--:-- Ryan Hanley: In a crude laboratory in the basement of his home... We want to welcome back to the show. Today we have an absolutely tremendous episode for you. I hope you're into crypto and blockchain, because you are getting the full frontal download in this episode. We are talking to Jonathan Libby, the founder of SteadyState Smart DeFi Insurance. That's smart decentralized finance insurance.
--:-- Ryan Hanley: This conversation is absolutely incredible because it really is like we've opened up a window in time and we're able to reach into the future and get a look at how the world operates. Jonathan is an incredibly smart dude doing some really dynamic, really interesting things. This is one of those episodes that you just sit back and download. Just let it sink in. There's not a lot that you can actually take action on today necessarily from this episode, but it is absolutely going to expand your mind on what is possible and what is happening out in the world of decentralized finance in general, crypto, cryptocurrency, and ultimately the place that insurance can have in all of it.
--:-- Ryan Hanley: It's a tremendous episode. You're going to love it. Before we get there, I want to give a big shout out to today's sponsor, AgencyVA. Guys, I've been talking about Agency VA for over a year now. I just had the one-year anniversary of my VA. His name is Nat. He handles all our transactional related service requests. He's a big part of our team. Agency VA is a big part of our team. I'm looking forward to expanding that relationship as we continue to grow. I couldn't be happier for the success that Wes and Ben and everyone, including Lally and everybody at Agency VA, have had.
--:-- Ryan Hanley: If you are looking for some horsepower to put into your agency, to get some people who know what they're doing, who can get to work, who are going to get things done, do it right, do it well, have them well managed, Agency VA is the place to go. Go to Agency VA today. That's agencyva.com.
--:-- Ryan Hanley: I also want to give a quick shout out to my boy Chris Langell from Advisory Evolved. Chris has been a long time sponsor of the show. I think Advisory Evolved, what they do with websites, the way they operate, how Chris is constantly out in the forefront of not necessarily the showy stuff. Chris has a tremendous way of improving the Advisory Evolved website ecosystem with the stuff that's actually going to have an impact, from visual conversion to ranking to helping ease of business, without just injecting crap that you don't need into your website.
--:-- Ryan Hanley: If you're looking for a new website, if you're looking to dust up your web presence and really put your best foot forward on the interwebs at a price you can afford with a guy you can trust, with a team you can trust, that's Advisory Evolved. Go to advisorevolved.com or just Google Advisory Evolved or Google Chris Langell. You're going to find Advisory Evolved and I promise you will not be unhappy with your website.
--:-- Ryan Hanley: Alright, with that, let's get on to Jonathan Libby from Steady State. Here we go. Well, hey man, thanks for coming on the show. I appreciate you taking the time. I know you're a busy dude. I know you've got a lot going on. You're in a very dynamic space, and I'm just incredibly excited to have you on the show.
--:-- Jonathan Libby: Excited to be here.
--:-- Ryan Hanley: Awesome. So I was referred to you by Jeff Shea, who's been on the podcast as well. Good friend. Runs a tremendous organization in Quantum. When he recommends someone, I am obviously very interested because he's not the kind of guy to mess around. Then when I looked into what you're up to, I was like, this is like the coolest stuff going right now. As we talked a little bit before we went live, I think maybe not tomorrow, but certainly in our future, this is one of the more... and I don't like to throw the word disruption or disrupt around just to be disruptive. But I do think DeFi has a chance to make a significant and dynamic impact on how insurance operates and how our world operates, frankly.
--:-- Ryan Hanley: I'd be lying if I said I hadn't re-upped my stake of XRP about 15 minutes before we went live because I'm kind of a crackhead. But first of all, let's take a step back. What is decentralized finance? What is DeFi? When you hear that term thrown around, let's start at the basics and we'll build our way up.
--:-- Jonathan Libby: I think that's a great place to start. So decentralized finance, often called DeFi, is kind of doing everything we do normally in finance, but rather than people handling the business, it runs on autonomous code fully. We have this idea of how the business works as professionals in finance or in any kind of area. A lot of normal people have an idea of how things work, but when they start explaining your job, you realize they have no idea what actually goes on.
--:-- Jonathan Libby: How DeFi works is it runs off autonomous code where if you put money in, you can actually see step A, B, C, and D run naturally on a code system. You can actually know what is going on. What this means is it's meant to remove a lot of the third party or intermediaries between getting some kind of achievement or input and output. Rather than having to go through intermediaries to get some kind of solution, it's supposed to be a one-to-one ratio where someone has an input, someone has an output, and it just goes there without the third party broker.
--:-- Jonathan Libby: It's a really unique aspect in the industry where we've always had that and we're trying to figure out how it works and what the value is there. If you're a banker trying to give out a loan, there's a very direct framework to function on. But if you know the framework around that, it's like, okay, well that's better than code. But the reality is there's another value. Even though it can't be as customizable in the space, it allows you to be more capital efficient. You don't need the overhead. You don't need the people. It's a system that actually runs.
--:-- Jonathan Libby: Another thing that makes it very interesting is that it's tough to control or manipulate this code when it's built. Often there are keys that show you the way to add more code to the system. What people often do in decentralized finance is they burn the keys for the criteria to add information into the system to make it grow better. What that means is that there's no centralized authority. Because there's no centralized authority, there's no one to collect the overhead. Because there's no overhead or any kind of cost on that end, it's just a one-to-one ratio like I said at the beginning. That's decentralized finance in the full.
--:-- Jonathan Libby: In bank lending, rather than going to a bank to receive the assets, people buy capital on one end and someone lends money here. They take a lend and they provide. Because of that low cost, you can actually get higher returns compared to traditional financial markets.
--:-- Ryan Hanley: Yeah. The other part that I think is interesting about that is the opportunities it presents. Just taking the lending, that is one kind of microcosm of decentralized finance. It opens up the market for micro lending. It opened up lending to people who may otherwise have been unable to hit certain triggers. It provides someone like me who is never going to have enough money to create a traditional lending facility. I could actually put some of my assets into a pool that is then lent out. I could pick a risk tolerance and then be part of a lending pool. Now I'm able to capitalize on capital that would have just been sitting in a bank account otherwise.
--:-- Ryan Hanley: I hate to use too many buzz terms, but the democratization of that in its untarnished form is incredibly interesting to me. I'm way down the rabbit hole, not as much as you, but without owning a DeFi or crypto business. I just think it's so interesting. I can't see how, once you start down this path, at some point—and handicapping the timetable feels kind of impossible—I can't see how this isn't the eventual where we go.
--:-- Jonathan Libby: Oh, absolutely. The question is, is it going to be the future for everyone, or is it just going to be like fintech taking over a portion of the market, making things easier to access, and finding its niche within how things actually work? That's the real question. What it's going to look like.
--:-- Jonathan Libby: The coolest thing about DeFi, as you dive in, is it's kind of the weird marriage of traditional finance nerds like you and me with developers and code knowledge. It's creating creativity. I think it's one of those things where we can combine these two concepts of autonomous code, financial nerds, and creativity. I'm seeing a lot of people building a lot of unique concepts that aren't possible in traditional finance. They're applying them and really challenging the way financial systems work and proving how there could be a better solution.
--:-- Jonathan Libby: The reason I believe decentralized finance is the future for sure is it really allows people... let's start with third world countries. In first world countries, it's great. There's a lot of corruption in banking models and in currency. I remember a story where Turkey's currency raised and inflation raised by a 40% decrease in the value of your assets. Could you imagine having $100,000 in the bank and now it's worth $60,000 a day later with nowhere to go? It's incredibly disruptive.
--:-- Jonathan Libby: One of the key aspects, this isn't necessarily native to DeFi but it's very much used in the DeFi system, is stable coins. It's one coin with a derivative value that's staked to another value constantly and can't move. Nigeria is one of the largest users of Bitcoin, even more than the USA. With these stable coins, it allows people to actually keep stable value in their funds to be able to transfer it naturally. Another problem is if you want to exchange your assets, you are often stuck in the area you are. With the internet and these stable coins, you can now access digitally or easily from Nigeria to Thailand or the USA naturally, creating a more global market and actually increasing maximum market share, allowing variable countries to move up way faster and allowing us as international countries to actually have more access to new opportunities.
--:-- Ryan Hanley: It's really amazing. This is going to be one of my favorite conversations. My first thought is imagine if the ruler of your kingdom could just drop $1.9 trillion on the ecosystem in a snap of his fingers and tell you it's because of a disease, and then do another six just for why not. This is real world hitting everyone.
--:-- Ryan Hanley: One of the cryptocurrencies that I follow quite closely is Cardano. One of the things that initially caught my eye, and since reading into it I know more of the nuances, was how Charles Hoskinson, the founder of Cardano, was working towards applying it to the African continent. If you don't necessarily understand what goes on there as a listener, if there's a currency and if that currency is controlled by whatever the country is, it is often highly centralized and grouped into whoever the few controlling entities are. The rest of the country is left still trading like sticks and stuff.
--:-- Ryan Hanley: What Cardano was doing, one of its early missions, was to be able to do just like you said: provide a base layer of transactability to people boots on the ground. I can actually pay you for the milk that I need and you can pay me for the bread. Being able to give a stable currency to all these people. So that's the cool part.
--:-- Ryan Hanley: What is really going to be fun is when we can blockchain HTTP protocols like web protocols. Right now they can still use the internet to create geographical barriers to crypto. As soon as we can figure that out—and I know there's some projects working on it—as soon as you bring down that layer and you put the actual internet onto a blockchain that is not able to be centralized or have these artificial barriers to it, holy shit. That's a whole other level.
--:-- Jonathan Libby: I think a great example of that is there was recently a subpoena on Uniswap. Uniswap is a decentralized exchange where people can post tokens and trade it like a broker that runs totally automatically, which is amazing. We have Cardano looking to do it, Ethereum has done it, Algorand's looking to do it, Polygon's built on Ethereum. It's like a decentralized internet where no one can control and anyone can build on it. That's where people are building on these protocols. We're building on it.
--:-- Jonathan Libby: What we saw is the power of building on a non-controllable system. You can control how the output works, but you can't control the input within the ecosystem. Uniswap built a whole entire system on the Ethereum network on decentralized code. It's open source, publicly available to anyone. They basically got a subpoena saying they were launching unregulated securities and anyone had access to them. The problem was the government couldn't shut down Uniswap. They built this code on this ecosystem that just can't get shut down. It's naturally there. It's running on all this autonomous code. They burned the keys to running the system.
--:-- Jonathan Libby: All Uniswap had access to was an HTTP front layer landing page to enter the app. All that had to happen was somebody made a new website in another country, copied that, popped it, placed it there, and it's running again. You can't actually stop the system.
--:-- Ryan Hanley: Hold on one second before you go any further, because I think this is an important thing to clear up for people. When you say it's running on a deep... I would love for you to explain how the distributed network works, how they can't take it down. For people who are listening and maybe still not familiar with a lot of this stuff, that doesn't make sense. You just pull the plug or delete the server, right? How is it that that can't happen?
--:-- Ryan Hanley: I'm not the foremost expert on blockchain as a base layer, but you're better than probably 95% of the people listening. So go right ahead.
--:-- Jonathan Libby: So kind of what Ethereum is. I think there are some major asset classes that are competing. I think Bitcoin is in a world of its own where it's trying to compete as a store of value, but the rest are trying to take over market ecosystems. So it's Cardano, Algorand, Ethereum, and Polygon which is based on Ethereum, and a lot of others like Solana. The list can go on.
--:-- Jonathan Libby: What these guys do is they built a code or a system where there is ability... it's called a blockchain where all the information the system would have access to is stored. Rather than people manually having one group or one central authority grow a system out, like the internet where you have to go and build a website system or expand it, they build a layer that's naturally valuable or customizable. People go in and implement and grow it naturally.
--:-- Jonathan Libby: Originally you'd have to have access to a native token to implement and then use it. But a lot of these you actually don't have to import. It's an autonomous system that runs where a framework is given. That framework is code. We have JavaScript, Python, and Ethereum has Solidity. I don't remember what Cardano's is off the top of my head. You enter code and you can enter anything in here. Because no one is in charge of that layer, no one can shut it down. If I input a code or do anything, I can plug it there. No one can just go off and say that code developer, pull it out.
--:-- Jonathan Libby: If I did that on the Internet, I have a website attached to me. I have a domain. I have a license. I have all these different things. They can know where the code is, attach the code, and then wipe the code out and go to some kind of centralized group to destroy it. If I build my domain on Google and build that out, they can go to Google and say this guy. With Ethereum, there's no way to really actually... on the initial layer, you don't know what it is. It's not like KYC necessarily. On the system itself, you can't just go and figure out who someone is. Because of that, anyone can place anything and you can't just pull it off. Anyone can post anything or do anything in the system network internally and no one can stop them.
--:-- Jonathan Libby: Unlike the internet where anyone can pull it off, now you can control and figure out who people are. It's called off ramps, but I can go into that. That's where you start really figuring out... there's also Etherscan, MetaMask transactions. I can go into how it's very easy to figure out who everyone is, but it's also at the same time kind of complex.
--:-- Ryan Hanley: And the reason you can't just pull it off is because you have 20,000, 100,000 different computers that at all times are safe.
--:-- Jonathan Libby: Exactly. And the computers are anyone who holds the token. You have to get everyone who holds a token to be like, take that off. It's almost impossible. That's the great point I forgot to add. That's the perfect conclusion. How you can pull anything off is you have to get a large... there's that native token that you have to have in the system, like I said, where there's ADA for Cardano, Ethereum for Ether. You have to get a majority of people that want to agree to pull something or implement something new into that system. It has to be a universal agreement.
--:-- Jonathan Libby: The group that does this best, I would say, is the Bitcoin community with Taproot. It's almost impossible to change. They just recently implemented this new system called Taproot. From what I understand, in Bitcoin it's very hard to use as anything other than the golden rock, I would say. But what they tried to do is allow transactions. They built this thing called Taproot. I still have never actually sat down and really gone into the nature of what Taproot is, which came out like months ago. But basically they had like a 60% consensus. Everyone involved in the Bitcoin community somehow agreed to implement something new. Getting these Bitcoin guys to agree on anything is possible. So they agreed to it.
--:-- Jonathan Libby: It basically allows transactions to flow more freely within this thing they're trying to build called the Lightning Network. That is something they're building that goes on top of Bitcoin that's supposed to compete with the Ethereum concept and Cardano and what these guys are all doing. You can actually build on the Bitcoin network and put transactions through on Bitcoin. That was one of the great examples of like, this is the first change I think in like eight years or something crazy like that. The thing was built in like 2008, which tells you how impossible it is to change anything. It's just going to get harder and harder as this big thing gets more people.
--:-- Ryan Hanley: Yeah. They call it FUD for anyone listening. It's basically just trash talking and nonsensical stories. There's a lot of gaslighting that goes on. I'm probably way too deep down into this rabbit hole for my own good, considering my limited technical knowledge. But the more I research the technologies, the more I understand things like Solana coming out with proof of history. You have proof of work, proof of stake. Now here's another network that has something called proof of history, which is able to even take proof of stake a step further.
--:-- Ryan Hanley: We're continually moving to the idea that in order for something to change, the whole group or a massive portion of the group has to agree to it. Each one of these evolutions makes it harder and harder to rig that change in any way that isn't an agreed upon part of the network as it was set up. There's a set of rules for that network. You can operate inside those rules as much as you want. What all these iterations and new attempts are doing is solidifying the security of that network so that you can't have someone come in and just all of a sudden debit themselves a million dollars for no reason. Everyone's going to say wait a minute, that's not how the system works. 73% of the people in the network say it's not, so too bad, so sad.
--:-- Ryan Hanley: I look at that and I want to transition a little bit to insurance. We can go down these rabbit holes again as much as we want, but I want to transition to insurance because I have a hard time. I live in the traditional property casualty insurance world. To run a traditional property casualty insurance business, you have to operate by that set of rules. Then you see the things that are happening in finance and you're like, oh my God, look at what they're doing and the way data is passed and how it's held and how easy it is to spread risk. This is what we're doing in insurance yet we're still using AL3 download systems in order to transfer inaccurate and oftentimes antiquated data bites between... I just look at it and I'm like, this is insane that this is how we operate.
--:-- Ryan Hanley: I know you're not operating in that same space. You're doing something slightly different. But if there isn't right now every major property casualty insurer in the country finding people who think the way you do, who have your type of expertise, and putting them on staff... even if they're not doing anything, they should be researching and testing and talking to people and starting to build these networks.
--:-- [Ryan Hanley addresses the audience directly]
--:-- Ryan Hanley: What's up, guys? Sorry to take you away from the episode, but as you know, we do not run ads on this show. In exchange for that, I need your help. If you're loving this episode, if you enjoy this podcast, whether you're watching on YouTube or you're listening on your favorite podcast platform, I would love for you to subscribe, share, comment if you're on YouTube, leave a rating review if you're on Spotify or Apple iTunes. This helps the show grow. It helps me bring more guests in.
--:-- Ryan Hanley: We have a tremendous lineup of people coming in, men and women who've done incredible things, sharing their stories around peak performance, leadership, growth, sales, the things that are going to help you grow as a person and grow your business. They all check out comments, ratings, reviews. They check out all this information before they come on. So as I reach out to more and more people and want to bring them in and share their stories with you, I need your help. Share the show, subscribe if you're not subscribed, and I'd love for you to leave a comment about the show because I read all the comments. If you're on Apple or Spotify, leave a rating review of this show. I love you for listening to this show, and I hope you enjoy listening as much as I do creating the show for you. Alright, I'm out of here. Peace.
--:-- [The interview resumes]
--:-- Ryan Hanley: Let's get back to the episode. You got to have it. If you want to discuss insurance and implement a lot of these new concepts, you have to understand insurance and you also have to understand the space. You have to combine it. You can't have one or the other.
--:-- Jonathan Libby: What I built started originally as a parametric insurance framework built under a captive insurance model. Then I implemented the idea of insurance and security, which is a brand new concept. In cat insurance and CDOs, credit default models, the whole thing... you're paying these guys a thing. You give them a problem and you tell them to solve this. If they do their job, they're passionate. If you get the right person, they'll create some crazy solutions. You're like, oh my God. That's why you hire these guys.
--:-- Ryan Hanley: Yeah. There's a strategist who can think 10 years ahead of what the industry looks like and actually bring your company forward.
--:-- Ryan Hanley: So let's talk about Steady State. What's going on? Give us the lowdown.
--:-- Jonathan Libby: Steady State. We are so under these layers. Let's call it Ethereum. Cardano is not there yet, they're heading there. Solana is heading there as well. Avalanche just started. There are these things people build, these decentralized code businesses on top of these networks. What we simply are is we're providing insurance to these businesses for different kinds of risks, specifically catastrophic risks.
--:-- Jonathan Libby: Catastrophic risks like we actually normally understand them are hurricanes, lightning storms, earthquakes. But there's a new kind of catastrophe risk we understand to be a cat event, such as technological risk or cybersecurity risk. We actually forget those are catastrophe events. The biggest risk right now in this industry is the code is still early. This industry is so early. It's like the wild west. You and I were probably on the cusp of the internet when we were young, but people with phishing attacks and viruses and scandals... this is where we're at right now in this space. It's a wild west. If you're not careful, you can get in serious trouble.
--:-- Jonathan Libby: What we're doing is basically... the risk you're exposed to is if you build this decentralized code, if there's a bug in the code, someone can take advantage of that and steal the money. Or if there's a black hat exploit. If the coders themselves make a mistake on some kind of poor decision on the infrastructure, you can black hat exploit that. People who provide capital to build these networks, these systems, are totally exposed. These kinds of events we're trying to start to insure for protocols.
--:-- Jonathan Libby: How the industry currently works is there is no insurance for protocols. It's a $145 billion industry just on Ethereum. We're probably heading to a trillion dollars in a year or two, I wouldn't be surprised. A year and a half ago it was like $10 billion, maybe less. That gives you an idea of how quickly it's scaling and growing. There's no sign of stopping. What we are doing is we are starting to insure these protocols for catastrophe risks.
--:-- Jonathan Libby: Currently how the industry works right now is if I'm a retailer and I want to get in, there's no insurance protocols. The retailers have to get insurance. I can use like 50 protocols.
--:-- Jonathan Libby: I can use like 50 business models. In this new industry, you can work in like 50 businesses rather than being attached to one. I'm involved with 50, 60 protocols. I'm running capital, actually using them, growing my stake. I get all of them. And basically, if anyone gets hacked, rather than the business being responsible for writing the code or the people in charge of that area, I lose the money. And if I want to get insured for that, I have to go to mutual systems.
--:-- Jonathan Libby: How it works in these mutual systems is incredibly fundamentally flawed, where people like you and me, Ryan, provide capital into a pool to insure people. And I get insurance in that pool. So I want $100 insurance. Now let's say one of the users wants $100 insurance, and you and I provide $50. If this week we plan a criteria to pay them out if the event happens, we have to vote on whether or not we pay him our money. It's kind of an odd system, the mutual model. And there's no regulation to provide about whether we want to pay out. In the current model right now, the approval rate for a payout is 18%. No one's going to trust that model of insurance, and so businesses aren't trusting that either.
--:-- Jonathan Libby: What we're doing is all these events that we're trying to cover for have historical address to what kind of loss you're expecting. And the events you want to look at can be tracked on on-chain public data. We've actually just partnered with one of the biggest players in the game, Chainlink. We're integrating with Chainlink. And we're working very closely with them. They have this concept called the Keepers Network. What it does is it tracks all this on-chain data that's going on constantly, all these different protocols. And when it finds whatever it needs, it'll actually bring the data to the smart contract that you're looking for. From here, we have this network now that can detect events almost automatically.
--:-- Jonathan Libby: We're using parametric insurance for protocols, where you agree to evaluate payout per the event, and we agree to establish criteria. The Keepers Network goes out to those criteria, and when it finds the event, it brings it in, and it starts bringing a payout for the claims process that's almost completely automated to the protocol. Rather than humans intervening and voting on the decision, it's run by technology, and humans evaluate the technology to make sure it's correct.
--:-- Jonathan Libby: Now, the other problem we have with insurance is we are not like a $500 billion insurance fund. How do you provide business insurance? That's the other key problem. How do we actually provide capital to insure these protocols? With the parametric model, how we're building it out initially, you have a predefined level payout value pre to the event. Often it's the average loss. You need about 23% of the actual protocol size value to fully cover 98% of hacks on the protocol. So it's already calculated. That 20-30% they say they process it. Rather than you, I can insure them as a business initially because we don't have the capital. People can stake capital.
--:-- Jonathan Libby: Say you have Aave. Aave is a lending program on the decentralized finance on the Ethereum network. Aave is willing to pay a 20% rate of return in their own native token if I'm up to that $30 million policy. So if I, as a user, take 100 USDC to cover their downside, I can receive a 20% rate of return to Aave. So buying the risk of a business, they're paying me in business stock, which is a whole unique aspect to it. But the problem here now with this, Ryan, is my upside is 20% in moving value, which is great actually in my opinion, but your downside is 100% on a USD value loss because it's parametric to pay what happens. It's going to pay out.
--:-- Jonathan Libby: What we're doing rather is rather than trying to argue what are the odds of this happening, because we're always doing that on any kind of structured debt, you're deciding your loss betting on a chance of it happening. We're trying to control your loss. We're borrowing from CDO credit default swap models to build things called index pools. If there's a derivative pool with weighted exposure to multiple different insurance pools on the coverage side. So if I have a pool with 5% exposure to 20 protocols, and the premiums here are really high, by the way, the APYs here are stupid high. With the blue chips, the Aaves, the Compounds, the ones that are really long-term, the Googles and the Apps of the future, their APYs on accumulation are very well.
--:-- Jonathan Libby: We're building derivative pools with weighted exposure to multiple of these different kind of parametric coverage pools, say 5% to 20 pools. If an event happens to any of these pools, rather than losing 100% of value, it was 5%. And say my upside is 20% again of 20 native tokens being accumulated naturally during the duration period. Our long-term vision is to make this a top 100 DeFi index pool, structured pool with 1% exposure. The odds of one protocol filing for insurance in the system is like 5% in a top 100, which means you're taking a 5% chance at a 1% loss. Two, you're taking a 1% chance at a 2% loss. Let's say Black Swan, five protocols filed for insurance on this network, you're taking five chances. You're looking at 5% loss of your principal, but your upside is a 25% return, 20% and 100 tokens being paid out to you. You're accumulating.
--:-- Jonathan Libby: We're actually trying to turn insurance into one of the most natural accumulating products you can buy while controlling your downside risk. This is going to be one of the best ways to accumulate blue chip tokens in DeFi that are the future of the industries while also controlling the downside. We're looking to take this structured product model, go on the KYC compliant blockchains, and actually look to sell that and bring institutional finance in. Our long-term goal is to take these fees, collect them naturally, and then build an insurance pool that floats over all of it. So what you actually see is this is more of a reinsurance model than an insurance model for a billion out. But the goal is to take the fees, collect them, and then build an insurance pool that floats off. When the insurance pool floats up, it'll actually keep the APYs high for the stakers while reducing it for the protocol.
--:-- Ryan Hanley: That was a lot, right?
--:-- Jonathan Libby: No, but it's awesome.
--:-- Ryan Hanley: I followed like 90% of it. So essentially what you're providing, if I were to put this back into analog terms, is you're creating an insurance company in which the dollars that normally would be invested by the company and reaped by the company are invested into the products in which you are actually insuring. And then the people that you're actually getting to reap the investment dollars out of those entities in sorts, right? Kind of like that.
--:-- Jonathan Libby: Yeah. We can almost create insurance where businesses can buy their own risk and then profit off of it.
--:-- Ryan Hanley: Again, I know it's a lot for you guys listening at home who haven't done a lot of the research. Maybe you don't understand all the terms. And I'm certainly not going to ask you to stop and define them because go do the research. But I just can't see how this isn't where we're going. I can't see how this isn't the path forward. Now, one of the questions: do you guys have a token? Could a consumer like me buy Steady State to start to get into these pools and start to be part of this?
--:-- Jonathan Libby: We're releasing product in Q1 2022. We're about 30% through our build out and we're going to be on test net probably November, December. Once we're all set, we're planning to use our token with product with utility value in Q1 2022. You can have our tokens. Whoever holds our tokens, one of the nice values is you're collecting the fees, a portion of the fees throughout the whole system, which is really nice. So it's a natural automatic paying dividend. But also at the same time, using these systems, these models and state pools, we're almost building the first insurance space, but also building the first bond market because of these structured products.
--:-- Ryan Hanley: That's what I was going to say. It sounds like a hybrid insurance slash bond product.
--:-- Jonathan Libby: Yeah. And the long term goal is to build an insurance pool that flows over the network. We can offer 40% collateralization to all the pools in our system. What protocols can do is they have an insured payout, let's say 50%, and then they have a floating payout on the natural insurance pool in the floating rate that only promises say 10% of value. So then we're only receiving the business 10% premium on the 40% million, which is actually 2% or whatever. But the people who stake capital will still get their high APYs because you're paying the full on the collateralization. So you can get full collateralization on this. People taking capital still receive those APYs, but we receive a lower one, which makes it much more attractive for the business.
--:-- Jonathan Libby: What this will do long-term is as we keep floating, it'll create scarcity on the stake. And then people will start trying to buy and trade these on these index pools on a discount and premium value on a secondary market. Similar to a fixed income system. But at the same time, it's insurance. Longer term, we create our goal to create a short-term and long-term scalable model to insure protocols. We're almost building a model that prioritizes reinsurance, but we move from reinsurance to actually insuring the protocols ourselves as we keep developing. And by us, I mean a decentralized community, not run by me, not run by anyone directly, but by the people who actually want to be involved in the space. When you have that token, that native token risk, you can be a part of that community and help develop it in the future.
--:-- Jonathan Libby: We're planning to build fintechs that work with DAOs, this new concept where this DAO community runs everything versus this community. Fintechs have to fight to receive these tokens, they get a stake in the business, and then these fintechs are going to take these products long term and want to go into KYC, KYT group blockchains. We want to take these products and sell them as new asset classes across a whole new industry of traditional finance, because honestly these structured index pools are a concept they clearly understand on a financial model, but you get exposure to DeFi in a way that makes sense.
--:-- Ryan Hanley: How did you get into this? DeFi? How did you get here? How do you get to this level where you're talking about derivatives of decentralized finance, what is essentially a bond product? We're talking about layers on layers that we're still seemingly years away from. How do you get to this space? How do you get to this point, as far back as you feel is relevant?
--:-- Jonathan Libby: I fell in love with DeFi in the fall of 2019. One of my professors ran a product called Pool Together. Pool Together is a no-loss lottery savings account where I put money into a savings account. Everyone sees some of the rewards of all the aggregated APY. What they used was Compound. Compound is a new lending protocol that pays interest by the second or by the hour. In banking, you get it annually or semi-annually. How do they compete with by the second? All those generated APYs pay out the winner every week and they receive rewards. So it's like a savings account where your money never loses money, but then you have a chance on top of that of receiving an extra million dollars randomly one week.
--:-- Jonathan Libby: Then from there, what was interesting was Compound Finance, where I saw the interest paid by the second as a finance guy. How is that even possible?
--:-- Ryan Hanley: Doesn't Gemini run off Compound Finance?
--:-- Jonathan Libby: I think a lot of people use Compound. They're very secure systems. They're very effective and they're very up to code standard in any industry. So they're very solid. I think Gemini uses it. COMP is a very good token. I think these are blue chips of the future, the new blue chips of the future. But yeah, COMP is like... I immediately thought this was a scam. There's no way interest paid by the second. And then I found that it's not a scam.
--:-- Jonathan Libby: What blew my mind and really brought me into DeFi was another product built called Yearn Finance. Yearn Finance has a lot of uses now. It's like an ultimate hedge fund for anyone to use, basically, on this decentralized node by anonymous people. But what it was really built out to be initially was basically a smart contract where I put my USDC or my stable coins into the smart contract. It would find the highest APY every second between Aave, Compound, Synthetix, and other lending protocols and naturally move my money at all times between all these narrative systems and find the highest APY possible in all these bankings. My thought was, if you put that on a bank, what would happen? It would force these guys to think, how the hell do we get these APYs up? My thought was, let's apply this. I'm like, this is the future.
--:-- Jonathan Libby: So I started looking at how to put all these concepts together and build something. Eventually I met a very well-known figure in the space named Tim Frost from Yield App. Yield App contracted me to build an insurance solution for them and how to insure their portfolio for other DeFi risk. Tim Frost is a very, very well-known person in the industry. I was very blessed to get to know the guy. He's a great mentor. They liked my solution. They thought it was typical insurance, an alternative insurance, but combined with DeFi and combined with all the derivatives. They were like, this makes sense actually. And they said, let's go for it. We ended up going with that as our first client and our first partner. We're very excited to work alongside each other to the future of insurance.
--:-- Ryan Hanley: That's awesome, man. That's very cool. You're what, like 25?
--:-- Jonathan Libby: Yeah. 24.
--:-- Ryan Hanley: Fuck you. If I wasn't 40 and deeply invested in the standard insurance space, this is absolutely where I would be. I think this world that you are playing in is just so intriguing on so many levels. The freedom that it provides to people, the opportunity, the redistribution of wealth in a non-communist standpoint, in a very capitalistic, opportunistic standpoint. I mean, I see this. It's incredible.
--:-- Jonathan Libby: I think in cryptocurrency, universal basic income is for the first time actually possible in a way that can actually feasibly work, where people can all have a standard of life without sacrificing individual liberties. I found that very attractive. I am a big believer in trying to find the best ways to create global equity. I think if you solve poverty and wealth disparities, you solve a lot of problems in the world. I think it's pretty cool. And crypto for me is that solution. In one sense, you and I no longer have to attach to one business, whether it's Goldman Sachs or Liberty Mutual or Walmart. You can now work in whatever industry you want and get paid in the industry you want. But also, you're paid for the value you produce. These are money Legos.
--:-- Jonathan Libby: Say I work with this one network, this one protocol. And then I use all these other protocols. All my tokens get moved into this other protocol and it gets naturally grown. Then I get the protocol that serves me income, and the rest gets grown to a growth account that grows say 20% annual, which is not crazy in this space. Then that 20% growth amount moves into other growth accounts. This new space is, if you're willing to be creative, you can disrupt everything. I still really encourage you, Ryan, to look into it and contribute or be involved. All these concepts we do in finance, whether it's insurance, PMC, title, health, life, alternative, parametric, all these different concepts are going to be put into a decentralized sphere. If you know these concepts and are willing to be a little bit creative, you can build billion dollar unicorns because there's already a billion dollar industry in this space. It's not crazy. I think it's going to get crazier as we keep progressing.
--:-- Ryan Hanley: I don't have my head wrapped around it completely, but the property casualty space, particularly in personal lines, auto, home, things like that. The idea of starting to decentralize those risks, starting to categorize them, better understand what they are. The other thing that's interesting to me is a concept I was toying with. I was listening to some podcasts and they were talking about different concepts. I'm always thinking about what can decentralized autonomous code do for property casualty?
--:-- Ryan Hanley: I started to think to myself, rating is such a problem. Oftentimes it's because let's take a less standard account, like a roofer. Tougher to place, limited markets. The roofer is forced to go through multiple hoops, oftentimes paying a drastic premium because of the risk that they have. What if that risk was able at the base layer, not at the reinsurance layer for the huge players, but at the base layer, at the small business level, you could spread that risk out over five or six carriers or as many carriers as we're willing to take a layer on that business? How much more competitive could the pricing be? How much more reasonable could it be? How much faster could it be delivered if one of those carriers didn't have to take the entire chunk? Today that would be impossible based on current systems, but in a decentralized manner, you could easily chop up those risks. Carriers could buy into a roofer pool and run off basically the same concepts that you're talking about right now.
--:-- Ryan Hanley: There's an enormous opportunity there because now I don't have to be scared about cat events. I don't have to be scared about one of your guys rolling off a roof, breaking his neck and dying and having that destroy my year because that risk is actually going to be distributed over five or seven different companies at the base layer, at the primary layer. The only time you get into any kind of distributed risk in this capacity is when you get into umbrella layers that are tens of millions deep, you start to chop it up. But the full risk of a million dollar death is taken on by the comp carrier on a roofing account.
--:-- Ryan Hanley: To me, this is one idea. How does the decentralized finance and blockchain start to impact the property casualty world? The idea of being able to buy into pools of risk. Maybe as an agency, I want to go be the roofing guy and I buy into the roofing pool because now I'm actually incentivized to write people into that pool because I'm staking what I've bought into in that roofing pool. There's all kinds of concepts there where you can start to distribute the risk, lessen the burden of any one major disaster. The hope would be quicker placement, processing, distribution of information, and ultimately a diversified catastrophic loss.
--:-- Jonathan Libby: Once we separate the concepts of stocks as a security and tokens as a security, and really start separating that, and tokens give them a new value add, I think everything you said is just absolutely possible. Our concept connects with tokenization. There's a guy I just recently met, not going to disclose his name, but he's talking with DraftKings, GameStop. I'm going to be checking with Barstool where they're building tokenized DAO systems within these kind of ecosystems using loyalty rewards. I'm thinking like what you're saying. Combine these pools. I want to get invested in these systems to make sure that they're doing their job right. Get a portion of their tokens, get an infrastructure and actually evaluate them. They're incentivized to make sure that this is running as good as possible.
--:-- Jonathan Libby: I think you're seeing it right and what it's going to look like. It's going to get crazy. I love it when I hear stories about kids like 10, 14 who understand this. I met a kid who made $400,000 on NFTs last month. He's 14. I'm like, wow. They get it. We're just catching up, Ryan.
--:-- Ryan Hanley: Another industry that demands disruption that you can immediately look at is title insurance. Why do we have title insurance? If there's a blockchain, you can associate an ID to every person. I think that is one of the easiest industries in insurance and P&C or real estate to disrupt is title. One of the easiest use cases is what's the point to say you own something? You can literally attach an ID to that on a public layer.
--:-- Jonathan Libby: Exactly. I think what you're saying, all these things, you can just start seeing it.
--:-- Ryan Hanley: Where my mind goes with this is it takes someone having balls like you do to do these things because they've never been done before. We're talking about concepts that are literally being generated. There are tangible things that come out of them, but you're generating ideas that didn't exist and concepts that didn't exist. The way to maneuver around... I just think there are so many barriers. All the barriers that are keeping what we're describing from happening are up here. It's having the storytellers, it's having the use cases. It's podcasts like this, where 90% of the people that are going to listen to this, they're only going to understand 25% of what we said. But that's researching.
--:-- Jonathan Libby: Yeah.
--:-- Ryan Hanley: But that's good. We need to expose more people to these concepts. I look at some of the things that happen in insurance and people call them disruptors. I'm just like, that's bananas. That's not a disruption. A disruption is when... If I were to describe to you what it takes to purchase an insurance policy today, just all the steps, all the different things that have to happen to get an insurance policy, you would shit yourself. You'd be like, that can't be 2021, what we're still doing today to get insurance. There's a whole better method. It's just going to take time for it to leak down to the lay.
--:-- Jonathan Libby: As adoption continues, I hope things like Bitcoin and Ethereum and Cardano and some of the networks that you talked about, I hope people continue to build on them. What I really hope is we don't get the pendulum swing of over regulation into this space that hinders what's actually happening. Because to me, it's one of the most exciting things. It's the most exciting technology that we've seen since the early 90s with the internet.
--:-- Ryan Hanley: It certainly is.
--:-- Jonathan Libby: This is the new internet. When people tell you that this is the future, blockchain, DeFi, NFTs, it's like people telling you telecommunications internet was not going to destroy telecommunications. This is the next step. For people that told me that, I'm like, you have history to prove it. You were wrong here. Tell me if you had the internet suddenly you're right now. You're not. Let's stop being skeptical and really explore why. Ask the question like you're saying. Open the minds and ask why.
--:-- Ryan Hanley: Personally, I think it's an even bigger jump than that. This is kind of how we'll close. I see it more like the Manhattan Project than I do the internet. To me, this is that generational jump. When we went from nuclear power not existing, no one could even imagine it, to what we got after the Manhattan Project. I look at what's happening right now. This is that big a leap in my opinion. It is that powerful. Granted, we're in the coin flip of the baseball game. We're not even in the first inning yet of what's possible. But that being said, I'm excited that we had a chance to meet. I'm going to be following along with what you're doing. I'll be buying some tokens as soon as you get those out. You want to sneak me some on the side? I'm cool with that. You can be like, hey, Ryan's a cool guy. No, it's probably against every regulation that exists, but I'm not against that if you're in. No, dude, I appreciate you taking the time. I'm really glad that Jeff introduced us. Hopefully we'll have a chance to connect again in the future.
--:-- Jonathan Libby: Great to be here with us.
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