Beyond Bitcoin: Why DeFi & NFTs are potential game changers for financial markets and maybe every other industry

Interview with Egor Sidelska, Director, Magnet Capital

I am delighted to have joining me today Egor Sidelska, who is with Magnet Capital. And we are going to talk today about decentralized finance, or DeFi, which is absolutely taking the crypto world by storm. And so with that I will pass over to Egor to just introduce himself and his involvement in the cryptocurrency world.

Transcript

Nick Abrahams:

Hello everyone. My name is Nick Abrahams, and I am delighted to have joining me today Egor Sidelska, who is with Magnet Capital. And we are going to talk today about decentralized finance, or DeFi, which is absolutely taking the crypto world by storm. And so with that I will pass over to Egor to just introduce himself and his involvement in the cryptocurrency world.

Egor Sidelska:

Great, thanks Nick. So I’m currently the director of Magnet Capital, which is a hedge fund that we started in 2017 as the first licensed crypto hedge fund. We now have three products, so we have OneTrust, which is a multi-asset crypto trust, a passive Bitcoin only trust, and Australia’s first Ethereum only passive trust. We’ve got about 30 billion of assets under management across the group, and our main trust has returned about seven and a half times since inception. But I actually started in crypto a little bit of time before that. So back in 2013, in the very early days, I started mining Bitcoin and Litecoin just to really start understanding what the blockchain technology even was. And then a little bit later on I met with Benjamin, our other director at Magnet Capital, and we started going to businesses and talking to them about how to integrate blockchain into their businesses in 2016, which as you can imagine, Nick, we got laughed out of a lot of boardrooms at that stage.

Nick Abrahams:

I could imagine. Yeah, no, the world wasn’t quite ready for blockchain.

Egor Sidelska:

No, back in 2016 it was very, very nascent technology, a very small market cap, very innovative at that stage, but it’s very different now.

Nick Abrahams:

Terrific. Well, clearly an extraordinary background. So maybe if we just, to set the scene, because we just assume that many of the folks who are listening to this, or watching it, probably don’t have a great understanding of cryptocurrency, other than the general skepticism that exists out there in the market as to what is it really about, but could you just, at a very high level, just talk us through how does Bitcoin work, what’s cryptocurrency, that sort of idea.

Egor Sidelska:

Absolutely, and Bitcoin’s a great start. It was the first iteration of its kind in crypto, and Bitcoin works on what we call blockchain technology, and the blockchain is very, very simple. It is a distributed ledger that is distributed amongst now millions and millions of machines. Each of these machines work in order to add blocks onto the network, and that is what we call the blockchain. The blocks are just a series of transactions that supersede each other and add to what we call the blockchain. So it means the first time that we have ever had what we call decentralized trust, you now no longer need to use a centralized entity in order to be able to send transactions, and the blockchain allows you to do that.

Egor Sidelska:

The unique properties are what really makes it very, very interesting. So the blockchain in Bitcoin’s format is completely immutable, it is completely transparent, it is completely decentralized, it’s not owned by any one government, one institution, it’s not controlled by any single party, and it’s completely finite. So every time that a new block is minted, Bitcoin is given to the person, or the miner, that minted that block as a reward, and only 21 million Bitcoin will ever exist. And we call it secure because right now there are millions of these machines globally in football pitch size data centers that are all working to keep up in that work. So in summary, it’s just a big ledger of every single transaction that’s ever happened, that every single one of these machines keeps up to date.

Nick Abrahams:

Fantastic. That was actually understandable, thank you, that’s quite the task. And there’s a lot of talk recently about crypto currency going mainstream, and we’ve obviously seen a big rise in crypto valuations. What are some of the catalysts that have caused this concept of Bitcoin and crypto going mainstream?

Egor Sidelska:

Yeah, it’s a great question. So this technology, it will have the same global impact in the world as modern computing, as global card networks, as the internet, or even artificial intelligence. And we’re starting to see, very, very slowly we’re starting to see big institutions really take that up. And it’s because of the network effects, it’s because over the last 12 years of Bitcoin’s existence, besides two years, the price has continuously gone up, and the number of users have continuously gone up. The number of machines that are mining Bitcoin and protecting network has continuously gone up.

Egor Sidelska:

And you’re starting to see real innovation come out of this, not just in Bitcoin’s format, but in Ethereum and in the other 9,000 tokens that are also available. Just to give you an example, probably the biggest driver to the market was MicroStrategy investing their balance sheet, or $250 million off their balance sheet, back in, I think this was 2020, early 2020, and that really drove a big spike in awareness, not only for bigger institutions, but also wealth advisors, wealth managers, large hedge funds, to get ahead of the curve. Because as you start to see gigantic organizations, like MicroStrategy, or even Tesla, take Bitcoins off the market, you start to get this compression of the supply that’s available.

Nick Abrahams:

Yeah, brilliant, brilliant. It has been interesting, isn’t it, that there’s such interest that’s come around, and folks like the Grayscale Trust, and so forth, and we’ve seen even folks like JP Morgan and Morgan Stanley [crosstalk 00:06:50]-

Egor Sidelska:

Absolutely, yeah.

Nick Abrahams:

About cryptocurrency, which is quite the turnaround, I guess, the Coinbase listing as well, so lots of things pushing. You mentioned Ethereum there, and some other coins. Maybe just a little something, I know it’s complex, but we talk about the Blue Chip Coins, and then we talk about the altcoin. Maybe just a bit of a sense as to what does that all mean?

Egor Sidelska:

Yeah, so altcoin is what is typically referred to as anything other than Bitcoin. Bitcoin was the first, it’s the largest, it has the biggest network, altcoin are everything else that has followed after that. So when we talk about altcoin we mean everything from Ethereum, to Ripple, to Polkadot, to Uniswap, SNX, and the other roughly about 9,000 of them that exist. Most of them are completely useless and no one ever really needs to worry about them, but the top 100 are probably common names, or beginning to be slightly more common names. Like Ethereum is very, I mean, Ethereum is probably the second most popular, and it’s grown its popularity incredibly quickly because of its network effects and what it can do.

Egor Sidelska:

So Ethereum, as a quick summary, is a smart contracts platform, so it still utilizes blockchain technology, and all of the great characteristics that run with it, immutability and transparency, but what it allows you to do is put smart contracts onto the blockchain. So by smart contract it really is just a series of programmable events that allows you to attach it to the blockchain network.

Nick Abrahams:

Yeah, and it is interesting because I was quite cynical of blockchain smart contract propositions a couple of years ago, I was like, I’m a lawyer, I know what it takes to draft a contract, and this could never be done by the machines, but I didn’t really understand the proposition there, and in fact, how we’ve now seen smart contracts underpin the success of particularly decentralized finance, or DeFi. So maybe, could you give us a bit of a sense of on a high level, what exactly is DeFi? What’s the movement all about?

Egor Sidelska:

So DeFi is what we call decentralized finance, and it can be broken down into a number of key categories, everything from stablecoins to lending platforms to decentralized exchanges, vaults, and even insurance. What they’re trying to build is the entire ecosystem of what we think traditional finance is, but without any of the barriers to entry, so you’ve got completely open immutable decentralized finance applications that exist on Ethereum. They do exist on other chains, but in this case, to keep it quite simple, we’ll just talk about the Ethereum ones because they’re the biggest, they’re probably the most well known. And you would’ve heard of some of these, for example-

PART 1 OF 4 ENDS [00:10:04]

Egor Sidelska:

… the most well known. And you would’ve heard of some of these, for example, USDT, so Tether, which is a one-to-one pegged stable coin of the US dollar. It was very famous about three years ago for rising as part of 1exchange’s giveaway for being hacked. So that’s actually how it was born. The coin was given out as an IOU to some of the participants that were affected by the hack of Bitfinex, and they stumbled upon it. Now it’s grown to be a $51-billion coin that really underpins a lot of what the DeFi applications even are.

Nick Abrahams:

I did not know that that is how it came out. It is remarkable, the more that I speak to people, the free coins that got distributed a couple of years ago, that’s been a great source of wealth accumulation for many people who just ended up receiving a bunch of free coins for a whole variety of reasons and airdropping and so forth.

Egor Sidelska:

Yeah. Yeah, absolutely. Yeah.

Nick Abrahams:

So conceptually, DeFi is looking to replicate traditional finance models, maybe dropping into specific use cases. So what are some of the ways that we might be able to… I mean, it’s happening right at the moment, but what are some of the more specific use cases on DeFi?

Egor Sidelska:

Sure. When we, and when I say we, I mean [inaudible 00:11:45] Capital, when we talk about decentralized finance, we really break it down into the first couple of stages of adoption. For adoption to occur, you really need to keep it simple. So you really need to lay the foundation in the basics before you start doing anything really complex. So let me take that into stablecoins, lending platforms, and decentralized exchanges. That’s probably the three easiest ways to start thinking about this.

Egor Sidelska:

Stablecoins provide you within the option to stay within the crypto eco system, but get out of volatile crypto assets. So you can exchange your Ethereum for USDT and you are still within the immutable transparent ecosystem that doesn’t ever close, is completely available on weekends. There is no 5:00 PM shutoff. You still get to keep it within there, but you get to exit out of your potentially volatile position. So that’s number one.

Egor Sidelska:

The second are lending platforms. Now lending platforms have really come up over the last two to three years in a very, very big way. Platforms like Aave, like Compound and Maker, that even Maker who’s probably the first, who’s been around for the longest, but ones like Aave which are now about $11 billion in total lending on the platform. And all they do is provide you a marketplace where borrowers and lenders can interact. It aggregates all of the borrowing and all of the lending to give you an APR and an APY on either side of the equation you take. You can lock up your crypto assets, whether it be Ethereum or anything else, and you can receive stablecoins. That might be Dai, it might be USDC, or it might be USDT. That gives you the ability to take that into real world cash and spend it on whatever you like. So that’s a really, really simple entry level to decentralized finance.

Egor Sidelska:

Then you get decentralized exchanges. So historically, as you mentioned earlier, Coinbase, Kraken, Gemini are your more traditional exchanges. They’re like the NASDAQ, the S&P, the SX. They provide you a marketplace for buyers and sell. Now what decentralized exchanges do is they provide millions and millions of pairs for all kinds of crypto assets to be exchanged whenever you’d like. So unlike the traditional markets, again, which close on the weekends, which close at five o’clock, there is absolutely no downtime. So they are the leaders in the space like UniSwap, Curve and SushiSwap. These guys have billions of dollars in liquidity on their platforms. You can do everything from a micro transaction up to hundreds and hundreds of thousands of dollars. The volumes are staggering. In UniSwap alone, which has 9 billion worth of liquidity, $1.3 billion gets exchanged every 24 hours without interruptions.

Nick Abrahams:

$1.3 billion.

Egor Sidelska:

$1.3 billion US.

Nick Abrahams:

Wow.

Egor Sidelska:

Massive. It’s massive.

Nick Abrahams:

Maybe we’ll go back to the lending thing and then we can get onto the decentralized. Let’s get, I guess, clarity around the lending transaction. So effectively, if I’ve got Ether, so then I stake the Ether on Aave a or something like that, and so that means for me, is basically I’m providing that as collateral. So I’m saying to Aave, “Here you go. Here’s my Ether. You hold that.” And then through this smart contract, they will give me Tether or USDT?

Egor Sidelska:

Yep. I’ll run you through an example.

Nick Abrahams:

Okay. Perfect.

Egor Sidelska:

A very easy scenario.

Nick Abrahams:

[inaudible 00:16:10] me.

Egor Sidelska:

You’ve got an asset like Ethereum, which you don’t want to sell, but your car just broke down and you need cash for a repair. So what you do is you take your Ethereum and you go to you go to Aave’s application, which is just a marketplace, and you lock your 10 Ethereum, let’s call it $30,000 worth. You lock your Ethereum into a smart contract on Aave, which you lock in an interest rate, and that interest rate, it then gives you USDT or USDC or Dai, whatever you want. Let’s just use USDC for this example. And USDC is a stablecoin. You then take your USDC.So it’s given to you automatically in the same wallet that you use to transact.

Egor Sidelska:

So again, no one controls the staked amount that you have. It’s all done on platform. It’s all done completely automatically. It’s very transparent. And you get $3,000 of USDC. You take your $3,000 of USDC, and you go to a traditional exchange, for example, Coinbase or Kraken. You then exchange your USDC for AUD, and then you withdraw off the platform.

Egor Sidelska:

So right now, decentralized exchanges don’t have the ability to provide you with a FIA offramp, so like a real cash off ramp. So what you need to do is you need to use one of these slightly bigger centralized exchanges that run by companies.

Egor Sidelska:

Then you have your AUD, so you can use your AUD in your bank account to pay for any of the car repairs. The beauty with this model is you still have the exposure to the Ethereum which is locked up in a smart contract. The only thing you need to do is pay back the principal plus interest. So you can pay that back in one day, you can pay it back in 20 days, you can pay it back in three years. It’s completely and utterly up to you. The interest accrues.

Egor Sidelska:

So the next question you should be asking is what happens if you either never want to pay back? It means that your tokens are just staked on the platform forever. The amount of interest that you have will keep accruing. At some point, there will be a drop-dead date where they auto liquidate you. So in two scenarios, if the market starts to come down and your collateral ratio falls below 80%, so as in your one to five, the system will automatically liquidate your position in order to pay the principal back. So it has nothing to do with you. You need to make sure that enough liquidity is available within your smart contract in order so that you don’t get liquidated, or enough collaterals there so you don’t get liquidated.

Nick Abrahams:

Right. Right. So, very similar to, in the offline world, there’s cash collateralization contracts, which you would do. In that case, you’re not talking about crypto, but you are putting, let’s say you wanted some Aussie, but you had US dollars, but you didn’t want to lose your exposure to the US dollar.

Egor Sidelska:

Exactly.

Nick Abrahams:

Because you felt bullish on that.

Egor Sidelska:

Yeah.

Nick Abrahams:

So you could put it into a bank under cash collateralization and then pick up the Aussie dollar and then you could get your staked, as such as it’s called, US dollar back by repaying the Aussie dollar. Okay. So it’s very similar to what we have in the real world.

Egor Sidelska:

So that’s similar, but what isn’t similar is you-

PART 2 OF 4 ENDS [00:20:04]

Nick Abrahams:

Will.

Egor Sidelska:

So that’s similar, but what isn’t similar is, you can’t easily get cash for your CommBank shares or your NAB shares.

Nick Abrahams:

Yeah.

Egor Sidelska:

Or you can’t easily get cash for the shares that you have in a private company.

Nick Abrahams:

Yeah.

Egor Sidelska:

So if you are a high net worth that has a private banker, then you might be able to get a very, very small loan based off the assets that you have that they can see.

Nick Abrahams:

Yeah.

Egor Sidelska:

But that requires somebody to be able to give you that loan, that requires a ton of friction. You need banking approvals, you need credit rate checks. You also can’t do this on a holiday or a weekend. You simply can’t borrow and repay at speed for any amount of capital that you might have. Now, you can also do this with Bitcoin. So it doesn’t necessarily have to be part of the Ethereum ecosystem. And this is some of the really interesting stuff that’s coming out of that of DeFi at the moment. Bitcoin is acting as a store of value for people right now. And they don’t want to get out of it. You cannot in the real world, collateralize your physical gold into cash. There is no service, or at least I don’t know a service that will be able to do that for you, or do at scale, or do it at speed. But what you can do, is you can wrap your Bitcoin on the Ethereum network. You can stake your wrapped Bitcoin in Aave, and then you can get cash for that. You can do all of that within about 10 minutes.

Nick Abrahams:

It’s fantastic. And the 24/7 nature of it, but also, if you think about it, the closest you get if you’re trying to take out margin loans or something like that.

Egor Sidelska:

Yeah, exactly.

Nick Abrahams:

Which obviously is incredibly risky and can go against you quite poorly. So, yeah, you’re quite right though. It’s very difficult to collateralize things other than, I guess, houses. That’s the closest we’ve got, but there’s plenty of transaction friction there. And just in terms of how big is the lending market, you think? You’ve mentioned, I think 11 billion just through Aave alone, is it?

Egor Sidelska:

Yeah. Yeah. So, 11 billion is locked into Aave. If you look at everything else, like Compound. Compound is $10 billion. If you look at Maker, Maker is another $10 billion. The total value locked in lending alone across all of the platforms is about $32 billion.

Nick Abrahams:

Wow.

Egor Sidelska:

To give you insight as to how that’s changed over time, just a year ago, so this time, 2020, it was about 650 million.

Nick Abrahams:

Okay. Okay. So this market is massively on the move.

Egor Sidelska:

Absolutely. Absolutely. And not only is it on the move, but people are starting to pick up. So as you mentioned, JP Morgan now offering clients the managed Bitcoin fund, whereas before Jamie Dimon said that he would fire any employees if they even talked about Bitcoin. Now they’re structuring products around it. Fidelity is filing for an ETF. Credit Swiss came out with research on why crypto deserves to be its own asset class. Square, along with another 10 publicly listed companies are holding Bitcoin on the balance sheet. You’ve got industry experts, Ray Dalio, Eric [inaudible 00:23:51], coming out and endorsing Bitcoin and the crypto market. And then you’ve got an array of giant hedge funds, like Guggenheim, and AllianceBernstein, and MassMutual, Blackrock, all gaining exposure to Bitcoin.

Egor Sidelska:

And it starts with Bitcoin because it’s the oldest, it’s the most proven. It’s been around for the longest amount of time. And it’s completely and utterly transparent. You can see every transaction that’s ever made. You can see every single node and where it’s based. You can validate every single transaction. Coinbase is a key beneficiary of this. Notoriously, they hold very, very few Bitcoin on the balance sheet, but they’re still an $86 billion US business. And that’s just trading some of the major assets. It’s not even the small obscure assets. These are just mainly Bitcoin, Ether, Ripple. Just the common names that have been around for a long time.

Nick Abrahams:

Yeah. It is interesting, the JP Morgan comment. Obviously there was commentary made a few years ago by the leadership there, that it was a fraud, et cetera. And then JP Morgan were one of the banks that listed Coinbase. So I think they found the true belief there. [crosstalk 00:25:21] decentralized exchanges. Could you just run through that again and just perhaps a use case as to how that would work?

Egor Sidelska:

Yeah. So decentralized exchanges are again, a marketplace for two different kinds of transactions. Basically if you want to buy a token, or if you want to buy any Ethereum based token using either Ethereum or something else, there exists a liquidity pool. And that liquidity pool then is able to match either side of that transaction for you. Now, that sounds complicated, it’s really not. All that happens is, if I want to exchange my ether for something called SNX, then I use a decentralized exchange, which is basically a platform. And I type in however many, maybe 10 Ethereum exchange for 1,000 SNX. And I sign the contract, and the contract goes into the pool, pulls out the fee for doing it. And that’s the fee that you pay to the exchange, and then swaps your token.

Nick Abrahams:

Okay.

Egor Sidelska:

So the beauty with the is, in the real world, you can’t swap your CommBank shares for NAB shares. You’d need to go into cash first, and then from cash, you need to put it back on the live market and wait for your order to be hit. So what this does, is it creates a gigantic marketplace for you to be able to exchange frankly, any Ethereum based token, especially on Uniswap. Any Ethereum based token at really large volumes. Now there are benefits to drawbacks to this, because the Ethereum network gets very, very clogged up with these transactions. And that’s been part of the argument has been running for a very long time now.

Egor Sidelska:

It’s the fact that in order to execute this transaction, you essentially need to connect with a smart contract. And that smart contract needs to execute on both sides of the agreement. It sends the token that you’re wanting to swap, and then sends you the one that you wanted to buy. And that process involves multiple steps in the smart contract, which is expensive from a networking perspective. So there’s been an ongoing debate, ongoing argument as the number of Ethereum users grows, as the network grows in popularity. So does the network fees to make these exchanges. So right now it’s very, very difficult, and really costly to send a $30 transaction, or swap anything less than $300, because the exchange itself might cost you anywhere between 50 and $80.

Nick Abrahams:

Wow. Okay. Okay. Right. And so that money is not being taken by the exchange as such, it’s being taken by the network who-

Egor Sidelska:

The network, that’s right. Yeah.

Nick Abrahams:

Is that where the concept of gas comes in?

Egor Sidelska:

Yeah, exactly. Exactly. So the gas fee is what you pay the miners in order to process your transaction. So if I wanted to exchange one ether for 10 SNX, I need to post that into the smart contract, essentially broadcast it to the network. I need to have a miner that scoops up my transaction and processes it on the back end, which means it pulls it out of the pool and sends me my 10 SNX. In order to do that, you need to pay a gas fee. And because there are multiple steps involved, sending an Ethereum to Ethereum transaction is relatively cheap, five to $15, because it’s not a very complex transaction. But once you engage with the smart contract and it has multiple steps, that’s when you start to pay really high gas fees. And for the miners, it’s a supply and demand issue, for the miners, they will automatically pick the highest fees to execute first, because it’s a competitive environment. And that’s where you have this really big debate about …

PART 3 OF 4 ENDS [00:30:04]

Egor Sidelska:

That’s where you have this really big debate about transactions per second, it’s called TPS.

Nick Abrahams:

Right, right. Fantastic. I mean, that is extraordinary insight. Thank you for that. Just and with part of DeFi, there’s now insurance available on DeFi. Could you us through just a use case for insurance?

Egor Sidelska:

Yeah. Yeah. Nexus Mutual is a great example to use here. Nexus Mutual is building a two-way insurance company. It allows you to be able to take either side of the insurance claim. Now, that’s fantastic. It doesn’t really exist apart from PTP insurances, which again, is very different because then you need to assess individual insurance risk.

Egor Sidelska:

What makes Mutual do is they ensure against smart contract failure. Smart contract failure was of the Dow hack back in 2015 or 2016. And what it does, is it protects you from the smart contract code that’s written and people being able to hack the funds out of that state. In our your AAVE example, your Ethereum is staked in a contract, now people will attack that contract to try and get the staked AAVE out or the staked Ethereum out of that AAVE contract.

Egor Sidelska:

What it does Nexus Mutual is provided an insurance policy to pay out if that smart contract attacked. Now you, as a participant will say, “I’m very happy to pay 3% extra on my vault, on my smart contract, in order to have the insurance policy.” And on the other side, you might say, “Well, I think that the Yearn Vaults haven’t been hacked ever, and they’re made by very sophisticated platform engineers. And I think they’re very safe, so what I’m going to do is provide collateral into that.”

Egor Sidelska:

And what happens is, the people that take out that insurance policy pay interest and the people that provide collateral net interest. There is a very, very small fee for the Nexus Mutual contracts as a business. They’re revenue driving, but it gives you a platform to be able to be able to not only ensure crypto products, but also collateral them if you want to take the other side of it.

Nick Abrahams:

Fantastic. It’s the, so you’ve then got the insurance. If you are concerned that your underlying lending transaction might be subject to hacking, then you take out insurance on that. Fascinating. It’s creating a whole ecosystem of providers. Just, we of come to a close then. But I guess maybe just one final bit, and it’s without wanting to go into a great amount of detail, but non-fungible tokens, NFTs. There’s been a lot of talk about that recently. People paying $60 million for digital art and so forth. Slightly outsider, I guess, the DeFi world. But could you just explain just briefly what the NFT story is all about?

Egor Sidelska:

Yeah. NFTs, as you mentioned, non-fungible tokens, they provide a way for you to create art that belongs on the blockchain that is owner specific. It is a token of ownership that you get to your piece of art. It may be a GIF. It may be a JPEG. In the case that somebody paid nearly $70 million, it was a series of artworks that was created by someone called Beeple.

Egor Sidelska:

And what it does for artists is it allows you to make art programmable. It allows you to put in things like, every time the artwork is sold to a new owner, you will take a 1% clip of that. Every time that the artwork is transferred to a new ownership, it allows you to take recognition for that. And while the image can be copied, the ownership card. So the ownership belongs to the keys and whoever holds the keys is the beneficial owner of that piece of artwork.

Egor Sidelska:

And we’re only really scratching the surface of what NFTs are. CryptoKitties was the first iteration of that, I think back in 2018. And they have blown up. There’s CryptoKitties selling for 40 Ethereum and 400 Ethereum. And there are thousands and thousands of these, but it allows you to take ownership like you haven’t been able to do for on pieces of art. It allows you to digitize that entire process.

Nick Abrahams:

Yeah, no, it’s a fascinating area. And I must say, obviously, for you, it’s a natural evolution. I think for others of us, the last year has really been a tremendous revelation as we’ve seen cryptocurrency move, beyond a bit of a mystery into a genuine solution to a lot of problems out there.

Nick Abrahams:

Of course, we should say that, whilst there has been a good run in cryptocurrency recently it’s an incredibly volatile area. And so, people should obviously be very cautious about that. But Igor, thank you very much for your time today. Being very generous with your knowledge and also explaining the seemingly impenetrable in a way that we can all understand. Thank you very much for your time, Igor.

Egor Sidelska:

No problem at all. Good to… Thank you.

Nick Abrahams:

Thanks.

 

 

How DeFi Works: Smart Contracts, Etherium & the Future with Benjamin Celermajer

Nick:

Hello, ladies and gentlemen. And welcome to the second in our series on decentralized finance and what it means for not only the financial markets, but actually the whole world, and how it is transforming a lot of businesses out there. And today we are going to drop into a little bit detail about really the infrastructure and how decentralized finance works. We’re going to talk about smart contracts and also Ethereum. And we’ll find out more about that from our guest today. And so, I welcome Benjamin Celermajer. And Benjamin has two roles. He’s co-founder of crypto hedge fund Magnet Capital, and is also the Index Manager at Coin Metrics. So Benjamin, welcome to the show.

Benjamin Celermajer:

Thank you, Nick. Looking forward to being here, and thank you for having me.

Nick:

Great. Well, why don’t we kick off with … So those two hats that you wear, could you just give us a little of the sense as to what it is that both of those organizations do?

Benjamin Celermajer:

Yeah, absolutely. So, Magnet Capital is a company that I co-founded with I believe guest one of the series, Egor Sidelska. We co-founded it in 2017, based on the premise that we wanted to be able to provide individuals with access to this exciting asset class, crypto currency, that we felt can be cumbersome to get involved in. Or, the knowledge gap between people who were interested and actually willing to pull the trigger. So just trying to fill that gap and be able to provide a service around getting access to this space. So, since then we’ve launched three funds, our Magnet Capital Trust 1.0, which is a multi-asset fund. A Bitcoin-only passive-managed fund, as well as an Ethereum-only passive-managed fund, both of which we launched within the last eight months.

Nick:

Great. And what about as Index Manager at Coin Metrics?

Benjamin Celermajer:

Yeah, so Coin Metrics is a super interesting company, based over in Boston. They’re essentially trying to be the institutional data provider behind crypto assets. So, if you think of your SMP, your MSCIs, your FTSEs, Coin Metrics is trying to be that foundational data player that allows institutions to plug into what’s actually happening with crypto assets on chain, as well as well with market data, which is dispersed across numerous exchanges globally, be it spot markets or derivatives markets. So, providing robust infrastructure where they can plug in and really understand what’s happening in the ecosystem and market, in a very familiar way to how they do with equities and commodities and FX in more traditional markets.

Nick:

Fantastic. Well, that’s great. And, that sounds fascinating and, possibly, the subject of a further webinar down the track. And also, I should just remind everyone that cryptocurrency is a highly volatile asset. And so, what we are talking about here is in no way financial advice. And so, please do treat it as such. But why don’t we get into smart contracts? And, as a lawyer, when smart contracts came out, I was like, “Oh, hang on.” This was a few years ago. “I’m a lawyer, I know what’s contract. [inaudible 00:03:16] very difficult. And we spend a lot of time drafting them and machines couldn’t possibly do that.” And then, I found with the rise of DeFi over the last year, I had an understanding then, of actually what smart contracts are truly about and what the promise of smart contracts are. But Benjamin, could you just give us a sense of why should people be interested in the smart contracts? Why is now their moment?

Benjamin Celermajer:

Yeah. So essentially, the way that I think about smart contracts is, to draw an analogy, how I think about what the internet did for information. And what I mean by that is, prior to the internet launching, I think there were a lot of gate keepers of information and how messages were propagated around the world. And they were the news editors, the radio jockeys, the news station hosts or producers. And, what happened when the internet was launched is all of a sudden information became democratized, and anyone could launch a blog, anyone could distribute it globally, almost in real time. Anyone could comment on that, anyone could propagate that message, if it was something that they believed in, or they found interesting.

Benjamin Celermajer:

However, when the internet launched, one of the pieces of that puzzle that was missing was value couldn’t be propagated. And, you still did need gatekeepers when it came to transacting value. You still did need banks in order to settle between an individual and a consumer. Sorry, a consumer and a business. You still did need, be it FX providers if you wanted to transact money from Australia to the US, or Australia to the UK. And, I guess, there was no trustless way to do so, which smart contracts can enable. Essentially what they can allow for individuals to do is, they can allow individuals in a very trustless manner to set up a range of parameters, under which a contract will be executed in a very programmatic and predefined way.

Benjamin Celermajer:

And, what the power of blockchain is in smart contracts is that, all of a sudden it can be run by preset computer programs, as opposed to requiring these gatekeepers that have traditionally been the ones who either permission individuals or provide different levels of access, depending on who you are, be it a retail individual or an institution. And it can democratize how value is transacted and that’s done through smart contracts. So, smart contracts are just the plumbing behind the promise of what they can actually achieve, or enable us as a society to do.

Nick:

And so, if we think about that, I guess, at a slightly more detailed level, so that people get understanding of how it would work. So, in effect, if we think of smart contracts, it’s really thinking you about it as a piece of programming that executes on a particular transaction. And so, it self-executes, is it? Could you give us an example of how a smart contract might work in a more-

Benjamin Celermajer:

Yeah, absolutely. Absolutely. So, the way I try and think about it is it’s just a bunch of [inaudible 00:06:35] statements. If something happens, then do this. If this happens, then do that. If trigger A happens, go down this path. And there are several examples when it comes to, I guess, finance. One of the examples that I like to discuss is collateralized lending, because that’s something that I think is super promising and is really up and coming in the crypto asset class. But, essentially, what you can do is, with unproductive assets today … As a retail user, I can’t lend my Bitcoin to a bank and take a loan out against it, let alone any of my equities or some of my other assets that I hold personally.

Benjamin Celermajer:

But, through is some of these protocols that are being developed … Initially, it’s only for crypto assets, I should note, but eventually, hopefully, once you’re able to tokenize equities or real estate and have external oracles that provide price feeds into the value of those assets, then with the programs and the smart contracts that sit behind all of this, it allows you to take a loan out against that value. And, depending on your collateralization thresholds, it will allow you to maintain that loan, unless your value drops below a certain threshold, whereby your loan becomes at risk, because the collateral doesn’t cover the value of that loan. And therefore, the system can come undone if there’s not enough collateral in the system to back all the loans.

Benjamin Celermajer:

So, I hope I explained that clearly, but, but essentially it’s a way whereby you can, all of a sudden in a trustless manner, you can lend out your assets, you can take value out against those. And, in the background there’s a program executing all these smart contracts, executing to, I guess, verify the quality of that loan, the value of that loan, the value of the collateral against that loan. And it will trigger its own mechanics in the background to make sure that the system stays whole, that everyone operates under the same umbrella, under the same parameters, has the same permission limits. Depending on what demographic I’m from or what ethnicity I am, or where I live in the world, I don’t get different lending rates. If I’m retailer institution I’ll get the same rates. It’s just with a different value. So again, it democratizes how we interact with finance.

Nick:

Yeah. And, it’s human-less in that sense. So, it’s 24/7, 365. You mentioned there Oracles. And so, I guess, for those who are watching in a sense … So, an Oracle is just really a data point, isn’t it? It might be the US dollar. If the US dollar does something then the smart contract, in terms of your “if then” statement, US dollar does something, then, if that happens, then the transaction is triggered. I guess the most important crypto infrastructure other than Bitcoin is Ethereum. So, what is Ethereum?

Benjamin Celermajer:

Yeah. So, Ethereum to me represents almost like the internet protocol. Ethereum is the protocol on which a lot of decentralized applications and smart contracts will be built, will be launched, will operate. And the reason that that’s the case is, in order to construct these blockchains that are robust, they are manipulation resistant, they are secure, you need truly global networks, whereby you have thousands of people buying in to run their own nodes, validate the network, mine the assets so that there’s a barrier to new entrance coming and acquiring over 50%, which is super majority, which … Because these are all consensus networks, if it costs you $10,000 to gain 51% of the network, it’s easily corruptible. Whereas, if it costs you tens of millions of dollars per hour, which it does for the more secure ones like Bitcoin and Ethereum, then it can become cost prohibitive to corrupt the network.

Benjamin Celermajer:

So that’s that security that I talk about. And then the distribution of decentralization comes from the number of individuals willing to run nodes and verify the ledger themselves. In order to do that, it’s extremely cumbersome. And it’s next to impossible in this new age, whereby when Bitcoin Ethereum launched, they really launched from very pure foundations. Whereas a lot of the projects that are launched today are more financially driven and more economically driven, given the way that crypto has evolved over time. So, what Ethereum does is, it essentially provides that decentralization, that security for any applications or smart contract that wants to launch on top of it. So, it acts as the host for all of these applications and smart contracts.

Nick:

Great. And so, if we were to think about it, because I think there’s a few concepts there that we should perhaps unpack a little bit further … Because, the promise of, I guess, decentralized finance lies in that word decentralized. And so, you mentioned people who have the machinery to operate the nodes, if you like, and validate the transactions. And so, when you talk about a smart contract effectively, is that smart contract that’s sitting on a … If we think about it in a practical sense, that contract is in effect, programming, sitting on a lot of machines that are operating nodes, as it were, around the world? Is that how people should think about that?

Benjamin Celermajer:

Yeah. So, that’s what Ethereum does. So Ethereum’s got its node network. The individuals operate, corporations can operate. It’s permissionless, so really anyone with an internet connection can operate node and can validate every transaction in the history of Ethereum and any application on top of Ethereum. That is open. There can be private networks in there, which can obfuscate some information. But as long as there’s these open protocols, then anyone can validate that through running an Ethereum node.

Benjamin Celermajer:

Each protocol doesn’t necessarily need its own node network, need its own distribution. The decentralization comes from building on these base layers that are decentralized, are distributed, do have that robust security network through, I guess, the massive amount of participants that do actively participate in the ecosystem.

Nick:

Yeah. And so, just to throw a curly one in there, the concept of paying gas and-

Benjamin Celermajer:

Yes.

Nick:

And for those people that might have been struggling to date, then this might be even a bridge too far. But, can you just talk a little bit about what does that mean? Because it’s interesting. It seems to be like, if we think about a payment to use the internet in some respect, or whereas we see of the internet is free, but … Can you talk a little bit about gas and how that fits into the whole Ethereum plan

Benjamin Celermajer:

Completely. Completely. So, you’re absolutely right. If every time you clicked on a new internet page, you got charged a couple of cents or something to the like of that, I doubt we’d be using the internet as much as we do today.

Nick:

Yeah. Yeah.

Benjamin Celermajer:

But unfortunately, for Ethereum and these networks, or these blockchain networks, I should say, such as … It’s the same with all of them, Bitcoin, Binance, Solana, Cardano. Because you need to incentivize the miners, and we can talk about miners a bit later, if you want. But, because you need to the miners to participate in the network … And when I say participate in the network, the more miners you have, that’s your security layer. So, when I talk about the cost to corrupt these networks, the cost is essentially the compute power or when Ethereum transitions to proof-of-stake, it will be the value stake to Ethereum. That essentially provides your moat around security.

Benjamin Celermajer:

So, at the minute, Bitcoin and Ethereum run on proof-of-work. And proof-of-work is essentially the miners need to provide compute power to the network, in order to process transactions. And compute power is expensive. If anyone’s contracted with Microsoft, as you were in the past, getting GPU tips, getting the specific tips to buy Bitcoin as well, they’re highly expensive. And there’s lots of electricity costs. There’s calling costs for the data centers that you run them in. And that’s the cost that essentially creates that cost prohibitive part in order to prevent corruption in the network.

Benjamin Celermajer:

So, really what you’re paying for when you pay for every transaction utilizing Ethereum as the base layer, is you’re paying to maintain security. You’re paying to maintain the history of every transaction that happened on Ethereum. And you’re paying for the immutable nature of the network, in that when you settle a transaction, you want to know that there’s finality in that transaction on these [inaudible 00:16:09] networks. Because it’s not like a bank’s ledger, whereby it’s debits and credits on paper until they settle at the end of the day, or at the end of 30 days if it were for a credit card, for example, that can be reversed, it can be undone, it can be unwound.

Benjamin Celermajer:

Once someone settles on these decentralized networks, you want to know that that value’s settled and that value will settle forever. You don’t want to, all of a sudden pay someone for a house and then in a day’s time the network’s corrupt and that transaction’s unwound and you’re living in the house and you’ve got the value back in your wallet. That wouldn’t work in a society and, therefore, that’s what you’re paying for. You’re paying for that security, you’re paying for fidelity of transaction and you’re paying to, I guess, participate in this decentralized, distributed trustless value ecosystem.

Nick:

Yeah. And, if we think about the internet and build on Tim Berners-Lee’s work with how the web would operate. And, obviously, Tim Berners-Lee had nothing further to do with the internet in terms of taking a piece of the value created by that. And no one essentially owns the internet. Because, Ethereum is obviously a company or an organization, how does that work if we think about the idea that … And Ethereum is obviously only one of the smart contract infrastructure players. But, how should we think about Ethereum when it comes to smart contracts? And, do have any residual control over how the network works? And so, is that an issue that people should be concerned about?

Benjamin Celermajer:

I could answer “yes” in one way and I could answer “no” in another. What you want as a participant in this network is, you want to know that the code will execute as per the way it’s prescribed. If, all of a sudden, there are master levers that can be pulled or master keys that can change inputs or outputs, or especially outputs I should say, then immutability is out the window. You don’t know that there’s finality in transactions and you lose trust in this trustless network. And that, to me, would be a critical failure in Ethereum or any of these blockchain networks, if that were to happen.

Benjamin Celermajer:

So, to that extent, the answer on that side of the equation is “no,” in that there is no master controls. There is no one that can change transactions or go back and fiddle with what’s happened in the past. And undo, be it … Even if it’s illicit transactions or thefts or hacks, they can’t go back and undo them. Because, if you can go back and undo them, you’re back in a centralized world where you’ve got a few people pulling strings in the system. And, if you do want to have this trustless system, whereby you know the parameters that you’re operating under and you know they’re not going to be changed, then you can’t have people pulling strings in the background. Where I will say, potentially, is that there are developers that do develop the network daily and they maintain the network. They propose new proposals. It sounded clunky, but they propose new improvements, I should say. And, they do get pushed.

Benjamin Celermajer:

So people can upgrade the network. It is actively worked on, but their incentive is to work on it in a manner that is beneficial to the community and the ecosystem. Otherwise, if they were to upgrade where every user and miner didn’t agree … If the developers thought, “Hey, this is great for Ethereum,” but no user and no minor agreed, the users and miners can still operate on the old version of Ethereum. And, the developers could to upgrade to a new version, but if no, miners are mining transactions on the new version, nothing will go through. If no users are using it on the new version, no developer will stay there all that long, because they’re incentivized to be in the most vibrant community, because that’s where they want to play.

Benjamin Celermajer:

So, it’s this nice ecosystem whereby there are multiple participants that need to agree on every upgrade in order for it to fruition. And that’s where the concept of forks come in, if you’ve discussed those? I’m not sure, but essentially whereby you can have two versions of Ethereum. And there are two versions of Ethereum at the minute. There’s Ethereum and Ethereum Classic, but most of the users, participants and developers stuck with Ethereum and didn’t like the parameters or the rule set that Ethereum Classic was operating under. And therefore that’s where most of the value stayed. And, that’s reflected in the price of Ethereum and Ethereum Classic today.

Nick:

Yeah. No. it’s been fascinating to watch the price differential between those two currencies. You mentioned there, or a little bit earlier, the idea of moving from Ethereum, moving from proof-of-work, proof-of-stake, and that one of the big criticism that’s been leveled at crypto is its energy usage. And so, can you talk a little bit about, what does it mean for this new version, if you like of, Ethereum 2.0, with moving to proof-of-stake.

Benjamin Celermajer:

Yeah, absolutely. So, currently, as I mentioned before, with proof-of-work, the way that you prove your work to the system is, you provide compute power. Compute power, as we discussed was costly and expensive. And if you are using coal resources or any kind of natural gas, there is a carbon footprint that that leaves on the environment. If you’re using sustainables, that’s a different story. But, as you mentioned, there has been concerns around the carbon footprint or the environmental sustainability concerns around proof-of-work as a consensus mechanism.

 

 

DeFi & Crypto – The Australian Perspecitve – Jonathan Miller

Speaker 1:

Ladies and gentlemen, welcome to our session today. I am delighted to have another luminary from the crypto world. Jonathan Miller, who is the managing director for Australia for Kraken. So Jonathan, thanks very much for your joining us today.

Jonathan Miller:

Thanks for having me. You’re too kind.

Speaker 1:

Not at all. Why don’t we just get straight into whether I was too kind? So you are, I think, Jonathan, one of the rare people in Australia who has been a believer in crypto through the dark times and obviously it’s had its better times recently. But can you give us a little bit of your background and how you’ve come to the position that you’re in now?

Jonathan Miller:

Yeah, absolutely. So I was privileged enough to work with a bunch of people who got really excited about Bitcoin in 2013. It’s a while back.

Speaker 1:

It’s a long time ago in Bitcoin terms.

Jonathan Miller:

Yeah, that’s right. In the crypto world, it’s a while ago. So we took the approach to leverage our skillset. There was a group of five of us and I had a product management background so I did a fair bit of product consulting and got really excited about blockchain. I was a Venn diagram, really, of my interests with an academic interest in macroeconomics and practical experience as a product developer and a software engineer. So that Venn diagram, Bitcoin sat in the middle there for me as a non state issued programmable money. And so I got really excited about blockchain and then as the years progressed, we also realized it was super hard to get in Australia so we built a brokerage and that was called bit trade. Over the years, as they progressed, I ended up taking over the managing director role of that business. We explored a whole bunch of different opportunities in the space.

Jonathan Miller:

One very fortunate day, one of the other founders introduced Kraken to us and it made sense for them to take over this business. So we exited into subsidiary of Kraken and now I’m really proud to be representing Kraken in the market here in Australia.

Speaker 1:

So it’s just such a fantastic story. And I can remember bit trade when it came onto the scene and it was one of the key players in Australia. And for Kraken to come along and see the opportunity was just terrific. So maybe could you give us a bit more about what is Kraken?

Jonathan Miller:

Sure. Kraken’s a really interesting business. They’ve got a couple of products probably know, which are fundamentally a crypto exchange. But what they are interested in doing is building an integrated digital wealth platform that’s crypto native. So over the years, we’ve slowly progressed the product and its different guises and there’s a couple of different touchpoints. We’re iterating on that idea at the moment. So where Kraken began, actually earlier than bit trade. One of the really early exchanges out of the ashes of Mt. Gox, Jesse Cox, the founder of Kraken, he was I think would’ve been a client of Mt. Gox. And he realized…

Speaker 1:

Oh my. [crosstalk 00:03:32]

Jonathan Miller:

I don’t know about that. He definitely was involved in trying to help the team get funds back to people. He offered his expertise. He’d run his own marketplaces before, digital asset marketplaces, actually. He realized that that crypto exchanges needed to professionalize in order to grow and to provide the services, that I guess you’d call them more mainstream, our clients would expect. So that was his mission. That was the original mission of Kraken. We’re growing now into a business that’s really interested in ensuring that everyone can get access to crypto assets and understand them and leverage their opportunities they’re in. And there are a whole bunch so we can talk about that, but that’s an overview. Cryptocurrency exchange is a short answer.

Speaker 1:

Fantastic. Why don’t we get into what the opportunities are because I think crypto’s had a few winters where it’s fallen out of favor and then obviously recently it was a big run on the assets and they went to some pretty impressive valuations. I guess if we look at the crypto world, what excites you? Where do you think the opportunities are?

Jonathan Miller:

It’s a good question. There’s a lot of areas I think are still super innovative. Everyone knows Bitcoin, but there’s more than Bitcoin. It’s interesting to say that now because there was a time relatively recently when everyone didn’t know Bitcoin. So that’s part one. I think part two is the Altcoin space and that happened in 2017. And now part three, we’ve seen the evolution of some really interesting layers on top of these protocols and also an evolution of the protocols themselves. So something that Kraken’s really excited about, I’m excited about, I’m proud of what Kraken’s done with this, is the staking space. So for example, proof of stake networks, they allow people to become participant to the distributed consensus at the protocol level become a minor, so to speak, of the tokens, but to do so without setting up machines and running big warehouses full of CPUs, all those photos you see in China.

Jonathan Miller:

So proof of stake is an alternative to that proof of work and you can stake your coins into these proof of state networks via Kraken. That’s a really exciting, I think, evolution in the… Do you call it cloud mining? I don’t think so. It’s more decentralized participation through trusted third parties like Kraken. We administer people into these spaces and allow people to become a validator through us so they can stake their tokens and get rewarded for doing so, for voting really, on the block. So that’s a complex idea [crosstalk 00:06:37]

Speaker 1:

Can we [crosstalk 00:06:37] leave that complex idea? We might try to unpack that a little bit because probably some folks might not quite get the sense of proof of work and proof of stake and so forth. So maybe could you just explain briefly the proof of work concept and how proof of stake seeks to redress perhaps some of the issues associated with proof of work?

Jonathan Miller:

Yeah. So proof of work is a quite a fascinating mechanism. It’s a real innovation. It’s what made Bitcoin work. It’s a deployment some game theory into real world. And what is happening is, when you participate in the Bitcoin network as a minor, as a validator of transactions, you have to prove that you are a good actor by fulfilling a race condition. Now, what does that mean? It means you get a computer and you run a program and that program is the Bitcoin software, which is open source. And as part of that software, you solve a puzzle and the puzzle enforces the use of CPU time. So real hard electrons, I guess hard’s not the right word for electrons, but there are hard costs involved, that’s for sure. Power costs, the electricity costs to run those CPUs, to run the cooling of those CPUs, the build costs of the machines; all of the costs associated with running this puzzle.

Jonathan Miller:

So what that means is that the players that are participating in the network as validators have a sunk cost and a variable cost associated with that participation. There is actually a disincentive to be a bad actor as a result. So that’s a really cool mechanism. It’s got critics though because it consumes a lot of power, but that’s the genesis of it; it essentially means that if you are a validator, you have something to lose by being a validator because you’ve put cost on the line. You’ve got stake in the game, so to speak. Now, when you abstract that away then, and this was quite cleverly abstracted by some of the core developers in the Ethereum community and I remember seeing them speak some time ago on this, if you abstract that away and you think about it from that [inaudible 00:08:54] theoretical level, what is the difference between having stake, having something on the line?

Jonathan Miller:

Because remember, if you put out a ledger that’s wrong and you’ve spent all that money, you get no reward. So you have an opportunity cost. The same could be said for just putting tokens into a lockbox. That’s what proof of stake is. Instead of buying the computers, running these network operators in warehouses, you do it digitally. You put some skin in the game and you have something to lose by putting these tokens into a box. And if you, as a network validator, say that the network is one way where it actually is the other, when you don’t come to consensus over who’s got crypto, for example, if I said, “No, no, it’s all mine,” I would lose what I put on the line. So really, it’s just an alternative way of enforcing the same disincentive for bad actors on the network. I hope that gives you an idea of what the difference is between those two networks. One is power, one is value; a locked value.

Speaker 1:

It’s a hard asset that you’re putting up. And I think

PART 1 OF 4 ENDS [00:10:04]

Speaker 1:

That you’re putting up. And I think time and time again with crypto, the thing that brings me back to it that I feel like why it’s going to be part of the future, is it’s just the elegance of the solution. I mean, the original blockchain architecture was remarkable, that decentralized approach, and the way it validates and so forth. Similarly with proof of stake. So can you just talk a little bit about to… How does that work if someone is staking through Kraken… So what’s actually happening… So they put that crypto with you for staking. What’s the deal for them? What do they get?

Jonathan Miller:

Sure. What happens is, as a validator, if you were a Bitcoin miner, you would get Bitcoin and you would get that because the blockchain, as it’s produced, releases new coins over time, and also you get transaction fees from the network. So as people are using crypto, they’re spending fees to send from A to B./ If they’re using something like Ethereum, they’re spending from A to B, but also they’re spending to get the contract or the program that they’ve written that exists on the blockchain running. So there are fees associated with these networks, and as a validator you collect those fees. So there’s a reward for participating in these things. With the staking protocols, proof of protocols, you get those same rewards for being a validator, and what we’re doing at cracking is really interesting is we’re administering people onto these platforms.

Jonathan Miller:

So by that I mean helping them lock their funds up into the protocol. So there’s a technical role we’re playing, but the protocol level is the part that’s doing all the work. So this is very different to, say, for example, taking someone’s money and saying that you’re going to do something with it and give them a return. This his is not what that’s about. This is about plugging people into the native protocols of these proof of state networks and letting them become a validator without having to learn all those technical skills themselves. So that to me is an innovative step because there are barriers to entry when it comes to mining, and we’re trying to reduce those. And that’s really part of one of the themes of this business. And then you can go broader than that, and maybe we want to talk about this stuff, but the next evolution beyond that, that’s an example of a decentralized network where value is being… Not necessarily traded, but distributed between people almost automatically. There are other versions of that deployment, which are fashionably now known as DeFi or decentralized finance, and that’s another area.

Speaker 1:

Great. Just before we get off, because one of the question… I usually always preface these with a warning to people who are listening, but this is not financial advice. Because one of the problems with crypto is the minute you start talking about a lot of people get a bit excited and want to jump in. But in terms of what you are doing with the staking, which is obviously different to staking that we might talk about in DeFi, those staking transactions, is that… Because with Ethereum, we’re talking about Ethereum 2.0, proof of stake and so forth. What sort of applications are currently running the proof of stake solution you’re talking about?

Jonathan Miller:

Sure, absolutely. And I think it’s a good point you raise when it comes to the financial nature of these technologies. There is an interesting problem there because you moment you start talking about these technologies, you’re talking about money, digital money, but I would say, and I would preface everything that I say, with this, which is that these are experimental technologies. So if you are interested in getting involved with them, it’s really important to do your own research and not rely on other people’s points of view. But I’m really happy to talk about this stuff because it’s super interesting. I guess my take on the current state of play for proof of state networks are that they’re still very experimental, but some of those are doing some really interesting things, in particular DOT and Kusama.

Jonathan Miller:

Those two networks are… In a way they’re spinoffs from Ethereum. They’ve had similar core development teams that have been involved and they have similar use cases being designed for smart contracts, so to speak, or programs that run on a blockchain. And one of the protocol level differences that’s quite fascinating is the way that they manage token issuance. So one of the things that Ethereum does really well is produce other tokens. You might have heard of ERC-20 tokens, but these are the tokens that were used during ICOs. These are the tokens that are used to represent a lot of things, including NFTs, which you could talk about as well, but DOT and Kusama have a different model for issuing tokens on their network. Because one of the things about Ethereum is that it’s quite popular and it’s almost overloaded by the token use case.

Jonathan Miller:

What DOT and Kusama have developed is what they call a parachain approach. It’s a snazzy word, but what it means is that there’s a limited number of other tokens available for you to mint or produce on their network, and the way that they choose which people to create these other tokens you is via auction. So they create a another race, and they love races. They love marketplace. It’s one big neoliberal marketplace romp, the crypto world, but it’s great. It’s really fascinating, and super interesting. So the parachain mechanism is essentially an auction, and the auction winner slot, they’re allowed to then create their own token on that network. And what the auction requires is people to stake their coins. For example, if it’s the DOT network, and they haven’t gone live with that yet, by the way. Kusama has.

Jonathan Miller:

So Kusama, you stake your Kasam into the project that you… You back the project that you think is interesting, and those coins get locked into the network. And if that project is the winner in the auction, and this is all just… There’s no humans counting this, this is all programmatic. If that project is the winner based on the auction conditions, then the participants will receive their stake back, but they’ll get the reward of the coins that the project have produced. So that’s an interesting project and idea because it solves for a couple of things, and one of those is the scalability issue, because it limits, in way, the number of possible projects. Now is that the ultimate solution? Probably not. But it’s just a good example of how you can use decentralized systems to solve problems. There’s a bunch of other de decentralized tokens out there, but only a handful of them are really actively using proof of stake at this point, so I think there’s probably six or seven that we support on our platform for staking.

Speaker 1:

And just the final question on proof of steak, just because I think it’s important, is can we think of proof of stake as solving the proof of work energy consumption conundrum? Because Bitcoin, I mean, I assume you can’t reverse engineer Bitcoin, it’s going to be proof of work forever, is it? Does proof of stake solve our issue?

Jonathan Miller:

Its pitch does that, and there are critics on either side, that people that think that proof of stake will lead to more centralization. The question is to whether it’s more efficient or not. It definitely uses less power because it doesn’t require that proof of work, that race condition, the CPU cycles. So it exists in a lighter sense from a consumption point of view. But the goal and the intention behind these problems, or the puzzle in the proof of work design is to ensure that the networks are strong. So there is the potential that that proof of state networks could become too centralized, and therefore you might lose the resilience that you get from proof of work. That being said, because the proof of work protocol has been so industrialized, there’s only a limited number of players that can participate there as well.

Jonathan Miller:

I think that it’s a head to head argument and you can solve the consumption problems, the dirty consumption problem, that is, by plugging crypto into renewable energy. In fact, it’s the cheapest way to do it. And with China exiting the space, or enforcing the exit of the space for miners, you’re going to see more and more renewable energy mining coming online, because that’s the cheapest for energy outside of China. So yeah, it’s not a pure solve, because it’s still experimental, so people are yet to see proof of state networks, I guess, in full action. So they’re on the battlefield, but they haven’t been hardened like Bitcoin has. So I think proof of work is a really powerful and important part of blockchain at the moment.

Speaker 1:

Brilliant. Brilliant. So you mentioned it just before, decentralized finance, obviously pretty hot topic around the place. What’s your view on DFI? How does Kraken fit into the DeFi world?

Jonathan Miller:

Sure. So DeFi, decentralized finance, in a way Kraken is a centralized… We’re a centralized exchange. We’re a fully audited reserved exchange and we’re-

PART 2 OF 4 ENDS [00:20:04]

Jonathan Miller:

… reserved exchange, and in that sense, we’re old school. Decentralized finance though, there are lots of different types of distributed consensus networks, and you can build platforms on top of them. And in Ethereum, there have been some builds of decentralized exchanges, but also more specific use cases, like for example, decentralized lending markets. So I think it’s a great example of what DeFi is, because most people know what lending is. And lending is a pretty cumbersome process, in the real world, there’s counterparty risk, it’s complicated, relying on traditional assets, and custodians, and attestations from third-parties, certificates of currency, legacy systems, to get a handle on people’s asset base, upon which you will then lend them. That’s quite an intensive process, and a costly one.

Jonathan Miller:

Whereas, lending based on someone’s kind of native crypto assets, which are verifiable on blockchains, for example, the Ethereum blockchain, or even the Bitcoin blockchain, you can see, and you can lock up these coins on the network, you can say, “These are there.” It kind of makes credit risk, in this certain sense, much easier to assess. It’s limited to people who already have those assets, but that might change over time as we see more and more tokenization of assets. But the point is, the blockchains, especially ones built on the current status quo blockchain for these kinds of things, which is Ethereum, it’s indulged in a system, so you can see the assets, you can lend into them, you can lend to that counterparty using a crypto asset, but perhaps it’s a stable coin, so something that’s not as fluctuant in value. And you can do that, and you can manage the interest rates, the liquidations of the collateral, you can kind of deal with the clearing and the settlement of this lending action online, programmatically.

Jonathan Miller:

So that’s why people get kind of interested, because, “Whoa, you can do that?” And there’s a lot of caveats there, as I mentioned, it’s limited to people dealing in that [inaudible 00:22:19] space, with those types of assets, but it is a really interesting development in the crypto world. And then there are other markets, so for example, there’s an Australian project, well, by Australian I mean one of the founders was Australian called Synthetix, which is a derivatives platform built on the blockchain, where the kind of… Well, firstly, the exchange itself is decentralized, the counterparties come and interact in a decentralized exchange, but the derivatives, the way the derivatives attract are on the blockchain, and they are kind of tokenized versions of the real world, supported by participants who essentially kind of support them with other digital assets underneath.

Jonathan Miller:

So you create liquidity on these networks, but with counterparties, that could be anywhere. It’s a really fascinating project that evolved out of stable coins actually. It’s an abstraction in a sense from a stable coin, because a stable coin, in a matter of speaking, is just an asset based on the value of another asset. So it’s a really interesting project, and the reason I bring it up is because there are people experimenting with all the kinds of platforms that exist today in kind of a centralized space, people are experimenting with those in a decentralized way. And I think that the DeFi spaces is, if anything, kind of one of the more explosively disruptive parts of the crypto world.

Speaker 1:

Okay. Well, everyone, welcome back. This was such a great, great interview that we decided to do it in two parts. And so welcome back, Jonathon. Just what I’d love to talk to you about now is really, how does DeFi impact traditional banking? And I had the opportunity to speak to the head of digital banking at one of the big global banks, and that person’s view was that DeFi was certainly interesting, and they are monitoring it quite clearly in a lot of detail. But their view was that they’ve been around for 200 plus years, and they are going to see where the opportunities for DeFi are for them, and ultimately will participate in DeFi where it makes sense for them, and so didn’t really see it as the end of banks as such. So how do you feel? What’s the intersection there between DeFi and the traditional banking system?

Jonathan Miller:

I’m not surprised that this entity has been looking at it, because banks follow the money. If you think about what is happening in the decentralized finance space at the moment, one of the functions is liquidity pooling, and banks have liquidity, so if they can get a return on their investment in one arena, they’ll go there. And so I don’t see why this is any different to other markets in that respect. Where it does become interesting though, is when it starts to who potentially disrupt other parts of the model. So as far as banks are deployers of capital, no, I think this is just another arena, I fully agree that it’s not necessarily disruptive in that sense. It might disrupt the way go about doing it, but as far as the function of leveraging capital reserves, and finding a return, that’s normal, that’s business as usual.

Jonathan Miller:

Where it becomes interesting, and potentially disruptive, is on the other side, so the people who are making use of their funds. At this point in the DeFi space, there’s a lot of trading, and a lot of the liquidity is there to provide trading liquidity in decentralized exchanges, and building other products on top of that, for example, decentralized derivative products, which are backed by these liquidity pools, and the liquidity pools are decentralized, so instead of having a derivative that requires a custodian to sit on all these funds, you can have a kind of programmatic view on that. A stable coin is that kind of thing as well, so there’s decentralized stable coins.

Jonathan Miller:

So those kind of use cases aren’t necessarily threatening, a little bit perhaps threatening to international flows. But then you have lending markets, so there are ways you can borrow money against digital collaterals, so you might have crypto in some form that might be say, Ethereum, and you might not want to sell that, but you might want to borrow against it, well, you could do that, but the people you’re borrowing from, the counterparty that is going to lend to you is actually a whole pool of people. And those counterparties might indeed be banks, but they could be anyone. So these decentralized marketplaces for liquidity do indeed, I think, come head-to-head with some of the other business models that banks, or I think, have dominated for some time. So I do see that as a potential disruptor.

Jonathan Miller:

The gap at the moment is that, in order to play in the arena, you need the crypto to begin with. So there’s a bit of an air-gap between the crypto world, crypto assets, and other assets that you might want to borrow against. So it’s very hard to borrow against your house in a decentralized finance platform, because the house is air-gapped from the crypto world. But there are people thinking about how you can bridge assets in and represent them digitally in a way that is enforceable. And I think property, there’s a long road before we get there, but there are lots of people thinking about how you can do that with other assets, how you can secure assets into custody, have them represented digitally, and then participate in marketplaces that are global and decentralized. And that’s why you’re seeing so much investment going into decentralized finance, because they can see the potential.

Speaker 1:

I agree, that concept of the tokenization of physical assets, and particularly assets that traditionally we’ve seen as been quite difficult to securitize, because it says if you want to do a securitization, generally speaking, it’s quite a big proposition, and you need a lot of people involved, and investment banks, and so forth. Whereas, we’ve been talking to folks about securitizing pieces of plant and equipment recently, big pieces of plant and equipment, but using tokens to do that, and of course, because it’s decentralized, your transaction costs are much lower. So I think it’s a lot of interesting things ahead on that front.

Jonathan Miller:

Yeah, at worst, it’s a marginal efficiency gain, but at best it completely upends the existing models.

Speaker 1:

Yeah, yeah, no, interesting times. Just changing tech slightly, so Australia’s got some good crypto businesses, and yours of course, was one of them, and Kraken and saw the opportunity there. How do you see Australia performing in, I guess the war for talent, it’s very difficult to get quality programmers who understand this stuff, particularly in the NFT space and so forth. How do you see that rolling out for Australia? Will we have a seat at the table, or will we be left behind?

Jonathan Miller:

I think Australia is an interesting place. I think the recent turn of events with us becoming more isolated is potentially, and has an impact, because we’ve attracted talent…

PART 3 OF 4 ENDS [00:30:04]

Jonathan Miller:

… has an impact, because we’ve attracted talent. Australia has attracted talent, because of lifestyle, and so we’ve got a lot of inbound talent to Australia. Businesses here can rely on that talent, and there’s some amazing, in the crypto space, some really interesting projects. I think I mentioned some already, even when I was talking about decentralized derivatives platforms, one of those happens to be… Well, kind of, I guess, seeded by and kind of managed by an Australian, so there’s a lot of talent here.

Jonathan Miller:

In terms of the idea, I guess, the limits to that, and I think this is true for any startup in Australia, is access to capital, to venture capital. That’s got a lot better, even when we started out, venture capital, in our particular industry was… Australia lagged, I think, relative to the U.S., so most of the big crypto… For example, Kraken. Well funded early. People take risks, right? Crypto, I think taking risks in Australia is happening now. Absolutely, so I’m not going to go out there and say people aren’t taking risks and there’s been an amazing amount of capital flowing into really interesting projects, but I think we were behind in terms of that. We generally have a smaller pool of capital available to startups in this market, so that’s why people go overseas, I think still.

Jonathan Miller:

In terms of the talent that’s available in Australia now, I mean, Kraken’s got a whole bunch of Australians behind the scenes working in its business, and some of them are doing some really important things for the platform. They’re in kind of important innovative roles, and so I think, globally, we’re recognized as having well educated and capable people, full stop. That goes all the way down to crypto engineers. I just look at the scene here and I’m pretty excited at what’s happening here.

Jonathan Miller:

The question is, can you scale as fast as others, and that then is the capital question? I think that’s where we need to do better.

Speaker 1:

Just finally, is there anything else that Australian needs to be doing to set the right levers for us to be successful in the crypto and the DeFi world?

Jonathan Miller:

I think so. Yes. Look, it’s slightly less sexy area to talk about, but the regulatory constraints in Australia are definitely visible, and some of that’s because of gray area. There’s a little bit of gray area, and some of that’s because of… I mean, there’s been a recent call for a restructuring of our regulatory bodies into a more kind of harmonized shape. Perhaps that’s a good thing. As long as however that new structure that is deployed is done in a way… It does so in a way that allows innovation, because the problem is we’ve dealt with it.

Jonathan Miller:

Prior to working at Kraken we did a fair bit of consulting for startups and people get scared. They get scared that they’re going to get in trouble in the future, and that was true for a couple of projects we worked on, and rightly so, because I think that sometimes we can bring in a regulator that has been a relatively conservative, but in the end, generally speaking, it’s hard to argue with consumer protection. We’ve got to strike a balance. We’re not calling here for a free-for-all, but I do think that any future regulatory changes, especially in the crypto space, should keep the space open, as open as possible.

Jonathan Miller:

There’s a lot of competition in the market at the moment. That’s a good thing. That’s fantastic. People who are building these decentralized finance models, if they suddenly have to become a bank to do that, I think we’re going to miss out, and the consumer will miss out on the upsides of innovation. It’s a careful balance that we have to strike, and the last thing I want to see is the kind of thing that’s happened in other markets.

Jonathan Miller:

We actually have a markets license in Japan, so Kraken holds a Tier 1 market license in Japan, but from my point of view, as an outsider, even though I’m part of this organization, it’s an onerous requirement. They had a catastrophic kind of first mover issue there with Mt. Gox losing a lot of money for a lot of different people, and so that was the reaction, and I can see why that has happened. However, I think if Australia went down that road, we would just see a complete and utter stifling of innovation in this space here. I think that’s been true of some other markets.

Jonathan Miller:

Even the U.S. has struggled a little bit with this, with the different regulatory zones from state to state has caused a lot of issue. Kraken has had to kind of weave its way through that. I think there’s a case for some clarity in general, around some of the things that… The financial services legislation doesn’t really understand crypto yet, so there’s definitely a case of clarity, but I don’t think we need to go heavy handed in licenses, because that’s one thing. That’s the kind of boring thing. In the sexy thing, I think is about culture change when it comes to risk taking from an investment point of view, and that, that’s a bigger question, because I think a lot of the culture in Australia around investment from where, I guess, the biggest sources of capital. They’ve had the luxury of property and that luxury continues today, but that’s a rational choice.

Jonathan Miller:

At the moment, the choice for capital is to look at returns, and look at quality and the risk associated with those returns. At the moment, you can look at the property market and you can compare that to investing in a startup. I think nine times out of 10, or maybe it’s 99 times out of a hundred, someone’s going to invest over there instead of here, so I think there’s a cultural issue. Some of that’s structural, some of that’s just legacy, so we need to get more… We need to take more risks, I think, as a class. It’d be nice to see more steps like the one that Reinventure took. More direct investment in some of these types of businesses, especially crypto businesses, because if you don’t get into these, then it’ll happen somewhere else. It just will.

Speaker 1:

Yeah. No, it’s a great. It’s a great point. The bit about property, it reminds me, I was speaking to a U.S. venture capitalist, I asked him the question, “Why is it that the U.S. has so many serial entrepreneurs and Australia doesn’t have a lot of serial entrepreneurs?” He said, “Well, the reason for that is actually three reasons, and that’s Byron Bay, Byron Bay, and Byron Bay.” He said, “The basic Aussie entrepreneur, when they make $50 million they head up to Byron Bay, they buy a bunch of properties, and it’s a great life.” That’s less relevant now. It was a few years ago that he said it, but it’s so true when you look at property returns on a relatively risk free basis compared to startups.

Jonathan Miller:

Yeah, but look, we’re seeing people buck the trend. Mike Cannon-Brookes-

Speaker 1:

Amazing.

Jonathan Miller:

… is doing a lot of really kind of groundbreaking stuff and he’s taking risks, big time risks, and we want to see more of that. I think he’s a great example of what the next generation of a successful startup kind of entrepreneurs exited on… Or he’s not exited, he’s still in, but he’s in a position to leverage his assets and deploy them into new ventures. We need more people like that.

Speaker 1:

I agree. It’s fantastic. Just on that regulatory point of view, I think, one of the things that… and obviously the Australian government has a review going on in relation to regulation of crypto, et cetera. But I think what’s really got to be top of mind is, this is a real risk issue for sovereigns, because they could completely lose control of their fiscal capabilities if they lose control of financial services market, which could potentially, if it goes all offline. I think there has to be that balance struck, as you say. It’ll be very interesting times.

Speaker 1:

Look, Jonathan, thank you very much. This has been a two parter, but really appreciate your time. Thank you for joining us. Best wishes with Kraken. I know it’s going fantastically and just the recent surge in crypto has been wonderful to watch, and we’ll continue to watch you and check in with you in a year or so’s time, and see how things are going.

Jonathan Miller:

Thanks for having me and yeah, absolutely happy to talk to you about anything crypto related in the future. It was great.

Speaker 1:

Fantastic. Thanks Jonathan.

Jonathan Miller:

Cheers. Bye.

 

 

 

 

NFTs, non fungible tokens with Tim Lea

Speaker 1:

Nick Abrahams:

Hello, everyone and welcome to today’s session on NFTs, non fungible tokens. Now, unless you’ve been living under a rock over the last 18 months, you will be familiar with the concept of NFTs. We’ve seen really NFTs joining cryptocurrency and the metaverse as, as this enormous movement described by the broader descriptor of Web 3.0. And I’m delighted today have joining me, Tim Lee, who is the CEO of Walking Between Worlds. Tim, Welcome. Thanks very much for joining us.

Tim:

Thanks Nick. Thanks for the invite. I appreciate it. Very keen to share all about NFTs and all the misconceptions.

Nick Abrahams:

Yeah. Well, so Tim has been around the NFT world for a good period of time now and is a true expert in the space. And if we just have a look at some of the things that we’ve seen, first of all, it was in the art space and we saw NFT digital artwork selling for $60 or $70 US million. Then we saw it in the sports world and the US basketball [inaudible 00:01:22] the NBA selling top shots, little video NFTs of great basketball shots for millions of dollars. And then relatively recently Penfolds, the wine company, launched a fascinating NFT product with NFTs for a very, very premium wine, which allowed people to actually trade the wine without having to leave the safe storehouse that it’s in. So, there’s a lot happening, both for individuals and what the NFT world might mean for individuals and finding your own creative streak there, but also for enterprise. And so, Tim, maybe we roll it back a little bit, and what is an NFT?

Tim:

Yeah, it’s interesting. An NFT technically, it’s a non fungible token. And without getting too heavy into the technology, it’s a unique identifier of a particular digital file. It’s almost like a digital fingerprint of a digital file. I mean, in technical terms, fungibility is where you’ve actually got something that can be automatically exchanged like one $20 bill is the same as another $20 bill, which can be, oops, I’m so sorry. That’s my phone. Let me switch it off. Sorry guys.

Nick Abrahams:

No worries.

Tim:

Sorry. That’s my bad. Sorry.

Nick Abrahams:

You’re right.

Tim:

Sorry guys. I apologize.

Nick Abrahams:

Why don’t we take it back to, I’ll just ask you what is an NFT and you can-

Tim:

Yeah. Sorry.

Nick Abrahams:

… take it from there. No worries. No worries. And so why don’t we roll it all the way back to the beginning. And Tim, what is an NFT?

Tim:

It’s a great question, Nick. It’s one of those things that has a lot of confusion around it. An NFT is non fungible token, and the easiest way to think of it is like a digital fingerprint of a digital file. So, if you think of your own finger, I mean, there are something like 84 trillion versions of a fingerprint. And when it comes to NFTs, there are the equivalent of all of the grains of sand on the planet in terms of the number that is potentially available. So, it’s really a digital fingerprint. It’s the easiest way of remembering it.

Tim:

I mean, technically fungibility relates to something being easily exchanged. A $20 bill is exchangeable for a $20 bill or four, $5 bills. But a Mana is not as exchangeable as, for example, a DaVinci piece might be. They’re completely different. They are unique pieces. So, a non fungible token is a unique digital identifier for a digital asset, most notably a digital file. And one of the key things to understand is that if you change a full stop, a frame of a video or a pixel on an image, the digital fingerprint will change.

Nick Abrahams:

In terms of how that might work, let’s say for example, I want to send a photograph of my kids to my mother. Let’s say something simple like that. Now I can make infinite copies of that photograph digitally, but will every copy of that photograph have that same token identifier? So, there’ll be sort of, I will be regarded as the one sort of owner of that NFT if I was to make this photograph an NFT. So, it wouldn’t stop it from being copied, but it would show through the blockchain that I was the actual owner of the original NFT of that image.

Tim:

Yes. Correct. It’s very much that the original image would have that digital fingerprints, and that would actually identify that you had produced the actual original photograph. So, then that could be tracked back. Now, the reality is that if you’re sending multiple copies, I mean, it would be an identical reference point because it’s the same file. But you can create limited editions if you’re an artist, for example. So, one can create an NFT relating to a limited edition set of prints. But essentially without getting too knee deep in the weeds, just think of it like an authentication layer. And that’s like your fingerprint defines you, the digital fingerprint defines your ownership in this particular case of the image that you’ve actually made and produced.

Nick Abrahams:

And this is all enabled by blockchain technology?

Tim:

Correct.

Tim:

Okay.

Speaker 1:

Correct. Absolutely. Absolutely.

Nick Abrahams:

And so this marketplace seems to have exploded over the last year. I mean, how big is it now?

Tim:

It’s exploded. I mean, the best way of looking at it is to say that in quarter three last year, the sales of the NFT marketplace overall were $22.1 million. In the same time period this year, they’re $5.9 billion. So, it’s 265 times increase in the volume of trades and sales that have actually gone on. So, if you look at the explosive growth, I mean, it’s one of the largest growing markets on the planet and we’re just at the beginning of where this technology’s actually going to go.

Nick Abrahams:

Yeah. 250X, that’s not a bad growth inside.

Tim:

It’s a nice growth. It’s a nice growth. And a lot of that came as you were saying before, like the NBA top shots, in the first month that they produced those, they sold $232 million worth.

Nick Abrahams:

Wow.

Tim:

So, it’s really significant sums that are beginning to come into this space and it’s just the tip of the iceberg.

Nick Abrahams:

Yeah. And I guess, why are people buying them? What do they see in them? It’s a digital asset, so it’s a new asset class, which is fascinating. But say, for example, people buying digital art, I know it’s subject close to your heart. What are people doing with them?

Tim:

I think it’s fair to say there are different motivations for different types of people. There are people who actually enjoy art and are collectors, but then there are those that look at the financial relationships. It’s one of those things that people are looking at the idea, because you can digitally define ownership of that particular work of art. You can actually have an investment thesis in a very similar way that art investment is looked at. So, for example, imagine you owned Mona Lisa, right? It’d be very nice if you own that. And the NFT defined your ownership.

Nick Abrahams:

Right.

Tim:

Okay. Now you could go onto Google, right click and you can save an image of the Mo Lisa, but you can’t sell it because it’s not yours. This technology enables the ownership to be tracked. Now, that’s a really important feature, because if you imagine the Louvre did sell you the Mona Lisa, right? There would be a transaction linked into the technology that would identify this came from the Louvre to Nick Abrahams, right? And so there’s a trackable record that’s actually permanently stored on the blockchains. So, what it means is that record is permanent. It can only be updated, it can never be removed.

Tim:

And so there’s a complete layer of transparency and auditability, which makes this incredibly powerful. So, lots of people may own a digital image of the Mona Lisa, but only you own the one that confirms the ownership. And as a result, the value of the Mona Lisa, for example, I mean, that’s got to be worth half a billion dollars or something similar. You can now define your ownership of that and that could be extended to any digital file.

Nick Abrahams:

Also I’m fascinated with the concept of, I guess, the smart contract that’s built into the NFT, because one of the great tragedies of art has been that most artists, when they sell their paintings, don’t sell them for terribly much. And then over time they get sold for a lot more. So, it’s actually the people further down the track who bought the art rather than the artists who are getting compensated. But can you talk a little bit about how smart contracts can enable artists and creators to be rewarded?

Tim:

Sure. Because NFTs are based our cryptocurrencies and based around smart contracts, you can actually program the art. And what I mean by that is, you can actually program into the actual NFT, a royalty to be paid every time the NFT is sold. So, for example, if you think of Vincent van Gogh, for example, or Vincent van Gogh depending on which way you prefer the pronunciation. He died penniless. But if you could track every single transaction of Van Gogh paintings, you attribute 5% of that and 5% of those go…

PART 1 OF 4 ENDS [00:11:04]

Tim:

… and yeah, you attribute 5% of that. And 5% of those goes to the family, for example. That would be a substantial amount of money. Now, the idea is, with any digital file, you can program in a royalty stream. And that was one of the things that really appealed to the NBA, that they had all this collateral that they could actually then sell as unique assets, as unique collectibles. And every time a piece is sold, whether it’s sold for a profit or a loss, they get a percentage clip on the ticket in the form of a royalty. And that is really powerful because, certainly within the art space, the ability to actually track pieces and to attribute a royalty going forward is a nightmare the way that it would work at the moment, because there’s not the transparency.

Tim:

If you go to a gallery, you buy a piece, then you sell it subsequently, once it’s gone past the owner from the gallery, you just don’t know where it’s going. And so, as a result, if you can build in a 2.5%, 5% royalty, whatever it might be into the transaction, it means you can follow the provenance and you can follow the money, which then means that you can actually just have that programmed so that your royalties are actually paid automatically.

Nick Abrahams:

So I feel like, based on that, there’s going to be a lot of people listening who are thinking, “Well, I could be a digital artist. I wouldn’t mind the idea of a trailing commission on something that I created over time.” Can we talk just a little bit, we won’t get into the enterprise area for NFTs, but just a little bit about what it means for the individual and for those budding artists who are listening? How do you go about actually creating an NFT and selling an NFT, and so forth?

Tim:

Sure. I mean, if you’re a traditional artist, you have to be able to either create digital pieces or convert your existing art into a digital file. So it’ll be scanning or high quality photography, whatever it might be. And the idea is that you can go onto a number the open marketplaces that exist. Probably the easiest to use is OpenSea, and that accounts for about 92% of the market. And that’s opensea.io.

Nick Abrahams:

Wow.

Tim:

Exactly. And that’s one of the challenges of the market, to be honest. But the idea is, you can literally go onto OpenSea and you could get that photograph of your kids and put it up as an NFT and see if your grandma will pay you $120 million.

Nick Abrahams:

What a good idea. We’ll monetize the family relationship.

Tim:

Exactly. But the idea is that any artist can get involved. Now that’s the easy bit, to be honest.

Nick Abrahams:

Oh right.

Tim:

The hard bit is that because the market has come from the cryptocurrency space, those non-fungible tokens are all based around smart contracts, which is based on what is known as the Ethereum Network, which is the second largest cryptocurrency. So, as a result, the whole culture of the market has come from the cryptocurrency space. And so the people that have been the early adopting buyers have been from the cryptocurrency space, those that have been in the space for probably at least five, six, seven years. I mean, I’ve been involved since 2015, the very beginning of 2015, and lots of my peers who are regular buyers of NFTs. I’ve bought a lot of NFTs myself, but the idea is they understand the technology, they trust the technology. And that’s why the image that you were talking about at the very beginning of this session by Beeple, who’s a very famous digital artist, he actually produced a digital piece every day for 5,000 days, and that piece was called 5,000 Days and that’s the one that sold for 69 million back in March this year.

Tim:

Now, it was a hedge fund out of Singapore that bought that, and this is a guy who’s been in the blockchain space for quite a number of years, made a lot of money on initial coin offerings and through the general rise of cryptocurrency. But what he’s looking at and what others are looking at as an investment thesis is they’re saying, “This is an iconic piece of art and buying it for 69 million now means it’s a high value piece but a very high profile piece.” So what’ll happen is, in the future, as you get institutional funds coming into this market, with the idea of getting behind regulated structures, they’ll be looking towards buying the high quality pieces and they’ll be paying not $69 million, but probably $200 million further down the track because of the cultural significance. And it’s equally, when you look at these things called the crypto punks, which you may or may not have heard of, your audiences may not have heard of those, but these were given away in 2017 for free.

Nick Abrahams:

Right.

Tim:

Now, back in October this year, there was a guy who was offered $9.6 million for his, and he turned it down. He said, “I am not selling this for anything.” And that is because the crypto punks, again, have cultural significance within the early adopting users. Because this was, broad brush, the first major NFT put onto the Ethereum blockchain back in 2017. There were a couple of minor ones before that, but this is the most notable one. And so, as a result, that is being viewed as a blue chip. So, again, hedge funds are buying into these like it’s going out of fashion because, just like the cryptocurrency market, they see this is the beginning of a massive transformation. And where they’re paying $9 million now, in five years time, they’ll probably be selling those for $100 million. No financial advice, obviously, but this is what’s the market.

Tim:

So going back to the original point about an individual artist, you can put art up there, but it’s like anything, you have to make people aware of your art. And so the overall issue is that it’s not about talent at this moment in time. It’s honestly about to 20% talent and 80% marketing.

Nick Abrahams:

Right.

Tim:

And it’s marketing to the crypto Twitter space.

Nick Abrahams:

Right.

Tim:

Because those are the people that are buying as it stands at the moment. Now, this dynamic is going to be changing, especially with the likes of Coinbase, which is a regulated exchange over in the U.S. It announced that they’re launching an NFT marketplace, and within 48 hours of announcing, they had 2.1 million people subscribe.

Nick Abrahams:

Right.

Tim:

So it gives you an indication that this market is just going to go absolutely bananas. So if you’re an individual or an existing additional artist, you’ve got to understand the space. That’s really important. And I would say to anybody, research the market for between 30 and 50 hours, and it sounds like a lot, but once you get into the rabbit hole, time goes really quickly. Research the market to understand the dynamics because it’s all based around cryptocurrencies. It’s all based around crypto Twitter. It’s all based around the dynamic if you’re an artist sharing other people’s work and getting other people to share yours and just understanding that dynamic.

Tim:

And one of the key things about Twitter is there’s a thing now called Twitter Spaces where you can actually have audio channels linked into the Twitter channel. And what it means is that you get a bucket load of people turning up for Twitter Spaces. I’ve run quite a number of Twitter Spaces. I’ve joined others, been asked to participate in that type of thing, and the great thing is that you actually get a real sense of what’s going. Because if you’re an artist, you want to make sure you understand the market so you can maximize your opportunities. If you’re an investor, you need to understand the dynamic of the market so you can understand there’s complete transparency of data and you can actually implement some strategies and strategies relating to your buying if you understand the market. But expect to lose money, if you’re an investor in the early stages. That’s going to be your tuition.

Nick Abrahams:

Right.

Tim:

And that’s why I say, if you want to minimize the tuition fees, do 30 to 50 hours research, play around. Don’t get caught up in the FOMO. Just observe and just see how it operates. It’s a really powerful space if you can get underneath the hood.

Nick Abrahams:

And so we will get to the enterprise usage of NFTs in a moment, but I think now’s a perfect opportunity to segue just into your project which you’ve been working on for some considerable time, Walking Between Worlds. Can you give us a bit of background on what’s happening there?

Tim:

Yeah. Walking Between Worlds, it’s designed to actually help global Indigenous communities capitalize on the NFT space and it’s primarily looking at the idea of energizing, first of all, Indigenous communities here in Australia, and then using that as a playbook to actually energize Indigenous communities globally. And so it’s the idea that we’re building out a platform in time that will actually enable collaborations to happen where digital skills can be shared and collaboration pieces can be done, looking at the idea of online education for digital art skills and basically digital skills, because there’s a massive digital divide between Indigenous communities, generally speaking, and traditional Western communities, looking at creating best in class galleries in the Metaverses, which we’ll talk about a little bit later.

Tim:

But these are three dimensional galleries that are in spaces that are coming up and very much embracing art investors to support emerging talent. And so, as part of that structure, we’ve coordinated a number of Indigenous artists and we’re launching the first collection of NFTs for Indigenous artists on January the 14th. We’ve just announced that very recently. So the first collection is 1,100 pieces.

Nick Abrahams:

Wow.

Tim:

But there will be 10 hero pieces as well, and these hero pieces include animation, include Indigenous poetry, music, and soundscapes from-

PART 2 OF 4 ENDS [00:22:04]

Tim:

… indigenous poetry, music and soundscapes to give a real sense of where the art came from. But this is about energizing indigenous communities, because under normal circumstances, when you look at technology, when you see the internet and you see the blockchain in general, they generally tend to start very, very broad, go into vertical markets, and then go to niche markets. So, it’s about we want to empower the indigenous communities globally to actually grab hold of the entities right now. What we’re doing is putting together the oldest culture in the world, which is the Aboriginal and Torres Strait Island culture, together with the bleeding edge technology. You can imagine there are some interesting challenges that are associated with that, but we’ve got an amazing chair for the project who’s a global expert on indigenous wellbeing and suicide prevention, and she’s a wonderful advocate for the project.

Tim:

She walks absolutely in both worlds. She understands both worlds, and she was on indigenous radio just last week, sorry, the week before last, talking about Walking Between Worlds on national indigenous radio. I was super impressed with her. I was so proud. It was amazing. Yeah, it’s challenging, but it’s empowering. That’s the thing. When you look at the technology, it’s amazing, but it’s what it can do for communities that have been disenfranchised, to be honest. That’s globally. It’s not just here in Australia. Through all the Twitter spaces and all the marketing we’ve done over the past six months, we’ve connected with the Hopi Indians or conduits to the Hopi Indians in Arizona, to the Inuits in Canada, and the Mayans in Guatemala. So, yeah, we’re super excited about where this could go, but, yeah, it’s a great use case for the technology if we can pull it off, or should I say when we pull it off. But, yeah, it’s awesome.

Nick Abrahams:

I think it’s fantastic, and congratulations to you and the team. I know it’s a deep personal commitment that you’ve got to that cause and that project. I think it’s fantastic, and it sounds like it will be tremendously successful. I think one of the interesting things that you also mention is that included in the NFT drop, soundscapes and poetry, and I assume that means spoken word. Maybe just to give people a sense of the NFTs are not just about images and so forth and back. There’s a school of thought that says that as certain streaming services have taken money away from artists, recording artists, that actually NFTs may be a way to restore some money back into the pockets of recording artists. But NFTs could to apply to sound recordings as well. Yeah.

Tim:

It’s to any digital files. It’ll be a sound file, it can be a video file, augmented reality. It extends to any form of digital files. Yeah, I think the music industry’s always going to be an interesting discussion, because the music industry has already transformed into the digital realm already. Certainly, what we’re seeing is that musicians are working closer and closer with artists and other technical parties to actually create new markets. Certainly, with the hero pieces that we’re looking at, those do embed an immersive experience relating to the pieces that are being sold. The whole technology’s going to transform landscapes in ways that we haven’t even thought of yet.

Nick Abrahams:

Yeah. Yeah. Well, maybe if we move to the enterprise use case now, I guess one of the early movers in this space has been premium apparel and footwear. we’ve seen Adidas and ASICS and others make available digital footwear. Gucci has a digital sneaker available on Roblox for $19, its cheapest sneaker ever. We’ve then seen it move up into the handbags space, so the Birkin, a virtual Birkin sold the other day for more than what you would pay if you were to able to get a Birkin in a shop. Then we moved into, as I mentioned, fascinating use case with Penfolds allowing bottles of premium wine to be represented and traded as NFTs, and the actual wine stays in a proper up a storage container, because one of the problems, obviously, with trading vintage wines is having to move a bottle around the place is not good, particularly when it’s so susceptible to things such as temperature and so forth. So, yeah, I mean, Tim, what’s your view on which industries are embracing it, and where are the big opportunities?

Tim:

It’s a really good question, Nick. I think the major space that really seems to be growing, and there are two that are running sort of parallel. The fashion industry is absolutely embracing this 100%, and also the gaming industry. In some ways, they can be somewhat related. But if we look at the fashion industry, what has happened over the past two years or so with the pandemic or close to two years, is that the rise of digitization has just exploded. As a result, when you look at flexing that happens in terms of premium brands, it would be the situation that people driving a Lamborghini down the street or wearing Rolex watch, whatever it might be, there’s the flexing that actually happens in that particular way. But if you think of the Lamborghini effect, for example, it might be that maybe 250 people or 500 people might see it. All right? If you’ve got digital flexing, that becomes really powerful, right? Now-

Nick Abrahams:

Digital flexing, I love it.

Tim:

Right? But bear with me, all right?

Nick Abrahams:

Yeah.

Tim:

Because, yeah, we spoke about crypto punks earlier on, okay? Now, if somebody owns a CryptoPunk that is worth, and they have turned down an offer for $9.6 million for a piece of art that is a dysfunctional piece of art, that is pixelated, that from an art point of view, have deep cultural significance, but in terms of the artistic quality, probably the kids that you sent the image to their nana could probably have drawn it better. Right? But the digital flexing now becomes really important, because you can now have your profile picture on LinkedIn, on Twitter, on Instagram, all the digital platforms, for example, that showcase your CryptoPunk.

Nick Abrahams:

Right.

Tim:

One of the things that’s really interesting, and I know you’re laughing-

Nick Abrahams:

I love it. No, I’m a believer, so, no, no-

Tim:

No, no, because if you’re not laughing, it means your audience aren’t laughing. I know your audience will be saying, “Oh, this is baloney. What are you talking about?”

Nick Abrahams:

Oh, no. No, no. I think its absolutely true.

Tim:

The thing that is really powerful, and where this is heading, in my opinion, Twitter announced a couple of months ago they will be validating your profile picture in your Twitter profile. Think about this for a second now. All right? If you’re on Twitter and you’ve right clicked and saved the CryptoPunk, right? And you’ve put it up as your profile to try and flex and say, “Yes, I’ve got that,” all of a sudden, Twitter, when it goes live, will be able to say, “You know what? You’re not the owner.” But the original owner will have a tick mark by their name that’ll link to their Ethereum wallet. Right? So, what it means is that your digital flexing becomes very powerful.

Nick Abrahams:

Yeah.

Tim:

Because then now, instead of 250 people seeing your digital flexing with your Lamborghini, you’ve got all the people that are following you on Twitter, and goodness knows what, seeing digital flexing wherever you go. Then that’s going extend, because with Twitter doing that, they are essentially positioning themselves, in my opinion, as an identity play now. What’ll happen, I think we’ll see that style of identity going into the Metaverse. So, if you do buy the Gucci sneakers or the Dolce and Gabbana suit, there was one that sold the $670,000 going back about six weeks ago. Right? If you can actually identify that it’s been validated that you own it, you are going to be digitally flexing. Whether flexing is right or wrong is a completely different issue.

Nick Abrahams:

Yeah.

Tim:

But it’s all part of the game. Right? So, as we head more and more into the digital realm, and, I mean, if we look at the way marketing is going, I mean, offline marketing, that’s very challenging. I mean, TV advertising is way, way down. I mean, as a digital transformation specialist, you’re going to be across a lot more of the data than I will be, but we’re going to see a massive transformation, and we’re going to see identity being linked into your digital assets that you own.

Nick Abrahams:

Yeah.

Tim:

I think that becomes a really fascinating layer as we head into the Metaverse and that type of thing.

Nick Abrahams:

Yeah. I mean, you’ve mentioned the Metaverse, so what is the future of NFTs and the Metaverse? Maybe your views on, I mean, perhaps explaining to people what is the Metaverse anyway?

Tim:

Yeah. The Metaverse has got a multitude of definitions. It’s essentially where you’re living in… it’s almost like, what was it? Second Life and those types of things.

Nick Abrahams:

Yeah.

Tim:

Except it’s Second Life on steroids, where you’ve actually got the virtual environments. I mean, there are a number of areas like Decentraland or Sandbox or Cryptovoxels, there’s a number of places that are coming up, and these are creating communities online through VR, virtual reality.

Nick Abrahams:

Wow.

Tim:

Which-

PART 3 OF 4 ENDS [00:33:04]

Tim:

Through VR, virtual reality, which I think it’s still got a long way to go because you’re encapsulated in a screen that is very one dimensional in terms of its experience because you can’t share it with anybody. We’re going to have these two and a half D environments where you go into an art gallery, for example, that looks like 3D, but you’re looking at it on your desktop or your mobile phone or your tablet. These types of virtual experiences are beginning to ramp up. Facebook announced going back about two and a half months ago that they’re changing their name to Meta. Now there’s a whole variety of potential issues around why they changed their name as you know, because obviously they’ve encountered a few challenges, but they are actually going to be funding $10 billion in the metaverse. They’re seriously committing to it.

Tim:

From my eyes, what they’re trying to do is trying to go for the land grant and they’re instead of actually looking at the eyeballs that are looking at the website, they’re going to follow your eyeballs. If you’re in the metaverse and you actually look at a painting, you say, “Oh, that’s a good painting,” painted by your kids that you sent across to their Nan, all right. If people are looking at particular paintings, whatever they might be, Facebook want to have the situation to be able to sell you ads linked into what you’re looking at. All right. But the Winklevoss brothers and their Gemini exchange who had the massive legal stoush with Zuckerberg. They are now billionaires in their own right with the Gemini exchange. They announced a couple of weeks after Facebook announced their meta investment, they announced they’d raised $400 million to look at a metaverse, an open source metaverse outside of the walled garden of Facebook.

Tim:

It’s going to be a battle Royal, I think, in the metaverse because the Winklevoss, it’s going to be the largest game of chicken that’s ever been played I think.

Nick Abrahams:

It’s round two.

Tim:

It’s round two. But this is the thing. It’s personal. Now, it’s personal, but there’s a driving factor behind it. Neither party’s going to want to lose. The ultimate winner will be the consumers because they’ll be constantly fighting to position better products, better projects, all this type of stuff. I think what we’re going to see is that there’s going to become a rise in essentially the personal data economy, where you’re in the metaverse and you own your data and then you sell that according to organizations, enterprises that may want to buy it.

Tim:

I think we’re going to see a shift in the business models away from the centralized version of Google and Facebook in terms of where you are the product. I think we’re going to see a dynamic shift and it might take a few years, but we’re going to see a dynamic shift in the way data is held, owned and sold. I think it’s just going to be a massive transition. I mean, there are so many opportunities building in this space, going back to the question of Enterprise and that type of thing. There are so many opportunities with new channels that are opening up and certainly fashion, going back to what we were saying before, is absolutely a leader and gaming is another area that’s just mushrooming.

Tim:

When you think of gaming and even augmented reality, for example, these are all linked into the same style of technology. There are various event organizers that we’ve spoken to over time, over the past six months that are looking at the idea when the big music festivals come out again, that they’ll have augmented reality structures at the music festival, which will actually be an NFT that will give the opportunity to actually get free beer at the bar if you find it. It’s the idea that, almost like the Pokemon Go Moments that we had in 2017, this time you can actually put a financial transaction linked into the digital asset that you actually find and pick up.

Tim:

That’s the structure of the metaverse as well. We’re going to see a whole shift in new dynamic models that are going to create massive business opportunities for those that are nimble enough to understand and get in them. I think the key thing I would say to anybody is look at this now, because we’re just touching the beginning of where it’s going. The early adopters are the ones that are going to make the mistakes obviously, and there’ll be early adopters that will actually drive the market. It’s going to be a fascinating world.

Nick Abrahams:

Oh Tim, it’s been fantastic. We can talk for hours on this. I should let you go.

Tim:

I know. I’m sorry. I probably whittled on far too much, but.

Nick Abrahams:

I love it and you gave me a new term, digital flexing. It’s-

Tim:

Oh, yeah. It’s amazing. Look it up on Twitter, the stuff on this. It’s just incredible.

Nick Abrahams:

I think it is. No, look, I agree entirely the whole Web 3.0. In fact, I say for every organization, they all need a Web 3.0 strategy because it will touch, whether it’s in financial services with DFI fashion we’ve heard about, who would’ve thought with wine. Then you mentioned that the terrific distinction with virtual reality keeps you in one space and so if you compare the Oculus experience, which is very much about VR, and then you compare that to the HoloLens experience from Microsoft, which is about integrating with your world around you, the opportunities are extraordinary.

Nick Abrahams:

Tim, thank you very much for, for being with us today. I wish you all the best of luck with Walking Between Worlds. I’m sure it’ll be a terrific success and we’d love to catch up in six or 12 and hear how it’s gone.

Tim:

I’d love to. I’d love to, and I mean, look, thank you to you guys for putting the webinar on. It’s great. I think there is one thing that Enterprise needs to be aware about. There are massive legal challenges coming. The issue of copyright and the issue of intellectual property is a major, major time bomb that is exploding. I think if any enterprise is actually looking at this, get in touch with Nick and the team to get themselves protected. I think there’s going to be a massive level of conflict going on.

Nick Abrahams:

It’ll be interesting. Well, Tim, if we can help, obviously we’re here to help.

Tim:

Of course, I know. I mean, but it’s just a massive opportunity.

Nick Abrahams:

Fantastic. Well, once again, thanks for spending time with us and best wishes and people please do have a look out for Walking Between Worlds. Thank you very much, Tim Lea.

Tim:

Thanks Nick. Thanks very much for your time. Cheers.

 

 

 

What is the Metaverse & Why you should care about it? – Seb Borget

Nick:

Hello everyone. Welcome to what is the Metaverse and why should I care? Now the Metaverse is an essential element of what is known as web three or the embodied internet. For those of you that have seen the movie Ready Player One, you’ll have a bit of a sense as to what the Metaverse is all about, but it’s more than just fiction. In fact, it’s so important that Facebook changed the name of its parent company from Facebook to Meta, and they have over 10,000 developers building out Facebook’s version of the Metaverse. Fortune magazine said just recently that the Metaverse was the most important tech trend since the iPhone. I’m delighted to have our guest here today to explain the Metaverse to us. It’s Sebastien Borget, who is the co-founder and chief operating officer of The Sandbox. The Sandbox is one of the leading Metaverse platforms. With that, Sebastien, thank you very much for joining us here in the real world.

Sebastien Borget:

Thank you Nick for having me. It’s a pleasure.

Nick:

What would be great to start off with is we hear a lot about the Metaverse today. Could you give us a sense of what is your interpretation of that term? What does it mean when we talk about the Metaverse?

Sebastien Borget:

In simple terms for us, the Metaverse is this myriad of digital world, digital part of universes where us human beings can get to enjoy, participate, engage through social, immersive, playful, fun experiences, and all of that through just a 3D avatar that is a representation of ourselves. The Sandbox is one of this virtual world that’s contributing to developers and we are taking a fresh approach to it by being this virtual world that use blockchain technology and NFTs in order to enable the users to truly own their identity, to truly own their asset and their currency so that they can actually, if they choose to, also transfer this identity into other virtual world and then enjoy this concept of open Metaverse.

Nick:

I mean it is fantastic. I think a couple of key points that you talked about there seems to be what distinguishes the Metaverses we talk about today and what The Sandbox is doing from say what we’ve had previously, particularly with virtual worlds like Second Life which sort of burnt pretty bright and then sort of burned out a few years ago now. Can you sort of hone in on why is it different now? What’s changed?

Sebastien Borget:

There’s many factors I think that can explain what’s changed, but you’re right. Over the past 25 years we’ve already seen Second Life and then we’ve seen World of Warcraft, Roblox, Minecraft, Fortnite, Meta. All of these are just virtual world. They are closed economies, closed environments where yes, users can enter them through an avatar, just like I said before, but they are locked in into those environments with their avatar. With the time they spent on those worlds, everything they do, everything they earn, everything they spend onto with real money is actually not theirs. It’s locked on the platform. They cannot transfer it to another users. They cannot sell it somewhere else than on those platform.

Sebastien Borget:

Even worse, anything they do or they actually create, so they spend time into creating amazing content that contributed to the success of those large virtual world, it’s actually not theirs. This is, I think, one of the key difference in Sandbox. Anything you as a user entering this virtual world through your avatar make is truly yours and you get to own it and you get to keep 100 percent of the value you generate from this creation when you want to sell it on the marketplace or when you want to use it to build your own world.

Sebastien Borget:

Also, I think something quite important is what you’re going to experience in the Metaverse versus those centralized virtual world. Second Life was mostly a place designed for commerce in a way. A lot of brands establish their shop and in a very transactional approach with users, not very fun in our opinion.

Sebastien Borget:

The Sandbox is aiming to replicate a lot of the activities we are seeing in the real world already like attending a fashion show, attending a virtual concert, discovering an art gallery or museum, but also playing games, socializing with other users, dancing at clubs and so many other things that are not only designed by our teams, but more and more importantly designed 90%-99% by users and the last 1% by major brands and IPs entering Sandbox.

Sebastien Borget:

For us is really important the idea of experience of fun and ownership and that we think is something that differentiates. We also have virtual lands that not all those virtual worlds are. Sandbox became actually very much known for its virtual real estate. Any land parcel that is, we have a map of 166,464 lands in total. Each one is actually a NFT on the blockchain and it can be owned by the users. Users own a piece of that world that they contribute to build and they can monetize it through renting it, through publishing content, and contributing to growing the world, growing the network behind.

Nick:

Fantastic. We will come back to the virtual land because I think it’s a fascinating area and that’s certainly an area of massive difference to what we saw with Second Life back in those days. Maybe just to give people a bit more of a sense of this because I think one of the concerns is, well, I mean, do I need a virtual reality headset? I guess who is in The Sandbox? What’s your demographic? Who’s in there and what are they doing and what sort of technology do they need to actually enjoy The Sandbox?

Sebastien Borget:

That’s a good question. I’m really excited that the community that’s already owning land and contributing to Sandbox, we are now close to 19,000 unique landowners who are participating to build that world. We have members from almost any country in the world. Majority in the US, but Sandbox top tier countries are Korea, Japan, China, Indonesia, Thailand, Philippines, India, Turkey, Italy. It’s a very diverse virtual world already where we have a lot of culture also coming from brands, both the physical world so some of them you can see behind me. Let’s mentioned Snoop Dogg, Warner Music Group, Atari, Adidas, The Walking Dead, Care Bears, Smurfs. Just a few of the one that’s been announced to date.

Sebastien Borget:

Fantastic communities as well that come and are born from this web free ecosystem including Binance, Coin Market Cap or bought atypically as World of Women or [inaudible 00:09:00]. Many of those NFT collections as well that are enjoying the true ownership that are enjoying also interoperability, one of the feature that blockchain enables to actually give life to their NFTs. Add more utility to them and come to Sandbox to create first and then play, engage, and play to earn afterwards.

Sebastien Borget:

We are mostly aiming at the adult children so far with users between 25 to 45-years-old so that’s also important as a differentiator versus Roblox and other virtual world that skew to our much younger audience. We’ve just passed 2 million registered wallets so Sandbox is one actually of the leading growth engine for adoption of web free in general. That’s still a small number of users compared to the hundred million of users [inaudible 00:09:57] but just think that a year ago, some of the largest blockchain based…

PART 1 OF 4 ENDS [00:10:04]

Sebastien Borget:

Like of some of the largest blockchain based services application, they roughly had 10,000 users at pitch and it was being in the top. So it’s fantastic to observe that growth, to see all the community empowerments that comes through the ownership of the digital asset and tokens and how Sandbox is growing fast today.

Nick:

Right. So that is amazing growth. It’s the 19,000 landowners: that is spectacular. So congratulations. So just this interoperability, which I think is very important for people, and maybe goes some way to explaining the current NFT craze. Let’s say, for example, I have a spot of luck and stumble across one and half million dollars and buy myself a Bored Ape NFT. Would I be able to bring that into the Sandbox? How does it work? I think people don’t understand why NFTs are priced the way they are. Maybe just a little bit of a sense as to, what does it mean to own an NFT and within an environment like the Sandbox?

Sebastien Borget:

That’s one great example. Bored Ape, they are probably one of the most important, most cultural and creative community to date. Let’s take just, what is a Bored Ape? Bored Ape is initially a collection of characters, set into a world map and an environment. They launch this collection, we call them 10,000 collection, because there is effectively 10,000 unique 2D images characters with different traits and attributes that makes them more rarer for certain.

Sebastien Borget:

Effectively, they are just images at the beginning. You cannot use them into games, et cetera. You can just have them in your wallet. You own them. So if you have in your wallet you can exchange them, sell them. Or use them to display them over social media profile picture, et cetera. What Sandbox is aiming to do is through interoperability to look through your wallet, the same wallet that you use to connect with Sandbox. So that’s part also of being in Web3: your identity is the same across and you connect to value stats. We recognize your Bored Ape and we will recognize a lot of other NFT collection. And we will give you a 3D equivalent representation of that same 2D image that you have. And that 3D representation, it’s a game character. It’s a new avatar in Sandbox, which then you can use to, I don’t know, to work, to chat with other, to dance. They have some 60 plus animation already from the get go. To fight against enemies. To jump around and do other cool things. And that can keep being improved over time.

Sebastien Borget:

And I think it’s exciting because it was not made by the Bored Ape community or Bored Ape creators, Yugo Lab. It’s made by Sandbox to add more value to those NFTs. Because suddenly from the 2D image, you have the possibility to play to a 3D virtual world with that. And Sandbox is more than just a 3D virtual world world as you chatted [inaudible 00:13:27]. It’s a user generated content platform. We provide amazing creative tool, Voxel, to make 3D asset. Game Maker, which is a no-code software where you can just drag and drop to start creating interactive games and experiences. And the map where Bored Ape has lands, but people can become the virtual neighbors of Bored Ape to build together this environment.

Sebastien Borget:

So in a way, Sandbox provide the world, the place, the environments, the tools where some 2D collections, NFT collection, can come to life. Allow their owners to become more creative, to build a world. And I think it’s important. Some people start to say, Sandbox is a digital nation. Or NFT collection is a new way to create IP. It’s the next Disney is actually being made starting from characters and in a Web3 this socialized environment. There are other tools and other community members that will build the world, build the story, and adventure of those characters.

Nick:

Fantastic. So you mentioned a few big brands before. Obviously Snoop Dogg, you famously… He was a very early buyer into the Sandbox, but also Adidas and Warner Music. And then interestingly, PWC, one of the big four, big professional services firms acquired a plot in the Sandbox. So could you give us a sense… And many of our listeners and viewers will be people within large organizations who will be wondering what are the opportunities within the metaverse, and particular platform like the Sandbox, for their organizations. Could you just talk through a little bit why are folks acquiring land and building out experiences in the Sandbox?

Sebastien Borget:

There’s many various reasons why you want buy land. But I would say that a few of them, being present into the metaverse, owning land is the first step to being present in the metaverse. And show that to the world through your logo on the map. That’s also one of the success recipes of Sandbox. On the map, to reinforce the idea of ownership, you can display your logo and you can let the community buy land around yourself to become essentially your virtual neighbors. They are just one walk away in the 3D world with avatars from your land.

Sebastien Borget:

There is also this Web3 is very community driven and user centric. Web2 is designed around… Unfortunately, it became a machine at collecting data and using that data to serve you more ads or to sell you more product. A very transactional at the end of the day, again. Web3 is oriented to run not trying to sell more product, but feels around to create more engagement, more meaning for users toward the brand they’re a fan of, or they choose to stay engaged with. And that means with creative tool that even a company like PWC can create a place where they can engage with their customer in a different way.

Sebastien Borget:

Also, since many of their clients come and want to invest, to learn, to own a piece, to have digital asset, et cetera; it makes a lot of sense for them to actually be an actor in the space. How can you advise someone if you do not own yourself? You did not try the tools. If you did not go through the whole journey of what it is like to own the land and participate into this our Web3 [inaudible 00:17:07]. That’s why I think they’ve been one of the leading and pioneer company to jump and start there.

Sebastien Borget:

But they are not the only one kind of companies that are not necessarily entertainment, sports, music, celebrity, or gaming that enter the space. We are seeing such a great diversity of partners, of culture, essentially, that’s present. And you have wellbeing related companies. You have coaching, education, as well. A topic I’m really attached to: how do we create more engagement and reward people for learning? Learning new skills, typically, in the metaverse and make it a revenue from their time, their engagement, the content they contribute to.

Sebastien Borget:

So there’s no definite answer to what can we do in the metaverse. It’s ongoing. It’s really early days in the way. And that’s what’s also make it a very exciting space to be in. You get the chance to really redefine who you are as a company. What you create is greater. And then who you are as your identity through that avatar. It’s really opening interesting new perspective for everyone who wants to join into the space.

Nick:

You mentioned the idea of education. And I know one of the metrics that you’re very proud of is that you’ve created over a thousand jobs with the Sandbox. Can you give people a sense of how is that so? What jobs are they and who are these people? What are they doing?

Sebastien Borget:

Yes. And we hope to keep creating millions more. Not only in Sandbox, but I think in the metaverse in general, there is an opportunity for millions of jobs to be created. Again, going back to the definition. It’s a set of a virtual world where users can engage and transfer their identity and belongings from one to an another. Those world, they need to be built. Originally, they’re all empty. They are not replicating the physical world. They’re all thing that come up from our imagination. So you and anyone else can come and start contributing to this large scale effort of populating the metaverse. Populating it with content. Populating it with people.

Sebastien Borget:

So that’s why the creator economy will be thriving again in the metaverse. Because we are going to need so many architect, designers, fashion designers for avatar, novel designers, game designers. People who are creating those space where we socialize, where we see experiences that go beyond our imagination and make us dream again. And we’ll need people as well, I think, being present, engaging with other, chatting with others, making this place fun and alive is also as valuable and should be rewarded. That’s why they are-

PART 2 OF 4 ENDS [00:20:04]

Sebastien Borget:

Also as valuable and should be rewarded. That’s why there are play to earn mechanics in a platform like Sandbox and other decentralized games. And it also enables new businesses like selling virtual land, so virtual real estate order. Curator for looking at content made by the community and helping for discovery and selling it. Coaching, et cetera.

Sebastien Borget:

Even player is now turning into an activity that can generate an income. Basically the definition of a job. If I’m playing one hour into a land, a game that, don’t know, rewards me with a certain NFT. A ghost world. There’s only 100 copy in the world of that digitals world. And on the market places, it can be sold for $100. I effectively made $100 an hour after playing if I sell it. And that’s basically the beginning of a whole economy.

Sebastien Borget:

Now, that’s what also is important in Web 3.0. all the digital assets also NFTs. They can hold values, they can be sold. They are allowed to create services, sands like jobs behind and just all the ingredient for digital economy. We have 50 plus two jobs who started in the last six months from being one single person studio, to now becoming 10 to 20, some 40 people studios who help the 19,000 landowners to build their content. Or they help big brands to enter the metaverse and create those amazing experiences.

Sebastien Borget:

They are from around the world, from Korea, from France, from Japan and other location. It’s also exciting as well to have such a great diversity. Some are led by women as well. We actually launched recently the metaverse accelerator. It’s a $15 million program that will be supporting 40 entrepreneurs and startup as well, to build not just content, but to build businesses and the services that will allow Sandbox and Web 3.0 ecosystem in general as well to grow. We are doing our best to keep pushing for those initiative and support with our foundation as we want the ecosystem to grow. We will grow and accelerate it with together.

Nick:

Now, I think there’s a lot of parents who might have been listening to what you had to say. They will be very pleased that now they can actually monetize their children’s game time with play to earn. But it is a big change, isn’t it, which the metaverse and the Sandbox creates the idea of play to earn.

Sebastien Borget:

There will be great parents, very forward thinking. Because, well, I think probably your generation and mine, we were told, “Stop playing games. It’s actually not an activity that will lead you anywhere.” But though I think those are valuable skills and these are some of those skills that they will never be taught at school.

Sebastien Borget:

Actually, you can now learn through gaming a lot of complex financial concept from the idea of yield generation from utilizing game attempts, NFT, selling, trading, renting, sometimes staking as well. I think kids understanding the principle of staking NFT and APY, who would guess that? And that’s just some of the amazing things we’re seeing. Yeah.

Nick:

And some of those things that Sebastian has just talked about it, draw from the world of DeFi and decentralized finance, which I know the Sandbox that is very engaged in. But concepts of staking cryptocurrency, and so forth, are completely foreign, I think, to most people. And yet, in the Sandbox you’ve created that conceptually. And so people can actually experience it in a simpler way. Is decentralized finance and that concept, I guess it goes along with the ownership of digital assets and so forth, is that a big part of the roadmap?

Sebastien Borget:

It is. We don’t claim any credit for, I mean, inventing the concept of staking.

Nick:

No, no.

Sebastien Borget:

It’s been there, but what’s interesting is, it was mostly applied to staking a cryptocurrency. And so by contributing to reducing the amount of supply available on market, culling the circulating supply, you help to stabilize, I would say, the currency from its fluctuation, roughly speaking.

Sebastien Borget:

The idea of applying it to NFTs and applying as well, I think is important. Because well, in a market, which is more or less liquid, where there is less server of a certain item while the demand keeps being high, is contributing to make those items more valued. People will want those items, but not from the pure speculative aspect. I think it’s really built in with the utility behind and the demand that comes from gambling.

Nick:

Great. Just so we’ve talked to about virtual land. And congratulations, because we were talking before about, so CNBC reported that there was over $500 million of virtual land sales last year. And I think they identify the Sandbox as the leader in that, with over 60% of those sales. I mean, we know there’s been a virtual land boom. Could you talk us through, how does that work for people who don’t understand what that means? How would they get involved in virtual land investment?

Sebastien Borget:

You’re right. I was looking at the later start, we’re almost at $400 million GMV by Sandbox over its lifetime. Last year, the overall virtual real estate market was half a billion dollar of exchange. People might wonder, why is virtual land valuable? And why would people want to buy it? It essentially works the same as physical property and physical land.

Sebastien Borget:

You own a location into a virtual world, where that location, you can actually generate a revenue from. Either to rent it to other creator, or by building it yourself, or hiring a specialized builder creator for hire. And launching your own business, like launching a game, launching an experience, something that will help you to monetize through a NFT ticket or selling content as NFTs typically, that you use into your game.

Sebastien Borget:

Now, okay, property development. Except that in the metaverse you can build things so much faster. We are just talking in a matter of hours, days at most, weeks maybe, for the most ambitious project. You have access to a very creative tool that allows you to make things beyond the laws of physics, beyond imagination. Really cool, fun, culturally relevant, amazing. Almost for me, can become a virtual shows.

Sebastien Borget:

And you have access to a global audience, people from Korea, from Japan, from US, from Europe, they can come with their avatar, visit it, engage with it. You can launch your community. Through the token, you engage them. And the community of other NFT holder are going to contribute as well to support and build that together.

Sebastien Borget:

That’s some of the exciting possibilities behind, versus the physical world where it takes months, years, sometimes decades to build cool things. You have a lot of complex administrative paperwork. And you are very limited to the reach of the audience, depending on where you actually buy. Which city, which country and so on. Those are very comprehensible things.

Sebastien Borget:

The second factor is also the current, I think no one is supposed to ignore. But it’s getting harder and harder for the middle class and the younger generation to actually buy their first apartment, their first house. The median age to become a owner of property is moving towards 40 plus. Whereas, maybe two generation before, our parents were able to buy it when they’re 20, 30s.

Sebastien Borget:

And we think since the pandemic, there’s a generation and yourself, we’re spending more time into virtual world and online initially. We are not looking at the same. We no longer have the same aspiration and we no longer need to have physical property. If actually, the place we work, we play, we engage, we socialize and more, is online and those have utility. And we use it every day and we start to be part of that space through our avatar and accounts. And we understand it.

Sebastien Borget:

We are becoming more native to the space and it makes sense that we want to own a place, a location where we can have a host, or host parties, or build a place where we want to generate an activity, well, rather than in the physical world.

Nick:

I noted that I think it was reported that three people had paid over a million dollars to be Snoop Dogg’s, neighbors. I don’t know. Is that a good place to be? Is it loud being next to Snoop Dogg? Or in the virtual world it’s going to be quiet?

Sebastien Borget:

Well, so that’s another aspect. You have the choice of the location. Not all property, not all land are worth that range. It-

PART 3 OF 4 ENDS [00:30:04]

Sebastien Borget:

Not all property, not all land are worth that range. It’s still very accessible with the smallest one by one, which is still one hectare of the actual space. Accessible for about 1,000 cents. Roughly 3,000, $4,000, but there are key location that are unique being and some people would value them more.

Sebastien Borget:

People will value that being the direct driver to Snoop Dogg is actually going to be a place with more food traffic for avatars, and probably more famous people around will hang out at Snoop mentioned. Since Snoopy is going to host his virtual concert, as he’s mentioned, have probably friends from his real world network, celebrities, older artists, et cetera.

Sebastien Borget:

It makes sense indeed to… It’s almost like having a restaurant at Times Square versus a restaurant maybe into another location that’s less hyped. At least initially, but anyone can build the next Times Square, the next landmark, next monument, the next concert hall, et cetera. Well, in the manners. There’s also this re-definition. Anyone can choose the value and the way they… We have all the personal way to appreciate what’s valuable to us. And that’s what I want to say. And for some, this location for Snoop Dogg is important.

Nick:

And just to move on to, I know a subject that’s very important to you. And you talked about creating the open metaverse. And as we know, there are a number of big technology players who are building aspects of the metaverse themselves. Can you talk a little bit about, well, conceptually, the open metaverse verse a closed metaverse?

Sebastien Borget:

Well, going back to what my introduction. I’d say the true metaverse can only be open. It can only be true to the definition if users, through their avatar from their identity, can actually take that identity from one to another. And not be locked in by the platform that own their data or capture all the value they bring into it. That’s essential. That’s it. Anyone else who’s not into using this technology and not enabling their users to be free in a way, to move, free to own and not supporting those digital rights, cannot really claim to be metaverse.

Nick:

Yeah. Yep. Great. And maybe just a final question, which is really just for folks. How should they get started? And what’s happening with the Sandbox and access to the Sandbox and so forth?

Sebastien Borget:

There’s so many ways to get started in Sandbox. First of all, you do not need to buy anything. You do not need to buy any land, et cetera. You can just download the creation tools, for example. Try it for yourself, create your content. And only at the very last time, if want to publish on the map, you need a land ultimately, to make it public for others to visit.

Sebastien Borget:

But until then, owning the land is just a matter of maybe securing the spot at a certain location on the map maybe before it’s gone or before it’s someone else bought it. You can also engage in Sandbox as a player rather than a creator or an artist or a land owner. We have regular play to earn seasons. The next one will be launching around end of February. You can also just be involved, like we mentioned, as an investor or holder of the token of the platform, sand and staking it. It’s valuable for the economy and you helping in certain as well without being any of the other that are, in other profile.

Sebastien Borget:

That’s also interesting. The platform allows so many different ways to contribute. You can just come to earn a revenue as being a community manager into experiences, and being a curator. And being a virtual real estate broker facilitate saving that parcel. Those are jobs, there’s even jobs to invent. And I’m looking to more creativity and more ideas, or how you want to engage in the metaverse.

Nick:

Fantastic. Well, Sebastien Borget, thank you very much for your time. Your enthusiasm is palpable. And in fact, I think your real humanity also comes through and it comes through in what your intentions are for the Sandbox. And so, thank you all very much.

Nick:

I would encourage everyone who’s watching, listening to have a look at the Sandbox. It is quite a remarkable experience. You don’t need virtual reality gear or anything that. You can get straight in and it’s really great fun. And just fascinating. Sebastian, we wish you all the very best. I know it’s been a great run so far. I’m sure it will continue to go incredibly well. Thank you very much.

Sebastien Borget:

Thank you, Nick. Thank you, everyone, for watching and hopefully see you in the metaverse.

Nick:

Great. Okay. That’s fantastic. Thank you. Could I just do a selfie just with you there on screen?

Sebastien Borget:

Yeah.

Nick:

I’ll just see if I can make this work. And so, here we go. Thank you. That was fantastic. I really appreciate your time. I think that…

Sebastien Borget:

Nice.

Nick:

And just one last time.

Sebastien Borget:

Okay, go again.

Nick:

Perfect. That is great. Thank you very much for your time. Great. Really appreciate it. And I will let you know when it’s coming out and so forth. But best wishes with everything and thank you very much. I’m a happy holder of sand. It’s performed well. It’s great. I’m very pleased. Thank you. Good luck with it all.

Sebastien Borget:

Thank you. I hope we get to do that selfie in person. One day I’ll come visit Australia.

Nick:

That would be great to see you. Please do come out. We’d love to see you. Okay.

Sebastien Borget:

Bye-bye.

Nick:

Thanks, hey. Bye-bye.



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