation in general over the last few weeks.
2. Jeff shares his thoughts on centralized versus decentralized exchanges.
3. Peter talking about DeFi says in early 2021we saw DeFi was on fire from a token standpoint, it'd be especially January, and it's been really a bear market for Defined Names since then. And asks Jeff "So I wonder how the TVL compared year over year,it looks like it's up, at least frequently."
4. Jeff discusses the four successful blockchain use cases to far.

TRANSCRIPT:

NOTE: Following transcript is generated using AI. Minor errors might be present.

REAL VISION 00:00

Welcome to the real vision Podcast Network.

REAL VISION 00:08

Before we get going, we want to remind you that Jeff Dorman is the co founder and chief investment officer of ARCA funds. And Peter Hans is Arca funds managing director. The commentary and opinions expressed in this podcast are solely those of the podcast participants and do not necessarily reflect the opinions of our funds or its affiliates and are subject to change for any reason without notice. Any discussion of investments or investment strategies within this podcast are for informational purposes only, and not to be construed as a recommendation to buy or sell any particular investment, security, digital asset or strategy. Investing in digital assets involves a high degree of risk and volatility, including the risk of the total loss of principal and now enjoy the show with your host Peter Hans.

PETER HANS 01:02

All right, it is Thursday, March 3, I am Peter Hans. And welcome to between two chains after a few weeks hiatus here I'm joined by Arca CIO and co founder Jeff Dorman. And there's a lot happening in the world, Jeff?

JEFF DORMAN 01:20

Yeah, there sure is. It's, it's nice that the rest of the world now has to invest 24/7 Just like we do. So it's nice that these headlines are coming out at all times of day regardless of when so.

PETER HANS 01:31

Yeah, it's been a volatile start to the year a little bit of a little bit of a rough start to the year for basically every risk asset for sure. Certainly for peloton, which I'm a shareholder of, but not until very recently, but a February was a crazy month it was it was up a little bit, it got smoked, two major intraday swings, and frankly, in both directions. And, you know, marches starting off, I don't know how you would describe it. I'm almost like, not quite cautiously optimistic mark, it feels like a little skittish to me, but I don't know, I want to hear your take on where you think we are right now. But then I also want to hear you expand on some of the thoughts you've shared more publicly around, you know, the importance of what you what you saw happen over the past few weeks for the digital asset ecosystem and decentralization broadly?

JEFF DORMAN 02:28

Yeah, for sure. There's been a lot going on. I mean, first, let's, let's maybe just put some numbers out there. Right. So for February, the VIX, Rose 21%, oil was up 8%, Bitcoin was up 8%. and other digital assets were basically up anywhere from 3% to 10%, gold was up 6%. And that was it, pretty much anything else you touched was down bonds were down at about one to 2%, the s&p was down 3%. The NASDAQ was down 4%. For those in any Russian equities, you were down probably 55%. So it was pretty brutal month for your traditional 60-40 portfolio or your traditional debt and equity. And what was interesting, though, about the move in digital assets, as the majority of it came, in the last few days of them, we had been tracking equities as an asset class for most of the last eight weeks. And we've talked about in the past of why that is the case, right? A lot of that was, you know, more due to who is now involved in the space than really what the assets are themselves. You know, as we talked about the dangers of institutionalization of an asset class is that once all the institution's own digital assets, they trade it with correlations, and with the models very similarly to how they're trading, you know, oil and equities and bonds. But we really broke through that correlation in the last few days. And it was, it was interesting, because it was a pretty strong parallel to January. So in January, digital assets were, for the most part, ignoring the equity moves. And then there was a day I think it was January 20. It was a Thursday, when the NASDAQ was up 2% to start the day. And the last two hours of trading, it fell all the way down to down 2%. And that was the precipitous of digital assets falling basically 30% to 50%. Over the next four days. Well, the exact mirror image of that happened a week ago, Thursday at the end of February, where equities started down more than 3% On the day in futures trading pre market and finished the day up 3%. And that was the low for digital assets. After that we were off and running culminating with the Saturday night decision by the the US and the EU and other nations as part of NATO to implement the sanctions on Russia. And I think the most interesting part of that was digital assets didn't budge, right? So so you know, one of the things that's nice about this industry is that it's the only thing that trades on a weekend, right so you can use it as a proxy for how markets are thinking about certain pieces. is the news from Saturday night until Sunday at about 5pm. Eastern, there was no movement at all on digital assets. They just ignored the sanctions. And then when the FX market opened on Sunday night, and the euro got killed, and the ruble got killed, Bitcoin started the the leg down was down about 5% to 7%, that everything followed suit. And this lasted until equities, opened the futures on Sunday night open, and they were down about 2% or 3%. But then by the time markets opened on Monday morning, Bitcoin was up 10%. And obviously, we now know it was up almost 20% Over the next. To me, that was a pretty watershed moment, for a few reasons, right? One was, it showed that on weekends, nothing matters, right, you still have to wait until all markets are open to really fully gauge how the market is going to be moving. Because there are just so many different players involved in this market now who do care about cross asset correlations like that. But two, I think we're going to remember February 2022, a year from now as a critical watershed moment in the breakaway of digital assets relative to equities, in the sense that everything we once thought we knew about money is now flipped on its head, given the the news from everywhere, from Canada's sanctions on its own citizens to Russia's decisions that are impacting all of its citizens, to now these full sanctions from the US and the EU and other nations on Iran. I think Matt Levine at Bloomberg put it best in one of his pieces recently, he said, up until this week, we thought money was an asset that you own. Now, we're all learning that money is somebody else's liability to you, and whether or not you have the ability to capitalize on that liability is now in question, basically, meaning if you hold money in a bank or brokerage account or some sort of government entity, you don't actually know if it's yours, and you may never see it again. And that's a pretty powerful statement. And I think, you know, again, we're going to look back on this in six months in a year and be like, Well, that was obvious, I cannot believe I wasn't maximum digital asset.

PETER HANS 07:04

It is a slippery slope, isn't it?

JEFF DORMAN 07:06

Yeah.

PETER HANS 07:06

I mean, look, you know, nothing, nothing in life is free. And there are there are benefits associated with centralization as it pertains to it's a double edged sword, right as it pertains to, you know, you hear Gensler and regulators talk about, you know, trust and large institutions, I think, you know, waiting on regulation in this space looking for, you know, a trusted counterparty intervening, but at the end of the day, it's that same trusted counterparty that, you know, could very could very quickly turn right. And in essence, you are, you are the sole, you know, you you are certainly at the mercy of that Counterparty, it is a slippery slope.

JEFF DORMAN 07:47

Yeah, for sure. It definitely is, right. And I think, you know, not all digital assets are obviously outside of the bank and brokerage system anyway, right. I mean, you know, certainly many people trade on centralized entities like Coinbase, or Kraken or Binance. And obviously, if a government came in and said, hey, you need to, you know, blacklist this address, or you need to shut down like they're going to, for the most part have to comply. But outside of that, it really kind of fulfills the destiny, in my opinion of what we were trying to solve for digital assets, which is, if you want to make it a bearer instrument, and if you want to combine your investments with your spending vehicles into one entity, meaning, you know, whether it's one day tokenizing your Tesla stock and being able to pay with it, or if it's just now, you know, having your ethereum and ethereum of investment, or your Luna investment, you know, or your Axie infinity investment, but being able to hold it yourself and use it as payment of some sort, that does, in some ways fulfill what we were hoping for with digital assets is that you can own it, and you can control it, not necessarily to avoid, you know, government regulations, but certainly a little safer, right? It's one thing to, for instance, like, it's one thing to have land and have somebody take your land by force than it is to just zero out a number on an electronic ledger of your bank account. It's much easier to do monetary warfare than it is to do land warfare. And there's a reason people own real estate. There's a reason people own gold in actual bullions in a volt, and I think there's going to be a reason that people own actual digital.

PETER HANS 09:17

So many ways to go with this. Yeah, no, I completely agree. And you can take it further. So what are your thoughts on the whole, you know, discussion of, you know, now it's centralized exchanges versus decentralized exchanges, or, you know, physical hardware wallets offline, like, you know, you could, you could, you know, I don't want to take this to the point where we're all living like off the grid in the woods.

JEFF DORMAN 09:43

Yeah, well, I mean, at the end of the day, the majority of people still want someone else to hold their assets with them, right? I mean, it's not it's not going to be easy, at least with today's technology and today's you know, wallets and, you know, the ability to store passwords and things like that for everybody to go completely off the Grid, I don't think that's wanted by anybody, and I don't think it's realistic. So I think centralized counterparties will certainly still be used. This isn't by any means the the demise of that. But at the same time, you know, Dex, overall decentralized exchange volume as a percentage of centralized exchange volume using the digital asset market as a proxy, you know, in the last year and a half, it's gone from 0% to I'm trying to pull the data right now, I think it's like 13% of all volume goes through decentralized exchanges, which is another way of saying these are people who own their own assets, and only bring it to an exchange, briefly, in a noncustodial fashion, just to trade it, I think it's very realistic that that number continues to rise. You know, those who do have the means to do it this way, and have the knowledge and to hold their own assets will probably continue to do so. And it'll probably continue to grow. So, you know, again, this is not the death of banks and brokerages or centralized exchanges, by any means. It's, you know, it's definitely gonna be a catalyst, though, for more decentralized trading and more self ownership and self custody.

PETER HANS 11:00

So guess what could go wrong in this in this whole scenario? Because, you know, what you're saying definitely makes sense. I mean, it could also be the type of thing where, you know, people have short memories, and, you know, three weeks from now, and nothing actually materializes, people just move on and forget about it. But you know, like, is this a, is this a slow change? Or do you, I mean, it can't really predict some sort of like, massive macro economic fallout, but there could also be that type of thing where there is a singular event, but it's gonna require a coordinated, like a coordinated global uprising, in a sense, and I don't mean to be dramatic with that word. But if that's basically what you're talking about,

JEFF DORMAN 11:41

well, I don't think it has to be like an all at once. You know, Malcolm Gladwell like tipping point where it's like, all of a sudden, you can just be like, Oh, that's it. Nobody uses banks or garbage anymore. I think it's just a gradual shift, I found finally pulling up the data, for example, looking at the the great dashboard from the blockcrypto.com. You can look at their dashboards. But, you know, decentralized exchange volumes, as a percentage of overall volumes, like I said, has grown from basically zero to 12 to now 13%. That's been a pretty gradual move since basically, middle of 2020. You know, I think you are just going to continue to see more of that. I mean, we see everyday at Arca that the amount of interest that we're getting, whether it's in terms of views of our content, or inbound leads to our funds, you know, it's been steady, right? It hasn't been like, Oh, that was the day where there was a huge spike, it's just been a steady. You know, you, I think there's very few people in my life who have not in the last, you know, three or four months reached out to me in some capacity, just because I'm known as the digital asset guy. Right. And, you know, there's also very few people in my life in the last week or two who hasn't, in some way, shape or form mentioned, you know, what happened in Canada? Or what just happened in Russia or any of these sanctions, right. So it is top of mind, it is definitely out there in the world of being aware of how, you know, quite frankly, how scary this is, right? I wrote a blog post last week on our, our website, err.ca. Just talk, as I said, remove all biases, and just ask yourself like, WTF like, what is going on right now? Like, we completely just lost the plot on what banking and brokerages. I mean, you literally had the Canadian government shutting down banking access to its citizens, you've had a single decision maker in Russia, you know, President Putin, invading Ukraine and causing hundreds of billions of dollars of losses in the stock market, and turning Russia's credit worthiness into oblivion with five year CDs widening to basically implying 30% to 40% probability of default and maybe even higher now, if you had the Swift communication system shut down for Russia, right, the entire internal banking communication system, you know, even before that, you could go even further you can say, you know, how much of this year's moves in the markets have been caused just by the jawboning of what, 20 people in the world, the 12 Fed officials and the rest of the ECB officials, you know, it's, it's probably not what we intended. You know, if you remove any emotional attachments, you know, whether whether you're somebody who got quote, unquote, crypto rich, and is therefore, you know, overly enthusiastic about this market, or you're someone on the other side of the fence, who is, you know, just hell bent on, you know, pretending that this market isn't real, and all this stuff is just a mirage, if you remove those extreme biases, and just ask yourself, what is going on here? You know, this is this is crazy that so few people in the world are able to make decisions that affect everybody in the world. And, you know, hundreds of billions, if not trillions of dollars of wealth. So, you know, it's, I saw a great stat that I put in our blog, too, which is that if all of DeFi right DeFi now has about call it 225 billion or so of TVL, which is there's another way of just saying deposits. If you put all of DeFi as just one bank, it would now be the 19th largest bank in the US. That's pretty powerful. Right? I mean, that's a that's a pretty big deal. So, you know, I think it's gradual, right? I don't think it's the eight In one moment, I think it's just for the first time in history there is, if not certainly a better system, at least an alternative system. And these are pretty scary data points in the last two weeks that are going to drive marginal people towards this market.

PETER HANS 15:14

DeFi point is actually pretty interesting. surprises, not higher, not because not based on anything else. But just because there's been so much bank consolidation, I don't even know that I could name 20 Banks.

JEFF DORMAN 15:27

Well, JP Morgan, JP Morgan, is

PETER HANS 15:31

gonna be JP Morgan wells Bank of America,

JEFF DORMAN 15:33

in Sydney. Yeah. So since Wells is two is 2 trillion. And city I'm sorry, JP Morgan is almost 4 trillion.

PETER HANS 15:40

Wow. Okay. What about if you add in like, and I don't know, if we have the numbers on this, but you know, because I think there's decentralized exchanges, of course, or DeFi broadly, and then you but then you also have, which is still in the ecosystem, though, at centralized entities, like, you know, the BlockFi's, and, you know, if you're earning yield, and Coinbase, or something like that, if you add in kind of all of, you know, tokenized deposit equivalents.

JEFF DORMAN 16:08

The 10th largest US bank right now is is PNC with 550 billion. So if you think, you know,

PETER HANS 16:14

so 2x

JEFF DORMAN 16:15

2x From where we are now, and if you look at the graph, so again, you know, again, shout out to the block crypto if you use their dashboards. So if you look at, you know, total TVL, across the entire market right now, which I said is 225 billion, go back exactly one year to February 2021. And that number was 48 billion.

PETER HANS 16:34

Okay, I was gonna ask, so Okay, so that's interesting. So the, the, because, you know, early 2021, you know, roughly a year ago or so we saw, you know, DeFi was on fire from a token standpoint, it'd be especially January, right, a big bull market DeFi. And it's been really a bear market for Defined Names since then. So I was actually going to wonder how the TVL compared year over year, but it looks like it's up, at least frequently.

JEFF DORMAN 17:01

 Yeah, four or 5x in the last year. So two, if you would, you know, that that's more in my opinion, that's more of a reflection on tokens that were structured incorrectly. You know, if you think of the token of a project, like an Ave, or like a maker Dow or like a, you know, sushi swapper unit or something like that, those tokens have gone straight down, even while economic activity has gone straight up. Right? So if you were looking at market cap to TVL, it's straight down, right, these things would be the cheapest things on the planet for any value investor, if you believe in that metric. To me, that's more of a reflection on just high inflation schedules and poorly constructed tokenomics. But it there's no question if you're just looking at did are the fundamentals of defy better than they were a year ago is unequivocal? Yes, right. Volumes are up three to 500%. Year over year for exchanges. Assets are up, you know, 5x to 10x, you know, for lending and borrowing, insurance revenue and usage is up 5x like you know, it is it has been a massive, massive leader. And I think I've said before, I don't know if I did it on your show or not. But I've said before, there's really only been four successful use cases of blockchain to date DeFi being one of them, for sure. The others being Bitcoin. And regardless whether Bitcoin is a real success or not, at least it is viewed as a success. The other is stable coins, which have gone from zero of assets to now almost 200 billion of assets in the last, you know, year and a half. And then the fourth being, you know, some combination of NFT's and gaming, there will be other use cases in the future. But those are four of them. And DeFi Far and Away is the best success story in terms of speed, and growth and usage of what we're seeing. So yeah, going back to what we just said, next year, most likely all of DeFi is now a top 10 US Bank, and probably pretty soon a top 10 global bank. I don't actually have the global stats here, but I'm sure most of us banks are probably larger than majority of other banks, other than a few in Europe. So you know, we're this is real, right? This is real growth. And again, I don't want to be too hyperbolic here. But if you told me Bitcoin was at $400,000, next year, which is which would put it on par with gold in terms of market cap, right, that'd be in your 8 to 10 trillion range. If you told me Bitcoin was at $400,000, next year, I might look at you and say, Well, yeah, that was obvious after what happened in February of 2022. You know, and again, I'm not suggesting we'll get there but I think if we get anywhere if we have any sort of a huge hyperbolic move in digital assets with you know, I think Bitcoin is probably the biggest beneficiary but also stable coin growth and certainly a lot of DeFi growth and other assets. I think we will inevitably look back at February 2022 and say, Yeah, that was obvious.

PETER HANS 19:34

Yeah, and in hindsight, it's a mofo Hmm you know, because he did a lot the same thing and in March of 2020, across many many assets, yeah, things get overheated and and over cooled, under cooled over cooled, you know what I mean?

JEFF DORMAN 19:51

They get it they get cooled

PETER HANS 19:52

over cooled over cooled under cooled would be like room temperature, I guess. Well, then this is This is interesting. I know you're not feeling well, Jeff. So we're gonna keep it a short show today. We got some interesting things planned in the in the subsequent weeks. So thank you for joining me. Thank you everyone for for listening promised the marketing folks at Arca that I would I would give a quick plug for the BTF paper that was put out the other day. Really interesting things there about kind of the future of tokenized securitization. And we're also hosting a webinar in in early March, which I guess is now is early March. So check the website in the blockchain, you probably know more than me.

JEFF DORMAN 20:39

Yeah, I mean, BTF stands for the blockchain transferred fund, which is a mirror image of the ETF right, which Everyone now knows of. But you know, 20 years ago, ETFs, barely existed. And now they're attentionally Nellore industry and heading towards 30 to 50, according to Bank of America. So, the BTF, the blockchain transferred fund with all the same properties, but with its shares transferred on blockchain instead of through the traditional DTC, bank and brokerage system, you know, again, in line with what we just talked about with this world where you're a bearer asset, pretty powerful. So if anyone who is interested in that, certainly check out the webinar, check out the white paper that the team at Oracle put together.

PETER HANS 21:15

Yeah, definitely. No, it is a it is there's no doubt in my mind. You know, I don't know what the markets doing day in day out, you know, short term but from a structural standpoint, a technological standpoint, there is there's no doubt in my mind that we are moving to a a tokenized blockchain based world because it is just, you know, so much more efficient, so much. So much better user experience. It'll take some time, but we'll get there. So, so Thanks, Jeff. I appreciate you spending some time I know you're a little under the weather so you feel better. And thanks, everyone for joining us.

JEFF DORMAN 21:51

Take care.

REAL VISION 21:54

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REAL VISION 22:20

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