Everything You Need to Know About DeFi, DAOs, and Investing in On-Chain Crypto Indexes

In this video Mike Taormina, our Co-Head of Institutional Business at Index Coop, goes on the Animal Spirits podcast to explains everything you need to know about DeFi, DAOs, and investing in on-chain crypto indices.

We are joined today by Mike Taormina. I'm not sure what Mike's title is.

We'll get into that in a moment.

Today, we are going to be discussing DeFi, the metaverse, crypto, Web 3, Web 4.

We're talking about Index Coop and other things that we're going to get into, but I think a good place to start this conversation, Mike, is who are you? What is your background and how did you fall down the rabbit hole?

Amen. Michael and Ben, first, thanks so much for having me.

This is awesome. I'm pumped to be here. So a little bit on me. I've always worked in finance, but many very different places in the finance highway, many different stops.

I worked initially in asset management at JP Morgan, so traditional finance. And then spent the next 10 years of my career in FinTech, most notably as co-founder and CFO of CommonBond.

That's a student lending refinancing platform, but have been in FinTech, like I said, for about a decade, in SureTech advising companies, but got into DeFi only last December.

I saw a presentation by VC based here in New York and they spoke of NFTs and DeFi and it was, I had loosely heard of what DeFi was, but just kept saying to myself, I need to sit down and really spend some time looking into this.

Well, this was my first foray. And from that point, I never dove into something with more passion in my entire life.

So there's a leaderboard for DeFi or decentralized finance, all of the biggest projects in the space.

And I went to that leaderboard and I just went, okay, what is Uniswap? What is SushiSwap? And went down the list of all of these projects just to learn.

And then what I was doing on the side... Is that the Llama place? Is that like the Llama site? How did you find those projects? If you put DeFi in, it's actually the first thing that's going to pop up is DeFi Pulse.

They're one of our partners. They're one of the founding members... You just sent Michael down a rabbit hole for like four weeks, I hope you know.

I know. I know. I know. Everyone get [crosstalk 00:02:00], eventually. Wait, but before you get in the rest of your story.

This is something we've found from some of the podcast and stuff we listen to, do you think there's more traditional finance people in the DeFi space than the other initial crypto project? Does that make sense to you?

Yes. Yes. I think that... It seems like there's more traditional credit based people that have a more of a traditional finance background that say, I can apply that to this new stuff. Is that right? I think that's fair.

Okay. I think that what we see is that folks they'll hear about Bitcoin first. That'll get them interested in crypto, blockchain in general, where they next would go to is a smart contract based blockchain like Ethereum.

What I think we're seeing is people are jumping straight to that third stop, which is DeFi, particularly if they have that traditional finance background, because it's things that they know.

It just based off of a blockchain, right? So it's market making, it's insurance, it's lending and borrowing, and it's asset management. Trading. Trading.

So, that thing Defi Llama is the scoreboard that I was talking about so you could see all of the different protocols and variations that we're going to talk about today.

Yeah, it's good enough. All right. So Mike, so now you found, who did you find? Did you find Index Coop or Co-op, whatever we're calling it, and let us know what it is.

Did you find Defi Pulse? Did you find Set Labs? How did you find what you found and what is your role in the community today?

Sure. There's so many names and so much jargon. It's a lot to keep track of but the first spot that I went to was DeFi Pulse. That's where I started doing research.

What I found is there was an index listed on their website, the DeFi Pulse Index. And so I looked into that and effectively, it's like an ETF, but instead of stocks, ETFs, we have governance tokens, DeFi governance tokens that you're able to basically purchase on-chain in one token.

So I was getting exposure to many tokens by just buying one. I said, that is... I know that from traditional finance, that sounds great to me because all of this research is onerous.

How do I keep track trying to pick winners and losers? I can just buy something simple and get exposure to this space that I'm really interested in.

So that was kind of step two, right? Found Defi Pulse, then I found the DeFi Pulse Index, then I found the community that was behind this product and others and that's the Index Cooperative.

So this is a decentralized community that is powering crypto index funds that can be bought effectively on the blockchain. How long has it been around for?

I'm curious, because you go to the website and says there's almost $500 million in assets on it. This is something that seemingly came out of nowhere.

I mean, I'm sure at some of the crypto websites, there's some advertising, people talking about it, maybe on the back channels, but essentially this is an asset management firm that was created out of thin air, out of the traditional confines of BlackRock or JP Morgan or one of these type of places that creates their own funds.

When did this happen? October 6th, 2020 to be exact. And it was born out of Set Labs. So Set Labs is a venture back firm.

They are the technology that we used to create our index products. And so September 2020, DeFi Pulse and Set, launched the DeFi Pulse Index. And it doesn't have a ton of traction in its first six weeks.

And I think seeing this, Felix Fang, the CEO of Set, said to himself, well, a community actually rallying behind some of these products to help them become industry leading is what's needed.

So he launches the DAO, the Index Cooperative in October of 2020. We've gone from basically zero in AUM to half a billion roughly a year later. All right. So let's put a pin in the DAO for a sec, because I want to get into that and talk all about it.

Let's start with DeFi. Yeah. What the hell is DeFi? And I read a really good primer last week from Bitwise and we will, of course, link this to the show notes.

But in that article, they described that somebody named Brian Brooks and Brian was the former head of the office of the Comptroller of the Currency.

And he was a Chief Legal Officer at Coinbase. He defined DeFi applications as self driving banks, which I thought was perfect. So talk about what a self-driving bank does, what's wrong with how JP Morgan and Bank of America do it? Why do we need self-driving banks?

Sure. Okay. So Bank of America, Goldman Sachs, right? JP Morgan, these are intermediary institutions, financial institutions between borrowers and lenders, for example.

And what DeFi is doing is challenging that model by inserting code instead of an actual institution between those two sides of the market. So we can rely 100% on code.

And as a result, you've basically taken the middlemen completely out of the equation. This was in some ways the promise of FinTech was to make finance much better.

But I think DeFi is actually doing that by removing middlemen and that therefore giving value back to both sides of the market, right? And so DeFi encompasses all sorts of financial activities.

Again, borrowing and lending, trading, market making, asset management, insurance, but you don't have these large behemoths involved. And as a result, you can look to the code, it's 100% open sourced.

It's permission less, which means that anyone who has an Ethereum wallet can participate in this economy. And that opens the doors access-wise to billions of people that are not part of the traditional financial system today.

My theory is just that all the people in DeFi have really figured out that incentives drive behavior, right?

I mean, is it as simple as that they've figured out, we need to have incentives to make people want to do stuff and participate, and that's what's driven the growth here?

That's right. There's a heavy dose of game theory and incentivization at every turn, right? So when a new product is launched or when a new pro...

Yeah, when a new project is launched in general, there tend to be incentives to accumulate assets or to bring liquidity to that project, right?

Which is effectively like marketing dollars. And what happens as a result is you get a critical mass of users that power whatever that project is, right?

And this started in spring 2020 with Compound Finance, they're a borrowing and lending protocol. And with their comp token were able to incentivize users to come over to the comp project, right? To actually use it.

They were rewarded just for using the project. And that kicked off what's known as DeFi Summer, just can bring explosion of different projects that came online and use those incentives to drive the growth of the network.

So, that was DeFi Summer 2020. And I think the challenge with a lot of these products is that they were built in my estimation by people like yourself with traditional finance backgrounds.

I'm listening to the guy Zeus from Olympus DAO on the Bankless Podcast. And it's clear to me that, that person was some sort of fixed income derivatives trader at a big bank, just by the way that he speaks.

This is not a tech person. It's a financial engineering person. And if you log onto Uni, or Aave or Sushi, or any of these places, it is so overwhelming.

Like, wait, what did I just dive into? Because the functions that it's replacing are really investment banking functions like lending and staking and trading and tokens and all of this sort of stuff that there is very little real world application today.

I'm not saying it's not going to change the stuff, it will. There's very little real world application to the average person who just logs onto their Wells Fargo account.

That's right. Yeah. If you look at, so there's two main types of projects and there's all these variations on it, but it really comes down to, there's borrowing and lending and then there's trading, market making, right?

So that decentralized exchanges and decentralized borrowing and lending. And so you can take your... You have Ethereum sitting in your wallet, you can go to one of these protocols, stake your Ethereum, which is basically like, just parking it there.

You can then borrow a stable coin and use that to make another purchase and you kind of take a step back and going, okay, I'm staking my tokens to borrow tokens, to buy tokens, to lever tokens, right?

What's the point, right? Right. Yeah. And if you look at the decentralized exchange, the analogy there is you're basically swapping tokens or providing liquidity so others can do so. So does this make any sense?

And it does if you make one little tweak to it and realize that we're moving towards a future where pretty much everything is probably going to be tokenized, and these are the rails that are going to allow for that commerce.

And when you make that one little tweak, everything then makes sense. So let's talk about this as a real world application. A couple of weeks ago, I got tokens, which you could think of as equity and a new project.

I got tokens from the Ethereum Name Service, ENS, and it was new to me. My friend, Justin Paterno told me six months ago buy Michaelbatnick.e. This will be your domain.

This will be where you send people to when you're exchanging money and whatever, so fine, I did it. And I didn't think anything of it. And there was an airdrop where ENS, I believe did, was it $2 billion worth of tokens?

It was a lot of money. They did 25% of their project went to folks who had used the protocol, right? They looked to how long you had used it, and how long they've been to the future, you've registered your names and that dictated how many tokens a given wallet received.

So that was a light bulb moment for me, where I was like, holy shit, now I get it, now I understand what these DAOs are, because what if, and the example I keep using, what if Twitter did this, where there was Twitter tokens?

And instead of this fakakta idea that the power users would pay Twitter, what if Twitter pays their power users via tokens? What if, to Ben's point, if you make a really bad dad joke, you get docked.

So like all of these ways of incentivizing your users with tokens, I feel like that's not going to happen necessarily to tomorrow with every company.

And not every company's going to be a DAO, but this is definitely where things are headed. I agree with you. And what is the best form of marketing at the end of the day, right?

It's... Power users, word of mouth. It's word of mouth, right? But it's so hard to actually get word of mouth. This actually enables word of mouth marketing, financing that channel in a way that we've never seen before.

So [inaudible 00:13:09] acquisition costs, which is like the biggest missing piece, this like flips it on its head? Totally. Totally. My entrance into the DeFi world was, okay, I'm starting to understand that this could be huge.

And people are saying, well, this is going to replace the finance system or whatever. I tend to think it's going to go hand in hand, but whatever, I said, okay, so how do I get into front of this? How do I invest in this?

So I asked a few people, and I think it was Leigh Drogen who said to me, if you don't want of get into figuring out, and I'm total new boy in this market.

Like, I can't get into these different protocols and pick which one's going to win. And the one that's going to win might haven't been invented yet. So I said, I just want to invest in a bunch of them.

I don't want to do it myself. And he said, oh, you can invest in an index and he pointed me to Index Coop and said, go there's this DeFi Pulse Index, go buy the index, he said.

And to me, a person who is this diversified finance brain, I said, okay, this makes a ton of sense to me. And it almost seems like this thing happened way before it should, because DeFi is still so young.

So who came up with this index and who is investing in it right now? Sure. So with any of our products, there's a methodologist who comes with the rules for the index.

So in this case, the Defi Pulse Index methodologist is Defi Pulse itself, which is a leading analytics firm in the DeFi space. Like I said, if you put DeFi in for a Google search, they're the top result that's going to come up.

And so this again, September of 2020 is when this came up and there are a series of rules that this goes through. And so once a month, they will run their entire universe of DeFi protocols through those rules and see how many projects pass.

And that will dictate the asset allocation or portfolio for the next month. And they pass those instructions over to our technology partner, Set, and then Set will actually execute those instructions to send, if you are a buyer, you don't have to worry about any of this.

This rebalancing is happening behind the scenes and gas costs are being socialized away. So if you purchase DPI, once you kind of just set it and forget it, which is exactly my mentality for this.

So, if there are new protocols that come on board, you only have to wait a month until they could be on it potentially if they scream to the moon and go crazy.

Like one rule is that it needs to have been out in the market for at least 180 days. One of the reasons, one of the main reasons that we do that is because we want to see that the project, the token, et cetera, are all working as hoped and that there aren't exploits or hacks or anything like that.

So there's a waiting period to get into the index even if your protocol has been around for a while, like dY/dX, it's going to take at least six months for them to be eligible to be in the index.

Is this index market cap weighted? Yes. All right. So I see the biggest holding is Uniswap then Aave, what's LRC? I don't recognize that one.

That's Loopring. Okay. That's a layer two. That's new to me. Maker, Compound, Sushi, so you have all of this. Like you said, it's like an ETF, but I can't buy this at TD Ameritrade, where do I buy this? How do I buy this?

Well, you can buy it on-chain, meaning you need to have an Ethereum wallet. How does that happen? And it's funny because I actually walked Leigh Drogen exactly through all of this stuff.

I red pills him on this space. And Leigh's the one that I think told Ben who told me about this. That's great. Yeah. And that round around we go, all right. So basically people will set up a Coinbase account, generally.

I think that's the most common use case, right? So they have a regular Coinbase account and they can move those funds to a non-custodial Ethereum wallet.

So this is like MetaMask, probably the most popular, 21 million MetaMask wallet I just saw is the latest on that. And so you move funds on-chain and you engage with it using your MetaMask, you go to a decentralized exchange like Uniswap, like SushiSwap.

And that's where you can purchase one of these products, right? Let me tell you... And it can be done anywhere in the world. ... that's not how I did it. Here's how I did it.

So it sounds all of these are probably new terms to a lot of listeners. It's complicated but it's not that complicated. So you sign up for a MetaMask wallet, you get a secret recovery phrase and you hold onto that with a death like grip.

You never let that go. You never enter it into any sort of place unless you get hacked like I did, but you get a secret recovery phrase. You create a MetaMask wallet and you plug that in, at least I do, I plug it into my Google Chrome.

Then there is a 27 digit, whatever, I guess that's like a wallet address where you could simply copy and paste that into your Coinbase. You buy Ethereum at Coinbase or BlockFi or Gemini or wherever you buy it.

You buy the Ethereum, you hit transfer, you get a destination, you copy and paste your code. And then 30 seconds later, you've got Ethereum on your MetaMask wallet.

And then from there, what I did was I went to Indexcoop.com. I looked at the different products. So you've got DeFi Pulse Index. You've got a metaverse index.

You've got a two time ETH index, which if you're looking to buy, get leveraged on ETH after a crash, or even on the way up. So you go there and then you could connect your wallet and simply at Index Coop, buy some tokens.

That's right. And really what we are doing there is leveraging Uniswap to do it, but it's abstracted away. The end user, they go to our site, they can easily buy any of our products.

So where is this? Where are these tokens being held? In finance speak, who's the custodian here? In the metaverse, moron. You were the custodian.

Okay. Its self-custodian. So everyone is holding this on their own wallet, technically? That's right. Okay. So there is no custodian here? That's right.

There's a smart contract that is holding all the underlying tokens and then the tokens that you own are not held at a Coinbase or a traditional custodian.

They're held in your wallet, right? Do you see this ever coming to like a Coinbase or a BlockFi? Or would you prefer to always have it like that on the wallet? So I'm co-head of institutional business working group for the cooperative.

And our main job is to engage with the mainstream and try to make it more accessible for folks that are not going to do what Michael just laid out, right?

Michael's 14 step process. I mean, it's onerous, it's one of the things but... Yeah, it is. ... it's difficult, right? So we have custody. We have custody at BitGo and at Coinbase, Coinbase custody, not the exchange, but Coinbase has a custody business.

And so institutional investors, high-net-worth investors, who prefer to have an extra layer of security, can hold tokens there.

But you can't buy it at Coinbase the custodian? You can't buy it at Coinbase the exchange. Yeah. But you can buy it at the custodian? We're working at.

You can hold it at the custodian. So there's exchanges where you can actually trade. And then a custodian allows you to hold tokens with an extra layer of security.

So this whole thing... If one of our listeners wants to buy it and they don't want to do the MetaMask part. Is the MetaMask process the easiest way to do it?

Well, I know you have a how to buy on here, right? Yeah. I do see there's a step by step process. We can send to there. But I guess the crazy thing to me is that it isn't like download Robinhood, push a button to buy or sell. It's not that easy, still kind of hard.

So the fact that there are half a billion dollars in assets on here makes me think like, if we can turn it into one button, there's going to be way more money going in here, eventually, potentially, right? 100%, 100%.

Because the people who are there now are probably the huge crypto heads who have been in this stuff for a while and know what they're doing.

That's right. Mike, can we talk about the different like tokens or protocols or whatever we're calling them? So SushiSwap, is that an automated market maker?

That's a decentralized exchange or automated market maker. That's right.

Okay. So what happens is instead of having a broker that brings together two sides of a transaction, like somebody at Morgan Stanley, for example, these codes, these smart contracts replace all of that.

Why don't we just start? Let me think. Let's do this. How do these things have value? So much like these banks make money, these things make a shitload of money. So does the money that these places make drive the value of the token?

Like I'm trying to figure out what moves the price of Uniswap versus Aave, for example, is it all just speculation, supply and demand, or is there underlying cash flows that influence the direction of these tokens?

Yeah. They're real business models. This is what's so exciting I think for folks from traditional finance looking at this, this is not just purely number go up and number also go down, right?

With the token prices, but also a real business model. So in the case of SushiSwap, when someone comes to SushiSwap and engages with the site, what are they typically doing?

They're trading, right? So this is where you would go to take a token you have and swap it for another token.

Maybe you have Ethereum and you want to swap it for something like USDC, USD Coin, right? When you make that trade, you are charged by SushiSwap 30 basis points.

So on the size of the whole trade, right, 30 basis points fee, five of those 30 basis points goes to the project. And so as SushiSwap continues to grow and the volumes continue to increase, that's more and more cash flows that are going to the project.

Uniswap also has a similar business model. They charge 30 basis points. Today, they aren't taking in any of the fees. And I think they're doing this purposefully because all the fees instead go to the folks who are providing liquidity to the system.

That's the second big user in an automated market maker, right? There's the folks who want to swap and then there are folks who have idle tokens and are providing them as liquidity, so people can engage.

Well, those liquidity providers are earning all of the fees when it comes to Uniswap. But one day, Uniswap can turn the switch on and start collecting.

And if it's gotten to a scale where it's... I mean, right now, it's starting to get to a point where it's on Coinbase's radar, right? Like they're doing billions of dollars today.

We could pull up what the volume is over the last seven days at Uniswap. It's incredible when you think that there's just a couple dozen people who are working, have built this thing and are working at Uniswap versus a Coinbase, which has over 3,000 employees.

Is Uniswap a DAO, too? Uniswap does have a... Actually, I'm not sure if it's formally a DAO. It has a governance token, it has a community that votes on various proposals that come up.

So, I'm going to say yes. I feel like the names are also keeping people scratching their heads, like what the hell is SushiSwap and PancakeSwap?

It sounds like a joke. Right. Yeah. So, the governance token, this is interesting from the Index Cooperative aspect as well. So there actually is an index token here, right?

Yes. For the actual platform. What is that? What's the difference between the token index and then like buying shares in BlackRock on the open market?

What's the difference there between the stock in a public company and then an index, a governance token at a place like this? Right.

So our governance token index allows any community members to vote on various proposals that come up such as a new product that might come down the pipeline, right?

So we're going to have a DeFi 2.0 product, which is effectively smaller cap projects that haven't taken off as much as the ones that are in DPI, really excited about that product by the way, but... By the way, sorry to cut you off.

Is this how you got involved as well that you owned some of the governance tokens, and you said, I want to get more involved in here?

Yes. Yes. When I saw, like I was walking through earlier the step by step process, found out, found DeFi Pulse, found DPI itself, found that the Index Cooperative was behind it, learned that they had a governance token, bought some and someone from the community reached out and said, "Hey, let's get you involved."

It happens very organic like that. And so the governance token allows you to vote on things like, hey, do we like this product? Right? It's 60% of the folks that vote, vote in favor of a new product.

That's how it gets passed. So these products, like who writes these proposals? Are there lawyers that work for the... Do you outsource some of these contracts? Are they contracts or is it literally like a 10 year old could read it and understand what goes on?

Well, from a methodologist standpoint, anyone, if you guys wanted to launch a product with Index Cooperative, you would ideally speak to the product team first to learn a little bit more about what would make something successful, but if you come to our governance forum and you say, okay, here is the idea for a new product, here are the rules that's going to decide what will be included in that token.

Here are some considerations on the market size and on liquidity, et cetera, et cetera, basically you're pitching a new product. Ben will pitch a target date crypto fund.

Ben's a big target date fund guy. Very interesting. That is something that came up recently in our governance forum. And so then people will... That sounds great, Michael… people will thrash it out, right?

Some people will love it. Some people will hate it. And in doing so, the product methodologist will get feedback. Then they'll come back with a form of a proposal and that'll go up for a vote.

And the first vote, pretty much everything gets through the first vote. Because we're pretty passionate about these ideas, we want to dig in more. It's from the first vote to the second vote that things get, I'd say even more contentious.

We really dig into from an engineering standpoint, can we do this? From a liquidity standpoint, is there enough to make this a successful product?

And... Are there any... Yeah. Are there any fees paid on these indexes? Yes. Like does the cooperative generating fee at revenue somehow? Yeah. The cooperative does earn fee revenue in its treasury.

So all of the products have what are called streaming fees. You could think of them like expense ratios.

So DPI has a streaming fee of 95 basis points and that's split 70/30 Index Cooperative to the product methodologist, so DeFi Pulse. That fee is literally streamed every block into the Index Cooperative treasury.

So talk to us about this DAO. So Index Coop is a DAO, you all meet up in the metaverse, where do you guys meet Discord, Telegram, Slack?

Well, it's a combination of Discord, Google Meets and Discourse, which is our governance forum. That's where all these posts and proposals take place. So is it like a yes, no poll?

I'm just curious to who actually writes these proposals. Yeah. Most of them are I'm in favor or I'm against. I think we're moving to a place where there's going to be more than those two options, but we try to keep it pretty simple.

So it'll go through a couple rounds, right? So someone will post an idea first. It's not going to be voted on immediately, but rather, you'll get feedback.

You'll iterate, you'll make it better. And then it'll go up for vote after there's another proposal. How many people are we talking? How many people are involved in this?

There are about 30 folks who are gold level and that's basically full-time what they do. I'm in that group. Then there's about another 30 that are halftime on it.

And then there's some folks who it's very part-time, they come in, maybe they work on a project. Maybe they translate one of our articles into another language, stuff like that.

And what's the incentive there? Do they get paid in governance tokens? Based on the value of the contributions that you make, you then earn index tokens.

And who decides what the value of the contribution is? So if you come to say, you're coming to the institutional business working group, right? You would do work for that group.

And then at the end of the month, that work will be linked to, and I'll take a look at it and I'll make an assessment. And if there's a dispute, someone can go to the finance group and dispute that.

But that pretty much happens across all the various working groups on a monthly basis. And then people will receive automatically in their wallets, those governance tokens they earned in the prior month. Is this global?

Yes. Yes. And as someone who's worked for a large company like JP Morgan, you did mention, you worked for FinTech company as well, what do you think are some pros and cons of the DAO versus the traditional more centralized form of governance?

I'd say, let's start with the pros. So some of the pros are, it's a fantastic tool for recruiting talented people from all over the world. And when you show up to the DAO, somehow people find exactly what they should be doing, right?

You go in and maybe sit in on a few different meetings, get a sense of what you like and start picking up work. So it really appeals to self starters who want to get their hands dirty and I love that.

I think one of the tricky things with the DAO is there is no CEO. And so things just happen in a more deliberate, slower pace than if someone was in charge and making a very decisive decision.

And so our response to that is to rethink some of the ways that we're working to make the organization even more functional. So an idea that we're contemplating is a group of seven that would effectively have the role of unblocking certain issues that come up or helping to prioritize somewhat.

But it still is a very grassroots community based project. Do you know the people that you work with? Have you met them? Have you seen them?

Yeah, I've probably met in person more owl. We call ourselves owls, more owls than anyone else in the group, just because I've gone to various conferences.

So I went to TOKEN2049 in London. I was down at Bitcoin Miami and here in New York at Mainnet NYC, NFT.NYC, and so got to meet people who came in from all walks of the planet.

Frankly, if it wasn't for COVID, I think I would've met even more people. We have team members who are in every continent. I can think of off the top of my head except Antarctica and not too many people in Latin America, but every other continent, we have a lot of participation.

What's to stop somebody like a nefarious actor from like just scooping all the tokens, like an engineer, smart person inside the coop that just pulls some shady shit?

Well, scooping up all of the tokens is going to be extremely expensive because one of the benefits of decentralization is the fact that it's distributed broadly.

So there's nothing to... Like, even if they wanted to hack. So the way that I got hacked was very foolish. I gave away the keys to my house and the alarm password.

Yes. But is there a way for Index Coop somehow to get hacked or does the decentralized nature of the project make that? I don't know if impossible is the right word, but highly unlikely.

So, there is a new risk that we never had to think of in traditional finance and that's smart contract risk. So talk about smart contracts, we haven't spoken about this yet.

What is a smart contract? Right. A smart contract is what allows for all of these use cases. So the difference between Bitcoin, which is a blockchain, a distributed ledger, and something like Ethereum is that Ethereum has these smart contracts.

They basically perform a function. They can do many different things. Okay. And they allow for decentralized finance. That's why decentralized finance is on Ethereum and you don't really hear that. It's not on Bitcoin, right?

So that's smart contracts, but smart contracts can have logic that can be exploited. And so that is one of the risks you just don't have in traditional finance.

So you need to be careful, where are you parking your funds? Is this project, has it been around long enough? Has the code been audited? And by whom?

I'm thinking about like GoldenEye, like a crazy, genius, Russian spy, like planting a bug in the code. If that were to happen, is this like engineering stuff?

What does the contract look like? For example, Mike, could you see a smart contract and be like, oh, I know what that means, or is it like code? Oh, it's code.

Yeah. I mean, this is a solidity and it's certainly not my expertise, but so just recently there was actually a hack of a project where we found out that it was a minor in Canada who had hacked this project for millions of dollars.

So it's not some evil villain from Russia, but... They're not always Russian, sometimes they're Canadians. Right. Right. Right. So I suppose that the risk to this whole concept gets bigger as more assets come into this space and DeFi gets bigger, right?

Because you could effectively be, have billions of dollars in assets under management in the coming years. What are some of the risks as you get bigger and grow?

Yeah. I mean, I think that's fair. There are security based channels set up across a lot of the big protocols. So when that hack that I mentioned happened, everyone, the community at large, not just a given project, but all the projects are learning from each other and enhancing the code all the time.

So it's constantly being iterated upon. The other thing that I haven't mentioned yet is there's often a multi signature process that takes place in order to make changes to the code.

It's part of how DeFi Pulse examines if a given project is up to snuff when it comes to their processes. So if one person's able to make changes, that's not a really secure project.

If a project has a lot of multi signatures in place, then that's a much higher degree of security. Does the co-op or the coop, I guess I'm going to call it the co-op in this case, have bigger aspirations outside of the indexes?

So right now you've got the Defi Pulse Index, which we've spoken about. There's a Metaverse Index, there's a Data Economy Index. Aside from the indexes, which I'm sure you'll make more of, are there other projects that you're looking into or are you laser focused on this segment of the ecosystem?

I think for the next couple years, we're going to be laser focused on just having the best index products possible. And what you see today are products that appeal to passive buy and hold investors that give you exposure to a theme.

So we have DeFi Pulse for DeFi. We have the Metaverse Index, Data Economy. These are protocols that are going after what has been very successful in Web 2, but with a Web 3 flavor.

So this is decentralized oracles, decentralized queries, decentralized file storage, right? Those are our thematic. Then you have products for more active buyers.

That's where our leverage products get in. And that is a theme, I think we're going to be building, not just more leverage products, but also other types of other tokens that will abstract away processes that are painful and annoying for the end user, right?

So our leverage products compared to what you would have to do today, if you go to Compound to create a leverage position, you have to stake your Ethereum.

Then you need to do a borrow transaction. Then you need to do another buy and it's kind of a pain. And then you need to monitor it to make sure that you don't get liquidated.

Our token just takes that off the table. So when we think about other products that are going to similarly tokenize, otherwise painful situations, the management of stablecoin strategies is a massive opportunity and something that is in our pipeline right now.

So being able to buy one token, but then getting exposure to eight to 10 different stablecoin strategies, where in DeFi the yield, because there's no intermediary is much more attractive than when you can get in traditional finance.

So Mike, maybe this is bad karma, but Mark's price don't always go up. What about an inverse lever token? What if I want to short these damn things?

Yeah, we do have an inverse Ethereum product that's in the pipeline right now as well. There you go. Okay. All right. Who's looking over your shoulder?

Because obviously, there's not much regulation in this space yet, is that a concern at all that there is no regulation and eventually there could be?

Does that concern you at all or not really? I mean, I think everyone in the space is looking for more clarity. So it'll probably be a good thing, perhaps not in the short term, because we need to react to it.

But in the long term, that's going to allow for a healthier market, more users coming on board, higher adoption. So we'll broadly welcome any kind of clarity on that.

Zero to half a billion in not a lot of time, when does BlackRock buy you guys? Just kidding. They can't. Yeah. It's very difficult to buy an on-chain project like this. Like M&A is tricky.

Actually, I'm not kidding. What is if Blackstone said, "You know what? I like what's going on here." They secretly bought up all the governance tokens, could somebody take control like that?

Yes. I mean, it would be harder to do because you're not dealing with a single management team orchestrating that. So you'd have to buy up on decentralized exchange [crosstalk 00:38:19].

But you all would've to sell, right? Exactly. Okay. It's a lot harder to get the entire community to agree to something like that. Is it... Everyone has a price… possible?

Yes. Is it possible? Yes, but it's a lot more difficult to do than off chain. All right. I can't wait to see the emails from this episode. Mike, what did we not get to that you wanted to, if anything?

Let's see. So we talked about the coop, we talked about the DAO, we talked about what makes decentralized organizations different in some ways better than their centralized equivalents.

Wait, what do your parents say? Like Mike, what do you do? What do you tell them? Oh my God. When you go to a bar, how do you explain this to people? My dad just shakes his head.

So my dad's got a finance background, so he understands all the stuff while at the same time just shaking his head. Like when I was telling him about the constitution DAO.

So DAO's going to be spun up for managing a business like Index Cooperative or for a special purpose situation like buying a copy of the US constitution.

So, when I was going over what just happened last week in the attempt to buy the US constitution. I mean, he just kind of shakes his head, but it's like, it's one of the problems with the space.

There's too much jargon. It's too hard to get in. And I think what you're going to see over the next couple of years is a real effort to improve the UI and to simplify things.

So our mandate institutional business is to help speak to people like you guys and just educate more people, make them more aware about this, but also try and simplify some of the concepts because it's very confusing.

Well, we tried. It's difficult, but Mike, this is great. This is so much fun. We've been looking forward to this for a long time.

So thank you so much for coming on today. Thank you so much, guys. Really appreciate it.