DeFi Trump-style: A family circus

With World Liberty Financial, Donald Trump and his sons are promising a new decentralized lending platform – but a closer look reveals a mixture of recycled ideas and glaring warning signals.

_{From Nina Bambysheva And Steven EhrlichForbes Employee}

Donald Trump is taking another spectacular step into the world of cryptocurrencies – and this time he's taking his family with him. On Monday, Trump introduced World Liberty Financial, a crypto company “run” by his sons Donald Jr. and Eric, in a livestream on X in front of 155,000 listeners.

“We have to be on top of what we do. Crypto is one of the things we have to do whether we like it or not,” explained Trump, streaming from Mar-a-Lago, his country club in Palm Beach, Florida. “If we don't do it, China will. China is doing it anyway,” he added, apparently unaware that cryptocurrencies have been illegal in China since 2021. The former president said it was his children who “opened his eyes more than anything.” “Barron knows so much about it. He's a young guy, but he knows. He's got four wallets or something, and I say, 'What's a wallet?'” Trump noted.

Trump's sons and the team at World Liberty Financial are railing against what they see as the inherent injustice of the banking industry, revisiting old stories about their new decentralized finance (“DeFi”) project.

“I think DeFi would be what [our founding fathers] I would not imagine a broken, bureaucratized system where a bunch of middlemen are exploited for doing nothing, for shuffling paperwork, which not only leads to a lot of waste and inefficiency, but has become a politicized process, and we see that,” said Donald Trump Jr.

Although few details were revealed during the two-and-a-half-hour stream, the project is said to be based on the DeFi lending platform Aave.
Aave
and will also include stablecoins, tokens typically used to track traditional currencies like the dollar. DeFi is a term used to define bank- and exchange-like products that exist entirely on blockchains and claim to be autonomous and outside the control of any single actor or party. The promise is that DeFi could eventually become a cheaper, more private, more secure, and more accessible replacement for traditional financial institutions, including banks and exchanges. On lending protocols like Aave, users can borrow digital assets like Ether from other depositors who want to earn a return on their holdings, usually paid out in the form of more digital tokens, in the same way someone might take out a personal loan from a bank. But these aren't FDIC-backed banks. They're risky havens for speculators because they offer returns of up to 7%. In late 2021/early 2022, rampant speculation and leverage fueled a self-reinforcing bubble on DeFi platforms, with total value locked reaching as high as $180 billion.

Today, there is over $30 billion invested in loans in these protocols, but the majority of loans are used by traders to gain additional leverage in digital asset markets, rather than to finance physical assets like real estate or businesses. WLFI believes that regular borrowers will be more likely to use these DeFi platforms if they can be made more user-friendly.

A leaked white paper first seen by CoinDesk reveals that Trump has named himself “chief crypto advocate,” while his sons will take on the flashy titles of “Web3 ambassadors.” Meanwhile, 18-year-old Barron Trump, a freshman at NYU, has been dubbed a “DeFi visionary.” Other key executives include Chase Herro and Zachary Folkman, both known for their involvement in Dough Finance, a failed DeFi protocol that was hacked and defrauded of $1.8 million in July. Folkman is listed as chief operating officer at World Liberty Financial. A self-proclaimed “scumbag of the internet,” he once called on regulators to “kick out scumbags like me.” His resume is equally colorful: He co-founded Subify, a censorship-free alternative to Patreon and OnlyFans, and registered a company called Date Hotter Girls LLC. He has also published YouTube seminars on how to pick up women.

Steve Witkoff, a longtime Trump ally and real estate developer who was with the former president on the golf course on Sunday when an assassination attempt was thwarted, also took over as head of “institutional investments,” and his son, Zach Witkoff, took over as head of “intelligence.”

A disclaimer notes that World Liberty is not actually “owned, directed, or managed” by the Trump family — though they will cash in regardless. Folkman confirmed on last night’s livestream that WLFI will be selling a “governance token,” which in crypto-speak means a digital asset that confers voting rights similar to a stock. About 63% will be sold to the public, 17% will be set aside for user rewards, while 20% will be earmarked for “team compensation” including advisors and future hires and, of course, the Trump family. In the U.S., the tokens will only be offered to accredited investors — those with a net worth of at least $1 million or annual income over $200,000 — under the SEC’s Regulation D, which exempts some companies from the registration requirements of a public offering. Additionally, these tokens will initially be non-transferable. Folkman said this is because they only want people interested in managing and running the platform.

Given that most DeFi tokens have lost 88% of their value since the highs caused by the Covid pandemic, locking in investors now could be a smart business move for the Trumps.

DeFi tokens have not recovered from their post-Covid slump

“DeFi is struggling because most of the previous liquidity that previously earned 4-6% returns on leading platforms has flowed into new projects like Liquid Restaking because they can earn higher returns from airdrops. [free tokens]”, says Kavita Gupta, founder of Delta Blockchain Fund, referring to a process where users deposit tokens as collateral to run networks like Ethereum in exchange for rewards. Typically, these assets are then locked, but liquid staking providers issue an accompanying token that is liquid. “That’s why we don’t even see blue chip [DeFi lending] Products like Aave and Compound process the same volumes as before.”

These two prominent DeFi platforms, Aave and Compound, have fallen 73% and 95% respectively since their all-time highs at the beginning of the decade. And yet they trade at outrageous premiums compared to the valuations of traditional financial firms like banks. The fully diluted price-to-sales ratios for Aave and Compound are 38.4 and 221, respectively. Invesco's Regional Banking Index (KBWR) trades at a price-to-sales ratio of under 12.

WLFI plans to provide some tokens to its users, but given the recent poor performance of meme tokens tied to Trump and Trump Media & Technology Group Corp. (DJT) stock, non-transferability could prove to be a problem.

DJT has fallen 75% since trading began

Well-known Trump meme coins crash

So far, Trump has earned more than $7 million from the sale of his NFT collections since turning from crypto critic to crypto lover. A pro-crypto PAC called Fairshake has also raised more than $161 million from the likes of Coinbase, Andreessen Horowitz, Ripple and other crypto luminaries. With less than two months to go before the election, keeping the money flowing may be his top priority.

“World Liberty Financial is not a bunch of suits getting into the crypto world and trying to take over. It's a bunch of suits getting into the crypto world and embracing people… and we're doing that here on a much larger scale, integrating DeFi, crypto, NFTs – live from Mar-a-Lago with the Trumps,” Folkman said. “Regardless of what you think of them, regardless of your political leanings, they are the biggest, most powerful brand in the world right now.”

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