Robert Leshner - Decentralised Finance Will Change The World: It's Cheap, Fast, Reliable, Transparent & Efficient

Full transcript: Robert Leshner on London Real

2:33 Brian Rose: I am Brian Rose. My guest today is Robert Leshner, the former economist turned entrepreneur and decentralized finance innovator. You are the founder and CEO of Compound, the software development company that is revolutionizing the entire DeFi ecosystem. Your company played a key role in the explosion of cryptocurrency yield farming during the DeFi summer of 2020, a year when the total value locked and decentralized finance grew a staggering 88 times, according to Forbes magazine.

3:02 Compound was also a pioneer in this space of blockchain governance and the issuance of governance tokens, and you have been at the forefront of helping to grow the blockchain space, investing in crypto platforms like Argent wallet, open, and Blockfolio. Robert, welcome to London.

3:18 Robert Leshner: Thanks for having me.

3:19 Brian Rose: Great to have you here. I got so much to ask you and so much to talk about.

3:23 You know, I actually started my career in finance, and I was in New York City in the 90s, and they were recruiting engineers from MIT to be like their rocket scientists on the desk, and so I went into fixed income, and I got dropped into a group that was doing all these complex financial derivatives. Robert, you know, all these really fascinating things like option trades, and you know time trades, and it all had to do with the financing and treasury curve, and it was a fascinating place to be in, and I was really excited to be there. And you know, I moved on to Chicago.

3:56 I came here in London to do credit derivatives, but then I stopped, and I started broadcasting for 10 years, and so I really hadn’t been involved in this space, Robert. And about four or five months ago, I looked at what you guys were doing, and I thought, wow, this reminds me of what we were doing in the 90s, except you don’t need 10,000 employees. You don’t need a balance sheet. You don’t need a direct line to the Fed. You got, you know, four guys in the dog in Tel Aviv or three girls in St Petersburg with a cat, or who knows where they are, putting up these DeFi protocols, and the innovation was amazing to me.

4:28 I mean, I used to trade in the repo markets where we’d have to swap a government security, right? 30-year Treasury or two-year Treasury, and get a yield, and I was like, wow, look at what they’re doing, and I was so exciting to watch. And so we’ve kind of gone all in on the ecosystem. We’ve created an Academy. We’re teaching hundreds of students, and so I’m just super excited to have you here to talk about this stuff.

4:50 You know, on my show London Real we had conversations about crypto and DeFi over the years, but we couldn’t put the pieces together. I had Max Keiser here in 2013 talking about Bitcoin, screaming about Bitcoin. I had Andreas Antonopoulos on the show in 2015, 2017, 2019. You know, Robert, talking about the future of money, the internet of money, but it hadn’t happened now it clearly has happened, and thanks to the work that you’re doing at Compound. And so let’s jump into it.

5:19 I figured maybe we just jump right in to summer of last year when your platform is just going up. You know, 10x in volumes, and something that I’m sure you guys always believed in becoming this reality. Can you maybe walk us through what some of those days and months were like, and maybe explain to people what was happening and why it was so important?

5:42 Robert Leshner: Yeah, so I’ll start with the history. You know, I’ll try to tie it back to your experience trading with very math-based products, right, where markets were really, you know, created and run by really smart guys.

5:56 You know, people are coming in doing rocket science, you know, trying to price different financial instruments, trading them, having internal workings, trading with counterparties. That’s the way finance is always basically out there. And you know, I started my career in finance in 2007 and this is right as global markets started to enter into an incredibly dark moment where the global financial system started to melt down. And when I looked around, I saw it was melting down because with all these smart people that all knew what their positions were, but nobody else knew what any other bank or any other counterparty held.

6:34 It was a guessing game, you know, and there was whisper campaigns and guesses all across Wall Street and all across global financial markets as to the health of counterparties. And so, like, what you know the system was actually due, or how, like, different things were going to price or unfold, and nobody knew what was going on. It led to this like global calamity, right? And so one of the things I’ve set out to do with my whole life, my whole career, is to build a financial market that’s the opposite of that, where it’s not run by lots of brilliant people doing complex math.

7:08 It’s run by computer code doing math, and it’s doing it as open source computer code, in a way that anyone can have visibility into, anyone can audit, anyone can inspect and understand the workings of this financial market. This is what we call DeFi today. It’s replacing all of the really smart people with all of their, you know, own proprietary information with financial markets run by the program, and these programs exist on blockchains, and this idea when we sort of came up with it, you know, in 2017, was crazy.

7:42 It was, you know, novel in a lot of ways. There was no real examples of DeFi applications that were working or had critical mass scale yet, and so Compound is an attempt to create an interest rate market using computer programs. You know, we started this in 2017, and it was a couple years until last summer when things started to really take off. Now, Compound lets you do two things very simply. One is you can borrow assets using crypto collateral.

8:10 This computer program manages the entire process. You post your collateral directly to the program. It holds the asset for you, and it says you can borrow this much. It manages the risk and the liquidation of your position, and it ensures that, you know, you don’t pose any systemic risk to others, and it lets you borrow anything you want. Typically people are borrowing stablecoins.

8:30 On the other side of this, it allows users, whether they’re individuals, hedge funds, other financial applications, other DeFi tools, to earn an interest rate by simply providing liquidity to the borrower and, you know, it was last summer that this really started to take off. We launched Compound in 2018. It was very simple. You could earn interest and you can borrow crypto assets. You know, by the end of 2018 there’s maybe 20 million dollars of assets in Compound, which was as a proof of concept of a completely different approach to creating a financial market.

9:05 Phenomenal. By the end of 2019 the number was about 100 million dollars. You know, it started to grow, but again, like, the concept of DeFi was still relatively limited. There wasn’t that much assets in aggregate being, you know, put into these new financial applications. And then in the summer of 2020, we did something that was transformative, which was we took a protocol which was running, had 100 million dollars in it.

9:30 It was providing 100 million dollars of, you know, interest bearing assets available to one side, and people are borrowing them on the other side, and we said no longer is this system going to be run by the team that built it, and instead what we’re going to do is we’re going to hand off the administration of this market to the community, and all of the governance of it, and all of the value of it is going to accrue to the community instead of the original team that built it, and this was one of the first times that you had seen a platform that started off centralized moved to decentralization. Certain assets like Bitcoin were lucky, and they started off from a very early point, not very decentralized, but they started off in a state in which incentives and competition created a decentralized structure, and this was one of the first times that we were going, you know, through a transformation of an in-flight system that was managing a huge amount of money.

10:25 I mean, this was really exciting. And so this set off an explosion of new ideas on just how users interacted with DeFi applications. We began giving away ownership of the protocol directly to the users. That led to this flywheel effect where there was more users who wanted to participate in the market because they were going to become owners of it. It created a huge amount of awareness and visibility, and it created, you know, a set of incentives that got people to participate in actually taking ownership of this system and feeling like they had a vested interest in the success of it.

11:01 And it was a wild time. I think since then, we’ve seen this become a playbook and a template for a lot of different new DeFi applications to launch a product or a market, and then as it scales, handed off to the community so that it can become anti-fragile. There’s a huge, you know, collection of interested stakeholders that want to see it succeed as opposed to one. So that was the most exciting summer that I’ve ever seen.

11:26 Brian Rose: And so, you think that wasn’t a coincidence?

11:29 Do you think that when you made that governance decision to kind of open source it, and also, you know, first of all, give the ideas to the community so they could flywheel it, and also give them the ownership? That wasn’t just a coincidence, with everybody wanted to do yield swapping at the same time? They were hand in hand.

11:47 Robert Leshner: Yeah, they were, and you know, you know, we also didn’t know what to expect, right? So you know, when we first started building Compound, you know, the idea of, you know, computer code, you know, running a market without tens of thousands of employees and without buildings and without control essentially, this was a radical notion, and then the idea of giving it away, you know, as it was succeeding was in some ways even more of a radical, radical notion.

12:12 You know, a lot of, you know, the stakeholders that we had, like investors in our business, were a little terrified of us essentially giving away something that we had built that was working, that was scaling, but I think at this point it’s become, you know, almost an understood concept that this is feasible and it can work.

12:29 Brian Rose: It’s such a radical concept. I’m thinking of my equivalent on Wall Street. So when I was on Wall Street, I’d be sitting on, you know, hundreds of millions of dollars of government bonds overnight, and I would repo them out so just people would know, as opposed to just sitting on them and getting no money.

12:45 I could lend them out overnight and someone would pay me, you know, fed funds rate, three or four percent, or if they were really hard to find, I might get paid something nice because people really wanted to grab them to sell them. And so usually I call my own repo desk. Maybe I could call another institution and get a rate, and it might be a little bit better. Now the equivalent is Compound comes out and says, guess what? First of all, we’ll show you how you can do your own repo, and we’ll also give you part of the company as a bonus for doing business with us, and you can tell us how to run the company.

13:16 If you told me that on Wall Street, my brain would have fried. The only thing I ever got offered was a steak dinner or tickets to see the Knicks. You know, that’s the way they would incentivize in the past. Right, there was it going on, but it was never this way of doing it with a token, and then the token has a mark-to-market immediate value, and it created this crazy flywheel of of critical mass that, again, that could never happen in the centralized finance world.

13:41 I knew of the past, right, but in DeFi. Well, you guys, you guys made it happen, and people could see it, and obviously they believed it and they participated in it, and again, people got the yield, and they got COMP tokens along with that for doing business on your platform and that kind of made it really explode.

13:58 Robert Leshner: Yeah. And today, you know, there’s about 18 billion dollars of assets earning interest in Compound, which is a number that, you know, was hard to fathom a summer ago, you know, and you know it has succeeded in that sense and has built up a pool of liquidity that’s now institutional at scale, where you know you can come into Compound and borrow a billion dollars, and that’s something that you never could have done, you know, prior to the introduction of this complete ecosystem.

14:25 Brian Rose: Right? And you say the word institution, and I want to get to that because that’s kind of, I think, a lot of where you’re heading with Treasury, and you kind of want to bring in I think the centralized institutions and get them to be working on your platform, and I definitely want to talk about that because that gets really interesting for people that are still coming up to speed here. You know, I have one of my students the other day, and I want to talk about stablecoins too, but they said, you know, why is this such a big deal?

14:48 Because I get them to go on like Compound and borrow and lend an asset in small size just so they see what it is, because most people have no concept of this, right? Robert, because we know our stockbrokers, this was the best kept secret for a long time. They would hold our shares and lend them out overnight when we just thought that you couldn’t do that. So how do you usually educate people on the fact of financing assets? Because we don’t normally, I mean, Airbnb maybe, as an example.

15:15 I guess we don’t normally finance our cars. Or how do you usually explain that, and why is it such an important building block to the whole system?

15:23 Robert Leshner: Yeah, it’s a great question. So you know, you mentioned a point, which is you know, all the stocks in the world, you know, that most people are sitting on, you know, overnight their broker is lending them out to a short seller or in some way to, like, earn just a little bit of extra income for themselves, and most of that value doesn’t accrue to you.

15:42 And you know, the idea behind Compound is that you know, originally we thought, okay, all idle assets out there, and starting with crypto assets that were available in the Ethereum blockchain, if somebody wants to borrow them, it should be freely available, and the people with the asset should be receiving the yield from that behavior. And so you know, one way to think about it is, you know, people will borrow the assets that you have. If they’re borrowing stablecoins, they’re excited to borrow these stablecoins to buy other assets, you know, to essentially, you know, convert the stablecoin into more Bitcoin, into more Ether, and then over time hopefully pay it back.

16:18 Bitcoin or Ether have gone up. They sell it, they repay the stablecoins, they farm, or if you know somebody’s looking to borrow Ether either to, like, run smart contracts or to sell either for something else, or to purchase an NFT with Ether, because that’s the only thing that can purchase the NFT. They might borrow either. And all of this leads to this process of people paying for the opportunity to borrow outsides, and paying the users that provide those assets directly.

16:47 And you know, the system works, you know, in a, you know, single-player mode basis, where you can just go to the protocol and take the prevailing yield, or you can borrow at the prevailing interest rate. You have to call anybody. It’s not like, you know, if you wanted to, like, get an interest rate on a Treasury, having to, like, work the phones or work the desk or, like, work chat rooms. You know, it’s a system that’s designed to be, you know, one which you can just directly interact with the protocol 24/7.

17:12 You know, it could be 3am and you could be wearing your pajamas and the system just works. And so the easiest way to think about it is, if you have crypto, there’s a yield available to you on that crypto, and if you want to borrow any of the different crypto assets for any reason, you can do so using other assets as collateral. So the most popular use cases are people taking a basket of volatile crypto assets, whether it’s Ether or Bitcoin or Uniswap tokens, or whatever, and borrowing stablecoins against it, or you know, providing, you know, stablecoins and other crypto to the protocol to earn the prevailing rate.

17:47 And the most popular trade has always been borrow stablecoins to buy more assets with, or, you know, go put the productive use in the real economy or do anything you want with against crypto, and other people providing stablecoins to earn an attractive yield relative to, you know, traditional financial markets. Right now in Compound, stablecoins all in earn about three to five percent, which, you know, most folks are interested in one way or another.

18:15 Brian Rose: Yeah, well, we mentioned stablecoins a few times there, so we probably should talk about what these curious instruments are.

18:22 Again, that’s one of the things that caught my eye when I took a double take at this market, and I thought, wow, that’s some serious innovation. But I had a student the other night on my course, and they said I’m looking at this stablecoin, Brian. I don’t know what to do with it, because if I invest in it, it doesn’t go up. It seems so boring. And what’s the point?

18:43 And I laughed, and I thought, you know, how can I explain this? And I thought, you know what, I like boring. There’s some times where you like boring. I have two young boys. They’re four and five years old, and they have a babysitter.

18:54 When I come home at night, I want to see boring. I don’t want to see somebody dancing on a pole, you know, with the whiskey out and some party you know, I want to want boring. You know, I want something that’s not volatile that I know is going to be there, that I moved into a neighborhood where nothing goes on, right? And that’s a beautiful thing. And so I tried to explain that a stablecoin does that similar thing, where everything else can be chaotic and up and down.

19:19 The only thing I promise you is boring stability. It will most likely be this one thing, and we’re going to try really hard and the track record shows we can pretty much do that. But that in itself is incredible value. And maybe you can talk about this, because this is also the embodiment of a smart contract, and it also, I think, even surprising to you, has become one of the biggest uses of blockchain of your platforms as well. You know, who would have thunk a few years ago?

19:49 So again, maybe you can talk about some of those points.

19:53 Robert Leshner: Yeah, and all that makes a lot of sense. So a stablecoin is a crypto asset that’s meant to be represented exactly one dollar, and there’s a huge demand for these stablecoins, because relative to dollars in a bank account, stablecoins are much more portable. You can send them to anyone, anywhere in the world, at any hour. They, you know, can cross capital markets.

20:17 They can cross geographies much more easily than dollars held on a bank account. Can you, you know, even just wiring money to someone is like a chore. You know, it often involves, like, visits to a bank and, like, 15 fees, and it takes hours and multiple phone calls. Right? Stablecoins are like the most portable version of the dollar.

20:34 You just can keep them in your crypto wallet, and you can send them to anyone else’s crypto wallet very simply. It could also, you know, be sent to you know, a DeFi application. And there’s the second advantage of stablecoins, is that they’re programmable, so anyone out there who’s building a DeFi application can very easily program stablecoins. They can build interest rates into markets for stablecoins, like Compound, they can come up with tools so you can trade stablecoins for other crypto asset sets, and vice versa.

21:02 They’re more useful than dollars held in a bank account because you can trade them. You can program them. You can do all sorts of extremely complex and rich behavior with them. So you know, imagine the international demand for dollars. It’s huge.

21:14 It’s off the charts. Imagine the international demand for better dollars that are more portable, and they’re programmable, and you can interact in all sorts of ways. That’s a stablecoin. And so what’s happening is, there’s lots of, like, dollars that were being held in bank accounts that are moving into crypto. People are trading or buying stablecoins with dollars.

21:35 They do this through Coinbase. They do this through exchanges. They’re converting dollars into stablecoins because stablecoins, for a lot of use cases, are just better than dollars held in a bank account. And likewise, there’s a lot of people that are borrowing stablecoins. It’s extremely hard to borrow dollars in a bank account.

21:53 It’s very easy to borrow stablecoins from a system like Compound. And so this borrowing demand creates a yield opportunity for those people with stablecoins, and it’s one of the things that actually pulls dollars from bank accounts into stablecoins in the first place. Is people say, wow, I can earn a three percent yield on stablecoins. Like, I can’t earn anything in my bank. It’s 10 basis points, or it’s zero, or it’s zero plus fees, you know?

22:17 Brian Rose: And so is it, is it the new gateway drug for crypto? It used to be Bitcoin. Now it’s stablecoins. It, as in a nice way, I’m saying, it gets people to try it for the first time because it’s so clear and the volatility is low.

22:29 Robert Leshner: It’s a great analogy.

22:30 You know, I would say at this moment stablecoins and NFTs are like the two gateway drugs that, like, get people into crypto that aren’t there just to, like, speculate on the price of Bitcoin or Ether. In the first place, it’s extremely useful and interesting, like on-ramps into the ecosystem, and if you’re someone that’s, like, boring, that, like, you don’t want to go out and buy a bunch of Bitcoin and Ether, even if you think it’s a great investment, you know, you might be attracted to, oh, I can earn three percent, and the price of the thing doesn’t go up. Right?

23:00 That’s attractive to people who like boring. And so, you know, this is something that surprised, I think, myself and the whole ecosystem is when Compound lobster wasn’t a stablecoin as a supported market, and it wasn’t until, you know, Compound had been running for a while that stablecoins really came into fruition, and it turned out that this was, like, the killer use case of a decent decentralized financial market, like Compound was to borrow a stable asset, which is much better than borrowing a volatile one. However, your debt is uncertain, and earning a yield on a stable asset is much more exciting than earning a yield on a volatile one.

23:36 So stablecoins have turned out to be this, like, this unbelievably important tool for global crypto markets.

23:42 Brian Rose: Yeah, it’s incredible. If you think about it, even back in the day, if you would go to places like Russia or South America, you know, even the ’80s and ’90s, you know, the babushkas, they had dollars under the mattress, right? They knew they had been through the ruble devaluations, they had been through the repudiations, the new, you know, all the wars and everything.

24:04 They knew property or American dollars is where you’d hold that currency, and now you’re giving them, it’s not the equivalent. We can talk about it, but you’re giving them, you know, something like that digitally. And again, you make some points a lot of people don’t realize. I mean, trying to get dollars out of a bank or move them geographically has all sorts of implications, from, you know, KYC and AML, and who’s doing this, and who’s taxing this, and whereas with a crypto transaction, it’s boom, it’s moved, it’s instant, and you’re seeing, like, that instant nature of it, you know, changing people’s minds on how crypto works.

24:42 Robert Leshner: Like, people used to say, like, oh, crypto is so much like a worse user experience than, like, the banking system or Venmo and all these things, right? Because it’s like you have to have a wallet, and, like, it’s complex, and there’s seed phrases, and, like, if it goes wrong, you can lose your crypto. But, like, at this point, stablecoins are just superior to, you know, wire transfers. You know, they’re faster, they’re cheaper, they’re instant. You know, it’s just like a better way for money to move.

25:09 And so I think, like, it’s winning over, like, the hearts and minds of people. I’m starting to see venture capital firms using stablecoins to invest in startups instead of dollars because they can, you know, close the transactions like the second that the docs are signed. You know, I think stablecoins are, like, this unbelievably powerful opportunity, and I think it’s one of the most important trends for the U.S. dollar, and I think it’s catching the eye of, you know, the Federal Reserve and regulators at this point.

25:36 But I think there’s, like, so much promise and opportunity in stablecoins that, you know, I think the next couple years are going to be a major turning point just in how dollars get used, and hopefully the world can start to embrace stablecoins, just making dollars more useful.

25:51 Brian Rose: Good. Look, we got more to talk about, but I want to just talk about the downside of a stablecoin. Is this, is that it’s not a dollar backed by the U.S. government? It’s something that looks like a dollar, right?

26:03 It floats like a duck, it quacks like a duck, but it’s not necessarily a duck. And depending on the protocol, the biggest ones are Tether and USDC. They have collateralization, and they’re usually overcollateralized, like I know you do on your platform, where you over-collateralize something, so if a market moves, there’s a margin call, and perhaps we talk about that shortly. But, you know, they perform pretty well, those top ones, but we haven’t you could argue, have they been stress tested?

26:29 What happens when the markets drop 50? What happens when that happens fast? I know we have Black Thursday as an example, March 12th, where you could back up a lot of what you’re doing with a collateral standpoint. But do we still need to test these stablecoins a little bit more, and do people need to know that there’s a risk, because it says USD on the screen but it is a very different instrument than a dollar.

26:50 Robert Leshner: Yeah, that’s a great point.

26:51 So stablecoins are minted by a business that says we’re holding a dollar of assets for every stablecoin, and those assets, you know, are generally safe assets. You know, it might be deposits at banks, it might be commercial paper, it might be U.S. Treasuries, and they’re saying we have a dollar back in it. They look like money market funds in a very vague way, right? And you know, if you were to have, like, a tail risk event like crypto collapsing, it’s uncertain if everybody would want to redeem all their stablecoins all at once.

27:22 Could the business that issued the stablecoin convert all the Treasuries or commercial paper into dollars if everybody wanted out the door? That’s unknown. You know, I think you know, we might not ever see a major stress test of a stablecoin for the simple reason being that when crypto’s crashing, the demand for stablecoins goes out up. People want to exit their crypto into stablecoins, and demands only going, you know, up, and you know, the demand for stablecoins only goes down when crypto’s actually slowly going up when people are saying, get rid of my stablecoins, buy more Bitcoin, buy more Ether, convert stablecoins into them.

27:56 So it’s hard to say, like, they’re, you know, it’s hard to imagine right now a market event that would cause a huge portion of a stablecoin to want to leave, and, like, unwind the position at the same time but that risk is there, and this is one of the reasons why people, like, view their being tail risks to stable coins. They might be one in a million, or they might be 1,000, or it’s hard to say, but there is a very small risk that if you have a stable coin, it’s possible that it won’t be redeemable one day for one reason or another. Now, this has never occurred, but that’s the risk that I think, you know, central banks are, like, trying to evaluate in real time.

28:34 Brian Rose: Okay, really good stuff. And again, just to say, like, the financial markets, as far as the yield curve of where you can borrow and lend instruments, it’s such an important part of the growth of a financial market. And, like, just as a bit of a background, you know, on Wall Street, I guess up until, like, the ’80s, if you wanted to borrow or lend money at a fixed rate, you kind of had to do it at whatever there was, a corporate bond or a U.S. government Treasury, and it wasn’t until they created kind of fixed floating swaps with specific maturity dates and custom yields, which was my first book I traded, that you couldn’t actually get a customized yield for a price.

29:12 And it all happened because somebody innovated with this kind of off-balance sheet mechanism, and it allowed so many other aspects of the market to explode. Some will never even know, but it probably helped facilitate school loans, mortgages, car loans, insurance contracts, options. Maybe, you know, who knows? It made the whole market grow, and that probably could have helped people outside of the country as well. So what you’re doing, sometimes when my students look at it, it looks small, but it’s massive, because it creates leverage and borrowing and opportunities, and it’s just an important part that I think is really important.

29:48 One thing we haven’t talked about is this concept of a smart contract. And you know, you mentioned Bitcoin early on, and that was actually, we’ll talk about centralization too, that was centralized from the beginning, but it never actually got to that point where you could do more than trade a Bitcoin and actually have logic in there. Obviously, the Ethereum network provided that, which had then allowed you guys to create these systems and all this other great stuff that’s happened.

30:12 I think you said something one time. You said the most valuable asset is time, and the best systems are designed to make trust obsolete. And also, you said earlier we want to get rid of the bankers and replace them with software, which might sound like a bad thing to do, but I knew those bankers, they should be replaced by software, but it’ll pass the savings on to you. How do you end up trying to explain to people what’s happening there, and why it is the future?

30:39 Robert Leshner: Yeah, it’s a great question. So you know, there’s certain, you know, products and markets that are best run by robots, right, metaphorically speaking. Where humans only introduce problems, they introduce, you know, malice or error or, like, blunder or you know, there’s all these things that can go wrong when humans are in the middle, and there’s certain financial markets that are best run by just an open source piece of computer code. You know, ideally markets that are very simple and ones that benefit from transparency.

31:11 And so you know, this is done with a smart contract. A smart contract just me is a fancy word for a computer program deployed onto a blockchain, and you know, the nice thing about, you know, whether it’s Bitcoin or Ethereum or whatever, once a block has been mined, everyone can be confident that it’s final, that it’s not going to change, and so a smart contract is just a very simple computer program deployed into the history of the Ethereum blockchain. There’s other blockchains now that can also support smart contracts, but once it’s been deployed, you see this computer code, and it says, you know, if this asset does this, then do Y, and if user supplies an asset, then do this, and it just manages, you know, a financial activity, and it does so in a way that everyone can see.

31:56 Like, anyone out there can, like, read how it works. You know, it might take some, like, sophistication, you know, but it’s doable, right? And the whole thing runs on its phone. You can think of it like a self-driving financial market. And just like, eventually when self-driving cars are really good, there’s gonna be less accidents, and when people are driving, right, it’s also going to be better, because, like, you can, like, fall asleep in the car and drive you.

32:19 The same thing is going to happen with financial markets, where self-driving financial markets are going to be better than ones where you have to pick up the phone and call people to get something done. You know, these DeFi markets are faster, cheaper, more transparent. They run 24/7. It’s just, it’s superior in almost every way, right? The biggest downside is that this is so new.

32:42 There’s, like, unknown unknowns, and that can include technical risks. That can include, like, you know, like inter, like connected, you know, risks of, like, financial markets. It’s newer, and that’s therefore a little bit dangerous, but long-term, this is the direction I think almost every financial market is going to go. It’s going to be run by computer code, not by people, and that’s how I like to summarize it. A smart contract is just a fancy name for a computer program being used for a market like this.

33:11 Brian Rose: Okay, now, you earlier talked about how last year you were taking everything you built, right, and trying to give it back into the users and the community. This whole kind of decentralized autonomous organization, or DAO type concept, which seems to be more in the forefront of blockchain development than say in your typical Silicon Valley tech startup. I mean, try telling Steve Jobs he’s going to do that. I think that would have been a hard sell, but maybe I’m wrong.

33:40 Maybe it could have been explained differently. I know that’s your long-term goal. We’ve seen attempts of that. You know, just recently Charles Hoskinson, who will be here in two weeks, was on an AMA, and he said, look, he’s like, you know, I’m talking about this right now. I’m kind of the spokesman, but I’m not.

33:58 This isn’t mine anymore. This is supposed to be something else. This is infrastructure for the future. It’s, I think, maybe a software developer’s mentality, right? I’m going to build something that ultimately doesn’t need me, right?

34:11 That’s like out of the movie Tron or something. Maybe talk about what you mean by that and how it can, I guess, maybe move an organization forward, and when you kind of gave it back, you gave the tokens back in governance form and also in value form, and maybe explain those differences.

34:27 Robert Leshner: Yeah, absolutely. So I like to start off by saying that if Bitcoin were run by the Bitcoin Corporation, it would be worthless. The value of Bitcoin comes from the fact that no one person controls it, right?

34:39 And that means that no one can shut it down. It’s going to run forever. It’s like extremely anti-fragile, you know, and its decentralization is what gives it value, and if it wasn’t decentralized, I wouldn’t pay a dollar for a Bitcoin, right? And its value, its strength, comes from the fact that, like, nobody can like wreck it or mess it up. Now, I believe the same thing is true for financial markets, right?

35:03 If a financial market is anti-fragile and, like, unwreckable, you have a lot more confidence participating in it or building a product on top of it or, like, you know, using it in any way, shape, or form. If it’s going to be there in 100 years, it’s a good financial market. Now, you know, you can’t apply this logic to everything. You can’t apply it to, like, Nike. You know, you can’t, like, possibly make cool shoes, you know, if it’s not done by, like, a company that’s really good at it.

35:32 Like, I can’t even imagine how you would, like, organize, like, a distributed and decentralized group to, like, make shoes, right? But a financial market is actually something that fits really well with nobody being in direct control of it, and so this was the goal with decentralizing Compound, and we basically went through this process of saying, instead of one company running it, we’re going to roll out a system by which every single user holds control and governance in some proportion to their usage, and then all of those users can collectively make decisions about its future. It’s impossible for one person to wreck the market, either by, you know, pressing the wrong button or making the wrong decision or whatever, and now it’s in the hands of hundreds of thousands of stakeholders, most of which might not pay attention to, like, the day-to-day operations of the system, but enough that there’s an extreme amount of visibility being put on the protocol.

36:33 Changes to the protocol all have to be approved by a large community instead of just one group, and it creates like a confidence that the system’s going to continue to work, and will work, you know, for hopefully the next 100 years, and I think that is done to make a stronger financial market one that, you know, isn’t dependent on, you know, the original developers of it and actually gains strength and value by being put in the hands of the community instead of remaining in the hands of one team, right?

37:01 Brian Rose: And I think just to paraphrase what you’re saying, if there was someone or something controlling Bitcoin, you wouldn’t trust it enough, I guess, to give them a dollar of your money, because you would assume they might do something funny in the long run or try to change it in their way that they want.

37:18 I won’t make any allusions to the U.S. federal government. We can talk about you know, printing money later. And again, that’s complicated, because they provide defense, and there’s all sorts of issues there, but you’re saying the fact, since it is distributed and it’s decentralized and it’s not controlled by one person, creates the value in it, strangely enough, and so that’s what a lot of TradFi companies are doing, that you guys were ahead of the curve I think in moving that forward and putting that out there.

37:46 Let me ask you a question about governance, and I always wanted to ask someone, Robert, you’re the perfect one. I spent the first six months of this year running to be the next mayor of London. All right, I had never been in politics before. As you know, 2020 was a crazy year, and we were interviewing lots of people that had different ideas about what we should do. Let me just say that and I thought, you know what, I’m not necessarily agreeing with what the current people are doing, so maybe I should do something about it, as opposed to just making some videos.

38:13 So I ran, and I got to see the democratic process at scale, and you know, it’s not always the most functioning process. The media plays a big role in it. There’s all sorts of weird things going on that I don’t think we’ve seen yet hit token governments, but when it does, maybe strap your seat belts in, because you know, influence and media and all these other things play parts in it now. You could say, well, that’s better, Brian, than one person or one stakeholder, and I could agree, but it’s also potentially got its own issues in the future.

38:43 Maybe you can speak on that, and also speak on maybe now the governance is still limited to a few major stakeholders. Maybe even on Compound, I tell me if it is or isn’t still mainly in the control of the big stakeholders of Compound, like yourself, and a16z and Bain and your investors. And maybe just talk about that.

39:04 Robert Leshner: Yeah, absolutely. So this is actually a really interesting topic, and I think in general, we’re at, like, a very early chapter of decentralized communities figuring out, like, how to manage a very complex financial market collectively.

39:20 Now there’s a couple models, right? The idea behind how Compound distributed tokens is we wanted to be essentially like a federation of people that were involved overseas, much better than one, you know, team, you know, having lots of, you know, dissenting views and competing views running a protocol, with the visibility, buying, and participation of every single user. So in Compound, every single user gets governance tokens no matter how big or how small, but it’s proportional to your usage.

39:52 So the larger a user you are, the more tokens you have. And this is a model which has, you know, I think 300-something thousand COMP holders, right? It doesn’t mean they’re all large, or they’re all going to participate in running this platform, but they’re all, you know, in some sense a stakeholder, with larger stakes done by those who have the most history and the most vested interest in seeing and succeed. And you know, this is a different approach from, you know, like, call it, like, you know, complete democracy, where every single user gets one vote, and you might have, like, you know, the crowd in its wisdom and its stupidity making decisions for a very complex system.

40:36 You know, it’s in contrast to that. So it’s completely scaled by a number of factors, but you know, it’s not designed to be equal. You know, so the way the protocol operates is, you know, there is an imbalance in the tokens over time. There’s going to be less and less tokens in the hands of the original stakeholders relative to the community, and we expect that because the tokens are distributed to the users of the protocol, proportion decides that the institutions and applications that are built on top of the protocol will amass the most governance and the most control.

41:12 So you can imagine, like, a custodian or an exchange integrating this market into the platform. They’ll wind up being very large stakeholders in the future of Compound. And so what’s going to happen is, it’s going to start with, you know, call it, like, the most professional stakeholders, and over time, you know, it’s going to go to the most active users, whether it’s businesses or applications or exchanges using a protocol. And it’s a system that makes it very hard for someone to lie, cheat, steal, or screw up, because there’s a lot of people watching.

41:49 The likelihood that, like, a bad decision makes its way through the governance process is very low. And it’s designed for essentially slow governance. You know, things aren’t changing very quickly. It’s predictable, and you have to convince a lot of people to support a change to the way the protocol works, whether it’s a small change, like, you know, what’s this interest rate curve in this one market, or a large change, like how useful is this asset as collateral.

42:13 Making changes to it, you know, requires a lot of buy-in, which I think is a very strong feature.

42:18 Brian Rose: Yeah, and you know, blockchain or accountability and government have never, they never really danced much together. So I think that’s an amazing thing to have, even with financial markets. I mean, you know, you, I’ll say Robert alluded to during the crisis, basically the Fed didn’t know the level of risk at some of these banks. When I used to be a banker at Bankers Trust, you know, we would do trades on the phone, you know, and it was an off-balance sheet transaction agreed between two counterparties, and we would never tell anybody the volumes.

42:48 We did it, it was all secret, and that’s how we kept our margins. It was control of information. Whereas the blockchain, you can’t do that, which is great for finance and potentially even better for government. It’s going to be interesting to see how it plays out. One final question.

43:04 Do you have a governance token, and also, not if I call it an equity token, or a token that has a kind of a share in the market cap, and are those separate, and is there a point where companies get too many tokens? What do you think is the future? I don’t know. Capital or a governance structure like that.

43:19 Robert Leshner: Yeah, it’s a really interesting question.

43:21 So there’s a single token called the COMP governance token, which runs the protocol and is essentially the owner of everything inside of the protocol. You know, there’s only a single token. This is for simplicity. I think over time you might start to see, you know, in all DeFi applications, you know, different experiments being conducted, you know, separating, like, voting from, you know, economic ownership. You see this in, like, different class structures of, like, you know, equities and publicly traded companies.

43:50 You’ve got common stock, you’ve preferred stock. You have all different, like, approaches to, like, slicing and dicing the relationship between, you know, governance and economics with the common protocols. There’s just one token. It’s extremely simple. Maybe in ten years the community, like, takes in a direction where they slice and dice it in some way, but for right now it’s just, you know, as simple as possible.

44:12 I think, you know, DAOs and decentralized financial applications will try tons of things, some will work, some will fail. I think we’ll replicate some of the best successes and failures from traditional financial markets, and bring in entirely new approaches to run these systems, and, you know, in the future it might change, but for right now it’s going to get interesting.

44:34 Brian Rose: That’s for sure. And when we see politics get into the governments, it’s going to be fascinating.

44:40 I mean, you know, I was driving around a battle bus with my face on the side of it through 5,000 miles in London, in every borough, and shaking hands on the street and live streaming videos. And you know, I hate to see that happen to governance tokens, but it’ll be interesting to see what happens. But it’s a great step forward, and like you said, if you look at traditional media companies, like for example, the New York Times, they keep a separate governance and equity ownership, so the owners don’t control the news.

45:07 That was, like, one of the classic media structures. So that was considered a good thing, because you didn’t want the owners to affect what they hoped or at least used to be. Transparency, and we saw that adopted in a lot of the tech startups, and this will be interesting to see, the future hybrids going forward. I want to ask you two things, Robert. One is the relationship between DeFi and CeFi, that’s crucial.

45:30 And then I want to talk about governance and regulation. So first, CeFi. I worked in banking for 15 years. Look, there was some amazing innovation. It was a great career for me, but I saw a lot of things going on that made me never put my money in a bank, and actually I just never put my money anywhere after that experience.

45:50 I wouldn’t buy equities or whatever, just because I knew there were, you know, big chunks being taken out a lot of inefficiencies and stuff. And so when I see DeFi, and you see a lot of people, they want to go do DeFi and leave CeFi behind. Some of them want to burn the banks down and just create DeFi, the future. But maybe also that’s not realistic, and I think you’re trying to find a way where we can work together, which is probably the right way. But there is definitely a spirit in this system, as you know, of, you know, a rebellion of pioneers of brand new innovation.

46:25 And if you look at tech startup, and you were in tech startup before, well, you still are, but you were in software before. The Valley has a reputation of taking out brick and mortar companies and leaving no prisoners, because the software is eating the world, right, to use the phrase of one of your investors. I think it was Marc Andreessen who said that. So how do you see this relationship with banks going forward? I think you’re working hard to try to provide them liquidity, but how does that work, and how do you explain that, you know, to the kid on Robinhood who’s betting against it?

47:01 Like, how do we find this balance?

47:03 Robert Leshner: Yeah, it’s a great question. So you know, I think it’s, you know, naive to think that there’s only going to be, like, you know, one type of financial market or one place where business is done. Right, so CeFi and traditional financial markets are never going away, right? They might get smaller and smaller and smaller over time, but they’re not going away, and DeFi might start small, and it’s getting larger and larger and larger, but it’s never going to be everything, right?

47:29 No matter how good the underlying technology is in DeFi, right? You’re never going to get every single asset in the world to migrate over to running on a blockchain. You’re just not, right? A lot of assets are going to migrate over, because you know, administering assets with computer programs that are open source and tamper proof is better than spreadsheets and legal contracts and thousands of employees, you know, and all of these, you know, costs of existing markets.

47:55 But, like, DeFi is never going to get 100 market share. They’re always going to be two different markets, and the lines between them are going to blend more and more and more, in my opinion, until eventually we’re just, like, you know, we stopped calling in DeFi, and see if I was like, yeah, finance is like all of these products and all of these markets, and they’re all interwoven in, like, great ways, and the businesses that operate might have, like, you know, DeFi components. We’re like, yeah, like we interact with this decentralized product or decentralized market, and we take the returns and we slice them and dice them in this financial product and sell it on Wall Street.

48:29 You might have all different interactions, but the lines between them are going to blur, just like you know, today stablecoins blur the lines, right? You have a stablecoin, which is like dollars and like financial assets held by a business, but it’s being used in DeFi. It’s a bridge, and it’s a blurring of the lines. And so, you know, I think the two are going to coalesce more and more and more, and eventually we’ll just call it finance again, whether it’s built on a blockchain or built in a database with legal contracts to enforce it.

49:00 So I see the two coming together, and there’s approaches that are going to accelerate this. So a great example is Compound Labs, which built the protocol, recently announced a product called Compound Treasury, and this is meant to blur the lines between CeFi and DeFi just a little bit more, and bring traditional financial market participants into DeFi. So the way it works is, for years we’ve been hearing from institutions saying, oh, it’s too complex to interact with DeFi.

49:29 We have to, like, custody our own cryptographic keys. We have to interact with a smart contract on a blockchain. They’re just like, we can’t do this, like, it’s just too many new things at once, you know? Just like the IT problems alone are just like too big for a traditional financial institution. And so, you know, what we’ve done is introduced a standalone business that abstracts away the complexity of interacting with the DeFi protocol and does it on behalf of its customers.

49:58 So a Wall Street institution, or a fintech, or a neobank, or, you know, a business, can come and say, I want to interact with the DeFi protocol without touching crypto, and Compound Treasury does that for that. It basically takes dollars, converts them into stablecoins, interacts with the DeFi protocol, and passes the yield back to the institution without them having to manage private keys and interact with smart contracts and do all of these complex, you know, workflows. And so this is, like, an example of a product that blurs the lines, and so you have a CeFi institution, their assets are interacting with DeFi, and they’re getting the benefits of DeFi, but all of the complexity is abstracted away.

50:43 And I think this is going to be a pattern that more and more institutions can get behind. Over time, that is, they’ll get the benefits of these new financial markets, and there’s going to be, you know, counterparties and entities set up that really want to interact directly with these markets, and that’s, like, an edge and an opportunity for them, and they figure out a way to pass the economics back to the old world. And there’s going to be all sorts of hedge funds getting involved in one way or another, and it’s going to get more and more, you know, complex over time, in a good way, as people navigate the different opportunities and arbitrages and, you know, different quarks between two separate but connected financial markets.

51:20 Brian Rose: Interesting. So it’s almost like a fintech company you’ve set up in between to balance, whereas most people are saying it’s time for you to get on board. You got Michael Saylor, who was here a few weeks ago, buying five billion bitcoin on his public balance sheet, because when I heard about Compound Treasury, I said, who are your customers? You know, Tesla and MicroStrategy, who else? But now I see what you’re doing, because right now nobody has crypto on their balance sheets.

51:47 Public companies, I mean, it’s like, it’s like less than 10 and less than five big ones, and banks are probably a ways from that. So I was wondering how you were doing, but you’re seeing that that’s going to take them a long period of time. So, as opposed to waiting for them to figure it out or a fintech company to do it, you’re saying, wait a second, we know more about this than anything. Why don’t we set up the entity that basically stands between your publicly traded, you know, decks and the institution?

52:16 Robert Leshner: Yeah, that’s exactly right.

52:18 Brian Rose: Okay, that’s nice. Which leads to my next question, because you know, you created an amazing product in DeFi summer. Liquidity went through the roof because it was simple, and you put the governance back out, but when something’s simple, obviously it can be recreated. And so you saw Uniswap and Aave jump in, and I don’t know who has what market share then or now, but you’re competing on what becomes more and more of a commoditized product.

52:43 Wall Street always has the same problem, right? So like you said, the discount brokers came in to do this. So I guess my question is, how do you compete there and keep market share, or does it matter? Be, and as the answer is, we create these new innovations to pull more liquidity in. I mean, do you ever sit there and say, oh man, our market share isn’t what it used to be?

53:05 You know, you know, when I look at something like Uniswap, who obviously does other things different than what you do, you know, they’ve come way up the market cap tables, and they provide an amazing service, but I’m also wondering two years from now, will they be the MySpace of DEXes when someone else comes along with a slightly better product, maybe cheaper, and will they just vanish because there’s no barriers to entry. So a few questions there, but if you could answer them best, you could.

53:32 Robert Leshner: Yeah, the way I like to think about this is, I think that DeFi is like the internet in, like, 1993, where we’re seeing, like, the first, you know, attempts to create different types of businesses using this, like, crazy new technology, but no one is able to tell you what it’s going to look like in 10 years, because we don’t know.

53:50 It’s going to evolve in crazy ways. Like, I couldn’t have told you a year ago that the rise of NFTs was going to capture everybody’s attention, right? It’s an unbelievably powerful new technology that, you know, isn’t going to look the same way in 10 years. So the things that even exist today, some of them might exist in 10 years, be a thousand times in size. He might conquer, you know, an entire financial market.

54:13 Some things might fizzle out, right? And so I think, like, the state of different products and markets and protocols today informs what might exist in 10 years, but we can’t rely on them. And so I think it requires a constant rethinking and re- invention and approach to think about, like, what’s the next step? How do things evolve? Right.

54:35 At Compound, we handed off control of the protocol to the community, and we’re basically building a fintech on top of that protocol that works, and, you know, this is one approach. You know, maybe this creates the Amazon or the JP Morgan of, you know, crypto. Maybe it’s the wrong approach, right? Maybe someone else has, like, a completely new insight of, like, oh, we’ll have a fintech but not a protocol, you know, or something else. And so it’s hard to say.

55:01 I don’t think that, you know, anyone’s able to predict what it looks like, but today doesn’t matter. Five, ten years from now is what really matters.

55:09 Brian Rose: Yeah, that’s really interesting, and I guess just to take your Amazon analogy, I mean, you know, Amazon, I guess they’re kind of the gatekeeper between consumers and products, but you see tons of businesses listing their products under Amazon, right? So it kind of flows in, and it can create businesses because it creates that relationship with the customer.

55:29 And maybe you’re making that analogy with banks. Maybe if I got that right, yeah, it’s good and it’s a really smart thing to do. And now I see what you guys are doing, and and it sounds really, really cool. So I like that you mentioned NFTs. Let’s talk about NFTs, because you have a very interesting take on NFTs.

55:46 I think, you know, most people think of NFTs, Robert, and this is because of the media, and we think of that one piece of art that sold for 69 million dollars, and we think of the 10 other people that decided to create NFTs for the sake of it and try to sell them to us for 20 million dollars, and our brain has a bit of a disconnect, and then we try to learn about it more, and I’ve had some guests here talk about it, and it’s starting to make more sense to me. But I think you had a different take, because you go to the root word, what does a non-fungible token mean versus a fungible token? Maybe you can speak on that and explain that to people.

56:21 Robert Leshner: Yeah, absolutely. So most of the assets in crypto today are what we call fungible tokens, so every single one of them is the same. It’s almost like shares of a company stock, where, you know, if you have 17 shares, you know, it doesn’t matter. It’s not the same. It’s the same as that.

56:37 If you hold 94 shares, right? It’s all, the shares are the same. They all do the same thing. They’re all worth the same thing. They’re all completely equal, and crypto assets are the same.

56:48 They’re fungible, right? They’re all basically the same. Might be, like, new differences between, like, you know, one Bitcoin versus another one based on when it was mined, but, like, for the most part, like, all Bitcoin is the same. All ether is the same. All COMP tokens are the same.

57:03 They’re all uniform. They all do the same thing. And we’ve built over the last couple years, as a society, really good DeFi tools for fungible assets, and we’ve applied a lot of this, like, lessons from finance. You can now trade fungible assets very easily. You can now borrow fungible assets you can, you know, trade options on fungible assets, right?

57:26 Just like you can with shares of stock. And the last couple years have all focused on the fungible things. The non-fungible things are a massive area of exploration that’s occurring right now, which haven’t really had years of development. They’ve had a small amount of time, and it’s even more new than DeFi is, right? DeFi is like three years old.

57:51 NFT is in the sort of mainstream, being explored, are in a lot of ways just a year old or less, right? And so what makes NFTs really interesting is that right now they generally represent art. You know, this asset represents this piece of art, but they can represent so much more than that, and so NFTs are really saying, I have a unique thing, and for the moment that unique thing is mostly, like, a JPEG image, you know, on the internet, but over time that unique thing that you basically can prove ownership of is not going to be an image.

58:24 It’s going to be, I own this skyscraper or I own this car or I own this specific, you know, mortgage bond that’s different from other skyscrapers and cars and mortgage bonds. And the NFTs, I think, are going to, like, grow into being not just art but all types of different financial objects. And, you know, just like DeFi spun up to, like, trade and borrow and, like, derivative, like fungible things, the same thing is going to happen with non-fungible things, and just like we’ve seen, you know, assets flowing into blockchains like stablecoins from the legacy financial market, as NFTs develop, we’re gonna start to see the objects that exist from the outside world flow onto blockchains, and NFTs start to represent skyscrapers and cars and mortgages.

59:13 And so I’m really excited about NFTs, not for, like, the art, but because I think we’re at, like, a very early chapter of discovery about how people can trade these things and, like, do finance with them on a blockchain. And you know, I think it’s, like, really, like, a big, big opportunity that people are starting to just begin to grapple with.

59:36 Brian Rose: Yeah, I love how you explain it. And I think you once said that there’s actually a bigger asset class in non-fungible tokens and fungible tokens or assets.

59:46 They think of all the different businesses in the world, like you said, all the different properties. I mean, every property’s got its. I mean, there’s actually more of those, but as we’re used to the financial markets being fungible, right? If the barrel of oil, the dollar, the yen, the this, you don’t even have to tell people what fungible means, and they already know what that means. So we’re used to it, but you’re right, there’s actually massive assets that are non-fungible.

1:00:10 Now we think about them being on a blockchain and being able to be quantified and qualified and tracked. It becomes super exciting. And so, yeah, don’t get caught up in the JPEG thing. It’s a bit like Andreas Antonopoulos once said. He said we used to think the internet was email, and I remember I got my first email account.

1:00:28 I was called Project Athena at MIT in 1989, and I got on there, and I got it, and I sent an email to my brother at Stanford, and I didn’t use it ever again. And so, and then we used to think that, you know, crypt, sorry, that DeFi was Bitcoin, and we’re like, okay, cool, but, you know, what is it really? So I think it’s a good NFT analogy, and that became so much more. So with NFTs they can become some more. We’ve almost just seen one use case, right, and we assume maybe that’s it, but it’s like one dimension of a five-dimension puzzle.

1:00:59 Robert Leshner: I think so. Yeah, it’s the first use case, and it’s the easiest use case, which is like, you know, I’m gonna take something, you know, that’s on the internet and, like, put it in an NFT. It’s like art, but, like, eventually it’s going to be things that aren’t on the internet but that we bring onto the blockchains.

1:01:16 Brian Rose: I had a really interesting conversation with Raoul Pal, who talks a lot about these concepts, ex-Goldman Sachs hedge fund trading, who, liberated himself from the banking world like I did, which is not easy to do, but he gave a really good explanation about how communities work together with those governance tokens, with the protocol, with the value in the system that they accrue when it appreciates, with things that are valuable to that community, all the way up to the metaverse, and where these things will have value when they’re not even physical.

1:01:45 And it was a really good explanation, and for the first time, I saw how they actually all go together in a strange way. How maybe you can’t even have, I don’t know if this will apply to Compound in the long structure. NFTs will appear for certain communities anyways, because that’s how they value each other and value what they’re a part of, but you can’t synthetically create them and assign value. They almost have to naturally have that value. But you could figure out what they want and then give it to them.

1:02:14 So, to be continued. It’s an interesting space, I have put the Oculus on, and before it, it’s pretty interesting in there, but I still have a hard time thinking of that as a future reality, but I’m starting to understand the concept a little bit, and a little more to go. Question for you about governments, as far as the U.S. government and other governments. I think, you, I’m quoting you. I think I hope I’m right.

1:02:37 You said 14 of Americans own crypto and Congress acts like the number is zero. We saw the infrastructure bill happen recently, and you know, the community was up in arms about it, because we saw potentially a lot of damage, especially, you know, to the infrastructure, including, like, the miners, and even what you do. We thought there might be senseless regulations that would stop the innovation. The winds is we got, you know, some 70-something-year-old senator from the South to talk about crypto on the floor.

1:03:06 Some said it’s the best press that money could buy. On the con is we still don’t know what’s going to happen and the regulations coming in the future. How do you stand on government being a part of this, educating them? Obviously you want to work with the banks, but how does that work with government?

1:03:21 Robert Leshner: Yeah, it’s a great question.

1:03:22 So you know, I’ll go back to what I said earlier, which is 14 of Americans on crypto and Congress acts like the number zero percent. I think that’s completely true. Which is, this is an incredibly new technology in a lot of ways. It’s like, you know, 1995 when 14 of America had a modem, you know, and used the internet, and, like, it wound up becoming a hundred percent, you know, just a couple years later. And it’s a new technology that I think is catching legislators and the government off guard, because it’s so new, and the first reaction to a new technology is, like, oh no.

1:03:57 It doesn’t matter who you are, you know. Small numbers of early adopters see, like, the promise and the upside, and they get, you know, really excited and really rich, but for the most part, I think a lot of people say, like, oh no, like, there’s a new technology, it’s going to change everything. And I think that’s the phase we’re at right now, with, you know, the U.S. government, and the first glance is they’re not seeing the promise and the opportunity and the upside to having, you know, financial markets and assets running in better infrastructure.

1:04:27 They only see, like, the fear, and, you know, for the first time, we’re starting to see the government, like, start to take legislative action to try to control and rein in crypto now. I don’t think this is a good thing. I think, you know, if we reacted this way when the internet came out, almost all the major tech corporations would be, like, Chinese. You’d have Google and Amazon, you know, and Facebook and, like, Netflix, all, like, headquartered in Beijing, right?

1:04:55 If we, like, imposed, like, massive constraints. No, I think they’re falling into that trap, right? And, you know, people are starting to speak out, like, what was a bright spot in the infrastructure bill was that, you know, Congress was caught off guard a little bit by how vocal the crypto community was and said, like, wait, there’s actually people who are, like, pro-crypto. What’s amazing is that most of the offices didn’t even know that anyone was pro-crypto.

1:05:23 They thought, you know, for the most part, that this is, like, a low-risk, you know, political thing. They’re like, oh, you know, most Americans don’t care about crypto, like, who cares? You know, we’ll just, you know, start to impose restraint on it. And I think this is what they’re going to be surprised by is that, you know, it’s a large enough demographic that it would never be overlooked if it was done in the context of, like, polling, or, you know, political priorities.

1:05:49 And I think they’re starting to wake up to the fact that a huge number of Americans have crypto, care about crypto, and understand that the future is bright not that it’s a dangerous and bad thing. And so I that the political wins will change. I think that, you know, you’re starting to see legislators and government officials, you know, waking up to the fact that this is a huge political demographic that’s extremely passionate. And so I think it’s early.

1:06:16 You know, I think even when mistakes are made, and I think the infrastructure bill was a huge mistake. I think there’s a lot of opportunity in time for, you know, the government to come around and actually see what, you know, they need to do and why crypto can be such a powerful and positive technology.

1:06:33 Brian Rose: Yeah, and I’ve never held political office, but I ran, and I got to, you know, really close to it, and I will say, politicians, well, they kind of care about two things.

1:06:43 They want to get reelected, so they will listen to the voters when they call them up and email them and say this is really important to me, which I know a lot of people did, which was good. They also care about taxation and revenue, and this is potentially a golden goose that they shouldn’t kill. You could argue they won’t kill, but they’ve, you know, governments have done stupider things before and shot themselves in the foot. So yeah, I hope those things together will help it going forward.

1:07:07 The last thing that was reminded to me by Dan Moorhead of Pantera Capital, he’s here last week. When I asked him about, you know, the Fed stopping, you know, cryptos or the government starting cryptos, he said, he said, well, you know, Brian, you know, I sat next to Steve Mnuchin when I was at Goldman Sachs, and he became the Treasury Secretary, and he said, you know, we forget that the banks and the federal governments are always talking to each other, and, you know, now we see JP Morgan getting into this, and Goldman get into this, because their clients want in on the action and the risk. And so, you know, he says it’s going to be very hard to stop that from moving forward, and I do think they, he has a point there.

1:07:48 But stranger things have happened with governments, right? Do you kind of agree that this seems like it’s got some momentum and it’s moving forward when it comes to some of the institutional adoption? And again, I had a former banker last week, and he said, Brian, you know, fund managers are simple beans. You know, they’re kind of like Wall Street cavemen. It’s like, if my client wants in, I’m going to find a way to get them in, and if I don’t get the extra yield on my fund, I’m gonna get fired.

1:08:12 And so there’s a point where an asset, people are gonna get into it. Do you feel that’s what crypto is at this point?

1:08:18 Robert Leshner: Completely. I mean, at this point, it should be clear that history is on the side of crypto, and that there’s a tailwind behind it, right? It’s only flowing in one direction.

1:08:28 You know, every single year, you know, the drumbeat of, like, clients and people that are interested in cryptos increasing. It’s not decreasing, right? And so, you know, I think that, like, the river is only flowing in one direction here. Like, it’s not that, like, there’s, you know, every institution is like, we have to get in on this, right? Now, they’re all skeptical, but they’re all being convinced by this underlying innovate demand from their clients and their customers, and so you know, it’s going in the right direction.

1:08:57 The numbers are small but rapidly growing. You know, we’re at this sort of moment where you are starting to see new financial products coming out from very stodgy institutions focused on crypto. This is a good thing. You’re starting to see fintechs and neobanks getting involved in crypto. This is a good thing.

1:09:14 You’re starting to see, you know, payment networks like Visa getting involved in crypto. This is a good thing, and the river’s flowing, and we’re gonna start to see in five years that the institutions that were late to the game got left behind, and the ones that figured out how to swim, you know, became like the better athlete. So I’m optimistic, and I think, like, the trends are really strong here. And I see it almost every day as institutions inquire about Compound Treasury and how they can, like, one, either use the product or build their own bridges to new financial markets.

1:09:48 Brian Rose: Okay, really good stuff. Cardano, tell me what you think about the future of this protocol. We’ve seen its price, I think, double in about three weeks, which of course gets everyone’s attention. Third, their largest market cap, I think. We got Charles here at two weeks from yesterday, 13 days.

1:10:06 He’s also does a lot of live streams on YouTube. He’s the only major blockchain with a spokesperson good or bad. And now after five years, I think we might get smart contracts from that blockchain. Can I get your opinions whether Cardano will replace Ethereum? And I’ll give you a little context.

1:10:27 I asked a couple guests recently, I even asked Dan Moorhead, who was out there in 2013 flogging Bitcoin funds to the institutions and getting thrown out of board rooms, so he’s been there and done that, told some great war stories, but he flat out told me he’s not convinced. He said the amount of developers, the amount of transactions, the amount of history on Ethereum makes it almost I don’t know if it’s unusurpable is the right word, but it makes it very difficult, but if you’re coming late to the Cardano narrative, and again, most of these coins are narratives to a certain extent. It looks like it could be the next thing.

1:11:04 And so, you know, that was his read on it. We also made a reference to Microsoft and Microsoft Office, and I’ve used this a lot with my students, and it gets a chuckle out of all of them. I don’t work in an office, but I know some people that have, and whenever I go there, I look at their computers first of all. They’re using these, you know, old crappy computers. We use iMacs here, but they’re usually running Outlook or something, and it’s kind of your grandma’s software, but no one disputes the fact that even though it’s a second, maybe not the best product, it’s got the adoption, and Microsoft probably isn’t going anywhere for 20 years, and it’s probably going to be a great business model.

1:11:37 So what’s your call? Is Ethereum the Microsoft of blockchains, or do you think Cardano’s got a real shot?

1:11:44 Robert Leshner: I think Ethereum is the Microsoft of blockchains in a lot of ways, and I think there’s, you know, the standardization that’s occurring even with, like, the Ethereum Virtual Machine. So I’ll try to break it down real quick. Ethereum has all of the popular applications.

1:12:03 It has the most activity. It’s like the London or the New York City of blockchains. Like, all the businesses are there, and it’s like a hub, right? In order for people to move to another neighborhood, it has to be that much better, and if you’re not sure where you’re going to plant your flag, you’re going to plant it, you know, in the hub where all the activities are. Yeah, the traffic is bad, and the taxes are bad, and it’s expensive, but, like, you know, if you want to build your own business, you want to go to the hub, and that’s how I see Ethereum, in that it has this amazing network effect and, like, lacking already there.

1:12:37 There will be blockchains that are faster and cheaper than Ethereum, but it doesn’t mean that they’re going to win. They might attract unique applications that can’t be done, you know, in a city. Like, maybe they’ll attract, you know, agriculture, whereas, you know, that doesn’t belong in a city, you know, if you have wide open fields. It’s a different type of entity that wants to go there. And so I think, like, you know, even though Ethereum has flaws, it’s expensive, it’s slow, it’s got, you know, lots of traffic, it’s still like the hub for these types of activities, so it’s gonna be really hard to dethrone.

1:13:14 You know, that being said, there’s always the opportunity to surprise the community, surprise everybody. You know, if a platform is materially and significantly better, it’s possible it wins over the hearts and minds of developers, and it creates, like, a huge network effect for itself, but it’s a really tall bar, and I think that’s why you see, you know, even in assets that have appreciated rapidly, Ethereum as a smart contract platform, a Layer 1, is still head and shoulders more valuable than every other L1 that’s competing with it combined and then multiplied. You know, so I think the market’s relatively fair in that regard, and I think it sort of like implies a continued dominance of Ethereum.

1:13:56 Brian Rose: Yeah, really good call. All right, a couple final pieces. Investing, I don’t know how you find the time, but you seem to make a lot of investments, you know, including also being invested in in the first place, I think it was Andreessen Horowitz that invested in Compound early on. You know, you’re from the Valley, you know that space. You know, there’s people listening right now that don’t know anything about VC or even raising money from angels and are maybe curious if it’s necessary, how it works, you know, with tokens in the blockchain, you know, does it, is it even necessary anymore?

1:14:31 It’s a really interesting question. How do you go about investing, and how do you try to advise people about the space if they’re looking for investment or even looking to invest, you know, in what they believe is going to be just a massive trade? I mean, everyone I talked to has said what you said, this is bigger than the internet, you know, and that’s a very general thing to say, but the adoption is, and we can see it. Yeah, how do you look at it from an investor or from someone looking for money?

1:14:55 Robert Leshner: Yeah, so I like to think about it as a market that’s going to be really big but is very early, and that means that most of the investments that one makes might die, might go to zero, right? And there might be some winners, but it’s like investing in the internet in the ’90s. Most of the companies that even IPO that are gone today, right? There’s a couple massive winners, like your Google, your Facebook, your Netflix’s, your Amazons, that, you know, took time to, like, be creative and grow and become dominant, but if you were investing in the internet in, like, the early ’90s, you have a lot of companies that are gone, right?

1:15:30 And you might not have any of the winners. And so it requires you to think that you know, this is a long game that might span 10, 20 years, and that you have to act accordingly. There obviously is, like, phenomenal successes all over the place. And, you know, I think indexing the entire ecosystem, someone can do probably extremely well, but you have to be prepared for the entire ecosystem to be worth nothing, at least all the companies or projects you invested in to be worth nothing in 10 years.

1:16:01 And so I approach, you know, investing with the same mindset, knowing that the way it’s going to look in 10 years might be completely different. All the things that are dominant today might not exist. There might be relative outperformance or relative winners, but the most important thing is to try to find things that will be here in a decade. And, you know, that requires, at least when I invest, to look for things that are differentiated. It doesn’t make much sense to invest in five decentralized exchanges.

1:16:28 It makes sense to invest in every different type of business, knowing that the future is completely unpredictable and uncertain, and the things that succeed might not be what I thought was going to succeed a year ago. A year ago, I would have said DEXes. You know, you want to be in decentralized trading. Now it’s like, oh man, you know, NFTs next year, it’s going to be something else, right? The question then is, what becomes huge in 2030, right?

1:16:53 And what’s like a massive protocol or business or entity then? And so that’s how I think about it, just knowing I’m going to be wrong more often than I’m right. You know, the winners pay for a lot of losers, but you have to expect that you’re going to be wrong most of the time, even if in the short term it looks like you can do no wrong and everything is right.

1:17:13 Brian Rose: Yeah, okay, really good advice. Your single biggest challenge right now, Robert, as CEO, what is it?

1:17:19 Robert Leshner: Yeah, I think the biggest challenge is, you know, convincing people that DeFi crypto is not only here to stay but is better than existing financial systems, and just opening people’s minds to the fact that eventually most assets are going to live on blockchains instead of traditional financial markets, and they have to start getting prepared for it today. You know, it’s harder than you think when I talk to institutions. You know, for them to accept this fact, they say, oh, you know, we’ll be fine, we’ll figure it out, but they’re not going to figure it out by doing nothing, and a lot of them have this delusion still that they don’t have to change anything or get started.

1:17:59 Brian Rose: Yeah, and they still have some margins left in their businesses, you know, another 10 years maybe, and like you said, there’ll always be something there. Predictions for the future, or thoughts to leave people with, the things to think about. I mean, you already said there’ll be things we can’t think about, like you said last year would have been DEXes, maybe now it’s NFTs, but the predictions for the future are things that we should all be thinking about.

1:18:22 Robert Leshner: Yeah, I predict two things. One is that, you know, in five years most NFTs won’t be part. I think we’ll start to see NFTs represent more than art. And the second is that traditional financial market assets like stocks and bonds and currencies are going to increasingly flow to blockchains, and I think in five years we’re going to see not just U.S. dollar stablecoins, but we’ll see all sorts of global currencies.

1:18:45 We’ll see all sorts of, you know, traditional financial assets, and all of them are going to start to live on blockchains, and the DeFi tools of the future are going to span all of these, and it’s going to be really much better than it is today.

1:18:59 Brian Rose: Beautiful prediction. Rob, I just want to say thank you. You’re one of the OGs of DeFi. You’re quite humble about it, but the work that you guys did as a company last summer and your community, I mean, you could argue we wouldn’t be here if it wasn’t for what you did.

1:19:14 I mean, seriously, it’s that important, and I think we’ll look back on history as one of those moments that just accelerated the marketplace. So you know, that took a lot of foresight, and again, was probably very not an easy thing to do, by pushing that governments and that equity back out to the community. But what an incredible idea, and one of the first things I noticed with this market, of why it’s so much different than anything that could be imagined in centralized finance.

1:19:39 It’s almost the epitome of the beauty of this market, and you explained it multiple times with your Bitcoin analogy, etc. So thank you, Robert. Looking forward to Compound Treasury. Looks very interesting. If I can introduce you to any old bankers, you just let me know, and wishing you guys all the best.

1:19:55 If people want to follow you, you’re on Twitter as well. Obviously, Compound. Google it. You can go start lending and borrowing securities, and Compound Treasury. It’s on your website as well, right?

1:20:05 You’ve got everything there at the top nav bar.

1:20:07 Robert Leshner: I think, yeah, go to compound.finance, and you can follow me on Twitter at R. And really enjoyed the chance to be on the show today.

1:20:13 Brian Rose: All right, fantastic. We appreciate you thank you, Robert.

1:20:15 Thanks for everyone for watching. We’ll see you next time on London Real. Take care. Bye. You