"We Took Lessons From the 'Food Festival' to Level Up the DeFi Experience," Bloq's Jeff Garzik
Garzik told The Defiant how the yield bouncer he's building is aimed at getting DeFi beyond "long-haired crypto" people, to retail users and institutions.
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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🙌 Together with Neutrino, an algorithmic price-stable protocol that enables the creation of stablecoins tied real-world assets, 1inch.exchange v2, which aims to provide the best rates by discovering the most efficient swapping routes across all leading DEXes, and DeversiFi's Nectar Beehive V1, which allows traders to provide liquidity & earn Nectar ($NEC) tokens.
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
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.
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.
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?
JG: No, it's a great question. I see my view of Bitcoin as kind of unchanged over the past 10 years, in that I think it's the root of the cryptocurrency tree. What I mean by that is, it's a stable base, it's resilient. It's the blockchain that even today as we're recording this, is the one that's the most bomb-proof, the most difficult to disrupt, the most resilient. From that perspective, that's no surprise that when people are trading between various cryptocurrencies, they're usually going through Bitcoin or they're going to store some value in Bitcoin, just because there's a high trust level, high resilience level. It's kind of the rock that you can trust to be there.
“[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.”
That's why one of the three products we're building in Vesper is built on top of Bitcoin. 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. It's something that when Ethereum came along, is I feel additive. So without Bitcoin, Ethereum would not have gotten where it is today. Without Bitcoin, there would be far less total value locked, far less capital on Ethereum. Because 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. They have a higher risk tolerance and they’re first mover in that regard. So I think it's a one plus one equals three type of scenario. Is that if someone said Ethereum is leaving Bitcoin in its dust, I would disagree. I would say that Ethereum builds on top of Bitcoin and then DeFi builds on top of Ethereum.
“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.”
CR: That makes total sense. I want to get into your involvement in Bloq and then going from there, what Vesper is. Can you lead us through how that developed?
Enterprise Blockchain Infrastructure
JG: The 30 second commercial on Bloq is that we're an enterprise infrastructure firm for blockchain. We focus on public blockchains. People can go to Bloq.com and sign up for an account and access, manage nodes, infrastructure for Bitcoin, Bitcoin Cash, Ethereum, Algorand, several other really interesting and innovative blockchains. That's our core business and we continue to grow that. I could talk all day on the podcast about that.
But we also have a unit called Bloq Labs that spins out innovations out of Bloq. In 2017-2018, the first project that we spun out was Metronome and we're still continuing to build on that. We have an announcement in the next 30 days about Metronome. That was in hindsight DeFi, it had an on-chain DEX, and had an AMM, an Automated Market Maker, which is what made Uniswap very popular today. But we launched it in crypto winter, so that was definitely a challenge or a headwind for Metronome. But to this day, it remains one of the top 20 projects on DeFi Pulse in terms of total value locked, it's never been hacked. So we're very proud of that.
Next, we launched Titan mining, which just last week announced it's one of the first regulated North American Bitcoin mining pools. So we're still fans of Bitcoin and we still build on top of that network. As mentioned, it's the rock that we set our back against. Titan mining spun out last year. And this year, the DeFi experience, we had been, not only yield farming, privately playing around with some of these decentralized financial products, but running into some of the pain points in terms of hacks, lack of professionalism, lack of trust in some of these instruments, a lot of them are fly by night. There are terms that should give any retail user pause, like “rug pull,” where it's kind of an exit scam where the founders run away with millions in deposited assets.
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, the Pickles and the Sushis, and the wasabis and this, that and the other. We baked that into Vesper, which is a platform are a suite for DeFi products. The first line of products that we're releasing is a pretty familiar deposit your crypto, and earn yield, type of pattern. We call them Holding Pools for crypto holders. You want to trust that if you put your crypto in a Vesper holding pool, it's going to be there a year, 5 years, 10 years from now continuing to earn passive income.
“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.”
There's been definitely a lot of interest from kind of the crypto OGs, the Bitcoiners, the Ethereum crowd, they want something that they can trust that is not that kind of higher risk DeFi Food Festival. They want to hold their ETH or their Bitcoin, etc. But they want to grow it too. They don't just want capital to be at rest. That first touch of that product, was really aimed at those experts, and this is what led to Vesper. We were thinking to ourselves that this experience just needs to level up. It needs to be easy for retail users, for institutional users, and not just the long-haired crypto folks that we all know and love. We decided to make it official and kicked off Vesper about six months ago in terms of engineering based on work I did about 12 months ago.
“We were thinking to ourselves that this experience just needs to level up. It needs to be easy for retail users, for institutional users, and not just the long-haired crypto folks that we all know and love.”
CR: The main idea behind Vesper is to provide these are automated strategies for holding crypto and earning yield on that crypto?
JG: That's right. It's in one sentence, deposit ETH and earn ETH interest. Deposit Bitcoin, earn Bitcoin interest. It couldn't be simpler.
CR: What happens under the hold? How are those assets invested?
Dialing User Risk
JG: It's called a yield aggregator. What it does is, this is entirely on-chain permissionless, noncustodial. We're not holding funds, it's all in a smart contract. Those smart contracts, in turn, are routing to where is the best yield within a certain risk tolerance. 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. As part of leveling up that level of professionalism is that these yield sources, they have been on the market for months, possibly years, they've been seasoned. They've seen real money testing. They've seen dollar volume, transaction volume.
“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.”
We have about 20 metrics that we look at when we're examining a yield source, like a Compound, or an Aave or a Uniswap, or a MakerDAO, four of the components that we use. We look at those metrics and we say, is it sufficiently low risk that we can call it conservative? If the answer is yes, it goes into one bucket. If the answer is no, then it goes into an aggressive sort of high-risk, higher-yield bucket. Users can dial their risk level, if they feel that they're comfortable with higher risk, then they can go with that aggressive set of strategies. If they are just looking to part, liquidity passive income, but they want the longevity rather than the risk, they go with the conservative strategies.
CR: That would be the difference with something like Yearn which is offering something pretty similar to depositing crypto assets and having this yield aggregator, yield bouncer, they call it, but they don't have these different risk levels that users can choose from. Would that be the distinction between the other yield bouncers in the market?
JG: Absolutely. There are a number of distinctions. So choosing your risk level or dialing your risk, that's one. We actually work with Yearn. We have pools that, again, they're on the higher risk side of that divide. But if you want to engage with one of our aggressive pools, then we are sourcing some of that yield from Yearn itself. So it's a competition, maybe, in that it's there are some similarities, but also some differences.
Another difference is that we have a revenue model so that each of these pools is tied together with VSP governance token and the pools have fees associated with them. There's a withdrawal fee and an interest fee, and those fees from all the pools go to a central treasury box, which liquidates those tokens down to the VSP token. This is creating buying pressure by selling ETH that was earned as a fee and buying the VSP. Then that Vesper token goes into what's called a revenue vault. Anyone who wants to stake their tokens can receive a portion of the revenue.
We wanted to really think about the sustainability of the entire system. There's a lot of energy behind Yearn, but at the same time, their token was almost minted by mistake. They admitted 30,000 or so tokens and then governance proposal to increase the mintage did not pass. They're kind of stuck with this happy accident of history and it's not quite as integrated into each of the products as ours is natively integrated into all these pools. So we have the benefit of hindsight and we have the benefit to say, well, there's a couple of mistakes that Yearn made and we can learn from those mistakes, and create something that's more decentralized and more sustainable.
“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.”
CR: But what's the end goal of adding fees to these pools beyond distributing these fees to token holders? Is it in the end paying Vesper developers to continue maintaining Vesper?
JG: That's absolutely right. Is it creates sustainability for Vesper overall. We have, in addition to just that base revenue cycle I described, is we have a risk adjusting staircase for onboarding developers, the metaphorical whiz kid in Shanghai, or in Stanford, who writes a strategy that generates some pretty amazing yield. You want to take that raw source code, and we sponsor or pay for source code audits for that developer. We provide resources for private testing. We provide resources for back testing. Then unique in the industry, we actually provide some test capital so that those developers send their strategies through real money, limited testing live on the Ethereum mainnet.
If it survives that kind of Darwinian competition, and that Darwinian Wild West, then we move it up and we trust it a little bit more with a little bit more money. We ratchet up that level of trust over time, so that eventually, months down the line, it's been battle-tested and we can then assign a portion of that fee revenue to that developer. In theory, a Shanghai developer who writes a great strategy can retire on that stream of income. We gave them all the resources that we could think of, for them to succeed.
“In theory, a Shanghai developer who writes a great strategy can retire on that stream of income. We gave them all the resources that we could think of, for them to succeed.”
CR: I still see all these token models emerging and they make sense, they look promising. But in the end, there's still the risk of this being open-source code, and it becoming a race to the bottom, someone will create something similar to Vesper with lower fees, and then it'll be hard for you to compete. How do you see these token models evolving?
Can’t Fork Community
JG: For some products like Swaps, we've seen that the users are very happy to jump to a new project when the fees are one quintillionth slower. Some of the software such as DEX aggregators actually help with that. As soon as a new, like Sushiswap is on the market, a DEX aggregator will start routing traffic if the price is right. That's pretty common in the trading sphere. But you see it a little bit less in the vaulting sphere, because 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. That's part of the moat that each project has.
“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.”
At Vesper, in particular, we feel that not only are the fees competitive, other projects, they're higher fees, but again, you might get into that race that you just talked about. But you have that developer up-ramp that really embeds a developer in your community. We saw a lot of community efforts like this in my Linux kernel days, pre-blockchain, where the learning curve was so high, we had to create mentoring projects to mentor developers into your ecosystem. Writing strategies is a high dollar type of activity where you're potentially managing hundreds of millions, maybe even billions of dollars. That developer on-ramp and that developer community is something that can easily be forked and replicated.
CR: That's interesting. So you're hoping or betting on very skilled developers coming on to Vesper to create started these because they're being incentivized to do so with Vesper tokens, and that in the long run this community or network of high skilled developers will be really hard to replicate and we'll make the Vesper protocol more valuable, even if there's something else that's similar with lower fees?
JG: That's right. It's a continuous engine for new innovation year on year. That's something that you can't fork.
CR: This whole new mechanism of hiring but not really hiring, it's so interesting to me. It seems like there's a whole new business model emerging, where you're creating instead of full-time, paid roles at companies, you're just creating this funding source for contributors building your company. It's sort of a contributor-driven way of building.
JG: It's very self-motivated. You know, we look for self-motivated individuals. No one invited me to work on Bitcoin, I saw it on a website, I dove into the source code myself, and took it upon myself to start changing the software. We're looking for similar developers, is that if you're self-motivated enough to learn, here's this staircase that we built for you to make it easy for you to just walk in off the street. If you choose that you're working for Vesper, then you're working for Vesper. It's a new way of thinking about employment.
CR: Do you think this will lend itself to any industry? Or are there specific kinds of companies that can actually implement something like this?
JG: Well, I think it's mainly digital-friendly. You're not going to get a pipe fitter or an iron worker to really fit this model. But absolutely, whether it's media or communications or software development or filmmaking, any of those, I think you can build that kind of mentoring on-ramp. Just, as an engineer, I look at kind of what I call the plumbing behind the scenes, blockchain makes it possible for these disparate individuals to plug themselves into self-organizing networks. I think that's the software and social component that's new and interesting.
“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.”
CR: So Vesper had a beta launch. When will people start using it? What is the current status on that?
Path to Decentralization
JG: As we are recording this, our engineers are putting the final post audit smart contracts on the blockchain, and so our beta is about to go out the door in mere hours. Then T-plus, one to two weeks after that, we go to full production, and we're banging the drums and have the marching band marching down the street.
CR: What's the beta? Is it like a select group of people? Or is anyone able to test it with limits? What does it include?
JG: Anyone who is comfortable with testing a beta product, so again, it's kind of dial your own risk level. It's a public beta, open participation. 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.
“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.”
CR: Does it have any limits?
JG: Right now we have what's called a soft limit and so $10 million AUM for each of the pools during beta is our soft limit. We can if we elect to through multisig governance increase that. But once we hit production, no limits.
CR: How decentralized is this? Is there any KYC required, and also, what level of control does Bloq have over running the whole thing?
JG: On the fund perspective, it's permissionless noncustodial. There is no KYC gate or anything of that nature. That's one side of that. From the governance perspective, we've studied the various fair launches and the various governance tokens, and I think we've applied a lot of lessons learned from there, taking a phased approach. So the initial phase is a multisig of Bloq team members and also a couple externals, so some advisors. Phase two, we use the Compound governance model, so that's quickly becoming an industry standard, not just with Compound, and so proposals have to go through an on-chain governance and voting process. So that's kind of the path to decentralization, initially there's a multisig and also there for emergencies. But long term, it's the Compound governance process.
“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.”
CR: How is the Compound governance process?
JG: On-chain voting with a certain vote threshold for proposals and a certain vote threshold for passing.
CR: How many pools are you going to launch with?
JG: We're launching with three: V-USDC for USDC holding, V-ETH for ETH holding, and V-BTC for, you guessed it, Bitcoin holding. So three initial pools, very much targeted at crypto holders who want to just deposit and sort of set and forget. We take care of all the gas fees. If transaction fees go up, you're not impacted at all. We're aggregating all those fees, just like we're aggregating and pooling the yield. After that, 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, community, longevity, kind of just generally high quality is what we're shooting for after those first three.
“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.”
CR: Interesting. For the Bitcoin pool, is it any wrapped Bitcoin?
JG: That's exactly right.
CR: Going forward, looking at the broader picture, where you see Vesper as fitting into the automated asset management space in DeFi, where do you see this phase going in the long term? Do you see it just eating Wall Street's market share, replacing traditional funds? What’s the long term game in this?
Breaking Down Walled Gardens
JG: I think it's twofold. One is the decentralized finance is breaking down that walled garden where you log into a centralized account, and you just see fidelity products, or you log into a centralized account, you just see vanguard products. With DeFi is one wallet talking to any number of vendors, and you can mix and match those in new and interesting ways.
I mentioned earlier, we’re extensively playing in the same space as Yearn, but again, with our conservative versus aggressive risk levels, we're also plugging into Yearn. This interconnectivity is going to continue to pull legacy finance into the DeFi space. 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'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.”
At the same time, and you mentioned earlier KYC, I think there is room for kind of a parallel track for hybrid finance, whereby there are going to be some KYC controls in, say, a parallel set of yield aggregating tools. It's kind of a fusion of both to answer that question, but also, there's just flat out new products we've never seen before. We've invented something new called “Directed Pools”. Holding pools or something pretty familiar; you deposit a crypto and you earn interest in that crypto. That's a familiar DeFi primitive. “Directed Pools” are you deposit one thing and you earn something else. You can do something interesting with that yield.
What does that mean? To be specific, you can fund a charity by you and your friends all pull together and there is a project called “Pool Together” that does this. Pool logether, let's say, a million dollars among all your friends, and then you wait 30 days and you take back all your money, and you funded a charity through the interest earned on your money. Or venture capital, this has the possibility to change venture capital whereby limited partners, again, they all pull their capital, they wait 90 days, they all withdraw 100% of their capital, so no money lost. They funded an angel round of a startup, or a seed round or a series A.
It's kind of an evergreen funding model whereby you can use the yield for interesting new capital formations that go way beyond, I have some Ether, and I want my Ether to Compound. You start to be able to automate and program where that yield goes and get really creative about it. So those are some of the possibilities with that new DeFi primitive we're calling “Directed Pools”. We're seeing a lot of interest in that sort of earn X and then do something automated with it, type of pattern, which is really interesting.
CR: I've seen those projects, super interesting. Do you want to implement that as well in Vesper?
JG: We have. It's not going to be released at launch, but that is our second line of products is the “Directed Pools”. We do have some charity interconnections, so we're going to do some charity events. We're also going to build some products that allow sort of the other 99% be able to generate yield with their tokens. Right now, today, it's kind of the major tokens that can generate yield, your ETH, your Bitcoin, something like that. But there's just so many tokens out there that are underserved and we feel that you could say, deposit some ETH and earn KAMI coin. That's a realistic DeFi primitive, that if there's a really interesting community that you want to address, you could create a community coin for that and have one of these “Directed Pools” help fund community center or community event.
CR: What would the idea behind that be you deposit ETH, you invest that ETH and different pools and strategies, and then the return, you get on that, you just automatically convert to another token?
JG: That's exactly right. That automation, you can chain it such that it goes into another product, which goes into another product. You can use that yield just for flat funding, send a check to a charity, like UNICEF, or send a check to a startup to fund the startup. Or you can start to program yield in ways that quickly become, I guess, very complex, but also very innovative.
CR: I wanted to touch on the first thing that you mentioned which in this question, which was pulling in traditional finance and finding this kind of hybrid finance. Can you explain more what you mean by that? How do you do think traditional finance or legacy finance will start building DeFi products? Or will Vesper launch a KYC arm and that arm invest in via FinTech applications?
JG: Well, what we've done with Vesper is we built these permissionless yield strategies. At launch, that's field testing, road testing, and eventually, sort of battle hardening those yield strategies. We can take that same software and create kind of a separate universe that is a little bit more permissioned. We're reusing the same software that we've already battle-hardened for a similar use case, but in that case, it's wrapped with KYC.
There's one potential for bringing institutions in and giving them a little bit more of comfort level with that particular KYC. But we also feel that's kind of a limited bubble and they'll eventually want to graduate from the JV squad to full DeFi, to full decentralized finance, full public blockchain. That's where that conservative versus aggressive comes into play. We feel institutions will move from sort of the KYC kiddie pool to the full decentralized finance conservative strategy.
“We feel institutions will move from sort of the KYC kiddie pool to the full decentralized finance conservative strategy.”
Previous to Vesper, you've had these aggressive food festivals, and institutions really haven't had appetite for it; whereas with the conservative strategy and potential for hybrid finance, that gives institutions and up-ramp or an on-ramp into DeFi and then the full public blockchain.
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.
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.