"We Took Lessons From the 'Food Festival' to Level Up the DeFi Experience," Bloq's Jeff Garzik

Hello Defiers! In this week’s podcast episode I talk with Jeff Garzik, the Bitcoin core developer turned DeFi builder. Jeff has been in crypto from the very beginning; he even had an email exchange with Satoshi Nakamoto about the Bitcoin code. He has seen it all along the way and believes DeFi is the culmination of Bitcoin and Ethereum; an ecosystem that’s come to blow up the entire moat and structure of traditional finance.

Jeff leads Bloq, a blockchain infrastructure company focusing on enterprises. As much as decentralized finance is exciting and groundbreaking, he believes its lacking professionalism. He believes DeFi needs to be easy for retail users and for institutional users, not just for crypto natives. With that goal in mind, Bloq is launching Vesper, a decentralized protocol for users to gain passive interest on their crypto. The innovation relative to other yield bouncers, is that users can pick a risk level and the protocol will invest in different strategies accordingly. It both competes with, and uses Yearn Finance.

We also talked about how open source protocol can leverage their native tokens to pay for contributors and reward users, creating a community that makes it harder for others to compete, even if they can fork the code. Jeff highlighted how these new business model is fostering a new kind of team of independent contributors. We talked about what’s next for DeFi, and how he believes the space will trend towards “hybrid finance,” where traditional finance will progressively adopt this infrastructure to become more open and global

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

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Jeff Garzik: I think open-source begets open-source. What I mean by that is, I've always been interested in this. Since I was a boy, I’d been trading beer and pizza for me doing other people's homework in college, to get internet access in the late 80s. I've always been a nerd who wanted to connect with online communities, saw the great potential of the internet to bring people together and in new ways that have never really been imagined before the internet. Blockchain is one of those examples of that.

“I think open-source begets open-source.”

Before I get into blockchain, and what led me to it was open-source, working on the Linux kernel, which I did for over 10 years. I was very fortunate to work under Linus Torvalds, the inventor of Linux. 20 plus years later, Linux is an almost every android phone, every data center on the planet. So I was incredibly fortunate to be there, kind of at the beginning, but in the rough and tumble days. Fast-forwarding that story 10 years, I saw exactly the same thing in July of 2010, when I stumbled on Bitcoin on a website called Slashdot.org: News for Nerds was its tagline. It was at the time, one of the most popular websites on the web.

“I've always been a nerd who wanted to connect with online communities, saw the great potential of the internet to bring people together and in new ways that have never really been imagined before the internet. Blockchain is one of those examples of that.”

It was talking about decentralized currency, which maybe a little bit egotistically I thought was not possible. I thought to myself skeptically, this thing, there's no way that it's not, 1, 2, 3, 4, or 5 servers, maybe spread around the world. But it's still kind of centralized, it's still a multi-computer type of model that at the time was just cloud-based, but I was wrong, and I was happy to be proven wrong. I dove into the source code, and saw just this incredible vibrancy of intellect and design that Satoshi Nakamoto had put into Bitcoin and really converted me from a skeptic to believer, simply by the fact that I could prove to myself without having to ask any other credential third party, that this thing was for real. I could look under the hood, at the source code, at the core of the system, and say that it was math at the center of everything. That's really, you can't get more fundamental than that.

“I could look under the hood, at the source code, at the core of the system, and say that it was math at the center of everything. That's really, you can't get more fundamental than that.”

From there, I dove into the project similar to Linux. I started contributing source code changes called patches. Similar to my first experience in Linux, my first patch was rejected, so my first change was rejected. But the way the open-source process works, it's not just, I don't like this go away, it's there are these 1, 2, 3, 4, 5 problems, and if you address those, then I'll accept your change into the Bitcoin software. It's that kind of pull that really motivates open-source developers to do better, to come back address the feedback of the Bitcoin inventor and play some contributing role.

That was my first foray into Bitcoin. A developer always marks their first patch to the software as a real milestone, the first time you touch the software and the project leader puts your change into the software and I was hooked. From there, I was off to the races.

CR: Was your patch accepted?

JG: Eventually, it was. I revised the patch according to the feedback that Satoshi gave and he accepted it.

CR: Was it his/her/their feedback?

JG: That's right. The only communication anybody ever had was Satoshi was either a couple of private emails, or public internet forum posts. So there were no podcasts, no audio calls, none of that stuff. It was all just internet messaging.

CR: That's how you started contributing to the Bitcoin protocol from then on and this was in 2010?

JG: That's right. July of 2010, I kind of named it “The Great Slashdotting”, because this one Slashdot blog post led to not only myself discovering Bitcoin, but a number of the other early adherence, developers, purchasers, holders. Jed McCaleb started the famous or infamous Mt. Gox exchange off of ideas from that same Slashdot post. So yes, in July of 2010 I started contributing.

For the next several years, I worked with Bitpay, one of the early payment processors, trying to engineer how people can spend their Bitcoin, this at the time new and strange digital currency that nobody really understood. I pounded the pavement, like a good activist trying to encourage merchants to accept Bitcoin. I was the nerd knocking on the door, asking a gold dealer or my contractor fixing my house, hey, will you accept Bitcoin, here's why it's a great idea? That was 2010, Satoshi was still around, Gavin Andresen his number two, was still around. Any idea was kind of a good idea. It was a real good time for innovation and discussing ideas of economics and technology and the fusion of that. You know, Wild West is kind of a bad term for it, but it's really the pioneer days.

CR: How did that evolve, and can you kind of tell me what happened when Ethereum came around?

Crypto in Generations

Gen I

JG: Sure, well, I tend to label them first generation, second generation, third, etc. In that the first generation of tokens, were people photocopying Bitcoin. You, from a source code perspective, can just download this stuff from the internet and you could create the CAMI coin and CAMI network just by cloning the source code. So it takes a little bit of developer knowledge, but not a lot. That's where Litecoin was born. It was kind of a photocopy, change a couple numbers and here a marketing tagline of silver to Bitcoin’s Gold, and it was off to the races. So that was really generation number one, called altcoins at the time, were just photocopy Bitcoin source code.

Gen II

Ethereum ushered in the second generation. So no longer did you have to maintain this multi-computer infrastructure called Nodes just to create a digital token. You could just create something called a Smart Contract and publish it on Ethereum. You had the same censorship resistance of Bitcoin, the same permissionless nature of Bitcoin. But you didn't have to, again, spin up a number of computers that are copying this ledger back and forth. Ethereum kind of leveled up the entire blockchain ecosystem by making it easy to build on top of Ethereum rather than having to create your own network. Ethereum said, if you're on our network, you're on our platform, it's just another app. Whereas that's generation two.

“Ethereum kind of leveled up the entire blockchain ecosystem by making it easy to build on top of Ethereum rather than having to create your own network.”

Generation one, you had to clone your own network, you had to create JeffNet in order to create a new token. So Ethereum made it easier, it made it less costly to create new tokens, and so that created that second Cambrian explosion of tokens that we call the ICO era, with all its froth and hype and bubble, and frankly, innovation as well.

So I'm a very rationalist economic philosopher at heart. I believe that economic incentives tend to drive most people's behaviors. When the cost of token creation is zero, then you will have many people creating many tokens, because the cost is low. But most of those will be low value that will be not worth very much of anything. I'm not going to use the derogatory term. But there are a lot of tokens that are not worth a lot, and that just follows from the long tail of economics.

But what is the opposite of a long tail is what I call a fat head, is that there are a few tokens, which were innovative and not just a Ponzi by another name, or just money inflation by another name. But they're actually building their real teams, they are adding value. It's not just kind of a fiat by another name, in other words.

Gen III

Those teams are now in 2020, fast forward to kind of generation number three, they're releasing the products, the fruits of their labors, the Filecoins of the world, who have just been silently building throughout kind of the crypto winter, and they're serious teams with serious products. That's the 1%. So the 99%, we had to swim through, maybe a sea of Wild West refuse, but the 1% they really are smart teams with innovation. That's what you're seeing this year. That's where I believe the genesis of DeFi was that momentum.

“So the 99%, we had to swim through, maybe a sea of Wild West refuse, but the 1% they really are smart teams with innovation. That's what you're seeing this year. That's where I believe the genesis of DeFi was that momentum.”

Over the past 10 years, the first Bitcoin teaching us what digital tokens and digital scarcity was all about, Ethereum introducing a platform where you didn't have to create a new network to create that digital scarcity. Then once we had sort of that second Lego block, it enabled people to create what is now DeFi. It's kind of turning your Fidelity.com or Vanguard on its head, in that it's so powerful to access multiple financial products from one wallet. The inverse, kind of the centralized Fidelity and Vanguard experience, you go to a different walled garden to access a different product.

DeFi, Decentralized Finance opens up, it blows up that entire moat and structure and says, what if we can all mix and match different products from different vendors in new and interesting ways. That's why I'm so excited about DeFi. That's why DeFi is kind of the culmination of Bitcoin, then Ethereum, and we had to get through the gems and the ugliness of the ICO era. The lessons learned from that, I call it kind of “Tuition Cost” lesson learned. Then finally, we arrive at something that makes sense. It's not frothy like the ICO era, and it actually solves real problems for real people.

“DeFi blows up that entire moat and structure and says, what if we can all mix and match different products from different vendors in new and interesting ways?”

CR: I see that as well. But to hear you say that and having been early in Bitcoin, is not often what you necessarily hear from hardcore, OG Bitcoiners. What do you think that is? Did you initially see Ethereum as something that was positive in this space, or did it take you some time to see value there?

[ … ]

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

• Bitcoin value and limitations“[Bitcoin] is kind of the rock that you can trust to be there (…) But at the same time, the rock is there to be a rock to be solid, but it's not a new way of high tech rock.”
• Bitcoiners in DeFi“One of the dirty little secrets is that a lot of the OG Bitcoiners are the ones that are putting capital into some of these decentralized finance products.”
• Professionalized DeFi “Just looked at all that and saw that, yes, there was a lot of innovation, but there was also a lack of professionalism.”“We said, well, we've been doing this for a number of years with Metronome, and so let's take that experience and take what we've learned over 2020 with the so called Food Festival (…) We baked that into Vesper, which is a platform are a suite for DeFi products.”
• Dialing user risk“This is one of the unique things about Vesper, is that we have kind of two buckets: conservative and aggressive risk levels. The conservative risk level we feel is something new to the industry.”
• Competing with and using Yearn “There's a couple mistakes that Yearn made and we can learn from those mistakes, and create something that's more decentralized and more sustainable.”
• Business model“Although you can fork the source code, you can't really fork the community and the liquidity that's bound up in the particular yield aggregators.”“I look at what I call the plumbing behind the scenes, blockchain makes it possible for these disparate individuals to plug themselves into self-organizing networks.”
• Next steps for Vesper“If you participate in the beta, then you'll receive a risk reward in the term of Vesper tokens some weeks later. So it’s an incentivized beta.”“So that's the path to decentralization, initially there's a multisig and also there for emergencies. But long term, it's the Compound governance process.”“We have a component called a ‘Pool Factory’ that can marry a token with a yield strategy. So we just have to turn the crank, and we can create new holding pools for whatever tokens that seem to have demand.”
• Hybrid finance“We're creating new innovations and trying new innovations at a faster pace than, I think, the legacy finance industry. That's going to continue to pull legacy finance in this direction.”“We feel institutions will move from sort of the KYC kiddie pool to the full decentralized finance conservative strategy.”

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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. Sign up to learn more and keep up on the latest, most interesting developments. Get The Defiant’s $100 annual subscription for $80. Offer expires Dec. 31s.

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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.