Marco Di Maggio on Fintech Trends

Well, welcome to this edition of our thought leader series. I'm Joel Hefner. Today, I'm joined by professor Marco Di Maggio. Very exciting topic today on all things FinTech related. In fact, we're going to focus on three main areas, blockchain technology, cryptocurrencies, and of course DeFi. A couple of quick housekeeping items you should have in your Q and A. You should be able to type this in a question. Feel free to do that. If you have a question during the webcast, we'll do our best to get to it. I will say though, there's quite a few people on the webcast, so, if we aren't able to get to it, we'll make sure we do that afterwards. Now I'm gonna go ahead and introduce our main speaker professor Di Maggio right now. He is a professor at Harvard business school in the finance unit. He's also, works for NBER, National Bureau of Economic Research and has been involved in several cryptocurrencies projects as well. So, professor Di Maggio welcome back. Thank you so much for having me. It's a pleasure to be back. Awesome. Well, and a couple final things. If you are a CPA or a CFP, we will be issuing a credit, CE credit. So, you will be prompted three different times throughout the webcast. You need to make sure you stay on for the whole time. They're very quick, simple question, go ahead and type in that answer and we'll be sure to get you the credits. Also, I do want to make one other mention. We will be showing slides today. Professor Di Maggio has, has some slides he'll be showing. Unfortunately, given the nature of the audience today. So, this has of course financial advisors, institutions, some folks may be retail, direct clients as well. We're not going to be able to issue you a copy of this slide. So, apologize for that in advance. If you type in, say, "I'd love a copy of the slides", I'm sorry, we won't be able to give them to you, but you will be able to of course follow along and we'll be going through everything at that pace. And again, any questions, feel free to, to get those in. So professor, let me, as I kick it over to you now. So, we always say at Dimensional, there's really three main things we talk about as it relates to an asset class. In fact, we oftentimes say here at Dimensional, what role does an asset class, of course, play in your portfolio or an investment? What is the expected return of that investment? Of course, what are the costs to get in and out? So from that framework, I'll kick it over to you with the first question we were debating here internally a little bit as it relates to crypto, is it its own asset class? And if so, are we missing out by not directly investing in this asset class? So how, how would you address that question? So, thank you for that sweet, interesting question. So I, I will say that, you know, one, one interesting thing here is that probably not many of you know, but you are already exposed to the underlying technology blockchain because there are more and more companies nowadays that are using the underlying technology and uh, and so you know, just a few examples, you know, Tesla by owning and accepting a Bitcoin, micro-strategy by owning Bitcoins. And then that will touch upon the, some more, you know, even more standard companies like Walmart. And we'll give you a couple of examples that are using the underlying technology. And so even if you don't own the Bitcoin in your wallet or in your portfolio, you are likely to be already exposed to the underlying technology. So, I will go ahead and just show you a couple of different dates. As usual, these are my own views, not the views of a Dimensional. Let me start with two opposing views here. So on the one end, you have Tesla and Elon Musk saying that they are buying $1.5 billion in Bitcoin. And they're gonna use that to accept the two, use Bitcoin as payment for their uh cars. I have to say they changed ideas a couple of more times since February. And then on the other side of the spectrum, you have Warren Buffet saying that cryptocurrency has no value, "I don't own any and never will". Okay. So, I will not try to reconcile these two views, but I will sort of try to show you both the potential benefits and potential risk, both for investors as well as risk that comes from, you know, regulatory risk and so on. That might motivate, why there are such opposing views in the, in the space. Okay. Before talking about crypto, let me start with the underlying technology, exactly what I was telling you before then. The underlying technology is much bigger than just crypto. And where it all started, they started with this idea of creating a record. They think about it as a database, a ledger that these public, immutable, and it cannot really be counterfeit. And you know, one thing that we need to acknowledge here is that we are very much at the infancy stage we're at the proof of concept stage here. And so, many of the things that we are seeing right now are sort of experiments. So I'm not gonna work out there are gonna be scaling up and I'm going to be extremely successful. Others are gonna fail. There are going to be also loopholes there are gonna be also risk for, for investors, but sort of the idea is I'm acknowledging the fact that this has been around for just a few years, for a decade or so. Why it has the potential and should attract the attention that these attract, is the underlying technology. Is because it's somewhat complimenting the internet. As of now, the internet is all about sending information without a central intermediary. The idea of blockchain is really creating an internet of value. So transferring asset without a central intermediary and that might change dramatically, the way in which we interact with each other. And so the, you know, the applications that have been explored are in multiple different areas. There are some obviously in cryptocurrency and whatnot, but that there are some in decentralized finance. We're gonna talk about that at the end of the talk and some in NFTs, that these non-fungible tokens, which is rather new experiment that has attracted a lot of attention. But before going there, let me emphasize what I was telling you at the beginning, which is that at some point you are likely to have already some exposure to this sector. Why? Because of companies like Walmart, the we for instance right now using blockchain to bring transparency to the food supply chain. The idea was how do we trace products, that are coming from other countries into the U.S., for instance? And if they did an experiment that they were trying to trace, I think mangoes, and it took them about seven days to understand from which farm, which country these were coming from. So they say you know seven days. It's, you know, coming in from other places, but it's still extremely slow, because think about the, what happens to it, what happens if there's fruit bugs in the teas, and they want to trace it back immediately to the initial farmer. They used the underlying technology provided by IBM blockchain, and this was the what's called the hyperledger. And in this way, they were able to shrink that seven days into 2.2 seconds. So, immediately they were able to trace it back to where it was coming from. And so now they are rolling these out across different types of, of products. That's not the only application, they, they have been used to monitor our vaccine distribution in real time. And then the last one that many of, I think the, the people that are new tends to, are happy about is using Bitcoin as legal tender in El Salvador. Okay. The strange thing there that I will highlight here is that 70% of Salvadorian don't really have a bank account and just one third use the internet. So it doesn't seems to be really the place where you would do something like that, given the technological barriers. But obviously there is a lot of demand for something that is outsized. You know, it doesn't need the trust in a central authority to have some value. Let me do it, do the transition towards the first application we are talking about, the cryptocurrency. Okay. This is really, you know, I would say welcome to the Wild West, just because as you can see from this graph, which plots the total market cap of the industry, as well as the top cryptocurrency with the orange-yellow area, being the one of Bitcoin, and then the second largest one Ethereum, and then you have with the other, like, Cardano, XRP, Solana, and so on. These are sort of a large cryptocurrency, they've attracted a lot of investor attention. And there's, you can see, there is quite a bit of, of volatility here. You know, it's an industry that reached about $2 trillion in about 10 years, but it's still going through, as I mentioned, an infancy phase. What's the underlying challenge here is trying to find a system or mechanism by which a common set of facts can be agreed upon. And this is really what all of these cryptocurrencies are about. We have to agree that some transactions are happening and some others, some are valid and some are not valid. And this is sort of the main innovation of the underlying technology, trying to find that these consensus mechanism that we, where we know we can use the we can that used to agree on, on these sorts of transactions. Bitcoin, as their proof of work, which is environmentally, definitely not friendly and extremely expensive. Others are coming up with what are called proof of stakes, that are significantly more friendly to the environment because they don't consume as much energy as a Bitcoin. And as you will imagine, as we scale, and as these industries grows, you would expect more and more of these types of innovations that use the underlying technology, but improve them along some of the lines where we see the most inefficiency, for instance, the, the consumption around. Hey Marco, can I ask real quickly, there were a couple of questions that came in around that topic, around scalability. That seems to be one of the challenges some of the block chains have had. Is it more because of the mechanism where there's proof of work or stake, or what are you seeing as it relates to scalability? Because ultimately gotta be able to process an awful lot of transactions to make this work in a very short amount of time. Absolutely. I would say that there are two main roadblocks there, one is making all of the consensus mechanism and making more environmentally friendly. And the other one is number of transaction. Just to give you a sense, the number of transactions for Bitcoin is around four per second. The reason why is because every single block which really contains these transactions is limited in size. And its also limited in the number of blocks it can be approved in certain amount of time, just to give us a comparison, beside, think of time the transaction, about the use, about 4,000 transactions per second, but they could potentially handle 10 times larger number of transactions. So, there is a huge difference. Okay. Now, one thing that just to be fair, that we should say is that these have been acknowledged, these types of over block system. So barriers to scale, and there are now innovations that try to overcome these type of barriers. In particular, now you have a blockchains that allow for thousands of transactions to be processed per second. Solana is one of these, and you also have a system like I was mentioning that are significantly more environmentally friendly. And so they don't consume as much energy and retain the same efficiency in terms of agreeing on these transactions. So, there's the prop up, the reply, I would say, yes, there are big issues, but at the same time, this is an industry that is evolving, and so those issues are being taken care of as time passed by. And there are already a couple of different answers to those issues. Then I will add one more, which is sort of the way in which I will talk about this slide, which is the biggest issue in using any of these cryptocurrency. At least the ones that people are familiar with is the volatility. Okay. You, you don't really want to use a, as a minnow payment, a currency that changes value every day or even every hour. And so that's also something that has been proposed and it's really, it's taking off quite dramatically in the last few years, which are Stablecoins. So, they are usually pegged to a fiat currency, for instance, one USDC, which is one of these stable coins, or one better is worth $1. How those work, they work in different type of ways. This one standard one is that they keep reserves. So, meaning that for every $1 worth of the cryptocurrency, they all the $1 in treasury bills or in cash, or they you know, can be more sophisticated in terms of creating this stability and without going into the details, but there is the possibility of also creating these Stablecoins using algorithm. So, they don't really have reserves, but they provide the incentives to the players in these industry to keep it stable because of arbitrage. And this is actually an area that I've been involved with the, with the multiple companies. And so if you look at this space, you have the cryptocurrency that holds more than 6,000 different coins, and then a subset are the Stablecoin. And then even the smaller subset that is right now emerging, now we'll spend some time on are the CBDC, so, the Central Bank Digital Currency. But just to give you a sense of some headline numbers and a sense of, of this industry, these are the, you know, the cryptocurrency is, as I was saying, there are 6,000 of them and the three major ones are Bitcoin, which is also the first one that represents about 40% of the total market cap. Then there is Ethereum, and Ethereum is completely different cryptocurrency, and I want to spend a minute on this just to show you how different these different currency are from each other, although they are usually bundled together. You know, Bitcoin, the only value in Bitcoin is really even by some type of quality demand, and some expectation that the number of Bitcoin is limited, because that's true. So, the sort of supply is limited and would run out, but in experience, Ethereum instead the bill is built the underlying blockchain and why it has value, it's much closer related to use cases, meaning you have this technology and to really use this technology, the Ethereum blockchain, you have to buy Ethereum. Okay, so you have to buy the underlying currency. And so the more developers are working on different apps that are plugged into these ecosystem of a Ethereum, the more you would expect the value of Ethereum to go up. And so that's the reason why I was saying these are very different cryptocurrency. One is a limited supply and doesn't really have an ecosystem around it. Ethereum is unlimited supply, but its value really comes more from the use of the network use of the underlying knowledge. And in fact that most of the cause that we have seen in the last 12 months in the decentralized finance protocols are all linked to Ethereum. And then you have also very important, which is even in different models, Ripple is much more of a centralized company that is funded the sort of cryptocurrency with the more specific use cases like for instance, the difficulties to transact across international borders that is very slow as of now, and is extremely expensive. And so remittance is one of the remain use cases. But as I say of, it's barely from that as well, because it comes from a company that is proposing this, rather than being completely decentralized as the other two. Stablecoin, as I was saying very different, here, the idea is let's take seriously is the fault of using cryptocurrency as a means of payment. And to do that, we have to propose something that is stable, stable, stable with respect to what usually respect to other types of currency. There are, I mentioned three of them, which is a, which are USDT that is backed by fiat money, cash equivalents and receivables. USDC, very similarly backed by fiat money and published an audit report on it's collateral. And DAI, which is run on a decentralized protocol and backed by other cryptos. I'm also prompting the performance limits, I mean the price of this currency, although they should be stable, they, you know, they also went through some times of volatility. Although if you look at the scale where we're still talking about being a few cents around $1, which both know all three of them are linked to. One extra thing that I wanna mentioned here, which sort of opens up a lot of other questions in terms of the regulatory framework, is who checks what type of reserves, these people, this type of Stablecoins have? In fact there has been very recently quite a bit of controversy around the USDTs. Why, because they found out that there is first, there isn't much transparency, so, after a lot of pushback from the Assisi and other authorities, they found out that the data or USDTs owns a lot of commercial paper, Chinese commercial paper in their reserves. And given the, given the latest, latest, the issues with the, with some of the big companies in, in China, that's definitely not a sign that, you know, you will have for, it's definitely not something that you would like to have and see for a Stablecoin. And so there is a question of well, stability, but at the same time, we want to make sure that there are reports and real transparency around, "should we really trust this stability?" Also because these are not savings account, these have not, there is no FDIC insurance. So, if I own a USDC and then there is a drop in its value, it is, you know, as the risk, as Odinga, or any other type of currency. Okay. And then now I want to give you one specific example that some of you have heard about, which is Facebook Diem was formerly was called Libra. So you know even private companies have started thinking about issuing their own cryptocurrency. I will tell you why in a second, but let me first tell you sort of why, you know what this is really. And so thinking about building the internet of money for everyone, this was the plan lay, you know, having 2 billion people that currently use Facebook or Instagram or WhatsApp in you, and having a embedding payment system, we did their own cryptocurrencies. These was basically a design to have a friction-free global digital currency that will reach everybody that has a mobile phone with even those that don't really have access to banking. Because remember there is some demand for that. There are about 2 billion people around the world that own a mobile phone, but don't really have access to banks, don't really have access to a checking or a savings account. I mean, the, this is not just an issue for developing countries, this is also an issue for the U.S. that are the FDICs, says that there are about 25 million people in the U.S. that underbanked or unbanked. And so this is sort of the pos, there is a demand and there is the possibility of reaching these people and offering those people, some financial services. This was, this was the idea of launching these payments using, using these, these existing app, Diem. So, their coin will be a Stablecoin and you will be backed to each different country. So it will be backed to the currency. So you in the U.S., U.S. users who will see the M, as backed to the U.S. dollar. In Europe, they will see it as backed to the Europe. It's money, it's not really investment, an investment vehicle. And that the plan is to have it completely reserved. Okay. Towards the issue with that is really that if you take these ones that further, you are getting to some sort of privatization of money up to now, we've thought about money as something that is in the hands of the federal reserve is something that is in the hands of a central authority that is above everybody, above every single individual, above every single company. And even above the government because of the central banks are usually. But here instead you have the first example of a company that has creating its own currency. What that might bring, you may bring quite a lot of benefits for Facebook and companies like this, in particular because with the cryptocurrency where everything is digital, this also means that everything is traceable. And so I can see and follow the journey of each one of these users across different platform and across different use, use-cases. Meaning, I see somebody on Facebook to whom I can post and advertise and not for the product. And then I can follow this same user when they take their DMs, their Zack-buck, and they use that to buy the product that will be sort of a full circle. That will be worth a lot because that's sort of the key marketing of being able to trace the advertising with the end product of sales. Because I'm sure this has been extremely controversial because it's Facebook, but I'm sure this is not going to be the only one, and the only company that is actively thinking about this, you can imagine other large companies, what they already have huge user base, Amazon, Apple, Google, thinking about, okay, what's the next step? How can I create a more, it's an ecosystem around what we already know about these users. This is also open up sort of a lot of questions for central banks. As I was saying, this is the first step in the privatization of money. Central banks were not happy. Okay. Also, you know, some of you will remember in the last few months that we had many, many Congress hearings with the Facebook representative, with regulators, thinking about what are the risk of it being a private currency used by billions of people around the world. But, you know, the proposal, the proposal like the Facebook Diem is also, it needed its own response by central banks. So, central banks thinks that currency is sort of the next step here. And he's putting together some of the elements that we talked about before. There isn't really any out yet that is fully fledged, we'll talk about the Chinese example, which is the closest to be, it'll be up and running. But what's the economic idea here? How should we think about why, running these central bank digital currency? Well think about the stimulus checks that millions of people have received during the COVID pandemic. All of these will be a direct deposit and they will not go through the IRS. We have seen the many of the issues with the IRS payments. These will be directly deposited on, on the, on the accounts. You can have some type of universal, basic income. You can have some type of data and rule driven rate adjustment. Think about the, you know, monetary policy that is not decided, every two, three months, but is actually driven by what they're being observed in the data, in the economy, because you can trace every single transaction. Once you get, you get to use the central bank, digital currency. You can also implement negative rates. And so, you know, saying, okay, I'm gonna give you a similar stack of 2,000 dollars, but I'm also going to tell you that you need to spend it. You cannot really save it. You cannot really invest it, I need to see this spent away, otherwise, you know, you're going to lose two percent per month for every month that this sits on your account. This is sort of implemented, very powerful implementation, negative rates that may change the combination of both fiscal and monetary bonds. And then there is also just the data driven aspect in the sense that you can observe GDP and inflation in real times. As of now it's incredible, but it's still extremely slow and imperfect. The, what we can see, what we can see about the economy. So this is, this is an old idea, if you think about it. So I went back and looked at the James Tobin's which is a Noble laureate in 1987, that argued, that in order to avoid the relying too heavily on deposit insurance to protect the payment system, central banks should make available to the public a medium with the convenience of the positive deposits and the safety of currency, essentially a currency on deposit, transferable in any amount by check or other order. So basically the people should be able to serve value even without being subject to the risk of bank failure. Having a central bank digital currency exactly opens exactly that possibility. Meaning that the people who have direct accounts with the federal reserve or with central bank in general will not go through the, the commercial banks. Okay. That will be in a dramatic shift in our economics. Let me also pinpoint a couple of differences just to show you again, the spectrum, the breadth of the space. What that is, if I compare the features of Bitcoin, the feature of CBDC, you know, Bitcoin is it what's called a permissionless blockchain. Anyone can run the software and participate in this network. There is no central entity. And as I say, it's been running smoothly, for the last decade or so. The way in which people have been imagining the CBDC are what are called a permissioned blockchain. So instead of having one central database storing all of the financial records, these decentralized ledger can, can be composed of several copies of these transactions history, each managed by different financial institutions or whatever basically the ones that have permission to participate in this network. And then they can share the data seamlessly. The supply Bitcoin has a limit of 21 million Bitcoins built into the protocol, and it is impossible, basically to change, this limit. On the CBDC side, to regulate monetary policy in a digital world you will need the ability to change the supply. Okay. So you would like to remove or add the money for the supply, such as to stimulize the economy in a trouble, trouble environment. And so these are not really features that are gonna change once the CBDC are gone. Okay. And so this is sort of the view of really what are the main differences between, between a Bitcoin and the centralized digital currency. Obviously, the obviously is who runs it, the Bitcoin, everyone can run the software and have access to it. The central entity will run instead, the CBDC. So it's not be a decentralized, permissionless chain. There's going to be a centralized permissioned chain, but still may achieve some of the benefits that we have seen in other blockchains. So the, the, the one that I wanted to mention that there is been running far longer than, than others has been the Chinese one. So, just this is an experiment that they run over the summer; China handed out $6.2 million in digital currency to Beijing residents as part of this trial. Sort of a proof of concept, the idea here is really, you know, giving away these governments and see how these get, get to use the, in the transaction daily, today, in the day-to-day life of, of these people and their point of view as also some strong, you know, implications for, for us. Why, because the idea of inserting a in central bank digital currency is really about reasserting control of the financial system. If you know, the idea is that they have seen with the advent and then the extreme success of Alipay and Tencents. They've seen sort of these markets slipping away from the control of the Chinese government. Digital wallet will provide the digital world, which, which is gonna naturally compete. And surpass the private ones. And so these, there is, these can be used sort of, as a sort of a control of the underlying economy. It may also be, you know, there is a, another type of underlying fault there, which is that Digital wallet would help the international, internationalized the China's currency. Meaning as of now, most of the international trade agreements are done using the U.S. dollar, but this is expensive because of all the international transactions that take time, and are depending on what you pull, the Chinese one, might compete with that by a lot, by sort of fostering a different type of mechanism, but is potentially more efficient. But why over all, they are thinking about this, is not just a as a, a response to the Facebook Diem experiment, but is also because payment might get faster and cheaper, this is not more pay, we're talking about the 0.5 to 0.9% of GDP is payment is spent on payments today. More people can access digital payments, you know, 6.5% of Americans have no bank accounts, the underbanked or the unbanked. And as I said, there is a direct control of targeted payments, and stimulus check. So, you know, there are a bunch of questions and I'm gonna sort of lay them there without, you know, I can't offer definitive answers to all of these. But just to show, I want to tell you these, because I want to show you, there are still a lot of things that need to be figured out. So, we talked about how this might help us on the payment, transfer on settlement of transactions, especially because of cost, accessibility, and so improving financial inclusion and overall efficiency. How many of them there could be? Well, you know, as a currency in general, it's likely that we're going to see these three main buckets expanding in different directions. So you're going to have the cryptocurrency that are volatile, then you're gonna have the Stablecoin, so the cryptocurrency that are stable, and backed to the dollar or dollar currency, and then you're going to have the CBDCs, obviously the CBDCs are going to be a national effort. We're gonna have as many CBDCs we might eventually have as many CBDC's as countries. We have Stablecoin is probably the one where I see more of a convergence, towards just a few of them. And the reason is because at the end of the day, you want to use these as a means of payment. And so, you know, having some type of, as long as they're scalable, having some type of commonality across the different payment platforms, everybody using the same Stablecoin it's likely sort of having is sort of a forced towards the winners, take it all. There are questions that are at the periphery of these, but are very much connected to all of these worlds. And they're usually also connected to, when you read about blockchain and crypto, which is ultra protecting is cyber crime, software outages, malfunctions of distributed ledger. You know, we'll regulate or intervene here on the last point definitely we have seen, you know, the Congress and the Assisi have been in talks about regulation of, of the space for quite some time now. We're gonna see more and more of that. And in particular, these also is gonna show how these industries gonna expand. In particular, if I look at the type of investment that venture capital is start doing right now, there are mainly investing in infrastructure that these minimizing the regulatory risk, meaning nowadays, there are companies that allow and facilitate the way in which a "know your customer" practice can be implemented inside these type of projects. And so those are the ones that are, or anti money laundering type of practices. Those are exactly the things that one needs to make the industry compliant and also scalable. So, these are sort of some of, of the key issues that are facing right now. Okay. Hey professor, there were a few questions that came in as it relates around regulation. Obviously, people have noticed on here and, and, and some direct questions, hey, the Chinese government is flat out, just ban crypto altogether, ban its equipment, ban people using it, trading it, et cetera. What are the opportunities or possibilities of that happening at some point in the U.S. and how do you see that working? Obviously, we're not here to predict a future policies, but you may have some insights, at least as far as how this could fit in overall with the, with the structure of what's out there and what, what regulations may come into place in time? Yeah, I think that's an opportunity for us to actually innovate and provide the framework that allows for these innovation at the same time allows for some type of protection for retail investors. And so allowing an environment, lemme call it, you know, a sandbox where some of these cryptocurrency, some of these projects can run, can try it out, can be tested, I think it's extremely helpful. And also let me say that, you know, the Chinese ban, you know, they've been on this for the last few years. The fact that they've been announcing these for the last few years also tells you that it's fairly difficult to implement because there is no company against you. There is no, you know, central actor, that I can go and arrest, or I can go and force you to shut down the servers. And so it's, it's sort of very difficult to actually implement a policy like this. Significantly better, and the policy that would allow for immunization risk for the end users, and making sure that both of these type of decentralized projects, as well as the ones in the, all the traditional centralized finance are playing by the same rules. That will be supporting an environment where, we can get all the benefits, you know, the efficiency, the accessibility without facing much of the risk that we are facing right now. The fact that right now is sort of the Wild West that was mentioned before. And the fact that there is so much that is happening at the same time. That is very difficult to be certain what these, what is here to stay and what is just a scam, with the, in a blatant you know, violation of, of secrecy laws. So, that is definitely something that is gonna change. And the more this industry is growing, the more we would expect those changes to happen very fast. And so I, I think overall, it's a great opportunity for us to do something better than just band-aids. And then if you think also about the, the, the few companies that we have had so far in this industry, you know, Coinbase. Coinbase was allowed to go public and their own business about the exchange is all about these cryptocurrency. So, I would expect that to not have happened if there was even a slight probability that the U.S. regulator will go and ban them completely, the cryptocurrency. It's much more, that's I think, you know, my point of view, is that that's much more of an example of letting them run within the framework that we know, within the rules. And so, you know, a company like Coinbase is obviously doing AML, it's doing KYC, it's making sure that everything run smoothly, and the last two debates that they have had, that, you know, for those of you that are following the space, they had the controversy with the SCC about the potential lending program, meaning sort of allowing investors to deposit money, borrowing, getting some interest rates from there. The reason why there was these, these debates with the SCC is because Coinbase went to the SCC asking for permission to run something like this. Okay. And the news of last week, is that today we decided for now to put it on hold because they haven't figured out exactly a way of doing it in a compliant way. Right, I think I mentioned this a couple of times so far. I think it's now time to sort of talk about a little bit more about DeFi. So this is really what's what's happening. I will say this is sort of the awakening of the blockchain in the financial markets. So, the decentralized finance is basically offering a blockchain based financial infrastructure, and this is attracted the tens and tens of billions of dollars in the last, in the last few, I'd say in the last 12, 14 months. And this term generally refers to open, permissionless and interoperable protocol, that replicates financial services we already see in traditional institutions, but just in a more open and transparent way, in particular this doesn't rely on intermediaries or centralized institution, everything isn't really enforced by code, meaning once we write a contract, this contract is not only a legal contract, but it's actually a contract that is determined by the code. So once we go and run and execute this contract is done it by itself, there is no other a decision there. And there are so many applications. One, for instance, you can move, move Stablecoins in a decentralized the lending platform where you can earn interest. So think about this as a savings account, where instead of your 0.0002%, you may get into the single digit or double digits depending on market conditions, interest rate. So, you know, you can also add the interest-bearing instruments to decentralize the what's called liquidity pool. You have automatic market makers. So rather than having a market maker that needs to match, buy and sell orders, you can have an automatic market maker, that do that by code. Is there just as, some of the examples, so things that we have seen, and they have really transformed the way in which we use cryptocurrency and potentially can have spill overs so also to traditional finance. This is the picture that I was showing you the, the, the headline number that I was showing you before, this is a DeFi post, this is also track the amount of money that has been invested in, in DeFi applications. And this is, you know, we are reaching $90 billion in just the one year or so. What are, you know, if we have told this, the reason why we could pay attention to these, are I think four main reasons. One is efficiency, then signalized, transparency, then accessibility, and finally composability. So why efficiency, because now if two parties wants to exchange digital assets, for instance, thinking about exchanging one of these tokens, there is no need for guarantees from our central counterpart. We don't really need to go through a central counterparty to do this, and this decreases systemic risk and makes the financial transactions much more efficient. Why? Because you are not exposed to that counterparty risk. And imagine that, you know, the sort of the peer to peer decentralized type of transactions only occur and you only pay if the other can actually deliver. And so these types of contracts are significantly less risk. Then there is a question of transparency. All trans, transactions are publicly observable, and a smart contract code can be analyzed and audited. So it's through that, we have seen quite a few examples of companies that have gone through some type of accident with their codes or they're being hacked, and so on. I will say that those are still the exception, even in an industry that the, the such a proof of concept face. But the nice thing about all of these is that, you know, once the, once the contracts that are outside, everybody can look it over. Everybody can come up with the better and improve the forms of that. And if you think about the bringing this type of trans, transparency to the centralized finance system, this means that there is no more reporting. The regulator can actually observe the transactions in real time. Doesn't need the reporting from any of the institutional institutions to make sure that, you know, risk is assessed in the right way. Then there is a question of accessibility. If DeFi protocols can be used by anyone, the infrastructure requirements are pretty low. Everybody can run it on a laptop. And so also the risk of discrimination, zero. One thing that, that one caveat to this is that still there is a knowledge gap, and this is honestly something that, you know, you know, I am in this business, I'm excited about, I'm trying to fill that knowledge gap. I'm trying to show people how easy it is to potentially open a wallet, how to be, how to interact with these protocols and to what extent these may improve their financial life. But as of now, it's still significantly more difficult to onboard the people on one of these protocols than it is to open a Justworks account. And then the other thing is that these type of, when I call protocols think about really Lego pieces, so they can be all blocked in and they, you can have sort of an ecosystem where you can do multiple things at once in a almost seamless way. And this is really the promise of the, of these rates. I was mentioning a couple of examples. So interest-bearing cryptos, you know, one issue with the, with owning a cryptocurrency is that many of the, oh, John, do you want to say something? No, no, you're good. So one of the main, the downsides of owning crypto is that many of the crypto owners don't really want to sell because they would like to experience some price appreciation, but still they don't want to keep these money idle. And so what you can do is nowadays, so you can actually borrow and lend cryptocurrency. So you can deposit in a savings account and get some yields. Okay. This is a whole new industry, which is nowadays called the Yield Farming. And it's, you know, is somewhat equivalent to a currency carry rate in a sense that, you know, you peak the interest rate, which you borrow land in order to make, to make profits. Compound is one of these protocols that are offering those type of capabilities. And so, you know, you can own in a capital, a preceding asset, like a Bitcoin, and you can borrow land and get some extra return or even own Stablecoins, because maybe you're using them for something else. You know, institutional investors might use those for leverage, leveraging up their, their bet on this market. But as in time, you can deposit them, get some healthy units there. Then they, I was mentioning automatic market makers. The largest one is the Uniswap. So this is the possibility of creating a liquid market. You know, thinking of thinking of all of these cryptocurrency, you know, 6,000 tokens and more that are out there. One downside is that it's difficult to, to make sure that the market is deep enough for so many coins out there. While a protocol like Uniswap is sort of helping filling that gap, that the idea that if I own something, I would also make sure that I would like to make sure that at some point along the road I'm gonna be, I'm going to be in a position where I can sell it without paying to higher transaction costs, without having too much of a slippage. This is the automatic market makers offered by Uniswap, but allows for something like that, it's very simple is market order only, is transparent, you know the public ledger, you can inspect it, what is available out there. And they say what's called a near infinite market depth. In a sense that the price adjusts according to a curve, based on the order size, the larger the transactions, then, you know, the, the, the largest, the slippage I'm gonna have, but I could potentially fill that order, no matter what value the price, but they will fill it. And then there are two distinct roles here, makers and takers. So those will provide liquidity and earn some transaction fees. And those that are takers, those who consume liquidity then pay on transaction fees. So that shows how markets work, here I can be a liquidity maker and I can pick, for instance, a pair of cryptocurrencies. I can say, I want to provide liquidity for those that are looking to exchange Bitcoin with the Stablecoin. And I'm, I'm willing to do that for this price range. And I'm putting down some money and I'm gonna earn fees, I'm gonna earn, I'm gonna earn these fees as liquidity takers are executing transactions in that interval for that payer of elements. As I said there are cryptocurrency that are completely decentralized as DAI. The one thing that I want to mention is that you may have heard of what are called governance token. And I want to explain these just because this gives you a sense of what it means to be completely decentralized, and where some of the astonishing keels come from. They, you know, many of these, of these companies, the one for instance, that I've studied, but many others have additional tokens that are created by these companies as an additional, don't go in to give to their users. What these tokens allow you to do, allow you to actively participate in the decisions of these protocols. So these may determine the direction of the official development. Should we offer this product or not? Well who is deciding, everybody who owns governance, governance token for that particular protocol can go and submit votes about what is the direction they should fall. But that's really what it means to be decentralized. One caveat to that. Obviously the initial group that is launching the protocol owns a lot of these tokens. So potentially they always owned majority. However you get, you know, you get deeply penalized in these, in this community. If, if sort of you don't allow that decentralization, people will want to make sure to have a voice. And so then those governance tokens also have a price. It can be traded in secondary market. And the price of those tokens depend on how much excitement there is in these projects. So if they think that these particular application of thinking about the yield farming but we are not a market maker or another new application, mainly we have a lot of, a lot of user in the future. What do you want to do is buying these tokens that allow you to then decide what's going to happen in the future. At the same time, you are going to experience some capitalization. The reason why you can also pay such a high interest on these type of accounts is because part of those interests are financed by these governance tokens. So yes, I pay you 10% yield, but those 10% is calculated, because I'm paying you with tokens that are appreciating at such high rate. This was to explain, you know, is this sustainable or not? It's definitely to be seen. This has been sustainable right now, because there has been a huge demand in this sector, but it's not clear what's going to happen once we are in steady state. So, you know, all, I will say that one small example that I want to tell you about in terms of the implication is that if you remember at all the GameStop and Robinhood episode, well, the DeFi in some sense, answers the call for a growing number of retail investors who demand to democratize finance who they are able to trade free of interruption and censorship. Why? Because if you remember a certain point during those crazy weeks, Robinhood for instance, shutdown trading on those min stock multiple times, that will not be possible if you were trading on a DeFi application. Around now there are DeFi apps that are very controversial, but allow you to trade tokenized stocks so that allow you to trade assets outside the blockchain and follow those prices. And that's sort of without any type of control. And that's one of the things that are under the most scrutiny by the SCC. Now, the last thing that I will now conclude with is the other application. So we talked about the blockchain in general, we talked about cryptocurrency, we talked about, in particular, Stablecoin and CBDC, and I'll finish with the non-fungible tokens. Many of you have heard about the, what happened with this one NFT called Everydays, which was the, you know, the collection of 5,000 days or, or the art produced over 5,000 days that sold for $69 million. Okay. Similarly, the first tweet of Jack Dorsey, the CEO and founder of Twitter, "just setting up my twttr account" was sold as an NFT for $2.9 million. Okay. What is an NFT? NFT is just a mean to commodify, the ownership of each digital asset is basically is a piece of code that represent that particular image. So when you buy an NFT that represents a particular type of art, you're not going to go home and hang the, your beautiful painting to the, to the wall, but you're going to have ownership of that image. And you're gonna know whether the image has been used, the used or bought or sold by other people on the, on the blockchain. In some sense, it's another way of, you know, doing collections or collect art without the gratification of looking at it on the, on the, on the wall. But, you know, so that's the strange thing if we are not digital, because digital files can be infinitely duplicated at a minimal cost. So it's particularly risky. And there are a bunch of questions that are in the gray area. Does the creator retain the copyright, so they are paid whenever an NFT is sold, can regular art be authenticated through an NFT? And is it sort of a fad or is it something to stay? We don't know, but some of these questions are getting clarified, in particular, there is another famous artist Damien Hirst, a UK based artist that has launched the first, the first art piece to his, to his audience, through an NFT. And after six months, if you, if you've bought this NFT, you can decide whether to store lobbies of art or just retain the digital, a digital asset. We are still sort of waiting to see what's the demand for something like that. But definitely there is sort of a, an implication that goes above and beyond art, with NFT there is a possibility of authenticated art because for that single piece of code that corresponds a particular image, a particular transaction. So I know exactly whether that gallery bought it from the artist and whether then the gallery sold it to somebody else, and then it got to me. So, I can trace it back. This is very similar to the supply chain example that we talked about at the beginning with Walmart, we can do that also for other things, including art, but overall, there is sort of this demand of tokenizing, meaning making digital, what is out, out in the real world, art is the first piece, but it's not clear that that's going to be the only application weaponizing. Let me conclude with the, with the wrap up on the risk of all of this. So we've talked about the carbon emission. So, you know, Bitcoin consuming more electricity than Argentina and we've, but we've talked about also the, the, the shift between proof of work and proof of stake. So meaning high energy consumption to lower energy consumption, is the risk premium justified? Definitely there is no free lunch here. The, the yields are extremely volatile, even the ones on the savings account that it is no FDIC insurance with a lot of security incidents for, for these type of currency and protocols, Is the anonymity really a blessing? Well depends from the, which point of view, you know, Angus Deaton says on the enterprise; "The only advantage as far as I can see is you can be a crook." So there is definitely that is an issue, and then regulators are acting and watching the space. And so there is a question of what's gonna happen in this space, once regulator finally enacts the sum of these rules? And the one bad side of having a completely decentralized system is also that the diet, the way in which the, the legislation is going to move in this space, is gonna be very different than the way in which has moved for the banking sector. The banks has had, had sort of, some type of voice in the legislation over the years, here there is no single entity that can go and lobby Congress of one way or the other. So that's also going to be a problem for the industry. Overall, then we went from zero to $2 trillion, in about 13 years, we've seen a bunch of different applications of these underlying technology, cryptos, DeFi, NFTs. There is a real and tangible benefits that is emerging and we are seeing that more and more in the payment, in transferring, in bookkeeping. And there is a ultimately question of ultimate mass adoption where, when and who? I think this is still to be seen. And it's just gonna depend on really the product, the progress we're going to see in next, in next few years. Awesome. Well, thank you so much. We've certainly got a lot out of this session. There were quite a number of questions that came in. People wanting to know, "Hey, what percent of, of the marketplace is illegal transactions?" You'll hear an awful lot of things, depending on your source. You know, how stable are these stable coins? All all kinds of different pieces to it. So we'll certainly follow up on some of those. Maybe I would like to leave with one that I thought was, was very appropriate. Okay. Somebody's heard this, you've covered through these three areas; blockchain what's going on. You've talked about a few of the big names in there. People were asking questions on some of the others when you mentioned a few names, where can somebody go? What would be a good resource to get additional information beyond obviously going through any of the papers that you've, you've put out there on this topic. So there are quite a few, the, the, the, the issue is trying to find something that is reliable and there's some sort of credibility. So honestly, on my side that I'm working night and day on these, we, you know, if you look on my webpage, there are multiple articles on DeFi and on the space. So just to give you a sense, there are, I'm launching a new course in this space, online, as well. Things that are, doesn't, that don't really have our, you know, stamp of approval. I will say one thing that I found is helpful is going on, and some of the biggest name in this industry, for instance, Binance, which is one of the largest exchanges, have a very nice website to where they explain you some of the main concepts behind it. I think they call it the Binance Academy. And those are definitely the resources that are factual, and, and are useful to look at, as you learn more and more through it. Okay. Awesome. Well, great. Well, thank you very much for that. And a few people noted early on. They said, "Hey, did you directly answer, is crypto its own asset class?" So I'm not going to put you on the spot, maybe that sort of a, an afterwards, but it does revolve around those three things we talk about, what should the role of an investment be in your portfolio? That's something each and every one of you is going to have to answer on your own for yourself, for your clients. Where does this fit in? You're gonna have to ask yourself, what is the expected return? You just heard an awful lot of information there. And a lot of volatility, pretty hard to put a measure on that at this point. And then the cost structure, which we didn't totally get to. It's still pretty expensive. And so like some areas, selling it directly it's very expensive, particularly in the U.S. in some cases. So all things that you're going to want to think about in that overall portfolio, but, but any final thoughts on that, the asset class question. So, I think it is still debatable. There are, there is one line of folks that thinks that this is, you know, putting operations on hold, there are others point out that, you know, Bitcoin has gone through significantly higher volatility, but, you know, if one takes sort of a step back and think about these as a larger industry, not to just through the lenses of Bitcoin, I will say it is shaping as more and more of a it's own asset class. We are far away from, you know, the levels of stocks and bonds, real estate and so on. Awesome! Well, that's all the time we have today. Certainly want to thank professor Di Maggio for, for an excellent conversation there. Hope that was really helpful to everybody. Again, I apologize, we didn't get to every question on that. We'll certainly follow up with some of you directly if you're working with us. On that note, I'll go ahead and close this out. I'm Joel Hefner. Thanks so much for watching.