 Why do all these DeFi projects have to have their own token? What are the risks with DeFi? All right, Tom, let me give you the silly answer and then I'll give you the serious answer. Why do all these DeFi projects have to have their own token? How are these people going to get stupid rich if they don't chill a token? That's the silly answer. Listen, there are a lot of these projects that are very, very thinly disguised, get rich quick in pump and dump schemes. But that's not all there is to see here. And just like in the ICO era, just because a technology enables an amazing degree of innovation, and we can see that in the long run over the next few decades, it's going to change, fundamentally change the structure of finance doesn't mean that you can't also expect and acknowledge that right now, a very large percentage of the projects out there are either outright garbage or just mechanisms used to enrich some people who are able to write some white papers. There are a couple of very interesting projects emerging out of the DeFi space. And for the most part, these projects do need to have their own token for a number of different reasons. One reason is that if they have a series of rules, not consensus rules, because a lot of these run on top of Ethereum, so the consensus rules are already provided by the underlying platform. But within the smart contracts themselves, there is this fundamental tradeoff to be made. Pay attention. This is important to understand. This is immature technology. And as immature technology, it has the risk of, among other things, bugs in the smart contract code. Now these bugs in the smart contract code, as we saw with the DAO, can be catastrophic bugs. They can be bugs that basically break the entire system. And so what do you do if that happens? This is where you have to decide how autonomous or decentralized you want your project to be. And if you go all the way to, it's completely autonomous and has no possibility of intervention, a catastrophic bug cannot be fixed. Now on the other end of the scale, you might go to, and then we give five people keys that allow them to do whatever the hell they want. And then you end up pretty much back in CFI, only now with some platform vulnerabilities that are really annoying. And you see that with some of the centralized stablecoins, for example. They have effectively backdoors. They're not really backdoors because they're well known. It's not a secret, but they effectively have God mode keys that allow the controllers of these systems to seize and freeze and reverse transactions, et cetera. They break some of the fundamental aspects of RIP Court on purpose in order to achieve control. They're CFI. Now that's a spectrum of decentralization. And both of the end points are dangerous. So then where do you find the right balance? And over time, we're seeing the emergence of a lot of governance solutions that are attempting to solve where the sweet spot is to the degree of autonomy that you need in order to really make this as decentralized as possible without going too far and overstepping the maturity level of your smart contract. So if you go to autonomous too early, you end up running into a situation where a single bug can take the whole system down, and then you want to decide how much governance do you allow? Well, one of the reasons why these projects have their own tokens is because the tokens allow you to take the God mode type powers and spread them out, perhaps in multiple tiers, to the participants. You know, I mentioned RIP Court and I'll mention it again. So C, the C in RIP Court is collaborative, right? So what the tokens do in the case of governance tokens is they allow the participants to share in some of the benefits that are accruing from the application of this platform. That's almost like an equity token. They allow them to meter or prevent denial of service against the platform in the form of some kind of utility token. And finally, they are an access token that can be used for participation in the governance to do things like setting interest rates or maybe overriding a catastrophic mistake or providing trapped or exits that liquidates the system and reimburses all of the participants in the case of a catastrophic problem. So that is the sweet spot. And to do that, you need a token. I mean, basically it's a choice between make it completely autonomous and hope for the best, give God mode to just a few people or create a governance structure. Now, the governance structure that involves the participants in the system having some kind of token then means that you have a greater degree of decentralization in the governance decisions. That's one of the reasons you would have your own token. You may agree with this or not, but we do see this working fairly effectively and we've seen it in both aspects. In the side of governance, for example, a good example would be MakerDAO. MakerDAO is the system that backs the decentralized stablecoin, which is one of the first and best examples of a decentralized dollar pegged stablecoin that is collateralized with on-chain collateral. Now, that system is governed through the maker token, which means that those who participate in the system can not only earn some reward for participating in the system, but most importantly, they can participate in decision making critical decisions like where should the interest rate for dye lending be set. And that is the kind of thing a token can do. Another example would be Compound, of course. Compound started the whole yield farming space and Compound is the token that's used inside the Compound system and was distributed to participants, which allows them to participate in the yield of the system. Education About Bitcoin and Open Blockchains To as many people as possible under open free Creative Commons licenses, please consider subscribing to my channel and supporting me on patreon.com.