Decentralized Finance with Julian Hosp of Cake Defi

Decentralized Finance with Julian Hosp of Cake Defi

Julian Hosp Cake Defi Bake

2021-03-03

This episode kicks off the DeFi series of the TX podcast. Our guest, Dr. Julian Hosp is the co-founder and CEO of Cake Defi (now known as Bake) – a platform that generates cash flow from cryptocurrencies and harnesses the possibilities of decentralized finance for its users. Hosp himself is an ex-pro athlete and best-selling author of multiple books, including “Retired by 30 – 25 stories I would tell my Younger Self” where he recounts 75 lessons learned over his life – some of which you’ll hear in this pod!

In this episode, Hosp walks listeners through the seven functions of finance to explain what DeFi means. He tells us why being blockchain agnostic is kind of like not getting married on the first date, and what are the three main risks of investing in cryptocurrencies.

Watch the video podcast on Youtube, or listen on Apple Podcasts or Spotify.

Key points with Julian Hosp

  1. Understanding DeFi and Liquidity Pools
    DeFi, short for Decentralized Finance, represents a revolutionary shift in the world of finance, moving away from traditional intermediaries like banks and towards blockchain-based financial systems.

    Julian Hosp, co-founder of Cake Defi, explains that at the heart of DeFi are liquidity pools. These pools are essential components, powered by smart contracts, where users deposit their cryptocurrencies. This enables other users to easily borrow or trade these assets without relying on a centralized authority. As Hosp puts it, “Liquidity pools really are this idea of making a protocol available for anyone to use.”
  2. Challenges Solved by DeFi
    One of the central achievements of DeFi is its ability to address various financial functions, effectively replacing intermediaries. Traditional finance often requires trusted third parties, like banks, to facilitate lending, borrowing, trading, and more.

    Hosp highlights that DeFi’s strength lies in its community-driven approach, stating, “It’s actually all based on predictions and probabilities, and the same can be done in a decentralized system.” DeFi projects aim to solve these challenges in a decentralized and automated manner, making financial services accessible to all.
  3. The Role of Cake DeFi
    Cake Defi emerges as a bridge between the traditional financial world and the DeFi ecosystem. It simplifies the complexities of DeFi for users, offering them an intuitive platform. Hosp emphasizes Cake Defi’s mission: “It’s about benefiting from the financial upside but also about benefiting from cash flow.”

    Cake Defi’s user-friendly approach enables individuals to participate in the DeFi space without grappling with the technical intricacies, making it easier for them to earn from their investments.
  4. Blockchain Agnosticism
    Cake Defi adopts a blockchain-agnostic approach, meaning it supports various blockchains. Hosp clarifies that this is because there’s no one-size-fits-all solution in the DeFi space. Users can access a wide array of DeFi services and liquidity pools across different blockchains through the Cake Defi platform.

    In the ever-evolving DeFi landscape, being blockchain-agnostic allows Cake Defi to cater to the diverse needs of its users, providing them with the flexibility to navigate different blockchain ecosystems.
  5. Risks of Investing in Liquidity Pools
    Despite the potential for attractive returns in DeFi liquidity pools, they come with their fair share of risks. Hosp outlines three primary risks: project risk, technical risk, and impermanent loss. Project risk pertains to the possibility of exit scams by unscrupulous founders, which can result in significant losses for investors.

    Technical risk involves smart contract vulnerabilities, which can be exploited by malicious actors. Impermanent loss is a more abstract concept, where the value of assets in a liquidity pool fluctuates due to price movements. As Hosp points out, “It’s something that affects anyone and everyone, there’s no way around it in this entire thing.” These risks necessitate careful consideration and due diligence by investors.
  6. Upside of Investing in Liquidity Pools
    While the risks are inherent, there’s an exciting upside to participating in DeFi liquidity pools. Hosp highlights the potential for high returns, driven by the demand for DeFi services and the scarcity of liquidity providers. Users who provide liquidity to these pools can earn fees, and some liquidity providers can achieve substantial returns.

    In some instances, returns can be remarkably high, as Hosp attests, “I’m making, what, 0.4% a day. That’s after any loss, any fees, any risks, and so on.” However, it’s essential to note that these attractive returns come with associated risks, making it crucial for investors to proceed with caution.

Cake Defi stands as a crucial player in simplifying access to the dynamic world of decentralized finance (DeFi). By offering a user-friendly platform that caters to blockchain agnosticism, Cake Defi bridges the gap between traditional finance and Defi’s innovative landscape. While DeFi liquidity pools present enticing opportunities for high returns, the risks associated with these pools require careful consideration. Cake Defi’s mission to empower users with knowledge and easy access to DeFi services positions it to continue thriving in this ever-evolving financial frontier, facilitating users’ exploration and participation in the decentralized financial ecosystem.

Transcript

Ben Sheppard  00:28

Hi, everyone, welcome to another episode of The TX – Tomorrow Explored podcast show. I’m Ben Sheppard, Managing Director at TX tomorrow explored. Very excited today because we’re kicking off our DeFi series with Dr. Julian Hosp, who’s the co-founder and CEO of Cake DeFi, Julian welcomes to the podcast show. How are you?

Julian Hosp  00:51

Ben, it’s such a pleasure to be on here. Cool. Looking forward.

Ben Sheppard  00:55

Great. So, I did a bit of research on you via LinkedIn, and it was quite a fascinating read. So, before we get into DeFi, and all of that stuff, you have to tell me, ex-pro athlete, five times best-selling author. I mean, what a career you’ve been a busy guy. So, what’s the ex-pro athlete? What did you do? You know, well, what was your specialization area?

Julian Hosp  01:21

When I was 17, I stumbled across this new sport called kite surfing. I was young enough to be crazy enough to really kind of pour my soul and heart into the sport and I was already a bit old enough to have enough experience to kind of become a professional athlete in that field. Obviously, it’s a bit different than being a professional kite surfer than being I don’t know, a professional runner. Your training regimen looks a bit different. Obviously, there’s a lot more lifestyle involved, a lot of traveling, a lot of travel stories, competition as well, and at the end, I was close to 10 years. So, professional kite surfer crazy, crazy, and exciting time at the same time.

Ben Sheppard  02:06

Yeah. Wow, that’s awesome. I head of marketing, Laura is massively into surfing, so she’ll probably find this pod quite interesting now and five times successful book selling author. So, what are the books about Julian?

Julian Hosp  02:23

The very first one was when I was a professional athlete and then I studied medicine. My mom always said I had to do something that was serious. So, yeah, I studied medicine, I was very curious about the human body and about how everything works and obviously with the connection to sports I became a trauma surgeon, or I trained to, so I finished my medical degree and then I was training to be a trauma surgeon. I completely hated my life at that point because it was just so different to what I was used to before we had so many more freedoms and it was all about experimenting and trying out things. As a medical doctor, that’s not what you want to do. You want to follow procedures and you want to follow the code and what’s been tested and so I was really miserable during this time, and I quit, moved into the business side. I had about two years of one failure after another and it was just as well, obviously, you are transitioning from one to another and it just takes time. I finally started hitting my stride and suddenly it started moving and yes, things started to become successful. So, the very first book I wrote there was called 25 stories, I will tell my younger self. I wrote that book when I was 29 and it was about 25 stories. 75 lessons that, I thought, you know, these are some crazy stories. They are some crazy stories.

So, there’s this one story would like I was in Brazil, and it was this crazy drug story and like really, it was quite crazy and then another story was about this ex-girlfriend that was at the end, I figured this out was looked for by the FBI. Yeah, so it was like really crazy and it’s all true stories and obviously me traveling so much. I experienced a lot of those things. Then there was a financial story about how I lost all my money and then what took me in and obviously a story about how I quit medicine. That was the very first star story and then I built the first book and then I build on top of that I had another book that was that only came out in German that was done with the publisher, it’s called successful beyond your wildest dreams and it just talks about success about what makes you happy and so I talk about obviously freedom and I talk about the traveling and about following your passion in life. So, it built up on those 25 stories and both books were super successful. The first one originally not that much. It took a little bit and then suddenly it hit it and then that it was quite interesting. Then I learned about cryptocurrencies. I learned about blockchain and that was in 2014, so seven years ago, and it was really early, relatively early from a whole standpoint and back then there weren’t many great books. There was one from Andreas Antonopoulos, who was an engineer, and it was called Mastering Bitcoin, it was very, very technical. I just thought, you know, we need a book that’s simple. That’s for the layman like me. So, I wrote a book called Cryptocurrencies explained simply, it was erotically a book that also Elon Musk was taking a picture of, so he was holding that book in his hand. Yeah, that book became, we sold over half a million copies, it was insane. It was translated in like 20 languages. Yeah, so obviously it hit a nerve with a lot of people. Then I wrote a sequel to that, which was called Blockchain 2.0, more than Bitcoin. So, this one talks about all the non-financial applications and yeah, and then there was another one that I wrote, two years ago, I had a bit of a fallout with my ex-business partners, and it was quite disturbing for myself and for everything, and so I had to kind of refocus. So, I wrote a book called Time Horizon Principle, which was basically all about focusing on the bigger picture. Yeah. So, that’s kind of seven years of book writing or almost 10 years.

Ben Sheppard  06:32

I’d be curious to see your mom’s face after she read the first book that you wrote.

Julian Hosp  06:39

She complained, because there’s just one story when I was really, really young and I was like, five years old, and I had just learned to swim or six years, I think I was just six years old, and I just learned to swim. In this book, I talk about how she made me swim 10 times back and forth, until I get my ice cream and how I remember it. She was like, oh, my goodness, when people read this book, they think I’m like this mean mom, who doesn’t want to give their son an ice cream, but actually makes him swim up and down? I’m like, no, mom, everyone really kind of appreciates that and thinks that’s a great story. She’s still completely, like chewing my ear off, because like, no, I sound like, or I appear like this really mean mom who doesn’t give free ice cream to our son.

Ben Sheppard  07:24

Your mum sounds a lot like my mum. Actually, I remember when I was doing my GCSEs at school and I was a bit of a lazy kid, I guess I always did just enough to get over the line and she brought home a college course to learn how to be a bricklayer and was I are essentially going to fail all your GCSEs you might as well apply for this now and outside. Wow.

Julian Hosp  07:46

Thanks, mom. Thanks for the confidence.

Ben Sheppard  07:49

But what, what motivated me to pass the GCSEs? That was what she said, and of course, if you don’t pass them, and you have to do this, you’re gonna have to live at home for at least the next four years. I was like, I am passing and getting into university. That’s hilarious. So, you and I actually share a common challenge in life. We both got dyslexia. So, I think we spoke about this in the pre call, didn’t we? And I was really impressed by the fact that you’ve written you know, five books, I’ve written three trap chapters for a book and with the dyslexia struggle, it can be harder to do those things, but what you’ve proven is, it doesn’t hold you back can actually you can be a best-selling author.

Julian Hosp  08:39

I mean, mine is not that bad, but I mean, at the end, I think it’s about best-selling not about the best written book, right. So, a lot of the feedback I get is like, oh, you know, this is written like, for 12-year-old. Yes, exactly, and that was the whole intention of it, right?

Ben Sheppard  09:00

Yeah. You know, that’s great. So, topic of today, DeFi and we’re going to talk about Cake DeFi, and in quite some detail, there’ll be a lot of listeners on this podcast show that don’t even know what DeFi means. You know, they’re just getting their heads around what blockchain is, and this new way a relatively new thing DeFi so in a nutshell, how would you describe DeFi to those outside of the world of DeFi at the moment?

Julian Hosp  09:30

To understand decentralized finance, it’s easier to start with centralized finance, which is the financial system we basically all experience on a daily basis. If you analyze that system, you realize that all this is about it’s about mainly seven so called function sets or seven things that most of us use the financial system for, or the financial system is used for. Then once you understand those seven, then you can go and say, okay, how could we decentralize those meaning it’s not one party that’s in charge, but there’s a lot of people in charge. So, you decentralize and that’s what DeFi them become. So, what I would love to do is maybe just briefly talk about those seven function sets, and we go from there. The very first one is that of creating value, and it’s actually creating money in a sense. It’s a traditional function that the government or the central bank has. So, the counterparty here is decentralizing this, and this is what Bitcoin basically did, in with the white paper in 2008, defining how a decentralized community could do it got started, January 3, 2009. And, yeah, it’s the largest decentralized ecosystem today. So, that of creating value, obviously, just creating value is not that exciting, we all notice, we also want to transfer that value. Very typical, obviously, you have paper notes, then it’s not digital or if you do this digitally, you have to trust the bank, or you trust PayPal. So, you tell them, hey, I want to send 1000 pounds to someone, or 1000 euros or $1,000 and you instruct someone, and maybe I’ve had this experience where I don’t know, PayPal froze your account, or the bank says sorry, the transfer doesn’t work, we can do it, right?

So, there’s always a decentralized aspect and in a decentralized ecosystem, and I’m using Bitcoin here, again, as an example. Bitcoin goes about this, by using time blocks or content blocks where this information gets stored. In order to add information to those blocks, you have to solve the puzzles. So, it’s not for free, you have to solve a puzzle, which is called mining. So, it’s not that anyone can just do it. So, you have to actually do a mathematical calculation and that’s how the second function set then happens that you can actually transfer your bitcoins to someone else. So, that’s the second one. The third one, and if you think about, it’s about exchanging value, it’s a bit different than just transferring, exchanging means Ben, I’ll give you A and you give me B in return, but I don’t give you A unless I ensure you give me B. So, it’s this typical exchange, we notice whenever we actually buy something online, or when we exchange for example, euros into dollars, when we buy a stock, actually buying is always an exchange and always there’s a trusted centralized party and so you could decentralize that and so a decentralization there and Bitcoin cannot do this anymore. I’m involved in a decentralized project, it was called DeFi chain, it actually built on top of Bitcoin. There’s another project called Ethereum, that does this really well, what the idea here is, you tell all the participants, and if then scenario, so instead of me telling the exchange to do this, where I say, hey, I give you $1,000, give me an apple share, or Tesla shares. I communicate this to everyone and say, hey, let me send your coins, but the other party can only receive them if the other party agrees that he or she is sending me something else.

So, instead of having a centralized exchange, this is called a Dex, a decentralized exchange. That’s the third function set. The fourth one is the typical lending main business for banks. Yeah, and it’s always centralized. So, you need to go to the bank, the bank checks your credit score, if your credit is not good enough for the bank doesn’t like you, you’re not gonna get a loan, or you get a very unfavorable loan and so well, this could be done on a decentralized basis as well and so the way it works, there’s you need to lock up a value. So, for example, you can lock up Bitcoins, you still own them, but you lock them up and then in return, you can take a loan from those Bitcoins and whoever’s giving you this loan is being paid an interest, and you can only get your bitcoins back out if you actually return the loan plus interest. So, suddenly, it’s decentralized. So, that’s quite interesting and then the next one is basically that of so-called derivatives or what in the blockchain world, we call this tokenization. So, a token is always something that is risk represents something else. Normally, that’s what a bank does, it creates those derivatives or other things that are derived from something on a blockchain, you can do the exact same thing, but it’s the community backing this. The sixth one is that of so-called prediction markets. So, instead of that’s what insurances normally do, they try to calculate probabilities. Obviously, any kind of gambling gets destroyed, but it’s actually all based on predictions on probabilities and the same can be done in a decentralized system. So, instead of the insurance being centralized, it can be an entire community. All those six are what we call solved. So, all those function sets are solved in the DeFi space.

The seventh is a question. It’s still up in the air will this ever be solved and that instead of identification of value and what this means is, when you go to the bank, and you show them, for example, your own identity, or you show them something, it always needs someone to verify or validate. In a decentralized ecosystem, we haven’t found a good way to actually validate value or identify value or actually show reputation, showing an identity, we haven’t really found a way to solve that. So, that seventh one is still really up in the air. The first six, many, many barriers’ projects, tackle them try to kind of solve them. My company Cake DeFi is this hub, this platform where you can go to, and in a very easy user experience, you get access to all those various function sets of the DeFi ecosystem.

Ben Sheppard  15:56

Yeah, I mean, that’s a great segue actually indicate DeFi. So, tell us about Cake DeFi. I love that name. You know, when I went to the platform, I could say okay, there’s this cake analogy, you can take slices of the cake. You know, this is how you make your investment. So, you make your returns, but perhaps you want to explain it, Julian is it’s your pet, isn’t it?

Julian Hosp  16:17

Yeah, so when we started Cake, for us, it was really about ease of use, it was about obviously making it a bit fun. So, using these pawns and games with the words, it’s like a piece of cake, or grab your slice of the cake. So, we use a lot of those things, because I feel this makes it a bit more approachable. Yeah, the idea behind it is that it’s this one stop platform that gives you access into all those various systems, it’s at the end, always about benefiting from the financial upside, but at the same time about benefiting from cash flow, because basically, if you think about a bank, a bank makes money by providing the service. So, this is CeFi, centralized finance, DeFi basically just replaces the bank or the banks. So, that’s also cash flow, but who gets this? Well, it’s always someone who provides the service. So, for example, who lends out money, who facilitates an exchange, who facilitates a tokenization. So, these are all the same concepts that helps with a transfer, that helps with the creation of values, all those kinds of function sets. So, Cake is all about two things. It’s about you are making money from appreciation and it’s the same time about you making money from cash flow, we started it mainly for the cash flow. I was a very early crypto investor; I made quite a lot of money. I was super fortunate in investing early, but so obviously, you always sit there just like with a house, imagine you invest in this property and suddenly this property gets worse, super locked and you’re like, da, should I sell it now, but maybe it might go for up? Well, what about if you rent it out, and suddenly you get rental income? So, we get cash flow and that was the entire idea, then invest into the assets, but get cash flow from it and that’s what Cake was all about?

Ben Sheppard  18:09

So, if we’ve got sort of banks at one end with Cefi, and we’ve got, you know, maybe are they at the other end with a fully decentralized sort of lending platform? Where does Cake DeFi sort of sit in that sort of paradigm? Because you’re a combination, don’t you have centralized and decentralized functionality?

Julian Hosp  18:28

So, the company Cake itself is centralized, but all the services on there are decentralized services that we just facilitate for the user, that is important that to understand. Cake doesn’t offer a service that a user cannot access him or herself. It just facilitates that and makes it easy and yeah, so we basically cater to the, I would say 95%, of crypto users who don’t want to do the nitty gritty themselves, where they can just do it all themselves, but we want to make an easy user interface, we provide them full transparency, so people can calculate everything for themselves, they see exactly what we’re doing is exactly what they are getting, they were transparent about our fees. So, on average, for example, we take about 15% of the cash flow that they are getting. So, if a user gets, let’s say, 10%, the rate of return, we will take 1.5% of that, and then give the user 8.5% We’re completely transparent about this. So, some users say, oh, this, I don’t want to pay 1.5% fair enough. Do it yourself, no problem. Someone says, hey, wow, that’s fantastic. I have this all at that one stop, don’t have to deal with it myself and so that’s where the individual kind of preferences come in.

Ben Sheppard  19:47

Yeah. For people that haven’t sort of operated in this industry before. I think Cake DeFi is quite an interesting opportunity for them because yeah, okay, there’s a fee, but you’re actually getting someone to help you get into the world of crypto, it’d be able to make these investments and sort of guide you through it because you know, crypto DeFi. It’s not for everyone. I think it was only two weeks ago, my dad blessed him said, son, how do I buy a Bitcoin? I was like, oh, my goodness, where do we start that? So, but you know, having platforms like Cake DeFi that can take some of the, you know, difficulty out of that process in understanding how it works, I think is great for trying to help crypto go mainstream, because there are people now, particularly at the moment when you’ve got Elon Musk buying for that Bitcoin, that are getting very interested in this, and they’re like, okay, I need to get one of these Bitcoins things, what, what’s this all about, you know, I need to get on this bandwagon, this is clearly going somewhere now, but you know, then they go into, you know, one of the DeFi platforms that’s fully decentralized and are looking at the light. So, you know, that, then it’s a case of, well, where can you go, and I think Cake DeFi is a nice opportunity for people that aren’t quite that familiar with that.

Julian Hosp  21:02

For us, it’s also important, we’re platform agnostic. So, for example, otherwise, you have to go and use this and this, and suddenly, you have like these nine accounts, nine things to deal with and so this is kind of an aggregator and suddenly, if this one stop, we get access to all those various things. So, like, the main feedback we get from our customers is, it’s super easy to use. It’s the convenience, you guys are super transparent about everything and yeah, you are taking a cut, but the cut is like and obviously we’ve tested is also the cut you’re taking is it’s basically just the pain point. So, the pain of the cut is not strong enough to say, okay, I’m going to do it all myself, I’m going to take full responsibility. So, the value we give, I feel is super fair to the price we charge, and people always feel that.

Ben Sheppard  21:54

You know, I think that’s a really great point about the aggregator type role that you play, because when you start investing in all these different platforms, you then got to remember, okay, where did I invest? How much did I invest? You know, before you know it, you’re in a Binance and are they a maker, a compound, a duct out, you know, all of these things, you know, okay, I need to write all this down, where have I put funds and you know, when can I get them out? Then you couple that with the challenges of MetaMask and Ethereum guess fees at the moment, and it just makes the whole thing very challenging.

Julian Hosp  22:24

Usable.

Ben Sheppard  22:27

Yeah, absolutely. It’s unusable at the moment. Rarely, it’s very difficult. So, unless there’s a reason why, obviously, you need to charge those fees because Cake DeFi doesn’t have its own token, does it you’ve actually funded this in a different way. So, can you expand on that a little bit?

Julian Hosp  22:45

So, we didn’t do the typical crypto route that raises funds from the community or something, we actually invested our own money. We had a very small angel investor round is actually friends of mine that I also know well, who else would make good money in crypto? We invested our own money. We believe in this and yeah, we had about 18 months of runway and we knew okay, within those 18 months, we need to be cashflow positive. So, otherwise, we’re going to be struggling and yeah, we made that. So, we have been cashflow positive ever since. So, I’m proud of that. I think in today’s startup world, today’s business world, for some weird reason, it’s not about producing profit anymore. It’s just about, I don’t know, raising more money grow, raise more money and again, I believe in gross, right? I’m fast gross, I believe in that, but at the end, I still believe, I don’t know, a real business makes money. That’s what the entire reason for the business is for and the business is about delivering value for a customer in order to make money and that’s what it does. So, yeah, we’re paying taxes. We are funding it ourselves, all the services, all the growth. I also believe this makes you smarter, leaner, focused, you cut away all of the fab and all the extras because you’re like, hey, I really need to pay attention. I can’t just raise another 10 million you know, just comes out of my own pocket. I think that’s important.

Ben Sheppard  24:22

I saw I found this really interesting, actually, when I changed industry to come into the world of blockchain in tech because prior to that, I was working as a management consultant doing major infrastructure projects. So, toll roads and railways and doing transactions between banks and governments and developers and it’s all about profit. It’s all about the financial model. You know, can this thing wash its own face, then you come into the world of crypto and blockchain is running low on cash. Let’s do a token sale.

Julian Hosp  24:50

I want to be debt honest, right? When I came into space, I started the company 2015 together with three other partners, and we did one of the largest ICOs in 2017. We raised $80 million and that was the beginning of the entire problem, because suddenly, the founder started fighting. I was at the end pushed out. The other three completely pushed me out and said, you know what? We want to keep all the money; they kept all the money pushed me out. It was a publicity or a PR kind of nightmare for everyone. Because, yeah, people were like, hey, where’s my money, $80 million, where did it go? Yeah, this happened now over two years ago, and the company now is sunsetting their services. So, they are basically shutting down. Obviously, all the investors from then are like, hey, what’s happening? Yeah, so to me, obviously, this is something where like, I never make this mistake again, where too much money is really, really hurtful. Obviously, too little money as well, but obviously the best is if you can really kind of have enough road scale built on top of that. That was a big lesson, right? And you live to learn.

Ben Sheppard  25:44

Yeah, definitely. I mean, there’s lots of examples in the market of, you know, where they’ve just had too much money and they’ve lost focus of what it is they’re really there and totally tied up in knots because of it. Actually, in those early days, being really close to the breadline helps keep me focused and really eyes on the prize, which is scaling the product, not just building it, and saying, oh, yeah, we built it. It’s done. It’s about scaling it beyond that. So, yeah, I think it’s a really interesting point and yeah, I think it’s great that, you know, basically, you ate your own dog food, you invested all your own money in it with your partners, and you’ve made it work and you know, and it’s the success now and that’s what really counts. So, now that’s super. Can we talk briefly about why you chose to be blockchain agnostic? So, what’s the benefit of being blockchain agnostic in Cake DeFi?

Julian Hosp  27:00

I think it’s a blockchain agnostic to me just also means that you pick it because you basically don’t get married on the first date, you try to kind of meet more and more and try to understand what’s happening, which platform is good for what, at some point, you realize that there is no perfect platform, there’s always drawdowns to every upside. Yeah, I think the super successful platforms, like in the long run, are going to be more of the aggregators, rather than the specialists for one thing. Yeah, I mean, that’s how everything is right. I mean, one of the reasons the internet one, is because it can do so much communication from the same protocol, and it can use for video, for audio, for text, for files, it can do the same thing, right? Because people like to have the aggregator they don’t want to have, like you said, 60 different things. They prefer to have it in one spot. So, that’s what Cake is all about.

Ben Sheppard  28:02

I feel like there’s probably a chapter in your first book about not getting married on the first day, which has a difference…

Julian Hosp  28:10

I wasn’t kite surfer for close to 10 years in my 20s. I traveled everywhere to Brazil, South America, South Africa, what do you expect?

Ben Sheppard  28:24

So, for those that are looking to get into, you know, investing in these different liquidity pools, there’s obviously opportunities, there’s a lot of upsides to it, there’s a lot of things that I need to be cautious of, as well. So, let’s touch on the risks that what are some of the risks that people need to think about, if they’re going to start investing into these different liquidity pools?

Julian Hosp  28:49

You have three main risks, and this is the key thing, the very first one is the project itself. So, that means what we call a rock pool. It’s a very, like vivid example. So, basically, you are standing on a rock, you believe all is good, and suddenly someone pulls the rock, and you fall. So, basically, it’s these typical exit scams. Almost every week you hear this from a project, so it’s broke founders, most of the time. It’s anonymous founders. So, that is one of the major risks that you need to start off with, right? It’s an easy one to kind of cut out in a sense. You need to have certain rules, for example, don’t invest in projects where you don’t know who’s behind it, because this anonymity is super, super dangerous and it’s not always right. I mean, we have counter examples, but they are quite rare. So, yeah, that’s the very first risk. The second risk is the technical risk, and that’s especially Ethereum, has been suffering from that, projects that have other roots. They don’t have these problems as much as it has to do with the technical fundamentals. These are typical smart contract risks, these are bugs, we see them all the time. Also on a weekly basis, it’s really, really difficult to protect yourself from that. So, the lesson probably use more tested platforms, obviously, then the returns are smaller, right? It’s always a give and take. So, again, there’s no perfect thing, it doesn’t exist, it’s really difficult to protect yourself from this. Time is a good example, obviously, also, the larger, the more people use it, the more tested it is. That just helps.

Again, rock pools work the exact opposite, many times. We have seen rock pools for projects where there were $50 million in 1000s of people 10s of 1000s of people, everyone was like, oh, yeah, this is gonna work and what the contracts got emptied, and all the money was gone, right. So, it’s just tricky. So, just be really careful. The third one is a bit of an abstract one and that’s called impermanent loss. It’s something that’s always there. So, from this, you cannot protect yourself and that has to offset the returns and impermanent loss is a bit of an abstract example, but basically, what it does is in most of those pools, you have to always submit a pair of assets. So, it’s not just one asset, it’s actually two. The impermanent loss works, how much these assets move away from each other. So, the impairment loss is greater, the more those assets move apart, if those assets will always move in parallel, the impairment loss will be very small, it’s just a mathematical problem, you can’t get rid of it, it’s the fundamental problem in the entire exchange model. It’s the same thing. A good visualization I always use is, imagine you look at the like, on a bank, right? You think of an exchange, for example, the bank needs to keep dollars and euros, because otherwise, the people from dollars cannot exchange in euros, or the euros cannot exchange dollars. So, the risk there is how do those euros and dollars move to each other. If both always move at the same, the bank doesn’t have much risk, because if the dollar goes down, euros goes down, it doesn’t really matter, but if those things move totally against each other, their books are never balanced. So, it’s like constantly a challenge. So, this impermanent loss is something that affects anyone and everyone, there’s no way around it in this entire thing. The only way what you can do there is you can look at the impairment loss risk in comparison to the returns that you’re getting. Then you know, okay, some of these protocols, for example, give you half a percent a day. So, it’s like insanely a lot, right? We’re talking about 180% a year, but obviously, if the impairment loss is, I don’t know, 170% a year, and it can be that means net, you’re making only 10% but he’s still making 10% and that’s still good, but then you have other examples where the returns are 25% a year, but the impairment losses, like 28% suddenly, you’re losing 3% a year. So, yeah, there’s no right or wrong here. It’s something you always live with and it’s also difficult to predict because it really depends on how those assets that you have are moving against each other.

Ben Sheppard  33:16

Yeah. I suppose the stable coin liquidity pool investments versus the utility token liquid pool investments, they’re a bit lower risk because you’d expect the stable coins to fluctuate just very slightly.

Julian Hosp  33:30

It depends though, right? So, it depends on what’s the counter pair if you have too stable coins? Sure, but if you have stable coins, like let’s say one stable coin and Bitcoin man like that can be insane, right? Because the stable coin is supposed to be stable, and bitcoin is volatile. So, sometimes, for example, a Bitcoin, Ethereum pool can be better than a Bitcoin stable coin pool, right? So, you don’t have those generalized answers there. It also depends a lot on the market. So, I mean, we’ve seen this right. So, we have seen those stable coins, but we have this problem with maker for example, versus USDC, once where these things are supposed to be $1 each, so there shouldn’t be any impairment loss and then suddenly maker had like this 20% premium and USDC had this other problem telling you what they were like 30% apart, and everyone got hammered and it’s like a black swan. That shouldn’t have happened, but it did. So, these are risks that you just have to deal with.

Ben Sheppard  34:30

Okay, so that’s the risks. Let’s talk about the upside, for those still listening to the pod, and they didn’t just go. So, what’s the upside, Julian?

Julian Hosp  34:42

So obviously, it’s just like at the bank, right? A bank is only going to provide you with a loan, it’s only going to provide you with an exchange, it’s only going to provide you any service if it’s paid for doing so and the person paying is the user, right? It’s the person who uses the exchange. It’s the person who wants to make a transfer. It’s the person who wants to loan or lend some money. At the end, it’s always a supply and demand and that’s also a key thing. The risks are always there, but again, it’s the people offering the service, they’re going to ask for a fee. Obviously, the more people want to use that service, the easier is for you to charge a fee. So, those fees can be insanely attractive. Again, there are like on Cake, for example, I’m using some of our services at the moment I’m making, what 0.4% a day. That’s after any loss, any fees, any risks, and so on. 0.4% a day, this sounds absolutely insane, and people will say, how is this even possible? Well, the reason is because there’s so much demand for that service. There’s just so few people who are offering the service. So, they’re sitting on the other side, the reason they’re so few on the other side, it’s more of an information arbitrage than anything else. It just the understanding that this is there. Imagine in a town, there’s 26 banks, and there’s 1000 people? Well, obviously, those banks are in super high competition, but now imagine there’s a monopoly for a million people and can only be done by one single bank. Well, you can charge whatever, right you can charge super lot of money. It’s exactly the same thing in the DeFi space. So, the key thing here, it’s extremely attractive, I see people making insane returns, but you have to be nimble, you have to be agile. If you want to do this yourself. Obviously at Cake, we always try to gather new ideas, get a new service, we try to vet the project and make sure we offer only solid things for you and so far, we’ve done a good job. I think we are taking a very safe route there, but yeah, these are just the things to consider.

Ben Sheppard  36:47

Yeah, now that’s a great explanation, you need quite a few cups of coffee and slices of cake to keep you going and watching the liquid pools in case you do need to be that nimble transactor, taking the investments out. So, this is great. This was a fantastic pod, Julian. It’s been great having you on and talking to you about what Cake’s doing. I wish you all the success and I think it’s a great platform, particularly for those that are really unfamiliar with the space still and you know, sort of want to be led through the journey of how to invest in these things and have some of the difficulties taken out of that process. I think Cake does a fantastic job of that. So, yes, great having you on and yeah, I hope we speak again in the future and get an update on some of the new things that Cake’s getting up.

Julian Hosp  37:34

Definitely. Thanks, Ben. Appreciate it.

37:37

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