📺 PANEL: The Current State of DeFi | Vance Spencer, Santiago Santos, Spencer Noon

hey bankless nation we've got exciting 60 minutes planned for you we are doing a current state of defy panel with three of the biggest d5 brains that we know david i know you're excited about this man because it's all you've been talking about for the past two weeks what excites you about this panel why uh why is this so interesting yeah the uh the context for this panel is that i went on to a a different panel a couple weeks ago and it didn't really it wasn't what i wanted it to be when it was a what is

the current state of defy panel uh and so i got uh i got teased by what i thought was gonna be a really dope panel but we are now we are actually doing it i think banqus can do it better uh so banqus is doing what is the current state of defy panel and we have brought on three big brain guests to give us their perspective as to what they see on the frontier we've got santiago santos of parify capital we have vance spencer from framework ventures and we have spencer noon from the variant fund and these guys are both defy investors and

so they think like investors but they are importantly also defy users and so they know about it from both sides like they use this stuff and they invest in this stuff uh and so i think this is going to be a fantastic panel to go through a ton of topics really quickly uh if you have consumed bankless content since you're viewing this i'm assuming you have uh you know that we kind of tend to really take our time and distill stuff this is gonna be a little bit quicker this is we're gonna we're gonna move really quickly through a lot of subjects it's gonna be zippy yeah

and so if you guys like this content like this panel content let us know we have other ideas about panel content this is kind of in contrast to the ama stuff that we do and so if you like this panel content leave a comment in the show notes also like and subscribe to the youtube because we do these at least every single week uh so ryan without any further ado shall we just go ahead and get right into it yeah and uh guys of course like any other ama you can leave questions in youtube we will get to those questions if we have time as uh the the panel has

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hey bankless welcome back this is our big brain d5 panel we are really excited to talk about the current state of defy we're going to whip through a whole bunch of topics here today keep this zippy as david said in the intro i want to introduce you to santiago santos of parify capital we've got spencer noon from variant fund and we've got vance spencer from framework ventures guys how are you doing today it's great to have you that's great to be here thanks ryan awesome thank you all right everyone looks good you guys are looking

good ready to talk some defy i'm sure uh you don't do this on a regular basis i'm sure this is a rare event for you but let's let's start with this because i think this is important um the definition of defy how do we define defy iowa's team call this thing open finance i felt that was a bit more fluid lost that battle this ended up being called defy how do we define what it actually is spencer can we start with you uh yeah

so thanks for having me guys um i mean this is obviously pretty difficult i think the crypto community generally sucks at coming up with names for things i think one thing is for sure d5 is not bitcoin um so just want to get that out there first but i would say you know we have this these financial applications these primitives that are that are built for me d5 is that and principally i think their cash flows being on chain is the core thing that kind of defines them and unites them so um when it touches something that's on

chain i think of it as being defy it's a spectrum um but that's a that's probably the litmus test so touch is something on chain on chain cash flows but bitcoin is not defy vance would you add anything to that do you disagree is bitcoin not d5 um i i think that uh bitcoin is a subset of d5 um i i don't think the two are necessarily mutually exclusive i kind of build up my understanding of blockchains and of d5 kind of from from

three steps number one you know blockchains are something that are built for a trust trustless transfer of value number two blockchains are an open development platform that anybody can write logic on and so anything that's on a blockchain that has logic built on on top of it is defy um you know whether that's an escrow contract whether that's trade you know from one address to another whether that's a complex derivatives protocol um that's how i kind of build up the definition of defy in my mind santiago we we haven't yet very much

used the term decentralization uh and maybe that's intentional from our other two panelists but is decentralization part of d5 what is defy yeah i i think um for me what i think about d5 is embedding a logic in a smart contract that executes in a very predictable reliable and trustworthy manner it's certainly like the sediment layer which is ethereum or some other chain you're relying on some degree of decentralization to make sure that that smart contract executes the

way that that you know it makes that state transition if you will but for me defy is you as vance said you are transferring some value and that might not just be you know tokens it might be nfts might be other things that have value via some sort of digital scarcity attached to it but generally speaking um yeah it is for me the most exciting thing about d5 is the predictability of a smart contract to do a specific logic if then statements that um and you can apply that to any money verb if you will

so when we talk about like defy what it is and what it isn't can we apply that to any specific platforms right so vance thinks that bitcoin is maybe a subset of of d5 spencer might disagree uh another investor might call solana or binance chain defy some other people might disagree are what about these platforms is solana d5 is binance chain d5 what's your take on that where do you draw the line

i think the space is exploring all these trade-offs right now and so i i think a lot of it is you know we will see um but a lot of things will trend towards kind of either side of the spectrum so like i'm sure at some point someone will build an interoperable google sheet with ethereum and they'll be transferring money around on a spreadsheet that settles on each and they'll call that d5 to me that that falls outside the kind of scope of what is d5 because it's you know naturally kind of decentralized um and so you know the criteria for you

know what is enough decentralization to qualify as d5 is kind of the heart of the question and i think with with decentralization you only really find out that you need it when the chips are down when things are breaking when you know regulations come in when you know there's adversarial actors on a network that's when decentralization really matters and so oftentimes you only find out what's decentralized when you know things are breaking or things aren't going that well and you know i think you can see that on things like finance where it shuts down uh you know where that

would never happen with ethereum or you know the polygon bridge which you know isn't operable for hours on end when there's a market crash those things are not defy just because they've kind of fallen under that exclusion criteria and i think more of these blockchain platforms that are not ethereum will eventually not be d5 as well santiago do you have an opinion on what is and is not d5 yeah very succinctly it is minimizing counterparty risk because that's really the only reason why you want to do d5 otherwise you know if you're doing uh bsc or some

other chain you know you might go there for yield you might go there for some other reason if you're especially if you're like a binance user um and and but but largely i think where this space really is going when you have large financial institutions aggregators where a lot of retail will end up interacting uh with these platforms and they might not even know that they're interacting with d5 context is i think when you're providing liquidity uh when you're interacting in the system you want to make sure that you're minimizing counterparty risk right yeah

i'll give you an example in a day like black thursday where you have a market collapse the first thing i thought when i woke up is i didn't think i wasn't concerned about ave or compound being insolvent i mean you could have looked at the state of liquidations in real time and defense said okay things are working of course it's congested of course the keeper system is a little bit flawed but things are working in a very predictable way the thing that i wasn't 100 sure on was are arc centralized counterparty solvent and to me that's the most important thing and you see that over and over

again in the in the normal financial system in 2008 um in robin hood like in these instances of market failure i think traditional finance is quite fragile and d5 time and time again has proven to be a very anti-fragile system that is very adversarial and is by design can't be insolvent not only can they not be insolvent but a frequent uh line that i like to i like about d5 and i hear a lot about d5 is uh can't be evil protocols can't be evil uh and so uh let's turn to to spencer what

does the the phrase can't be evil mean to you inside the context of defy uh yeah i i think it's it kind of goes to this idea that anyone can audit um the code of the platforms that they're using right so um the code is deterministic it's being you know executed and you as a user have kind of like all of the tools at your disposal to figure out if it's evil or not it can like be evil right there are there are smart contracts that can do

things that are antagonistic to users um so i don't know if i like necessarily agree with that but um yeah does that answer your question yeah totally uh maybe it's it's more like uh we can all audit the evilness right we can all exactly check on how exactly evil these applications are um vance or santiago and i think or spencer well i would just add one thing too i think is important is that users in d5 have agency and that they can exit the system if uh the the set of rules changes right

so you have i think like we were saying before decentralization obviously it's a spectrum there are some um protocols where there are only a few parameters if any that can be changed there are others where their smart contracts are like truly upgradable um in you know a very wide uh kind of amount of um changes that can be made and for that you you can leave and so i think it's it's it does also one thing that you always have to come back to with d5 is that the users have the agency to leave yeah yeah totally like you saw yesterday's statement by the cfdc one of

the commissioners saying well you know in d5 you know things can be manipulated and can't be enforced i'm like wait wait a minute that's that's not true i mean the traditional financial system goes back to what spencer's saying you don't have agency right people understand that when you deposit your money in a bank you have no idea what they're going to use it for now you rely on regulators to kind of have some sort of oversight into what banks are doing but the only oversight that they're doing is like top like what is it like bank efficiency ratios and making sure that they're quasi-solvent uh but they're stress deaths and those

tend to fail whereas in d5 you kind of you are your own bank you control your assets right uh and so that's where um you know i would challenge when when someone says you know in d5 things are perfectly transparent you're in real time evident for anyone can be a watchdog and anyone can infer if if there's a change to a smart contract if there's a change if it validates you're down we're not executing things in the way that things are are intended to then you can exit the system and i think it's that ability for anyone to be a watchdog that keeps the system

uh much more resilient something that we've seen lately is we've seen brian brooks being hired by binance u.s and we've also seen a coinbase also hire a particular regulator who you know used to be part of regulation and now is part of coinbase and one thing that really concerns me and ryan when we chat about this on the weekly rollups or just privately is this is kind of what we've seen before uh is d5 perfectly antagonistic to this is is defy the counterpart towards all this revolving

door politics that uh we're trying to escape from or is that is that is there something else there um vance let's turn that to you and and uh do you mean that you know people from the government wouldn't come work for a d5 protocol or in what sense well even if they did is does it really change the nature of the protocol right can can a regulator uh even perhaps a benefit benevolent regulator or perhaps a corrupt regulator does the d5 protocol actually uh absorb corruption in the same way that

you know uh the traditional nation-state regulating body does that that we've seen throughout the end of time yeah i mean you know blockchains don't have a wi-fi connection they can't tell uh who's good or who's bad and uh you know smart contracts are the exact same and so their ability to be um you know kind of taken over is relatively small i will say that um because tokens are you know governance votes and and those are effectively purchasable or borrowable there is that attack vector and there's

also the attack factor of you know regulators regulating by decree um a lot of their power in this space comes from the fact that uh you know one statement one speech one indication can send prices downwards um and regulators oftentimes will do everything they can not to kind of draw formal lines in the sand um and instead kind of rule by by kind of uh you know public speaking and so i think that's kind of one of the bigger tools that they have in d5 where they don't have elsewhere but ultimately i think regulation is

going to be good for the space and it might not kind of break exactly the way we want to see it but the total addressable market of this stuff is so large and it's moving so quickly that if we're able to embrace regulation in a way that's constructive you know it's going to be a positive that's where we want to get to you next van so maybe we'll uh we'll we'll stick with you for a minute um we often talk about you know chris berninski has used this phrase infinite white space to describe sort of the frontier that is d5 the frontier that is uh crypto

what i want to know from from our panelists is how big is this frontier exactly you just use the word tam total addressable market size but like quantify this for us we we all remember the birth the birth of the internet or we were young when when it was uh birth but it's a big deal right and i think a lot of institutional investors harking back to the early days of the internet is defy as big as the internet how do we quantify its size advanced to you yeah so in the us there are about

3 trillion in market cap of financial services providers that exist within the traditional ecosystem and if you add banks to that it's more you know maybe double or triple and so you know you're talking about and i just always go in orders of magnitude probably 10 trillion to 100 trillion dollars of market cap opportunity assuming that dfi doesn't just reinvent the stack it actually makes it better um and i think with all kind of you know digital transformations that's proven to be the case and so i think it's that large of an opportunity um and maybe that encompasses the base

layers and the apps or just the apps but you know i think it's probably all-encompassing and so 10 to 100 trillion is about as large as i think it is um which would make it bigger than the internet 10 to 100 trillion okay and so like are we talking their advance about like bitcoin as well being incorporated in this like often bitcoiners talk about the total addressable market of gold 8 trillion to 10 trillion is that something different when you're doing the quantification of the d5 market size it's different um i think uh you know if

you think about so say the tam for defies is a hundred trillion um and you say the tam for for bitcoin is is you know 12 trillion which is the market cap of gold i think bitcoin has a better chance of fulfilling more of the tam just because it's it's you know relatively a neutral technology um you can cleanly put it into a regulatory bucket there's not things building on top of things that you need to regulate um so i think bitcoin will probably you know have all of that tam were exceeded at some point i think these financial apps it largely depends on regulations

you know what percentage of that tan it increases does the world look like all of these d5 protocols are offshore and you know we're doing this regulatory hopscotch or is it kind of you know embedded into the traditional financial ecosystem i think that's the determinant of of the tam um or the percentage of that that it occupies but um i think you know they're both going to be absolutely gigantic and there's definitely no lack of opportunity spencer what do you think about this yeah i think i think defy is a like a super set of everything basically so i would think about it um all of the

world's value will be instantiated on blockchains it will clear on different layers of you know blockchains whether that's ethereum because it's um you know like requires an extremely secure blockchain or a layer 2 or a sidechain or any other smart contract platform where there's like some type of financial activity happening i think like zooming out right um the internet allowed us to kind of send packets of information crypto and d5 allows us to send for the first time

packets of value and that's the most disruptive thing that has kind of like happened i would say so um i think it eats everything it eats the world santiago defy eating the world tell us about this but also how are the traditional financial systems going to act what's wall street got to say about this what do traditional banks have to say about this what about our friend wells fargo what's wells fargo going to say when all this transformation starts eating their core business

yeah i mean like ultimately they won't have a choice uh because a consumer will demand it right when you can earn higher yield on chain uh when i was at jp morgan this was rap poison and now they're banking crypto why i don't think jamie diamond woke up one day and said in the board meeting we we have to do this it's if we don't do it you know crypto banks are going to eat our lunch and so look i mean the global financial services industry is 20 trillion and events like to go off of what vance has said you know it's very antiquated it's very uh there's a lot of friction in the

system and it's not capturing the all of the value right and um and nor is it capturing all of servicing all of the tamp right there are many people that are on bank they don't have access to credit and so really d5 for me is about not only making doing things that spencer said in a much like faster better cheaper way than the traditional financial system so by virtue of that you expand right what it is today from 20 to maybe 40. but it's also capturing anyone that has an internet connection can now transfer value and that has never happened in the history

of the world and so when you connect all of that and you leverage the infrastructure the internet and the distribution of smartphones then you start getting to i think advances saying more to closer to 100 or 100 plus now you layer on top of that the metaverse and things like nfts where you're capturing essentially you're combining global capital markets with digital scarcity and creating new forms of non-sovereign like stores of value and mediums of exchange if you combine all of that you get 100 plus in my mind guys i remember and i think the rockets are i was just going to say i think the

rocket fuel here is that smart contracts offer developers unprecedented leverage you have never had more kind of um value that you could pack into a line of code than you can with a smart contract and i think the prime example is uni swap i looked at this calculation maybe in march and i think where we came out was that every line of uni-swap code based on its market cap um was something like 18 million dollars right and and all that is to say that there are very few lines

of code in in wait wait every every line of code was worth kind of uni market cap was right so if you took the the market cap of uni right yeah and you divided it by the number of lines of code in the new swap smart contracts you got to you know it was like 18 million at the time and and all that i mean obviously it's not this is not perfect science but it just shows you kind of the relative level of um programming that is necessary i mean think about coinbase versus uni swap you have dozens of people working at one protocol versus

you know hundreds you know thousand plus at um a company and they're doing roughly the same order of magnitude of volume that is the opportunity right everything is about to be disrupted because of smart contracts and i think that's why like it's it's i don't like to um value like the addressable market just because it's like so so big that it like would make my head explode it also sounds silly i think to some like outside investors when they hear us talk about these things like 10 to 100 trillion is the is the tam the tam is everything like like the whole world

but yes i think there's uh one thing i think about is that um like the internet was invented in the mid 90s like around the time that you know probably most of us were born and like that is such a huge development and i don't think that has even been fully you know appreciated or explored in terms of the time of what that means to to have a hyper-connected world like it would be like being kind of born within 20 years of the wheel being invented or you know fire being invented like i'm sure you know all almost all measures of of uh of you know life quality were went

up over the next kind of 200 years and i think that will be a very similar thing with not only the internet but but also defy um and i see those things as very intertwined guys i remember in 2017 everyone was really really stoked because the institutions were coming the institutions were coming or at least that was the narrative at the time turns out uh that took about four years to actually become true but 2021 does seem to have been the year that institutions put bitcoin on the balance sheet institutions starting to allocate to ether and perhaps now also looking into defy

and nfts and understanding the excitement there so why in your mind would you say our institutions here today what do we have in 2021 that we didn't have in 2017 that are enticing institutions to finally come um spencer let's start with you uh large amounts of liquidity it really comes down to that right like institutions can access these markets and put on size in them and that's kind of a testament to um yield farming liquidity mining right

like the the the innovation happening through a lot of the the core low-level um d5 protocols i think um for me i don't get excited about institutions with defy at all i think they uh are just not the right users for this this is about again um kind of giving just individuals financial tools that they've never had before such that they don't have to go to an institution who rips them off right or um takes a massive cut and so

um yeah i think i think the idea of an institution is is being challenged as well right with things like dows investment clubs yeah there's a long way to go this is a huge battle but um yeah i totally understand why they're here spencer i was talking to you david when we were preparing notes for for what questions to ask the panelists and when we got to the institutions question like part of my discussion was like uh whether the institutions come or not doesn't really matter because what defy

is actually doing is we're building new institutions right so come aboard if you guys want but back to santiago's point like they're going to be forced into it whether they come early or they come late uh so echoing yeah no i think that's a great point that santiago made like um you you talk to any trad by person and you explain them compounder abe and they eat it up and get it immediately right and and they're starting to use it um but i just yeah again i just think that's not like

the end goal so santiago what would you add to that so your background is is jp morgan so you've seen the the institutions from the inside are they coming or is this more about building new institutions or is it a bit about it's definitely both i mean i i do think that there's two things that are different this time 2017 one there's much more infrastructure in place and much more lindy to the space um there's also covet certainly i think was an accelerant to for instance stable coin adoption and if you look at the circle i think put out a metric last

summer that said like there's been like a 600 700 increase uh and i think it was like you know year to date in the number of non-crypto businesses using stable coins and you ask why well because people can't go to a bank and so digital money becomes much more it becomes the solution right um so anyone that has used a stablecoin doesn't want to go back to a wire transfer so if your starbucks of your walmart and you can pay your you know coffee growers in sumatra with stable coins well why why else would you do something differently right so it really challenges the operating flow why

the only reason why technology's ever gone adopted is because it's faster it's better and it's cheaper right and so stable coins fulfill that criteria relative to a wire transfer so i think code was an accelerant to a digital transformation like you would have looked at asia and the way that they've like totally leapfrog financial infrastructure and no one in asia ever thinks of like brick and mortar banks everything is just sort of very native with a smartphone like wechat and cacao like so i think like you extend that further in the u.s and other places and people become much more um

uh you know in tune i think stable coins are a gateway drug to crypto to define and so i think that's different and for banks look i mean the only the only department keeps growing in banks is back office and compliance and operations all of those three can be totally like collapsed if you operate through a smart contract now you look at what avi is doing with a permission market like white list of market where jp morgan can underwrite loans and borrow from another counterparty and interact with the customer directly what does that do to their operation well all of a sudden

they can process order a magnitude or two of mortgages and service a much wider audience and so you know going back to this thing like finance is perhaps the only sector that hasn't truly cut off to the internet and for the first time banks are realizing that and i think they are much much more um friendly and welcoming to this technology than most people assume they are uh because they appreciate that they can any anything any technology that can strip away fat from their p l they're going to be

very incentivized to adopt vance what's your take on whether or not we can just build our own defy native institutions and if we can what is what is really different about these that are um that are built on the inside rather than coming from the outside in what what does this new era of institutions look like uh i think it's i think it's path dependent based on on the regulatory landscape like i can see a version of the future where um consumer banking apps are able to interact with all d5 protocols and i

think that things like coinbase wallet which has you know a million users is largely a representation of that future and that is a future where we can build our own institutions and we use the crypto exchanges as the on-ramps and that's kind of our banking stack um you know and i think that will be kind of the way that the world plays out i think the other version of the world is um where uh regulations are are uh onerous and protocols are basically kind of separated into this kind of like shadow banking institutional world um where you

know maker and nave and all those things are kind of these these offshore uh you know banks um and i think that's also a gigantic market but it looks a lot more like you know kind of how finance developed and their kind of restrictions on a regulatory or jurisdictional basis and in that case i think that it's going to be harder for these things to grow um so i think you know i'm optimistic and i think that you know regulators will come around and realize that these things are not positive but it's extremely path-dependent and you know it's just worth