18 - COMP Growth Hacking DeFi

welcome to bankless 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 we've got a really exciting guest this is going to be a fantastic podcast and it may be our most timely podcast yet can you tell us about it yeah dan elliser a personal hero of mine in the d5 space dm'd me the other day and he said i've got a lot of stuff on my mind

all obviously around what's been going around in defy with these new emergence of governance tokens and when dan messages me and says that he's got a lot of stuff on his mind i i give him a platform and so we bring him on to the bankless podcast to hear what dan is thinking about when it comes to these this new emerging uh apparently emerging class of tokens that uh compound has established with their comp token but the the concept of this token is much greater right we are now being able to use our imaginations and see what

happens into the future with this yeah so what i love about this is dan really answers what's happening like what is going on is this new um are are these new d5 tokens for real are they or is this sort of a repeat of 2017 and will we see another boom bust cycle we talk about all of those things we also talk about how to yield farm to get the highest returns and dan has some practical strategies that he's sharing about uh that he shared about yield farming and how to actually get access

to some of these assets that i think listeners will like too dan wrote the very prophetic piece superfluid collateral in open finance a little over a year ago which talked about how you can deposit collateral in one application and receive a token that you can then deposit as collateral in another application and that really just super drives overcharges the efficiency of collateral in defy and we've seen a lot of applications use that sort of theory that concept as foundation for

their that design and so we asked dan about the concept of super fluidity when it comes to yield farming which is another super interesting topic that i expect to see play out in some form into the future i also love that we talked about some of the downsides in the future of these d5 tokens and what to look out for as we enter into what i think is going to be a new chapter in the d5 space i always looked to dan to see what is coming on the horizon of d5

he is in the weeds talking to the teams he's a he's a venture capitalist so he always inspects things with a closer eye than everyone else and so uh dan's perspective is always super valuable to have and getting him onto the bankless pod to talk about this emerging topic of governance tokens was both really valuable to me and i'm sure it will be really valuable to you you know what else i love about dan the last thing david what's that he listens to state of the nation he watched our new show state of the

nation which comes out on tuesdays on youtube uh he took a look at the the first episode and loved it so that's what you have to do too if you have not taken a look at state of the nation we publish it every tuesday on youtube and we also publish a podcast version of it on wednesday so make sure you check that out yeah we listened to dan to learn all about what's happening in d5 but dan listens to us about what's happening in the bankless nation so you should also tune in to the bankless nation before we get into the podcast with dan

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card today okay we've got a special guest today i want to intro you to dan elliser he's an investor at ido collab ventures he's a writer as well we're actually going to get him to do some writing this week on the bankless newsletter so very excited about that he's also a yield farmer and he's going to tell us a lot more about what the heck is going on with these governance tokens in particular the comp governance token balancer and others dan it is fantastic to have you i know this is a

last minute episode for you but we're glad we could snag you thanks for having me it's it's exciting to have this conversation with you guys you've been uh really leading this bankless community and been at the forefront of a lot of the trends that are really now starting to explode in the space so excited for the conversation well we want to keep the bankless community at the forefront and we know you are at the forefront of what's going on with these defy tokens these capital assets as we've called them uh previously or like soon to be possibly capital assets can

you just um maybe tell us like what your day-to-day looks like and how how you're involved with these governance tokens so we can get some context and then we want to dig into them deeper and we want to figure out what exactly is going on here but why don't you start with some of that background for us dan sure so my day to day is that i'm an early stage investor with ideoco lab ventures we have a traditional venture fund that is focused on investing in what we call distributed web technologies so blockchains crypto

and increasingly defy personally i've been closing in on 100 of a d5 focus for the past year or so and we've made a lot of precede investments in that space um some of our more well-known portfolio companies include instadap and pool together and there's some really exciting stuff that's been been happening over the past year but i think things have just taken off in the past week with the launch of

the compound finance governance token comp so we can we can talk a little bit about that and some of the trends that are showing up there oh yeah we are going to get into that i'm just curious for from my perspective was was the shift to more 100 d5 was that kind of a you know a calculated bet or did it just sort of happen to to happen can you tell us how you went from just general crypto blockchain to more 100 d5 now yeah well so our whole fund we've actually got five people who work on the team and and to be clear i'm

one of the people on the team that is most uh far down the d5 rabbit hole so we did recently launch this uh product validation day for d5 teams which actually happened yesterday with 30 top defy teams we've got an upcoming d5 residency but our fund is still more broadly focused we do still invest in other things in the space largely this has happened just kind of following my passion and my nose over the past year you know you guys know i wrote that superfluid collateral piece

in february 2019 as i was just starting to get really excited by some of the possibilities here but d5 represents why i got interested in this whole space in the first place uh prior to uh joining ido and prior to being into crypto at all i worked in microfinance and when i i saw bitcoin and started actually paying attention to it in 2013 uh what clicked for me was the idea of a bank account that was accessible to

anybody with an internet connected device and it was the first time in the history of the world that you've been able to have one person to send value to another person who was physically distant from them without any intermediary and i i think that still just alone is a huge huge game changer but what got very exciting was thinking about okay just being able to send and store money is is a superpower but what we're starting to see the

glimpses of is the ability for anybody anywhere in the world to create or access any imaginable financial product on the same terms as anybody else so it doesn't matter where you're based it doesn't matter anything that we can bias by it it doesn't matter right it's just reduced to pure open source software and of course there are all of these regulatory hurdles and there's always

things that you can do that are going to make more sense when you have more capital than you have less but there's now kind of a global base rate uh that you can get on exchange on borrowing on lending on all these things that as long as you have a wallet uh a digital wallet an open source wallet you can now start to access these things and so that just got me incredibly excited at seeing that this ecosystem was starting to reach a place where there was real diversity in it and a lot more capabilities were

becoming real and not just for people who were comfortable getting down to the command line but for as much as you know everybody likes to hate on metamask and some of the the painful ux flows that exist today they're still a lot better they are um you know graphical user interfaces that a non-technical person can interact with if they care enough uh and and we're getting to a place where things like argent and

dharma are really just taking up to another level where i think very soon we're gonna see this be something that really anybody can use dan your article superfluid collateral in open finance was one of the was how i figured out who you were and how you think and it really told me that this particular individual is seeing things earlier than everyone else really seeing the writing on the wall of what is possible even though we are not yet seeing that being developed on a

technical level in some of these uh defy applications and it was one of the main the core pieces that i used to uh to stand up my ether is a triple point asset article and and then over the next 12 months we saw a lot of that a lot of the content that was in that article become true and is continuing to show itself as an extremely prophetic piece as we see different d5 apps uh be designed in a way that fits that the thesis of that article and you've been

uh we we've been you know messaging each other on twitter and you've been throwing the these articles about the concept of like governance tokens and and what turned into like liquidity mining tokens and you were sending these to me like months ago like three or four months ago trying to to get me on the ship of like this is the next big thing this is the the thing that is going to wake up the movement once again what writing on the wall did you see with this liquidity mining phenomenon that we are seeing so much hype by like

what what were the things that really alerted you as to why this was such a big deal well i want to give um full credit to my colleague gavin mcdermott he he wrote up this piece about what he called the saf g simple agreement for future governance that was really getting into these concepts and i think he did the same thing with that piece as what inspired me for the superfluid collateral piece which was neither of us came up with a new concept we just took these trends that we were seeing

other people circling around and just called attention to them and gavin did a great job laying out how this is something where it's unlike the ico boom in that you've got a real working protocol and you're giving out tokens that are necessary you're not forcing people who interact with the protocol to use the tokens these aren't um payment tokens these are governance tokens and so 99.9 of people are going to eventually be

interacting with these protocols and not caring about the governance token the the ability to just have them be useful and have them be live today really separates them from what we saw in 2017 and the governance tokens are a way that you can actually make these things credibly decentralized and distribute it in a way that is actually proportional to the use and is is encouraging the growth um and hopefully eventual you know dominance of some of these protocols in a global way

can we just uh recap for those who haven't read it like uh gavin's article dan so like like the concept as i understand it is is you know that there's this idea there's this legal document in vc in the vc space called a simple agreement for future tokens right which is based on you know um a simple agreement for future equity which you know angel investors y combinator cetera have been using for a long time and then kind of you know th the tokenization movement and almost the ico movement created this simple

agreement for future tokens where accredited investors can buy um a contract essentially that that yields them uh tokens in the future but you know gavin's article was sort of a riff on this saying it's essentially like a simple agreement for future tokens except what you're getting is a governance token so this is not a token that necessarily yields cash flows in any way there's no promise necessarily of future profit but it does enable the token recipients to

some sort of uh governance stake in the decision making process is that essentially what the what the article was is there more to it how would you talk about it yeah that's that's what the the article was and i think the the other piece to it was right this is giving you governance rights governance is also a responsibility and if people are going to take this responsibility seriously at some point it's likely that they will decide that

to support the governance and support the long-term health of the protocol the token holders may decide to vote in some sort of value capture mechanism right there's no promise of that there's no way to guarantee that but if you think about it and you think about how human motivations work and wanting these protocols honestly to be long-term sustainable right and to actually be able to be inclusive and allow anybody to participate in this process you're probably going to need to

eventually get to a place where there is some uh some sort of value capture backing it and what form that takes and when it happens or anything is totally up in the air but we're going to see that experiment play out over the coming months and years will some things go and stay pure governance for years maybe will some of them try to stick value capture in there sooner but most likely but we we just don't know and it's going to be a fun experiment to watch now i think

one of the things that uh he pointed out was really different was the two examples that he called attention to his compound because compound had said they were going to be doing this governance token distribution to users of the protocol but they had not yet started it and the other one was future swap which is a uh on-chain perpetual swap protocol lets people go up to 20x leverage long or short on ethan erc20 tokens

and that team had done an alpha release and had just gone completely bonkers right they they planned to be in the market for a couple weeks within three days they'd done 17 million dollars in volume and closed it down just to be safe because they they learn what they need to do and they were like guys this is an audited contract which wasn't fully on it right they didn't sponsor they want to do more because they really care about the safety of their users and and we've worked closely with the team and so we saw how they were thinking about this

we worked with them on product but what we what we saw there was they promised from day one usage of the protocol would result in receiving a governance token and they actually went a step further though in one direction than compound in that they said and by the way this token is non-transferable so they don't want you know speculation on this token they're saying hey if you're using this from day one you get a voice from day one um and you know as you gain that voice at some

point will those likely you know governors choose to make them transferable they may but there's no way to guarantee that compound went the other way and i said you know we're not doing a governance talk from day one we're going to build up a useful product to a certain size and then we're going to layer on the governance token on top i don't think one is right or wrong but gavin did call attention to how these are to two similar but slightly different models like one is bootstrapping from zero and one is get yourself to a certain level and then

you know dump a whole bunch of rocket fuel on it so what i'm really seeing here is i'm seeing a clever way to get around some of the regulations that have really been holding the the industry back lately um specifically with regards to like securities and the how we test right uh and the mkr token has always kind of just been dubiously assumed that if the regulators took a closer look and were more public about it than they would call mkr a security because it was issued by a central party and it fit and it fits the the howie test etc and it had and it had the

profit mechanism baked in from the start however what we're seeing with with the the comp token is that what these and the model of uh you know the the enabling future governance and enabling the ability to govern over where cash flows are directed what people are what these token issuers are doing is they're issuing just a governance token but it is a i guess it's not really assumed by anyone but why would you not assume this that the nebulous set of stakeholders

which are almost by definition uh decentralized by nature of how the token is distributed uh is they they would just ultimately vote themselves into the security aspect of the token after it had been like fairly issued and fairly distributed uh is that how is the this clever engineering of distribution and issuance and governance is that how you are seeing this well i think it's it's hard to look at these tokens that on the day that they're released

and say that um you know they they passed the howey test right which meaning that they are securities right there there's there's not i think basis for really saying that um but you know it is a question right i think this this um is a different take and you know it's possible that some of these things will remain forever governance tokens um one of the the interesting things about comp uh ideocool adventures is uh a delegate for comp we don't own any comp as a fund

uh i i've been doing a little bit of uh kind of farming uh comp tokens like on on a personal basis on a very very very small personal basis um but i don't have anything meaningful like maybe i if i have a hundred dollars in comp right now i'll be pretty excited um but you know it's not something that we have an interest in directly as a fund and yet we've still been one of the most active governance participants we've been administrators on the camaraderie forum where proposals are discussed we've been talking about

it on twitter um we're we're in a number of chats with like other people who are delegates and we do this because we think like hey it's just one of the most interesting things happening in the space so i want to be involved but b we've got multiple portfolio companies that are highly dependent on compound and so as part of our fiduciary responsibility and part of you know being good investors and supporters of those companies and those protocols we want to help make sure that the protocol they rely on

is in a position of strength long term and is taking their needs as other companies and protocols building on top of compound into account when governance decisions are made and so from that perspective like i look at comp and you know i do not care if comp actually uh has a value capture mechanism for me to want to be involved in governance because i'm hopefully going to make money as an investor on these

other things built on top of it and so i'm willing to spend that time and do that how does that translate to people who like have chosen to pay money for comp like i could see a potential future in which we cared enough and it was important enough that we sought his responsibility to also directly have ownership uh instead of just receiving delegation like that's possible uh but honestly i don't know exactly how that ends up playing out you know what's cool about these assets to me and so like to recap for everyone what we're talking about is basically d5 protocol assets that have tokens

associated with them essentially being released and going through possibly a couple stages of transformation you know the first transformation stage is basically they become these governance tokens so you can vote on decisions in the protocol and then later possibly the governors of the protocol may decide to add a value accrual mechanism on top of it too and transform these d5 protocol assets into capital assets right so securities aside

these are these can potentially become cash flowing assets that are associated with a protocol that has a tremendous amount of value uh capture on top of it what's super interesting to me dan is that what we're essentially creating for the first time is crypto native governance and crypto native capital assets in that when you if you're a shareholder in a publicly traded company and you do a proxy vote of some sort you know that vote is governed by essentially the the nation

state uh by you know kind of the the laws of the land in meat space or whatever jurisdiction you reside in whatever country you reside in or you know state or what have you but when you vote on compound your jurisdiction is essentially ethereum and the vote you cast is binding on chain on ethereum and if um you know if some sort of a capital is is issued if fees are added to the protocol then these are also fully settled on ethereum two so they become like capital crypto

native capital assets and to me that is the first time that we've seen these types of assets come into existence i want to contrast this though because we've had an absolutely crazy week in in d5 this week with uh you know compound i don't know what it was trading at dan did it start the week at 20 or something like that yeah well i think the the i've heard rumors that you know the valuation like on the last private round was like 150 million 250 million something like that okay um i think it initially when i

when i first glanced at where it was trading uniswap on on i think monday uh it was around like the 50 mark right and i think it's got it's gotten as high as i i saw it as high as like 200. it's 323 right now yes i think yes yes so the uh so two right and that's like a market cap of over two billion right i mean so fully market cap right yeah so people see that and they see like a 900 growth just this week and they start to think about 2017 because they start

to think about the the ico bubble is it different this time in some ways yes in some ways no right history rhymes and so is it similar in that there is a lot of speculation and uh evaluations just going up really rapidly and looking at mania's around this yeah yeah absolutely people see an opportunity where things are moving quickly and and generally in an upwards direction and they want to get rich so yes it does have that

similarity to it uh i i don't think there's any way that most the people buying into uh comp either you know through uniswap or by liquidity mining i i'm guessing a lot of them are not doing uh some kind of formal valuation methodology that supports it being at a certain price that said the difference here is that we already had a protocol that had uh more than 100 million dollars in value locked in it right uh and was doing significant essentially loan origination and volume and it's not hard

to look at that and say okay well i can reasonably say i expect it to grow at this rate and so you know five years from now i expected to have how many billions of dollars in assets in there and loans originated and if you take uh 10 basis points 25 basis points 50 100 basis points who knows then i can discount back that cash flow into the protocol um assuming there is some way to capture out of it but like since you control governance you can

figure out any number of potential ways to do value capture and i think that's one of the next stages that i'm just excited about because i nerd out about this stuff is like what are the best ways to capture value on cash flows coming through some of these protocols and there's different things you can optimize for and i think we're going to see a lot of different experiments playing out right the most simple being in some ways the maker mkr buy and burn

model as a way of essentially paying doing share buybacks effectively and then you can look at something like synthetics which is a much more complicated model but you're essentially able to stake your snx and then claim fees every i think it's a couple weeks um and they're very different models but i think we're going to see all sorts of different experiments happen around value capture with these but the core difference is it's not trying to be

application-specific money right these are intended i just said more towards capital assets whereas in 2017 everyone was talking utility tokens and um you know honestly that took me that's one of the reasons why i i think i was a little actually late given i had been in crypto for a while it was late getting on the the bandwagon in terms of tokens was i looked at this i said this makes no sense why do i want to manage different types of money for all these different applications like that's terrible ux and even assuming that like

we can fix the ux because fixing ux would probably mean just automate that in the back end when i hold uh you know stable coins or i hold you know bitcoin or eth on the back end and then i just like swap into exactly the number of that asset that i want when i need it and that leads this crazy velocity problem and then those tokens aren't really worth very much and they have trouble capturing value because there's no reservation demand um and the model just didn't make sense and now we're saying you don't need to hold this token people

can use the protocols if they are getting value from using the protocols and they don't even need to think about that they only need to know there's a token involved um for those who who are aware this kind of model of giving out tokens to users the protocol can be a very powerful incentive to onboard new users and new capital um and then it will be very valuable i think to govern this and allow it to be truly decentralized over time but

uh i i'm still very hopeful that we get to a point where again like 99.9 of users will not care or potentially not even know that there is a token involved in the product they're using at all you said why the ico mania didn't work right but there are also a lot of you know there was a lot of optimism as to why the ico mania or any ico the ico model at large was why people were hopeful that that would