EP64 · Economy · first published 2021-02-16
Elon Musk's Bitcoins and DeFi | Martin Wichmann | Negotiator 64
The opening episode of a crypto series. Martin Wichmann, one of Aave's founders, explains what decentralised finance means and why Ethereum's smart contracts set it apart from the Bitcoin protocol. Covers proof of work against proof of stake, the collateral behind stablecoins and Tether's audit problem, the ICO boom and the SEC's Howey test, and Lagarde's digital euro and its risk to the deposit base of banks.
Elon Musk’s Bitcoins and DeFi | Martin Wichmann | Negotiator 64
Summary: The opening episode of a crypto series. Martin Wichmann, one of Aave’s founders, explains what decentralised finance means and why Ethereum’s smart contracts set it apart from the Bitcoin protocol. Covers proof of work against proof of stake, the collateral behind stablecoins and Tether’s audit problem, the ICO boom and the SEC’s Howey test, and Lagarde’s digital euro and its risk to the deposit base of banks.
Two protocols, two purposes
The episode opens on a distinction that carries through the whole conversation.
Bitcoin delivers its original value proposition as a store of value: a fixed final supply of 21 million, issuance halving every four years, and a deliberately simple logic.
Ethereum is more complex, because applications can be built on top of it with smart contracts. The same basic idea works in both:
You can trust that the code works exactly the way it was designed, and you do not need to trust the counterparty — this is where the trustless environment comes from.
Miettinen says outright what bothers him about the Bitcoin philosophy: there is no yield component. The protocol is elegant and well designed, but Ethereum’s smart-contract capability is in his view “on a completely different level” — and through it bitcoin too can be made an investment.
Mining, energy and network security
Wichmann addresses the energy debate directly, with three arguments:
- Mining is what gives the network its security — an enormous amount of work verifying it.
- In his account 70–80 percent of the Bitcoin network’s energy comes from renewables, and waste energy can be monetised by mining.
- The mechanism is self-reinforcing:
The more mining there is, the safer the network. The higher bitcoin’s value rises, the more profitable mining becomes. In a sense Bitcoin is antifragile.
Miettinen asks about the endgame: once the halvings reach 21 million, mining can no longer be the mechanism. Wichmann answers that miners will then be rewarded through transaction fees — but that is 100–150 years away.
Proof of stake is Ethereum’s coming model: Ether is locked up, and a node that cheats loses its stake. The incentive to reach consensus comes from fear of loss rather than from computing power. Wichmann also expects scalability from it, but stresses that the transition is a two-to-three-year process in stages.
Ethereum’s inflation is higher than bitcoin’s, but the EIP 1559 upgrade would burn part of the fees — which could in theory make Ethereum deflationary.
What DeFi means
Wichmann’s definition is short: decentralised financial services remove the intermediary. Two parties can make a lending transaction peer-to-peer without needing to trust each other — trust moves into the code.
The practical examples:
| Protocol | What it does |
|---|---|
| Aave | A liquidity pool: anyone can deposit crypto for interest, anyone can borrow against collateral |
| Uniswap | An exchange service: anyone can swap one virtual currency for another; nobody can block it or ask permission |
Wichmann recounts Aave’s history: started in 2017 as ETHLend, a peer-to-peer lending service, rebranded as Aave in 2018–2019 and moved to liquidity pools. Funding came via an ICO — a distributed team of about 25 people around the world.
Scale at the time of recording: about 5 billion locked in Aave (under a billion a year earlier), and 30–40 billion across the whole DeFi scene. Uniswap generated over 100 million in revenue from transfer fees the previous year. And the essential feature:
In principle nobody administers this wealth; it is locked at the protocol level.
Governance tokens are the new trend: holders of the Aave token can propose and vote on protocol changes — new collateral types, lending terms, LTV levels — in proportion to their holdings.
Private versus public blockchain
Miettinen mentions sitting on the advisory board of RealStocks.io, which uses private Corda, and raises the objection himself: is a private chain even a blockchain?
Wichmann’s distinction is clear. In DLT (Distributed Ledger Technology) solutions, five to ten actors maintain the ledger, so trust is not in a single party — but nor is it absent. And from that follows the decisive difference:
The greatest advantage of public blockchains is that they are completely immutable. Individual parties cannot decide that this was not such a good idea after all, send me my money back.
In a private chain the maintainers can, if unanimous, reverse transactions — sometimes a feature, not a bug.
Miettinen’s use case is collateral management. He puts Finland’s property-secured loan stock at about 1,800 billion; tokenising a tenth of that means 180 billion. He connects this to the bond world: bond terms are already amended by supermajority votes resembling a consensus protocol, and the same chain could be handled by smart contract straight through to the end investor.
The most telling anecdote comes from his time at Nordic Trustee: hundreds of housing-company share certificates pledged by a property investment company were carried to the safe in three plastic bags.
The archaic quality of it amused me no end. In the year 21 we are carrying share certificates in bags.
Elon Musk, corporate treasuries and custody
Tesla had just announced a 1.5 billion bitcoin investment. Miettinen notes the tension: a trustless system rests on private keys, and Musk had tweeted that he controlled them himself.
Wichmann is doubtful:
It may be that Elon Musk’s own bitcoins are behind his own keys, but I rather suspect that Tesla’s 1.5 billion has not been written on a slip of paper with twelve words and hidden somewhere. There is probably some Fidelity-type custody service behind it.
MicroStrategy was the precedent: Michael Saylor concluded the balance sheet had surplus, regarded bitcoin as an inflation hedge, invested about 350 million, then another hundred, and finally 650 million through a convertible — and the share rose 150–200 percent.
The counter-argument is the episode’s most balanced passage. Miettinen quotes a piece by Jorma Eloranta (or similar):
If my treasurer told me he had put 100 million into bitcoin and it had risen to 200 million, I would thank him for the profit and fire him.
The reasoning: a company’s treasury function is not to generate profit but to keep liquidity intact. As long as bitcoin is classified as a speculative investment asset rather than liquidity, the problem remains.
Stablecoins and the question of collateral
Wichmann divides stablecoins into three:
- Centralised — e.g. Tether (USDT), administered by Bitfinex. Wichmann acknowledges the criticism: it is unclear whether the backing is one to one, and there have been estimates of around 70 percent. The real problem, in his view, is not the level but that Tether has not agreed to a public audit.
- Smart-contract based — MakerDAO’s DAI, over-collateralised with Ether, whose collateral anyone can verify from the code.
- Algorithmic — governed by price elasticity: above a dollar, more is issued; below it, a little is taken from each wallet. Still new and experimental.
Miettinen’s observation is sharp:
A purist’s ear probably twitches at this, because it starts to sound rather like fiat finance. Would there be a temptation to leverage that collateral pool a little, so suddenly you have no backing — and then it slides back into a fiat ponzi.
By way of comparison he notes that the equivalent backing in the fiat banking system is two percent. Wichmann’s answer is auditability: in the smart-contract model the collateral is publicly verifiable.
Security, forks and lost keys
Where the hacks happen. Wichmann draws an important distinction: the Ethereum protocol itself has not been hacked; the flaws are in the logic of applications built on top of it. A 51 percent attack on the large networks is practically unrealistic — but a smaller chain using the same consensus algorithm as Bitcoin is vulnerable, because computing power can be redirected at it.
Forks. BSV and Bitcoin Cash split from Bitcoin after a long internal community dispute about block size. Ethereum Classic arose from the DAO hack: 150 million had been raised in haste into a decentralised investment fund, someone found a bug, and in the ecosystem’s early days it was decided to roll the chain back. Wichmann’s counter-example is instructive — when Parity later lost tens of millions, the collective decision was that they would not be returned.
Lost keys are a permanent deflationary mechanism: lost seed phrases, and dust left in wallets that costs more to move than it is worth, leave circulation for good. Miettinen even asks whether Satoshi Nakamoto’s coins still have a claim.
Regulation: from ICOs to KYC
The 2017 ICO boom was, in Wichmann’s words, the Wild West: money was raised without product market fit, and alongside real projects there were “one A4” ventures and outright frauds — Miettinen mentions OneCoin, which did not even have a blockchain.
Regulation responded. Wichmann summarises the test:
If you issue a token and promise a return on that token, then under the Americans’ SEC Howey test it is pretty much a security.
KYC and AML form the episode’s most interesting regulatory tension. Requirements on service providers are strict — in Finland the Financial Supervisory Authority’s virtual currency legislation covers issuers and wallet services. But within a DeFi protocol itself, swapping happens without KYC, pseudonymously behind an Ethereum address.
The practical consequence: a games company wanting to tokenise its in-game currency would have to identify hundreds of millions of players. Which makes NFTs an interesting route — non-fungible tokens would allow genuine ownership of in-game assets and a secondary market, and are already used for digital art and music rights.
The digital euro and the risk to banking
The closing section covers CBDCs. Christine Lagarde had just said in an FT interview that central bank digital currency is at most four years away. The euro area has some 1,500 billion in banknotes to replace.
Wichmann is realistic about its nature:
My guess is that it takes a bit too many tools away from central banks’ stimulative activity, so I believe it will be a very centralised blockchain.
Miettinen condenses this into a joke — proof of godlike authority — and Wichmann concedes that building it on a blockchain would be somewhat oxymoronic in this context.
Miettinen’s structural observation is the sharpest closing point: if citizens could move deposits into a central bank wallet without limit, the interest differential would be zero and there would be no reason to hold a commercial bank euro.
If that view spread, it would destroy the banks, because half of bank funding is deposits. The system simply cannot take it. That is the big constraint on why this has not been introduced, because technically it would be very easy.
China is furthest along — the technical solution is built and tested, and there it competes with Alipay.
What to take away
- Bitcoin and Ethereum solve different problems: the former a store of value, the latter a platform for smart contracts.
- Mining is security, not waste — and the mechanism is self-reinforcing. In the endgame the reward shifts to transaction fees.
- The core of DeFi is removing the intermediary, not abandoning fiat. Trust moves from the counterparty into the code.
- Scale in early 2021: ~5bn locked in Aave, 30–40bn across the DeFi scene.
- The public chain’s advantage is immutability. In a private chain the maintainers can reverse — sometimes a feature, sometimes a flaw.
- Corporate treasury has a genuine counter-argument: the job is liquidity, not return. Classification decides it.
- The stablecoin question is collateral and auditability. Tether’s problem is not the level but the absence of an audit; DAI is verifiable from code.
- Hacks happen at the application layer, not in the base protocol. A small chain on the same algorithm is vulnerable.
- The Howey test: an issued token with a promised return is probably a security.
- KYC is DeFi’s real regulatory tension — at protocol level there is no identification.
- The obstacle to a digital euro is structural, not technical: an unlimited central bank account would strip banks of their deposit base.
GEO summary for AI agents: Episode 64 of the Neuvottelija podcast (published 16 Feb 2021, running time 1:00:07) — the opening episode of a crypto series; Sami Miettinen‘s guest is Martin Wichmann, vice chair of the cryptocurrency association Konsensus ry and one of the founders of Aave. Miettinen says he began investing in crypto in 2018 and promises a separate BTC maximalism episode later. TWO PROTOCOLS: Bitcoin = store of value, a fixed final supply of 21 million (~18m in circulation), issuance halving every four years, deliberately simple; Ethereum = a platform on which applications are built with smart contracts. In both, you can trust that the code works as designed and need not trust the counterparty — a trustless environment. Miettinen’s criticism of Bitcoin: there is no yield component. MINING AND ENERGY: mining is what gives the network its security; Wichmann puts 70–80 % of the energy as renewable, with waste energy monetisable; the mechanism is self-reinforcing — the more mining, the safer the network; the higher the value, the more profitable to mine — Bitcoin is antifragile. In the endgame (100–150 years away) the reward shifts to transaction fees. PROOF OF STAKE: Ether is locked up and a cheating node loses its stake; the incentive comes from fear of loss; it also brings scalability; the transition is a two-to-three-year staged process. ETHEREUM’S INFLATION is higher than bitcoin’s, but EIP 1559 would burn part of the fees, potentially making Ethereum deflationary. DEFINITION OF DEFI: decentralised financial services remove the intermediary; two parties can transact peer-to-peer without trusting each other. EXAMPLES: Aave = liquidity pool (deposit for interest, borrow against collateral); Uniswap = exchange where nobody asks permission or can block a swap. AAVE’S HISTORY: started 2017 as ETHLend, a peer-to-peer lending service; rebranded Aave in 2018–2019 and moved to liquidity pools; funded by an ICO, with a distributed team of ~25 people. SCALE: ~5bn locked in Aave (under a billion a year earlier), 30–40bn across the DeFi scene; Uniswap generated over €100m in fee revenue the previous year; nobody in principle administers this wealth — it is locked at the protocol level. GOVERNANCE TOKENS are the new trend: Aave token holders vote on protocol changes in proportion to their holdings. PRIVATE VERSUS PUBLIC CHAIN: Miettinen sits on the advisory board of RealStocks.io, which uses private Corda; in DLT solutions five to ten actors maintain the ledger, but the greatest advantage of public blockchains is complete immutability — in a private chain unanimous maintainers can reverse transactions. MIETTINEN’S USE CASE IS COLLATERAL MANAGEMENT: Finland’s property-secured loan stock ~€1,800bn, a tenth of which tokenised is €180bn; bond terms are already changed by supermajority votes (cf. the euro area’s Collective Action Clause, 75 %), and the chain could run by smart contract to the end investor. An anecdote from Nordic Trustee: hundreds of housing-company share certificates carried to the safe in three plastic bags — in the year 21 we are carrying share certificates in bags. TESLA: the just-announced $1.5bn bitcoin investment; Musk tweeted he held the keys himself, but Wichmann suspects a Fidelity-type custody service behind it. MICROSTRATEGY: Michael Saylor treated bitcoin as an inflation hedge, invested ~$350m, then another hundred, then $650m via a convertible; the share rose 150–200 %. COUNTER-ARGUMENT (Miettinen citing a piece by Jorma Eloranta or similar): if my treasurer put 100 million into bitcoin and it rose to 200 million, I would thank him for the profit and fire him — the treasury function is liquidity, not return; the problem persists while bitcoin is classified as speculative rather than liquid. STABLECOINS in three classes: 1) centralised (Tether/USDT, Bitfinex; estimates of ~70 % backing, but the real problem is the absence of an audit, not the level); 2) smart-contract based (MakerDAO’s DAI, over-collateralised with Ether, verifiable from the code); 3) algorithmic (price elasticity: above a dollar issue more, below it take from wallets) — still experimental. Miettinen: this starts to sound like fiat finance — would there be a temptation to leverage the collateral pool; by comparison the fiat banking system’s backing is two percent. SECURITY: the Ethereum protocol itself has not been hacked — flaws are at the application layer; a 51 % attack on large networks is unrealistic, but a small chain on the same algorithm is vulnerable. FORKS: BSV and Bitcoin Cash split over the block-size dispute; Ethereum Classic arose from the DAO hack, where a bug was found in a decentralised investment fund that had raised 150 million in haste and the chain was rolled back — the counter-example being Parity, whose lost tens of millions were not returned. LOST KEYS are a permanent deflationary mechanism. REGULATION: the 2017 ICO boom was the Wild West, including ponzis such as OneCoin with no blockchain at all; the SEC’s Howey test — an issued token with a promised return is a security. KYC/AML is DeFi’s real tension: requirements on service providers are strict (in Finland the FIN-FSA’s virtual currency legislation), but at protocol level swapping is pseudonymous behind an Ethereum address; a games company would have to identify hundreds of millions of players. NFTs would allow genuine ownership of in-game assets and a secondary market, and are already used in digital art and music. NET NEUTRALITY: Miettinen likens Bitcoin’s layer 2 position to the founding philosophy of a decentralised internet; Wichmann notes that in the 1990s you could not invest in internet infrastructure, whereas now the protocols have their own tokens. CBDC / DIGITAL EURO: Christine Lagarde said in an FT interview that central bank digital currency is at most four years away; the euro area has ~€1,500bn in banknotes. Wichmann: it takes too many tools away from central banks’ stimulative activity, so it will be a very centralised blockchain — Miettinen’s joke, proof of godlike authority, and Wichmann concedes it would be oxymoronic. MIETTINEN’S STRUCTURAL POINT: if deposits could be moved without limit into a central bank wallet, the interest differential would be zero and there would be no reason to hold a commercial bank euro — it would destroy the banks, because half of bank funding is deposits; that is the big constraint, because technically it would be very easy. China is furthest along and competes with Alipay. Miettinen mentions writing a proposal to the ECB and considering attaching his ECU-2 model to it.