🎙 "I Try to Tell People About DeFi; It Will Come Here and Completely Flatten You:" Jim Bianco
Jim Bianco has decades of experience as a macro markets researcher. He's been leading his firm Bianco Research since 1990, which has family offices and traditional money managers as clients. He was at UBS and Lehman Brothers before that. He’s as TradFi as ...
Jim Bianco has decades of experience as a macro markets researcher. He's been leading his firm Bianco Research since 1990, which has family offices and traditional money managers as clients. He was at UBS and Lehman Brothers before that. He’s as TradFi as it gets, but recently, he’s been falling down the crypto rabbit hole —hard.
He says that while bitcoin was interesting as an investment, to him it’s DeFi that really caught his attention. It was after installing MetaMask, and doing some yield farming and NFT investing, that he realized, DeFi is a new financial system, and it will replace the old one. And the reason is simple: it’s just better.
He has carefully brought this up to his clients, but it’s been tough. Those that don’t underestimate open finance, are waiting to retire before they have to catch up. But Bianco thinks DeFi is taking over sooner than they think, and when it does, they’ll be just like taxi drivers in a ride-sharing world.
Bianco believes the biggest risk is US regulation but he sees it as a risk to the US, not to DeFi. He believes the US’s stifling regulatory environment will force innovation to start elsewhere, it will likely grow in the developing world and then come to the US and as he put it, completely flatten everything else.
The podcast was led by Camila Russo, and edited by Alp Gasimov. Transcript was edited by Owen Fernau and Dan Kahan.
🎙Listen to the interview in this week’s podcast episode here:
You’re a paid subscriber, which means you get the full transcript below. Subscribers also get exclusive access to The Defiant’s Discord chat for the community, here’s a new link to join.
🙌 Together with:
- Zerion, a simple interface to access and use decentralized finance
- Balancer, one of the leading DeFi automated market makers (AMM) for multiple tokens. Dive into their pools at https://balancer.finance/!
- Kraken, consistently rated the best and most secure cryptocurrency exchange, which can get you from fiat to DeFi
- Casper, an enterprise-focused blockchain which aims to introduce unprecedented security, speed and scale for businesses
Jim Bianco: Yeah, so we're going to scare everybody away. Oh, my God, you're talking to a boomer from traditional finance, although I do think of myself as an older Gen X, but that's a different conversation. So I've been involved in the traditional financial markets since the stock market crash of ‘87. So I go back almost 33 years now in the markets and I worked on Wall Street in the 1980s and into the 1990s. And then I moved to an institutional bond brokerage firm called Arbor Research & Trading.
And in 1998, so 23 years it'll be April 1st, I started my own firm Bianco Research. It's an advisory firm where we publish research and offer ideas and advisory in a traditional payment model for traditional financial people, where focus is macro. So that mainly means interest rates, Fed policy, the economy, but it also means the stock market, the currency markets, a little bit of politics, and wherever else I want to go with it.
The beauty about being at a shop with my name on it, is I can go anywhere I want and I can try and bring my customer base, which is a traditional financial customer base along for the ride. And so I've gone in various different directions over the last many years. And the newest one in the last couple of years, has been crypto and DeFi which I've been trying to talk up a little bit more than being a traditional financial boomer guy and basically arguing when is all this stuff going to go to zero and go away? It actually isn't. And that's what I'm trying to get across to a lot of the traditional financial people.
Camila Russo: So interesting. So what made you become convinced that this isn't going to zero or going away?
JB: First of all, I opened my first Coinbase account in 2017, so I've been playing in these markets for about four years. And I was traditionally playing it in Bitcoin and I was struggling to understand the bigger picture of Bitcoin, this is 2017, ‘18. And to put it bluntly, I thought of it as a competitor to a gambling site, you know, just plunk your money down and bet whether or not the little horse is going to go up or go down and that's basically all I saw as Bitcoin. I still think a lot of financial people think that that's what Bitcoin is to this day so they couldn't really see the bigger picture.
Then, DeFi summer came. I had been aware of DeFi before last summer, then DeFi summer came and I started delving into it a little bit. I got my MetaMask wallet, I started connecting to sites. I started doing a little bit of yield farming, started investigating NFTs. And it just occurred to me that this is a brand new financial system, and that this is going to replace the current CeFi financial system.
In my chair, I have been somewhat critical of this current financial system. I think it's slow, it's cumbersome, it's obtuse. There's way too much permissioning. I have to get permission from everybody to do everything, including the ultimate permissioning is know your customer, which is I have to beg my broker to let me do stuff which I find to be antihuman rights, if you want to go that far, with some of that stuff. And I've always found that the financial system is operated, the current one, it's just a series of toll booths that they just continually take money. I still don't understand why it takes me two days to send money to somebody through some kind of a transfer, because the ACH and the SWIFT systems are so old and antiquated as well too. So I was always of the mind that this system was going to be ripe for some kind of a disruption. And when I saw DeFi, I started to see where that disruption was going to come from. And I started to understand that this is going to be where it goes.
“I still don't understand why it takes me two days to send money to somebody through some kind of a transfer, because the ACH and the SWIFT systems are so old and antiquated as well too. So I was always of the mind that this system was going to be ripe for some kind of a disruption.”
When people ask me a question, well, how do I invest in DeFi? And how do I take advantage of that, if I believe what you're believing? And I've said, this is the problem. There's lots of protocols. There's two major systems, you know, there's the Ethereum network and the Binance Smart Chain network. There might be more. There will be more protocols that come along. And I've said to them, quit thinking like Warren Buffett that this is a horse race track, and they're going to shut down the racetrack. No, you got to pick the right horse and that's going to be tricky.
“...quit thinking like Warren Buffett that this is a horse race track, and they're going to shut down the racetrack. No, you got to pick the right horse and that's going to be tricky.”
But what I do feel comfortable with is the current systems in trouble, because the current system, they don't get it, and they don't want to get it. And they want to be like Paul Singer of Elliott Management, who just says, I'm just biding my time until I can say I told you so, is his attitude about this. So that's kind of where I've been cutting through with a lot of this to try and say, now this is coming, I might be able to tell you whether or not it's going to be Uniswap, or Sushiswap, or PancakeSwap, or some version of it, or another swap that hasn't been created yet, as to which will be the main protocol that will win out above all the other ones, but one of them will. And when it does, the current system is going to look like it's standing in place: you're going to look like a bunch of taxi drivers in a ride sharing world is what you're going to wind up with.
“...the current system is going to look like it's standing in place: you're going to look like a bunch of taxi drivers in a ride sharing world is what you're going to wind up with.”
DeFi As Blockchain’s Killer App
CR: I completely agree. So it's interesting that it was actually DeFi what convinced you of the value of blockchain technology. I mean, not really Bitcoin, but seeing how DeFi is helping build really a new financial system from the ground up.
JB: One of the complaints that people had about blockchain technology, I'm going back to 2017, ‘18 when I first got started, is all this blockchain technology is going to change the world. Okay, where's the application? It's been around for eight years. Any kind of transformative technology doesn't take eight years for people to figure out what to do with it. It becomes almost obvious what you're going to do with it.
When the internal combustion engine was invented, it didn't take eight years to figure out that we can make an automobile. We knew that right away. Just then, to follow up on my analogy, by 1900, in the United States, there were over 100 automobile companies in the United States because we all knew where we were going to go and then eventually turned out to be the big three about 30 years later. And we were all trying to get there.
When I saw DeFi, I was like, here's what you can do with this blockchain technology. It's not some IBM commercial where they talk about tracking fresh vegetables, I was like really, they put together DeFi and that's the best you could come up with is to track fresh vegetables? That it's something a little bit bigger than that. And that's why when I saw it, I was like they’re creating a whole new financial system, and the current trading, and everything else is stress testing that system so that it will be ready for primetime when you start to introduce it to the real economy.
“...when I saw it, I was like they’re creating a whole new financial system, and the current trading, and everything else is stress testing that system so that it will be ready for primetime when you start to introduce it to the real economy.”
Stifling US Regulations
CR: So for you, what's missing for it to be ready for primetime? I mean, you've been testing this stuff, is it the UX is still too difficult? Is it scaling? Is it regulation? All of the above. What are the pieces missing for you?
JB: Yeah, I think it's all of the above. I think that the biggest concern I have right now is when I talk to traditional people, they think that oh, so I open a Coinbase account, and then I can yield farm out of my Coinbase account? It's a little more complicated than that. You got to go open a wallet and you got to start moving to the next and the next level. And admittedly, that is way beyond maybe 98% of the country, maybe 99% of the country. I wouldn't dare tell my 84-year-old mother, I would not tell her oh, yeah, mom, so you will go open a Coinbase account, then you will open a MetaMask account, you will transfer your money into MetaMask, and then you will connect to Uniswap and then you will do some yield farming. So go figure it out, mom, good luck, you know. We're a ways away from that. We have to get that system so that somebody like her could actually pull it off.
“I wouldn't dare tell my 84-year-old mother, I would not tell her oh, yeah, mom, so you will go open a Coinbase account, then you will open a MetaMask account, you will transfer your money into MetaMask, and then you will connect to Uniswap and then you will do some yield farming.”
The other problem I have with is regulation. I think that the current set of regulations is doing the US a tremendous disservice. I can't trade Binance coin on my Coinbase account. I can't trade Ripple. If you're in the United States, and you're in New York, you can't trade Tether anymore. There's a bunch of AML, Anti-Money Laundering and KYC, Know Your Customer rules that basically block you out. And what I've tried to tell people is what you need to understand about this new DeFi system is it will start in the third world and it will grow from there in the second world, third world, and then it will come here and completely flatten you. Because you are not allowed to play in this in the sandbox and you're not allowed to go there in a lot of different ways, because we've got all these regulations to protect you, but we're shutting you out. So it's just going to come from the rest of the world, imposing it on us.
“...what I've tried to tell people is what you need to understand about this new DeFi system is it will start in the third world and it will grow from there in the second world, third world, and then it will come here and completely flatten you.”
And that's why, we, the United States, I don't see us in any way being the leader in this. I think it's going to be rammed down our throat, is what it's going to be. And part of the reason is, as its traditional finance guy, I'll come back to. I know traditional financial people that have accounts on Coinbase. And they just think that speculating up and down on the price of Bitcoin, that's it, or maybe I'll get fancy and do it on Ethereum too.
Have you opened a MetaMask wallet? Have you looked at some of these, what's MetaMask? Have you looked at yield farming? What's yield farming? Have you looked at what's going on in the DeFi space, what's DeFi? Matter of fact, a friend of mine did a quick search on the Wall Street Journal website, and in the last year, there's only four references to the word DeFi the Wall Street Journal in the last year. No one has any idea what this stuff is. And so they think what it is, is just gambling on this made up thing called Bitcoin, whether it will go up or down. And that's it. That's all it is. And that's why they think it's dumb, or it's rat poison squared is, as Warren Buffett calls it and they cannot see the applications. Because I've even had some of them like, well, I went on my Coinbase account, where's this DeFi thing you're talking about? And it’s like you're not going to see it there.
“...a friend of mine did a quick search on the Wall Street Journal website, and in the last year, there's only four references to the word DeFi the Wall Street Journal in the last year. No one has any idea what this stuff is.”
So that's on the industry as well too, the education of the industry, to make the people aware of this. I’ll admit it's not easy to do this. I am more computer savvy than most, I think. I'm not nearly as computer savvy as many. But there are hordes of people that are in executive positions at traditional CeFi firms or traditional financial firms that think high technology is successfully sending a group text and you've got to get those people to understand this stuff and it's too much to get them to ask them to open a MetaMask account. So the customer front end and stuff like that have to get better. The protections for people have to get better. This whole rug pull thing has got to go away as quickly as possible because it will do nothing but damage the credibility of the industry as we get more and more of those rug pulls. And I understand there's some auditing processes that are in place to help trying to get rid of it.
TradFi Still Not Looking Beyond Bitcoin
CR: Okay. So for one, tell all of those traditional finance guys to subscribe to The Defiant if they want to read more about DeFi. But the other piece is, so how are institutional investors and traditional finance considering Bitcoin and cryptocurrencies? Just as something to buy on Coinbase to speculate, or is it really at least starting to be considered as an asset class that you can put a percentage of your portfolio in and maybe that will lead the way into DeFi? Or is that still not even a consideration, crypto as a new asset class?
JB: It's not a consideration yet. There's too many rules around traditional finance that will not allow them to even speculate in Coinbase which is why you keep hearing for all these calls about Bitcoin ETFs and a Grayscale Trust, MicroStrategy as another option as well too. And even those, it's all about Bitcoin, is really what it is. When you start getting into explaining stablecoins to them and explaining borrowing and lending and go look at Aave, go look at Compound and go look at what they're doing in the traditional financial space, eyes glaze over, they've never heard these phrases. So they can't really push their customers into it unless a regulated traditional financial structure comes into place that allows that. And the only ones that there are really out there are Bitcoin ones. Michael Saylor is buying Bitcoin for MicroStrategy and so he's not playing in any of the tokens for the DeFi exchanges yet.
Elon Musk has only bought Bitcoin as well too. Square is only really talking about Bitcoin. MasterCard is only really talking about Bitcoin. Now unless you update me on something else, I'm not hearing talk about stablecoins, or any of the other things that people can do with a lot of this money. So it leaves people the impression that the crypto universe is like three currencies. It's like it's Bitcoin and Ethereum and “Shitcoins”, and then you just speculate on whether or not they're going to go up or down. And that's where I think that everybody really struggles because they're not aware. So they might do it in their personal accounts, but they definitely can't, if you’re a traditional money manager, if you’re a traditional mutual fund manager, you can't do it in those accounts. The Winklevoss twins can't even get an ETF pushed over the finish line as well too, that would bring it to the masses. Galaxy is another way that they're trying to bring it to the masses as well too. But that's just one person that's really trying to push it as well.
“I'm not hearing talk about stablecoins, or any of the other things that people can do with a lot of this money. So it leaves people the impression that the crypto universe is like three currencies. It's like it's Bitcoin and Ethereum and “Shitcoins”, and then you just speculate on whether or not they're going to go up or down.”
CR: Yeah. But I mean at the same time, a couple of years ago, this wasn't even happening with Bitcoin, right? So maybe you can say Bitcoin in institutions and in big public companies is the first step that will lead to them eventually getting into Ethereum and discovering what DeFi is all about and that there's actual utility in these protocols beyond speculating.
JB: Yeah, I definitely think so. Because I definitely believe the idea that Bitcoin will be the store of value. It will take the role of gold as in the current CeFi system as well. And if I could, the people I detest the most are the Bitcoin maximalists that think that everything else has to go to zero and all you need is Bitcoin. Look, the day you're right everything else goes to zero is the day you're $54,000 Bitcoin is worth three bucks, because Bitcoin cannot survive without DeFi and DeFi needs Bitcoin. They both need each other right now. So it is a good way to get them involved into the system by playing Bitcoin.
“...the people I detest the most are the Bitcoin maximalists that think that everything else has to go to zero and all you need is Bitcoin. Look, the day you're right everything else goes to zero is the day you're $54,000 Bitcoin is worth three bucks, because Bitcoin cannot survive without DeFi and DeFi needs Bitcoin.”
The other problem I think that they have right now is once they start meandering into the DeFi world, the dozen or so that I've been trying to say, hey, look at this, look at this, and they're like, holy crap, look at these gas fees, are you kidding me? I thought this was supposed to be more efficient? I was like oh yeah, don't worry, don't worry, EIP-1559 and the ETH 2.0 is coming, that will be taken care of over time. And what I try to counsel them on is, look at the potential, don't get hung up on the immediate problems that it has, they will get worked out over time. I'm sure when you looked at version 1.0 of Snapchat or 1.0 of Uber, you would say this is a buggy piece of crap. It's not usable. But look at the potential of what it could be, and not what it is at this moment. These problems will get solved. And these gas fees problems will get solved over time, as well too.
DeFi’s Stands Out Against Legacy Markets
CR: 100%. I think a good analogy is looking at the internet itself. We all can remember dialing up to plug into the internet and hearing kind of the dial tone and how slow it was to just load one picture, and now you're scrolling through Instagram seamlessly. Who would have imagined that sort of progress? And I think that's the stage we're at with Ethereum and decentralized ledger based finance. We're at the very, very early stages.
JB: Yeah. And the thing is that when you see the potential, I think what you will definitely see is not just cost savings, but exponential cost savings that could come from this new DeFi system. And I might even add, most of my client base is traditional money managers. They're looking to generate alpha. So they're looking to outperform some kind of an index and they ask me for opinions about where to exploit opportunities. And it is really difficult in the current financial system to generate any kind of alpha, because the system has gotten so efficient, and is so hamstrung.
That's why in the traditional space, everybody keeps moving their money towards ETFs, and low-cost index funds, and the like. And there are a few exceptions to that, you know, Cathie Wood at ARK being the big one right now. But I said in the new DeFi world, if you get in there early, there's going to be tremendous alpha opportunities for a traditional manager who's just looking to exploit opportunities to make money.
“But I said in the new DeFi world, if you get in there early, there's going to be tremendous alpha opportunities for a traditional manager.”
Where it's very difficult, if you're in the business of maybe I'll invest in healthcare stocks this week, and consumer product stocks next week, and maybe rotate over to financials and back to technology, man, almost nobody adds anything above the index that's doing that. But in the DeFi world, I think for the next several years, if you can get involved with that space, there's going to be all kinds of opportunities for traditional managers, just to basically understand what's going on and basically say, this is not going to make it, this is going to make it. Let's all go over here, buy these tokens. Let's avoid these tokens over time. So you can really make your mark in this space as it moves forward.
Running Out The Clock
CR: That's a great point. And are your clients, are any of them starting to experiment in that space or at least asking about it?
JB: Yes, and let me be blunt about my clients. I love them all, thank you very much, first of all. But let me put them into two broad categories, younger and older. And I see this with all technology. The younger crowd is more adept to want to play on it. Let's call them under 45, maybe under 50. They definitely want to take a look at what's going on in this space. Maybe they'll play with it in a personal account or something like that.
The over 50 crowd, especially the over 60 crowd, and unfortunately, obviously over 60 crowd is usually the senior managers, they all play the same game, is that they've done with every disruptive technology. Yeah, maybe this is coming. Yeah, maybe this is going to change the world. Yeah, maybe this is going to disrupt my business line, or my business model, or me personally. But I'm 61, my bet is just five years away and I'll just ride it out to 65, take my gold watch in retirement and walk away. And I've always got the same answer for them every time. You ain't going to make it. You ain't going to make it. It's going to come on you a lot faster than you think and the disruption is going to be a lot worse than you think if you think that I'm just too old and too set in my ways to just let it ride out.
There was a bunch of 60-year-old taxi drivers that said, yeah, this ride sharing thing is coming, but I got a couple of more years behind this wheel, and I'll get a little bit more regulated taxi money, and then I'll retire. And next thing they know is no one's hailing them for a ride, and their taxi token is worth nothing. And so they waited too long, or they refuse. And you see that all the time.
The older crowd, and it's just not my customers, but it's just older crowds in general with any disruption, they all want to play beat the clock. Yeah, I get it, it's coming. But I can milk this current way that I do business for another five more years, and then just walk away, and it's the guys behind me, it's their problem. Well the guys behind you are figuring out how to deal with it, you're the impediment. And that's the hardest part to go about. Is to teach somebody something that's been in business for 25 years or 30 years doing something a certain way and saying you got to open your mind that maybe the way that you've been doing it needs to change and it needs to change sooner than you think and dragging your feet is not the answer.
“...older crowds in general with any disruption, they all want to play beat the clock. Yeah, I get it, it's coming. But I can milk this current way that I do business for another five more years, and then just walk away, and it's the guys behind me, it's their problem.”
CR: Right. Because this is coming anyways, whether they adopt it or not. So…
JB: Well, they’re hoping that when it comes, they're retired. They're in Florida living in their retirement and going to their 4:30 early bird dinners, and it's somebody else's problem. It's not their problem anymore.
The US May Miss the DeFi Boat
CR: Okay. So when this revolution happens, if DeFi ends up disrupting Wall Street and finance, do you think current traditional finance institutions, should they be worried about DeFi protocols coming and taking their customers or is it the other way around and will big Wall Street institutions come and adapt and build their own DeFi offerings and take current emerging DeFi protocols’ users away?
JB: I think it's going to come from the former. It's going to be that the DeFi protocols are going to take it away from them. What's going to happen is, the current Wall Street institutions are going to try and build their own coins. We got JP Morgan coin and various other versions of that as well too. The Fed is talking about creating Fedcoin. The Fed is talking about revising the Fed payment systems to make them more realigned. And by the way, they've already stated that they intend on having all this stuff in five years. So they're going to have their version 1.0 in five years. Game's going to be over in five years.
And then, and remember the way that they're going to work. They're going to take 2015 technology, they're going to start creating on that platform in 2020. And they're going to introduce that 2015 technology in 2025. And they're going to say, wow, look at us on the cutting edge of the revolution. We're going to give you centralized, 10 year old technology, is what we're going to wind up giving you. And then they're going to throw up all these regulations and impediments to anybody competing in this space with them.
Janet Yellen, who knows absolutely nothing whatsoever about cryptocurrencies and DeFi, she knows nothing about how financial markets work when she said she had to deeply understand what happened with GameStop, which is code word for “I don't get it” as well, is still worried about the potential that drug dealers are using Bitcoin for transactions. Really, I thought we got past that around 2015, that's not an issue.
And the FBI actually loves it, because they can go on with the blockchain and everything else. But that's part and parcel of they're going to try and keep the traditional CeFi out by giving you a centralized version of it run by them, which still requires their permission. Which is why I said it's going to start in the rest of the world, and it's going to grow so big in the rest of the world, it's going to be forced on us. Because we're going to look and we're going to say, to do any business outside the United States, we have to do business in this DeFi world. And that the world that we have is just hamstringing us and putting us at a competitive disadvantage. That's my fear, is that they will not let it go and they will not embrace it.
“Because we're going to look and we're going to say, to do any business outside the United States, we have to do business in this DeFi world. And that the world that we have is just hamstringing us and putting us at a competitive disadvantage. That's my fear, is that they will not let it go and they will not embrace it.“
JP Morgan's got JPMorgan coin, centralized permission coin, is what they got, brought to you by the same guy that was going to fire anybody in 2018 that was trading in Bitcoin as well. So they're not close to where they want to go. Citibank just put out a big 108 page report about cryptocurrency, 108 pages. DeFi first appeared, I did a search on the Adobe document, DeFi first appeared on page 68. And one of their big conclusions was, these guys have to adhere to the same rules that we are. We have the suffocating, terrible regulations that we've put this financial system under, and now here comes a new version of the financial system, bury them with the same rules, is basically what their recommendation was. That's just going to keep the US behind the rest of the world. That's all that's going to do.
“We have the suffocating, terrible regulations that we've put this financial system under, and now here comes a new version of the financial system, bury them with the same rules, is basically what their recommendation was. That's just going to keep the US behind the rest of the world.”
We should be talking about tearing down some of the suffocating rules that we have, which keep the costs up, which keeps the system unfair, which keeps everybody shut out. But they're not thinking of it in that way. Everybody thinks about it as how do I protect my own turf with as little disruption as possible? That's the way I think that the traditional banks are going to do it. And that's why it's going to be forced on them. And not that they're going to be leading the way as far as I can see. Maybe some FinTech companies might lead the way. Maybe some FinTech companies that don't exist might be leading the way. Maybe some of these Silicon Valley companies might lead the way. Amazon decides to accept payment in cryptocurrencies, or something like that that will be a game changer, but it won't be, I don't think traditional finance.
M-Pesa in Kenya
CR: So interesting. Because I think a big argument to be cautious about DeFi is the US regulatory environment, and how one day they can easily come down on US traders and say, it's illegal to hold stablecoins, and then like the argument goes, DeFi is dead. But you're saying, if I will actually thrive outside of the US, and then US citizens, users will be kind of forced to use these protocols created outside of the US.
JB: If you look at some of the things about electronic payments, and who does electronic payments around the world, you'd find that the US is near the lower end of the scale. We still like to hand plastic credit cards to people, and a little bit of Apple Pay and Android Pay, but that's about it.
Let me give you the example that I've always used, and that is M-Pesa in Kenya. So in the third world, they never had 100% landline penetration like we do in the United States. Every single building in the United States has a copper wire going into it. Every house has a copper wire going into it that you could get a plain old telephone service line in it as well, they never had that. So when cell phones came, and they looked around and said, we can't run 100 million miles of copper wire all over Kenya, we can’t put up a dozen or two dozen cell phone towers, and everybody can connect that way. Now these subsistence farmers in Kenya, they have M-Pesa that they're taking old technology phones, whatever happened to your iPhone 5 that you had that you traded in three generations ago, it's probably someone in Kenya is using it. And through M-Pesa, they text money back and forth to each other. That's their banking system. They are further ahead than us in doing that.
And at night, in some of these subsistence farmer villages, there's a Honda generator charging 100 phones overnight. So when you bring to them a decentralized system that says, we just need to text money back and forth to each other, they're ready. I've heard it from Americans, oh, this will never work in the third world, because in the third world, everything is bribery and corruption and you need like hard physical currency to bribe the border guard. Like really? Have you noticed that they're sending money to each other on their phones now? They're doing it now.
“Now these subsistence farmers in Kenya, they have M-Pesa that they're taking old technology phones, whatever happened to your iPhone 5 that you had that you traded in three generations ago, it's probably someone in Kenya is using it. And through M-Pesa, they text money back and forth to each other. That's their banking system. They are further ahead than us in doing that.
So to just point them over from sending Kenyan shillings or American dollars to some other form of a token is not going to be the big stretch that everybody thinks it's going to be. They’re there. You know, the infrastructure is waiting for the token as opposed to ‘let's build the token and then we've got to build out the infrastructure around it,’ then a lot of places in the third world, and in the Middle East, they're already doing it, so they're ready. And if that becomes the de facto standard for 2 billion people in the world, then in the US is going to be at a competitive disadvantage, because the de facto standard right now for those people is the US dollar, and then the US dollar starts to lose its reserve currency status to whatever DeFi protocol or whatever stablecoin seems to supplant it as we move forward from here.
Competitors to DeFi
CR: I mean, that brings up an interesting point. What if a competitor to the US in the global stage, say China takes a lead on something like this, and is very aggressive with its like blockchain policy, I guess you can call it, and issues its own Chinese CBDC and it just has, it's like the entire country using blockchain technology, how will that play out? I mean, that's not good for the US, but it's not good for DeFi either.
JB: Right? It won't. It won't. One of the reasons that the Chinese currency will never become the reserve currency in its current status, the Yuan, is because it's not convertible and there is a rule of law problem in China. Well, that's going to apply to their CBDC. It's going to apply to the US CBDC as well too.
It might get everybody more aware of what's going on, but I still don't think that a non-permissionless system will work. Because at the end of the day, what have you gained by trading in a CBDC issued by China? Is it cheaper? Is it more flexible? What is it that it offers you that is so much better than what the current system is that you would just abandon the current system for that? I'm still waiting for that answer.
It's kind of the same thing that I've talked about with Fedcoin or the CBDC by the Fed. The problem is, and I've publicly stated and I stated here, I don't think there ever will be one or if there is, it'll never be serious. Because if the Fed were to create a Fedcoin, and you can apply the same thing to China, right, we've poof, we've created Fedcoin. Okay, how do I use it? Oh, I have to go down to Citibank and open an account and use Fedcoin, it's accomplished nothing at that point, nothing has changed. Or if I opened an account with the Fed directly, and I use Fedcoin, you have now cannibalized your existing commercial banking system, and the Fed will never do that. And the Fed has essentially said that, we have to figure out how to do this and that's what code word is. If we let me have an account at the Fed, goodbye commercial banking system. If you create Fedcoin, and then I have to go through Citibank or JP Morgan, or Wells Fargo to access it, you've accomplished nothing at that point.
“Because if the Fed were to create a Fedcoin, and you can apply the same thing to China, right, we've poof, we've created Fedcoin. Okay, how do I use it? Oh, I have to go down to Citibank and open an account and use Fedcoin, it's accomplished nothing at that point, nothing has changed. Or if I opened an account with the Fed directly, and I use Fedcoin, you have now cannibalized your existing commercial banking system, and the Fed will never do that.”
And so I see the Chinese as kind of being the same way. They’ll create it, but if it's still a centralized permissioned needed version of this, they have not done anything that's going to really move the needle. They certainly haven't brought down the costs along that way, or made the system perceived to be fair or opened it up to the billions of unbanked people in the world to get them involved in this system. I don't see how that would help do any of that. And that's why I think that ultimately, a permissionless decentralized system that we're talking about is the only way to come. It'll be cheap. It'll be affordable. It’ll be understandable. It'll be fair. And that's what’ll get everybody into that system right now.
CR: And actually open and accessible to everyone in a global financial system that just isn't available right now. Like each financial system is limited to its own geography. So an actual DeFi system just lowers those barriers and allows access to everyone.
JB: Right. And I'll just remind the traditional financial people, go to the UN website and go look at, on the UN website, under the statistical data, there's some data about cell phone penetration per country. And you go look at the poorest countries in the world, and they're still, what percentage of the poorest countries in the world do people have cell phones? It's 80% right now. In some medium poor countries, it's over 100%. So they've already got the tool in their hands. Here's my cell phone, they got the tool in their hands ready to use DeFi. They just need to bring that to them. So it isn't going to be about…
“...what percentage of the poorest countries in the world do people have cell phones? It's 80% right now. In some medium poor countries, it's over 100%. So they've already got the tool in their hands.”
See, I know a lot of people watch too much Hollywood, and they think that in these countries that they're all on their own barter system trading diamonds, if they're rich or something like that in order to make commerce go. It's a little more sophisticated than they think it is as well. So, yeah, we'll see where it goes. And they're all in LT connections too. Don't kid yourself, you know, traditional Americans who think that they're all stuck on 2G networks or something like that. They're a lot more advanced in the poor countries than you think so that this CeFi system it's accessible, it's got its portal for everybody all ready to go.
Decentralization Reigns Supreme
CR: Yeah. So decentralization does matter, like how actually decentralized and permissionless like the underlying network is?
JB: Because at the end of the day, what the system probably won't have is it won't have consumer protections that Americans are used to. So one of the great examples is, if my credit card gets stolen, and I get a whole bunch of unknown charges on my credit card, because of the consumer protections we have, I call my bank, say that's not me, and in a day or two, they credit me back all that lost money. No, no, you pay for it in higher fees and stuff like that along the way, but the perception is you've got this consumer protection.
So now if you're going to go to a DeFi system, you're probably not going to have that consumer protection anymore. And so why would I abandon this system and go to that system? Because that system’s fair. That system, it's fair and hopefully, it's not now, it's easy to use. And because of that, the costs are much, much lower in that system. I mean, orders and orders of magnitude lower. That's why you would use that system over the current system as well too.
“So now if you're going to go to a DeFi system, you're probably not going to have that consumer protection anymore. And so why would I abandon this system and go to that system? Because that system’s fair.”
So in order for that system to work, it's got to start off with being fair. And being permissionless is really pretty much the only way it's going to be fair. Code is law, here's the rules, you qualify or you don't. And if you qualify, you don't need a banker, or you don't need a bureaucrat to bless you. You can just go do it. And if you don't qualify, you don't qualify and don't go ask for special permission.
And so I know there might be other protocols that if you don't qualify for this protocol, you could probably qualify for that protocol as well too. That's what’ll bring people, I think, to go into that system, and abandon the system that they have now. Because like I said, one of the reasons that people I think tolerate the credit card system that we have now is because everybody's identity gets stolen, and everybody gets their money back. So that's what you've got to overcome. And the only way I could see that being is in a decentralized system. Some kind of permission system still has this error of selectivity or corruption associated with it that makes people skeptical of it: they're going to find a way to screw me.
Now, this is completely open. And it is straightforward. And there isn't a special deal for these people, but not for you. It's all everybody gets the same thing… Kind of like the internet is, you know, it's kind of like the internet. There isn't the billionaire browser that they get to have that gives them special access to things that you don't get with your regular Chrome or Firefox browser. It's the same thing and it's fair for everybody. And everybody can use it equally the same way.
Ironing Out the Kinks
CR: Yeah. And it's important that nobody has the power to shut anyone out. Like, nobody can ban your account. They can’t censor your transactions. They can’t tell you, you’re, I don't know, in this business that's frowned upon so you can't open an account on this blockchain, like nobody has the power to do that. So in that sense, maybe like blockchains like Ethereum, or Polkadot or like more decentralized blockchains should win out from something like Binance, which is controlled by a centralized exchange.
JB: Right. I think, as far as the Binance Smart Chain, I think it's great because it's bringing along competition. And that's not a bad thing. It's also great, because it's introduced the direct appeal that people care about gas fees. So they go play on the Binance Smart Chain with PancakeSwap, because it's cheap. And that will work for a while, especially until maybe Ethereum 2.0 comes around and the gas fees start coming down. But at some point, if the Binance Smart Chain is to be considered longer term, it's got to start to decentralize.
I understand that the trilemma that you can only optimize two of the three things and the Binance Smart Chain is decided to let decentralization go to optimize speed and costs and stuff where the other ones that are sacrificing higher costs for decentralization. So you've got to go towards decentralization, or it's not going to work. On the Ethereum chain, you got to go towards no cost, or it's not going to work either, because if you don't make it vastly cheaper. Because what have we learned about technology is, you don't invent a technology that makes the current system 5% cheaper, you invent a technology that makes it 95% cheaper, and that's when you get everybody to come across.
So the biggest problem the Ethereum blockchain has is those gas fees and I believe, they'll get solved, but they've got to get solved, otherwise that will debilitate that system. And the Binance Smart Chain has got to solve the decentralized nugget or it will debilitate their system as well too.
“On the Ethereum chain, you got to go towards no cost, or it's not going to work either, because if you don't make it vastly cheaper. Because what have we learned about technology is, you don't invent a technology that makes the current system 5% cheaper, you invent a technology that makes it 95% cheaper, and that's when you get everybody to come across.”
NFTs are the Future
CR: What are your thoughts on NFTs?
JB: I think they could be the biggest game changer of everything as far as NFTs go now. Let me be clear on this. I don't get the digital art thing, that people are trading digital art. That's fine. I never understood why Ken Griffin pays $150 million for a Rembrandt either. I could buy a copy of those paintings now that are computer generated for less than $1,000 that are so good that it'll fool some of the experts in thinking it’s an original. So I don't get that.
But when I look at non-fungible tokens, and what they're trying to do, I think that they could be the replacement for royalties, for stocks, for bonds. They can replace the entire financial system. It will open up companies to a whole new world that they've not been used to right now. Right now, what is your choice as a company? You either issue debt, or you issue equity and your capital stack is somewhat limited; this becomes completely unlimited.
“But when I look at non-fungible tokens, and what they're trying to do, I think that they could be the replacement for royalties, for stocks, for bonds. They can replace the entire financial system.”
We can issue tokens for divisions, profitability. We can issue tokens that are secured against particular assets. We can issue tokens that allow for royalties on certain rights that we own. We can keep going on and on and on down the line. Mark Cuban has talked about that someday the Dallas Mavericks which he owns will issue NFTs maybe for all of their seats at basketball games, and then there will be a royalty written in the smart contract. So if it ever trades above the fee, that they'll get some kind of a royalty. So I don't get the art thing, but that's fine. That's just me. I don't get Rembrandt's either as well.
But I do see that NFTs, once that system is robust enough and brought to the real economy can fundamentally change the whole purpose of a stock or a bond or Stock Exchange, or bond trading in ways that we can only now begin to imagine. So I do think that there's a huge upside on the NFT world.
CR: So maybe NFTs will become kind of the new protocol for at least some types of securities?
JB: Yes, because of their uniqueness as well too. Because what can happen is a company can issue an almost infinite number of securities, depending on how they want to finance certain business lines, how they want to securitize certain assets as well too. I know that some will go, no they do that, now. Yeah, they do that now in a very obtuse and closed and permissioned way that no one understands half the equipment lease financings that they do. And it's always done, you know, insider to Insider, and it's private transaction. This opens it up to everybody else as well too, and allows for flexibility among businesses all the way down to small businesses that they don't have right now. That's what I see in the NFT space and what I see could potentially be coming in the NFT space.
I also think for content creators, it could open up a whole new world for them as well too. What Kings of Leon is now going to issue an album using an NFT as well. And when it trades, it's got a royalty written into it so that you don't throw your copyrighted content out there in the world and you never know what happens with it and you're missing out on all of your potential royalties. In this world, you are then able to continue to track all your royalties in a very straightforward and easy to do way as well too. And it will encourage more content creators in the future as well.
Current Macro Environment
CR: Yeah. No, it is a game changer. And so to start wrapping up, we have a like super experienced macro strategist here in the podcast. So definitely want to get your thoughts on how does the current macro environment affect cryptocurrencies?
JB: It more than ever. I think that there's two things that I've noticed with cryptos as well too. So one, is because of DeFi and because of yield farming and liquidity pools, I've done a little bit of studying on this. My impression is that a lot of the relationships between like types of currencies, Ethereum and Uniswap, they're becoming more correlated to each other; your impairment losses are becoming less. Not all the way, but they're becoming less because they're moving more in line with each other, moving in line more with Bitcoin as well too.
So you see, like the day we're recording is a strong update in Bitcoin and Ethereum and a lot of other cryptos they're all going up. And that suggests that they're starting to take on some kind of asset class mentality and it isn't just a bunch of random tokens are going up down, up down and sideways all at the same time always.
“My impression is that a lot of the relationships between like types of currencies, Ethereum and Uniswap, they're becoming more correlated to each other; your impairment losses are becoming less. Not all the way, but they're becoming less because they're moving more in line with each other, moving in line more with Bitcoin as well too.”
And second of all, because of yield farming, and because of liquidity pools and stuff, all of a sudden now, the real financial world in interest rates in the fear of inflation and financial risk or financial stability is starting to impact these cryptocurrencies, these DeFi tokens as well too. So they start now trading more like financial assets, or they started hearing more to financial asset properties, and that's good. Because if you want to make the case that they are going to be the replacement for the CeFi world, they ought to start acting like the replacement for the CeFi world. And that's exactly what they're starting to do. They're not just these random tokens.
Like I said, when I first started trading Bitcoin in 2017, I still had this impression that I couldn't figure out what drove it at the time, other than maybe memes on Twitter. But beyond that, it was like betting on a random number generator, is what it seemed like it was. But now you're starting to be able to attach fundamental stories to it, and then attach technical stories to it to understand why it's going up and why it's going down as much, and acting like an asset class. So I see that as being a positive as it moves forward from here.
The day we're recording, the US stock market is up huge, over 4% on the NASDAQ on this day, and Bitcoin is 55,000, Ethereum is 1,850 or very close to 1,850. And I'm hearing watching Bloomberg TV that they're equating the two, that they're related to each other. That's good. That's good. It's never going to be 100% correlated, but on these extreme volatile days in financial markets, if they react, you're now starting to say it's acting like an asset class. And if it is acting like an asset class, it can become an asset class, it can then become a competitor to the CeFi world as well too, because then people have a familiarity with it. I understand what circumstances would cause it to go up and what circumstances would cause it to go down as well. So I think the outlook for it it's very bright.
CR: And so, to which assets do you think crypto is most correlated to? Like, it's more like a risk asset life like stocks or like Bitcoin has been usually paired with gold and so if you're expecting inflation to pick up, then that should be good for Bitcoin? But I don't know like, if that's the same for something like Ethereum and DeFi tokens?
JB: Yeah. I think that I buy the argument for gold and for Bitcoin to store value. Gold, if I was to define what I've always argued gold was for 15 years, as I said, whenever you're unsure about the current financial system, and you want to get your money away from it, the answer was, there was no way to do it, but the closest was gold. So what would make you ensure the financial system inflation is one, deflation is another one, financial crisis is a third, and gold performs very well in all those environments? Now, you've got Bitcoin that does the same thing as well too.
“And if it is acting like an asset class, it can become an asset class, it can then become a competitor to the CeFi world as well too, because then people have a familiarity with it. I understand what circumstances would cause it to go up and what circumstances would cause it to go down as well. So I think the outlook for it it's very bright.”
And that's why the argument that's made that a 55,000 Bitcoin is roughly 10%, 8% the size of the gold market, that maybe it can go into 500,000 and be the size of the gold market and assume the same role that gold has. I get that argument. I don't know when. But I can definitely see something like that happening over time.
On the other side of the equation, I think you're starting to get some traction with the stablecoins and with short term interest rates. I've heard the argument being made, and I think conceptually, the argument is right. There's two and a quarter trillion dollars in European banks that are being charged every month because they've got negative interest rates. So not only iis 2.5 trillion euros in European banks that are getting no interest but also getting a charge because of negative interest rates. Why don't they move to a stablecoin? And why don't they go to an Aave or Compound and lend out their stablecoin and get 6%? It's a hell of a lot better than -50 basis points that they're getting now.
Now I understand there is some risk associated with it: the coin you get back is not the same one. There's risks of hacks. There's the difficulty in doing it. Again, my mother argument, mom, stop getting zero in a passbook account, go lend out a stablecoin on Compound. What? You know, trying to get her to do that on our own is impossible. But yet that I think is something that will continue to play over time, especially as it becomes easier and easier to do. Because the front ends of these wallets and everything else just make it simple or make it less likely you'll make a mistake as well.
I was joking with my wife, about a month ago I was transferring money to my MetaMask wallet, And now my cat jumped up on the desk and I said to my wife, get the cat off the desk, because if she steps on the keyboard while I'm trying to transfer this money, it could all go away like that. Well, hopefully, we can set up a system where my cat can step out the keyboard, and my money doesn't go poof into the Ether as well.
“Well, hopefully, we can set up a system where my cat can step out the keyboard, and my money doesn't go poof into the Ether as well.”
So, yeah, the stablecoins, I think, are benefiting from lower interest rates, and people starting to at least if they're not doing it, lending it out, so more and more every day, they're understanding that that is a possibility. So they're starting to act more and more like an asset class as well too.
Picking the Winners
CR: Interesting. And for like, DeFi tokens and other like non Bitcoin tokens, would those be more like stocks? Like, if there's a lot of stimulus and just like money flowing around the economy, are those tokens likely to perform well in kind of those conditions?
JB: Yeah, I'll go back to my analogy from earlier. In 1900, there were 100 automobile companies. And we all knew in 1900 that the automobile was going to replace the horse, and everybody was going to have an automobile company. And that's why we had 100 of these companies. But by 1930, we were down to three companies as well. And General Motors was the agglomeration of about 50 of them all, kind of swallowed up together; some of the bigger names were Buick and Chevrolet and stuff like that. And Chrysler also had Dodge and stuff.
And I see the DeFi tokens as being something of the same as well too. You're going to have 100 DEX exchanges. You're going to have 100 DEX tokens. But years down the road, we're probably only going to have three to five of them that are really going to be transformational. And the hard part is going to be trying to figure out which three to five. And to make it even more difficult, maybe some of those three to five that make it, they don't exist right now, they're still to come as well too. And some of the others might make it as very specialized types of applications as well too. But we can't have 100 of these DEX exchanges all operating at the same time, all kind of doing the same thing in different ways.
So I kind of analogize it to what I see with the automobile companies. We all know where we're going. And like I said in 1900, I'm sure there were some buggy whip manufacturers saying all these automobiles, they always break, they're expensive, and stuff. Yeah, we know where we're going and the answer is we're not going to close all of them down and continue to use horses. We're not going to close all these DEXs down and all these crypto exchanges down and continue to beg for permission from the current financial exchanges. That we're not going back to, we're going forward here. But figuring out how we're going to go forward from here is going to be the trick.
“But years down the road, we're probably only going to have three to five of them that are really going to be transformational. And the hard part is going to be trying to figure out which three to five. And to make it even more difficult, maybe some of those three to five that make it, they don't exist right now, they're still to come as well too.”
And that's why I said earlier that there's a lot of alpha. If you're one that really understands these spaces and really gets it, you could look through this and say these protocols aren't going to make it, these protocols are going to make it. These protocols might have specialized applications that will make them somewhat successful. This one is the home run. You might be able to do that in this space if you really get a deep understanding. I'm not there yet. I don't know if I'll ever be there yet, but I'm trying to right now.
The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Spread the word and share!