28 - The Bull Case for DeFi | Vance Spencer

welcome to bankless where we explore the frontier 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 am here with david hoffman and we're here to help you become more bankless david how are you doing after that epic episode we just came out of perhaps the best bankless episode we've ever recorded with vance spencer of framework vance got on my radar when he did the podcast with uh dimitri from

hidden forces and he just nailed everything i thought about defy and so we wanted to get him onto the bankless podcast to do a podcast with two hosts that live inside of the defy ecosystem instead of outside of it and vance just hid it out of the park this podcast was absolutely insane we kind of go through the the history of communities that came out of the 2017 mania went through a grueling bear market together created culture while the well their respective teams created

protocols and turned into the d5 protocols that we know of them today and then we talk about liquidity mining and governance tokens and distributing ownership over these pseudo equity cash flow protocols and then we talk about how these things compose together and then we finish off with some of the most insanely bullish predictions i've ever heard ever about crypto at the very end so you guys got to listen to the whole thing this this episode just flowed so beautifully ryan what'd you think about this episode yeah you know we always talk about it in the in the intro we

always talk about how to get started how to get better how to front run the opportunity this is an episode that will help you front run the opportunity because vance and the framework folks have been front running the opportunity in d5 since the whole thing started in 2017-2018 so if you listen to like one episode on d5 and you're trying to get insights into what's next what's the future trying to understand how to like invest deploy capital in the space this would be the one to listen to of

course the 27 episodes previous are also some essential listening as well so if this is your first bankless episode go check out the archive a lot of gold in the archive and we've been building up to this point david you know what i've got kind of no more to say on this i think we should just get to the goods and go right into the episode yeah there's nothing more that we could add to this insanely dense episode but before we get there we're going to take a moment to talk about our fantastic bankless sponsors

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loopering.io enter code bankless alright let's get to the episode with fans bankless nation we are so excited to bring on our special guest vance spencer vance is the co-founder of framework ventures which is a d5 first crypto fund we'll talk about what that means in just a minute but it basically means he and his partner had the thesis of d5

before it was cool now everyone's doing it he's got a background in silicon valley as well vance how the heck are you doing is this a d5 bull market my friend that we're in hey uh thanks for thanks for having me on uh is this a d5 bull market it certainly seems like there's a lot of enthusiasm i think uh you know with all the vegetable coins coming out euphoria um yeah i think it's uh it's it's good to

see the technology progress it's good to see the community rallying around these kind of new primitives it's good to see more usage in the space uh i don't know if i would call it a bull run quite yet um but uh certainly thanks for heading in the right direction all right so maybe i missed some vegetable coins guys what else is there i know there's yams but are we at like you know potatoes are we broccoli yet his hair and spams you know spaghetti the whole food camera will be fight coins so we're hitting all the food groups yeah you gotta hit all your food grapes

for proper nutrition i mean we're not specifically bullish on one section of the food pyramid versus another but [Laughter] it's good to see the whole food pyramid getting the the attention deserves well well one thing you've been consistent on is your consistent bowl thesis for d5 can we talk about that for a minute if you if you were to summarize vance the framework bull thesis for d5 the why d5 what is it our our pitch on d5 is three things you know number one finance is the world's largest market for consumer

enterprise software number two there's been almost no innovation in finance for the past 30 or 40 years and and the reason there has been no innovation in finance for the past three or 40 years is because there's no developer sandbox if you develop a game or if you develop a you know social networking app you can go to the ios app store you can get it on test flight you can get instant distribution into millions and millions of iphones if you want to develop a financial product your path to getting that out into the market is effectively to go work for

goldman or morgan stanley for 20 years get senior enough to propose you know some new exotic instrument and then hope to get it pushed through you know there's really no developer first ethos in finance until now and what we think defy is uh and and this is always evolving but you know generally it is the developer sandbox for finance you know today anyone in the world whether you're a developer in india developer in china you know smart kid living on the west coast east coast united states whatever you can go and build synthetic assets

you can go and build an amm you can go and build new and interesting applications built off the financial primitives and the tooling that is based on ethereum today and that's something that's fundamentally new and when things get you know 10 to 100 times cheaper you know innovation naturally explodes you saw that with amazon web services you saw that with the iphone becoming this new developer platform and distribution mechanism and you know i think that's kind of where our our bull case for d5 comes from um on a really general sense

in a very specific sense you know we're bullish on the people in the industry i think it's all just about people um you know you have the andres you have the michael from curbs you have canes you have robert lesnar's you have runes like these are very unique people in the sense that you know these probably aren't the likely candidates to go and start an equity-based company but the the dna of a founder in this space is just so much different uh and it's so interesting um and they move so fast that it's just hard to not be as bullish

on the space as we are on the people in it you know itself so it's really the permissionless aspect of it yeah yeah i mean you know i'm i'm super excited to see how we can uh put the supply chain on a blockchain and track strawberry shipments in real time but like i think the real innovation is going to be um just new things that we can do with this technology and and just the the creativity of developers around the world you know seeing robert lashner build a unicorn in two years like that's a huge just flag that he planted in the

ground and that's going to serve as a rallying point for people um yeah so vance i've just on this permissionless point for for just one second i've you know some people outside of defy have said well if the traditional banking system just opened up all of their apis you'd basically have the same thing so there's efforts to do that in europe and maybe it's more advanced in europe than it is in uh the us do you believe that's true like what if all of the banking like infrastructure api layer just sort of opened up would we have

permissionless finance that way too so the european regulation as it relates to banks is effectively opening up all apis for read access that's a lot different than write access and it's a lot different than fully kind of embedding a permissionless permissionlessness within the the banking stack itself so you know i'm pretty bearish on uh just like the open up the bank apis and we'll have a permissionless finance uh kind of ecosystem today i really think you need to re-architect this stuff from the ground up yeah vance you you said that you're

bullish on d5 because of the financial sandbox and there are and what we're talking about is there are perhaps ways that that the legacy system could open up and be a little bit more uh modular and experimental but why at the core of the of the problem why is traditional finance so gated like what who's gating it is it the private banking industry or is it like the the uh nation state regulations why can't we have what we have in the defy world today with ex with financial

experimentation in the legacy system like who's holding that back it's it's honestly a mixture of both um you know the enterprise enterprises that control the financial stack as it you know lives today they really have no incentivization mechanism to open it up for third-party developers um and and to a true permissionless financial system um they would have to develop new business models they would have to potentially cannibalize what they already have going it's uh it's just you know something that doesn't have a very clear value prop for them and on top of

that you know they're burdened by regulations and you know things that they need to do as a financial services business to stay compliant within whatever geography that they're currently located in so you know there's the old adage that it's really hard to turn like you know a hundred and hundred and just a huge cruise liner but with a smaller boat you can be a bit more agile and get place get placed a bit faster so i'm just like more bullish on just this bottoms up developer movement rather than like a top-down re-architecture of the existing financial system so the d5 protocols

that we've seen lately and you rattled off a list of d5 entrepreneurs defy seems to be able to offer like the the breeding ground for like a new type of person right and and you you listed like roon kane uh you know just the the leaders of these d5 protocols that are but like perhaps like technically minded they're developers but they're also financially minded as well and so there seems to be like this new breeding ground for these new types of people that are coming from the the finance world and

also coming from the tech world that is now enabled to do something experimental and so there is now like so many more like finance startups that are enabled by by crypto and by d5 if you look in traditional industries versus what's going on in crypto you know the amount of greenfield and crypto both on the there's not a lot of people experimenting there yet and on the kind of this is just a massive wave that people are going to ride you know the opportunity is relatively um large

compared to just kind of developing a basic you know c corp equity style company um but with that you know comes additional risks like you know one of the things that i ask founders when they say you know we want to do a token we want to hand this over to the community we want to you know fully decentralize this you know one of the questions i ask is like you know are you about that life like is that something that you really want to do you know it's you're playing for a much larger outcome uh because you're looking at basically the re-architecture of finance uh in the

21st century but it also comes with uh you know regulatory gray area it comes with um you know moving organizational control of your baby to a dao or people you don't know i think the people that do these things the best are the ones that just full-on embrace it you know whole hog and just go for it you see andre you know just distributing wi-fi to people based on the premise that this is software that he builds that he will continue to develop it but he doesn't want to organize it anymore you know that's very powerful you see kane doing the same thing with the three dow structure you

see robert lester doing the same thing with progressive decentralization it really isn't for everybody but the entrepreneurs that self-select to be in this space are just of an incredible cowbell bird because they're at the cutting edge of financial technology and if just organizational principles writ large and so you know i think maybe it's just the self selection but the entrepreneurs that we see in this space the really high quality entrepreneurs you know that is the real scarce resource and you know they're just frankly incredible when when things really start to to get humming and you know i think the the thing that uh

you know all these founders probably won't um come out and say but is readily apparent to me is that you know these people are playing for much larger outcomes than just a c corp you know you might get to a billion two billion three billion dollar valuation for your c corp equity and that's great you know you'll probably sell it you know maybe you'll try to spec it take it public whatever that's great but when you look at defy and you look at you know the cash flows these protocols accrue you know it's very easy to see these being 10 50 100 billion dollar businesses you know the meme used to be

you know which coins will be a trillion but like i think that will eventually happen um just because of the way the token works in the system and the way it captures value and just the community owned nature of these things um and so you know i think that that's just a long-winded way of saying that the entrepreneurs in this space they're playing for a lot more than just traditional entrepreneurs and and their kind of caliber of talent and attitude has to match that that pace it seems like you guys aren't just looking in in d5 but part of the thesis is to find that crypto native unicorn founder right and

we'll come back to you know some of the founders and archetypes a little bit later because i think it's super interesting to dive into more um but before we do can we talk about another element of the thesis that i feel like uh framework the way you've structured uh your your company is a little bit business and this is if i understand it correctly vance you have kind of two sides to your i guess support like investment uh business there's two sides to framework there's kind of the fun side where you're actually like actively

investing and then there's also the lab side where you're actually participating in these networks in various ways so it's almost like a an activist investor type of flavor where you're doing both sides you're investing in the networks but you're also participating in them can you talk about that a little bit so we can understand how things are structured and why you've decided to structure it that way on the activist investor side i think uh activists usually comes with a bit of a negative connotation you know generally like with these protocols we come in peace we're

definitely opinionated and we definitely want to see things get done and you know i'm happy to be you know pushy with teams or with the community just in the spirit of pushing things forward but you know our our bias is is uh you know to the protocol and then to the founding team you know in that order uh and you know early on in the life cycle when there's more of a core team than a protocol that may flip but you know once this thing is live you know it's like you've created this public park and it's basically all of our job to maintain it and make sure you know it doesn't kind of just become this tragedy the common style situation in

terms of you know labs and ventures ventures is our principle you know investing entity and that's where we do most of the venture work out of but labs the reason why we have that is because you know participating actively out of a fund is very difficult you know there's admin there's audit there's tax complexities but more than that you need to have the talent in-house like we have a full engineering team you need to be building infrastructure you know you can't really do that at a fund you need to have mechanisms for participating participation governance and honestly

that works best out of a c-corp and so the idea of labs was just fully borne out of you know how do we provide you know services to our portfolio companies in the way that is the most valuable and so you know you'll see us doing things like you know precipitating governance you'll also see us being you know the largest trader on a lot of the protocols we participate in and that's because we've built custom trading infrastructure that does really remarkable things to help bootstrap volume bootstrap liquidity and show people you know how you can use these protocols an example

of that is our futures trading strategy so what we do is you know we'll look at binance and we'll look at the perps on binance and and we'll trade them when the funding rate spikes and we'll hedge that out on synthetics and and you know really we were the first people to figure out that you could do this and that hedging on synthetics exchange was the best way to hedge a futures bet um but really we're building this to not only benefit the network in the sense that we're effectively harvesting yield from c5 and giving it to the synthetic staker base but we're also doing this to show people and lead the way on you know how you can actually use these decentralized protocols to add value

to a trading strategy if you're trading fund or if you're a retail customer or really whatever and so labs is really just you know it's our active participation entity it's you know where we kind of demonstrate the value of protocols through uh and then you know coming up here we're actually gonna start you know building things and spinning them out uh and so you know eventually we want to kind of see um you know framework ventures is just one business line that we have um where while labs kind of does you know a bunch of different things to support the protocol to push things forward more

generally in d5 and just to be a good steward of the industry as a fund that is an active user of the protocols that you guys are participating in you guys get access to some alpha that maybe somebody that just buys a protocols token on unit swap doesn't have because you guys are you know in the trenches using the protocol for what it's supposed to be used for seeing it positive seeing its best seeing it's negative seeing where it needs to get fixed and then also you have a stake in the protocol because you are investing

in the tokens of the protocol which means that you guys are incentivized to work with the teams of these protocols to make their protocol better so how to tell us a little bit about that process so so you guys are users of synthetics you guys are users of ave tell us about your communication with these teams and how this is that kind of a conversation about how to iterate and improve the product yeah so so i think the first thing is that uh and this is definitely different than the traditional venture hedge funds is that we do you know

95 of our business out in the open uh you know whether it's in the wi-fi telegram channel whether it's in the synthetics discord whether it's in the ave discord you know people can see what we're doing and i think that gives them a sense that you know there is no kind of boogeyman behind the curtain um with ulterior motives in the sense that you know we're just very open and honest and transparent with the communities about what we do and i think you know after we did that once people started to notice it after we did it twice it was like kind of interesting but then third time people were like oh interesting these guys are good stewards of the

protocol you know we can trust them and i think when you see this like backlash against vcs you know in the market with things like wi-fi or yams you know right or wrong you know i think that's why we haven't really been looped into that bucket just because you know we're super close to the metal we're super transparent and people just know that we come in peace um so i think you know that's kind of one aspect of what we do but you know you're totally right in the sense that you know our whole strategy is that you know instead of being super large we're just

going to be super agile we're going to be the first we're going to be the heaviest user we're going to be the closest to the metal like we're going to understand how these protocols work at an atomic level um so that when it comes to making you know investment decisions you know we can make those you know as accurately as any person on the planet um and really you know this shouldn't come to surprise anybody but the only way to learn about stuff is to just do it and then to figure out you know if you're interested or if it's working for you kind of later down the road um and so using these protocols and you know getting into the the dna of

what's going on and understanding how the smart contracts are architected and what the vulnerabilities are you know that's just the standard part of our due diligence process and in a way that i don't think is fundamental to many other firms um and that's because we have a full engineering team that's because we have a full training architecture that's because we're just super close to the teams and the dna and the culture of the space itself and i think that is in a lot of ways our unique advantage you know vance it's kind of strikes me that we're just talking about what what you look for is crypto native uh founders essentially right so they're

not going to be the the typical you know cast the the typical archetype who would start a silicon valley for well you guys are also not structured as the you know the typical vc fund or the typical even crypto hedge fund it's more of a crypto native fund type approach that you're taking right and what also strikes me is that what you've been able to produce with this approach is this really incredible feedback loop where as you're stewards of the network and you add value to the network

well then you start getting invited into the network more by the grassroots community it also provides a way for you to really learn about what you're investing in it it strikes me i don't know if this is if you if you think this is the case but it strikes me that many um even even crypto funds don't actually know what they're investing in when they're when they're buying a token and when they're like investing in something and certainly that the traditional uh funds like have no idea

what they're buying do you see a lot of that like is there a information arbitrage that you guys have because you're actually participating these things and like using d5 that they don't i mean you know not to to my own horn but but like absolutely um we get a lot of questions of like you know how are you guys this close like how do you guys have this much information advantage and i think the honest answer is just like this is literally all we do you know michael and i lived together uh we started the fun together we've known each other for for five years and have

been you know best friends in the foxhole of crypto and other startups throughout that and i think just like the relationship between michael and i uh and just our commitment to building something that can be you know quite large and hopefully outlast us is really kind of what separates us and just in terms of you know bringing the same intensity to work every single day you know reading everything on crypto twitter meeting every single person you know if anybody on in the link marines or in the synthetic spartan you know needs help with you know the resume or editing things like that like we'll actually help them and

it's not just because like this is some like psyop uh you know information advantage it's just like this is because this is all we do literally um and so just being you know as humanly close to the possible or humanly as close to the metal as possible is really where all of our advantage derives from um and i think what's what's really cool for us is like you know we saw uh these couple of chinese uh you know blockchain outlets that posted this full story about us and and it was really well researched and it had all the details of how the fun started and what our thesis was and the projects we've

been in and we literally had no communication with the people before they posted it wow like you know i'm on i'm on google translate like trying to like read like you know kind of broken chinese like in english and it just like people notice this stuff like when you're authentic when you're showing up every day when you're bringing that same intensity and when you're just showing that you know you're good stewards it reaps benefits it might take a little bit like we were deeply uncool for probably the better part of a year and a lot of people still think our

style is pretty whack but you know this is basically what we do um and it's like the best job ever and we're super thankful for it and and we're just kind of determined to keep giving back to the community and keep pushing things forward um and and i want to get to another point you made which is uh you know these aren't the typical in you know founders these aren't the typical people that you might invest in i think that is like one of the things that i enjoy the most out of crypto is just the the sheer uh volume of the number of characters in

this state like like kane is basically a pseudo anarchist like it's pretty funny to me but they're kind of what are you um straight up not even a little bit danny is like this pretty funny uh fin finish guy um you know michael your egrov is a you know ex ex particle physicist um and it's just like the amount of people you meet in this space is super interesting and it's what keeps me super motivated uh and i just think it's just an incredible incredible vertical to be in right now i feel like it's just like the island of misfit toys

like everybody you know and then you have then you have someone like andre who who you know he launched wi-fi and then i called him like two hours later just like first kind of out of the blue call and he described himself as you know the joker in batman you know chasing it caught it he wouldn't know what to do with it and immediately after that call i looked at michael and i was like yo we have to buy as much of this as humanly possible that's a complete opposite of what a silicon valley vc firm would do by the way oh yeah and there was discussion

about it and there was kind of like looking at the business model and what this could possibly be and i posted a short twitter thread about the thesis on it but you know things like that and opportunities like that you really have to be prepared for and if you have a traditional vc mindset in this space i don't think it's just part of your natural kind of like reflexes to to think openly about that for us like we saw andre and in this anti-vc movement as a theme and the fundamentals of the business were found but like if you're a venture capitalist and you see a theme that explicitly excludes you

you know that should immediately be a cue for you to get exposure to it because purposefully you're not supposed to be part of that and if you can kind of help subvert that and help the company and help the narrative and help the protocol like you can add outside value to that investment um and so just like weird opportunities like that uh is just the stuff that we live for it seems to be to me that framework ventures suffered through the bear market just like the rest of us right and also just like the protocols that framework invested in and and one of the topics that we're going

to go into is like what what happens to a protocol in its community when it goes to a bear market and how it comes out of that and it seems to me that you guys survived the bear market by just using this sandbox that is defy as your uh ground for sharpening your sticks right as your ground for getting better and and kind of shedding traditional thought and just learning what works in the moment right and then as a result of this you guys have turned into just it turns out what works is just being

good uh governors of a protocol as a result of this you guys have invested in uh things that you know have have worked and you guys are now the stewards of these protocols and so at this point how do you guys because you guys have limited energies you guys have limited capital because capital is not infinite so at this point now that you we've gone through this bear market and now we seem to be you know quote unquote going into a bull market how has your learnings guided what you guys now decide to invest in like what are the criterias

for a protocol that you guys really look for that kind of matches this thesis that you guys have generated over the last like two years so so i think at this point and and we started with you know probably 20 million um when the fun started um at this point our our energy is is probably the rate limiter and michael and i's time versus our capital you know like we could make seed investments usa investments all day uh but like the stuff that that we've always kind of like internalized and talked about is is not becoming you know the spraying previously that do

a bunch of different projects and have you know no conviction or very little conviction and or just kind of working off of the signaling of other vcs and letting them kind of do the cognitive work for them um for us like i think we've always taken a lot of pride in investing in things that are deeply unpopular um you know whether it be chain link which you know nobody has liked for for a long time uh except for lots of kind of grassroots organizations synthetics which you know got hacked was the stablecoin project was located in australia like that