From Bitcoin to DeFi (in 12 Short Years)
So we're living in the early days of a massive paradigm shift. We are accelerating into a digitized and decentralized future. That is why Bitcoin is here. The cryptocurrency market has roughly a $3 trillion market cap. That's the huge milestone.
This is the largest fastest wealth creation event in the history of the world and financial institutions have only now just figured this out. The first futures ETF tied to Bitcoin. This thing is becoming increasingly entangled with the mainstream financial markets.
The world's going there. You know, Bank of America is now fully engaging in analysis of crypto broadly. Never at any point have we had the freedom of financial mobility that we do have now with blockchain and DeFi.
It is a power to the people kind of technology. We're moving to a new kind of world now where users own their own data, and they get to run their own financial services. However, we are still tied to the centralized banking system in a way that is unnecessary.
The crypto sector today is largely unregulated. This is a little bit of like the American wild west. Essentially, what DeFi is, it's like a big casino.
That's scary to the JPMorgans because they're seeing all this growth and they're left out. You all can do whatever you want and I don't care. You're either in or out. There's no in-between. It's pretty much full service shadow banking with nobody in charge.
There's an old adage in technology where they say software is going to eat everything, and one can say very clearly that blockchain is going to eat everything. We're seeing a revolution unfold right now. These are historic times. Buckle your seatbelt. This is where the ride gets really interesting.
My jacket's in 414 or something. Oh, yeah. We got the presidential suite downstairs for the after party. I just, okay. And I left my jacket there and I just, I will check it on my way out.
Coffee, black. Bitcoin was the beginning, right? Bitcoin is where it all started. What are cryptocurrencies? They're a type of digital money, but instead of being controlled by a central government they're decentralized using blockchain technology. The impetus was the financial crash of 2008, right? That's in the white paper of bitcoin. 2008 and Bitcoin gave us the first spark that we needed in order to, you know, start the fire.
We had the same basically financial systems in place for hundreds of years. And now we have this new type of ledger that's actually self-auditing by the virtue of being decentralized. So that is really the core of this technology.
So what was once very obscure magic internet money is now a global financial infrastructure that anybody can build on and anybody can access. And what this whole movement has grown into has been like an evolution of the technology. The vision has really always been the same, decentralizing, democratizing, returning power to users of finance or really any web-based application. So we're effectively building an entire, you know, new world ourselves, right? This, you know, this, $2 trillion industry has bubbled up in 12 years.
Soon a majority of the world's billionaires will have made their money from cryptocurrency. I don't mean many, a majority. This is super new.
If you think about Bitcoin again, the most mainstream digital asset in the cryptocurrency universe. That was only released in 2008, and it really didn't come into mainstream consciousness until 2017. One of the best ways to view the maturation of Bitcoin is, if you look at mining. This used to be something that you could mine in your dorm room. I know a few people who did that. To now, you basically have to have a very sophisticated operation to really mine Bitcoin at scale, to solve these increasingly complex computer problems.
That takes a lot of electricity. Bit Digital is a Bitcoin miner, and we've been mining Bitcoin in various states like Nebraska, New York, Georgia, and Texas and so on. Bit Digital in particular, looks for clean sources of power in order to power our computers that help solve these mathematical problems that produce Bitcoin. Can't hear a damn thing in here. Correct, it's pretty loud. This is our warehouse in Kearney, Nebraska.
Over here we've got a bunch of unboxed units. There's about 2,000 here. And you know, frankly, it's not great to see them sitting here in boxes because they could be plugged in and making money. What are these, M21s? Yeah, these are all M20s. M20s, depending on the model and the exact moment you buy them are gonna cost 10 to 15,000 a piece.
They're a lot heavier than they look and you plug it in and it starts making this commodity we know as Bitcoin. Bitcoin is the mother coin. It's the first coin, it's the first blockchain. But I think beyond that, Bitcoin has had a bit of a democratizing effect. It's created opportunities to generate capital.
We wouldn't have had access to that before. You know, that was enabled by Bitcoin. And now it's spread to a bigger ecosystem. The basic business model of Bitcoin mining has traditionally been to accumulate as much Bitcoin as possible and hold that Bitcoin for its appreciation potential.
But there's a broader vision here. Lending, borrowing, stock exchanges, currency exchanges, insurance, derivatives, all of these now have their facsimiles in the digital realm, which had been created with code rather than with brick and mortar institutions. And this is the landscape that we are thinking of when we say the word DeFi. Trying to study and wrap my head around DeFi a lot more lately. Four or five years ago, you know, everything we were doing was really oriented around Bitcoin and its growing ecosystem.
Over the past few years in contrast, everything has been oriented around DeFi. DeFi is a collection of software projects that run on the blockchain that enable a host of money activities. Things like lending and borrowing, swapping or trading of different assets. The creation of new asset classes like NFTs.
You go and deposit money in a bank and, what, you get .75% interest at best. Depositing in a bank, but then they loan it out at 10% to 20% to people. So they're making 20 times the money that they're giving you in return. Whereas like DeFi can definitely change that paradigm. There are two promises to DeFi. And I think they broadly fork. So you have the idea of financial inclusion, where people who do not have access to financial services can get that access.
And then you have the idea that for the rest of the world that already had access to financial services, were now switching from snail mail to email. and I think it's exciting and unknown what emergent properties will come out of that, when you can transact much faster and in a much more trustless way. I don't need five people to guarantee that a transaction is gonna happen if I can just automate it through a code. Because the code is available for anybody to see, and that code is immutable, you should be able to simply look at that and say, yes this code is doing what that person is saying they're gonna do, I can verify, not trust. The decentralized finance system is, we believe a disruptive technology, not unlike the early days of the internet, that is eventually going to replace large swaths of the financial and monetary system as we know it. The potential for it to really disrupt finance and the banking system, a lot of that is still very much a dream, a vision of the crypto community, but its potential applications are enormous for sure.
If you think about the overall cryptocurrency universe, that's estimated to be $3 trillion. Estimates for how much of that is in DeFi is in the hundreds of billions, 250 billion. The speed of innovation is incredible.
There's compounding exponential innovation. And it's driven by the openness of the community, both from a software perspective, but also a really genuine desire to continue to add to innovations. The blockchain is the underpinning of all of this change. So blockchain is the record keeping technology. It's this decentralized public ledger where all of these cryptocurrency transactions are recorded anonymously. So the cryptocurrency is the medium of exchange and the blockchain is where that's all recorded.
Blockchain is good at three things. It's good at storing information, security, and allowing anyone to audit it. That is the ultimate weapon, dare I say, to fight back against people who have been hiding information, who have been threatening security, who have been manipulating information. It's a decentralized system, no one owns or controls or runs it. Meaning, if you wanted to stop this thing, that's facilitating this change, how do you do it? You know, where's the leader? Where's the CEO? Where's the company? There isn't one.
You can't shut down that system, and it's the most secure system the world has ever seen. And so that is what makes this all possible. The next evolution for a lot of people is then the Ethereum network. Ethereum has expanded the possibilities of what can be done with this technology. We understood that the technology worked. From there it was kind of like a very quick click.
Hi, my name is Joseph Lubin. Yeah so I was one of eight original co-founders of Ethereum. The Ethereum project set out to become a new trust foundation for the planet, to essentially effect a paradigm shift in how the world organizes itself. In order to be a new trust foundation, you need to be massively decentralized in as many dimensions of decentralization as you can identify. And the new trust foundation gives us things like digital scarcity, it gives us trustworthy collaboration. It enables us to transact between people who don't know one another, just because you can trust the programs that are guaranteed to execute on the blockchain.
It seemed very natural to call this emerging decentralized protocol, blockchain, cryptocurrency, set of technologies, Web3. What is Web3? Can you explain it simply? Let's start with Web1, how about that? Web1, for the first time we had access to information. Welcome. We had this kind
of real idealistic notion of knowledge and communication and information. Goodbye. Web2 happened, we saw a big consolidation. You know, Facebook, Twitter, so on and so forth. And Web3 is really taking the ideals of Web1 and kind of solidifying them in a meaningful way.
Web3 is really shorthand for a world where the users are creating the value, but also capturing the value. Something that was totally lost with the Facebooks and the Googles and the Amazons of the world. The people, the users are the ones that have much more power, that are able to create much more value and also are able to consequently capture some of that value.
It's known as this amalgamation of these different decentralized technologies. And this new world, essentially that we're creating. The first wave of the internet, right, took multiple years. Web2 unfolded over the course of, you know, 10, 12 years.
And so Web3, it's just beginning. And so that's the phase that we're in right now. Early on, we built smart contracts. Probably the most interesting part of the Ethereum network is that it uses smart contracts.
Which are basically these self-executing contracts based on preset conditions. And when those conditions take place, there is an exchange of value that happens automatically. If then, this, that. If you think about the floor of the New York stock exchange, or if you think about simply buying or selling stock in your brokerage account, there are fees paid that are associated with doing that.
Contrast that with clicking a button on your computer, without any human beings touching it, and without any transaction fees. That becomes much more efficient from an economic perspective for the user. What we've done is we've identified certain DeFi protocols. Then you could generate a very good return. It's all governed by code. It's just software running in the cloud.
There aren't armies of human beings working in office towers, earning bonuses to facilitate this. We're not participating in DeFi at this time, just because there's too much regulatory uncertainty for a public company. So what we're doing right now in the interim is we're studying it. My name is Tim Massad. I was formerly the chairman of the Commodity Futures Trading Commission.
Well, the crypto sector today is largely unregulated. It's hard to know whether a particular DeFi app is going to work as promised or whether it was created by reputable people, unless you've done a lot of due diligence. How can a typical person even begin to, say, identify, like, what a good project is, in this space? I mean there's no question that the token economy is a very volatile asset class to be involved in. There's tens of thousands of cryptocurrencies and NFTs being created every day.
And some of these things are gonna go off a cliff to zero. And so buyer beware. The obvious risk is that, you know, there is no counterparty to fall back on. If you do lose your money somehow, which theoretically, you're not supposed to be able to with a smart contract, there's no recourse here.
You have, you don't have a counterparty to turn back to, that's why prime brokers exist. That's why they calculate risk rules. That's why exchanges facilitate these transactions. But by removing them, you also remove that buffer. Right now, if I mistype the address in Ethereum, that money could be gone forever, right? And my aunt Matilda can't lose her life savings using Ethereum that way. It's just not usable or sustainable for somebody like her.
So in order to go mainstream, you may need to invite some centralized aspects. Most of us can't spend hours figuring out if a particular DeFi app is going to work as promised or studying the code. So we rely on others for expertise, for certain services, and intermediaries often perform those functions. The real value of a regulatory framework is that it gives people confidence.
It gives them confidence that whatever financial activity they're participating in or intermediary they're relying on is going to do what it promised. That they're not going to be the victim of fraud and manipulation, that no one's going to abscond with their money. This is a little bit like the American Wild West, right? Like there's this cutting edge frontier out there, freelance, stake your claim on the potential gold rush, right? But when you get out there, it's, hey, there's people trying to rob you and there's scams going on and...
Blockchain and cryptocurrencies are a disruptive technology. They're a young technology, there will be exploits. Federal investigators say a Wild West culture has led to a massive spike in cryptocurrency scams. There are a whole list of problems with crypto.
Unreliable tech, scams. You have like these Ponzi scheme projects where their tokens are priced - basically crap coins, right? Or you have these other projects where you deposit your liquidity and then they do a rug pull where they basically steal the money out from under you. Or basically these just fly by night projects, where they never really had the intention to build it, but they just kind of strung you along and then they close up shop eventually.
Regulators need to step up to address crypto's regulatory gaps and ensure that we're actually building the inclusive financial system that we need. Essentially what DeFi is, it's like a big casino. It provides people with an opportunity to make potentially huge gains or potentially lose a ton of money. But for the people who end up being the house, running the casino, it's pretty much guaranteed gain. The intermediate, they're the exchanges, they're the DeFi platforms. And beyond that, they don't have any of the regulations that guarantee safety, soundness and protect customers.
It may ultimately produce some really useful innovations. But for the time being, it's pretty much full service shadow banking with nobody in charge. Throughout the financial system we have what are known as Know Your Customer requirements, which means that banks, brokers, and other financial actors have to verify the identity of their customer. And that is a means to prevent illicit activity.
It also helps reduce fraud. The DeFi sector will have to figure out how to do this. And I think really the only way the sector can grow and become mainstream is if you have a regulatory framework that sets some baseline standards.
We welcome regulation, we're eager for it because we need clarity and there's so much opportunity in this space we wanna participate in. What I'd say is that we're hopeful that the regulation's crafted in a way that protects individual investors and spurs innovation. And doesn't just protect the interests of incumbent financial institutions. So what are these guys doing? Why are they going to these great lengths? Are they trying to bring about, a more stable, equitable, inclusive kind of finance? Or are they looking to get rich? I would tend to believe the latter. Miami has a very crypto friendly vibe. And I think the industry is taking off.
It's hard to imagine what decentralization looks like. You come here though and you see real people who you've met online, or, hey, I threw this metaverse party and you were there and I'm meeting you in real life. It's all these people who love all these esoteric pieces of the cryptocurrency universe, that now come together and they can share the things that they're passionate about. They can share their enthusiasm, they can share their expertise.
Their minds are open to ideas, to dreaming, to thinking big, to thinking differently. As we're re-imagining money, we're really creating this equality future. I think we're gonna slowly change this disparity between the rich and the poor. This whole event here is still very, very early compared to what's gonna happen, or what's about to happen in crypto and NFTs. And this space in general.
DeFi is actually in the heart, in the skin, everything of what we do. It's exciting to see how many people are getting into this space. Art has sort of joined forces with tech. There's enough space for everyone in here.
So we're living in the early days of a massive paradigm shift. We are accelerating, into a digitized and decentralized future where there will be a better trust foundation. So similar to how web technology and internet technology brought democracy and democratization to access to information, we're bringing technologists and entrepreneurs in, to democratize global finance. So I actually just left my job for 10 years at Goldman Sachs as a VP in the risk division. You know, covering hedge funds and prime services. My last day I caught a flight to come to this convention and really start participating in the decentralized finance space.
As I started to realize, I don't know, the lack of necessity of my own role that I was building. My legacy helps a system that I don't believe is fully necessary anymore and a system that doesn't benefit the broad public or communities that really need it. It's hard to read, but if you look at the placard for the convention, the Wifi password is kind of self-evident about how a lot of these people here feel. You know, there's an entire financial ecosystem that's being modeled and created and championed by, you know, a bunch of apes or you know other kind of like avatars.
And that's scary to the JPMorgans because again, they're seeing all this growth and they're left out. Jamie Dimon has a very specific opinion on cryptocurrency, he really thinks it's a scam. I could care less what Bitcoin trades for, how it trades, why it trades, who trades it, if you're stupid enough to buy, you'll pay the price for it one day. But that doesn't stop JPMorgan from having an entire department devoted to blockchain technology. There are so many people involved in the traditional banking system. I don't think the goal is to remove them, but the question is, what is necessary? Should we be doing things the way we're doing them today, simply because we've always done that? We don't do that with telephones.
We don't do that with cars. We don't do that with all the other technology. However, we are still tied to the centralized banking system in a way that is unnecessary. So major financial institutions are for the large part aware of the technology.
Many of them have strict regulation, that they have to pay attention to and are constrained by. Maybe some of them will put their head in the sand and think all of this will go away. They won't last very long, I assume. It's either, you know, come in and participate or basically die, right? Or get displaced in some form or fashion. So I know that banks are working on their own blockchain solutions. They're keeping up with everything that's going on.
And it's the same with the governments. They're not really talking about this stuff, but they're there, they're listening and they're learning because they know that this is the future. As you think about, you know, the billions of people that are coming onto the internet first time, having an internet native financial infrastructure is gonna allow all of these people that are normally unbanked to become banked. And it's definitely gonna be very big for financial inclusivity across the entire world.
We're not waiting for the big banks to open the door, we're not waiting for the federal reserve to give a thumbs up. People are able to create and cultivate their own communities, their own ideas, their own products, and capture more of that value directly with fewer middlemen. That's really the promise of blockchain. And so we're at that stage of this industry's development where everybody's starting to get it. You know, consensus just being reached amongst all the industries that this is real and it ain't going anywhere.