Larry Cermak – VP Research, The Block Ep #50

EPISODE SUMMARY

Larry Cermak joined The Block as one of the first employees with the mission to provide professionals with accurate information about crypto. He now leads a 30-person research team that delivers insights to institutional customers. 00:09 - Intro 00:20 - Larry Cermak’s origin story / His work at The Block 08:25 - The fundamentals of Bitcoin 16:03 - The value of SushiSwap 19:35 - Investing based on Memes 23:42 - Market Value for future gains in Crypto 26:12 - Will NFTs be backing internet money? 28:44 - Thoughts on Algorithmic Stablecoins 31:00 - Regulation in the US 34:47 - Decentralization and tokens in the context of regulation 39:45 - Volume of users / social networks DISCLAIMER The information on this podcast is provided for educational, informational, and entertainment purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. The information contained in or provided from or through this podcast is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice. The information on this podcast is general in nature and is not specific to you, the user or anyone else. You should not make any decision, financial, investment, trading or otherwise, based on any of the information presented on this podcast without undertaking independent due diligence and consultation with a professional broker or financial advisor.

EPISODE NOTES

Larry Cermak joined The Block as one of the first employees with the mission to provide professionals with accurate information about crypto. He now leads a 30-person research team that delivers insights to institutional customers.

  • 00:09 – Intro
  • 00:20 – Larry Cermak’s origin story / His work at The Block
  • 08:25 – The fundamentals of Bitcoin
  • 16:03 – The value of SushiSwap
  • 19:35 – Investing based on Memes
  • 23:42 – Market Value for future gains in Crypto
  • 26:12 – Will NFTs be backing internet money?
  • 28:44 – Thoughts on Algorithmic Stablecoins
  • 31:00 – Regulation in the US
  • 34:47 – Decentralization and tokens in the context of regulation
  • 39:45 – Volume of users / social networks

DISCLAIMER

The information on this podcast is provided for educational, informational, and entertainment purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose.The information contained in or provided from or through this podcast is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice.The information on this podcast is general in nature and is not specific to you, the user or anyone else. You should not make any decision, financial, investment, trading or otherwise, based on any of the information presented on this podcast without undertaking independent due diligence and consultation with a professional broker or financial advisor.

Anatoly (00:09):

Hey folks, this is Anatoly, and you’re listening to The Solana Podcast. And today I have Larry Cermak, who’s the VP of Research at The Block. Awesome to have you, man.

Larry Cermak (00:18):

Nice to be on, it’s a pleasure.

Anatoly (00:20):

Yeah, so tell me your origin story. How’d you get into crypto?

Larry Cermak (00:24):

Yeah, it’s probably slightly longer. But really high-level, I got involved in late 2016, I was in college in the US and was thinking about what to do my thesis on and Bitcoin seemed like one of the more obvious options, to not make it incredibly boring, so I just decided to go with that. And throughout the research process, I just kind of found that there isn’t good research about Bitcoin, just in general crypto. There was either the super bullish people that were like all in on Bitcoin, or super bearish academics, and there nothing in between, and I felt like I can fill the gap a little bit.

So after I published that research, I shared it publicly as well with a few people, and based on that I got my first job offer to work at Diar which is a research company, focusing only on crypto. So I worked there for a couple of years, and really just tried to focus on data driven research, which now it sounds kind of obvious, but back then it just wasn’t very common. Most people were just looking at the really simple metrics and munging data, but mostly it was just price discussion, price predictions, all that stuff. And we were really looking at just analyzing the market a little bit more fundamentally, that sounds even more silly now looking back.

And I got lucky that in 2017 when I joined full time, like early 2017 I joined full time, and that’s when everything popped off massively, and it was just a bunch of shit ICOs, like a lot of sketchy stuff. I consciously started looking more into these projects, so I was one of the people that were kind of cautioning against some of the ICO stuff, and it was a lot of fun but I was quite skeptical back then still. So actually, a lot of people who have followed me for a while, they know initially I was a no-coiner, I had no crypto, and I was convinced that initially actually that a lot of this is just kind of hype mania, it’s just all like overblown massively. But something really drew me into it, and it was mostly the permissionless nature, ability for anyone to participate, but what really I didn’t like was just the hype around it, the marketing, the emptiness, and all that stuff.

So I over-focused on that I think initially, but after some time, I realized that that’s probably not what this is all about. Initially, I didn’t think that it was necessarily important for most projects to have tokens and I was very skeptical that most tokens need a project, and I started massively changing my mind on this with the DeFi beginnings. So early 2020 my mind started completely changing on most of the space and I stared allocating a little bit more, and now I also do seed investing privately. And obviously, I lead the research department at The Block which is now 25 researches, probably the largest research team in crypto.

Anatoly (03:33):

So you went from Bitcoin skeptic to full shit-coiner.

Larry Cermak (03:38):

Kind of, yeah. It’s a little bit concerning honestly.

Anatoly (03:42):

In four years.

Larry Cermak (03:44):

Yeah, I don’t think I was really a massive Bitcoin skeptic, I was just skeptical of everyone is just so positive, and Bitcoin maximalists, I just could not handle that. When you just start using really bad arguments, just kind of shit-post and being really negative about everything other than Bitcoin and not being open-minded, that really pissed me off and I wasn’t open to it.

Then I was like relatively active in the Ethereum community early on and DeFi. We had Teo on the team initially who was one of the people the most involved in DeFi early on, he’s now the Director of Strategy at Uniswap, and he definitely showed us all on the research team why this makes sense. And when I really started understanding that these tokens are not just useless, they can actually be used for real things, and they do get closer to almost equity in some ways, even though obviously a lot of them try not to, but when you have some sort of a claim and some sort of cashflows, that’s when it gets interesting to me. And governance obviously as well, but that’s when I really completely started flipping.

Larry Cermak (04:57):

But yeah, you’re kind of right, I went from a skeptical no-coiner to then kind of a shit-coiner now, like spreading seed investments that I like.

Anatoly (05:06):

Do you still believe in this idea of sound money, or?

Larry Cermak (05:10):

So a lot of Ethereum community members think that Bitcoin is just a meme, it’s going to go away, I actually don’t believe that myself. I do believe that what’s really powerful about Bitcoin is that it’s been around for the longest time and it’s very hard to compete against what it has, which is basically just the belief of a lot of people, and it’s difficult to break that. And then you also have a lot of buy-in recently from, not only hedge funds, but also larger institutional investors, and that counts for a lot more than just blockchain, even though it sounds silly, something that’s established as internet money and a lot of people pushing for it is really powerful.

So yeah, I still kind of believe in that and I don’t think that Bitcoin is going to be surpassed by Ethereum anytime soon, I actually have a bet going with Kyle from Multicoin about that. But yeah, generally I believe there is some merit to it, but I definitely also believe that people should be more open-minded, and because a lot of people are close-minded, they are missing on a lot of really obvious opportunities. Really my bread and butter is exploiting these things, when people underestimate something, and when there is actual merit to it that they don’t see because of some reason or another, that’s when I usually perform really well.

Anatoly (06:35):

Yeah, that’s digging for alpha man, that’s real work.

Larry Cermak (06:40):

Yeah. But yeah, The Block’s research team, when I started obviously it was just two people, and now we have 25 full time researchers that a lot of them digged that up for me now thankfully. It is a lot of hard work like doing a lot of that myself, but now there’s a massive team behind me. It’s going really well, like we’re reaching a lot of institutional customers as well, and the market just exploded massively this year for institutional access.

Anatoly (07:08):

That’s amazing. So 25 researchers at The Block, how many people total?

Larry Cermak (07:15):

Around 70 or something, 75 maybe. But The Block initially, even when we started, I joined one of the first employees like 2018, and the vision was always to go through all the noise and bullshit and price predictions, and SEO plays and all the click bait nonsense, and try to go through that and have more data driven, research oriented coverage on the news side. We started with that and then eventually turned into actually a research product that just mainly focused towards institutional customers. But obviously, the news part is still a really important part of the business, it’s what most people know, the institutional product is not really accessible for regular retail customers.

And it’s been a really, really fun ride, just going through this in the last three years. I don’t think people realize how really difficult it is to go from nothing to building a media company that’s recognized by people and somewhat respected. It’s something that took a lot of hard work, and it’s a very thankless business, like media, it doesn’t usually make too much money, it’s something that’s really undermonetized in a lot of ways. So that’s why we’re going more into research, more into data, and just going after the institutional customers because they just have deeper pockets and they’re more sophisticated, which is easier.

Anatoly (08:44):

What are the fundamentals with something like Bitcoin, something like money? It’s just such a dumb idea for somebody that’s like a value equity investor that’s looking at the Amazon.

Larry Cermak (08:56):

It’s a really good question, a lot of it is just a common belief that this is worth something. If you ask the same question about a lot of other things, you’re going to arrive at the same answer, it’s basically like the value is because a lot of people believe in it. Similarly with gold, like who’s using gold for stuff, very little people for jewelry and chips and all that. Most people don’t care about that, most people use it because they believe it will retain value and because they believe there is some sort of a scarce supply that’s somehow protecting their investment.

And it’s Bitcoin, it’s something similar, where you have a lot of really, really religious supporters who are the holders of the last resort who are just never going to sell, that creates a pretty powerful price for a lot of these things. And then on top of that, you also have guaranteed fixed supply, which obviously I think there are going to be some issues about in the future, but it is a meme that people buy, it is a meme that people believe in, and I think that in itself is more powerful than-

Anatoly (09:58):

But people don’t write research reports on gold, or fundamentals of gold, or how gold is going to get more gold.

Larry Cermak (10:06):

… Yeah, no, I agree. And I think it’s like funny, we started the research firm three years ago, and since then what can you really research about Bitcoin? We’ve done obviously a few research pieces about mining, and few like micro looks basically on how Bitcoin is performing, but ultimately there really isn’t much you can research. It’s more so about just like enough people believing, and the better the buy-in is and the longer Bitcoin survives, I think the better the likelihood that it will continue surviving, is kind of my thesis. But there are a lot of issues obviously, like it’s still not exactly figured out how everything is going to incentivized when there is not many subsidies anymore, and a lot of people just don’t want to answer these things right now, because they just put it off.

But generally, yeah, there isn’t much to research, we don’t research much. What we also do from time to time is just explain what Bitcoin is, explain how it works, to just institutional customers that want to learn just fundamentally what it is. But generally yeah, if you want to dig a little bit deeper, really like Bitcoin mining is the only thing where look at a lot of data and analyze how that’s going, everything else not much honestly.

Anatoly (11:19):

Part of this research right is to give you some ability to predict price I would imagine, like why would I care about Bitcoin, is because I hope that it doesn’t crash or it goes up, something. So where does that come from?

Larry Cermak (11:36):

It just comes from people that… and I think that this is somewhat justified, let’s see what’s going on around us for the last two years and see that inflation is spiking while a lot of people have been denying that this is going to happen. It’s just like this belief of finally having control over something, something like being programmed before, is a powerful concept that a lot of just hedge fund investors and institutional investors just buy into.

Anatoly (12:02):

Is it like a fundamental though? Are we going to have accounting standards for how much of a religious belief is spread?

Larry Cermak (12:15):

I think that by itself is somewhat fundamental, like why are people investing in gold, you can be asking the same questions. Central banks have some gold, but ultimately it’s just because enough people believe that it will retain value, and it has done that relatively well historically. And as we are moving, everything as you know is now moving to the digital world, everything that used to be physical is somehow transforming into the digital world, and there’s probably no reason why that shouldn’t happen to money either.

And I think fundamentally, there also is some value to Bitcoin not changing that much. A lot of people make fun of it and I think it is kind of funny as well, there is not much innovation in Bitcoin, but also that it’s one of the benefits, where you have something that’s totally predictable, you have something that you know what to expect from. I kind of buy that as well, I think Bitcoin is one of the most boring things that you can invest in, but it’s also the thing that usually gets people in the door, and it’s always when friends come to me and when they say what they invested in, it’s almost always Bitcoin first, just because it’s talked about the most.

It’s kind of like also the most safe, if you think about it. Everything else is kind of still unclear, even Ethereum, even Solana, it’s not totally clear if all this is going to end up working out and if there’s ever going to be some larger issues. Whereas with Bitcoin, it’s a lot of more guaranteed that if people keep having this belief and if something is digitally scarce, it will probably retain the value in the future. So yeah, it is kind of ridiculous, but almost everything is a meme recently, so why not Bitcoin as well.

Anatoly (14:02):

Well, I mean it’s weird, again, we’re not looking at a company even like Google or Facebook, which has people and memes, or Twitter, but they still have like cashflow.

Larry Cermak (14:14):

Yeah, but Bitcoin was the first as well, which in itself has a lot of value. For every project, if you look at everyone who was always the first, even in crypto, there is always a big premium to that. And I don’t think it matters too much if there are cashflows and if there are real people, it just matters if enough people believe that this will retain the value in the future and if enough people do.

I think like Tesla was a massive fundamental shift, like we saw that with our customers on the research side, it absolutely exploded after the announcement, just institutional interest, more companies inquiring into what Bitcoin is, more companies thinking about treasury management. Those things really matter, and it’s hard to go back from them.

Anatoly (14:59):

Can you like measure that? Can you measure how many people believe that Bitcoin is safe or like an inflation fund? You’re literally just testing how many people are part of the religion basically.

Larry Cermak (15:20):

I think you can say something similar about Ethereum, probably about Solana as well, you always need some sort of a belief. Of course, there is some backdrop of some sort of cashflow, some fee generating, but it’s the same shit as people saying oh, I’m only investing in cashflow generating DeFi projects, but ultimately who cares. Ultimately, if the price goes down generally over the market, it doesn’t matter if you have cashflows or not, everything is going to crash. It’s just like a general belief in the market overall.

Anatoly (15:48):

Especially if they’re marked in the token itself, then if the price goes down, so do the cashflows.

Larry Cermak (15:58):

Exactly, yeah. So a lot of TVL metrics and all the revenue metrics, and not only that, but we’ve talked about this before as well, but a lot of the revenue or what people call revenue is basically just going to the participants, like LPs, it’s not even distributed in any way. So a lot of this thing, I think it just doesn’t matter too much, what’s important is social belief. It really is, it does sound ridiculous, even to people on the outside, but when more people are buying into it, it is basically a Ponzi but it’s really like a well working Ponzi.

Anatoly (16:32):

You said it. What about something like SushiSwap? What is the value there?

Larry Cermak (16:42):

I think SushiSwap is interesting, and the value is your belief that this will continue existing in the future, that the people involved in SushiSwap, the developers will figure out ways how to get some value out of the ecosystem. And even though I said it’s kind of bullshit, it is, but it does have some claim to cashflows, unlike Uniswap at the moment.

But yeah, the value is just you believing that the currently associated developers and the community will just build something that will end up sticking around. So right now, a lot of people are betting on the fact that they’re developing an NFT platform to compete with OpenSea, they also have a token launching platform, it’s always just going to be a bet on the people involved with the protocol and on the community.

I think that’s one theme that I see constantly, time and time again, crypto is very much about the community, it’s very much about engaging with the community, listening to what they want. I think what SushiSwap has shown even though it was really, really cold early on, for some really good reasons as well, is that it does listen to what people actually want, because if they listen to what people want, they will get more support, they will get more public support, price usually is pretty reflective of that. So that value is just like betting on this being around for a longer period of time, adjusting to the market, so if people figure out that AMM is not the right way to go and it’s [inaudible 00:18:17] based exchange, they’re betting on the fact that they’ll be able to pivot to something that is meaningful. I think that’s a relatively reasonable bet, but SushiSwap is still giving out, or was giving out a lot of incentives. What a lot of people don’t realize or maybe don’t want to realize is that if you look at how much they’re giving out in incentives and how much they’re actually generating in revenue or cashflows or whatever, it’s usually negative, even for the most successful protocols, because it’s still right now-

Anatoly (18:50):

Like Bitcoin even.

Larry Cermak (18:51):

… Yeah. Bitcoin is slightly different, where you’re ultimately burning energy to prove something. But yeah, it is similar.

Anatoly (19:00):

So why couldn’t Sushi become the meme for internet money or a store of value?

Larry Cermak (19:07):

I just think because Bitcoin was the first, it’s the most established, it has probably closest properties to something like gold which is also a meme that people believe in. I think it potentially could, it’s just unlikely. Ethereum could potentially replace Bitcoin at some point if enough people believe that that will happen, but I don’t think that’s going to happen anytime soon. If I was betting someone, and I think I bet Kyle that this is not going to happen by the end of this year which is ridiculous, I don’t know why he made that bet, but even in the next three or five years, I don’t think that’s going to happen.

Anatoly (19:47):

I’m a logical person, I’m an engineer, this stuff doesn’t make sense to me, so I try to break it down into things. The pieces that I see is that there’s the technology to coordinate shared state, Makimoto, BFT, whatever, and then there’s the people participating in that shared state, and the size of the people is that super connected social network and the technology is the piece of tech that does it.

Larry Cermak (20:13):

I mean, look at equities right now, no one fucking cares about the fundamental value, no one is investing based on that. People are investing based on meme, based on what they believe the future will be. So even something as dumb as Tesla, no one is looking at the cashflows, everyone is looking at the potential to become something larger in the future, and I think that’s the same in crypto. People are looking at Bitcoin as being able to capture a lot of that. If you have someone that’s right now, institutional investor or a big hedge fund, and they’re looking for instruments to hedge the inevitable inflation that’s coming in the market as central banks kind of went nuts in the last two years, what are your options right now? You’re probably not buying Ethereum, you’re probably not buying Solana. Maybe you’re buying some gold, but probably you’re already overexposed to gold in some way, and then also the upside in gold is probably relatively small, it hasn’t really moved, it’s not volatile, the opportunity isn’t that great.

So if you’re looking at it from like a really pragmatic approach, and I talk to these people so I know how they’re thinking and this is how they’re thinking, I mean it just works that way, it doesn’t matter if there’s no logic to it, what matters is enough people just buying into this meme and buying it because they believe that the price in the future will appreciate.

Anatoly (21:40):

Because the meme will get stronger so you get more people into that?

Larry Cermak (21:44):

Yeah.

Anatoly (21:44):

So if these are like memes, these are basically social networks.

Larry Cermak (21:49):

How much of the recent price appreciation in Solana do you think it’s because of strong memes and because of strong community buy-in? Maybe you think differently.

Anatoly (21:59):

I can be totally honest, I think it’s purely people comparing us to Ethereum. And they’re like, well Ethereum is more and this [crosstalk 00:22:07] good.

Larry Cermak (22:07):

Exactly. And then if you make this comparison to Bitcoin and gold, it’s exactly the same stuff. People are like, oh shit, what if this goes up to the gold’s market cap, the upside is still 5 to 10x, or whatever it is. It’s just like, that’s how people think, and I think that’s exactly right, you’re totally right, it’s because people in Solana or a lot of investors in Solana, they’re like all of a sudden, what if there is 5% chance that Solana takes Ethereum’s users and replaces Ethereum in some way?

Anatoly (22:39):

They’re not doing the fundamental valuation comparison of what is the actual value of this thing to the world? What is the benefit derived from it even?

Larry Cermak (22:51):

Again, we can go back to this in almost everything, what’s the benefit of any company, it’s to satisfy shareholders, and people don’t really care about cashflows anymore lately.

Anatoly (23:05):

Sure, but we can remove the cashflow component, maybe in a fully super connected peer to peer system, that doesn’t make any sense. Maybe there is no cashflow because you don’t have like a centralized coordinator that’s doing it, it is purely peer to peer, then how do you measure what is the fundamental value that this thing is providing to the world? Like if this didn’t exist, is the world poor? Can we even say that?

Larry Cermak (23:34):

Yeah, probably not, but again, you can this about everything. A lot of things don’t need to exist.

Anatoly (23:40):

I can say that about Tesla, I can say if Tesla didn’t exist the world would be poorer, because there would be fewer electric cards, high quality electric cars. I can clearly say that.

Larry Cermak (23:54):

I guess so. But the utility is always a small aspect of why people are buying into it, it’s more so just your bet that in the future, this will become more important. And as people are grasping with how much inflation is hitting right now, there just aren’t many other options, and I think that’s really the main reason.

Anatoly (24:14):

So I can see price being inflated due to… there’s so much money available, so much capital that is seeking future gains, that anything with potential for upside is now overvalued. But maybe not overvalued, maybe it’s just market value, it’s just the market value for future gains is so large right now. But I can still kind of look back at the dot.com era and look at like okay, Amazon was overvalued, Microsoft was overvalued, because there was a huge crash, but I could see that if I remove this thing from the world, the world is poor. Are we there yet with crypto, 10 years in?

Larry Cermak (24:58):

I think honestly we’re getting there. I think crypto now, in the last two years, showed us there’s potential to do good, which is basically giving access to something that they didn’t have before, and tangibly making their life better for one reason or another, and also just giving people access to this new asset class. I think those are really powerful concepts by itself. And on top of that, you add like composability of all these different protocols working together.

I think yeah, I would say if crypto wasn’t here, the world would probably be worse of, and I also think that the longer crypto is around, the higher the chance that it’s not going to go away. I’m very sure, I can’t imagine a world where in like three years, we bump into each other on the street and we say, holly fuck, this crypto thing was dumb and it’s not around anymore, I just can’t see that.

Anatoly (26:04):

We’re all infected with the same virus.

Larry Cermak (26:06):

The concept of crypto makes a ton of sense to me, and it is definitely empowering people, even in jurisdictions that normally don’t have that much access to the financial system. For example, we have a researcher from Kenya on the team, and we only pay her in stablecoins I believe, or it might be crypto, and we initially tried to pay her through the regular banking system and it was almost not possible. She’s just one example, but there’s tens of thousands of examples like this, where you have people all of a sudden getting access to something that they couldn’t access before, and even if crypto just helped with that, that by itself, I love that, I love giving people more equal access to stuff.

Anatoly (27:01):

Okay, I’ll throw some theories out and see if they stick. I think NFTs are a clear good to the world because any luxury spending that we move away from, like fast cars that burn fuel or penthouses into digital goods, is good for the world. Let people waste their money on digital things, because it costs nothing to create, that’s great. So that’s one theory.

Anatoly (27:35):

The other one is, if we are moving into post-capitalist society totally where everything is plentiful, what would people be doing? They would just be messing around in the digital metaverse, this is all just part of it.

Larry Cermak (27:56):

No, I think those are pretty good theories. I think it is kind of fascinating how you had this shift from NFTs basically being in like a digital flux, the most luxurious NFTs only owned by the elite, that’s really, really interesting to me. I remember 2017, I was looking at CryptoKitties, and none of that made sense to me, and even with CryptoPunks, I was probably one of the biggest CryptoPunks skeptics as well, even earlier this year. The price is probably like 100x or 1000x since then, it makes almost no sense to me fundamentally as well, but it’s what it is.

I think NFTs are quite similar to Bitcoin, Bitcoin is basically one of the original NFTs. It’s the same thing, you’re trying to collect as many of them as you can, and because you believe it’s something that will have some value, and similar things are happening with NFTs. And yeah, maybe it is removing some luxury overspending on dumb cars and watches and all that, but who knows, I don’t know if this is going to stick, but it seems sticky so far.

Anatoly (29:08):

My theory is that we’re going to see internet money be a perpetual basis trade of a NFT floor market, that’s going to be the asset that’s backing internet money. It’s not going to be Bitcoin, it’s not going to be ETH, it’s going to be entirely backed by culture, [crosstalk 00:29:32].

Larry Cermak (29:36):

Yeah, maybe. But I think that you kind of hit it on the head, a lot of this is just literally backed by culture, backed by communities, backed by culture, and that’s what matters.

Anatoly (29:45):

Do you think algorithmic stablecoins can make it?

Larry Cermak (29:48):

Oh, no. Again, there are going to be people that are going to say, I’m super dumb and not looking at it from the right perspective, maybe I am, but I think algorithmic stablecoins are fundamentally broken. You’re always relying on some sort of demand to be the backdrop of stabilizing these things, and I’m just not skeptical that that’s going to hold up in really maybe not as favorable market conditions long term, and I have not seen a single evidence to show that these things will be resistant to some sort of scrutiny in the future. That being said, stablecoins are probably going to be regulated by the US government, and maybe if you create enough demand for these, it can sustain for some time. A lot of the algorithmic stablecoins have performed incredibly well, because they’re really like, what happens if stablecoins are called securities in the US now, it severely impacts the rest of the crypto space. And when you look at something like DAI, it’s backed massively by centralized stablecoins as well, and then all of a sudden what’s the alternative. If none of the centralized stablecoins are allowed to be used by investors in the US, even on Solana, a lot of the DeFi apps still use USDC and on Ethereum as well.

I think that’s why there’s a lot of interest, is because people are realizing that centralized stablecoins are obviously prone to be regulated, and if they are, it’s going to affect how the rest of the space operates. DAI hasn’t shown that it’s actually really decentralized, especially now that it’s backed massively by centralized stable coins, and you don’t really have any other options at the moment if you want to just transact value in some sort of stable instrument. But generally I think the idea of algorithmic stablecoins is never going to work. It’s much better to just use Ethereum, or Solana, or Bitcoin as [inaudible 00:32:06] value and just [inaudible 00:32:07] if stablecoins are regulated, at least that’s my belief.

Anatoly (32:11):

How much do you guys spend researching regulation in the US specifically?

Larry Cermak (32:17):

Not much on the research side, mostly on the news side, we have people in Washington that talk to these guys. But I guess the problem with researching regulation generally is that it’s super opaque, like you don’t see into it. Unless you talk to people and actually ask them what they’re thinking, you don’t really know. We know some people who are talking to the SEC, we know some people that are talking to CFTC and some regulators, and we have a directional idea of what will happen, but ultimately none of us can know until this is actually going to go into effect. We sometimes talk to the lobbying firms as well and they also don’t know, it’s a black box completely.

But I think what most people that we talk to that actually are in the know or some sort of insiders, they agree that some sort of regulation is coming. The SEC obviously, there have been tons of indications already, but the SEC will do something, the question is how severe this will be. And it is very likely to me right now that within the next year or a year and a half, there will be some sort of a framework for crypto assets from the SEC, so they can actually with some sort of certainty know if it could be a security, or if it just a utility coin, or a governance coin.

And there are also some serious indications that stablecoins are going to be in some way regulated. I’ve heard rumors that there are a lot of people who are trying to label it as securities, but none of that is final, and I don’t think we’re going to find out until actually that gets released in some way.

Anatoly (34:00):

Yeah, there is this like a lot of big uncertainty. You don’t think there’s any hope of US actually just creating clear, simple rules that just open the space up to innovation? Are you both bearish on regulation and bullish on crypto at the same time?

Larry Cermak (34:22):

I think the US is likely going to release some guidelines, the SEC will likely release some clear guidelines for what is and what isn’t a security, I think that’s going to be coming. That could be positive in some way, it’s probably going to label a lot of the governance coins as securities, it could be negative short term as well.

Generally, yeah, I’m pretty bearish on US regulation. What I’ve seen anecdotally is a lot of people just getting out of there. I frankly don’t understand why DeFi teams are based in the US, why Uniswap team is based in Brooklyn, it makes no sense to me. I think if you’re trying to build a really censorship resistant DeFi protocol you should get out of the US, because there is uncertainly for you right now and also for people to invest in your protocols, there’s just too much uncertainty. And I think a lot of the future in crypto will be anonymous developers developing these protocols, I’m pretty convinced about that as well, that this eventually will shift into pseudo-anonymous developers that are not doxed. I don’t think this will happen to like L1s, so the networks that will be securing these protocols, but I do believe that those that are really trying to empower people without being limited by sometimes nonsensical regulations, I believe those will have to be build by pseudo-anonymous developers, in some way or another, and then just decentralize early. I think that that’s going to solve some of the issues. There are obviously some doubts about people trusting these projects, but there have already been some hints at this potentially happening. So I’m pretty optimistic that this will happen.

Anatoly (36:12):

What is decentralization mean in that context for these projects?

Larry Cermak (36:16):

For me, it means just inability to shut something down. So if you’re the SEC and if you’re looking at Uniswap, maybe you can call the UNI token a security, but ultimately what are you going to accomplish if you go after the project? You’re not going to able to shut it down, you’re probably just going to look like a fool afterwards, so you don’t have that many options. So to me, decentralization means if someone really wants, if a regulator really wants, or if some third party really wants, it’s possible to shut you down. So just having unchangeable [inaudible 00:36:50] is a point on Ethereum or on Solana, that’s decentralized to me, and I think a lot of that will go towards that direction.

We’ve seen examples of this with 1inch for example in the last two weeks, 1inch started limiting US customers or at least letting them sign a message. And that’s partially because they’re doing a lot of [inaudible 00:37:15] computing and they can be targeted in some way by these regulators, they can be threatened, whereas some other protocols really can’t be. And I do also think that in the future, like in the next couple of years, there’s going to be a lot of front end basically blocking or geo blocking, and restricting uses, blocking assets. So there’s going to be a shift into alternative front ends for example, or making people interact with the protocols more directly that what they do now, which is they google Uniswap, go on the Uniswap’s website, and then swap an asset, like that’s not going to be sustainable, I’m already pretty certain about that.

Anatoly (38:00):

I’m just annoyed that like, if this is pure code, what is there to regulate? The token right, or the UNI token. So to speak to your original point that you’ve become a believer of every project needs a token, but if the contract itself doesn’t need a token doesn’t do anything, besides run this mathematical function, there’s nothing to regulate.

Larry Cermak (38:22):

That is true, that is all true. I think why projects need a token is pretty simple, it’s because it builds communities and it builds engagement, and it helps you incentivize some sort of usage or bootstraps these protocols. So I don’t think that if Compound didn’t do the initial liquidity mining last year, I don’t think DeFi would be where it is right now, and the same goes for Airdrops. It just helps to engage people, it helps to get them invested in some way, and that’s why I think they’re important. But you’re totally right, they are opening up a possibility for regulators to go after these tokens and regulate it in some way.

But tokens are also opening up opportunities for not only people to invest, but also institutional investors and more capital to be draw in. A lot of the VC firms right now, they’re completely stacked in cash, there’s billions of dollars on the sidelines right now waiting to be deployed, they’re only investing because they know there’s some sort of an exit strategy, which to them is selling the tokens at some point in the future to enough people that think it’s going to be more valuable. And I don’t think this would happen if there were no tokens, I used to believe this myself as well. It’s like Uniswap doesn’t need a token, it’s a perfect protocol, it’s totally fine the way it is, but because it does have a token, it just attracted more usage and it’s trending more people to actually use these things. And I think that by itself is something that probably overweighs the negative consequences which is more regulatory capture.

Anatoly (39:56):

Do you think we could separate the devs from the community? Could you have the Shiba token adopt the best developers in the space? They built the distribution and the community and they’re like, we’re going bribe Vitalik to work on some more contracts for us.

Larry Cermak (40:26):

I don’t think that can happen or will happen. We’ve seen this before as well, a lot of projects raised a lot of money, like Tezos or EOS, and they haven’t been able to do much with it, they haven’t been able to accomplish much. And I think a part of it is just because communities are built by people actually believing in the project, in the future, and I just think that communities rule everything in crypto, and that’s how I think it’s going to stay.

Anatoly (40:55):

This is like both utopia and dystopia at the same time.

Larry Cermak (40:59):

Yeah. I think it’s just a pragmatic approach. You look at how everything has worked in the last three years, and the conclusion is like it makes sense for people to interact with these protocols early because you believe that in the future there’s going to be some sort of an Airdrop. And then there are like loops to this, if enough people believe that there are going to be Airdrops for all the protocols on Ethereum and on Solana, they’re going to use these protocols more. So even if you look at the number of transactions on Solana or just generally how many people are using these things and for what reason, a lot of it is just speculators, a lot of it is literally completely useless activity, and people just hoping that they’re going to make money out of it. And that’s fine, like if you’re bootstrapping usage, if you bootstrap attention with purely capitalistic intent, I think that totally works. If Compound didn’t do the incentives, I don’t think we would be here right now talking to each other, I don’t think Solana would be worth as much. And it’s just a way to get more of that interest, and almost like abuse the speculators to get more attention for this, to get more mainstream media to cover this, to get more investors interested in this.

Larry Cermak (42:11):

I think it’s much deeper than you think, where yeah, a lot of these are probably useless to some extent, but a lot of these are just social experiments, social tokens, and a way for people to get exposure to some of these things.

Anatoly (42:25):

If we use that as like the fundamental thing, then you really should be looking at these as social networks, how many people, how connected they are, what are they doing?

Larry Cermak (42:35):

Yeah, you should be, and then also utility on top. If I can get a stablecoin swap for cheaper than I can get it on [inaudible 00:42:43] exchange, that’s probably worth something. Similarly for Uniswap, if some of these players have more liquidity and it’s cheaper for me to go there instead of on Binance, if I want to sell $1 million of something, that’s also worth something. But generally yes, it’s absolutely a function of how many people are using these things, how many people are interacting with this. That’s why I think for crypto, the most powerful indicators are really social indicators, it’s like looking at how many people are using these things, how many people are actually transacting. What’s more difficult sometimes is to remove all the either fake activity or non-essential activity, and that’s the hard part. But generally yeah, it’s just a function of attention, function of which people are involved, and eventually you hope that this will turn into a mainstream thing.

When I look at DeFi right now on Ethereum, and even on Solana, it’s a relatively meaningless number of people using these things. Even Uniswap, maybe 150000 users maximum, it’s a joke. None of us think that this is why we’re here, all of us think that this will eventually go to tens of millions of people using these protocols, and that’s really the end game. And I think even obviously for Solana, one of the premises for why it’s designed this way is to support a lot of these new people.

Anatoly (44:06):

Yeah, I’ve said this a bunch of times, that trying to predict how this stuff is going to be used is like trying to predict Facebook in ’94, zero chance I would’ve believed you that sharing pictures of your cats is going to be worth a trillion dollars, it’s ridiculous.

Larry Cermak (44:24):

I totally agree, and no one knows. I think that’s kind of the fun part, that it’s like enabling people to really do whatever they want, it’s really cool. Even just me talking to some small teams about seed investing, it’s like you’re talking to people in Pakistan and India, those guys normally would be somewhere closed up in their office, not really having these opportunities, and now all of a sudden they can develop these protocols, they can arbitrage them, they can make money. Like we have a guy in Russia, a genius coder, he’s exploiting these arbitrage opportunities and making a ton of money, that’s awesome. That’s really powerful.

Anatoly (45:07):

Awesome man, really good to go deep down the rabbit hole with you.

Larry Cermak (45:13):

Yeah. Honestly, I didn’t expect I would be the one convincing you of crypto’s potential, I thought it would be the other way.

Anatoly (45:21):

I’m an engineer, so I look at a system and then I try to like, where does it break down? What does all this stuff not seem backed by strong arguments and real physics? Why is it all bullshit?

All right man, really awesome to have you. Thank you so much for being in the Solana Podcast, and always enjoy your work at The Block.

Larry Cermak:

Thanks a lot.

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