TRANSCRIPT: Aaron Lammer On Yield Farming, DeFi, And Ethereum

On this episode of Odd Lots, we speak with Aaron Lammer, the host of the Exit Scam podcast and an avid DeFi trader. He talks about his trading on Uniswap, the concept of yield farming, and much more. Transcripts have been lightly edited for clarity.

Joe Weisenthal:  Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy Alloway:  And I'm Tracy Alloway.

Joe: You know, there's probably like, let's be honest: There's probably some connection between the fact that we've been doing a bunch of crypto episodes lately and the big selloff that we have in crypto today. That's just always how it works. It's like you get to something and by the time you start talking about it, a bunch, it's probably the top.

Tracy: You think it was our fault and not Elon Musk's?

Joe: No, I don't think it's like our fault per se, but maybe it's just like, you know, it's just how timing works. By the time the mainstream media is focused on something, the mainstream media, like the Odd Lots podcast, it's the final chapter.

Tracy:  This is the curse of the magazine cover, right? Like as soon as it hits the cover of Barron's or the Economist or whatever, um, it's time to sell and get out.

Joe: Well, we are recording this May 13th ad last night, Elon Musk tweeted that due to the electricity consumption of Bitcoin, they would no longer use it. They're going to still hold it, but they're not going to be involved in transacting it at any more. I don't really know what the real reason is. I mean, that's what he says. And he, you know, all the coins are falling, but you know, there's volatility at this space, but all the coins are falling today. Even the ones that aren't mined with lots of electricity, so we have a mini crypto bear market

Tracy: Yeah. They are definitely falling and Bitcoin and other cryptocurrencies have always been volatile. That's true. But I do think, you know, people talk about crypto as this decentralized ideas, something that works as an inflation hedge, something that's sort of beyond the ability of governments and central bankers to manipulate. And so it's kind of ironic that one tweet from a CEO can cause this kind of mayhem in the market.

Joe: Yeah, totally. Right. And you know, I have to say like earlier in my career, I would have said something like, “Oh, this is the top, the bubble burst or whatever.”  But I no longer think that. I mean, I don't know, like cycles come and go. Elon could tweet whatever he wants. It's clearly not going away any, uh, any time soon as a phenomenon -- a part of the world and maybe a part of the finance world.

Tracy:  Yeah. I agree. Uh, we've learned our lesson about calling bubbles in Bitcoin. We're not going to do that anymore, but what we are going to do is talk about some of the things that are helping crypto, I guess, become more widely adopted or are more entrenched. One of the reasons why it's not going away.

Joe: Yeah. So listeners may recall a couple weeks ago, we did an episode on decentralized exchanges. So, you know, a centralized exchange like Coinbase, you send them fiat currency, and then you can trade cryptocurrency like Bitcoin or Ethereum. On decentralized exchanges, they don't hold your money. Uh, you don't even need to start an account or anything like that. In fact, you can't start an account and all the trading is done on the blockchain itself. We talked to Hayden Adams, the developer of the Uniswap protocol, which is behind the exchange Uniswap and talk about automated market-making and so forth. And it was super fascinating, but like, I still need to learn more. I'm only like maybe like twenty-five percent of the way there in terms of like getting how this all works. Maybe just 10%.

Tracy: Same here. And for those of our listeners who actually listen to the very end of that podcast, you might've heard us say that we wanted to record an episode on yield farming, which is this phenomenon that has come about because of DeFi. So the DeFi ecosystem has basically allowed this to happen. I know absolutely nothing about the space, other than it's a way to earn money or interest on your cryptocurrency. So I'm very, very interested in learning more.

Joe: Right? So, and again, people should probably listen to that episode, but the premise of these automated market-making model is yes, you can trade one coin versus another like any exchange, but you can also stake your coins. You could put coins that you hold into a liquidity pool. As you have your coin stake there, you can earn interest yield, you can farm yield. There's all kinds of crazy stuff you could do. So we're going to learn more about how this all works from the perspective of an actual trader slash yield farmer. We're going to have a farmer on the episode today.

Tracy: We have had actual farmers on the episode before, but we have yet to have a yield farmer. So let's do it.

Joe: Yeah, exactly. Right. We've had corn and other stuff like that and a cattle farmer and stuff like that, cows, but now, uh, someone who farms yield. So I'm very excited about our guest today. Uh, actually long time friend of mine, acquaintance, at least we're going to be speaking with, uh, Aaron Lammer who himself also has a podcast. So he is the host of the Exit Scam podcast, brand new podcast out, which chronicles the collapse of the Canadian crypto exchange Quadriga. Absolutely fascinating story. He is also the host of a very popular Longform podcast. And I've been talking to him for years as he is dived deeper and deeper into the crypto rabbit hole. And one time, a few, uh, several months ago, I think it was last summer. He DMd me and he says, Joe, I'm DeFi-pilling, all of the suburban dads of Long Island. So he's, he himself has been hooked. He is hooking other people into DeFi yield farming. And he's going to explain his descent into madness or maybe how he's made a bunch of money. So, uh, I'm very excited. Aaron Lamer is on the podcast. Aaron, thank you very much for joining us.

Aaron Lammer:  Hi Joe. Hi Tracy. Thanks for having me.

Joe: You're fully DeFi pilled, huh?

Aaron: 100%. When you were saying that the market had crashed, I was thinking not really for me, because I don't have any Bitcoin and I'm deep into the Ethereum world. Ethereum appears to be where it was at an all time high earlier this week. So I'm not worried. I'm just saying I'm not worried.

Joe: Okay, good to establish that.

Tracy:  Are we going to become yield farmers by the end of this episode? Are you going to convert us?

Aaron: I mean, the reason I DMd Joe in the first place was to test whether he was open to farming a little bit with me and I still, I think I'm going to, I think I'm going to flip him eventually.

Joe: You should've just said, “Joe, I've got this huge money making opportunity drive over to my house on long Island right now. I'm going to make you a bunch of money.” And if I had listened, like I think that was like, I dunno, that was several months ago. I probably would have made a bunch of money.

Aaron: Absolutely

Tracy:  Can we start with the very, very basic question, which is what is yield farming?

Aaron: Yeah, I mean, I think we sorta have to like rewind through a Ethereum history a little bit. I didn't start off wanting to become a farmer. And I should say that my farming is like when someone moves from Brooklyn to Vermont and has like a few chickens and maybe one cow. I'm not, I'm not doing this on an industrial scale. There are people you can actually look at other people's wallets and Ethereum, because it's all open. So like I'm looking, there's a really big farmer named, uh, ox0xb1 and he's farming hundreds of millions of dollars in his wallet. You can just watch him farming. So if you're interested in like farming, uh, visuals, you can actually add them to your own wallet. I’m a small farmer and I kind of backed my way into it. Um, I was interested in Bitcoin, interested in Ethereum.

I've always believed that to really understand this stuff, you actually have to do it. Like you have to try the products with like real coins and play live. So I've always like tried all of the weird Ethereum world, things that existed. Like I used to make markets on this thing called Auger, which was a decentralized prediction market. I think that was the first Ethereum product that I actually used. And all of these Ethereum products, what they have in common is that you log in with a wallet. Most people may use Metamask, I think is probably the most popular one. And this is both an Ethereum wallet that holds your coins. And it's a form of pseudonymous identity. It's basically all, any of these services know about you as this person uses this wallet and they have access to the private keys.

So I started getting into the yield stuff when I started trading on Dexes. And a Dex is exactly what Hayden Adams, who was on the show, and he  makes the biggest, most famous one. I would say that if you're familiar at all with a Dex it's probably Uniswap. When I first started using it, I didn't even really know what was so different about it than say trading on Coinbase. I understand a lot better now. But Uniswap is what's called a automated market-maker, don't quote me if I got that acronym wrong. And basically instead of having a central order book, it uses a big liquidity pool to create trades and it uses algorithmic arbitrage basically to figure out a price within that. So I started trading there primarily because I find centralized exchanges pretty sketchy, and I've had some sketchy experiences.

I didn't lose money in Quadriga, but I used to trade coins on an exchange called Cryptopia that went down. So I've been burned by before by, um, sketchy exchanges. But if you like trading these tiny, small cap coins, it's unlikely they're going to be on somewhere like Coinbase or Gemini. So you kind of have to find a place where you can trade them. And the really incredible thing about Uniswap and other dexes is, is there's this kind of coin called ERC 20. And I consider it like a, a varietal of Ethereum, like, uh, you know, there's different wines that come from different regions. These are all like takes on the basic Ethereum coin and they're all interoperable and the protocol can recognize all of them. So basically any ERC 20 can be traded on Uniswap or any dex.

This is a pretty powerful idea. It means that anyone can just come out with a project. And if people put a little liquidity into Uniswap, you can trade it. Sometimes I've found coins that are so small that they won't even be recognized by Uniswap. You have to copy and paste in the smart contract and then Uniswap goes, okay. Yeah, I know what that is. Yeah. You can trade it, go ahead. It might not have a logo for it, but like the protocol recognizes it. So I was trading this way for a while and I started to see these incredible yields that you could get by, um, providing liquidity for these pairs of coins, many of which I happened to already have. So I would see, wow, this pair is paying 70, 80% APY. And when I say 70, 80% APY, that would mean if I kept my, my coins in the liquidity pool for one year. And that rate was stable through that year, which it's unlikely to be. I would earn 70 to 80 on top of, uh, the coins I already had, which is a pretty appealing idea.

Joe:  So let's talk about this some more. I mean, this is really the key thing. So there's two things that a trader can do on a dex like Uniswap. You can identify a coin that you think is going to go up, which is, I guess, what most people think of as trading or speculating or whatever. You see some project that you like, it's small. You think the number is going to go up. That's sort of the essence of what a lot of what draws people to crypto. But then the other aspect of it is this idea that you can, if you have a coin, you can put it into this pool and earn yield. So just explain to us the mechanism there, how that works and why you get paid to put your coin into a pool.

Aaron: So this isn't actually the only way to get yield. And I think this is one thing that's confusing about farming. There's actually like dairy farming and like, um, big farming. And each of them are a little different, but this kind of yield, basically you're taking a pair of two coins. So I'm going to get, say for example, Ethereum and Dai, which is a stable coin. A lot of people are trading Dai for Ethereum all the time. So I can supply equal amounts of Ethereum and Dai into the pool. And then that will be used to facilitate trades. Each of those trades pays a fee and I get a portion of that fee relative to how much of the pool I own. So the best pools for me to be in are the pools where people are trading the most and where there's the least liquidity relative to how much trading there is. So this is why you're seeing things swinging wildly. In terms of these APIs,

Joe:  So the least liquidity. You mean the, the smallest pools. So there is a lot of volume of trading, but not many people have put their pairs into the pool.

Aaron: Exactly. So you can actually see in Uniswap, how much of the pool you own. So there's a pool for, this is going to get a little complex, but there's a pool for FF2X, a token that basically tracks the price of Ethereum with 2X leverage. So I happen to hold that a token and the Ethereum token. So I put them into that pool. I now own currently about 0.1%. So I own one 1000th of that pool. One 1000th of all the money in that pool is money I put in and therefore each fee that gets paid, I get one, 1000th of that fee. And therefore I'm looking for places where I can either own a lot of the pool or, um, there's massive volume on the pool. And my little share, uh, is valuable. And these are swinging in real time because everyone's out chasing this yield. So today's yield is not tomorrow's yield at all. I've got, I've seen the pool I'm in go from 80% APY to under 10% APY in the course of 24 hours because people are pulling their liquidity in and out.

Tracy: So can you maybe walk us through, I remember that Hayden talked about this a little bit, but walk us through the actual fees that you can earn on something like this and you know, how does it work being the biggest one in a pool versus being in a pool where there's a lot of activity going on, which one's more profitable and also how labor intensive is yield farming. So you just described having to sort of move from thing to thing, to thing to chase the liquidity. Um, does it take up a lot of time?

Aaron: I mean, crypto in general, I think takes up a lot of time, but that's more of a brain disease than an actual like, need to do anything. So you could potentially just deposit into a pool and leave it there for a year. And you would just get a, you know, a rolling average of whatever the APY was over that time. The more you want to maximize yield, the more you would do. But every time you deposit into one of these pools, you pay gas. And if you're doing this on the Ethereum network, gas is very expensive right now because it's scaled by Ethereum being worth $3,800 per coin. So you really wouldn't want to be moving these multiple times a day. I try to do as little as possible. Now there's a site that you can go to and log in with your wallet called fees.wtf, and it tells you the lifetime value of all the fees.

You can see all the gas you've paid on the Ethereum network. And when I looked at mine, it like ruined like a month of my life. I mean, I've lost a lot of money to gas fees. So there's certain properties about which pools are valuable that I think you can sort of see as patterns. Pools that have stable coins pay very well. And the reason is most people in crypto don't want to hold a bunch of stable coins because they're degen gamblers. They would rather hold Bitcoin or Ethereum or an even smaller coin that's going up. So because not many people want to hold stablecoins, stable coins pools pay very well. There's a thing where you can pool with other people in a sort of automated way called pool together and stablecoin pools usually pay 30 to 40% APY. This is against, I don't know, what is a bank pay entrance a field right now, probably 0.1 at best.

Okay. So you're holding basically a token that represents $1 and you're getting paid 30 to 40% APY versus less than 1% of this bank. But some of this yield stuff is to, uh, infect other parts of the ecosystem. So now Coinbase and Gemini are saying, you can stake your Ethereum probably in a way that's more safe than the way I just described for I think, 6 to 8% APY. So depending on your tolerance for risk, there are other ways to earn yield. The simplest way is to stake your Ethereum for, uh, ETH 2, which is a big update that's coming to Ethereum and you can basically stake your Ethereum now and get paid. I'm not sure if it's 6 or 8%. I think it depends who you do it well with, um, for the entire time until that happens. And when ether, Ethereum upgrades to ether to your tokens are unlocked and you get paid that yield for that whole period. So the kind of yield farming where you're providing liquidity is maybe the most active and the way that you can optimize the most for your results. But there's other ways that are far more passive, that you can more safely earn. What's still a pretty good yield compared to like a bank.

Joe: All right. Let me ask you a question about the pool mechanics that I guess I still like don't quite get, so there is a pool, you know, like the ETH-DAI pool or the ETH-USDC, different, both of them are stable coins. I assume some of the biggest pairs that exist on the Uniswap network, you stake both sides of the coin. What happens? How does it work? Okay. Let's say I want to make a directional bet. I have some USD. See, I'd be like, alright, I want to trade it for Ethereum. So I go into that pool and I just buy some Ethereum in that pool. Does the ratio change inside the pool? Explain like, what does what's happening there? Like who's ETH am I getting exactly where does it come from?

Aaron: This is a fascinating question. And, uh, I am still not totally clear on it. So I'm going to give you what I think without being totally right. So there's something called impermanent loss. And this has to do with the fact that the two things in the pool are not being equally drawn, right? If the Ethereum is going up and there's more demand for Ethereum, more Ethereum is getting pulled out of the pool, then Dai. And therefore, to be in a pool like that is to actually lose some of your exposure to Ethereum you might end up getting put in equal amounts, Dai in Ethereum, but because of changes in the pricing of Ethereum relative to Dai, you might get out more Dai. So going into these liquidity pools can blunt some of your upside to holding crypto, but you're getting paid a fee to do that.

And someone might look at ETH-DAI and say, Hey, I don't want to be in that pool. If ETH moons, I'm going to end up with more Dai than I want. And that's a loss for me. So in some ways we're incentivizing people to create liquidity and their liquidity makes their trading a little bit less valuable.

Joe: Just, just to be clear here, you put in both sides of the coin in equal proportion, correct. But you're not guaranteed to pull out the same volume of them or like explain like what are you guaranteed to be able to pull up?

Aaron: Well, this is like a tricky concept, but like, let's just think about something that's pegged and something that's not pegged.  So let's say I deposited $2,000 worth of Ethereum when ETH was $2,000 a coin and I put in 2000 Dai, but now ETH as of yesterday had doubled to $4,000, right?

So basically the whole time, the liquidity pool, as I understand it is acting as sort of a balancer, like as if it was balancing an ETF so that I have the same amount value of each. So as a Ethereum is going up in value I'm, it's tilting towards Dai, so that they're worth the same amount. And that when I withdraw, I'm getting more of the other thing that seems like a bad deal when crypto is going way up and you're pegging it against a stable coin. It's a little more complicated when you're talking about pairs where it's say an alt coin like Compound or Maker and Ethereum, you don't necessarily know which direction they're going. So I think in practice, it almost acts more sort of like a cost average, where it's continually rebalancing these two assets that you have so that you have equal amounts of them. The pool always needs to have equal amounts of both. I see. And I'll admit that's confusing and I don't totally get it.

Tracy: Well, I wanted to ask exactly on this point on the sort of like chain of ownership or chain of transaction. So all of this is enabled through Uniswap’s, automated market-maker system which we may not quite understand all the details of, but you mentioned that you became interested in yield farming because you didn't trust, uh, traditional crypto exchanges. It sounds weird to put it like that. Um, but centralized crypto exchanges, cause you had a bad experience, what would happen to your coins if you Nisswa pour to go down suddenly? And I realized, I'm saying that and Hayden told us that it couldn't go down suddenly because it is decentralized, but I'm just curious, like how much of this relies on uni swap functioning while and the decisions that they are making.

Aaron: I think it relies very little on decisions that are humans are making it Uniswap. And it depends deeply on how well the protocol itself works. The money is not like locked up in some office that Uniswap owns it's locked up into the smart contracts. So all of stuff is as strong as the smart contracts that support it. The good thing is that those smart contracts are something that you can just see. You can see the money's there. Unlike in the case of Quadrigas, which was a centralized exchange that was lying and running a fractional reserve. If unit swap didn't have the money that it was supposed to locked into its smart contracts, we'd all know. And a lot of these protocols have gotten hacked. So there is risk. I would, I would not downplay the risk of this stuff. You have people who are often pseudonymous creating products that lock up billions of dollars in value, and there could be a catastrophe, but unlike the centralized exchange system, I think it's more likely that catastrophe, it would happen at the code level and less likely it would happen at the human thief flies level.

And my own orientation is to sort of trust that system far more than I would trust. Um, any person who was running an exchange and those kinds of ideas. I mean, you've talked about DRI centralization on the show. It sort of goes beyond just safety and risk. I think it's fundamentally, you know, who's in control when you go to a centralized exchange, they're choosing which coins you can trade, they're influencing the market heavily simply by letting you buy certain things and not letting you buy other things.

Joe: What happens in both coins just tumble on dollar value. So let's say you're trading in some pool and it's like ETH versus some coin. We've probably never heard of, you know, and one of these tiny coins and it pays some fat APY, but then someone tweets something or it's like a bunch of stuff happens and they both go down. How do you, as a trader, think about the sort of cost benefit of yield versus price and basically finding good opportunities, such that the yield appeals to you without having to worry about downside price risk, because although, you know, cryptos and this multi-year bull market that is not guaranteed. And of course there have been many crashes in the past.

Aaron: I started as a trader and I don't really consider myself like a hardcore farmer. So I'm mostly speculating on coins. This is a way for me to get yield on the coins I already have. And a bit more Ethereum, some crashes, and I have 1.2 times as many Ethereum as I did before and still in a better position. So I don't really choose what I buy based on what farming I can do. I'm more using farming as a bonus. And one other thing I didn't mention about that sort of fee that you get from Uniswap is Uniswap is this like very austere, non-scammy presentation kind of company, but they have a lot of competitors who would rather you put their liquidity with them instead of Uniswap. And those people offer incentives on top of the fees to the value of providing liquidity there.

And I think you talked about Sushiswap on there.

Joe: Yeah. The vampire attack!

Aaron: I loved when you when you brought up Sushiswap there. Cause I’m not sure I had actually ever heard Hayden Adams directly say what he thought about Sushiswap, which is a clone of his exchange. But when Sushiswap was started getting started, they basically said, we'll pay you these APY fees and we'll pay you this bonus in our native sushi token to bring your liquidity over here. So on top of the liquidity profile and you get a LP token, right? So my deposits, aren't just something I know I have, I can actually see my LP token in my wallet. And in the case of sushi swap, you can then deposit that LP token and earn these incentives on top of the APY. So a lot of this farming stuff is like bonus on top of bonus, I'll give you like an example of like a way you can stack some, some of this yield earning there's this thing called Ledo finance, which we'll do that F2 staking that I was describing and you can deposit your ETH with them and they give you back a token called STF, which is basically staked F when you take that stake to ETH, you can then go deposit that somewhere like Compound or AAVE and borrow against it.

Aaron: So you can take that staked ETH and go borrow a bunch of Stablecoins against it, and then earn yield on those. The really hardcore farmers are using a system of constant lending and borrowing to get the most advantageous yield while basically still holding their original collateral. That's the game to hold your original collateral and get as much else as you can. So when you ask, well, what happened when it crashed, the same thing would happen when it crashed. That would happen to me anyway, except I'd have more of the thing that had crashed, which gives me a better position.

Tracy: How has the yield farming phenomenon impacted the crypto coins themselves? So you have this whole process at Uniswap that is dedicated to creating liquidity in crypto currencies, whether they're, you know, big or small coins at a minimum, I would imagine this is allowing a lot of those smaller coins to sort of get traction.

Aaron: It's allowing small coins to get traction and big protocols to lock large amounts of value, which allow them to do lending and borrowing stuff. And then there's this service called Yearn. That's kind of on the top of a lot of this stuff where if you don't want to go out and seek out all these, yield opportunities, you can just lock your coins in Yearn and Yearn works in an automated fashion to try to find you the best opportunities. So I would say that actually most of the yield farming that's happening, isn't people like making a bunch of manual decisions. It's people who are locking their money into these big protocols that go out and use strategies that require tons and tons of capital. If you only have a few thousand dollars in crypto, it may not be worth it to do this, but it might be worth the posting that crypto into Yearn and letting Yearn move around billions of, or hundreds of millions of dollars in the way that can earn the most yield. So not everyone is like me trying to do this themselves, which is probably stupid. I think a lot of the smarter people actually just go for these automated strategies

Joe: Backing up for a second. You know, you mentioned like finding some sort of like a smaller coin, some tiny coin where maybe you're going to dominate the pool or you already had it or something like that. You know, I think that like when people like buy stocks, you know, there are certain metrics that they use and they look at profitability or whatever. Like how do you begin to evaluate? I mean, there's that, you know, I think as Hayden said, there's like, they're adding like 2000 coins a day on you and a swap or something like that. Just some insane number. How do you evaluate what's a coin you want to buy? Like, what are the things you look for?

Aaron: Well, it's a really interesting question because I have really dabbled in all the stages from the blue chip, uh, prestige DeFi to the very, very tiny market cap. And I've tried to play those kind of waited. So I have most of my DeFi money in things like the top 10 DeFi tokens, things like Uniswap that you've heard of. Um, and then as you say, 2000 being added a day, there's a lot of really tiny cap coins. So I'll admit I for a period would scan the top 500 coins top gainers. Um, when NFTs were big, I just looked through the entire list on CoinGecko of NFT-related coins. I'm looking for a good logo. I'm looking for a clear presentation that offers what the value is. And above all, I'm looking at the market cap.

 You know, if I can see a coin that has a market cap and the market cap, this is in cryptocurrency, just basically how, how much at the current price are all the tokens in circulation worth. And I also like to look at how much will the total market cap be when it's fully diluted, because there's a lot of manipulative tactics where it's like, “Oh, you know, we only have released a certain amount now, but we're going to release a ton in the future,” which is going to crash the price. So I'm on the lookout for all that stuff, but I'm mostly looking for what looks like a legitimate project that has like a clear value proposition. Ideally, it's doing something that earns money, right? Uniswap, earns money. It's earning millions of dollars in fees every day. That's a good look. I like that.

I look at all those factors and then I try to figure out where I am sort of in the narrative of that coin. And I generally don't like to buy things when they're like really, really at the beginning, because liquidity is really bad. You know, some of these really tiny coins, if you're to sell off anything over say like $10,000 worth of them, you can slip the market. I've had times when it's going to slip the market 15% if I sell off my own coins, right? So some of those things you need to be careful of, it may look like a great opportunity that’s doubling every few days and value, but not necessarily easy to get out of some of those positions. So each of those factors are kind of like weighing against each other. And I'm so bullish on Ethereum right now that I'm like kind of less likely to be dabbling in these really tiny coins.

But I think that's kind of a market cycles thing. I'll probably be back there at some point, but one of the reasons there's so many of these little projects that I actually do think are worth buying and I have invested money in is that the whole DeFi system makes it really easy for people who make open-source software to do their own projects. You've got DAOs, uh, digitally autonomous organizations, which are tools to coordinate lots of people around the world and split the upside amongst them. You've got a lot of people who are willing to flood capital into tiny projects often with almost no information. So in the same way that I think like, I don't know, 2009, like Silicon Valley was probably a good place to just invest in like every little startup that was coming up. And people made a lot of money doing that.

When I look at the sort of shallow end of the DeFi world, I just see like a lot of really young people experimenting. And some of those projects will become big. I'm probably not going to like hold them for three years. So I might not see all of that, but, uh, if I can ride it, you know, through the early part of the project, it's, it's kind of exciting. And a lot of these projects, like I, I was interested in this project and FTX, which basically creates funds based on NFTs. So they have like a CryptoPunks fund where instead of actually owning CryptoPunks, you can get exposure to crypto punks through this coin. It's just a bunch of people they're on Twitter. You can see the people who are running the project that follow them, and it's kind of fun. And following them does give me some insight. Like I saw that they had a designer who was doing a rebrand of the site. It's kind of bullish, you know, like people who are shipping new software and doing stuff. 

Tracy: A really blunt question. Um, and I don't mean to pry or anything, not at all. How much money have you made? Sorry. Um, I need to know, okay. For science.

Aaron: I, I won't tell you how much money I've made. I'll tell you how much a factor of what I put in and what it's worth now. So I think I've gone about 14 or 15x, my original investment, but that original investment was years ago. If I had just bought Bitcoin when I very first got into crypto and never done anything I would have done better than I did now. So I was into all of this small cap coin trading during the first alt coin boom in 2017. And I also made a lot of money during that period. Not a lot of money. I had, my initial investment was very small, but as a percentage, a large amount of money and lost it all in the crash.

So I don't really know that I'm going to walk away even with, uh, as much as I've made now. And I know people who've made a hundred times more than me, uh, through more aggressive strategies. I'm kind of in it, to like mess around a little bit more like I like to try things. So some of the things I do are not necessarily the smartest or most, you know. Putting your money in during the first round in a exchange that was supposedly, I think, in New Zealand, but the guy's exit scammed like that wasn't smart that wasn't like a smart financial move to do that. Some of the things I think I've done in DeFi, like I've bought some like dumb NFTs. I've bought some projects that went to zero. Like there've been mistakes along the way, but you know, this stuff is so new that simply riding the success of even the biggest projects probably would have yielded you many multiples now. And I didn't actually, I wasn't into this during the Defi Summer last summer, which was when people made the most gains. I only got into this, like after the first wave of interest. I had no idea what it was when I was first happening

Joe: Years ago. I think it was like sometime in 2017 or like 2018. I think we got Hot Pot together. And Aaron was trying to pitch me on like setting up some like mining operation in upstate New York to mine a fork of Monero or something, just some like crazy things. I've always really admired your experimentation. And did you ever get that mining rig off the ground?

Aaron: So I did go visit. My plan was to buy a defunct hydroelectric dam in upstate New York that had its own power generating station and then use that to mine and like most things in crypto, like that wasn't going to happen. But it did lead me to an interesting place. It eventually hooked me up with these guys, Bison Trails, who were starting a mining center, which I actually think their mining center didn't do that well, but they built a bunch of software for their mining center to coordinate all the miners and then Coinbase acquired them because they wanted all of this like mining software. So like that's a lot of crypto is like that few losses than a win few losses than a win.

Joe: Here's something. And I have to admit, like, this is probably like a super Boomer question of me and it's why I haven't made a ton of money like you, but I'm curious, and this is the part that always gets me And it's the same when we were talking to Hayden.. when I think of finance, regular TradFi banking… in theory there's always some non-finance end to it. So someone invests in like Uber early on, you mentioned like Silicon Valley in 2009, but then like someone's doing something non-finance, like selling rides. The early model of venture capital was whaling ships. And you like lay off some of your risks to investors because whaling is very dangerous.

But if you get a bunch of whale on an expedition, you make a lot of money, so you'd distribute the risk, but that's a non-finance thing going out. And I'm hunting whales. When I like look into DeFi stuff. Every project that I see is just like something about more coins. So it's like, Oh, here's a really cool project. And it allows you to like balance your coins. Here's a cool project that allows you to like lend. Here's a cool project that allows you to find more yield in an automated way, but where do you see it going. It's like, ok we have this financial infrastructure that exists now, high volume, high liquidity, very impressive technologically. But like, what is it going to be used for? Because at the moment it's all just looks like kind of what you described, where it's like more speculation in coin.

Aaron: Okay. So you're not wrong at all. And I think that's an accurate way to characterize like where it is right now, which is very early. So we're like, I don't know if we look at like Uniswap as like one of the, the launch of Uniswap is like one of the first landmark events here. I don't know. I think that's less than three years ago and it even launched the V1 product. So I think where we are now is we're moving a lot of capital into this system because the traditional finance world shows you need a lot of capital to do any of this stuff. You can't just like start from zero. So a lot of these incentives and APYs, they're, they're here to, to, to learn people in. But I think once that's established, there's a lot of ways that this can, um, do you ever read that story by, uh, Borges?

It's about a guy who writes like a fictional story and then the objects bleeding into the real world. So I do think DFi has the potential to bleed into the real world and the easiest ways that I can imagine that happening early on are, I do think like home loans will be done through this system in the not very distant future. I actually think you could do it now, but you'd have to be like me, like a guy who was willing to do it as kind of a stunt. But you know, there's nothing stopping you. Let's say you have a large amount of coins, which a lot of these early crypto people do, including Bitcoin people who hate this stuff. If they come around, you could potentially lock up some of your Bitcoin in a protocol through Wrapped Bitcoin, and then take a loan against it and stable coins and buy a house that you can live in.

And potentially there are ways to do that, where you get the money you need, but don't even actually lose your collateral. It's just sort of sitting there to guarantee your loan. Um, so for people like me who like don't have like a full time job and haven't for like a decade, you know, uh, it's a weird proposition to try to get lent money, to buy a house. I have to really sort of justify I'm like, no, I’m a podcast maker, I make podcasts. Those kinds of things don't really go over well with like banks. So I think that's one potential application, but I think, and even deeper application is in company formation itself. I think people will form companies in which everything the company does from earning money to paying out money, to even establishing like forms of like a constitution that basically dictates how the company has governed.

All of these things can happen on the blockchain. Young people are doing it. The same young people that I saw in San Francisco doing startups, uh, whatever year startup mania in San Francisco peaked. Those people are doing this stuff, uh, within the DeFi world. Now they're forming DAOs, they're starting protocols. You know, a lot of DeFi, I think of as like people use the metaphor of Legos, right? So you may not even know which different protocols you're interacting with. These protocols are all stacked on top of each other and each of them can earn value. So I think it bleeds into the real world when some of those Lego's stop being like things that are just smart contracts and actually start to interact with the real world or become companies that started in a [inaudible] fashion and then are like doing business with the rest of the world. And startups are usually the easiest way to understand that because they're things that need a bunch of capital quickly, uh, for an experimental project that will probably fail. But if you invest in 100 of them, you'll probably do pretty well.

Tracy: So I have one more prying question, which is what is your...

Joe: What is your seed, please tell us your 12 word seed phrase. 

Aaron: Does anyone from the IRS listen to the show. I'm having second thoughts about that.

Tracy: Okay. Just one more, but on a day like today, when, you know, Elon Musk tweeted Bitcoin fell 16%. Although, you know, as we're recording this, it's pared some of those losses, but all the crypto coins, all the crypto related stocks are all falling. What was today like for you? Like what did your yield farming portfolio look like?

Aaron: You know, I honestly didn't even check like most of this yield stuff, just kind of happening in the background, I'll look and see how much I've made, but I'm looking more at the prices of the tokens than yields. I think that there are people who are just seeking yield out there, but those are people who have a lot more capital to start with than I do and are like not wanting to risk it, but want to just earn yield on like stable coins. I'm primarily a holding Ethereum and other DeFi tokens. So when I saw that I actually was happy because I'm in Ethereum, I'm true believer. And I believe that Ethereum will pass Bitcoin at some point. And I am fine with accelerating that if it can pass Bitcoin by going up or by Bitcoin going down, um, and I love the hostility and the space between the two camps. It's getting ugly out there.

I will say I kind of left crypto for a year or two. And the new thing that that really came in is true animosity, uh, between the Ethereum and Bitcoin camps. So for me, I look into very specifically what was said, which was Elon Musk said, we're pulling, first of all, I think people were playing with fire when they turn Elon and Michael Saylor. Michael, I won't say anything negative about him since he's been on the show. But I think, I think when you sort of create idols out of these people, um, the rug can get pulled out from under you and, you know, the same thing works the other direction. So the thing is the environmental stuff. And I, I have thoughts about it. I know Joe is, um, in contact a lot with Nic Carter.

Who's written a lot about this. I'll just put, say that the environmental stuff is not something I consider myself particularly knowledgeable about, but I do know that a big difference between Bitcoin and Ethereum is that Ethereum is moving toward where it's proof of stake. And this actually all this stuff that we've talked about, it all interlinks. When I say that you can earn money by staking, for Ethereum to that is seeking Ethereum. That will ultimately power the proof of stake system that moves the Ethereum off mining Bitcoin has no plans to leave proof of work mining behind. So it's a really big difference between the two of them. For me, when I read that, I was like, okay, I'm going to take a small head here. The market's going to come down, but ultimately I think it leaves a theory I'm stronger than Bitcoin. And I'm hoping that more and more of the market shifts away from these centralized exchanges that were sort of established during the Bitcoin period and moves towards this new Ethereum future of Dexis. So I know that was kind of a long explanation, but like all of those things were, were coloring. My thinking about this news event that probably some PR person at Tesla wrote, I don't even know if it had anything to do with like the actual Elon Musk. Um, but it all moves the markets.

Joe: So this is really important. And I'm sure we're going to have to do a follow-up episode on this, but just so that people understand currently Ethereum and Bitcoin have roughly the same security mining model, people buy chips, and they expend a lot of energy to secure the network and to create new coins. And Ethereum has had for several years on its roadmap, a plan to move from the so-called proof of work, which is this sort of very computationally intensive energy intensive system to proof of stake in which that is not going to happen. And it's sort of secured by people locking up their Ethereum in some manner. What is the roadmap, as you understand it, the timeline for the, the handover to Eve, to the new proof of stake, Ethereum, that will not. And I know it's been pushed back multiple times so that it won't be as computationally expensive.

Aaron: If I was like an angry Bitcoiner I would say, never going to happen right now. And what I would say is the next big landmark is July 14th. So it's soon and it's EIP 1559. These are like constitutional improvement protocol. So it's basically like a change to how Ethereum works and these are planned a lot in advance and don't always happen, but this one is happening. I would bet very strongly that this happens on January, on July 14th. So right now, when you pay your fee to the, uh, Ethereum, your gas fee that goes to miners, or a percentage of it goes to miners, that's how we pay all these miners, right? We're, we're giving them, they're, they're holding up the network. We pay them a fee after EIP 1559, we're going to stop paying the miners.

Mining is going to become less profitable, and we're going to start burning that Ethereum and Ethereum is going to go from an inflationary asset. There's more and more Ethereum every year, too. If Ethereum has the potential to become deflationary as we burn more than is created. And that's a step towards the ultimate goal of going into this proof of stake model in which there's no mining at all. In fact, I'm not really sure after EIP 1559, whether there will be any mining. Um, I don't know what the timetable for the true shift to proof of stake is, but when a lot of this environmental stuff came up, people were like, let's do it right now. Like there was a movement with an Ethereum to expedite it. So I think that there is a huge pressure to do it. And my guess would be by 2022, we'll be, you know, in a proof of stake system, there may be people who know more about the timing than I do, but for people who like me, the next big thing that we're thinking about is this EIP 1559.

And it's funny because you go on like CNBC and they're doing like a, maybe it's not CNBC. There was some TV thing that had a, like how to get into Ethereum of mining. And like, this is the worst possible time to get into Ethereum of mining. That equipment will be trash in a few months when this happens, it's not so different right now, but they're on very different trajectories with regards to mining and the people who are making the bull case for Ethereum are saying, look, we're doing all this stuff in defy that burns a lot of gas, the amount of gas being burned to do all this stuff is immense. And if we start not paying that out to miners who then sell it, and instead of literally burning it, um, Ethereum is just going to go through the roof, um, as it becomes deflationary and more people want it and people need it. You know, businesses, I think will eventually do business within defy. People will hold company treasuries in yield farms. I know that sounds crazy, but it's calming. And all those people are going to need a theory of gas to put their money in and out and do stuff. So the big change for me, with Ethereum, from, you know, getting into this stuff with Bitcoin is you can actually do stuff with Ethereum. And when you do stuff, it causes a theorem to be destroyed. Post July 14th,

Joe: Dogecoin is proof of work as well. Right. Just trying to think about what Elon Musk's next tweet might be,

Aaron: Honestly like he's playing so many narrative threads at once that I don't, I don't even know how all of these things can, like co-exist in one space, but yeah, I think Doge has forked off of Litecoin or forked off of something Litecoin related. So it's a descendant of beta merge.

Joe: It's merge-mined with Litecoin, so Litecoin miners get doge as well.

Aaron: There you go. See Joe, Joe's the doge expert in the call, but ironically, you know, I don't know if you've heard about this thing, Sheba.

Joe: Yeah. I was just about to ask you about that. I had a question about that. What were you gonna say?

Aaron: Ask me the question and I'm not particularly knowledgeable about it, and I know I did not get any,

Joe: There is this like Doge, um, parody, whatever it is called Sheba went through the moon and it's traded on the Ethereum network. And it's a joke coin. I mean, I don't think anyone really thinks it has that bright of a future, but that's not the point. The point is it had this mania and the trading of the coin got, so it got so insane that it significantly drove up the gas fees for everyone trading up on the Ethereum network is my understanding. And this raises a question to me, which is like, okay, you have this like open blockchain network. Anyone can make a coin. We saw this in 2017 with the crypto kitties phenomenon where people went crazy for that. And that was all on the Ethereum blockchain and just trading in those drawings of cats themselves caused the fees to rise.

 So as it stands right now, no coin Bitcoin, Ethereum, whatever is really that big yet in terms of like a meaningful share of like economic activity happening with these coins, it's still like sandbox syrup for the most part. So if one joke thing like a Sheba coin or crypto kitties taking off among ultimately a fairly small section of the population can cause the entire system to jam up. Does that raise? I know like how do you think about like the future of all these coins or the future of Ethereum, if like, uh, a joke or a meme coin or whatever can raise everybody's, uh, gas fees, including people who theoretically have to do various serious transactions in a timely manner. If a business is actually going to use it for real purposes,

Aaron: People are paying for those transactions. So it's not like they're just joking. They are actually spending money. They're spending the same money. The gas cost, the same amount is for a joke and for a serious purpose. So the friction is there. And the short story is that some people believe that people are going to flee Ethereum to other networks that are basically clones of Ethereum, but with minuscule gas prices and the best known one would probably be Binance smart chain.

Joe: And they achieved that by sacrificing decentralization.

Aaron: Exactly all this stuff is super easy and you can do a gazillion throughput, whatever. If it's just running on a server somewhere, we've solved these problems for centralized currencies. It's much harder to do in a decentralized way. So the answer for, if you don't think the future is everyone just trading on a centralized Binance system, is layer two and layer two like EIP 1559 is something that's like incoming right now in a theory, there's already certain ways you can use it and there'll be a lot more by the summer. And as I understand it, there's basically two major threads of how we can deal with these congestion problems with layer two, the first way is through Ethereum side chains and the most famous one is probably MATIC. I think they've rebranded as Polygon and Matic's actually a different network. Like if you're in Metamask you have to go off the Ethereum network and onto Matic network, which isn't the easiest thing, but Maticbasically takes all of the protocol level stuff that's going on with the Ethereum and lets you do it on their own still decentralized, but not Ethereum, a main net and pay cents on the dollar in terms of fees.

So I'm actually farming on Matic right now and because Matic is trying to get people to do that, the incentives are excellent. I'm using the, uh, the Matic Uniswap clone it's called Quickswap. Quickswap is offering all sorts of incentives to do, to provide liquidity. So I'm providing some liquidity there. You do still pay a gas fee. When you jump between the Ethereum network and the Matic network, I don't actually think that this is going to be the implementation that solves this. I think the implementation is going to be something called a roll-ups. And my understanding is that Uniswap, uh, the Uniswap will eventually use roll-ups, uh, to lessen fees. And I can't tell you how they work technically, but basically it batches, a large number of transactions in the space that currently only a few transactions can fit and uses some dynamic system.

And that should allow for a lot more throughput directly on the Ethereum main net. This is probably like the biggest issue in DeFi right now is figuring this stuff out because as the price of Ethereum keeps going up, it's not so much that gas fees are high right now. They are high scaled by the price of Ethereum. So one important concept, I think for people listening is that whatever network you're on, you pay the native token and gas. So when you're on the Ethereum main net, you pay Ethereum when you're on the Binance smart chain, you pay BNB. And when you're on the Matic network, you pay Matic. So the theory comes in this tricky position where not only is the the network congested, the coin itself has seen, you know, 10 X gains over the last year and the, the gas fees are scaled by that.

I think there's also a counter argument that some of the friction and high gas fees is not a terrible thing. It actually causes people to only want to use your chain for serious things. So, you know, I guess you could look at Sheba as a counter example of that. Although I think the Sheba era is now early over because Vitalik just dumped all of his Sheba, but overall, some people might say, it's not such a bad thing that it's really expensive to do something on the network. People will only do things that are valuable instead of what you saw when gas was really cheap, which is a lot of like front running bots and things like that that are basically just trying to extract stall small amounts of value. And that becomes unprofitable as gas becomes expensive.

Joe: I think that's a great place to leave it. So now we only have like 10 more episodes to do on this before I start understanding it a little bit, but actually Aaron, that was fantastic. And I think you're a great guys because you yourself are a podcast and you know how to speak. That was, I really appreciate it.

Aaron: I wish I could get someone like Hayden to explain some of that stuff to me because honestly the deeper this defy stuff goes, I it's like, it's like I was here for algebra, but I'm not here for calculus.

Joe: That was great, Aaron. And, um, really appreciate you, uh, joining us.

Aaron: Thank you. Thank you very much.

Tracy: Thanks Aaron.

Joe: Take care and thanks a lot.

That was great. I I actually, I did learn quite a lot from Aaron on this. I still have like a million more things and they're like all kinds of technical market mechanic questions, but, uh, I thought he did a great job of explaining, uh, some of the, some of the basics of, uh, trading on these networks and where the opportunity has come from.

Tracy: Definitely a lot there. Uh, and it's kind of funny how each one of our crypto episodes lately just leads to another crypto episode. This one in particular, I think we're probably going to walk away with at least five ideas for new episodes, but on that note, it does also sound like it's a pretty labor intensive activity. And I think this is a theme that we've talked about at various points in time, when you get into a new market, when you spot some sort of arbitrage opportunity, like it takes a lot of work to do that sometimes. And I know Aaron was talking about how there are automated yield farming strategies and things like that, but just this notion of going through dozens and dozens of new coins, trying to figure out which ones look most promising or which ones have the nicest logo. That's a lot of work,

Joe: A lot of work. And I, but I do think that that really is like a consistent theme crypto or not crypto that like, I guess the, sort of the richest trading environments for like an actual, like trader are in markets that are not even close to efficient. And I always like go back to our interview with Doug Cifu, the Virtu CEO, which could not be more opposite than this — in terms of a market, you know, the stock market. It's so insanely hyper-efficient — the market for listed U.S. equities. And there's like this crazy spectrum, I keep thinking about this, like Doug on one end and guys like Sam Bankman-Fried or Aaron on the other end. And the amount, just the literal amount of work that it is to execute a trade or like switch over to another protocol or whatever is like fascinating — the whole, uh, spectrum. And, you know the richest opportunities are where there's just a lot of work involved.

Tracy: I have another prying question, but this time for you.

Joe: Oh?

Tracy: Why do you always bring up whaling in your model of finance. I think you've brought it up three times.

Joe: Uh, there's a great book that came out a year ago. That was basically about the history of whaling. I forget the title, I'll tweet it out after this, I'll find it. And then people can go find me on Twitter and tweet it out. But that is basically like making the case that like the venture capital, the venture capital was founded with Waylon that the first, like if you trace the history of VC, you could sort of like draw this lineage that goes back to people, funding whaling expeditions, because the distribution of the returns of whaling, which is that you had a few expeditions, they got tons of whales and tons of blubber and oil. And they paid for tons of failed expeditions where people died or didn't catch anything or had to turn around. And that was like the first sort of like VC investing. And so like, that is my model, essentially for like the purpose of finance, which is to essentially create liquid markets out of like these sort of, uh, sort of like match up entities that have a lot of like cash and have one risk profile versus entities that are just the, uh, highly liquid. And so I keep like, going back to that is like -- that is the purpose of finance on some like deep level.

Tracy: So now we're going to have to do a whaling episode.

Joe: Yeah. That's you're right. We should talk to that's. The next episode is, uh, well, let's find that book. I'll find it. We'll get the author. And we'll talk about the history of whaling because yeah, I guess that makes sense. Why do I keep talking about whaling? That is the reason I'm glad you.

Tracy: All right. Shall we leave it there?

Joe: Let's leave it there.
 

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