Camila Russo on Ethereum and the Future of Decentralized Finance (DeFi)

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Hi, I'm Matt DeVoe, the CEO of OODA and you are watching the Oodacast. And today we are joined by Camilla Russo, who happened to be the author of one of my top 10 technology, security and business books of the year with her book the Infinite how an army of Crypto Hackers Is Building the Next Internet with Ethereum. She currently runs an organization called the Defiant that tracks decentralized finance and kind of all of its incarnations. So, Camilla, thank you for joining us. I would love to start with just your background and how you came to be focused on the issue of Ethereum and blockchain.

Yeah, of course. Well, first of all, thanks so much for inviting me and I'm honored to have made the top of your list. That's awesome to hear. So, on my background, I'll start by saying I'm originally from Chile, from Santiago. I'm a financial journalist, started journalism, started my career in Chile in a newspaper there, then came to the US with hopes of being hired at a big media company here. Went to journalism school at Northwestern and then did an internship at Bloomberg News and stayed at Bloomberg for the next eight years in different places. Started in New York, then in Argentina, then in Spain and then back in New York. Yeah, it was in Argentina where I first wrote about bitcoin. This was 2013, it was Cristina Fernandez second term. There was 25% inflation in the country, currency controls. So I was a market reporter writing about how people were protecting against all this economic mismanagement. And so one of the stories was that they were using Bitcoin. And so after that, like I was fascinated by crypto. And when I was back In New York 2017, I had another opportunity to write about the space. And I became one of the few journalists there who were covering crypto kind of on a day to day basis and was just fascinated by it. And at the end of 2017, I decided to pitch to write a book on the history of Ethereum. First I decided that I wanted to just find a book worthy topic in crypto. I just like after that explosion in 2017, I was like, there has to be a book here somewhere. And so the story of Bitcoin had been told pretty well, but I was amazed that really nobody had written the history of Ethereum. And it's the second biggest cryptocurrency and it fueled much of the hype that was in the 2017 with the ICO boom. And all of that. So decided to do that and got the deal with HarperCollins and then left early 2019 to finish my book. And then because I thought eight years in the same place was long enough and wanted to do something on my own. So here we are.

Excellent. So tell me a little bit about what you're up to now with the Defiant.

Yeah, so when I left Bloomberg early 2019, I left with the idea to just become an independent freelancer writing about tech and finance as soon as I filed the first draft of my book. But as I was kind of in the Ethereum community, I saw this really incredible ecosystem of, of financial applications being built on top of Ethereum and also saw that nobody was really paying much attention to it. Even crypto media weren't covering it very well. So I saw an opportunity there to start a newsletter. I'm sorry about my dog. A newsletter focusing on decentralized finance. So as soon as I turned in the first draft of my book, a week later I sent the first email of the Defiant. And you know, it was meant to be kind of a side project but ended up becoming kind of a full time thing to cover the space day to day. So started this newsletter on substack. Then I realized people were willing to pay for my content, which was incredible to see. You know, I, I had been kind of had the Bloomberg name behind or like, I guess in front of all my content before. And so it was really scary to be out there and just like publishing all this stuff on my own. So it was huge validation to see that people were willing to pay for that content that I was putting out. So that was kind of the first sign that I was onto something and that this could turn into an actual business like a media company. So I just, you know, made it my full time job after. You know, it was like at the time I was still finishing the book. So it was like I would write the book during the day and then write the newsletter in the evening and into the night. And then when I finally finished the book, I, you know, I started doing a podcast with the Defiant, a YouTube channel and that now I publish kind of the, the articles in the newsletter. In the newsletter they have, you know, they're published on kind of the defined website. So yeah, it's, you know, turned into a content platform with all these different channels and my own team of writers as well.

That's excellent. There's so much happening in this space. What mechanism do you use to prioritize what is newsworthy or what is worth Covering?

Yeah, it's a good question because there's just so much. Sometimes it's hard to tell what's worth covering and what's not. I think it just comes from a lot of experience in being able to tell which teams have been in this space for a long time telling, kind of just organic excitement around a project. So when you see something mentioned by multiple sources that I trust, that's kind of a signal. Okay, like this is something I should be covering. And basically just by looking at raw numbers like, okay, is this attracting, is this attracting money? Is it attracting kind of volume? Like are people actually using this? Is it live? You know, I think there's so many kind of grand plans and ambitions in crypto and defi that a good kind of tool or signal I use is like, is this just an announcement in a website or is the protocol actually live and has users? So yeah, there's I guess like different kind of things that I take into account before covering something. But yeah, it's a lot to keep track of.

Yeah, I know the feeling. I've operated content curation initiatives for 20 years and it's. You have to develop some fine tuned filters and understand what your readers are interested in. Right. At the end of the day, if they're purchasing the content or accessing the content has to be something that's of interest to you. I would love to break down. You mentioned the early exposure to Bitcoin. It was in 2012 or 2013. I personally got exposed to Bitcoin in 2011. So it was a technology that I was tracking very closely. Actually mined bitcoin back then. I wish I had kept my mining rig active. So I did enough to learn how it worked and how to mine and all the operations to it and then stopped after a little over a month. So I would be curious with regards to the distinction as you see it between something like Bitcoin is kind of a store of value in something like Ethereum, which not only has a store of value component, but operates as a application layer on a blockchain. Can you kind of step us through the difference between those two different cryptocurrencies or blockchains?

Sure. Okay, so first thing is that Bitcoin and Ethereum are both blockchains and cryptocurrencies. So blockchain is basically a decentralized network of nodes that are operating kind of in the same hierarchy. So they're both kind of equal to each other. They all have copies of the same transaction layer and have to agree by consensus on what gets added to that layer and they are incentivized by the cryptocurrency of that network to continue validating transactions. So the Bitcoin network cryptocurrency is Bitcoin and Ethereum network's cryptocurrency is ether. Bitcoin was the first cryptocurrency. Satoshi Nakamoto invented it in 2008. It went live in 2009. And it was built to be a peer to peer, permissionless way to exchange value and be basically peer to peer cash and the money. Ethereum wanted to go a bit further using this technology and be not just peer to peer value, but peer to peer anything. And so the way that it wanted to achieve this was so was enabling the nodes of this network to not only be able to process transactional value, but to also be able to process computer programs. So there's kind of the ability to process any kind of computational formula or program that you throw at this network. So it's Turing complete is kind of the feature that defines Ethereum. And what this allows is for developers to create a more sophisticated, more sophisticated applications on top of the Ethereum network. Which is why you have decentralized finance being built mostly on Ethereum, because it's just too hard to do or nearly impossible to do on top of Bitcoin, because Bitcoin does not have this ability to process computer programs on the network. And so you have something that's kind of very core to Ethereum, which is smart contracts. And there are these computer programs that automatically execute different actions. So with smart contracts, you're able to program things like futures contracts, like lending and borrowing contracts, decentralized exchanges, like all the building blocks of a new financial system that's open and transparent and automated.

Excellent. Yeah, I mean, there's an entire application layer there that kind of removes the middle person in the transaction is kind of the appeal. The example I always use is kind of the annuities market, which is one that I looked at. You have human beings that sit down and go through an application and then write a contract and gets put in kind of very modest safe investments. You could have the equivalent of that in an Ethereum contract run by some form of a data science algorithm. How old are you? What are your health standards? And then serve as the custodian for that annuity over the next 20, 30 years, whatever it may be. So kind of unlimited application potential from that perspective makes it all the more exciting. What are some of the more interesting applications that you have seen seen arise that are riding on the Ethereum blockchain.

Well, there's a lot I think to start with just like the basic one that's. I'll start with like the two basic pillars of decentralized finance that they're kind of what are enabling all this boom to date. And the first is Makerdao, which is really kind of the grandfather of decentralized finance and kind of the backbone of this financial ecosystem. So Makerdao is kind of like a automated central bank in the sense that it issues a stablecoin that's called DAI and that has become kind of like the reserve currency of decentralized finance, kind of like the dollar of decentralized finance. But what's interesting is that the way that this stablecoin is issued is completely automated and permissionless. And so what this means is that for other stablecoins in the past like Tether and usdc, you needed to have a bank behind it that would back the stablecoin with actual dollars in a bank. With Makerdao they are replacing the bank with smart contracts. So what happens there is that you have users depositing ether, like Ethereum's cryptocurrency into the Makerdao kind of platform. And by depositing ether on Makerdao they are automatically issuing kind of loans in dai. So you have kind of this ether collateral and with that collateral you can issue dai. And so this all happens kind of automatically. Like nobody asks you who you are, your information, it just this automatically detects your Ethereum wallet, how much money you have there. And you can simply deposit your ether there and get stablecoin in return. And so on top of this system and with dai, many other different projects have been built. For example, from there there were lending protocols that allowed people to take DAI and deposit and earn interest on that stablecoin, which is really kind of cool thinking about it from both developing nations and developed nations. Like if you're in a developing country with devaluating currency and with huge inflation and you can't access dollars, you still can buy Dai, which is pegged at 1 to $1, and open this kind of dollar based savings account and start earning interest on a dollar based asset. In the same way, if you're in a developed country and many of them have banks that are actually charging users to keep their money in the bank instead of paying interest on deposits, you can now also buy DAI and deposit DAI in a smart contract and start earning interest. So it really democratizes saving. And then the other kind of pillar of decentralized Finance is these exchanges called automated market makers. So, okay, so I was saying AMMS is kind of the other important innovation in this space. So what is like in general to have an exchange, you need an order book. You need a place to store, buy and sell orders from traders. And that usually requires a centralized entity. It's really hard to do this in a decentralized way. So what AMMS do is that instead of an order book, they have pools of liquidity, so they have pools of tokens in smart contracts. And these tokens are often paired with kind of a reserve asset, which is, in the case of Uniswap, the biggest amm, it's eth. So each token is paired with eth. And so because every token has its kind of ETH pair, you can exchange any two pairs of tokens in Uniswap because there's always kind of ETH in between those two. So you don't have to wait for the a counterpart to trade. You're trading directly with the smart contracts in this protocol. And so this is kind of like the oil to decentralized finance to be able to have these automated exchanges like market makers. Because tokens are so small and illiquidate, in most cases, if you don't have this mechanism to exchange between them, just using these applications would be super hard to do and clunky. So, yeah. So these two innovations, I think, are, I think, key to the development of the entire space. This decentralized central bank and this permissionless way of exchanging tokens. And from there, the space has blown up.

Excellent. So basically helping to reduce the friction as well. Right. So taking out the middleware and trying to reduce the friction between all of these different projects. What. What did you find with regards to kind of the emergence of Ethereum? I think Ethereum creates an interesting case study because it's hard to go back and really study the emergence of Bitcoin because you can't get access to some of the. The original players and founders.

Right.

With Satoshi, et cetera. But with Ethereum, you're able to kind of talk to everybody who is involved from the beginning. So can you step us through what was kind of compelling or unique about the rise of Ethereum as the second most popular cryptocurrency.

Yeah, that's a great point. That difference between Bitcoin and Ethereum, the fact that Vitalik Buterin, the creator of Ethereum, is still around and very much a public person while Satoshi Nakamoto disappears and nobody knows who he is. So for the book that was definitely an advantage to be able to interview Vitalik, talk to him, like hear his, his side of the story, what motivated him to, to create Ethereum. And, and I think within kind of the story of Ethereum, Vitalik himself is, you know, has an interesting story himself. I mean, he thought of this groundbreaking new technology in the blockchain space. When he was just 19 years old, he got started into kind of the bitcoin community as a writer. He was writing blog posts for different online kind of bitcoin forums. And then he became popular enough that he was approached by someone in the bitcoin community to start the first bitcoin magazine. And so that's how Vitalik became recognized within the cryptocurrency community, first as a journalist and a writer, and then his background as well. Like his family immigrated to Canada from Russia. Vitalik was actually born in Russia and his family, like his parents, really suffered through like the Soviet Union and then the fall of the Soviet Union. And so they have very kind of strong feelings against centralized organizations from their experience there. So I think that that definitely made a mark on Vitalik and kind of informed his views on why decentralization and open source systems are important. And from there he was able to create this new blockchain and inspire this really fun, mismatched group of people who followed him in this journey. There were kind of former hedge fund managers, there were former poker players, obviously developers. So it was an interesting group of people who followed Vitalik in his dream. And the fact that this group came from such different backgrounds and had different views on what Ethereum should look like also created a lot of drama and tension in the early days of Ethereum. You know, of course you read how that kind of played out, but there, there was two different views on how Ethereum should develop. There was, you know, one group who wanted to make it a for profit company and the other group wanted to make it a nonprofit foundation. And that difference of ideas ultimately resulted in, in two of the founders leaving the kind of the Ethereum leadership in the very early days. And of course the nonprofit foundation route is the one that won out. And I think what's the one that has ultimately allowed Ethereum to become as successful as it had. So definitely an advantage to be able to, to have been able to speak with all of the founders and hear their stories firsthand. Yeah, hopefully all of their different personalities and views come out in the book.

I think that's what I liked about the book is almost the generational aspect because I got the Feeling that these were your peers or you'd kind of all come into bitcoin at the same time and were covering the same topic. And it's why Stephen Levy was so great at writing the book Hackers, because that was his peer group during an exciting time. Wouldn't be as exciting to see Walter Isaacson write, you know, the history of Ethereum. I think it has to be somebody who, who was there and was covering it and kind of saw it develop in real time with that perspective. So that was definitely one of the things, I think, that differentiated your book was that that kind of. You understood it before you sought to go and write about it. And you had been part of that and seeing it in 2012, 2013, and writing about it at Bloomberg, I think it gave great, great perspective. And I also enjoyed just kind of watching it is a traditional startup story as well. When you said about the human drama and they're confronted with a very difficult decision as well after the, the, the kind of, the fraudulent activity on whether to fork the blockchain or not and, you know, whether there should be, you know, absoluteness in the code that they developed or whether there should be some pliability based on that type of fraud activity as well.

Yeah, no, I think that that's a great point. It is in the end. It was a startup story in the beginning, and I think that's, that's why. That's what I would really want to communicate to people who aren't necessarily kind of so interested in blockchain technology and crypto, because I really wanted to write a book that anyone could pick up and would be interested in just because of the story of it. And just, you know, anyone who is a founder or, you know, part of a. Just, you know, has a big dream or a big project that they're working on is something that maybe they can identify with kind of this, this journey of people who have a big dream and like, set out to make it a reality with Ethereum. And yeah, you're right, one of the biggest challenges in Ethereum's early days was the dao, this big hack that happened in Ethereum but ultimately caused the chain to split. That was a really dramatic moment. So I guess a little bit of context. So when Ethereum was on its, its first year. So ethereum launched in 2015, and this big hack happened in 2016. There was this project that was really ambitious. It was. Wanted to do sort of like a decentralized Airbnb, like create like a decentralized kind of sharing economy. And so they, they were raising money through Ethereum and in the process of this fundraising they decided why not raise money and put it all in a fund and we can vote on how that money is spent to fund not just our project, but just any other project that kind of the investors in the fund decide to invest in. So that idea was called the dao, the decentralized autonomous organization. And it really blew up and captured $150 million in DAI in. Sorry, in DAI in Ether in just, you know, a few weeks. It was at the time like, I think it was like 11 or 13% of total ether out there. So it was like considerable amount. And of course that was irresistible for hackers out there to try to break into. And sure enough somebody did and was able to start draining the dao. So there was this whole kind of counter hack to the hackers trying to recuperate the money that was being drained. It was like really kind of sci fi, like Star wars situation, like black hat hackers, white hat hackers, like all of that. But in the end, as this kind of hacker wars were going on, the Ethereum community was debating whether they should just fork the Ethereum protocol, like make a copy of it and start over without kind of the mess of, of the DAO and put it behind them so that they could have like a real shot at success. Because there was the actual fear that if this thing succeeded, there would be a big chunk of ether in the hands of a malicious party. And so in the end the decision was to fork the, the protocol. And then to the surprise of everyone, the old Ethereum chain kept going. So like Vitalik or a lot of the people forging Ethereum didn't expect that to happen. And it's still live today. Ethereum classic, though much less valuable than Ethereum itself. So the market kind of spoke and chose Ethereum. Like the new Ethereum chain, the market.

Seems to be speaking on cryptocurrencies in general. I went back and looked. We scheduled this interview on December 14, today's January 7. And Ethereum and Bitcoin have both doubled in price since then over the course of a couple of weeks. So definitely a lot of momentum there. Admittedly, Ethereum was on my radar screen well before the launch. I think it was one of the handful of people it was tracking it at that time. But I was actually looking at it from a security and risk perspective. In fact, there's a keynote I gave, you know, where I mentioned the, the, you know, the development of Ethereum and what it was trying to do and the introduction of the digital autonomous corporations and the contracts, et cetera as the potential to be used for bad things. You know, I was had, had read and studied the assassination politics essays in the 90s, you know, had seen the potential for. Maybe there's a contract that gets issued that says if Apple Stock drops by 50% it pays out. You know, there were certain things that you could codify that could be used for ill intent. Haven't really seen that manifest itself yet. Did you encounter that in any of your research? Are there any exploitations of these technologies for kind of negative consequences or has it all been positive?

I think kind of just the closest to that is the number of just hacks that there are in the ecosystem. So you know, just people finding loopholes in the code and figuring out ways of stealing other people's money. So you know that's, that's kind of the over like the. Yeah, the overwhelming way that Ethereum is used maliciously is, you know, by hackers who figure out how to steal other people's money. And that's, you know, that's happening in Defi a lot. And it's usually, it's usually a way that hackers find it to manipulate markets in such a way that they end up buying and selling tokens that kind of mispriced, that are, that have been mispriced. So like buying a token at like a very, very low price and then selling it on an inflated price is how these kind of hacks usually work. But yeah, I have seen kind of the theory of it, of how for example you could use prediction market to have like order a murder or something. You know, like you could set up some sort of market saying that it'll, it'll pay out if somebody gets killed or I don't know something I've seen that theory but I mean fortunately it hasn't been kind of a big use case for Ethereum so far.

Yeah, yeah.

It's just funny given my security and.

Risk background that even having studied Bitcoin.

That was the first thing that I thought of and obviously I was influenced by my exposure to some of those theories and some of those issues in the 90s as well before Bitcoin emerged on the scene or well before Ethereum. So kind of curious if you'd encountered that. But it sounds like most of the malicious activity is either price arbitrage or directly going after users wallets or to just try to steal the cryptocurrencies that are contained within them.

Prediction is always hard In a space.

That is moving as fast as this.

But where do you see things going?

What is your outlook or say the next five years? What do you think we need to be ready for by way of disruption?

Yeah. So obviously right now we're in a bull market. Everyone is super optimistic. I'm not sure kind of where the price is going. This thing might pop and fall and we're back in a bear market again for two years, who knows? But I have become convinced that this technology is here to stay, albeit with a lot of volatility throughout, throughout its kind of ascent. So I think the overall trend of Ether, Bitcoin and kind of the legitimate projects will be up in terms of kind of disruption. I cover decentralized finance every day. I also use it, I test all these protocols and to me it's just so clear that this is a better system than the old one. Traditional finance is using an infrastructure that was created in the 1970s that simply isn't made to transact value. It's a messaging system, like what banks use to transfer money between each other. They're not like value, they're not money networks, they're messaging networks. And you also just compare how far we've come with communications in the Internet, how we're able to have this video chat in real time. We're sitting in different places of the world, we're able to just send GIFs and, and chat and like all these things through the Internet. But you compare that with how money works. And just money has been lagging behind all technological development for too long. And seeing how DEFI works, to me that's a lot closer to how I think money should be working just in this open, seamless, instant way without having intermediaries, without having to pay extra fees. And it's just more fun and just like more creative. You know, you see just developers coming up with crazy ideas and just having food themed coins and you know, just like more creativity, more innovation that that you've ever seen in traditional financial markets. So to me there's no question that Defi will continue growing and I see it becoming just a part of fintech. Like I see DEFI as just growing into becoming just finance. At some point I think there will be an increasing number of bridges between fintech applications and DeFi to the point that the user won't really recognize that they're using Ethereum in the background and it'll just be a better experience for everyone.

Excellent. That's insightful. I tend to agree. I mean, to me it seems like an inevitable future.

But it's hard to predict timeframes because I've felt like that for quite some time, even before the emergence of Bitcoin.

So, you know, I realize you're very busy, but we always like to ask.

And it doesn't have to be a cryptocurrency book, but, you know, what are you reading right now or what are you finding compelling from a topic or content perspective?

So right now I'm reading a really interesting book. And it's funny because I found it kind of on the street in Brooklyn. So I don't know if if where you're based, but I just moved to Brooklyn and found that people just like, leave their books, their old books outside. And I picked this one up and I have it like, I happen to love it. It's called the Mandibles. I don't know if you know it. It's. And I'm like spacing on the name of the author. One second, let me just. Okay, so it's the Mandibles, and the author is called Lionel Shriver. And it's about a family. And it's set in the future, but it's not like so distant future. It's like set in like 2029 or something. And it's about how kind of the US has fallen in the national stage and the US dollar has depreciated, and there's this new kind of world currency called the banker that has taken over and it's being led by China. And so it's the story of how this family is dealing with just the loss of their savings and inflation in the US and all this stuff that I'm used to seeing kind of in South America, but set in the US and just people realizing, oh my God, the US Isn't a superpower anymore. And just that thought experiment that the author does is super interesting. So, yeah, really enjoying that one.

Excellent.

I have to check that one out. I read over 100 books a year.

I always have to ask what folks are reading so I can keep the recommendations coming in.

Oh, amazing.

Excellent. But thanks for joining us again.

I highly recommend that folks read your book the Infinite Machine. As you mentioned, it's a history of Ethereum, which is an incredibly compelling technology, going to be important in the future. There's a startup story in there. There's a cybersecurity story in there. It's a great read for our time. And I love that we get these perspectives on these projects kind of while they're still emerging. It's not like you're writing the history of it from 20 years ago. It's kind of here and now and still kind of a very despite the maturity in raw form. So makes for a compelling read. So thanks for writing it. Thanks for joining us on this podcast.

Thank you so much for having me. It was really fun conversation.

Thanks thanks for listening to this OODA Loop production. For the latest analysis on cybersecurity, technology and global risks, please visit www.oodaloop.com.