Linen Co-founder Vitaly Bahachuk Talks DeFi

Linen is an investing app that helps anyone to earn shares (tokens) in community-owned projects, such as those in Decentralized Finance (DeFi) and creator economies.

DeFi and crypto economies in general provide new ways to earn, invest, and engage with products and communities. For example, those who are in the know are able to earn 20-40% APY and more on their crypto and stablecoins holdings. In many cases, these tech savvy users get their crypto for free just by being an early user of DeFi platforms. In 2020, many DeFi participants received around $20,000 of shares (tokens) from different DeFi platforms. 

At the same time, the industry has high technical and informational barriers to entry for an average consumer. The technical issue is related to private key management of non-custodial wallets that are required to participate in DeFi. We saw this growing pain by observing our friends and family members and decided to lower technical and informational barriers by building Linen Wallet and a mobile app. Once everything is said and done, Linen would allow hundreds of millions of people to participate in DeFi, the creator and ownership economies to start building wealth with this new asset class.

Both Alex (co-founder of Linen) and I were early users of crypto and DeFi platforms. We were spending all our time trying to understand what crypto was all about in 2016-2017. The smartest people in my life and best thinkers I met in crypto. I learned a lot from them, and I learned from them a ton. 

I also come from a finance background. My first job out of college was at a bank, working for KeyBanc Capital Markets in their Debt Capital Markets and Technology Investment Banking groups. While advising tech companies on mergers and acquisitions and stock issuances, I was exposed to software and financial technology companies and really dug deep into their business models. It excited me.

Both of those experiences positioned well in this emerging industry.

We envision the future where people become partial owners of platforms and services that they use every day. Imagine if early users of Uber and Airbnb received shares of those companies by helping build those companies. In the future people will be earning living wages by contributing labor, attention and capital to internet native corporations. It sounds like Sci-Fi today to many, but we are already seeing that.

There are seven people working on this project. My co-founder Alex and I met at one of the blockchain hackathons in 2017. He was one of the guest speakers talking about layer-2 scaling solutions for Ethereum. I mostly did not understand what he was talking about, as it was too technical for me. We chatted during the hackathon and kept in touch. When the opportunity arose, I reached out to Alex and pitched the idea of a lending/earning platform using crypto. We’ve been building together ever since. 

Max, our product designer, got introduced through common connections and joined us a bit later. Our engineers came through our networks too. Luis reached out to me on Linkedin and asked to get involved. Basically, the team assembled organically.

DeFi is a system of applications (smart contracts) that runs on blockchains. These applications recreate traditional financial services such as borrowing, lending, brokerage, exchange, options, futures, etc. without a centralized party. Because these applications run on credibly neutral decentralized blockchains (multiple backup copies around the world) such as Ethereum and not on centralized company servers, they can not be stopped. Anyone can build applications and use these applications. Because anyone can build these applications without permission, and the level of innovation is going through the roof by attracting the best developers and economists as evidenced by the amount of value supplied to DiFi platforms (more than $40 billion per DeFi Pulse).

Because user-centric platforms are community built, operated, and managed, the decision making process and coordination of labor and capital can take longer than within traditional companies where management is the ultimate decision maker.

The way we look at this is that there are two major types of players in our industry:

• Hosted wallets where users do not have access to their private keys, cannot participate in DeFi, and cannot acquire the long tail of crypto assets or access third-party decentralized applications (Dapps).
• Self-custody platforms (wallets) optimized for a tech-savvy audience.

By far, the biggest wallets today are custodial wallets and services such as Coinbase Consumer and BlockFi. The primary use case for custodial wallets is to buy and sell a limited number of crypto assets in U.S. dollars. These players are beneficial to DeFi and the broader ownership economy as they provide a cost-effective way to acquire stablecoins and Ether with U.S. dollars. Subsequently, these stablecoins are transferred to self-custody wallets and used in DeFi. 

There are also self-custody wallets that use a seed phrase (special password) for backup and recovery. But such wallets are harder to use for the average person because the passwords cannot be recovered if lost or forgotten. These wallets are usually used by early adopters and the tech-savvy. Notable players are MetaMask, TrustWallet, BRD, and Blockchain. 

Linen uses a different wallet design and technology that makes it very user-friendly and lowers barriers to enter DeFi and other crypto services.

User self-custody of assets allows us to grow in a scalable manner as a software company and not as a capital-intensive financial institution. We have outlined three revenue streams: 

• Assert swap fees
• Affiliate fees from DeFi yield pools
• Premium subscription plans

Wallet: Build additional wallet backup and recovery mechanisms, such as social recovery where your trusted party (like a friend or a family member) can help you recover your wallet if you lose the phone or uninstall the app. Remember that Linen does not store your crypto assets. Assets are stored on a blockchain and users hold their keys on device and in other ways. Backup of keys in a user friendly manner is the biggest bottleneck within the industry and it is not a small task to solve. 

App: Adding new functionality and new assets. For example, the ability to earn high yield on autopilot, ability to link Linen Wallet to any other DeFi platform. 

Community: Education on new asset classes such as social tokens/creators tokens. Outlining our community ambassador program. If any KingsCrowd community members are interested in joining, please fill out the applications here. 

We have always wanted to offer our users and community members the ability to invest in the company. Also, our users kept asking for it. Bringing customers and community members on as investors will be a new norm in fundraising for any successful company. Last month we launched the Republic.co community fundraise to augment our venture capital fundraises and bring in new stakeholders — users of the Linen App and community members. We had not anticipated that our Republic.co campaign would sell out in less than 5 days, and we therefore had to place investors on the waiting list.

Thanks to the new SEC rules and significant interest from our users and community members, we are able to reallocate amounts reserved for VC investors to our community. In other words, we upsized our community raise and downsized the private investment allocation to allow for greater community participation in this financing round.

The majority of funds will be spent on product development.

Ownership of internet platforms and services is being redefined now. There is a tectonic shift of services from being a company centric to a user-centric. Unlike traditional companies, new community-owned platforms often allocate an unusually high percentage of their shares — sometimes 30% to 60% — to early users. This is because these companies and platforms recognize the enormous value created by early users. 

Get on-board with DeFi, participate in crypto communities like Linen and start building wealth with this new phenomenon. The earlier you start, the more upside you can capture (not financial advice!).

Being in crypto — in addition to traditional exit options such as M&A/IPO — we have novel and experimental exit options such as: exit to the community, a co-op structure essentially. This is a very hot topic in the crypto industry now as ownership structures of internet platforms are being redefined now. Also, a very interesting acquisition model can be where a DAO (Decentralized Autonomous Organization or internet native corporation) wants to vertically integrate and acquire a wallet and a user facing side of the business. This can be really interesting.

Our North Star is to onboard 100 million people to DeFi, so they can start building wealth outside of the traditional financial system. Crypto is a global phenomenon and being non-custodial, our market is global from day one. Legacy financial services companies can not do that. So, 100 million is very reachable!