Ground Floor Consensus GFC014: Aave And The DeFI Revolution ( w/ Stani Kulechov )

Episode Summary

Mar 16 2021 . 55 MIN

GFC014: Aave And The DeFI Revolution ( w/ Stani Kulechov )

Stani Kulechov, founder & CEO of Aave, returns to Real Vision after his recent deep-dive conversation with Ash Bennington to talk about his journey in the defi space and how he sees the world. Kulechov discusses where we are in the space, what it will take for mainstream adoption of defi, how defi is radically shifting paradigms in the financial world, why governance is so critical for the space, privacy, NFTs, and more. It’s a fascinating conversation that covers the most important issues investors need to understand.

Show Notes

Stani Kulechov, founder & CEO of Aave, returns to Real Vision after his recent deep-dive conversation with Ash Bennington to talk about his journey in the defi space and how he sees the world. Kulechov discusses where we are in the space, what it will take for mainstream adoption of defi, how defi is radically shifting paradigms in the financial world, why governance is so critical for the space, privacy, NFTs, and more. It’s a fascinating conversation that covers the most important issues investors need to understand.

In this Episode:

  1. Kulechov details his journey to get where he is right now, from getting started with crypto in the legal world to being a practitioner at the highest level of the defi space
  2. He talks about working capital requirements in the crypto and defi spaces and why working capital is so significant
  3. He discusses stable coins as a game changer in the space
  4. He shares his view of where we are right now with decentralized protocols, what the next logical step is for the future, and why he believes it is better finance
  5. He talks about what governance really means and why it is absolutely critical for understanding the defi revolution
  6. He covers how the traditional corporation and other paradigms are radically shifting in a decentralized world
  7. He explores how defi can go mainstream and discusses barriers to participation, including user experience
  8. He details where he sees the potential for risk to evolve in the defi space
  9. He touches on NFTs: what they are, key features, how they’re different from other tokens, practical applications, and where NFTs and defi can intersect
  10. He talks about privacy: the current state of play, what he’s watching, and how he thinks the protocol will evolve
  11. He discusses where we are in terms of user interface, where we need to go, and why those changes are so important



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


ASH BENNINGTON & Stani Kulechov



Stani Welcome to ground floor consensus. And welcome back to real vision.



Thanks for having me here. Ash.



Yeah, it's such a pleasure to have you back. For folks who don't know, I did an hour long deep dive with Stani on the real vision crypto platform, talking about Ave. and if you haven't taken a look at it yet, I'd highly recommend it. You know, for two reasons. One, if you're looking to understand the specifics about Ave, it's a great place to start. but to also, if you're relatively new to the deFi space, it's a great primer on the way that world works, and how someone who is a practitioner at the highest level in the space thinks about deFi?



Yeah, pretty much I mean,



Stani, let's, let's, let's assume with that said, let's assume that people haven't seen that interview yet. And tell us a little bit about your background, you've had an interesting journey to get to where you are right now.



Yeah, my background is a bit weird, because I kind of stumbled upon into into the crypto space a bit of accidentally and more from the perspective. So four years ago, about four and a half, we were starting our first decentralized protocol, which is like the set of smart contracts, running on the Ethereum blockchain. And I was before the whole crypto space and the simplest finance I was actually in, in working in the legal industry. So I'm a professional lawyer. And before that, even when I was way more way more younger, I was building financial technology application. So FinTech as we know it. So it's pretty much like tweaking the user experience for finance applications. And working capital finance was was the thing I was focusing upon. So I am not like completely like a, like developer background, I would say, but it's a bit of like a mix of a bit of everything, which is good, because I need this different things. I need a bit of a legal perspective, a bit of technical perspective and economic perspective in my current stuff that I do. So it's been helpful for me.



Yeah, it's, it's actually so interesting to me, because while obviously there are a lot of very smart lawyers, in the crypto space, most of them are not founding protocols, or doing development work. I'm really curious to hear a little bit more about what that journey was like, and what your what your legal colleagues said, when you explained this thing that you were doing that probably didn't make a whole ton of sense to them.



Yeah, made like, zero sense. It's, it's kind of like a user, like, actually, in the legal space. I think there was like recently a, a student actually interviewing me from from Switzerland, and she was doing her PhD, the PhD. And and the idea was, like, how blockchain could help the legal industry. And at some point, she asked me that, like, how it helps like lawyers as well, actually, you know, like smart contracts, just make contracts, better contracts. So you might not need lawyers, but you might be for coders. And when you say this to lawyers, they freaked out, you know, like, oh, but you know, do we have work in the future. And it's the same thing with AI. So legal space doesn't like technology, they like that things are complex that they can specialize in, and so forth. But the thing is that, because we have this technology, there's some stuff related to regulation, where you actually need a lot of kind of, like a therapy and, and then you need lawyers. But in essence, it's kind of like a, it's always difficult for for lawyers to hear, hear about like, like this kind of technology that changes the way they they will work as well. So that was the reception back then.



I'm sure, you know, it's funny, I have some close friends who are lawyers, and it's interesting lawyers, sometimes I feel like they, they wonder why and why smart people would want to do anything else, but be lawyer, so like, I but you could be a lawyer, I don't understand like, it feels like they you know, that's like such a passion and such a calling for them. And you start to see the world in that context. And in many ways, paradoxical, although they're very different in every other regard. And that sense is very similar to engineers and developers so that you just start to see the world through that particular lens. And it begins to shape everything else. I'm really curious to go back to the very beginning. Started, what were the first sort of twitches that you got that made you think that you know, a life in technology, even prior perhaps to small contract or something that was smart contracts? Were something that interested you?



Yeah, I think I've been always like, technology focused. So when I was very, very little, I think, nine years old, eight years old. I used to play a lot of computer games. So I remember my dad One One day just came to home last year, work a bit drive this computer, you know, it's like very old running Windows 95. Back in those days, and pretty much he plugged into the modem connection, it was very slow. And And then from there, we started to do all kinds of things with my older brought butter. And one of those things, we played a lot of games, we played Counter Strike, but it also likes started a lot. And it's a good amount of programming. My brother, for example, he was very into, you know, tweaking kernels, studying Linux systems. And for me, I loved more programming and creating scripts. And that is where it kind of like this idea of like, being close to technology was interesting for me. And then I started more in depth, location, space and finance. And it's been always kind of like, I think I went to legal theory, because there was in FinTech, there's always like regulation involved. And I wanted to understand more like, what's, what are the different kinds of rules here. And that's it to be to law. And now I'm back in tech. And so it's, it's, for me, like, I feel very good in tech, because this is the place to innovate and create new things. And that's been cool to me now.



Yeah. You know, it's interesting, I was talking to Caitlin long, not long ago, and I refer to her as a triple threat. She's one of the few people who understands the legal component, the technological component, and the finance component of it. And I think that's one of the things that makes that makes the crypto digital asset space. So interesting, because it really is a mash up of three radically different fields. And there are so few people who understand them all. And it is not entirely clear how all of those components are going to integrate, to call back to something that you said a few moments ago that I found interesting. For people who aren't in the finance space, who don't have traditional finance backgrounds. You mentioned that you were doing working capital requirements in the financial space, which is something that you know, kind of now probably looks like such critical experience for what you're doing in the, in the deFi space. But for people who don't know what working capital is, talk a little bit about what that is and why it's so significant.



Yeah, working capital is pretty much you know, you have a basis that you're running and and, you know, and beat based on the the revenue that you're getting, like future revenue, you could actually get financed at for certain requirements there. And in the In my case, I was building a application where, you know, we had, I'm from Finland, originally smart, country Nordics. But there's like little game developers there. There's couple of bigger game developers, studios, there's Supercell, with the voltic lash bands, and then there is the Rovio, who developed the Angry Birds. So it's kind of like a very, very game developer centric scene. And one of the things I noticed that there's a lot of indie game developers that are publishing their games in the app store, or Google Play back then. And they had to wait, let's say one a month and 15 or whatnot, days to get their monthly their fake news and payouts for from this venues. So what do we kind of like create this application marketplace where you can actually get from liquidity providers, working capital, finance, so you could get those payouts practically tomorrow, and instead of waiting one a month, in 30 days, or 15 days, whatever is the platform. And this helps you to grow faster, and pay bills faster, and kind of like have more flat incorporate. And this is like what we were doing. And I think it was quite interesting. But the thing is like I never wanted it to be a startup, it was just a project. And even like East London of it, it never was meant to be a actual startup is just a project and it just evolved so.



yeah, it's absolutely fascinating. You know, one of the themes that keeps coming up again and again on this podcast is actually something it's a quote from a philosopher from Nordic country, Soren Kierkegaard, which is that life must be lived forward, but can only be understood in reverse. And when we talk about some of the points that you just made, and thinking about working capital, it's so obvious now in retrospect, how that has a tie in at the most integral level to something like decentralized lending. Talk a little bit about how you started to see the need to move more into the smart contract space and ultimately into the deFi space.



Yeah, so what I wanted to achieve is that you could use cryptographic assets as a collateral and and just borrow against them. And you could do this achieve this by by just creating a centralized platform where you you act Stadion and take the cryptographic assets and give let's say dollars in return or Stable coins. And the thing is that there was so much stuff happening on Ethereum in terms of like the developer community. And one of the things like I understood that actually, you could do this completely on contracts, market checks. And that means that you don't have this kind of a trust relationship the same way, as you're holding, let's say, Bitcoin, with your keys or ethereum, to say, where you will be holding the control of withdrawing those funds from a decent first protocol like other. And what's interesting here is that when we started to build, there wasn't stable coins on if they went off like that there was still under stable coin around in 2016. And that was on the on the blockchain. So it was kind of like tricky at the moment, like, you put a so called ERC 20, just a Ethereum based token as a collateral and borrow eath. And you have this volatility. So there wasn't many users back then. But now that you can actually borrow stable coins, that makes way more sense. And this is how like the market that's been growing because of those stable coins.



Yeah, stable coins have deFinitely been a game changer. It's interesting to think that they're relatively recent addition to the space the last few years, and how much has changed, and then how much they've enabled. I'm kind of curious to kind of zoom the camera out and get a big picture overview of where you think we are with this right now. Like, how would you describe if someone said to you something I'm really interested in this space? Like, what inning are we hidden? How early is this in the game? How well developed? Do you think this is? And where do you think the next natural step is to head?



I think we're surprisingly early, because the thing is that these decentralized protocols, you know, they start to get more and more decentralized as people join in. And also kind of like, I would say that the market size of those protocols in terms of like how much value they hold in the smart contracts is relatively small compared to the kind of like rest of the crypto space or rest of the traditional finance. So I think if we delete into technology and live in that, you know, they the future of finance will be more interoperable because of smart contracts and permissionless. And you can transfer and program value easily. And, you know, if you believe in this thing, and also governing this protocol in a decentralized manner, then, I mean, then there's a lot of growth there. I personally believe because I think it's just this just a passion that I'm building, but also kind of like something that I think changes find us for a period because it's more transparent. You see everything that is happening in the fall, you see all the transactions, the collateral levels in our protocol, and that makes it's already better finance for me.



Yeah, then for those of us who lived through the 2007 2008 financial crisis, a lack of transparency, problems with collateral were obviously things that absolutely became gasoline on the bonfire that fueled that crisis.



Yeah, exactly. I mean, that's, that's a good example, where you, you didn't know only like, kind of like, what's the overall exposure, but you don't you didn't know like, what the market participants were exposed to each other what they had they their balance sheets, like, sure you have like financial audits, but in regulatory filings, but they're come periodically. And what happens in the simplest finance is that you could actually track the exposure on every every block, or block minute. And that's a big advantage there. And you can build wealth protection within the smart contracts and can't be arbitrarily changed. That's, that's something very superior.



Yeah. And what kind of protection Do you think you can build in that really would solve some of the challenges that we've seen in the past?



For example, it's in the protocol itself. So every collateral asset has a different kind of risk parameters. So how much you can borrow against ethereum? How much you can borrow standpoints, again, brought Bitcoin. And these parameters, once they are set by the decentralized governance, what happens is that you can't arbitrarily change. But for example, if there's traditional market player, of course, there's regulation, but there's also like, it's based on frosting that that market participant will not take excess risk. But here in deFi you can actually build kind of like a mechanisms to ensure that that's not even possible on the smart project level. And that's the big difference when we are looking at decentralize finance and also like the person to traditional finance.



Yeah, you know, and to exactly that point, the question of who gets to decide, is something that I know that you're very passionate about the decentralized revolution that we're seeing taking place. Now, you mentioned governance earlier, tell us a little bit about especially for people who are not as close to the space as you are, what governance really means, and why it is absolutely critical to understanding decentralization.



governance is the most important part of the decentralization and these interest finance. So without these interest governance, there is no actually that much of a centralized finance, you could create code, which is immutable, like on the, let's say, etherion blockchain, but someone also needs to govern that blockchain. So there's always, always somewhere a level of community based governance. And what's what's interesting about token based community governance is that that community can decide and the rules of how they want to govern that particular protocol, what changes to make, and it also ensures that everyone can participate there into this governance system. And also, if you don't have even the kind of like a governance token, what you can do is that you can request proposition power to create new proposals or requests for voting power from other governance members, because not everyone is that active folder? And that makes it quite powerful. system.



Yeah. So walk us through that would be some examples of how that actually works in practice.



Yeah, so it's quite straightforward. So to create a proposal on chain, which means that to change anything on the protocol level, let's say, for example, changing the interest rate curve, in the other protocol for a particular asset, what you need to do is you need to submit a proposal, either directly to the smart contract or use some sort of like a user interface. That is something we're building for the audience interface. And there's a couple of other user interfaces building the same experience. So you could just submit the proposal, you have to have a certain amount of opposition power, either by holding the the, the governance asset itself, or by by just getting opposition power delegations.And then once



And ultimately, this is the token that you're referring to it's ownership of the token or delegation of the governance power from those who own the token who delegate to others.



Exactly. And then once you have the sufficient, sufficient power, so then you put the proposal on chain, so you submit it, like that's a risk parameter changes are quite simple, you don't need that much of smart contract code. And then the voting begins. And once the voting begins, it means that now the community boss, and if that result is positive in its outcome, what happens is that it goes after some of the somewhat of the community calling the execution, it goes into the smart project base, that code change, which means that that, that that's, that is something that went from proposal all the way into the protocol. And actually, now is, you know, it can't be any more arbitrarily changed. So you need I needed like a proposal, if you want to change this, again, something else. So that's the kind of like a fairly simple, so there's like a, there's a proposal, and then there is voting, and then it's either accepted or declined, based based on the majority.



Yeah, you know, I think about this as being a potential solutions that. And I say potential, because it's very early in the game, but to some of the problems that we were talking about earlier with 2007 2008. You know, for me, someone who covered that crisis at CNBC and elsewhere, the key to understanding it was there were different categories of people in the capital stack. So you had basically what economists called principal agency conflict, you had people who were managers of the business, who were acting in ways that was very different from what other stakeholders would do. And just to give some examples of that, you know, basically means that you have the the CEO of a company, who could be compensated for taking on a great deal of risk, when it might not be in the long term interests of the company. So you'd have potentially management in conflict with long term shareholders and certainly in conflict with the bondholders who are only interested in getting timely principal and interest payments. So you have this unusual circumstance where you in 2007 2008 had this perfect storm blow through and because of a misalignment of incentives. You had obviously really, really ugly outcomes come out of it. I'm curious if you've thought about that and thought about how decentralization and decentralized governance can potentially avoid those kinds of conflicts in the future.



Yeah, I have and I think when it when we compare like, traditional business models, and also like traditional sense of like, governance in in financial entities, what's spermatic is that if you get the majority of a company, they pretty much can control like how the company will be developed in the future. And you might have people who are aligned with your kind of like principles and, and or they might have like different opinion, and, and so forth. But what's interesting like about decentralized finance, for example, is that because it's built on open source technology, it actually means that the code code is open and public. But the majority, for example, in all the stakeholders, they need to always think about the minority opinion, because if they, if they all the incentives are not aligned, what happens is the minority can actually fork the piece of code and create their own community, and also their own governance, and those who are jumping into their own governance, they basically have the early adopter advantage there as well. So that's why like, it's very, very difficult to be evil in decentralized systems like these centralized financial protocols, because they don't have the similar kind of like a moat systems that traditional businesses have, for example, you might have a distribution, bigger use how so many users or you might have just like some sort of regulation that allows you to do things that others can't do. But in these adverse finance, you know, users can walk to other platforms fairly quickly, liquidity moves in a permissionless fashion, if someone creates something, some better algorithms, some of the liquidity goes there, and so forth. So it's very, very difficult to kind of like a against, you know, the, the the minorities of the of these protocols. And I think that's, that's kind of like a sub policy for the system. The ability for




Yeah, you mentioned, you mentioned forks, which is an interesting topic, obviously, some things that people who've been in the Bitcoin space, for some time have thought about, because of the forks that we saw there, I'm curious to think about how and to hear your view of how forks can operate in the decentralized finance environment, and what some examples might be of when a group of users might want to split off and do something different.



I think good example is where, you know, if you are having a decent rest protocol, but then the community has difficulty to participate, have a say, and, and stake in the system. And that's happened with the uniswap Association of kind of like a fourth, because unisaw were not so eager to have this kind of like a token based community. And then like, it felt more like that uniswap was building more for more kind of like a, with their own agenda in the sense that they, there will be like a product and use product, but you know, committee had less this ability to influence anything. And that's why when suslov came and the poor cap, and you know, the token economics, gather people together, that they could actually govern something together. And that was that was the kind of like an example, there. The other example, he says, you know, if if they, if there's some sort of like a differences, like how things should be handled, you know, you can always work. And folks aren't necessarily bad in the sense if they create different kinds of directions, they can be also bad if they're just pretty much like a copy pasting things and creating unnecessarily value extraction, which, which doesn't lead to anywhere, but it's always a question of like, what are what's the kind of like a net result that they're trying to achieve? When therefore?



Yeah, you know, it's, it's really fascinating to me, because the size of the ideas that we're talking about here, I think it's just massive. I had a conversation yesterday with Kevin Chow from rally. And he was saying, look, I think that the most important thing that people need to understand, or one of the most important things that people need to understand here is that the traditional Corporation, that people who went to business school and spent a lot of time learning about how it operates, and many of those paradigms may no longer effectively be I don't want to put words in his mouth. But there's a change that's happening, right that many of the paradigms that we saw in traditional corporations are are radically shifting in a decentralized world. And I think that that that is a huge idea that people who are outside of this space have just not reckoned with yet. They think Well, yeah, no, I understand. There's a lot of technology that I don't get, but but basically, it's kind of the same thing. It's not the same thing. In a decentralized world, the technology seems to be powering a decentralized revolution, where the decision making power Where the governance power, or the ability to set incentives and to align different groups of actors is a dramatically different world that we're moving toward.



Yeah, I mean, it's assuming it's difficult to believe. I mean, in my kind of like, past years, for me, it has been, I always believe, what I'm what I'm building. But at some point, like, what are we see other people do to see the value and see the benefits that did through the grades? For example, do people understand like how important that transparencies or the fact that you can govern with a community, or you have like a permission late way to build new things, innovate all the time, and we've ever be valued the same way, because especially like starting in the beginning, where user experience by not be very good at technology might be very difficult to understand. It's very challenging at those points. But now where we are moving towards more frequent, frictionless deFi, and it's in a more slightly more wire, understanding what what the fi is, it's becoming quite, quite easier. And I think the goal is here to continue educating people on users. And at some point, of course, it's user's choice, whether they want to use a custodian, and who uses deFi the background, or then they log in themselves directly, decentralized technologies, but I think like, we're in a time where users want to have this decision, and whether they have a custody or not. This is why like, the simplest technologies like Bitcoin has, like, it has like a big value proposition because you know, it's choice. You can can choose to keep your keys, or you can give your keys to someone and say, same goes with decentralized finance, you know, you can do it yourself, or then you can trust someone, but you need to have the choice and right, I think that's the, the main main idea behind off the the kind of like a power or behind of decentralized, technologies.



Yeah, one of my favorite moments in the interview that we did a few weeks ago, was one, near the end of the interview, I was joking around and saying, Stani, I'm sure you have bankers and very expensive suits, offering to take you out to lunch. And you said, Yeah, take me out to lunch. But hey, guess what, like, I don't have the ability to make unilateral decisions here. This is something that is about a user based decision making process. And I think that that is probably something that people who are not in this space struggle to get their head around.



Yeah, that's the cool part about like, you know, you have a truly decentralized protocol where the the founding team or members of the founding team, or the, you know, the biggest stakeholder and they, they kind of get a, like a plus a, a change in the protocol, that actually goes against the protocol, because that alarms everyone in the ecosystem to actually vote against. So you don't need to see voting behavior where we see maybe 2 to 10%, or 5%, whatever is the number of participating governance, it doesn't mean that actually those rest of the community isn't active, it just means that the the, the decision making at the moment, in addition to this fashion is working well, because there's there's two, the most active ones pushing off the important decisions. And then if there's something controversial, then you know, you see more, kind of like increased voting behavior. And and that's, that's pretty cool. And I think like this, the kind of like proposition power delegation to technical developers, and then both voting power delegation to protocols, politicians, makes a lot of sense, because you can kind of like delegate your mandate to someone who kind of like has the same agenda as you have and can actually gather, right, our and I think that's very, very big benefit in this this systems.




Yeah, it's something that's, that's intriguing. And still so early on, you can imagine, for example, you could have different groups who had different views about things and you could delegate to a particular leader and say, Hey, I know this person is kind of aligned with me. I like what they stand for. I like their values, I'm going to delegate my authority to them, people who felt otherwise could find someone else. So it becomes almost like a potential for a representative, almost republican style democracy to emerge.



Yeah, and I think it's going to increase we just need better use of experiences in terms of like leaderboards and and you know, managing these delegations and just like also kind of, like some sort of funding system that, you know, the top delegates will get funding from the protocol. That can be pretty, pretty cool.



Yeah, and also, I would add to that probably UI and education seem to be two of the biggest factors that are so challenging that have made it you know, obviously, this is a space right now for people who are who are advocates, enthusiasts, people who are very passionate about it. But the question then becomes, you know, how does this move into a broader audience, for people who don't have the technical backgrounds for people who aren't involved in the industry, who are working in the space for people who are doing other things, right? Like in 2021, if you're a cardiologist seeing patients 60 hours a week, it's probably hard to be involved in this space right now, just because the time constraints to learn and understand the things that are happening are still fairly high in terms of barriers to participating.



Yeah, so user experience is getting better. But it still sucks in the sense that there's so so much work to do, like, we're just like, so happy that they experience better than it was years ago. But like, where we should be, like we should like actually get more accelerated in that sense. And I think we will, I think we will have more and more developers and designers, especially designers, coming into the space and, you know, making word of interesting, cool user experiences that kind of like, make makes more sense to a wider audience. And I think this could happen as well. It's just take some time.



Yeah. You know, one of the things I'm curious to hear your view on is we've talked a lot about some of the potential benefits of decentralized finance, I don't want to sound as though I'm being utopian about this here. I'm curious about what you thought about in terms of the potential risks and challenges that could come from a decentralized governance model, I'm sure there are probably things that are going to crop up that we haven't thought of yet. And I'm curious about if you've seen some of the potential pockets, where you see maybe the potential for some risk to evolve.





Yeah, I mean, there's always a risk of, you know, someone could obtain certain amount of, you know, tokens and vote somehow, let's say there's a lot of tokens in different centralized exchange balance sheets. And this is kind of like a difficult thing, because it gives some voting power to those exchanges. They haven't, of course, like exercise that much, at least, like the, the reputable exchanges that are the bigger ones. But I guess like, that's, that's one of the risks. But you can, you can put a lot of protection into the, like a contract and governance level, because, for example, you could build that before any, any proposal of positive outcome before it actually gets executed into the protocol contracts, there's a time lock period in time, it could be from one to three days can be even longer, depending on the proposal, for example, in our we have two days in the previous process, before an actual proposal that is positive will get executed into the contracts in the protocol level. And on the token level, it's actually multiple peaks. And what this allows to do is that, you know, if there is some sort of malicious proposal, you know, you can withdraw the funds from the protocol. And also there is so called Community Guardian as well, in the, in the, the the other governance, which is kind of like a multi SIG. So if there is a malicious proposal, they can actually kind of like a cancel that proposal. And that's, of course, can even be to be set to, to a kind of like, voided the the actual it's kind of like a guardian. But I think it's very, very, very powerful, especially in the beginning of a protocol to avoid having those kind of like malicious proposals, but they haven't been actually. So serious, malicious proposals in deFi at the moment, haven't seen anything like anything super crazy, at least.



Yeah, and in many ways, the programmability creates almost unlimited opportunities to develop interesting solutions, process flows, mechanisms of governance, like you can do things like, you know, time locks, and different proportionality of votes required to make changes or roll changes back. It really is something that, you know, I suppose it bears repeating, so early in terms of the way that we're thinking it through, and the potential because of the technology to do these things that we've never been able to do before. It's just so vast.



Yeah, I mean, I can't say that we are so early on innovation. And so early what what this will look like. So I think, going forward, I'm pretty sure like, like everything that we're seeing now will just like change, and this is the beauty of the system because it's open. Like they get as a kind of like a ecosystem everyone can build. So it's not just permissionless way to use this protocols, but to build new features within the protocol or on top and building new products. It's it's actually like very open system. Anyone any part of the board can actually Participating in building new, new products and protocols. And that's that's what makes this feel like so fast in terms of like how it goes in innovation.






Yeah. and the other thing that comes to mind is when we were talking about my my silly metaphor about bankers wanting to take you out to lunch, you said, and at the kind of the ultimate guarantor of that is at the end of the day, if something happens that the community doesn't like, they can fork it.



Yeah, exactly. And that's, that's like a sad thing. And usually spider kind of like, that doesn't happen because you get those smart people to continue participating and contributing. And that's what usually happens. Like there's so many, there's way more compromises in the protocol level in across deFi that there's actually like forking.



Yeah, so Stani to shift gears here a little bit. I'm curious, what else are you thinking about right now? What's caught your attention? And what do you think is something that we need to think about? Because it's coming down the pike? And it would be great to have a little bit of an early peek in what's going on inside your thoughts?



Oh, yeah, I think two things. I'm curious. Currently. One thing is, is the company like the the the nst space, I've been following what's happening there, mainly because I'm seeing a lot of greater craters coming in. So there's like the, in the nsds, which is, which is a non fungible token represents some digital art and so forth for for those who are wanting to do the idea.






And I'm kind of like looking towards, like, I see a lot of like, like a art coming, like creators coming into the space. And I see an onboarding tool. And that's, that's one of the interesting things. And privacy. Privacy is second thing.



Yeah, those are the two absolutely massive topics to touch on NFTs first for people who are new to the space, but I, what I generally think about in terms of NFT's is the key feature there is that each individual token can be different. If you think about Bitcoin, Ethereum Ave other tokens. They're fungible in that, you know, one token equals any other token, if you think about, you know, on a practical level, that means if I have a $20 bill, and you have a $20 bill, I'm happy to exchange mine with yours doesn't really make any difference. They're identical. But the idea of non fungible tokens is that each one is unique and can represent some physical artifact, a claim on ownership, it could really be anything, and then you have the ability then to exchange and be traded freely. That opens up all kinds of interesting possibilities. I'm curious if there are any applications that you've been thinking of, in terms of spaces where NFT's and deFi might intersect?



Yeah, I deFinitely think there is something that is one project in the other ecosystem which is called are the gotchas so are the gotchas are this like a cryptographic collectibles would be the collectibles on this ghost pixelize code shapes. And how it works is that you have this ghost token that you use as a payment currency to buy this kind of like a portals. And each portal has certain amount of other gotchas. And when you get those other gotchas, you still need to unlock them before you can move. So what you need to do is that you you deposit into the Avi protocol, and start earning interest now as you're earning and practically saving, saving funds, you will unlock those other gotchas. And then when you are locked them, you can actually you have this kind of like consumables wearables, and you know, you can, you can build a very unique looking other gotcha. And that's pretty cool because it opens the doors to a new metaverse where you could actually create, like a battle royale game, a system developer just decides to create a battle royale game and invite the other coaches without having any relation to the to the ecosystem and just expanding mellower verse. And I think that's, that's something very fascinating for me how you could actually combine NFT's and deFi and even like larger gaming gaming as well.



Yeah, it's kind of a surreal idea. I'm actually flipping around on the avid gotchas wiki right now. And it looks like it's done in like CGA graphics for those who are too young to remember that the old like four color graphics that old games in the pre windows 95 days used to have so it looks like some really smart folks having some fun playing around with those ideas.



Yeah, it's it's pretty funny actually. And it just shows kind of like how, how simple things could become very, very, very, like fun, and it's all about fun, you know, an experience. That is what then if these are like, I don't think people should like think about NFT's as some sort of like a, you know, as a financial thing, or reggae. I think it's just like, experience meant representation of provenance, you know that you got it from someone and also kind of like, maybe you were part of somebody then and you got the the, this is like, setting fonts on Ave and getting in a thesis is pretty cool, cool idea.



Yeah, you know, it's really interesting talking about NFT's one of the topics that comes up, especially with people who are more in the mainstream and outside the space is what's happening in the NBA, right now. And obviously, it's a huge amount of money chasing after these technologies, but again, to the point that, that you just made and the point that I keep making just how early It is, in this space, you know, and it, it's, you know, to me, it's, it's really, it's two types of people who are coming into the space, it's the, it's the people who are interested in passionate about the technology who want to play, who want to build, who want to do cool things. And it's people who are generally highly sophisticated investors who understand the size of the risk that they're taking who understand, look, this is something that's incredibly early, there's a tremendous amount of risk in this. And I worry often about retail investors, who get sucked into, you know, what starts to look like a gold rush, everyone, you know, has an uncle or a cousin or a hairdresser, who tells them that they made 5x their money in six weeks. That's a dangerous proposition. That's risk, there's people who are gonna be plowing money into this space, that they shouldn't be plowing into the space taking risks that they shouldn't be taking. Because, look, the magnitude of some of these returns is enormous.



Yeah, I mean, you always need to approach everything with risk first approach of like, yeah, like, you shouldn't look at the returns. But actually, like, what's, what's your risk, what you're doing everything. That's like how you approach these technologies?



Yeah, and I always say, the incredibly boring thing that I learned in traditional finance, which is, talk to your own financial adviser understand what your risk tolerance is, understand what your your profile looks like, understand what your objectives are, and make informed decisions with someone who's a professional. Don't listen to anyone on the internet, including me.



Yeah, exactly. That's that's the thing. Like, it's, it's pretty much in your own hands.



Right, exactly. 100%. So you also mentioned privacy, which is a big topic, what do you think the current state of play Is there? What are you watching? And how do you think about it in the context of Ave?



Yeah, privacy is becoming a bigger topic. For me, I think not many people are looking into that at the moment. But it's going to be really, really more the more we transact on chain. So the more we collect NFT's The more we use deFi protocols. You know, the more we sign transactions, the more data will give on chain in in a ledger that actually is going to be stored. Well, kind of forever. If you think about how does blockchain sort of plan? And how do you this kind of like an armchair history of your transactions is something very new to everyone? Because obviously, when you transact, usually, the bank, the payment network, might have the data of those transactions. But in blockchain wise, it's it's transparent, completely. So everyone can see that data is good for the markets, like deFi protocols, because you see the exposures to see what's going on. The challenging part here is actually that, you know, when it comes to your own holdings, and your own kind of like, positions, you know, like, what kind of a thesis you have and what you have done previously, then, you know, you leak a lot of data. And that is very privacy wise. Challenging, and I think we haven't, like seen this or have an issue get that big, but I think it will become because like, we were just increasing the amount of how much we transact on chain. And I think what I think is interesting solution is, is it on all those rules, it's a way to, to actually kind of like prove certain things without actually kind of like, prevailing those things. And






Yeah, I think the next six, six to 12 months privacy is going to be big topics in terms of like, creating new products as well.



Yeah, privacy, of course, is very important. I think it's something worth advocating for. But I also understand that there's a flip side of that coin, and as a lawyer, I'm certain that you thought a fair amount about which is there are really bad actors in the world who want to do bad things, and how do we find a mechanism to find them? That's a question that is a very delicate balancing act. And I'm curious about where you think we are with that right now.



Yeah, I think kind of like the the thing with the bad actors, they always find a way, but I think it's a risk approach the same As we're doing now, so we were looking at the current systems, how they work, where's the risk and how to approach I would say like when, when it comes to these interest technologies, it's kind of like an ocean, OCEAN or a network. It's kind of like the the, you know, the, the internet cables and satellites. But actually, what, where were those bad actors to be kind of like handled is those gateways, you know, those coin bases of the world, where you actually like, provide this, this gateway to the ecosystem there, you can actually remove. But the risk risk is actually a very small if you look at statistics, and what we have now. And I think like the more institutions are interested in this interest technologists like the less that the more and more we actually put on this, this kind of like a topic and the less of an issue becomes.



Yeah, I'm also curious, what else are you looking at? What else are you thinking about? Particularly as we think about what's going to happen? In the remainder of 2021? Where are your eyes focused?



Well, I would say a bit of, kind of, like, We're looking now in into deFi, and maybe more on the user experience wise, like how we can improve that. But also like thinking, you know, how we can create better tools in terms of fiscal management, and also like, community initiatives, how we ensure that, you know, wherever it wants to build, contribute into deFi protocols into all of it, how can we ensure that they have all the needs to do that, you know, in terms of like, the process and everything, so it's going to be a lot of fine tuning in the next next six, six months. And I think it's necessary this kind of like a technical depth that we need to do, because it, it, of course, brings us opportunities to build new things. But of course, we're still building new stuff. We're basically working on the whole kind of like looking what to build next, what kind of products we build, what kind of like a additions the protocol could have. And also, there's a bunch of 100 people doing the same. So like, our team is not the only one that is building. There's also like, developers in that community that want to contribute, they want to build new pieces in this is going to be quite interesting to see like how, how the protocol evolves from there.



Yeah, it'd be interesting to hear you go through a couple of those points individually, for people who aren't obviously as close to this as you are, talk a little bit about what the where we are right now in terms of the user interface, and where you think it needs to get and why it's so important to make those changes.



Yeah, user interfaces. The cool part about like these interest protocols is that you can very much build a user interface that fits your audience. So let's say that currently there's or 80, or 90, or even more like access points to the audit protocol, different wallet supports it. So there's already like different user experience, experience there. But also different kinds of bar aggregators, like field aggregators are using, let's say, you'd like to have a yield aggregator that I agree as your funds to the lending protocols that earned the most and diversifies it a bit. And they can build their own kind of experiences. So that's the kind of like a core part. And if you don't like something can always build something better, or use something that you could use all of it without actually using the, the, the kind of like Genesis user interface, you could use it, any of what is available. So that's the






That's the thing, like, like, anyone can build this experience.



Yeah. And, and, and to your point, it basically it's separated, right, so the user interface layer and the functionality layer are segregated. They've been disaggregated from each other, and so that you can replace, you can replace the UI while not changing the back end functionality.



Yeah, exactly. Exactly. So that's, that's completely separated. And I think people will build better user experiences they already do, then then then what we can actually do, because our goal has been always like, we contribute a bit on the kind of like a protocol side, and help others to contribute as well. And that's the thing, but we haven't had we lived in a given user experience as well. So I think we're proud of that as well. I mean, because like, you know, explaining, like how to use like, learning protocols is deFinitely like something that, you know, you want to make it as easy as possible on the user interface. And that was what we have put a lot of effort this fall, so it's quite good to be honest.



Yeah, it's obviously it's changed. There's your Ave v2 market now.






Yeah, talk Little bit. Also, the other thing that you mentioned that I thought was interesting was the risk management component. Tell us about what some of the key challenges are in risk management, and how you're addressing them today, as well as into the future.



Yeah. So from a risk management perspective, like, of course, like when it comes to the protocol itself. So there's this kind of like a risk framework. And methodology that is applied is it's created by the Ave availability and the risk team. And there is actually like, what kind of risk parameters the community could indicatively could choose when they're listing assets, changing risk parameters, like ratios of how much you can borrow against certain types of collateral. Let's say how much you can borrow against how much you can borrow usdc, against ethereal and this kind of things. And it's based on like, various risks, like the technical smart contract ways. It could be liquidity risk market risk on that particular collateral asset, or just some some sort of moderate type of risk that is so specific. So risk is always like something that kind of like a deFi ecosystem needs to always put more more effort to researching and improving the tools. But so far, it's been working pretty good. Like if you look at deFi as a larger spectrum, like there's actually like a couple of 100 like liquidators that are looking into the all the protocols and trying to liquidate different long positions to practically taking the collateral, reselling it if the collateral value decreases. So that has been working quite quite well, to be honest.



And what are some of the things that you foresee potentially being new developments in the future in risk management?



I think maybe like calculating the systemic risk. So let's say if there is an asset in our system, like Ave, and in our system, as well as our deFi protocol, in calculating like, what's the, what's the exposure to that asset, because of the way it's in different protocols, because let's say, if an asset is in our lending protocol that has some sort of like a incident, it might affect the audit protocol as well. So those those kind of things are now what I think will evolve a bit more in risk management wise.



Yeah, difficult to calculate systemic risk and those kind of feedback loops that occur when there are problems.



Yeah, exactly.



Yeah, so this has been a great conversation. We really appreciate you coming back again. And joining us, I'm curious final thoughts that you'd like to leave our listeners with?



I think as a final thought I'd recommend everyone to research more like a decentralized finances, about the transparency and how the protocols are governed, what makes them decentralized, like in terms of like a governance voice and the technology itself? What kind of benefits there are and start from there. This this Why? Why kind of like AI?



Research more is always good advice, I think for everyone, especially as it continues to change and grow. So thank you again, so much for joining us.



Thank you Ash. Thanks for having me.



Thanks for listening, everyone.



Ash Bennington

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