It’s hard enough being a teenager these days. Between canceled proms, delayed starts to college, and getting stuck back at home just when they thought they were out for good, teens these days have it tougher than ever. For the tight-knit group of friends and business partners building Rari Capital, however, one more type of pressure is on the list – trying to build and develop a decentralized finance (DeFi) business.
Founded by Jai Bhavnani, 18, Jack Lipstone, 19, and David Lucid, also 19, Rari Capital is a newly-launched project in the incredibly hot DeFi space. Billed as “The Smartest Stable Robo-Advisor”, Rari is a cross between an aggregator deploying lending strategies across multiple liquid protocol pools and a more traditional active manager with proprietary allocation strategies.
To be fair, there’s really nothing traditional about it. The yield aggregation strategies Rari deploys have to do with various new protocols such as those available on Compound, Aave, Synthetix, Curve and others. These protocols, all grouped broadly under an umbrella known as DeFi, allow anyone with an Ethereum-based wallet to access the protocol and lend their funds. This is a process popularly referred to as yield farming, in a nod to the ‘planting’ of stablecoins (a type of Ethereum-based token meant to mimic the value of the US dollar) and the subsequent ‘harvesting’ of yield back both in interest as well as tokens native to each protocol. These tokens can then be exchanged for more stablecoins, enhancing the yield gained, or used to stake a claim to the governance of the underlying lending protocols themselves.
While undeniably still a bit over complicated for the average user, yield farming has exploded onto the scene in 2020, with the total value locked in these strategies having recently eclipsed $4 billion and more than doubling in just the past month, according to industry data provider DeFi Pulse.
Despite their young age, CEO Jai and COO Jack are grizzled veterans by both traditional and crypto industry standards. As high school classmates from the Mar Vista neighborhood of Los Angeles, CA, they incubated and later sold a DeFi focused wallet app named Ambo to another well-known wallet mainstay known as MyCrypto.
The idea behind Ambo was simple. Make crypto, and specifically DeFi, easier to access. “Jai was in the crypto world for awhile,” explains Lipstone. “I was really big into investing in stocks, but I was also learning about Ethereum and Bitcoin. And Jai said, there’s this huge problem. I’m trading all these really small tokens, but I want my friends to be able to trade them, and that’s just not happening right now. Especially since Binance wasn’t out at the time, very early days of Coinbase, it was just really hard.”
It was the first half of 2017, and bitcoin, ethereum, and cryptocurrency in general was just becoming a household name. Despite the early days and rough user interfaces on the market, the budding entrepreneurs had a vision. “The goal was to strip down all of the really difficult technology and jargon that you need to understand, and just make a very simple to use mobile wallet that allows for easy trading” says Lipstone. Despite classes, activities, and the general milieu of high school life, they stayed focused, not an easy task while markets were skyrocketing. Although the markets would eventually return back to earth, Ambo never did, as interest and offers began to pour in.
Not Exactly A Lemonade Stand
“It was a team of a few of us, and we worked on this for about a year and a half. And then we were approached by a few different companies with acquisition offers” Lipstone continues. What started as an entrepreneurial venture between high school friends was quickly evolving. Although the billionaire tech dropout has become an aspirational social archetype, that has generally meant college, not high school. Lipstone describes the period as exciting, but fraught. And it’s no wonder. The team had a decision to make. Well, at least for now, maybe their parents did too.
“We really wanted to stay in school, because we were theoretically building this product for the kids our age. During lunch breaks, we would go show our friends what the new designs looked like to see how they would interact with it. So we decided to go with MyCrypto, as our strategies aligned very well, and we were on this mission together.” It didn’t hurt that MyCrypto was also based in LA and run by Taylor Monahan, a leader in crypto known for her focus on integrity in the space.
The team stayed at MyCrypto for a year and a half, with Bhavnani leading strategy for Ambo, while Lipstone oversaw business development. Although they had a strong relationship with Monahan and learned a lot, the pull of being a part of the development of an entirely new market was compelling. Despite being supportive of the team, Monahan is known for her staid attitude towards development and focus on communicating and minimizing risk. Says Bhavnani “Taylor is probably the biggest advocate of risks in DeFi. She is the one that taught us everything we know about security. Like if you go on her Twitter it’s her talking a lot about risks in DeFi. And that’s something that we learned while we were there. We knew that it just wouldn’t align with the company culture. So despite us ideating it in our head for many months and recognizing the problem while we were at MyCrypto, we knew it wouldn’t be the place to build out a product like [Rari].”
With the industry evolving at a blistering pace, it was hard to quell the flutters of a young man’s heart. Eventually, Bhavnani and Lipstone had to admit that their passion was increasingly pointing towards new pastures. “The pull was that we were possibly rebuilding the entire financial system from the bottom up, and that’s a very big pull, to be one of the pioneers and guide that vision forward. That’s something that we wanted to build. In the 1% chance that this does become the next financial system or the pillar of the next financial system, that’s something that we want to be here for” Bhavnani states passionately.
Do The Right Thing
That’s not to say that Monahan’s influence and guidance haven’t left an imprint on Rari’s strategy. “She always kicks us in the leg and is like ‘what new value are you actually creating for the ecosystem? What new stuff are you actually putting into the world, rather than reusing the same capital and not actually creating anything new?’ She’s actually the one that’s like, putting us in line every once in awhile.” To their credit, the team has done the opposite of receding into a typical surly teenage attitude, listening closely to Monahan’s guidance and leaning in wholeheartedly to being good stewards of the community. From their initial decision to bootstrap the business to investor education efforts and other guardrails, they’ve taken a conservative approach to development, fundraising, and user acquisition.
The team is following what is known as the “guarded launch” approach proposed by Ken Deeter of well-known crypto VC firm Electric Capital. Warnings on Rari’s site are prominent, and they funnel users towards educational materials and blog posts outlining both the platform, and the risks. That’s not all though. Rari has decided to limit deposits initially to just $350 in value while they pursue a full security audit and continue to test and work out bugs. While it may impede some early user growth, they’re confident it’s the right approach to ensure both the safety of users and health of the platform in the long-run.
Long Term Greedy
Despite the wild-west nature of the DeFi market currently, Bhavnani is optimistic. “I would say the one thing that I think most people are missing is they’re hitting on yield farming for doing all these bad things but a lot of people aren’t really taking into account that this is the first time in history where we’ve had capital formation in the most efficient way possible that actually aligns incentives between all parties. Everybody is taking all these negative pieces of it but that in itself has never been done before, before Compound. And that, in my opinion, is the most interesting part of yield farming.”
Similar arguments have been made in crypto before, notably during the 2017 ICO craze which ended in disaster for most projects. But this is not your average lowbrow shill. Although only 18, Bhavnani is clear-eyed about the overall risks and has earned every right to his opinion. Having traded and developed through 2017, he has a nuanced view lacking in many so-called adults who can make up an unfortunately noisy part of the crypto community at times. His view on the recent spectacular rise of the yEarn protocol and its native YFI token is celebratory, but cautious. The token has attracted enormous interest and subsequent investment inflows, despite questionable economics and governance. “The overall creation of the YFI token was extremely fascinating. I think it’s really funny to all of the bitcoin maximalists that hit on Ethereum’s decentralization and Andre comes along with a token and he doesn’t take anything, and he creates a multisig that he’s not even a part of. I think that was really funny, and I think it was really interesting. But the long term sustainability of yEarn, that’s another question that honestly like, I’m not the most optimistic for only because of how this all came to be, and it doesn’t have me super optimistic for the future.”
As to the long term growth of the ecosystem, he worries that some of the cheekiness may ultimately hold the industry back. “I think that DeFi, despite the run-up and despite all of the hype that’s going on, it’s actually for good reason because it could build these new building blocks for the world, and it’s still extremely undervalued right now. So I think what we’re gonna see is over the next couple years we’re gonna see a lot of usage come in on DeFi, if we can maintain the velocity that we’re building. But I think that’s going to be difficult with some of the approaches that some of these teams are taking to security. Like you see YFI attract $400 million. And that’s scary if something happened to that $400 million and that’s not an improbable future considering Andre the creator his bio on Twitter is literally I test in production. It sucks for the entire DeFi ecosystem because if he messes up it messes up for everybody else.”
Whatever comes, Rari plans to be a part of it. They are putting in place controls and developing frameworks to vet new strategies, with CTO and head developer Lucid in charge of implementing the tech. Bhavnani thinks that there is plenty of whitespace in the field, with a clear path for growth into new areas for alpha. He says that while the fund is mainly rebalancing between various lending protocols and stablecoins for now, in a year lending could potentially make up less than 2% of the allocation, with other proprietary strategies making up the bulk. One such strategy would involve participating as a liquidity provider on recently launched Augur v2, where there could be an opportunity to buy out certain winning contracts at a discount in order to free traders up so they don’t have to wait on a slower payout structure. As more investment and development pours into the space, so too will more possible plays, and Rari will be ready.
For too long, crypto has suffered from tribalism and immaturity that has impeded the ability to transmit the reality of the underlying and potentially world-altering tech. While risks are indeed high particularly in these novel strategies, Rari is committed to acting as community-minded leaders demonstrating best practices. Through it all, they have been focused on teamwork, humility, and an unwavering devotion to a high quality, honest user experience. If they can keep it up, it just may turn out that the kids at Rari have been the real adults in the room all along.