🎙️ #6 - DeFi Trust Spectrum

welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david we have an excellent episode today i'm super excited about it the defy trust spectrum give us a tease of what we're going to talk about today ethereum is an agnostic platform that allows anyone to come and build anything on it depending

on how you build that thing you can place it on a different part of the trustless spectrum so some applications on ethereum are very trustless and some applications on ethereum are completely trusted the trustlessness or trustedness of an application on ethereum is a way of illustrating how much human responsibility there is in the operation of the application why bitcoin is so powerful is because of how it is a very human free application

on the internet it is this thing that is internet native and does not need humans really to maintain it the the power of bitcoin is its lack of human maintainers of the system it the system perpetuates and so therefore bitcoin is a very trustless system because its operation is entirely computer run and that same illustration is found on ethereum applications ethereum applications can be completely trustless and completely unmaintained by humans ethereum itself

is unmaintained by humans however some applications can be trusted or human maintained and that means that when you use these things that you are trusting the people that maintain the each application to some degree and so that's why you can lay these things out in a spectrum of trustlessness where where some applications are more trusted than others and sometimes you can actually get completely trustless applications and so for example uniswap is the example that everyone uses to talk about

the most trustless application on ethereum it's maximally simple and it requires no human uh coordination or input it's humans at the end edges and code in the center and this is kind of like different websites around the internet 2.0 where some websites you can go to like wikipedia and access you know basically the entire website and other websites other ip addresses you go to and then you are asked for an admin like login and login credentials you know

some applications are open to everyone and completely trustless and some applications are closed and like realty for example my company we have white listed tokens you need to sign up with us et cetera and so we talk about that spectrum what it's like to be on either end of the spectrum what it's like to be in the middle a really fascinating topic there is so many other lines of conversation that spawn out of this for example at the trustless end of the spectrum i i believe and i and i think you agree with me ryan that things

gravitate towards that end of the spectrum the more applications we have on the trustless end of the spectrum the easier it is to build further applications there and so in the long term you know 10 20 50 year time horizon of ethereum i expect all the applications to be kind of grouped up there and bundled there in the trustless end we've been wanting to talk about this for a long time and there's three kind of takeaways or concepts that we're going to touch on the first is what you're talking about is the machine versus man on ethereum

what that what that looks like some are more machine robots some are more human-oriented people the fact that in many cases the machines will win out they will become the base layer and what happens to eth when all of this is going on when all of these trusted and trustless tokens start appearing and money protocols start appearing on ethereum uh how does eth win does it win we're gonna talk about all of that but let's dive into some housekeeping first um you had some

thoughts i know you mentioned me david after thinking about our previous episode on memes uh what have you been thinking about what what have been the reflections after we did that last episode episode number five yeah so far every episode we've recorded the next week i'm thinking about it and i'm like i should have said that should have brought up that and so this housekeeping section i think we're going to test out to see if whether people like it but just kind of go over our thoughts over the last episode and and the conversations from the community that have given us feedback uh so memes

we talked about memes as a communication mechanism a communication vehicle across time and across generations right so good memes last throughout generations memes travel from brain to brain and they can latch on and live across time and that's really why memes are so powerful and money is a meme right so the the paper bill that you have in your pocket it's a meme that we all accept as as money except the way that if you go back

to i think our very first episode we talked about how uh money is created or one way that money is created where there is a farmer uh toiling in his field he collects a bunch of wheat he goes to the granary and he deposits it and he is returned to receipt that a paper receipt and that paper receipt is a credit on whatever is in the granary or you could also call it a bank and then that that farmer can go and take that paper receipt and take it to a local store a local whatever blacksmith

uh and and redeem an equal amount of value for what he needs and so that's how that's how money is created and that money when that money is handed from person a to person b it the person b can then hand it to person c d e f you know and then this gets carried out throughout time and so money in the same way that memes are communication vehicles through from our ancestors it is our ancestors telling us our stories one of the one of the lines that i gave in that episode was that the bible is a collection of memes that our

ancestors have learned to pass on money and the money in the bank and the money of the world is this collection of our ancestors blood sweat and tears as they worked and as they produced value so that receipt that the farmer got for depositing his wheat is a receipt of his work it's his energy that he put into creating value and the way that we transcend we pass on value throughout generations is money and i think that when we are talking about

hyperinflation or argentina or venezuela hyperinflating the value of their currency away it's a lot more impactful when we think of it as they are deleting the value of our ancestors because that is what's happening that is the the value and work of our ancestors is being uh forgotten it's being washed away and that's why uh bitcoin and bitcoiners from their perspective is so important as a hard asset that cannot be inflated away or printed because it

retains the work of our ancestors across time so that's just something i thought about in the last week since we released that episode one thing i was reading this week was actually about the the birth of the greenback so that is the the us dollar was called the greenback and um lincoln actually created this uh during the civil war in an effort to win the civil war he knew in fighting the confederacy that it was also an economic war and he would need lots of money in order to do this

and so it was proposed internally and and he accepted the idea that they would actually have to create a fiat that wasn't really backed by gold it was somewhat through um a couple of steps removed redeemable by gold eventually basically it was it was sort of a non-backed new money that was being used to finance uh the war so financing security through issuance which is which is pretty interesting and it was laughed at at first i mean you know the idea that um

a government that the u.s would create its own non-backed currency the inflation rates during during the civil war um the the greenback uh rose in in terms of its its price relative to gold quite high when the union was losing uh and started to do better when when they were winning um it's just a really fascinating history and i think we are like what five six generations removed from that but we forget that our ancestors worked

very hard to establish money memes um and at the very beginning they weren't very established at all um you know they had to bootstrap their meme off of off of things like gold by putting imprints on the dollar like in god we trust or this is redeemable for for gold at the federal reserve uh they put a lot of work into establishing those memes when we do inflate them away when our government sort of issues more and we we see hyperinflation were kind

of destroying all of that previous work a super interesting perspective it maybe makes the uh the reason why no one should have the ability to print money uh it makes that a little bit more tangible in my opinion yeah um absolutely there's also some other cool stuff going on we published a post on on bank list this week about ethereum on bloomberg terminals did you get a second to check that out david yeah i did i thought it was great so something that cool that's going on is that we are starting to see

some of the real world assets this is a restaurant company they own about 400 restaurants called fat brands and they're publicly traded nasdaq company and they have actually issued uh through a third party a bond on ethereum and so you can log into uh bloomberg terminal and bloomberg terminals those are the user interfaces of wall street of traditional finance you can now log into a bloomberg terminal and actually see this bond being settled on

ethereum to an eth address and the payments from this bond are being paid to eth addresses too in stable coins um yeah i saw this about a month ago that this was happening and it kind of blew my mind that we're already getting to the place where wall street is starting to settle transactions on ethereum and kind of a thesis that what's going to happen is over time ethereum and networks like ethereum will become the base settlement layer for

bloomberg terminals for wall street and it's simply because closed permission systems can't compete against open neutral systems it's like closed source software competing against open source software it's like microsoft trying to compete against the internet in the 1990s open generally wins permissionless generally wins um you know 500 bankers ruling the world really can't compete against millions of of developers and folks who are building

on the ecosystem and it's it's exciting to start to see uh some of those early seeds of what's going on there too so if you get a chance uh check out that article see what's going on in the ethereum bloomberg terminal space where wall street is starting to settle on this open permissionless network looking at the image in your article i think it's so funny because it's just a normal bloomberg terminal image with all the normal things that you would see there and then in the bottom right corner there's a notes section with an ethereum address labeled ethereum contract they

just didn't have any any like field or place to put the relevant information there so they just had to manually put it in the notes section like oh yeah by the way this is on ethereum yeah and in the future hopefully that you know that that's like a link out to ether scan where you can see it where you can see the address in real time one other thing that um uh we were talking about as an open thread this week on bankless is about the price that you'd sell your crypto so

you know the question is i'm not selling my crypto until what happens do you have like a date or a timeline or an event that needs to happen for you to sell your crypto david uh no not at all um and that's because i think that that is a silly question uh because every person has their own time horizon and their own personal demands to sell their money for the things that they want and so i am planning on holding my ether

because that's my savings that's my that's my money right and so i'll sell my savings when i need to buy something like perhaps a house but as far as a date goes or a time i don't think that i i don't i don't think in those terms i think that i'm just going to stack my way and at some point in time when it feels right for me because i want to buy something i'll dip into my savings and sell it so you're not waiting for like you're not you don't have like a 10-year time horizon you don't have like a if ether hits

a thousand or ten that you're you're gonna sell a portion and dollar cost average out nothing like that well i think if ether hits like a really high number like 10 000 it'll be because ether is being used as money for the world and so what when you ask me if i'm going to win i'm going to sell it or what i'm what i'm going to sell it for that my question is what am i going to sell it into what selling it implies that i'm exchanging it for something else am i going to be selling it back to a dollar well

if ether is ten thousand dollars per ether what what is the role of the us dollar in the world if ether is like ten thousand dollars it's probably because there's a whole bunch of economic activity on ethereum so like why would i sell my ether when i just might when all of my economic activity might be on ethereum like that's where i go to buy all the things like i'm moving my my money elsewhere and it might be less useful there and so i'm what i'm questioning is what do i what am i

actually selling that ether for and what is that ether good for that like do i want whatever i'm selling it for yeah that's a really good point whenever you are selling bitcoin or selling ether you know you're you're also buying something else right so to sell ether is also to buy us dollars if you're exchanging it for that and that's the question is is you know do you want to hold us dollars at this point in time yeah that's a super interesting perspective i'd be interested to hear from other bankless podcast listeners

what they think um you know are they waiting for a specific date like eth2 to come out or proof of stake or are they waiting for bitcoin to hit uh 100k before they're selling or are they like you are they just like going to hold until they don't really have to sell until this thing becomes money um i'm probably a bit more in that camp too uh but um but yeah it'll be uh it's interesting to to hear the the time horizons from different folks in the community i'm reminded of this uh

very old meme that i've seen in the crypto space where it's the neo talking to morpheus meme and neo asks what are you trying to tell me that i can trade my bitcoins for millions someday and then morpheus replies no neo i'm trying to tell you that when you are ready you won't have to that's a great meme it i think it's act there's there's a lot of truth to that for sure i mean as as these crypto money assets become financialized the question is why sell uh maybe you can lend instead right so you don't have to sell you can lend a

portion and start receiving interest maybe you can stake eth instead of selling and receive interest maybe you don't want to sell for an inferior money like euros or yen or us dollars because the world essentially has come to crypto um and and and you no longer need to sell that is the banking system um that's kind of the bankless vision uh so we'll uh we'll see how that plays out we should jump into our sponsors so

let's start with rocket dollar rocket dollar was actually the very first tactic that was released on bank lessons part of the reason i started bank list honestly saw this amazing opportunity for a self-directed irs that basically no one was talking about and i wrote a bit about self-directed iras and rocket dollars so if you're in the u.s you don't have to be jailed inside of your brokerage and you know buy the stocks that they list you can break your ira or 401k out

of brokerage jail you can buy crypto on an exchange like gemini and coinbase you have to create what's called a self-directed ira rocket dollar can help with that they can help you with all the paperwork break your retirement account out of jail if you go to rocketdollar.com right now you can use the code bankless and get 50 off it's a fantastic deal it's a good time to start thinking about your future and start thinking about your crypto retirement if you are looking for a solid footing in the d5 world you need to go to

xerion.io xerion is defy made easy it's way better than your bank and it is the gateway to the world of decentralized finance if you are used to logging into your bank accounts front page in order to access your personal finance services xerion is the uh the defy alternative for that sirion is the place where you can go and get a summary of your d5 portfolio all in one space and access all of the device

financial services that defy has to offer you can go to xerion at all of your wallets get a summary of your portfolio and the assets that you hold as well as all of your borrowing and lending positions you can also exchange assets through uniswap and you can also pull out a loan from maker all in the same spot so if you are tired of going to all these different d5 protocol urls like uniswap.exchange compound.finance etc and you just want everything all in one spot in a slick and easy ui and ux

go to xerion.io that's z-e-r-i-o-n-i-o all right let's dig into the subject today this is the d5 trust spectrum that's what we're going to be talking about you know i think this is a super important subject because a lot of people make the quip you know d5 isn't really decentralized they'll talk about a protocol like compound maybe having some ability to access the contract and and edit the contract or

they'll talk about a protocol like um like set which has some administrative rights as well um but i'm looking right now david at a spectrum diagram that you came up with which i i think is really good and i'll just describe describe this for listeners so on the far left there's this picture of just a human right normal guy on the left side of the spectrum on the far right side of the spectrum there's

this terminator style machine and in the middle there's a cyborg and what you have below the spectrum are various defy protocols money protocols that range from human to cyborg all the way to full machine it's really a spectrum of protocols that are run by humans the man protocols and all the way to the other end of the protocols run by machine the machine protocols and there are a few on the

left that are real like realty like god's unchained and there are many on on the right that are more full machine like uniswap um can you kind of talk about the the concept behind that david like why why'd you put together that image and why is it relevant the d5 trustless spectrum is something that we should all have in the back of our heads and and that's why i put that spectrum together uh it's supposed to be a visual representation of what and where these defy applications are in

relation to each other in relation to uh their trustlessness and so it's it's hopefully a quick like cheat sheet for you to go and be able to review where on the spectrum of trust do these things lie when you use these applications how much trust are you putting on the operators of the system right so if you go to uniswap there is no trust it is completely trustless if you go to realty and buy property there is trust humans are at the helm of

realty and you are trusting that they are steering that ship in the right direction unit swap you don't have to have that trust and it's important to understand where trust comes in at each of these protocols and so that's kind of what this article was about it's an article i published forever ago it's called the two faces of ethereum i definitely recommend it as a read there's a video of me on the bank list youtube reading it to you if you prefer that instead and it kind of illustrates what what different behaviors and applications are

found on different ends of the spectrum so we're saying ethereum as a network right and and remember we've talked about this before in previous episodes there's the difference between ether the asset and ethereum the network what we're saying is ethereum the network it it is a permissionless platform that can host really any money application any d5 protocol that ranges they don't all have to be completely trustless but they can be trustless as uniswap is um but but but some can be

still trusted uh can we talk about what we mean by trust a little bit more so like what are we actually trusting when you say something like uh realty and for those that don't know maybe you should describe what realty is um but can can you talk about why what we're trusting what systems or what sort of people we're trusting in realty versus something like uniswap where we've said that's trustless and

how they've removed the humans from the equation and this is different for every single application on ethereum right like each application has its own vectors or surfaces of trust or trustlessness so with something like realty where we tokenize real world assets real estate and put them on ethereum as erc20s you are trusting a number of things first off you're trusting that the legal structure actually links the the token that we put on ethereum to the property now you can go and look at the documents

that we send you when you purchase and you can say yep these documents link the ownership to the token but then you're just trusting the legal system to actually honor that commitment right so then you're then you're just trusting the united states legal system which is a decent thing to trust but it's a trust nonetheless uh and then you're also trusting us to appropriately collect the rent from the tenants turn it into dye and send it into your address you're trusting us to do all of those things now with uniswap uniswap has done

gone in the furthest opposite direction where there is absolutely no trust and that is enabled specifically by the way that uniswap is architected there are no humans at the center of uniswap for its operation there is only code at the center and the definition of a dao in my opinion is something that is code in the middle and humans on the fringes and so the dao the decentralized autonomous organization things that we're used to calling uh maker dao or molok dao in my

opinion aren't actually daos because there are humans at the center uniswap is a really good example of the og definition of a dao because there are no humans at the center for the operation there's no place for a human to you know mistype a number there's no place for a human to uh route a trade wrong it's only computers it's only code uh and so uniswap there is no vector of trust whereas realty there's a lot of vectors of trust so maybe i'm kind of picking out three things from from what you said

which which you know range the spectrum of of trustlessness so the first is settlement so with something like realty settlement occurs in meat space it's settlement on the legal system right so it's not settlement in this alternate crypto universe that's the first thing the second is issuance right with realty we have to trust an issuer right so the company behind this tokenized security issues and set supply and and the third is the mechanism itself

can either be code or sort of human run so we've got settlement we've got issuance and we've got mechanism and what you're saying is with uniswap all three of those things are code right so settlement that occurs purely on ethereum there's no legal system uh involved at all it doesn't rely on the us legal system and uh issuance as well well that that occurs uh native to uniswap the the acid itself i suppose so there's no acid in

in uniswap it's it's more mechanism but many of the assets inside of it like ethereum or like die their issuance happens in crypto as well and then the the mechanism so the the rules of engagement the rules of exchange and trade that's all happening in code as well and that code is entirely present on the ethereum chain so it can essentially exist if some of the developers behind uniswap go away it continues it continues moving it

continues humming it can exist if um you know the the us legal system uh falls apart god forbid um it can exist as long as ethereum exists and as long as the internet itself exists so that is kind of the definition of of trustlessness it seems unstoppability uncensorability like no reliance on humans just pure machine just pure code yeah that's totally right and to go back to your

your uh part about settlement realty with our tokens we can burn tokens right and so by definition it does not completely settle on ethereum because we have the ability to arbitrary change ownership values now we would never ever do this in a way that is malicious to our customers right because you know our customers are you know the whole point of realty but at the end of the day if something quote unquote goes wrong and doesn't line up with the outside settlement the legal system settlement we can burn tokens in

order to make sure that things do line up and that's not something having that guarantee of ownership asset ownership is only possible with completely decentralized trustless assets like dye or ether right so the the real estate tokens that are erc20 tokens are not the same as dye which dye doesn't under does die doesn't know who owns it or how it's being used it just goes with it but real tokens we we do it does uh know that it does know who is

being uh tr who is transacting in real tokens and and making sure that everyone is kyc at the same time so you know completely trusted yeah so there's actually white lists attached to uh tokenized securities like like realty right where um you have to have your etherdress kyc'd or it actually can't buy or sell one of these tokens on uniswap like the transaction literally doesn't go through um so that is if that is trusted um it's a trusted asset like a traditional

financial asset only it exists on this ethereum open finance layer so you know we've talked about maybe the the far left which is uh pure pure like you know man right pure pure human trust which is a lot like the existing system so we'd see tokenized real estate tokenized securities the bloomberg example um terminal example where we had this tokenized bond in a bloomberg terminal we talked about that in uh in

the intro that would be on the far left side this very human trusted thing on the far right side pure machine we've got things like uniswap and that might be the most trustless protocol that the ethereum defy ecosystem has ever created but there's lots of space in between too right maybe we should talk about some of the projects that fall somewhere in between those ranks let's start with maker yeah maker is a really important example because maker itself has parts of it

that are completely trustless and then it also has parts that are trusted so when you combine all these things you you end up in the middle of the spectrum but i i think it's also important to differentiate between the parts of maker that are completely trustless and completely code driven and then the parts of maker that are are human driven right so cdps or vaults or loans or whatever however whichever work terminology we're using these days though that part is completely trustless

so you can deposit your ether you can get a die loan you can go and do whatever you want with that die there's no kyc involved there's no permissioning involved you don't have to apply and you get to do whatever you want with that die and then you pay it back later and all that all of that um financial activity is completely trustless is completely automated completely managed by computers yeah great great point david so like these these vaults these are are these cdps these are actually loans

so for people who haven't used maker you you actually what you do is you go to the maker website you don't need a bank you don't need any intermediary you just need an etherdress and and some ether what you can do is you can deposit that ether into a smart contract so again into a machine like david's talking about there's no human in the middle there's no trusting maker for custody it's all in code and then you can mint die that's a stable coin against the