Advice Architects Ep. 1 with Lex Sokolin
WAGMI: Defi, Web3 and the Future of Advice
WAGMI: Defi, Web3 and the Future of Advice
We are thrilled to kick off our Advice Architect podcast series with this episode featuring Lex Sokolin. In addition to being one of the sharpest minds in fintech, Lex is articulate and has a knack for explaining complex concepts clearly.
And for many people working in the financial advice industry today, the new and rapidly evolving world of decentralized finance (DeFi) and Web 3.0 (Web3) technology architecture can seem unfamiliar and a bit murky. There are three ways for advice providers to respond to that, according to Lex: they can be dismissive and ignore it outright (like former Microsoft head, Steve Ballmer, did about the iPhone when it first appeared) or they can learn more and provide guidance to clients, either reactively or proactively.
This episode will help clarify a lot about why it’s critically important for frontline advisors, as well as those engineering advice experiences for customers, to pay attention to what’s happening with digital assets and markets. We are going to make it!
For more information on Responsive AI’s solutions for advice providers, contact us.
Welcome to Advice Architects. This is Day from Responsive. And today we are speaking with Lex Sokolin. Anyone who's been in FinTech for a second, of course, knows Lex. In a past life, he worked in advicetech. Now he's out front shaping the future of DeFi. He's currently the head economist at ConsenSys, but he is also the founder and lead analyst for one of the most scintillating FinTech newsletters out there, FinTech Blueprint. Every time I hear Lex, I learn something new.
Welcome to Advice Architects and good morning, Lex.
Good morning. Thank you so much for having me on.
Okay. To start the show, we do the Advice Architects questionnaire. Helps listeners learn a little bit about you and your superpowers and your point of view. So starting off, what's your job title?
And what do you actually do?
I spend most of my day trying to build up our team. And our team is focused on this new emerging field called crypto economics. And you can think of it as applied macroeconomics.
So, in the old world of five years ago, or maybe 10 years ago, if you are an economist and you're interested in systems and you're interested in the interactions between different participants in economic systems, you don't really have much in terms of an applied science. What you have are experiments over time in different countries, in history, under different circumstances, and you try to make sense of them retroactively and look backwards.
And what the current state of the art in technology and software and in these crypto systems allows is to actually build little economies. So you're not just building products. You're building the entire ecosystems that come out of those products and you can track currencies and activities and all of this.
And so crypto-economics is one way to try to design these systems in productive ways. And it's highly novel and interesting. And so we think about token engineering. We think about decentralized autonomous organization. Of course, we think about investment strategy as well.
And how long have you been studying these burgeoning crypto economies?
Well, all this stuff is quite fresh. So somebody's like, "I've been doing this for 30 years." Well, yes. If they've been writing science fiction in the nineties and their name is Neil Stevenson, then yes, you've been doing that for 30 years.
I've been in this role for about a year, a little bit over. My background, as you mentioned, spans everything from traditional investment management to FinTech and building digital products to equity research, portfolio construction, and analysis. And so for me, I'm coming at this less so from a highly structured quant PhD background. We have a number of team members that work with me to do that. And I come at it more from a practical applied point of view of, what have we seen in terms of these systems being built? Are any of them real? How much of it is hype? How much of it is not? So if you think about, generally, financial services innovation, that I've been focused on for a little bit over a decade.
So, live science and live history. Very cool. When and where were you happiest in a FinTech experience, whether that's a gig or just a one day, what was your happiest FinTech moment?
I hate it all. It's all terrible. That's not a question I've been asked before.
I think there's just so much scar tissue in entrepreneurship and the frontier stuff that I'm doing that, I think it's less about kind of, oh, man, this IPO, or we sold this company and this worked, and more about, I guess, the feelings that really get me satisfied are when I had some sort of... I had a far out hypothesis, I had a bet that was a lot of people were negative on and I ended up being right. And that feels really good whether or not you make money on it.
Well, yeah. And you spend years being wrong and every person in a suit takes significant pleasure telling you how wrong you are. So, for example, I remember a moment in 2014, maybe it was 2013, when I had spent about three years building out the robo-advisor at the time, Nestegg, wealth and prospecting and raising money and just getting told left and right how small accounts are trash and nothing will ever work and there's no point.
And then there was a month, I think, in 2013 when our company had more inbound for a private label robo-advisor than all the meetings I had put together in the three years before trying to do it on my own. And it was just this kind of market shift of demand that hit you in the face being like, actually, you were right to persevere.
And I think when I look at the crypto space and one of the reasons I've gravitated towards it is that there are things that I really like, whether it's generative art or whether it's these digital investment experiences or whether it is some of the more really breaking down financial infrastructure. And there were moments last year before the crash of this year, or maybe even the year before, where all of a sudden generative art, so art made with software, turned into an investment asset class.
And arguably not a particularly good one longer term or who knows, and it was a very strange experience for me because I had grown up doing that art and having lots of feelings about it and thinking about it a lot and to see it collide out of the software world into the investing world, into the asset allocation world, and people starting to talk about NFT art collection robo-advisors. It was pretty wild for me.
I do think the word advice is quite loaded. I'll say, why do I care about financial services? Because my career has been dedicated to financial services even though I focus on the novelty around financial services.
I care about financial services because I think they are an element of human dignity. So I don't think of them as a right. Nobody's got a right to anything really. I mean, there's some things granted by the law or by a social contract. But there are elements of the human experience that we all think are a minimum to living a good life, and giving people the ability to flourish financially, meaning just have the ability to save, have the ability to be creative by borrowing money or by investing money or by building a business or creating a practice of some sort, I think is just a basic aspect of human dignity.
And it's also a field that's very quantitative and controllable. So for a person that likes things to be very organized and OCD, finance is nice because you can put it all into a spreadsheet. But at the same time, it is connected to political issues, issues of productivity and creation, and then you can spin it out into all sorts of adjacent things, whether it's governance, whether it's moral hazard or ethics, and these days it's technology and it's power and it's intergenerational conflict. It's the power between genders. There's just so much that is around it. And I think finance itself is just one of the more concrete attributes of an economy that you can focus on.
It's observable and it's a way to understand almost all of human life.
Yeah. the word "advice" is dangerous because it's like it puts on a pedestal a thing that is not science. Even in the medical profession, you get multiple opinions and none of them are... Some of them might approach truth, but often the medical opinions you get, which are advice, are not true. They're hypotheses.
I wanted to circle back and get to first principles and talk about core concepts and what you think about them and sort of explore the past as a way of exploring the future. So I want to talk about ledgers, contracts, and financialization as sort of topics and categories.
So first, what is a ledger? And do you have any points of interest about the history of ledgers? And what are ledgers becoming with blockchain? And what do they enable from a capability point of view?
I'm going to hijack your question to fit into my mental model rather than answer it straight on as you'd expect. I think, for people who are very new to blockchains and still have some fundamental questions, that's great. It's fine. There are early adopters and they are late adopters and such is the world, but it's important to understand that blockchains are indeed a software or technological innovation that kind of add to the soup of tools that exists.
And when you add to that soup of tools, that's sort of permanent. You open Pandora's box and you don't close it and people are getting capability that they didn't have before in the same way that, after the invention of electricity, nobody thinks about it. It's like an electric company by invention of electricity, of course, the commercialization and the electricity infrastructure, the ability to use it in everyday life. So we just assumed that we're able to use current and energy.
Similarly for the internet, we just assume that we're able to have all these benefits of connectivity, of sharing, of information exchange and so on. And I think today we talk about blockchains as these things that we're trying to describe as if they're an elephant from different parts, but is just another one of these things that'll get absorbed into the architecture of how stuff gets built.
So in terms of the ledger concept, if you're a financial advisor and you've worked with a custodian, whether it's Fidelity or Schwab or whoever, you're going to be familiar with the account files that they've got for you. So the CSVs that they have of all your clients and their positions.
And then maybe you want to have that over time and so then you'll have multiple CSV files. And then maybe you have a different custodian or you have a portfolio management system that connects to the custodian, but they have a slightly different price for some different position. And now you have breaks and now you're reconciling those breaks and your client's calling you and you don't know if the number is 10 or 15, because the statement's different from what they see in the website.
And so now what you've experienced is you've experienced different parties keeping track of an accounting track or ledger of the same information, but it's not synced. It's got different approaches to it. Now you multiply that by the number of companies in the world and the number of accounting firms and all of that and you get to lots of little bits of data that are disconnected.
Now, with cloud infrastructure and software that is digital first, where people are constantly outputting digital exhaust, in that context, it's a little bit better. There's a lot more data that's consistent, but you still have different sources of validation for that. What does Amazon say? What does Google say? Is it a Goldman's file? And so on.
And so what blockchains resolve is they create a single source of truth, a single ledger that has the information you need at the very basic level. It's here are the things at this moment of time and time is denominated by blocks. And there's a mathematical formula. There's an algorithm that allows for a truth, a consensus, an agreement to be determined about that data.
Now, the second thing to think about is computation. And this touches on things like contracts and the law and agreements and execution and settlements, and things that, in the physical world, again, would be done through paper or through legal agreement and negotiation between individuals. In the world of... Let's use the words from our space, so in the world of Web 3.0, we're no longer talking about digital assets only running on blockchains. We're talking about computers being embedded in blockchains. And what that means is that you can have computation, you can have software performing anything you want. You want a financial function, you want a healthcare function, you want media, business, whatever, you can embed software in this blockchain and the software will do computation and start to have real economic outputs that look a lot more like agreements or businesses between different participants in the market.
So I think that, as a computational paradigm, is really important because you can start to understand why you start to have applications and you start thinking about operating systems being anchored on blockchains.
The first thing you identified was that blockchain is enabling a sense of truth on ledger by architecture, design, and consensus rather than there needing to be some sovereign or arbitrator to enforce the truth of that ledger. Does that sound like an accurate encapsulation of what you said in the first part?
I think so. And I'm often less worried about, will that arbiter tell the truth? There's some places where it's really important. There's countries with pretty failing political and economic systems where being able to actually record-keep the truth is extremely scarce, which is why there's so much product market fit between crypto assets and places like Venezuela and other emerging economies that have weakness in their political systems.
But in the U.S., or in Europe, that's a little bit less motivating so people don't relate to it. And then I just think of, forget the trustworthiness of any particular arbiter. It's just that it's an unbelievably convenient thing to have a giant open source set of mathematical or financial ground truth that we all maintain as a public good together. And if we maintain it, we receive economic value again from an open financial instrument or a token.
So, I agree, yes, you're moving away from a centralized, permissioned arbiter, but there's also just... The new world looks quite different. And I think it's architecture lets you build things that are quite different.
So, there's a deep productivity unlock by having that.
Yeah. Another way to think about it is YouTube. So let's say you're a giant maker of movies in the early 2000s and somebody's like, "Listen, the best opportunity for video content is to create a platform where literally anybody can upload their worst stuff, just teenagers drumming poorly to Metallica songs. And then what we're going to do is, anybody can upload, and also they can put a bunch of pirated movies on it whenever they feel like it. And that's going to be the most valuable video initiative of the next 20 years."
And so similarly, there's nothing wrong with central bank digital currencies or enterprise blockchain projects or talking about bonds on some institutional chain or whatever, but that's not the platform that matters. The platform that matters is an open place that we all maintain, that is computational and can run applications, where communities own the fruits of their labor, and where creativity is unbounded.
Fruits of our labor. Okay. So I think that's interesting. What does this enable in terms of financial engineering and financialization that might be novel or different or sort of change the game?
For most people in wealthtech and planning, you're not often seeing the whole value chain, from the New York Stock Exchange to capital markets to high frequency trading to institutional sales people to fund management and fund packaging to portfolio management to brokerage custodians to advisor software and then to advisor asset allocation and then to planning. You're not seeing the actual factory because, end of the day, you are the store of the financial product. You sell sandwiches, you sell pie charts, you sell planning.
So financial engineering is a practice, in my view, that is applicable in the factory of financial products. So, largely within the capital markets context, you are designing how particular financial instruments should perform given different risk parameters and underlying exposures.
And so similarly in crypto these days, there have been many software applications, decentralized software applications, that's one point for me. And so these decentralized financial applications, some of them are high quality, Maker, Compound, Alvey. Some of them are terrible quality, like Terra and Luna and Olympus and others. And they're the factory of financial instruments, and the financial instruments are poorly designed and sort of unwind when under small duress.
Now let's remember that Soros was able to break the bank of England, so it's no surprise that some particular large trader can break a stablecoin in crypto that's much, much smaller than a central bank's reserve assets. But anyway, a lot of the applications within DeFi were ways for people to create the factory that makes financial products that are really at the level of the capital markets desk at Morgan Stanley or even lower, the exchange itself or the custodian itself or the market maker.
And so I think one of the major innovations that we've seen is, if you think that FinTech distribution collapses costs in a substantial way of distribution of advice and asset management, and so on, here, what you see is that the creation of these products is essentially open source and you don't need a BlackRock or a Vanguard to make... You don't need any of their infrastructure, literally zero. You need nothing at all from the traditional financial world in order to make things that from an architecture perspective, look like an ETF, or look like a high frequency trading algorithm, or look like a market making position, or look like a margin lending business. It's actually just open source software that you can deploy. And I think that's really profound.
So functionally, from a market point of view, really incredible new kinds of opportunities, really complex, frightening, confusing kinds of risks, new kinds of manufacturing processes, new kinds of distribution processes, new kinds of alpha managers, it's a lot for most people to swallow, especially when some of the coolest ideas are coming from some frog cartoon or some anime character. Maybe talk practically about some projects or startups that you think are going to have maybe a short to medium term impact on advice or wealth. And since you're synthesizing forward, maybe talking to the strategy around how everyday businesses, or businesses sort of focused on the short to medium term, can sort of capture some of this opportunity and manage risk as things develop.
Some of the answer is, many of these things are not for wealth managers yet, but many are. And so it is a really hard question to answer. There are projects that I like, but I don't know that they're going to be particularly informative. So Maker, as a basic example, is an interesting project in that there's a box, you put collateral in the box, and you get a pegged stablecoin out of it. And if the price of the thing in the box goes down, you can get liquidated and then you're just left with the cash. Alternately, you can top up your margin requirement. Or alternately, another one that is pretty fundamental is Uniswap, and that is an automated market maker. And the model there is to kind of replace the exchange or the order book based broker.
And, because computation on these chains is so expensive, it's so valuable, you can think of a Nintendo rendering a Mario game. And so when you're looking at pixelated Mario from the '80s, and you're trying to compare that to all of the Mandalorian rendered in the Unity engine and we can't tell reality from 3D, and for somebody to be like, "It's the same thing. That pixel here in this Nintendo in 1980 is exactly the same as this gigantic 3D rendering engine that is photorealistic that can entertain people for 12 hours straight."
Well, it's the same analogy here, where the software that's being run on blockchains is so compressed, that pixelated form, it's very expensive to do the computation. So there's some elegant and interesting and compressed solutions, and one of them is Uniswap, which is an automated market maker, which removes the need to have a market, a bazaar of people with bids and offers. Instead, there's a mathematical curve that determines the price between assets and people who want to be market makers provide their assets into this kind of vending machine. And then people who want to use the vending machine for trading, the price will travel along this curve, along some different parameters. And then the fees will be paid back into the vending machine. So it's like a very elegant solution for trading in assets that otherwise would not have a market.
So I think these machines are all really interesting and fit for purpose and performance. It's not necessarily true that they need to be useful to a regular business. It's not obvious to me that we should be trying to force traditional businesses into Web 3.0. I think there's a pretty good chance that Web 3.0 is going to have its own economy, which is banked only by, or in large part, is banked by DeFi because it's so much easier to stay inside of that ecosystem if that's where you produce goods and services, if you're an artist there or if you run a community or whatever it is, then very possibly you won't touch a bank account and you won't touch Schwab or Fidelity ever in your life because you'd much rather touch Compound and Uniswap and other projects.
So, I think the jury's out still about how much integration is required.
I think the hard thing to is to tell where the pockets of adopters will be. I was surprised by the extreme popularity of NFTs last year and just how mainstream it went. But you do have kind of these doors, these floodgates open of people who are willing to undergo the friction of learning how to use MetaMask, or what does it mean to have a wallet and all of that in order to access the Web 3.0 rails.
And once you're there, it's really very straightforward to use in the same way that, when you get into an Uber, you are not trying to pay the Uber driver with cash. That there's no expectation of using an old system inside of a new experience. Even if you caught a taxi, you might still be able to pay them in cash. But if you get that taxi off an app, like the Apple.... process the payment.
So you've kind of been critical of the category of advice, but there's still investors, right? There's still people who want to get involved in financial markets. They want to own things. They want to buy and sell things. They want to try and create more value for their future. Whatever wealth management becomes, whatever advisors become, I think there will be wealth managers and advisors.
Do you have just any final thoughts on the biggest risks for wealth or advice businesses or actors or agents when it comes to this new technology, both in doing things and in not doing things? When you answered the last question, it sounds like you were saying some people are just going to move into this new universe and they're never going to look back. There's an impetus to evolve there and do something if you do want to be relevant.
Yeah, I think it's a really interesting opportunity for advisors. And I also agree that, I think, you look forward fifty years, of course there's going to be financial advisors. I think it's a persistent evergreen need for people to have other people who can help them make sense of their life. Some advisors lean more into, "I'm going to help you make money." Others lean more into, "I'm going to help you structure these various legal entities to deal with your taxes or whatever." So the word advisor is very broad, but yeah, for sure. You're always going to need that. And I think, for folks who are thinking about, whether it's DeFi or Web 3.0, you can be proactive or you can be reactive, or you can be unprepared.
So being unprepared means, "I am so skeptical and all these kids are super annoying and this is dumb and, look, everybody lost their money." So it's a totally fabulous position to take and I think Steve Ballmer took that position on the iPhone, and there's lots of examples of people deciding to be luddites. But it's not generally a position that works out against a technology wave. So, if anything, I don't recommend it.
Then there are the other two positions, which is proactive and reactive. And I think being reactive is okay. There's nothing wrong with it. And being reactive, in my mind, just means you're educated enough that you can talk about something on its own terms. You can engage in conversation about decentralized exchanges or fiat on ramps, or NFT/PFP collections, you just know what these words mean, and if it's important for your clients, you can be a credible source of information and you're not knee-jerking into, "Well, the dimensional fund advisor matrix tells me that the only thing I need to invest in is value and blah, blah, blah." You're trying to engage with a thing on its own terms. And then what you'll see is you'll likely be whipped around by demand. If your clients come to you and ask you this stuff, then you'll help them, but you don't have to drag them into something.
Now to be proactive is to grow or to fail. So you can be proactive and say, "Not only am I going to know all this, but I'm going to take a view. And my view is that X, Y, Z protocol is great exposure and people should have that in their portfolio. And so I'm going to differentiate on having a really good understanding of the space, and I'm going to try to prospect people who care about that, and that's what we're going to build our relationship on. And I'm going to help them make sense of it." And your bet is that, number one, this stuff is real, and then number two is, over time, generationally, more and more people care about it. And so your business and your practice is going to grow because you're speaking in the language of Gen Z or millennials or whatever.
I've definitely taken the choice of being proactive, but that works for me because I'm just interested in it. I find the other approaches, I get bored. I want the stimulation of having to grapple with the difficulty of novelty. It's not the only way, but I think as long as you're informed, you're going to be ahead of a lot of people.
So stay curious, stay interested, stay imaginative, have a little fun. Do you have any sort of similar advice or pearls of wisdom for the advice architects of the world, the people thinking about buying technology, buying innovation, building for the future across the aisle in traditional advice?
Now is an interesting time... Everything is cheap because of the crash. So if you're a FinTech with broader crypto ambitions or Web 3.0 ambitions, I think looking and buying stuff that gives you capability to read and write to blockchains is interesting.
That said, I think it's also really hard to run a firm that understands both wallets and brokerage accounts. I think it's really tough to create that skillset and to build that firm. So maybe one of the things to do is just to build the right relationships and integrations and join the right communities in Web 3.0 and be in the right Discords and just participate. I know that there's a planner DAO that's got a lot of people in the community, and there's some individual companies, whether it's on ramp or others, that have been pushing what right now is quite a thin overlap between the financial advice world and the DeFi world.
It's really hard for me to say, "There are these products that you need to integrate now that are going to be giving you great financial performance." I think that's very contextual and to make those decisions, honestly, you just need to have really strong portfolio construction capabilities.
I'll tell you that I work with, or I often interact with, pretty high quality hedge funds that have crypto exposure so multi-billion dollar hedge funds that are managing traditional portfolios that have a view on macroeconomics and interest rates and exposure and risk on risk off, but then are also running crypto strategies. And they're very sophisticated investors and they have fully staffed and very hands-on teams that engage with the crypto asset class using a lot of financial analysis and data analysis.
So, again, for people who are builders in this space that want to bridge DeFi into wealthtech, there are lots of angles to touch on whether it's custody or data or portfolio management, but it is a good time to focus and find partners because there's going to be lots of people who are available. I'll put it that way.
Okay, final question, and it's a deep question. What is "We are going to make it" (WAGMI), and do you think that we are going to make it, and if so, why?
"We are going to make it" is a meme. It's a battle cry. It's a flag. So people wave their flag to signal affinity and affiliation in the same way if... I get to tease. "I did this." I get to tease, right? So you say "fiduciary." Saying "fiduciary" is a flag. It's, "I feel good. I'm a fiduciary. We're all fiduciaries. We take care of our clients. Those brokers, ugh, they're not fiduciaries." It's a differentiation, right?
And so "We're going to make it" is a similar meme for generational separation. "We, the ones who embrace Web 3.0 and who embrace innovation and creativity and the silliness of how the world is, as an existentialism through that, we are going to make money. We're going to be popular. We're going to succeed. Our stuff is going to win and their stuff is going to fail. The dollar will collapse. Bitcoin will rise." There's an anarchist trend to it. "NFTs are going to be valuable. All the skeptics will be wrong."
So it's a motivation flag and it's great. It creates community and creates affinity and alignment and signaling. And I think we are going to make it, but also when Tom Brady puts on laser eyes in his Twitter profile, that's a top signal for Bitcoin.
And it's because it is, just like any top signal. If retail is so saturated with positive sentiment that your taxi driver is recommending derivative strategies on crypto, probably that's a moment of a local optimum, but just because a local optimum leads to a local minimum, doesn't imply local optimum. What is that? Local maximum? I don't know. It is going to fall. It's going to go up again. And since I believe this is a technology shift rather than like a market play, then I do think I am like a progressivist in that sense. I do think there's an arc of technology progress and I think it's cumulative. So we're definitely going to make it.
I'm with you, Lex. I think we're going to make it. Thank you so much for coming on the show today. Really awesome to talk to you.