Why Investors Are Looking to Bitcoin DeFi | Own Your Crypto: Episode 2
In order for DeFi to achieve mass adoption, we need the security and immutability that only Bitcoin can provide. In this episode, we’ve brought in an all-star lineup of Bitcoin DeFi thought leaders and builders to take a look at why investors are looking to Bitcoin DeFi, and how Stacks is making this possible.
Elizabeth Olson (Host): We’re going to be talking about decentralized finance or "DeFi." Let’s take a step back to understand the DeFi big-picture developments in recent years. Looking to a few years back, in May 2020, we have just crossed over a billion dollars in total value in DeFi protocols over the world. Fast forward to today, we’re now over $60 billion. Now, if we talk about DeFi market share, Ethereum by far dominates with $200 billion of assets in apps led by protocols which you are probably familiar with like Compound and Ave. However, if we take a look at Bitcoin, we see that the market cap is far greater at $600 billion and 176 million holders which are about 7 times more than Ethereum’s 23 million holders, so again, that’s $200 billion with Ethereum and $600 billion with Bitcoin.
Despite Bitcoin being the first crypto and still the largest crypto by market value, DeFi is mostly not built on Bitcoin – until recently, as we’ll be discussing some solutions for this. We’ve brought in an all-star lineup of Bitcoin DeFi thought leaders and builders in the space here to share with you “Why Investors Are Now Looking to Bitcoin DeFi” and how new technology is making this possible.
Here with us we have:
- Dr. Chiente Hsu from ALEX
- Philip de Smedt from Arkadiko
- Aki Balogh and Jesse Eisenberg from DLC.Link
- Tycho Onnasch from Zest Protocol
- Ken Liao from Xverse
Let’s go ahead and kick it off with a quick round of introductions. Just a short, few seconds for everybody and perhaps the taglines, if you will, behind your protocols.
Chiente (ALEX): Thank you, Elizabeth, and hope everyone is well. I am the CEO and co-founder of ALEX Go. ALEX stands for Automated Liquidity Exchange. What is ALEX? ALEX's vision is to achieve financial freedom through Bitcoin. It is our goal that whoever holds Bitcoin should earn Bitcoin, and that's the very reason why we decided to come to build on Stacks.
Philip (Arkadiko): Hello, I am Philip, core contributor at Arkidiko. We are a crypto collateralized stablecoin. Specifically, that means you can put in your crypto that is today STX and xBTC, and very soon also atALEX, the auto compounding ALEX governance token. You can put those tokens in a smart contract and mint our stablecoin USDA against us, so effectively you're leveraging yourself against your crypto additional liquidity without selling it.
Aki (DLC.Link): Hey everyone. I'm Aki, co-founder of DLC.Link. We're letting native Bitcoin be used in applications on any chain using the Bitcoin escrow system enabled by discreet law contracts or DLCs.
Tycho (Zest Protocol): Yeah. Fantastic. Thanks very much. I'm Tycho and co-founder of Zest Protocol and what we're building is the first native Bitcoin on-chain yield product so you can earn yield on your Bitcoin. What happens under the hood is that Bitcoin gets lent to some of the most credit-worthy institutions in crypto to generate a sustainable yield, doing a yield-bearing activity with it on centralized exchanges in the real world.
Q: What is DeFi?
Chiente (ALEX): Sure. DeFi stands for decentralized finance. What is important here? Decentralized. There are many different definitions, obviously from math to philosophy to computer science to economics, but the way we understand it is that there's no single point of centralized authority that will be the decision maker to shut the participant. That's what we believe is a decentralized finance. Now, one thing I want to make it clear because we are here, most of us are builders on Stacks, Bitcoin via Stacks, and one thing I want to make it clear is I believe that Bitcoin doesn't need DeFi.
Bitcoin is a perfect layer of money. Big database, so Bitcoin doesn't need DeFi, but we truly believe, particularly at ALEX, we truly believe that DeFi does need Bitcoin. Bitcoin exists years before DeFi emerged, and Bitcoin will remain if DeFi ever disappears, but DeFi however, do need Bitcoin. Why? Because without the security and the immutability unique to Bitcoin, DeFi will never achieve mass adaption.
Most of the public, they don't hold, and they don't understand Bitcoin at all. To go from being a newcomer to crypto to participating in Bitcoin DeFi, it takes a few steps, and we like to call it steps one to three. This is very specific to ALEX, but feel free to adapt to your own protocol.
Number one is Bitcoin is money layer. It's an ultimate form of money. If you ask somebody, you say, Okay, you are not happy with the current fiat system. Write down everything you don't like, and then write down everything that you would like, it turns out that everything, every point will lead to Bitcoin. That's how beautiful this protocol is.
It's an ultimate form of money because Bitcoin is truly and securely ours, yours. Now, the whole purpose of ALEX coming to build on Stacks is that Stacks is a smart contract layer. Just like you said, Elizabeth, all the thriving DeFi at the moment are on Ethereum, Solana, and other chains, but Stacks enable the small contract layer on Bitcoin. Stacks makes Bitcoin programmable money.
We should keep on saying this over and over again because I feel like most people don't understand it. ALEX is a protocol built on Stack, built on Bitcoin, and set on Bitcoin via Stack, so ALEX protocol turns Bitcoin into a productive asset. What does that mean? Productive asset. If you hold Bitcoin, you should earn Bitcoin. That's really the beauty. I always like to say this is genius. When you use a network like Stack, a smart contract layer and you can earn, when you Stack, you can earn Bitcoin. That's the beauty of Stacks, and ALEX is here to offer the Bitcoin yield to all Bitcoin holders that make your Bitcoin earn the yield in a completely decentralized way.
Tycho (Zest Protocol): Why would you want to do DeFi Bitcoin and maybe not with other assets? I think that the simple answer is because it's Bitcoin and Bitcoin has some real-world use cases today, and I guess we all believe that it will have more of those in the future. If Bitcoin is money, then there has to be a Bitcoin economy with people and businesses that have earnings in Bitcoin and that are spent in Bitcoin. Once you have people and businesses that have earnings in Bitcoin, you also have people and businesses that have future earnings in Bitcoin. They might want to bring those to the present to grow their activity and whatever it is that they're doing.
That's my thesis on why it will be very critical for Bitcoin to have under-characterized lending or borrowing layers so that participants in the Bitcoin economy can actually bring their future earnings to the present and invest it in what they're doing, which is in many ways the basis of civilization today, or why we are sitting here on our smartphones or computers and are able to communicate across the world and all of that stuff.
Now, what makes Stacks uniquely positioned to enable Bitcoin DeFi is that if you write a smart contract on Stacks, you have read access to Bitcoin states via the Stacks nodes. I guess all the Stacks nodes together function as a big oracle for Bitcoin states. Where Bitcoin is, you know what it does. Bitcoin doesn't know Stacks, but Stacks knows Bitcoin. That's the only chain.
Then you can basically do DeFi that responds to Bitcoin transactions. Someone sends a Bitcoin transaction to another person and triggers something on Stacks where you keep accounts on Stacks of what's going on. That's something that's unique to Stacks because of the proof of transfer consensus mechanism. Because people are sending in Bitcoin to mine the next Stacks block, all the nodes need to know where this Bitcoin has arrived and then you could reuse this feature for Defi, because suddenly these simple peer to peer transactions on Bitcoin start becoming loans or payments for digital goods and so on and so forth.
Q: What is wrapped Bitcoin and why do Ethereum DeFi apps rely on this despite its centralized nature and really being counter to the ethos of decentralization?
Jesse (DLC.Link): Yeah, so basically, Bitcoin chain is not interoperable with Ethereum or other chains. It's standalone by design, and so in order to bridge, I don't want to say anything ill about it, but essentially there was like a workaround. Wrapped Bitcoin was created a couple of years ago, and the idea is basically, you take your Bitcoin, you send it to a custodian, Bit Go, and they hold onto it, and they give you a token that is a receipt that they're storing some Bitcoin for you, and then you can use that token on Ethereum. That started just like I said, as a workaround. But it's really grown to be the predominant form of using Bitcoin on Ethereum, which is a problem for everyone because it's not, from a computer science standpoint, it's not a sound way to do things, and my take is that it's not going to scale really well.
It has already scaled to over $5 billion in value. In its own right, it's a business that is growing, but when you look at the total market cap of Bitcoin, even if you subtract the amount of Bitcoin that is presumably lost or is not actively used, there's probably, right now it's about 2%, but there's probably no more than like 3% of all Bitcoin is wrapped. There are other forms of wrapped Bitcoin. There are different bridges that give you tokens that show you that something is in custody, but that's basically the way to use Bitcoin on DeFi.
Elizabeth (Host): I assume there are probably also some risks there since it's no longer native Bitcoin. You're entrusting this.
Jesse (DLC.Link): Yeah, exactly. The big draw of Bitcoin versus other digital currencies like USDC, the big draw of Bitcoin is that it's censorship resistant and you lose that benefit immediately when you wrap it in that way.
Q: What do you see as the current bottleneck here for Bitcoin DeFi?
Philip (Arkidiko): First, let me say that I'm obviously super bullish on Stacks. That's the reason we start building on it. Lots of potential. I love the angle of Bitcoin. We're all Bitcoiners here, and we came not because of mercenary money or anything, but just because of our thesis. But to your question, I do think it's both the technology and the competition. Let me illustrate that with an example.
If I go to, let's say what we call a normie layman who doesn't really know crypto, they've never really used it, and I go to them and I give them one ETH equivalent in SOL and equivalent in Stacks. I'm like, "Do any on-chain transaction, go work with a protocol whether that's ALEX, Arkidiko, on Stacks, or something else, maybe in NFT marketplace, and do the same Ethereum and Solana." I've done this with more than 10 people. They come back to me and they're like, "Bro, I have to wait for 30 minutes for my transaction to even do something." I'm like, "Yeah, because this connects to Bitcoin." And you go with the whole pitch.
But these people, they don't care so much about decentralization. They care about cool products. They care about great communities. They care about the fantastic UX and all those things. I believe, obviously, I'm going to hyper chains. We need that. That's the technology part. I believe decentralization also doesn't really matter until we're at Solana levels of speed. We need to fly with Stacks, and I don't think the normies will come unless we fix that. I think the optionality of having decentralization is amazing. You can just go from fairly decentralized on the anchor level, on the base level of stacks all the way to like hyper chains, which are super-fast and immediately sell your transactions.
Another thing that I want to say is I want to see more velocity in the money, meaning in Stacks and BTC. I don't want to hold my BTC. I think the number of holders, by the way, is a terrible metric. I think we need to look at velocity and I think, I don't really actually have data, but I believe that's a lot lower than Ethereum or Solana. That's something that I hope Stacks will fix.
Last but not least, I think most of you are, a lot of you will know Peter Thiel, and maybe have read his book, Zero to One. I believe that's a great framework to look at this. I think we're still going from one to M, which is catching up with other chains. We have amazing NFT projects. We have stablecoin or multiple. We have Texas, some lending borrowing. But we don't have amazing articles. We don't have fast settlement. We don't have those hyper chains, so that's part of the one to M. I believe hinting at what Tycho and Aki already did is the native BTC angle, and for me, that's the zero to one thing.
If we don't have a zero to one, we might be at M plus one, but it won't matter. We need that catalyst, that novel app that other chains don't have. That could be the Bitcoin thing, or it could be something else, but more innovation. I love the DLC.Link angle and we're also working on that. That's my take. Might be a little bit negative, but we need to be critical, and we need some criticism in the inner space to get better. Having said that, still super bullish on the Stacks and the angle of it. That's how I see it.
Q: Chiente, what can people do with Bitcoin today, and what is ALEX building?
Chiente (ALEX): Instead of starting with the laundry list of what we have, I would like to start with really ultimately why ALEX is here. Again, we want the Bitcoin holder to earn Bitcoin. We want Bitcoin to be able to earn yield if you hold it. But how do we do that instead of a centralized lend borrow entity or centralized exchange?
That's what ALEX is for. Everything we have built so far, and we come to build is to enable this just one utility It's very simple. You don't need to go to very complicated stuff, whatever it is and that. Very simple. End of the year, if you have Bitcoin, you will be able to earn Bitcoin yield and hopefully, and that's why we work quite closely with the Xverse, with Ken. Shout out to this wonderful CEO and then the team. Very soon, once the functionality is there, that's through ALEX, if you have Bitcoin, you can earn Bitcoin yield. Hopefully, we can see through Xverse, like my mom or my mother-in-law, they download the Xverse, and they can see their Bitcoin every day. The accumulation of the yield through the Xverse. So ultimately, that's the vision we have. But how do we do that?
Number one, we need to have all the bits and pieces, all the functionalities. I call it building blocks. At the moment, ALEX is rolling out Orderbook, so you can call it eydx on Stack. We need to get, as Phillip said, the velocity going. We need to really offer topnotch UI/UX, and for people who want to come to ALEX, to Stack, to Bitcoin DeFi and they want to trick, and that's what ALEX Orderbook is about. It's very sleek. If you have the chance, please sign up to join our testnet. You can put the limit order, later you can do leverage trade, et cetera. We need this piece in order to get a velocity going.
You may come to say, “Oh my God, it is not a 10-minute block time. I have to wait until I grow my gray hair.” Instead, the confirmation on ALEX Orderbook is instantaneous, but the settlement, it is still on Bitcoin, so that's number one. Once we have that, the next step for us is the perpetual futures between Bitcoin and Stacks, because, at the end of the day, we are building on Stacks. But the Bitcoin holder, when they want to earn Bitcoin yield, most of them don't want to take the risk between Stacks and Bitcoin. What we're going to do is the following. ALEX will handle the conversion from the Bitcoin to Stacks, and then we will stack the Stacks in order for the Bitcoin holder to earn the stacking yield. Now, ALEX will also have the perpetual futures to hedge out the risk and ultimately return the native Bitcoin yield from stacking, but also add the maturity, return your Bitcoin principle to now Stacks.
So that's really the single most important use case that the people will come to ALEX or come to Stack to earn some extra yield. Now, I understand what Aki talked about wrapped Bitcoin and Philip talked about native Bitcoin. What I heard, and I hope to read that white paper very soon, is that the top-notch engineers in the Stacks ecosystem are working towards the Bitcoin pack-out issue. I want to say whatever ALEX is doing. Again, this is our philosophy. Instead of sitting there counting our fingers, waiting for everything in the world to be perfect in order to do something, we want to be pragmatic. At the moment, that problem is not solved, and I hope to see DLC thrive to solve the first step problem, but ultimately, wrapped Bitcoin on Stack is not like wrapped Bitcoin on ETH, so don't think wrapped Bitcoin is a dirty word.
Now, if wrapped Bitcoin on other chain maintain only the asset value of Bitcoin, you lose networks. You can confirm the providence or settlement on the Bitcoin that was wrapped permissionlessly. If we have a certain wrapped coin on top of a Stack that can directly refer to the actual or regional Bitcoin asset.
On the Bitcoin chain, we already have a huge step ahead. Think about what was just mentioned by Philip, the velocity. Think about the market cap or wrapped Bitcoin. We're not even talking about Bitcoin, it's 5 billion. If we can bring this into the Stack system, I think we have achieved a huge step ahead.
Q: Aki, what possibilities are you working on over at DLC.Link? What solutions you're looking for to also open up Bitcoin DeFi?
Aki (DLC.Link): The infrastructure we're building lets users lock Bitcoin in an escrow in their own wallet to use that value elsewhere, and that really enables a great usability improvement. Right now, anytime you want to use your decentralized Bitcoin anywhere else, you have to send it to a bridge or send it to another address or swap it for a wrapped token, and those are your only options, or you send it to a custodian and then you use it within the custodian systems. With any of those options, you've lost the decentralized nature of your Bitcoin. What a DLC lets you do is you actually, DLC is an escrow where you just lock it in and you can use that Bitcoin as collateral anywhere else. This aligns perfectly with the idea of generating Bitcoin yield in various ways.
In fact, from a DLC perspective, you can use that Bitcoin on Stacks or on any chain. I think we're going to see a marketplace of Bitcoin yield products emerge that generate yield in various ways. Stacks has some technological advantages that are going to set it apart. Our development has been a little more native to Stacks and we can take advantage of Stack's consensus layer in multiple ways, which is really exciting.
Q: Philip, what developments are Arkidiko working on with DLC.Link?
Philip (Arkadiko): I spoke to Aki, Jesse, and the team six months ago for the first time. They're really baller guys. Love the attitude, and love working with them. I was like, "Hey, let's try something." There were conversations of building a Bitcoin native stablecoin. I know a lot of people hinted at that. That's actually not what we're doing. I'm sorry to disappoint some of you. It's not what we're doing. Our focus is on USDA for the time being as our only stablecoin that we're developing. However, we are doing something really cool, in my opinion, with DLC.Link, which is native BTC lending borrowing, which allows you to lock your Bitcoin, your native Bitcoin, your non-wrapped Bitcoin, so Bitcoin on the Bitcoin blockchain and the DLC, and borrow stablecoins against that. That's a prototype. Don't really have a timeline, but I'm pretty excited about the development. I think that's going to really create a peer-to-peer lending borrowing market on stacks together with Bitcoin.
And I believe more people in the ecosystem should look at that. If you do have any questions related to the functionality or whatever, happy to help. Jesse or Aki can probably explain as well as they've been very closely involved.
Philip (Arkadiko): I said in the intro in the beginning a bit, that we're mostly focused on our stable coin and what I want to give people, so for me, DeFi is really about addressing listeners, transparency, openness, and availability for everyone, not based on where you live, where you were born, or how much money you.
If I go to my bank and I say, "I have a Bitcoin, can I borrow against?" They laugh and they say, "Go away." That's frustrating for people and I wanted to fix that with Arkidiko. That's why we built a stablecoin. Essentially it's a borrowing product, you put in some Bitcoin, and you get your stablecoin out, and you can use that stablecoin in whichever shape or form you want, as long as you pay it back. The payback is guaranteed through over-collateralization, so you always want your collateral back at some point because you put in more dollar value than you're actually borrowing. It's very effective. Honestly, that's really what I'm focused on. I just want to put that in the market, and scale it up further. I know it's boring answers. We're not building them new products every year. No, that's not what we're doing. I really want that stable coin to work, and then we're focusing around that stablecoin. For instance, if you put your Bitcoin in a DLC you will be able to borrow USDA against that, so in some shape or form, USDA will always be central to our vision.
Having said that, we did build a little product called The Keepers Network, and this allows you to automate some smart contract functionality, meaning, imagine you need to form something every two weeks or something. You don't really want to think of that always. You just want that to be automated and automatically broadcast as a transaction on chain. With our Keepers product, which will probably be launching before the end of the year on May net, we are already using it internally, in fact, to do some Arikidiko jobs, and now I believe the Lydian protocol is also integrating it. That's something that we have launched internally as well, and we will do these small experiments, but we'll probably be focused on the boring stuff, which is just trying to make our stable coin work, growing that, and making sure that we do allow people to access that in a trustless and transparent way.
Q: Tycho, can you talk to us about Zest Protocol?
Tycho (Zest Protocol): Happy to shed some lights on that. In terms of the trinity or collection of different products, if we really nailed this, a tokenized Bitcoin on stacks, then you could borrow really effectively against your Bitcoin and collateral with Arkidiko, you could borrow stablecoins, or you could do a lot of cool stuff on ALEX with it. But the question that we set up to solve was a bit of a different one, which is more about Bitcoin credits or Bitcoin capital markets in a bit of a broader sense maybe, which is that if you look at like traditional finance, say 95% of the loans are under collateralized, if you look at corporate bonds or very profitable companies borrowing money, they borrow that without putting any collateral, which makes sense because they're borrowing that against their future earnings.
If there's like this Bitcoin economy really exists or starts to flourish, there'll be actors who would want to borrow against their future earnings and credits or that type of credit will always be based on something, some information that's by default not public. It's in the word credit, credo means "I believe" in Latin, so how do you judge that? There are experts that are very good at credits and we call them pool delegates that basically run a pool and they decide, who would borrow from this pool based on off chain credit assessment. In that sense, we're working towards basically this large group of different pool delegates that all compete with each other on who is the best at underwriting credits or doing credit.
In that sense, companies that have future earnings in Bitcoin, say market makers that borrow Bitcoin to do arbitrage or minors that could borrow Bitcoin and grow their mining operations. They could basically borrow in the asset that they have their future earnings in which it really solves all these problems that you have now with miners. We're basically getting into big trouble because they pour a lot of fiat. They pour a lot of dollars and suddenly the Bitcoin price is down and the price pouring those dollars is very expensive because they have this mismatch between what they pay, which is fiat for the electricity and machines and stuff, and they earn Bitcoin.
If you're a market maker, you can borrow Bitcoin on Zest and you can then use that Bitcoin on ALEX, for example, to do some really sophisticated trading strategies, or you could put it on Arikidiko to borrow some stablecoins against it or some other strategies, and really complete the full picture of what you can do on Stacks with Bitcoin.
Chiente (ALEX): Or you can just put on ALEX and earn Bitcoin yield.
Q: What is the difference between ALEX and Zest Bitcoin yield?
Chiente (ALEX): We use a Stack yield. You stack your stack, you get a Bitcoin yield, but if you're a Bitcoin holder, you have the exchange rate risk between Bitcoin and Stacks. ALEX, through a smart contract, will hedge out this exchange risk, so Bitcoin holder will get a Bitcoin yield, but we also get a Bitcoin principle, as simple as that, through stacking yield.
Tycho (Zest Protocol): How the yield is generated is that it's basically, it's a company or an entity that takes this Bitcoin to earn more Bitcoin with it. The primary activity that exists today is to do arbitrage trading. Some of the most sophisticated market makers, they have very good strategies for moving money across centralized exchanges. That way they're able to generate a yield and that's basically the actors who Zest protocol or the Zest protocol pools will end up lending to.
Q: Tycho, can you explain to us some of the mechanics of how it operates?
Tycho (Zest Protocol): It's helpful to understand a little bit as well how Bitcoin lending in general works today. If you would want to borrow Bitcoin somewhere, if you are like Citadel, one of these big market makers. What they would do is they would say, "Go to BlockFi, Genesis, or Galaxy Digital," and then they just basically agree on terms and they sign a master loan agreement and they get the Bitcoins to do these activities with, and the volume of Bitcoin that that is getting borrowed if you would look at the Genesis quarterly reports, it's probably around say 20 billion or something. That's basically how this works today.
Now this created like a lot of problems, as we saw a few months ago, because no one really knows, okay, if I put my money on BlockFi, who are they lending to? It's a black box and you just need to hope that it goes well, and then it doesn't go well, often how these things go. How Zest creates the next iteration of this is by basically decentralizing this process and making it fully transparent, so instead of putting your Bitcoin into BlockFi, and then hoping, you basically see an overview of different delegates that are all credit experts, and then you can see who are these people lending to? What rates are they earning? What are their default rates? And based on that, you can make a decision. "Okay, I would allocate to this pool or to that pool." Even in a further future, you would just allocate to something that just does that automatically and moves it in between pools based on performance and stuff like that.
Basically, BlockFi sales is where we're basically providing a very important service for the Bitcoin economy, which means that you can actually borrow this asset to do stuff with, such as make sure that it's liquid on exchanges you can buy and sell it and stuff like that. But now all those credit lines are gone and they would need to be rebuilt in some way for the crypto economy to succeed. We're trying the next iteration of this.
Q: How can somebody become a pool delegate?
Tycho (Zest Protocol): Those are very good points. Initially, we'll probably start with say, one or two delegates that are like very good at, for example, haven't had any defaults in this past blood bath that we saw over the last four months, and then as it progressively decentralizes, in the end, this would be something that the token hall basically govern. Probably, there'll be some specialized committee that's very good at credit that understands the different strategies to decide who pool delegates could be.
But in essence, Zest is just the infrastructure, so if someone opens a pool or gets to be a pool delegates and that pool doesn't perform well, then that only affects people that have lent into that pool. One pool can go totally bust, and when there are hundreds of pools that doesn't really matter. But obviously at the start it's going to be really important that default rate is minimized and that there are only these really good pool delegates that have really good past performance.
Q: Ken, we've talked a lot about how the Stacks' ecosystem is really maturing in the applications being built and what's to come. What do you see as the impact this will have on the Stacks' ecosystem and bringing this technology and protocols to Xverse users?
Ken (Xverse): Yeah, sure. So I'm super excited just hearing all these development that are happening with the various projects that we have here today. Very bullish for the next year or two for Stacks and I think what this does for users is it'll open up many different choices for users to invest and earn a yield. So right now, users can hold their Stacks tokens and earn a yield through stacking, But with projects like ALEX, Zest, DLC and Arkidiko, there's going to be many more choices for users to earn a yield, and I think it's going to be huge that we can unlock this $400 billion of Bitcoin capital and there's 170 million plus holders of Bitcoin and all that Bitcoin is essentially just sitting there right now and not doing much. If we're able to put this Bitcoin to use, that's going to be a huge unlock.
I couldn't agree more on Chiente's point on needing great UX in this ecosystem, because I think for most people, DeFi is still very complicated, and if you look outside the crypto space, if you wanted to invest in stocks or equities, a lot of people don't have the time to do research on individual companies to figure out what stocks are good to invest in, but there are choices like index funds where people have figured out the math for you and you can just put it into the index fund and it'll grow. You don't have to think too much about it, and you're insulated from the risk of investing in individual companies.
Q: Will we see something like an index fund for Bitcoin yield in the near future?
Chiente (ALEX): I think the index fund has had his good run over the past two decades, but I don't think it's going to work in this business cycle or this economic cycle. If you think about over the past 20 years or so, on the average, if you just invest in the index fund, which is very low fee and very liquid, that's why people like it, on the average, you get 10%, but not anymore. If you look at the current market environment, the low interest rate is definitely gone, and the reason why index fund work is because of the low interest rate.
Now, all the equity valuation was very high. You get these 10% plus growth across the board that works. Actually, I don't think it's going to work over the next, I would say at least three to five years. So just want to give a word of warning, if you want to really make your money work, I think the hundred percent diversification is not going to be the magic formula anymore. That's why I think that investors should be very interested in Bitcoin, in crypto good projects, like the ones who are here, my co-speakers have good projects and try to concentrate a little bit of your bet. So that's number one, my 1 cent of the index fund.
But I know what you mean, Ken, about index fund. You are talking about aggregation, automated weighting, or different yield generation, yield generating strategies across Stacks. Definitely. I think the builder should come. How can we attract people to come to Stacks to this network and to utilize the protocols. It will be really the number one common goal of all the builders here and the listeners here.
Q: Where can people go to learn and connect with you guys?
Chiente (ALEX): We need everybody to come. Really. If we are talking about decentralization, permissionless web3. You are ALEX team. You are ALEX contributors. So come and help us to test and we are on Discord, otherwise we are on Twitter, and again, thank you for including us. I'm really excited and I don't say this very often. I think Stack is the best community. I know there's a lot of things we don't have yet. Other people's garden are greener. Please come tell us what we do well, what we don't do well, and like you've said, we either succeed together or we die together, and I would like us to succeed together. Thank you.
Absolutely. I've actually only been in this space a few months and I've just been blown away by the incredible inclusivity and talent and really, I think strength and diversity that Stacks ecosystem has to bring.
Q: Aki and Jesse, can you tell us where we can go learn more about DLC.Link?
Aki (DLC.Link): Yeah, you can follow us DLC_Link on Twitter or just go to our website. You can go to documentation in docs.dlc.link. And also we're going to have an offer where we're letting developers get 10 free API calls to power five DLC escrows, open and closing. But reach out on Twitter or you can email us API@dlc.link.
Q: Tycho, can you tell us where we can learn more about Zest?
Tycho (Zest Protocol): So it's at Zest protocol on Twitter. We don't have that much information out just yet. Our contracts are already in audit and passed the first audits, but everyone can go and test very soon. We've been working pretty hard on that. But yeah, that's the place where you can find out more. You can also leave your email on zestprotocol.com and then you'll be notified once there is cool stuff to see.
Elizabeth (Host): Super. All right. Let's open up the stage for a quick Q and A.
Q: Thank you so much, guys. I would really be curious to hear from all of you speakers about the adoption of Bitcoin DeFi, especially on the institutional side because I can imagine that there's a lot of institutions that are interested in buying Bitcoin and they probably already have some, they're holding it, and they should be pretty interested in earning some yield, especially if we're talking about, let's say, some low-risk type of setup here. Do you see any use cases or do you have any specific comments on this?
Chiente (ALEX): Yeah, absolutely. Since the collapse of many of those centralized lend borrow entities, we have gotten a lot of inquiries about earning Bitcoin through a complete, sovereign, decentralized, and transparent way through smart contract. Again, if you look at very conservative institutions like BlackRock a few years ago, telling all their clients don't touch crypto, but now really through demand because their client want to be exposed, their institutional clients want to be exposed to crypto, I definitely would say yes, the institutional interest on Bitcoin and particularly on Stack is really increasing.
Aki (DLC.Link): The other part of this is when institutions move Bitcoin or send it to a bridge, it generates a taxable event, so that is a challenge, in addition to the risk of having a custodian hold it and the losses that can be incurred. That's why we feel that letting Bitcoiners earn yield directly from their wallets is going to be a scalable solution for institutions as well.
Q: I would like to ask how do you think regulation will impact DeFi and what will set Bitcoin apart from the other ecosystem in regards to that?
Tycho (Zest Protocol): I'm happy to briefly comment on that one. I think the interesting thing is that Bitcoin is a digital asset where it's clearest that it's not a security and where it's also the clearest that it cannot easily be controlled, so what we see with stablecoins is that they have this blacklist feature, so USDC could be frozen essentially, similar with USDT. With Ethereum in the upcoming merge, it still remains to be seen what will happen when people might ask, or governments might ask some of the largest staking nodes which is Coinbase and so on to basically censor blocks from, because when a proof of stake validator creates a new block, then in essence verify the whole state of the chain. Whereas when a minor is mining, they just basically delegate their hash power somewhere to a mining pool, which just works in a fundamentally different way. Bitcoin is the most censorship resistant, and it'll stay like that.
Chiente (ALEX): I think this is an excellent question. I think all of us here who are builders, we have to be very aware of those regulatory environment. I think the ultimate goal of regulation are twofold. Number one is to protect the retail investors because by nature you want to protect those mom and pops. They are not that knowledgeable about certain securities or financial investments, but you want to protect them. That's number one goal.
The second goal is about systemic risk. You don't want certain financial security or institution that has such an intertwined relationship with other financial institution, now suddenly it could be the cause of systemic risk. Ultimately, these are the two goals of the regulators.
Now, the second one is very easy to answer because DeFi will never cause any systemic risk, but CeFi, yes. Centralized institution. Yes. That's where the regulators will go and they are doing it right now, to try to regulate as much as possible, starting with stablecoins. If you look at those three biggest stable coins, they are completely centralized, but they are now transparent, so they have the sweet spot of both world. They are acting like a money market fund, but they are not regulated in money market. Big red flag there. But this has nothing to do with DeFi, whatever Tycho, Aki, Ken, Philip, are building here right now is DeFi, is completely decentralized smart contract that doesn't belong to anybody. The developers put those smart contract on the blockchain for people to use peer to peer, so there's zero systemic risk. Now to protect the mom and pop or so called retail investors. I think we all have to do better in this. That lies in information transparency and education, and we need to do better. All of us together.
Elizabeth (Host): Thank you so much Chiente and everyone today. This is such a perfect way to wrap things up. If Bitcoin DeFi is new to you, it's definitely a good idea to get started by downloading Xverse available on iPhone and Android and soon desktop. You can acquire some Stacks, Bitcoin, CityCoins, and other SIP 10 tokens, use the in-app browser to directly connect and interact with DeFi protocols built on Stacks that you've heard about today and as always, Xverse welcomes feedback on how we can improve, so please feel free to join our community and get in touch on ways we can make the app even better for you. Thanks again to everyone for joining us. Stay tuned and see you next time.
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