← Animal Spirits Podcast
Loading summary
Transcript51 lines
- [00:00]
Michael Batnik
Today's Animal Spirits Talk. Your book is brought to you by Chainlink. Go to Chain Link to learn more about how Chainlink is trying to create the industry standard platform for capital markets on chain and power the majority of decentralized finance. That's Chain Link. To learn more.
- [00:17]
Ben Carlson
Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Red Holtz, Wealth Management Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Britholtz Wealth Management may maintain positions in the securities discussed in this podcast.
- [00:47]
Michael Batnik
Welcome to Animal Spirits with Michael and Ben. Michael, I think we found the use case for crypto potentially. I think the traditional finance people. We've talked to a handful of people who've made the shift from tradfi which is a word I just don't like. I don't know why trad fi doesn't do it for me, but traditional finance into crypto. And those conversations are usually around people who understand it from the Rails perspective. Right. Like how the financial system works. The stuff that we usually don't see, the plumbing, as they say. Right. So it's the transactions. It's the cost of transactions, is the speed of transactions. And the whole idea is that the blockchain technology and crypto can help make those things more cost effective, more efficient and faster.
- [01:28]
That's it.
- [01:29]
I think that's the hope. Right?
- [01:31]
I want to say that's it. I mean, that's everything. It's the whole thing.
- [01:35]
Yeah. And the financial system is obviously huge.
- [01:37]
We're due for like a Windows upgrade.
- [01:38]
Ryan Leavelle
Right.
- [01:39]
Michael Batnik
That's what it seems like. Getting from here to there is obviously the hard part, that no one knows about the timing of it, obviously. Today we talked to Ryan Leavelle. Ryan is the director of capital markets at Chainlink Labs. And Chainlink is essentially trying to do this. They're trying to take all these other blockchains, how many of them there are, and bring them together and be like the middleman, for lack of better term, to like make all these rails happen. And we're still at the early innings because they're still figuring out all the regulation behind this. The rules are being written as we speak. But I think Ryan, who actually comes from Vanguard, is an interesting person to talk about this stuff because he. He's worked in the plumbing for. For his career. So here's our talk with Ryan Lovell from Chainlink.
- [02:23]
Ryan, welcome to the show.
- [02:24]
Ryan Leavelle
Pleasure to be here.
- [02:25]
Michael Batnik
Pleasure is ours. So let's start here. Before we get into Chainlink and the Oracle and the tokens and the stables and the all this good stuff, I want to learn about you, Ryan, because I can't imagine that there are dozens, forget about hundreds of former Vanguard employees that, that now work in the crypto industry. So I would love to know your origin story. How did you get. Is it red pill? Is that what they say? It's the red pill, right?
- [02:58]
Ryan Leavelle
Just remember in this, in 1975, Bogle did have a disruptive idea, right? It did get very boring because everyone else just copied it. And, you know, passive, you know, passive indexing took over the world. But it really starts from a point of, like, curiosity on how markets work and how the plumbing of market works. And I think that if you've just interacted with, like, a brokerage platform, there's like this smooth surface that you think this is how things occur. I click button stock appears on the website. I click button mutual fund appears in my account. But there's obviously this iceberg under the ocean, which is the plumbing. And at Vanguard, I worked more on the institutional custom side. So a large client would come in and they'd say, I want nothing off the shelf. But I won something crazy like a custom stable value fund or like a custom separately managed account. And the team was that I was on managed all of that like soup to nuts. So I really got to understand just, you know, settlement systems, clearing systems, custody systems. And then the very moment that you learn how these things work, it kind of naturally leads you to this technology. So started to get into this technology around 2017, 2018, and then during COVID when kind of like this giant wave of, shall we say, like, institutions started to dip their toes into this space. It was almost like it was like it was safe. Now, like, this is not going away. Like, people are starting to invest. Large entities are going to start, like, talking about it. So I made the shift four years ago to come from Vanguard directly over to Chainlink. So it's been a wild ride.
- [05:06]
Michael Batnik
So we have the biggest, deepest, most liquid financial markets in the world. So obviously we're doing something right. But obviously there's ways to improve that. So maybe you could start by talking about, like, what do we do right here with the plumbing of the financial system and what do we need to improve upon?
- [05:20]
Ryan Leavelle
So I think, like, what we did right was react to what happened in the late 60s which was, it was all paper and paper crisis occurred and the infrastructure couldn't handle all of this processing of paper at the same time. Technology. The NASDAQ just started. I think like what we did right was like d dematerialize paper into essentially database technology. Right. What, what really hasn't happened is that same technology that's been in place since 1975 hasn't really changed. So it's still end of day batch based. You're still buying essentially like static things, just entries at a database. And I think that in the same way that you're thinking about this from like a foundational infrastructure perspective, this would be the moment of like what I feel like going from wood to steel. It's just a better material to build financial market structure out of. That takes us from like the paper era to the database era into now where we're entering the blockchain based era.
- [06:41]
Michael Batnik
So I am experiencing the wood. I moved money into my brokerage account on Tuesday of last week and I needed to move it back and it didn't settle until today. It's like, I don't know if it's eight or nine business days and it's like outrageous. How is this possible?
- [07:05]
Ryan Leavelle
It's crazy, right? Because it goes back to plumbing. Are you guys familiar with like the ACH system?
- [07:10]
Michael Batnik
No. I mean, I used it. I used ach. But tell me why it's such a piece of garbage.
- [07:16]
Ryan Leavelle
The ACH system is essentially, there's no confirmation that the payment has actually received the destination. So it's simply a file which is a set of instructions which is telling an originating institution send money from Ryan's institution to Michael's institution. But Michael's institution never tells Ryan's institution that you've gotten the money. So you kind of just send it. And the reason it takes three to five days is because if there's any issues, there needs to be like a timing lag to figure out why Michael's institution never received the money. Because there's no positive confirmation, which is simply just old plumbing, end of day batch based cycles, no instant settlement. But more importantly, there's no confirmation. The system is not sending another system a confirmation back that your money is there. Which is kind of crazy in this, in this day and age, I guess like the wire.
- [08:23]
Michael Batnik
The wire fixes this. I could have just paid 25 bucks and have done it that way, which I guess I'll do going forward. But nevertheless, I know a lot of things are still ACH based. So super annoying there. What is it about Chainlink that got you excited because there's all sorts of different technologies in the space. What is it that's unique about chainlink that you said, I want to go spend my life building there?
- [08:47]
Ryan Leavelle
Yeah, for sure. In the 2017, 2018, 2019 era, there was this belief that. That there was going to be like one or two blockchains, and that was it. Right. It was like there was going to be like a private blockchain for institutions and then a public blockchain for, you know, defi or more crypto natives. The opposite has happened. And I was kind of early on in seeing this, which is that in. In the same way that, like, the database industry, it became, like, cheaper to create a database, faster and efficient to create a database, it's become faster and efficient to create a blockchain. So there's so much fragmentation out there in different blockchains. And to weigh that decision, I wanted to be in a place that's completely neutral and agnostic to the different blockchains that kind of sits as like an orchestration layer that helps all of these blockchains talk to one another. So that was really exciting for me is you're not taking, like, an individual bet that Ethereum is going to win or Solana is going to win. You're taking a bet that, like, the whole ecosystem is going to win. Because chainlink really sits as, like, the neutral kind of connective tissue that kind of makes all this work at scale.
- [10:12]
Michael Batnik
So the one thing people have been saying that crypto skeptics have been saying for years is, show me the use case, right? Show me what it is. And I think what you're saying is the plumbing is the use case. Is that fair? Right. We can rewrite the whole plumbing. Now. What's the bottleneck here? Is it just the legacy financial system and the inertia? And, hey, we do it this way because we've always done it this way. What are you running up against? What's the brick wall you're running up against that's going to make this hard to do? Because I assume that this is not going to be easy to. To totally transform the plumbing like this.
- [10:44]
Ryan Leavelle
I think what we've seen is, like, different phases where there's been institutional toe dipping and they're waiting on things like regulatory clarity. But since all of that has changed now, a lot of these institutions are opening up their existing infrastructure for settlement trading, utility on the different public blockchains. And this is just going to take more time than I think we originally hoped, because a Lot of this foundational kind of clarity has only come in in the past couple months or so and even clarity act is coming. So, so there, there was almost a risk Ben, in like you could have put a lot of investment in a certain type of application but without clarity you've, you may have had run the risk of like just tearing the whole thing down because you couldn't do it. And I think that that's been like foundational in what's holding back adoption.
- [11:44]
Michael Batnik
So the one thing I've heard that like the best case, best use case for this or the best like the pro argument for this is listen, call it what you want. I don't know if it's 1% fee extraction or 2, whatever the financial system takes out of everyone else. Right. I don't know what the actual number is, that if we did this, we can kind of eliminate the majority of those fees. So my question is, what's the incentive for the big banks to go along with this? Are they going to have to be pulled kicking and screaming into this?
- [12:11]
Ryan Leavelle
Think about this. With the iPhone launched, and I love analogies, so we'll use analogies, banks didn't think we need to rebuild our entire infrastructure for mobile. They thought we need a mobile app, a thin interface layer on top of existing systems. But look what happened like over time mobile became like the primary interface for most customers. So the banks that won weren't those with like the best app skins. They were the ones who like re architected around like mobile first experiences. Venmo Cash app, Robinhood, they didn't like port desktop experiences to like the iPhone they built from scratch. So I think to answer your specific question, if you aren't thinking about how to service the wallet in the same way that you may have not been thinking about servicing the iPhone, there are competitors out there with licenses that have like ATS licenses that have transfer agent licenses. I think the Fed, you know, has been more open around opening up potentially like the master account to different types of stablecoin issuers. You can't ignore these, these competitors anymore. Like, and I don't think like you can ignore it and say, well let me pull you back into my, my legacy Rails. I think the competitive forces of like the new emerging fintechs, very similar to the fintechs that won the mobile revolution, are competitive forces.
- [13:54]
Michael Batnik
It's kind of like Robinhood, they did $0 trading. All these other firms had to go along with it because guess what, you had to. Right?
- [14:00]
Ryan Leavelle
Yeah. And I think both of you guys know this we're sitting kind of at the impetus of, like, the largest wealth transfer the world has ever seen coming up in the next five to 10 years. And it's like, okay, if the average age of an investor at Vanguard or BlackRock or Fidelity is 65 to 75, and they're used to this, like, static, set it and forget it. My financial advisors got it in the 60 40, like, Benjamin Graham model portfolio. They're going to be in for a rude awakening if that gets passed down and someone's like, well, I'm going to transfer this to Robinhood and all of my financial services. And the experiences I am, are, are, are there. That's a reality of just how things could shake out over the next, you know, 5, 10, 15 years.
- [14:54]
Michael Batnik
Let's talk about a headline that we got last week. This is the Wall Street Journal. The New York Stock Exchange said Monday that it was developing a platform for trading tokenized securities, putting the heft of the 233-year-old exchange behind Wall Street's growing embrace of the technology behind Bitcoin. All right, my first question is this. What is the benefit to tokenized securities that trade 24. 7?
- [15:24]
Ryan Leavelle
So I think 24. 7 is a feature, right? And I'm going to go back to the wood to steel analogy. The biggest benefit is not necessarily cost savings, operational efficiency, settlement times. Those things, like, really matter. But when you think about it, as in the lens of, like, programmability and composability, that's where the real benefits come through. So, like on chain assets are different because they're software objects that interact with other software objects. Let me give you an example. A tokenized treasury bill could simultaneously serve as collateral for a loan, earn yield, be fractionalized all through smart contracts that execute automatically. So let's use, like, another analogy, right? So, but before Spotify, right, you bought albums. They were discrete static bundles. If you wanted songs from 10 artists, you bought 10 albums. The music was trapped in a container, a CD. After Spotify, music became easily composable at a user level. So individual tracks flow into playlists, algorithmically generated mixes, social sharing. Like, the platform learns your preferences. Like, music became programmable, like at a user level. So when you think of the outcome of all of this tokenization, instead of buying like a mutual fund or an individual stock, hence the static bundle, you're buying this dynamic thing that can respond in real time. So things become massively flexible because of the programmability and composability of the asset. And I think the fund managers have the most to Gain here because going back to my Vanguard days to set up a new fund, it had to be scalable, it had to be like. Because the cost of setting up a new fund and composing it in a static way had to meet the needs of like let's say 50,000 people if you get faster, more composable, flexible infrastructure. And Michael may want his own custom fund and his advisor wants his own custom fund and Ben wants his own custom fund. The very moment you can spin those things up, there needs to be proper liquidity venues that can cater to that type of format. That is like what the New York Stock Exchange and a lot of these other exchanges see is like there are service providers that just have to have that capability otherwise they may miss the boat on, you know, who is an execution venue that could be, you know, front running kind of the future of what that could look like.
- [18:19]
Michael Batnik
So where does chainlink sit on this whole thing? Like what is it that you guys do? What are you trying to facilitate? Like where do you sit in this whole process?
- [18:26]
Ryan Leavelle
Think of chainlink as a global standard on how to get data into out of blockchains as well as how to connect chains with each other so that the transactions that occur on the New York Stock Exchange can work in like a secure, reliable, compliant way. So so far our system has processed and enabled over 27 trillion in US transactional value. We're very widely adopted in DeFi, but now we're becoming more widely adopted in capital markets. We work a lot with these firms already. We work with Swift, dtcc, JP Morgan, ubs. So think of this as connective tissue.
- [19:11]
Michael Batnik
All right, so getting back to the tokenized stuff that NYSE is doing and presumably others will follow suit. What do you think this means for the end investor? Is there going to be 36 different wallets or is this going to be integrated at the custodial level? Like how do you think people are going to interact with these tokenized securities?
- [19:29]
Ryan Leavelle
The biggest benefit to the investor is really just that composability. And I think for the first time you're going to have optionality on if you want to do self custody or rely on a custodian, something that just hasn't been available in the system so far because I think that there's two worlds. There's compliant capital and I'm sure Michael and Ben, you're Both familiar with DeFi, there's non compliant capital. So in the non compliant capital world you have the permissionless innovation that's occurring in DeFi. You can clear trades at A market setting price that a protocol determines. It's called an amm. You have a peer to peer borrowing and lending protocol where you don't necessarily need a bank to do that. It's called aave. So what we're trying to really do at Chainlink is merge both of those worlds into a way to do that in a secure and compliant way so that the investor of the future all of a sudden now has optionality into self custody and directly interacting with a lot of this permissionless innovation which is brand new for the industry in a compliant way. Which means kyc, aml. Who am I interacting with? Is that secure? How am I getting yield? Is that compliant yield? We're kind of sitting in between of like how do you merge these, these two worlds of like non compliant to compliant to create like brand new products?
- [21:22]
Michael Batnik
Is the hope that people will be using blockchains but they won't really even notice?
- [21:26]
Ryan Leavelle
Exactly. Yeah, yeah.
- [21:28]
Michael Batnik
Is that the, is that the best case scenario where you're, you're using all these, this new technology and it's faster and maybe you're getting a yield and you're able to borrow against it plus but most people, it's just, it's just a line item on their screen and they don't even, can't even tell they're using it.
- [21:38]
Ryan Leavelle
You're exactly right. Like, like the Robin Hood ux. We're not going to disrupt that. That is extremely mature and very good. What you do have now though is okay, I have options on a yield strategy. What is your yield strategy? Do I have a, like, like say interest rates come down back to zero again.
- [21:58]
Michael Batnik
Right.
- [21:58]
Ryan Leavelle
Which you know, may or may not happen. All of a sudden people are going to say where am I going to get yield from with 0% interest rates? Okay. There's protocols out there that are facilitating yield from user to user interactions. But to get to those applications it's kind of complicated. You got to use a wallet, you got to manage private key, you got to sign transactions. I think that's where we're headed in the future is like a lot of these existing platforms and user experiences and this is a lot of what Chainlink does today is we abstract a lot of this complexity so those platforms can interact with these applications. Is that you say hey, let me adjust the slider here. If we have a 0% SOFR, maybe I want to go out the risk curve to 4%. Okay, which approved protocols can we deploy? Your capital XYZ, I have $10,000. Deploy that in those three, three different applications and give me a yield bearing instrument that I wouldn't have had before because now I can interact with defi protocols that can give me yield in a 0% market environment without actually having to know and knowledge. But these platforms need help, these brokerage platforms need help in validating like who are your blue chip applications? Like how is that yield being generated? And this also goes into the regulatory environment as well. I think you're exactly right in kind of like a long winded answer and saying like it's the exact, like it's going to be all abstracted away. You're not going to know you're, you're interacting with the blockchain. I think there are advanced users who want to do that. Like if you're a hardcore user and like you know you, you believe in, you should keep your money under your mattress. So this is like a new way of doing this where it's like I self custody stablecoins now is like the new kind of like money under the mattress. So yeah, there's going to be different levels of, you know, users. But all in all I'm pretty excited about where we're headed and hopefully you guys are too.
- [24:02]
Michael Batnik
This future. Well, we'll see. I'm just kidding. This, this future that you're describing. No, I, I am very excited to not have to wait eight business days for, for my money to be my money. This, this future that we're describing. Do you think this is 12 to 18 months away? Is this like five or 15 years away? Like what's your best guess?
- [24:23]
Ryan Leavelle
So my best guess is that right now you have 300 billion in stable coins by all intensive purposes compared to like an asset manager. That's not, that's not that massive amount of money. So they settle quadrillion dollars, bring those assets on chain. I think what you're going to see in the next 12 to 18 months is foundational infrastructure which is like the first or second inning in figuring out how do we get equities on chain, how do we get equities to interact with stablecoins? How do on chain applications adhere to existing security laws such as national, national best bid, best offer. I think you're going to see a lot of the large qualified custodians, right? Like I'll give you an example. Bank of New York Mellon has 40 trillion 50 trillion in assets under custody. I think firms like that, State Street, JP Morgan, they're going to finally start to offer custody solutions in this space and that's going to really unlock I think the third and fourth inning, which is probably three or four years away when we get to see sort of this adoption at scale. Because the existing players today, and I'm going back to what I said earlier only a couple months ago, had clarity from the OCC that they can hold cryptocurrency and pay for fees in cryptocurrency. So the regulatory clarity is there. And a lot of these players are going to offer products and services in this industry. And this is just foundational infrastructure that we need in place first before we can get to like the mass adoption phase.
- [26:09]
Michael Batnik
So, Ryan, who are your customers? Are your customers your clients? Is it the blockchains? Is it financial institutions? Like, who are you working with?
- [26:16]
Ryan Leavelle
Both. Okay. One of the core beliefs at Chainlink is that existing systems are not going away. Like the Swift system, like the ACH system, like all these different systems, there's too much value on them today. Like all of Michael's money at the wire he had to wait for. There's just too much money and value on these systems today. And the cost of replacing them and just putting them on a blockchain is just far too great. So what we really do at Chainlink is we say, okay, don't replace your existing system, but what we do is we add additional capabilities to that existing tech stack. So I'll give you an example. Swift has been in business for over 50 years. Right now I think they just celebrated their 50 50th anniversary. They've created a set of standards on how financial messaging and how different components of the financial industry communicate with one another. There's no reason to change that. So what we do is we integrate with a lot of these existing standards to make them talk and communicate with blockchains. The other half of this is blockchains themselves, which need our core services, which is data, which is cross chain connectivity, which is orchestration to a lot of these tradfi players. When I say connective tissue, like we really are kind of sitting everything a blockchain can't do as a service. We're like a feature and an additional capability to that specific blockchain, if that makes sense.
- [27:48]
Michael Batnik
So, Ryan, anything else we missed that you wanted to cover today?
- [27:51]
Ryan Leavelle
What do you guys think as a whole? I think we talked a lot about, like, what we do, where we fit into the ecosystem, what are the benefits. And like, the big thing was about this is not about like a specific use case. This is like foundational infrastructure.
- [28:05]
Michael Batnik
All right, Ryan, so if this is the way that, that the financial system is going, is Chainlink going to win regardless of what the dominant blockchain is like? In other words, if the tokenization is powered by the Ethereum blockchain or a blockchain that doesn't even exist today, are you guys positioned well? Regardless of who ultimately wins, even if.
- [28:30]
Ryan Leavelle
There'S multiple winners, we are positioned extremely well. What hasn't happened is that there hasn't been a single blockchain that has won the market because of certain restrictions around scale and speed and features. So some features, some blockchains don't have privacy of transactions, some do. Some blockchains have faster transactions, some do. It's no different than the existing financial system. You use the Fed Wire to do high value, like infrequent payments. You use ACH to do smaller, more frequent payments. Use MasterCard system to process certain transactions from a card. That is going to be no different in the blockchain world. There's going to be app specific chains, there's going to be, you know, Stripe has a payment specific chain where Chainlink is positioned as completely blockchain agnostic software. So if you're a platform like a Robinhood or a broker dealer, you're not saying, I want to integrate simply with this specific chain. It's you need orchestration across all of these different blockchains because different types of assets and use cases are going to sit across from them. So it really de risks kind of like you running an initiative within a bank because if you can integrate to one blockchain and that kind of application or use case fizzles out, your use case fizzles out. So people love working with us because we're truly across all the different chains and all the different use cases as a single integration point into their use case or application.
- [30:14]
Michael Batnik
So there's obviously a ton more stuff we can get into here. Where do we send people who want to learn more about Chainlink.
- [30:20]
Ryan Leavelle
Straight to the website? I mean, we're across all social media platforms. I think we have like a million Twitter followers. I think most people talk. Follow our Twitter, which is fantastic. Our website is very simple. Chain Link.
- [30:36]
Michael Batnik
Thanks, Ryan. All right, thanks to Ryan. Remember, check out Chain Link. To learn more, email us animalspirits at compoundnews. Com.