#19: The Future of Financial Populism – with Su Zhu and Hasu + transcript

In this episode, Su and I discuss the rise of WallStreetBets and financial populism. As one of the most experienced market participants I know, Su has a unique perspective on the story behind the GameStop short squeeze. We explore why he thinks it is going to end in tears for small investors, which invisible rules of the traditional financial system have been laid bare for everyone to see, and how all of this massively validates crypto and Defi going forward.

Listen to the Episode now

Transcript

Thanks to Zay for the transcript!

Hasu 0:00

Welcome to Uncommon Core, where we explore the Big Ideas in crypto from first principle. Today so when I will discuss the rise of Wallstreetbets and financial population in general, as one of the most experienced market participants I know, Su has a unique perspective on the story behind the GameStop short squeeze. We explore why he thinks it is going to end in tears for small investors, which invisible rules of the traditional financial system have been laid bare for everyone to see and why all of this massively validates crypto and DeFi going forward. Enjoy. 

Hasu 0:42

Ok Su so, Wallstreetbets. So Wallstreetbets, it was catapulted to mainstream popularity. Everyone is talking about it now, even my parents. Everyone I know is talking about it. Arguably it all started with the GameStop short squeeze that’s how it kind of permeated the media initially, then it’s kind of morphed into a almost like a culture slash financial counter movement. So what happened and why do you think it went viral?

Su Zhu 1:12

Well I think Wallstreetbets’ been around for a while right? It’s basically a subreddit that people discuss trading ideas on mainly US equities, single stock names, and  I think the idea is that on reddit itself it’s very user-driven so people just post ideas, their pseudonymous and it’s kind of community participation. Not unlike crypto right? There’s no coin for Wallstreetbets but there’s this idea that you are contributing to like a sort of an open source well of ideas and I do think that the big explosion of interest in that has been due to their main success. Which is the GameStop squeeze and that was a squeeze that one of the users there had been planning for quite some time. Michael Burry was in that as well and where they basically realise that there are some hedge funds that had been running long short equities books where the short legs had gotten very big in terms of percentage of overall shares outstanding. So, I think the success of that squeeze has been really fascinating for people and made people realise that they can source very good trading ideas and make a lot of money from just being on Reddit and just being part of that community.

Hasu 2:34

Yeah so I agree, it’s extremely similar to Crypto twitter in that sense I hadn’t been on Wallstreetbets before last week but when I joined, the similarity to Crypto twitter immediately struck me as sort of like. But talking about like how they identified this trading idea. So why GameStop? You mention that there was maybe above 100% outstanding float was short, did they like analyse a lot of companies to see which one would lend itself for a short squeeze?

Su Zhu 3:10

Yeah, I think Michael Burry had an interesting tweet a few days ago, where he said they’re can only ever be one GameStop because it was the perfect squeeze, and I think he’s right for a few reasons. I think one is that the element of surprise is important, so the idea is that people are buying a lot of calls right? They’re buying a lot of calls from dealers and they’re also they’re sort of attacking before it has ever happened to any fund. So the way the shares get moved around as well to get recalled, so that people are short have to buy back. I think there’s just that overall confluence and I think the main thing with long short equities and why it’s such a dangerous game at times is that people end up having the same positions because they all want to beat each other or at least track each other. So there’s a memetic quality to it, so kind of after Covid a lot of long short funds jumped the thesis that the brick and mortar shops would do poorly, like AMC which is a cinema company, runs theatres you know? GameStop where you buy video games at a store. But yeah there’s basically these two, kind of the big ones that people just said you know what these companies are gonna do really poorly during COVID and so their easy shorts, consensus shorts. So they become really crowded positions. On the long side they buy the internet stocks. So it’s kind of also why we saw that internet stocks kind of took a tumble while GameStop was going up because people were having to unwind their longs in order to have more collateral for their shorts. So, anyway I think GameStop, without getting into too much detail they basically executed it very well the timing of it so that the shorts they couldn’t do anything, at that time. I think also that the whole narrative around it brought a lot of fresh money to buy it and pump it up which made it obviously even more painful for the shorts, for a while so.

Hasu 5:13

Yeah and I don’t know if you know about this but GameStop it already has a huge memetic quality to it. I remember for years there being this meme where people called GameStop on the phone, their local GameStop and asked if they had a game in store called Battletoads and this game had been out of print for like a decade or something and this was a very popular internet meme by the way. I hadn’t thought about this until now but yeah. So everyone like kinda their 4chan and Reddit community was already like, GameStop was a name to them. Even if they lived outside the US like I do. Like GameStop doesn’t exist here but even I knew about GameStop and it, know that it was something that a lot people have a lot of positive and nostalgic feelings about like where you hang out at a physical store and play the latest games and so on you know? So, a lot of people try, try to connect these events with like Crypto and Bitcoin or in other words like Bitcoin Crypto people they feel very drawn to what is happening here. Why do you think that is what do you think is the connection is between the two?

Su Zhu 6:24

Well I think both come from a deep sense of financial populism. A sense that the little guy has a very hard time making money in traditional finance as it were and they see this as a chance for them to make out size gains and also for them to make gains while the big guys suffer right? More importantly, so kind of a short squeeze mentality where the hedge funds guys are finally the ones who lose money and so I think with crypto you know it’s less that the outside world is losing money but rather that it’s you know kind of us vs them mentality. Where the individual investors, the individuals that are on the internet communities are the victors and the institutions are you know, the guys with the nice suits and ties other ones who have to scramble to figure out what’s going on. So, I think there the similarities there but you know I also think there’s very important differences and I made a few tweets when the GameStop stuff was coming out kind of warning people that, you know you don’t really actually want to take on Citadel in traditional market. You don’t really actually want to do these kind of things because like because Michael Burry said GameStop is a one-off. It took years of research and months of preparation for them to pull that off and even now GameStops starting to sell off and there’s these games that Citadel can play. Their the market maker for it, they are, have exemptions to giving them a 7-day window they can still naked short they can move positions around from entity to entity and claim they covered shorts. They can basically play a long trench warfare to win right? and you know, I kind of see it as, you know the whole idea of a protest buy, where people protest the system and then buy something? I think that that’s what really fascinates the Crypto gees and the Crypto thought leaders that say you know what this is actually what Bitcoin is all about as well right? Bitcoin it is also protest buy, your protesting the fiat system and therefore by doing so not only do you do well, but you also draw attention to it and you also help engender the success of the community. So my fear with the GameStop stuff is that, they ultimately will lose that fight because that fight is still within the traditional finance system itself. Where your opponents do have all the regulators on their side, they do have all these institutions on their side which hold your shares right? Who actually holds custody over everything, who actually can lobby for rule changes. So that’s I think what scares me about the idea of another GameStop because next time they will be prepared and they will fight back very well in my opinion. So, I see that energy being much better spent in Crypto, then in the stock market.

Hasu 9:25

Oh, so much interesting stuff to unpack there. So, let’s talk about financial populism just really briefly so would you say that…my take would be the word has become so gentrified, I don’t know if that’s even the right word here? The options of people so restricted, especially now with Covid were like other forms of protest might not be viable. So has kind of what you buy like what you consume what you buy has that become the last battle line in your opinion?

Su Zhu 9:59

Yeah I think it’s always been a battle line, in some sense but you’re right that because people can’t go outside consumption has gone down and internet use has gone up and speculation has also gone up. I think that the memetic nature of money and the memetic nature of finance has never been higher. So when we talk about financial populism I think there has to be understood in the backdrop of record inequality in the states and record amounts of malcontent toward the way that COVID policies were also done. Where you had small businesses that were shut down but Walmart was left open. You had small restaurants shut down, but bigger ones are allowed to open you know? There are all these things that favor the bigger guys over the smaller guys right? And it’s to the point now were people just, you know the people who make the rules they don’t even see what’s wrong with it anymore because they just say well that just makes sense right and you see this really starkly in the structure of financial markets. Because just take a financial market right like a stock, you have a designated market maker that marker maker trades on different rules than you do, they almost pay no fees because they have high volumes they get volume discounts. They also have ability to short sell in ways that you can’t because they are the designated market maker. They also have a whole host of advantages right, maybe they can access capital at a much cheaper price, maybe they can do long short trades on a higher leverage. Whatever it is, this is kind of baked into the system and the incumbents don’t even see what’s wrong with it. They take it for granted and for the smaller guys it’s seen as a given that these guys will pay money, they will gamble they will speculate they will lose money to the market makers, they will lose money to the the professionals and so but…With that said the small guys are realising that if they, if they collectify or if they kind of can coordinate then they can accomplish big things, or so they think right? So you have GameStop and then in Crypto have DogeCoin, where Doge went extremely viral on Tik Tok and other kind of like non-traditional Crypto related mediums where DodgeCoin briefly went the top 5. Which is kind of incredible to think about, coming from where it is. So, I think that financial populism, you know it made its start in traditional finance with the idea of these with GameStop. I do see its natural home and sort of natural habitat being back in Crypto, because in Crypto right? In contrast to traditional finance, if everyone gets together and buys a coin there’s no one that can come and say you know what you actually need to sell that coin because of some rule or you can’t buy that coin you know like what we so with Robin Hood right and with GameStop where they actually forced some customers to sell because it was a margin account and they, even if the account had enough money in it they could makeup some reason why we had to sell it and also would let people buy anymore because they said it was risky to the system but it’s all a bit of opaque right and there’s always some reason that they give. But at the end of the day right, you know that the forces that be their looking for that profit and they’re looking to treat their customer as a revenue source right? So I think my hope is that that energy will transfuse will sort of  transmorph over into Crypto.

Hasu 13:54

A lot of the unhappiness with the current system kind of culminated with this, with the event of the Robin Hood disables, kind of the buying of the securities. So in some cases even unwound positions automatically and this, they claimed right that this is due to them having insufficient collateral at their clearing house, which is a valid argument but now everyone is arguing that this kind of proved that the market structure is inherently rigged against the smaller guys so I feel like I already got a clue what you’re going to say. But do you think that like very clearly that is true that the financial the traditional financial market is rigged against the small investor?

Su Zhu 14:37

I wouldn’t say it’s rigged persae, I think rigged is a tough word to prove but I think that the structure assumes certain things right? It assumes for one that if you trade more volume, you should get lower fees. It assumes that if you are a bigger participant that you can lobby for things that smaller participants can’t. You can have these host of benefits and a whole host of advantages and when you contrast that to DeFi right? Where in DeFi, no matter how big you are you’re still participating on an even playing field. You’re still having to pay the same fee and having to interact with the same smart contracts. I think that that stands in very stark contrast right? Like probably the most egregious example of where this is an assumption that would be in retail FX brokers or in retail options trading where massive amounts of flow gets internalize because people assume to the flow is dumb and if they know it often is and then they’re competing to pay for that to acquire that flow and the flow doesn’t even hit the real market right? It just gets put on the market makers books where they hope to either net it out or move the market in a way that they can then scalp out a profit.  All these things right, but then ask the question why cant these clients trade with each other?  Why can’t they match with each other? Why is that sort of internalisation even needed? And I think that DeFi is asking that question now nicely where it’s saying you know?  Can you create a system…an alternate system where people are interacting with each other directly? With each other’s liquidity and you don’t have this need for a systematic internaliser sitting in the middle that’s trading like against every client and on the opposite side of every trade? I think that these are the questions that I think DeFi will ultimately be able to solve that I think traditional finance because of the way that it’s structured it assumes certain profit motives and it assumes certain things must hold right? The investment bank for instance is known as the rightful broker dealer and you know if you’re not an Investment Bank it’s very hard to become a broker dealer. To face clients, there’s regulatory red tape that make it so that, those at the right firms that have been doing so, I mean my firm Three Arrows we used to trade a lot of foreign exchange emerging markets and NDFs. We would’ve loved to make markets to other clients but the structure of the market such that you wouldn’t even be allowed to. You know for the longest time they would ban non-bank participants from the interbank dealer market because they thought that by allowing non-banks into that market that would be extremely damaging to the banks profit margins and so as a result they sort of create this cartel right. Where they say they use regulation, they use relationships with governments and things like this to basically say, here are the things that we make money from and here’s everything else. This is the pie and within this pie you can control us but this is ours, right and I think that, this structure is inefficient and it’s also rent seeking and there’s no real value being added in my opinion. You kind of see the breakdown in some markets right where, you know like, for a long time interbank FX rates are very cheap but the rate you get when you go and convert are expensive. If you go to a teller or if you go to some place and that’s come down a lot with Revolut and things like that. Then you kind of see similar type things happening now where like in the US fixed income markets, non-bank market makers are now 80% of the volume because these are leaner firms and they don’t need to make as much money because their smaller, they don’t have as much overhead and these are incidentally some of the firm’s participating in Crypto the most as well because they kind of like the fact that it’s a level playing field they don’t need to have special benefits in order to do well in that system.

Hasu 19:15

Yeah, so Robin Hood it internalises the orders of their customers, we discussed this and actually when you just said that market makers might move stocks to scab their customers that reminded me a lot of when I read ‘Reminiscences of a Stock Operator’ a couple of months ago. With all these prop shops back in the day, where people would be encouraged to trade very high leverage so they could get immediately liquidated, like on a few ticks up or down. Of course the prop shops they would know all the liquidation points of their customers and they were just called basically their oracle. Which is kind of the big exchange or a big broker and in some larger city, and they would tell them to please move the stock there or there and then get the local customers liquidated. So do you think that, or sounded like that’s what’s still going on today?

Su Zhu 20:08

Yeah, I mean you kind of saw that we’re Steve Cohen’s tweets right where he was like, kind of goating on the longs and saying like let’s see how this fight goes or like trading’s a tough game you know? Like he was kind of, I think he for a moment there kind of slipped up and sort of said the things out loud that that shouldn’t be said. For a man in his position, I think since then he’s deleted all his tweets and so on. But look, I mean it’s a zero sum game in many respects right so, so that needs to always be remembered I think no matter how much you know lipstick on the pig you want to put on it, it’s still a zero sum game so that that kind of tell you what you need to know I think about what these firms may do or are willing to do, but I think that the problem isn’t in-and-of-itself the fact that its zero-sum. The problem in traditional finance is that the rules itself of the game are not known well and I’m not written in a way that is good for individuals right? They’re not written away that you as an individual on the internet can understand them, can reason about them, can use them to find good opportunities. You know like, I worked at a ETF options, an ETF market maker called Flow Traders. Which is on the top ETF market makers along with Jane Street and some of these other firms and you know like there is so many esoteric games that you can play with stock borrow lending, with the way you do a creation redemption, the way you do all these types of things that are incredibly esoteric probably fewer than 100 people in the world know how to do them and yet these products that are being traded are the most commonly traded products in the world. These are ETFs, these are stocks and so that kind of massive inequality of knowledge and massive inequality of access, I think is something that Crypto fundamental solves, where we’ve seen in DeFi where individuals in their teens in their parents houses can make tens of millions of dollars right. Can really understand what’s going on, can reason about it can participate in the governance of it, participate in the building up of it and so I think that’s a massive contrast that I think for me having seen both sides of the traditional finance and DeFi has actually kind of made me more reinvigorated on the idea that Crypto is the true home of financial populism and where I see that all the populism in stock markets fundamentally is going to lead to tears more likely than not. 

Hasu 23:00

And that is because people who engage in financial populism in traditional markets right now they will realise that the rules of the game are too opaque this is not the battleground that they should choose to make a stand because they can’t win and it probably will take a few, like for GameStock and a few of these others to unwind completely. Let’s actually talk about how this is going to look. How is the GameStop and the Wallstreetbets saga in traditional finance going to end for them?

Su Zhu 23:34

I think it’s a game of attrition right, so there’s these things you can do where you can you have a 7-day window to cover naked shorts. You can basically hope that the flow, that basically the longs can’t keep up the battle right? That they get bored as the price goes down people get bored they sell it they move onto something else. There’s going to be a lot of like counter intelligence where they try to get these communities to be weaker but in general like,  people yes some people are in GME for the the protest but a lot are in for the pump right? So if they hold it for a day it’s not going anywhere goes down 20% there just going to dump it and move on and you know, at this price you do like. Some of the guys are in it for $5, $10 you know it’s very Crypto like in that sense so you have early adopters of the GameStop thesis, you know if they want to actually get out and crystallize their you know 40x they have to sell right and so they’re also going to be jumping on the so-called protest buys. So you know you have this situation where the shorts, yes they are short a lot of the company. But if they play their cards right, they can keep rolling it for some time and if the momentum dies off then it’s very difficult actually to ultimately win in that and you kind of need the management of the company to be on the side of the of the small shareholders. Think about this right, let’s say you and I start a company, we list it and then people try to squeeze our company to the moon right? You and I might say why don’t we issue more shares yeah? Why don’t we do an initial share offering right? Why don’t we just even give ourselves stock stock options? Then we exercise them, now we have stocks now we dump our sticks right? So you know that’s the problem of using stocks as a store of value or using stocks as Crypto. Its actually it’s the direction of the company is not up to the holders of its stock it’s up to the management and that is in power right?

Hasu 25:44

How long does it take to issue new stock? Or write a new stock, option?

Su Zhu 25:48

It can be done in a day right? I mean…

Hasu 25:50

Oh really?

Su Zhu 25:51

It can be done really fast. So, like there’s all sorts of game theory that you know, like if you’re Citadel maybe you can talk with management get them to agree that you know give them a split of the profits you can do all these games right? And I would not think that it’s a game that Citadel would want to lose either put it that way. So, I think there is a good tweet threat today, someone posted where he said that, like Citadel is already up money net from GameStop, just from all the volume, from the back and forth, they’ve already made so much from the float that they’re net up ok? That’s pretty shocking if you think about it, but they’re already net up. Point 72 is definitely down a lot, because they simply invested in Melvin before the squeeze. They kind of caught the whole loss on the way up and they’re also not the market maker on it. So, but it’s kind of, it’s kind of like you know these guys will protect their own because they’ll say look this is my turf and my game is long short equities and I can’t just you know be squeezed like this willy-nilly so they’re going to make a stand here. They’re kind of not going to take it lying down so I think that whole reality is something that is going start to set in for the idea of financial populism in stocks and also if you look at the standard of discourse now on Wallstreetbets talking about this it’s not, it’s not that high. If you look at, you know the guys going at $5 who started the squeeze they’re all obviously very smart. But a lot of them have now exited too right? So, there’s a Korean fund that announced that you know they made a billion dollars on Game Stop right? This is not an individual, these are not people right? This is a, this is like another financial company betting against something else. Like AMC as well, I saw like Silverlake announced that they sold all their AMC right? Like there’s convertible notes, people who are long are like you know, hybrid fixed income notes where they get to have stocks if the stock price goes high enough they go in the money and they exercise meaning that they started getting shares. Shares start coming out of nowhere and start being able to be dumped on people so you know there’s all these ways that shares can be created, there’s all these ways that shares already exist from people that are incentivize to sell. So it’s not all at all like Crypto where you know if you buy Doge the beauty of Doge is that it’s a pure meme, it’s tokenized meme like there’s nobody there’s nobody sitting around with like Doge options, where if the price goes high enough suddenly they have a lot more Doge, that person doesn’t exist right?

Hasu 28:27

Probably a lot of people have like huge amounts of Doge lying around that they just don’t care about because it’s not worth very much and you know but when it pumps and lot of the supply will maybe activate? I don’t know.

Su Zhu 28:41

Yeah, but it’s still the fundamentally it’s different because no one is expecting it to be something other than a meme or other than a kind of like a buyer Crypto concept. So, I think that the whole crypto-ization of stocks idea that’s kind of where it ultimately breaks down because stocks are still actually stocks they’re still percentage ownership of a company and those have rights and some people have more rights than you do right? They may have management rights, they may have preference, they have a higher-class of shares than you. So there’s all these kind of like it’s actually it’s more like you’re buying a share of a Dow and and you don’t have decidability on this Dow either so, you know. You don’t actually own as much as you think you do and you don’t control the narrative as much as you think you do.

Hasu 29:26

So, you said that the most likely way that GME’s going to unwind is from the narrative dying down. So do you think that actually these squeezes and Silver and Doge that they are kind of manufactured narratives in order to distract people from, from GME and some of the earlier stock squeezes kind of spread the capital over more bets?

Su Zhu 29:52

Tough to answer that question, but I will say that the whole financial system does not want the WallStreetBets people to win on GameStop right? Because a lot of these funds who are short GameStop they’re also long everyone’s favourite companies their long Facebook, Apple, Amazon, Netflix, Google right? So,  you know yesterday, Monday the stock market went up a lot as GameStop fell because people they got calmer about systemic risk as GameStop fell. You know GameStop went to $10,000, there’s a lot of holes in everyone’s balance sheet right? Because now like everyone has to pay these GameStop long’s out for huge amounts of money right and so that, you kind of tried a break, it’s almost like counting cards against the casino’s the way I would say it. Is like, yeah you can be the best card counter in the world but you’re still playing in a casino you still need them to pay you out right? There’s some world’s where that wouldn’t even get paid out like the US maybe is like probably not a thuggish country, but if you do the same trade-in like Argentina or you did the same trade-in Brazil or in like some parts of Asia like no one’s going to pay you out right? They’re just going to say ‘it’s a cool story that you did here’. ‘You have nothing now I have zero’ed out  your account you have nothing.’ You know ? And you were doing market manipulation and they’ll throw you in jail as well. So, I think that the US probably not, that stuff can’t happen in the same way. But the idea that the whole financial system will kind of you know, allow this to get paid out in a huge way. That is a very tough battle it is actually tougher than the battle of hyper-monetizing Bitcoin even in my opinion.

Hasu 31:37

Um, that’s something that I didn’t really realise until now, is that how you can layover what happens on Crypto Twitter or WallStreetBets over traditional finance media as well. Like everyone is shilling their favourite coin on Crypto Twitter and like, very blatant ways right it’s like the only goal is to kind of manipulate the market or kind of coordinate people on betting on the same thing right and then squeezing everyone else who’s not in it and triggering the fomo. But that is exactly what all those large fund managers do by going on CNBC right?

Su Zhu 32:14

It’s the same thing!

Hasu 32:15

Right? Once you see it you cannot unsee it then they are just a Twitter talking heads who manipulate the market and extremely obvious ways.

Su Zhu 32:23

Certainly

Hasu 32:24

Yeah, ok so we’ve established that traditional finance is not the right battleground for financial populism to win right? They can fight a few battles there, but hopefully in order only to realise that this is not this is not the right battlefield right? So, let’s talk about Crypto and something that I thought was super interesting that you said earlier is that the smaller guys are realising that they have to coordinate with each other right? They have to form a collective and that’s how they can get some of the benefits that the big guys get right? Um, and the way I think about Crypto and always have is that Crypto is also in itself a coordination mechanism right? So like you, it would be impossible for people to monetize new form of money like from the bottom up for example right like Bitcoin because how do we how do we agree on what money to use for that right? There are so many options and the problem is also like the way that kind of I see Bitcoin solves this is, it gives people an incentive, financial incentive to bet on the right thing because they can get in early and the earlier they get in the more they can win right? So, it’s actually like a famous story that kind of Wei Dai its the famous cryptographer the inventor of B Money and he wrote to, so he didn’t, Satoshi wrote him an email telling him about Bitcoin and Wei Dai didn’t take it seriously and didnt respond and then years later he came up with like micro graphs and Bitcoin is like a blown opportunity and if I could turn back time I would do it and I would tell Satoshi to make the Bitcoin a stablecoin right? Because the fact that Bitcoin is fixed supply makes it like completely unworkable and pointless but I lack. In my view the fact that Bitcoin is fixed by floating against everything else that’s it makes it the big Innovation because that’s what creates this coordination mechanism were people are actually incentivised to all buy the same thing and that’s what allows it to monetize in bottom up way and yeah the same in my opinion applies to DeFi, so let’s talk about that.

Su Zhu 34:39

Yeah I think you’re absolutely right right? I mean the coordination effects of Bitcoin are so powerful that if every Bitcoin holder in the world says they will be BTC denominated they’ll put all their fiat gains back into BTC. Then even with no new people coming in the price will almost certainly go up because at any given point the dollar value of the fiat earnings of existing BTC holders is far higher than mining supply, than mining emissions right? So as long as they buy up enough that they have enough fiat earnings relative to the fiat cost of the system. The price will keep going higher an higher, so that kind of short squeeze on the world effect makes people say ok well do I also join this game and do I also by joining it also become wealthy with these people right? And so that’s why like you’re absolutely right, like if you didn’t have that mechanism whereby getting in early you benefit from evangelizing it and from being a part of it then you would never have that option right? So, I think with DeFi, with governance tokens, with farming early farming participation you know, people also fundamentally respect the work that has been done by people right? When people first learn about crypto don’t quite understand, like why do you need proof of work? That seems wasteful, or why do you need to give the early adopters of a DeFi coin like a lot of the supply? Well it’s because how else do you give it in a way that anyone can compete for it’s pseudonymously anonymously? How do you give it away in a way such that like the whole world will think of it after it’s done as like the fairest possible way? Right? So if you give it all to yourself, so they give it all to yourself then people say well that’s that may still be ok but how are you then going to give it away? and how fast we give it away right? So that would, kind of the foundation model. But if you were able start from scratch and say you know you tried to give as much as possible to the users or to the people that invest real work into it, then suddenly you have this element of people saying ok so this is something that is actually fair it is not like traditional finance it is not like something where you and I would have no control over how many dollars get printed or how many you know? Who gets printed where did the dollars go? You know, where does fiscal stimulus go? You know, you could ask the basic question, why is stimulus given to people as thousand dollars? $2,000 why it cash? Why is it not a credit to your medical bill or just some other bill? You know, there’s all these ways you could do it, but sometimes you have no control over how that’s done and so I think in Crypto you and in DeFi, you have very much that user governance direct link where the users are the same people as the owners so that user owner combination I think is uniquely enabled by Crypto and I think this is actually the even more so than the technological paradigm or the money paradigm it’s a societal paradigm, right? Where you really haven’t been able to have user owner before this.

Hasu 38:10

I would broadly classify, kind of our current societal structure as market capitalism. Do you think that what DeFi ushers in is, or like Crypto in general ushers in this era of decentralized that works with fair an observable and unchangeable rules. Do you think that ushers in a new general societal paradigm that is like distinct from market capitalism? or like how do you think about that?

Su Zhu 38:35

Yeah I think it’s distinct in a few ways, I think it’s distinct in a way I almost see it as the answer to the question of what are these big tech companies doing if they can never really earn a profit but they have all this mindshare and have all this network effect right? Because you could broadly say that 2010s are about big tech right? As much as Crypto grew and was born in the 2010s it was really a decade of big tech right? Facebook, Amazon, Apple, Netflix, Google, these type of firms and I think that the 2020s will be about Crypto because Crypto has some of the answers to the questions of what do you do if something is very useful but the company can’t make much money out of it if it was run as a company? Right? Like, Linux open source this kind of spirit of something that is very useful but who contributes to it? Who keeps it going? How do users claim the value from it right? And when you think about Wikipedia, Linux, some of the earlier power users, all that. They did that of their own volition right, they did that out of passion right and you know saints and martyrs that they are, we now have a way to incentivize participation in these open-source endeavours and more importantly make them powerful enough that they can serve, they can not only surpass what traditional finance can offer in terms of utility but they can far exceed it because of the way that their governed, their costs can be lower you can participate as a market maker from day one. You can you can be on both sides of the trade, you can kind of be like you can be you can basically rewrite the rules of how peer-to-peer finance works, how peer-to-community community finance works. So, I think that that’s the the whole blank slate I wouldn’t call it a contrast of market capitalism necessarily because capitalism itself is very hard to define really but I think it’s a big contrast to the idea of the dealer-to-client or company-to-user and that kind of divide. I think that divide ultimately will not be the way that the internet structure of finance or of companies in general that are internet native I don’t think that will be either structure.

Hasu 41:16 

I agree, I agree. I think that in the 2010s we saw the incredible power of networks unleashed right? That networks eat everything right? and if you’re only bet on that thesis then you would have done incredibly well right? But Crypto it combines this with I think two important innovations and the first is that you kind of have the unchangeable rules right? Like you can make networks that are like truly neutral right? That someone can amass a lot of power in these networks and still not be able to change the rules and thats part like due to the innovation of like kind of the decentralised consensus process of these things right, they rely on a theory of Bitcoin, and the second is like digital value right and the way that we can use this to create incentives for people and I think we see this with Bitcoin, Bitcoin is itself like an enormous economic innovation kind of creating is coordination mechanism, but we see this like the innovation of Bitcoin taking to something like DeFi, we’re also people can like completely they can make up a coin that has no value today but the promise of that coin is that it will be valuable when the network like for example two sided market for whatever lending and borrowing becomes useful and I think it’ll be useful so it is in itself a form of equity right same as Bitcoin is a form of equity in kind of the Bitcoin network and that’s what allows these things to bootstrap themselves in a way that we have never seen before, before Crypto right and I think we are at the kind of the verge of it’s almost like the early days of the internet in that sense it’s a completely new paradigm and we have these two innovations incredible neutrality and kind of permissionless financial incentives and I think in combination with the network paradigm of the 2010s I think that it’s very hard to imagine what kind of like how it will this just disrupt the world as we know it.

Su Zhu 43:36

Yeah, and I think that it’s not a coincidence to that sort of coinciding with the Robin Hood stuff you’ve seen a wave of non-crypto venture and non-crypto fintech investors really all start to wake up DeFi, I mean part of it is guys like Naval talking for extended periods of time on clubhouse and introducing investors to this kind of idea but I think it’s also that people are you know the traditional finance fintech system is their kind of running up against limits right there that kind of the users are sort of breaking through the simulation. Where their saying, hey we we realise that this is not actually free that we are actually you know the product and we are actually harvested for gains and so their imagining a better system they’re also imagining themselves as the owners, small as they are and I think that energy has nowhere to go except for Crypto and I think investors now when they look at the fintech space, starting from the seed prospective it suddenly now looks far appealing to seed a DeFi projects than it does to seed the fintech project because fintech, not only are you not competing with the banks and competing with the incumbent but now you’re also competing with Crypto to offer the same thing and you also competing to figure out what your revenue model maybe and what you’re you know market fit maybe and so that whole pressure, I think people have always known that traditional finance is very inefficient that there wasted is disruptive it but everything seems always like 2x better or 3x better or 5x better right because it’s still operating in the same rail. So instead of you know Citadel market making on that, it’s market making direct to client via the broker it’s doing this very like at the end of the day it’s still the same 3 firms at the end of it it’s the same market structure and I think now market structure is getting seriously questioned by the users and therefore also by the investors in these kind of trends and that energy will only continue as long as people continue to question, what should be the role of the individual in financial markets? Is it to be the profit, the revenue of a large professional firm? or is it something else, right? Is it something different all together ? That question is in my opinion the real question is an internet user, talking about Web 3 pieces of crypto, is an internet user fundamental someone using free to play products but who is essentially harvested in a sort of rather insidious way via his attention as well as via his identity and via his overall being his over a content right? Is that the structure of the internet that people ultimately want? Or is that, because that’s not that’s not  written in stone right? This is how it’s been so far but it doesn’t it may not be how it is in the future, you know?  There is, would the WhatApp, I think there’s so much social competence around Crypto will you have the WhatsApp privacy stuff where you have you know tones of users going to Signal going to Telegram and saying you know I now question how I use the internet I don’t just use the dumbest the easiest thing. I question how I might want to use it in the future and people also underestimate to that, we now have a very internet native sophisticated generation right? Below the millennials, the zoomers and these people are already question how societies run just by their very nature and they will be very interested in creating it in their own you know in their own image so just as sort of working in banking became very popular until 2007 then you have a great financial crash and then after that Silicon Valley and tech companies big tech became very popular you now see a big migration out of big tech from talent it’s now seen as if you work at Google for 2 years or 3 years like, the longer you stay there’s almost stigma that’s coming again where they’re saying like why aren’t you in Crypto or why arn’t you doing something that you really care about and I kind of see Crypto as that kind of outlet for this mass generation of talent who’s interested in both finance and technology.

Hasu 48:01

Yeah, I agree. It’s almost like, I’ve talk to a couple people over the years and got the impression that especially working at somewhere like Google will you spend like months getting people to click 0.1% more on one button like to harvest their attention even better. I think that has risen very very rapidly to one of the most soul sucking jobs in the entire world and people don’t stay very long and I think, I think it’s most people still underestimate the ability and willingness for young people to re-write the world as you say in their image and I agree very strongly that all roads all roads lead to Crypto.

Su Zhu 48:45

Absolutely.