"I Do Believe Ethereum Will Flip Bitcoin in the Next Four Years:” Balancer's Fernando Martinelli

In this week’s Defiant podcast episode, I speak with Illia Polosukhin, cofounder of the Near Protocol and Fernando Martinelli, co-founder and CEO of Balancer Labs. Near is one of the up and coming Layer 1 chains, Balancer is a prominent DeFi protocol and application on Ethereum that will now also be on Near and other blockchains.

Fernando explains why he wants Balancer to live on other chains, not just on Ethereum, and why Near is the first one he’s working with. As for Near being labeled an “Ethereum Killer” Illia says Near is “not trying to kill anybody” and still views Etehreum as the safest place for high-value financial transactions. He thinks finance is just a stepping stone for all the use cases enabled by blockchains and that Near can be the place where those consumer apps are built.

We talk DeFi summer with Fernando who believes liquidity mining is about making protocols more decentralized, with a healthier token distribution. He thinks using token rewards is not a fad and will be here to stay.

Fernando and Illia also talked about the Eth1 to Eth2 transition, and Illia says he thinks the best way forward is for people to opt-in to the new chain. while Fernando is optimistic about a more automatic switch.

About a multichain future, Fernando says DeFi will live on many different Layer 1s, but he sees the space expanding into less than 10, not hundreds of chains. He remains very bullish on Ethereum and is betting on a flippening with Bitcoin in the near future, which Illia agreed would be “totally possible.”

🎙Listen to the interview in this week’s podcast episode here:

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Fernando Martinelli: I'm a mechatronics engineer. I did a Masters in Vision Processing in robotics. I also did an MBA and tried the entrepreneurial route a bit. Naturally, I started founding companies very early on, and got involved in crypto in early 2013. At first, I think, as usual, I thought that Bitcoin was a Ponzi scheme, but was lucky to realize that it was not the case in early 2013.

When Ethereum came out, I was really excited with the idea of smart contracts. Because I had always had the idea that in order to get to mass adoption, Bitcoin needed to have some stability, or some type of stablecoin, and smart contracts are perfect for enabling that to happen. That led me to get involved very early on with the MakerDAO team with whom I collaborated and met the team in person very early on. This is how I got to know Nikolai and also, Mike McDonald, who is our CTO today.

Balancer was born from the early days MakerDAO community. Balancer was born in early 2018, so over two years ago. My motivation was to find ways in which AMMs could be serving as an index fund mechanism or protocol. So how can an AMM not only be an exchange. I had the idea of Balancer even before Uniswap was launched, but then Uniswap took more the exchange side of things. I had more the idea of having more flexibility to allow people who are providing liquidity to use the AMM as a portfolio management tool. So this is more or less how Balancer was born.

“My motivation was to find ways in which AMM could be serving as an index fund mechanism or protocol.”

Camila Russo: I think for those listening (or reading) who maybe aren't as familiar with Balancer, to me, it was really helpful to understand Balancer as kind of a way for anyone to create their own index fund. The way to do that is you're able to add many different tokens in a liquidity pool as opposed to just one token plus ETH on Uniswap. What that does is it gives you exposure to this basket of tokens and you get a token that's like a derivative of that pool. So effectively, you have this kind of investment in a basket that looks a little bit like an index of tokens. The other side of it is that people can actually trade in the liquidity of those pools, so you have kind of the asset management side and the DEX/AMM side. Really cool project.In the beginning when I first heard it, it was like a little bit hard to understand. But that's kind of the way that I understood it.

FM: Unfortunately it is. But you summarized it very well.

CR: Illia, let's get into your background and how you started with Near.

Machine Learning Roots

Illia Polosukhin: My background is actually in machine learning. I worked for about 10 years at a few places. Specifically, my last big company gig was at Google Research, where I led a team working on question answering, machine translation. I was always really excited about open source, a lot of machine learning is open source and actually was one of the biggest contributors at the time to TensorFlow when it was just getting released by Google. For people who don't know, TensorFlow is probably like, top five open source projects on GitHub, in the world overall.

So that was really exciting actually working in a big company, and at the same time really releasing something into the world, and really contributing and also working together with a lot of people around the world. There are really cool things where people would use TensorFlow for like classifying random things at their homes.

But in general, Google, even though inside, it's a very open place, but it has a lot of constraints just being a big company. I left it to start a startup because I wanted to leverage things that I learned and some of the machine learning tools in the wider world. Me and my co-founder, Alex, we started the company called Near AI, which was supposed to teach machines to code. So we really wanted to have a machine learning model that a normal person who does not know how to do programming would be able to explain what they want, and the computer would write codes for them. It's a very challenging task, a lot of people have been working on it.

Problems Paying People Globally

We had an interesting approach to collecting data. We built this platform, where student engineers usually around the world would actually contribute tasks. So they would write code and write some language for these things. It was kind of like what Gitcoin right now is doing was these tasks. At that time, we did not know what Gitcoin is, but we had a ton of problems paying people around the world. We had people in China, we had people in Russia and Ukraine, Poland, all these places have very different capital control requirements. This is like 2018, not that long ago.

We looked at crypto and Ethereum smart contracts as a way to solve our own problem. We were thinking, can we use pretty much crypto to pay people? Can we use smart contracts to actually create a more open, transparent marketplace so we can actually get more people to be participating and maybe pretty much creating more, like putting more money into this process so we can collect more data?

The problem is, even if it's 100 people, so we were paying about $0.30 per task, and people are doing them like once a minute. It actually would cost us at the time, about the same as we were paying in transaction fees on Ethereum. Probably right now, it's even more. So even at that time, just like a pretty simple task, and again, we had “hundredish” users, it's not even that big. It was pretty clear that Ethereum, albeit serving a very specific purpose is not actually kind of fitting what we call a more wide set of use cases.

We started looking at what are other platforms out there were able to serve this. Being from a technical background, my co-founder built sharded databases that are used across big companies like Goldman Sachs, Uber. At Google, we were pretty surprised by the state of blockchains. This is really where Near came out, really looking at, well, if we cannot even solve this pretty small problem, and as we were getting deeper into blockchain, we're getting more in the spirit of how these types of platforms can unlock new types of marketplaces that are impossible, really hard to do. With millions, and ideally, billions of people using them, you do need a scalable platform. So this is how Near started with that premise in mind.

“With millions, and ideally, billions of people using them, you do need a scalable platform. So this is how Near started with that premise in mind.”

CR: The market problem you were trying to solve, was it to enable a distributed network that was able to process smaller payments like micropayments and faster transactions, is that kind of the use case you started out with?

Handling Millions of Users

IP: Well, so the way we wanted to build that was really we wanted to do a lot of things on-chain because we wanted to create a whole application on-chain where people would contribute tasks, they would be recorded, and then as it gets used, people get paid through that and stuff like that. I mean, when you start designing things is on the whiteboard, there's a lot of things.

So really, we wanted a smart contract platform that can handle millions of users, at the same time processing things that maybe attached values that were reasonably small. Right now in Ethereum, if you're not sending $100, you probably shouldn't do it. Obviously, if it's more there's a lot of opportunity to make money, it's a great platform. But first, for anything, that's a task or a process or buying an item or a transaction of low value that, it's not worth it, just because there's such a big competition for the resources on Ethereum. So really, it was, how can we scale this up to an extent where you can build what we call now open lab applications, applications that go beyond just finance, go beyond just marketplaces, but actually can handle a lot of more logic and processing and connecting to real-world storage and all sorts of things.

CR: How did you go about achieving this more scalable network?

[ … ]

Paid subscribers have access to the full transcript, including sections on:

• Maintaining DeFi composabilityIP: “The Bridge itself allows a contract on Near to call something on Ethereum and get back a response pretty much later, maybe a few minutes or hours later. So this suggests it does not provide the same composability as what people on Ethereum have, but it still allows to build some of the use cases.”
• Rainbow Bridge Architecture IP: “The interesting thing is the Rainbow Bridge, architecture wise, it actually allows the developers to build not just the token, but any information sending between chains.”
• Lessons from DeFi Summer FM:“I don't think [liquidity mining] is a fad. I think Balancer and other protocols will keep distributing tokens to users of the protocol.”
• Revenue in DeFiFM: “Fees go just liquidity providers. Balancer, the protocol doesn't take any fee at all. Many protocols will eventually consider, and it's definitely up to governance.”
• “Ethereum Killer”IP: “Near is a place for people to actually build all those use cases that have been envisioned and experiment more while still having this connection to Ethereum. We're definitely not trying to kill anything.”
• Eth2 TransitionFM: ““I don't think it should be so traumatic. I do think that everyone in Ethereum knows that if such a traumatic event happened, then it would be kind of a great occasion for Ethereum to lose support and to lose developers and to lose assets, which none of us want. I don't think it's in our best interest to make it hard to transition to ETH 2.0.”IP: “There's motivation for people to continue running ETH 1.0 and there is a demand for it to run; proof-of-stake has very different parameters.”
• Path to the Flippening FM: “People will just realize that Ethereum is superior to Bitcoin in every aspect today, other than the issuance (…) I do believe that in the next four years, Ethereum will flip Bitcoin.”

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About the founder and editor: Camila Russo is the author of The Infinite Machine, the first book on the history of Ethereum, and was previously a Bloomberg News markets reporter based in New York, Madrid and Buenos Aires. She has extensively covered crypto and finance, and now is diving into DeFi, the intersection of the two.