Nadav Hollander on How Dharma Could Create New Forms of Debt

Laura Shin:
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin. If you’ve been enjoying Unchained, pop onto iTunes to give us a top rating or review. That helps other listeners find the show. Here’s a pause for the ads. My guest today is Nadav Hollander, founder of Dharma Protocol. Welcome, Nadav.

Nadav Hollander:
Thank you so much, Laura. It’s good to be here.

Laura Shin:
What is Dharma Protocol?

Nadav Hollander:
So, Dharma is a protocol that enables borrowing and lending of crypto assets on blockchains like Ethereum. So, you can basically kind of think of it as this infrastructure layer that sits on top of the Ethereum blockchain, that enables any internet-connected application to programmatically tap into a line of credit or a vehicle of savings, in the form of crypto assets. And so, kind of our general goal here is to build the infrastructure today that in, you know, five years or so will power the financial services of the so-called open financial system.

Laura Shin:
So, how does Dharma work? Walk me through an example of how someone might borrow money using the Dharma Protocol.

Nadav Hollander:
So, there’s a couple things that are worth clarifying. So, first of all, Dharma is a protocol and not an end-user application in and of itself, right? So, our users aren’t necessarily borrowers and lenders, per se, but more so application developers that kind of tap into our infrastructure and build the actual online storefronts for these experiences. Now, if we’re going to kind of walk through this from the borrower perspective, like, what it would look like for them to tap into a line of credit that was originated by Dharma, basically, at least today, the majority of volume on the protocol is sourced by what we call relayers.

So, essentially, like, if you’re going to have a debt agreement, there’s kind of two things that need to happen, right? On one hand, you need some way of administering that debt agreement, so you need some way of actually kind of tracking how many repayments have occurred, of making sure repayments are sort of funneled to the correct beneficiary at any given time, and then, you also need some way of actually, like, essentially, like, bringing that debt agreement into fruition, like, somehow matching the borrower and lender, finding essentially a source of credit for that borrower.

And so, in order to solve that latter problem, we’ve introduced this concept called essentially relayers, which are these kind of, like, centralized actors that host some sort of order book online that you can kind of imagine is looking like a bulletin board, where borrowers can essentially post requests for different types of loans, and then, if a creditor comes in and decides that they want to invest in one of those loans, then that relayer is going to earn a fee, essentially. This might sound very familiar if you’re familiar with the 0x protocol. It is a highly analogous concept, and basically, the idea there is that any body in the world can start one of these relayers. You don’t need permission from Dharma Labs. If Dharma Labs was to go, like, bankrupt tomorrow, this mechanism could still function, essentially.

Laura Shin:
Yeah. For listeners who have not heard my episode with Will Warren of 0x, you should definitely go back and check that out, because he did describe very similar concepts. So, what problems are you trying solve? Like, what problems in net debt or lending can be resolved using this protocol rather than a centralized service?

Nadav Hollander:
So, yeah, I mean, first of all, like, a higher level, I’d say that just in general, if you’ve been in the blockchain industry for a while, basically, like, there’s always been this concept of “banking the unbanked” that’s been very popular as a supposed use case for blockchains, i.e., like, building financial services that are fundamentally, globally accessible, and more equitable and transparent, et cetera. Realistically, like, that utopic vision of, like, you know, we’re going to bank the two billion unbanked using cryptocurrencies, like, that’s probably a little far right now.

But if you kind of start there and work, like, backwards, in terms of the things that we need to enable that, there’s a lot of fundamental building blocks that need to be created. This includes things like stable coins, a.k.a. tokens that are in some way pegged to a stable fiat asset, or this includes things like having, like, good derivative markets or good mechanisms for actually trading tokens, and crucially, one of those pieces is having a robust, decentralized credit market, because you know, if we zoom into the future and imagine one day that a, you know, a borrower in Ghana is on an application on their phone, and they press a button, and they’re instantly able to access some sort of line of credit, in the background, that, like, application needs to somehow be able to tap into a decentralized credit market in order to actually source that liquidity.

And so, essentially, the problem that we’re trying to solve is basically to fill that gap. We’re trying to basically build both a decentralized manner of matching borrowers and lenders for credit liquidity, and a decentralized manner of actually administering a loan throughout its life cycle, without having to have any sort of intermediary standing between the borrower and the lender.

Laura Shin:
And there are actually a lot of fin-tech companies now that do this kind of thing. You know, maybe, the ones I’m thinking of have actually mainly served the US markets, but I do think there are ones that are maybe more international as well. So, why is it better to do this in a decentralized fashion, rather than on some of these really big services like LendingClub, or SoFi, or whatever it might be?

Nadav Hollander:
So, I think it’s crucial to remember that, like, while the internet has kind of evolved in a manner where it’s kind of, it has no real conception of borders, and is kind of, like, globally accessible, you know, with an asterisk there for, like, certain despotic countries, it’s not like if you’re in Ghana or in Karnataka, India, or in, you know, name X country, it’s not like you can go to LendingClub.com and take out a loan from that web site, right? And the reason for that is that while the internet doesn’t necessarily have, like, robust concepts of borders, the banking system, which pretty much any sort of financial service today is heavily coupled to, very much so has a concept of borders, and very much so is kind of coupled to geographic locales.

And so, that means that it’s like, it’s not like, if you’re a lending club and you’re trying to expand operations, it’s not like it’s trivially easy to turn the lights on on, you know, enabling support for, like, Ghana, or something like that, right, because there’s this, like, highly friction-laden bottleneck at the point of the actual banking infrastructure. And so, the argument that I would make is that with something like a decentralized credit market, where there’s no sort of centralized institution that needs to kind of stand as a cog in the middle, there’s so much less of a regulatory burden that needs to be undertaken by some sort of central party that’s going to kind of bring together the world’s credit markets, because there is no central party, right?

And it’s kind of like imagining, like, what would the internet have looked like if, like, instead of being created on top of open standards, it looked more like an AOL, or instead was kind of, like, this closed network that, you know, people had to be permissioned onto? And so, I would argue that by having a decentralized network for actually sourcing credit liquidity, you kind of, it’s almost like a regulatory arbitrage in some senses.

Laura Shin:
Well, in that regard, if there are certain regulations around, like, who can lend to whom or under what conditions, then could those be circumvented using this? And so, in that sense, is this a way around those regulations? Like, is this basically going to lead to illegal lending?

Nadav Hollander:
I don’t necessarily think that that is the expressed purpose of it, and I don’t think that that’s, like, what will represent the majority of what happens on this platform. But look, in general, when you’re touching cryptocurrencies, the whole idea of this asset class in that, like, with permissionless innovation, a lot of use cases become essentially a lot more user-friendly and a lot more globally accessible, and that’s great. But permissionless innovation is very much like a double-edged sword, and this is, you know, I’m sure, you’ve been in this industry for a long time, this is discussed in pretty much, like, every use case that’s ever been discussed in cryptocurrency has its dark side…

Laura Shin:
I feel like this is, like, a question that comes up in every one of my podcast episodes…

Nadav Hollander:
Yeah, no, definitely, and I think, though, that’s like, it’s something that us as technologists in this space have to, like, wrestle with, which is like, what are the negative consequences of what we’re building. I would argue, however, that much like the internet itself, which had its terrorist chatrooms back in its heyday, and back in its salad days, rather, and that was an easy way to write off, you know, a permissionless information network’s capabilities. I would argue that, as a nice heuristic, like, empirically these things tend to turn out net-positive.

And so, I think that the amount of people that would benefit from being able to access a line of credit online, who may not have previously been able to, will outweigh the, you know, the drug dealers and traffickers who may be able to access credit when they were prior not, unable to.

Laura Shin:
One thing I thought you might say there was that the underwriters and the relayers themselves could kind of, like, impose those, you know, regulatory restrictions, but you, but they actually can’t, is that what you’re…?

Nadav Hollander:
They actually can, right?

Laura Shin:
Okay.

Nadav Hollander:
So, I mean, that’s actually a very fair question. So, I think it’s worth, like, taking a step back and perhaps, like, giving a much more, like, step-by-step overview of how the protocol works. I think I’d give a very glossy, high-level explanation earlier, so maybe I’ll dive into more of the nuts and bolts. So, essentially, there are two different actors, classes of actors in the protocol, right? There are what are called underwriters and relayers. And so, relayers, as I explained previously, are essentially these centralized is the host orders from borrowers and essentially match them with lenders in some capacity, and earn fees for that.

Now, naturally the question that comes up is, like, “Okay, like, how am I supposed to know, as a lender on this network, that a borrower’s credit-worthy, when they’re just a dress of letters and numbers, with no kind of prior history?” And so, this is essentially where the concept of underwriters comes in. Underwriters are centralized actors that basically vouch for their belief of a borrower’s likelihood of default. So, essentially, a borrower’s going to come to them, and the underwriter’s going to say, “I believe Borrower X has a Y percent chance of defaulting on their loan,” and they’re going to cryptographically attest to that.

And the idea is that, similarly to the relayers, they could, they would, like, earn a fee, essentially, if that loan is filled. So, taking a step back to your question, yes, that is correct, as in, like, the relayers and underwriters, if they were to have somehow facilitated, you know, a transaction, let’s just say to an OFAC-sanctioned individual, like, somebody who’s, like, in Iran, let’s just say, then yes, they could face legal consequences to that. And so, so it’s likely that they would have to implement some sort of check to make sure that doesn’t happen, but I think in the abstract, like, if we’re talking about a network in which anybody can build a relayer or anybody can build an underwriter, that doesn’t necessarily categorically mean that every relayer and underwriter is going to be benevolent and compliant.

I find this to be kind of analogous to just, like, Bitcoin in general, right? It’s like, you can buy and sell Bitcoin on many different exchanges. Those exchanges very much lie on the spectrum of how much they respect the sanctity of, you know, various money transmission and securities laws…

Laura Shin:
Huge spectrum.

Nadav Hollander:
A very, very large spectrum, right. So, I think that it’s a similar sort of dynamic, and our philosophy is that it’s like, these, like, jurisdiction-specific compliance protections don’t necessarily belong at the core protocol layer, and that it makes a lot more sense for those to be essentially enforced at the application layer instead.

Laura Shin:
Let’s go back to the underwriters. How do Dharma underwriters assess potential borrowers’ credit worthiness? Is it just each has their own method of doing it, or…?

Nadav Hollander:
So, yeah, I mean, so, we don’t necessarily define exactly how they’re supposed to do it. The whole idea is that it’s basically, there’s this marketplace for underwriters, right? And these underwriters are kind of, like, known centralized institutions, and if they do a particularly good job of underwriting loans, then that will be, like, markedly visible on chain, right, because you, let’s just say, like, I am considering making an investment in a loan that a certain underwriter has vouched for. I can look up all loans that are associated with their address.

I can see the sort of predictions they had made as to the borrower’s credit worthiness every single time, and I can compute kind of a heuristic score of that underwriter’s, like, “trustworthiness.” And so, at the protocol layer, we don’t necessarily define, like, you know, the underwriter has to pull a FICO score, or they have to go and you know, like, I don’t know, like, get a blood test done on, like, the borrower, or use some crazy data points, you know? Like, these things lie completely undefined at the protocol layer because essentially, the incentive mechanism is set up such that, like, underwriters, like, by whatever magic method, if they’re really good at their job, they’re going to get more business, and if they’re really bad at their job, they’re going to get less business.

Laura Shin:
And do you imagine that the underwriters will be, like, existing underwriters, or new types of underwriters that try to take advantage of this protocol?

Nadav Hollander:
So, I think that’s a really interesting question. So, you know, like, I find it less likely that these will be kind of traditional debt underwriters, and much more likely that these will be upstart lending businesses, particularly trying to underwrite classes of debt that don’t really even exist in the real world right now, and I’ll give you a couple examples. So, there’s a lot of, like, use cases for lending that are, like, highly specific to the cryptocurrency industry, and wouldn’t have made sense in a sentence like, if you were to, you know, talk about them ten years ago.

So, one example is, like, there’s this emerging class of crypto-collectibles, you know, the most notable example being CryptoKitties, but there’s tons of these nowadays. I think if you go on OpenSea, which is an exchange for buying and selling these, there’s something like, you know, like, a million different NFTs listed on there, it’s something crazy. And something that we’re really interested in is, like, these nonfungible assets can become extremely valuable, right? And essentially, with Dharma, you can actually take a loan out against one of those assets.

So, you could, like, almost in the same way that a mortgage is a loan backed by a house, like, you can take, you know, your extremely rare CryptoKitty that’s worth 100,000 dollars, and take out a line of credit against it. Now, you know, you might be wondering why I’m talking about this in the context of underwriters. What’s kind of funny about that is that if you’re a creditor and you’re thinking about investing in this Kitty-backed loan, per se, somebody needs to appraise the value of that CryptoKitty, right?

Laura Shin:
Right.

Nadav Hollander:
Somebody needs to, like, come in and actually be able to, like, assign, like, what would be the fair market value of this CryptoKitty today, and insofar as that’s the case, like, what is the likelihood that, you know, this lender would not be made whole if, like, the borrower defaulted. And so, I give that example because it’s like, you can imagine that an underwriter emerges that focuses essentially on appraising the value of digital collectible assets. And personally, I find those sort of niche classes of crypto-native debt to be much more likely to emerge than for a kind of traditional underwriter of, like, you know, unsecured personal loans, or like, credit card refinancing or what have you, jumping into this market, because, like, it’s, the UX in this space is so difficult.

Like, all-around, right, like, it’s like, even just, even interacting with a DApp in any capacity requires you to, like, do crazy stuff, like install MetaMask, and you know, save your seed phrase, and all this sort of stuff. So, we find it much more likely that the use cases that are going to be compelling in the sort term are going to be people who want to borrow crypto assets, and are, like, comfortable interacting with crypto assets. And so, I think naturally, as a result of that, that means that the sorts of underwriters that will be attracted to the network will similarly be kind of crypto-native.

Laura Shin:
What happens in that case where someone puts a CryptoKitty as collateral, but then the value of the CryptoKitty falls? How does that work?

Nadav Hollander:
Well, so, it’s interesting you say that. So, we’re actually at the moment working on adding margin-calling functionality to the network, where essentially, like…this is perhaps more relevant with, like, fungible assets, like with, say, something like if you had Ether up for collateral, and you know, you have, like, a regular spot price for that Ether. So, with a CryptoKitty, it’s a little bit harder to say, but I can tell you that in the concept of, that if you’re talking about a loan that is backed by a fungible asset, essentially when the collateral drops below, like, a certain threshold, then the collateral becomes eligible for liquidation.

And so, I guess you’d have to, in the CryptoKitty example, you’d have to get some sort of, like, rolling notion of, like, what the CryptoKitty’s value is. But that’s kind of hard to do, because it’s a nonfungible asset, and not necessarily, like, something you can pull a spot price on, like Ether.

Laura Shin:
Okay. So, what happens if a borrower defaults?

Nadav Hollander:
So, this is very case by case, right? Intentionally, we’ve built the protocol to be, like, very flexible and unopinionated, and so, essentially, you can kind of think of it as, like, there’s, like, an open-source set of loan templates that people can use in the protocol, and they define everything from, like, super-simple unsecured loans, to loans that are collateralized with some sort of nonfungible token, to loans that are, you know, very, like, very much oriented towards, like, speculative use cases, and are, like, intended for say, like, shorts and things like that.

And essentially, like, each of these classes of loans has their own sort of default-deterrence mechanism associated with them. So, right now, you know, we’ve been live on May, since around May. The vast majority of volume in Dharma is represented by, like, loans that are overly collateralized by some other asset, right? So, it’ll be like, I put up 100 dollars of Dai and borrowed, like, 50 dollars’ worth of Ether against it, and the basic default-deterrence mechanism there is that if I don’t pay back my 50 dollars’ worth of Ether, then my Dai is going to get seized by the lender.

So, it’s very simple, but there are other classes of loans in which the penalties for defaulting could be very different, right? Like, you can imagine that there would be an underwriter that essentially originated the borrower, right, they kind of, the borrower comes to their web site, applies for a loan, the underwriter approves them, kind of assigns a sort of score to them, and then in addition to actually, you know, taking their order and forwarding it off to a relayer in order to kind of complete the lending process, they actually have the borrower sign, like, a meet space, like, lending contract, right, like, a real legal contract that has some, like, real legal stipulations as to what might happen to them if they were to default on the loan.

And the underwriter has an incentive to do that, because they are, you know, they’re going to get compensated on the basis of how good of a job they’re doing, because if they, if they underwrite a lot of good loans, they’re going to get more business.

Laura Shin:
Right.

Nadav Hollander:
So, you know, in short, we’ve intentionally kind of left that portion undefined, and instead try to define the incentives of the protocol at large, such that if you’re underwriting and originating good debt, then you’re going to get compensated more by the market.

Laura Shin:
Okay. And to take a step back, how are debts paid back?

Nadav Hollander:
So, this is actually kind of like one of the beauties of the protocol, is that in the traditional financial system, there’s this construct of what are called paying agents, right, where essentially, like, if a loan, like, let’s just say you take out a mortgage. That bank, like, now owns, like, that loan, right? They own the right to be repaid, or to, you know, foreclose on your house. And what tends to happen is the financial system is that they’re going to go, and then, you know, sell that loan to some other bank, and then that bank’s going to go, and you know, package that loan with a bunch of other loans, and then take that package and sell it, and so on and so forth.

And the problem is, is that if you’re the borrower, like, you this is totally unknown to you in the background, and it’s not like you know who, like, the end user is that actually is the final beneficiary of your loan at any given time. All you know is that you need to, like, you know, pay back a certain, through a certain portal on the bill that got sent to you in the mail.

Laura Shin:
Right.

Nadav Hollander:
And so, the person who’s taking that buck is a paying agent, right? They are a person that’s, whose job is to basically take the money, and you know, by some way, shape, or form, funnel it to its correct beneficiary, as stipulated in, like, various legal contracts. Now, the way that Dharma works is that essentially, we do away with the concept of there being any sort of individual that has to keep track of who owns the loan, and instead, we have a smart contract that administers the entire life cycle of the loan. So, you can imagine that in the Dharma example, if Alice were to lend 100 dollars to Bob, and then Alice were to go off and sell her loan to, you know, Charlie, Bob doesn’t need to have any sort of knowledge of that.

If Bob wants to repay his loan, he basically sends his money back to, like, the loan smart contract, and the loan smart contract automatically routes it to whoever is supposed to be the given beneficiary at that time. And so, essentially, you kind of get to add a lot of the efficiencies of essentially, like, cryptocurrency trading, but to the world of debt capital markets.

Laura Shin:
And so, basically the borrower needs to put the payments into whatever address it is that is part, you know, delineated in the smart contract to make those payments from, and if they don’t, then it goes into the default mode, and whatever happens in the default is determined by the underwriter.

Nadav Hollander:
It’s determined by the loan contract itself.

Laura Shin:
Okay.

Nadav Hollander:
And that can sometimes be adjudicated by the underwriter, but often it can be some sort of penalty that has nothing to do with, like, any sort of underwritten agreement, right? Like, the majority of the loans in Dharma today, there is no underwriter even involved in them. It’s just a contract that holds the collateral, and that if the borrower does not repay, then the collateral gets seized.

Laura Shin:
Okay, and earlier you talked about serving these kind of, like, unbanked populations, but you were mainly naming ones abroad. Like, can you just tell me all the populations you think that could be served by this protocol now that are not served by the traditional credit markets?

Nadav Hollander:
Yeah, super-good question. So, I think I can answer this in, like, kind of, like, two tiers, one which is, like, more realistic, like, today use cases, as in, like, not pie-in-the-sky, sci-fi sort of stuff, and then, like, the, kind of, like, five years out or ten years out, whatever the time horizon is that we think it is, that’s realistic. So, in the long term, I think, like, yes, there are something like two billion unbanked people in the world, and all of them are rapidly coming online, and though they can go onto Facebook.com and make a social networking account, they can’t necessarily go onto LendingClub and take out a loan.

So, I think, like, in the long term, like, these are the people that we’re really excited about. There’s a lot of credit markets in the world that have just, like, totally insane conditions, that aren’t even necessarily, like, third-world countries per se. That would benefit a lot from things like this. For instance, Brazil has some of the highest APRs in the world, and you know, is solidly, like, a developed country, very technology-literate, very modern, but just because of just the way the, like, like, socioeconomic reality on the ground has developed, like, APRs are just, like, totally insane.

That’s all, like, long-term stuff, and I think, like, it’s, you know, it’s fun to think of that sort of stuff, but like, realistically, until cryptocurrencies are more scalable and easy to use, that’s, like, probably not what’s going to happen. I’d say in the short term, the people who we think most about are either people who are, like, very much on the margins of the current western financial system, or are people in the cryptocurrency industry specifically, who for some reason need to access a line of credit. So, in the latter category, the kind of lion’s share of it is basically people who are trying to borrow and lend for speculative purposes, right?

It’s people who are essentially like, “I need to, I feel bearish about a certain token, and I want to short it, and so, I’m going to borrow that token and then sell it, and then purchase it back later and return it.” Or it’s people trying to get leverage on their assets in some capacity, but I think that, like, that category of crypto-native use cases actually has a lot of facets to it that aren’t necessarily speculative, but that just kind of, like, solve problems that are niche to that actually crypto ecosystem, right? So, I’ll give you a certain example. Are you familiar with what Plasma is?

Laura Shin:
Yeah.

Nadav Hollander:
So, Plasma is this kind of framework for scalability on top of Ethereum, and essentially, like, the way the concept works at, like, a really high level is that you take your tokens on the main chain, you deposit them onto a Plasma chain. The Plasma chain is, you know, presumably much more efficient, and then, once you want to, like, go back to the main chain, you need to, like, with draw your coins out of there, right? The problem is is that for a whole bunch of different reasons, when you’re withdrawing those coins, there’s kind of, like, this seven to 14-day, like, thawing period, at least in the current designs that they have for it, and that’s kind of a crappy UX, if you’re, like, a normal user of any application ever.

Laura Shin:
Like the normal banking system.

Nadav Hollander:
Yeah, like the normal, yeah, exactly, and we’re trying to build things that are better than the normal banking system, right? And so, I think there’s, like, this is an example of somewhere where there’s a really interesting use case for debt, right, because essentially, if you had somebody that just fronted you the money, and like, right off the bat, and kind of was able to, like, buy the risk of that, you know, of you defaulting, essentially, because of X, Y, Z technical reasons in the Plasma specification, then we could make UX, like, much, much better, right?

Laura Shin:
Right.

Nadav Hollander:
And so, I like to list that as an example of, like, there being crypto-native use cases for borrowing and lending that aren’t even, like, underserved now. They’re just entirely unserved right now because they, like, don’t exist, and they aren’t even necessarily speculation-related themselves. Now, and before I forget, I wanted to kind of go into the other category of what I view as being use cases that are viable in the short term, which are, like, people who are kind of, like, on the edges of the financial system, even in, like, the western world today.

And this is, like, a really interesting category of people, right? So, one example would be, like, gray-market businesses. So, for instance, if you are a marijuana dispensary, right, it’s not necessarily you can go over to a Wells Fargo and take out a loan from them, because they have, you know, a million and a half different compliance requirements that are going to forbid them from doing that. And so, I think it’s really interesting to imagine a world in which the sort of, like, this emerging cannabis industry, which is projected to be, like, bigger than the wine industry and is just growing at this, like, unbelievably rapid rate, is able to access credit financing in a manner not unlike how people raise ICOs right now, right?

And so, I think a lot of use cases on the kind of margins of the financial system like that are interesting as well.

Laura Shin:
Interesting, yeah. I feel like every conversation I have is somewhat similar, where people are saying, like, speculation is one use case, and then sort of these kind of regulatory gray areas. We’re going to discuss why Dharma doesn’t have a token, and how Nadav got into crypto, but first I’d like to take a quick break for our fabulous sponsors. Here’s a pause for the ads.

Actually, when I was reading about all the things you can do with Dharma, there were a couple things that you had written about or spoken about on podcasts that interested me. I just want you to, like, briefly describe them.

Nadav Hollander:
Yeah, totally.

Laura Shin:
Initial debt offerings, or tokenized SAFTs?

Nadav Hollander:
Yeah.

Laura Shin:
Trustless savings accounts and tokenized municipal bonds?

Nadav Hollander:
Yeah, definitely. So, okay, what was the first one on there?

Laura Shin:
The tokenized SAFTs, or initial debt offerings.

Nadav Hollander:
Yeah, the tokenized SAFT, yeah. So, this is something that we’re, like, pretty interested in. We haven’t seen anybody do it yet, but basically it’s like, like, the ICO boom that happened in 2017 was almost entirely based around, like, selling tokens to the public that had, like, equity-like properties to them, right? Like, you know, people buy these things because they think they have, like, a certain chance of going to the moon, or they’re going to go to zero. And what’s kind of interesting is that in the real world, like, equity-like assets are actually a much smaller of the global economy, much smaller portion of the global economy than, like, debt, right?

Like, I think, like, the, you know, I’m going to pull these numbers out of my head right now, they might be a little bit inaccurate, but I think, like, the global market cap of, like, equities is, like, somewhere around, like, 70 trillion, whereas, like, the market cap of global debt assets is, like, 210 trillion or something like that. And so, it’s kind of interesting to imagine, like, what if we could take the ICO model and apply it essentially to, like, debt fundraisers, right? So, essentially, you could benefit from selling tokens that, like, plug natively into this kind of infrastructure, this global infrastructure for either custodying or trading, or, you know, building applications on top of whatever crypto assets and have them be debt assets, like, you know, that look much like, say, a corporate bond would.

So, one use case that we’re pretty excited about is just really, like, allowing companies of all shapes and sizes to be able to, like, raise debt from the general public in a way that has a very low kind of initial fixed cost to get set up.

Laura Shin:
And what about, I’m interested in these trustless savings accounts and the tokenized municipal bonds as well.

Nadav Hollander:
Yeah, yeah, yeah, okay. So, trustless savings accounts, so, again, this probably falls into the, a bit more sci-fi category, but we’re really excited to see somebody build this out. Essentially, if you have, once you have, like, a good decentralized credit market, right, and you have all these different, like, classes of debt, that an application can kind of go in and source liquidity from. You can imagine that we created a savings account that was entirely administered by a smart contract, and so, you can imagine, like, savers would put their funds into this smart contract, and the smart contract would automatically invest in certain classes of loans, of a certain risk threshold from the Dharma credit network.

And so, it’s this really interesting concept where you’re like, you can imagine basically, like, banks existing that have no person at the helm of them, and have no marketing budget, and have no compliance budget, and there’s no person that has to, like, sit there in a suit and shake hands with you. And so, like, a tremendous amount of inefficiency is kind of, like, shaved out of the system. And so, we’re really excited about seeing that concept come to fruition, though I would argue that it’s kind of, like, it’s a, we’re at step one right now. That’s, like, step five or six, right?

Laura Shin:
Right. Yeah, and the last one, tokenized municipal bonds.

Nadav Hollander:
Tokenized municipal bonds, yeah. So, I think this is a really interesting concept. There’s a lot of municipalities in the world who aren’t necessarily…so, sorry, let me take a step back for a second. Municipalities raise debt all the time, right? Like, municipalities, like, need to build parks, and they need to, like, invest in schools, and they need to invest in, like, public infrastructure in different capacities. And so, they’ll often go to an investment bank and have that investment bank help them issue a municipal bond, and you know, this is how some, like, the most, like, iconic infrastructure in the world was built.

And that’s great, and the system functions fantastically, but it doesn’t necessarily function equally well for everybody, right? Like, there are a lot of people, or a lot of municipalities, particularly outside of the western world, that may not have access to the same friendly credit conditions that, say, a San Francisco might, or, you know, an Oakland might, or what have you. And so, it’s interesting to imagine, you know, the concept that I kind of outlined earlier, of, like, a business doing a debt ICO, taking that and kind of extrapolating it to the next step, where you have a municipality or even a sovereign nation issuing debt on chain and selling it as a token.

So, you know, again, this goes back to, like, the double-edged sword conversation, because, like, there’s a lot of municipalities and sovereign nations that, like, rightfully so, we don’t want having access to the financial system, right? But I would make an argument that I think that if you open up this market more, the benefits will outweigh the cons.

Laura Shin:
Yeah, that’s been a theme in some recent podcasts, because we’ve been talking about, like, what’s been going on in Venezuela and stuff like that…

Nadav Hollander:
Right, right, exactly.

Laura Shin:
Yeah.

Nadav Hollander:
It’s, like, what happens when Venezuela tries to, like, raise a bond on the blockchain.

Laura Shin:
Right. Right, in addition to their Petro…

Nadav Hollander:
Yeah, yeah.

Laura Shin:
I’m speaking with Nadav Hollander, founder of Dharma Protocol. If Dharma Protocol takes off, how will that change the way people borrow and lend, and what other impacts do you think it could have, you know, maybe on the size of the debt markets, or anything else like that?

Nadav Hollander:
Yeah. So, I pretty strongly feel that if Dharma’s going to actually kind of, like, you know, if the rubbers are really going to meet the road, and we’re going to have a lot of traction, I don’t necessarily, I find it less likely that, that the use cases that will take off will be, like, the traditional sort of, like, use cases of debt that we imagine today, right? Like, I find it unlikely that, like, that the way people are taking out mortgages is going to, like, entirely shift onto Dharma’s infrastructure in the next, like, five to ten years, because at the end of the day, like, in the western world, like, credit markets function, like, pretty well. Like, it’s a pretty saturated market already.

Laura Shin:
Right.

Nadav Hollander:
And so, I think that if we are successful, it’s going to be in use cases that are initially very niche, and are very specific to the crypto world, and as that world expands and kind of bleeds its way into various aspects of people’s day-to-day life, then I think we’re going to serve use cases and classes of debt that are really, really hard to imagine right now, but that make a lot of sense in that sort of crypto or digital-native context. And so, it’s kind of like, you imagine, like, yeah, the borrowers who, I gave you the example of, like, collateralizing a CryptoKitty earlier, right, and a CryptoKitty is a type of nonfungible token.

Another type of nonfungible token is, you know, like, there’s this project called Decentraland, where they basically sold, like, plots of virtual reality land on chain, which is this kind of kooky concept, but if you kind of take that, and you look at what one of those Decentraland plots are, that is similarly a nonfungible token, right?

Laura Shin:
Right.

Nadav Hollander:
And so, you can imagine, like, literally borrowing against that Decentraland plot in order to finance, like, a virtual reality real estate development on top of it, and then to sell, you know, tickets to people who want to, like, put on their headsets and like, walk through it, or something like that.

Laura Shin:
Wow.

Nadav Hollander:
And so, like, I give that example, because it’s like, it’s like, I view that as, like, a class of debt that makes, like, no sense in the current, like, real world, but that makes a lot of sense in a totally digitally-native crypto-native context. And I think that there will be many of those sorts of use cases, things that are very difficult for us to imagine right now, and I would conjecture that that means that, like, in the future, like, the market cap of global debt will be much, much larger, because debt will essentially kind of bleed its way into markets that it previously has not, because we never really had the ability to, like, super-cheaply spin up debt assets and super-cheaply raise debt for different use cases.

Laura Shin:
Interesting. Yeah, what you just described, it was like Monopoly meets VR, something like that…

Nadav Hollander:
Meets VR, that’s a great way of putting it, yeah.

Laura Shin:
A couple things I wanted to ask you about. You know, you talked about 0x a lot, you talked about how the relayers idea is very similar to 0x. I know also Dharma’s built on Ethereum. What is the relationship between Dharma and things like 0x and Ethereum? Like, could you switch to another blockchain, or how easy would it be to add other blockchains, and…yeah?

Nadav Hollander:
Yeah, that’s a fantastic question. So, I’ll answer first of all the question about 0x…

Laura Shin:
Okay.

Nadav Hollander:
…because I think there’s kind of two answers here, about, like, our relationship to something like a 0x, versus our relationship to the Ethereum blockchain. So, 0x, I would put them in a category of, like, a, you know, being a crypto-financial primitive, as in, like, sort of in a basic primitive operation that is a building block for a whole lot of different types of financial instruments, and eventually, financial services. And I would put us in a, kind of a similar bucket, in that, like, we’re kind of, like, this building block that will eventually be used, likely alongside things like 0x, or dYdX, or Set, or, you know, there’s a whole bevy of these different crypto-financial primitive protocols, in order to construct financial services that are globally accessible and fundamentally transparent.

So, yeah, so, that’s kind of how I describe our relationship vis a vis 0x, as opposed, with respect to the Ethereum blockchain, right now, there’s not really any other, like, show in the game, in terms of, like, a blockchain that you can meaningfully build an application on top of. That will likely change, and we are not, like, dogmatically wedded to being, like, built on top of the Ethereum blockchain. It’s just, like, extremely unclear what the multi-blockchain in the future looks like, and how, like, how these sort of meta-protocols like 0x and Dharma will be structured in that multi-blockchain future, right?

Because you could imagine on one side of the spectrum, like, that, you know, there will be many different blockchains, and that these blockchains will kind of have a distribution like operating systems, right? It’s like Android and IOS, right, and so, like, every application developer will make their Android app or their IOS app, so, you know, if you stretch that analogy to blockchains, you can imagine, like, every 0x or Dharma will have a deployment on DFINITY, and have a deployment on Ethereum, and have one on Tezos, and you know, you name it.

So, that could be the way that it pans out, but it could also be the case that these kind of interoperability protocols really take off, and the whole concept of individual blockchains is just so heavily abstracted away, that it doesn’t even necessarily matter that, like, you know, that a 0x or Dharma basically sits a layer above that, and operates across blockchains, and there’s not really any sort of concept of, like, what chain you’re on at any given time, because these interoperability protocols make these seem so, things so abstracted and seamless.

And so, in summary, I’d say, like, I could try to, like, you know, prognosticate here, and like, tell you what exactly is the way that this is going to pan out for, like, a Dharma or 0x, but the truth is, like, nobody really knows, and at this point in time, like, really, the only viable option for building on top of the Ethereum.

Laura Shin:
Okay, yeah, sounds like a wait-and-see type answer.

Nadav Hollander:
Yeah, that’s not a cop-out.

Laura Shin:
No, no, not at all, not at all. I think it’s smart. So, you guys could have easily done a token sale, you know, at the height of the ICO mania last year, but you chose not to. Why not?

Nadav Hollander:
Yeah. So, I’ve been very fond of the token kind of model in general. I do think there’s a lot of promise to it, I do think that it’s very possible that tokens are kind of, like, the future of capital formation, and yadda yadda. But circa back when we were potentially considering doing something like a token sale, everything was super-murky, and everything still is super-murky right now. And when I say “everything,” I mean, like, not just, you know, regulatory aspects. Like, that’s one issue, but even if we were to sort of put aside the sort of regulatory murkiness of these things, it’s like, it’s not entirely clear yet how and when tokens capture value from the projects that they, you know, espouse to be tied to, even Ether, mind you.

And the kind of economics we use to explain these things are highly, highly unproven, and I think, like, cynically, we could say that, like, right now the crypto markets are much more a reflection of people’s kind of, like, loose thoughts of, like, how successful a project or protocol is than it is actually, like, some sort of fundamental valuation of what these assets actually are. And so, from our perspective, like, we didn’t really want to, like, raise money on a token if we in our heart of hearts didn’t even really know if that token would accrue value if, like, what we built was successful.

And so, our approach is similarly to the kind of wait-and-see approach that I mentioned earlier, is like, you know, we’re not dogmatically opposed to doing a token maybe one day, but right now, the market is just so nascent and young, and it’s just so unclear how these things operate and how these things accrue value, that we think it just makes a lot more sense to focus on just building a core ecosystem, and getting a lot of people essentially borrowing and lending on Dharma, and figuring out our value capture later down the line.

Laura Shin:
And do you make money now, or do you have a plan for how you will eventually make money?

Nadav Hollander:
We do not make money right now, no. So, we aren’t taking any sorts of fees in the actual protocol level. We have no plans of inserting fees at the protocol level at any given time. Even if we wanted to insert fees at the protocol layer, everything is open-source, so it could just be forked away. As for what our plans are in the future, like, we are not a nonprofit. We are a for-profit company, so we do intend on in some way, shape, or form capturing value.

We just are very much, like, we kind of take a deliberately ambiguous approach to it now, where it’s like, there are many different routes we could take to capture value in the future, ranging from, you know, providing basically, like, consulting services to enterprises we’re trying to build on Dharma, all kind of like the Red Hat model, with respect to their open-source distribution. Or it could take a route of us essentially building products and services that in some way serve constituents in the actual ecosystem, and that, you know, give us revenue in some capacity that way. And I think, like, an analogy I like to use is that, like, imagine if, you know SMTP, the protocol for email, right, so SMTP is a protocol that makes it so that if you send an email from Outlook to Gmail, you know, it’s all going to go through fine.

You can imagine, like, if Google had developed SMTP originally, and then built G Suite on top of it, and kind of monetized it in that capacity, I think that’s, like, a great example of, like, what it could look like for an open-source protocol to be developed in a manner that’s totally free, and then for a company to come and build services and products on top of it that serve users of that protocol in some capacity.

Laura Shin:
Yeah. I imagine your VCs, like Polychain Capital and Y Combinator and some of the others, will be interested to know…

Nadav Hollander:
Yeah, yeah, and I mean, I think we’ve been lucky enough to have investors that are quite comfortable with this ambiguity, and we think that it’s just, we’re at a point right now that’s too early, at least in my opinion, to try to shoehorn a business model onto this, when we’re really just kind of, like, getting the race started right now.

Laura Shin:
Okay. Yeah, I want to let people know what your background is, because when we first met, I was shocked to find out that you had just graduated from Stanford in 2017. And it’s similar to when I, you know, first discovered how young Joey Krug was, I could not believe it, and he was recently on the show, so…

Nadav Hollander:
Yeah…

Laura Shin:
…tell us your background and how you got into crypto.

Nadav Hollander:
Yeah, so, I got into the crypto…so, I used to be a student at Stanford, and I was, you know, studying computer science, and it was, like, 2015, and I took a class, or I was sitting in on this talk that Eric Schmidt from Google had given, and this was, like, really at the peak of, like, kind of, like, blockchain, not Bitcoin stuff, and at one point, somebody in the audience asked Eric Schmidt about, like, Bitcoin, and you know, he basically gave, like, the “Blockchain, not Bitcoin” spiel. He was like, “Yeah, you know, Bitcoin’s interesting, but like, the technology behind it is, like, super-super interesting,” blah blah.

And so, I kind of came away from that being like, “Huh, blockchain, like, what does that mean?” And lo and behold, in the fall of 2015, was it 2015 or 2016? Sorry, I’m getting mixed up. Anyways, in the fall of what was then my junior year, I took a class at Stanford called Bitcoin and Cryptocurrencies, and it was the first time that it was taught, and I just totally fell in love with the space, and just like, just completely just thought this was, like, the most exciting thing happening in technology. Ended up meeting Fred from Coinbase, because he came in and gave a talk in that class, and kind of as a result ended up working at Coinbase for a while as an engineer, kind of as I was finishing up school.

And then on the side, I’d started working on Dharma, and as soon as I graduated, I kind of turned that into a full-time profession.

Laura Shin:
And how did you come up with the idea for Dharma?

Nadav Hollander:
So, when I was at Coinbase, I was pretty struck by the fact that Coinbase just, like, sits on so much crypto assets. Like, for the most part, they’re just entirely stagnant. Like, it’s not like, when you put your money in a bank account, it’s, you know, accruing interest for you because the bank is presumably lending that money out to other people, whereas if you put your kind of Bitcoin in Coinbase, it’s just kind of sitting there, riding the waves of the Bitcoin market. So, you know, in my head, I was like, “Wow, we have borderless currency. Like, how cool would it be if we had, like, a borderless bank?”

Turns out, that’s, like, really hard for a centralized institution like Coinbase to do, because there’s just, like, nine gajillion different regulatory issues that they have to be concerned with, and this is, like, not their number-one priority. But this had kind of jiggered the idea of, like, wow, we have, you know, a decentralized, borderless currency. What if we add a decentralized, borderless credit market? And so, I kind of started tinkering with that idea there, and it’s evolved into what it is today.

Laura Shin:
And why the name Dharma? Like, you know, I am a former yoga teacher, and am interested in meditation, so I was like, “That’s a Buddhist word.” I was like, “What does that have to do with anything?”

Nadav Hollander:
Well, I mean, it really depends on how you cut it. It’s both a Hindu and Buddhist concept.

Laura Shin:
Okay.

Nadav Hollander:
So, the reason why I chose the name Dharma, so, I’m, like, deeply fascinated with Indian culture, I’ve spent a good amount of time living there, and I think, like, dharma is this concept that doesn’t really have, like, a single English word for it, but at least in Hindu culture, generally, it refers to, like, acting in accordance with one’s, like, obligations and duties. And I thought that that was sort of fitting to the kind of concept of what a debt is, in that a debt is basically like an obligation. And so, if we’re talking about. Like, kind of like creating a universal comprehensive system for settling these obligations, I thought that Dharma would essentially be kind of a fitting title.

Laura Shin:
Interesting, I like it. I actually want to go back to Stanford now, and just ask one question.

Nadav Hollander:
Yeah.

Laura Shin:
You kind of mentioned sort of, like, what the atmosphere was around, like, blockchain versus Bitcoin back in 2015…

Nadav Hollander:
Yeah.

Laura Shin:
…and just out of curiosity, how did the attitude around Bitcoin and crypto change within Stanford during the years you were there?

Nadav Hollander:
Man, not tremendously, but I also, like, literally graduated right before this whole explosion of interest in cryptocurrencies happened. So, I know now things are different, about, like, I’ve gone back to campus now, and like, there’s, you know, a big, like, Blockchain Club, and there’s, like, all sorts of people from, like, the GSB and stuff that are trying to, like, get into blockchain and cryptocurrency. So, you know, it’s very much like, it’s changed from this thing that was, like, a bit of, like, an off-kilter technical curiosity to being, like, very front and center, which I’m sure is the case in, like, probably most universities.

Laura Shin:
Yeah. Katie Haun and Susan Athey taught a class at the GSB on crypto in the spring, and I think it was, like, over-subscribed.

Nadav Hollander:
Yeah, yeah, yeah.

Laura Shin:
So, you guys recently launched. What kinds of volume and behaviors have you been seeing in terms of the loan activity on Dharma?

Nadav Hollander:
Yeah, so, there’s been around, something like almost 150k in loans that have been issued via Dharma since we launched in May. The vast, vast majority of these, I’d say, fall into the kind of, like, speculative camp, as in, like, they’re basically people who are trying to either, like, leverage their existing assets, or, like, short certain assets. And because right now there’s not, for a lot of ERC, 20 tokens is not really a good way of doing either of those things.

Like, I think that that’s kind of the primary driver of volume right now, but we’ve been seeing a lot of really exciting and interesting development interest, and in terms of, like, companies that are, like, in the pipeline right now for use cases that aren’t necessarily speculative, per se, and you know, we can dive into some of those if you’re interested, but you know, they kind of fall into a lot of the buckets of the things that I kind of listed earlier, in terms of things like NFT-based loans, or even, like, you know, credit to facilitate Plasma withdrawals and things like that.

Laura Shin:
Okay. Well, because you started off by talking about people in the developing world, and people to…do you have any plan for kind of extending this out? It sounds like it’s probably a lot of westerners that big in this speculative mania right now, that are using it. But you know, how do you plan to kind of reach the audience that you feel that could really use this?

Nadav Hollander:
Yeah. I mean, I think, like, the sober, realistic answer here is that it’s like, I think that, like, that will, those use cases will come, but there are a lot of other bottlenecks that kind of need to be ironed out before that happens, and a lot of them are kind of, like, outside of our general control. Like, you know, we just came back from India, actually. We were there for the EEF India Hackathon, and we were talking to people on the ground there who were interested in building out, you know, like, micro-lending underwriters, or something like that, in the Dharma protocol.

And the fundamental problem that they have is that it’s like, okay, unless the people are totally willing and able to accept cryptocurrency, they’re going to want to convert it back to rupees, and currently, that’s really hard to do in India, because, like, the Indian government has, like, heavily clamped down on exchanges. And so, I think that’s, like, just an example, it’s indicative of, like, there’s just a lot of bottlenecks in making crypto-adoption happen in, like, the third world that are just totally out of our control right now. And so, like, you know, we can academically talk about the things that we can do to, like, make Dharma, like, more accessible for, like, developing world use cases, but I think realistically, in the short term, as I kind of stated earlier it’s going to start with very crypto-native use cases, and kind of expand concentrically from there.

Laura Shin:
Yeah. Yeah, that makes sense. So, are there any other developments that are forthcoming, or new apps, or anything that are being built that you’re excited about?

Nadav Hollander:
Man, not a lot that I can share publicly, but all I can say is that if you’re interested in building a business in the cryptocurrency industry, and you’re looking to get involved in a way that doesn’t require you to have deep technical knowledge, we think that building a relayer or underwriter in Dharma is a very low-hanging fruit in terms of being able to capture value from this nascent industry. And so, we’d love to kind of get in touch if you’re interested, and support you.

Laura Shin:
Well, great. This has been a fabulous discussion. Where can people learn more about you and Dharma?

Nadav Hollander:
So, if you go to Dharma.io, Dharma.io, that’s our web site, you can find our blog there, you can find all of our technical materials there, that should kind of walk you through what it’s like to build an application on top of Dharma, and we’d love to have you join our telegram channel. It’s, you know, the most classic cryptocurrency statement ever, but that’s kind of where you can find the whole team and pick our brains on anything, and yeah, that’s it.

Laura Shin:
Okay, great. Well, thanks for coming on Unchained.

Nadav Hollander:
Awesome, thank you so much, Laura.

Laura Shin:
Thanks so much for joining us today. To learn more about Nadav and Dharma, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review, and subscribe on Apple Podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn. And if you’re not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, with help from Raylene Gallipoli, Fractal Recording, Jennie Josephson, Rahul Singireddy, and Daniel Nuss. Thanks for listening.