Why you should pay attention to #DeFI
The Internet is Eating the World
Marc Andressen, Ben Horowitz and Extreme Internet Wisdom
In my writings, three characters tend appear often - Marc Andressen, Ben Horowitz and Chris Dixon. These gentlemen are some of the best known venture capitalists in the world and I am unashamedly hooked to their talks, writings and frequent insightful utterances. This is mainly because they practically built some of the key parts of the internet as we experience it today in fintech, including the famous web browser and web server - Netscape and one of the earliest cloud computing ventures - loudcloud. Pioneers? Sure. Consistently right? Shockingly.
Around 2008, Just as Lehman Brothers was failing and my beloved investment banking industry was starting to hand over the big kahuna status to the tech industry, they set up a venture capital firm known as Andressen Horowitz. Andressen’s core investing theses are as follows:
Entrepreneurial talent, and not capital is the scare resource: and venture capitalists that provide access to exceptional managerial and engineering talent to startups will win much more often than firms that only offer capital and wait for exits.
Software is eating the world - the economics of software are such that everything that can be done in software will be done in Software. This was partly true when software was copied for free on DVDs and distributed for not a lot and this is 100% true in the era of cloud when starting a software company costs generally costs under a million dollars for the entire first year. The economics of software is also the entire reason all of us work in fintech and not in the branch of a bank.
VCs are in the business of investing in good ideas that look like bad ideas: This is because good ideas that look like good ideas (e.g. neobanks) are overcrowded with competition and bad ideas that look like bad ideas should die. Bad ideas that look like good ideas might attract talent and capital for some time but will soon be proven fads. That leaves us with the only investable category in the early stages - good ideas that look like bad ideas. Get in there before others and make things happen.
There are no bad ideas on the internet, only bad timing - as technology, regulation and customer needs evolve, things that aren’t viable businesses today become so. Netscape was launched when a maximum of 50 million people globally used the internet. Netflix dreamed up of streaming a streaming service at least a decade before it was actually viable. A lot of defi ideas will land here because we are so early with the underlying tech and regulation.
If the future came to you, would you accept it?
This is a play on the song, “What if God Was One of Us”. Honestly, most of us wouldn’t - because God may not fit into one of our echo chambers and we will look around and check whether the echo chamber agrees. The same thing applies to Future. The Future is often too weird, too unexpected to be acceptable today and what is acceptable today is rarely the future.
In fintech, we love to talk about the future. Mobile is the future, cloud is the future, remote is the future, AI is the future, potatoes (no, not those) are the future. However, typically, we only call out things that are safe and common wisdom. Things that make sense, don’t look too weird and fit into the current world already. Most of the time, we just look upto Silicon Valley business models that are already proven and mature and predict that the same models - Uber, Netflix, Amazon etc will disrupt Financial Services also.
However, when we stick to the safety of fintech future from Silicon Valley’s past, we end up with good ideas that look like good ideas. We get umpty-five neobanks in every country that outcompete each other to death and give enough time for banks to catch up and launch their own me too mobile banking offerings. We get a plethora of pointless fintech partnerships that predictably fail to disrupt legacy banks and probably even entrench the oligarchy and tyranny of legacy banking.
When we predict the past, what we seek is disruption, what we get is incrementalism. What we want is digital transformation and what we get is an industrywide IT upgrade.
Ok, Ok, So What the Hell is DeFi?
You have to be really careful of the fringes on the internet - it’s the fringes where all the good ideas that look like bad ideas start. If you spend all your time on the mainstream then all you do is mobile bank waiting for AI and you miss out on all the good ideas - Paypal (no idea how regulators approved that one back then), Stripe (payments for developers) and Square (wasn’t even supposed to be legal). Because software is eating the world, it really doesn’t matter too much what you know about the world. You have to, hell - yes, you simply have to think like a developer and not a banker.
I will deep dive into regulation and defi in a subsequent writeup but here’s what Scott Kupor of Andressen Horowitz has to say
Anyhow, decentralised Finance is an extension of Bitcoin. I will get a lot of internet hate for saying this but it’s true. Bitcoin was the culmination of a long series of failed (I prefer partially successful) experiments that tried to create a peer to peer internet currency.
Bitcoin effectively tried to solve one of the things Marc Andressen couldn’t build into Netscape because of the then state of technology and the fear of regulation - and as the ten year journey of bitcoin has shown, this was a really smart choice at the time. The other thing Marc didn’t build is an internet identity ( hence all the spam from “on the internet nobody knows that you are a dog”). What he did build is encryption - the one thing that powers all of multi trillion dollar internet commerce today.
Like cash, bitcoin provides a bearer asset but you can’t build a financial system with bearer assets alone. The foundation of all finance is credit i.e. debt. No surprise then that this is the first thing DeFi tries to solve - “P2P Internet Credit”. Today, it does so using another bearer asset - Ether which is the native asset of Ethereum - a well developed (blockchain) framework for programmers to create complex software programs that:
Use Ether to create new assets that express complex, real world (and unreal world) behaviors e.g. a coin that is algorithmic ally pegged to the US dollar using operations that look remarkably similar to the open market operations of a central bank
Can be extended to implement sophisticated behavioural incentives for participants that are not known to each other (pseudonymous).
Use a “blockchain” as the shared, secure, global ledger of transactions. This ledger is transparent to and verifiable by everyone.
Assemble complex financial products and services by assembling “lego blocks” i.e. financial primitives - or simpler component financial services.
How far have we come already?
Not far at all. Not far enough to be mainstream but not early enough to be ignored anymore. Several important experiments are happening every day with real money and real people (unlike fintech innovation labs or sandboxes) participating in the evolution. In my book the most important milestones are:
An automated cryto-asset pegged to the US dollar using open market operations (DAI).
Operation of a financial system using participatory, peer to peer governance in a pseudonymous environment (DAO, YFI).
Peer to peer borrowing/lending (LEND)
Many to Many (pooled) collateralised lending and borrowing (AAVE).
Primitive insurance for pseudonymous lending transactions (Nexus)
Synthetic (financially engineered) products from simpler primitives… Synthetix and most DeFi applications land here.
Is it a Toy, Is it a Bubble?
Yes it’s a video game right now but so is most of our online life. The internet label for someone actively involved in defi is “degen”, which is a shorthand for degenerate. The degens are typically programmers who got rich (or richer) when they bought ethereum or bitcoin early and now need to play with it. Many degens are people who carry a distinct internet consciouness i.e. their minds aren’t and cant’ be programmed any other way. They grew up on video games and mobile apps and the global financial system is just one of the things that simply needs to fit into that mental video game world of warcraft.
Why so? As I learn from my two kids every single day - it’s not their problem that thats not how you okBoomers model your world in your mind. You are probably just one such video game character called Dad who makes them study math and pays their bills with occasional hugs and cricket in the mix.
Yes it’s a bubble right now but only one of the many bubbles we will experience on the way to the internet eating the financial system. It’s a big bubble (a few billion) if you live in the crypto echo chamber but it’s a microscopic one compared to the size of the global financial system and the dot.com bubble.
Why so? Well, the internet has an insatiable hunger for new ideas. As a result, after three years of being ignored into an obscure and weird fringe of fintech, DeFi projects and founders have become instant internet celebrities, at least in the crypto echo chamber. DeFi coins are going to the stratosphere instantly (same as the dot com boom, although much shorter and faster), poetic blogs (like this one) are being written in their praise and social media channels are on fire waiting for the next instant path to riches… this bubble is sucking in mostly existing money into bad ideas that look like bad ideas, but also bringing new investment into good ideas that look like bad ideas.
As in any bubble, there will be lots of bathwater i.e. scams and crashes from which the baby defi will emerge. Here’s the catch 22 you need to keep in mind
If you focus entirely on the bathwater ie scams, bubbles and crashes, you will miss the whole baby and all the opportunities attached to the baby.
If you focus only on the baby i.e. go full wide eyed revolutionista into it, you might not see the wholesome opportunities for people who actually understand how and why the financial system works today to participate in the the glorious, disruptive weirdness of the internet.
I Will Bite! Where can I learn More?
We will talk a lot more about DeFi from an “OkBoomer”’s perspective in the coming episodes. For now, let#s ear it from the OG (original ganstas i.e. pioneers), people who might as well end up being the Andressens’ and Horowitz’s of our era.
It’s not probable that the future Marc and Ben are on this podcast but it’s also not entirely unlikely.
