SotN #42: Ethereum Devs Building DeFi | Preston Van Loon and Will Villanueva

hey guys welcome to another state of the nation episode i'm ryan sean adams i'm here with david hoffman this is an episode where we this is a show rather where we talk about what's going on in crypto we we zoom in on one item we relate it to some of the big picture stuff we discussed in the podcast and the newsletter we tried to drop some insights and action items to you as well this is streaming live right now on youtube this also comes out on the podcast david how you doing today oh absolutely fantastic it's coinbase

week it's all-time high day it's building day there's so much to talk about uh which is why we actually have two guests today on today's stay of the nation because what are we talking about then today yeah yeah so uh some interesting projects have come out with a slightly different flavor to them i would say um they're really cool projects in of themselves but it's also the people behind these projects that i think is also uniquely interesting uh we have uh people who have been in the actual ethereum protocol building the ethereum protocol preston van van loon and will

villanova uh hopefully i got that pronunciation right i forgot to ask him ahead of the show um preston van loon has uh been with the prismatic team building out eth2 uh and and will has been uh doing our r and d with uh phase two the sharding aspect of ethereum two in his past as well and so the through line here is that we have ethereum ethereum builders turning into app builders uh and that is a unique story that we have not yet seen coming out of the ethereum ecosystem yeah i think that also gives them a unique perspective to david on like both

the protocol layer on ethereum and also the app layer and you know what david i i won't be able to help myself i'm definitely going to ask some eth2 questions at the very end of this because i just want to like we're five months into e2 staking launch what what's happening next what do they think how do they think it's gone timeline that sort of thing so we'll try to fit that in at the end david what is new in the bankless community we gotta talk about bankless badge week that starts next week so next monday let's see monday the april 19th

what is bankless badge week what are we doing i thought i thought it was bankless multiple badge weeks i thought i thought is yeah so we're gonna be giving it's badge week that last two weeks how's that badge weeks yeah so uh we've been we've been uh hammering this out in previous episodes and so we finally figured out the uh raffle giveaway agenda first week is all about bats all about baps people are getting their uh gonna get people with the bankless badge are going to be getting baps and that's what these are uh and so there are only six maps left

which means only six more people will ever get this shirt that you can you are seeing ryan wear right now uh and so that's pretty cool uh and then that is week one uh and week two uh will be uh uh and now soon yeah we too um the rumor is it the the raffle weeks is going to rain raffles for the next uh two weeks starting on the 19th rumor is the last day of the raffle we will be raffling off one eath sir wonder what the price of one eath will be at that point could it be two

thousand could it be ten thousand we don't know but one eighth is one eighth and that's why there's one roughly um and for for those of you don't know uh the way to get a badge is you can become a bankless subscriber get a badge but we're doing this raffle really because we want a lot of the people who have subscribed already and have a badge link somewhere in their email to go back through make sure you claim your badge so you can participate in these raffles we want everyone who is a full bankless subscriber who already has a badge link to go claim their badge that's what

badge week is all about so go do that this is a a what you're seeing on the screen if you're viewing this in video is how you enter the raffles when they come in this is a grid plus raffle that we did previously you just connect your your wallet to it has to have a poet badge in it could be on xdi could be on ethereum main net and then you're entered in the raffle and it randomly picks a winner uh every single day is is how we're gonna be doing this so super exciting that that is uh that is happening soon yeah so just to reiterate

if you are already a bankless subscriber you can go get your badge right now you gotta peruse through your history of your email inbox to go claim your badge uh and then future raffles uh if you want access to future raffles you can go and become a paid subscriber to bankless and then you will get your badge on the first of the month yep uh may 1st is when we meant those if you're looking for an email specifically uh search for lucas at banklesshq.com he's gonna hate me but that that's where the email is coming from it's all coming from lucas he is the the master of minting the master of

coin maybe i should say it thankless uh all right um what else we have hester purse commissioner crypto mom turns out she's also defy mom we had her on the the podcast episode released on monday that's just a fantastic episode everyone should go listen to that to figure out how regulators at least the good ones how they think about crypto and more importantly how they think about d5 specifically any takeaways you want to mention from that episode david yeah uh the biggest complaint i think out of the

crypto space is the lack of clarity that the sec has uh provided our industry uh and i think that's something that hester purse is on a mission to help solve and i feel like that's why she's coming on to shows like ours uh to to help uh explain her thoughts and her her thinking about how things could be and what she hopes to have as a regulatory relationship with our industry um so that was my big takeaway since hester's trying to make things really clear the other takeaway i have is that she loves the bankwest podcast which

[Laughter] that was awesome not only hester but apparently the sec members of the sec listen to bankless podcast on a regular basis which i'm not sure if i should be uh excited or terrified but i'm more excited especially after that conversation with with hester that the last thing i'll say about this is it feels like 2021 could be a time for a um a blank slate in crypto gary gensler is the sec commissioner he's coming aboard as part of the new administration so there really does seem

to be a push to get some things right provide some that clarity you were talking about um david all right i've got to start with the question i ask you at the front of every state of the nation episode david what is the state of the nation today sir the state of the nation this is a good one pioneering we are pioneering so in multiple different fronts and always always state of the nations are always and mean multiple things in multiple different ways i can't believe we haven't used this one before pioneering there's a decent chance that we have okay as well

if we did it early once yeah so we are pioneering into the world of the nasdaq today or in this week uh and so coin is getting listed on the nasdaq tomorrow uh is that why some of the crazy price action is happening right now is that why ether is currently breaking through all-time highs all right what's coin for people don't know oh coin is the the ticker symbol for coinbase which is going to be listed publicly so that is going to happen tomorrow that's going to cause a bunch of news um the the bankless opinion we put this out on the market monday piece

yesterday is that no matter what the valuation is on day one coin pumps um price go up um it's just it's perhaps the new meme stock that's that's my predictive uh statement about the future not financial advice but we are not only pioneering into the nasdaq but we are also pioneering with new defy apps um and and this is what we are going to get preston and will on to talk about shortly is that uh element which is will's project is pioneering into the world of splitting one token into two the principle and the yield and then

presence project is pioneering into the synthetic asset world of producing tcap which is the total crypto market cap so new defy apps building on top of other defy apps and also allowing other defy apps to build on them pioneering new surface area in d5 guys you will not want to miss this upcoming brilliant conversation with these two fantastic e2 developers who are also now developing d5 protocols but before we get to the conversation we want to tell you about the sponsors that made this

state of the nation episode possible bankless is proud to be supported by uniswap uniswap is a new paradigm in asset exchange infrastructure instead of the cumbersome order book system where trades are matched with other humans uniswap is an autonomous piece of software on ethereum which is what ryan and i call a money robot no human counterparties or centralized intermediaries just autonomous code on ethereum input the token you want to sell and receive the token you want to buy something brand new in the uniswop ecosystem is the uniswap grants program

is now accepting applications for grants we have been saying this for a while and we'll say it again dows have money and they are in need of labor if you think that you have something to contribute to the uni-swap dow apply for a grant to uniswap just look at the size of the uniswap treasury it's almost 3 billion this mountain of capital is looking for labor do you have something of value to contribute to the uniswap dow no matter how big or small your idea is you can apply for a uni grant at unigramps.org and help steer unit swap in the

direction that you think it should go that's exactly what we did to get uniswop to be a sponsor for bankless and you can do the same for your project thank you uniswap for sponsoring bankless metamask is your go-to wallet for the bankless journey if you're going bankless you need metamask period browser and mobile get them both this is your tool to unlock the world of d5 here's my favorite part now you can swap tokens directly in metamask with a single swipe this has got to be the easiest way to trade ethereum tokens

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metamask for desktop or mobile now at metamask.io and start swapping all right bankless nation we are here with preston van loon and will villanova uh guys welcome to the show thanks so much for for coming on yeah thanks for having us yeah glad to be here yeah i'm going to do my best at your guys's bios and then we're i'm going to hand it off to you to help fill the gaps but uh preston you are the founder at prismatic labs which is um perhaps the

most downloaded uh eth2 client uh i think it has the most east staked in it so so congratulations to that and uh preston's been been working on ethereum ever since he was full-time at google and then started working just on ethereum on the side because out of passion uh and then i believe what happened is uh vitalik yellowed a thousand eth into the prismatic treasury and that's what really enabled you guys to go full-time uh full-time at prismatic and then uh will you were part of the quill team at consensus doing r and d on the sharding side of things uh

so specifically phase two and now you are working as the ceo of element finance which is what we're about to get into uh so so preston let's start with you give you a chance to correct any errors in the in the bio that i might have just made and also expand on it as well now that was pretty close so yeah i was working full-time at google and i was working on ads and ads are not very like globally impactful at least positive to most people i mean they help people find products and whatnot but it's not what i was

interested in and i found ethereum at the tail end of 2017 kind of when icos were getting big and cryptokitties and all this kind of stuff and seeing like wow you know ethereum has a lot of potential use cases but it's super kind of maxing out right now kind of slow so i wanted to get involved to the protocol layer with e2 so at the beginning of 2018 i ran into raul jordan online and he and i started prismatic labs with uh terence and nishant we're the four

founding members of prismatic and we just kind of moodle it through all of 2018. we we got some grants during that year but it i think it was the yolo grant that really signaled the confidence of the ef and of the community that if we all quit our nice jobs that we're gonna be okay like we're not gonna i mean none of us had any ether at the time like we're just kind of interested so it was a big risk but it it really paid off i mean we have an amazing community

and and and it's been really good um but i still have this passion for like how do i further increase my impact and so uh we started uh cryptex financed um as a as a moonlight project to prismatic so i've been work still working full-time as prismatic but on the side working on cryptex trying to build a new financial product for mostly for retail investors like if you talk to normal people they they they know bitcoin and they they might

know ethereum but they they don't really know how to invest in everything they know there's a lot of cryptocurrencies but they don't really know like how do i get into the whole market so that's kind of what we're trying to solve with cryptex and tcap awesome and yeah we are going to get into each uh the details of each of your guys's projects in just a sec but uh will uh maybe explain a little bit about yourself and your background as well yeah for sure um so similar to preston actually i was also in the ad space and uh you know saw that it wasn't you know

moving towards the greater good um and then on the tail end of 2017 um you know hopped into the space i'd been following it for a while um and built the bounties network at the time uh built that from from the ground up um we did uh some of the contracts that get coin uses as well so we were pretty uh pretty close to the bitcoin team um and then sort of after that i was you know making a decision whether to um i kind of had two two routes that i was going to go i was very very passionate about the

breaking d5 space and at the time you know i had a friendship with fernando who you know is the ceo at balancer and actually almost joined balancers the cto there but ended up instead you know at the time joe lubin had you know asked if you know i could dive into some of the research on youth too you know help help look into some of the areas and so i ended up doing that and you know i was i was really excited about that helping helping scale things uh

diving in a bit deeper working working closely with the eth2 research team and you know a lot of a lot of bright minds there um so i did that did that for a while um you know we we did a lot of uh you know research and and development on you know what what do shards look like in the future how do we generalize them how do we bring wasm onto them you know how do we make it so um you know eth2 and in the long term can serve many different uh types of blockchains and and uh many different structures that

can grow on that um and so we we explored a lot there which is which is really solid and then also ended up um working on some uh some research on eth1 um and actually uh you know put put forward an eip 2938 on account abstraction which brought some of the research we had done on eth2 into sort of the stateless world and some of the generalization we want to bring into eth1 um and we you know put together a implementation in uh the go theorying client um and did

did a bunch of simulations on that and saw how that could you know improve some of the execution uh currently uh on ethereum as well and that was part of you know all of that was a part of a team quilt that i had started um and had grown to just you know work and and further develop and uh research things uh in the space and so quilt is still moving forward strongly um and about six months ago i had you know been really excited about some of the developments in the d5 space um kind of going back to some of my routes um

and you know almost uh joining in building balancer uh you know a few years ago um kind of re-centered around that and so that's what's what has brought me here with element and yeah very cool very cool so like we alluded to at the beginning the reason why we have both of you guys on here is that you guys are both building cool new defy apps with a unique perspective of coming from the ethereum side of things and so that's where we want to end up with the conversation is like how has your guys experience building ethereum translated

into uh skills building defy apps and then also why have specifically you guys chosen to build on the app layer now instead of a year ago or perhaps a year from now like why now and then also perhaps some conversations about what surprised you about the trajectory of ethereum both at the protocol layer and at the app layer but first we want to start with the actual details of your guys's projects uh and so uh will's project element got announced first so we're going to start with elements uh and so uh will can you kind of give us

the uh the bird's eye view birds eye pitch of element and then we can go in from there yeah definitely so uh the element protocol basically you know for the casual user average uh user uh they can come to uh to the protocol and they can purchase uh bitcoin eth die or usdc and they get it at a discount um and essentially that you know that can be translated into um securing a fixed rate of income on that purchase so

if you're looking at ten percent fixed-rate apr on eth um and you're looking at over a year period then you can secure um 11 eth that can be redeemed a year from now and so we make that process really simple we make it really really easy and we let those users you know in reality avoid a lot of the issues around variable apr um gas issues having to manage their funds which is which is really cool um on the as far as like how how it works behind

the scenes um we essentially uh take uh positions that you know current defy users are already staking in uh specifically in yearn and we split that into two new tokens so we're able to represent the yield that's gained in one token and then the principal and essentially for users who are already staking they're given further avenues of revenue so they can go ahead and take those two tokens they can provide liquidity on an amm and they can actually get you know higher apy off

that um but also what it allows them to do is is it allows them essentially to sell their principle and give them a bit more capital capital efficiency they can sell the principal and they can gain more liquidity to get exposure to more and more interest and essentially when they're selling their principal they're selling their principal as a fixed uh a fixed rate of income and so that's for the casual user basically it's subsidized by these more active users who are actively using their funds um and selling their

principal as as fixed-rate income so it's sort of like the circle of the the two sides of the market and how they how they benefit each other so will can we talk about like fixed rate income just in general like so in the in the old world um how does fixed rate income work are these like i go to my bank account and i know that interest rates are crappy i know you're going to tell me that but like i go to my bank account i have some money and i go and i buy cds right are like cds in a bank account are these

fixed rate income maybe you can talk about what this is in in the in the old world and how this translates into crypto yeah typically when you look at a cd or you look at a savings account um but that you're evaluating you're given you know a rate that uh that is fixed and so um you know it's for example in a savings account right now i think the best that you can find is maybe you know half a percent uh apy which is uh you know nothing in comparison to what we're seeing in the uh in the

d5 space right now so people in d5 on variable apy positions are seen anywhere from you know 10 to 50 um it can even be you know higher in some cases and so um essentially you know for the users in the traditional finance space who you know sort of are accustomed to at least being told like this is what we can guarantee and this is what you'll get um you know the element protocol offers the same thing but those rates are going to be you know significantly higher than what you see um in traditional finance

um and uh the other thing that you could sort of compare um you know deeply when you you look at the traditional finance space is um also this is somewhat akin to a whole space of um zero coupon bonds this is where you you know you essentially get an asset at a discount um but you you basically commit to it being locked until um until a final date and because that asset is locked that's that's essentially what introduces that that

discount you have an opportunity lost um instead of using those funds depositing and getting apy um you know the fact that it's locked means you can't do that and for the opportunity cost um that's why it's it's sold um essentially you know at a discount um so this is like a cd for um crypto assets basically and specifically like the the crypto monetary assets which would call like bitcoin eth and usdc so if i'm bullish on eth and i want it to

generate yield i i can park it into this this um into your system basically into element and then i have to hold it there for a period of time right uh and then at the end of that period of time i've received my yield is this kind of how it works or am i paid the yields continuously yeah as time goes by yeah so the the way it works is essentially um technically uh yes so you sort of go and you bring your eath you trade your eat for the locked eath

essentially and that may be locked let's say for three months six months but you get it at a discount that then gets redeemed for a larger amount at the at the end of that period however sort of what's what's really innovative you know about about what we're doing um is we've you know put a lot of effort and research into making sure that market is liquid um and so what what that means we're actually you know doing a custom trading curve where a launch partner with balancer v2 as well so we actually built

um built a uh a invariant it's the uh constant um power sum and very invariant um an iteration some of the work that yield space has done um and so we we're you know launching that and it's you know been audited on balancer v2 um and so it enables liquidity for these assets and so what that means is even though technically you know you have three months that you know you have to be locked into this or six months you can actually exit at any time so

you could go through let's say you're on a six-month term you could go through uh halfway at the three-month mark and decide that you you know you actually want liquidity again um and then at that point you can you can sell it um you know with this with this uh custom curve um and then you'll have gained uh the interest uh along the way as well this is something you can do in like traditional consumer level you know cds that you might get in your your bank account right they're really locked in i i've never seen a way to like

you know trade these on the secondary market yeah yeah no that's correct and that's what's so cool about this is um we sort of you know and this this is what i love about the defy space is it sort of opens up all these new avenues of innovation and all these new primitives that you know i think a lot of them haven't even been explored fully in the traditional finance world and just due to the you know nature of amms um the fact that you know like in balance or v2 you can uh you can write custom trading curves um which is which is really really cool i

have a lot of good things to say about uh balancer v2 so a huge shout out to them um but it just opens up so many so many cool things and so something that you know you would have originally thought you would have been locked in exactly you now have liquidity around being able to exit any time and so there's no real commitment towards that locking period which is which is beautiful so will i'm interested in so this if i'm bullish on a particular asset this allows me to express my bullishness by committing to a lock-up period uh and

then because i'm committing to that lock-up period i get to access that that asset that i'm bullish on at a discount and if i'm bullish on an asset what would i like more other than the asset that i want offered to me at a discounted rate uh and of course the measure the magnitude of that discount is probably correlative to how much yield is is that asset can bear but the cool thing about uh finance is that this separates this allows uh two groups of people to separate from each other people who want to purchase an asset at a discount and that is uh and that's one

half of element uh go into details on the other half was who's is there some other half of this equation where people are getting extra yield on this where's the other half of this equation uh fall in yeah yeah so this this is what's really cool and this is um this is what i you know i love about um you know about the product in general is we're sort of you know we we've done a lot of research and ideation and shared a lot of what these like market effects you know will be or what we think they'll be um and so we're sort of letting the

market push this forward and so what our general hypothesis is and we write about this a lot and we've you know dove into it is essentially for the other side we're talking more the sophisticated defy user right these are the d5 users that are depositing into a urine vault and maybe shifting their assets over time taking bets on different positions um and uh you know it might not just be urine it might be you know a number of different uh protocols that they're jumping into and so what we do is uh they sort of feel the market um and so we say that

you know it's the sophisticated users who are subsidizing uh the discounts of the casual user and the casual users subsidizing the strategies of the sophisticated user and so if i'm you know the sophisticated d5 user and i am depositing into let's say the uh yearn s t ether and the st vault um is you know basically uh uh investing in the eth2 uh staking position right and so let's say i'm you know in investing in that anyways um

then with the with the element protocol um what i can essentially do is i'm still investing in that position but i get a little extra so i now kind of split i split that position that i'm in um into the principle and the interest and so this this lets me do a number of cool things um one i could you know stake both those tokens and get a bunch of extra trading fees and we've simulated that you could you know boost your apy significantly creating this market

um but but additionally it gives me other like ways of escape right so um i for example um if i want to shift funds around but i still want to keep exposure the interest i can sell my principal i have new liquidity i still have exposure to that interest um on that position and now i can use that liquidity for um to put into any other position in the space and uh and so however we've we've dove into this concept called yield token compounding

and so this is this is the idea where you uh you sell your liquidity um your principle um and in general you know variable rate will always be higher or should always be higher than fixed rate um sort of how markets you know generally work and so um i can go ahead because there's that split i can go ahead and i can sell my principal and i'm getting a higher rate of interest on the variable interest that i'm betting on and so when i when i sell my principal i'm selling that at uh less less of a

discount and i get that liquidity and then i can redeposit into that position and i can basically increase my exposure to the interest and i can do this multiple times so i redeposit i collect these yield tokens i'm getting more and more exposure to the interest i sell the principle get liquidity again redeposit sell the principal liquidity recursive right yeah it's recursive and i can do this like 10 times do this more and essentially it's another way of leverage so i could have started off with 10 eth

and assuming the variable position is going for 20 and fixed rate is going for 10 percent um you know i can essentially get exposure to 63 eth worth of interest yeah yeah and if you're doing this with you know there's really other cool things like if you're doing this with flash loans as an example you don't even have to put through the full capital this is where you can essentially get you know 10x uh leverage um on these on these positions

um and on the interest um by by you know sort of selling your principal and doubling down on on the yield and your exposure to the yield so will we talk about money legos so so often on bank list because that's kind of a great mental analogy for like what we're actually building here right so i'm gonna ask the question of like you mentioned some other money legos what money legos does element build on top of like you mentioned urine is that kind of a strategy piece are there other pieces involved and then a follow like a

second question of that is this seems to be built on money legos but is its own money lego it's kind of a new d5 primitive so any thoughts on what could be built on top of it let's first take the the first question of what money legos needed to be here for you to build element yeah so urine urine is a huge one um and then right yearn is built on the number of legos too so if you look at like what what sort of you know