Buck: Welcome back to the show, everyone, today. My guest on Wealth from your podcast is Omid Malekan. He is the Explainer in Chief of Blockchain Technology. He’s an adjunct Professor at Columbia Business School, where he lectures on blockchain and crypto. Omid, welcome to Wealth Formula Podcast.
Omid: Thank you for having me.
Buck: I should also mention you just have you have a new book, Architecture Trust The Curse of History and the Crypto Cure for Money, Markets and Platforms, which will get in as well. But just so people have some foundation. Well, first of all, I mean, you’re you’re a professor over at Columbia. How how did you get interested or, you know, turned on to this entire field of blockchain?
Omid: Originally, when I was younger, out of college. I had a Wall Street and financial services background. So I was fairly familiar with how the plumbing of the world is currently designed, or when it came to things like money or financial markets. And then around at this point, gosh, eight or nine years ago I was introduced by someone to Bitcoin and I was just curious about it. Not so much. Not really. From an investment angle, but from a again plumbing aspect, because there was just something about how this whole very confusing thing called the blockchain worked. That was so different to me than, say, how Wall Street works. So originally as a hobbyist, I was just curious. I spent some years learning about it. And then as it started to grow more and more mainstream and finally into applications, that’s when I decided to make a career out of it. Tackling it in terms of writing books and teaching classes and whatnot.
Buck: So at some point you were advising some banks on cryptocurrency policies and that sort of thing. Is that right? Can you talk a little bit about that?
Omid: Yeah, I spent three and a half years at Citi Ventures, which was is the VCR of Citibank, but it also used to have this dual role or it’s supposed to help any part of the bank with innovation. So at the time, it was mostly educating my colleagues, which was actually great for me because it was like one of the big global banks. Citi does everything and it was a good opportunity for me to learn how or how does banking work? How does the stock market work, how does money move around the world? And I think the only way to really have an opinion on how blockchain and crypto might potentially change things is you have to come at it from a place of understanding how the world works today.
Buck: And that’s and I think that would be a good place to kind of sort of take off in terms of your take on cryptocurrency. So what are the fundamental problems in the system, in the plumbing that we of the old guard that crypto potentially provides a solution for?
Omid: The number one problem is that most of our systems today were designed a very long time ago, long before there was the Internet or even smartphones. And while a lot of it on the surface looks like it’s digital and electronic, the architecture is still the same. So even if you use something like a PayPal, it’s a little bit to make an analogy, if you remember the early days of digital video, it was like, first we used to go before digital. We used to go to Blockbuster and rent a VHS tape. Yeah. And when digital came, you saw not a blockbuster, but now you are renting a DVD disk. Yeah, it was a little better, but it took some years for people to be like, Wait a minute. Now that the movies are digital, why can’t we just stream it over the Internet?
And that really led to like the transformation of media, right? So I think of think of blockchain as similar, like so much of our banking system today is really like DVD this, you know, just the fact that anybody who’s had to send a wire is like anybody who’s had to do a deal. Certainly cross-border is like there’s something kind of absurd about you got to fill out a form. And then depending on whether it’s like a banking hours or not, that might impact whether your money gets there today or, you know, three days from now. And it’s like, wait, it’s the year 2022? I can write, send a picture to anyone, anywhere.
Buck: If you’re not shipping over gold or something like that. Right.
Omid: Right. And this is one of the things like just payments, like there are many places even in America where you can FedEx someone, a box of cash overnight, but you can’t send them a wire overnight. So the way I think about blockchain is like it is the financial system we would build. If we start with the assumption that, hey, everything’s global, everything’s 24 seven. Most people have Internet access or even a smartphone. What will we do different?
Buck: A big element of this, I know that also you’ve written about is trust. So trust is really at a premium today. So how can blockchain and cryptocurrency, I guess these technologies, how how you know, how can they restore trust in the system?
Omid: So a couple of ways. One is to make things be more built around communities than, say, around like a single corporation. So if you think about like what’s happened with social media when we have these companies like Facebook and Twitter in charge. Originally, the vision of social media was like, Oh, isn’t this great? I get to connect with friends and family and share pictures and stuff.
But then it turned into this massive surveillance capitalism infrastructure. And now these platforms are trying to capture our attention as much as possible because they have to sell ads and make money. So that’s just one summary of it. But the blockchain thing is very confusing. So if your listeners are confused, then they should not be deterred. I actually start every teaching semester by telling my students that I’ve spent years being confused about this stuff so they don’t have to be.
But the things that I think are important to note about it is that one, everything is community oriented. Two, there’s a lot more transparency. Three, A lot of things are programable. So instead of appointing fallible people to decide things like how much money is okay to land someone rich, you use code and then cryptography, you just get much more predictable outcomes. And I know that sounds a little funny to some people when I say it because they’re like, Oh, crypto is just chaos. And every day some coins crashing and something’s happening. That’s true enough. But that really is not a reflection of the underlying technology. That’s just the messy sausage making of building a new and different kind of financial system.
Buck: And what you referred to this, these digital instructions essentially is what’s known as a smart contract, isn’t that that’s that’s a concept.
Omid: That’s right. And it’s a bit of a poor terminology because a smart contract is definitely not the blockchain version of a legal contract. A smart contract is just some kind of a financial transaction, which could be as simple as I sent you 100 bucks. But you can tie conditions to it. So it could be I sent you a hundred bucks if a deal closed, if you transferred something to me, if it’s Tuesday or if a certain sports team won, whatever.
But the important thing is that most of the economy runs on these kind of conditional transactions. And payments. You know, if this happens, then do that. And that might be pay money transfer title or whatever. And in the traditional setting, we usually put like a company or an escrow agent or a clerk or a courthouse or something in charge of executing this, which has its drawbacks. With smart contracts, you can literally write two or three lines of code, and because it’s executed using this decentralized infrastructure, the code is always going to do exactly what the instructions say.
Buck: You know, I’m curious with your perspective, having worked with banks, particularly Citibank, and I’m assuming some of the others, as you kind of have your opinions and the banks were listening to you, there was an evolution. I mean, there there has been there was a lot of pushback for obvious reasons by banks who are probably concerned having existential concerns about, you know, whether or not he will be needed in the long run to ultimately turning around and and actually working with cryptocurrency and certain, you know, areas. I mean, Jamie Diamond’s, I guess probably the best example of that being with Chase. And now Chase is pretty involved in blockchain. Can you talk about, you know, that perspective initially and why you think it has evolved and where we are now?
Omid: Yes. A lot of the original crypto ethos was this sort of libertarian, utopian tear down the institutions that every individual will hold all their assets in custody of themselves and not have to rely on intermediaries. The problem with that vision is that that’s just not what most people want, even historically. Like if you go and in the book, there’s actually a lot of this kind of history.
If you go back to the days where people relied on things like gold coins for a money and you could just have like a bag of gold coins, that was all your money. Most people chose not to do that. Most people still chose to go to some kind of bank or a money changer or even a goldsmith to protect their assets. And there are good reasons for that, right? Like they’re professionals. They have security. You don’t want to worry about losing all your money or just being kidnaped or something. And so crypto originally also had this kind of go it alone type of EFTPOS. But increasingly that’s turned out not to be what most people want. And ultimately, if you want your technology or your currency or whatever to go mainstream, you have to accommodate.
But most people want and most people want the help of some kind of a trusted, probably regulated financial institution and doing things like protecting their valuables. So whereas originally there was this like crypto was going to take down the banks and the banks were going to pull, pull crypto. Increasingly, they realized that they needed to figure out how to work together.
Buck: And. And how is that how is that been implemented so far with the big banks?
Omid: The big banks have been slow to do anything more than experiments and proof of concepts. And that’s for a couple of reasons. One is, as the among the world’s most regulated institutions, it’s just hard for them to do too much with crypto. Yet a lot of times the regulators just won’t let them. Two is the big banks are just not known for their tech savviness. Three There are aspects of this technology that will someday replace what the big a lot of what the big banks do today. That doesn’t mean we won’t need banks. It just means we need different banks. And, you know, the history of technological innovation is that a lot of incumbents are hesitant to embrace that kind of change. So there is an open question now.
I mean, I’m certain that the future of crypto is most people will access it through some kind of a financial institution, could be a bank, could be a fintech. But the open question now is, is that financial institution a JPMorgan or a city like institution? Is it a more modern fintech like a power square? Is it more a crypto native startup? Like a Coinbase, or is it possibly some company that hasn’t even been launched yet because it’s still too soon?
Buck: So what’s interesting to me, and I’ve always kind of thought there’s this tug of war between crypto, particularly Bitcoin purists and, you know, and this desire to stay outside of the system. But in many ways, what has made it grow and what has given it even the market cap that it has today is is really because of its implementation into mainstream platforms and exposure to people and easier use. And so I to your point, I think the question is like, are banks understanding that and are they what do you think that the outcome would be in terms to in terms of trying to cater to people’s desire for that, you know, that kind of technology, but still providing some level of ease of use, which is, I think one of the problems with cryptocurrency.
Omid: It absolutely is one of the biggest problems. And we’ve seen developments like when PayPal and Robinhood let people buy or trade crypto through them the same way they would stocks that just onboarded a lot of new investors or users who otherwise may not want to go through the trouble of doing the crypto purist way. And where this this is really rubber is really hitting the road is with institute actions because as you know, institutions control the vast majority of the world’s capital, whether we’re talking about pension funds, insurance companies, hedge funds, etc., and institutions often by law are not allowed to go it alone. So if you are if you and I want to own a little bit of Bitcoin, we can do what we call self-custody. We have our own wallet. We control the private key for it. And that’s fine. But a pension fund is legally not allowed to do that. I mean, who would do it right? Like we can’t have the CFO or one employee control.
So they have to they have to rely on a custodian and that custodian is going to be a bank or some kind of a bank like institution. So the one thing I think a lot of the crypto or Bitcoin purists got wrong is on the one hand, they want to, you know, Wall Street and Wall Street type firms have nothing to do with this world. On the other hand, they wanted to have their coin go up in value. Right. It’s not going to go up in value if the vast majority of the world’s capital is mechanically not able to access it.
Buck: That’s right. Let’s talk a little bit about decentralized finance, also known as Defi. Where are we with this technology? And, you know, I guess I guess, you know, part of what your book is about is architecture and trust. And I’m curious how that pertains to decentralized finance.
Omid: So I love Defi. It is one of my favorite areas because there’s some real interesting experimentation and innovation going on there. You know, finance is not an industry, but like inventing brand new things in the way that say like tech does. But in Defi, there are certain things that are possible because of the unique features of crypto and blockchain that’ll get to in a second. So it’s fascinating to watch. A lot of it does end badly. But yeah, to me that’s the birth of anything new and transformative I can. I’m sure if you go back to the early days of the auto industry, there was a lot of companies that failed and a lot of ideas that now we look back and be like, Well, that was never going to work.
That sounds crazy, but they didn’t know that back then. Someone had to try it. So we’re currently in the experimentation phase with Defi. The things that really excite me about Defi is if you set aside crypto for a second, go ask any finance nerd or professor or someone who really knows the history of the financial system and say, Well, what are the things that improve trust in financial services? They probably tell you one of the most important things is transparency. Mm hmm. And then they will probably say another one of the most important things is like whatever you can do to diminish what we call counterparty risk or settlement risk, that that’s just a fancy way of saying, like, if people just did what they promised they would do.
So if I’m buying something from you, if I deliver the money like I’m supposed to, and if you deliver the goods like you’re supposed to, then that makes for a better financial system. The problems usually happens like in 2008 with the financial crisis where people can’t live up to their promises for whatever reason. And the things that I think are cool within DEFI is there are solutions that are similar to what people are used to today.
There are bank like solutions that we don’t. They’re not banks. We call them protocols because they’re decentralized, but they’re places where like some people deposit some coin to earn interest and other people borrow it to do something. There are exchanges that are like the New York Stock Exchange or even like a Coinbase. But instead of the company facilitating between buyer and seller and you just have code doing it and with the things that are remarkable to me about it is one. The whole thing is transparent. So with these decentralized banks, if you and I wanted to right now, we could go to a website where we would know more about their financial health or just like the situation of their balance sheet than Jamie Dimon can ever know about JPMorgan. That goes the traditional financial system. The systems are very old. A lot of times they don’t talk to each other. There’s a lot of reconciliation. Defi doesn’t have these problems. So to the extent that there are things that matter, like, Oh, we want to make sure this bank is not lending too much for defi. You can just go and look and confirm. And then because you have these aforementioned smart contracts that are facilitating between lender and borrower or buyer and seller, you just have a lot more counterparty risk.
So despite Crypto’s reputation as being this like crazy Wild West ecosystem, some of which is well deserved, there are fundamental tenants of Defi that I look at and I make the case in the book that projects forward 510 years when it’s become a lot more mature and it will actually be safer than what we have from Wall Street today.
Buck: Yeah. I’m curious, though, on what you know, the other part of the defi question is that oftentimes they seem to be built on fairly volatile and arguably centralized blockchains. I mean, I think if you look at this example of what happened with I think it was Terra Luna and that ecosystem basically had some defi built on in that ecosystem, but ultimately ended up failing miserably because, you know, in a way, the founder of Terra Luna, you know, had this centralized control and and that ended up in a very bad outcome. So is that just part of being in this startup phase, in this, you know, the, you know, Pets.com in the nineties kind of thing? Or is that what’s that all about?
Omid: A lot of it is that and unfortunately, within my industry, there is this tendency to have these like cults or personality and these individuals that people think can do no wrong. Just as you and I are talking today, just in the last 24 hours, it’s come out that one of the most prominent people in crypto today, sandbag free, that is exchange attacks have done some terrible things. We don’t even know what they’ve done, but we know that they’ve done things with client coins that they should not have. And this is not defi major like exchanges like Coinbase and FDX are very much of the traditional world. They just happened to deal with crypto. And part of this issue here is that people, institutions, everyone trusted people like the founder of terror Luna, or even this founder too much.
So that goes back to that question of trust and crypto keeps sort of having to like relearned the lessons of the hard way. My hope is that that is all part of building up resilience and shaking out the bad actors and learning the real first principles even within some of the other defi projects like there are still things that happened that I just shake my head at and I’m like, Well, that’s not going to end well. But then you show a coin and it goes up and somebody people are making money. So they they sort of like suspend disbelief and then the bear market happens and everything blows up.
Buck: It’s interesting, I didn’t know about the FDX thing because that’s kind of that is a that is a potentially would be a really big problem. I mean, right. Like is he he he helped to bail out a number of the companies that got into trouble last time, I think, including Blockfi who’s that whose founder was interviewed on the show as well. And so that’s the problem I think is we’ve got, you know, this ecosystem built on the backs of shady characters. Yeah.
Omid: Yeah. And this, you know, even by crypto standards, this story is just it’s big. It’s big. And it’s hard to believe because people like the Bill Quan, the founder of Kara that you mentioned earlier. Right. He was wrong. He was really wrong. But he wasn’t disingenuous. I don’t think it was like he wasn’t. Yeah. People call that whole thing a Ponzi, but to me, a Ponzi is based on a lie. Yes. He told you exactly what he was doing the whole time. He just thought it would work and it didn’t. So he was arrogant. Right. And then people like like even the block size of the world, they just got a little carried away or they they didn’t have proper risk management and all that. What’s crazy about this story is here you have someone who just a couple of weeks ago is going out trying to take a leadership position on the importance for crypto to be regulated. Is very active in Washington, working with senators to pass legislation with one of the top donors to the last few election cycles. And while he’s out publicly doing this, it turns out that we still don’t know exactly what his firm did. But we know that the client deposits are not there. They’re not all there, which is a big no no.
Unlike Blockfi, you know, we’re not supposed to be touching client coins or language or not. So there’s almost like a riot is it’s word, but there’s like a psychopath element here that you turned out to be the exact opposite of the person you went out of your way to convince us that you were. Yeah. And and he’s a very clearly a bright fellow.
So then the question is, did you ever think you could possibly get away with that? You know what people say about Bernie Madoff, like obviously he was going to blow up at some point. Yeah, that’s the story. At least 24 hours into it.
Buck: Wow. It’ll be interesting to see how that plays out. And certainly it’ll be by the time listeners listen to this show, you’ll you’ll know more about it if you’re following cryptocurrency at all. But I did. I did wonder why everything plummeted last, but that explains that. Speaking of plummeting, there’s there’s this issue. There’s two things that I think that people sometimes don’t extricate. And one is technology and one is cryptocurrency as an investment of what? Making money off of it. Right. We’ve focused primarily on the software element of this. But why in your mind is is cryptocurrency so volatile still in terms of value?
Omid: Two reasons. One, because it’s so new, we still have no way to try to put a valuation on anything. But, you know, in any asset class, there are some generally agreed upon valuation metrics, like a price to earnings ratio or a cap rate, etc. Nobody has any clue what those would be in crypto and different cryptos are very different things, so they may require different valuation metrics and it’s not like PS or cap rates are perfect, but any investor knows they give you some kind of a groundwork like, okay, this price is too high or too low.
So that’s number one. And I think in time, smart people will figure out valuation metrics that sort of become generally accepted. Number two, because blockchain technology as financial infrastructure is so much more efficient than, say, like the New York Stock Exchange, it allows for any project to have a token or a coin that starts trading right away, even before the project actually has a product or a solution. And this is both great and terrible. It’s great because it allows the founders to raise money sooner than they might otherwise. And without having to go through like the usual time consuming classes of I got to go convince a bunch of reasons or something. On the other hand, think about a situation where if I were to open a restaurant today and I issued share that traded from my restaurant even before I opened doors, that those shares would have to be crazy volatile because like the distribution of potential outcomes from me being the next McDonald’s that they’ve gone out of business in a month, it’s all fair game. So if I go to my liquor license and I’m to share my triple because that’s going to really impact my revenue. But then if I get a bad review in the in the local paper, my shares might fall significantly. It goes for a new restaurant that’s really bad. Eventually, as that restaurant matures, then news on any given day won’t matter that much.
So I think because crypto affords any project liquidity and price discovery from day one, you’re bound to see a lot more volatility. And I think every startup is like that is just startups in the traditional world don’t have to share its trading right away. So you just don’t see the volatility.
Buck: Yeah, I mean, and my, my take has always been that you’ve really got to, you’ve got two different things in Bitcoin and then everything else, right? So Bitcoin is like digital gold and everything else is a startup software company pretty much similar.
Omid: The one difference is ultimately everything in crypto revolves around the ability to achieve some kind of sustainable network effects. So I think Bitcoin, we can say is there like there’s enough people all over the world that believe the price might go up, the price might go down, but it’s not going to disappear. Next, some of the other a few other projects like Etherium are also, I would say there and then there are all these applications, maybe a very small handful of them are there. But for everything else, it’s like, yes, software is a good way to think of it, but ultimately it has to be software that so community buys into and and produces the capital, financial, labor or whatever to sustain it and sustain its network effects. That’s always a big if. It’s a very hard thing to do, which is why I agree with the general sentiment. A lot of people have. The vast majority of coins that exist today are probably not going to make it in the long run.
Buck: Just going back to your book Re Architecture and Trust The Curse of History and the Crypto Cure for Money, Markets and platforms. First of all, it’s available everywhere, I assume. Yes, easy to get Amazon the usual players. So when you talk about Re-architect during Trust and the Curse of History, what’s the curse of history?
Omid: The curse of history is an idea that I invented that the more established any trust framework becomes, then the more somebody tries to take advantage of it or abuse it. So if you think about it in the context of money, one of the period we’re living through now is that we had these successful established currencies like the dollar, which made our central banks comfortable and printing more and more of it.
And that’s actually the history of money. Now, there have been many very successful currencies throughout the eons. None of them make it till today. And the main reason why is the issuer is like, oh, you know, everybody likes my money. Print a little bit more today and then a little bit more tomorrow and oh, war just broke out.
I mean or pandemic or with financial services. Like one of the reasons that problems like the Madoff thing happened is because people are like, oh, well, Bernie Madoff is a good guy. He’s been around forever. We can trust him. So it’s sort of this like cyclicality of trust in the long run, it always becomes self-defeating. But specifically in the example they give in the book is how it plays out with money, with things like tech platforms, social media services, banking and financial services, and a few other examples.
Buck: And the key element to the crypto cure is the element of trust.
Omid: Yes, the core thesis in the book is that if you look at the importance of trust historically and how we have as a species constantly innovated in newer and better ways to achieve trust, then there are aspects of blockchain and crypto that almost make it inevitable in being adopted for trust building and different applications.
Buck: Again, the bookRe-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms. Omid Malekan, thank you very much for being on Wealth Formula Podcast today.
Omid: Thank you for having me.
Buck: We’ll be right back.