DeFi Didn't Break with Dan Morehead & Joey Krug

Hey Bankless Nation, welcome to another episode of State of the Nation. Gonna deep dive into a topic today, and that topic is a topic we've been talking about over the past couple of months. That is a whole bunch of C Fi lenders, the decentralized finance lenders, the Celsiuses of the world. They broke, but it seems like mainstream is blaming DeFi? Like, why? DeFi worked great. That's the title of today's episode. David, who do we have on to talk about this?

We have on Joey Krug and Dan from Pantera, who wrote this in fantastic investor memo on this exact subject. And this actually really hits home for me, Ryan, because my favorite podcast, other than Bankless, The Daily, ran this show called The Collapse of a Crypto Company. And it was all about how the visions of crypto have been completely invalidated by all these collapsing crypto companies. And I'm like, no, no, no, no. That's not the vision of crypto. So we are here to set the record straight about what exactly broke in the last six months and what worked fantastically. And we're gonna uh talk to Dan and Joey from Pantera to unpack all of this story. Uh and hopefully this story breaks out into mainstream so that they can perhaps correct the record.

Yeah, I love uh, you know, Dan and Joey are they're close to the institutions. They know they're right around C Fi lending, and they're also close to DeFi. So I think they're gonna be able to shine some light here. They also wrote a fantastic um newsletter article uh recently called uh DeFi worked great. We're gonna talk about that as well. Um, all right, David, gotta ask you the question I always start these episodes with, which is what is the state of the nation today?

Ryan, well, it is sad and unfortunate that we have to learn these lessons in ways that centralized companies end up having to give retail a haircut. Still, at the end of the day, the thesis is that DeFi takes over the world. And for those that believe in the thesis, in that thesis, which are you and me, Ryan, the state of the nation is we're taking victory laps, man. Like we we got the data. We're taking victory laps.

We are taking victory laps.

I am. I'm like, yeah

So I feel like so I feel like this is applicable because uh mainstream media like they're taking victory laps and saying like it's their moment to say crypto is over. It's funny you should say DeFi is taking a victory lap and saying, hey, DeFi worked fine, because mainstream media is saying, uh, look, we told you all along crypto is broken, it's never gonna work. Here's uh exhibit A, B, and C.

Mm-hmm. Well, okay. Me mainstream media is grave dancing. We are taking our thesis has been proven and now we've got the data to show it. And also mainstream media, get your shit together. Uh this much smaller podcast called Bankless is gonna set the record straight.

Alright, we're gonna do that right when we come back with Dan and Joey. Before we do, we want to thank the sponsors that made this episode possible.

Alright, guys, we are back talking about C Fi, the busts, the bankruptcies, and also contrasting that with DeFi. We are joined by two fantastic guests. Dan Moorhead, whom we had on the podcast just three months ago, I believe. We were talking about macro at the time. Of course, he is the founder of Pantera, did the famous cryptocurrency pivot at a very good time back in 2013. Dan, great to have you back on Bankless. How are you doing?

Great. Thanks for having me back.

We also have Joey Krug, who's also at Pantera. And fun fact, fun bankless fact, he came on last game on the Bankless show two years ago to the day. All right. We were talking about DeFi, I think, at the time, and here we are talking about it two years later with him again. Joey, welcome back to Bankless.

Thanks for having me.

All right, guys, let's get into it. Uh, want to start here with what's happened in crypto. I think since Dan probably we last you know talked over the last uh three months or so. And it's it's kind of rippled out

beyond the crypto bubble. Mainstream's caught onto this and given it lots of spotlight, lots of attention. And that is what David has called before crypto's 2008 moment, where we saw a lot of, I'm gonna call them shorthand crypto banks go completely bust and get wiped out. Uh, can you guide us through what's been happening over the last three months or so in kind of the C Fi world?

Yeah, I'll do a take on and then let uh Joey share his view. You know, so we've had a long bull market in kind of everything rates, equities, crypto,

all that stuff. And in bull markets, people, you know, take on more and more leverage. So there were a handful of lending entities

in crypto. Uh most were started in 2017, so they kind of enjoyed

the the ride we've had since uh crypto is you know in the low single digit thousands.

Uh in price, and

you know, just some of them uh took on excessive leverage. And when a market goes down 75 or 80 percent, and you have any leverage,

you know, it's it's really dangerous. So

uh and but you know, I think the perspective everybody should have is

anytime you have a super disruptive technology, people are gonna try all kinds of business models.

You know, it's like the internet in the 90s, you know, some of them work, some of them don't.

Uh some get lucky, you know, some some have bad luck, you know. It and it in the end, though, the underlying technology is fantastic and blockchain is gonna, you know, be incredibly important.

Yeah, I think the the thing I would add to that is I

I remember when I first joined Pantera, Dan said something about, you know, like

if you think about like

assets or pooled asset vehicles,

you know, they they tend to be limited by their least liquid asset.

And if you look at what happened to all these lenders, they started doing things like letting people borrow against collateral

that they consider to be close to one to one, but wasn't anywhere close to that from a liquidity standpoint. And so, like what I mean is if you look at GBTC,

You know, there's two liquidity question marks there. One is it takes six months to be able to sell it

after you buy it.

There are firms that would let you borrow against that in cash at very high loan to value ratios,

um,

you know, even though the underlying asset couldn't be sold at all.

And then even once it was liquid, if you look at the trading volume of GBTC versus Bitcoin,

um, it's it's kind of no match, right? GBTC is a much more illiquid asset. It trades in the over the counter um markets.

And so what ended up happening is uh people just basically

you know, borrowed against this very illiquid asset.

And, you know, when when people need to sell, it starts causing cascading liquidations because

if you have a lot of money

in a very liquid asset borrowed against something that's very illiquid,

um, you know, the market impact upon selling it's going to be, you know, disproportionately higher.

Would you guys take the comparison that this is crypto like 2008 moment? Obviously, there are some differences. We're not trading asset backed securities that has nothing to do with the housing market. But other than that, like the parallels kind of seem to be pretty strong. For example, we have too much entity, centralized entities with too much exposure that are black boxes that don't have any transparency into what's going on, uh, not realizing that there is like a center point of contagion being three arrows capital, but also a few others. Uh, and now as a result of all this, there's gonna be a bunch of just like court dates and legal documents and a bunch of fallout. W is it fair to call this crypto's 2008 moment?

Yeah, I think that's a great analog, right? And in in our letter, we pointed out a newspaper article that said this was totally different than Lehman Brothers.

Uh no, it's pretty much the same. You know, some very black box centralized entities, you know, had a business model at work for a while, but when the leverage uh swung against them,

everyone was trying to rip their collateral back or withdraw. And so, like Joey said, you get these.

You know, uh run on a bank where they have you know borrowed money overnight and they've lent it out for six months or in some cases, you know, multi-year periods of time.

And you know, that's

that's a story that's as old as banking.

Except we didn't get bailed out, it feels like.

Well, that's still on the table.

That's important, right? Mt. Gox, you know, Bitfinex.

There's been a lot of issues in our industry, and not one taxpayer dollar has been, you know, spent bailing people out. Hugely important, right? When when everybody gets all

you know excited about problems that are an issue, and there always will be problems, but the industry just deals with it.

Rather than always being backstop by the taxpayer.

Yeah. And there's a bunch of nuances that we want to get into, such as, you know, w why did DeFi get paid back first before C Fi companies? Uh what are the nuances of that where such as like the overcollateralization of DeFi protected it? Um is that really a fair comparison when like, you know, perhaps in a future version of DeFi we have undercollateralized loans and then we do have some of these risks. There are a bunch of questions that I want to get into, but we'll save that for later. I really want to get into the story uh that mainstream media is telling. Uh and and Dan, you put this in the uh in the Pantera letter about uh the Wall Street Journal's article titled DeFi's Existential Problem. It only lends money to itself. And it talked about all of these, you know, these crypto companies, things that if you're inside the industry, you would not call these DeFi. Not in the slightest. We call these things C Fi. Uh and I alluded to this in the intro. We had this uh daily podcast talked about the vision, the the utopia vision of the crypto industry was just realized to be a bunch of like smoke and mirrors, and it's actually just the same old financial system like put on new rails. Uh what what what was your guys' take when you guys saw the mainstream media report on it like this? And what was what was your guys' reaction to it? Joey, you want to start?