Tom Schmidt Explains What You Need to Know about DeFi

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, we've obviously done a few, or at least a couple, DeFi episodes this year, Decentralized Finance, sort of the hot thing in crypto. But if I'm being honest, there's just still a lot that I don't get.

Tracy Alloway (0:33)

I don't think you're the only one, to be fair.

Like, I think there seems to be a lot of interesting things happening in the space. But it's hard to wrap your head around a lot of them because frankly they are so brand new. And in addition to that, as we've spoken about before, a lot of them seem to be kind of wrapped around each other. It's like DeFi wrapped around DeFi, wrapped around DeFi, sort of DeFi all the way down. And it's hard to figure out exactly what the application is to people outside of the space.

Joe Weisenthal (1:11)

Right. And this is, of course, I think there's clearly a lot of trading and speculation, and we'll talk about how those markets work because they work differently than, say, the stock market. But then there's also the question of what is it for? Because it's very easy for me to conceptualize sort of traditional equity or traditional lending because I have an idea of what these financial instruments are for, whereas my impression of the DeFi space in large part is like it's incredibly sophisticated and derivatives and all this kind of stuff, but like I still don't know what it's like for, per se.

Tracy Alloway (1:47)

Yeah, I think that's right. And I mean, to what I was saying earlier, who it's for, right? When I see a lot of the DeFi accomplishments, I think like, okay, that's great. You guys have built yourself a really interesting little DeFi ecosystem, and I know that sounds patronizing, but like, I don't know who's interested, who's interested in it outside of that. I feel like that's the missing part of DeFi. The space hasn't been very good at delivering the message about what this means for people who are actually outside of the DeFi space.

Joe Weisenthal (2:19)

Right, where it actually sort of competes with traditional finance and so forth. Anyway, we always ask these questions, but I'm very excited to say, I think our guest today is gonna be really good. Multiple people have suggested that he's a great person to talk to, very active in investing in the DeFi space. So maybe we'll get some answers today.

Tracy Alloway (2:40)

I hope so, let's do it.

Joe Weisenthal (2:42)

All right, I'm very excited. We're going to be speaking with Tom Schmidt. He's a general partner at Dragonfly Capital.

It's a venture firm that focuses on the crypto space more broadly. Tom himself is a fairly long background, long as these things go in the DeFi space, and very active in it. So we're going to get all our questions answered. Tom, thank you so much for coming on Odd Lots.

Tom Schmidt (3:06)

Thanks for having me, Joe. Thanks for having me, Tracy.

Joe Weisenthal (3:08)

Tom, let's start with your background. I mean, like, I think the average person maybe listening to this has been like spending the last like two months trying to understand DeFi. And the idea that like one could have a long lineage in the space is kind of weird, but you actually legitimately do. What do you give us like sort of like a little bit of like your background in crypto and DeFi, et cetera? How you got here?

Tom Schmidt (3:31)

Yeah, it's funny that DeFi is now sort of a thing that people talk about, but you know, it didn't sort of come from nowhere. I think in many respects, my sort of, you know, entrance into crypto sort of parallels DeFi in some ways, not to get too poetic. I really got into, you know, crypto during college.

I was writing this sort of computer science ethics paper on your interesting topic that anyone can choose. And I ended up doing this sort of Bitcoin regulation back in 2012 And I thought this was this brand new asset. No one really knew what to do with it. Sort of thinking through, hey, how might this thing be viewed in the eyes of the law? And then sort of actually put it into Bitcoin mining from my dorm room along with a couple other friends. And that was sort of when I got interested in the cryptocurrency space overall.

If you look at sort of those early days of Bitcoin, you know, sort of 2013, 2014, the things that people are doing in DeFi these days, people were talking about back then, back on Bitcoin Talk, where they're trying to do where, hey, there's this new asset, but it's sort of stuck. You know, it's not, it's just this form of money, but we can only just sort of send this money back and forth. And people want to do other things with it, right? People want financial services, people want to be able to exchange. But in order to do that with Bitcoin, you have to go through a centralized party, like a Coinbase or like a FTX, and they have to, you know, cuss your Bitcoin, they might go down, they might lose funds, they might exclude you. And so there's sort of this weird paradox where you have this great decentralized currency, but you don't have any financial services that also have those same properties. You know, one of those main functions that I mentioned was exchange. Decentralized exchanges have been around for a long time. People have always been trying to build them. I ended up getting back into the cryptocurrency space in 2017 when I joined ZeroX, which is one of the very first decentralized exchange protocols to run product for them.