Why DeFi Is The Next Big Thing In Crypto [Chills 26 with Cake Defi]
If someone told you 15 years ago that you could achieve an annual percentage yield of 1000% in your investment, you would probably walk away from that crazy person. However, this actually became reality for some in the DeFi space, also known as decentralized finance. As with cryptocurrency, DeFi is pushing the boundaries on how we think about finance. What exactly is decentralized finance? Why is it making waves among investors? How should we evaluate and decide which DeFi projects to include in our investment portfolio? Dr Julian Hosp from Cake DeFi enlightens us on this exciting space in this week’s Chills with TFC!
In this informative and educational episode, Dr Hosp and Andrew dive into key DeFi concepts such as decentralized exchange, yield farming, liquidity pool and many more. While some of these terms may sound technical for some, the succinct explanation provided by Dr Hosp will help listeners gain new insights. He also includes various examples to illustrate his points too.
With DeFi being a relatively new player in the investment world, one has to be even more cognizant of the risks and factors to consider when choosing a DeFi project to invest in. Dr Hosp spells them out in detail in the second half of the episode. With this wealth of information on DeFi, Chills 26 is undoubtedly a great resource for anyone interested in DeFi investments.
Andrew: We’re going to talk about one of the hottest topics in crypto right now, and that is decentralized finance or DeFi in short. Beyond buying, holding and selling Bitcoin or other cryptocurrencies, how else can you make money in crypto? How is it possible to get annual percentage yield of 100%, 1000% or more? What are the risks? What should you look out for when investing in DeFi projects? Let’s deep dive into the world of decentralized finance.
Expand Full Transcript
Hello, my name is Andrew and welcome to another Chills with TFC session. In this series, we hope to bring on interesting and relevant people to help us learn better from various perspectives. Life is not always about learning from the people you agree with. Different perspectives shape us to be more well-rounded in our thinking.
So in our pursuit of the life we love while managing our finances well, our guest for today is going to talk about decentralized finance and the exciting trends in this space. What are the metrics to look at in DeFi projects? And how should you think about crypto as part of your portfolio allocation?
Our guest is the CEO and Co-Founder of Cake DeFi, a dedicated platform that enables users to earn cash flow from their crypto. Prior to being an entrepreneur, he spent 10 years as a pro-kitesurfer and seven years in medicine. To help us gain an understanding of decentralized finance, let’s welcome Dr. Julian Hosp.
So Dr. Julian, let’s set the stage. What is DeFi or decentralized finance? Could you define it for us?
Julian: Sure. So contrary to CeFi, centralized finance, which is what the finance that we all know, banks and so on, you don’t have centralized parties that are in charge or they can manipulate a certain system.
The very first form of DeFi was Bitcoin and it’s basically creating money, it’s creating value and transferring that value. There’s no one in charge, it’s an entire community and there’s other applications as well. For example, lending… typical bank business, you borrow, you lend, someone takes a charge.
Blockchain, a decentralized community could also do that and they could make money off that. That’s a humongous business lending. It’s fantastic! There’s always people who need money, there’s people who want to lend money and if you can do this via blockchain, the trust is done via the community, there’s no more centralized party. That is completely groundbreaking because it disrupts this banking business, if you want to call it. You have exchangings instead of having a broker doing the exchange, you can do this decentrally, decentralized exchanging and then the community exchanges it for you.
You make a bit, you say, “You know what, I want to exchange one Bitcoin for something else.” And then the community brokers all that. Basically what happens in DeFi is all these services… instead of having a bank, or a government, or one individual, you have an entire community called a blockchain community executing the entire deal.
Andrew: I like the word DeFi because it sounds like defying the current system or the banking system, as you would like to call it, or the government system even. In terms of marketing or branding, like the word DeFi is really cool but what is true decentralization?
Julian: It is difficult actually. I think true decentralization… and we can also ask ourselves is this something we actually want? Many people always think that true decentralization is… means actually everyone is equal. There’s no one who is better or worse, there’s actually a set of rules that we all agree on and we just live by all those rules. I’m not 100% convinced that it is actually the state that we would love to have, because it could either mean pure communism or the other side, which we could discuss on a political spectrum actually goes in the backend curves and is anarchy.
I’m not sure if this is actually what you really want. Pure decentralization would mean no one is better or worse, everyone is the same. We either have no rules or all of us agree on a set of rules. In blockchain we always call these protocols. The Bitcoin protocol is actually nothing else than a set of rules that we all agree on.
Again, I’m not sure if this is actually what we really would want. I think what is the ideal scenario is to having a bit of a mix between centralized parties, because you always need leaders, you need people who take initiative, take the first step, who pushed stuff forward. But then you need to put power out of certain positions and out of certain ideas, because otherwise it’s very easy to misuse that. I think that’s the ideal kind of scenario.
Andrew: Right, because there are people in the crypto space talking about being a sovereign individual and being like independent of the states, but there’s an extreme. Without going into political explanations and all that, kind of think that both systems would exist. Maybe the DeFi system will exist together with the banking system.
Julian: A 100%! You see this… DBS, they announced that they are issuing a small amount, I think SGD 15 million in debt on the Assyrians blockchain or 7.5 million? I’m not exactly sure on the exact number. But they’re going this route right now and I think that you will see this overlap of the traditional banks. Customers will always need someone to talk to. But on the other hand, they want to have certain guarantees. For example, I as a bank cannot just take their money away.
You yourself, you love to have someone that you can talk to you and say, “Hey, can you help me out? I’m willing to pay a fee if you can help me out. But I don’t want you to be able to just run away with my money.” That is this kind of marriage between CeFi and DeFi and I think that is the future. Whatever company or institution governments embrace that, they will win. The governments who will say, “You know what, only what we have been doing over the last centuries is the right way.” I think they’re going to lose, just like with the internet. But those groups of people, except governments, groups of people say “Only pure de-centralization is the way forward.” Good luck, that’s not going to work. A true decentralized system does not move, it’s stagnant, there’s status, because it’s so difficult to move anything forward. So the merger, that’s the golden middle.
Andrew: Yeah, okay. Let’s bring it back to current reality. So based on what I understand about decentralized finance, is that there’s no intermediaries, there’s no banks. You and the other party are interacting directly in this relationship through a smart contract.
The smart contract lists all the terms of this borrowing or lending, or whatever financial relationship that you have with each other. How do we get to this place? How do you get to DeFi? Let’s talk about the trends, let’s talk about blockchain. How did we get to this new system?
Julian: It all started 31 October 2008, Halloween, when Satoshi published a white paper and said, “Let’s create a peer to peer cash system without any intermediaries. I’m proposing two things out of the DeFi world. The first one, creating value, which is creating money. There’s no bank that dictated, it’s a mathematical algorithm. At the same time, we can transfer that value and we can send it to someone else.” For about five years, these were the only two functions that we had. Then Assyrian came along and said, “You know what? It’s actually not the only kind of simple terms that we could have. We can expand that, we can do whatever.”
And suddenly we had lending, we had a smart contract that defined the rules. You put up a certain collateral. For that collateral, as long as that collateral stays in a lock, in a smart contract, you can withdraw at the value from that collateral. Someone who delivers that value to you is being paid an interest from whatever you locked in there.
The only way how you can unlock this is if you put back plus the interest, what you took out. The other person doesn’t have to trust you because there’s just box with value inside and the entire blockchain algorithm ensures that you can’t just run away. So I am insured, I’m getting my interest of that. That was typical lending.
Assyrian kind of had that and that was very early on when that got started. One trend that really came up and as it got started about 2017. Last year, 2020, was when this entire… exchanging DEX, liquidity mining, yield farming that entire… these crazy hype words started.
Basically what’s happening there is… imagine you want to go from Singapore dollars to US dollars. You always need someone who has the other side of the liquidity, because it’s very rare that you actually meet someone on the street who wants to go the other way. If you want to go from Singapore dollars to US dollars, you need someone at the same time who wants to go from US dollars to Singapore dollars.
It’s rare, not always there. What you do is you go to a bank and what does the bank do? The bank just holds both sides, it has Singapore dollars and it has US dollars. And for holding those two liquidity pools, it charges you a fee. It doesn’t necessarily charge you a fee for the conversion, it charges you for providing that capital. In a decentralized ecosystem, you can do the same.
Now, what’s very interesting, anyone… you and I can provide this liquidity and we call this liquidity mining. For example, on Cake, if you go to our platform, CakeDeFi.com, you can put Bitcoin and DFI on there. If you do this, the entire community pays you between 40% to 70% per year on this capital.
Why? Because there’s so much exchanging and so hefty transactions going on. Basically what you’re doing is you’re taking the position of a bank or an exchange kind of brokerage. That entire concept started last year that got super hot and I think what’s the next trend now is the concept of decentralized tokenization. The idea here is the following… imagine you have a Tesla share. Instead of representing that Tesla share as a token on the blockchain, you say, “You know what? There is no Tesla share, there’s only a price.” And that price is guaranteed by the community. If the Tesla share moves up, the price also moves up. Not because of the share, but because it’s guaranteed, it’s mirroring it.
The interesting concept now suddenly becomes you can invest in anything, whatever is represented in there. Not because you actually own it, but because you own the price. The concept here is important because now suddenly no one can take this away from you. So the entire story about wallstreetbets and about all these cannot happen anymore, because there’s no one who can close. There’s no one who can just say, “You know what? You’re not allowed to trade that price anymore, because it’s happening on a blockchain.” It’s completely decentralized.
Now there’s downsides with that. The downside is you have no voting rights, you don’t get dividends, but in most of the shares it is actually not that relevant. Tesla, AMC, GameStop and so on, they don’t have dividends anyways. Most people don’t care about the voting rights, but it ensures that you have a 24/7 access to get share and to get price feed. So if you say… you know what? Screw a lot of these investors, I’m going to hold that and I’m going to write this, there’s no one who can take it away from you anymore. That’s just extremely powerful going forward. I see a lot of the trends here empower the individual and taking a lot of power away here from some large institutions that have been pressuring, or having used to setting a direction. I think that’s going to be the super exciting use case this year.
Andrew: So you think that DeFi did start from the point that Satoshi came up with Bitcoin?
Andrew: I think when it comes to cryptocurrency, there’s like a ladder of knowledge. Everytime I feel that I understood it, there’s something new to learn. It seems like DeFi is the hottest keyword recently as compared to three years ago, of course, while cryptocurrency is also gaining more mainstream attention right now.
We’re talking about DeFi today, you gave us three use cases. Number one, you mentioned DEX, which will stand for decentralized exchange. So it’s like on the centralized exchange, I’m going to the bank and the bank is like an intermediary between me and you. We do our lending and borrowing…
Julian: All buying ends in the crypto space, a large exchange…
Andrew: On the crypto space, in the case of a DEX is a direct relationship between me and you through a smart contract. So that’s one. I can lend you some money and of course I get interest for it.
Julian: No, you don’t even really need a DEX for that, that’s more lending contract. On a DEX it’s like… I give you one Bitcoin if you give me 10 ETHs (Ethereum). You lock this up for a fraction of a moment, if you don’t get the 10 ETHs, the Bitcoin goes back to you. If you get my 10 ETHs, I get your Bitcoin. So I don’t have to trust you that if I give you 10 ETHs, I don’t get your Bitcoin. And you’re not giving me the Bitcoin first and getting the ETHs afterwards. It’s basically right in this moment.
Andrew: Because the protocol manages that. Because when you borrow from me, you need to put up collateral. Is that correct?
Julian: It’s basically the community. Imagine there’s 100 people in the room, let’s imagine there’s 100 people and they all look at us. You and I sit there and I say, “I’m going to give you a Bitcoin if you give me 10 ETHs.” Everyone’s listening and everyone says, “Yeah, listening.” So here’s the Bitcoin and it’s like right in the middle of us. You can’t grab it because the community doesn’t let you. There’s a hundred people, you cannot battle a hundred people. Now you give me the ETHs and the people are like, “Okay, great. Julian got the ETHs, great. You can take the Bitcoin.”
Andrew: All right. So that’s where liquidity pool comes in.
Andrew: Okay. Let’s talk about liquidity pool, let’s define it first.
Julian: Basically what I described here is a very unlikely scenario because it means that I actually find you. I find you in this entire space of a person who wants to do exactly what I want to do, but the other way around. So I want to go from one currency into the other, and you coincidentally want to swap the exact same amount, but the other way around. It’s just super unlikely, right? It’s possible, but it’s unlikely.
The easier way is if we use that scenario… now we can have a hundred people in the room and there’s just two of us in the hundred people. All the other people, whoever wants to write, puts the two currencies in front of us, onto the table. Bitcoin and whatever. Let’s use an example. We have on Cake DeFi, Bitcoin and DFI DeFiChain. So these two are on the table. Whoever wants to go from either Bitcoin DeFiChain or from DeFiChain into Bitcoin, doesn’t have to find someone else. There’s actually a lot of people who already put the money on the table and said, “If you put Bitcoin in, you can take the equivalent amount minus a small fee of DeFiChain out.” If you want to go from DeFiChain to Bitcoin, you do the same thing. You put DeFiChain in and you can take Bitcoin out.
But no one does that for free. Nope, because everyone says, “Hey, why should I put my Bitcoin and DeFiChain in there? I’m locking up capital.” So what happens is people need to pay a transaction fee and this transaction fee compounds. It gets diversified, gets distributed over all the people who put those currencies onto the table.
Andrew: So that’s where the pool comes in because everyone’s just chipping in and we’re using a pair of coins, in this case, you’re using an example of DeFi and the Bitcoin.
Julian: Correct. The more of this action is happening, the more fees are being collected by the people who are putting in and that generates a really high return or a very low return, it depends. At the moment, these returns are just super, super high. Sometimes go up to 100% per year. People that put in their funds, they can make 100% per year. Obviously they’re not guaranteed, they can go down, they can go up, they fluctuate.
Andrew: Okay. I’m going to go into a hundred percent because I think this number will raise some eyebrows among our listeners. There’s a pool of two coins, a pair of coins and people just chip in. So I’m providing liquidity to the pool and it gets some interest from it. I get the base tokens or some other rewards from the transaction fees as well.
Andrew: In some kind of yield farming and the whole image of a farmer come into place. And you’re like…
Julian: They are like those pictures on social medial.
Andrew: Yeah. So that’s yield farming, right?
Julian: Yield farming comes into play, where you now start stacking these ideas behind each other. I’m going to give you an example. There’s ideas where I can do that and I generate new returns. I use those returns, I take them and put them into the next idea. So now I’m starting to cascade those returns on top of each other. I started with $1,000. I lock them up, I get some returns here. I use those returns right away, lock them up into the next thing. I get those returns, lock them up into the next thing. I take those returns, lock them up into the next thing.
Yield farmers are those kind of people who kind of farm yield, like returns and stack those ideas behind each other. That’s the yield farming concept in the entire crypto space. You’re really optimizing and you’re looking for all those protocols, because sometimes some protocols don’t work that well with each other. Because one works really well with a coin that you’re getting, you can use that right away and lock it up into the next thing where you really maximize the returns. Sometimes you can then stack those returns really well where 70%, plus a 30% can generate over 100%. Where maybe one idea he gives you 80%, but the output you can’t really use it for anything else. It’s riskier, but higher return use those two stacked after each other and get over 100% versus one with 80%. But one problem here is if something goes wrong, suddenly an entire cascade…
Andrew: Is it like house of cards?
Julian: Completely. The entire cascade kind of disappears. So I am for example… I liquidity mine a lot, I think it’s fantastic. But I don’t stack those ideas behind each other. I don’t leverage, to me that’s way too risky. I just think that’s…
Andrew: A risky degen play would be to put some money as collateral, borrow some money based on that collateral, put it into a liquidity pool and then just continue with that process.
Julian: Yeah, so you put it in, you borrow something against that, take that what you borrow, put it in there and then whatever you’re getting out here, use this to pay back their returns here. Suddenly, this entire thing can work really well for three months…
Andrew: And then crypto crash!
Julian: Exactly! Yes, that’s when you see all those… when you go to the statistics and you see people lost $15 billion…
Andrew: Because of leverage, right?
Julian: Yeah, like really lost. Not market fluctuation. Like capital went down, complete liquidation. Like zero, it’s insane.
Andrew: That’s a few plays that you can do. For example, we started off lending, borrowing, and talked about liquidity mining, and then yield farming which is like playing with Lego blocks.
Julian: Basically it’s putting all those together. You do lending here, you combine that with liquidity mining and then you use some leverage here, you arbitrage those. So stacking all these together, this concept called yield farming.
Andrew: No wonder they say being a farmer is like the most desired job nowadays. But manage your own risk.
Julian: I think that’s insane. Like Charlie Munger, Warren Buffett’s partner always said the 3 Ls. That the bankrupt demand, ladies, liquor, leverage. He always says no drinking, be careful with the ladies and no leverage and finance.
Andrew: Because leverage can wipe you out easily. If you are five times leverage, a 20% drop would mean 100%. So we have a few ways, what other ways are there to invest in DeFi?
Julian: These are the functions at the moment. I mean there are only 7 DeFi functions creating value, transferring value. That’s Bitcoin, creating and transferring. You have the exchanging, you have the lending, you have the tokenization. You have predicting of value, that’s the entire kind of futures, options market, it’s closely tied together with tokenization. Then you have reputation or identity of value. That’s a super futuristic concept, no one really knows yet how it works. Algour, very old protocol actually tried to solve that. The idea behind it is how can you build up reputation, or how can you build up an identity on a blockchain?
The biggest problem, if you think fundamentally right, is how do you identify yourself or anything? How does a machine, an animal, or a human being identify themselves against a group of computers? Because that’s what basically you do as a blockchain. So the way we do it is we have a private key as a randomly generated number, 80 digits. And so because the probability that someone else generated the same unique number is super unlikely, it’s the same thing as we’re all born with a fingerprint, no one does anything to their fingerprints. But the odds of two people having the same fingerprints is basically zero. It’s the same thing in this decentralized world. Everyone uses this fingerprint as a private key. But the problem is, your fingerprint, you cannot regenerate your fingerprint. It’s not possible. So if you do anything illegal, you can’t just go and say, “Okay, I want new fingerprints.” and then you start from scratch. That doesn’t work.
Whereas in the blockchain world, you do anything stupid, you just generate a new private key. So in theory, you could generate as many online identities on a blockchain as you want. And so, the golden egg or the really unbelievable use case would be, how can you limit that, so that you would stay anonymous, so no one would actually know who you are, but you would still have a unique blockchain identity. No one knows how to really solve that, there’s a lot of approaches. But that would be absolutely unique because then you would marry basically the best ideas out of a decentralized world. You could separate the blockchain world from the physical world, but you would still have this complete unique identity concept on there. You wouldn’t need a lot of the exchanges.
Suddenly humans would all be equal, because it’s not about passports anymore, it’s not about which country you’re from. It’s really about building your reputation in that world. There’s just no good solution to it.
Andrew: Multiple identities. Like one that is more anonymous, one that’s public, one that is different versions of yourself on the internet.
Julian: We’re talking about finance, right? We’re really not talking about gaming, we’re really talking about finance here. So let’s say you meet this number online. This number is 283 and it says, “Hey, I want a million dollars from you. I’m not putting up any collateral, but I put my good name to it.” You’d be like, “Are you insane?” Yeah, exactly! But that’s the concept of the real world. You go to a bank, and you say, “Hey look, I need a loan. I’m not going to use this for property, I’m going to use this for my car. I need to pay for something personal.” The bank says, “Okay, let me see your income, let me see your credit history, let me see all these things.” And based on that, the bank makes a judgment call to give you a loan or doesn’t give you a loan. It’s actually completely a different concept. The way this works is because you have skin in the game with the bank, where number 283 on the blockchain has no skin in the game. Because if you give him a million dollars to her or whatever, it just runs away with the million dollars and generates a new idea. I don’t know, 586.
So now it’s a completely new ID and that’s the major issue. But if you could solve that, then suddenly all these actors on a blockchain could actually make mathematical calculations on what is the probability that you will actually pay back alone, or that you are actually credit worthy. Or your vote, or your idea, how much is that worth base on a lot of factors. Again, there’s a lot of people who criticize such a system, because it would be a crazy meritocracy on one hand. On the other hand, it could be super difficult for someone actually to climb that ladder. Then others say, don’t worry, it will never work. It’s super hypothetical. No one knows, no one knows if that’s ever going to work.
Andrew: We don’t have to go so far because based on what we’ve just shared, that I think there are enough toys to play with. I can understand how is it like for a retail investor to look at all these different tools that you can use to make money.
Julian: And that’s where…I want to be super transparent here. There’s several companies who offer such services. Cake DeFi just really focused on making this super easy and user-friendly for that specific reason. So that people just say, “We are blockchain agnostic, we are project agnostic, we integrate Ethereum, Bitcoin, DeFiChain, Dash, Bitcoin Cash, Litecoin.” It doesn’t matter. We are blockchain agnostic, we just look at the best features and ideas. People in theory could do them all themselves. None of the services that we offer are offered by us. They’re actually offered by a blockchain and we just aggregate them, and make it super user friendly for the person to actually get a hundred percent per year and I think that’s exactly the point.
Andrew: Let’s talk about that hundred percent per year. We first have to define APY (Annual Percentage Yield), could you help us?
Julian: There’s a difference between APR (Annual Percentage Rate) and APY. APR just means it’s the return you’re actually getting. APY is if you compound that return. There’s always a big discussion, what number should you use? What numbers should you show? There’s no right or wrong because you could say, “It should actually be APR, the actual return. That’s basically not compounded.” But that’s very misleading sometimes, because as Albert Einstein said… compounded interest is the eighth wonder of the world. Especially in yield farming, for example, or in liquidity mining, the compounding is what makes it so insanely powerful. So many times that’s how you see returns, where people put in $1,000 and they take out $100,000. It’s really because they compound it.
Whereas if they would have only done the APR, they would have made, I don’t know, maybe $5,000. The differences are dramatic. That’s where this is coming from APR, APY.
Andrew: All right. So for common understanding, it’s your yield, it’s your return, APY. And I’m looking at a hundred percent, I’m also looking at a thousand, a few thousand percent. How does it work? How do you get hundred percent or even a thousand percent on certain pool?
Julian: On the one hand, it depends on popularity. The more popular pool is, the lower the return, because you’re sharing it with more people in the room. If there’s three people in the room and it’s just the two of us, so that’s one other person providing liquidity…
Andrew: That’s risky.
Julian: Yeah. But that person makes all the money. He’s the only person in the room, like low risk, only person in the room. Now imagine there’s a thousand people in the room. Obviously the same return is not shared with one person, it’s shared with a thousand people. So suddenly the return goes down dramatically, that’s the first thing.
The second thing, it depends on how old or how young the project is. The younger the project, in percentages, the higher the return. If you think of Bitcoin, at the very beginning, there was the first block, which was 50 Bitcoins. The second block was again, 50 Bitcoin. If you look at the return that miners would have made in Bitcoin and after the very first block, it’s like billions of percent, because there’s such a small amount of coins only and the coins would be coming over the next year, like every 10 minutes 50 Bitcoins. You can multiply that up. Over the first year is two and a half million Bitcoins, and over 50. The returns will be insane. But today, with 18 million Bitcoins in existence and only 6.25 Bitcoins every 10 minutes, the return is now 2% per year. That has a massive difference.
And then obviously a lot of that comes into play with risk. A lot of that comes into play of expectations by the community. So of course the younger project, the fewer people, the riskier, but also the higher return. The older, the more substantiated, the larger the lower return, the lower the risk.
Andrew: We’ve got to take note that the APY you see today might not be the same APY that you get tomorrow because the number fluctuates every day.
Julian: It fluctuates hourly.
Andrew: As more people join the pool, it might go down.
Julian: It might go down, it might go up, over the trend, you actually… and that is interesting. You actually want the APY to go down, because that means more and more people come in, the project gets larger. So it sounds counter-intuitive, but actually it makes it more reliable, it makes it safer. Projects, whether the returns are stagnant or actually go up, I would be really a bit worried. Like you want to have slightly decreasing returns because that shows that the project is constantly growing, there’s more and more people. It’s actually, even if it’s a bit counter-intuitive, but it’s actually really good.
Andrew: It’s still not guaranteed that the project is safe, but at least you feel that more people are locking in their money. So we are looking at the risks factor.
Julian: There’s mainly three risks. The very first risk is always that of the project as a whole. And that project as a whole depends on who are the parties who actually initiated it, who is behind it, these are researchable factors. These are all things that you can do due diligence on.
The second risk is technical risk and the problem about the technical risk is, it’s very difficult to predict that. Super, super difficult. I would almost say no one, this is almost researchable. Because whenever it’s researched, it’s either used by a blackhat, meaning he’s going to attack it, or it’s going to be kind of shown by a whitehat and he’s actually going to get a reward for that. So for 99.99999%, that risk is so difficult to gauge. That technical risk.
The first one, it’s the background, it’s a team. These are all things you can research and these are all like… you should actually do research on that.
Andrew: Even if they are anonymous, you can still do research on.
Julian: Very few projects are anonymous, very few. Even if there are anonymous, there’s always some pseudonym. Like Satoshi, Satoshi was a pseudonym. But Satoshi was super well-respected even though he was pseudonym in that cryptographer community. So of course, there’s still risk here and if someone shows their face, but that second risk is so tricky. It’s so difficult to gauge it.
In general, there’s projects who have more issues there simply because of how they’re structured. For example, Ethereum and a lot of the Ethereum kind of copies, Binance Smart Chain, all these projects, they have a bit more risk because they allow anything. It’s just a bit more risk that doesn’t mean that something happens, it just means it has a higher risk. Bitcoin, for example, DeFiChain, all the Bitcoin related forks, they have a lower risk. Why? Because they are Non-Turing-complete, so they allow for very few things to happen. It doesn’t give guarantees, Bitcoin can still have a bug, but it’s just very unlikely for Bitcoin to have a bug. But Ethereum, every once in a while they discover something that’s really major, the technical side.
Andrew: Help us understand Non-Turing-complete.
Julian: Turing-complete is what pretty much all the computers that we use are. That means the way they function is that the programmers, that program a program, they can define for it to do anything they want. Whatever they want the computer to do, they can do. It’s basically meant that the reading head can move in either direction and it can do as many steps as it wants. That’s just a computer science kind of language.
Non-Turing-complete has predefined steps that the computer can do. All you can do is you can use those predefined modules and you have to put those predefined modules and you have to work with those. Imagine it this way. If you are an architect and you would work Turing-complete, you get an empty canvas and you can start drawing whatever you want. If you would be Non-Turing-complete, you would already have all the rooms decided in. You would already have the walls of the house and all you could do is you could put some furniture in there. The furniture you can’t even design freely, you have predefined symbols. So all you would have to be able to do is place them in there. Obviously, if you are an architect that has Turing-complete, you have a white canvas, then you can do whatever. But you can really screw the house up.
Someone that has already predefined walls, and rooms are predefined, and the symbols of the couch and a bed is predefined, you could still try to screw up the house, but at the end there’s not much to screw up anymore. Big difference. In general, Non-Turing-complete blockchains are less risky, but less possibilities. For your possibilities, Turing-complete all the possibilities in the world and a lot of risks. There’s always a tradeoff, always.
Andrew: So this is where technical risks come in.
Andrew: You’ll talk about the third risk.
Julian: Third risk is impermanent loss risk and that is always the pair that you provide liquidity for. The risk here is how volatile are those pairs against each other. Imagine a bank providing US dollars and Singapore dollars. If those two currencies always move with each other, there’s no risk for the bank. But if those things start moving against each other, there’s massive risks because suddenly their holdings on one can decrease and the other one can increase, and that’s what’s called impermanent loss. The reason why it’s impermanent is because in theory, it could count the balance again.
Andrew: Give it some more time it could counter balance to a neutral state.
Julian: So what they always say is it’s just a matter of time. Just a matter of time can be a hundred years. That’s why they call it impermanent loss. You make it permanent, as soon as you say, that’s it, I’m gonna take my money off the table.
Andrew: Back to the room example, with a hundred people in this room, some of us put money into this pool and then these two coins are moving at different levels. Maybe one is decreasing in value, the other is increasing. Therefore, when I want to take it out, at a point in time, when I want to take it out, I don’t get the same value of… example USD with Singapore dollars.
Andrew: So that is impermanent loss.
Julian: Impermanent loss, so IL. They always abbreviated as IL. These are the three main risks. You always have the project and the team, you have the technical. The project and the team that’s like analyzable, right? Again, it doesn’t mean it’s super easy to be analyzed, but it’s analyzable. The technical risk is just so difficult. Most people just say, you know what, if you are going for Turing-complete blockchains, just expect there’s a higher risk.
You would want to have higher returns if you go for Non-Turing-complete. They’re a bit safer, so you are okay with a bit lower returns, because you have a bit of a tradeoff there. Impermanent loss, again, there’s pools that go from $1 stable coin to another $1 stable coin. Just a different brand, if you want to call it, but it’s all dollar stable coins. They should actually be $1. For example, to go from Tether, which is one form of a stable coin to Dai, which is another dollar form.
In theory, there should be no impermanent loss because $1 is a dollar. So thee should actually track each other all the time, but there are insane scenarios where suddenly the trust in these stable coins go so far apart, that the impermanent loss in there is like 25%. If in that moment you want to exit, dude, you’re losing 25% in that very moment. Normally, these pools then get together again and people here, they make maybe a half a percent, so that’s the annual return that they’re actually making. It’s very low and sometimes you have these crazy scenarios where people need to exit a position, right when they have these 25% differences. It’s just absolutely bonkers.
Andrew: So by definition, a Stablecoin is a coin that is pegged to a US dollar.
Julian: Let’s define it a bit more general, that’s pegged to something, whatever that something is. Doesn’t have to be a dollar, it can be anything. You can have a Stablecoin on gold, you can have a Stablecoin on Singapore dollars. You can have a Stablecoin on the US dollar. You could have it on whatever… in theory, a Stablecoin on Tesla share is actually a Stablecoin.
Andrew: I see, got it. So you put into a Stablecoin liquidity pool, for example, LP, and then you’re like, this should be safe, Stablecoins. They’re not supposed to deviate much from its core.
Julian: No impermanent loss.
Andrew: And then what you say happened, the pegging, right?
Julian: Yeah, exactly. Suddenly they move so against each other. It’s just… and then again, 99% of people don’t have to exit the position, but maybe someone needs liquidity right now because they’re yield farming and they stack those returns over 10 layers. So now suddenly they need the liquidity…
Andrew: It’s almost like a margin call.
Julian: Correct. It is like a margin call. They need to exit a position right now and then they are taking a 25% loss.
Andrew: This is how you can get wrecked in the cryptocurrency world. Huge gains possibly, but huge risk as well. And because there are so many projects, so many protocols nowadays that you really have to… like you’re talking about technical risks, it’s really hard to assess those.
Julian: I really think the technical risk is so difficult. I stopped yield farming or liquidity mining on Turing-complete blockchains for that reason, because they have so many issues.
Assyrian started something that all these rock pools and then they had all these smart contract issues. Then what happened? Finance smart chain came, and then buying and smart chain, now suddenly they’re having all these issues. So now they bring in all these security firms to actually analyze their smart contracts and analyze the blockchain, because they have every single thing. They called it the Binance Rockpool Chain. So that people constantly got basically the Rockpool…
Andrew: So someone pulls the rug out from under your feet, you fall and they take your money.
Julian: It’s so insane! Because every single day there was someone who got hacked and not by like tens of thousands of dollars, like tens of millions of dollars. It’s just insane. That’s why I’m like… no more Turing-complete blockchains for me. I focus more on the non-Turing complete when it comes to the liquidity mining, the lending and so on. Maybe I make some lower returns in certain things, but I’d rather make a little bit lower returns than losing a lot of money.
Andrew: So the Turing-complete blockchain will be like Ethereum?
Julian: Ethereum, Binance smart chain, Cardano, Polkadot… am I missing any of the larger ones? I don’t think so.
Andrew: These are the big names and Non-Turing would be our grandfather of all crypto, Bitcoin.
Julian: And obviously all the derivatives of it. Stellar Lumens is also going now Non-Turing complete route.
Dash, DeFiChain, all these kinds of… Litecoin, all these kinds of ideas here. If you invest into the Turing-complete blockchains, which I also do, then I just invest into the coin and I hold the coin. So there I’m not generating any cashflow. But on the Non-Turing complete, there I actually generate cashflow.
Andrew: So this is how you mitigate your risks in DeFi.
Julian: Correct. Cause then I’m like, Assyrian is going to do super well, I believe Assyrian’s going to do well. I just don’t want to start risking my ETHs there, in some really questionable things and maybe I’ll make 50% per year, but probably I’ll lose it all. So I just say, you know what, I’ll just hold the ETHs and that’s it. And I’ll get the capital gains there. That’s just a bit of the tradeoffs that I’m making.
Andrew: I think this is a good point in time to ask you about… where do you see crypto and Bitcoin price movement in… let’s take second half of this year, 2021?
Julian: It’s the beginning of June, Bitcoin just had its worst months in the history, -37% in a single month. Not unexpected, I had several interviews in end of March, beginning of April, where I was like very cautious for the entire crypto ecosystem. I myself am moving away from the super high risk kind of project, really focusing on very few ideas. Like taking some money off the table, just be a bit rather safe than sorry.
I didn’t expect the minus whatever, 40%, 50% setback, I want to admit that. I had… saw maybe a 20%, 25%, but no surprise. If I would have to have a crystal ball and it’s always difficult to make predictions about the future.
Andrew: [00:39:33] I’m going to take this audio clip half a year later and check back.
Julian: If we don’t see an insane catalyst right now, to either the down or to the upside… we saw El Salvador just announced yesterday that they are thinking about making Bitcoin legal tender. Paraguay came second country who is going this route. Again, I don’t think that’s much of an event, but long-term it will have an effect. So if there’s no catalyst to the upper downside, I think we’re going to see a calm summer.
September, October is going to be the pump again. So that’s going to be the hype cycle right now. September, October, it’s going to be the run up and I think we can see a run up to over a hundred thousand. Maybe a bit higher, but I think a hundred thousand would be the safe…
Andrew: Place your bets, ladies and gentlemen, that’s Dr. Julian’s crystal ball prediction, but it’s based on what you understand about this industry.
Julian: Pure speculation, I’ve got no freaking clue if this is going to happen.
Andrew: Not financial advice, do your own research.
Julian: No financial advice, that’s my own mental model. That would be like… I’m expecting a calm summer. Maybe we’re going to see a bit on the lower side, about 30,000 over the summer. Maybe we see a bit on the 40s, maybe scratching into the 50s, but I just don’t expect that. I think it’s going to be really side wards, very boring. August, that should be the waking up. September, October… that’s the timeline.
Andrew: We also see another trend whereby there are more institutional investors coming in, companies coming in…
Julian: At the moment. I don’t see the data for that. Like whatever data I see, I think it’s a bit… people are just a bit more cautious. I think at the moment, especially with the ESG, environmental, social governance kind of movement, especially around Bitcoin with the dirty mining it’s… Bitcoin just needs to get their stuff sorted there. Needs to get their PR sorted, needs to make sure that the people really understand what’s really happening, that Bitcoin is actually taking a lot of the excess energy that’s being produced. It kinds of takes that off the grid and will allow for development of greener energy actually.
I think that just has to be communicated better. I think that’s until when a lot of institutions right now, also governments are probably going to be more hesitant, cautious, because they’re like, “Hey, you know what? There’s such a strong push for ESG righteously and as like super important today, with all the capitalism that’s going on.” People are like… okay, when you take care of the environment, we need to understand what’s happening socially. We want to have good governance, so it shouldn’t be like dictatorship.
There should be good governance and there’s a strong focus towards that. Companies, governments, they will watch out for that because there is pushback all the time. We saw that with Tesla, we saw that with Elon Musk, really pulling back, like doing a 180.
Andrew: Within a month?
Julian: There’s a lot of stories on what actually happened here. To me the most…. there was this anonymous video that just came out, I don’t know if you’ve seen that. There was this anonymous video that came out and I think it brought up some good points. I think the main point to me is really Tesla is very viable. Tesla is making a lot of money off the carbon credits in the US and it’s a massive revenue source.
I just think that US government just said, “We can just cut you off of those.” uS government knows that like Tesla having Bitcoin in the balance sheet, accepting Bitcoin against Teslas, there is a certain competition to the dollar. I don’t see them as competing, but there is. They’re just like… “dude, you gotta turn this around.” Or maybe it wasn’t even the US government. Maybe it was a large shareholder, maybe it was an important board member.
Andrew: We can only speculate because we’re not Elon Musk. But wait, he has your book. He’s read your book.
Julian: I don’t know if he read it, but he has it.
Andrew: He was definitely holding it in some events.
Julian: He was! South by Southwest 2018 I think.
Andrew: So that’s you to have a bit of history there?
Julian: He has my book, I don’t know if he has read it. I doubt that he read it just for… he had it on stage. That was pretty cool.
Andrew: Okay. So as a retail investor, what would you tell them about having crypto as part of your portfolio allocation?
Julian: I think Bitcoin especially has to be part of your portfolio allocation. We can discuss how much. I think depending on your age, your ability to generate cashflow, your risk profile, it can be from anywhere from a percent, all the way up to 20%, 30%. Just be aware that it’s just super volatile. You saw this right now, -50% within a month, just be super careful there. Especially if you go by the mathematical models, a lot of them suggest like 6% is a super nice optimum from the volatility against its returns. It’s like coming from the sharpe ratios where you match those against each other, the downside volatility to the upside returns, that’s what’s measured here.
And so 6% in a portfolio in Bitcoin tends to do really well. Nice diversifier, non-correlated to pretty much any other asset class. I think it makes a lot sense. If you go from Bitcoin and you diversify into the coins, only do this if you really know what you’re doing. I think to invest in Bitcoin, sign up with one of the large exchanges with the larger platforms. I don’t think you need to be like the super expert. I think it’s more like if you invest into an ETF (Exchange Traded Fund) and you’re like which ETFs should I use? You know what, I’ll just use… I don’t know, an MSCI World, like a global index, or I use like a S&P 500, the 500 largest US companies. I don’t think there will be many people who would say “oh what a stupid move, investing into an MSCI World.”
A lot of people will tell you, you can probably do better. But I don’t think a lot of people will tell you “man, you’re wrecked.” No one will say that. I think with Bitcoin, putting 6% in there, I think it’s a similar kind of approach. Only then from there, if you then say, you know what, like MSCI World or a large index, not what I wanted, let me get into the actual companies. That’s like a total different ball game, then you have to really understand what you’re doing.
In crypto, it’s exactly the same thing. So by far, I would not invest into any of those meme coins that we’re seeing up, popping up right now. You know what I mean? You can make lots of money, but you can lose it all. So just be aware of that.
In Bitcoin, I think that’s way less likely. Especially over the last month, Bitcoin did so much better than all the other coins just because they got completely hammered. There’s very few coins which actually outperform Bitcoin. So just keep this in mind.
Andrew: So if you are buying altcoins, which is any coin apart from Bitcoin, you’re going to make sure it outperforms Bitcoin, right? If not, what’s the point? Might as well just hold Bitcoin.
Julian: I don’t like this distinguishment as much anymore. I go more either… talk about large caps, mid caps and like the small caps I like doing this. To me, the large caps is like Bitcoin, all the way to maybe 10 or 20. That’s to me, the large caps. Large caps did really well over the last month. I think they really held up well. Mid caps… yeah. The small caps would have been losers, which makes sense. It’s just like in stocks.
Or the other thing you can do is talk more about sectors. You can have the NFT (Non-Fungible Token) sector, you can have the Meme coin sector, you can do all the Turing-complete blockchains, you can have the centralized exchange coin sector, you can have the de-centralized exchange coin sector. With all that, if you look at the last months, the large caps they performed by far the best. If you look at…
Andrew: Large caps are like, Bitcoin, Ethereum…
Julian: Correct. Bitcoin, Ethereum, you would have… Polkadot did really well. You have Cardano who did really well. Then there’s a couple of coins that I don’t know, I think they are a big trick here. I think for example, XRP is always a bit tricky. Litecoin, Bitcoin Cash, very tricky. I invest… obviously I invested a lot in DeFiChain, it also did really well, a lot of yield farming, liquidity mining. Solana, Polymath, MATIC, these are the larger kind of projects there that did really well. I think Polymath did 120% over the last month when Bitcoin is -40. DeFiChain did 10% or something where Bitcoin did whatever, -40.
To me, what I like doing is really diversify in more to sectors and I don’t see it more as a Bitcoin versus altcoins, but to me the way I see it, if you just want to invest in crypto, I would just invest in Bitcoin. That’s it. I would not start diversifying. I would only diversify if you’re like, I know what I’m doing. The MSCI World or the S&P 500, it’s way too boring for me. I really want to pick my Amazon…
Andrew: All right, okay. So where do you see the DeFi space heading towards next?
Julian: Two new term trends. Decentralized tokenization, creating those synthetical kind of prices, I think that’s massive. Also on Cake DeFi, that’s actually the next project to integrating in Q3. So not this quarter, not in June, but next quarter. That’s super important.
The other thing is the interoperability. You see so many projects now and so many blockchains, and being able to communicate among those communities and connecting. I think that’s going to be a really important part. Not sure if that’s going to happen this year, but I think for definitely next year. That’s important because every kind of blockchain has its own strengths and also weaknesses. Sometimes strengths inherently creates a weakness.
Just like Turing-complete blockchain, you can do anything, but also a lot of risks. So the strengths create the weakness. A Non-Turing complete blockchain, not that many options, not that many risks.
Andrew: That’s secure.
Julian: Yeah, secure! So many times, connecting those is really interesting. Also, you have more privacy focused blockchains where you have options where you can have way less transparency. You can actually do certain things in a private way. You want to maybe not do everything there because that’s also a bit shady, right? It doesn’t make sense to hide everything.
But on the other hand, you don’t want to do everything transparently. You don’t like… you want to have your own four walls where you can do stuff that no one needs to know. But then there are certain things that you don’t want, like everyone does. Because you want to know what’s happening in certain meetings actually by law. You want to have transparency over certain things, but everyone has this common sense that there should be privacy and the same on blockchains. It’s not possible to do the same thing in kind of the same set up. So you have this interoperability.
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I have three questions that’s more of a personal nature. What is a core life principle that you hold close to?
Julian: I truly believe in a growth mindset. What I mean with that is… if you put your focus to something and you really work hard on something, you can do so many things. I just believe that most people maybe say yes to that, but they really don’t live up to that.
In my life, I had three major steps. I was a professional kite surfer for almost 10 years, completely different to what I did afterwards. I became a medical doctor, completely separate. Afterwards, I became a business owner and our company is now worth a couple hundred million dollars. It’s completely different than what I did before. The only reason it works is because every single time, along the way, I had to learn a lot of new things. I had to be completely outside of my comfort zone, I had to look like a total idiot every single time. Most people just don’t want to do that because they like being really good at what they are and then they don’t want to move out of it.
I remember the very first time I was in a hospital, it was like after half a year of studying. I remember when the doctor just asked me, what organ are we looking at? I thought I had no clue, I had no freaking clue! I didn’t know if that was the lung, the liver, what was this? He just made fun of me in front of the entire staff. But at the end, that’s what you have to go through. At the moment I started playing golf. I look like a total idiot because I’m new at it. So who wants to do that, if you’re so successful in so many other things? But I think that’s always the real joy in life I always feel.
Andrew: You literally plucked yourself from your comfort zone and throw yourself into the deep end. And you did it at least twice, in terms of your career path at least. So that’s the growth mindset you’re talking about.
What is one piece of financial advice, which you feel needs to be further propagated?
Julian: It’s not about being right, it’s about not being wrong. It’s so massive. Like really, understand that. Buffett always taught that… it’s not about getting the best return, it’s about not going to zero and anyone who uses leverage is exactly going for that. They want to maximize their returns by risking going to zero. The problem is whatever percentage you compound from zero stays zero. You can never recover from that. So the trick is …and that’s financially very interesting. If you look at Buffett, he’s always seen as the wealthiest investor ever. The curious part is actually the reason he became so wealthy is because he has been investing now for so long.
I think he became a billionaire at age 50. And don’t forget, that was when he was already like 35 years of compounding. After age 50, he’s now over a hundred billion, but actually don’t forget he’s 90 now. 40 years of compounding, actually the rate that these compoundings are about 20% per year. This is actually not that low when you talk to a lot of the millennials who are like, I need to make a thousand percent a year.
Andrew: 10 X.
Julian: Correct. But the problem is he does this every single year. He does that not by trying to be right, but he does that by trying not to be wrong. If you go with that approach, you have a way higher chance of winning because suddenly it’s not about picking the best, it’s about avoiding the worst. Whenever I invest today, people are like, “I have a coin that performs way better.” I’m like, that’s great for you, but I just don’t want to have the worst coin. I don’t want to have a coin that goes to zero. If I have a coin that just does 30% per year, I’m totally happy with that. I don’t need 300%. I’m happy if I get 100%. It’s not what I need and I think so many people, they are so short-term focused, so stressed out that they need to get rich so quick. Many times it just backfires.
Andrew: Financial advice, trickling into life advice, which is useful, which is very useful. Which part of a life are you giving additional focus right now?
Julian: Oh man, I’m a young father. My son is eight months, so it’s a whole new challenge. If there’s one thing where I always feel I have no freaking clue and I don’t know what to do next, and nothing prepares you for it… it’s being a father.
The interesting thing is I think no one ever is going to tell you, you did well. You only see it from how your child turns out. Nothing like seriously… nothing lights up a day better than when you see this complete innocent smile of a kid, it’s so pure. It puts away a lot of the distress and other things.
Andrew: Has it changed your mindset or approach to business or in life?
Julian: It has changed my emotional side a lot. I used to be super left brain, super rational, logical, super. When it came to bad news or like bad luck of people… now I’m like, holy crap! Whenever I hear like those crazy life stories, it touches me completely differently. Also, I’ve always donated and I’ve been donating whenever, since I’ve been making good money. Now my donations have completely changed. I changed, I donate a lot to single mothers, I donate a lot to babies or kids that really have some… they’re born and they really… they just weren’t lucky when they were born. I consider myself super lucky. I have no major kind of issue. My son’s super lucky. There’s nothing I could do about it. I mean, that’s the first thing, he comes out and you’re like, wow! He has 10 toes, 10 fingers, looks healthy and it’s like… there’s nothing you can really do about that. That’s just so much luck. So whenever I see that other parents are not that lucky and it’s pure luck, I just… I feel I need to give back to that because I was lucky in that side. I don’t know… a year ago I would’ve never said that answer and that’s the answer I have now, and I would have never expected me to have such an answer.
Andrew: That’s beautiful. So let’s wrap up this interview and so we can go back to your baby. Thank you, Dr. Julian. Thank you for your time.
Julian: Thanks, it’s a pleasure.
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