TMBA 609: Is "DeFi" the Future of Finance?
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This week, we are once again diving into the world of cryptocurrency and blockchain technology.
Gerbz is a regular contributor to this podcast and our go-to guy for all things crypto.
He is the founder of BitLift.com, and the host of the brand new BitLift podcast, which aims to guide people down the crypto rabbit hole.
Gerbz joins us this week to discuss the world of "Decentralized Finance", or "DeFi", where smart contracts and blockchain technology are being used to replace traditional financial institutions.
He'll also be answering 5 pressing questions that we have about the state of crypto in 2021.
Disclaimer: These are just our opinions, and are presented for informational purposes only. They are not intended to be considered as financial advice.
Listen to this week's show and learn:
The difference between "CeFi" and "DeFi". (5:14)
Why the returns on DeFi investments are often much better than traditional ones. (12:11)
The importance of taking custody of your crypto assets. (22:24)
What percentage of his portfolio is in stable coins. (34:41)
The answers to 5 pressing questions that we have about crypto in 2021. (40:05)
Mentioned in the episode:
Before the Exit - Our New Book
Partner With Us
The Dynamite Circle
Dynamite Jobs
Dynamite Deals
Tropical MBA on YouTube
Post a Remote Job
Dynamite Jobs - Remote Recruiting Sales Page
Let's Talk High-Level Podcast Strategy for 1 Hour
Gerbz
BitLift
BitLift Podcast
Paper: Bitcoin, Currencies, and Fragility by Nassim Taleb
A Quick Guide to Cryptocurrency Terms
Nassim Taleb, Erstwhile Bitcoin Admirer, Publishes Paper Trashing It
MakerDAO's Problems Are a Textbook Case of Governance Failure
Coinbase
BlockFi
Nexo
Tether
Terra
MakerDAO
Ledger
Trezor
MetaMask
UniSwap
Compound
Aave
Anchor
Curve
Convex
Enjoyed this podcast? Check out these:
TMBA422: Crypto: What’s It All About?
TMBA568: ‘I’m Fiscally Bitcoin and Socially Ethereum’
TMBA576: The Kings of Crypto
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Thanks for listening to our show! We'll be back next Thursday morning 8AM EST.
Cheers,
Dan & Ian
Full Transcript
Gerbz: You've worked hard for this money. Do you know JP Morgan, is he your buddy? You're gonna let him hold on to your money for you, invest your money, do whatever he wants with it without even asking for permission when he makes those changes? Or are you going to take your hard earned money into your own hands and go invest in the things that JP Morgan is looking to invest in? And that's the power of all of crypto.
Dan: Happy Thursday morning. Welcome back to the podcast. Actually, I'm thinking a Q&A ep is in order. If you got a prompt, a question for something you'd like to hear us cover, drop me an email Dan at tropical mba.com. Today we are talking crypto with a regular guest.
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Gerbz: My name is Gerbz. And I've been going down the crypto rabbit hole now since 2013.
Dan: Are you going anonymous?
Gerbz: Yeah. But you've already said your name, people can find it out really easily.
Gerbz: That would take work and people don't put in work.
Dan: Now Bitlift dot com’s Gerbz has been on the show a bunch of times. And crypto has long had his fascination and focus. He even designed a business specifically to receive income in cryptocurrency, something we covered before and is very, very smart. And this week, he's launching the Bitlift podcast.
So, as many of you know, I'm sincerely interested in crypto. And I gotta say, I'm a little bit of a believer. I feel like we're in the early days of the web with this technology. Yeah, it's a little bit wacky, it doesn't really work all that well. And a lot of the applications kind of stay in the crypto verse. But I lived throug the same thing with the internet. And so I'm tempted to see the features, see the potential and just want to continue to learn more about it and incorporate more of it into my business, as we slowly plod along growing more successful location independent businesses. Basically the idea is I just want to keep up to speed on what's happening and keep a couple big toes in the water.
So when Gerbz reached out to me recently to say that, this year, he's been seeing returns of up to 20% using crypto as an investment vehicle, and specifically we're going to dig more into DeFi on today's episode. I thought, let's get Gerbz back on the show, especially as I recently read Nassim Taleb what he's calling ‘A Black Paper’ that he titled ‘Bitcoin Currencies and Fragility’, in which Taleb states quote, ‘that Bitcoin can be neither a long or short term store of value, cannot operate as a reliable inflation hedge. And worst of all, does not constitute, not even remotely, a tail protection vehicle for catastrophic episodes’. That's right. The man himself says that Bitcoin is not a hedge against unforeseeable, catastrophic episodes. Anyway, we could debate this a million different ways. We're going to touch on some points of that today. So we'll link to that piece in the show notes and also include a crib sheet on the alphabet soup of terms that we'll be discussing today like NFTs, CeFi, and DeFi. In addition to that, we'll cover what's in Gerbz’ his own portfolio, don't tell me what you think, tell me what you hold. And he answers my five burning questions about crypto today.
So I started out by asking Gerbz whether he thought the investment returns he's been achieving mostly through DeFi or decentralised finance, are limited to the bull market we're currently in or whether or not they're likely to be more enduring.
Gerbz: It's hard to say exactly what will happen. But, you know, DeFi did exist before this bull market, and there were great yields to be had there, too. There's different places that the yields come from, and we'll break those down. But some of them lend themselves to bull markets, some of them might lend themselves to bear markets.
Dan: How about we take maybe an example of an average, passive crypto investor in our audience, we'll make a character and call them ‘DeFi Devin’. And DeFi Devin is curious about DeFi but he hasn't pursued it. So DeFi Devin has a Coinbase account. And he has $10,000- $20,000 worth of Bitcoin, whatever number works easy for our math, we'll just toss it into his Coinbase account. Let’s walk Devin through the process of getting into the world of DeFi, understanding what it is, what the risks are, what the opportunities are, and how to go to work making passive, or somewhat active investments, and getting yield returns on that crypto coins.
Gerbz: So the entire DeFi landscape can sort of break down into two different opportunities. The first one is this idea of like staking your assets somewhere or loaning them to someone. And the other one is borrowing against your assets and investing the money that you borrow. Pretty much everything falls into those two. DeFi Devin who's just got a Coinbase account and some Bitcoin. He's gonna probably use it like a little stepping stone, which is - he's gonna use CeFi before he goes DeFinitely and CeFi is centralised finance versus DeFi, which is decentralised finance. And essentially, there's these companies, you may have heard of BlockFi, Nexo is another big one. And these are sort of like these banks that sit in between crypto and DeFi, and they will do DeFi stuff for you. And they will pay you a percentage of the yield.
Dan: So they're like the Coinbase of DeFi?
Gerbz: They are. I mean, they are banks. It's the same model that a bank has always had, right? You stick your money in a bank account, the bank without telling you goes out and loans it out to people and invests it in stuff and they give you you know, the bank gives you a half of a percent maybe on a good year. But in DeFi-land, the CeFi companies are paying 8% on stablecoins, somewhere around 5-6% on things like Bitcoin.
Dan: What counts as a stablecoin nowadays?
Gerbz: Stable coin is a dollar pegged coin. It's a coin that should be $1 every time you use it. They fluctuate too, sometimes as much as $1 and a penny down to nine cents, but they should recalibrate themselves back to $1.
Dan: And how many examples of stable coins are there at the moment?
Gerbz: There's probably hundreds, but there's probably also 10 that matter. And then within that there's probably two that make up most of it. One of the biggest is Tether - $31 billion worth of Tether exists in the world. And there's like $25 billion worth of the USDC, which is Coinbase’s stablecoin. I think there's somewhere around $80 billion of stablecoins in total. So three quarters of all the stablecoins that exist kind of fall into those two.
Dan: And when one of the stories, it's been getting more and more traction as people seek sort of rationalisation for the Bear trend we've been .. or like downward pressure on crypto the past few months is the some fundamentals of Tether. Let’s maybe interrupt just to get a prediction or some insight into how you feel what Tether’s role is, what the issue is, and what are the possible outcomes there.
Gerbz: Tether is like the CeFi of stable coins. So, Tether is like a centrally controlled stable coin. Investors deposit dollars with the Tether Corporation, the Tether Corporation takes those dollars, invests them in other things, but mints of $1 worth of Tether, usually on the Ethereum blockchain, but it's also cross-chain. And they're a bank that issues their own dollars, they just swap dollar bills for stablecoins. And then they take those dollar bills and invest them. A lot of these stable coins work that way. Tether themselves, they haven't been incredibly open with what they're investing in, historically, and there've been a lot of questions what are they doing with your money when you deposit with them?
They went through like a big court case. And they actually were required to kind of disclose more to the investors and they've done that recently. And it's not great, what it turned out was they're investing in things that may be a little higher risk than what a typical bank would invest in. They're also not FDIC insured, for example. So it's not anything like a bank in that regard. But they're investing it, and they're investing in ways that they think is in the best interest of the people depositing with them and and of themselves, of course, but it's a centralised, stable coin. But there's other stable coins that are algorithmic, that don't have a central party or a bank account, necessarily. Things like Luna or things like MakerDAO, which we could talk about, but those are ways of issuing stable coins on top of debt or equity or equity. So there's all sorts of experiments happening in the stablecoin land.
Dan: And why are stablecoins important?
Gerbz: Stable coins are wildly important. In fact, it’s one of the biggest changes that's come to crypto in this cycle. Because what's going to happen is as this cycle matures, maybe we're starting the bear market now, maybe we're halfway that way. That's up for debate. But even people who are selling their crypto are selling them into stablecoins, which sort of keeps it within the crypto verse, right? Last cycle or cycles in the past, if you sold your Bitcoin, you sold it for dollars and withdrew to JPMorgan. Now you sell those stablecoins and you keep it on your Trezor. So that money is still just one click away from being back into Bitcoin or back into Eth. And I think what's going to happen is stablecoins are going to lock .. as value flows from the traditional finance system into the crypto system. Now it's going to stay in the crypto system because stablecoins have kind of enabled the ability to take some weight off the pedal and you don't have to be like invested in a volatile asset in crypto anymore. You can just hold your assets as crypto without the volatility.
Dan: What sort of practical uses do stablecoins have beyond reducing volatility on your crypto holdings?
Gerbz: From an investment perspective, it's one of the highest demanded assets because people want to borrow stablecoins to invest. So it's got one some of the highest demand which is why it returns some of the highest yields in DeFi. There's talk a lot also about like, we've always had this issue where Bitcoin is super volatile, why would you use it for payments? Stablecoins offer the opportunity for us to have a wallet full of stablecoins that we can use for making payments online. It really still hasn't matured yet to that, credit cards are still easy and everyone knows how to do it and it's integrated everywhere. But eventually stablecoins will be very likely what's used for payments and stuff moving forward. And I think even governments are going to be issuing stablecoins that represent their Fiat dollar but on blockchains
Dan: We talked about our sort of user path of DeFi Devin, he has all of a sudden transferred some of his crypto holdings on to DeFi or BlockFi rather or some similar centralised DeFi service and is all of a sudden enjoying seeing the returns, the yields, come into his account every month, how safe is it on something like BlockFi to just deposit your crypto there.
Gerbz: It's pretty safe. I mean, those guys have been in the business of investment banking and doing this stuff for long before crypto existed. It's the banking business model, and it's been going on for a long time. Companies like BlockFi have raised major investment capital from the big time VCs that you hear about all over Silicon Valley. There's a lot of big names behind it, and none of them are going to allow BlockFi to fail in any glorious fashion.
Dan: Why can BlockFi give you 8%, but JP Morgan Chase is only going to give you a half of a percent?
Gerbz: JP is stingy. JPMorgan has been around for so long, that it's just like this, this giant overweight gorilla that kind of moves slow and still faxes stuff back and forth. So their margins suck. And quite frankly, people probably haven't demanded from them any more than just having an account where they can store their money. So they've found that their customers don't leave them if they don't pay them a high rate. So they just keep lowering it.
Dan: So, in essence, BlockFi is offering such great rates because they need to, in order to attract customers to deposit.
Gerbz: That's a big part of it. When we get into talking more of the DeFi model, you'll see there's a lot of incentives that are also worked into this system that enable some of these companies to pay higher yields than maybe even their earnings on the money that they're loaning to them. But the way I see it is - you remember PayPal back in the day used to have this thing like when they first started, it was like, send money to a new friend and they get $5 and you get $5. Like a referral programme. PayPal wasn't making any money at that time. They were giving away billions of dollars of venture capital money. And they built PayPal on the back of that model of incentivizing user growth and user expansion. And a lot of stuff happening in DeFi land is similar.
Dan: So DeFi Devin is, all of a sudden, CeFi Devin. He's moved his $20K of Bitcoins over to BlockFi. Now what are they actually doing with that holding? Can he still grab his Bitcoin whenever he wants? Or is it a time deposit, like with more traditional banks?
Gerbz: It's fairly liquid, I would say BlockFi is the least liquid of the CeFi. Nexo is this fully automated system where I've taken out loans and deposits in there, like from my phone in bed one night, and it's all pretty instant. And Nexo is really, really good like that. I got an email from BlockFi, though, a couple weeks ago that they were closed for the Fourth of July, and that deposits will come through on Monday. So they're kind of operating much more like a bank, which, quite frankly, is silly, as far as I'm concerned. They still are able to drum up enough demand for their product, though. But I've been going more and more DeFi as things like that have been kind of creeping into the system.
Dan: So right now, if you were to take $100,000 of bitcoins, dump it into a CeFi company, you can reliably make $5-8,000 worth a year of passive income or something like that.
Gerbz: Exactly that and it'll come in Bitcoin, likely likely, the asset you deposit in is the one that you'll receive the yield in. You are still exposed to the volatility of your asset, and if they're holding your Bitcoin and Bitcoin goes to the moon, you're still your Bitcoin and you can withdraw it, but you'll also be receiving the 8%. And I mean, what a lot of people in Bitcoin in particular would probably say is - you've got this thing that's up 250% this year, and you're gonna let someone else hold on to it for you for an extra 8%, weigh out the risk reward on that?
Dan: Can you break down what that risk might be?
Gerbz: The risk of using a custodian is that you are not holding your money.And the reason I would advise Devin to kind of keep with the CeFi versus going straight DeFi is that what he's comfortable with so far is he's bought on Coinbase. He's connected his bank account there, he's bought some Bitcoin there. Coinbase is holding his Bitcoins for him. If he's gonna allow another company to hold on to his Bitcoins. He might as well allow a company that's gonna pay him 8% to hold on to it. And this idea that, you know, Coinbase, or BlockFi, they could theoretically go insolvent. That's one of the risks, right? But more likely the case and the reason I even got into crypto in the first place, is that they could close down your account. And who knows why it could be, They might have mistaken you for someone else. They might not like the IP address you were using last time you logged in, who the hell knows what their reason will be? And quite frankly, they won't even tell you what the reason is. But you could wake up one day and all of your crypto, all your money is frozen or locked out. And that risk to me is not worth it.
Dan: I was locked out of a custodial account for months. So yeah, it's a real thing. So now let's just say we're on a bull run, we put our $100,000 and we made $8,000. In the last 12 months, we've been so excited. Now we want to go DeFi. What are the baby steps and some of the concepts we need to understand to move our our Bitcoins off of a centralised, a CeFi company and to just go full DeFi and get better returns,
Gerbz: Quite frankly, DeFi is not happening in Bitcoin land. In fact, Bitcoin is the slowest moving, least innovative thing happening in crypto today. There are some ways that you can invest your Bitcoin natively, which means, well, the opposite of natively is you can wrap your bitcoins in Ethereum, and something like WBTC. And now once your bitcoins are kind of rolling on Eth rails, you can then take advantage of all sorts of DeFi opportunities that are happening on Ethereum.
Dan: But can you describe what it means to ‘wrap’?
Gerbz: The idea of wrapping your coins is this idea that crypto monies are native to the blockchains that they're created in. So Bitcoins are native to the Bitcoin blockchain. But if you want to, there's different systems being developed, some of them centralised, some decentralised once again, where you can sort of deposit your Bitcoin with someone and they will issue you WBitcoins, or wrapped bitcoins in return. And they'll publicly be able to prove that, hey, the Bitcoins you deposited are sort of … they're not burned, but they're sitting in this account that's never going to move. And now you have these WBTC, that are sitting on Ethereum that you can use to invest in DeFi.
Dan: That sounds rather complicated, why not just sell your Bitcoins for Ethereum?
Gerbz: You could do that. But likely, the reason you do that is you want exposure to the upside of Bitcoin. You want to be invested in Bitcoin, you think Bitcoin is going to outperform Ethereum in the future, but you want to put your Bitcoins to work. So what do you do? One of your options is wrapping them and doing it that way.
Dan: When you say lack of innovation, one way to simplify that is like a lot of the DeFi action is just happening with Ethereum. Is that more or less correct?
Gerbz: That's right. A lot of it's happening with Ethereum. There's also a tonne of other chains that are kind of popping up, there's second layer chains to help scale Ethereum? . There's a lot of action happening there. Ethereum is based on this concept of smart contracts. And smart contracts are this idea that you can have little programmes running on the blockchain. And a programme can be written to do anything. So there's tonnes of experimentation happening within the Ethereum blockchain where Bitcoin doesn't have native smart contract capabilities. You can send it, you can receive it. But that's it. In Ethereum you can send Ethereum to an address, and then it can run a programme that does anything.
Dan: What's an example of a programme that's simple and used often nowadays?
Gerbz: There's none of them that are simple. Let's see. This idea of banks issuing money, I think, is a somewhat simple concept to understand for a smart contract. So, for example, if you wanted to borrow against your Ethereum, you could deposit it in something like MakerDAO, and they will issue you Dai, which is a stablecoin. Let's say you have $100,000 worth of Ethereum, they'll let you borrow up to $40,000 in stable coins against that Ethereum. So it's just like this simple smart contract that issues you Dai and holds on to your Ethereum for you. And, at any point, you can pay down your loan, and it'll give you your Ethereum back so it's just like this little locking mechanism that issues stable coins in return for your Ethereum as collateral..
Dan: Okay, I deposit my $100,000 of Ethereum, I get 40,000 Dai. What is a typical use case? Why am I even doing this transaction?
Gerbz: The simplest explanation is that you're levering up your investment abilities. You said earlier, ‘Why not sell your Bitcoin for Eth?’ Well, the same thing goes for - maybe you don't want to sell your Eth for some other opportunity that you have available to you. So instead of selling your Ethereum, you borrow against it. And, one thing that really resonated with me thinking about this was - you've heard in the traditional finance world about this 60/40 portfolio of stocks and bonds. And I'm always like, Who are these guys with 40% bonds? It's always these old guys that are talking about bonds, I've never been into bonds, or quite frankly, it doesn't doesn't interest me. But this idea that you can have a portion of your portfolio that generates income alongside a portion of your portfolio that's in this kind of volatile growth pattern. I think, together, it helps minimise the overall volatility of your portfolio. And I think DeFi and this ability to borrow against your assets or invest stablecoins into things, it’s sort of like the bond portion of your portfolio. So you can have income and volatility together.
Dan: So we're catching Devin here on his path down the DeFi rabbit hole. He wants those 20% returns, what are some of the next steps he's going to take?
Gerbz: The very first thing he's going to do is he's going to take custody of his … let's call it Ethereum now, let's say he swapped his Bitcoin for Ethereum, because he decided he wanted to go down DeFi right, or maybe a portion of his Bitcoin, which is probably more likely. He’ll take custody, which means he's going to take his Ethereum from Coinbase, or BlockFi and put it into a wallet where he holds the private keys. Very likely, it's a hardware wallet, something like a Ledger or a Trezor. And then he'll connect his Ledger to a wallet, something like MetaMask is the most popular kind of DeFi interface. MetaMask is this wallet that you can connect your hardware wallet to, so that you can now interact with all of the DeFi apps that exist out there.
Dan: What's the difference between a hardware wallet and something like MetaMask?
Gerbz: So when you first set up MetaMask, it's what's called a hot wallet, it'll have you write down your passphrase, or your seed phrase, which are these 12 or 24 words that protect that or create the private key that holds your crypto. But you know, that seed phrase was generated not only on an internet that's connected to the computer, but MetaMask is like a browser extension inside of a computer that's connected to the internet, it's just not a safe, secure environment for creating a password that's going to hold on to all your money. So what you want is a hardware wallet, which is a stick drive-like looking device that is not connected to the internet. And it generates the private key on this device. And it never lets go. It passes information back and forth between that device and your computer. But the private key itself never leaves that device making it much more secure than something like using MetaMask directly. The thing about MetaMask though, is it's a great interface. It's a great user experience. I mean, people would argue that but it's a better user experience than what the Ledger app offers directly. So a lot of people will have their hardware wallet, but then connect it to MetaMask and use MetaMask as their kind of gateway into DeFi.
Dan: So if you got $100,000 of Ethereum on a stick drive that's in your safe in your house, you pull it out, plug it in your computer, say you dump whatever the investable amount you want into MetaMask in order to deploy it into DeFi.
Gerbz: You actually don't dump it into MetaMask, you connect your hardware wallet to MetaMask and MetaMask will use your hardware wallet as the private key. So you don't actually have to transfer it, you can use it as the interface for your hardware wallet.
Dan: It's interesting, say you have $100,000 worth of Ethereum quote ‘on your hardware wallet’, you don't actually have that Ethereum on the hardware wallet, you simply have what?
Gerbz: You have a private key, you have a badass password, and your Ethereum exists on the Ledger on the Ethereum network. But your hardware wallet holds the password that allows you to point at that Ledger in the cloud and say, ‘Hey, this, this row on the Ledger that's mine, and I can prove it’.
Dan: Ideally, you don't want to outsource that to either custodians or to software like MetaMask, which has that capability.
Gerbz: Correct yet, ideally, it's on a well protected seed phrase that was generated in a hardware wallet, that you have good backups of that seed phrase written down, maybe in a couple of locations.
Dan: This is really scary stuff for people. And this might be the moment where the Devans of the world say, ‘Nah, not gonna go down that route’. Just talk to Devin at that moment. What's, what's your feelings? and thoughts about that?
Gerbz 30:37
Here's my pitch to Devin. Devin, you've worked hard for this money. Do you know JP Morgan, is he your buddy? Do you know though? Do you know him? You're gonna let him hold on to your money for you to invest your money, do whatever he wants with it without even asking for permission when he makes those changes? Or are you going to take your hard earned money into your own hands? And go invest in the things that JP Morgan is looking to invest in? And are you going to take control of that hard earned value you've created in the world? And that's the power of all of crypto.
Dan: So I've got $100,000 on a hardware wallet, I've got a passphrase that allows me to access the Ledger, that indicates to other users on the network that I indeed have $100,000 worth of value here. I've got my hot wallet open, I've chosen MetaMask. Now what? What am I going to do now to get that extra 10 percentage points on top of a CeFi company?
Gerbz: So one of the lowest risk things you could do is you can stake your Ethereum directly to help secure the network. Ethereum 2.0 is a phrase you've heard thrown around, it's this kind of evolution of Ethereum , where Ethereum is moving from proof of work to proof of stake. And this idea that instead of using like, you know, electricity to power the network, it's going to move more towards a staking system. So what does that mean? If you have 32 Ethereum, which I think your guy with $100,000 worth of Eth has over 32 Ethereum. So he could be a validator on the new Ethereum network. So he can stake 32 Eth. And by staking it, he can now be a validator, which means he can approve transactions and try to organise blocks and participate in the lottery that happens in crypto mining.
And if he doesn't follow the rules, his stake will get taken from him. That's the incentive and the consensus mechanism with Eth 2.0 is this idea of like, you're going to follow the rules, and everyone's going to watch to make sure you follow the rules. If you follow the rules, you can earn a fee, which is roughly around 6% right now. But if you break those rules, you're going to lose your stake. So this new system is very different from proof of work, but still enables the nodes on the Ethereum network to gain consensus. It sounds complicated, but you can even use middlemen for that. If you don't want to run your own node, you can just deposit your Eth with someone, they'll stake it in a validator for you, which makes it even more liquid. If it's earning 6%, they'll pay you like five and a half percent. And literally with just a couple clicks now, you're helping secure the Ethereum network and you're getting paid for it.
Dan: And so this is a contrast to Bitcoin, which relies on proof of work. I wonder if you could dig into that just a little bit more?
Gerbz: So Bitcoin’s proof of work mining system is based on electricity. And so every block, there's this lottery that runs, because someone has to be the one to kind of decide what that block is going to look like. And we don't want a centralised system where there's like one guy deciding what every block on the blockchain is. So there's this lottery that runs with all of these miners, and all of them are trying to guess this really complicated number. And if they guess it, they win the lottery, and they win some reward. And guessing that number costs a lot of money in electricity. And so if it didn't cost anything, people would just instantly create an infinite number of lottery tickets, and the system wouldn't work. But proof of work is this idea that if you guessed that number, it's proof that you put in the work to guess that number. It's proof that you made the investment in the electricity and the mining equipment and what it takes to participate in that lottery. So it's a similar but different mechanism to proof of stake.
Dan: If I wanted to follow some of your investments or styles of your investments, just to get my beak wet on this stuff, what are some things that you're putting your money after?
Gerbz: So I break down DeFi into there's four different categories of ways to generate interest. The first was staking directly to help secure the network. That's the one we just covered. The next big one is you can earn trading fees. So, in Ethereum, one of the biggest thing that's that's come over the last few years is these automated market makers or decentralised exchanges, rather, this idea that now a company like Coinbase isn't necessary anymore in the world of smart contracts and decentralised computing, we can have a Coinbase that's decentralised and runs in the cloud. You can earn fees by providing liquidity to that exchange. So the exchange, like Uniswap is the biggest and the most popular example, every trade that you do on Uniswap, between Eth or any other coin on Etherium Uniswap, charges a 0.3% fee.
And that fee goes to the people that provide liquidity. So this idea of providing liquidity, so if Devan's got some Eth. And maybe there's a way you can trade Eth for USDC, on Eniswap. So someone has to provide Ethereum and the USDC to the system in order for people to trade it, you can be one of the what's called being a liquidity provider to Uniswap. And if you are a liquidity provider to Uniswap, you can earn a portion of that 0.3% fee that Uniswap takes on every trade. So trading fees and becoming an LP, a liquidity provider to exchanges, that's the second way that you can generate yield.
The third is that you can loan out your crypto. And that's essentially what you're doing in CeFi when you give your Bitcoin to BlockFi, you're loaning it to them, and they're loaning it to someone else. And everyone's sharing the fees for loaning. But this also happens in DeFi, things like we mentioned, MakerDAO, but Compound is another popular, decentralised loaning system built on Ethereum. And Aave is another big one that you've seen thrown around. And it's just these borrowing and lending networks that are built on top of Ethereum.
And then the third is this idea of incentives. So a lot of the yield coming out of DeFi comes from these accent incentives. It's that Pay Pal example we were talking about earlier, where these DeFi projects have created and issued their own tokens. And to help juice the reward within those systems, they offer up some of their token as part of that, as well. So a good example of this is, we just talked about Compound, this borrowing and lending platform. So right now, if you want to provide liquid like USDC, to Compound, if you want to loan them money, they'll pay you 1.89% as the base rate, which is pretty low. But they'll also incentivize it with another one and a half percent in comp tokens. So overall, you can make like three and a half percent by depositing your money in something like Compound.And when you hear like, ‘Oh, someone's earning a 2,000% APY in this new DeFi thing’, that's because this new DeFi thing launched yesterday, first of all, so it's totally untested and will likely get hacked or fall apart in the next week. But if it survives, they're going to be issuing a lot of their own token to the early adopters of that platform, because they need to bring liquidity to their system so that people can start using it because day one there's just not enough money in the system for it to operate smoothly.
Dan: I think most of us, adjacent to the space, have heard some story of somebody making that 2000% APY by basically just being one of the first and early projects, essentially. It sort of sounds like this is a part time job at the current moment.
Gerbz: Oh yeah. I never understood what it meant to be like a professional investor. And I've sort of sort of made that transition now. Quite frankly, it's a lot of fun. So that's why I spend a lot of time doing it. But you could do this more than full time. In fact, you could hire massive teams to be doing this and you still wouldn't have enough people.
Dan: So just to warp in here to give a small financial health warning that what we're discussing are just thoughts and ideas and definitely not advice. We highly suggest you find your own rabbit hole and do your own research. Just for one example, MakerDao, which we are mentioning drew some significant criticism last year over governance issues. We'll post a link to an article about some of that in the show notes today.
Gerbz: Part of my portfolio now, like 30% of my portfolio is in stable coins. And I'm using stable coins specifically, because I like this idea of a portion of my portfolio that's not volatile, that's just generating yield, 70% of my portfolio is volatile and like I wake up every day looking at what it's worth. And the other part of it the other 30% of stable coins, it only goes up. And I use that to generate income to live on now. Once your portfolio grows to enough size - here's a simple example is like if you had a million dollars, you could borrow $400k against that million dollars, you could borrow in stable coins, so say, a million dollars with a Bitcoin, you can borrow $400k worth of stable coins, stick it in something relatively safe, that's generating 10%. And that's $40k a year of spending money, its income, you can spend it. And so this concept of having this portion that you can use for income can scale in all sorts of different ways.
So one of the projects that I like most is I'm really bullish on stablecoins. And this idea that, you know, but you can't just buy stable coins and hope to get rich, that's kind of the whole point of it. So how can you capitalise on the growth and opportunity in stablecoins. So one of them is like MakerDAO is one of the early stablecoins, they issue this coin called Dai. But there's these new algorithmic stablecoins. And one of my favourites is this project called Luna. And Luna is sort of Luna is this idea where it's actually called Terra and Luna is the asset. And so there's these two assets. One of them is a stable coin, and then one of them is this volatile asset. And whenever there's more demand for the stable coin, they burn some of the assets. And whenever demand for the stable coin, they reverse it. So these two assets kind of keep each other in sync algorithmically. And within the Terra eco system there's all sorts of really cool stuff happening based around stablecoins. So my favourite project in the Terra ecosystem is called Anchor. And it's this fixed savings rate account that pays 20% somewhat fixed, it's been slightly volatile as low as 16%. But it pays 19 to 20% today, on the stable coins that you keep in there. If I wanted to get someone into DeFi today, it's a good stepping stone, it's like, all you need to do is get this USD stablecoin, put it in anchor, and it's it's generating yield, it's completely liquid, you can pull it out at any time swap it for other stablecoins, but it's like a it's a good like savings account for your stablecoins.
One of my other favourite projects is, it's again related to stable coins, because that's just something I've been bullish on this year. So Curve is this decentralised exchange, It focuses on stable coins, it actually focuses on assets that have the same value. So if you want to swap a Tether for a USDC, you would use Curve for that, because it's kind of optimised for swapping these assets that are the same. And it has a much lower fee because of that as well. So you can provide liquidity to Curve’s ecosystem. And you can generate fees on that. But the way that Curve’s sort of incentive mechanism works is that you buy this Curve token, and you lock it up in Curve.
And so if you want to earn the maximum yield on your stable coins, you want to lock your curve tokens up for four years. So that's a long time. There’s hardly anyone thinking that long term in crypto. But what this incentive system they designed, it's inspired some things to be built on top of it. So now you can there's this project, for example, called Convex, they say, ‘Hey, most of you don't want to lock your Curve up for four years. So why don't we just pool together our curve, and we can get the highest rate collectively, but you don't have to lock up as much’. So long story short, you can deposit your stable coins into Curve to get their Curve LP token, take that LPs token, stick it in Convex, where you can get the maximum rate on your stablecoins, that would be kind of more on the extreme end of taking all of these extra steps to get there. But once you've gone down the rabbit hole, and you're comfortable moving these tokens around and putting them to work, it's not that hard. And that can generate upwards of 20- 30%.
Dan: What's your final pitch for the rabbit hole? I think that metaphor makes sense, there's people who've gone down and people who haven't, essentially, and what's the pitch from having gone down it for those who are considering doing so themselves?
Gerbz: No one cracked a book one weekend and learned about how to use the internet, and if anyone tried to do that with the internet, they really quickly realise they're going to be doing this for the rest of their life. They're not going to be doing it on weekends. And I think crypto is that, crypto is the Internet of money. And you're going to be using it for the rest of your life. So don't think you can just kind of set a little time aside. It's a rabbit hole just like learning how to build an online business or do online internet marketing, or anything that's happening on the internet, you're going to be going down the internet rabbit hole for the rest of your life too.
Dan: I got five hot tech questions to ask you, they might be difficult to answer. But nonetheless, I will challenge you,
Gerbz: I’m afraid.
Dan: Number one. For years now we've been using this metaphor that, ‘This is the next internet. This is the Internet of money’. Like you just said, How does this metaphor hold up in 2021? And if so, what year are we in?
Gerbz: It's an optimum analogy. It really is the same concept. The question of, ‘Where are we?’ in the cycle is the most interesting. We all saw, obviously the dot com boom, we don't even call it like the tech boom, it was the dot com boom. And a lot of the companies that turned out to literally be the companies that rule the world today. They were inspired during these times. In fact, they were inspired during the depths of despair after that boom in some cases, but Amazon, it dropped 95% during the dot com boom and now today, it's the biggest company on Earth, I think. So, I think what's going to happen in crypto is we're gonna have a lot of these dot coms. And right now I think maybe we're going through like a DeFi dot com bubble. Last cycle was maybe like the Bitcoin or an Ethereum dot com bubble. I have no idea what the next one is going to be. We've heard about … NF T's are another cool thing we haven't even talked about that are just like this fun new entrant. So I think the analogy is good. And that the difference is we're gonna have a lot of dot coms in crypto.
Dan: I sort of feel like Coinbase, if we're going to follow the metaphor, Coinbase and some CeFi projects and similar kind of on ramp into holding crypto. They're kind of like Netscape a little bit. And Netscape was 1994-95/96 maybe? If that's true, then we haven't even hit the dot com bust yet.
Gerbz: I like it. I honestly think Coinbase IPO-ed because they see themselves being irrelevant a decade from now. The investors needed to get their money, they wanted to do it during a boom. So if they didn't do it this one, then they were waiting another four years. And who knows what could happen in four years. And yeah, Netscape hardly doesn't exist today. Maybe Coinbase won't either.
Dan: Question number two, if the DeFi revolution depends largely on Ethereum isn't that bad for Bitcoin?
Gerbz: So DeFi, the way I think about DeFi is - it's like the low hanging fruit of the industry that crypto can displace. So there are lots of other industries that I think crypto will go after just like the internet started with some things, but then it took, you know, decades for e-commerce to actually be real. I think DeFi is just the easiest, because it's the financial industry, which is a totally antiquated industry. And it's also the industry of money and crypto is the new money.
Dan: It’s almost like the internet displacing classifieds or something, that was the first thing but shoe shopping is going to take some time.
Gerbz: It's exactly that.
Dan: Number three, what has been the impact of Nassim Taleb’s Bitcoin black paper?
Gerbz: Man you know, crypto drums up a lot of emotional responses. And for whatever reason, he sort of had this visceral emotional response to Bitcoin and quite frankly not the Bitcoin itself but like to the evangelists of Bitcoin. One thing I like to think about is how Bitcoin has no CEO, it has no marketing department or PR firm. The users of Bitcoin, they take on their own roles and responsibilities, and they represent Bitcoin. And in this totally decentralised fashion, quite frankly, it's just yelling at each other on Twitter is what it ends up looking like. So I don't think he likes that. I don't think he likes being bombarded by 1000s of people on the internet telling them that he's wrong, especially that. And I think that's why he had this kind of response.
Dan: He had one argument that did that was unique and interesting, which is the idea of the mining itself providing sort of the intrinsic value to the network, and that once that sort of exhausted, and there's no mining activities happening, often Bitcoin evangelists have talked about the price kind of comes to the energy costs, like mine, a new note or whatever. He kind of points to this future in which like, none of that activity is happening anymore. And that would have a dramatic impact on the price of Bitcoin.
Gerbz: This is something that's been talked about since the first day of Bitcoin - Bitcoin is designed to have this issue schedule that will exhaust issuance when it reaches 21 million, and there will never be any more. And there is data that shows that the production cost of Bitcoin is the floor price of Bitcoin, meaning how much it costs in electricity and, and electronics and time to mine Bitcoin is how much a Bitcoin is fundamentally worth.
Dan: Which makes sense, because that's like the ROI math that the miners are doing.
Gerbz: Exactly.
Dan: Which actually lends a little bit of credence to his argument, makes it a little interesting, right?
Gerbz: Sure. But the issuance is only part of how much money the miners earn. So transaction fees are a big part of every, every block. And I mean, when I say a big part, Bitcoin is still in its earlier days, as far as global, ‘every person on earth’ adoption, so to speak. If and when that occurs, transaction fees could be worth a lot more than the incentive that Bitcoin offers as the block reward. So Bitcoiners will point to - that's literally how it's designed on purpose. If you don't see the future of Bitcoin being this global dominant currency, then maybe that's true, but Bitcoiners Definitely see that as the future. That's why we're all investing in it.
Dan: Number four, what are the biggest existential threats to Bitcoin right now?
Gerbz: One of my one of the funniest takes, and quite frankly, the realest is that like, what if government just like get their shit together, and stop printing so much money and go back on a gold backed currency or something like that, where it's publicly auditable, and trusted and secure in a way that like, it was designed to be in the first place? If that happens, we don't need Bitcoin? So that would suck.
Dan: Number five. What does it mean that China banned Bitcoin?
Gerbz: It's hard for me as an American without a lot of insight into China to answer that. But my understanding is, they're taking a hard stance on global warming. They know they've done a lot of wrong in the past on that front, and they want to set it right. And they don't want, you know, their hydroelectric dams, for example, being used for people in the country to make money. But the take that I like most is that China didn't ban Bitcoin from China, China banned China from Bitcoin. They're going to be out on this island as one of the only countries that has that where it's illegal to mine Bitcoin. And it's hard to say what kind of impact that will have on them in the future.
Dan: Any parting shots for us Gerbz?
Gerbz: This is now my third sort of bull cycle that I've been through. And whether or not we're in a bear market cycle now or in crypto winter now is still kind of up for debate. Maybe to the end of the year, if we continue this kind of downslide I would definitely consider it being over but I'm not sure that's happened yet. And, you know, something I see every cycle is, you know, my phone blows up when the price starts going up. And like our Discord group at Bitlift, it blows up with so much chatter and all this action, and everyone's really excited. And the second they start losing,
Dan: Who's buying now?
Gerbz: Yeah. This is when you make the money, you make money when it's down, when everyone's scared. People, they're afraid to even look at their portfolio. There's a couple months where they're just refreshing like crazy. And then they have a few down days and they don't even look at it anymore. That's when you realise that's what separates the people who succeed in crypto versus the ones that don't. The people that stick it out have this kind of longer time horizon. And, when they see the price going down, they're more excited than when it's going up because now they can buy more of it. And that's the true flipping, so to speak of this mindset of like kind of how to be in crypto.
Dan: Gerbz Thanks for joining us on the pod.
Gerbz: Always fun.
Dan: Big shout out to Gerbz for dropping by the show today. It's cool just to hear people's views. Sometimes with crypto, it has a tendency to stoke up very personal and vitriolic attacks, which is a shame because it's so interesting. But maybe that's just the reality with these disruptive moments. And when everybody can have an opinion about everything sometimes it's tough to stay productive. But that's definitely what we're striving for here on the pod. And you know what? That's part of the appeal too. It's interesting, really thought provoking stuff. Go ahead, drop us a comment. Let us know your views. Email us directly if you got something that you'd like us to cover. Our producer's email is Jane at tropical mba dot com and mine is Dan at tropical mba dot com. One final reminder here Gerbz has a new podcast Bitlift starting this week. Check that out at www dot Bitlift dot com and he'll also be hosting a crypto meetup at our very own DC Mexico City event in October. That's for qualified location independent business owners. If you're interested in attending, you can always email me. I can send you over to someone who can share with you the details and as Gerbz is a regular valued contributor at DC events and our DC forum. I thought to play us out I just asked him why. And that's it for this week. We'll see you next Thursday morning. 8am New York City time.
Gerbz: I like having a good excuse for an adventure every year. And I think the DC events are that for me, usually Bangkok this time of year. But I use that as a launch off point for something else also. The last Bangkok event, we went to Australia for a couple of weeks beforehand, and then hopped over to Bangkok. And then home. This year, we're gonna go down to Mexico City. And then we're looking at some beach towns, maybe hanging at the beach after. I like to travel. And I like adventure, but also like seeing a lot of people and travelling with people and connecting with people in different parts of the world. So I enjoy having these two parts to my trip. The first part is kind of business and reconnecting and connecting with people. And then the second half is a little bit more fun and adventure.
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