Bringing Real World Assets onto the Blockchain

Mark Lurie:

Welcome to WTF Crypto, where we peel back the layers of the onion of the crypto universe to understand what's really going on and how it affects you and your portfolio. I'm your host Mark Lurie of Shipyard Software. And as a caveat, nothing in this podcast is legal or investing advice. Today, we're talking about bringing real-world assets on chain with Karl Jacob of HomeCoin. Welcome, Karl. Thank you so much for joining us.

Karl Jacob:

Hi, thanks so much for having me.

Mark Lurie:

So Karl, one of the things that people think about most is bringing real-world assets onto the blockchain. This is really important for traders and crypto holders because whereas the crypto market is 1.2 trillion today, that's Bitcoin, Ethereum and everything else. The largest market in the world is actually the mortgage market, and that's 13 trillion in the US alone. Right? And there's more, the US stock market is 95 trillion. And according to McKinsey, the total balance sheet of the entire world is 1.5 quadrillion that's 1,500 trillion. So the assets in the world dwarf the crypto market cap, bringing them on chain is, in order of magnitude and multiplier in the economic activity that goes on in the economic activity, that's possible to trad. So it's really important for everyone to understand. But, real-world assets have been surprisingly slow in coming on chain. And I'd love to understand why. Why don't we kick off by asking you what makes you such a credible expert in guide on the subject so that the audience knows where your thoughts are coming from?

Karl Jacob:

You bet. So I started building companies quite a while ago. This is my seventh one. I was at Facebook when it was six guys in house in Palo Alto. So I have some experience in building new and different things.

Mark Lurie:

I didn't know that you were there that summer. That's great. A few of my friends were there because I was, well, a year below him.

Karl Jacob:

Oh, no way.

Mark Lurie:

But in the nerdy Jewish fraternity with him.

Karl Jacob:

Yeah. I got a call from Sean Parker who said, "You have to come meet this guy." That was literally how it started. Yeah. Obviously, you have a lot of experience building companies, but my journey in crypto really started about six years ago, and in particular with mortgage, about five years ago. What I was fascinated by was this idea that there's this ginormous market called mortgage that most people understand from the perspective of getting a mortgage, but very few understand from the perspective of how it's used in the world and why it's so important to the economy. Until 2008, I don't think anybody really realized what an underpinning of our core financial system mortgage had had become. And that, to me, spelled opportunity, the problem was, that opportunity was only being offered to very, very wealthy individuals or very large financial institutions like governments and banks.

Mark Lurie:

Makes sense. So that leads you to start HomeCoin?

Karl Jacob:

Correct. The first thing we had to do in mortgage was really make it more efficient. We closed mortgages in about 24 hours at LoanSnap, which is the mortgage company that we created about five years ago. The problem is that we sold those mortgages to big banks and institutions because we didn't have the money in order to do that ourselves. So we started looking around for some way that we could basically create a distributed balance sheet, in effect, allowing people to put money into a pool and have that money be used to purchase mortgages. That's how a bank works today. You put your money in an account, usually a savings account. They take that money and they lend it out to people who want to get a home. And as that person repays their mortgage, the bank takes the lion's share of that and they give you a small percentage, which is where the 0.1 or 0.2% return in your savings account comes from.

Karl Jacob:

We decided to flip that on its head. So basically, in the crypto world, what we can do is allow people to purchase a coin, and then the money from that coin goes to funding mortgages. And then the cash flow from people repaying those mortgages flows right back to the coin holder. This time, the people who make the most money are the people who put up the money, which are the coin holders, rather than the people who put the money into the bank accounts who get the least amount of return.

Mark Lurie:

Makes sense. And just so I understand, today, I mean the idea of a bank is that they take deposits that are on demand and then they pay an interest on it. And then they lend that money out for longer term, typically to people who buy houses for the most part, and they earn a bigger interest rate. It's kind of confusing to me, the rates you can get on a mortgage right now are a few percentage points, several percent. Right? So why, if we're depositors, do we only get 0.1%? Fundamentally, I don't understand why that is. And I think that's important to understand what it means to go direct, like you're doing.

Karl Jacob:

Well, that's the problem. That's the problem that we saw, which is the people who are putting up the money are getting the lowest return. And the reason for that is all the people in between. There are so many institutions, companies, people involved in that process, and each group takes their cut. So by the time they all take their cut, that 3% becomes quite a bit less, particularly when it comes to the bank. The bank makes about 30 times what the consumer putting money into their bank account makes on those mortgages. That's just the way it is. Those institutions have gotten away with it for a very, very long period of time. It powers the balance sheet at the federal government level. So there's about $3 trillion worth of mortgages on the federal balance sheet, and companies and banks like Wells Fargo have over $275 billion of mortgages on their balance sheet, which effectively means everybody at Wells Fargo could quit tomorrow and they'd still be making about $8 billion a year on interest payments for mortgages.

Karl Jacob:

So this is a great example of how these big, large slow financial institutions, where there are so many people involved in these transactions, are pushing that off onto the consumer and effectively screwing over the consumer. The consumer's getting screwed in that. The blockchain allows us to go direct. So basically, your money goes directly to funding a mortgage that is someone's home. And the payments from that mortgage flow back in, and we can share that directly with the consumer at a higher percentage because we don't have all those inefficiencies in the process.

Mark Lurie:

Okay. I guess before we dig into bringing them on chain, I guess I still don't fully understand. Finance is a competitive market. You would think that some banks would run more efficiently and then offer a higher interest rate to deposit holders and then people would shift over, and so banks would compete for customers, but it seems like that's not working. Why is one bank able to take 30 times more than it gives to depositors, and yet that margin is not competed away?

Karl Jacob:

I think a lot of that's greed, and on top of greed are just these large financial institutions, rules, structures, and everything like that, that they've put in place, where they've built a product that's oriented toward making money for banks and financial institutions and governments versus helping out consumers. We see this in credit cards. We see this in car loans. I mean, these were not created to benefit consumers. They're actually created in order to benefit the profit margins at banks and other places. So people have tried. Unfortunately, until now, it took a lot of human beings to make a mortgage until we came along. It also took a lot of human beings to package up those mortgages and sell them to large financial institutions.

Karl Jacob:

If you look at the way that works, Fannie Mae effectively does this on a monthly basis. They package a whole bunch of mortgage together and they turn around and they sell it to others. That's a very large financial institution. These institutions just haven't had the automation and the technology to be efficient enough in order to share more than what they are and get the same profit margins with the consumer. So they've tried, but unfortunately, that turns into maybe a 1% savings account, and they're razor thin on margins on those because there's so many people involved. I mean, think about your traditional bank and all the branches and brick-and-mortar buildings that they have. I mean, the cost structure for those institutions are massive, and they have to feed that somehow.

Mark Lurie:

Interesting. I guess there's probably some economies of scale. So in order to achieve those economies of scale, you need a big enough cost structure that you kind of need to take all that margin out. And then you're effectively competing against only a few other banks that have the same economy of scale.

Karl Jacob:

Yeah, that's correct. I mean, look at the size of somebody like Bank of America or Morgan Stanley, just from a human capital perspective, they're massive. And that's not counting all the people involved in those transactions, the servicers, the loan brokers, the people who are bond traders, the people who are slicing and dicing these pools and then taking a slight margin on those and selling those to other people. It's a massive industry with hundreds of thousands of people in an individual institution. When Lehman brothers went under, that wasn't a small amount of humans that were affected. It was hundreds of thousands.

Mark Lurie:

Mm-hmm. Okay, got it. Today, if I want to go out and just back some mortgages myself, is that something I'm able to do, put blockchain aside?

Karl Jacob:

Blockchain aside, you can, and many very wealthy individuals do. But think about this, the average mortgage in this country that the government will buy is about a $350,000 home. So you have to be quite wealthy to be able to buy even one of those. So imagine buying a pool of them that were somewhat diversified, that's where you're starting to talk about billions of dollars in order to be able to do that. And that's just not even remotely accessible by even wealthy people. I mean, this is the ultra wealthy that are able to do this. So what we're trying is to just bring that-

Mark Lurie:

Presumably, there's some sort of pool that I can buy a share of, that itself is a diversified pool of mortgages if I want retail exposure. Right?

Karl Jacob:

You can. There are MBS's and there are others, but of course, then we get back to the problem of those are cut 15 different ways. So the return you're going to get there isn't nearly the return that the wealthy individual who can buy those direct is going to get, and that's the problem we're trying to solve.

Mark Lurie:

I see. Okay. Okay. I think I'm clear. Now, you are trying to bring these assets on chain. So before we get to the broader discussions about bringing assets on chain, I'd love to understand how you bring them on chain from a legal regulatory and product perspective. How do you actually deliver this?

Karl Jacob:

Yeah. So we took a really different approach. Most of the people who've tried this before took the approach of, how can we move the entire mortgage ecosystem on chain. We just think we're a long, long way from that both technically and legally. So we focused on how do we take the smallest piece of the real world and put that on chain and let the rest of it exist off chain as it does today, so that we could basically leverage all the work that had come before us versus trying to recreate it. And that item is a lien on a home. So if you look at a mortgage, a mortgage has two components. It's a lien on a home, which is a promise to repay a debt, and then a agreement to repay that debt over a period of time. So this is the 30-year fixed mortgage. There is a part of it that says, "You owe say $50,000," and there's another part of it that says, "Here's your payment plan effectively."

Karl Jacob:

So what we did is, we took the lien part and we put that on chain. So whenever we record a lien on a property, which is the first part of the mortgage process, then we wrap an NFT around it. We published that to the blockchain, with the address of the property, all public information that would already be held at the county. We published that on the chain and then we lend against that actual NFT. So there's a lot of advantages to that. One of them being that we don't have to set any new legal precedence. The liens that have been recorded at counties, that's been happening for hundreds of years, that's something that's a widely distributed system. It's a state run system.

Karl Jacob:

So from a diversification and from a distributed perspective, that is one of the few truly distributed financial institutions in the country, is the recording of deeds and titles at the county level, which basically means you have this county recording that, let's say, you don't trust us. Let's say you don't think that we did all those liens. You could actually go to each county and look up the lien and see that what we represented on the blockchain as an NFT is what's recorded at the county. And that's the transparency piece that I think is important about how we've built the system versus how others have built the system and said kind of, "Well, just trust our auditors or trust the people looking at the books." What we've done is taken that very small piece of the real world, published it onto the chain, and kept those two things in sync over time.

Mark Lurie:

Just so I understand, in the lien, what does it actually say the lien holder is? Is it an entity, an LLC? Is it a blockchain address? What is actually in the government document?

Karl Jacob:

Yeah. That's where things get a little complicated in the mortgage industry because there is an in between today. Today, that would be the originator of the loan and the servicer of the loan. And not to complicate things, but that's basically who created the loan and who actually collects the payments. So the servicer and the mortgage company are generally on the lien, usually, the person holding the loan. And in this case, the blockchain entity is backed into the originator itself.

Karl Jacob:

We've stayed away from LLCs because we're unsure of how those are going to be tested in the court. The courts really don't have a system for dealing with an LLC situation where maybe three of the LLC holders are just investors and one of them owns the home or lives in the home. So imagine that. You've got four people, one person lives in the home, three people don't, and now somebody offers to buy the home. Well, the person living there, who's only one quarter of the equation, they for sure don't want to sell in most cases, but the three who are investors, they might want to sell tomorrow. So we're going to try to stay away from that until that's cleared up in the courts.

Mark Lurie:

I guess I'm still confused. How is the actual link between the chain and the lien established?

Karl Jacob:

Yeah. So basically, we record the lien at the county, which is something we do today, and that's a normal part of operations at a mortgage company. And then the difference is that we publish that information through an NFT to the chain and that shows up on our website.

Mark Lurie:

What's the information that's published?

Karl Jacob:

Oh, sorry. The address of the property, the size of the lien. Yeah, those two pieces of information.

Mark Lurie:

I see. And then your mortgage company basically says the owner of the NFT has claim over this particular lien.

Karl Jacob:

That's correct.

Mark Lurie:

That's correct. Okay. Got it. So you are kind of holding lien in benefit for the NFT owner?

Karl Jacob:

That's correct.

Mark Lurie:

Okay.

Karl Jacob:

Well, the county holds it because it's recorded at the county.

Mark Lurie:

Sure, sure.

Karl Jacob:

But we are the ones who keep those two things synchronized, and that's part of the service we provide to the ecosystem. Now, somebody else could do that as well, and we hope that they will over time. And that's the whole idea here, is that we have lots of different service providers who are today off chain, come participate in this ecosystem, each providing a piece of the puzzle that we need to build a much more efficient, distributed, transparent system.

Mark Lurie:

I see. Okay. Got it. And there's a few approaches to this. Right? You've mentioned some. At least in the US, you could create a trust and then have the trust own real-world assets and then the beneficiary of the trust is a wallet address. Right? You could have a Marshall Islands LLC or a Wyoming LLC, where the law actually says the member of this LLC is a blockchain address. You have your approach. Are there any other approaches? All have their pros and cons for different types of assets, et cetera. Are there any other approaches that you're aware of to bringing off chain assets on chain?

Karl Jacob:

Well, I think that the most common is the one you mentioned, is the LLC version, where they basically take a house or an object of some kind in the real world, put it in an LLC, and then piece it apart and sell parts of it on the chain. There's not really any precedent for that in mortgage. Splitting mortgages up into smaller pieces is just not something that's been tested. So we're a little bit pessimistic about how that gets tested in courts and whether that works out or not.

Karl Jacob:

The other problem is that those are not assets that there's a liquid market for in the real world. So one of the things we focused on were what we call Fannie Mae loans. So, loans that are underwritten to the standard that the government will buy the loans. And for that, you really do need the owner to be an individual. They shy away from, for a good reason, these more corporate entities that own real-world assets because of all the legal complexity.

Mark Lurie:

Mm-hmm. Okay. Got it. All right. Thank you for taking me through that.

Karl Jacob:

Oh, sure.

Mark Lurie:

Okay. So now you have these liens on chain, their NFTs, and you can fractionalize them, you can lend against them. It sounds like, in your case, you're doing a stablecoin against them.

Karl Jacob:

Yeah. Actually, we can't fractionalize the ones we built, but yes, you're-

Mark Lurie:

One could.

Karl Jacob:

One could. Correct.

Mark Lurie:

Yes.

Karl Jacob:

Correct. Yeah. Yeah. So what we decided to do was be more traditional about it. Basically build a pool of these so that the dow that governs the coin basically will allow the loans to be entered into the system, be purchased by the system. And then the coin that we built, there are stablecoins that are built on top of dollars, there are stablecoins built on like treasuries or commercial paper. Most of them today are built on a pool of unknown assets. And when I say that, I mean that they get audited, but it's a promise of someone, "Hey, this is what really exists." The role or approach that we took was really, "Hey, what could we do to make sure this is completely, fully transparent from the start?" And the way that works effectively is, for every dollar that goes into the coin, that dollar then goes into a pool of money, and then that purchases a loan that goes into a pool of loans.

Karl Jacob:

So you get a distributed group of loans, as we've talked about, you can see those loans on the blockchain. You can also know where those properties are. So you could run an analysis. So you can say, "Well, I want to make sure that all the properties in this pool are geographically dispersed in case, God forbid, California falls into the water." So I want to make sure that that's the case. And you could do that on our system. Whereas with these other stablecoins, try asking what exact assets sit in those bank accounts, and you're going to get an answer that you don't like, which is, "Well, just trust us that it's there."

Karl Jacob:

The other part is that those assets themselves are centralized. The fact that they exist in a bank account or through a banking relationship, we think, makes other stablecoins somewhat difficult. And we're seeing some of that happen. Right now, the concern around Dai, and that's backing by USDC is, well, that's a centralized coin. It is centralized into these bank accounts. Our goal is to build a completely decentralized systems so that no bank would be involved either in the creation of the assets or the holding of the assets, the servicing of the assets, or even the payments. In fact, we have two of our loans where their mortgage payments are made from their crypto wallet. So the banking system is not involved in any of the repayments of those loans, which means if the whole banking system went under, those people would still be repaying their home loans.

Mark Lurie:

I see. Okay. Got it. Basically what you've done is productize this in the form of a stablecoin. And the difference between your stablecoin and HomeCoin-

Karl Jacob:

Correct.

Mark Lurie:

... HomeCoin and a USDC or USDT is that USDC and USDT are taking the money people deposit and they are putting it in money markets, or really, probably a lot of it is just going into mortgages, but you don't really know-

Karl Jacob:

Way far down the road. Yes, exactly.

Mark Lurie:

Way far down the road. Yeah. So you don't really know what that is. Right?

Karl Jacob:

Right.

Mark Lurie:

You see a pie chart with this much as allocated to mortgages, and then you see an auditor's report saying this is true.

Karl Jacob:

Right.

Mark Lurie:

Or in the case of Tether, you don't really even see the auditor's report. Okay. So whereas you're saying, "Well, actually in our case, it's backed by essentially similar assets, but the assets themselves and brought on chain, you can take this pie chart and you can slice it all the way into the individual houses that are backing this thing."

Karl Jacob:

That's right. I think if you remember the movie, The Big Short, one of the things that he did was dig in to find out what was actually behind these credit ratings and what houses were actually there. He was quite surprised by what he found, as we all know, and that's why he shorted the mortgage market. That would be something you could do right now today on top of our existing system. You could do that analysis and you could decide, "Well, I don't like the fact that too many houses are in Texas," for instance. I think that's where this radical, full transparency needs to happen. A lot of these stablecoins were built at a time when crypto was nascent, and having a stablecoin was a huge benefit, and a bank account was like, "Well, okay, we're willing to give that up."

Karl Jacob:

We're willing to give up a little bit of the crypto ethos in order to have some of the stability that stablecoins brought. Now it's a trillion dollar market and growing, and now we want to move real assets and real money onto the chain. And I think that we're going to have to take kind of a stablecoin 2.0 approach. What would we do if we learn from our past and created something focused on the future? And I think that's something where it's fully transparent, it's distributed. And in many ways, it's one of those things that the average person can look at it and say, "Okay, I can go see what's backing this coin. I don't have to have somebody tell me. It's not an auditor. It's not a bank. It's not a government." I can actually do my own homework, which I think is an important part of the crypto ethos.

Mark Lurie:

Right. So what happens with the cash flows? Because that's a yield bearing asset. In the case of USDC, USDT, those companies just keep the interest. That's their business model. How does it work for you guys? And that's fine, right? They need to pay their bills. But I'm just curious, when you bring these assets on chain, are you also bringing the cash flows on chain? And then how does that... There's a whole regulatory problem there.

Karl Jacob:

Right. So that's actually one of the great things about the protocol, is that the protocol is designed to share that money with the people involved in the process. So it will share some of it with the protocol itself. We have to pay our bills too, a lot more efficiently than others, but we still have to pay them. The other is the people involved in creating the loan and servicing the loan. Today, the idea for that is, they send the bills out and they make sure that people pay on time and things like that. And then of course, the lion's share of it goes to the coin holders, the people who provided the capital.

Karl Jacob:

One of the rules in capitalism, the unwritten rules is, if you provide the capital, you make most of the money. But in fact, the banks and others have been taking advantage of consumers and flipping that script on them. This system allows us to do it the right way. So the cash flows basically flow directly to the servicer. And there can be many servicers. We're one. We hopefully have thousands of them in the future. And then that money flows onto the chain. So it flows basically through the system, sometimes directly out of a wallet, which I think is where things are going in the long run, but not everybody has the ability to pay their loans in crypto. So for those who don't, there has to be a Fiat conversion system. And that has to be, again, distributed and transparent. And then you can see those payments flowing back into the pool and then being distributed out to the coin holders based on how much of the coin you held.

Mark Lurie:

I see. Okay. I see. And this is what makes it decentralized. Because the distribution of these cash flows is decentralized, it makes it non security.

Karl Jacob:

Exactly. There's two key things. One, mortgages themselves aren't securities, which they're state regulated and have not-

Mark Lurie:

Oh, I did not know that.

Karl Jacob:

Yeah. Yeah. It's one of the interesting things that we learned in the process, is that because their state regulated and it's been tested actually at the federal level. The federal government tried to nationalize mortgage a long time ago, and the states of course rejected that, I think, for a good reason. It's one of the first and only truly decentralized asset systems in the country. The other is the Howey Test. Mortgages are unique in that sense because we can't do anything to make those mortgages more or less valuable. We can't make the borrower pay more money per month. We can't make improvements on the house. We can't control anything that it comes with. That's all regulated by the state and the federal government. So the asset class itself passes the Howey Test because we can't do work to make it more valuable, which by definition of Howey Test, it passes.

Mark Lurie:

Interesting. Yeah. Super interesting. Okay. And that's interesting because that is an issue that a lot of real-world assets are going to have coming on chains. How do you deal with the cash flows? How do you deal with the Howey Test?

Karl Jacob:

That's right. That's right. I think-

Mark Lurie:

Okay. So I think this is all... Well, sorry, go on.

Karl Jacob:

Well, no, I think that's where you get into interesting things around asset classes that investors are involved in because they're involved in those asset classes for a reason. And by definition, they're trying to improve the asset. So for instance, if you're splitting up a house in Aspen and the owner puts a solar roof on it, well, that's improving the asset. So that's a different story than what we have.

Mark Lurie:

Yeah. Okay. All right. So I think I understand now. I guess the next question is, how's it going? How do you feel like demand is going for these real-world assets on chain?

Karl Jacob:

It's going really well. I think the recent issues around stablecoins have accelerated a trend we were already seeing. So there's two things that we had started to see. We launched a project just late last year. So it's a little bit young, but we already have 35 houses that we've financed with the system. I think the two things that we started to see were a tendency toward wanting durable yield. We haven't talked about that. But one of the most important things to think about today is not how much yield you're getting tomorrow or how much yield you're getting even next week; how much yield are you going to get over the next five to 10 to 15 to 30 years? And we got a little confused in crypto. We saw 30% rates and we thought, "Oh my gosh, that's fantastic," because in our head, we think that's got to keep going, but that wasn't the case as we clearly found out. In fact, it didn't just go from 30% to zero return. The underlying assets basically evaporated. So that's something that consumers just have never been confronted with.

Karl Jacob:

So our goal was, "Hey, how do we create a durable return asset? And then how do we get people to think a little bit differently about how they're investing?" Today, getting a 30% return is great, but eventually, you're going to want to find a place to put, say, 10 to 20% of your money that you know is going to be there and you know is going to give you, say, a 5% return, but over a much longer period of time, which any investor knows is highly valuable. 5% return over two years is worth a lot of 30% returns over two weeks. So that shift had started to happen and then the crypto crash happened.

Karl Jacob:

Now I think everybody's waking up the next morning from a pretty big night and saying, "Gosh, had I had my money in something that was effectively backed by a real-world asset in off-chain and cash flows from that off-chain asset, then I would've been doing a lot better than I am right now." So that has caused a lot of interest, not just from individuals, but institutions who look at their crypto holdings and say, "Gosh, maybe we should have had some of our treasury or some of our investments in something that was truly stable, truly transparent in a durable return, a return over time."

Mark Lurie:

That makes sense, but that doesn't sound very much like the crypto zeitgeist. Right? It doesn't strike me that there's a lot of interest in crypto for good common sense, conservative, but good returns. Instead it's like, "Hey, if we're not getting 30%, it's not worth our time."

Karl Jacob:

Yeah. We got a lot of that last year particularly. That has cooled down for sure.

Mark Lurie:

Yeah. It seems to me, that's probably one of the reasons why more real-world assets haven't come on chain. Right? Once they come on chain, the crypto space multiplies by orders of magnitude, but there's no interest in trading them. So they don't come on chain that much right now. I mean, there is. You are generating this interest now. Right? And this is the stage of your project, but the order of magnitude, it's not like 20% of all crypto is in real-world assets or in reasonably returning assets. Right? It's a small portion total, not just mortgages, all real-world assets. I wonder when you think that this goes from 2% to 20% and how.

Karl Jacob:

Yeah. I mean, I think just looking back in history, we've seen this movie before. Right? We saw a huge run up in the stock market really early on with very little... There effectively were no bonds. There were no mortgages in the system, very few I would say. And then we had a big crash, and then we had a depression. And an entire generation changed their thinking on what a investment really was. So you saw all these people who basically lost everything in the stock market rebuilding their lives and thinking, "Okay, this time I'm going to do it a little bit differently. If I do get some wealth from that 30% return you're talking about, I'm going to take some of it and I'm going to take it off the table." It's like being in Vegas. Take some money off the table if you win and hold it and then play with the house's money.

Karl Jacob:

I think that ethos powered in an entire generation, we saw the same thing happen in the '99 crash. All those people who invested in internet stocks, who did quite well and didn't put some of it away, many of them lost everything. A great example of that is Mark Cuban. So Mark Cuban, when he sold his company to broadcast.com, to Yahoo, he made a tremendous amount of money by actually shorting Yahoo stock. So he sold his company, and as a safety net, he basically shorted Yahoo stock just to make sure that if the stock went down, he made money and didn't lose everything by selling the company for stock. And sure enough, Yahoo went from whatever it was, a couple hundred down to 20, or whatever the meteoric decline was. A lot of the money that Mark made was from that exact trade. And that's somebody who's been through it before, who has the experience.

Karl Jacob:

So we're just nascent in crypto. We got a lot of new investors, a lot of people who haven't been through a downturn, as we all know, and we saw what happened just a few months ago. Now, a lot of people are waking up from that and saying, "Okay, how am I going to not let that happen again?" So each generation, it seems like, has one of these highly impactful events that changes the way they think about investment in return. It sounds great to be able to put your money into Tether and go do Anchor and get 30% return until you don't get that and then you lose your principle, and then you think differently about investing. And that shift is underway. We're hoping to be there to be not only helping investors but helping the ecosystem itself. The ecosystem needs stabilization, just like the stock market did before. And just like at the end of the day, that financial markets worldwide did after 2008.

Mark Lurie:

First, I agree with you. I agree it's just a matter of time. Right? It's like, obviously, as the market matures and people go through these cycles, they are going to want to access other assets in real-world assets. Do you mind if I play devil's advocate and stress test this a bit?

Karl Jacob:

Yeah. Yeah.

Mark Lurie:

Okay. Because I'm really curious, your replies. I think one counter is, there's such a secular trend of value creation in crypto that the cost of capital, even aside from crazy Ponzi yields, is high enough that it will consistently dwarf real-world yields for a long time, 10, 20 years even. Right. I mean, defi, gaming, NFTs, there's all these secular trends where markets are being created in crypto. So what's the cost of capital crypto? Well, it can't be 30, 40% reliably, but could it be 10% reliably or 8% reliably? Yeah, I think that makes sense. I think the GDP, the output, the GDP of crypto is probably growing at 10% a year on average for the next 10 years, at least. So if the GDP of the real world is growing at 2% a year, then bringing off-chain assets on mass on chain is not going to attract interest in capital. And that seems like a structural departure from tech or the Black Tuesday or Black Friday, whichever it was, in the '30s, where people shifted to more conservative investments.

Karl Jacob:

Yeah. I think that's a good thought experiment, and I would say there are a couple things to provide context. The first is, all startups and I would call the blockchain and crypto a startup, just like the internet was, are going to have stunning growth, but that doesn't mean they get to break the rules in the long run because eventually they run into what my friend calls the law of big numbers. You saw it when the internet sucks. You saw it when the stock market was running back in the '20s and '30s, and you're going to see it again.

Karl Jacob:

So every new technology, every new invention has unlimited potential in the early days because they're so small. Right? I mean, trillion dollars, it's a tiny fraction of even just the mortgage industry, and even smaller of the worldwide as you pointed out. So I don't know what it will be, but it won't be those kind of returns over 10 to 20 years. And why can I say that? Well, history is, as they say, it basically doesn't repeat, but boy, it sure does rhyme. And it's going to rhyme in this case, I think, because of what we just saw. What we just saw was a massive destruction of wealth for a group of people who didn't necessarily understand the financial product they were investing in.

Karl Jacob:

So there's two outcomes with that. One is, we're going to be more open and honest and explicit about these products. We're not going to sell credit cards that are 30% interest rate and pretend that they're really 10, which is what was happening in the credit card industry. I think that's going to cause consumers to be more realistic about the return. You're seeing returns in crypto plunge. I mean, you look at a lot of these coins that we're returning 10, 20%. Now they're much more like four to 5%. Unfortunately, that's not a durable return. We still don't have any idea how long those returns are going to last. And we don't have the transparency to tell, like we do with HomeCoin. So I think that's one.

Karl Jacob:

I think the other is that it's not an either/or, it's an and. If you look at modern, even reasonable wealth management, part of wealth is gaining it. The big hit, the big contract, if you're an athlete, the big contract you signed, or a musician, if you're a trader, it's that three or four, selling your company or whatever it might be as an entrepreneur, but wealth preservation is the other side of that. We have a whole group of people who are not thinking anything about wealth preservation until now. It's one thing to say, "I don't care. I'm just going to huddle and I'll bet on Dogecoin forever," when you are down 10%. When you're down 70% and you have to start over again, or you have to start from zero, that's a very different thing. And I think that's the change we're starting to see as we broaden the group of people that are coming to crypto.

Karl Jacob:

I think if we don't become a reasonable wealth management platform for people and have all those choices all the way from super crazy magic internet money, all the way to what I would consider an analog to the conservative investing in mortgages or bonds or treasuries, I don't think we're going to have a ecosystem that will attract the large numbers of people that we need to power those gains over the 10 to 20 years that you're talking about. I think it's just going to have to become more balanced.

Mark Lurie:

Okay. Makes sense. I see. So the market cost of capital, let's say it's 10% in crypto. That's GDP growth. It's really like a blend. What it really is, is there's some 30% cost of capital and there's some 2% cost of capital, and humans have net fear or loss aversion. So they're going to have a properly diversified portfolio, and so the more wealth that gets generated, the more some of that will rotate into, shall we say, conservative assets.

Karl Jacob:

Exactly. It's I think when people start thinking about wealth preservation, not just about wealth creation. And that tends to happen as people gain more experience in the market. That also tends to happen when people lose money. I mean, it's all great when all boats are rising. I remember a friend of mine, his analogy was, if he heard a stock tip in a cab or in an Uber, that was the moment at which he was going to sell.

Mark Lurie:

Yep. Makes sense.

Karl Jacob:

And I started to hear a lot of crypto tips in Ubers over the last couple of years.

Mark Lurie:

Yeah. Yeah. I really did. It was remarkable. Yeah. I mean, I guess as diminishing marginal utility to having more and more money as an individual, there's also increasing marginal disutility in losing more and more money.

Karl Jacob:

That's correct. We talked to a lot of people late last year, early this year about putting money into HomeCoin, particularly people who are trying to measure or basically measure and grow their treasury. And we got the same answer, "I can't get the same returns. Why would I talk to you?" And why are those people calling back and interested now in preparing for what's coming next? Because the problem that people don't realize is that, you've got to start now if you want to build up those stores of cash flows. I mean, what is everybody talking about now in a recession? "How do I get cash flow? Well, I'm going to buy a property. I'm going to start a business. I'm going to do whatever." Or you can buy HomeCoin, which is cash flow from houses that are actually rising in return in this environment.

Karl Jacob:

So people who've been through a recession, which is very few people in the current market, think like that. They're like, "I need to have some kind of cash flow." And that's not really accessible to your average coin holder or your average crypto person. If they've got, say $2,000 a year to put it into the market, they're not going to be starting their own business anytime soon. So the ability for them to participate efficiently in that ecosystem and get that four to 5% durable return and as well make the crazy bets on Dogecoin or whatever wacky new coin that's coming out soon, that I think is a more balanced approach to it. It may be a little bit slower, but you're not going to lose everything, which is kind of what we're trying to prevent from happening that happened in the past few months.

Mark Lurie:

Why doesn't that capital rotate out of crypto and into real-world assets through the traditional financial system? I mean, I get that there's a convenience. If it's available, if you have money, you want to diversify on chain.

Karl Jacob:

Right.

Mark Lurie:

And the option exists on chain, then sure, do it. It also sounds like you're bringing some efficiencies to the process of lending. So okay, that's great too.

Karl Jacob:

Right.

Mark Lurie:

But in terms of bringing off-chain assets writ large on chain, is there anything stopping this capital from going off chain? Is it then, there's a tax hit because pulling capital off chain essentially makes it much more likely that someone will file taxes on that?

Karl Jacob:

I think that's a large part of it. I think the other is just, as my friend said, "Hey, that's meat space, and I don't deal with meat space." I think it's just an ethos thing. It's like, "I don't want to touch anything that is off chain without a wrapper around it that's on chain. Right." So it's one of the reasons we created HomeCoin. We heard that a lot. It's like, "I would love to invest in a pool of mortgages. I would love to have that safety of asset that is not correlated to crypto, that actually rises in return in a recession or an inflationary environment, not decreases. But I'm not willing to go off chain to do that. I'm not willing to liquidate my e-portfolio or whatever it might be, move it into a Fiat account. And then even worse, I lose all the efficiencies that brought me to the blockchain in the first place." And I think that's one of the things that we've noticed and one of the reasons we built a stablecoin.

Karl Jacob:

I mean, there are stablecoin that's pretty unique in the sense that you can hold our stablecoin and get a 1% return. There's not a stablecoin on the planet that'll do that. There's not a bank account on the planet that will do that. Right? So that's the power that of crypto in the blockchain. And then the other is being able to lock up over a certain period of time your money and get a even higher return. And that's, again, something you can't fluidly move your money in the existing off-chain world or on-chain world, and gain retire return based on how long you're willing to commit the money without a lot of work, a lot of paper signed, funds, getting a wealth manager, all that stuff. And that's not just a pain; that's just inaccessible for most people who are crypto holders.

Mark Lurie:

Makes sense. Okay. So here's my takeaway from our conversation. Tell me if you think this is a good takeaway.

Karl Jacob:

Okay.

Mark Lurie:

The story of off-chain assets coming on chain is likely as follows: Generational wealth is created for people who are deep in crypto because of the appreciation of Bitcoin, Ethereum, bunch of other stuff. That wealth wants to diversify and wants to stay on chain because of who they are. That pulls real-world assets on chain to serve them. Right?

Karl Jacob:

Right.

Mark Lurie:

Over time, enough of that happens that it kind of makes sense for non-crypto people to also begin trading these things, these real-world assets on chain because there actually are efficiencies there.

Karl Jacob:

That's right.

Mark Lurie:

And then over the long run, we are actually trading and using all these off-chain assets on the blockchain as much, or eventually perhaps more than the traditional rails.

Karl Jacob:

Yeah, exactly. And then we start to solve this problem by moving more and more of these pieces of infrastructure on chain. And I would say, I love the way you summarize it. I think generational wealth is kind of a funny concept. What I would say is, there's wealth and it doesn't become generational unless it's preserved. If you're the one creating the wealth, you have a responsibility to preserve that wealth and not have your children or your children's children wake up one day and find out that all the money was in the next Tether or the next thing that should have returned 30% but didn't. And that's, I think, where you see a big difference between wealth creation and generational wealth, which in order to have that, you have to preserve it and you have to use all the tools available to you.

Mark Lurie:

Including HomeCoin.

Karl Jacob:

Including HomeCoin.

Mark Lurie:

Awesome. Karl, thank you so much for joining us today. This was really interesting. I learned a lot. Is there anything else you'd like to share with our audience and particular how they can follow you or learn more?

Karl Jacob:

I'm @Karl on Twitter, so that's easy, @karl. Homecoin.finance is the website to find out more about our product. Or on Twitter, we're @homecoinfinance. Come join our Discord, come have a conversation, ask great questions like you did today, and learn more about investing in an asset that is stable, durable, and fully transparent so you know what you're putting your money into.

Mark Lurie:

Awesome. Thank you again. We really appreciate it.

Karl Jacob:

Great. Thank you.

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