Balancing the Ledger Compound CEO Robert Leshner
Leshner shares Compound's vision for creating interest rate markets for tokenized real world assets. He also breaks down stablecoin mania, and why the technology could be beneficial.
Welcome to Balancing the Ledger, where tech and finance intersect. I'm Robert Hackett. And I'm Jeff Roberts. And today we're joined by Robert Leshner, the CEO and co-founder of Compound thanks for joining us. Glad to be here. So let's kick it off. What is compound? Tell us about your company. So Compound is a protocol built on the Ethereum blockchain to create interest rate markets for Ethereum tokens. What I mean by that is we're creating a short term creditless spot interest rate that fluctuates in real time based on supply and demand. So a user can earn interest by supplying an asset to one of our markets, and similarly a user can borrow an asset from one of our markets assuming that they have enough collateral, such that there's no credit risk that they exposed the protocol to. To simplify it for a sec, though, the idea behind this is that you don't get any interest holding crypto. Even savings accounts in the real world are paying interest, but right now, if you have your crypto in exchange in a wallet, you don't get any, right? That's right. The interest rate on most crypto is zero, because you're not able to let other traders or individuals use your crypto. And so what we're trying to do is to create a marketplace where all cryptos are used and is interest generating. And this is focusing on coins and tokens that are not the value-- they don't have the same value proposition of a bitcoin, where you're not really seeking an interest rate on bitcoin because it's a speculative bet that you're expecting is going to appreciate in value, given the sort of deflationary aspects of the system. So this kind of solves a separate problem. It does, although I would love to point out that bitcoin, assuming it can be recognized at some point as a currency, should have an interest rate, because there should be demand for that currency from other individuals, traders, and funds. And the interest rates you envision-- they're almost like repos. This is very short term, right? That's right. They're designed to be extremely short term and without credit risk. So the alternative approach to creating an interest bearing instrument is a loan to another trader or another fund. Our system, you're not interacting with other peers directly. You're simply supplying assets to a market which is liquid. You can redeem your assets at any time. It's ultra short term. You could supply assets for five minutes, which is appealing to programmatic traders and arbitragers. And it allows there to be a lot more flexibility in locking up an asset in a loan. We've chatted before, and we've been catching up on some of your own views on crypto. And you're actually a skeptic of a lot of the crypto assets that are out there. Can you speak a little bit about your thoughts. Yeah, so I'm a little bit skeptical of crypto native assets in general, simply because a lot of them have been designed for capital formation, and not for fulfilling a specific goal. An easy summary is a lot of the tokens that have been created in the last two years are pretty much vaporware. I don't mean that for every single one. There's obviously some projects that are of extreme caliber and integrity, but for the most part, tokens have been used to raise capital, not because they're needed. And I think we're approaching an era in which eventually there's going to be a come to Jesus moment, where projects have to put up or shut up. And their token has to have value or create value, or it will eventually become extinct. So it's like the long game for you might not be a lot of these vaporware tokens, but you're talking about real currencies like yen, and euros, and sterling, and dollars. Do you want to tell us a little more about that? Yeah, the overwhelming trend we see is the tokenization of real world assets. You're starting to see that with the US dollar in the creation of stable coins. The next step in this is the tokenization of other currencies, eventually other real world assets, and eventually securities. In a 10 to 20 year spectrum, we believe that most assets are going to be tokenized. And in that universe, all of the crypto native tokens that have been created over the last couple of years look a lot less appealing. And so what our vision is is that eventually we'll be creating interest rate markets for the real world assets that happen to exist in crypto form. There are a number of different stable coins out there right now. There's actually this mania going on. Everybody seems to be releasing their own. What is your opinion of them? Do you value some more than others? Yeah, so right now there's a lot of stable coins that are being created with the same model, which is collateralizing dollars, and being able to demonstrate that the dollars exist, and issuing a token against them. There's starting to be a lot of competition for this, because the barriers to entry are relatively low. It's a process that the community is becoming comfortable with. Tether had a lot of difficulty with transparency, and there's a lot of distrust about their mechanism of tokenizing a dollar, but a lot of newer projects are doing this in a much more transparent fashion. And my belief is that there's going to be a continuing increase in the number of stable coins that exist because the barriers are low, and the upside to successfully creating a stable coin is huge. Namely? Namely if you hold the dollars and issue stable coins against them, you benefit from the interest rates inherent in dollars eventually, and you can also benefit from transaction costs that you build into the stable coin for the creation, redemption, or transfer of them. So you're saying, if I create a stable coin, the advantage is people will basically lend me money for free. They'll give me their dollars, and I don't have to give them any interest. Right, if you can be the central bank, there's a lot of value there. And so I think that's a really attractive goal that a lot of projects are marching towards. Do you expect a Fed coin to obviate the need for many of these stable coins in the future? It's going to be a long time before we get to that. I do think that we're going to have more and more fragmentation of the US dollar. There's no reason why we couldn't see 50 stable coins with the exact same model, which would eventually incentivize the US government to intervene. We saw this with the myriad versions of the dollar that existed up until the national Banking Act in the 19th century. The same thing might happen again where we see 50 different stable coins, and we eventually say enough is enough. There can only be one tokenized version of $1. But right now, who's winning? Are you making any bets? It's hard to say. A lot of these are so new. Stable coins have had such growth over the past eight weeks alone, where volumes have gone from essentially zero to hundreds of millions of dollars for a lot of these stable coins. It's too early to say. One of things that we're doing is we're allowing our community to vote on which stable coin we create an interest rate market for, simply because it's hard to pick. The best way to pick at this point is to let the community express its opinions. Who is in the lead right now? Right now, with two weeks to go, it's actually Dai, which is a completely decentralized stable coin. It's the only stable coin on Ethereum right now that doesn't follow the same mechanism of collateralizing a US dollar and issuing a token against it. It's entirely encapsulated on the Ethereum blockchain with no offline components. I'd like to bring it back to interest rates, though, because you describe yourself as an interest rate guy. I'm not sure I've ever met an interest rate guy before, but that's kind of cool. You studied economics, and you forecasted them and predicted them, but you think the actual real world interest rates are increasingly going to have an impact on the crypto world. Do you want to unpack that for us a bit? Yeah, absolutely. So crypto has grown up in an era of what was a zero interest rate policy environment. The bitcoin white paper is now 10 years old. We've always known crypto in an environment of essentially zero or low interest rates, and that's an environment of easy and loose money, where capital has been prolific and looking for returns wherever it was found. We're finally starting to enter an environment of rising interest rates, which crypto has never seen before. And it's going to be potentially challenging to the price of a lot of crypto assets, just like it will be for a lot of assets in general, including equities, in the same way. The great dream of bitcoin when it launched was this libertarian vehicle that would be totally divorced from central banks. And now you're saying that actually interest rates and the hikes that are coming by the Fed could negatively impact crypto. Is that right? Right. Crypto is starting to look like an asset class, just like many other asset classes. And a lot of asset classes move together. The impact of the Federal Reserve increasing interest rates has ramifications for every asset class, and it's hard to say that crypto can exist completely independently of any other system. And your long term goal is to tokenize a whole bunch of currencies-- greenback, and yen, and sterling, and so on. But I guess to sort of put on a skeptics hat from that, what's the point? Don't we already have big forex markets? Why do we have to go sort of tokenize things when there's already a immensely liquid and massive market for forex? So the advantages of tokenization are that it brings transparency and programmability to currencies in ways that don't exist right now. Having a token dollar-- and there's a lot of stable coins creating tokenized versions of a dollar-- allows users to not only know send them around the world more easily and more transparently, but to also interact with smart contracts and computer programs. It's very difficult in the traditional financial system to program dollars. Fintech startups in general have a small surface area by which they can truly innovate, but when dollars are actually open to blockchains, there's so much more innovation that can occur. But don't you face a big regulatory hurdle in that, if I want to move $10,000 across the border from here to Canada, that sets off red flags. And if I start whisking tokenized dollars around the world, isn't someone-- isn't the treasury going to show up at your door at some point? Yeah, it seems like the regulatory environment that we're entering into is one in which the on and off ramps between fiat and crypto assets are highly regulated. And it allows governments to actually step in when assets are moving in and out of the financial system, while allowing them to move more freely in the crypto system. It still adds a lot of control, but at the same time not hampering too much of the freedom or programmability. Well, that's all we've got time for. Thank you so much for coming on the show, Robert. Compound is a very interesting company. Good one. You see what I did there? I'm Robert Hackett. And I'm Jeff Roberts. For more Balancing the Ledger, please go to Fortune.com. See you next time.