130 - How to Fix DeFi Tokens | Hasu

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. Guys, great episode, great topic, great guest for you. This is how to fix DeFi tokens. We have Hasu, who is a prominent researcher and I think one of the best people on earth positioned to talk about this with us. We talk about why DeFi tokens are broken and how to fix them. This is really the hard work we have to do during the bear market. Look out for these takeaways. Number one, we discuss what's broken about DeFi tokens today. Number two, we discuss why all roads seem to lead back to regulatory question mark. We talk about number three, why the West might actually be the last to embrace crypto. Number four, we talk about why fixing governance is the key to fixing DeFi tokens. We have to do that first. And Hasu dropped some tips for DAOs as well. And number five, we talk about why we have to fix DeFi tokens if we want to end the bear market. This is key as well. Making DeFi tokens an investable asset class, shoring up our investor protections there. David, this was a really fascinating discussion with Hasi. What did you think?

I have so many things to say. Some of them I'll have definitely have to say for the debrief. For the listeners that listened to my very quick interview with Kane Warwick out of ECC, he talked about this meta of in 2017, the scoreboard was how much can your ICO raise? In 2020, the scoreboard was how much can your yield farm get up in TVL? And then he predicted the next bull market, the next scoreboard will be how much fees can your protocol generate. And that third scoreboard is intimately tied to this conversation that we just had with Hazu because how much fees can your protocol generate is going to be a function of the quality of the protocol, not necessarily the thing that's broken, but the quality of how well that DAO can organize around those fees and capture those fees and direct value back to token holders. This is the thing that is broken today, is that we have stellar protocols and fundamentally broken DAOs. We have fundamentally broken DAO structures. And we need to fix that DAO side of things to bridge the fee flows that these protocols are just printing. They're money printers, but we don't have the pipe between the money printer and the DAO to fund operations, to pay for contributors. And we go through all the variables, all the aspects of DAOs that need to be fixed in order to build this bridge between the fees that some DAOs are absolutely printing right now, and then the actual organization that governs over these things. This is the conversation. I have so much more to say, Ryan. So we'll have to talk about it in the debrief.

No, we will talk about that in the debrief. Debrief, of course, is our episode after the episode where you get David and I's raw thoughts. If you're a premium subscriber, you get that and we'll include a link for you to become a premium subscriber. It's really a fantastic episode. And I think if you're a DeFi investor, you want to pay close attention to this episode because we talk about what's going to be required to make this a much more investable asset class as well.

One of the big themes that we've said on Bankless is we're speedrunning the history of money and finance. Then that quickly turned over into DAOs. We are also speedrunning the history of human coordination systems. And that theme is part of what we're talking about today, where this is actually a science that humanity has already perfected. It's corporate governance, it's human organization. We already know the answers to these things. We just need to learn how to apply them in a new DAO context. And so one of the big themes for this episode is how do we apply the lessons that we've already learned as a species onto this new form factor, which is DAOs? And so the listeners should think in that frame as they go throughout this episode.

Guys, we're gonna get right to our episode with Hasu. Hey Bankless Nation, we're super excited to introduce you yet again to Hasu. Hasu has been on the podcast before. He's a crypto economic researcher, pseudoanonymous. He's helping to build the frontier in many different directions. He's a researcher at Paradigm. He works strategy at Flashbots, solving, helping to solve the MEV problem. He's also a podcaster as well, a governor, a delegate in many DeFi protocols, such as Maker Dow. And overall, he's uh definitely a DeFi governance big thinker. So wanted to bring Hasu on, and I guess the original topic for today was how we can fix DeFi tokens. But I think in talking to Hasu pre show, David and Hasu and I concluded that there might not be a clean answer on how to fix DeFi tokens. So I think the orientation of this podcast is really the question can DeFi tokens be fixed? Hasu, welcome to Bankless. We're excited to uh have this discussion with you.

Yeah, hey Ryan. Hey David. Thanks for having me back on.

Okay, I'm gonna tee this up and just set this up. I feel like DeFi tokens, and I think maybe many people in crypto feel like DeFi tokens are somewhat broken right now, at least from a value accrual perspective. So the idea is many of our DeFi protocols actually are working really well. Like Maker is working pretty darn well. Uniswap, historic volumes, it's driving more transaction revenue than Ethereum at this point in time. Ave has proven itself in ways that the C Fi lenders could not during this cycle, and yet the value accrual for D5 tokens has been somewhat disappointing, leads to the conclusion that maybe they're a bit broken right now. First, Hasu, what do you think about that statement? Do you agree that DeFi tokens are kind of broken in their current form? And what about them is broken?

First of all, I guess um so you're saying that DeFi protocols do a really good job, but um the value cruel of the token is is a bit disappointing, right?

Yes. Correct.

Yeah.

I I wouldn't really over-index on uh how the DeFi protocols have done uh in sort of this credit um contraction that we've seen um in over the last month. I mean, the DeFi protocols, fortunately, they haven't gotten into the business of unsecured lending yet, which is what really drive all of these lenders into bankruptcy. And so that you have a pretty easy explanation for why they came out of this um better than the CFA lenders, which is that they only offered repo lending. So

They're just all over collateralized is what you're saying.

Yeah, exactly, exactly. So um yeah, Mekadao has like a small amount of sort of uncollateralized lending, but that that was sort of c is completely orthogonal to um the crypto space.

But also there's examples in DeFi of like Uniswap and Synthetics, for example, unrelated to lending, unrelated to collateral, that are also driving a ton of fees. So yes, I take the argument that just like the overcollateralized nature of DeFi lenders may make them meaningfully different than C Fi lenders. But I think the real conversation is a lot of these DeFi apps are directing cash flows or directing fees. And yet none of those fees are falling into the hands of value capture into the token. Basically, we're not seeing token price go up. We're kind of just seeing a leaky ship. No matter what DeFi protocol you're looking at, you're not really seeing any of these protocols capturing and maintaining value as a function of the fees that they are collecting in the space. Would you agree with that?

Um partially. I mean, I think Unisorp, for example, is still worth $7 billion fully diluted. I think off the top of Mad Lido are they somewhere between $1 and $2 billion. We have DeFi unicorns, right? I don't think that the valuation is extremely unfair or anything. If anything, they probably went up

too high, I think. I mean, as is kind of expected in the cycle uh of crypto that we see, like.

As like kind of speculative mania. But I mean, nonetheless, it's really impressive to create, like in the real world, we would say it's extremely impressive to create a unicorn company. Um and and so I I think these companies are doing quite well, but maybe not as well as they could do if investors had more faith that these um I mean they that sort of certain overhangs would be eliminated, right? And we can sort of get into what these are. I mean, um

One is basically uh just to go like very briefly through them. I mean um so they don't they tend to not have sort of uh you know effective management. Um why? Because um these protocols need to be decentralized. Um they don't they tend not to do any marketing at all.

Um, because then you get into securities regulation, um, they tend to uh you know uh have really broad token issuance, um, they tend to not uh drive any revenue to their token and and so on. So um, and furthermore, we are in a market that is extremely cyclical. So investors don't really like very cyclical markets. Um

and in many ways, I mean, sort of um

I guess the staying power of DeFi. DeFi has only been around for two years uh at this point. Um so I mean.

As an investor, it feels warranted to put a large discount on DeFi tokens before you see some of these sort of regulatory overhangs and eliminated.

Just to really drive this point home, you put out an article that was more or less, I think, close to the top of the bull market, talking about the actual fleeting nature of all these DeFi treasuries. We looked at the Uniswap treasury and we saw four billion dollars. And then we actually took a peek under the hood and it was all uni tokens, which you were arguing doesn't really count as a treasury when it's denominated in an asset that the protocol can just freely mint if they so desire. And so, like if I wanted to, I could go mint a token, put it on Uniswap, and then mint 10 trillion of them in the back end, and I could claim that I have like a trillion dollar treasury. It doesn't really work like that. Your treasury should really only be denominated in external assets and perhaps just mainly monies, Ether, Bitcoin, and stable coins. And so you made this argument that the size of these treasuries were actually extremely at risk from a bear market, which we tend to always know comes in crypto and then tend to always be, you know, 90% drawdowns. And that's kind of what we've seen in a lot of DeFi treasuries. And so this conversation of are DeFi tokens broken? Is there a missing link between protocol revenues and DeFi Dow treasuries? I think is really, really salient.

Yes.

And when I say the words like we have a leaky ship, is that we have these DAOs, we have these orgs that govern over DeFi protocols on chain, and those protocols direct cash flows, direct fees, but the fees that they are directing are not going into the treasuries of DAOs, meaning that we cannot pay for labor, we cannot pay for capital expenses, we can't really grow these organizations in a meaningful way that has been tried and true throughout time. Would you agree with all these statements?

Yeah, and I think the the reason why it makes sense to bring up the treasury debate from last year is that this proves to me that most DeFi protocols are not run like businesses.

Because if you were like if you were actually running your protocol like a business, then you would make sure that it has sufficient liquidity to pay wages and invest throughout the bear market.

But we are seeing the opposite. We are seeing that uh many protocols did very poor treasury management and now find themselves in a position where, you know, they have to reduce the headcount, they have to stop incentive programs, they have to raise money near the um sort of uh at peak low prices. And this is all things that um

I mean if you had someone in charge of treasury management uh who had worked at a traditional company before, I mean these are very basic things, basically. And yeah, um

I think

if projects thought of themselves more as businesses, then you wouldn't see some of these easy mistakes.

Yeah, what's interesting to me is it feels like the simple question to me, and maybe sort of an archetype for uh the protocol works incredibly well, but the token feels like it's a little bit broken, is probably the Uni token, right? And the criticisms of the Uni token right now are, oh, it's just a governance token. And by the way, governance doesn't work very well. Go look at the kind of the Uniswap governance forms, and you can kind of see. And it doesn't even have value accrual attached to it right now. And so the Uniswap, incredible protocol working very well, showing what DeFi is capable of, but that is not translating into a token that is delivering value back to investors. What's interesting to me is like there's different answers to this. Like some people would actually say Uniswap should not have a token at all. Why are you even introducing a token in the first place? It should just be a protocol that kind of works and there's no need for a token. So why don't we just eliminate the token? That's one potential answer to this problem. Another is from I guess the uni investor perspective.

Why don't we just turn on fees? Let's start there. Let's start getting some revenue, I suppose, into the protocol so we can have some fees to govern. Of course, there's lots of governance issues to work through on the other side of that that we could step into. But why don't we just turn on fees? I want to ask you about maybe these first two things. Like, so first, why does Uniswap even need a token? Maybe some of the critics are right that some of these protocols should be tokenless. And then secondly, if there is an argument for Uniswap to have a token, why haven't we just turned on fees yet? Why haven't the governors done that yet?

Okay, so I think to get into the first question, um it depends what you mean by token. Uh whether it's like

Whether you mean that uh Unisop should could in theory be owned by like one person, one company, one family without putting any sort of shares on the secondary market, which is one valid interpretation, or whether Uniswap should like benefit no one and be sort of a completely free open source project that doesn't ever charge a fee.

And I do mean that, more the public good model.

Yeah. I mean the the answer is basically that uh you can do that, but there's not gonna be uh another Unisop after that. So I think you need the ability for

Um, you know, people to get rich in order to have um you know a funding market for these things. So um if if uni the token can never you know pay back the investment that sort of the the investors made in it, then uh

basically the the primary funding market also is going to dry up, and then we just have a lot less um innovation in DeFi projects. So I think that the founders and investors need to be able to get rich from this, or you will just see no further projects.

And so I think it follows to say that this is kind of the core argument as to why everything has a token. Because if you don't have a token, somebody will just copy you and then make a token. And then now that's kind of the new shelling point.

It's an arms race, right?

It's a little bit of an arms race, yeah.

That's why Uniswap did this in the first place, you might argue, as a response to a competitor, SushiSwap.

And so I think Hazu, you'd agree with me is that many DAOs, many DeFi apps have an undefined vision for themselves. You know, what are we? What is Uniswap? Is it a public good? Is it a for profit exchange? And I think the argument that we're making is like everything kind of boils down into a for profit value capture governance token that governs over a DeFi protocol. Would you agree with that conclusion?

I think that if the answer to that is yes, then that's the brightest possible future for DeFi, right? Because if there's no value accrual, then I think the space of possible innovation in the future is going to be a lot lower, lower.

Whereas if investors learn that you can make a lot of money from DeFi tokens, then you will attract a lot of great founders, great teams, you will unlock a lot of financial innovation, and you'll have a very uh deep and liquid market for funding these projects in the first place.

Okay, so we're now operating under a paradigm that everything is gonna have a token. The best token governance, the best DAO governance that leverages the powers that their token enables to them to best govern over their protocol, make the best protocol possible, which captures the best fees possible, will be the protocol that wins. Honestly, this feels like very basic business 101, and we just kind of forget this. That we are not like escaping just like 101 rational economic truths by being in the crypto space. We still follow the laws of economics. We still follow the laws of incentives. And so may the best protocol win. And the protocol that wins is the one that drives a bunch of revenue to the Dow, grows the organization, uh, and ultimately rewards token holders. Yeah, we on the same page?

Yeah, I mean, I would think so, yeah.

I mean, so that begs the question then in the kind of the second point or the second criticism or the second question people have about something like the Uni token, why not turn on fees? Why don't they just do that? Why hasn't this been done? And we are seeing proposals that have come out over time. And I think some action has maybe been heating up in the last week or two around series proposals to turn on the Uniswap fee switch. But I'm curious, what's the history here? Why hasn't that been done previously, do you think? And does it feel like governance is broken because we can't do this simple thing?

I don't think it means governance is broken. So why haven't we turned on the fees in Uniswap? I think there are very good business reasons why we haven't done it. So traditional sort of Silicon Valley startup canon would be first you like in these sort of kind of network based businesses, businesses with network effects, which definitely Uniswap um kind of uh you know this applies to it as well, um, because you have a two sided market between you know traders and market makers. Um

Really, what you want to do is you kind of you want to grow the network as much as possible.

And then only then when sort of your users have a switching cost to another network and gain more utility from being in your network than in another network, that's when you start to monetize and you can monetize up to their exit cost. So that would be kind of the traditional VC way of thinking about these networks.

So Hasi, this is like why Amazon ran with no profit for like decades and why Facebook didn't even have a revenue model like, you know, four or five years into its business. It's to build that network effect, is that correct?

Yeah, or Uber, I mean Uber still uh loses money on every ride. Yeah. So um

uh so yeah, I mean this these networks can require uh like 10 years of investment um before they uh are so big. Or YouTube, for example, didn't run any ads for the first seven to eight years, right? Uh and only when sort of the library of videos and the algorithm and everything was so

Strong that their users didn't really have an alternative to YouTube. That's when they slowly started sort of to ramp up the adverts and started to roll out YouTube Premium and all of this stuff. So

that's why you can definitely point to business logic and say, hey, that's why Unisop shouldn't turn on the fee switch today.

But I think that there is still doubt in the general market's mind whether Unisop, even if it would make sense, were in a position to turn on the fees. So I think that's definitely also a factor.

So, what about that second bucket? So let's say I totally understand the argument of not turning on the fees on something like the Uniswap protocol of we're building network effect, and you know, we want to make this as low cost as possible to outcompete our competitors and build the biggest network. And yet on the other side, there could be the business case to do this. You know, turning on fees, for instance, you got to think that that would be a positive catalyst for the value of the Uni token for one. And if the DAO has a lot of uni in its treasury, then that makes it more valuable, which is a good thing, can be spent on other aspects of growing the Uniswap protocol. Also, of course, this starts to create the first revenue stream, like a real way to bolster a DAO's treasury with actual revenue rather than just kind of their own token. And so this is a positive thing that could be poured back into investments in the business and could be used to kind of expand the Uniswap protocol.

Buying a stadium, perhaps.