The Democratic Nature of DeFi

perhaps even a regulator, hold fraudsters accountable. And there's a tendency to consolidate around the strongest and biggest players in the market. But in an industry so prone to spectacular scams and expensive hats, this tension is ever present, and it's getting worse. Can you simultaneously reject all forms of centralized control role and then demand help from centralized authorities in times of trouble? For more on this, I'm joined

today by Bloomberg reporter Emil Nicole. We're both in London. We're going to talk about democracy around the time that you know, UK politics are going through some interesting some interesting things in the small d democratic tradition. But today we're really going to focus on the gap between the ideological tenets that underpin certain parts of crypto and how

those things play out in reality. And specifically, you've written a lot for the Bloomberg Crypto Newsletter, to which everyone should subscribe, But you've written a lot for the Bloomber Crypto Newsletter about the tension between the theory of decentralization

and the reality of bailouts. You've written about the tension between the idea of code is law, which is that if you are a developer and you write a smart contract and that smart contract has a bug in it, and as a result, you lose all your money, tough luck. Court is law. Can you talk more about one what's so interesting about this and to how it's playing out

in this particular Crypto winter. The idea that code is law just automatically flies in the face of how we as humans live our lives and expect things to work. And that's kind of the inherent problem with crypto is

that code is kind of the primacy of everything. It's what you rely on, it's how we determine, you know, who owns what token, who sent what to wear UM And unfortunately, then when it comes to kind of the rest of the way that we would interact with money, UM, relying on that code to be your source of truth or your oracle means that you know, for example, if somebody was to hack a major play to earn crypto game for six hundred million dollars, like really actually happened

in real life, attack or stole about six hundred million dollars from a blockchain network connected to the popular Axi Infinity online game. They targeted what is known as the Ronan bridge and drained etheran USDC tokens and two transactions.

The reach wasn't discovered for six days. Who is to say whether that is stolen because all they did really in that particular instance was exploit a vulnerability in the network, which, if you take code, is the ultimate source of truth, is perfectly fine and perfectly legal according to the code, and transferred that crypto to themselves. So now according to the code, they own that crypto, it is rightfully there's

they haven't stolen it from anybody. UM. That's obviously if you take everything to the extreme level, UM, and nobody in crypto probably wants to do that. But if we are moving towards a society where everything is based upon code and never the way that we interact with all of this stuff um is kind of underpinned by that technology. That is the reality that a lot of authorities and legal play is will face is how do you counteract

what it says on the blockchain? So, before we get into why this is particularly challenging and what we are taking to call in crypto winter, when we say code, what do we mean? I always like to wonder what people picture when they think of blockchain, because well, we'll get you know, it's in the name, right blocks? Chains? Are you imagining like a room full of servers? Are you imagining an actual platform on which things can be built upon? A bit like a lego block system. I

think blockchain if it was real and physical. We thought like a tapestry where everyone has their in section and everyone can paint or add to their in section, but at the end of the days for everyone to see and everyone can visualize what's happened and what changes have you made? And I picture block chain, I think of lots and lots of chains linked to one another, kind of like those paper chains we used to make when

your children, but infinitely long. When I think about blockchain, I don't really visualize it as a as a physical thing. I'm more just consider as some sort of computer program or innovation rather than something physical that you can look at or visualize. If you have to open it up on your computer, it's a page full of rich text and lots of words. And that isn't biggause that don't mean anything to you unless you know that language. Yes,

unless you know that language, which very few of us do. Um. But obviously those are the things that actually run the way that we live our lives. Right even if we go beyond crypto, if you think about the apps that you have on your phone or the way you get to work in the morning, a lot of stuff runs on code. Um. And so when we talk about code, that's what we're talking about. It's the it's the parts of the technology systems that determine why things happen and

when they happen. The thing that refuses to set your Instagram feed the chronological order and you stop showing you suggested from people that you do and follow. For some people, they want to put more of how we live now on the blockchain and the practical implications of that are something like, you know, right, so I I have a hyphenated first name. There are times when I'm trying to book a flight or do something, I'll get it air message is like your name is not valid, and it

fills me with rage. But it's also a reflection of the the tyranny of a circumstance in which what is allowed is defined by a software engineer whose name is probably John, who does not have a hyphenated first name, or whose last name doesn't have more you know, absolutely has more than two characters, for example, and you're like, okay, fine,

that's frustrating. But if my identity were tied to a blockchain that also had inscribed in it that hyphens were not valid, like what you know, what does that mean? And I think sometimes when we talk about crypto, even on the show, it can sound like these are purely financial considerations, or these are purely abstract things, or these are just markets. But what I'm hearing from you is there is a potential for some of these concepts to

start to show up in so called real life. Yeah. So, for example, if we think about non fungible tokens and n f t s. Right now, most of us know n f T s as digital artworks. It's a board ape, it's you know, a pudgy penguin um, something that can

be easily dismissed as a gimmick. But the hopes and dreams for n f T s in the crypto industry go far beyond that, because the way that they'll make n f T is more relevant to the regular person on the street is to say, Okay, you would normally sign ten different pieces of paper to buy this house, but instead we're going to put it all on the block chain, and therefore that house will belong to you

in a verifiable way that everybody can trace. And in future that n FT can get past to the next owner and the next and there will always be a chain of a traceable chain of ownership of that house. UM whether or not there will be authorities that recognize UM that verifiable ownership. Yes, is I think one of the biggest questions at the moment around that that I think is actually one of the more interesting parts about code.

It is law because at the moment it's not just about you know whether or not you and I agree to accept that the n f T you have given me that piece of code dictates that the ownership has transferred.

And if we think about what progress is being made to determine that there's some stuff going on in the UK at the moment with the Law Commission trying to look into the how, um, how blockchain can assist in terms of rights of ownership or de facto companies that spring up around crypto projects, how those can be respected as legal entities while not really being based anywhere at all. Um And that's a bit of a headache. Let's go back to the idea of crypto winter and what's happening now.

We had, as you've said, you know, hacks, we've had scams, we've had odds, and I would say in general, even the most like die Hard, we believe in the sanctity of the software person. If they're at risk of losing five hundred million dollars, they're going to excuse me, police, or you know, some investor, please please come bail me out. And that that is absolutely one of the circumstances that we've seen. But we're also starting to see bankruptcies. We're

also starting to see companies in distress. We're starting to see people worrying about the fact that they handed their tokens over to these you know, entities or in some cases, these protocols having consequences that they weren't necessarily thinking about. When all the prices were going up. What are you observing there in your in your reporting and your conversations

with folks. One thing that has popped up a lot from investors, especially online, is saying, you know, I was prepared for my crypticurrency to go up or down in value. I was prepared to potentially lose all of the money that I've put in. What I was not prepared for was not being able to access my money. Because a lot of this the appeal of crypto is that it's decentralized, right, It's all on you. There's no middleman, there's no big brother telling you you can't do x, y and z

with your dollars um. But when crypto lenders suspend withdrawals and say, actually, we're really in trouble, so we can't handle giving your money back right now, We're going to keep hold of it, and you have to just sit there and watches the price of bitcoin goes down and you can't cash out or do anything with it um.

That's that therein lies the rub like that's where people are starting to now feel very uncomfortable about the way the industry is going and actually shows that something that previously was thought to be decentralized is pretty centralized in reality. We'll be right back with more from Emily Nicole. This is where we get into an interesting nuance, which is you've got the coda's law elements, but then you've also got not your keys not your coins. Can you talk

more about that? So not your key is not your coins is a phrase within the crypto industry that basically is exactly what I just described. It is that if you are not hosting your coins yourself in a cold wallet normally, but just something that is not stored within another entities treasury, then you don't have control over those and that's not something that everybody in crypto is aware of, particularly as we have like a massive retail investor market.

Now you probably didn't think, okay, well, if I buy some bitcoin with x y Z exchange um and I just like, you know, leave it in on that platform, that's not my bitcoin. It's so funny because when we talk about real life parallels, it's like when you buy a kindle book from Amazon, that you can actually take that book back at any time. Right, So we we do have in tech at least the idea of what you think of his ownership is really leasing. But I think a lot of people to your point, didn't think

that they were leasing their crypto from these exchanges. It's like if we if we think about the decentralization of social media, a lot of the appeal there if you listen to any of the vcs investing in these projects, is that Okay, so you have a follow a list in one place, and you want to be able to take that follow a list to another platform and it should automatically follow you if all these things are sold

on blockchain and everything's interoperable, etcetera. And you know, we're used to thinking that way a little bit more in something like you just described with books or with music like these. Yeah, if you have a Spotify account, you've spent years building up a library of playlists that are painstakingly curated. But you know that if you stop being a Spotify user, you can't take that with you. And

that's what vcs are trying to change. That's what they that's what they say they're trying, Yes, exactly, that's what they That's what they think is the major appeal here, because that's a bugbear of ale of us. Right. Whether or not they can change that is another matter, And to be honest, it goes against most of the usual ways that business work. If you were to allow people just to move things around and stop being a customer

if they wanted to um and so. But I think, as you as to your point, nobody thought that would be then the case for their cryptocurrencies as well. They didn't think that. You know, if I hold all my coins on coin base, I won't be able to take them to crack. And those are just two examples, and neither of them are suspended withdrawals. But there are now a few players that have suspended access to tokens and

people can't move them anywhere. Do you think that this current crypto winter is going to encourage more people to go like self host called wallet there like even though it's a pain, it's worth it. Or do you think people are just going to be like, none of this makes sense. I can't get my coins out if I put it on in exchange. The self hosting thing is too annoying. I'm going to put my money in a see things account on a high street bank, I'd be

slightly more skeptical. I guess in the present um, most of the players that have suspended withdrawals are still relative the niche within crypto as a whole. So the investors that would have been putting their money into platforms like Celsius or platforms like block Fire, which also suspended with drules previously, um, they would have been kind of a little bit more aware, a little bit more um discerning, as you know, how they might go about storing their

crypto in future. But as it hasn't happened to a major crypto exchange yet, most people who buy crypto are going to think, well, that looks really sucky for them, but I'm doing okay and I'll take the risk. They may not even be paying attention to the statements that they very clear that this exactly could happen to them

on on major exchange. Is if if the situation arose for the folks who have been burned by, as you rightly point out, the more esoteric parts of defy are you, are you getting any sense that there's still true believers in the court is low idea like that sort of fundamentally, even though they're like, but I also want my money back. The libertarian instinct to not be regulated, to not be

told what to do. Is that persisting. I think it's definitely persisting, at least even even if we look outside off even if you look straight at the most mainstream part of crypto, that is bitcoin, you're still seeing people shout about how bitcoin is the only monetary system that's going to work and not be you know, under the oversight of central banks and governments, the only thing that

will give you true and free liberty in your monetary system. Um. And if you then think about defy, there are still players that are offering insanely how yields without really explaining where that yield is coming from. UM. And obviously we don't yet have like real customer data on you know, has there been demand drop offs, Has there been you know, businesses having to wind down certain parts of their activities

in different jurisdictions. But what we do know is that the market is still struggling, UM and whether it will recover. I think there has been a significant knocking confidence as to whether people will continue to buy the idea that fields can be magiced out of thin air. And if you put money in the box and say this worth something, it'll it'll come out with even more wife on the other side the boxes magic. Thank you very much. Always a pleasure to have you on the pod. Thanks for

having me. You can find more of Emily's reporting on the Bloomberg Terminal, on Bloomberg dot com and on Twitter. She's at Emily J. Nicole. That's n I C O L L E. On the next episode of Bloomberg Crypto. Earlier this year, the pop music duo known as The Chain Smokers released five thousand non fungible tokens for free. These n f t s gave fans a one percent cut of the streaming royalties from their latest album, as well as priority access to concert tickets and free merchandise.

What are artists and musicians like The Chain Smokers hoping to achieve with these moves and how are fans responding? Could the decentralization of the music industry actually be upon us? For more on these questions, I'll be joined by Bloomberg reporter Ana Miller and by Justin blou CEO of Royal a decentralized music Stato. I'm Stacy Marie Ishmael and this is Bloomberg Crypto, a daily podcast from Bloomberg and I

Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Email your questions, comments, or suggestions for the show to Crypto at Bloomberg dot net and you'll find us on Twitter at Crypto. The supervising producer of Bloomberg Crypto is Vicky very Galina. Our producer is Mohammed Farup. Our associate producers Ozanam Siddiki and Moses and m Desta wonder At is our engineer. Original music by Leo Sidron