Crypto UX. DeFi regulation. The fallout of FTX. PWN covers these hot topics (and more) in the latest installment of Cryptonatives.
PWN is honored to have had the opportunity to pick the brain of Marc Zeller, who wears multiple hats within the DeFi ecosystem. After you’ve read through the following article, be sure to check out Marc’s current work at the Aave-Chan Initiative and Gotchi Vault.
PWN: What do you think defines a cryptonative?
MZ: If you take a literal sense of this approach, it will be something reflecting generational trends. There's a lot of people out there that start their financial journey directly in crypto — I'm thinking of developers of DeFi technologies who are less than 25 years old. Those guys add Ethereum addresses before owning a bank account. I think a lot of people younger than 25 today who have some form of interest in finance are in crypto and interact with it much more than traditional finance.
Also, there’s a world demographic that basically bypasses traditional finance — in other words, countries that have weaker fiduciary currencies and go directly into crypto or directly into stable current usage. A great example of this demographic are the young adapters in Argentina in the early days of DeFi. Because of the weakness of the Argentine peso, MakerDAO and DAI were very popular there.
We’re now seeing the adoption of Bitcoin in countries like Turkey and Nigeria as well as in other parts of the world. Obviously, there’s the example of Bitcoin use in El Salvador (which is a story of its own), but other countries, including Nigeria, went from using cash to mobile payments without using a credit card at all. They completely skipped that part of finance that we have in the western world. I think that a huge part of the population will go from fiat usage directly to crypto by skipping all the intermediary tape. That's the direction of history.
PWN: As a cryptonative, what are some of the DeFi tools and strategies that you find yourself using?
MZ: One important thing that I make clear is that blockchain protocols are not soccer teams. Some sports fans have a team that they’ve followed and supported since their youth, and they’ll go to the grave being a fan of that team. When it comes to sports, that’s completely acceptable because you can be completely faithful and stay with one opinion until the day you die.
In the world of technology and investments, though, the market rewards flexibility. It's completely fine to change your mind. When I arrived in the blockchain ecosystem, I was a Bitcoiner because at that time, Bitcoin was the only proposition that made sense. When Ethereum came out, I was an Ethereum enthusiast because Ethereum was a complete game changer in the blockchain ecosystem. It wasn’t merely a cheaper, faster Bitcoin — it was a completely different value proposition, and one that makes sense to me.
Now, I define myself as an EVM enthusiast because the Ethereum Layer 1 is at capacity. There's a lot of other use cases and capabilities offered by Layer 2s, but also by other Layer 1s that leverage Ethereum technology and EVM.
It’d be stupid to say that in five years’ time, I feel completely certain that I will be an Ethereum maximalist. In investment with any protocol and blockchain, it’s crucial to adapt to the facts and the changes of the technology. Like I said before, it's not a soccer team.
It's really rewarding to keep doing our own homework, researching, and adapting to what is (in our own opinion) the best possible application protocols and blockchain out there.
PWN: What are some of the main issues facing cryptonatives in today's financial ecosystem? What issues have you faced and how are you mitigating these?
MZ: In general, I see three main current issues in crypto. The first thing is the UX. Like, it can be completely mind-boggling and difficult to use crypto today (although it's much better than it used to be). When I started using Ethereum, it was in the command line interface. Since you had to write code to send tokens and transactions, it was absolutely impossible for the mainstream modules to use Ethereum. Fortunately, since then, we’ve come out with good wallets, protocols, and applications — we have so much stuff that’s better, but it's still not good enough. It remains too expensive and too complex, and on top of that, you can end up in real trouble if you send your tokens to the wrong address.
It’s exciting to see what’s being done to balance user experience while still staying true to the DeFi ethos. For example, on the wallet side of things, smart contract wallets have become a big thing. These were pioneered by Argent wallet on mobile, which has functionality that makes it possible to recover funds; for example, if you lose your phone. I think that these kinds of features will become more mainstream in order to ensure that user experience is more friendly.
The second issue in crypto is the connection between traditional finance and crypto. Right now, it's completely centralized with loosely regulated actors that we call crypto asset service providers. There's regulatory effort in that sense, and to me, it makes sense that there's a framework that brings clarity into this ecosystem — but it will always be a matter of finding a balance between freedom and user protection. As a cryptonative, I'm more on the side of freedom, obviously, but I do understand that more clarity on the regulatory side of things will help the ecosystem expand and will reduce the risk of actors hurting their users, like we’ve recently experienced with the FTX drama.
The third issue is answering the question of what we can do with our crypto. Right now, we’re focused on decentralized finance and NFTs because they’re the immediately addressable market and added value proposition market. In finance, you’re completely fine paying a transaction fee when you expect that your revenue will exceed the cost of using the blockchain to do it. Similarly, you’re fine with spending some crypto on NFTs because you’ve extracted some value from them. However, I think there are a lot of less added value use cases that might be interesting for user adoption that haven’t yet been sufficiently explored. I’m quite interested to see how the ecosystem will develop in this area.
PWN: What are your thoughts on the prospect of DeFi mortgages (i.e. using digital assets to back long-term mortgages)?
MZ: This is actually two questions in one. The first question is whether we use crypto to borrow a stablecoin and buy a house with it — and the answer is yes. If you have like $1 million worth of ETH, you can put that on Aave today, borrow half a million dollars, and buy a flat somewhere. However, if you have $1 million laying around, you likely don't need a mortgage or a loan to actually buy property. For most people who earn a predictable revenue through their salaries, they take out a loan for the next 15, 20, or 30 years and pay it back slowly. That’s the definition of an undercollateralized loan.
In DeFi, we currently have overcollateralized lending. You always have more collateral as a guarantee in the protocol than the value you extract from the protocol. In order to access undercollateralized loans, you need to address the trust issue (in other words, what happens if someone borrows some money and doesn't pay it back). In current DeFi, because every position is overcollateralized, the answer is simple: We liquidate the shop, the protocol is fine, and the liquidator gains liquidation budgets. Why? Because there's always more value locked than the value extracted.
Conversely, in traditional finance, you send the cops or a “love letter” written by your lawyer in these types of situations, and if the person doesn't pay back, you involve the legal system. That’s extremely hard to enforce in the purely decentralized, permissionless system in which every actor is pseudonymous.
In order to address those markets, it’s necessary to make some concessions in the decentralized ethos because at the end of the day, decentralization and centralization are not a binary set. Instead, the reality is that everything falls within a spectrum. If you want to address undercollateralized lending, you will need to accept something that’s completely unacceptable on paper in the pure, perfect ethos of DeFi, such as KYC or the identification of off-chain agreements.
I think there’s a push to address this market, but it's not mature enough and won't be until there's some actual regulatory clarity around this kind of operation. Because if you want to involve the mid-belt judicial system, you will need some laws and some paperwork that will provide a framework for that process.
PWN: In your work with tradFi and traditional media, what is your current view on how the DeFi space is perceived from the outside?
MZ: I’ll answer this as the President of the DeFi committee of Adan, which is the main French industry lobby. In my role, I'm very often meeting with both French and European institutions to discuss regulatory issues and how they’re perceived. Because of that, I have quite a clear vision on DeFi’s current standing, and I have to say that FTX did a lot of damage to crypto’s image.
In the political landscape, you have two sides even when it comes to crypto: There’s the left that should love crypto because at the end of the day, we’re here to burn the banks and give back more power to the common people. Unfortunately, the left side's current vision of crypto (at least in France) is that it's speculation, it's capitalism, so it's bad.
Then, there’s the right side of the political spectrum that maintains the opinion that crypto is used for terrorism, scammers, and selling drugs. So obviously, when you have events like FTX, it's not helping.
Nevertheless, we still have quite a few movements inside the governments in Europe that are trying to push innovation. With regulators, there’s always the fear of missing out on the next internet or technological revolution. (This is especially the case in France, since the country did in fact miss out on the internet by proposing their own version of it called Minitel. It was a huge failure.)
So the framework isn’t completely dark, but it's long and hard work to spread knowledge and educate regulators and policymakers around the intrinsic interests and benefits of crypto.
PWN’s Cryptonatives is an interview series with some of the brightest minds within the Web3 and DeFi space who are building and making active use of the services that today’s crypto ecosystem has to offer. Through shedding light on their experiences and lessons learned throughout their careers, it’s our team’s goal to educate the masses and further spread our guests’ wealth of knowledge.
Read through our previous Cryptonatives interview with Pavol Luptak.
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