Bringing Crypto Mainstream: DeFi & Beyond with SKALE, Terra and Hashed
At this event on August 10, 2020, Simon Kim from Hashed, Do Kwon from Terra and Jack O’Holleran from SKALE Labs, got together to discuss what we can do to bring crypto to the mainstream.
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Simon@Hashed> What does DeFi info system mean to Terra and SKALE?
Do@Terra> I think people are already pretty invested in the crypto ecosystem. DeFi right now is a really interesting time. Because you have lots of these protocols being traded in the thin layer- governance tokens, yield farming etc- there are lots of opportunities for profit out there. But if you are trying to onboard new users to join crypto, which is essentially why we are all in this game, the barrier to entry both education and technical knowledge to begin experimenting with crypto and DeFi is getting higher and higher. I think that’s actually from lots of different things ranging from scaling issues to more complicated user interfaces and barriers on education. But I think we are coming up with a very basic primitive and easy to understand so you can draw an analogy for Terra and traditional finance. Such as a savings account which you just deposit some money in and forget about how it works and it offers you better rates than you can get in a commercial bank. Or like a simple investor product where you can buy different kinds of assets in a really simple way without having to understand concepts of gas or having to wait five minutes for the transaction to clear.
Jack@SKALE> I am incredibly excited about the growth in DeFi. When it comes to partnership and integration of the SKALE network, there are over 50 decentralized apps right now built in the SKALE innovator program. These are Ethereum companies, projects, networks, products, and one third of them are DeFi. All of this is a very clear, strong fit for the SKALE network. The beauty of DeFi is that we have these webs of smart contracts that displace middlemen in multiple areas of centralized finance. With automated market making and trading, these different functionalities all rely on smart contracts which is great for SKALE as it is very focused on executing smart contracts at no costs. Developers buy a chain and pay subsidized costs for a year, or two years, removing the burden and cost of paying per transaction. When they need to connect back to the main net, there are different ways for them to do that. When end users want to leave the chain, they can leave and go back into the Ethereum ecosystem and the gas fee will be paid only at that point. As we look at the money legos that are coming together in the DeFi world, it’s interesting to see the way developers use and leverage SKALE chains and other different types of chains. SKALE allows you to buy a very small chain and as a developer you may buy a lot of small chains and have them do different functions. Or you could have a large chain and have more storage. When you build something and the community is doing open source projects, you have a very clear initial idea of how it will be used, but then you start learning and still getting pushed as more and more people start interacting with the software.
So I’m also excited to see what people come up with over time and even how SKALE’s token itself is used and boiled into this DeFi framework and the world. I think it’s really in the beginning of its life. The main thing is, we need to lower costs and make transactions move faster, which is exciting. Another cool thing about SKALE is that the Ethereum developer ecosystem is really booming and with the right sort of connection into another stable currency that isn’t even built in within the framework, it can be frozen or cloned over and stocked and wrapped and run over into the SKALE chain and used by the Ethereum developer in the ecosystem. And I think one of the interesting things about Terra and Luna is that Luna is actually an utilized blockchain. There are lots of ghost chains out there so it’s nice to see the usage. I’m excited to see how people not only use blockchain but how they start leveraging different markets and currencies in different areas, and pull them in different developer environments and grow market share.
Do@Terra> One of the things we are pushing at Terra is to have our stable coin in multiple chains. We announced something with Solana early this year. The great thing about this is, first, it gives social to the developer ecosystem in different communities. Second, all of these different stable coins are going to have first class citizen rights. For example people will be able to top up into payment companies using Terra stable coins.
Simon@Hashed> How do you view Ethereum dominance in DeFi today? Are you betting on collaborations or building a whole new ecosystem as Ethereum’s competitor?
Do@Terra> We will be creating pools on Bancor and there could be Uniswap applications. In terms of competing, that’s something that asks a lot. But I think the really important thing is to try to get developers that are outside of crypto to join in rather than fighting for developer mine share. Maybe there’s 50,000 developers in Ethereum, but if you look at the java, there are probably millions. I think everybody wants to get to stay where the total number of crypto developers are millions.
Simon@Hashed> Could you explain how you view layer 2 landscape? And what makes SKALE unique?
Jack@SKALE> Layer 2 is critical for the success of Ethereum. I think what’s not understood by many people is its TAM, or total addressable market. We see the ecosystem growing but the TAM is still very small compared to traditional finance, gaming, enterprise software, consumer applications, payment platforms or currencies. It’s just the tip of the iceberg and I think there will be tons of growth. Clearly layer 2 is very important. We see certain chains have different strengths with different use cases and different geographies too. SKALE is unique because there is a design decision that we bet on. One of the prior layer 2 design decisions that a lot of research was based on was trying to create dynamic chains on layer 2 using enterprise style software, different tools required a central operator to run the software on the node, then acted as a protector so the main network is always responsible for determining whose tokens goes where. Layer 2 used to just throw on layer 1. And then it turned into design decision zero custody dynamic on layer 2.
SKALE took a different route. We believe in the value of side chains, but there are some issues with side chains, such as security. One of the issues with the traditional side chains is that they have a fixed set of validators and nodes, usually small in number, so collusion and bribery attacks are easier. You lose a lot of defense in game theory elements that protect a traditional blockchain if you only have a very small set of people that are acting on the blockchain. The decision SKALE made is that the value you get for the side chain is that there is no complexity. You just connect with things immediately and they talk back and forth really quickly. You don’t have data availability issues, being directly connected to the end users without time outs and all these other UX issues that we see in the enterprise software version of layer 2. SKALE is building a design that has a large set of nodes through random selection, randomly defining which nodes operate in the chain and then rotating them. You get a really big pool, but whoever runs your chain is going to be different, and the initial set will be pooled from a very large pool. If you act maliciously you will lose a lot of money if you are running a node. So the principals of randomness, rotation, and incentives allow you to avoid the security issues you would have with traditional side chains. It gives you a lot of advantages over what you would get with traditional side chains.
In addition SKALE has other benefits around consensus that allow for optimized performance. A big question was will there be a validator ecosystem? In 2016–2017, no one knew, it just seemed like ‘what the mining pools were doing’. Now there is a mature, robust, evolving validator ecosystem and that makes running BFT blockchain a secure practice. So it opens up things like SKALE and what we see in other networks without major security issues. I haven’t seen anybody steal money from Cosmos yet, and that’s a proof of stake BFT blockchain. I think the world is changing and this design change, we feel really good because we give developers what they need, how they need it and at the price they want it.
Simon@Hashed> You mentioned more adoption is critical. What’s missing in DeFi today to lead the next level mass adoption? What are you doing to achieve this goal?
Jack@SKALE> Lots of impressive things are happening. We are still in the early stages of use cases and a lot of these are focused on “crypto on crypto” loans. It will be really interesting when we start to see other loan types supported, though maybe not mortgages for a long time because of the nature, importance, and lengths of those loans. But there are other shorter term loans that aren’t just about gamification and trading of crypto assets to crypto assets. I think when we get to those other loan types, we are going to be in the next tier. What we are building now are the requirements to help all these components to come together. I think DeFi will support the web 3 movement when web 3 starts to rock in later because you have this liquidity back end that’s smart contract run, as supposed to only being done through central gateways. So I’m excited to see what’s come in the next 6 months, 12 months.
Do@Terra> In terms of DeFi, if you look at the everyday users, what they want, the types of the product that they really want is pretty simple. They want to be able to earn a passive income that’s higher than they can get in the commercial bank. And right now it’s a really good opportunity to do that because the interest rates of the commercial bank is really low. They like the ability to buy price exposure to lots of different assets, it could be real estate, stocks or commodities. And all situations considered, they’d like the ability to be able to borrow capital to be able to do 1 and 2. These are the properties of the DeFi that we should be supporting in the long term. Today I think the problem is there are lots of interesting things happening in DeFi but basically there are no analogs to the traditional finance space. You have this ability to lever up on tokens you can buy either spot or levered up price exposures to Bitcoin, Ethereum and lots of wrapped tokens but there isn’t ability to buy exposure to buy lots of real world assets. And there isn’t really a way to borrow money in a way that isn’t fully crypto collateralized. And this last piece is also very important as well. For example, if I’m a farmer in Malaysia, you are not banking the unbanked by giving this person the ability to borrow money on fully collateralized Bitcoins, because he is not going to have Bitcoins anyways. Some sort of social proof under collateralized crypto based loans is definitely something missing in the DeFi. Of course there are lots of infrastructure questions that need to be solved before DeFi can mature. But I think it’s a question of finding financial products that are really simple to understand and are analogous to what users can get in the real world except a couple of features and properties that are different, so better accessibility and better rates. At Terra, that’s most of the things we are focusing on now through Anchor, we are trying to create a better interest rate on passive income and create better synthetic price exposure to assets.
Simon@Hashed> Right now, I see a difference between the real world and the virtual world powered by blockchain. In the real world, I largely see production before finance. But in the blockchain world, I see much more financial activities before basing this real value from production. Historically, for example, a farmer would want to take out a loan to buy more farmlands and cows to increase his production. Finance here makes sense only because there is an underlying production. In blockchain, however, we are missing this underlying asset of farmlands and cows, but the financial infrastructure is there to leverage itself, which is why we are seeing ICOs, IEOs, but not enough tangible products. This is a critical point, and we base a lot of our investments to solve this pain point. We need more projects to create value, whether it is through games, entertainment, or contents, in the blockchain ecosystem so that the financial infrastructure can become more robust. So, questions for you now. So why do you think much more progress has been made in finance instead of creating more blockchain-based services? And when do you think we can start seeing these services available to the general public?
Jack@SKALE> It seems like it’s about when we are going to see blockchain start disrupting either centralized businesses or centralized businesses using blockchain and web 3 to compete with other centralized competitors. I think DeFi achieved success because you could finally have a user experience for the captive audience or the market share that was ready to use DeFi that worked for them. If you had to pay 10 dollars to mint your synthetics assets, you are still going to do it. If you have to pay 10 dollars to move out a loan out of a balancing pool, you are going to do it. If a transaction takes 15 seconds, it’s okay. What happened was that we got to the point with Ethereum where we were able to build user experiences that still worked with high latency and really high costs for the market that cared.
There is still a massive market that cares, and Do had a good point, just around a savings account. As DeFi grows up we are going to have less risk and still have higher returning savings vehicles because we don’t have brick and mortar banks. We don’t have people working at these places doing sales etc. we are using smart contracts. So i think we will keep evolving. But I also think that we need to have a component and injection of real world value. Think about our daily lives: what do we spend money on? The things we spend money on at some point need to be paid in crypto. And there are a lot of things we spend money on as opposed to just crypto on crypto, which also has a place and it’s exciting. But I really feel like the user experience with latency, blocktimes, having mature, stable tokens, which now we are seeing come into fruition. All of these things are needed in order to get us to a web 3 world, where you do have the user experience that meets the audience where they need to be met.
For example, I need to eliminate all those crypto things on my phone that our friends and families don’t like doing. I need to be able to use products that have reasonable user experiences and ones that I’m used to. As it all comes together, it’s our goal at SKALE is to make sure user experiences and price components can be there to make crypto work. But I think we will have hundreds of millions of users in a lot of use cases, which makes DeFi even more powerful because they are able to pull in assets that have real world use for things we actually spend our money on. I think we are really close. Within 6 months of seeing a massive outbreak of web3 products.
Simon@Hashed> Do, you talked about financial products on top of Terra. What services do you think will drive mass adoption for the general public outside the financial products?
Do@Terra> I’m interested in a couple of different things and I think thematically, outside of finance, they coalesce around two different things. Number one, I think blockchain is really good when you are trying to solve large scale coordination problems. For example when you try to put together a massive donation, I think you can solve social problems by using blockchain technology to do that, rather than centralized services. When you are trying to put together elections, I think right now blockchains are not mature enough to handle things like the national presidential election, because network security isn’t expensive enough to secure for example, the US presidential elections. But I think it can be used for things like unbiased census of what people are feeling about different issues that are going on within a country. This could be like non politicized, unadulterated, people’s sentiment on lots of different issues. You can even have pricing schemes that are built on top of it. On the other end of the spectrum I’m pretty interested in games. In South Korea, the gaming industry did very well. A lot of the novel concepts and technology and gamifications that we use in e-commerce and payments today was actually first developed in the leading games of the country, things like Maple Story and other massive multiplayer online games. I think games with large user bases, interesting incentive systems, persistent wealth being generated such as NFTs is a really interesting industry to look forward to as blockchain scales over the 3 years.
Jack> There are things we are not ready for yet because there is a cost to trusting a blockchain. Right now there’s the cost of just trusting one operator, like the government, but people are okay with that. The cost of trusting blockchain is that blockchain works in a game theory model, assuming two thirds of these operators will not be bad. In proof of work, are we sure that never greater than 51% will be bad. There are some areas where this is not even an issue. Those are the areas where there is an immediate value, where you can have large scale coordination with the complexity that Do was talking about. Gaming is a sweet spot. There is a lot of cool stuff being worked on right now and I think we are going to see a gaming boom over the next six months.
Simon@Hashed> I’m really excited about gaming in the blockchain space too. We believe custody and wallet solutions are key for mass adoption in Korea and Asia. What steps are taken to capture these opportunities?
Jack@SKALE> Today we announced 40 integration partners. It’s incredibly easy for SKALE to integrate everywhere because of the Ethereum compatibility. For instance, SKALE tokens are ERC777 tokens that are fully Ethereum compatible, and the Ethereum mainnet is almost like a brain, acting in cahoots with the SKALE manager. What it does is it determines, through a lot of cryptography in conjunction with the nodes in the network, what nodes go where, who works on which dapp and it performs the orchestration, administration and payments. People that are staked, get staked in the Ethereum mainnet. If you buy a chain or rent a chain you pay in SKALE into the Ethereum mainnet. So Ethereum is the back end and it’s really easy for us since there’s instant interoperability with anything Ethereum, because EVM lives on each chain and everything in SKALE is ERC 20 backwards compatible through ERC 777. We had it a lot easier than other people who had to design and build a lot of their own tooling, wallets, networks and ecosystem. Terra is doing phenomenally well, so I’d love to hear their secrets because they are one of the most used blockchains in the world from my understanding.
Simon@Hashed> Synergies between Terra & Chai? Other opportunities with other wallets/custody services?
Do@Terra> Before I talk about Terra and Chai, what I find really interesting is that we are reliving a lot of the evolution that fintech mobile wallets slip through in the early to mid 2000s, today in blockchain.
In 2010, lots of fintech wallets were raising money in silicon valley and they were mainly competing on vectors of user experience. So there were no unique features behind each of these wallets. Basically these wallets were competing on how pretty their buttons were and how friendly their tutorials. You had named VCs go up in front of the press and talk about how user friendly these different wallets are.
But today most of the user experience of fintech is mostly played out. If you look at the user experience that Square cash app offers versus Venmo or Paypal, Alipay, Wechat pay, I think they are all competitive. They do have differences but I don’t think you would pick one wallet over another depending on how strong their user interface or design qualities are. A lot of differentiation in fintech happens around commercial terms. How many merchants does this thing hook up to? What sort of features does this wallet have? Does it offer me more benefits? Does it offer me more kickbacks or promotions? The same thing happened in the credit card industry as well. When Visa and Mastercard first rolled out, the main question was on how many different merchants would accept my card and that’s where American Express lost the battle. But today it’s accepted that merchant acceptance is ubiquitous and all of these credit cards are competing on commercial factors like how many benefits can this card offer me, how many airline miles, how much discounts on Starbucks.
So narrative changes from very simple user experience based concerns to something that is a bit more sophisticated, like multi year or decade long retention patterns or schemes that these companies can offer to their customers. I see similar patterns play out in crypto wallets and custody providers. In crypto wallets, most of the benefits the top wallets offer the communities is support for the asset they want, which is the mainly the coverage question. And secondly there are starting to be some promotions especially on the exchanges like doing user promotions such as token airdrops. A lot of the wallets are still mainly competing on user experience and commercial interface. Going forward the next three years, the pattern I see is that the dialogue will shift more and more toward competing on commercial vectors of what these wallets can do with different assets. But these benefits will start to become repackaged. So instead of just doing token air drops, these wallet providers might try to negotiate with service providers like Netflix, Starbucks, etc to get preferred pricing for payments that are made through their respective wallets. So you are going to see repackaged commercial benefits.
That’s sort of what we do at Chai through our network as well. Now we are starting to have lots of scale, for example at the beginning, we used to pay for most of the user kickbacks, promotions and benefits. We’ve transitioned to a model where now that we have the user base, we are using some of the cash flows that are happening within the network and the system to offer merchants a way to compete for revenue lifts by offering users promotions. That’s the main growth drivers for Chai and Terra at the moment, where merchants offer promotions to different users, users come into the application to check out different types of promotions. This creates a virtuous cycle where merchants are providing more and more promotion dollars to the service and then users are using the service more and more based on these promotions. Excited to see how wallets and custody businesses will evolve.
Simon@Hashed> Thoughts on west Silicon Valley adoption vs. growth in Asia?
Do@Terra> Terra is fairly distributed at this point, I think about 20–25% of our headcounts are working outside of Seoul. We are in the process of setting up an office outside of Asia. One of the best things about working in blockchain is that by necessity of having to include the community in the discussion, a lot of business and engineering development has to happen in highly documented and distributed format. So which means that your company is able to go global maybe not from day one but very soon from day one. So you are actually able to hire people globally and given sufficient maturity in the types of people you work with, that doesn’t cause any problems in driving adoption of whatever that you happen to be working on at the moment. In terms of the end product, a lot of things we are creating in the second half of 2020 are geared towards markets outside of Asia so Anchor is going to be predominantly, with the exception of Chai, launched in the US. One of the things that’s interesting about Korea is that the market is starting to become much smaller after 2017 but it drove out a lot of speculators and people that are genuinely interested in the industry are increasing in number. In terms of the total caliber of discussions and even the quality of traders is going up over time. That’s something we see that’s super positive and we’ve been working with a lot of talents who want to get their hands into blockchain for the first time. At least in Korean market, I think a lot of things that are happening are super positive.
Simon@Hashed> What’s your strategy to extend in Asia market?
Jack@SKALE> For crypto to succeed, the core team and supporting teams have to be really global. It’s a global game and global effort. You can see from the user perspective, tokens are held globally and launch participation is very global. Asia is a very important strategic market that is exciting and growing. When we think about it, we think about the developers and where they are located. Korea In particular has a lot of phenomenal gaming, decentralized finance and other entities that are thinking of using crypto or blockchain within their platforms. That market is very exciting for us and growing. Everyone in SF is working from home so we lost a lot of that coffee shop magic of trading ideas over a coffee together.
Now a lot of people are talking a lot about DeFi, that’s where a lot of the action is. I’ve seen a lot of efforts and teams focused on that for the last 6 months. You go to Ethereum meetups, developer meetups, everyone is talking about DeFi and then 6 months later, the rest of the world knows about it. Now I’m starting to hear, the web3 crickets are chirping the momentum starting to build again. A big piece of this is that there are so many project launches that, from an infrastructure perspective, makes using crypto easier, faster and less expensive. So I think web3 is soon going to have its day too. We are really excited about having a big presence in Korea, that was one of the reasons we started working together with Hashed.
FIN.
