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The global macro environment and the impact of inflation
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Ganesh’s introduction to blockchain technology, cryptocurrency, and Ethereum
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Asset correlation and Bitcoin
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FTX, 3AC, Celsius Network
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Proof of reserves
Read the best-effort transcript below (This technology is still not as good as they say it is…):
Michael Waitze 0:04
Okay, we’re on. Hi, this is Michael Waitze. And welcome back to the Asia Tech Podcast. Today we are joined by Ganesh Kompella, a founding investment partner at Harrow finance and Title Block ventures. I hope I got all that right. Thank you so much for coming on the show. How are you doing, by the way?
Ganesh Kompella 0:20
Glad to be here. I’m doing great. Just enjoying the winter season in India.
Michael Waitze 0:25
Okay, so I have to talk to you about winter for a second. So I grew up in Boston and Connecticut for the most part. And again, I’m not sure how familiar everybody is with the geography of the United States, but let’s just say it gets really cold and when I was a kid, it snowed a lot. And if it’s snowing in the suburbs, well then what do you have to do? You got to shovel the snow so your dad can get out of the driveway and go to work if I ever see snow again. It’ll be too soon. I hate the winter can I say
Ganesh Kompella 0:55
Read To be honest, I’ve never seen snowfall happen into places where snowfall did occur a night before or something but is still on my to do list. And I hope to crack that during the December season. Now we go to the Himalayas or somewhere
Michael Waitze 1:10
so good luck so if you want that snowfall if you want both of my parents are still healthy I can send you to their place in in Pennsylvania and the first time it snows they can wake you up in the morning and you can go shovel there
Ganesh Kompella 1:24
sounds like a lovely idea.
Michael Waitze 1:27
Oh gosh, I’ll let them know. Anyway. Gonna thanks again for doing this before we jump in. Let’s get a little bit of your background now that people know that I don’t like snow.
Ganesh Kompella 1:38
So I have I’ve been a software programmer at heart. I learned to code very, very early. dropped out of college also very early dropped out of college in 2009. Did you? Belters I did, I did I joined physics honors. I was always good at science and math. So I finally picked the course I started doing it then I figured I’m also a coder, why not start working. So then I started a software services company here in Delhi called SHINE Web Services. Now I have offices in Delhi and Chandigarh. I have 50 member team build things for some fortune 500 companies like Mercer Marshall McMullen, did that for five years, then I was like, Okay, this climb to work is getting too much. So why hide for some leadership roles, automated that entire process and stepped away from the day to day. I think my vision was slightly changing towards working in our tech startup. So I then went on to work as a CTO at a healthcare IT firm called aesthetic record. Okay. It is now very nice Electronic Health Record system for the dermatology industry currently serves around three to 4 million patient individuals every year across US and Canada. Did that startup for four to five years. It was good learning. This was my first growth tech startup experience. I was the first technical, I worked with doctors to figure out what kind of solutions they would need. Then I had designers to get all of those designs created. Then I had the engineering team to get all those designs converted into code. Then once the product was ready, I worked with the sales team in the US so that they could sell this product to all the doctors. It was this entire 360 degree kind of a role. Very, very fruitful. While I was working there. We were experimenting some stuff on blockchain. So healthcare on blockchain, we never shipped any features out but blockchain and web three caught my eye. I was very very early to the space started investing. I was mining Bitcoin for fun through my office in 2013. Wait a sec bought some GPUs online.
Michael Waitze 4:09
Wait a second you were mining Bitcoin in your office?
Ganesh Kompella 4:13
Okay. Me, me and one of my old childhood friends. He is also a partner it now manage Donald Murjani him and I bought GPUs online. We never intended the mining to be a business. It was just for fun, just bought a couple of GPUs. So there was this provider from China called slush pool. I think they have rebranded now, but you could create an account on slush pool, plugin your GPU capacity, and they will do the rest of the mining work and you will get your awards. So a little technical to set all these things up. But it wasn’t like we were setting up a mining rig up your road. This was fairly simple, fair enough. So We did that in 2013 I think I started heavily investing into Aetherium when it was in the $10 range in 2000, end of 2016 2017. So, pretty much I’ve been here for all the bull and bear cycles of this blockchain space crypto space since then, what was
Michael Waitze 5:20
it like when Vitalik Buterin and kind of jumped onto the scene and started talking about smart contracts and Aetherium were you sitting there with your buddies thinking, Okay, we’ve been mining Bitcoin, we’ve been building these sort of GPU based rigs to mined Bitcoin through what did you call it slush pool. But this is different, like did you feel something fundamentally had changed when Aetherium was announced?
Ganesh Kompella 5:42
So when when Ethereum, white paper first came out, until then, crypto was just Bitcoin, right? A store of value of sorts. You couldn’t really do things on crypto, you would build things on blockchain. Blockchain technology is different to crypto. Sure, a lot of people will just they are related. But in reality, blockchain technology is like a data layer that has existed for a very, very long time and people have built stuff on it. But talking about crypto and Aetherium, only Bitcoin existed as a store of value. And this beautiful white paper came out, suddenly said hey, use blockchain technology, use crypto, build these incredible applications. And they could really scale to I don’t think I read the white paper the moment it came out. I was a little late to it. If I didn’t, I would have definitely participated in the Etherium. Ico, which was a deal of a lifetime for everybody involved. That’s definitely a miss. Although I did. I wouldn’t say I didn’t hear about Aetherium I did hear about it, but never played very, very close attention to it until later. 2016 70. Right. That’s that’s that’s a definite Miss. What a super technological layer though, in 2017, because of Aetherium. And the smart contracts, which you mentioned. The concept of Ico became so famous, it just blew us off. 10,000 Yeah, and just 10,000 tech startups. Instead of going to VCs. They created tokens on Ethereum, ERC 20 standardized tokens, and they did a crowdfunding and no vesting schedule or anything, it was a mania. But this was the first time in the human history, people were able to do that. Otherwise, it’s a normal route, you create a product, you take angel investments, then you go to venture capitalists, then you go to private equity. And probably if you’re lucky, you get to do an IPO. Right? But here, the IPO is the ICO, you do Ico on day one. And then a lot of bad players also did wrong stuff. But overall, from our advanced spend perspective, I think they’re always good things and bad things. Whenever a new technology comes out.
Michael Waitze 8:00
Do you feel like your life has moved from? What’s the right thing from being a developer from being an engineer into being an investor? Or is there some kind of fence you’re sitting on where both of those things are relevant?
Ganesh Kompella 8:12
I feel I’m more of an investor now in the way I operate. But since I’ve been a developer all my life a developer looks at it breaks it down, like looks at a complex issue breaks it down into simple multiple parts, so you can achieve that complex issue in our code. So that mindset never goes away. Okay. So I, I think I still kind of use that mindset just in a different new investing field. Fair enough. In 2017 18. i During this Ico boom, I like invested in like 50 plus companies, no lock schedule at all. Yeah, some of them have done tremendously well. Khyber network ripple, has AWS ontology to name a few, which also helped me, I quit my job. And since then, I’ve been a full time investor.
Michael Waitze 9:11
I have to ask you this though. You must have done well in school before. Before University, right? I mean, otherwise, you wouldn’t have gotten into engineering and what did you say you joined like?
Unknown Speaker 9:25
What kind of physics? Physics physics on us?
Michael Waitze 9:29
Yeah, physics honors right? So you must have been really good at this stuff. You must be good at math good at science. Your parents and your family must have been super proud of you. And then one day you woke up and said nevermind, I’m not doing this school thing and everybody look has extenuating circumstances, right. Like it may be the case that your family needed the money or your parents needed help with their business or something. So you started to do that. But at some point your parents and your family most of thought is this guy can be okay. And then this crypto thing happens. But now they look at you and then you quit your job like what was going on in the background with the family and the friends watching you going? Is he going to be okay? kind of thing. You know what I mean?
Ganesh Kompella 10:02
So both my parents, my dad is no more, but he was a climatologist working for the government here in India. And my mom’s a nurse working for the same department. Okay? So I was always good at science. From the get go, I was always interested in physics from the get go. software programming is something a subject I took when I was in middle school, and I started coding, okay, and I have medals from that time, in my final year of high school is when my father passed away, I think that suddenly changed some fundamental way in which I was thinking about like, the normal, the normal route was enough for almost every kid in India, you get a nice education, then you go to a nice College. Mostly everybody picks engineering because they’re just engineering fanatics. And then you go work at a really cool startup or a big tech MNC. That’s a normal route. But when all of these changes are happening in the family, I just felt like I’ve always came from good means. So it was never a financial pressure that decision. But I just felt like okay, let’s let’s do something new, which me and my family have done in the past good stuff. And suddenly, I had this idea I met a friend of mine bounces idea to this friend of mine is again, that was still my partner in the fund. I love it. So him and I go, go way back. At that time, he he already dropped out of college, and he was running an internet marketing agency here in Delhi. I bounced this idea of him, Hey, I’m good at coding, why don’t I start creating websites and mobile apps for clients. And he was very, very receptive to the idea. He said, I already have an office, come over, share the office with me and start doing your thing. I love it. And that was the humble beginning, which I had. And since then, it was a one man team, then I had one, one developer to help me with helping with things. And suddenly things started growing.
Michael Waitze 12:24
Okay, let’s talk about this article that you wrote. I mean, now that we’re deep into the crypto world, and deep into the finance world, you wrote this article about some of the recent happenings. It’s not all crypto, right? It’s this overriding view on like, the macro markets, the crypto markets with some web three stuff mixed in. There’s been so much happening since December 2022. But if you look at what’s happened this year in the crypto space, and in the web three space, I feel like stuff is accelerating. Well, it’s falling back. Like there’s a lot of this stuff going on. I want to get your perspective on this from this article that you wrote, and then maybe dig a little bit deeper as we go through some of the points that you made. So do you want to kind of just run through this and I’ll jump in and ask you some questions as you go along.
Ganesh Kompella 13:04
Sounds good. Why I wrote this article was since I’m in this investing business, and I manage external capital, right? Suddenly, the decision making the way me and betting we started thinking about not just crypto but since we are in this cyclical bear market of sorts across the globe since the Ukraine or start. I feel everything is very, very cool rated and interlink. I know a lot of people talk about Bitcoin as an inflation hedge, but I don’t Theoretically, yes, it is. It’s supposed to function that way. But I don’t think we have reached that stage or it has started. started building that building all of that concept in a reactionary way.
Michael Waitze 13:56
Can you make the case for why crypto or why Bitcoin you said Bitcoin specifically, can you make the case for why Bitcoin itself should be an inflation hedge?
Ganesh Kompella 14:06
So the idea when Bitcoin was created was created around 2008 during that last financial bubble and crash, excessive printing of money from Central Reserve banks across the globe, and Bitcoin kind of is the end of all that concept, instead of quantitative easing. Yeah, it brings a different concept altogether. To reading theoretically, it is it is super, it is supposed to function that way. But so far, we haven’t seen that happen. So when people I am only entered in the crypto scene in 2016, but people have been investing into Kryptos in super late. So when people started investing into crypto, there was always an idea that this is an inflation hedge. It is not coupled to the rest of the stock markets around the globe all the indexes And there was this, there is this general debate, even right now, if you go to crypto Twitter, you will see this debate happening all the time, people will be, hey, Bitcoin is anti inflation, they will be harsh on people. It’s not anti inflation. So taking all those concepts in, I started thinking about, hey, it is not, it’s not like it’s not related, it is highly correlated. And if you have, if you have an understanding of the world, the economics of the world, how central banks behave, then maybe you can have a better understanding of how you need to behave around investments, how you need to allocate funds to sectors, what sectors will perform better than the rest. That was the base layer, which we started to build on. And since then, we have been keeping track of the inflation and macro markets in general. Over the last 12 to 18 months, there has been a very, very strong narrative around inflation. A lot of people are talking talking about inflation, and deeper recession, right?
Michael Waitze 16:07
So strictly speaking, right? Strictly speaking, inflation is just rising prices, just really strictly speaking, right. Exactly. So but it’s, it can happen for multiple reasons, I, you saw me put two fingers up, but it’s more than two. And I want to dig into this as well, because I want people to understand that I wanna understand your perspective, too. There can be supply and demand imbalances that create inflation, there can also be price gouging. And if you go back to the 1970s, which is my first experience with inflation, and frankly, back then it was stagflation. Right. So you had massively rising prices, but not a growing economy, right, you had stagnation in the growth of GDP, but you had these really high prices running and you ran into this real problem, because that inflation was essentially built around if my memory serves me correctly, the tripling of oil prices from OPEC in the mid 1970s. And I remember it actually pretty clearly, I remember driving around with my dad, first of all, alternate days of gas buying in the United States. But again, that was price gouging, there wasn’t like a supply demand problem, there was a supply restriction problem and demand stayed the same or went down a little bit what’s happening today, and is there a price gouging today as well.
Ganesh Kompella 17:17
So I feel the scenario isn’t a lot different. Because the energy prices are so high. Again, it isn’t the main cause. But since energy prices have been up for such a long time, you have all these companies like food companies who produce food and transport food from the factories to your kitchen. Since the energy prices have been at a high for a very, very long time, all these companies, the manufacturing cost went way, way up, and it was not coming up. So when the manufacturing costs is not coming down, they had to bring up the prices, the shelf prices go up. And even right now, energy, if you look at oil, energy consumption is if I’m automobile, if I’m driving, driving to my office, electricity, which I get at my home. These are the only two things which come into mind. The first things which come into mind, if oil prices are up, they stay up for two months, I pay higher energy bills come down my energy bills. So a day before yesterday, I think there was a US CPI report, which shows that energy prices have been on decline. And they have been on decline month over. But if you if you look at the shelter costs, they have been up the rent I pay, because rent is locked in for the next 12 months. So if the housing the real estate prices are up right now, and I’m signing a new lease I am signing for 12 months at the same price. So inflation, my shelter costs the same 12 months. If oil price comes down after two months, I’m still paying a high shelter, the shelter prices are constantly up, energy prices are down, the prices are up, food prices are up food prices, because all of this oil and gas adds up to a lot of manufacturing costs and a lot of transport costs. And those things don’t go away easily. There’s a month or month process for the food prices to come down. So although the energy prices compared to a few months before they are down from that point, but the inflation is still being supported by the rising food prices and shelter costs.
Michael Waitze 19:31
Really curious to discuss this with somebody and I’m not sure I’m on the same intellectual level as you right. So I want to throw this at you and see what you think, in the 1970s. And even in the 1980s. Right. The number of people and the number of institutions that were participating in the financial markets were much lower than they are today. And that meant that the futures and options that were created for hedging purposes for big companies were used mostly not only but mostly to hedge future price moves. But now the markets are financialized completely, almost everything not completely yet. But we’re going in that direction, which means that everybody is speculating on oil prices, wheat price, all this kind of stuff in anticipation of either rising or dropping inflation. And I think this makes everything much more correlated as well, right? Because if oil prices are gonna go higher than feed prices are gonna go higher and carpet like all this kind of stuff is correlated. What do you think the impact is for the financialization of the whole world? On the level of inflation globally? Yeah, because remember, we’re way more connected today than we were 50 years ago. Yeah.
Ganesh Kompella 20:40
So if you look at all the derivative options, which are available for traders, they are just financial instruments. Yep, they do have a certain impact on how people around the globe start thinking about a particular asset. For example, 90% of the traders from Citibank suddenly start going long on oil. Right. And the news is definitely made public. That’s why it has that ripple effect. Yep. It has that ripple effect, for sure. But overall, I think end of the day, just financial instruments they are they, from a psychological perspective, if I look at that news, I started looking at oil or the oil price differently. Apart from that effect, I think those things are not correlated, correlated. And I don’t think they affect the price in any way. Except for this. If I’m a retail leader, and I’m definitely on Twitter or on the internet looking to find a trade idea, then maybe this kind of futures announcement helps. But if I’m a normal person, it definitely doesn’t help when the American market starts costing much higher. That’s the time I would start noticing, hey, why is it higher? And then I will read articles about dates higher because the oil prices have been high for the past few months. So but that effect has a certain delay.
Michael Waitze 22:06
Talk to me about the crypto markets now the big story in the past month, six weeks, pick a timeframe, whatever you want is what’s happening at FTX. And frankly, since the last time you and I spoke the the head of FTX has been arrested and jailed and denied bail. What is your what is going on here? From your perspective, just talk me through this.
Ganesh Kompella 22:33
So instead of like starting with FTX, go for it. Let’s start with what happened with CAC a few months ago, okay? Three arrows capital. Yep, because they are they’re all very, very interlinked, very, and then then we’ll get to FTX. So they’re all these centralized lending firms across the globe, like Celsius, Voyager. And they’re a couple of more. So these centralized entities were the first domino they went bankrupt. Usually, these entities go bankrupt, because either they lend money to entities that can’t pay them back, or they have duration mismatches on their lending books. So during a bull market, if these centralized lending firms do a call back on their loans, and the people taking loans from these firms are CROs capital, Alameda research, and these big big big firms who are like super high and confident on how well their quant crypto trading strategy will do. So in a bull market, if Celsius does a loan called, I can just go to a different lending firm, take that capital, give it to Celsius, close my contract with them without having to liquidate things or closing the trades, which I’m in when that first domino fell, they did a call back to three, three AC of course, had most of their money in Luna had some of some other investment into some other illiquid assets, and they couldn’t pay back the loan, right? So LCS went down and solvent, then three AC followed. And we felt I would say this is credit crunch number one. So suddenly, three all the assets with three AC had whatever assets were left were sent to Celsius, and most liquid assets are always Bitcoin and Aetherium. And in everybody’s books, so when we saw big sell orders on BTC and Ethereum Celsius or big Bitcoin as as a loan payback, and probably did a market sell on our DC counter or something. So that was the first price drop. It started 2022 For me And then then then there was there was this long sideways market, which played nobody, nobody noticed that Alameda research was in a similar position. Because of course, Alameda had backed over dx.
Michael Waitze 25:17
Can I ask you this, though there are big companies out there, right. And I’m not pointing out anybody in particular. But these are just the ones I know, right? chainalysis, Merkel science, all these companies that are out there, saying, We know what’s going on in the back end of the crypto market, because we’ve built technology that can see into the blockchain, right, which is, it’s available for everybody. But you got to build tech to sort of consolidate it all together. And we can tell like, who the good actors and the bad actors are, why did the whole system miss this?
Ganesh Kompella 25:48
So there’s two ways to look at it. So if I, if we continue on what happened with three AC, they invested in something called Luna, Luna was an algorithmic stable coin. Without any reserves, they said that we have built this wonderful piece of code, right? So you don’t need gold as your reserve. You don’t need us as your reserve unit code. And this code will keep this currency up and running. Well, that didn’t keep it happen. Although, concept perspective, algorithms stable points are the future. I just don’t feel that we are there yet. We still need jobs. So it didn’t work. Three AC was heavily invested. Celsius did a loan called back three, he of course, couldn’t pay back the loan. Problem number one happened. So in this entire setup, it’s not that three aces books were bad. They invested in something called Luna, they had USD on their books, it was a crypto, it was a crypto coin, it was on chain, people could see what USD they had, and USD was pegged to the dollar. So it stayed at $1. But suddenly, when things went blue, the value dropped. So I don’t think it has anything in that case, at least it has it. It doesn’t have to do it doesn’t have anything to do with smart contracts or the web three concepts in general. Now, example two would be what happened with FTX? I don’t know I think it’s 16. How many buildings 16 or 20 billion in customer funds, if I’m not wrong. So with FTX the funds were not on a blockchain network. If you had 10 Bitcoin on your FTS account was just a website showing 10 Bitcoin. It didn’t mean that they had 10 Bitcoin in reserves, which is the beauty of exchanges, centralized exchanges, they have one pool, and they show no proofs because it is a private company that they have reserves. So with FTX, I don’t think it has anything to do with crypto, it is just bad mismanagement of how an excellent business should be run. Right? So I think that’s I would take that stance on both those examples.
Michael Waitze 28:09
Okay. But then what did happen here, according to what you the way you understand it.
Ganesh Kompella 28:16
So that’s what happened with CAC, then we had this continued sideways market, and suddenly coin desk, or coin desk coin got a hold of not Coinbase coin desk is a crypto crypto news site. They got access to Alameda balance sheets all of a sudden, and they made them public. And their balance sheet clearly, clearly depicted that most of the collateral which Alameda used was FTD token FTT token was FTX exchange token. So if you own FTD, you would get trading discounts, trading fee discounts and so on. So it didn’t have any other utility. So it was a token which was propped up. But a lot of exchanges do that. Okay. It says op X token by Nance has b&b. But b&b supports the binance chain. So it has a certain utility people can similar to how you build things on Aetherium. Using Aetherium. smart contracts, you can build on BNB chain using BNB smart contracts. Okay, and BNB token, although it’s a by Nance token, but it still has certain utility. KU coin is another exchange, which has a token called KCS. So all these exchanges, it was a very good model of how you can create a token for your exchange and how you can incentivize users to buy that token and log that token within your exchange to get trading fee discounts and some other box and this was a working model. It worked brilliantly. It still does work brilliantly for a lot of the other exchanges the prop boom started happening when Alameda research gave the FTT they had against as collateral against these loans. And that word got out. And a lot of these big investors had FTD in their portfolio, because they have invested in FTX by Nance, the CEO was one of them. So once people started, they noticed this balance sheet issue, instead of like, being confident about it, they just I felt they just market sold all their FTP positions. And as FTP price came down, since most of the collateral was FTD, suddenly Alameda was insolvent.
Michael Waitze 30:43
Can we back up for a second? Because you said, for some reason, and I want to get this right coin, base coin, coin desk, sorry, coin desk got access to the balance sheet of Alameda and FTX. Why? Do you know what I mean? Like what was going on there that made them want to get this that made them want to research this? Did they feel like something fishy was going on? Or was it just like through the normal process of what was happening? Like why?
Ganesh Kompella 31:11
No, I feel somebody reported that it was a employee hack, or an old FTX employee disclosing all that news. Because it’s a centralized exchange, right, Alameda research is also centralized. FTD and FTX are also centralized. So this was investigative journalism. I would say, maybe they came up with this. Yeah. So they came up with this balance sheet and everything just went down post that.
Michael Waitze 31:44
Is there any like Do you worry about finance as well? Do you not I mean, because now like Alameda FTX. Now it’s kind of like, it’s gone at some level, right? There’s a new CEO there, there’s going to be an unwind, all this stuff is going to take place. Like we said before, the old CEO and founder of FTX is in jail, the person who ran Alameda research, and there’s a relationship there as well, but you don’t need to get into his also has some legal problems. But there is this kind of symbiotic relationship between what’s happening with CZ, right, a by Nance and the FTT tokens, like do we worry at all about finance now as well, who’s strongly coming out and saying, like, we’re okay, we’re okay. We’re okay. Are they okay?
Ganesh Kompella 32:26
So, this, so if you look at the before I go to buy Nance, there is a small concept, which I want to talk about. So if you look at all these traditional banks, in India, if I deposit my money into a savings account, I get somewhere around 2.5 to 3%. In the US, it’s much, much less Japan, it’s actually negative. Japanese banks actually want you to spend all that money on assets. But the concept is, I store all my money with the bank, the bank has rights to do certain things or apply certain complex strategies on the money, which is deposited into the bank, then generate a certain need, and pay all their savings bank subscribers, and I only see I only see the number in my account, it’s a it’s a number I see on the screen. And if all of the bank account holders, at any given point of time, go to any bank and do 100% withdrawals, they will be bankrupt. Like this is a general concept. And everybody agrees to the
Michael Waitze 33:33
fractional reserves, right? I mean, you only need to have a certain number of amount of money in the bank. But banks are regulated around if I give you $100, I’m making it up. Yeah, cuz I don’t know what the fractional number is, you have to have 10% of that money there. The other 90% you can lend out. That’s what a bank does. But that’s not what an exchange does. Go ahead.
Ganesh Kompella 33:50
So those rules are set for that industry, with the crypto exchanges. But however, with the crypto exchanges, those rules don’t exist. So all of these exchanges can have a party if they want to. And FTX was kind of having a party. And with the other exchanges. Since the FTX scenario has happened. And this is kind of the second part of my article, I introduced a concept called Proof of reserve. Go ahead. I’m not the one who coined that proof of reserve proof of reserve, I think it was CZ from by Nance, who was very, very public about showcasing the reserves they had and instead of as a centralized agency, sort of not showcasing my reserves, suddenly all these businesses learn and evolve. And now they have found a trustworthy way to move forward. Traditionally, they have been very secretive about all this, but now they have pulled in all their reserves into public blockchain addresses, and they have posted these public blockchain addresses are On chain, and they even there’s this research firm called Glassnote glassnote.com. They provide excellent content analysis on Bitcoin Glassnote actually now provides a dashboard for all users. And it’s called glasnow.com/dashboard/proof of reserves, you can deselect the exchange, and they will show all the reserves they have, how many BTC they are our money at them they have, how many US dollars, they have, how many stable coins out and everything. So this was kind of the most simple thing that these exchanges could do. FTX went bankrupt, because they were doing things with the public funds, and they couldn’t process the bankruptcy. But suddenly they felt okay, the best thing that we could do is we can ensure our user that, hey, we have reserved, these are your reserve, here are the addresses. And they have all done that, from the smallest exchange to the biggest exchange, the small exchanges took a little time, which I felt was a little weird. From a fun standpoint, we withdrew all funds from all these small exchanges. We didn’t have a lot of capital, we did have some capital, the certain small exchanges, not the tier one exchanges, so we withdrew all the funds, but by Nance I think would do too nicely.
Michael Waitze 36:24
I want to back up to this concept. You mentioned before about the duration mismatch, because my guess would be that most people that aren’t involved in the financial services industry have no idea what that means, right in the sense that if I’m borrowing short term, but I have long term liabilities, or if I have long term borrowing but short term liabilities, I run into real problems. Exactly. But I have another question. The proof of reserves is a good straightforward way of showing the assets that I have on my balance sheet, but they don’t show the liabilities. Are you concerned at all that there’s an asset liability mismatch as well. So I can say like I have a billion dollars, I’m making numbers up Yeah. of assets. So I’m fine. But if I have $10 billion dollars of liabilities, I still have problems. No.
Ganesh Kompella 37:07
So couldn’t look at it two ways. Most of these exchange businesses, they have a different venture arm. Since these exchanges were very, very early to the crypto space, they made a hell lot of profit, giving that trading platform. And suddenly FDA started element that research by Nance has binance Labs. Okay, exciting has okie X ventures who will be as we’ll be ventures, they all have separate balance sheets. So if these businesses are kept really, really separate, and the transactions between each of these two separate businesses are all also publicly showcase, then this won’t be a problem. But if I’m running an exchange, if I’m showing you the results, but I’m constantly sending money out of the reserve, to these new venture companies, I don’t publicly disclose them, then it’s a problem. Yeah, it’s the way you operate is what brings trustworthiness.
Michael Waitze 38:05
So you also mentioned this idea of you think that stable coins are the future. And frankly, you’re not the only person that said this to me, but we’re not there yet. Can we talk a little bit again, just for people that don’t understand what a stable coin is, like, what went wrong this time and why they are in fact the future and what’s going to be different.
Ganesh Kompella 38:23
So what I feel like algorithmic stable coins are the future. And the reason for my belief in algorithmic stable coins is, I think, in 1970s, is when we decoupled from gold. It’s called the Brent
Michael Waitze 38:41
Bretton Woods, the Bretton Woods the Bretton Woods Agreement, Nixon, Nixon decided that we were no longer going to peg the dollar to gold, which is what we used to do. And what used to happen actually was foreign governments could say, here’s a bunch of dollars, give us our gold back. But that doesn’t happen anymore. Anyway, go ahead.
Ganesh Kompella 38:59
So we decoupled from gold, and suddenly post that concept. You had quantitative easing, quantitative tightening, the ability to print money, take inflation, up control, inflation, all the concepts while these were also pretty fruitful, because from 1974 to early 2000s, if we look at all stock indexes across the globe, they shoot up then the financial crisis the.com bubble and the financial crash. And but with algorithmic stable coins, they kind of do the role the Fed is doing but code does it Fed takes in all this going back to the inflation concepts and US CPI reports and everything Fed takes in all that information and decides Hey, what if I increase the interest rate? What will happen? They make an assessment I think they have there is a concept within the federal it’s called a dot dot. I think within Fred there are seven to eight decision makers there chair is something, the chairman is something else, but there are at least seven to eight different decision makers. They all have this dot chart. And on a yearly timeline on a six monthly timeline, they kind of plot these interest rates dots, and how they decide on how much are they going to increases, they, they add up all the eight different dot charts which have been created. And the average is the rate that they decide to increase or decrease. All of this is done very, very manually. You can just Google Chart and you will get that the chart which I’m talking about,
Michael Waitze 40:35
just so you know, I used to trade US government bonds very familiar with the Fed path. Go ahead.
Ganesh Kompella 40:40
Nice, nice. So you know, all of this already, I only learned this concept like a year ago, I CAC, I seriously started taking an interest in the macro economics. So the Fed does this, it does all the interest rate adjustments in the hope that the inflation will either go up or down. And so algorithmic stable coins will kind of do all that in a very codified way. They are not there yet. USD did promises that hey, I’m the next generation algorithmic stable coin. But that is the true nature of what an algorithmic stable coin needs to do.
Michael Waitze 41:22
Yeah, so there’s this push and pull right between the Keynesian economist and the monetarist right, which are mostly led by the thinking of Milton Friedman, Keynes was sort of running, the way that the Fed was doing all these things are always in conflict, right. And at some level back in the 1970s. And even in the 80s, the world was way less connected than it was today. So when the US Federal Government, obviously the dollar was the reserve currency of the world. So when the US Federal Government made decisions about where interest rate policy was, it kind of affected the rest of the world, there was this concept of, you know, with the US sneezes, the rest of the world catches a cold. But other governments can, we could move interest rates around and it kind of didn’t matter as much. But today, to say the world is interconnected is to underestimate like how important that is. It’s like everything is connected, in a way that’s very strange. So I’m just wondering, like, what has to happen to the algorithmic stable coin, market or environment to make it so that because at some point, right, and the euro, the euro, yuan union, learn this European Union learn this, right? In no way. And again, forgive me for all the European countries that I mentioned, but the Greek economy is never gonna look like the German economy, but they both run with the same central bank and the same currency. So interest rates in Germany at the same level as they are in Greece are gonna have a completely different impact on the local economy. And that’s never going to change. So, like the local steel matters, and I just wonder, like, what is the impact of this going to be and I don’t have an answer on rates. And then on these algorithmic stable coins, as well, as you even see some countries in the European Union going, I’m out, like, I can’t take the pain anymore. So I’m gonna get out of the Union, like how does all this play out?
Ganesh Kompella 43:07
So I think instead of this book, which I was reading, some while ago, it’s from Ray Dalio, the changing world order. He talks about changing the world reserve currencies and stuff. So if I, when I look at the US US Dollar as a reserve currency right now, it is the reserve currency because suddenly, oil was being bought in US dollars. And oil is the biggest purchase each country makes because they have energy security needs. And that is why we’ll really start to be using US dollar. Now, if you want to get algorithmic stable coins into play, you would say, book actually described that Chinese yuan is going to be the next reserve currency over I don’t know, maybe a decade or two decades. But Chinese government is already experimenting with Central Bank digital currencies. They are not printing money anymore. They have already started using stable coins. It’s not an algorithmic stable coin, but it is a stable coin. You if I have Chinese digitally one, they have also experimented in Atlantic City. And I think India, China, Brazil, Saudi Arabia, they they even experimented with purchasing some five to 10 million of crude oil using that traditional currency to in the last six months. They are still in very, very experimental stage. But you suddenly now see, it’s I’m not talking about the circles USDC or the tether usdt purely talking about stable coin. So we are already seeing a shift from using regular country currencies, using stable coins still related link to a country and link to a country’s currency but suddenly you see this shift. I feel from a valuation standpoint one means you need to replace your paper money with stable coins. And once that is successfully done, then the next evolution would be you replace your monetary policy monitoring with algorithmic stable coins. I haven’t conceptualized really how all of this will play out by the stages, I can definitely vouch for these other stages in which it will go. And once you get there, all the spending, which your citizens are doing all their spending behavior, what time are they spending? How are their friends spending, on what they are spending from a Chinese government perspective, you would say that that’s not totally right, proud. But if it’s a democratic country, then I don’t feel you will be you will be having an issue, sharing that information with the government. But all of that also helps with the monetary decision making. Right now that does not exist. And because the information is not so vast right now, is why most of the countries like Britain, they chose to take an exit to Brexit. But I don’t think things have been going really well for them since the decision was made. No, I read an article a few days or weeks ago, where there again, be considering to join me.
Michael Waitze 46:24
That would not surprise me. Go ahead.
Ganesh Kompella 46:27
As best at best these politicians are making, I won’t say vices, but they’re just operating with whatever information they have. And the information they have about this entire economy, I would still not say it’s 100% accurate, because it is not on chain. So it’s not entirely available, there are a lot of central entities you can get in character information. And all that stuff. Once you see that shift happening is when I think these issues will be I don’t think maybe a century or two centuries from now, these issues won’t be issues anymore, you would have solved all of them. And one global currency or something.
Michael Waitze 47:07
Yeah, I mean, at some level, there should be a global currency because foreign exchange rates don’t really make any don’t make any sense anymore. The one not the one thing. But one of the things I worry about with Central Bank digital currencies, is that because it’s just, it’s just programmable, right? It’s just software, it’s programmable money. And to the extent that the government controls the supply of money, you said this earlier, right? Like in a non democratic or in a fascistic country, right or non democratic country, the government can now control what you can and can’t spend your money on. Right. So in other words, I can give you a billion dollars, but you can only spend it on, you know, chewing gum, because that’s how its programmed, is kind of a bad way to run economy. But in reverse, I can give you a billion dollars and say like, you can’t spend this on cigarettes and alcohol, do you don’t even like it’s a slippery slope, I think to like, what will humans allow governments to do? And I don’t have an answer to that either. But I just think it’s an unspoken about concept here, this idea of the monies program, because today, if I give you 100 bucks or like 10 million rupee, nobody can tell you what to do with it. I mean, sure, they can tell you can’t buy drugs with it or sell arms or do human trafficking. But otherwise, like if you want to buy just bread, you can do that, or just buy car tires, you can do that. But Central Bank, digital currencies are running the risk of the government going, sorry, you bought enough Coca Cola this month.
Ganesh Kompella 48:28
Yeah, then definitely it can happen. But if this zoom out on a very large scale, feudalism existed a few centuries ago. Yeah, it certainly does not exist now. And when it’s realism existed, I feel everybody had this belief on this, that the ultimate decision maker, the king or whoever, they will do the right thing. But suddenly it all that decision making was democratized. Took a long while to make that change. At that time, why did that change happen? A lot of people started reading, they was printing press printing press, I think I would give a lot of credit to printing press. I guess now people could read people could write. People could read what was going on. And thinking differently. Now coming to the stage, I feel digital currencies have a similar stance as printing press. It can be used in bad ways. It was used in advance even back then. The church was also printing at the same time, a lot of things happening. So digital currency is just a mean a new innovation which has come into our hands as a civilization and it’s totally up to us how we use it.
Michael Waitze 49:49
I agree with you. 600 years ago, Johann Gutenberg invented the printing press. I think it was 1430 something I can’t remember exactly what the date was. And you’re right. It was used for good for bad and at some point it’s just out there now. And I think the jury’s out on what’s going to happen here. But I like having these conversations. And I love having them with conversations, these conversations with people like you that like, look at this stuff and think about it and study it in depth. I don’t want to take up more of your time today, because I think we’ve kind of gone through everything that we kind of wanted to cover here. We’ve been added almost
Ganesh Kompella 50:19
that is why I left college. Yeah, exactly the right because I want I wanted a freedom to I read a lot. It’s not like I never liked reading and I would like studying I study. But I think I just wanted to start and read switch point and not a curriculum. Yeah. I mean, if I were to simply put it,
Michael Waitze 50:41
who was it that said, was it Mark Twain that said Don’t let don’t let school get in the way of your education?
Ganesh Kompella 50:52
I can’t recall. I think so. Nice.
Michael Waitze 50:57
I think so. Look, let’s end on that. You got to promise me, you’ll come back. I want to have more of these conversations. The market is moving fast. And one of the reasons why I wanted to point out that the printing press was invented 600 years ago, is because time has passed slowly, but it’s now passing much faster. It’s not going to be another 600 years until the rest of this technology gets implemented and changes. Things are moving at warp speed. And I want to continue to have this conversation with you as things change. I really appreciate you coming on and doing this today. And just following up on that article. I know it was kind of last minute, but I love doing this. So thank you again for joining us today.
Ganesh Kompella 51:34
Absolutely glad to be here.
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