The Rise Of Defi And The Future Of Money

Alex: Hey everybody, welcome to the Curiosity Code podcast. I'm your host, Alex, and today I'm joined by Elena Shytsova, a pioneering thinker and practitioner in the blockchain and decentralized finance space. And together we'll dive into whether Defi is the inevitable future of finance, how it could become seamless and integrated, and what life might look like for the average person in a defi driven world. Welcome to the show, Lena.

Elena: Hi Alex, thanks for having me.

Alex: In couple words, in couple sentences, tell us a bit about your background, where you're at today. We're obviously going to talk about Defi, but just to create more context for this conversation, let's just spend a bit of time hearing about you and your journey.

Elena: Absolutely. I have a background in traditional finance and fintech, working for some, several large banks and neo banks in Russia. But back in 2017 I have discovered blockchain and namely Ethereum at that time and I got, I got startled. I understood like, wow, that's a future of finance, that's a future of money. And money is something that was always inspiring me. So I decided that I'm, I want to work there. And I instantly started to. I got hired as a product manager to one of the small centralized exchanges. And since then I was working in multiple blockchain companies, startups, some centralized exchanges, NFT marketplaces, for example Rarible. I was a CPO and co founder of one Web3 payment app, let's say Revolut for business, but in Web3 for crypto payments. And currently I'm advising multiple projects with their token sales, including one very interesting DeFi all in one on chain protocol and app.

Alex: Excellent. Excellent. All right, let's just start about Defi in general. You know, we had this conversation before the recording started and we wanted this episode to be a bit more about like exploring the defi in general, but not going into very nitty derails and the same time, keep it still relevant to the audience. Yeah. So Defi, what is Defi and why everybody's talking about Defi these days?

Elena: Well, Defi is the short for decentralized finance. And I believe most of your listeners already know the concept of tokens, coins, stablecoins, Blockchains, et cetera. But to have what is DEFI in general with all those protocol and bridges and lensing platforms and like what is, what is the whole thing? I would like to make this analogy. DEFI is Internet for finance and money. Like imagine the world before Internet when we had centralized information sources like newspapers, TV and. Yeah. And just basic peer to peer information like letters and conversations. And then the Internet happened and everyone could become their own media, everyone could host their own website. Now we have blogs and platforms that makes it easy to any teenager or even a kid. We have lots of Gen Z and Gen Alpha kids in Internet. So everyone is their own media now. Everyone is their own newspaper. Same with the money in DeFi, comparing to the CEFI to centralized finance, you are your own bank, you own your own wallet with your tokens. Because comparing to the bank owning your account and it can be hacked, it can be blocked, you can be sanctioned if you're a politically exposed person, for example, or if you're a criminal in the decentralized finance, you have security issues, but there is no one technically who can ban you. And also you are free to launch your own protocol or participate in existing protocols to lend or borrow money to raise investments through ICOs, for example. That's one of the things I'm currently doing. It's the same level up in financial freedom as Internet is a level up in the freedom of information. I would say.

Alex: Interesting analogy. When I think about the future of technology and how it may evolve and a picture, you know, the world where we're not actually linked or dependent on the banks per se, like in cefi. The only concern, probably I have major concern is that at the moment the reason we're using banks is because of trust. You know, it's a bank, it's governed by government and central banks and whatnot. And yes, we've seen cases when, you know, banks disappear in a day. Sometimes there is a crisis and not.

Elena: That's still the governments as well.

Alex: Yeah, yeah, yeah.

Elena: Both of us were alive when it happened to the Central bank of Russia and SVER bank of Russia.

Alex: Yeah. But conceptually, people kind of trust these banks. That's the reason, because they feel like, okay, that's a large system and somebody standing behind it and actually controlling. Oh, we will admit the fact sometimes, you know, the control bodies are not actually acting in the interest of people. But anyway, so for DEFI to become a future of finance, how do you address this issue with trust? How do you make it, you know, as a commodity, as a Standard for people to use as like, you know, we use classic banks today.

Elena: Oh well, there is more than one question in your question.

Alex: I know, I know, I probably went too deep.

Elena: Yeah. First of all the trust, it is a double sided sword in this case because for example Bitcoin I can trust and any one of us can trust Bitcoin protocol way, the trust is way stronger, almost infinite before the quantum computers are invented that your bitcoins are your bitcoins unless you compromised your keys and lost them. So any bank, any government can fail. But to take your bitcoins from you, unless you of course compromised or lost your private key, that malicious player, that hacker, whoever wants to take your bitcoins for you, they will have to destroy the overall network of computers running nodes of bitcoin all over the world, which is technically impossible. I think maybe if the nuclear war starts, maybe this can be possible, but otherwise no. Yeah, of course there is a risk of quantum computers that they will come and all the cryptography are going to be compromised because on the new level of computing power. But by this time I believe the smart guys who are developing Bitcoin protocol will find out something. And now it's outside of our probability horizon. Let's say that's with the trust, but with the same time big, this big self trust comes with big responsibility. And it's people who are libertarians with libertarian ideology, they usually adore bitcoins and cryptos because they own their own money. And at the same time they're fully 100% responsible for their own money. Like those Bitcoin maxis, they fully understand that they and only they are responsible for their safety of their funds. And if you lose, if you throw your hard drive with your coins to the garbage, as one guy did.

Alex: Yeah, yeah, yeah.

Elena: Now he's trying to speak with the government to purchase that landfill where supposedly his hard drive is to find. Because that will make him a billionaire. Yeah, if you lose it, there will be no way back. So it's two sides with big freedom you take big responsibility. And one of the keys to mass adoption would be actually help with both the user interface and risk reduction. So people are currently, builders are currently thinking on how to insert that intermediary in the middle that could potentially help you recover your wallet if you got your password stolen or you lose it yourself. But at the same time without building this trust. And maybe I'm not sure if this dilemma is like 100% solvable, but. But they're trying to find a compromise. But yeah, the security Issues and the ease of use with all those gas fees, seed phrases, wallets. It's now one of the massive challenges we need to solve to make the massive adoption of blockchain and defi possible.

Alex: So in practical terms, in your opinion, what needs to happen in reality so that we see that massive adoption and people are using this technology not as you know, all the let's suggest a crypto but actual finance like it's becoming go to finance tool versus alternative which is it is currently.

Elena: Oh well, it depends on what we say, what we call the massive adoption. But what we need to like remove or upgrade to make more people use it is actually their need to use it and no restrictions to do so. As we know, lots of people in certain countries, like Vietnam, like Argentina, Turkey, China by the way was their restrictive financial system. They love using crypto. And it's not because they love progressive financial technology. It's because. Because they have certain restrictions, for example their financial systems, maybe they're overly controlling their funds or they're not allowing people to receive remittances from abroad without certain like maybe forceful exchanging to the local currency. And in this case receiving crypto is a workaround that allows people even not very technically profound, not a crypto bros, not even an IT bros to learn how to work with it. But this is just. It's not defy, it's just using crypto as payment. So first of all it's neat. People need to like to start using it. People need to feel why they need it. Second is regulators and governments, they are quite careful with it. Cautious I would say. And because it's a new thing, it's hard to control. Banks do not know how to control the risks. Compliance officers not know how to actually find out if this crypto was somehow involved in some money laundering or whatever legal activities. And that's why slow and bureaucratic governments are doing their slow and bureaucratic things to be on the safe side. At the same time, some governments who prefer to be for any reasons more innovative and more open to risk like El Salvador, Central African Republic, some cantons of Switzerland, some states of America, I guess Colorado, they are already. They have already adopted crypto as a legal matter of payments. So you can technically pay taxes. There was the pay with crypto and they have different reasons for that. So of course if your government says this is okay, you are not a criminal for having bitcoins in your wallet, you can legally use it, that will help the adoption as well.

Alex: It's interesting that you keep mentioning bitcoin but in my mind when I think about crypto finance I think purely stablecoins and you mentioned adoption and people will actually the need of people will drive the adoption. And what comes back to my mind is when the Ukrainian war started, I've seen many, many people been impacted by it and lots of people who've never used crypto in their life, they actually never knew it because of all the limitations and sanctions and da da da, they started to use the stablecoins and suddenly two years forward you see lots of transactions happening in usdt. It's becoming like a main currency in you know, certain communities. And for me that's a good example of what you are describing. Like people actually start to need but you know, it sounds like it's in.

Elena: A bad way for the everyday use of course for payments for example or storage of value. Stable coins are, they are basically stable. So they're the more the most popular instruments. But I was mentioning Bitcoin because stablecoins, especially the popular ones, they are somewhat centralized. So for example USDC is the second best, the second most popular one is a very centralized entity, USDT as well. And USDT is getting banned from Europe gradually now, so some brokers are not willing to work with it. And Bitcoin stands with the initial ideological values which not helps with the ease of use with all that volatility and stuff, but keeps with the initial values.

Alex: So, so stablecoins is not pure example of defi. It has its centralized kind of component.

Elena: Not all of them, they're more heuristic, let's say algorithmic stable coins like Daim created by Makerdao. It has a very quite complicated mechanism behind it but it actually it's. I would say it's a masterpiece of financial engineering. Whoever like has a brain space one one evening you should just go and have a look how it works with different intents. It's a self regulating system that does not require any like central custody to store those dollars or whatever. They are backed by other cryptocurrencies and so far they're doing good. But yeah, most popular ones like USDT and USDC and Isana, the new one, they are highly centralized. So from the puristic point of view they're not that good. But still they are very popular and I would still call them parts of the decentralized finance.

Alex: So what I'm hearing and I'm actually learning something new, it's interesting that defi is not equal crypto and is not equal stablecoin in a sense. So defi is a crypto that has no centralized control. Right. So that's the definition of decentralized finance. And you know, probably it's obviously decentralized.

Elena: Finance is an ecosystem that contains coins, tokens, wallets, protocols. It's like infrastructure that allows people to do their financial interactions without using centralized bodies like government issued currencies or banks.

Alex: Let's look at another spectrum of adoption because I'm trying to think about this as how people will be adopting the technology, how we'll be adopting crypto and we see that's happening and stablecoins do take place in that adoption happening. What is happening with central bank digital currencies, CBDCs that started to appear in different countries, they working on this in different stages. How do you think this play out in the whole ecosystem? That's not defi, right? It's like the opposite of defi as far as I understand the concept.

Elena: It depends really on how it is going to work. Because if you're going to make a private blockchain that runs on one node in a central bank, maybe on two nodes, one in the central bank and another in the Ministry of Finance or whatever and they will be able to control all the flows and see all the information. See like aha, this is Peter. He's using his $5,000 to buy aha. What is is he buying? Is it illegal drugs? I'm going to block him and also take all his savings because he is a. He's a criminal. Now of course giving this control into any centralized bodies sounds like a very risky idea because you can be endlessly loyal, you can have an amazing government, but can you guarantee that it's going to be forever? What if tomorrow some bad guy will just enter the data room? I'm of course I'm oversimplifying but it looks like a concentration of power and risk in just one hands. But it's. If they diminish develop it according to this highly centralized idea. I don't know how they really like I've. I know that digital Yuan in China is already somewhat piloting and knowing the Chinese guys and their views on freedom of speech and everything, I'm afraid that that can end up into further lowering of the financial and overall freedom for the people who are using this currencies. But other government body like Europe or United States, they're currently in research and let's see where it goes. Maybe they will since they're declaring being a democratic constitutions and they have lots of bright people there. Maybe they will find out the way how to make it work for good, not for bad.

Alex: So it depends on the execution whether CBDCDs actually fall into DeFi category or not. Right.

Elena: We didn't see it in practice, so I would say it's too early to say, but I see like. And lots of people see risks in that.

Alex: Right. Again, coming back to the trust, maybe that will help people just to make a first step. Like hey, this is government issued stuff, you can probably trust it. Anyway, let's look into the future where we started the conversation. I just want to, I want you to think of, I don't know, let's call it five, ten years from now, how the finance for average person will look like in 10 years if actually DEFI continues to evolve as it evolves today and hopefully it succeeds.

Elena: From the retail user perspective, I don't think many things are going to change because the key of mass adoption is to make it useful to make good interfaces. And most probably I believe our normal usual financial service providers will just use blockchain as infrastructure. So they will propose us, by us I mean regular retail users of financial services. They will propose us new products like ETFs on Bitcoin coins already proposed. Perhaps they will use blockchain on the background as an infra for international remittances. So it will become faster, more reliable and cheaper for everyone. But in general it is going to be like, like pipes inside of the walls of the building. So overall infrastructure is going will start working better where, where blockchain can improve stuff but from the user's perspective like we will have more developed financial system.

Alex: So it's like you're getting more control over your finances. You're not dependent on central bank that much any longer. But from the user experience you can still go to the coffee shop and tap your phone and pay.

Elena: Ah, you mean if the users are going to switch from their normal banks to bank being fully in crypto. Yeah, I don't feel the need to be honest for most of the people to do so. Of course we have crypto anarchists, libertarians, bitcoin, maxis, people who don't trust their governments and in general like to be rebels and they will be happy to use their crypto to pay directly and they already have lots of opportunities to do so. There are cards that are working with bitcoin so you can pay with your crypto for your coffee already or for services for you can buy real estates with multiple real estate agencies using your crypto. But for most users they will only switch to this model of consumption, let's say of financial services in case of the huge need. Like as you mentioned before, the people who are during the war, they're either sanctioned or have some other problems with their regular financial services. And then the need come and they had to adopt.

Alex: So from the evolution point of view, what would dramatically change in the near future? I'm kind of trying to understand whether the system is already good enough and what's the outlook in the near future for defi learning.

Elena: I think the most part of adoption will happen on the institutional side. And banks and investment companies are going to use the infrastructure of blockchain for different reasons. To generate money, to store money.

Alex: Okay.

Elena: For the techno bros. The world of defi is full of amazing opportunities like yield farming, liquidity providing and stuff. But it has quite a steep learning curve and high barriers to enter because you need to understand lots of stuff. And there are traps here and there, you can get robbed, you can get your money stolen from you or you can just make some mistake and lose your money by yourself without external help. So I would say as of now, the biggest adopters are the advanced users, which are institutions and techno enthusiasts.

Alex: Yeah, it's interesting. I'm wondering how will it cascade down to the actual users? Will we see like a more accessible, cheaper financial services or things like that? But I get the point. It's, it's, it's interesting view on payment.

Elena: Will obviously be the, the first and it is already the first use case, especially cross border remittances. I had a freelancer from Vietnam and that girl was earning a very good 1500 bucks a month, which is a high salary for Vietnam. But she could not get a credit card. She said, I went to my bank and I showed all my pay slips for like a year before. Like see, I have money. Please give me a debit card or credit card because I want to travel and I want to buy stuff online. And they said no, you don't have a salary, you're a freelancer. Cards are only for the people with salary. So. Yeah, and also I paid to, I used to pay her in cryptocurrencies because the other way was to pay her to have her PayPal and the PayPal would charge her another 10 or 15% to withdraw, which is kind of crazy.

Alex: Yeah, I can relate to that. I can relate to that. I'm actually paying to few folks in stablecoins these days as well. So it's happening, the change is happening. Well, that's been a great conversation on defi, Elena, thanks a lot for your time. Hopefully, for the audience, things become a little bit more clear. They are clear to me now.

Elena: And yeah, I hope you have fun.

Alex: I did. Thanks for your time. For the listeners, thanks for staying with us till the end. Don't forget to subscribe to the channel. Hit the like button and leave a review on the podcast platform that you're listening this episode to. So see you, See you in the next episode. Bye. Bye.