In The Future of Decentralized Finance, Trond Arne Undheim, futurist and author, talks to Dan Elitzer, investor at IDEO Co-Lab Ventures. The takeaway is that the promise of open finance is a world where everyone can freely create or deploy new financial instruments and business models without or with less of the intermediary constraints that traditional institutions have put on the system. Even if that will take decades, this is cause for optimism. Also, should kids learn about bitcoin or perhaps even own it?
Dan Elitzer is an investor at IDEO CoLab Ventures, a venture fund that operates as a subsidiary of IDEO, a leading global design and innovation consultancy. IDEO CoLab Ventures invests in early-stage companies building on distributed web technology (blockchains, cryptocurrencies, etc). From 2015-2017, Dan led the distributed web portfolio at IDEO CoLab, conducting blockchain research and prototype development in partnership with both startups and Fortune 500 companies, including Citi, Nasdaq, Fidelity, Exelon, BlueCross BlueShield, and Ford. Dan received his MBA from MIT Sloan, where he co-founded the MIT Bitcoin Club, MIT FinTech Club, and MIT Bitcoin Project, which distributed $100 in bitcoin to each MIT undergraduate in 2014. Prior to falling down the crypto rabbit hole, Dan worked in social entrepreneurship and microfinance, at Community Wealth Partners and Grameen Foundation.
- Dan Elitzer LinkedIn (delitzer) https://www.linkedin.com/in/delitzer
- Dan Elitzer Twitter (@delitzer): https://twitter.com/delitzer
- Grameen Foundation https://grameenfoundation.org/
- Community Wealth Partners https://communitywealth.com/
- MIT Sloan https://mitsloan.mit.edu/
- MIT Bitcoin Club https://bitcoin.mit.edu/
- MIT Fintech Club http://www.mitfintech.com/
- IDEO CoLab Ventures https://www.ideocolab.com/ventures/
Dan, you are currently an Investor at IDEO CoLab Ventures. Previously, you’ve worked for foundations and ngos like the Grameen Foundation and you had a summer internship at Ashoka. It’s more for profit now? Since starting the MIT Bitcoin Club while at Sloan, you’ve been at IDEO, focused on blockchain, crypto, and now specifically decentralized finance (DeFi).
In the process of working at Grameen, which supports microfinance and technological tools to empower people in developing countries and in the process of doing that is when I fell down the bitcoin rabbit hole.
the bitcoin rabbit hole (00:03:00)
I’ve been that rabbit hole myself, it must have been back in 2004 when my consulting firm did a study on Bitoin’s Impact on Banks, and since then, a lot has happened to both Bitcoin and banks, I guess.
- Santander commissions study on bitcoin’s impact on banks https://www.finextra.com/newsarticle/26386/santander-commissions-study-on-bitcoins-impact-on-banks
Last time we met was at the MIT Sloan Fintech Conference. Tell me about your life since then?
I kind of had that fintech interest coming in, with my previous career being focused on the intersection of finance and tech. The Fintech Club at MIT Sloan was something that I helped start with a number of classmates, being inspired by how things were starting to change and the new capabilities coming to the forefront. At the same time as starting that, I also started the MIT Bitcoin Club to really go deeper on bitcoin, and what became a larger interest in bitcoin assets, bitcoin assets, cryptocurrency, crypto assets, blockchain technology and all the possibilities that that whole sector entails. I do think it dovetails nicely with fintech, and I’ve become convinced over the last 5-6 years that, in the future, these two areas will become increasingly combined.
Didn’t all MIT students get some bitcoin, and what was it worth at the time and what is it worth now?
At the time, Jeremy Rubin and I who was an undergrad, teamed up to work on the MIT Bitcoin Project. We announced that in the spring of 2014. In the fall of 2014, we ran a study which enabled every MIT undergrad to get $100 worth of bitcoin which at the time was worth something in the $3-400 dollar range. Today, it’s floating around $9000. Those students who held on to it have done quite well. The goal at the time was to understand what could happen in a world where you can assume that your peers all have access to bitcoin as well. Because there is always this bootstrapping problem of technologies. We thought, hey, this is a pretty tight knit community. If a group of very smart, young people who are largely technical all have access to bitcoin, what would they do with it, what would they build on top of it and how would they use and not use it. We saw some interesting results.
- MIT undergrads to get $100 in bitcoin in digital money trial https://www.reuters.com/article/us-bitcoin-mit/mit-undergrads-to-get-100-in-bitcoin-in-digital-money-trial-idUSBREA3S15E20140429
So, one thing is that not just technical people are interested in this anymore?
Yes, people with financial interest, and interest around monetary theory were early adopters, too. Now, people are coming at it both from a financial and a technical perspective. People in the industry tend to break it down to almost East Coast/West Coast, in terms of New York being the center of finance, and people on the East Coast coming at it from a financial perspective. People on the West coast coming at the space really from a technology innovation perspective.
In order to have enormous impact, it has to cater to various communities. In the interest of, clearing up the concept soup, could you clear up a few concepts? Cryptocurrency, blockchain protocol, tokens, all the way up to decentralized finance.
Bitoin is where it all began, it is the simplest to understand. It is a protocol, a network of computers that are all running the bitcoin software protocol, as well as the bitcoin asset, using the symbol BTC. Bitcoin is often referred to as a currency, which is a misnomer. When people think currency, that has a lot of preconceptions that bitcoin doesn’t fit into and that causes people to dismiss it, they say, this couldn’t possibly be money. You’ve got this asset that runs on this network, it exists on the bitcoin network, which is updating a blockchain, which is an immutable ledger which is shared along a network of computers. It allows for what I like to think about as row-by-row permissions. Everyone can update the database, to move their bitcoin, to move a bitcoin that they currently own, but nobody can update anybody else’s record. That was a big breakthrough. You can enable a whole host of applications and use cases, beyond tracking a single asset like bitcoin. So when you say tokens, tokens refer to assets that are issued on a blockchain network, the Ethereum network being the most popular at this point, for issuing tokens. People then are building applications that use tokens in various ways. They [tokens] can resemble money, they can be closer to equities or debt instruments, there are all sorts of different types of assets that you can create on these blockchains that are represented through tokens that can be transferred.
- Some Bitcoin words you might hear https://bitcoin.org/en/vocabulary
- The Crypto Dictionary https://thecryptodictionary.com/
- Cryptocurrency ABC – The Crypto Dictionary https://cryptoticker.io/en/cryptocurrency-crypto-dictionary/
Isn’t it also true that the initial idea of tokens didn’t represent anything external to the network?
getting beyond the 2017 ICO hype
There is a big range of things that they can represent. What we saw in 2017 when we had this boom in ICOs, or coin offerings, what was largely being created was akin to gift cards. These people were issuing these tokens which were meant to be used for very specific applications, business, there wasn’t really a lot of reason to do that from a business or user perspective. It was largely about fund raising. That makes it look a lot like security. That was problematic in terms of how that was approached. What we have seen since then, as people started to see we are past this initial hype, is what are these tokens actually useful for? One of the answers, is that you can use these digitally scarce tokens to represent ownership over a protocol. You can use that to govern that protocol and make changes to it. If you think about how open source software has been maintained and updated, it’s a very soft and mushy process. It happens in various discussion forums, on GitHub, but ultimately, there is somebody who holds the right to update in a code repository, somebody who can make the final decision there. If you want this to be truly decentralized, to [rather] do it in a way that you can actually have a vote, based on the weight of these tokens, you can have more influence in terms of how a network protocol or application is going to evolve going forward.
When you explain it like that, it seems very transparent. But, a lot of the discussion about how quickly this particular kind of fintech instrument is going to wash over [us], it has to do with trust, doesn’t it? So, how much trust was lost in this ICO situation, where a bunch of startups as you pointed out, where a bunch of people were trying to raise money, some legitimately, but without really having the asset clarified or representing anything beyond a promise of something in the future, it was purely a fundraising instrument.
- Life After The ICO Hype: What’s In Store For The Collective Investment Market? https://www.forbes.com/sites/forbestechcouncil/2019/10/25/life-after-the-ico-hype-whats-in-store-for-the-collective-investment-market/#250ce1793b17
Most people’s initial impression of this technology and industry is that it was hype and not sustainable. But, having been focused entirely on this space the last 6-7 years, the last few years have been wonderful for building. A lot of the people who came to make a quick buck are out and those left deeply appreciate the potential of this space, and are building the foundations for a real overhaul of the financial system and are building one that is much more inclusive, accessible, and is able to innovate at a much much faster pace than was previously possible.
If that’s true, that’s exciting for the financial sector, although as we will talk about, this has ramifications way beyond finance as such. That’s one of the complexities. But if it truly enables various sectors to innovate faster, this kind of innovation could be really, really interesting to make use of.
decentralized finance (00:10:00)
Let’s now move into this more recent phenomenon, the paradigm of decentralized finance that are starting to emerge. You are very optimistic. What is decentralized finance? Is it the sum of the things we have been talking about now, or is it something more in addition to that?
Largely it is. The way I like to describe the end goal of decentralized finance, or I actually prefer the term open finance, is that we are building tools that will make it possible for anyone, anywhere in the world, to access–or create—any financial instruments that they can imagine. That can be their own currency, issuing their own shares of some kind of venture organization or issuing new types of financial derivative products. Whatever you can think of, you can create these things and you can remix them. There is no intermediary who can tell you yes or no. You just need to find somebody else who wants to use this thing that you’ve created. That’s the kind of thing we saw happening with publishing, the whole web 2.0 movement, which was largely about user created content. We are now entering a phase of user-created finance, where anybody in the world can take power over their ability to interact with money and value and their financial wellbeing in a way that has not previously been possible.
- A Beginner’s Guide to Decentralized Finance (DeFi) https://blog.coinbase.com/a-beginners-guide-to-decentralized-finance-defi-574c68ff43c4
This brings to mind for me, the fact that in fields that previously had some people controlling them, notably finance, and politics, even media, and obviously all industries have a power structure. What does it do to the power structure when it increasingly becomes possible for anyone, ostensibly, to shake up the system, and act more like independent actors, and not be constrained, either by monopolies, or just by existing models of doing things that are either inefficient or unfair in terms of access. What does it do, though, to the people that sit there with vested power.
One of the issues in the 2014 study on bitcoin power that we did, was banks, what are they going to do? Are they going to experiment with it, are they going to ignore it, and if they embrace it, what is this going to mean for them? Would you say that there is a maturity now, among the powers that be, that this, even though it is disruptive, also can have value for those players, or have they concluded the opposite, that this will be a massive change, [so that] when it really shows up, it is going to really change everybody’s playing field.
That’s a really great question. Starting around the 2014-15 era, I was actually very impressed by how some of the large banks and financial institutions were starting to take seriously what they referred to as blockchain technology. I don’ think it’s catching them unaware, although I don’t think they have a sense of the direction in which this is headed. I don’t think it will disrupt and obsolete banks. I think it will change their role and where some of their opportunities lie. It will not end banks. It is merely opening up a much, much broader playing field, and letting a lot of new entrants in and moving much, much faster. We are moving from a world where it’s a default NO, you need to ask somebody’s permission to ask someone’s financial protocols, to a default YES, so anybody can interact with these open protocols without having to ask anybody’s permission.
It’s a very positive picture you paint here, Dan. Can we talk about the numbers here? You pointed out one actor, Compound Finance, maybe we can start with them? What size impact is this starting to have on various smaller markets? How significant of a force is it?
It’s still very nascent. There’s currently $1.6 billion worth of various assets deposited into these various DeFI protocols. Compound Finance is currently the largest. It has $600 million in assets in it. It’s a money market protocol, a protocol to allow anybody to permissionlessly loan or borrow certain (crypto) asets that exist on the Ethereum network.
What are the growth rates year on year in these markets?
It’s been an absolute hockey stick, even these past few months. Compound was sitting on around $100 million in assets, over a period of a year, incredible growth, but they just kicked off a new evolution to their model, which has kicked them and others into a hypergrowth moment, where harkening back to what we were talking about earlier, tokens. They have started distributing a governance token over their protocol, to users over their protocol. They have set aside 43% of their tokens to give out to users who borrow and lend through this protocol, to eventually hand over the governance of this protocol to the users or whoever holds those tokens. I think that’s incredibly exciting. It’s created massive subsidies, effectively. People are valuing this tokens, saying this is adding to the interest they’ve taken as a lender or in some cases, such heavy subsidies that it was leading to negative rates on borrowing. But it’s led to this astronomical level of growth which does have some shades of this 2017 ICO growth that we were talking about in terms of the mania that it’s setting off. But, we are also seeing that there is sustained growth when the incentives are removed. For example, one market that had grown to $100 million in borrowing, even when the incentives were taken away, there was $50 million in borrowing. These incentives are proving very effective in bootstrapping networks and liquidity. It will ultimately lead to them being of the size that they can start being interesting to people outside this small industry and create truly globally accessible markets for borrowing and lending.
The most popular assets are actually dollar denominated assets. They are referred to as stablecoins or crypto dollars. There is a possibility to get much higher yields from lending these crypto dollars via Compound than you can earn in your bank account. It’s accessible to anybody anywhere in the world, not just people with access to a US dollar denominated account within the traditional banking system.
- Compound Finance https://compound.finance/
- Superfluid collateral in open finance https://tokeneconomy.co/superfluid-collateral-in-open-finance-8c3db15efac
- Unchained (Laura Shin’s podcast) https://unchainedpodcast.com/how-to-earn-money-on-collateral-in-defi-and-why-thats-risky/
- The DeFi Challenge http://www.futuresmag.com/2020/07/22/defi-challenge
There’s also this idea that this could affect many other industries. I know the energy industry has been exploring this. A bunch of other industries have looked at it. Can you give us examples beyond finance where this is starting to, at least, be experimented with?
With IDEO Co-Lab we looked at, in 2016 the intersections of blockchains and IoT devices, and we built a prototype with NASDAQ, a large energy firm and a startup showing how you could connect a solar panel to a blockchain to issue renewable energy certificates, and create an audit trail for that. It allowed these energy credits to be traded on a blockchain.
There are a lot of experiments applying blockchain to supply chains. They have a lot of potential in the future, but what we need now is to focus more on the financial use cases. That is where we will see a wedge for this technology. Once we have a robust financial infrastructure, it will be much easier to tie in some of these other applications that may not be directly financial in nature.
Can you give us a sense of the timelines? When is decentralized finance a default option for finance? When will it in a significant way move into a pack of other industries?
We probably have another decade to go at least before we see decentralized finance moving the financial world in a way everybody is paying attention to. It’s similar to the evolution of how we think about the internet. We used to have internet startups. Today, it sounds silly to say: “I’m starting an internet company. Defi is just going to be part of a toolkit you need to do anything in financial services.
Such a storied place. I think of it as the home of design thinking. How is it to work there?
It’s been incredible. I’m surrounded by such amazing, creative colleagues. They have design backgrounds, IDEO thinks of design very broadly, so we have org, business and interaction designers, so many different disciplines. They force me to think about things differently. I never thought I would work at IDEO because I hadn’t thought of myself as a designer. What appealed to me about joining IDEO when I was looking out in 2015, and said I wanted to have impact in the industry, it was amazing to me that IDEO had the foresight to look at how design could impact blockchain technology. That foresight was incredible. One of the big things we are still in need of in this industry, is more application of design thinking, and putting the user in the center of product development so we can get this over the chasm and reach the potential to reach mainstream users.
You work in IDEO co-lab ventures. Are you actually investing or partnerning with ventures. IDEO Co-lab was a collaborative lab. We took inspiration from the MIT Media Lab. Through that, we were getting really close to those bleeding edge startups. We realized we could do a lot more if we could inject capital into the ones we had the most conviction around. A few of us on the team said, let’s pool some of our own money together. We were very fortunate to find a family office that co-invested with us. We then went to the IDEO leadership and said, what do you think of us starting a venture fund, and by the way, we have a bit of a track record. We ended up creating IDEO Co-Lab ventures, and launched our fund a couple of years ago. We started investing in early stage companies in this space. We termed it broadly distributed web startups, which covers decentralized finance, it touches on anything blockchain and crypto related. We’ve made two dozen investments, mostly at preseed and seed stage. A majority of them have had a strong defi or fintech component, there is also the future of work and gaming related or pure infrastructure things we are also excited about.
What are some of the notable emerging startups that you are particularly intrigued by? Not necessarily ones you are invested in, but perhaps they are chanting the chant of the future?
One we did invest in is Pool Together. They are building on top of Compound, the protocol we discussed earlier. They have created an incentivized, priced savings account. The idea is that people can deposit digital dollars. They are their own custodians for that account. Every week, there is a drawing and a prize is assigned to one of the depositors. As a user, you can take out your deposit at any time, but the interest is randomly deposited to one of the depositors. This type of offering has existed as premium bonds in the UK. In Michigan, a bunch of credit unions ran a project called Save To Win. They had 20K household participate for relatively low prizes. Those who participated, roughly 50% of them had previously not had savings habit and 60% of them had played the lottery in the past six months. So this was a way to redirect gambling behavior into savings behavior. This insight about the ability to marry the understanding of human psychology with these tools, is creating tools that are promoting financial tools that are ultimately good for them.
- Pool Together https://www.pooltogether.com/
- Premium Bonds (UK) https://www.nsandi.com/premium-bonds
- Save to Win http://www.savetowin.org/participating-credit-unions-michigan
You had revealed to me that you are interested in games. You played Magic.TheGathering? What’s so exciting? Games are very serious.
Fun is important. I learned a lot of strategy playing games, not just in my youth but in adulthood. The idea of looking at game mechanics, how you can incentivize certain behaviors, how systems react based on individual actions and decisions are very important. I think that’s served me well. Others that I see doing very smart stuff are often referencing game mechanics in their designs because we know that those are useful mechanics for engaging people and getting them to take certain actions.
staying informed (00:36:20)
Some of these things are really hard to fathom, frankly. It is a slightly technical sector even though it has moved more into fields that are easier to understand, and the platforms are becoming more user friendly. How do you explore this field and how do you stay current? (00:36:25)
The best way to do it is to start using it. I recommend Argent And Dharma.
Both have defi wallets. User controlled wallets. They have an amazing experience. Pretty friendly to people new to the space. Trying those out for yourself and seeing how they work, hopefully is enough to be intrigued and learn more. If you want to dive in deeper, there are some industry news site and newsletters, includig Camela Russo and Laura Shin, also, Bankless is a podcast for if you want to put some of these things into practice.
- Camela Russo (@camirusso) with the Defiant https://thedefiant.substack.com/about
- Laura Shin (@laurashin) who writes for Forbes has two podcasts, Unconfirmed https://unconfirmed.libsyn.com/ and Unchained https://unchainedpodcast.com/
- Bankless podcast http://podcast.banklesshq.com/
Once you start reading a few of these things, hopefully it will trigger some things.
Would you say that you, how much time to you spend tracking the field vs. acting in it? (00:38:30) How much time does it take if an investor wants to allocated 20% of their portfolio?
I spend all my time when I’m not with my family focused on it and it’s hard for me to keep up. There’s so much happening now. You need to be focused full time if you want to make individual investments. For people who are looking to get exposure, there are a number of funds you can go into. There are some things like Bitcoin (BTC) and the currency for Ethereum (ETH), not to give financial advice, but in my view, they have been correlated with the growth of the possibilities in this network. I encourage people to first look at these base layers to understand them. They are the building blocks. If you don’t understand those building blocks, it’s going to be hard to get into the more idiosyncratic pieces.
corporate use cases (00:41:04)
That’s great advice. A lot of my investors are corporate innovators. They work in large corporations. What are some of the best case studies on how large corporations are starting to embrace these trends?
We’ve worked with Citibank through their investment arm, and NASDAQ and Fidelity, who have been leaders in this space. From the financial services perspective, Fidelity has been an absolute leader, they launched their Fidelity Digital Assets subsidiary a year or two ago. They understood more deeply than pretty much any large corporate out there the potential for this technology for quite a long time. Outside of finance, Walmart and Maersk have done some supply chain related things.
I’m going to leave it open for you now. I feel like we have been through a little guideline for what is happening in the field, at least superficially. What are some things that you are excited about going forward that we may not have covered so far?
The areas that I would encourage people to think about is what are the opportunities that have been limited by ability to access financial networks. Think about what are the things where, if you are an 18 -year old software developer sitting in India, where it was unthinkable that you could touch, what are some areas that have opened up. We were working with, literally an 18-year old in India, we invested in a couple of brothers who were 19 and 21 out of Bangalore, who built a protocol that gives access to all those other ones, that have over $50 million sitting in it today. I think the amount of innovation that is possible now is just mind blowing. This is starting to accelerate the pace of development so much that it’s worth just exploring the possibilities. Say, what would I build? It really is now open to anyone.
introducing kids to Defi (00:43:45)
Lastly, a lot of these developments could potentially also change finance for younger people, even in the K-12 system. What re some of the places they can go in a very accessible way? I’m saying this, as a parent of three young kids that are very excitable, when it comes to new things, new technologies, kids are really interested in a lot of different areas. What are some of the choices they have to pick up things early, so they when they arrive at MIT and all these community colleges and wherever they end up, so all of them are prepared for this world with so much opportunity to innovate, to learn, and to be financial actors, earlier and more independently and before.
As a parent of children that are not yet teenagers, I hesitate to recommend specific forums, I don’t know any resources tailored to young adults, maybe good opportunity space to build tools for that. I know a family friend and we gifted him a small amount of bitcoin during Bar Mitzva. He got so interested, started learning and doing research on his own. Giving kids a small amount to play around with, almost as an allowance, is a good idea. The learning capability these days is so different than you and I were used to. They have access to tools that were unimaginable for us. I have a lot of faith in young people. If they are given a small chance and a small exposure, they will understand it so much faster. I came across bitcoin several times before I registered that there was something worthwhile there. A lot of people are the same way. Youth today are going to grasp this. Them coming in to becoming more meaningful economic actors, they will just intuitively grasp it. It’s after 5pm and I can’t send money, markets are closed? What’s that? It’s daytime somewhere in the world. Why can’t I access funds that I own because of some arbitrary restriction of the numbers in the clock. Gen Z inherently grasp the opportunity here, more so than you and me.
- Bitcoin https://wiki.kidzsearch.com/wiki/Bitcoin
- Square made an illustrated children’s story to explain bitcoin https://www.theverge.com/tldr/2018/1/31/16955374/square-bitcoin-decline-satoshi-illustrations-wise-financial-decisions-cash-app
I wanted to bring it to that, because the timelines are decades. It is, in some way, the children of today that will mature with this technology, so it’s really important, I think, that they grasp it as early as possible. Thanks, Dan, it’s been wonderful to reconnect with you. Thanks for educating me, and hopefully, my listeners.