podcasts

Beyond Defi: decentralising global credit markets, Rune Christensen

podcasts

Beyond Defi: decentralising global credit markets, Rune Christensen of MakerDAO

August 2020

Posted by

Jamie Burke

CEO and Founder

As an early investor in Bitcoin and Ether Jamie went ‘all in’ during 2013 founding Outlier Ventures, Europe’s 1st venture fund and platform dedicated to blockchain and Web 3....read more

Rune has founded ‘the central bank of DeFi’, powering the latest crypto cycle (with over $1 billion of collateral), but he has also created the world’s most successful DAO (Decentralized Autonomous Organisation) to coordinate a borderless decentralized credit market that is aggressively adding collateral beyond crypto towards real world securitised assets like commodities, central bank digital currencies and real estate. We talk through his unique founder experience of leading Maker DAO from its emergence in chat rooms in early 2014 to becoming a professional organisation engaging with regulators and now its eventual dissolution into the community.

Posted by Jamie Burke - August 2020

August 2020

Posted by

Jamie Burke

CEO and Founder

As an early investor in Bitcoin and Ether Jamie went ‘all in’ during 2013 founding Outlier Ventures, Europe’s 1st venture fund and platform dedicated to blockchain and Web 3....read more

Key Themes:

  • Learnings from creating the world’s most successful DAO
  • The 2020 DeFi speculative bubble compared to ICO mania
  • Financial inclusion through decentralised credit markets

Listen on iTunes

Transcript:

Jamie Burke
Welcome to the founders of web three series by ally ventures and me Your host Jamie Burke. Together we’re going to meet the entrepreneurs that backers and the leading policymakers that are shaping web three. Together we’re going to try to define what is web three, explore its nuances and understand the mission and purpose the drivers founders. If you enjoy what you hear, please do subscribe, rate and share your feedback to help us reach as many people as possible with the important mission that is web three.

Today I’m really excited to welcome Rune Christenson, Chief Executive Officer and co founder of make it out Welcome to the show. This man regie The more I researched having you on the show in advance to So the more excited I got about it, because I think one of the really interesting things about maker is that it’s, on one hand, it’s quite simple, some elegant, simple solution to a big foundational problem to the space. But the more you think about it, the more the implications are quite complex, as complex as the global financial system as it is today. So, really excited to cover some of these topics. So by way of introduction, I would describe maker as the kind of Central Bank of defi It enables decentralised credit markets. And if we kind of look at the constituent parts that make up maker maker dow is a decentralised autonomous organisation that issues died, the first stable coin pegged to the US dollar, but native to the Ethereum blockchain. And that dow is increasingly governed by Makeup go And it’s token and we’ll kind of talk about a little bit later. But the goal of make it ours to kind of die anyways to eliminate volatility, through a system of smart contracts that are designed to respond algorithmically to market dynamics, in terms of your role, and again, I think, is really representative of how a typical being a founder and the CEO is in the context of web three. So you founded and led the foundation and you kind of lead the community establishing this vision, but also this organisational structure of the Dow and the economic foundations of die, but you kind of see your role as driving towards its complete dissolution, which is fascinating in itself. And of course not not typical to how most founders look at their role and the company typically, but they’re working in so several different reasons why I wanted to get you on the show. As I said, I think just the concept of maker is fascinating. But with every year that passes, it’s becoming increasingly clear that this is a foundational building block for DeFi to mainstream, and to potentially eat the global financial system. You make a dow is kind of two successful innovations, probably the most successful example. So one is this algorithmic stable token, which is dye and the other one is the Dow itself, which as far as I’m aware, you could argue as the most successful, most adopted dow in terms of the kind of assets that it manages and coordinates as of last week, which for listeners that might be listening to this at some point in the future. end of July 2020. You pass the billion dollar mark in collateralization, which is a huge milestone, so congratulations on that. I don’t know whether you thought it would happen this soon or not. It was it was a right on time. I think

Rune Christensen
it seems a bit No surprise because of all of this, you farming have suddenly been popping out of nowhere. So maker hadn’t been growing. Here we’ve been driving this like steady pace for quite a while. And obviously with Coronavirus and this whole crash in the traditional markets and crypto that and also actually made the system attractive it made the supply of dye go down and then it just immediately shut back because suddenly this new wave of defi came and DAO became a central component of that. So that’s definitely been surprising. And I’ve actually just today I’ll be watching the in the chat, the maker communities chat which is where the community members that run the DAO just sit and discuss this issue and there’s a lot of like very heated debate exactly how to deal with this situation because it’s it’s a you know, it’s a scalability question and right now, what the community has been considering ever since this you’ll find me again is how do we safely expand the collateral systems, how do we allow more dye to be created so that we can, you know, increase the dye supply in line with the demand that sadly, because that’s necessary to keep the price of $1.

Jamie Burke
And it’s fascinating in a way that these tests on the system are going to make it and more resilient, you’re coming into 2020. And then COVID hit, I think most people were were pretty, concerned sceptical about, you know, where the market might be. And then as you say, the fight seemingly came out of nowhere. But I mean, the reality is, you could argue that maker enabled that, you know, without maker, this wouldn’t be happening. And so it’s as a consequence of the maturity of maker that this is happening. And of course, you then have the challenges about how you manage your own success. So again, all really fascinating stuff from a founder perspective, but I think it’s really important for listeners to understand that this hasn’t come out of nowhere. I mean, it’s been five years in the making. And as you said, You know, there’s been moments of doubt, I’m sure within the community, perhaps, with you as a founder. But you you successfully navigated through a lot of those. And for me, as I looked at your background, correct me if I’m wrong, but rather unbelievably, this look like only your second venture as a as a founder, is that right?

Rune Christensen
Yeah, well, it’s a second, when you call it somewhat successful venture, did a number of failed projects as

Jamie Burke
well? Well, they’ll get you here. And we’ll go into your background a little bit later. But also, fascinatingly, it’s not obvious that it would be you or somebody like you, that would be the founder of something so foundational to the space because it’s not like you came from an Ivy League, US University. You’re not a Silicon Valley Insider. You’re from Denmark, nor did you spend decades on wall street or study economics. And yet here you are in hair and makeup makers and also heard you talk About icebreaking, which I guess is a good analogy for a day, in terms of how you’ve constantly with maker at least been breaking through into new spaces and multi collateralization, of course being the more recent that will, we’ll talk about. So, in terms of your background, you studied at Copenhagen Business School in 2011, graduating 13. And I believe during those studies, you did one of your first ventures, which was try China International, which was a recruiting company. Then you also continued in education, focusing on biochemistry at I don’t know how to pronounce that university. Actually. Could you help me out?

Rune Christensen
university? Ah, that’s another way So okay, sorry. Yeah. Yeah.

Jamie Burke
And you looked at complex chemical machines, which sounds fascinating, to be honest. Yeah. I’d love to talk to you about that for at least half the podcast, but it might not make sense. And as I said, you then have tried try China. And in 2015, you founded maker dow. What went on to become the most successful DeFi app on aetherium? And I think you could argue even his killer app as I said, foundational to DeFi so could you tell us about the the journey towards maker I believe folklore has it that you got interested in stable coins after losing a load of money and in Bitcoin and experiencing the wrong end of its volatility in the early days, but how did you land upon stable coins? And can you talk us through this this five year journey of deciding that you know, a dow would be an important way of governing it?

Rune Christensen
Yeah, I’m gonna think a funny story or like funny part of my early days into crypto and also be like stumbling upon as I discovered Bitcoin in 2011. That’s probably actually what like, like that. And then the fact that I had been doing some some startups and like trying intrapreneurship already and then just being very Early into crypto wasn’t like once one of the really important things that helped me succeed see earlier than than most people like what was going to be really important with the theory was stable coins and so on. But also like suddenly due to notice that I actually you know went to the rescue twice dropped out and both times the both of the time to just like quit my studies halfway through and I have a pretty funny like story from the very early days of theory basically I remember being in China and sitting online you know, metallic and some of the other excellent the initial founders material. I like the initial group that was just trying to get their started back before blockchain was cool or anything like that. And then they were like, We will tell you in this case investor who was called hosting this lunch I think it was he started realising you all dropped out of university right and then we went around a table everyone. See ya He dropped out of university, and then got to meet us like, I dropped out of university twice. And then everyone’s like, well, that’s the father, Krebs students.

One thing is dropping out once again, but I’ve done it twice.

Jamie Burke
What was it that drive you to be a dropout? Wasn’t this curiosity in this emergent crypto world? Or was it something else?

Rune Christensen
So the first time I went to business school, and then I dropped out to try to scale, my first business was this company, placing English teachers in China. So I basically went full time and just failed, like I was, I wasn’t able to scale it. And then I basically gave up on the business, why the damage. And then I go back and study biochemistry. And at that point, that’s when just when a theorem had launched, and at some point, I just realised that this was a unique moment where there was like this window of opportunity to create a stable coin and I remember At that time, I mean, I don’t really have this experience with the output, put all my money for my first business into bitcoin. And then on paper, I saw these huge gains that within all the race stuff once again, right, so I didn’t lose anything, but I kind of didn’t feel particularly great to feel like you made millions and then lost it all up. So I already understood the importance of stable coins. And then there was just as like a constant discussion in the theorem community back in 2015, about like, Oh, yes, they will, like some of them made that right. Like that was kind of like a given that that was gonna be around somehow, and everyone was so excited about all the like, all this stuff they were going to build. And then like me to stay on heights, kind of like as an extra thing, you know, and that’s going to be there somehow. Right? And so I realised, well, you know, that seems like a good opportunity that’s already know that that’s like the most critical missing piece and like one of the things you can do to make crypto appealing to record people. And then just because I’ve been through so long and it’s actually going to have a hassle some About how to navigate the communities how to, you know how to actually start a project, the way that project was started back then, which is pretty much just write a post about it and ask people that want to help out. And it was just like, it’s just such a different time back. I mean, comparing what would crypto looks like today, which is almost like a normal industry at least much closer. And then back in 2015, or 2012, when it really was, was almost a religion, or so driven by ideology and driven by things just being completely different than this view that five years from now, the nation state would no longer exist, right? It would have been replaced by autonomous blockchains something. For me, the biggest journey of all has been moving from this extremely obscure ideological environment and then it is slowly becoming more mainstream becoming more formalised, more novel more boring. In particular actually writing, it’s really quite incredible sort of see that happening. And I still have a hard time even truly remembering what it was like a database at this point.

Jamie Burke
I wasn’t quite as early as you but probably Well, yeah, seven, seven years into the space or so. So how did the team assemble, he kind of put out a problem statement, possible solution, and then mobilised a group of people, presumably with some relevant skill set to kind of solve for this problem. how that process unfolds?

Rune Christensen
Yes, actually, recently, here in Denmark, I was talking to some some business papers about how to do remote work because everyone’s panicking, like what are we going to do? You know, we don’t have to adjust to this new world of working remotely and so on. I was thinking a lot about like, what is it? How do you actually do it? How do you know what are the keys to being successful with it because unknowingly that’s what we were lucky enough to do in the early days of of measurement. We sort of what we wanted to do is be more like applying our ideology essentially. And that just having to really align well with how do you how to run a distributed team effectively, right. So, so the number one thing is that it’s all centres around the chat room, right? Like slack or, I mean, right now we use something called rocket ship, but we actually use slack in the early days. And I know that most projects in crypto they use like slack or discord or something like that. And it really is the way I see this. That’s actually the office that would be in office when you’re under chat and monitoring the community from the very beginning. And the community entity completely revolved around this chat room and communicating through text messages. And then we had we just make sure that there was like, like, maximal transparency, right, so there was as much as possible. Of all the information discussion was shared publicly. And that was perfectly fine and safe. If you do back then because that was way before any regulator, so anyone would pay attention to that. So so it was completely safe to just talk freely about whatever random ideas we had. Because there was just this like total transparency of that information, then it was also just very easy for someone just get into the community and actually started contributing or just stop being a part of it. And then because there was this community spirit and inclusiveness and transparency that actually, like created is almost like a funnel where you just see people that would just join the community and you know, start contributing in some way or form and then eventually you could, you would actually, you would get to a point where the community as a whole the entire group of people that was doing the project, like consider, okay, should we start paying this person for instance, once there was an actual team and some of us some level who meant abandoned project that would maybe like to say 2030 people that were sort of like focusing on the left Most of them are working full time under anything. But just a lot of like there was like some decently sized group of people that were taking the project seriously. We created what we call the governance meetings, which is basically every Sunday there was this like this. But it was 4pm or something Ireland 4pm UTC, then there is just like an open call with anyone who joined, no matter who you were, where you, you know where you were located, you just find the link for the call and you join it. And then all decisions for the entire organisation were then made by consensus and that cold so people would suddenly propose something and if nobody else said no, it would actually happen. And then that would be how like the team would initially in particular payout API tokens of salary to people who were volunteer like working in your project.

Jamie Burke
So that has to be complete consensus. 100% consensus for it to pass

Rune Christensen
Yeah. That must’ve been a very decent project eventually broke down Of course it couldn’t possibly scale right but but when there was about 2030 people that that all knew each other pretty well then it actually worked. I mean Indian well at what point did

Jamie Burke
it not

Rune Christensen
work? Well so that’s that’s kind of like so that’s like fast forward a bit in the in the story but basically what sub so the project started operating like this and started growing as a building that issue technology and then we went through the you know, the crazier basically theory. So one of the things that happened was the Dow hack, for instance, right? It turned out that doing financial applications for blockchain is just a lot more dangerous and people that usually thought beforehand because actually before the Dow theory was randomness, it’s like you know, anyone can make, you know, make your website kind of thing. Make your own bank, right. Build your own little blockchain thing. Don’t worry about it. So easy, right. And then after that, it was like, Do not touch someone else. code you don’t use the code unless you really know it’s secure. So we just had to constantly dive sort of deeper and deeper into the tech. What we want to do is so complicated is one of the most advanced protocols and platforms that’s been built yet with so many moving parts, like interconnected modules, and so on. So, just really required just an extreme level of sort of like building the entire state of how to do smart contract security from the ground up. So that was really the early days of a project, which is like, operating this, I mean, high side somewhat naive for like, very ideologically driven and extremely decentralised, extremely open and transparent governance model. Well, yeah, like I said, well, actually anyone could join the sort of the board meetings almost you could call him right at the top of meetings and just actually have a say in the blog, anything or different propose any action. After the after, like the project get involved for a while, actually, there was a period where then I personally, again, it was kind of like naive in hindsight and driven somewhat it last year as well. But basically, I decided that well, since I’m running, you know, like the the developers are developing, and it’s getting built the technologies coming together. And so I actually just started being less and less engaged in the project at that point, basically, the governance model status shows of cracks, and and what happened after a couple of months was that, you know, this called the Sunday call where things are supposed to be decided by consensus, it wasn’t able to come to a decision about how to pay people for doing the work anymore. They couldn’t like agree to how to pay people, then you suddenly have a problem. So So it turned out that like, it started breaking down at a bigger scale. Basically, then we and the core team and that’s it. We then realised that we had to, to start basically, looking at things a bit more pragmatic, rather than just purely through the ideological lens that existed in like, Well, we’d never been like, as hydrological as other projects for sure. But but the whole space was just so like completely dominated with this kind of early crypto ideology that you couldn’t you couldn’t really avoid having that be an important part of almost every project. And we basically realised that we have to, you know, also be a bit more pragmatic and realistic and focused on what is the real goal we’re trying to do right? That is cause it’s creating a stable coin. It’s doing you know, financial inclusion, just improving the financial system and deliver on the original mission of big fight right, like so fix to the corrupt financial system that created the financial crisis and so on. And some of the responses we created the foundation we started formalising The organisation recreated is like separation between the community and the foundation. So the foundation was kind of like, you know, especially position in the community and couldn’t just represent the community itself, but rather it was its own unique entity. So how

Jamie Burke
many years in or months in until you spoke to a lawyer?

Rune Christensen
Now that was about two years ago? Oh, wow.

Jamie Burke
Um, presumably that was more about the formation of the foundation and how it’d be structured rather than necessarily, like a conversation about how to navigate the regulatory piece because I know, in advance of this podcast, this episode, I said to you, you know, there anything’s off limits to talk about a lot of a lot of guests comfortable talking about the regulatory piece, and he said, No, you absolutely want to talk about it. Because you think it’s really important for people who are trying to innovate in the space to understand so how is the attitude set towards dealing with regulation or lack of regulation? And kind of innovating in that creative space.

Rune Christensen
Yeah, I mean, thoroughly It is my appeal was that you can’t, like a court can’t control the blood cheaters and things you don’t have. You don’t even need lawyers, they’re actually useless. They’re gonna lose the jobs, you know? And yeah, is it right, let me laughter So after two years, we had to start talking to Lars about setting up the foundation, and also things like establishing the status of MKR token and so on. Right. But that was like the very, very beginnings of that. And then yeah, I mean, it just became like, once we started going the direction of Okay, we have to be a little bit more realistic. We have to not just take this, what do you call it? Like, the attitude of like, I’m rebel, right? That’s just like discarding everything that currently exists, but rather, it’s more about how can we integrate and how can we offer it and piggyback off existing systems and infrastructure. And that’s when the topic of regulation suddenly becomes an issue. Law and gentlemen, something becomes all encompassing, because it’s just so important for anything that has to do with pundits. So we went from not being very well, you know, not really be very well prepared right little days, because we’re simply, we didn’t believe that it was necessary. We just didn’t understand enough about what, you know what the space would actually look like, let’s say three years later, right? Like, if you look at how much regulation matters today, for instance, but once we went internationally, right, it was really built up. A really good foundation, like the entire organisation is very diversified, you can see right so that we have we have a lot of engineering and a lot of development resources and really some of the best technical talent in the whole space. But then also very strong legal team, and community building and, you know, communications and marketing that is very, also very globally focused and very diversified across many different markets. And I think that’s one of our biggest strengths is that we were able to sort of move away from this like extremist ideological starting point and really move in the direction of pragmatism and just focusing on the golden really matters, which is to deliver an awesome product in the form of a decentralised stable coin like and then, like some of the values in the project stands for that doesn’t really have anything to do with ideology, or at least the original crypto ideology, but rather, it’s just about you know, like, again, financial inclusion, equality, that kind of stuff, right, like, you know, in a corrupt institutions or at least makes it easier to to discover that kind of stuff.

Jamie Burke
Do these things become stated goals rather than kind of things that are just understood or a shared philosophy? Have you got to the point whereby, you know, these are kind of like stated aims, strategic aims of the foundation?

Rune Christensen
Yes, there it is.

entire communities the maker governance, the violent with the community, which is even more called logistics innovation, actually, in the very early days of when, when single collateral die had just been deployed. So mid 2018 basically, when crypto was just starting to after the big bubble and crypto starting to go a little bit extreme a little bit better understood, the voting system came online for make it became easy to use, it became easy for for regular people to use and care and vote with. And then the very first vote that’s on open to whole voting systems for more control the foundation principles, basically, in the documents, that then like broke down some of the corporate goals of the project and how, like what would sort of be the the foundation of how the community should evolve over time, right and, and what direction the project should take and why it exists. And, and the principles are, so serving the underserved for instance, which is, you know, funny. inclusion. And one of the really big advantages of blockchain is this, the fact that it’s a technology that uniquely so has this inherent characteristic of benefiting everybody equally with with the tech, right? very unlike a lot of the other like a lot of other technological revolutions that tend to favour the established, blockchain actually is a little bit upside down because a lot of the big benefits of block chains aren’t even imperatives in the in the first world, right? Because we can already do that with credit cards or something. But to a lot of people that don’t turn to have good access to finance, finance, it’s just a huge deal to be able to get blockchain based financial services. So that’s, that’s the first principle. And then there’s sustainable finance. So the idea that with the transparency of the blockchain, and with the transparency of decentralisation and decentralised governance with open decision making, there’s an opportunity to just use finance and A powerful good except for powerful evil, right where it can actually have positive impacts on the stuff it’s financing and sort of driving in a sustainable, positive direction instead of driving it towards short term returns and, you know, fraudulent accounting its own. And then there’s some scientific gardeners and like, focusing on dye adoption, and also what we call gradual decentralisation of the remaining principles. And I think maybe there’s lots of like one we were supposed to highlight is this concept of gradual decentralisation, which is something I think we’ve executed quite well, in making around the baby Foundation. The basic idea is the foundation slowly step by step and release the functionality to the community so the community can gradually take over different aspects of of running the day to day making profits process and of course, the system has from the very beginning. been controlled by Campbell’s Soup from very expensive down that’s been under the control of token holders. But there’s also an additional layer just beyond what you would call the crypto layer. That’s the process for how to like, it’s not the process of saying yes or no to decision. It’s the process for what’s the decision that’s up for debate. And that process is something that can be a little bit harder to, to decentralise. And that’s what the foundation has been slowly doing, ever since, basically, the beginning of, of media governance when the foundation principles were voted in, and then now we’re actually at the end. So we’re at the final stage where it’s possible to sort of see see into the future and to the point where the foundation will completely will deliver the protocol in such a state that nothing is needed from any external actors whatsoever, and then the foundation can dissolve it.

Jamie Burke
So yeah, and I definitely want to go deeper into that kind of pathway as a Dao. I mean, it sounds Like the natural conclusion, because in some sense, you’re never a company, you are never going to be a conventional company. It’s much more kind of bottom up. But before I do, I just kind of want to ask a question, which is, do you think that journey that that story about how how you were formed as an organisation as a community, do you think that that will happen again? Is that possible today? Or was that really a product of the time? And that that early period in kryptos lifecycle? Yeah.

Rune Christensen
That was a very unique sort of, almost like a random occurrence. Right? It’s not it’s not very likely for something like that to happen again, you’re Yeah, I mean, maybe it definitely is a very strange project that has like very strange and artistic kradic elements to it, that just all I mean, a lot of it is just sort of like the result of randomness and random occurrences and

Jamie Burke
so If we kind of look at that journey of becoming an adult was, was there a point where you sat down? And well, to what extent did you consciously design it? Did you sit down? So there’s a lot of theory now around crypto economics. And you know, how you kind of design the incentives and the game theory to make sure that the system functions in an orderly way. And people spend an inordinate amount of time on that before they even, you know, write a line of code and certainly launch a network. what extent did you kind of think that through? And, in your mind, what was the minimal viable dow what was the baseline that needs to be in place?

Rune Christensen
So in the beginning, I started assigning,

you can say, the first draft of the project in the beginning of 2015. And I just announced that and sort of announced basically the site on Reddit and just ask for feedback on iterative that maybe for a couple of months pretty much by myself and with some input from people in the early theorem community. But then after a couple of months, I was joined by my co founder, nickel I’m sure you came from who I knew from the BitShares community before that. So he has this kind of his earlier project and proceeded theory, remember that he invented the stable coin. My whole thing issue was that I was just going to copy the pictures too, because then they have a working stable coin concept. So we’re going to, we’re going to copy that and go to theory. That was kind of a very early idea. But then once legali got involved, we started having some deeper conversations. You know, we were able to sort of look further into the future, some of them having a deeper conversations about how will this baseball and then through then we’re able to arrive at at the multilateral by design, which then which actually, I mean, we came out on that in summer of 2015. And that has What’s interesting is that we started writing white papers based on that design. And what’s interesting is what’s actually implemented on chain today is almost completely identical to the first white paper I wrote in 215. There’s obviously tiny features that are different, but like, the sort of the basic logic is,

Jamie Burke
yeah, I mean, that’s amazing. Because normally you hear the opposite, right? That the intent and I have heard you talk about how the last five years you’ve really looked at di as this test token at building up towards this multilateral vision at that point, I mean, now obviously that the DAO space is more mature there’s a there’s different stacks available where you can roll out a DAO fairly easily issue a governance token and away you go and it’s got modules and at what point from a, you know, decentralisation perspective, and we all know that the centralization is slightly nebulous, it’s not easy to measure. But, you know, clearly, a high degree of decentralisation has been important to us like this North Star, looking back with, you know, retrospectively, are there any learnings that you think could be relevant to somebody that’s thinking about starting a new project and rolling it out straight away with with a doubt there any kind of hard lessons that you’ve learned that could help somebody on that pathway?

Rune Christensen
I think one thing that almost everyone will run into

sooner or later is it’s just decentralisation theatre, right? So this idea that you think you’re doing something decentralised, but what’s really happening is something that looks decentralised, but in fact isn’t and, you know, I would claim that almost everything that is being claimed to be civilization currently is decentralisation theatre and some photoshoot right? You Even point to something like Bitcoin and aetherium as like the big decentralised flagship for crypto and then just consider the role of tether, please this entire industry, right? And very quickly, it’s like when you really analyse it more deeply, it’s it’s rare that people like to put things into these, like, ideological boxes rather decentralised that we’re good and holy, and then centralised and therefore evil and advanced and so on. Right? And the reality is that I think it’s a completely wrong view, because really the way that all of this should be considered as it’s through the lens of risk management, right, it’s about what are the risks and you have to consider all the risks, you can’t just consider what’s convenient to act to your ideology, right. You have to, like, really just be objective about the risks. And, and, and so from the perspective of like studying a project, I think that that’s really, you know, decentralisation versus centralization. It’s not really meaningful. Question to think about beyond ideology for some people, right. But the thing that I see coming what’s often called decentralisation and what people often mean when they say that word is that it can be a tremendous tool that takes electrodes, parents and resilience. And that’s very important when it comes to mitigating certain types of risks. So I think, with many, or one of the really big advantages we’ve got from this, like decentralisation, mindset or ideology, is that it you know, it’s transparency. It’s a collaboration, that that enables better technology. And it’s also just like this ability to attract a completely different kind of team and they’re amazing project because of this radical openness and sort of flatness that existed.

Jamie Burke
Yeah, and obviously, increasingly so. The degree of decentralisation is important from a regulatory context so as regulators catch up with DeFi They even have in their mind that decentralisation, good centralization, bad around enforcement, and you know whether people are providing a regulated service or activity. And so as you if we look at how MKR functions now at the governance token, and how it functions from a voting perspective, the kind of things that can be voted on, could you could you talk through a little bit of that, and it would be good to understand as well, when you’re thinking about a change or an update or a new feature? Do you do the game theoretic? Do you gain something out before that? Or do you really just let it into the wild and, and see and iterate based upon it being out in the wild?

Rune Christensen
The thing about majors is it’s five years old. And that means that there’s been a lot of years a long time for the community to build up very complex procedures and so on, kids Knowledge elicits, right, that’s even that’s very specific to like how to operate a down scale in a decentralised community. And so there’s multiple processes for how to create proposals. But I guess you can really boil it down to three. And the two sort of most basic type posts that exist are, first of all, there’s what we call

it’s called a single request, that’s just kind of like a

I’m not even sure I don’t even know where that name came from, but that just somehow emerged. And so what that means is someone will actually just go and create a forum post with some idea and then basically see, you know, does this idea Make sense? Is it gonna, you know, am I gonna really get any traction from this, and even if it actually happens, if people love it, and it’s great, and there’s more discussion, and the ideas are fine, and so on, then ultimately, the idea actually gets put up for a vote through these like, streamlined governance processes ultimately revolves around what’s called the monthly cycle and redo cycle which is the end Much, there’s a big vote every week, there’s like a smaller vote, and then you can get into one of those seconds. And that’s how your proposal can actually get up, you know, and get into like a decision making up for the Dallas hole. And there’s, at this point, there’s just too many, you know, what I would call a decent purely organic, purely community driven proposal, Stephen count. And I remember when I first started seeing it happen in the wild, so that some community member came up with an awesome idea and they just like maybe proposal and then suddenly it’s in it’s there for voting and, and it gets voted in and this is done. And that was really like a tremendous feeling. For me, I guess, sort of, say, for the family perspective. It’s like, that’s just an incredible what I’m calling, you know, something I force multipliers, right? Because it was really just like, random people out there in the community, just doing work for free and not as much as doing work, play and like debating and You know, really giving it the full treatment of like rational analysis, and then they just get these really, really great change the system because that that’s the thing about if you had a strong process for how to funnel new proposals into the governance is, if if the filter is good enough, that means that anytime there’s a proposal in there, it’s almost always going to be like a really good proposal. Yeah, this is work quite well. And then the counterbalance to this community driven proposals is that there’s also this concept of domain teams. So the community elects basic domain experts to sort of make sure that there’s actual experts. So

sitting there with, you know, being a part

of the process and giving me a dossier. You don’t just get a bunch of accounts voting to do something totally crazy, but there has to be some checks and balances in the system. Because otherwise, it’s just, you know, stable coin. It has to be stable and reliable. And so that’s also the kind of stuff that we consider love and adore. Main teams of these experts, they can handle much more often return decisions that have to be made. So things like onboarding, new freelancers system, and modifying rates and prices and risk parameters in the system. And then together, that just raises the price process that’s quite sprawling with a lot of different moving parts. But ultimately, it all like fits together into a single, he’s gone in cycles where the actual

Jamie Burke
decisions can be, can get made. So maybe now’s a good point to to do a quick one on one on on the various constituent parts that the technology that makes this up because I’d really love to talk about the evolution of dye tools, what is now this kind of multi collateralization and go into the bigger vision of of the possibilities that that unlocks, but could you kind of give a one on one to the oldest song on the basic building blocks of how they function as a system.

Rune Christensen
We have the last verse Which is really the focal point of the whole project. And it’s a cryptocurrency that’s just worth $1 tries, that tries to keep it at $1. And die is created from a system known as vaults. It’s a smart contract system that allows anyone that can access blockchain to then deposit collateral into the smart contract goes into the maker protocol. And then with so through that collateral generate that. But it has to be over collateralized. So so we you know, really the analogy is it’s similar to borrowing money from the bank with your house as collateral. It’s actually similar to taking a mortgage, but you can place your collateral so they could place your house to the bank and you take a loan and with makers you place your collateral is like a piece of aetherium or Bitcoin and then you’re able to generate some dye. And then maybe you end up with let’s say, $200 worth of collateral and then $100 worth of dye that you generate and you can then go and spend that hundred dollars with dye somewhere else. And that’s the real basic dynamics of sort of a basic two sided market maker where you have people that want to hold dye and use its currency. And when people are able to generate dye basically use it as a way to access the liquidity of the assets or even a way to access decentralised credit. And then ultimately, you have your sphere. So that’s it’s a marketplace where there were these are these two, the dye holders, and the vault users, they interact with each other. And then that marketplace is essentially regulated by the MKR holders who ultimately write the rules of the game. And but they also take on some of the ultimate risk of the stability of the system. So basically, they set a different risk parameters, their liquidation, requirements and the rates, the cost of using a system Ultimately, if there is, like a shortfall in the system, basically if if there’s a situation where there’s too much dye in circulation, there’s not enough collateral in the system in the vaults to backup dye, then the shortfall of value has to be covered by the alchemists. So they have to actually, like dilute the token in order to raise more funds so that they can pluck the ball and, and all of this happens fully automatically, which is of course what makes it so powerful, right? So it’s not like you can have a gamble this sort of deciding to deciding not to pay like the system breaks it, right. It’s programmed into the code, you just, you can’t get around it. It happens completely automatically. And it’s even when there’s like critical connection between the MP October and it’s it’s a responsibility of basically underwriting the whole system was actually showcased on March 12. When you know, that was the big Coronavirus. stock market crashed due to the loss of pressure on crypto and ultimately cost a series of failures in the in the major system when it came. So basically when the maker protocol tried to sell some of its assets because it was liquidating its users, and it ended up like selling a long as it’s for nothing for zero value. And that’s really the main shortfall like rather than basically meant that now there’s a big hole. And that hole was then automatically plucked by a PR agent and was simply due to race. I think it was about $5 million. That was a tonne of whiskey raised by the protocol to then ensure that the system remain in balance. And that’s a such a crucial piece of the whole puzzle that you have is you know, the skin in the game. This alignment of incentives between the people that govern the system and other people use the system input. Those who go to the system, they take a loss with things If the government badly and mistakes happen when they’re on the hook for that, that’s very unlikely this this is where it’s a response to the financial crisis, right? Because that was this. That’s where we saw this moral hazard. And this, these, these diverging incentives, and then of course, because the answer to this risk and they’re already seen the effects of dilution, and and they’re under hood for that in the future, if there’s if there are any problems happening in the future, then of course, there’s also an income stream generated by system internet they have to, and ultimately that creates this balanced risk reward profile.

Jamie Burke
And how much did that naturally play out? So as that crisis hit? I mean, did you have to pick up the phone and phone around a few, you know, major MKR token holders and try to direct what was going on or did it just happen

Rune Christensen
once?

like the feeling from the foundation was that this is one of those moments where there was a fixture Towards the foundation isn’t really able to keep up with everything and kind of has to react a lot more and be following the direction of the community and ecosystem a lot more. And was a community vote to extend the duration of the options because there was concern around just not like it was the first time it had happened. And, and there just wasn’t that much time to react. And so because there just been an option problem with the options that Selleck lamda system, then I think it makes a lot of sense that people decided that in this case, the system needed some extra time to make sure that that just everyone can be ready to actually participate as options. Well, I think something like 70% of MKR was won by by crypto fund. That also means that like 30% of it was really bought by like, basically random people bailing out the bag holders, you could say right, and then in turn, getting a lot of newly generated healthcare.

Jamie Burke
Yeah. Fascinating. So, obviously the system’s evolved now it is it has its kind of first multi collateral asset, which was backed the basic attention token. Can you talk through how that process happened? Because I, as I understand it that was voted in again, through this governance process, some options were presented by the foundation had been tested. And then it was it was kind of voted upon, but could you talk about

Rune Christensen
that journey?

Yes. So, just to recap, back a super moment. So, tomatoes launched in 2015, right and then in 2017, at the very end of

the foundation launched, what was called signal collateral day. So, that was the it was like the first ever stable quantum theory and the first DeFi project and the theory. And, I mean, it was it was it was quite early, like, launched Of course, it was also some time at the absolute Top of the bubble back then it was a great time to launch because it proved to be like this trial by fire, then the stable coin actually survived, even though it was single collaterals, it was only backed by Ethereum and nothing else. And the price of Eth dropped from 12, you know, 1200 dollars to $85 over the course of six months, and during that time, about $50 million, were in circulation was backed by Ethereum. And actually managed to stay over collateralized despite the value of eath just dropping so dramatically. And then the problem is single collateral stable funds is that they have correlated risks, right? If completely crashes, then you have a problem. That’s your level. And so that’s why we only we always knew I mean all the way back from 2015 it was clear that the solution is multiple collateral types. diversification of risk, basically hedging one type of risk with another type of risk. So the formation from Remember that condition was single metal day, it was just, you know, completely focused on then finishing up and launching the full version of the system, which is multiple though, and ended up taking much, much, much longer than we had expected. But that’s, of course, always numbers. But it did eventually get finished. And then right before finished, when also the governance process of the system really started sort of being fully mature. I mean, it has been running ever since. Like I said, since the middle of 2018. That’s when it really started being, like made very easy to use by regular MKR holders. But about a year later, towards the end of 2019, when multimodal that was about to launch that was when, you know we started to see the community, finding its own voice right and actually becoming comfortable with the process. And so there was this vote to basically prioritise the different options. For collateral, when, when multiple and all that would launch. And this was actually was really well, it was more seen as like a technical demonstration that it’s sort of a more cookie cutter long run governance decision. So it was a list of assets that had been decided actually is only like a year for based on the technical simplicity of those tokens as collateral. And then the community ultimately voted for Yeah, they think bet the highest and then there were also a number of issues with the other tokens. So even though originally they I think people expected there will be maybe more than just one new token be added as collateral. In the end, it turned out to be the best option to just launch with with only bet and instead focus on getting the real governance process, getting it going and getting it rolling and actually getting the community interface headed of routinely onboarding a new level types. And then it took me months, but now you’re really in that spot. Right. So now there’s, on average is about one to two new collateral type events every single month, following this monkey cycle where they put up with the beginning of the month, and at the end of the month, there’s a vote on them. It’s really like a snowball effect, right? Where

today, the community is

able to unfold one to go out on types month, but maybe a couple years from now, that will be 20

or 30, who knows how much it would be but and that is really that that is the path to civilization that you can have so many people working in parallel, right with full transparency into what’s going on. I mean, you could use this in the fundamental dynamics of the maker protocol into this shared governance and shared responsibility and just the structure, which is that just the system can protect itself by having much a lot of scale and then a lot of diversification. And that just fits well with all the other concepts of decentralisation, community governance, and so on. And that’s ultimately what’s the Vision is running through these, through these characteristics. We can build something that can grow beyond, it’ll scale beyond how finance and financial systems currently look like. And hopefully actually have a real impact in the world.

Jamie Burke
Yeah, so let’s talk about that. So I know, obviously, to date, the things that have been added, the collateral that’s being added is crypto and of course, the crypto asset classes still highly correlated. I know you’ve been talking a lot about the possibility to move into cbdcs Central backed issued digital currencies, as well as real estate potentially presumably for things like stos or security tokens. Can you talk through some of the possibilities where you think the low hanging fruit is and yeah, you know, the the most interesting proposals that are being put forward

Rune Christensen
today is true but biggest next step maker after having lost multiple level died

like the Netflix

Wherever communities to go is towards connecting this financial infrastructure that now exists with the real world because that’s what’s lacking right now right now. If theorem and define blockchain is quite isolated, it’s kind of like this silver contained little bubble where everything interacts with itself inside this bubble, but there’s little, there’s not that much connection to the outside world to the to the to the real economy. But that’s where the real values and that’s also where things that a lot, you know, you can find stuff that isn’t all correlated Bitcoin exists. So so you’re completely right. One of the main things that we’re looking towards as you know, just avoid a scaling system, basically. And to the point I’m in the beginning, random, right now there is this, like intense debate about how do we, how does the community increase the supply of dye in the short run to meet all this demand that’s coming out of the new default projects? And the answer has always really even Trump, something like that. Back in 2016, we identified that we have to move out of the crypto bubble and into the real world, because that’s where you can get access to things like you have real estate, for instance, right, and, you know, legal claims on companies and stocks and bonds and so on.

I am particularly optimistic about trade finance

as an asset class

that

just is a really good fit for this position makers in right now. So basically, what it looks like is, I mean, trade balances, and financing invoices, essentially, between companies, especially international trade. So basically, you have one company that delivers a product to another company, and then send them an invoice. And then if they don’t want to wait, you know, three months to get paid, because that’s how long it takes you to pay for some reason. Still don’t know why that’s the case. But that’s just the case for some reason, right? It takes a lot of time to get paid if you’re a small business and you’re working in supply chain. And if you don’t want to wait those three months, then what you can do is you can Go to a trade finance facility and you can basically sell your inputs essentially.

And that’s actually a really, really crucial

service. In fact, I know I know someone myself who whose business was gonna go under during the Coronavirus crash. And the only reason why they survived was because they got trade balance. So they had some outstanding orders, they were able to, to basically get the short term financing for

you can take these kind of offer operations where

basically have I mean, it’s known as revolvers, right? Like you have these special purpose vehicles that are just buying invoices from companies, you could then take those companies like the company itself, especially for people so tokenize it

and then stick it into major as collateral

and then ultimately have major provide a line of credit to this company that then goes as far as credit to the small businesses doing trade finance. Yeah, I’d say so amazing. Because, first of all, this is really delivering on The core goal of the project right financial inclusion, you know, serving the small businesses that are struggling a lot more when Yeah, for instance, if there’s a financial crisis so big, but it’s, it’s also just a really great type of collateral system, right? Because we’re talking about assets that have good liquidity, right and short term duration, right? Meaning it’s possible for me to actually do things like liquidate and sort of like understand what the value is in the on the in the in the protocol as collateral for that same day. But also because trade finance is just something that it’s not very risky. It’s like very diversified. It’s not really like crypto where everything follows Bitcoin, right? trade finance, actually, is based on so many businesses all over the world, all the different characteristics, and it’s just very unlikely that they all collapse all at once reasons. So, and there is actually to your point about like, what’s the

one of the actual things on

post right now, so there’s like that Isn’t procreate proposals, anyone can go to the maker forum to form the mega.com. And check out all the different cloud applications that have been made by basically by, by by companies and people need your system, who then made these applications to the community that the communities are considering. And anyone can follow those discussions. And one of the projects that are that are there is one called console freight. And that’s basically a trade finance room like project that has created this structure where they can receive, like, they can receive a line of credit for major and then they can take that line of credit and they can use that for trade finance activity. And then, you know, take some sort of take on both the risks themselves, so that major section exposed to very little risk of any return they can also get a much lower rate on their cost of capital for me. So,

Jamie Burke
I mean, you know, if you follow that line of thought, and you know, it’s pretty clear that if you look at the current financial system, whether that’s trade, finance or anything else, just basic lending rates on savings accounts, it looks like it’d be very difficult for the financial system as it is today to compete with this new emergent financial system just because of all the inefficiencies it has, but if we look at where we are now with defi Obviously, we’ve got this bull run, who knows whether it’s a mini one or it’s going to be a sustained one? To what extent and defi is primarily oriented towards retail investors at the moment, although those with a fairly high technical competency, to what extent is that even interesting to you at the moment, does it does that feel like a fairly short cycle and a bit too small to have your attention versus the almost limitless potential of effectively absorbing the global financial system and and as you say, Non crypto related assets institutional SME type financing.

Rune Christensen
Yeah, we like to think of that, as you know, a lot of the stuff we see in the VI right now is really just like fluffy, short sighted and pointless, you know, exercise and try to move around money and pretend you’re creating value. And meanwhile, yeah, I mean, I exactly believe that the only way the real value will emerge out of crypto is by trying to apply it to problems in the real world. But at the same time, you can just never avoid these speculative bubbles right in all of this irrational behaviour. And the question is, what do the projects do with it opportunity they’re given right with all the capital

given with the raising money and so on. And

we’ve already been through this once before maker so major electric through the 2017, Ico mania, and at that time, we were very focused on keeping your head stuck. Just building and not buying into the hype, because I think that could actually be a very real risk. If you can lose focus and you just get like blinded by, you know, something is too good to be true. And then you have a problem. It’s actually very, it’s difficult to not let that happen, right. It takes a lot of discipline to, to focus on the long term. But in our case, we were it just turned out that really paid off for us because even though major was completely forgotten and overshadowed and just like, considered irrelevant, during the Ico mania, because there would be no because people just focus on short term gains. Then once the Ico mania died down, major actually emerged as like the only project that had actually done anything real. I mean, that’s, that’s extraordinary, right? There’s a lot of other really cool projects, but like maybe, I guess maybe it was only one that had done it and also had some level of scale. And so it really stood out because Yeah, we had just focused on, on delivering on the on the core technology. And I think that it this is kind of a situation where it’s not it’s not an executive parallel. Like there’s certainly more, you know, sophistication and some interesting things being tried out in this cycle as well. I certainly think that the big thing, the big differentiator, what we what

projects will be focusing on the real world and focusing on real problems, and what projects

we’ll be focusing on, like, you know, new ways to move around tokens and new ways to send around tokens and because the promise issue Yeah, you can’t create money out of nothing, right? So someone has to, like the value has to come from somewhere and you’re gonna be much better off focusing or creating a value rather than moving at once it’s already been created.

Jamie Burke
Yeah, so linked to that I have to ask the question, because I’m intrigued by it, but, uh, do you think this cycle will be as big as 2017 bigger or You know, what, what’s your intuition?

Rune Christensen
I don’t know, you can? I can’t really speculate on that, because I just

never

are able to predict that kind of stuff. But I certainly everything is possible, including that it doesn’t really go much further. That’s also absolutely a possibility as well, I think. So yeah, that’s just a matter of,

you know, sitting back and enjoying the ride.

Jamie Burke
Yeah. Well, I mean, I agree, as you said, this was definitely more substance to this. But at the same time, you know, there’s, there is a lot of movement of money happening without any kind of core value. It’s interesting to understand if it’s being driven by new money entering a system or it can attract new money into the system versus this recycling. I think we’re both agreed that that’s not the most interesting thing about what’s what’s happening with maker. So we kind of zoom out of that. And we look at what’s happening in a macro environment, you could argue, I mean, that couldn’t be a better moment for you to be at this point in your development. this occasion evolution. And I’ve heard you talk about as more things are collateralized, there’s the opportunity to hedge not just from an asset perspective, but also from a jurisdictional perspective. And I think that is really fascinating when you think about what you’re building here, what you’ve enabled as an exit ramp for people who might be otherwise stuck in a hyper localised environment.

Rune Christensen
Yeah, and thanks, jurisdictional arbitrage is a visit here but no purchase global and you can you can work from whichever place it’s best for you to work from. And so that’s I think that’s already always been quite a dissenter of how crypto operated. And I think, you know, a really early example, it’s like how Switzerland suddenly became this like hub of crypto right because everybody realised you guys to me, and then you can send them one day to Switzerland then there’s just so many projects, doing blockchain Switzerland nowadays because of And I mean with major, it’s, it’s, you know what, what it really all comes down to is this fundamental and almost ideological, you could say like question or like, really, maybe actually logical isn’t the right word but there’s like existential question of how the government’s going to try to shut down and weaker, right? Maybe even not even legally, but like, politically, you could say, right, I’m just gonna, you know, it’s the US just gonna say, you’re gonna shut it down, we’re just gonna figure out a way to shut it down and we’re gonna do

they’re gonna send out

you know, police to every single company or something that has a relationship with like this somehow doing stuff with maker and then they’re gonna arrest of all shut them down. And basically, that’s just like, I mean, it’s, it’s kind of like an unrealistic edge case. Right? But it’s kind of like

a deciding point for why,

you know, the community just takes diversification and you know, especially awesome Cheers. diversification so seriously, right? Because it is actually possible to get the system to a state where you don’t really know if you can actually have solved the losses of let’s say, a particular jurisdiction just decided to try to shut things down or something like that. Right. And and that’s the power of like the decentralised governance of the programmability of the system. It’s just a matter of adjusting parameters, basically. I mean, it’s not possible, right at this moment to, for me, to you know, decide exactly

what jurisdiction for what exposure here and that’s

just there’s not really anything available for you know, there’s nothing on the board and that’s that’s how you diversify just yet, right? There are some stable coins in a system that are under the the US jurisdiction,

but that’s it, right? There’s no European so

there’s not this ability yet to balance between

Europe and the US reasons. But as the system scales, all of them will become the possibility and they’ll be this You know, just the tools essentially in the framework to decide the exposure, exactly the weight that is optimal for the community for the NGO holders that are trying to escape the illusion. But then most importantly for like, the regular people that use die in like two years and right, let’s say Argentinians. That’s pretty quite popular logic to that, right. And the reason why it’s popular in the real big selling point is this idea that nobody controls this money, right? You can you can hold the money and it’s not going to get inflated away by the government sees the person or like it just can’t have him

do it right. Or do this even happens. It has, you know, you have the jobs, you have the

entire logic of the system, you had all the collateral like there’s so many layers of protection that is just very unlikely, but that it provides a level of, of protection that goes beyond anything else that currently exists.

Jamie Burke
Yeah, what we’ve shot over what would normally be a 45 minute, call Which, and I could stay on for another half an hour asking me a million other questions, but I want to be respectful of your time. So, Rudy, thanks so much for coming on the show, almost almost definitely gonna try to get you back on it at some point in the next 12 months to talk about the evolution of the community and this dissolution of the doubt, but I just want to give you a big thank you for your contribution to the space. As I said, I think it’s foundational. I think defi is not possible without it and everything else that’s going to happen on top of that, so thanks for coming on the show.

Rune Christensen
Really glad to be here.

Jamie Burke
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