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The State of Institutional Adoption of DeFi, Feat. Circle’s Jeremy Allaire

A conversation with the Circle CEO about the prospects for traditional finance to move into DeFi

Listen on:

On this episode

A conversation with the Circle CEO about the prospects for traditional finance to move into DeFi.

This episode is sponsored by NYDIG.

This conversation was originally released as a sponsored content webinar from Circle and CoinDesk. NLW decided to release it on his podcast of his own volition and was not paid to do so. The conversation covers why institutions are becoming interested in DeFi, which institutions are starting to participate and what barriers remain.

Image credit: TFYKub/iStock/Getty Images Plus, modified by CoinDesk

Transcript

NLW  

Today, we are talking about bringing DeFi to institutions. I'm joined by Jeremy Allaire from Circle and I'm so excited to have you here. Jeremy, how's it going?

Jeremy Allaire  

Hey, it's good. 

NLW  

I'm super excited for this topic. The bull run that we are either in a pause of, we're at the end of, or wherever you think the market cycle is, was so shaped by, from a narrative and a real perspective, the introduction of institutions in this space, something that we've been talking about for years, and then it actually started to really happen. Institutions, meaning a whole bunch of different things, which I think is part of what we're going to unpack here. But, I think it is this big question about what happens next, as institutions dig deeper into the space; whether they explore, if they'll stay solely interested in bitcoin and what might be built there, is it just a kind of treasury reserve asset for them, or is there a broader change that crypto markets might signal and shift? So, that's what we're going to talk about today, and maybe to kick it off, let's talk about what we mean, when we say institutions.

Jeremy Allaire

Yeah, this is a great topic, something we were thinking a ton about, and really timely. You know, I think, when people talk about institutions in the context of crypto, they're almost always trying to make reference to sort of, institutional investors, right? So, it's sort of, when do asset managers and pension funds and endowments and all these, when did they come in and buy crypto assets? That's sort of been the overall meaning of institutions, when the institutions get involved. And that has been part of the theme here, which is, you know, a few notable corporations putting bitcoin on their balance sheet, or bigger and bigger financial institutions enabling trading of different crypto derivatives, or whatever those institutional indicators are. That’s one view, which is institutional investing in the blue chip cryptos like bitcoin and ethereum, right, and if you actually look at what institutions are doing, that's a lot of it. I think we'll talk about this in the context of DeFi, but to me, institutions are something much, much, much larger than that. And it's essentially the question of will every corporation in the world, every organization in the world, connect to digital currency infrastructure, will they connect to it and use it, and use it as a part of the way that they store value, move value, etc? And, will they use it as a capital market? At the end of the day, capital markets, what we think of stocks and bonds, and debt, and all this sort of stuff that floats around, you know, corporate debt, companies borrowing capital to fund building a plant, or whatever, whatever you're doing, and so on. That's the real world, like businesses interacting with the financial system, which accounts for an enormous amount of it, that's institutions. To me, the question is, is, you know, when? When does that happen? When do businesses, writ large, institutions writ large, actually begin to integrate to this and rely on this as part of their overall treasury, and part of how they operate? So there's, to me, there's two big things, there's institutional investors, and that's basically people who are essentially just long term holders, speculators, traders, whatever that would be in terms of that, and then there's institutional adoption of crypto financial market infrastructure, crypto treasury infrastructure, crypto payments infrastructure, for the actual business of business, so to speak.

NLW  

So within that framework, where I want to go next is, who's looking for what and how DeFi offers that. But I think before that, I'd love to just get a sense of where your perception is of where people are on the adoption cycle. Are they allocating, are they building, are they on the edge looking in, are they way far away, but they've got one ear tuned in this direction? Maybe, if there's different types of these actors that fit different parts of that profile? Just give us a landscape as we go into, you know, kind of more precise questions about what they're interested in.

Jeremy Allaire

Yeah, I mean, I think, you know, right now the interest from businesses and institutions is fairly broad, and it's fairly nascent. Let's sort of speak realistically here. Like, there's been some high profile public companies that put bitcoin on their balance sheets, but it's pretty limited, right? There are more and more, you know, asset management firms that have some kind of strategy around this, but it's still relatively nascent. When we talk about DeFi specifically, institutional participation in DeFi, I think is extremely limited right now, like getting an institution comfortable with the idea that you could go to a regulated exchange, purchase a digital commodity, that's very clearly been sort of said as a legitimate form of commodity by U.S. regulators and owning it, and having it put with some bank-like custodian, and, you know, that kind of thing. Like, that's sort of where the comfort level is. But, you know, actively allocating capital into yield farming, or long tail crypto tokens, there aren't a lot of institutions doing that, whether on the investment, institutional investor side of things, or certainly on the corporate side of things. I think, if I'm a corporate treasurer, and I'm looking at this today, I may personally have bought some bitcoin, but I'm curious about this, I'm hearing a lot about it. But I'm extremely intimidated about what this is, it just feels dangerous and risky, and like kind of nuts, it's kind of science fiction. And so, to that world, it's there. However, one of the things that we've been seeing and it's really interesting to see, is for many corporate treasurers, and that includes like some, like the treasurer of the bank's balance sheet, for example, they're having a hard time getting their head wrapped around allocating some of their balance sheet into something like bitcoin. But, they're seeing yield markets that have emerged where there's dollarized, dollar denominated, dollar supplied and dollar delivered yield, stablecoin yield, that is really attractive, you know, whether in a DeFi market protocol or through through CeFi, and so, all of a sudden, you have businesses are saying, "Well, okay, I don't want to necessarily buy bitcoin, but I'm happy to have some form of indexed exposure to it that gives me a 4%, 5%, 6% APY, and I'm just shifting dollars away from the money market and into a stablecoin yield product," that actually feels a lot more comfortable to an institution in many senses than taking principal risks directly in a cryptocurrency. And so we're seeing that in terms of the, just in terms of like the inbound institutional interest in this, for the first time, we're seeing, you know, people who are, you know, CFOs or treasurers of regular way corporations saying, "I'm interested in looking at these stablecoin denominated yields that are happening."

NLW  

So, it's super interesting. I mean, we're gonna get more into this, but I think there's an obvious technological barrier to entry that feels insurmountable for individuals, in many cases, not just corporations and institutions. But it sounds like in some cases, there may actually be a motivational, philosophical, less of a barrier to entry, than certain sort of like spot-buying of assets, which is more like at least an assessment of the macro landscape and an attempt to do something different versus just kind of doing the normal thing that businesses do, which is go out and hunt for yield. So I guess that's a perfect segue maybe into the question of, you know, given that, as you've articulated, this is still very nascent. What do you believe the use is that, you know, those people that are starting to sniff around this area are most interested in? How much is it looking for yield, you know, that pure, simple thing? How much of it is speculating on future value? How much of it is lowering cost, cutting out intermediaries, trying to speed things up? You know, like, where are the different dimensions falling as you're having conversations? 

Jeremy Allaire  

Yeah, I mean, again, there's not like a uniform view on this, because businesses that are getting involved in this, it's fascinating to see because, Circle sits on both the kind of payment infrastructure side of this and we sit on the kind of treasury infrastructure side and the yield side, so we kind of see a lot of different angles on this. And so, on the one hand, we're seeing more and more, you know, small and medium enterprises who have figured out that stablecoins as a settlement medium are really efficient. And who are saying, "I want to get set up with this because people want to pay me with this, or I want to accept payments with this." And maybe these are business owners and entrepreneurs and startups and others who themselves are actively active in the crypto markets. And so, they're all of a sudden saying, “Wow, this is really powerful, we should just use this in our business.” You know, you're starting to see big companies that have big, complex global supply chains, that deal with suppliers in emerging markets all around the world, who are saying, "Dollar stablecoins actually look like an attractive way to distribute payments around the world," and then, you know, it leads into these conversations where the businesses are talking about these yields. The 3%, 4%, 5%, 6%, or whatever those yields are, talking about those yields. What is that? What's the risk of that? What's involved with that? How do I do that? So, you're absolutely seeing more businesses who are kind of looking at this, from those two sides. Like, how do I get utility value out of this? And what's the business benefit of parking capital here? That’s emerging. And then clearly, you have businesses and institutions who are entirely about just chasing the money, so to speak, they're just entirely about, “This is an investment, right? How do I treat this as an investment? I've got a thesis on the investment, I'm either taking a long position on an asset or I'm, or I want to actively trade an asset, or I want indexed exposure to an asset class.” And so, that's a whole category as well. But since this is  a pretty broad spectrum of what's kind of bringing people to it. And I think our thesis is that over time, in particular as as DeFi infrastructure matures, that it can just be a very, very efficient form of capital market that every business can tap into, in the same way that they do today, indirectly, through banks and commercial banks, that then intermediate capital markets on their behalf. I think that more and more, it'll be about businesses, perhaps working through financial technology firms that are intermediating DeFi on their behalf. But were there more as direct market participants in the capital markets themselves, which is ultimately I think the promise of DeFi is that market participants can face each other in a much more efficient, direct way, without the traditional kind of rent seeking.

NLW  

As a very eloquent and like, clear-eyed way to say all of the above in terms of what people are interested in, which I think makes sense. I think, in a lot of ways it sounds like what the key question is less like, what is the door that they walk through, but how it helps them journey down this path of understanding all of these different pieces, and how that sort of the whole is greater than the sum of the parts.

Jeremy Allaire  

Yeah, I mean, I think so. And, you know, for many businesses and business owners and institutions, like if the blind man or the elephant, it's like, wow, there's this over here. And there's this over here, and I'm just getting my head wrapped around it, as we all in crypto land, you know, talk about going down the rabbit hole and rabbit holes are big and complex and endless and confusing, and everything else. And, you know, so being down the rabbit hole, there's a lot to discover. And I think there's this process of discovery certainly going on for more and more businesses that are trying to get involved in this now.

NLW  

So we're coming up on a year now of the anniversary of DeFi summer, which was obviously a seminal moment in terms of expansion of kind of the infrastructure in this space, the assets, the things you can do, the value, you know, it's crazy to think that a year ago at this time, or I guess at the beginning of this month, there's sort of less than a billion locked in these protocols. And now to see where we are now. I guess what, over that year, in the context of these institutions, has been the most significant in terms of the infrastructure build out?

Jeremy Allaire  

In many ways, we've seen you know, the major protocols, right. So, if you go back to like 2018, when a lot of protocol projects were just getting started, 2017 even, but 2018 in particular, you know, these were pretty simple. And, what we've seen over the last year is, you know, multiple significant infrastructure upgrades to DeFi market infrastructure, both exchange infrastructure, and then more and more variability in terms of encapsulation. On top of those, you've seen huge infrastructure improvements in the way in which these are run and operated and governed. I mean, that's been one of the extraordinary stories is that this is community owned and operated, if you will, market infrastructure, it's like the, the traditional exchanges where you have a seat at the exchange, governing the New York Stock Exchange, or the CME or whatever, but this is, like, totally democratized and you've got governance models, and you've got successful risk management upgrades, protocol upgrades. They're really, really extraordinary. And now, you know, I think that the next big thing is we're now really starting to see at an infrastructure level, you know, the scalability upgrade. So, I think during the crypto bull market, we had these periods of, you know, enormous expensing and gas fees, and it's sort of like, why would I ever try and save $100 into compound protocol for it cost me $100, to put my $100 in, right, or these kinds of like, this is absurd. And so, you know, that's been the latest cycle has been watching protocol after protocol after protocol, deploy on level twos, completely, cleanroom ecosystems be built up on new third generation chains, like the whole Serum ecosystem built up on Solana. And, high performance DEXs that can execute central limit order books in the same way that a centralized exchange can. So, we've seen, like fundamental infrastructure improvements, we've seen protocol improvements, we've seen governance improvements, and just like a constant set of iteration, in terms of higher level protocols that encapsulate all this, I just feel like it's been, it's kind of been like relentless improvement going on. And now that the treasuries on these projects are quite robust, and the huge numbers of firms kind of around this, you know, firms like Circle, but dozens and dozens and dozens of other firms around this, that are very well capitalized, the build out from here, I think is super exciting. I mean, it's super exciting. And I think, you know, a lot of people are now going from, “Okay, we've sort of created this infrastructure for crypto tokens as a broad asset class. How do we expand this into other things? How do we take this infrastructure and apply it to the rest of the world and make capital markets that are, you know, dramatically larger capital markets than are served with the legacy exchange market infrastructure?”

NLW  

DeFi eating other aspects and other assets is something I want to come back to, but I guess I'd love to pause or kind of bring it back a little bit more temporal to where we are now, right. So obviously, you're looking at this from an extremely long duration point of view in terms of the implications, in terms of the types of actors that you want, you think are going to come in. Let's talk about what's happening right now from a price market cycle perspective. Were you surprised that there wasn't a DeFi phase to this bull after bitcoin hit all time highs, and then ethereum hit all time highs, has it impacted the enthusiasm that you're seeing or the interest coming in from outside? Just kind of like, how does where we are now in one, what's your assessment of it, and two, does it impact any of this? Or is it just kind of a short term part of the growth?

Jeremy Allaire  

Well, I mean, I think there has been a massive DeFi phase to this, I know that if you look at media coverage and attention, obviously, it's all about the price of bitcoin or the price of ether and, and things like this, but obviously, you know, there was a giant alt season. And beyond that, the DeFi governance tokens have grown dramatically. I mean, they didn't even exist a little over a year ago, there were no DeFi governance tokens. And so now, whether it's UNI or COMP, or WIFI, like go down the list, right? DeFi protocol tokens have grown to a very significant scan market cap, and you could argue that many of the next generation blockchain infrastructures like Solana or Polkadot, just giving a couple of examples, are fundamentally kind of DeFi, right? They're fundamentally people who are investing in it because they believe that so much of DeFi can get built on these as well. And so, I feel like there has been a huge amount there. And the fact that you know, major crypto brokerages now enable average investors to invest in these too is significant. So, I do feel like there's been a lot there, over this period. But it's still amongst the broader population of people who think about this space, like, if you go meet with your average person who's maybe bought some bitcoin or whatever, that all this stuff is like, still kind of Greek to them. And so, it certainly doesn't have quite the same, you know, awareness and adoption.

NLW  

So, you mentioned Solana, Polkadot, Ethereum, sort of a, you know, a slew of different ecosystems in which DeFi is growing up in parallel. How much do you think the institutional move into DeFi will be to cross-chain care about that, you know, what are the trade offs that you think people will ultimately care about in terms of decentralization, efficiency, speed? I mean, how does this all shake out? It's kind of a larger question about how you see the evolution of the space as a whole, but I think particularly through the lens of what might matter to this set of actors.

Jeremy Allaire  

Yeah. I mean, given business or institutional market participants or whatever, like, at the end of the day, they don't actually really care what the specific infrastructure is, right? They care about what it does. And I think a fundamental premise of what makes some of these infrastructures really successful is the programmable money, i.e. composable, Lego money, bricks, whatever metaphor you want to use, but basically, the composability of, of all these different protocols in smart contracts and the like. And so, certainly businesses care about, like, what's the ecosystem I'm basically plugging into, and therefore, that has higher market value, utility value, whatever that might be. So, that's something they certainly care about. But then, it comes down to, you know, the people who are building this set of market infrastructure, the people who are building these innovations, what do they care about? Well, they do care about performance, scalability, cost efficiency, and I think this is what the whole industry is up against right now. And this is a huge, huge thing, which is the move from centralization to decentralization, and doing that at Internet scale. And, you know, if you listen to Sam Bankman-Fried talk about this, yeah, and think about this is, what is it gonna take to have an infrastructure that can do a million transactions per second, that can do web scale, kind of compute, and information transmission and transaction throughput? Like, that's what we're up against. Because, if we really want this to be something that a billion people are using, or 2 billion people are using, we have to, we have to get there. And so all of DeFi, and Web 3.0 is up against that set of physical limitations, if you will. I think for this to really be, you know, let's say this vision of, of these, you know, extraordinarily diverse, long tail capital markets that can serve every asset in the world, and that every individual and every institution can plug into and it's this beautiful machinery that people are out interacting with to do that at scale. We're just nowhere close, right now. And, I think, the past market cycles, it was sort of like we had a market cycle. There's a lot of aspiration, there were a lot of new projects started, and then reality set in, and then there's a lot of building, right? And I think, you know, this time around, the reality is much firmer, it's much greater, but the building's continuing, and so I really think what institutions are looking for is scale, capital efficiency, and usability. Those are huge, huge things and frankly, the ability to interact with this infrastructure in a trusted way, and the ability to interact with this infrastructure in a legally compliant way. And I know a lot of people in DeFi don't want to hear about the legally compliant issues, but if you want this to be used by every day, every way businesses around the world, you have to figure that out, you have to figure out a way to connect real world identity, real world entities to face each other in these markets in some way, as well.

NLW  

So, let's talk about that. Because that feels like a transition that could fundamentally change the shape of what we call DeFi, it could splinter DeFi into the DeFi that's KYC and the DeFi that's for Anons with offcycling, you know, how does that transition play out? Maybe let's broaden that question to ask what your sense of the regulatory landscape is, because we're dealing with a type of infrastructure that runs in parallel to a totally different set of rails that have history, that have clarity, you know, how, how do you see regulators interacting with that? And then, you know, what are the risks in that, in bringing regulators up to speed with it?

Jeremy Allaire  

Well, first of all, it's like, it's absolutely critical that regulators be brought to speed. It’s never a winning game to just sort of go off and hide and hope that no one finds you. Because that's not gonna work. And the scale of this just today is significant enough that major national governments are reacting in different ways. So you have to go and educate and what's interesting is what's happening with the technology, what's happening with these market structures are so, so far ahead of where regulators are, that in and of itself is a risk, because if something truly bad happens, you could get an overreaction. That's always one of the concerns that that one has. Right now, a lot of the regulatory focus is really around identity compliance, financial crime risk, tax evasion, money laundering, terrorist financing, all this sort of stuff. And the answer is not to say, well, that's happening in the real world financial system, so, you know, we've got blockchain analytics, it's all fine. Right? That's not a that's not a reasonable answer, which, sometimes is the answer that you hear from various participants. I think the concept of a capital market, that is for borrowing and lending, trading and exchange, liquidity of various financial instruments, the concept of all of these capital market functions existing on the public internet, as autonomous software that just runs in the public domain, that hurts a regulator's head, it really hurts a regulator’s head, they're like, "What are you talking about, there's no company? This is just literally open source software that's literally just running on the public internet?" It hurts their head. And the knee jerk reaction is, "That's insane. That can't be allowed to go on. Like, we need to shut this down." Now, if you spend time with regulators, and you kind of walk through it and explain and say, "This is a world where the efficiencies and the transparency and the risk management of this open blockchain system is going to improve the financial system, it's going to provide greater access around the world, and actually greater transparency, greater auditability, greater understanding of risks, and allow entities, whether they be people or businesses, to directly participate and face each other through that, and that's going to improve the resilience of the economy." People go, "Oh, that sounds good. That sounds really exciting." But then it comes down to, we need to know that people who are interacting through this are not breaking the law, at the end of the day. The underlying, you know, kind of infrastructure is resilient, and we have a way of sort of knowing that it's resilient infrastructure. And that's where I think a lot of the questions are and that's why simultaneously one of the biggest challenges is one of the biggest opportunities, which is if you can create a way for individuals and institutions to kind of verify themselves and then flow capital in and out of these markets and know that they're dealing with and interacting with other verified individuals, then that will make this safer, and it will make it something that a radically larger number of institutions will want to participate in. And that's how you go from what sounds like a really big market today, to something that eats into the $350 trillion global equity and debt markets, so we have to make that progress. And that's what regulators are caring about and then I think that's ultimately a critical thing that the industry needs to solve broadly.

NLW  

So you got into this a little bit, but I just want to see if we can get it even more crisp because I feel like this is a conversation that you're having a lot already, and you're gonna have a lot more going forward. But, let's hold aside solving for the no crime thing, right? That is a meaningful thing. But let's hold this out. Let's say that that's all, because that's sort of just like, "how does this exist in a way that doesn't screw up other things" kind of an argument. What's the cleanest, simplest argument for why this should be allowed to exist? What is the benefit to the economy for this, to be allowed to continue to grow and reach maturity?

Jeremy Allaire  

This is where you have to kind of step back. And, you know, it's very easy to get kind of caught up in this stuff is just like, wow, all these people making money with all these tokens and all this speculation and so on. And like, that's, that's very easy. But it's also kind of not the point of it. Right? I mean, it is the point of it for some people for sure. But the financial system, right? The markets for capital are designed to support growth in the economy. They're designed to help societies raise prosperity, how do they do that? Well, they create ways to allocate capital, they enable, you know, people who have capital to provide capital to people who need capital, they create very flexible ways for, you know, businesses and households to generate value by investing it and lending it, like capital markets, are there to serve society, they're there to serve growth in businesses and household wealth. And, you know, there's a whole structure for how they do that today. And if you look at, you know, equity, which is a way for companies to enable people to own the future cash flows of their companies in the form of dividends, and having a voice in those businesses through voting, like, that's a model that works, the joint stock corporation, the evolution of that, that's a model that works. And there are capital markets for that that are today, fairly narrow, right? It's only the largest businesses in the world that can participate in them. And, I like to use the example of, you know, in the early days of the internet, if you wanted to, like, reach a global audience with an advertisement, you needed to spend like $100 million on a whole bunch of stuff that reached these big broadcast channels. And then long tail advertising marketplaces emerged, where like, anyone could reach anyone with a directed advertisement super efficiently with incredible cost efficiency, and that was transformative for commerce. And, I think that’s the kind of change I would like to see, and that we think is possible in capital markets. And what that should mean is that businesses and households can more efficiently deliver capital and borrow capital, and do that more directly with fewer intermediaries and lower costs and better risk management that ultimately, you know, delivers, you know, growth into the economy, right? That's what you're looking for from this. And so it is sort of saying, the public internet in this public infrastructure, and this, this resilient, global decentralized infrastructure can do it better. It can do it better than the infrastructure that we have today. And I think the internet has proven that over and over and over and over again, that it can do it way better, you know, 10x, 100x, whatever you want to use as your metaphor. So I think it can do it way, way better. Long way to go.

NLW  

I mean, basically, that's a broadening in some ways, you know, Mark Cuban and his open letter a couple weeks ago, he wrote that this could be the “next great American growth engine,” it sounds like that's basically what you're what you're pointing to.

Jeremy Allaire  

Well, I mean, I look at this as you know, public blockchain infrastructure, and all the things being created on top of that, everything from the digital commodity asset that fuel it, to stablecoin assets, to tokens more broadly, that can be used for a variety of things. I look at all of this as basically building a new global economic infrastructure from the ground up, natively on the internet, and envisioning a global economic system that is actually operated entirely in that, quote, unquote, digitally native form and mediated by software on the internet on these open networks. And that that is, I think, the destiny of the world, and that is what’s happening here. And we're in whatever stage of the heck you want to call it. Just like the world of information and data and communications has been completely subsumed by the internet, and computing. This is just the natural evolution of that to gobble up a really important set of information systems, which happened to be markets.

NLW  

Let's zoom out now I guess, or let's zoom forward to the next 12 to 18 months, or whatever the right period is. You kind of mentioned one of the key things that needs to happen is figuring out how the traditional financial landscape particularly as it relates to identity and compliance can plug in with the infrastructure that's being built. That's obviously one thing we can go more into that if you want, but what are other important catalysts you see over the next period? What are things that you think you see coming down the pipeline, or that you think should be, should be kind of have a heavy emphasis on them?

Jeremy Allaire  

Yeah, it's a great question. We touched a little bit on some of this earlier, in that, like, just generally, scaling infrastructure is just a huge one. And that's basically, you know, this, you know, third generation blockchain technology in the form of Layer 1s and Layer 2s that are designed for, you know, being able to run an actual capital market on, being able to run consumer scale payments, throughput, that kind of thing. So that's big, that's happening, that's going to be a story of the next 12 to 18 months is like, as I proverbially used, they're going from dial up to broadband. If you remember that transition from dial up internet to broadband, there were multiple stages along the way, there's something called ISDN, which was still using your copper wires in your house from your phone to deliver higher speed, but it was kind of like 10 times faster than your dial up modem. That's kind of what second generation chains are like. And now we're going way higher throughput. So that's a big thing, that's like just a general core, kind of almost like CapEx expansion, like building out this infrastructure. So that's huge and important. The second piece, which is something that you raise, and we touched on, which is solving the problem of how kind of, real world entities, individuals, firms can disclose themselves safely, in a privacy preserving manner, to these protocols, to these markets, and for the protocols in the markets themselves, to be able to know a real world identity, versus an anonymous identity, and enable markets and liquidity pools and other things to support that in a native way. That has to happen, that really is critical to truly opening this up to all businesses in the world, and all households in the world, and so on. And I think there's a path there, which we're really excited about. The next piece is, you know, part of introducing identity is also about introducing reputation. Yeah, we have a reputation in the financial system today in the form of credit scores. In FinTech, you have, AI-based reputation, AI signals that are making underwriting decisions and so on, connecting all of that into DeFi enabling, lending, for example, to happen, not just for people who have a bunch of bitcoin that are going to over collateralize and borrow on margin, but actually enable a market to price risk on an unsecured loan, and have that be delivered, you know, through these markets, that kind of thing. I think it's really important. And then maybe the third thing is beginning the process of bridging between other quote unquote, real world assets and digital assets, and so enabling equity, for property to be tokenized and be made available to transact in these decentralized markets. I think that ultimately represents an enormous, enormous opportunity for how big this kind of infrastructure can be.

NLW  

That’s maybe a good question, to just think as we zoom kind of as far out as possible. Right now, these rails are being built largely to facilitate interesting types of exchange, yield generation, around a specific new type of digital asset that has emerged over the last few years. To what extent in the long run is the real destiny of DeFi to be about a reimagining of basically markets infrastructure through which any types of assets that can be represented digitally get pushed through?

Jeremy Allaire  

I mean, that's, that's where that's where it has to go. That's where I think it's going. And that's where I think it has an incredible impact. Like right now, the universe of tradable instruments are the universe of tokens. And the universe of tokens are mostly tokens of crypto native protocols or projects, and stablecoins and crypto commodity assets like a bitcoin and so on, like, that's the universe, right? But the universe of theoretical tradable financial instruments is nearly infinite. And I look at innovations, like what Uniswap, or SushiSwap and all these types of DEXs is have done is they've solved something that has not been solved in classical markets, which is, how can you create a way for an instrument that is a very illiquid instrument, to actually have price discovery and have an incentive system for liquidity around something that is smaller in scale. And so, these new tokens get launched, and there's a liquidity pool, and there's ANMs and there's an incentive, you can get price discovery and liquidity on that in these DEXs. That's a breakthrough, from my perspective, because if you think about today, just take equity, right? The vast majority of equity in companies is not tradable. It's not even close, the vast majority of equity is in private corporations, it's in vast numbers of small and medium enterprises, startups, etc. And what if you could enable a slice of that private equity in startups, in growth companies, and all these things to be tokenized and have liquidity pools and automated market makers and find liquidity and distribution in a capital market like that, that's extraordinarily powerful. And I think it's that democratization of financial market infrastructure that this represents, and its application to many, many, many other types of assets beyond just native crypto tokens as we think of them today.

NLW  

So that I want to hang on that word, democratization as we close out with just a couple minutes left. How do we ensure that this is really a reimagining of the financial plumbing that allows for this sort of, you know, a new growth engine and new wealth, you know, kind of creation opportunities? How do we make sure that those benefits aren't just captured by, you know, the sort of limited few or the people who are already in positions of power in capital markets now? Is that the destiny of it, to just kind of port one set power structure over to a new?

Jeremy Allaire  

I certainly hope not. I mean, I think the internet has democratized a lot of things and we can argue about whether it's created, you know, super platform, centralized, super powerful platforms like Google and Facebook and the like, but what I would say is, is it has enabled, you know, dramatically more voices to be able to communicate, dramatically more creators of content to distributed, it's created a world where a small creator of a small product that's in some distant land can find a buyer in Cincinnati, and it's an efficient market. It's a global market. It's done that and that is democratizing, that is democratizing of information and communications and media and artistry, and being an artist and being a creative products. It's been just totally democratizing. And so, I just inherently believe that these internet-based platforms, in particular this form of decentralized financial market infrastructure, is going to be as democratizing to capital as the rest of the internet has been to these other things.

NLW  

Super exciting, Jeremy, really, really fun topic. Really fun conversation. Any last thoughts before we wrap?

Jeremy Allaire  

No, I'm good. Always a pleasure. Exciting times right now.

NLW  

Yeah. Excited to check back in on this in a few months too and see where we are now. All right. Jeremy, thank you so much for your time and to everyone watching. Really appreciate you hanging out. We'll catch you soon.

NLW  

Today, we are talking about bringing DeFi to institutions. I'm joined by Jeremy Allaire from Circle and I'm so excited to have you here. Jeremy, how's it going?

Jeremy Allaire  

Hey, it's good. 

NLW  

I'm super excited for this topic. The bull run that we are either in a pause of, we're at the end of, or wherever you think the market cycle is, was so shaped by, from a narrative and a real perspective, the introduction of institutions in this space, something that we've been talking about for years, and then it actually started to really happen. Institutions, meaning a whole bunch of different things, which I think is part of what we're going to unpack here. But, I think it is this big question about what happens next, as institutions dig deeper into the space; whether they explore, if they'll stay solely interested in bitcoin and what might be built there, is it just a kind of treasury reserve asset for them, or is there a broader change that crypto markets might signal and shift? So, that's what we're going to talk about today, and maybe to kick it off, let's talk about what we mean, when we say institutions.

Jeremy Allaire

Yeah, this is a great topic, something we were thinking a ton about, and really timely. You know, I think, when people talk about institutions in the context of crypto, they're almost always trying to make reference to sort of, institutional investors, right? So, it's sort of, when do asset managers and pension funds and endowments and all these, when did they come in and buy crypto assets? That's sort of been the overall meaning of institutions, when the institutions get involved. And that has been part of the theme here, which is, you know, a few notable corporations putting bitcoin on their balance sheet, or bigger and bigger financial institutions enabling trading of different crypto derivatives, or whatever those institutional indicators are. That’s one view, which is institutional investing in the blue chip cryptos like bitcoin and ethereum, right, and if you actually look at what institutions are doing, that's a lot of it. I think we'll talk about this in the context of DeFi, but to me, institutions are something much, much, much larger than that. And it's essentially the question of will every corporation in the world, every organization in the world, connect to digital currency infrastructure, will they connect to it and use it, and use it as a part of the way that they store value, move value, etc? And, will they use it as a capital market? At the end of the day, capital markets, what we think of stocks and bonds, and debt, and all this sort of stuff that floats around, you know, corporate debt, companies borrowing capital to fund building a plant, or whatever, whatever you're doing, and so on. That's the real world, like businesses interacting with the financial system, which accounts for an enormous amount of it, that's institutions. To me, the question is, is, you know, when? When does that happen? When do businesses, writ large, institutions writ large, actually begin to integrate to this and rely on this as part of their overall treasury, and part of how they operate? So there's, to me, there's two big things, there's institutional investors, and that's basically people who are essentially just long term holders, speculators, traders, whatever that would be in terms of that, and then there's institutional adoption of crypto financial market infrastructure, crypto treasury infrastructure, crypto payments infrastructure, for the actual business of business, so to speak.

NLW  

So within that framework, where I want to go next is, who's looking for what and how DeFi offers that. But I think before that, I'd love to just get a sense of where your perception is of where people are on the adoption cycle. Are they allocating, are they building, are they on the edge looking in, are they way far away, but they've got one ear tuned in this direction? Maybe, if there's different types of these actors that fit different parts of that profile? Just give us a landscape as we go into, you know, kind of more precise questions about what they're interested in.

Jeremy Allaire

Yeah, I mean, I think, you know, right now the interest from businesses and institutions is fairly broad, and it's fairly nascent. Let's sort of speak realistically here. Like, there's been some high profile public companies that put bitcoin on their balance sheets, but it's pretty limited, right? There are more and more, you know, asset management firms that have some kind of strategy around this, but it's still relatively nascent. When we talk about DeFi specifically, institutional participation in DeFi, I think is extremely limited right now, like getting an institution comfortable with the idea that you could go to a regulated exchange, purchase a digital commodity, that's very clearly been sort of said as a legitimate form of commodity by U.S. regulators and owning it, and having it put with some bank-like custodian, and, you know, that kind of thing. Like, that's sort of where the comfort level is. But, you know, actively allocating capital into yield farming, or long tail crypto tokens, there aren't a lot of institutions doing that, whether on the investment, institutional investor side of things, or certainly on the corporate side of things. I think, if I'm a corporate treasurer, and I'm looking at this today, I may personally have bought some bitcoin, but I'm curious about this, I'm hearing a lot about it. But I'm extremely intimidated about what this is, it just feels dangerous and risky, and like kind of nuts, it's kind of science fiction. And so, to that world, it's there. However, one of the things that we've been seeing and it's really interesting to see, is for many corporate treasurers, and that includes like some, like the treasurer of the bank's balance sheet, for example, they're having a hard time getting their head wrapped around allocating some of their balance sheet into something like bitcoin. But, they're seeing yield markets that have emerged where there's dollarized, dollar denominated, dollar supplied and dollar delivered yield, stablecoin yield, that is really attractive, you know, whether in a DeFi market protocol or through through CeFi, and so, all of a sudden, you have businesses are saying, "Well, okay, I don't want to necessarily buy bitcoin, but I'm happy to have some form of indexed exposure to it that gives me a 4%, 5%, 6% APY, and I'm just shifting dollars away from the money market and into a stablecoin yield product," that actually feels a lot more comfortable to an institution in many senses than taking principal risks directly in a cryptocurrency. And so we're seeing that in terms of the, just in terms of like the inbound institutional interest in this, for the first time, we're seeing, you know, people who are, you know, CFOs or treasurers of regular way corporations saying, "I'm interested in looking at these stablecoin denominated yields that are happening."

NLW  

So, it's super interesting. I mean, we're gonna get more into this, but I think there's an obvious technological barrier to entry that feels insurmountable for individuals, in many cases, not just corporations and institutions. But it sounds like in some cases, there may actually be a motivational, philosophical, less of a barrier to entry, than certain sort of like spot-buying of assets, which is more like at least an assessment of the macro landscape and an attempt to do something different versus just kind of doing the normal thing that businesses do, which is go out and hunt for yield. So I guess that's a perfect segue maybe into the question of, you know, given that, as you've articulated, this is still very nascent. What do you believe the use is that, you know, those people that are starting to sniff around this area are most interested in? How much is it looking for yield, you know, that pure, simple thing? How much of it is speculating on future value? How much of it is lowering cost, cutting out intermediaries, trying to speed things up? You know, like, where are the different dimensions falling as you're having conversations? 

Jeremy Allaire  

Yeah, I mean, again, there's not like a uniform view on this, because businesses that are getting involved in this, it's fascinating to see because, Circle sits on both the kind of payment infrastructure side of this and we sit on the kind of treasury infrastructure side and the yield side, so we kind of see a lot of different angles on this. And so, on the one hand, we're seeing more and more, you know, small and medium enterprises who have figured out that stablecoins as a settlement medium are really efficient. And who are saying, "I want to get set up with this because people want to pay me with this, or I want to accept payments with this." And maybe these are business owners and entrepreneurs and startups and others who themselves are actively active in the crypto markets. And so, they're all of a sudden saying, “Wow, this is really powerful, we should just use this in our business.” You know, you're starting to see big companies that have big, complex global supply chains, that deal with suppliers in emerging markets all around the world, who are saying, "Dollar stablecoins actually look like an attractive way to distribute payments around the world," and then, you know, it leads into these conversations where the businesses are talking about these yields. The 3%, 4%, 5%, 6%, or whatever those yields are, talking about those yields. What is that? What's the risk of that? What's involved with that? How do I do that? So, you're absolutely seeing more businesses who are kind of looking at this, from those two sides. Like, how do I get utility value out of this? And what's the business benefit of parking capital here? That’s emerging. And then clearly, you have businesses and institutions who are entirely about just chasing the money, so to speak, they're just entirely about, “This is an investment, right? How do I treat this as an investment? I've got a thesis on the investment, I'm either taking a long position on an asset or I'm, or I want to actively trade an asset, or I want indexed exposure to an asset class.” And so, that's a whole category as well. But since this is  a pretty broad spectrum of what's kind of bringing people to it. And I think our thesis is that over time, in particular as as DeFi infrastructure matures, that it can just be a very, very efficient form of capital market that every business can tap into, in the same way that they do today, indirectly, through banks and commercial banks, that then intermediate capital markets on their behalf. I think that more and more, it'll be about businesses, perhaps working through financial technology firms that are intermediating DeFi on their behalf. But were there more as direct market participants in the capital markets themselves, which is ultimately I think the promise of DeFi is that market participants can face each other in a much more efficient, direct way, without the traditional kind of rent seeking.

NLW  

As a very eloquent and like, clear-eyed way to say all of the above in terms of what people are interested in, which I think makes sense. I think, in a lot of ways it sounds like what the key question is less like, what is the door that they walk through, but how it helps them journey down this path of understanding all of these different pieces, and how that sort of the whole is greater than the sum of the parts.

Jeremy Allaire  

Yeah, I mean, I think so. And, you know, for many businesses and business owners and institutions, like if the blind man or the elephant, it's like, wow, there's this over here. And there's this over here, and I'm just getting my head wrapped around it, as we all in crypto land, you know, talk about going down the rabbit hole and rabbit holes are big and complex and endless and confusing, and everything else. And, you know, so being down the rabbit hole, there's a lot to discover. And I think there's this process of discovery certainly going on for more and more businesses that are trying to get involved in this now.

NLW  

So we're coming up on a year now of the anniversary of DeFi summer, which was obviously a seminal moment in terms of expansion of kind of the infrastructure in this space, the assets, the things you can do, the value, you know, it's crazy to think that a year ago at this time, or I guess at the beginning of this month, there's sort of less than a billion locked in these protocols. And now to see where we are now. I guess what, over that year, in the context of these institutions, has been the most significant in terms of the infrastructure build out?

Jeremy Allaire  

In many ways, we've seen you know, the major protocols, right. So, if you go back to like 2018, when a lot of protocol projects were just getting started, 2017 even, but 2018 in particular, you know, these were pretty simple. And, what we've seen over the last year is, you know, multiple significant infrastructure upgrades to DeFi market infrastructure, both exchange infrastructure, and then more and more variability in terms of encapsulation. On top of those, you've seen huge infrastructure improvements in the way in which these are run and operated and governed. I mean, that's been one of the extraordinary stories is that this is community owned and operated, if you will, market infrastructure, it's like the, the traditional exchanges where you have a seat at the exchange, governing the New York Stock Exchange, or the CME or whatever, but this is, like, totally democratized and you've got governance models, and you've got successful risk management upgrades, protocol upgrades. They're really, really extraordinary. And now, you know, I think that the next big thing is we're now really starting to see at an infrastructure level, you know, the scalability upgrade. So, I think during the crypto bull market, we had these periods of, you know, enormous expensing and gas fees, and it's sort of like, why would I ever try and save $100 into compound protocol for it cost me $100, to put my $100 in, right, or these kinds of like, this is absurd. And so, you know, that's been the latest cycle has been watching protocol after protocol after protocol, deploy on level twos, completely, cleanroom ecosystems be built up on new third generation chains, like the whole Serum ecosystem built up on Solana. And, high performance DEXs that can execute central limit order books in the same way that a centralized exchange can. So, we've seen, like fundamental infrastructure improvements, we've seen protocol improvements, we've seen governance improvements, and just like a constant set of iteration, in terms of higher level protocols that encapsulate all this, I just feel like it's been, it's kind of been like relentless improvement going on. And now that the treasuries on these projects are quite robust, and the huge numbers of firms kind of around this, you know, firms like Circle, but dozens and dozens and dozens of other firms around this, that are very well capitalized, the build out from here, I think is super exciting. I mean, it's super exciting. And I think, you know, a lot of people are now going from, “Okay, we've sort of created this infrastructure for crypto tokens as a broad asset class. How do we expand this into other things? How do we take this infrastructure and apply it to the rest of the world and make capital markets that are, you know, dramatically larger capital markets than are served with the legacy exchange market infrastructure?”

NLW  

DeFi eating other aspects and other assets is something I want to come back to, but I guess I'd love to pause or kind of bring it back a little bit more temporal to where we are now, right. So obviously, you're looking at this from an extremely long duration point of view in terms of the implications, in terms of the types of actors that you want, you think are going to come in. Let's talk about what's happening right now from a price market cycle perspective. Were you surprised that there wasn't a DeFi phase to this bull after bitcoin hit all time highs, and then ethereum hit all time highs, has it impacted the enthusiasm that you're seeing or the interest coming in from outside? Just kind of like, how does where we are now in one, what's your assessment of it, and two, does it impact any of this? Or is it just kind of a short term part of the growth?

Jeremy Allaire  

Well, I mean, I think there has been a massive DeFi phase to this, I know that if you look at media coverage and attention, obviously, it's all about the price of bitcoin or the price of ether and, and things like this, but obviously, you know, there was a giant alt season. And beyond that, the DeFi governance tokens have grown dramatically. I mean, they didn't even exist a little over a year ago, there were no DeFi governance tokens. And so now, whether it's UNI or COMP, or WIFI, like go down the list, right? DeFi protocol tokens have grown to a very significant scan market cap, and you could argue that many of the next generation blockchain infrastructures like Solana or Polkadot, just giving a couple of examples, are fundamentally kind of DeFi, right? They're fundamentally people who are investing in it because they believe that so much of DeFi can get built on these as well. And so, I feel like there has been a huge amount there. And the fact that you know, major crypto brokerages now enable average investors to invest in these too is significant. So, I do feel like there's been a lot there, over this period. But it's still amongst the broader population of people who think about this space, like, if you go meet with your average person who's maybe bought some bitcoin or whatever, that all this stuff is like, still kind of Greek to them. And so, it certainly doesn't have quite the same, you know, awareness and adoption.

NLW  

So, you mentioned Solana, Polkadot, Ethereum, sort of a, you know, a slew of different ecosystems in which DeFi is growing up in parallel. How much do you think the institutional move into DeFi will be to cross-chain care about that, you know, what are the trade offs that you think people will ultimately care about in terms of decentralization, efficiency, speed? I mean, how does this all shake out? It's kind of a larger question about how you see the evolution of the space as a whole, but I think particularly through the lens of what might matter to this set of actors.

Jeremy Allaire  

Yeah. I mean, given business or institutional market participants or whatever, like, at the end of the day, they don't actually really care what the specific infrastructure is, right? They care about what it does. And I think a fundamental premise of what makes some of these infrastructures really successful is the programmable money, i.e. composable, Lego money, bricks, whatever metaphor you want to use, but basically, the composability of, of all these different protocols in smart contracts and the like. And so, certainly businesses care about, like, what's the ecosystem I'm basically plugging into, and therefore, that has higher market value, utility value, whatever that might be. So, that's something they certainly care about. But then, it comes down to, you know, the people who are building this set of market infrastructure, the people who are building these innovations, what do they care about? Well, they do care about performance, scalability, cost efficiency, and I think this is what the whole industry is up against right now. And this is a huge, huge thing, which is the move from centralization to decentralization, and doing that at Internet scale. And, you know, if you listen to Sam Bankman-Fried talk about this, yeah, and think about this is, what is it gonna take to have an infrastructure that can do a million transactions per second, that can do web scale, kind of compute, and information transmission and transaction throughput? Like, that's what we're up against. Because, if we really want this to be something that a billion people are using, or 2 billion people are using, we have to, we have to get there. And so all of DeFi, and Web 3.0 is up against that set of physical limitations, if you will. I think for this to really be, you know, let's say this vision of, of these, you know, extraordinarily diverse, long tail capital markets that can serve every asset in the world, and that every individual and every institution can plug into and it's this beautiful machinery that people are out interacting with to do that at scale. We're just nowhere close, right now. And, I think, the past market cycles, it was sort of like we had a market cycle. There's a lot of aspiration, there were a lot of new projects started, and then reality set in, and then there's a lot of building, right? And I think, you know, this time around, the reality is much firmer, it's much greater, but the building's continuing, and so I really think what institutions are looking for is scale, capital efficiency, and usability. Those are huge, huge things and frankly, the ability to interact with this infrastructure in a trusted way, and the ability to interact with this infrastructure in a legally compliant way. And I know a lot of people in DeFi don't want to hear about the legally compliant issues, but if you want this to be used by every day, every way businesses around the world, you have to figure that out, you have to figure out a way to connect real world identity, real world entities to face each other in these markets in some way, as well.

NLW  

So, let's talk about that. Because that feels like a transition that could fundamentally change the shape of what we call DeFi, it could splinter DeFi into the DeFi that's KYC and the DeFi that's for Anons with offcycling, you know, how does that transition play out? Maybe let's broaden that question to ask what your sense of the regulatory landscape is, because we're dealing with a type of infrastructure that runs in parallel to a totally different set of rails that have history, that have clarity, you know, how, how do you see regulators interacting with that? And then, you know, what are the risks in that, in bringing regulators up to speed with it?

Jeremy Allaire  

Well, first of all, it's like, it's absolutely critical that regulators be brought to speed. It’s never a winning game to just sort of go off and hide and hope that no one finds you. Because that's not gonna work. And the scale of this just today is significant enough that major national governments are reacting in different ways. So you have to go and educate and what's interesting is what's happening with the technology, what's happening with these market structures are so, so far ahead of where regulators are, that in and of itself is a risk, because if something truly bad happens, you could get an overreaction. That's always one of the concerns that that one has. Right now, a lot of the regulatory focus is really around identity compliance, financial crime risk, tax evasion, money laundering, terrorist financing, all this sort of stuff. And the answer is not to say, well, that's happening in the real world financial system, so, you know, we've got blockchain analytics, it's all fine. Right? That's not a that's not a reasonable answer, which, sometimes is the answer that you hear from various participants. I think the concept of a capital market, that is for borrowing and lending, trading and exchange, liquidity of various financial instruments, the concept of all of these capital market functions existing on the public internet, as autonomous software that just runs in the public domain, that hurts a regulator's head, it really hurts a regulator’s head, they're like, "What are you talking about, there's no company? This is just literally open source software that's literally just running on the public internet?" It hurts their head. And the knee jerk reaction is, "That's insane. That can't be allowed to go on. Like, we need to shut this down." Now, if you spend time with regulators, and you kind of walk through it and explain and say, "This is a world where the efficiencies and the transparency and the risk management of this open blockchain system is going to improve the financial system, it's going to provide greater access around the world, and actually greater transparency, greater auditability, greater understanding of risks, and allow entities, whether they be people or businesses, to directly participate and face each other through that, and that's going to improve the resilience of the economy." People go, "Oh, that sounds good. That sounds really exciting." But then it comes down to, we need to know that people who are interacting through this are not breaking the law, at the end of the day. The underlying, you know, kind of infrastructure is resilient, and we have a way of sort of knowing that it's resilient infrastructure. And that's where I think a lot of the questions are and that's why simultaneously one of the biggest challenges is one of the biggest opportunities, which is if you can create a way for individuals and institutions to kind of verify themselves and then flow capital in and out of these markets and know that they're dealing with and interacting with other verified individuals, then that will make this safer, and it will make it something that a radically larger number of institutions will want to participate in. And that's how you go from what sounds like a really big market today, to something that eats into the $350 trillion global equity and debt markets, so we have to make that progress. And that's what regulators are caring about and then I think that's ultimately a critical thing that the industry needs to solve broadly.

NLW  

So you got into this a little bit, but I just want to see if we can get it even more crisp because I feel like this is a conversation that you're having a lot already, and you're gonna have a lot more going forward. But, let's hold aside solving for the no crime thing, right? That is a meaningful thing. But let's hold this out. Let's say that that's all, because that's sort of just like, "how does this exist in a way that doesn't screw up other things" kind of an argument. What's the cleanest, simplest argument for why this should be allowed to exist? What is the benefit to the economy for this, to be allowed to continue to grow and reach maturity?

Jeremy Allaire  

This is where you have to kind of step back. And, you know, it's very easy to get kind of caught up in this stuff is just like, wow, all these people making money with all these tokens and all this speculation and so on. And like, that's, that's very easy. But it's also kind of not the point of it. Right? I mean, it is the point of it for some people for sure. But the financial system, right? The markets for capital are designed to support growth in the economy. They're designed to help societies raise prosperity, how do they do that? Well, they create ways to allocate capital, they enable, you know, people who have capital to provide capital to people who need capital, they create very flexible ways for, you know, businesses and households to generate value by investing it and lending it, like capital markets, are there to serve society, they're there to serve growth in businesses and household wealth. And, you know, there's a whole structure for how they do that today. And if you look at, you know, equity, which is a way for companies to enable people to own the future cash flows of their companies in the form of dividends, and having a voice in those businesses through voting, like, that's a model that works, the joint stock corporation, the evolution of that, that's a model that works. And there are capital markets for that that are today, fairly narrow, right? It's only the largest businesses in the world that can participate in them. And, I like to use the example of, you know, in the early days of the internet, if you wanted to, like, reach a global audience with an advertisement, you needed to spend like $100 million on a whole bunch of stuff that reached these big broadcast channels. And then long tail advertising marketplaces emerged, where like, anyone could reach anyone with a directed advertisement super efficiently with incredible cost efficiency, and that was transformative for commerce. And, I think that’s the kind of change I would like to see, and that we think is possible in capital markets. And what that should mean is that businesses and households can more efficiently deliver capital and borrow capital, and do that more directly with fewer intermediaries and lower costs and better risk management that ultimately, you know, delivers, you know, growth into the economy, right? That's what you're looking for from this. And so it is sort of saying, the public internet in this public infrastructure, and this, this resilient, global decentralized infrastructure can do it better. It can do it better than the infrastructure that we have today. And I think the internet has proven that over and over and over and over again, that it can do it way better, you know, 10x, 100x, whatever you want to use as your metaphor. So I think it can do it way, way better. Long way to go.

NLW  

I mean, basically, that's a broadening in some ways, you know, Mark Cuban and his open letter a couple weeks ago, he wrote that this could be the “next great American growth engine,” it sounds like that's basically what you're what you're pointing to.

Jeremy Allaire  

Well, I mean, I look at this as you know, public blockchain infrastructure, and all the things being created on top of that, everything from the digital commodity asset that fuel it, to stablecoin assets, to tokens more broadly, that can be used for a variety of things. I look at all of this as basically building a new global economic infrastructure from the ground up, natively on the internet, and envisioning a global economic system that is actually operated entirely in that, quote, unquote, digitally native form and mediated by software on the internet on these open networks. And that that is, I think, the destiny of the world, and that is what’s happening here. And we're in whatever stage of the heck you want to call it. Just like the world of information and data and communications has been completely subsumed by the internet, and computing. This is just the natural evolution of that to gobble up a really important set of information systems, which happened to be markets.

NLW  

Let's zoom out now I guess, or let's zoom forward to the next 12 to 18 months, or whatever the right period is. You kind of mentioned one of the key things that needs to happen is figuring out how the traditional financial landscape particularly as it relates to identity and compliance can plug in with the infrastructure that's being built. That's obviously one thing we can go more into that if you want, but what are other important catalysts you see over the next period? What are things that you think you see coming down the pipeline, or that you think should be, should be kind of have a heavy emphasis on them?

Jeremy Allaire  

Yeah, it's a great question. We touched a little bit on some of this earlier, in that, like, just generally, scaling infrastructure is just a huge one. And that's basically, you know, this, you know, third generation blockchain technology in the form of Layer 1s and Layer 2s that are designed for, you know, being able to run an actual capital market on, being able to run consumer scale payments, throughput, that kind of thing. So that's big, that's happening, that's going to be a story of the next 12 to 18 months is like, as I proverbially used, they're going from dial up to broadband. If you remember that transition from dial up internet to broadband, there were multiple stages along the way, there's something called ISDN, which was still using your copper wires in your house from your phone to deliver higher speed, but it was kind of like 10 times faster than your dial up modem. That's kind of what second generation chains are like. And now we're going way higher throughput. So that's a big thing, that's like just a general core, kind of almost like CapEx expansion, like building out this infrastructure. So that's huge and important. The second piece, which is something that you raise, and we touched on, which is solving the problem of how kind of, real world entities, individuals, firms can disclose themselves safely, in a privacy preserving manner, to these protocols, to these markets, and for the protocols in the markets themselves, to be able to know a real world identity, versus an anonymous identity, and enable markets and liquidity pools and other things to support that in a native way. That has to happen, that really is critical to truly opening this up to all businesses in the world, and all households in the world, and so on. And I think there's a path there, which we're really excited about. The next piece is, you know, part of introducing identity is also about introducing reputation. Yeah, we have a reputation in the financial system today in the form of credit scores. In FinTech, you have, AI-based reputation, AI signals that are making underwriting decisions and so on, connecting all of that into DeFi enabling, lending, for example, to happen, not just for people who have a bunch of bitcoin that are going to over collateralize and borrow on margin, but actually enable a market to price risk on an unsecured loan, and have that be delivered, you know, through these markets, that kind of thing. I think it's really important. And then maybe the third thing is beginning the process of bridging between other quote unquote, real world assets and digital assets, and so enabling equity, for property to be tokenized and be made available to transact in these decentralized markets. I think that ultimately represents an enormous, enormous opportunity for how big this kind of infrastructure can be.

NLW  

That’s maybe a good question, to just think as we zoom kind of as far out as possible. Right now, these rails are being built largely to facilitate interesting types of exchange, yield generation, around a specific new type of digital asset that has emerged over the last few years. To what extent in the long run is the real destiny of DeFi to be about a reimagining of basically markets infrastructure through which any types of assets that can be represented digitally get pushed through?

Jeremy Allaire  

I mean, that's, that's where that's where it has to go. That's where I think it's going. And that's where I think it has an incredible impact. Like right now, the universe of tradable instruments are the universe of tokens. And the universe of tokens are mostly tokens of crypto native protocols or projects, and stablecoins and crypto commodity assets like a bitcoin and so on, like, that's the universe, right? But the universe of theoretical tradable financial instruments is nearly infinite. And I look at innovations, like what Uniswap, or SushiSwap and all these types of DEXs is have done is they've solved something that has not been solved in classical markets, which is, how can you create a way for an instrument that is a very illiquid instrument, to actually have price discovery and have an incentive system for liquidity around something that is smaller in scale. And so, these new tokens get launched, and there's a liquidity pool, and there's ANMs and there's an incentive, you can get price discovery and liquidity on that in these DEXs. That's a breakthrough, from my perspective, because if you think about today, just take equity, right? The vast majority of equity in companies is not tradable. It's not even close, the vast majority of equity is in private corporations, it's in vast numbers of small and medium enterprises, startups, etc. And what if you could enable a slice of that private equity in startups, in growth companies, and all these things to be tokenized and have liquidity pools and automated market makers and find liquidity and distribution in a capital market like that, that's extraordinarily powerful. And I think it's that democratization of financial market infrastructure that this represents, and its application to many, many, many other types of assets beyond just native crypto tokens as we think of them today.

NLW  

So that I want to hang on that word, democratization as we close out with just a couple minutes left. How do we ensure that this is really a reimagining of the financial plumbing that allows for this sort of, you know, a new growth engine and new wealth, you know, kind of creation opportunities? How do we make sure that those benefits aren't just captured by, you know, the sort of limited few or the people who are already in positions of power in capital markets now? Is that the destiny of it, to just kind of port one set power structure over to a new?

Jeremy Allaire  

I certainly hope not. I mean, I think the internet has democratized a lot of things and we can argue about whether it's created, you know, super platform, centralized, super powerful platforms like Google and Facebook and the like, but what I would say is, is it has enabled, you know, dramatically more voices to be able to communicate, dramatically more creators of content to distributed, it's created a world where a small creator of a small product that's in some distant land can find a buyer in Cincinnati, and it's an efficient market. It's a global market. It's done that and that is democratizing, that is democratizing of information and communications and media and artistry, and being an artist and being a creative products. It's been just totally democratizing. And so, I just inherently believe that these internet-based platforms, in particular this form of decentralized financial market infrastructure, is going to be as democratizing to capital as the rest of the internet has been to these other things.

NLW  

Super exciting, Jeremy, really, really fun topic. Really fun conversation. Any last thoughts before we wrap?

Jeremy Allaire  

No, I'm good. Always a pleasure. Exciting times right now.

NLW  

Yeah. Excited to check back in on this in a few months too and see where we are now. All right. Jeremy, thank you so much for your time and to everyone watching. Really appreciate you hanging out. We'll catch you soon.

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