Episode 97: DeFi and ETH Yields with Evgeny

[00:00:00] Ben: Welcome to the Alt asset Allocation Podcast, exploring alternative investment opportunities available to the everyday investor. Here's your host, Ben Lakoff.

Hello, welcome to the Alt Asset Allocation Podcast. Today's interview is with Evgeny on the defi landscape. Remember the last two summers when everyone was making 20 plus percent yield farming?

Man, who knew that wasn't sustainable . But really for some high yields are still out there in a risk adjusted manner. Evgeny runs a yield fund traditionally for stablecoin, but now they're launching a eth, which is staking yield fund as well. Of course, after we've switched to proof of stake. So we've covered defi a few times, but the space is changing all the time and quite quickly, we talked about where the defi stablecoin in eth yield space is right now and where it could be going.

There's some interesting new areas out there, defi across blockchains, and much, much more. We discussed some of the risks around defi, some of the pushbacks from people saying there don't seem to be any real use cases and some of the potential changes to the defi landscape post FTX blowout. Before we jump into the episode, I wanted to take a second to thank you for all the great questions and feedback I'm constantly getting from you guys.

I really, really appreciate it. If you enjoy the podcast, please share it with somebody who you think would a joy as. I really appreciate it. Enjoy this episode with Evgeny on Defi.

Evgeny, Good to see you. Welcome to the Alt Asset Allocation Podcast. Hi Ben. Thanks for having me. Of course been too long in real life.

So excited to have you on today. Defi, you're the wiz, you're the subject matter expert. So I wanted to have you on and give an overview of the space. There's been a lot of news constantly about the crypto space, but defi in general, decentralized finance for my listeners. Yeah. Before we get into all of those, I wanted to start off with your bio, a quick bio and how you got into the.

[00:02:05] Evgeny: Yeah, with pleasure. So it was a long and convoluted journey into, you know, the future of finance you know, finance or future of Frances as some people call it. So I spent about 10 years in investment management a few years in the hedge fund quite a few years in banking. Ubs, Deutsche Bank.

Started learning about Ethereum in 2015. In 2018 joined an enterprise blockchain startup focusing on some supply chain use cases. And then when I saw Defi emerging in 2019, early 2020, that was kind of a big signal to me that finally I can see something in like on chain crypto where I feel comfortable betting my whole kind of career on that

And it's been yeah, quite a rollercoaster.

[00:02:49] Ben: What was your first intro into defi that really like opened up your eyes to the, the power of this?

[00:02:55] Evgeny: It's a good question. I think it was, you know, looking, I think it was attending defi London. I think that's how it was called in like summer 2019 or something.

And I was just amazed. You know, I listened to a few talks and there was like real stuff going on. You know, one of the things that was kind of scaring me a little bit in 2017 was that the only real use case were the ICOs. . Right. And it kind of, it's not really an exciting technological kind of thing.

So seeing actual people doing actual transactions on the blockchain for, and more than just sending coins to each other. I mean, that was pretty fascinating. And that kind of unlocked everything to me. So learning about dye, you know, maker, synthetics, all of those kind of first generation projects. And to me it kind of, you know, came together.

Because I remember even in 2017, you know, Reading the first article about decentralized exchanges and I was thinking, okay, well people who will win this cycle will be the big exchanges, but then, and eventually this is the real future. And yeah, it took a few years, but now , the system, which is a whole new financial sector, right, which is built on this new internet and it allows you to do things very, very differently, which is very exciting.

[00:04:10] Ben: Yeah. And man, we've come a long way since those like Ether Delta, early decentralized exchanges, right? Yes. Let's just make sure my listeners understand and define defi decent, decentralized finance what it means to you and why you think it's important in the big scheme of things.

[00:04:30] Evgeny: It's a very good question. So the way, how I tend to think about Defi is that, you know, we have a traditional financial sector that is servicing the real economy, right? So, you know, McDonald's is served by JP Morgan. Then you have. Amazon and Netflix that are served by Stripe. You know, Amazon has its own bank and other financial institutions who exist on web two, right?

So real world web two. And then we have this digital economy and the blockchain economy, right, where you can buy some crazy monkeys as a picture. You can spend some time in the metaverse. But you know, admittedly is still a very narrow use case. And obviously there are, you know, hundreds of other use cases, not thousands around crypto in general.

And in order for that economy to exist, you need financial flows, right? You need an ability to send money to buy, sell, land, borrow, provide insurance, and do sophisticated things, right? So the first use cases of crypto were around mining. That was the first use case. You know, you can have mine and you earn.

Then you have, you know, speculation and exchanges where you facilitate trading, and now you have a blockchain native financial system, which is built radically differently. So a traditional bank cannot just migrate its infrastructure and become a dominant player. They have to build from scratch in a very different spirit of things, which to me basically means that we have this new economy and these new financial systems supports it.

And that means that new types of financial institutions can exist, right? So a cannot exist in the real world. Neither can maker, neither can unis swap, so on and so forth. And neither can reem them, right? So we are effectively defi yield funds. So we deploy capital into Defi Act as liquidity providers, providers of capital, and the objective is to generate return on, on that capital for the benefit of our investors.

And we, as you know, run, run a few strategies there. So to me defi represents the future of digital commerce, digital consumption, and digital growth, basically. And to me it's an opportunity to, you know, for our generation to contribute to the creation of this new financial system and hopefully take a leading role in doing so.

[00:06:46] Ben: Yeah, I like it. The future state is the idea that defi. Re replaces Tradify traditional finance, and it's like we're basically rebuilding the old system on these new crypto rails. Is that kind of the overall thesis?

[00:07:04] Evgeny: That's that's a trillion dollar question, I guess. I think the system is definitely being rebuilt, but the principles remain the same.

So the way, how I think about it is I think the financial logic of how things are. will stay the same because if I lend to you, whether it's on the blockchain or whether I'm a bank offering you a mortgage, I kind of take the same risk, right? It's the risk of you defaulting and if your collateral is a picture of a monkey or a, or a house or a factory, that's kind of irrelevant.

So I think the financial principles represent the relationships between people and they will never change. Full stop. Technical pieces are obviously very different, right? So my favorite case study here is Unis Swap. So Unis Swap as as you very well know, is one of the largest decentralized exchanges, which basically means it's piece of code where you can come with your coins.

I can come with my coins and we will be matched by this piece of code which is no different to what, let's say Coinbase does. But Coinbase at at some point, I, I think this data point was, is basically about a year old. So about a year ago, a Coinbase from memory had a couple thousand employees and Unisport has about or had about six employees, and yet they processed that month the same amount of trading volume.

So you can build a financial business with six people instead of 2000. , and that's fascinating. So I think what what in an ideal world will happen is that defi will become the backend of finance. So there are previous revolutions such as stripe and You know, Revolut in Europe and you know, well front in the US or what have you, these are kind of front end revolutions.

So they make it easy for us, as, you know, human beings to interact with our finance, or at least easier. But in the backend, it's still the same system. Defi comes from the other side. The user experience is pretty horrible and pretty painful. But the technology is radically. , and that's why Defi has proven itself to be way more resilient throughout the recent stress events in the crypto market.

So I doubt it'll replace it, but my hope is that at least it makes it more efficient in the backend.

[00:09:19] Ben: Yeah, and I think that that makes sense and I subscribe to that. Some of the pushbacks from like anti. Web three anti crypto, anti defi people, you know, wherever you kind of draw the line. It all kind of rolls up under the same umbrella with these pushbacks is that they're, you know, That's great.

That's way far down the timeline. After we solve scalability, after we solve privacy, after we solve all of these other things, you know, centralized providers in the stack, whatever. But like, you know, we're so far off from it and that. Where we are now, there's no real use cases. This is just like the same money sloshing around the same system.

What, what are kind of the real use cases for Defi right now? Right, right now that you're seeing.

[00:10:08] Evgeny: Yeah. So first I think it's a fair critique to a certain extent, but also I think it's important to step back and kind of think about it more broadly. Right? So, you know, when internet started you know, all you could do is send, you know, messages to each other for no good reason with like 10 people on the network.

Or, you know, I remember reading a book about the guys who created. , you know, the old video game and how they leveraged on kind of open sourcing it and making it free and easy for people to create their own mods and they built like a massive community around that. And arguably people would've said that it's useless.

So, very few Crypton natively is a very speculative asset and as much as it pains me to say by next speculation is actually a use case, right? Casino still. Retail brokerages still exist. So, and speculation is a use case in itself. It may not be productive use case in the long run, but what it does, it channels a lot of capital into the ecosystem.

A bit similar maybe to a.com bubble. And if you channel a lot of capital into the system, something productive will come out on the other end, right? So use case number one was clearly speculation. Now it has expanded a little bit. So a few use case that I'm seeing firstly, payments, right? If you know you based in the us I'm based in Europe.

The easiest way for us to send money to each other is to wire coins on chain instead of doing anything. And as we know, it costs very, very little if you do it on, you know, on depending on the blockchain where you do it. So payments, which is very viable. Secondly, we do have this vibrant, as I call it, digital consumption economy, where, you know, in web two people spend money in video games.

They spend money in Twitter, Facebook, Instagram, you know, whatever. Here they spend money on NFTs, which so far have been, you know, funny pictures, but it's expanding into. Where you can buy IP rights to to music content. And I think, you know Snoop Dogg published quite a few of his you know, masterpieces on chain.

There are use cases around social media that are being created that all loop into that kind of IP digital content. Which is a viable use case. Then it's lending, which is a massive, massive use case, whether it happens directly on chain or whether it's capital from on chain being pulled together and being lend to market makers, minors, or what have you.

Trading insurance. Right. There's been you know, a great example where some people actually had insurance on their deposits with, with FTX and others, and they bought that insurance on chain and they, they're getting paid out hopefully on that. So lots of those financial use cases exist and, but ultimately everything comes from the.

Level, right? So there are hundreds of technological use cases, and this reminds me, you know, Amazon from the early days of Amazon Cloud, where the first customer of Amazon Cloud was Amazon itself because they had to migrate their infrastructure. The second category were all Silicon Valley startups.

because no one else understood what cloud was and cared. And Amazon gave the Ubers of this world an easy way to bootstrap their business. And at first it was kind of the same money. You know, venture capital gives money to Amazon, Amazon gives it to those guys, and it kind of washes around in a circle.

But you plant the seeds and eventually something grows. So are there real use cases right now? Yes. Are they highly limited? Yes. Could this be seized for massive growth down the line? Yes, absolutely. And also, let's keep in mind that even if we say that Defi is kind of the same money floating around, I remember the days when there was, well, $0 on chain.

I remember the days just three years ago where there was about a hundred million even less actually, you know, 50 million sitting on the blockchain. At the peak we had three, 400 billion, and now we have about 40, 50. That's not this type of growth doesn't come without substance.

[00:14:04] Ben: That makes sense.

I'd be curious when you're looking at the defi space overall, there's a lot of use cases. What is perhaps like the most interesting thing that kind of catches your eye or innovation that is at its early stages that has a lot of potential?

[00:14:23] Evgeny: Yeah, that's a good question. Well, one thing I'm personally fascinated with, , it's kinda smart money, right?

So if you think about dollars that sit on your bank account, they're not smart. You can call your bank or, you know, send an instruction to your bank and they will do something with it. But you can't algorithmically instruct your dollars to move or to perform a certain function. And stablecoin are a very interesting use case because you have, it's a, it's.

Currency is not dollars. It's more like debt because this is, you know, you kind of hold a stable coin hoping that someone who issued it is, is solvent. So it's kind of credit, but you hold that asset, which is, which in normal circumstances should be linked to a dollar, but it's a smart asset that can do a other things.

And then if you go one step further, in reality, you know, you kind of shouldn't care about how many dollars you have, right? You should care about how much can these dollars afford. . So wouldn't it be smarter that your savings account in the real world isn't actually dollars, but it's dollars plus c p i plus inflation, right?

So to me, a fascinating use case isn't our inflation linked stablecoin, because why would anyone hold? The actual dollar, if you can have dollar that protects you from inflation. So there are few examples. Very early stage and you know, very kind of small scale for now, but inflation linked stable coins I think are just fascinating.

And, you know, if defi grows, that could be a very, very meaningful use case. And I think that's a use case that, you know, people can relate to. And obviously there are, you know, dozens and dozens of more, which are more kind of niche, specialized and kind of geeky, which which could be fun for people like us.

But

[00:16:06] Ben: Unfortunately, the first thing I think about is like attack vectors on anything. And it's like, oh, inflation length. That makes sense. Okay, wait, they're getting a feed from off chain that's measuring inflation that then changes the value of this thing. So you just. You know that's full on rabbit hole.

Lots of the growing pains that we have to evolve and grow out of, right?

[00:16:26] Evgeny: Yes, you're absolutely right. But it depends on how you define inflation. Right. Maybe you will say that actually inflation to me is a market cap of the crypto market, right? Or market cap of Ethereum. Yeah. Fully on chain. Exactly.

Yeah. Obviously no solution is perfect and we're far from that, but you know, innovation rarely is perfect in the early days.

[00:16:46] Ben: I mean, lately I hear Stablecoin and still have P T S D from Tara Luna, which you know, famously blew up, blew up earlier this year at the end of q1. And then the, the, the F T X thing fiasco, that kind of just happened in November, 2022.

So like, I'd be curious not to go into detail of those and what went wrong, because everybody's talked about the mad nauseum. , what is the outcome on the defi space from your perspective as a result of these kind of high profile, lots of retail loss money, lots of high profile losses within the crypto space?

Yeah.

[00:17:31] Evgeny: Well, it's a, it's a very good and, and topical question of course, and, well, there was lots of things there, but you know, first I think it's important to distinguish. Between an emotional response and a factual situation, right? So the short answer is that a lot of people will get scared whether these are individuals or institutions, and they will not touch crypto for a while.

That's a fact which is not a rational response, but that's just how the world works. Important point about, you know, let's not obviously go into the details of that, but it's important to understand what happened at the high level structurally, right? So if we work backwards, you know, with FTX it was, these were actions of a specific group of people, which is something they were not supposed to do with a centralized business that's actually a brokerage.

So that's not related to Krypton in any. , right? This happens in finance pretty frequently, maybe at a, without such crazy stories, but the logic of that never changes, right? It's a very, very old story. You do something, you take something which doesn't belong to, you're hoping to turn a quick buck, and then it goes against you and you lose everything, right?

U s T, which is a a more nuanced example is a stable coin, which exists on the blockchain is, is issued on the blockchain. So you kind of say, I think it's defi and it is defi. But the question is, why did it blow up and did it do something that was not supposed to do? And unfortunately that's not the case.

Those who took the time to read the white paper of the u s t stablecoin would've actually found that the mechanism of how it worked was known from day one. Right? So they told you that this is how it works, and in a specific scenario, this is what the protocol is going to do to support the p. Of the stablecoin and then you as an, and someone who's responsible for, you know, for your own money, you would've looked at it and said, well actually wait a second.

If they do this, that, and that, what they're, if they do what they're saying they will do, the whole system can collapse. , and then you can take a view and say, well, actually I understand what they're doing. I respect it, but I'm not gonna put my money in that. And this was the position of our fund, right? So we have never deposit money into Anchor because we read the documents, we understood the risk, and we just thought it's, it exceeds our risk appetite.

So U s D did exactly what it was designed to do in that specific scenario. So if I come to you and say, Hey, and I'm oversimplifying you know, I'm telling you I have no money, I have no income, I have no collateral, but please give me the money and if I cannot, I'll pay you back. But if I can't, I'll default on the loan and you give me the money, and then I default on the loan.

you can't really blame me because I told you upfront that you know, you, you should have known what you're working into. So what happened is that people bought something they didn't understand, unfortunately, and people lost a lot of money, which is very sad. But it wasn't really the failure of software on the blockchain.

It's like saying that, you know, you, you had, you know, A, a bad experience with Lehman Brothers and you will never touch finance again. That's obviously not the correct response. So to me it's actually the opposite. So when U s T was collapsing you know, like I haven't, my team and I, we haven't slept for two weeks, you know, just putting out fires, arbitraging different things, trading across nine different blockchains.

It was pretty intense and Defi was highly volatile. and you didn't know whether something would blow up or not. So it was highly, highly stressful for us. But the damn nothing blew up. Everything worked how it was supposed to work. Those who had money in bat, the credit lost their money as they should.

Unfortunately, this scenarios and everything else worked. And then if I fast forward to ftx, defi was extremely. , nothing has really collapsed. A few specific projects on Solana took a hit, but that's kind of FTX related. That's not a reflection on defi overall. So to me, defi, you know, it prove that it's, you know, it's a hammer that works, hammer that does a specific thing you tell it to.

So if you write a smart contract that you know, does lending or does trading, or facilitate trading, then they, they. , the market was highly volatile. Under pressure. They worked, the market was slow and boring. They, they worked. So defi to me, actually validated the necessity to have it because it gives people transparency and things that happened at F T X cannot happen on chain because everything is visible.

Everything is transparent. So, , it's yet another validation of a need to have a very different backend for our financial

[00:22:04] Ben: system.

Yeah, that makes sense. But I mean in terms of like negative. Public goodwill, retail goodwill within the space overall. I'm worried about this overarching ill conceived regulation that just squashes a lot of the innovation.

What are you thinking in terms of regulatory response to everything that happened and some of the r risks that that imposes in, in the defi space? It's,

[00:22:34] Evgeny: Yeah, it's a fair concern and. You know, arguably what happened could have been captured by traditional regulatory mechanisms and it wasn't. So it's probably fair to assume that there will be kind of an overextension of a response, which could be viewed as draconian at some point.

So clearly there'll be negative implications for, for the whole crypto industry, not, not just Defi. And we'll just have to grow, grow through them in the long run. I remain optimistic because, Crypto and defi are about open innovation. And if I look back, you know, even a few years, well, when Mongos happened, everyone thought crypto was dead.

Then where the I C O bubble, where 99% of the projects that I've seen at the time looked like complete fraud. And then I c ICOs got completely banned. Everything got bad than China. So to me that looked like, okay, he crypto. That looked like a crypto over crypto is dead moment. Now you have a global ecosystem of people who are building different types of businesses.

If some specific use case get restricted, which they might, well, that'll probably suck, but that might protect some people. So maybe it's worth it. And in the long run, I believe open innovation can prevail anyway because yeah, some things will be regulated, some compromises will be made, but. Some use cases will continue to thrive and exist.

So I think it's all about staying very nimble and just adapting to the new environment, which will change and which will be challenging for a while. But structurally, the underlying principles aren't going anywhere.

[00:24:09] Ben: Yeah. And it's important to think or to remember that like regulation, it's not like there's a global regulation against these things.

They're based in certain jurisdictions, and it's a bit of a, like oil and water, you know, if you put it out in this one spot, it'll just move somewhere else. And all the innovation will be accrued to whatever country it moves to, which is an interesting, like, game theoretical mind game to think through.

So what, what other, I mean, if I think risks to defi being this bigger thing than it is today. You know, regulation is obviously the one of them, but there's also issues with governance or some other ones. Ignoring. Kind of macro, cuz that's a whole nother rabbit hole. But like, what are the other biggest risks to defi, like existential risks to Defi overall?

[00:24:59] Evgeny: Well, I think actually the biggest risk to Defi is, is that it just stays small and irrelevant in the grand scheme of things. Right? I think the risk of Defi is that, It's kind of a fun, interesting place for a small group of people to experiment, play, and do something. But it doesn't go beyond that because defi in that scenario would've failed to solve some real meaningful use cases.

And I think that's the biggest risk. Defi as in, you know, code that allows you to do financial transactions on chain. You can't kill it. It will continue to exist. But if we don't. Mature and evolve to meet regulatory requirements as well as the real world kind of use cases and needs. Then it will just stay, you know, a sandbox for, for a small group of people to play with each other, which is kind of pointless, obviously.

I'm, I have our, you know, I'm seeing some kind of, you know, lights, a few dim lights at the end of the tunnel. Like in the wake of ftx you know, trading volumes on chain have. so people maybe temporarily don't trust centralized exchanges. They move money on chain. The trade on pain. That's great.

That's self custody

[00:26:07] Ben: is a thing. Again, ,

[00:26:09] Evgeny: who knew? Yeah, exactly. Exactly. Yeah. Who knew? . So it's, it's unpredictable, right? The way how, you know, there are so many unknowns. I try to kind of dumb it down and focus on, on what's kind of in front of. Meaning that, you know, in the long run, I believe in the space, there is a reason why someone could believe in the space and we'll just keep kind of building what we can for as long as we can.

But yeah, my, my kind of two, you know, short answer is that staying small is probably the biggest risk.

[00:26:41] Ben: Yeah, I forget who says the, the quote, the, the only thing to learn from history is that we never learn from history. So even though people have started to do self custody and it look looks great, is we're doomed to repeat it because that's what we do as humans.

and ultimately, yeah, that's kind of, kind of the way it goes. Looking at. Defi, you're seeing some, some lights at the end of the tunnel. I, I wanna dive into like this idea of institutional defi or you know, I've seen things talking about like, you know, defi continues to be this small little niche thing with like, people kind of, it, it's kind of like the Black market defi and then like institutional, gated, K Y C Defi what are your thoughts on like that potential future within the defi space and just kind of an update on institutional defi or K Y C Defi overall?

[00:27:38] Evgeny: Yeah. On one hand, you know, k y c Defi is kind of a misnomer because it is not really decentralized but it does exist on the same chain. It's pretty interesting, right? So we've seen a few projects, you know, maple have a few others who are showing some traction in that, in that regard. And I think it's a good thing.

And I think it's inevitable because especially after, you know, tornado cash has been sanction. Where you kind of, as a financial institution, you know, that you may be touching this code, but tomorrow it can get sanctioned and you obviously don't wanna get in trouble. It does make sense for you to operate in your kind of closed garden, so to speak.

I've spoken to some, you know, very large traditional hedge funds and then, and some banks and they're, they are excited about defi. They're comfortable playing and learning, but they're not comfortable taking. Existential risks. So for them, institutional, K y c Defi makes a lot of sense because they can, they will know their counterparty and it'll be like, you know a protected environment for them, which kind of matches up to what I was mentioning earlier where, you know, defi in that scenario becomes a backend.

For for finance, right? So you can have, you know, whatever JP Morgan trading against Goldman Sachs. But the trades are settled on the blockchain, not, not elsewhere. We actually have seen JP Morgan, I think they issued a bond or something on a private fork of Polygon a couple weeks ago, which was pretty interesting.

So I think it will continue to exist and it will be separated from. The real defi, well, let's call it that. But there is clearly some, some utility in that as, as a gateway that that makes a lot of sense. So in the long run, you're gonna have these two different pools, right? One of them is very large for institutions.

One of them is open, but smaller for people who are kind of experimenting, right? And maybe someone launches a product in decentralized finance. And then over time it migrate. Into the permission one. So it's an interesting symbiosis and it's probably a good thing that we have

[00:29:34] Ben: it, it is a misnomer.

It's interesting, but like I can see it playing out that way for a number of different products and services. Yeah. Okay. Defi, like what's the most over o overhyped thing in Defi right now? In your.

[00:29:51] Evgeny: overhyped. Well, that's that's an interesting question. Overhyped as in people talk too much about it when they shouldn't.

[00:29:59] Ben: Yeah, I mean, it's just like like going back to the 2017 ICO o bubbles, like, you know, throw Uber on a blockchain and it's gonna be super efficient and borderless and all of this stuff. It's like way overhyped. It's 10 years too early or whatever, you know, similar things within.

[00:30:16] Evgeny: I think, you know, probably sophisticated derivatives.

Right. So we barely have the infrastructure to handle, you know, sport trading. And there are some really good teams building, you know, options, protocols and, and what have you, but, From options on centralized exchanges in crypto, barely have enough volume to be of interest to large institutions.

So we haven't even solved that. So doing that on chain right away would really sophisticated things. Seems a bit too early. But with these things, you know, I mean, I've been wrong a million times and you know, one man's too early is another man's treasure as they as, as they say. But yeah, that's probably a bit excessive right now, I would say.

Yeah.

[00:30:59] Ben: Yeah. I think eventually, again, always a little bit of a timing issue. Alright, let's pivot a bit. So with re seven, what you guys do, you have Yield funds, whether it be stablecoin yield or eth yield. Eth yield obviously is a bit of a different animal or very much different animal because ultimately like the yield is generated from the proof of stake blockchain, which is now Ethereum, which is from these nodes validating blocks, and it's a real.

other defi is not real, but it's like, it's actually from, from the blockchain itself and built in. Talk to me about how you think about ETH yield's in general and then kind of some of the high level strategies of like what an eth yield fund does.

[00:31:48] Evgeny: Yeah. So obviously none of this financial advice goes without saying.

But yeah, so. As as we know Ethereum migrated from proof of work to proof of stake about two months ago. And what this means is that going forward, miners who bought all of this, you know, fancy expensive equipment, are no longer getting paid for maintaining the legitimacy of the blockchain.

Now, those who buy Ethereum and lock it in Valuators and can risk their capital rather than provide the infrastructure get paid effectively, dividend. on their asset. So now Ethereum, well, if itself is like it's a very volatile, but it's kind of a bond, it's an asset that pays you dividend continuously.

And as of right now, there are some kind of nuances where you can't take it out from the, from the blockchain. But in, in a few quarters from now, you should be able to do. So effectively eth is now a productive asset. It's like imagine that you have, you know, a barrel of oil. You can, you can put somewhere and, you know, make money on it without burning the actual oil.

And that's why ETH has become a deflationary asset, right? So the amount Ethereum that is being burned in transaction fees actually exceeds the daily issues. So again, if you think about it from a commodity perspective as supply demand, your supply has. Collapsed by about 90% and your demand is pretty high.

So as a commodity, it's pretty interesting kind of structure. And as a reward for those who log their Ethereum to maintain the validity of the network they get paid, if, which produces this yield. So this is a native, as you said way of earning. Interest on the blockchain, and you can do this across various chains which support proof of stake.

And then our objective is take that asset, which can exist in the liquid form. Right? So some assets that exist right now are called, you know, L S D liquids staking derivatives, which are a representation of these locked e assets. So it's like a zero coupon bond, which which also. Which just appreciates in value over time, essentially.

And the interesting thing is that you can, you can take that asset and put it somewhere in default, like lend it out in defi because everything is composable. You know, an example I like to give is imagine that, you know, you are in the US and you want to get the mortgage in Japan, right? You will not be able to do so.

Right? Even if you have the legal documents that allow you to do that, you know, You can't, you'll need to take your dollars, you'll need to convert 'em to Japanese yen, send it to Japan you know, put it up as collateral or what have you, right? So that all of that takes like three weeks and your banks will lose half your paperwork.

In the meantime. Whilst in crypto, everything is composable and everything can be done basically in one transaction. So we take this liquid staked. , we deploy them in defi in January, trading fees, January yield interest, insurance payments, premiums, and and so on and so forth, which allows us to earn two levels of yield.

And that's where, you know, active management kind of comes in, where we take risks with that, obviously. But then, you know, the yield could be could be pretty interesting. And it, on, it's only possible due to the composable nature of the blockchain where An asset from blockchain number one, platform A, can be deployed into blockchain number two, platform B.

And that's pretty fascinating.

[00:35:14] Ben: And I mean, how do you think about long-term yield percentage? I haven't looked at this in a while, but I mean, pre-launch, you know, people were, It was at 5% or whatever. Now I think it's a little bit more, but like is this gonna continue at this rate or, or where? Where do you kind of think of the long term kind of AP p y?

That should be on stated eth, I think like base, not without your alpha generation, obviously.

[00:35:45] Evgeny: Yeah, so the base can be anywhere from percent, and I think it'll kind of be in that range for a while. It depends on many technical parameters. But what's interesting is that there's like a hidden kicker because all transactions happened on the blockchain and previously, some market participants would pay effectively bribes to the miners to make sure that transactions are processed first.

And now instead they do kind of, you know, bribes effectively to those who run the validators. So as an Ethereum validator, who then creates this LI technique, you collect fees from Ethereum being burned when people do normal transactions. Then when you have this kind of. Accelerated transactions. You get this additional, as it called, as is called m e v boost, which can be another couple of percentage points a year.

So I think Ethereum will keep paying again, let's say, you know, four to eight on average, let's say six, six to eight. On top of that, you get a couple of points, percentage points through this boost with this trading rewards. . And then if you take the asset, you put it somewhere else, you get another few percentage points.

So that's kind of how, how we think about it in these early days of proof of stake networks.

[00:36:52] Ben: Fascinating. And I think there there's ought to be a lot of people interested in kind of putting their, putting their eth to work as opposed to just sitting there. But l lastly, I kind of want to go over.

I've been doing a little bit of thinking like, what is the bull case for crypto? What, what e e everything goes right and sends us into a new bull market up into the right. And then obviously the, the, the inverse of that, which is the bear market. So let's start for like your bull case for crypto web three in general.

What has to go right to like send it up into the right?

[00:37:27] Evgeny: That's so I'll give you my kind of. Idealistic Utopian use case, which I'm pretty excited about. So I'm actually super excited about everything, all things metaverse but metaverse not how it looks when you look at what Facebook has created.

But to me it's kind of an environment which is a combination of social networks. Gaming and this kind of digital consumption, right? So if you think about web two, I mean, I, I'm terrified of thinking how much, what percentage of our lives we spent on apps that belong to, you know, top five you know companies in Nasdaq.

So, YouTube, Instagram, Facebook, Twitter, alone, and, you know, and discord, they consume most of, of our lives. And it'll be great to move to the next level where we will inevitably be spending the same amount of time online or more, but if it's being spent in these open universes that are created very differently, and we are seeing that, right?

We're seeing the, the decentralized Twitter, we're seeing the decentralized gaming, YouTube, Facebook, and, and what have you. . So they're starting to emerge. And then as you have that digital. Experience, then people need to consume around that. Right. There was a some ar Airbnb concert. I think just when the Covid started.

I don't remember who it was. And they did this in Minecraft or in Fortnite. I keep confusing this Ian in Fortnite, and I think they were like, Millions of people who logged in to do that, right? And people started buying some little things that have been sold in that in that universe, right? So if we get the same, we pretty cool.

I remember when charge particles did their launch in, in the metaverse, and you could have, you know, walked around the virtual gallery and look at different pictures that you can, you could have bought. That's pretty cool. So I think the real kind of that was, that was the

[00:39:11] Ben: biggest part party in a, a metaverse at the time too, by the way.

Yeah, it was huge. We broke it multiple times. We were like talking to the founders because they hadn't seen that sort of traffic. It was great.

[00:39:23] Evgeny: Early. No, it was pretty, it was pretty cool. So yeah, I think these kinds of experiences over time will be, will be amazing. That's kind of on one side, on the other side, which is a more boring one.

You know, if Defi becomes more scalable, more private, and you know everything you've mentioned before and it becomes a backend for whatever JP Morgan. That's obviously amazing. A bit less, you know, exciting. But then we'll have this world where the traditional institutions rely on, on chain settlement and composability.

And then there is another side of that where people like us can play, experiment, and innovate potentially more radically. And then it all kind of comes together in a, in a perfect version of the future.

[00:40:02] Ben: It's always great to think about the bull case. I think all of us is like P perma bulls, you know, these are like kind of the utopian version of the future that we dream about, but it's also quite like constructive, I think, to think about the bear case, which is like existential risks where these.

Things go wrong. Where are blind spots? This whole thing is just there's no real innovation there. It's like taking advantage of opaque regulation, and speculation. What are kind of, what's kind of like the bear case or crypto?

[00:40:33] Evgeny: Unfortunately the Bear case is much easier. . Right? So the bear case is

[00:40:38] Ben: that right now it really is.

Which is like why I forced myself to write out the poll case cuz I wanted to have a light. But like the Bear case is simple. But let's walk through some of the big ones that you kinda see.

[00:40:49] Evgeny: We're pretty much at, well I dunno if we're at the bottom of the bear case, but we're pretty deep in the belly of the Bear case, let's call it that.

The negative scenario is that there are, there is an event or a series of events which seriously undermine the. Which is already, you know, not too strong in the whole ecosystem where your normal, innocent people lose money out of nowhere as a result of bad actors, and they don't wanna come back, whether as investors or as users, regulators go on the offensive and just, you know, choke the space as much as they can, which means that good people, so to speak.

And when I say good people, I mean those who want. Innovate in the open and therefore could be funded by those who want to innovate in the open. They can't build whatever they wanna build. And then crypto moves into a former kind of shed of itself into a shady universe where we have some enthusiasts still deploying code and playing with it, but it's being used by 10 people.

And these are all the same people playing with each other, and it just stays very small and you know, If anyone large touches it, they go to jail because of the, the regulation. And therefore, obviously no one will care about people moving a hundred dollars back and forth, but then it kind of is kind of pointless.

In that scenario, I think it's still fair to say that non-financial use case could exist, right? You could still publish your content. on chain, which could be music, which could be pictures, which could be text, which could be scientific papers or whatever else. So there will still be some decentralized infrastructure and some use cases, but they'll be very narrow.

And it will be at the level of individual apps rather than the whole ecosystem. Because to me, the most exciting thing about the cold space is that it's a brand new world. Where everything is, comes together, right? If it was simply, let's build another Twitter, well, sure, great. But you know, it's just one business and one business model.

So if this composability is broken because people don't want to use it and people get penalized, if they do, they'll be pretty very destructive. And yeah, it's a risk. It's always been a risk. Now that risk is higher than it's been over the last few years, but I remember the days. China made everything in crypto.

Illegal ICOs were banned and there was a crypto winter, so we're in the crypto winter now it's up to us to see if there's gonna be a spring. Oh

[00:43:19] Ben: yeah, there'll be a spring. I'm honestly always worried about this retail goodwill that has been just trampled by like these big high profile events.

And then ultimately the way that impacts the space even more is, Right now it seems like we have so many smart entrepreneurs coming into the space. It's like the freaking smartest, well-rounded teams X web two trying out this, this malleable new space of Web three and one. Come in with that bigger and intelligence and like.

Different viewpoint versus like the crypto native people, you know? And if like, if everything just kind of like stagnates for a while the worry of like this exodus of talent from the web three space and it was like, oh, that was a shiny object. Let's go on to whatever else. So that, that's like something that I've been thinking about is like, how, how can we keep, keep this great influx of smart entrepreneurs trying to change the world coming in.

Which I think is really, I. Yep, I agree. Evgeny This was great. A good decentralized finance defi overview, yield staking, e e staking. Where can my listeners find out more about you or re seven? Where would you like to send them?

[00:44:31] Evgeny: Yep. So we have where should have a blog. The easiest is probably, you know, www re seven.capital.

You can find our blog there. You know, we have tried to educate our readers about defi as much as we can, so please, you know, check it out. Yeah, that's, that's probably the easiest. And then we're always, you know, dms are open as they, as they say .

[00:44:53] Ben: Awesome. Evgeny Great to see you. Thanks for coming.

[00:44:56] Evgeny: Thanks for having me.

[00:44:56] Ben: Welcome. There you have it. Thank you for listening. I really appreciate your support. Show notes, transcript, links, and more can be found on our [email protected]. If you'd be so kind, please share this with anyone you think might be interested or get some value from this conversation.

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Thanks again and hope you have a fantastic day. Happy investing.

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