ShapeShift recently announced an intent to decentralize — a move that would transition the one-time centralized exchange to a full-on DAO. Erik Voorhees, founder and CEO of ShapeShift, comes onto the show to talk about decentralizing the exchange, along with his thoughts on Bitcoin maximalism and crypto regulation. Show highlights:

  • why ShapeShift is decentralizing the company 
  • how ShapeShift used to work
  • what needs to happen for ShapeShift to decentralize
  • why user experience should not change during the transition
  • how the FOX token works
  • what parts of a company cannot be decentralized yet
  • how ShapeShift’s forthcoming foundation will function
  • how ShapeShift decided upon the allocations for the FOX token airdrop
  • why ShapeShift employee and shareholder FOX tokens are locked up for three years
  • what Erik’s role will be going forward
  • how ShapeShift plans to attract devs
  • why Erik believes FOX is not a security
  • how Erik wants the SEC to handle crypto
  • why he believes THORChain is one of the most critical projects in crypto
  • why he is opposed to Bitcoin maximalism
  • Erik’s thoughts on BitMEX’s and Binance’s regulatory issues
  • what he thinks about stablecoin regulation
  • Why Erik believes ShapeShift and Uniswap are not competitors

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Episode Links

Erik Voorhees

ShapeShift: https://beta.shapeshift.com/ 

Decentralizing

Other

Transcript:

Laura Shin:

Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto over six years ago and, as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the July 27th, 2021 episode of Unchained. 

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 Today’s guest is Eric Voorhees, founder and CEO of ShapeShift, (disclosure: they are a past sponsor of my shows)

Welcome Eric.

Erik Voorhees:

Hey, how’s it going?

Laura Shin:

Great. Nice to have you.

Erik Voorhees:

Yeah, it’s very good to be here.

Laura Shin:

ShapeShift recently announced that it’s becoming decentralized. I believe it’s the first crypto company to make that transition. What did ShapeShift used to look like and what will it look like going forward?

Erik Voorhees:

We are a normal centralized company today. We have 66 employees. We have an office. We have VC investors. We’ve been around since 2014, so about seven years. We have decided that we are going to start dismantling the entire corporate structure and open-sourcing all of our code and moving to a decentralized DAO type organizational format instead of a centralized corporate organizational format. So there are certainly a number of decentralized projects within crypto. We’re certainly not the first of that, but I think we are the first established company that has just decided to no longer be an established company and completely decentralize itself to whatever degree we can.

Laura Shin:

And why did you decide to make this transition?

Erik Voorhees:

A few reasons… One is just that the strategic landscape of cryptocurrency, in my opinion, is clearly moving toward decentralized applications and will move away from centralized ones. The reason for this is various frictions that centralized entities have to deal with that decentralized ones don’t. There’s sort of an ideological reason to do this, which is just that Bitcoin’s ethos is one of decentralization, immutability, open, borderlessness, open-source as at a base layer, and to the degree that we can be in alignment with that, I think that is better for our customers, better for the brand, and ultimately better for entire cryptocurrency industry. The more companies that are in line with that ethos, the better.

Laura Shin:

And so ShapeShift as one of the oldest companies in this space, and also you as an entrepreneur and one of the long longest-serving entrepreneurs in this space, both of you have been through a lot when it comes to the different cycles in the industry, and also when it comes to regulation, banking, and all these other issues. So what does that transition signify for you?

Erik Voorhees:

For me, it signifies a development in cryptocurrency in which it’s actually possible to decentralize an organization. This was not something I understood or thought possible even a year ago. The tools that are built by various decentralized projects have gotten very advanced, and they’re developing rapidly. Years ago, we had to beg banks for bank accounts, and we were always on the precipice of having one bank account closed and having to open another one. That was always a stressful thing. And we were beholden to that system. We’re at the point now where we don’t need banks at all. Like not at all. If we need stability, we hold stablecoins. If we don’t need stability, we hold Bitcoin and Ethereum. That’s just a very cool development to see that actually we as an organization can build ourselves on top of the tools that others in this industry have been building.

Laura Shin:

All right. So let’s backtrack a second. So early on, or before you started making this transition, if a user went to ShapeShift, what would happen if they wanted to make a transaction?

Erik Voorhees:

In our first form starting in 2014, someone would arrive at our website and they would say, I have some Bitcoin, I want some Litecoin. We would show them a Bitcoin address. They send their Bitcoin to that address. We, ShapeShift, receive that coin and upon receipt of it, we send them their Litecoin from our own wallet. So it was a quick and easy way to convert one digital asset into another, without custody. And back then, of course, there was no KYC. There was no user accounts. It was just like a vending machine really. And people loved that. It was simple, it was clean. It did exactly what the user wanted in the way that the user wanted it. So that was our first incarnation. 

By 2018, we had gotten pretty large. We were over a hundred employees, and that was at the tail of the 2017 boom. We had invested a lot of time and money into the regulatory world. We came to the dismal conclusion that we may be treated as a financial institution. And as such, would have to start imposing all sorts of financial regulatory obligations on our users and on ourselves. This was extremely costly to implement, but more importantly, violated all of the ethical principles that we held and that our users held. Our users hated it. We hated it. But we felt coerced into that because regulators are going to regulate, and we did not see a way out at that time. So so we bit the bullet we implemented KYC, know your customer, basically a lot of the financial surveillance apparatus that all financial institutions have. And that was a couple of years of struggle, for sure.

More recently in 2020, in the fall, we decided that we would start integrating decentralized exchanges, which are immutable protocols that aren’t run by any company. They’re just open source software that live in the Ethereum cloud or on blockchains themselves. And we would rip out our entire trading system, which had been our lifeblood from the beginning and instead let our users trade directly with these decentralized protocols. So we got out of the business of regulated activity. By getting out of the business of regulated activity, the regulations do not apply to us because we’re not providing that service any longer. And that was the start of our move into an entirely decentralized mode, which we just announced recently.

Laura Shin:

Now that you’ve already made a few of these steps, what are some of the other things that need to happen over the next few months, I guess, to start the process?

Erik Voorhees:

So much stuff? I mean we are certainly not decentralized today. We are starting a process of decentralizing. Part of that is open-sourcing our code. And we have like seven years of software at all levels and layers. So that in and of itself is a huge project. We have to unwind the corporate entity, all of our contracts, all of our banking relationships. We have to do this in a way with shareholder approval and board approval and through all the corporate steps that a normal company has to deal with. And we have to build and cultivate a community of our users now that hold FOX tokens and bring them into the governance process of where ShapeShift goes because we will no longer be governed by essentially a foundation of shareholders. We will be governed by a foundation of FOX token holders. That’s a different paradigm, and we have to cultivate that community and build it up.

Laura Shin:

And so earlier, when you talked about how ShapeShift started, and it was kind of like a vending machine, what is the user experience like now? And then what will it eventually look like?

Erik Voorhees:

A lot of people still think of us as an exchange, but at this point, that’s just a complete misnomer. People can use us to exchange, but we are not in exchange. So ShapeShift is best today as a multi-chain, self custody crypto platform. So that means we support lots of different chains. We’re not Ethereum only, or Bitcoin only, or anything like that. We are self custody, so users always maintain control of their keys. You can hook up various wallets to the ShapeShift platform, like a KeepKey or Ledger or Trezor on the hardware side, or Portis or our mobile app on the software side. Eventually we will add MetaMask as well and other leading ones. You sort of bring your own wallet to our interface. And in that interface, you can interact with your digital assets. You can send and receive, you can track your portfolio balance, you can do trades from one asset to another. That’s kind of the starting point for building a crypto platform that the whole world can use. And now we open source that.

Laura Shin:

And so once it’s a DAO, I guess you may not know what the user experience will be like at that point, but if you’re a FOX token holder, then how will the ShapeShift experience be for you?

Erik Voorhees:

Yeah, so you certainly don’t need to hold the FOX token order to use anything about ShapeShift. You don’t get any worse pricing or rates ShapeShift, doesn’t add any fees to trading. So it’s just like if you went directly to Uniswap or something like that.

But if you hold the FOX tokens, you have pro-rata ability to govern the changes that are made to the platform going forward. So today that’s mostly a superficial benefit. Over time, it will become the complete and holistic way that all major decisions get made for the entire project. So that’s the transition that we’re going through. There are some other utilities of the token. For example, you get rebates on your gas fees if you hold the token and things like that. But primarily it is about moving the ability to govern the organization from the shareholder base to a open community that is global around the token.

Laura Shin:

And so a lot of projects went from centralized to decentralized via a foundation. And it looks to me like ShapeShift will start that way. You’re kind of transitioning from ShapeShift the company to ShapeShift that foundation — or correct me if any of that was incorrect. And so how will that part look?

Erik Voorhees:

Our end goal is not to have a foundation, but we are establishing a foundation that will exist for somewhere between one and five years. Its sole purpose is to help facilitate the decentralization. Ideally, it winds itself down sooner rather than later, because it’s not needed. There are parts of our operations and our projects that we don’t know how to decentralize today. Those parts need to move to the foundation for now. As and when we can figure out how to decentralize them, we will. So a lot of projects have a foundation that’s kind of meant to be perpetual. Ours is meant to be temporary. Ideally it becomes fairly redundant.

Laura Shin:

To start, you airdropped these FOX tokens to users across a number of different protocols, but obviously to ShapeShift users historically. How did you decide upon that allocation, and correct me if any of these figures are incorrect, but as far as I can tell, 34% was allocated to the ShapeShift community, 32% to ShapeShift staff, 24% to the ShapeShift DAO treasury, 7.5% to the foundation. And I believe you yourself have 5% of all FOX tokens.

Erik Voorhees:

This was an interesting part of our design over the last few months. We had 99% of all the tokens. We’ve never sold these things. There’s a limited supply. So how do we allocate these tokens in the best way to cultivate a decentralized community and make this successful longterm? One decision was a lot of these tokens have to get out and into the hands of the community. So we took a third of all of them and airdropped it to over 1.1 million recipients. Over 800,000 past ShapeShift customers, and a bunch of people from different DeFi projects, like Uniswap token holders and Thorchain users and various others. The value of that airdrop ranged from $100 or $200 up to a few thousand dollars.

It was the largest airdrop in history in terms of the number of recipients. That was a great way to just kind of bring everyone in and say like, here you go, thank you for working with us in the past, or thank you for being part of an inspirational community that has helped guide us toward this decentralized path. We put about a quarter of all the tokens into the DAO itself. So this is a fund that is governed by the community. So what that means is that over half of all the tokens are essentially in the hands of the community, either airdropped directly or in the hands of the DAO treasury, which the community of token holders can govern. And then of course, we have employees that have been with us for years and investors that have been with us for years. No part of this decentralized process can, can screw any group, right?

So our shareholders have to be made better off, our employees have to be made better off, and the customers. So the tokens are the way to do that, right? Give tokens out to everyone. And everyone has a stake in the future of the project. Everyone has governance over the project. But unlike equity and unlike shares, these tokens are immediately liquid, and people can do whatever they want with them. One caveat is that all insiders, all employees and shareholders, all of their tokens are locked for three years. So they unlock linearly over that three-year period. That aligns them with the long-term interests of ShapeShift.

Laura Shin:

And do you have a sense of the employees and shareholders, whether or not they plan to participate in the DAO or whether they’re going to move on to other things?

Erik Voorhees:

Yeah, it will be a range. So certainly some of our employees are just going to want a new like W2 salary job somewhere, and they will move on to other projects. And that’s fine. Many of our employees are really excited about this model and they will either part-time or full-time still contribute to what ShapeShift is. Depending on where the token price sits, some of their grants are worth far more than what they ever received in salary. That’s a very cool thing. And then they have complete freedom to decide their own schedule, their own lifestyle. There’s not a nine to five corporate job. They can work on it an hour a week or 50 hours a week, whatever they want. Some of our investors are total totally not familiar with crypto generally. They have no idea that what this even is. Others think this is the coolest thing ever. And they’re you know, I’m so glad to be part of it. And it’s, it’s the full gamut.

Laura Shin:

And what do you plan to do?

Erik Voorhees:

Yeah, so I will no longer be CEO of ShapeShift probably by the end of this year. And I would like to take a little bit of a break — like detach from some screens for awhile. But ultimately my interest in ShapeShift is heightened as it can be a decentralized project. I mean, to me, that is far more exciting than a centralized company. So I plan to just be one influential member among many in the community. I’ll throw my ideas out. I’ll try to help guide it. I will vote with my tokens and all that. So I will certainly have a lot of influence, but I will no longer controlled project as CEO. And I’m okay with that. I love seeing the community take up pieces of this, and we have all sorts of great people that have been employees, ShapeShift that are going to be leading various areas. I’m looking forward to that and it’s going to be a grand experiment.

Laura Shin:

At what point do you think this will be open source? And at that point, do you think that some of the engineers who’ve worked on ShapeShift will keep wanting to work on it as an open-source project?

Erik Voorhees:

Yeah. We’re going to open-source things incrementally, so kind of repo by repo. I think we looked and we have something like 340 different code repos at ShapeShift. A lot of it isn’t used anymore. Some of it is very mission critical. We have to do security reviews of the things that we open source. So as we can review things and feel comfortable that they are ready to open source, well commented and documented, those things will be released and opened iteratively. At the same time, we expect that the community will start building new repos and new things into ShapeShift and around ShapeShift so that we can’t control or predict where that will all go. But as an open-source project, it means that everyone in the crypto community that also has their own project can integrate what they’re doing into the ShapeShift platform. And that’s really going to give us a much better product development path where we are not the limiting factor in what gets built into ShapeShift. So looking forward to that.

Laura Shin:

Essentially what you’re talking about there is like people from other projects that are integrating with ShapeShift. Are there any efforts that you’re making to attract new developers to work on the open-source project? Or do you feel like the FOX tokens will do that naturally?

Erik Voorhees:

Certainly the tokens that were granted out to all of our employees are, I would say a medium term incentive for those people to continue working on the project, even though they have no mandate to, because they have a locked up vested interest in the success of this thing. But ShapeShift is not a charity and does not expect people to just work kind of philanthropically on it. So anyone who is interested in working on ShapeShift as an open-source project can propose to the DAO or to the foundation, either one, for a grant to do work. So this could be some tiny feature development or fixing a bug. It could be someone who creates an entire team of 20 engineers and says, hey, I want to go work on this area of the platform for the next year, give me this big grant, and we’ll do it. And those decisions ultimately come down to the governance of the FOX token holders. We’ll see how all that evolves, but yeah, the DAO has a large treasury — it’s over $200 million of value at this point. It can easily support a great deal of development over the coming years.

Laura Shin:

And have you guys already set up a governance system? Is there a process that you’re using for deciding these things?

Erik Voorhees:

Yeah, actually, we had our first governance vote last night, which was kind of kind of fun. There’s a bunch of really cool tools. Snapshot and Boardroom are two of the projects that we use. These things essentially look at token balances and use that to allow people, to make decisions and vote on things. What’s very cool is that you can hook these things up to things like the Gnosis Safe. So the Gnosis Safe can be like a multisig contract that holds all the FOX tokens in it. And the outcome of a vote will procedurally cause funds to move to a certain specified address. So you get like a nearly immutable system in which decisions can actually move economic value and you don’t need to trust anyone. We’re certainly not at that point yet, but that’s the direction we’re going, and all those tools are ready to go. So yeah, a lot of it is set up, and we now have to just build that muscle of using these tools instead of using our internal slack channel and corporate board.

Laura Shin:

The foundation has an allocation to start, but the foundation, does it exist yet? And if so, how does it plan to participate in the governor?

Erik Voorhees:

Yeah, so it doesn’t exist yet. It will likely exist within two months. It has a relatively small amount of tokens. I think 75 million tokens to the foundation. So 7.5% of all of them. It will be an influential participant, but it will not be able to control the outcome of the decision-making. Its tokens are mostly to put out bounties on work that it, as a centralized entity thinks are important.

Laura Shin:

And so how are you going to staff the foundation? Are you going to have a role there?

Erik Voorhees:

I won’t. None of the current executives of ShapeShift will have a role at that foundation. When we say decentralizing, it’s not like a superficial thing where we’re just like the same team, but now we’re a foundation. We are actually moving the whole power and governance structure that currently exists out of the question over time, iteratively. The foundation will be small. It will likely have somewhere between three and five full-time employees. And these will be people that oversee the open-source development and help cultivate that community. Help guide the project and the product, but they won’t be able to control it. And ultimately will hold on to things like IP or other centralized operational systems that we haven’t figured out how to decentralize yet.

Laura Shin:

So like you literally don’t know how you’ll decentralize that. Cause I was going to ask about that. How does that happen?

Erik Voorhees:

I mean, some questions we just don’t have answers to. So like a simple example, the ShapeShift.com domain name, right? Today that’s held by the ShapeShift company in a registrar’s account held by the company. The company is going away. So what happens to that account? What happens to that domain? There are things like that, which there are ways to solve that, right? There are different like unstoppable domains and things that are decentralized. We haven’t looked into how to use those effectively yet. So that’s a project that we will deal with in the future. We believe those things can be decentralized, but we can’t do everything at once. So that domain will be transferred to the foundation, and it will hold it for some period of time — things like that.

Laura Shin:

Interesting. And I noticed, so one of the businesses under the ShapeShift brand is KeepKey, which is your hardware wallet. And the current plan is for it to become an open-source hardware project, which I don’t know, is that like a typical thing? Is it common for something that’s like a kind of a physical product that is sold to the market to be open source? And if so, how do you imagine that will kind of function as a business?

Erik Voorhees:

To be clear, we haven’t fully decided what to do with KeepKey yet. One of the paths is to turn it into an open source hardware wallet. The firmware is already source, so no one should ever trust a hardware wallet where the the firmware itself is not open source, but the entire platform becoming open source, all software, all code, the entire hardware, design, everything. That is one option that we are seriously considering. That would be very cool because there isn’t any such thing in the world today. That would be great. KeepKey is absolutely the best way to interact with the ShapeShift platform. You get all the advantages of cold storage and just the, the software interaction between those two things is excellent. So even though we support Trezor and Ledger, the UX is definitely best with KeepKey. So we will figure out the right place for KeepKey to go. Another option would be that a company acquires it from us and runs it in tandem with the foundation or with some kind of partnership there TBD. But we don’t have to figure that out just yet.

Laura Shin:

Cause my thinking, when I saw that was that I thought it would probably work best as a managed by a centralized company.

Erik Voorhees:

These are all the questions we’re exploring. If we open-sourced KeepKeys, what it would mean is that anyone would have the schematics and plans to build the device or to manufacture the device. So anyone could go build more of them because they would know how to do it and they could sell those. They could even white-label them and put them under their own brand if they wanted. But you certainly get a little bit of risk in that because then how do you trust, KeepKey, right? You don’t know which manufacturer you’re getting it from. And there are some issues there. Those are solvable with cryptographic signatures and various things, but it is a challenge that we have to be careful about.

Laura Shin:

All right. So we’ll see what happens with that. Okay. So in a moment, we’re going to talk a little bit more about the FOX token, but first, a quick word from the sponsors who make this show possible. 

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Back to my conversation with Eric Voorhees. So earlier we talked about how you decided upon the allocations for the FOX token. How did you decide how to distribute it and where to? I believe there’s going to be some yield farming schemes as well. So how did you figure all that out?

Erik Voorhees:

For the insiders, for shareholders and employees, their tokens have to be locked for a period of time. We wanted that to happen so that it didn’t just get a big pile on day one. Now, how do you do that? How do you distribute over three years when the corporate entity will be gone in six months? That’s actually an easy answer today. A thing called Sablier, which is a smart contract, and you pour a bunch of tokens into it. You tell it a destination address and every Ethereum block unlocks a tiny fraction of those tokens that can be claimed by the address owner. So those contracts are all set up. So all the employees and shareholders can go like, see how much is available to them that day. And they can let them sit there for the next three years.

They could claim it every week if they wished and that will happen now, no matter what, like there’s no way to turn that off at this point. So when ShapeShift the entity goes away, those contracts continue spitting out those tokens to those people over the next three years. To the community, we didn’t want any lockup provisions. So we just did an airdrop. There are a lot of airdrop contracts out there the cool stuff about the cool thing about open source software is you can just copy it and use it, right? So we used a well-formed airdrop contracts that had been security audit and vetted, and we just changed some parameters and used those. And over a million addresses are eligible to receive those tokens. At the end of 90 days, anything that is unclaimed from the airdrop will get dumped into the Dow treasury. And that will probably be a large portion of those of those tokens. So I would guess that the DAO treasury will end up with around half of all the tokens in existence, and there’s no inflation in the FOX token. So that really imbues it with kind of like an endowment of assets that, especially if they appreciate can become a never-ending pool of capital.

Laura Shin:

So at the moment, roughly what is that just maybe a little over half of them have been claimed? Is that what you’re saying?

Erik Voorhees:

No, I’m saying that I would expect, by the end of the 90 days, there will probably be a couple of hundred million that aren’t claimed. Those will go into the DAO treasury. We will see the curve of people claiming it has been pretty steady. We’ll see kind of how it goes as we get to the end of the 90 days. But it’s just so many addresses. Like 1.1 million different addresses over the past six, seven years. So a lot of people have addresses that they don’t realize they’re eligible. And so we need to keep getting that word out and try and help people find it.

Laura Shin:

And what was your thinking about how you chose the different populations? Obviously ShapeShift users seems like an an obvious choice, but what about for some of the other projects?

Erik Voorhees:

We largely just did it on feel. Like what are those DeFi projects out there which have been inspirational to us? So as we learned about decentralized technology and it went from kind of theoretical DAO communities, which sounded cool on paper, but you know, that’ll never work in the real world to, oh, wow, not only can it work, but a lot of people are doing this. And some of the biggest DeFi protocols in the world are built on them. A lot of pioneers were in these projects, and we wanted to just appreciate them. So Thorchain, Uniswap, Balancer, Gitcoin, probably about 12 different protocols. Projects BadgerDAO. These are all inspirational projects to us. We decided to include them in the airdrop because that’s kind of part of the ethos of DeFi. It’s these composable interactive communities that all help each other build a decentralized financial system.

Laura Shin:

In a way, it’s like those are successful decentralized communities. And so you’re kind of just making sure that these tokens go to people who have a higher chance of actually using them rather than leaving them.

Erik Voorhees:

I won’t pretend part of it isn’t marketing, right? Like I want thousands of users of those communities to see ShapeShift, and to get interested in ShapeShift, and to learn about what we’re doing. And those projects are some of the more successful ones. So there’s obviously brilliant creative people involved in that. And if we can get exposure of those people to what we’re doing, hopefully some of them will help integrate those projects into ShapeShift. And hopefully many of them will become users of ShapeShift if they weren’t already.

Laura Shin:

So there are some murmurs that UNI, that token of Uniswap, could potentially be a security. And it also was a token airdrops by a centralized company. Do you have similar concerns for the FOX token?

Erik Voorhees:

No. FOX tokens is definitely not a security. And I think the entire world is waiting for the SEC to tell everyone what’s a security and what’s not right. No one knows. No one knows the lawyers don’t know the SEC. Doesn’t know if you ask anyone at the SEC, take the top a hundred coins on CoinMarketCap and tell me which of those are security and which are not, they can’t do it. They can’t do it. And that’s the SEC. So they always talk about regulatory clarity. There is none, nobody knows where the line is getting drawn. Nobody knows which tokens are securities. All you can do is kind of try to read the tea leaves and try to be as far from a security as possible. 

So that’s what we’ve done. We’ve never sold the FOX token. There’s no promise of return with the FOX token. It does not satisfy the Howie test. So we’re not worried about the FOX token. But I know a lot of projects that are trying to build protocols and tokens, and they have to spend hundreds of thousands of dollars on lawyers that can only give them gray answers. And that’s a problem.

Laura Shin:

So did you consult with the SEC about the FOX token before airdrop?

Erik Voorhees:

Well, you can’t consult with the SEC. Let’s put it that way. You can consult with lawyers, and if you ask the SEC, the best that they can do is put you through a sort of an administrative ruling process. That process will take many months and most projects that apply for that, never get an answer. So no administrative ruling is given. The SEC has only given a couple of these rulings, and they were on projects that were like so clearly on one side or another, that it was not helpful. 

There is essentially a bell curve of these tokens where some are very obviously securities. Some are very obviously not right. Bitcoin being like the best example of them not. And then all these things in the middle, the SEC will not give definitive answers on, even if you go through an administrative review process. No lawyer in the world will tell you which list which tokens fall on. And if you got a list from two different law firms, you can sure as hell bet that they would be different. They would include different ones in each bucket. So, yeah, it’s a total mess. Thank goodness people are continuing to innovate anyway, and they’re not waiting for all these regulators that have no idea about this new technology. It’s been sad to see, especially in America, where innovation is supposed to be like the default assumption and where entrepreneurs are able to build new things, and you essentially get this amazing, like new transparency in finance and immutability in finance, the coolest financial technology ever invented, and the regulators at best are just kind of hemming and hawing and providing zero useful information.

Laura Shin:

So what would you like to see happen? There are a number of proposals out there for how to resolve this from Hester Peirce’s Safe Harbor proposal to some different bills in Congress. What’s your kind of preferred way for how the SEC handles this?

Erik Voorhees:

Yeah. I think the SEC can have a very important role and be a very valuable organization. The degree to which they go after fraud is the scope of that, right? That’s what they should focus on. Go find people that are lying, stealing, defrauding people. Go find those people, bring them to justice. I would applaud that. But classifying things as securities or not, when it’s just voluntary exchange between consenting adults, I think adds zero value. Another thing I think the SEC could do that would be very reasonable is to just issue warnings or caution. Like, hey, this token we’re worried about for this reason or, hey, here’s some things to be mindful of if you’re going to buy tokens. Communicate, but don’t coerce. Don’t get in the middle of two adults in voluntary economic exchange, like that is antithetical to America. It’s antithetical to markets and I think is only counterproductive and harmful.

Laura Shin:

At the moment you don’t have a preference for any of the proposals for how to create more clarity?

Erik Voorhees:

I don’t really love any of those proposals. If I was King of the SEC, I would just go after fraud. I would feel good about that. That should be the proposal. Find the bad actors. It should come down to that. Was harm committed? Did someone do something wrong? Go after those people and stop worrying about whether something is a security or not, as long as people are being honest about what they’ve built and how it works. But I’m definitely in the minority of that. So I don’t expect the SEC to agree with it.

Laura Shin:

Yeah. Well, considering that it’s the Securities and Exchange Commission, and they’re all about securities, I don’t think they’re suddenly going to be like, we’re not going to regulate them.

Erik Voorhees:

I know, I know, it’s a pipe dream.

Laura Shin:

All right. Well, let’s talk about something that might be more fun for you. ShapeShift integrated Thorchain, which is a new chain that enables people to swap tokens from different blockchains without using wrapped versions of those tokens. Why did you like Thorchain so much? It was kind of a like a little bit of a dark horse, I think, when you chose it. There was like a lot of buzz about it, but you know, it didn’t launch until recently. So why did you decide to adopt it so quickly?

Erik Voorhees:

Yeah, so I learned about it in August of last year. So I guess almost a year ago. I’ve been a fan of Uniswap for 18 months. When I saw a Uniswap and used it for the first time, I was just awestruck because it had recaptured some of the magic of the original ShapeShift. It had a simple interface, no intermediary, no KYC, protected users by design of the protocol, and it worked great. It had become massive, right? They became far larger than ShapeShift ever was. And there were days on which it actually was doing more trade volume than Coinbase, as a decentralized immutable project. So I was like, that’s awesome. I loved it. But one big asterisk, one big caveat, is that it’s only a Ethereum and ERC 20 assets. As a Bitcoiner, as someone who believes in multichain future, that was a big problem.

So cool Uniswap, you made this great thing, but how the hell do I buy Bitcoin with it? That’s like the most important asset of all. How do I trade Bitcoin and Tether together? You know, one ERC 20 asset to one Bitcoin asset. And I couldn’t do that. They have wrapped Bitcoin, but any Bitcoiner knows that wrapped Bitcoin is not a Bitcoin. So I was a little dismayed, and I didn’t know, like how do we bring that model to multiple chains? And I had no idea how to answer that question. 

Thorchain answered that question. Thorchain has been under construction for two and a half years or so. And they took this automated market maker, liquidity pool model of Uniswap, but it works across chains. So you can trade from native unwrapped Bitcoin to native unwrapped ETH, you can trade from Litecoin to Bitcoin, Bitcoin to Bitcoin Cash.

Any of the major chains can integrate into Thorchain. That is a huge development for the industry. And I do not think most people have actually recognized that that exists or, or how cool that is. The ability to actually have a decentralized exchange that is chain agnostic is something that has never existed in crypto before. And it works at scale, in large amounts, with high liquidity. Caveat again here, Thorchain is very new, early software, and they’ve had a few pretty atrocious bugs recently, like right now the chain is offline. So it’s not a panacea, and it’s not ready for prime time, but it works. It’s worked with real money. It’s out in the wild, and it’s getting better and better each week. So yeah, I love that project and we integrated it into ShapeShift.

Laura Shin:

And what has been the uptake like have people kind of recognized kind of what a breakthrough it is and really been drawn to use it? Or do you find that they’re still kind of in their little camps, like the ether people and the Bitcoin people. And so there isn’t a lot of interest in these cross chain swaps?

Erik Voorhees:

What has been interesting is you can definitely see who the maximalists are on both sides. So like the Bitcoin maximalists aren’t into Thorchain because it’s supports other coins. Ethereum maximalists aren’t into it because it’s not like an Ethereum based DEX like Uniswap. But for everyone who actually cares about decentralized finance in a broad sense, the ability to move between different chains, move value between different chains is obviously important. It’s a critical piece of infrastructure for this ecosystem. So the growth of Thorchain has been pretty significant considering that they have self-imposed liquidity caps, they’re keeping the pools small and raising them marginally over time because it’s such a new software. And it’s smart that they’re doing that. As those caps get continually raised, the liquidity will grow to the point where the pricing becomes extremely competitive. I would not be surprised if the largest Tether/Bitcoin market in the world ends up on Thorchain. Like that’s the largest crypto market, Tether/Bitcoin. 99.999% of Tether/Bitcoin trading today happens at centralized exchanges. This is completely out of alignment with the ethos of Bitcoin as a decentralized immutable project. So thank goodness there is finally a way to convert Bitcoin to Tether without any intermediary. Everyone in the ecosystem should be celebrating that and helping to contribute to Thorchain and making it better.

Laura Shin:

Yeah, that idea is very cool, especially if a lot of that trading moves from centralized exchanges. It’ll be interesting to see what happens to that landscape. Oh, keep going.

Erik Voorhees:

I’ll add that I don’t think centralized exchanges go away. Like they have certain advantages that decentralized exchanges don’t today, but I’d like to at least go from a situation where 99.99% of Bitcoin/Tether trading being centralized falls to 60% or 50% or 40%, I think that’d be a much healthier market.

Laura Shin:

And, and what do you think are the benefits of centralized exchanges?

Erik Voorhees:

Generally the latency, right? So decentralized exchanges usually have latency issues. So they’re not good for like small trades. You would not want to use Thorchain for a $10 swap of Bitcoin to Ethereum because of the transaction fees would just clobber you, but it will absolutely be the best way to convert $1 million of Bitcoin into Ethereum. And those liquidity pools will get massively deep. Something that people don’t realize is that in Thorchain you can earn yield on all the assets of those liquidity pools. So you’ll be able to earn yield on Bitcoin by depositing Bitcoin into the Thorchain liquidity pool. So all these people that are excited about earning like 1% with BlockFi with a custodian, right, and only from certain jurisdictions, and only under KYC, and financial surveillance. They’ll be able to earn 5%, 10%, 20% yield with no intermediary on Thorchain. That’s huge. So you can tell I’m excited about it. I think it’s a big deal.

Laura Shin:

You’re not the only one — a lot of people have been telling me, and because I’ve been so focused on the book, I have not done a deep dive into it yet, but I definitely will. So a few times in this conversation, a reference to maximalism has come up. Obviously you made waves at Bitcoin Miami where you kind of poked the bears a little bit at the conference. What spurred you to make those remarks against maximalism?

Erik Voorhees:

Yao I’ve been outspoken against maximalism for years, and this, of course, has made me very hated by the maximalists. At that conference, so this was a Bitcoin focused conference and I get that, I respect that. I can appreciate a conference that tries to get all the noise of other tokens and other projects out of there and just talk about Bitcoin — I’m all for that. Right before I went up as a moderator of a panel, the panel before me, their topic was something like why toxic maximalism is good for Bitcoin. So not just maximums, not just like Bitcoin is the only one we should focus on, but like toxic maximalism, like how big of can we be to people who don’t think like us about Bitcoin? And so these people were on stage talking about the virtues of toxic maximalism.

I don’t know who these people were. I don’t know when they got into Bitcoin, but absolutely that is not the community that I come from in Bitcoin. The community I come from in Bitcoin is one of openness, and one of decentralization, of innovation, of caring passionately about monetary economics, and believing that Bitcoin is a better money system for the world. And that if there is an enemy, it is central banks, banking, and fiat currency… Not the Dogecoin community, not the Ethereum community. And yet there are these toxic maximalists that they get up there and just trash these people. And they’ve spun themselves up into thinking that like trashing these people is a virtue and it’s helping Bitcoin and it’s good. I think it’s frankly, I think it’s just kind of disgusting. And I was embarrassed. It was the first Bitcoin conference I’ve ever been to where I was embarrassed about many of the people who were there.

I want to be careful not to cast the entire audience or the entire group of Bitcoiners there as these kinds of maximalists. I think they are a small niche, but they’re very loud. They’re very obnoxious. And the thing that triggered me, when I was backstage, one of the guys that was up talking about this was, he said, “if you’re opposed to toxic maximalism, you’re opposed to Bitcoin, and you’re opposed to freedom.” I believe that was the exact quote. And this to me sounded like such absurd propaganda. And I almost laughed and realized that he wasn’t joking. He actually believed that. That if you’re not a jerk to other communities, you’re against freedom. So when I got up on stage, I addressed that comment and I just said that was bullshit. That was my only comment. A bunch of people in the audience started booing at me, a bunch of people in the audience start cheering. And it went a little bit viral on Twitter for a bit. I don’t want to be the center of maximalism. I just want people to realize that the best attributes of Bitcoin are openness and decentralization, and those attributes are best served by a thriving and diverse ecosystem of different digital assets.

Laura Shin:

So it’s fascinating. You’ve been in the ecosystem for so long, and you’ve been to a gazillion crypto conferences or Bitcoin conferences — why do you think this was the first one where you felt that strain of toxic maximalism that was kind of being pushed really hard?

Erik Voorhees:

We see this from online communities generally, where due to various social media algorithms and due to self-selection of messaging, people end up in bubbles of others who think like them. We see this in politics. We see this on Twitter, for sure. And I think that the, there is a bubble of Bitcoin maximalist, toxic maximalist, whatever they want to call themselves who have just continued to reinforce their own messaging. If you’re trying to get into Bitcoin and you can say something that gets you 300 likes because you slandered someone in another community, you’re going to feel good about that. The people that like that kind of messaging are gonna be attracted to you. I think we’ve gotten to a point where that has just gotten very powerful. The degree to which these people truly, I think they sincerely believe that what they’re doing is right.

I think they sincerely believe that it’s good that they are jerks to other people. And that that is somehow helpful for Bitcoin. It’s just turned into a subculture within the Bitcoin community. I see the same exact attributes starting to develop in the Ethereum community. There are Ethereum maxis and indeed some who I would consider pretty, pretty toxic. It’s a smaller portion, but I worry that it’s just a matter of time until any of these communities. You build up this like this niche minority who is more about the hatred of the other than they are about the virtuous attributes of the chain and assets that they fell in love with.

Laura Shin:

So what do you think can be done to kind of turn down those strains?

Erik Voorhees:

I don’t know. I don’t have any answers. I will keep talking about it, but I don’t know how to solve that, but I think it’s the biggest problem within crypto. It’s the biggest thing that prevents further progress. These communities should be collaborating with each other. Bitcoin is best when Ethereum exists and vice versa. It is no coincidence that the two things have grown up and hit their all time highs together. They are mutually beneficial, they have different attributes. I wish that the communities would see each other as allies in the actual fight, which is decentralized open finance versus centralized closed fiat banking establishment. That’s the real struggle here. And maybe some of the maximalists are too scared of that struggle. Maybe some of the maximalists are too afraid to actually push the boundary against the government or against a regulator. They’re too timid to actually fight. So they just take cheap shots at each other within the crypto community.

Laura Shin:

And out of curiosity, after you made those comments at Bitcoin Miami, did you hear more from maximalists who were mad at you or did you hear more from people who agreed with you and just said I agree with you, but I don’t want to make noise about it because I don’t want the maximalists to attack.

Erik Voorhees:

So there was some of both. When I left the stage after my panel, there were a few people that like just jelled out and heckled me, like “shitcoiner.” I’d never experienced that in person, right. What happens on Twitter all the time. But there are these people who I know haven’t been in Bitcoin for more than a couple of years, right. Where were they at 10 years ago? What were they doing? You know, they obviously didn’t understand this technology early enough. Now I think they’re trying to make up for it by just being jerks. It was uncomfortable. And for the rest of the day, my friends and I were sitting around just kind of talking about this development and how Bitcoin conferences did not use to be like that. And kind of wishing that that old old type of conference would come back.

Laura Shin:

I find this whole thing fascinating, especially since you say it’s very new. I wonder what that means. All right. A couple last questions about regulation, which you know, we’ve talked very generally about. The regulators are making a lot of moves. I guess we’ll start with one of the cases that’s kind of a bit older. Obviously the CFTC and DOJ went after not only BitMEX, but the executives. There were people who felt that this was overreach, and I wondered what your opinion was of that case.

Erik Voorhees:

I mean, anyone who knows me probably knows my opinion there. Where was the wrongdoing? Where was the harm? What did BitMEX lie about? Did they defraud someone? Did they steal someone’s money? Did they actually harm anyone? Or did they just offer a service that other people voluntarily used? Cause it sounds like it’s the latter. It sounds like the DOJ and the CFTC are upset that BitMEX didn’t have the right licenses and was actually allowing Americans to use that service, that kind of thing. These are non crimes. No one is hurt in that. And you just get a tremendous waste of resources and destruction of productive business when regulators go after others like that. So I’m not an expert on the case. Maybe there are things I do not know. from my distant view of it, it seems like the actual crime is the regulators going after private property and destroying commercial business that they had no business destroying.

Laura Shin:

And what do you think about Binance, which right now kind of is at the receiving end of a lot of different regulatory actions across jurisdictions around the world. It’s kind of historically known for maybe leaving certain jurisdictions to avoid regulators. What’s your take on what’s happening there?

Erik Voorhees:

I don’t have any inside knowledge there. Binance is obviously the biggest exchange, I think the biggest cryptocurrency company in the world. They’ve done a tremendous job of building a business. I respect CZ’s ability to execute and to build something so big. They are building so fast and in so many directions, it is not surprising to me that they’ve got the attention of a lot of regulators. And again, if they’re doing something actually wrong, if they’re actually harming someone, let the regulators allege the harm. Let’s hear that and take them to court for harm. I don’t want to hear a bunch of like, you don’t have the license to operate in our jurisdiction. That’s maybe appropriate for like Soviet Russia, but it should not be appropriate for any like Western market economy.

Laura Shin:

Okay. So with stablecoins, there’s also been a lot of noise being made here in the US recently, where the SEC Chairman Gary Gensler was saying that some stablecoins might be securities and the Presidential Working Group on crypto already started you know, looking closely at stablecoins. What’s your take on how stable coins should be regulated here in the US?

Erik Voorhees:

Well, first of all, they already are regulated. Like everything that is involved in finance is regulated. Anyone who’s issuing stable coins and backing it with fiat is already under a tremendous amount of financial regulation. So we need to remove this idea that stable coins aren’t regulated. Same with crypto. People say crypto is not regulated; it absolutely is that there are so many regulations that apply to this stuff. It’s absurd. What should be the regulatory situation with stablecoins? Again, none, unless people are committing fraud. People have built a new financial asset, and other people are finding it valuable. That should be the end of the story. That should be it. So I think what will happen is that governments will apply further regulations because that’s generally what they do. They always ratchet regulations on top of more. They never deregulate, contrary to popular opinion.

And as that happens, the UX, the user experience of using those stablecoins will get worse. You’ll have to jump through more hoops to use them. There’ll be higher capital requirements, which will mean that fees have to get added at various places. For a user, it will end up at worst experience, and you’ll find that they will start moving to the decentralized alternatives. The greatest beneficiary of stable coin regulations will be DAI, the decentralized stablecoin on Ethereum. And there are a dozen other projects that are decentralized stable coins like DAI that are waiting in the wings to take this market. The more the governments and regulators clamped down on voluntary economic exchange. Now that there is an ability for people to move,to decentralized open-source technology with no intermediary, the more they will have a reason to do so. So I’m very glad that that alternative exists. I think those alternatives get increasingly used to the degree that the UX of the centralized stablecoins gets worse.

Laura Shin:

Yeah. I agree with you that the more we’re going to see this type of regulation, I feel the more people will move into DeFi.

Erik Voorhees:

One more comment on this. The stablecoin thing is getting wrapped up in this whole CBDC discussion. And I think everyone realizes that like the United States and China are going to be in this battle for like the the digital currency of the future. Both those countries believe it will be a digital fiat currency. Obviously Bitcoiners have a different view on that. But the best that the US could do from a global political strategy perspective would be to allow these US-based stable coins that are already massive to continue to flourish. That is the best chance that the US maintains dominance from a digital fiat perspective. And if they just like kill that in in the cradle, it would be so foolish, but they may well do it.

Laura Shin:

Yeah. Well, actually, I don’t know if you are aware the former CFTC Chairman Chris Giancarlo or maybe Brian Brooks, I believe, is in favor of this kind of private stablecoins. I’m just blanking for a second, but they are behind a number of private stablecoins.

One other thing I wanted to ask you about was, you know, right now, the stablecoins are being all transparent and revealing what’s backing their stablecoins. So at the moment, Tether kind of has the least amount of direct cash reserves and then Circle has a little bit more at like 67% and then Paxos came out and said we have 96%. So it was just curious if you have any opinion on the structure of stablecoins. 

Erik Voorhees:

I love that example because it is a demonstration of how markets regulate themselves. None of those three companies are doing that because they were told to do it by a government regulator. They’re doing it because they’re all in competition with each other and the market demands transparency. If you have a stable coin and you can demonstrate that you are more sound, you have a huge advantage over others. So you get a far healthier financial system from that competition without a single regulation being written. My guess is that when the regulations get written, the further regulations on top of these things, you’re going to end up with the worst products that act in an antithetical way toward what the market wants. I wish that the government would just allow this incredible innovation to flourish because that is where all human ingenuity and wealth comes from is this market competition. It is what made America great. It’s what made crypto great. It’s why crypto has thrived and grown and innovated in so many different directions. It’s because right now it is somewhat free. I hope it can continue to maintain that. At least at the protocol level, it always will be.

Laura Shin:

Yeah, well, I think the one clarification I would make is that at least in the case of Tether, I believe the new transparency is because of the settlement with the New York Attorney General. So so their hand was a little bit forced there.

Erik Voorhees:

Right. So I would guess if USDC is doing it, they would have to do it to be competitive.

Laura Shin:

So I know you’re not the decider for ShapeShift going forward, but I did want to ask: how do you think ShapeShift could or should compete with Uniswap? Because it’s so dominant in the deck space.

Erik Voorhees:

Yeah, we are not trying to compete with Uniswap. We are not a DEX. We have actually integrated Uniswap into ShapeShift along with a dozen other DEXs. So when someone’s doing a trade on ShapeShift, it is being routed to any of those does indexes that have the best price at that moment. So we are huge fans of Uniswap. We hope they get massive. Their liquidity pools being bigger is better for us. There’s their strength is our strength.

Laura Shin:

So ShapeShift going forward will be more like a DEX aggregator.

Erik Voorhees:

Technically we’re not even an aggregator because we hook up aggregators into ShapeShift, but that’s a little bit better way to think about it. We integrate decentralized protocols into ShapeShift. So we don’t have to compete on any vertical with any of those.

Laura Shin:

All right. Well, we will see how this whole process unfolds. It’s been super interesting discussing it with you, and I really appreciate that you came on Unchained. 

Erik Voorhees:

Yeah. Happy to be here.

Laura Shin:

Well, actually, and last question, where can people learn more about you and ShapeShift?

Erik Voorhees:

Yeah. ShapeShift.com. Everyone should check to see if they’re eligible for the airdrop. Cause a lot of your listeners will be I’m @erikvoorhees on Twitter. Those are probably the best two places..

Laura Shin:

All right. Well, thanks so much for coming on Unchained.

Thanks so much for joining us today. To learn more about Erik and ShapeShift, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and Mark Murdock. Thanks for listening.