🎙 78 - Institutional DeFi Infrastructure | Fireblocks' Michael Shaulov

welcome to bank list where we explore the frontier of internet money and internet finance this is how to get started how to get better and 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 awesome podcast today in a subject i didn't know too much about who did we talk to we talked to michael shalov from the firebox company which just raised 310 million dollars which is all going to infrastructure to help people that get

scared coming into crypto which is kind of more or less everyone especially when there's a lot of risk at stake so tended to be geared towards institutions firebox is a infrastructure for getting into the world of crypto but not just getting assets into cold storage but getting them into safe storage yet also hooking into all of the cool powers that defy and the rest of the crypto ecosystem gives you so we talked to michael about what it's like to to build that company and really how this company fits into the overall

sphere of the crypto world and what they have really unlocked and are enabling over at the world of fire blocks yeah absolutely this is like a huge bridge to crypto to me and it's an institutional bridge not only to crypto but it's also an institutional bridge to defy so that's what's super exciting about what fire blocks is doing there are a lot of crypto custodians out there you know coinbase gemini they will hold your keys there's companies like bitco that sort of thing but fire blocks does more than that for institutions they actually give them exposure to d5 protocols so if you're an

institution you want to trade something on uniswap but you want to do it in a way that secures your private keys or if you want to deposit funds into compound or ave fire blocks does this so david this is really cool because i think it is um i guess living out uh one of the predictions we've made for a while which is kind of the protocol sync thesis that the most decentralized credibly neutral protocols will kind of tend to fall to the bottom

of everything else and everything else will be built on top of them we also talk about a little bit about the d5 mullet which is sort of an extension of the the crypto protocols thesis the idea that finpex are going to start building on these d5 protocols and become these these hybrid crypto fintech type things and we're really seeing that play out with the fire block story that's like exactly what they are doing they are the bridge to uh to this entire thesis for me the most interesting part of this conversation was how

the similar skills from the tradify world which we would consider to be like cyber security when you take cyber security skills and then you apply them to defy and you use ethereum and bitcoin as your back end like all of a sudden you have cyber security not around you know information in it for you know a traditional company but now you have cyber security around bank accounts right like your ethereum wallet your bitcoin wallet and that fundamentally changes the role that fireblocks has for going from a cyber security background to just infrastructure security and

protection around your bank account which is your private key and so it really just like is a new evolution as to what cyber security means because now the cyber security is now fintech now it's now it's a fintech service not just you know protection around like your servers uh and so the changing nature of the role of similar skills from from tradfy or from the legacy world into defy i think it's a really interesting through line that that if you pay attention you can glean a lot of lessons out of this uh episode with with michael

yeah i love this conversation hugely bullish on what's happening with d5 like the institutions now have a way to enter directly into d5 protocols not just one or two but like all of them make sure you stay tuned where michael talks about how like through fire blocks they basically have access to all of the d5 protocols that are available that can be connected through wallet connect um one question though david we did ask him near the end and i was sort of concerned about thinking about this is like fire blocks is not bankless you are giving up your private keys to uh to another entity in order to use it and

institutions kind of have to do that anyways in order to play in the space so what happens if everyone starts giving up their private keys do we get a less bankless world so he answers that question i think he had a pretty nuanced answer which i really appreciated so guys we think you are going to enjoy this episode before we get into it we want to thank the sponsors that made it possible living a bankless life requires taking control of your own private keys not your keys not your crypto that's why so many in the bankless nation already have their ledger hardware wallets which

makes proper private key management a breeze but the ledger ecosystem is more than just a secure hardware wallet ledger is the combination of the ledger hardware wallet and the ledger live app and if you're used to seeing all of your crypto services and favorite d apps all in one place ledger is where you want to be not only does ledger let you buy crypto assets straight from the app but it also hooks into decentralized exchange aggregators like paraswap which makes sure that you are getting the best prices on your trades without your assets ever leaving your control defy

never stops growing and the ledger live app grows alongside with it so click the link in the show notes to see all the defy apps that ledger live has and stay tuned as more and more apps come online and if you don't have a ledger hardware wallet what are you even waiting for go to ledger.com grab your ledger download ledger live and get all of your dapps all in one place arbitrum is an ethereum scaling solution that is going to completely change how we use defy if you've been using ethereum for the past 12 months you've probably noticed the high gas fees and

the slow confirmation times that have been plaguing d5 too many people want to use ethereum and it doesn't have enough capacity for all of us that's where arbitrarum comes in arbitrary is a layer two to ethereum which means arbitrary can increase ethereum's throughput by orders of magnitude at a fraction of the cost of what we are used to paying when interacting with arbitrary you can get the performance of a centralized exchange while tapping into ethereum's level of security and decentralization this is why people are calling this ethereum's broadband moment where we get to add performance onto decentralization

and security if you're a developer and you want to save on gas costs and make an overall better experience for your users go to developer.offchainlabs.com to get started building on arbitrom if you're a user keep an eye out for your favorite defy apps building on arbitrage arbitrary has been working with over 300 teams including ethereum's top infrastructure projects and will be opening up to all users shortly there are so many apps coming online to arbitrome so you may want to pack your bags in preparation for the great migration to the arbitrometer layer 2.

to keep up to speed with arbitrary follow them on twitter at arbitrom and join their discord bankless nation we are super excited about our next guest we have michael shaloff he is the ceo and co-founder of fireblocks what is fireblocks firebox is like the aws of crypto banking he's grown this company to crypto unicorn status already so in late july they raised over 310 million dollars at a two billion dollar valuation just blows my mind if you're in the crypto

institutional space you already know about fire blocks but if you're not maybe if you're a bankless listener it's kind of a d5 power user and fire blocks is probably one of the most important companies in crypto that you've not heard of and here's my favorite part fire blocks is defy friendly so i definitely see fire blocks as providing an essential bridge between the institutions we've been craving to come into crypto and defy this is part of the protocol sync thesis in action we think where the decentralized money protocols become the

base layer for everything else michael after that long intro sir wanna say welcome to bank list how are you doing thank you thank you thanks ryan thanks david for having me doing great and you know exciting to join you guys in this session well i bet you're doing great because you guys just raised 300 million dollars at a 2 billion dollar evaluation i have two questions about this first how does that feel and then and then second what are you going to do with all this money um so it feels great i mean i think that

it's i wouldn't say just the valuation and the money i think it's the fact that it happened in a fairly short period of time right because we started the company back in 2018 and we launched our product about two years ago and probably the most important um actually the most important numbers for us is the are the fact that we have 500 clients right and the fact that we have uh about uh one we grew the company to about 160 employees right in that period

of time so just uh we're seeing the market expanding and uh yeah generally exciting um the the main thing around i think uh the funding itself right or the big question is what are we going to do with the money is uh is mostly around the fact that we need to continue and invest first and foremost right in engineering and to be able to support the client base to support more and more institutions that are coming to the space

both from engineering standpoint operation standpoint customer success customer support and so on and the second aspect is that for our clients it's sort of very important to understand that they're dealing with a stable player that can you know work with them on the long term right and the fact that we have now the balance sheet and the money and the um and the ability to stay independent is um extremely important

for for our current clients and especially for the people that we are currently working on doing business with so you mentioned michael more and more institutions coming to this space so is that what you're seeing are institutions starting to flood into the space and give us a flavor for who these institutions are maybe some names listeners might recognize yeah so um we are seeing we're seeing quite a lot of the banks it's it's a bit weird right because you

know i guess in many ways the entire essence of crypto right was to basically maybe this intermediate this intermediate banks right but inevitably what happens is that at least right now a lot of those banks they do have um whether it is fomo right looking at the fintech players and trying to sort of like tap into that amount of into that activity into that revenue stream into the opportunity

right so that's you know one reason why they're doing it and i think that the most interesting aspect of it is that the more intelligent group of i would say uh financial institutions traditional financial institutions you know banks exchanges uh some of the more traditional fintechs right they're basically looking at the underlying technology and i guess in many ways what we call d5 but eventually the essence of blockchain right the ability to have autonomous

finance that is driven through smart contracts and this sort of smart programmable money and they understand that this is might be the most impactful and interesting technology um that they can you know that on one hand if they're there early they can use it as part of their competitive advantage right and on the flip side

if they're late uh they can be completely disintermediate right so i think that there is a broad realization of that and that's why i think people are sort of those institutions are coming in right so i guess a good example that we always give and they invested in us in serious sea is a bank of new york maryland that we are working with uh to basically deploy the technology with a and build those capabilities and for you know

for the listeners that are unfamiliar with bank of new york well it's like the oldest bank in in the united states and they're the biggest custodian in the world in fact i'm not showing the exact number right now but they hold somewhere around 40 trillion dollars of assets right so the majority of the assets in the world are actually sitting in bank of new york melon and and they do see um it's sort of public information but they do have a fairly extensive uh plan around not only how they do you know crypto like bitcoin ethereum but

really how this is sort of uh prog what is the progression to really touch on the uh traditional assets or the existing assets that they're currently custody and how they can basically bring them into blockchain tokenize them and so on michael uh you mentioned um fomo in the context of institutions uh we talk about retail fomo all of the time is it true that institutions can also get fomo um the individuals within the institutions

can get formal right now i guess like you know people are people right and and yes i mean in reality uh the what happened was is that ins all those banks and institutions they somewhere in between fomo and basically uh you know being caught off guard right if you take jp morgan chase as an

example right and i think it's a it's an interesting example to look at they sort of switch side over the last uh i don't know 12 months 18 months right from the ceo of the bank saying yeah this is a complete fraud i don't remember the exact wording oh i remember i remember all of that you know jamie dimon said this and crypto twitter went absolutely berserk on these comments but yes yeah but i guess his his main comment

was uh i think he had two comments one he said like you know or three comments that is like the biggest bubble of all time you know it's fraud and and his third comment which which i appreciate the most is that he said that he will uh fire any employee that will touch crypto because he's stupid enough to basically uh invest in crypto right that was uh that was basically is the most probably interesting comment um yeah i appreciate that you know very opinionated gentlemen

of course but but the reality is right that the bank sort of uh publicly changed his stance in you know very quickly within almost 12 months um but probably the most the the the crazy story which i think is sort of uh maybe not very obvious to people from the outside is that think about a situation where basically your employees are penalized for

uh touching this asset working with technology right and then the everybody wake up one morning and and basically they're telling like okay now we need to go and execute against something that we basically have zero internal knowledge right no one in the bank have ever done a single bitcoin or a crypto transaction now let's go and offer it to our you know tens of millions of clients right and um that's like a very

difficult situation where uh you're basically trying to go from you know 0 to 60 very quickly but you never took any driving lists right um so so i think that a lot of those institute now when i say fomo what i basically it's sort of reflecting the situation because if you think about how this should have happened if it was well

planned they had you know 10 years right to basically investigate educate themselves you know do you know test testing and just accumulate the knowledge the same way that i and you guys did right uh but they are being they've been cut off guard and and the fact that they sing some of the biggest you know uh biggest uh fintechs right moving so quickly into the space

sort of forces them to react quickly in a way that is really unplanned and i think that actually offers a great explanation as to why fireblocks has raised such a large amount of money to with such a strong valuation is because when institutions fomo and when they realize that they are behind the curve with regards to infrastructure development they realize that they need to outsource some of this and then they turn to fire blocks and so that brings me to i think what we should really get

into next michael which is exactly what is fire blocks and why do why would an institution choose to leverage fire blocks rather than going and building out all of these same things in-house and doing it themselves and while you give that answer i'd like to ask the listener to put this into the context of the protocol sync thesis which if you're not familiar with you should definitely go and do your homework on the protocol sync thesis because i think that's going to be a theme of what fireblocks is and what it's doing throughout the show but uh michael

question to you what actually is fire blocks and what is the products and service that you guys have to offer yeah so we basically make um those crypto make making the ability of businesses to um to offer uh making making the ability for businesses to basically offer services in crypto easy what does it mean the first thing that means that we basically provided them a secure access to

uh to storing uh those assets and so essentially a water technology that is secure and design for institutional usage right so hot storage cold storage worm storage all that is being basically packaged the technology they can consume and install and use right with all the complexities regulations policies and workflows that they need the second capability is around the

ability to transfer assets between themselves and between their counterparties or business partners in a secure way so i assume that like that most of the people on the show familiar with the fact that when you sending the transaction you're sending a bitcoin transaction you're sending ethereum transaction to your favorite exchange or for you to your favorite d5 protocol there is those you know depending if it's bitcoin or ethereum 15 seconds or 15 minutes of a

heart attack right that you don't know if you actually put the address the right address if you made a mistake right even if you're a veteran you still get that by the way it never goes away yeah it never goes away yeah that's that's part of the extreme fun in this place so yeah so you know i mean i think that most uh most retail users and most consumers and even prosumers uh they would do a handful of transactions per day right if you are

operating a brokerage uh an institutional brokerage you can end up doing hundreds of transactions like this per day right if you are um a big exchange right you we're talking about thousands right so um clearly to scale up and by the way an average transaction size in our network is around 100 000 right so if you make a mistake it's going to be a very costly mistake right um and therefore what we basically created

is this concept that is called the firebox network which is essentially a directory a set of apis and plugins that basically creating um sort of like an off-chain protocol that allows you to securely transfer those deposit addresses and identify uh the destination wallet or the counterparty that you're sending this transaction to and guarantee that you know uh if you know i'm i'm i'm sending a transaction to to david this transaction

will go to david by selecting him in the directory uh it's not going to go to ryan it's not going to be sent to the you know to the void right so that's basically the second capability the firebox network that is uh became you know sort of almost the de facto platform to to work with uh with digital assets and then uh the last capability that we have is around um um all the access to tokenization smart

contracts and defy so it it is slightly like you know different things in our offering but it's basically all the packaging around secure access to um yeah what we will call the centralized fund finance so you just said uh three things there michael one is wallet custody storage right the second is a network to route transactions and the third is access to what we call money protocols d5

protocols right and staking maybe i'll bundle in there too so those three things but i want to ask an obvious question you kind of alluded to this if you're like the person who just sent at an institution a uh you know transaction with five million dollars in it and you're not quite sure whether it's the right address or not right like you may have missed a character like oops right that is not a good feeling and obviously institutions can't do that on a daily basis but like is that like i think some people are

still sort of wandering right like um why can't institutions just custody things on their own like the individuals listening to bank lists they do all this all of the time right so why is it so difficult for institutions to enter this space why do they need those those three surfaces why can't they just use you know hardware wallets and metamask and deposit in ave themselves why do they need fire blocks because of the complexity

and the security level that they need right so when we started fire blocks that's what institutions were doing right they would i remember my the first time i walked into one of our bigger customers and they had a ledger nano with you know 80 million dollars worth of bitcoin on it and they were doing you know 50 transactions per day probably and the way that it was controlled is that one guy had the ledger nano the

other guy had half of the passcode and the third guy had the the the pin code and the the third guy had the other half of the pin code right and every time that they wanted to do a transaction um they basically had to come all of them together and and you know collaborate and sort of check do all the check and checks and balances right to basically guarantee that they're sending the right amount they're they're putting all the protocols in

place and those protocols can be um the pro those protocols can include first and foremost are we sending it to the right recipient right but have we they have compliance obligations right so they need to take that deposit address scan that deposit address in something like chain analysis or elliptic right to guarantee that it's not a bad actor right because they do need to operate within um um you know the applicable law right depending on the on the jurisdiction right and and for

sanctions and things like that right uh they might have all kind of a procedures that they guarantee to the regulator that a transaction above 100 000 is going to be uh reviewed and approved by their accounting team right and you know and last but not least i mean let's assume the scenario that i just explained you can have maybe like three people that uh is involved in that process but what

happened happens if you need to have five people or 10 people or 20 people right that are involved and maybe like you know those they're working in shifts right so um the complexity that is required to really do it in a robust way with high availability uh with all the policies and procedures that those that those entities need to comply is well beyond uh what

something like a hardware wallet can provide right and and this is basically where firebox excels right that you on top of those basic offerings you have a policy and workflow engine where as a customer you can essentially codify all those workflows and all those approval processes at the fundamental level of the wallet it's actually enforced cryptographically

through this technology it's called mpc multibody party computation right so you actually don't have a situation that you're relying on one single device to hold your private key the private key is distributed uh in you know among a set of servers and endpoints and mobile devices and even if one device fails lost or actually like you know a quorum of even even under a situation where a quorum of those devices fail fails or or being lost you can

still recover right so all those functionalities are you know fairly complicated and it takes time to build right it requires pretty significant expertise both uh from cyber security domain domain id cloud mobile and so on and most institutions they just don't have that skill set and even if they have that skill set it takes several years to basically build a product with all the functionalities that we have and you

know they are required that they need right to actually to operate michael i just want to rewind the clock for the listener here back to like 2017-2018 there was this mantra when the when the bull market the crypto bull market was getting a little long in the tooth but it was still rising everyone was euphoric everyone was excited and this is this mantra that people kept repeating the institutions are coming right that was supposed to be the next wave of crypto adoption to send prices even higher and higher um but like i i remember at the time what you were

saying about um like large crypto funds storing uh funds on hardware wallets like that's that was how everyone was doing it back then in in 2017 2018 i know a story of of a crypto fund i i won't name them but like they used to talk about how they would hide their um recovery keys in a safe deposit box in a bank and they would like use glitter and glue on top of the envelopes to to create like a like a certain pattern of

glue that couldn't be like repeated and tampered with and and um you know uh i guess i i guess made phony and this was kind of and you couldn't really bring the institutions into that environment because if you are a large bank or a large um you know pool of capital uh you're not going to enter that level of wild west so we needed like this layer of infrastructure in order to actually get the institutions to come first what i'm saying is 2018 2017 2018 the

institutions are coming wasn't even possible for them to come that was a pipe dream we did not have the custodial infrastructure on top of this to allow the institutions to start pouring capital in and i think that's basically what you've built over the last three years with fire blocks does any of that resonate yeah i mean i think that uh um definitely that's uh the majority of the story right i think that we there was lack of infrastructure right

for for that to happen at the time honestly just to reflect on 2017 2018 i think in a retrospect right there were a lot of uh probably yeah um regulatory issues right that uh even if the institution if the bigger institutions would have tried to enter the space i think the regulation was still not there for them to really you know jump fully in right but

honestly those are i think the two main things that been resolved over the last three years or so which i think that i think allow a much more um you know a real interest and a real movement of institutions into the space and and honestly you know with how much i want to always say like you know the institutions are coming it's not there you know when a big with big institutions even

small institutions even some of the smaller banks that we are working with it's a fairly lengthy process it takes them somewhere between you know six to nine months to basically go from inception to really signing contract and start deploying the technology and probably takes them almost 12 months to go from zero to production where they can offer offer those services right so uh we are sort of in the middle of of of that process and in the middle of that