✊ Crypto Devs Are "Building a Life Raft For The World After Fiat Falls Apart:" Erik Voorhees

In today’s episode, I speak with Erik Voorhees, long-time crypto advocate and founder and CEO of ShapeShift. Voorhees has been in crypto since 2012 and first learned about Bitcoin through his involvement in the Free State Project.

The idea of peer-to-peer money, where each individual is in control of their assets, appealed to his libertarian beliefs. Fast forward a couple of years later and he was founding ShapeShift, a non-custodial exchange. So the decision to add KYC to the platform in 2018 was especially tough. In this interview, he talks about how he was able to stop gathering information about his customers and take the exchange back to its roots, by leaning into DeFi. His plan is to create a platform that connects with all of the different DeFi applications, starting with decentralized exchanges.

Voorhees holds probably the boldest view of anyone who has come on this podcast. He thinks we will see the collapse of the US dollar within our lifetime. He argues the level of US debt and continuous erosion of the currency is untenable. When this happens an entire financial ecosystem built on open, immutable blockchains will be the solution. He believes today’s developers aren’t just building a product for their customers. They’re building a life raft for the world after fiat falls apart.

🎙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.

Erik Voorhees: I heard about Bitcoin in May of 2011. I was living in New Hampshire at that time, part of the Free State Project, which attempts to get 20,000 radical libertarian types to move to one small jurisdiction in order to have a more outsized influence on the political system than it could be scattered across the country.

To me that, at the time, that seemed like one of the ways in which I could make a difference doing something that I cared about, and that I thought was important. While I was there, a friend of mine posted on Facebook, an article about Bitcoin. I clicked it and I read it, and first, I dismissed it after that first article, and then read another one and another one, and then within 30 minutes I was absolutely hooked. I completely understood the value of something that could not be turned off and allowed you to move money anywhere in the world instantly. So I was immediately just enamored with it, and saw it as a way to basically pull the control over money out of states and into the free market, where it belongs.

“I completely understood the value of something that could not be turned off and allowed you to move money anywhere in the world instantly.”

Money is really the most important good in a market economy. It is the most important good for it to be non-centrally planned, and Bitcoin provided an actual possible solution to that. I put everything I had into that as my hobby and career and passion.

CR: I love kind of the idealism behind that. I agree with a lot of that, for sure. Just curious, are you still involved with the Free State Project?

EV: No, not anymore. I left New Hampshire to move down to New York to join BitInstant, so I haven't really been back to New Hampshire since then. Still certainly a supporter of that project, and hope that they can achieve those goals. But I saw Bitcoin is just such a higher leverage tool for achieving change. In New Hampshire, if we were successful over a couple of decades, we would change a very small state in the US. With Bitcoin, over a couple of decades, we would change the entire financial system of the planet. So, that's what I dedicated my time to.

“With Bitcoin, over a couple of decades, we would change the entire financial system of the planet..”

CR: So you got into BitInstant, then SatoshiDice, how did all of that lead to ShapeShift?

SatoshiDice, BitInstant, ShapeShift

EV: SatoshiDice was just like a side project, basically a way to let people gamble with Bitcoins and to show them a way of gambling that was provably fair so that they would know what the odds were and they would know that the rolls were actually fair. The reason it was cool is because anyone in the world could play the game without signing up, with no account. They didn't have to trust the system. The system didn't need to trust them. It was a demonstration of how Bitcoin in cryptography could be used to let two unrelated parties who didn't know each other actually transact.

That got totally carried away and became like half of all the Bitcoin transactions back then. It was pretty, pretty crazy. I realized that if I was going to be an outspoken proponent of Bitcoin, then I probably shouldn't also be running the world's biggest Bitcoin casino, just from an optics perspective. I felt like Bitcoin had plenty of reputational issues it had to overcome, and so if I was going to be one of its advocates, I didn't want to be running a casino. So sadly, I decided I needed to sell it and just focus on Bitcoin advocacy itself.

That was all around the same time as BitInstant. I left BitInstant after the Winklevoss brothers invested because I had a falling out with them, which I won't get into, but left BitInstant and went down to Panama and I was running this little wallet company called Coinapult for a year, decided I didn't want to be in Panama anymore and didn't want to be part of Coinapult. So I left, moved back to Colorado, and started ShapeShift.

The whole impetus for ShapeShift was just as a simple tool to allow people to convert one digital asset into another as safely and easily as possible. This was pre-Ethereum, but I saw that there were going to be more and more tokens in the world, there will be millions of digital assets eventually, and the world needed an easy way to move between them. So that was really the first idea for ShapeShift. It wasn't meant to be like a big business or anything, it was just meant to be kind of a useful tool. But as crypto grew, ShapeShift itself grew. After Ethereum, certainly, the number of tokens just boomed, and so we've been trying to ride that wave ever since.

CR: Was ShapeShift from the beginning a noncustodial exchange?

RV: ShapeShift has always been noncustodial. That was really, like when I said earlier that I wanted to make it safe and easy, the main way to make it safe was to not hold customer funds. So every exchange back then held customer funds. This was a couple months after Mt. Gox blew up that I thought about how to do ShapeShift. So it was based on the same model that SatoshiDice was, you know, user sends in a transaction and the system sends something back to them. So that noncustodial nature was key from the very beginning.

CR: So it's noncustodial, but it wasn't really a DEX, right? You were processing token transactions on a centralized database?

EV: Correct. So ShapeShift has never been decentralized. So it was noncustodial and we didn't hold customer funds. But it was a central company, and when a customer did a transaction, we would receive, ShapeShift the entity would receive coin A and send coin B out to them from our own wallets, our own inventory. So yeah, it was never a DEX.

CR: Right. So I guess that's what led you to have to implement KYC in 2018, right, because you were actually kind of doing that trade yourself as a company?

EV: So our initial analysis was that because we were noncustodial, and because we weren't handling regulated fiat currency, that the banking rules essentially did not apply to us because of that model. In 2018, by then we'd grown substantially, we were over 100 people by then and we had been able to lose millions of dollars on legal fees, trying to analyze this stuff really deeply. Came to the conclusion at that point in 2018 that we would likely be considered an intermediary and because of that, we would have to act like a bank, and KYC users and run our entire compliance program and all that.

That was obviously the darkest time for ShapeShift, coming to terms with that. Our customers hated it, our employees hated it, I hated it. It didn't help anyone, it only hurt them and I did not want to be in the business of building a big financial surveillance apparatus. But we continued through that, because I didn't want to shut down the company and I still felt that the noncustodial nature was really important.

Fast forward two and a half years, just a few weeks ago and we have changed our model, such that we're not an intermediary anymore, we've stopped trading with customers entirely, and instead, we have integrated decentralized exchanges into ShapeShift. So now when customers trade, they're trading from the customer to the DEX, instead of from the customer to ShapeShift. That means we are not an intermediary, and that means that we do not need to do KYC or run compliance on that because it is not a regulated activity. So that was a huge, profound change that we've been working on over the last six months and just went live on January 6th.

CR: Congrats on that. So just to understand kind of how this works: Basically, ShapeShift now is sort of a DEX aggregator like 1INCH, for example, or are there some differences there?

EV: We've integrated aggregators, and we're integrating DEXs directly. So it's not incorrect to call us an aggregator. But essentially, ShapeShift is like a noncustodial crypto platform where someone can hold their assets, trade their assets, buy assets, manage them, interact with decentralized protocols. So we're not just like an exchange, we're essentially the place where someone would interact with all their crypto assets and applications from one place, so like the center of decentralized finance, if you will.

A good explanation is like all the things that Coinbase is trying to do with making it easy and doing lots of basic services that all crypto people need, we're trying to do that as well, but without centralized custody, which is quite difficult. But that's our goal is to basically make self-custody as easy and as user friendly as a custodial service.

“Our goal is to basically make self-custody as easy and as user friendly as a custodial service.”

CR: Does that imply that from DEXs, you may then move to other DeFi applications? Are you integrating lending protocols going forward?

EV: Absolutely, all that stuff. Basically, all the leading decentralized protocols will end up within the ShapeShift platform. We acquired Portis a little under a year ago, and Portis already does a web 3.0 wallet that you can use at most of the decentralized applications out there.

CR: You mentioned how hard it is to do this in a noncustodial way versus what Coinbase is doing. Can you get into that a little bit, what are some of the challenges?

Centralized vs Decentralized Service

EV: I don't want to belittle what Coinbase has done because doing it as a custodian is also very hard. They have to do security on a level that we don't, because they're holding billions of dollars of customer funds, and we're not. So in that case, it's hard. What's much easier about a centralized service is that all the activity of the users within the service are not blockchain transactions, so they do not need to be broadcasting a transaction every time a user sends to another Coinbase user, for example.

But if the ShapeShift user sends to another ShapeShift user, that would absolutely be a blockchain transaction. It also means that basically running the nodes themselves become the business because all activity of customers is on the blockchains instead of being in a centralized database as ShapeShift. So this just creates a lot of complexities that a custodial service wouldn't have to deal with. But we think it's important to build that model and to make that easy for users. Ultimately, our value add is in doing that work so that it can be easy for users to have control of their own keys.

CR: Wow. So what’s the big vision? Will ShapeShift become a DeFi browser? Also, do you have an analogy that we could use?

EV: I keep trying to think of good analogies and still haven't found that perfect pitch analogy for what ShapeShift is trying to be. That is essentially a noncustodial crypto platform. All of the finance activity of the future, I believe will happen on decentralized protocols. ShapeShift is the interface through which you can interact with all of those things. So you can think of it like a wallet, you can think of it like an exchange, you can think of it like an asset management platform. Those are all true. It does all those things within one place.

CR: What's the benefit of going through ShapeShift and not going through these protocols directly?

EV: First is simplicity. So for all of our users that have their assets in a wallet connected to ShapeShift, they don't have to go and find other decentralized exchanges, they don't have to leave and move their assets somewhere else, they can just do it from where their assets are already living. But two, if they do a trade through ShapeShift, they're earning Fox tokens on those trades, and they're still getting the same price that they would if they went directly. So anyone who's going directly is basically missing out on earning Fox tokens if they're not using ShapeShift. So that's how we incentivize people to use ShapeShift instead of any of the direct places. But mostly, just that convenience is the value there.

CR: Do you see this incentivized token mechanism working in the long term, or is it something just to attract users right now that this is just starting?

EV: I would not make super long term plans with anything in crypto because even thinking one to two years out, how the ecosystem will change is pretty hard. But for the indefinite future, yeah, every trade that people do through ShapeShift and its integrations, they'll earn Fox on that.

CR: Right now, are you just integrating Ethereum-based DeFi? What are your plans for a multi-chain DeFi?

DeFi on Cosmos

EV: Great question. So basically, like 99.9% of DeFi is in Ethereum right now. We are very interested in the Cosmos ecosystem. Cosmos, it is essentially a way of creating zones of blockchains, they can talk to each other. That can talk with other blockchains like Ethereum, or like Bitcoin natively. It is now in its final stages of release after like four years of work and iteration. So I think this year, you're going to see quite a bit of DeFi projects move into Cosmos also. It's not that they'll leave Ethereum, it's just that they'll exist in both. The high fees that exist in Ethereum will not be there in Cosmos. Ethereum can solve that over time, but Cosmos can solve that in the next couple months.

So I think both systems are going to be very robust. Certainly, Ethereum has this huge network effect of all the developer mindshare. So the big question is, how many of those developers will venture out into some of these more cost effective chains when the fees are so high and so prohibitive for a lot of the transactions?

CR: I know that Polkadot is also trying to do something similar, interconnecting this pair of chains and also creating a fostering in the DeFi ecosystem. What's your view there? Do you think that will also kind of be the other important DeFi hub?

EV: It might, I'm not nearly as familiar with Polkadot. I'm quite familiar with Cosmos and from the people I know and trust, once they've really researched both, they tend to veer toward the design parameters of how Cosmos works. But certainly, either of them could see a lot of success this year, and maybe both.

CR: What does that mean for projects that are like yours, integrating with Ethereum applications? Is it as simple as for you to just start to integrate Cosmos apps? Or would you have to build a complete new infrastructure to support them?

Moving Between Blockchains

EV: Not a complete new infrastructure. So there are ways to use Solidity code in Cosmos zones, so a lot of apps can be ported over relatively easily. How they are interacted with depends on if they are building their own zone in the Cosmos ecosystem, or if they're just trying to peg into Cosmos. That gets a little complex. But a lot of this stuff isn't quite known yet, because this thing called IBC, or Inter Blockchain Communication, has not been available in Cosmos yet. That's what releases later in February and that's where we really allow the movement of tokens between zones and between blockchains.

So we've been working on Cosmos zones for at least two years, we launched a project back in the summer called Microtick, which is a decentralized short term options market that's built entirely on Cosmos. It's living as its own zone and its own blockchain. Once this IBC thing comes out, it will connect with all the other Cosmos zones and with Ethereum and all that. So, yeah, it's going to be very cool to see these blockchains start talking with each other, and then effectively.

CR: I'm so curious to see how that plays out. There's so much uncertainty right now on what a multi-chain DeFi feature will look like, how interoperable these applications will be, how will kind of services like ShapeShift, kind of plug into all these things, etc. It'll be interesting to see.

EV: Probably, for your listeners, the way to think about it is like if you had a DeFi asset, a DeFi token in Ethereum. Some number of months from now, you'll be able to send that into Ethereum address, which is a pegged zone into Cosmos. When you do that, you'll get a proxy token for that asset in the Cosmos world handled in a noncustodial way. So your Ethereum version of that token will become locked and an unlocked token of that asset will exist within the Cosmos world. That token will be able to move around for pennies instead of dollars. The extent developers have built some of these tools in Cosmos, they'll be able to use that DeFi token in those DeFi applications at far lower transaction fees. So in some ways you can think of it like a Layer 2 for Ethereum and that's definitely not technically correct. But functionally, it can work like that.

Maximalism

CR: That leads me to this topic. I wanted to talk with you about Maximalism…

EV: My favorite topic.

CR: Yes. Well, multichains and different coins. I think you've taken a different view from many early Bitcoiners and have really been open to the possibility that other blockchains can be successful. Now, talking about Cosmos, that proves that point, because you would think that you could now be some sort of Ethereum maximalist, but you're not, you're also open to Cosmos being successful in the future as well. So I'm just wondering, what do you think led you to have this mindset of just being open to multiple coins being successful?

EV: I think, fundamentally, it comes down to my real interest in this space is for the ideals, the ideology of an open financial system. That's what I care about more than anything else. Obviously, I own a lot of Bitcoin, and I want Bitcoin to go up in value. I could see Ethereum as a threat. But I see Ethereum as an extension of the virtues of what Bitcoin is doing and it's an extension of taking, basically, money out of the hands of the state, and now building financial tooling that is outside of the hands of the state.

“Fundamentally, it comes down to, my real interest in this space is for the ideals, the ideology of an open financial system.”

So from my perspective, that's great. A world with Bitcoin and Ethereum is better than just with Bitcoin, and a world with Bitcoin, Ethereum, and Cosmos is better than just with Bitcoin or Ethereum. Now, what that does not mean is that every project that comes along, I think is great, right? Most projects out there are total garbage. Most of the coins out there are total garbage. But some of these projects are really profound. I think anyone who latches on to one singular chain, and makes effort to ridicule and condemn every other project, I think is really shortsighted and I think cuts against the decentralization that Bitcoin showed was so important. Part of the decentralization is having multiple projects, multiple blockchains, multiple tradeoffs in their design parameters, it's really important.

CR: I’m interested in your view on the role for Bitcoin versus the role for Ethereum. Along with that question, do you think that Bitcoin can be a network for decentralized finance, or is its role entirely different from what Ethereum is having now?

Role of Bitcoin and Ethereum

EV: So there are parameters of how Bitcoin is designed in parts of its culture, which make it very good money. It is very conservative. It is very slow moving, in terms of changing anything about the protocol. That's a double-edged sword. It means it can't rapidly innovate. But it also means it's much safer and people can trust that it will work as they expect it to, not just today, but 5 years from now, or 10 years from now. That's super important. Bitcoin has that attribute. That makes it a better money from a trustworthiness perspective than Ethereum is today.

But Ethereum is innovating so fast and so much is happening on Ethereum. It's a far better platform for building decentralized applications. Some of the things that have been built on Ethereum were attempted on Bitcoin. They didn't work either, because the UX was horrible. Everything from the block speed being 10 minutes versus 18 seconds to just the limited amount of scripting language you can use in Bitcoin versus Ethereum really meant that it was awkward to build any kind of applications on top of Bitcoin.

When Ethereum came out, and gave people a full programming language to build whatever the hell they wanted, the developers went over there, or the application developers largely went over there. It invited a whole new generation of developers who were never that interested in Bitcoin, and they just kind of went straight to Ethereum and they build in that ecosystem. There are now things like Rootstock where you can do smart contracts on Bitcoin. From what I'm told, it works as well as Ethereum from an execution of solidity code perspective. But all the developers went over to Ethereum and Rootstock has had a very hard time attracting any of them to come even try those tools on top of Bitcoin. The culture of Bitcoin has not been one that has welcomed innovation. The culture of Bitcoin has been one of ridiculing ICOs, not on the specifics of an ICO, but ridiculing that concept entirely to assume that every project that raises money with a token is a scam.

“The culture of Bitcoin has not been one that has welcomed innovation.”

What that means is end-to-end, they're doing the same thing with DeFi now where they just kind of make fun of DeFi, and they point out silly examples and the catastrophes that have happened. They imply that that's the whole thing. So there's just a culture of open development on top of Ethereum that does not exist on top of Bitcoin. That's just part of the difference. Again, that conservatism on Bitcoin’s side is good for it as a form of money. The openness and iteration on Ethereum side is good for it as a way to build financial tooling. So both are succeeding right now in those two verticals.

“There's just a culture of open development on top of Ethereum that does not exist on top of Bitcoin.”

CR: Where do you think DeFi is going in the future? You mentioned you think all of finance is going to happen on decentralized platforms, do you think that in the current DeFi, the applications we're seeing right now, will evolve and become big enough to start replacing Bank of America and JP Morgan? Or will it be some sort of different iteration of decentralized applications on blockchains?

Stuck Industry

EV: These decentralized finance protocols are absolutely going to take over much of what banks do. Not necessarily all, but much of what they do. The reason is because they are far more efficient, they're far cheaper, and they're far easier,after you get over a little bit of a learning curve. So it is harder to use a DeFi application for the newbie, who has never done it, but once you've used it, and you understand the concepts and the terms and the tools, and then you try to go do a wire transfer at a Bank of America branch, there's no question that DeFi demolishes that whole industry. The banking industry has had essentially zero innovation in decades, because they feel no competitive pressure. They are essentially all tentacles of the state, and they are regulated so heavily that they have more compliance people than engineers, by far, probably by 100 to 1.

“The banking industry has had essentially zero innovation in decades, because they feel no competitive pressure […] and they are regulated so heavily that they have more compliance people than engineers, by far, probably by 100 to 1.”

So that's an industry that's stuck and it is not moving forward. As cryptocurrency, as DeFi advances and improves, as the bugs are worked out and as people get comfortable with purely digital forms of value, it's not just going to take some of the bank services away, it's going to totally demolish that as an industry and it's going to be overwhelming to those banks. You can expect that these banks and much of the financial services industry will lobby heavily to vilify many of these crypto projects and protocols. We can expect that over the next five years for sure.

CR: I know, 100% agreed. To me, it's so clear that this is just so much better.

EV: It's so much better. If you get a loan from Aave, and you deposit a token, click a button, and receive another token backed by the one you put in, it's like 10 seconds of work or like 30 seconds. It doesn't ask who you are. It doesn't care what country you're in. It doesn't care anything about you. It's just this cold calculating machine that does a thing that is useful to you. Versus a bank, which is like it's an institution of judgment, judgment of all kinds, some of which is necessary because they need to ensure that they won't be defrauded, but that's just because the forms of money they use are so open to fraud that they have to do that. Some of which are totally, totally inappropriate, like the country that someone is in should not change whether they can receive financial services, that just seems so obvious. These DeFi protocols are built in that way to be able to be open and borderless, and I think that's really special and absolutely will wane over time.

CR: I totally agree. But I think, right now, what's stopping mass adoption of DeFi, besides Ethereum scaling, is fundamentally, we assumed that there will be Layer 2s or other blockchains. Just the fundamental shift that needs to happen on how someone interacts with their financial services, knowing that you are responsible for your money that you have this thing called a private key, that you need to take care of, that you don't need a login and password. It’s a completely different paradigm. How do you see people getting over that? Do we just need to wait for a younger generation to take over for them to understand DeFi and for DeFi to be more adopted? Because I don't know if I see the older generation really adapting to that new mindset.

Adapting To New Routines

EV: I don't think that your average 65-year-old is going to become a common self-custody DeFi user. The younger generations absolutely will. So a lot of it is just that age gap. A lot of it is just that people need to go through a process of learning, and that often involves some loss. There are few people in crypto who haven't made a mistake and lost some money, myself included. What that loss does is it teaches you, it hurts, and it's from that pain that you grow, and you understand things that I didn't have to care about or pay attention to before I do now. I understand why these things are important, because I'm now taking control over value. How can that not be important, like people would just trust and outsource to other people complete authority over the value that they create, and spend and use.

I think with time, people will start to realize that it's a very important ability, a very important responsibility as an adult, like as you become an adult, you take on the responsibility of understanding how value works and in handling it well. That's just a skill set that humanity has not had, because everyone keeps their money in a bank, so that takes time to grow culturally.

CR: Do you think in this future where people have made the jump and they're managing their own money and using DeFi, do you see users also participating in governance? Governance has been such a big topic in DeFi, and everyone's moving to become more community-owned and token votes are kind of the way that decisions are made. Do you see that working out in the long run?

EV: I think a lot of experimentation has to be done there. Governance, I think is neither good nor bad in these protocols, it's just a new area of experimentation. It's definitely a buzzword right now. Just because a token has governance, that's a meaningless term unless you understand what that actually means. How does it enable governance? What can you govern? Who can govern it? So yeah, that all has to get played out.

I don't think it's reasonable or appropriate for a normal person to be engaged in governing fundamental money protocols. Not everyone should do that, or should care about it. What's important is that you can now, if you're interested in it, if you care enough to be involved in that project, you can actually now govern, in the protocol layer, so that that opt-in ability to really be part of something that is decentralized is really, really powerful. But that doesn't mean that everyone always needs to be focused on governing projects. That would be a waste of time.

CR: I'm interested in your thoughts on all the innovation with AMMs and DEXs going on. I mean, you obviously have a very kind of close view to that space. There's just so much innovation happening. Uniswap was kind of the original one, but then there are all these different ones popping up claiming they're solving and impermanent loss or reducing slippage, or all these different new ways of essentially swapping tokens. I’m curious to hear your thoughts on what are some of the most interesting innovations you've seen in this space?

Cross-Chain Liquidity Pools

EV: First, I'd say, I don't think people realize that there's a fundamental shift in the model of exchange that happened. We had order book exchanges, that was the norm, all decentralized exchanges were order books. Then some of the early DEXs were also trying to replicate order books in a decentralized way. They kind of worked, but they never achieved scale for various reasons.

What Uniswap did, and they weren't the first ones to do this. I think Bancor was one of the first, but Uniswap certainly was the one that popularized it. When they made it a totally different model of exchange that had nothing to do with an order book and uses these liquidity pools, and they're called Automated Market Makers or liquidity pools. That is new innovation in crypto that I don't believe has ever existed in traditional finance before. I could be wrong about that. But that innovation allowed DEXs to flourish because they were not as burdened by delays on the blockchains themselves, they did not need high throughput blockchains to work well. So the major innovation on DEXs is simply that model, the move to a liquidity pool instead of an order book. That's a profound change for how finance works.

So beyond that, there's marginal improvements, like changing the ratio at which the pools calculate the prices and things and people optimize those, but those are all marginal changes. The big next step is to do cross-chain liquidity pools. All DEXs today essentially live on Ethereum, and you can only trade Ethereum and ERC-20 tokens. You can't today trade a real Bitcoin for real ETH. That will be a huge, huge market when that opens up.

There are a couple projects trying this. THORChain is the one that I'm most familiar with, that launches pretty soon, like in this quarter. THORChain essentially uses liquidity pools to allow any blockchain to plug in natively so that you can trade a native Bitcoin into a native Ethereum. If that works, that's going to be like the theme of 2021, I think is cross-chain liquidity pools. It'll break out the DEX paradigm from just being Ethereum to being applicable to all the blockchains. So that's something I'm watching very closely.

CR: That's interesting. So you can swap ERC-20s and ETH, say for Bitcoin. But I'm still kind of seeing all this rise in wrapped Bitcoin coming to Ethereum. It's coming because I mean, presumably, people want to use DeFi applications, they want to put their Bitcoin to work and lend it out and earn extra yield on that. I mean, you can't really do that by just swapping, right? You would still need the wrapped version of Bitcoin.

EV: No. So you would trade native Bitcoin for native Ethereum. You'd send a real Bitcoin in and get a real Ethereum, out, no wrapping, or vice versa, with THORChain I'm talking about. So other projects might do this kind of thing. But yeah, it's about not adding wrapping as another layer. Wrapping is cool and all, but it adds another layer of complexity and risk. Clearly, people, it's still in demand, like the amount of wrapped Bitcoin on Ethereum is growing very rapidly. But I know a lot of people who, they want to participate in DeFi with their Bitcoin, but they don't want to add the wrapping layer. That's just like too much risk. Because DeFi is already risky, it's just it gets to be a little too much. So if you can handle it with native assets, that's a bit more efficient.

CR: Could you deposit like Bitcoin directly on a DeFi protocol?

EV: Well, what I'm talking about is the exchange. So we'll use THORChain again. THORChain’s being built as a Cosmos based zone. Let's say Aave builds a version of Aave in Cosmos, the whole lending market is built in Cosmos using Cosmos-based assets, you'll be able to swap a native Bitcoin into any asset in Cosmos directly from a native Bitcoin into those directly. Today, you cannot do that with a DEX. You cannot send a Bitcoin into Uniswap and get an Aave token out.

It can't be done, right. So it removes a step in that process and it also means that when you're done interacting with the DeFi, you can get back to native Bitcoin without any central party being involved. You can move in and out into the native asset again, as opposed to rapping, which adds another amount of time delay and cost and complexity. So I think there'll be, I don't know whether a Uniswap will end up being more volume than something like THORChain, which uses native assets. But there's a chance that the liquidity will pool around these exchanges that handle multiple chains, and that those will become sort of the centers of exchange in the ecosystem.

CR: Interesting. Definitely something to watch. We've mentioned risk a bunch in this conversation. As you're obviously a diehard libertarian, I'm interested in your thoughts on what regulation is looking like for this year. With a new US administration, I know that there's a new head of the SEC Gary Gensler was a blockchain professor at MIT, and this rule to regulate self-custody wallets, I think was stopped, that FinCEN was proposing. So there has been some positive news on the regulatory front for crypto. Are we heading into a maybe more friendly environment do you think?

Regulation of Crypto

EV: First, to be clear, the last thing you said, the proposal to regulate self-custody wallets. People keep using that phrase, but it's actually the opposite. It was a proposal to regulate custodial wallets in how their users interact with self-custody wallets. So it would regulate the Coinbases of the world, and when a user withdrew from Coinbase, to their own self custody wallet, the user would have to provide all sorts of information to Coinbase. So I just want to be a little clear about what that was.

Thankfully, that seems to be shelved for now, the comment period got extended. Now apparently, the Biden administration has sort of indefinitely frozen all new proposals. So it could come back as it is, or it could just be defeated. Who knows? Whether this new administration will be better or worse than Trump's? I have no idea. I mean, they will print more money than Trump did, just like Trump printed more money than his predecessor. So the story of the debasement of fiat currency is just accelerating.

While that is good for crypto, I think it's important to remind people that debasing currency, we shouldn't celebrate it because it's good for crypto, it's going to completely destroy one or two generations of people. Fortunately, there is this lifeboat of crypto now for those people. But that's going to be very painful and horrible. So governments will continue debasing, it's that it's growing at an increased rate.

From a regulatory perspective, I think we have essentially an ongoing clash between these immutable protocols that can't be stopped, they can't be turned off and these regulations, which demand control. The protocol will not control the things that the regulator's demand. So what happens when you get the world's most powerful regulators demanding something of a protocol that can't hear them and won't comply with anything they say? This is a very interesting question, right? This is going to be a massive clash. Certainly governments will try to regulate centralized entities as much as they can, as they obviously have been already, but the more they do that, the more they make the decentralized protocols attractive.

Some of the reason that Uniswap is so popular is because it is so frictionless. There's no KYC. There's no account signup. You go and use it and it's great. If Kraken or Coinbase was as frictionless as Uniswap, Uniswap may not have taken off at all. So the regulators are in this situation where they can't regulate the protocols. They can regulate the companies, but the more they do, the more it’ll push people to the protocols. The game theory of that, I don't know how it plays out, but what I like to tell people is, it's important that the regulators understand that many of these tools will actually achieve some of the same ends that they want.

Cryptocurrency, digital assets, blockchains, will bring about a fair, transparent, immutable financial system that the entire world can use without prejudice. You know, that's a very wonderful thing, and I would hope that any regulator would advocate for a fair and open and transparent financial system, they should have that same goal and so blockchains can actually achieve that. Even though they'll lose some powers that they used to have, hopefully, they will see that these tools are actually really important for humanity, and that they will permit that improvement to happen.

CR: I don't know if that’s too optimistic to hope.

EV: Oh, it's definitely optimistic. It's definitely optimistic. What will likely happen is that they will try to regulate the hell out of everything that they can.

CR: So how big a risk is it for DeFi, that regulators will come and say, in the US, maybe one way to do it would be saying people in the US can't trade stablecoins and maybe you can still do it on kind of a VPN and on Uniswap and maybe it will prevent people from cashing out. That will reduce just adoption, I don't know. I think there's ways that they can get to this, how big is the risk?

The Collapse of Fiat

EV: They can definitely make it unpleasant to try to use these things for sure. So this starts depending on which jurisdiction we're talking about. If we're talking about the US, it's not as easy as just banning users from interacting with stablecoins, like there are still constitutional rules that the regulators would have to get over. These would be challenged in court by extremely deep-pocketed companies at this point. But there are very large VCs, very large companies, very wealthy people, in many positions of power at this point that own crypto and that want it to succeed.

So for regulators to try to essentially violate the constitution, in clamping down on this stuff will, at minimum, lead to years of lawsuits and legal struggle. Those are years in which crypto continues to advance. I think when the rubber really hits the road is when fiat starts really falling apart. As fiat starts falling apart, and people realize that the alternative is these cryptocurrencies, then the importance of them will become more obvious, but the desperation of the governments will also become more severe. Because fiat currencies always fall apart. They have a lifespan that typically lasts 20 to 70 years.

I don't know that there's any fiat currency that's ever lived 100 years. The US dollar has only been around since 1971 as fiat. These things fall apart, politicians debase them into irrelevance and then they create a new fiat currency. This time, there is a non-fiat alternative and that has never existed before. So as fiat falls apart and people start fleeing to these crypto assets, that's unprecedented and that's going to be a really exciting time to live through and hopefully, everyone within crypto realizes it's going to be a struggle.

CR: Do you think we'll see the collapse of the US dollar in our lifetime?

EV: Oh yeah. Definitely within 30 years, probably within 20, and maybe within 10. That's what I would say. This would happen with or without Bitcoin, right? So the dollar is doomed with or without Bitcoin. The reason is, because it's perpetually printed. It is only ever debased and so it falls in value over and over and over. The government that is creating it is, I don't know, X trillion dollars in debt, adding trillions every year.

If you do the math over any period of time, 5, 10, 15 years, even at relatively low interest rates, the unpayability of those bonds becomes increasingly clear, and at some point, the bond market will fall apart, interest rates will spike and the debasement will go into a horrible downward spiral and it will destroy the economy. It's going to be like the momentous economic event of our lifetimes, and it's going to ruin lots of people and entire countries and it's going to be horrible. It's not something to celebrate. But out of that problem, people will finally rebuild finance and commerce on an immutable open money system. That's Bitcoin. That's crypto.

CR: Sounds like some sort of apocalyptic future, similar to The Matrix, the world falling apart or something.

EV: It's really bad. People are not ready for it. It's going to destroy a lot of lives, and it's going to be really horrible. When it happens, the politicians are not going to go on TV and say, hey, everyone, we really just printed too much money, and we're sorry. We brought this on ourselves because we kept printing for all the spending that you wanted us to do. We're sorry. They're going to blame it on everything else. They're going to blame it on the greedy capitalists. They're going to blame it on the currency speculators. They're going to blame it on automation or on China or on any other boogeyman. Most of the population will believe them, unfortunately, for a time.

CR: Well, I mean, I've seen it play out in Latin America. Argentina is kind of the prime example.

EV: Yes, this happens like every 5 or 10 years in Argentina.

CR: It's exactly that. The difference is that it's easier to sustain that farce, I guess in the US, because the US is kind of the base currency. So Argentina has huge debt payments due every month, it actually does have to pay back its debt. But the US can just put it on hold, people just hold US Treasury forever. Nobody's knocking on the door, asking the US Treasury to pay. But I think that if that kind of debt burden becomes so unsustainable, that creditors do start to become dangerous, I think you're right, that's kind of their risk there.

EV: No one buys a 30 year treasury bill because they want to be paid back in 30 years. They buy it, because it's a liquid market and they know they can sell it to someone tomorrow, right, which is like the definition of the Greater Fool theory. So when people start worrying about the creditworthiness over a 30 year period, people will demand higher and higher interest rates on a 30 year bond, and that becomes a self-reinforcing process. Because the higher the interest rates go, the worse the debt burden becomes.

Over a period of time, people will realize that lending money to an entirely bankrupt organization is not financially prudent. To lend it at a rate of interest below the real rate of inflation is complete madness. This will be written about in textbooks in the future, and college kids will laugh at how silly the prior generations were for lending money to a bankrupt institution at a rate below what inflation was. It's a weird time to be alive and most people don't realize it's weird, because it's normal. But it will end and something new will exist afterward where it'll be very clear how silly this was.

“This will be written about in textbooks in the future, and college kids will laugh at how silly the prior generations were for lending money to a bankrupt institution at a rate below what inflation was.”

CR: You think that in this post-collapse, Bitcoin or crypto will be the solution?

EV: It's not as simple as Bitcoin is the solution. It's that an entire financial ecosystem built on open immutable blockchains will become the solution. There's still going to be lots of problems and lots of solutions, but they will be built on a foundation of sound money and they can't be debased and open permissionless networks. So yeah, that is the suite of solutions that people can build on after fiat and banks fall apart.

CR: Right. What's likely going to happen is that that ecosystem will already exist, like we're building it. It's being built right now. So maybe it'll be just like the final push for people to go there.

EV: If all that doom and gloom that I just spoke of happened in 2012, Bitcoin wasn't ready for it. Ethereum didn't exist. The tools would not nearly have been as far along as they are now, arguably, the tools are still not ready, right? If everything fell apart tomorrow, maybe we're still not ready. But over time, we will become ready. I think it's incumbent on the entire crypto industry to realize that you're not just building a product for your customers or for your shareholders, you're actually building a life raft for the world after fiat falls apart. That's a big responsibility.

Even though the unicorns and pickles and memes that get thrown around on Twitter all day are fun, like very serious stuff is coming in the next 5-10 years and crypto needs to take itself seriously enough to be ready for that.

CR: Powerful words, and we need to be wrapping up, so it's good to end on that note. Eric, it was a pleasure chatting. Thank you for such an interesting conversation.

EV: Thanks, Camila. It was great.

Share The Defiant

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!