180 - Top 5 Bear Market Bets with Avichal Garg & Sanjay Shah of Electric Capital

Nothing tests your conviction like a bear market. This is an opportunity to test what you think you know, refine your thesis, and make your bets for the next leg up. Avichal and Sanjay are long time crypto investors and at VC fund electric capital. What are they betting on during the bear market? We discuss 5 of the most pressing questions facing crypto investors during the bear market including… 1) L2 tokens - Are L2 tokens they worth something or they just worthless governance tokens? 2) AltL1s…Will the ETH killers make a comeback? 3) Multichain world - Millions of L2 chains or a few big winners? 4) Restaking - big deal or overhyped? 5) What Avichal things are this cycle’s alt-coins. Episodes like this are an opportunity to sharpen your insights as a crypto investor. Don’t take these ideas as gospel. Wrestle with them. Test them. Make them your own. We’ll have other Bear Market Bets episodes with other perspectives, so this isn’t the last. ------ 🚀 Join Ryan & David at Permissionless in September. Bankless Citizens get 30% off. 🚀 https://bankless.cc/GoToPermissionless ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 🦊METAMASK PORTFOLIO | TRACK & MANAGE YOUR WEB3 EVERYTHING https://bankless.cc/MetaMask http://bankless.cc/MetaMask ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 👾POLYGON | VALUE LAYER OF THE INTERNET https://polygon.technology/roadmap ------ Timestamps 0:00 Intro 8:00 L2 Value Capture 15:12 How Rollups Make Money 20:20 Harmful vs. Good MEV 25:00 Transactions Fees & L2s 38:05 Are L2s Valueable? 40:00 Multichain L2s or Few Winners? 43:05 Multichain Applications 49:09 Multichain Friction 59:02 Are NFTs Dead? 1:06:45 Investing in NFTs 1:10:00 RSA’s Worst Fear 1:15:10 Ethereum Killers & Modular/Monolithic Chains 1:19:22 L1s Playing the Monetary Premium Game 1:22:00 RSA vs. Avichal Moneyness Debate 1:24:30 Is Restaking Overhyped? Risky? 1:29:35 Crypto’s Antifragileness & Are We Lost? 1:33:40 Closing & Disclosures ----- Resources Avichal Garg https://twitter.com/avichal Sanjay Shah https://twitter.com/sanjaypshah Read https://mirror.xyz/electriccap.eth/SD0wT7qSSfis9gLT_Ki1gY6_oTYEqgwcGE0hDw7kMDY https://www.developerreport.com/developer-report ------ Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures⁠

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  You can only really generate value as an investor if you have a deeper understanding of what's happening than anybody else. Like effectively, alpha in a market comes from depth of understanding. If you can see the actual value of the thing. And there's a disconnect between perception and reality. Right? So if the world thinks something is worth X, but it turns out to be worth 2X. And there's that, that's a delta between perception and reality. And so what you really have to do as an investor across all of the categories that you mentioned, picks and shovels, if you're an early stage equity investor, you know, NFTs themselves, if you're more of like an art curator. What you really have to do is understand the thing better than anybody else. You have to have some perspective on it that says, actually, reality is different than perception. And, and that's fundamentally what you're betting on.

• 0:44Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams, and I'm here to help you become more bankless. Yep, just me on the episode today. No David, he's off escaping to the mountains. If the AI tech was a little bit better, maybe he'd never miss an episode. I could just beam him in. Unfortunately, we're not there yet. So I had to take this episode on my own. The topic today is about bear market bets. Investor conviction during the bear market. And one thing I'll say at the outset is nothing tests your conviction as an investor like a bear market. In particular, a crypto bear market. I think they can be particularly deep and sinister.

• 1:28Ryan Sean Adams?

  But if you look at this from the right angle, this is actually an opportunity. It's an opportunity to test what you think you know, to refine your thesis, your ideas, and to make your bets for the next leg up at a lower price point. So that is the topic for today. Avichal and Sanjay are longtime crypto investors. They're the guests in today's episode. They're also VCs at Electric Capital. And I ask them, what ideas are they betting on during this bear market? We discuss five of the most pressing questions, I think, that are facing all crypto investors during this bear market, including number one, L2 tokens. These are layer two tokens. Are layer two tokens actually worth anything? Are they just worthless governance tokens? We get into that. Secondly, We talk about alternative layer ones.

• 2:11Ryan Sean Adams?

  Will the ETH killers make a comeback this cycle or not? Number three, we talk about what a multi-chain world really looks like. Will we have millions of layer twos and app chains? Or will there be a few big winners? Number four, we talk about restaking. Is restaking a big deal? Is it overhyped? Will it pose an existential risk to Ethereum? And number five, Avichal explains why he thinks NFTs are this cycle's altcoins and what he actually means by that. Also, toward the end of the episode, I get a quick debate with Avichal on the moneyness of Ether, Ether the asset. He disagrees with me on that. I wish we had some more time for that debate, but we touch it briefly. Perhaps in another episode, we can get into it in more detail.

• 2:54Ryan Sean Adams?

  Last thing I'll say before we begin, episodes like this are really an opportunity to sharpen your insights as a crypto investor. So you don't have to take these ideas as gospel. Not everything that these investors say will be right. You, of course, have to wrestle with the ideas. You have to test them. You have to make them your own. And we'll have other bear market episodes with other perspectives. So this certainly isn't the last word. All right, guys, we're going to get right to the episode on bear market bets with Avichal and Sanjay from Electric Capital. But before we do, we want to thank the sponsors that made this episode possible, including our number one recommended crypto exchange, Kraken. Go create an account.

• 3:30David Hoffman?

  Kraken Pro has easily become the best crypto trading platform in the industry. The place I use to check the charts and the crypto prices, even when I'm not looking to place a trade. On Kraken Pro, you'll have access to advanced charting tools, real-time market data, and lightning-fast trade execution, all inside their spiffy new modular interface. Kraken's new customizable modular layout lets you tailor your trading experience to suit your needs. Pick and choose your favorite modules and place them anywhere you want in your screen. With Kraken Pro, you have that power. Whether you are a seasoned pro or just starting out, join thousands of traders who trust Kraken Pro for their crypto trading needs. Visit pro.kraken.com to get started today. Mantle, formerly known as BitDAO, is the first DAO-led Web3 ecosystem, all built on top of Mantle's first core product, the Mantle Network,

• 4:15David Hoffman?

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• 5:00David Hoffman?

  check out Mantle at mantle.xyz and follow them on Twitter at @zeroxmantle. Arbitrum is accelerating the Web3 landscape with a suite of secure Ethereum scaling solutions. Hundreds of projects have already deployed onto Arbitrum 1. With a flourishing DeFi and NFT ecosystem, Arbitrum Nova is quickly becoming a Web3 gaming hub, and social dApps like Reddit are also calling Arbitrum home. And now, Arbitrum Orbit allows you to use Arbitrum's secure scaling technology to build your own Layer 3, giving you access to interoperable, customizable permissions with dedicated throughput. All of these technologies leverage the security and decentralization of Ethereum and provide a builder experience that's intuitive, familiar, and fully EVM-compatible. Faster transaction speeds and significantly lower gas fees. Are you a dev, but you don't know Solidity?

• 5:43David Hoffman?

  With Stylus, Arbitrum's upcoming proposal for a programming environment upgrade, developers can write smart contracts in Rust, C, C++, and many more coding languages. Arbitrum empowers you to explore and build without compromise. Visit arbitrum.io, where you can join the community, dive into the developer docs, bridge your assets, and start building your first app on Arbitrum.

• 6:03Ryan Sean Adams?

  Bankless Nation, I'm super excited to introduce you to our next guests, Avichal Garg and Sanjay Shah. Avichal is the founder of Electric Capital, and Sanjay is one of the investors at the VC firm called Electric Capital. You probably know them from their incredible annual crypto developer report they put out every single year. The most recent, I think, was put out in January. I don't miss this. Measures all of the dev and dev activity across crypto. Avichal and Sanjay, welcome to Bankless. All right.

• 6:31Speaker 00

  Thanks, Ryan. Nice to be here.

• 6:33Ryan Sean Adams?

  Guys, I'm excited. I'm excited to do this episode here and now in 2023, summer of 2023, when we are, I think, most listeners would agree, we are in the bear market. And the reason bear markets are interesting to me is they are this fiery crucible, where our investment ideas actually get tested, where we actually have an opportunity to kind of rebuild our ideas from the ground up and place our bets accordingly. So I want to ask a few questions today. I've got five teed up and then maybe some bonus questions if we get some time. And I think these questions are some of the biggest, most important questions that crypto investors are asking during this bear market. So I want to get your thoughts on this, the thesis that you're sort of rebuilding during

• 7:16Ryan Sean Adams?

  the bear market and really get a sense for your conviction, what you're convicted on. Does that sound okay?

• 7:21Speaker 00

  That sounds great. That's great. And maybe before we get into all that, we can do the standard disclaimer of

• 7:25Ryan Sean Adams?

  Oh, yeah, you gotta do that, right?

• 7:27Speaker 00

  Go for it. This is not, this is not financial advice. You should not listen to anything we have to say basically about anything. That's basically our juice.

• 7:34Ryan Sean Adams?

  That goes for bankless listeners. That goes for me, too. All right?

• 7:36Speaker 00

  Don't listen to us about anything.

• 7:38Ryan Sean Adams?

  None of this is financial advice.

• 7:41Speaker 00

  None of this is financial advice and beyond. This is not advice. This is not life advice. Don't listen to us.

• 7:45Ryan Sean Adams?

  It's not life advice. I don't know what it is. It's another category. It's just a conversation. Hopefully, you're entertained by it.

• 7:50Speaker 00

  A conversation amongst friends.

• 7:51Ryan Sean Adams?

  Yeah. And so a few of the conversation starters then amongst friends. And some of these questions are, I think, controversial questions, actually, which is among the most interesting. But I'm going to tee these up, the first five, to give listeners a sneak peek into where we're headed. All right? The first question I want to ask is about Layer 2 tokens. Are they worthless governance tokens, is the question. Second question, want to get into ETH. Will the ETH killers make a comeback? Alternative Layer 1s. Number three, I want to talk about Layer 2s. Are we going to live in a world where there's millions of chains or just a few big winners? Number four, I want to talk about restaking. Is restaking, I can layer all of these things, is it a big deal or is it overhyped? Is it an existential crisis for Ethereum?

• 8:34Ryan Sean Adams?

  And then number five, NFTs. Man, they've been down bad recently. I don't know if you guys have noticed, but are they dead? Or will they make a comeback? So that's a little agenda item. I've got some surprise bonus questions for you as well. Why don't we start, though, with the big question? I think part of the reason I wanted to have you both on the podcast is Sanjay, you wrote fantastic blog post about layer two value capture. And let me just frame the question and you put it nicely at the beginning of your post. The question is, these layer two tokens worth many billions of dollars, double-digit billions of dollars? I don't think triple-digit billions of dollars. Are they actually worth anything right now? Or are they just worthless governance tokens? I'll throw it to either one of you. How do you think about this question right now?

• 9:20Speaker 03

  Yeah, so, you know, to me, the way I sort of think about it is it always comes back to cash flows at the end of the day. So you always have to say, okay, let's look at this from a fundamental perspective and where are the cash flows going to come from? And I think that if you really dig deep into layer twos, there are very concrete sources that they can actually generate sustainable cash flows and sustainable profits. And so there is a real, and happy to sort of dig deeper into this, but just based on that idea alone, there is a real fundamental basis for why these tokens should have values based on cash flows.

• 9:56Ryan Sean Adams?

  So there's cash flows, just like a company, just like any type of business, these layer twos actually have a product that they're selling.

• 10:03Speaker 00

  Yeah, well, I would add one thing to that, too, is, I mean, this is how we model things internally is ultimately cash flows. Because if there's no cash flow coming out of the thing, then like it's, you know, what is the thing actually worth? And in finance in general or investing in general, that's like the great normalizer. It's like, what are the cash flows coming out and what kind of discount rate do I apply to that cash flow? And then I can start to normalize across things like bonds and stocks and tokens. And so I would add maybe two or three nuances or dimensions to this. So one, just because a thing has cash flow, it doesn't make it a security. And I think this gets into a lot of nitty gritty about regulatory and, but we firmly believe that there are ways to have cash flows coming out of these without necessarily making them securities.

• 10:43Ryan Sean Adams?

  Did you hear that Gary Gensler?

• 10:46Speaker 00

  It gets into, yeah, it gets into sort of how we And there's a lot we could go there, but I think there are actually, I think it's important people not necessarily conflate cash flow with security. Those are actually two different things. Second is, I think what's really interesting about crypto is the global nature of it. And so the fact that there's so much capital all over the world that would like to be able to invest in cash flow assets or any sort of asset outside of their local fiat regime. And that's actually for most of the world is not possible. Like, most of the world can't easily access US equities, for example. And so our belief is there's actually a lot of latent demand all over the world for these kinds of assets that are sort of, they exist outside any singular jurisdiction, like ETH doesn't exist only inside the United States.

• 11:32Speaker 00

  And that's actually what makes it so compelling, too, from like a global perspective, is that there are a lot of people who otherwise would not be able to participate that can participate. And I think, you know, kind of, I think the framing that you had around conviction at the front end was really compelling. And I think one of the things that we have, we personally have not lost conviction on, but I think in the bull market really gets lost in the noise and tends to come back in the bear markets, is that that's fundamentally what this stuff is about, right? It's about empowering people all over the world to participate in these open systems. And that's what's so interesting about the L2s is there are actually ways for people to participate all over the world and capture value in that in a way that doesn't make them security, but still has cash flow, which I think is actually, that's like one of the interesting breakthroughs.

• 12:10Ryan Sean Adams?

  By the way, just on the cash flow but not security, just a brief segue here. So there are other real world assets like this, right? So I, let's say you have property, I own a house, I'm a landlord. Well, that is a cash flow, cash flow producing asset that's not a security. You don't have to register that thing with the SEC. There are tons of categories in the real world, pre crypto, that actually fit this mold of being a cash flow but not a security. How come people are so hung up on this?

• 12:40Speaker 00

  Yeah, well, it goes to this general problem of like, our regulatory frameworks.

• 12:47Speaker 00

  Tend to have been designed with certain use cases in mind. This is why you have to be really careful with the regulation, I think. I spend a lot of time on the regulatory side. I think some people know this in conversations with senators and congresspeople and people at the White House and so on. And there are a lot of good people in the ecosystem that spend a lot of time behind the scenes on this stuff. And I think one of the challenges is that you don't want to bake technology solutions into the regulations. And every now and then, every 50 or 100 years, like a new technology comes along and it sort of breaks your mental model of what's possible. I think AI and crypto are going to both face this right now because I'll give you one concrete example. Like this stuff doesn't really exist inside a singular jurisdiction and that creates

• 13:30Speaker 00

  a whole new dimension of challenges from a regulator's perspective. Like ETH is not a thing that exists only in the United States or only in Europe. It exists cross-jurisdictionally because it lives in the cloud. So anywhere there's a server, this thing can exist. And I think that creates a whole host of challenges because our entire regulatory framework has been based around the notion of a nation state with physical geographic boundaries and capital controls. And this really starts to break a lot of that. AI is similar in all sorts of ways. Like, should an AI pay taxes? Well, it's kind of unclear. And if it pays taxes, like who does it pay taxes to? Because it can run on any server anywhere. So like, what does that mean? Does the question even make sense? And this happens every now and then.

• 14:10Speaker 00

  And I've talked about this in other contexts, but like, to me, crypto, like the idea of this non-jurisdictional coordination mechanism, the last time we really had to face something like this was with the invention of the joint stock corporation, which was like 1650. It was like, oh, we can put money together and like take risk without it being my personal property at risk. And before that, you just had the cottage industry. And so between like 1650 and 1850, we put a lot of regulations in place around how that should work. And it used to basically be that only kings could give you a charter to go start a corporation. And then around 1850, we said, wait a second, that doesn't make any sense. Anybody should be able to start a corporation. And so we created entirely new regulation that said, oh, here's what it means to register a company. And that unlocked the industrial revolution.

• 14:54Speaker 00

  Like, the reason railroads could get built is because a bunch of people Could pool capital at a scale that wasn't previously possible from one human. And I actually think a lot of crypto and AI, it's like the first time in 150 or 200 years that we've had to face this kind of a problem, which is like, it just breaks our existing model of regulation in a lot of fundamental ways. And so we need to rethink it. I know that's like super high level meta, but like that, that to me is what makes this so interesting because the properties of this stuff are like truly internet native in a way that I don't think we've ever experienced before. And that creates a whole host of challenges downstream, one of which is, well, how can you have a cash flow entity that a bunch of people participate in that I can track, that I know exactly what my cash flow stream is going to be, but it's not a security. And I think that's one of the side effects of like this new technology.

• 15:38Ryan Sean Adams?

  Well, regulatory is going to be one of the, the bonus questions we

• 15:42Speaker 00

  There's a lot to unpack there.

• 15:44Ryan Sean Adams?

  There's just so much to unpack there, but I'm, I don't, I don't know that's exactly comforting that it took us like about 200 years from the joint stock company, first joint stock company to get the regulation in order. I, I hope crypto can happen at a faster pace.

• 15:56Speaker 00

  It'll happen way faster.

• 15:57Ryan Sean Adams?

  All right. We'll get to that too. But okay. So, so bull case, I think what you, what you just gave was sort of the, the bull case for maybe these capital assets that are tokens in general, right? Which is they're global, they're digital, they're cash flow producing assets that aren't security. Anyone with an internet connection can own one of these things. So, well, how cool is that? All right. But so there's another piece here though, that I want to get to is just because there is a token out there that can accrue value, doesn't mean it's sort of set up to actually accrue value. So this idea of cash flows is like, where does the revenue come from for a layer two? Maybe you guys could give us a refresher, Sanjay, you could give us a refresher on how rollups

• 16:42Ryan Sean Adams?

  make money today. How do they actually generate revenue?

• 16:47Speaker 03

  Yeah. So today, rollups, so in the future, rollups, I think will generate value from sort of two different streams, MEV and transaction fees. Today, rollups don't actually generate any revenues from MEV because the sequencers are centralized. So.

• 17:04Speaker 03

  Optimism, Arbitrum, and of course, they don't want to be extractive to their users. So they've decided, hey, we're not going to extract any MEV.

• 17:12Ryan Sean Adams?

  So they've just turned it off, basically.

• 17:14Speaker 03

  Yeah.

• 17:14Ryan Sean Adams?

  They could, as a centralized sequencer, they could charge some fees for MEV and for transaction fees, but they've just set it to zero right now. Is that correct?

• 17:22Speaker 03

  For MEV.

• 17:23Ryan Sean Adams?

  Yeah.

• 17:23Speaker 03

  And then, of course, yes, and then, of course, they are charging transaction fees. And so that's the primary source of revenue today for layer twos. So that's today. And in the future, so I think there's a, so let's speak to both sides of those. So for the MEV, that can be turned on in the future. And I think that could be a sizable form of revenue for rollups. And so in the blog post, I sort of put a little bit of a framing around this. So there's sort of like good MEV and bad MEV. And good MEV, sort of harmful MEV is anything that's sort of harmful to the user. So let's say a sandwich attack, et cetera.

• 18:09Speaker 03

  And bad MEV is, yeah, exactly. Thank you for bringing this up. And then sort of bad MEV is, or good MEV is something that actually, you know, helps the ecosystem. So for example, an arbitrage helps keep prices consistent across different indexes. And so sort of my view is that as far as MEV, I think the harmful sort of MEV will ultimately be sort of either mitigated or rebated back to users. And sort of like, why do I say that? Well, one, you know, businesses, there's like a line I have in the post, which is like, typically businesses don't really gain adoption by screwing their users. That's, that's like not a good strategy.

• 18:53Speaker 03

  And so I think it's the same way with blockchains. And so there's sort of incentive at every layer of this, whether it's talking about wallets, whether you're talking about the rollups themselves, whether you're talking about shared sequencers. Like, hey, let's figure out a way to like get rid of these sandwich attacks. Let's figure out a way to sort of mitigate these, this harmful sort of form of MEV. And I think right now there's like 12 different projects that are working on trying to do this. And so I think with so many people sort of working on this, I feel fairly good that we're going to figure out a way to sort of combat that.

• 19:25Ryan Sean Adams?

  Okay, so let's break this down a little bit for people and spend some more time on kind of definitions to make sure we've got everyone with us today. So you think that the sources of revenue for rollups, the way they make money are two forms, MEV and transaction fees. And then we just went into MEV for a second. Defining MEV for a second, this is basically block ordering. There's some value for anyone who's sending a transaction or doing something on-chain on one of these Layer 2s and getting their transaction in first. And it turns out that we can sell that value. And Layer 2s indeed can in the future start selling that value. I believe that's what you're saying here.

• 20:07Ryan Sean Adams?

  And there are two forms of not the selling of that value, but I guess the maybe the effect of blockchain ordering, maybe you can find better words for this. One is there's harmful blockchain ordering. So you're calling that harmful MEV. And then there's good MEV. And what you're saying, Sanjay, is you think that the harmful MEV will actually be mitigated over time so that the Layer 2 designers will effectively try to minimize that as much as possible and/or rebate it to users. So if you're a user in MetaMask, you're committing a transaction, there's some future world where you actually receive some of the proceeds of that transaction in the form of a rebate. You get kind of your MEV money back.

• 20:52Ryan Sean Adams?

  That's what you think will happen to harmful. The good MEV, you think these Layer 2s will effectively take in the form of revenue under that MEV category. Is that right so far? What would you add to that definition, those definitions? And also, can you give us some examples of harmful versus good MEV?

• 21:11Speaker 03

  Yeah, so that's exactly right. I think you phrased it really well. So let me give you an example of harmful MEV is like a sandwich attack. So for example, you want to go and you want to buy an asset on a DEX, let's say Ether. Someone sees you're going to, your trade incoming, they're going to actually put in in order to trade that asset ahead of you. And then your order will actually push the price up. And then on the back of that, they'll actually sell what they bought. So they've just made money sort of risk free. And you, as a user, you've actually gotten to execute at a worse price. So that's probably the most sort of common prominent example of harmful MEV.

• 21:55Speaker 03

  And then as far as sort of good or beneficial MEV, like one example is just arbitrage. So, you know, if you have different DEXs on a rollup or a cross rollups, you obviously want prices to be the same or consistent across the different DEXs. That's good for users. Liquidations is another example of beneficial MEV. You want people to get liquidated as soon as possible, which helps the protocols not accrue bad debt. And so the faster that can happen, the better. And so that's another example of beneficial MEV. One good example is sort of like how I see this playing out. There's a new shared sequencer radius that has sort of come out in the last couple of months.

• 22:40Speaker 03

  And they're sort of implementing this thing where they're using encryption to actually block sort of this harmful MEV. So using encryption, nobody can see what your transactions are. And then after sort of transactions, some sort of transactions are finalized, then they're actually running an auction to allow people to back run these transactions. And so they're essentially blocking The front-running of transactions which allow for the sandwiches, et cetera. And they're running an auction to sort of optimize the back-running of the transactions, which allow for arbitrage and liquidations, et cetera. So it's sort of in line with sort of this framework that I've laid out.

• 23:19Ryan Sean Adams?

  So how does this MEV, we'll talk about transaction fees as the other pocket of kind of revenue in a second, but just for MEV in general. Right now, kind of, you said the sequencers are kind of centralized, haven't turned the dials on, so no one's actually charging for this. And in the future, they could. But how does this get to value in the token? If you're a token holder of something like the Arbitrum token, or the Optimism token, or something like that, how do you experience that value? One way in the Ethereum ecosystem that holders experience value is through EIP 1559, the burn, effectively, where supply is kind of destroyed. In the world of capital assets, I mentioned, you know, property that I might hold and

• 24:04Ryan Sean Adams?

  I might get a rental income from that. So my asset actually generates income that I can take home. It's not quite a dividend, but it's sort of a dividend, I suppose. Can an Arber, Optimism, or Layer 2 token holder expect to sort of receive this as a share of income? Or is it burnt? Or is there some other mechanism at play here to actually link the token itself to this value creation mechanism?

• 24:31Speaker 03

  Yeah, I think any of the above, and I think different Layer 2s are going to experiment with different models. So you could burn it, you could give it as a dividend, you could invest it in retroactive public goods, which ostensibly will then increase the value on the protocol further. How I expect it to happen in practice is through some sort of like auction mechanism. And so, like, right now, you have a centralized sequencer, and so... It's, you know, it's sort of like up to the goodwill, I guess, of the sequencer to sort of give that back. But I think, and how much to give back, inevitably, I think that once you have sort of auctions, just like, you know, you have at the proposer layer on Ethereum,

• 25:14Speaker 03

  where, you know, builders are actually competing to, for, to get proposers to choose their block. In the same way, I think you'll have people competing to build a block, and then that value will then get, go back to the protocol, and they can choose what to do with it, what they want.

• 25:33Ryan Sean Adams?

  Okay, so you think MEV will be a big source of revenue here? Let's talk about transaction fees, which is the second kind of source of revenue, of value creation, value capture here. So how do Layer 2s today charge transaction fees inside of their ecosystems? I'm gonna pull up a screen just to kind of start this conversation. I believe that was in your blog post. This is Arbitrum annualized revenue. If you've never looked at kind of Arbitrum from this perspective, I encourage you, this is the way that investors should and are looking at this. This is, I believe, a set of metrics from May of this year. And this says Arbitrum annualized revenue. If you annualize Arbitrum's revenue in May of

• 26:17Ryan Sean Adams?

  2023, this is in a bear market, mind you. We get 115 million in annualized revenue. Revenue being the term for kind of the top line, right? So this is not necessarily profit. We could talk about the costs of the Arbitrum, you know, business, if that's, or a capital asset, if that's what we want to call it. But revenue, 115 million dollars. And I believe this is from transaction fees. Can you explain this a little bit, Sanjay?

• 26:45Speaker 03

  Yeah, I mean, it's very impressive. Yeah, essentially, currently, Layer 2 sort of break down their costs into sort of like an L1 cost. So what are they paying to Ethereum for essentially the data availability? And then there's sort of an L2 operational cost, essentially, like, how much are they, you know, you know, how much is it, does it cost to actually sort of like operate the chain, etc.? And then there's like an L2 gas fee. And so, which essentially makes up the transaction fee. So that's how sort of the revenue model works today. And it's sort of broken down into these three chunks. I think the way that the

• 27:27Speaker 03

  It can be broken down in the future, can sort of be different. Like, it doesn't actually have to be on a menu where here's your L1 cost, here's your L2 operating cost, here's your L2 fee. But I think those basic components are going to always be baked in there.

• 27:43Ryan Sean Adams?

  And are they essentially, is the way to look at this, like a layer two is essentially a value-added reseller of layer one block space? Is that what they're doing? They're basically taking, like, something like Arbitrum or Optimism is basically taking the Ethereum block space and creating another layer of feature functionality, value on top of it, and then charging for that in the form of transaction fees and then also MEV? Is that what's going on here?

• 28:11Speaker 03

  Yeah, I think that's a reasonable way to think about it. I think one of the sort of like, you know, mental models that I wanted to at least put out there with this is that, you know, I think some people think like, okay, EIP 4844 is coming, block space is going to drastically reduce. And so as a result of that, okay, Arbitrum's revenues look great right now, but that's just because L1 data fees are super expensive right now. And once L1 data fees plummet, like, hey, Arbitrum's revenues are going to, you know, go down the toilet because, you know, maybe they're just making a 10% or 15% margin on top of what the L1 is charging. And sort of the model that we can get into it that I at least sort of propose here is,

• 28:51Speaker 03

  hey, that's not actually true because there's actually some block space that's actually valuable on the L2, and they don't actually have to price it at just like a fixed percentage above what the L1 block space is. So as an example, like, if you, you know, getting coffee at Starbucks just because it costs Starbucks 10 cents to make it, that doesn't mean you're paying 10 cents or 11 cents. You could be paying $5 or $10 for a cup of coffee. And so I think it's going to essentially be sort of similar in the L2 block space. I think you guys have a pretty famous saying, right, which is blockchain sell block space, right? And I think it's similar, it's very similar to L2 block space as well.

• 29:32Ryan Sean Adams?

  Yeah, I think a lot of people don't understand how Layer 2s actually make money and how much value is created here. And Avichal, I wonder, from your perspective, what this sort of looks like, right? So there are multiple analogues that we could use. Yes, we have said on Bankless many times, it's a mental model. Blockchain sell blocks. That's the thing that they do, just because it's a simplification. I feel like so many times the crypto investing world gets stuck on narrative value, meme value, and like, it's helpful to view this as almost like a company, right? So what does Apple sell? They sell iPhones, right? How do they create value? Well, they take all of these commodity type components and they create an incredible

• 30:15Ryan Sean Adams?

  user experience in a phone that you can use and apps that, you know, give you value to everyday life and they're able to charge $1,000 per phone, right? It's kind of amazing. And so, looking at these Layer 2s almost as kind of like companies, and they're not securities, but maybe from the perspective of there is something that all of them are trying to sell, they're trying to make their block space as valuable as possible. And to Sanjay's point, they can charge whatever they want for that, whatever the market is willing to pay. And so, you know, that's one model of looking at it. The other way to look at it, though, is as an emerging economy. It's almost like the nation-state type model, right?

• 30:55Ryan Sean Adams?

  And if, you know, another analog we've used is, think of like a province in a nation or like a state in the United States, the state of California. And it is kind of, there's a federal government, that federal government in the L2 world is maybe Ethereum, has its own currency, but then there's a state's economy, the state of California, and it can create value. So you're almost valuing it as emerging economy. Make sense of this. How do you think of Layer 2s?

• 31:23Speaker 00

  Yeah, so two thoughts on this. So I think your second point around thinking of these things as digital countries and states is exactly right. That's very much the conclusion I've come to. We wrote a paper about Ethereum as a digital country a few years ago.

• 31:37Speaker 00

  And sort of as a little bit of a detour into that for a second, you know, I think that's actually what the like, if you think about what the world wants and kind of what happened after Russia invaded Ukraine and the US flipped on sanctions, what the world kind of realized was that the the economy of the world, international trade, commodities trade, pricing, all this stuff runs on US dollars, but ultimately the US can shut you out of that economy if they feel like it. And that's really scary, right? If you're Turkey, if you're India, if you're Brazil. And and so what the what the world actually wants is a US dollar denominated system because they don't necessarily want to be beholden to the Chinese government either and denominate things in CNY. And you're seeing a little bit of a move towards that. And so what the world actually wants is a US dollar denominated system that the

• 32:19Speaker 00

  US government cannot unilaterally shut them out of. That's effectively credibly neutral and sufficiently decentralized such that you can get the bad actors, but that you can't be shut out shut out unilaterally. And that's effectively what Ethereum is becoming. And so our sort of like long term view on this is Ethereum is slowly evolving into this third space, which is not the US space, which is not the Chinese space, but is this sort of credibly neutral decentralized space. And I think your analogy of if that's kind of like the federal government in a sense, or that's the country, then L2 start to behave a little bit like states. And, you know, if you think about how a state like California operates and what they're able to do, in effect, you know, like, why does California have such high taxes? Or why can Apple charge a 30% tax? It's because they have pricing

• 33:03Speaker 00

  power, right? So the general term for this of it not collapsing to the commodity price of of the compute power on the thing, which is, I think, a thing that a lot of technologists and economists both miss, like, they think of these things as purely computational networks, and therefore they don't have pricing power. But but there are forms of pricing power that states and companies have, which are really interesting, right? So like, for example, California essentially having a monopoly on useful coastline on the West Coast, like all these beautiful beaches and Big Sur, and it's just, it's a beautiful place to live, means that real estate is tremendously valuable. And as a result, there's this like source of income, which they effectively have a monopoly on, which allows them to do a lot of other things. Or there's brand value, right? Like,

• 33:46Speaker 00

  Why do people pay for, for, you know, an $8 cup of coffee, right? Why do they go to Blue Bottle or whatever? Yeah, it tastes better, but like part of it is the experience. Part of it is the brand. Part of it is the ethos. You're holding the cup. You're being seen by other people. So there are these like emotional motivators. Or there are network effects, right? And so like Silicon Valley is a network effect around capital. This has been written about many, many times. Entrepreneurs will generally relocate to where they can get great capital. And there's so much tribal knowledge about how to build companies in Silicon Valley. That it's not a surprise that sort of that network effect continues to perpetuate. Crypto being a really interesting counter example we could talk about. And if you look at the L2s, they kind of have all of these, right? There are network effects in terms of like DeFi all being on Arbitrum right now. Or there are technical moats, right? Like actually building an iPhone is really hard.

• 34:31Speaker 00

  And so you look at something like Starkware and that you might argue that that's a real technical moat. There are just not that many people that could build a ZK based system or ZK sync. You look at brand effects and so like if all the cool kids are in one place for the NFTs, then like that's where all the NFTs will be. That's where the creators will want to be. So there are going to be these different forms of pricing power that these, that these networks have on top of the L1. That's going to allow them to have some spread there, I think. And I actually really, I hadn't heard somebody talk about it as a state on top of the federal government, but I think, I think that's a great analogy. And I think states like California or New York or Washington DC, where you have this combination of like network effects because of the industries that are there, the company towns is effectively the brand value. It's like, if you want to do anything in government, you have to be in DC. Like that's where the network is. That's where the flow is. And that gives them pricing power.

• 35:16Speaker 00

  And I think L2s will behave very similarly.

• 35:18Ryan Sean Adams?

  That's a super fascinating, and just maybe to extend this a little bit further, this line of thought, because what you were saying kind of brought some thoughts up in my mind. So I think what you're saying is that layer twos are a bit more like California than they are like Apple. But where that, I think that mental model falls apart for people is there's no way right now to invest in California tokens. Like, how would I even, how would I invest in the California economy, right?

• 35:48Speaker 00

  Yeah.

• 35:49Ryan Sean Adams?

  Well, if you, if you had a token that represented that or some sort of asset that represented that, it'd probably be the value of California's tax base, I guess.

• 35:58Speaker 00

  Yeah. Well, there's another example.

• 36:01Ryan Sean Adams?

  Yeah, go ahead.

• 36:01Speaker 00

  Like Alaska, right? So you get an oil rebate. So like the state has all this oil revenue coming in and they just refund it via tax revenue back to the citizens.

• 36:09Ryan Sean Adams?

  Right, yeah. Like, I wonder if there was some sort of composed asset that gave you an index of all of California's property assets, let's say, for instance, and then also the S and P five, like the number of public traded companies that were all based in California, something like that, that could almost give you a proxy for like what an investment in California would look like. But we don't really have that at the state level or even at the nation state level. So I guess the best proxy for investing in the United States is probably buying the S and P or something like that, Nasdaq, something like that, right? But you sure wouldn't want to buy the dollar. But so maybe that's what we're saying, you guys are saying, these L2 tokens

• 36:51Ryan Sean Adams?

  are, they're effectively, they're an investment in this emerging network state, let's call it. And just like if you live in California and they're not providing the services, it's not worth it, the network effects aren't worth it, you can defect and you can move to Texas, for example. Well, all of the different Layer 2s are competitive with one another and they have to provide the network effect, the services, or the population, the applications on top will kind of defect. I think the analog kind of holds. So is this making sense? Or are we stretching the metaphor too far?

• 37:25Speaker 00

  Well, it's a little bit stretched. And I mean, it is, it's one of the things that's generally tricky about technology, early-stage technology is like, we have to reason through analogy and schematically. Like, if you remember, the original iPhone apps were all kind of like leather and paper. And it's because that's like all we were used to when it came to touch. And so we're like, well, if it's a flat screen, let's make it look like paper and leather. But that just like, doesn't make any sense, actually. So I think it is a little bit stretched. But I, you know, I think analogs are still illustrative. They can still teach you things. So I do think there's a lot to that, you know? I think the idea that there are network effects, the idea that there is a notion of brand, there's community, there's cultural alignment. And so like, by choosing to live in San Francisco, you're making sort of like a cultural statement about your values as much as you are physically where you choose to live. So I think a lot of those

• 38:08Speaker 00

  drivers will exist in L2s as well. And then I think your point around You know, what is the ease of switching, given that all of these things are EVM right now on top of Ethereum? And the ease of sort of moving things around, I think, at least in the early days.

• 38:22Speaker 00

  You know, it's sort of like if I could effectively pick up and move to Nevada or Texas or Florida without having to uproot my entire family and like, you know, would I, would I do that? I think a lot of people would actually consider doing that. So like lowering the, the difference, I guess, here with the L2 is like the switching cost is significantly lowered as the infrastructure gets better and better. Like I can just use optimism or Arbitrum as an end user, or if I as a developer can just move my code because it's all EVM and it like basically works the same way everywhere. Then the switching costs are significantly lower than they are in the physical world.

• 38:55Ryan Sean Adams?

  So to answer this, this first question and the question, I think people, investors are rightly asking during, during the bear market, are layer two tokens valuable? You guys are saying, hell yeah, they're available, they're valuable. Just look at the kind of the on-chain revenue profile. And in fact, for those saying that like it's impossible to, to value different crypto assets. I think you guys are saying you can actually value this as a capital asset and forecast revenue and profit over time and plug in the numbers and excel a spreadsheet and it'll give you the valuation. Is that what you're saying here?

• 39:26Speaker 00

  That's well, I want one caveat there is I think everybody should do their own math on this and figure out whether or not that that's actually true. But the general statement I think definitely holds, which is you can absolutely make an assertion here that there can be cash flow coming out of this thing. There is some sort of pricing power. You can figure out what your assumptions might be for that. What the costs are for running the network and, and there's certainly a spreadsheet model that you could produce here that would produce like positive cash flow out to token holders over some period of time. That doesn't necessarily make it a great investment. That doesn't necessarily mean that people should do it. It's extremely risky. But that's roughly, that's generally how we think about these things is like, you know, if there isn't ultimately going to be cash flow coming out of it, the market in the long term will not value the thing.

• 40:07Ryan Sean Adams?

  Anything to add, Sajid?

• 40:09Speaker 00

  The only thing I'd add is

• 40:11Speaker 03

  They will, I think they'll be valuable, but the ones that will be the most valuable are the ones that can generate sort of like a unique state that cannot easily, you cannot easily just move to another rollup and get it. So if you think of, you know, if you have a rollup that's sort of like the DeFi hub, let's say the New York of L2s, right? You can't just go to Texas or you just can't go to Chicago and sort of get that same liquidity, et cetera. And so any, any of the rollups that can actually build this like sort of unique state that cannot easily be replicated are going to be the most valuable.

• 40:46Ryan Sean Adams?

  Well, then I think that brings me to the second question that I highlighted early, which is another question for the, for the bear market right now, where everyone's trying to test their, their theses. Forecast the future of L2s for us. There, there are two paths and, you know, I'll give them to you in their most exaggerated forms that we can discuss, the, the one side of the spectrum versus the other. There could be a world where we live in with millions of different chains and layer twos, or there could be a world we live in where there are a few winners with kind of big network effects, right? So which of those is the most likely outcome? Like one is a world where we might

• 41:26Ryan Sean Adams?

  have, you know, tons of app chains. There aren't any really, like too many generalized chains. I don't know if you could put some more color on that, but the, but the other is a world where there's a few big mega chains that kind of win, like DeFi and F2 use cases, they all sort of accrue to, to a couple of mega chains. We're sort of seeing that, I think, on the, the main chain, layer one side of things, but we'll get into that discussion next. So what do you think? Millions of L2s or a few big winners? Avichal, what do you think about this?

• 41:57Speaker 00

  Yeah, this, this is actually probably one of the things I've most changed my mind on over the last two years. You know, I mistakenly assumed there would be some sort of power law, the way I think the, the L1s will have a power law where Ether's really big, maybe the Cosmos ecosystem can be big, Solana might be big and you're going to have a long tail. And

• 42:19Speaker 00

  I mistakenly assumed that the L2s would work that way. And the sort of belief I've come to is actually there are going to be millions of L2s. There will be a relatively small number of generalized ones that are permissionless and open. But what I think optimism really did by open sourcing the OP stack was they made it really easy for people to spin up their own instance of optimism while still being a part of the ecosystem. So you look at things like Base. And as a result, I think what you're going to get is not just the truly open permissionless ones. You'll get everything from that to ecosystem chains. So I think there are probably going to be things that are like an NFT ecosystem chain. So to use Sanjay's analogy, maybe that's like the LA of Ethereum. Right? And there will be like the KYC chain.

• 43:04Speaker 00

  We have the KYC to get in. Maybe Base wants to do that with Coinbase. I'm not implying anything. I don't have any inside information or anything. But you could certainly imagine Coinbase taking that killer asset that they have with 100 million KYC accounts and saying, hey, you can actually trade in a KYC way here. And that looks like TradFi New York. And so you'll get sort of these ecosystem ones all the way out to the other extreme of like, the only user of that L2 is a specific application. So you essentially get an app chain, like the Cosmos style. You know, like I have a game, and I want to control the sequencers, and I want to have those be hyper centralized to lower gas fees. And I just want interoperability with Ethel one. And so I'm using all the same standards, like the same NFT standards, but I actually want to control it. And I think you'll get the full spectrum there. And so if you believe there could be millions of applications, then certainly all of a

• 43:49Speaker 00

  sudden you end up with millions of app chains.

• 43:51Ryan Sean Adams?

  Well, let's maybe test that assumption. Millions of applications? What are all these applications going to be? I somewhat wonder now, I guess this is a reflection in the bear market. It felt like during the bull market, we didn't have, we had too many apps, not enough block space, right? Like blocks, you know, chain fees were incredibly high. Now it feels like we're moving towards the opposite world. We have all this block space, but we don't have enough apps to actually use it. Are you like, why do you think we're going to have all of these applications? Why millions of chains? How come every, like, how come all of these applications need their own chain?

• 44:26Speaker 00

  Well, I think there's a couple of things to pull on there. So, you know, one, sort of more abstractly, it's interesting when you look at the history of available computational power, whether that's CPU or RAM or hard drive space, whatever, it just gets sucked up. Like, as soon as you make it available, some developer finds a way to use it. This is like the infamous Bill Gates quote that like 64K RAM is enough for everybody, and you just don't need more than that.

• 44:46Ryan Sean Adams?

  He really said that?

• 44:47Speaker 00

  Yeah, something, I don't remember what the exact quote was, we should look it up, in the late 80s. And it's probably misattributed in some form, I'm sure. He's a very smart guy, so he probably meant it in a different context or something. But the observation is like, you know, my, like, how much faster are computers today? And like, how much slower do they feel than the 1990s? There's a great video that was circulating a couple of weeks ago, I don't know if you saw this, about like, Windows NT or Windows 3.1, and you look at like, the boot times and like, how quickly apps come up. And it's instant, and it's like, slower today, even though computers are 10 million times more powerful. And so, there's just like, this property of computational markets, which is like, as soon as you give developers some computational resource, somebody will find a way to use it, and break through somehow. And so, you're just sort of perpetually sucking up all the available capacity.

• 45:31Speaker 00

  And so, I suspect that will be the case here. If I had to guess, what is the initial set of use cases there? I think it's probably going to be games. Yeah, I think often you see that in a lot of early platforms. And, you know, in some sense, DeFi and NFT are games. They're actually just real world, real money games being played across the entire internet. Rather than being played in like, some executable that you run on your computer, it's being played on Discord and Telegram and Twitter, and in the real world at events, and like, they're just games that we're playing, they're social games that we're playing.

• 46:01Ryan Sean Adams?

  I'm almost collapsing down to the idea of like, how much of real life is actually a game? I don't know, it's just like, is this all a game that we're all playing kind of in, you know, some alien simulator somewhere?

• 46:13Speaker 00

  Yeah, well, that's a funny question too, but, no, I mean, if you look at like, a lot of primate behavior, I mean, this is the thing too, is right, like, Look at the world's richest man, Bernard Arnault, right? He runs LVMH. Like, what does that guy do? That guy is basically like, makes money by selling you a $300 leather item for $3,000, because you're playing a social game. Like, what you're doing is converting capital, capital into social capital. And it turns out, billions of humans want to play that game. And that's just a totally socially constructed game that all these people need to play, and hence, this is the richest man in the world. But it's hard, I think, for a lot of engineers and a lot of Trifid, like, rational, you know, you like, look at finance analysis or economic analysis, and like, the center actor in all

• 46:57Speaker 00

  of that is always like, a rational adult, you know? It's like, somebody who only behaves 100% rational, and you're like, but that's like a disconnect with reality, that's just like, not how, how things work in reality. And so, like, we're all playing games. That's like, 80% of life is playing games.

• 47:14Ryan Sean Adams?

  I mean, I just wanted to hone in on that, because if anyone here is virtual, listening to this, and is like, "Well, just games, well, that's kind of a small use case, you're talking about like, hundreds of billions." It's like, no, like, expand your definition of what a game actually is. You know, a game can kind of encompass everything. It can be all of the use cases, like, you know, what is buying, you know, property, being a real estate agent in Manhattan, is that, is that, is that a game to acquire more and more kind of real estate tokens? I also find that, like, the best training I've had for crypto is actually playing video games. I've talked to many crypto investors who've said something like, similar, it's like, just playing RPG games, and you know, RTS games, all of these things, as they were growing up.

• 47:58Ryan Sean Adams?

  I mean, like, now what do we do as crypto investors? Well, we just try to level up and collect coins? Okay.

• 48:04Speaker 00

  That's true. 1,000% correct.

• 48:06Ryan Sean Adams?

  Sanjay, what do you think about this, this question? Millions of L2s are big winners.

• 48:12Speaker 03

  Yeah, so I think to think about that question, you first have to maybe like drill down into what do you get by being on sort of a general purpose chain versus like, what is the advantage of being on a specific L2? And so when you're on a general purpose chain like Arbitrum, Optimism, you get that asynchronous composability. That's like key, especially for DeFi. But there are actually like really big advantages to being on an app-specific chain. You lose the interoperability. Well, not like total interoperability, but you lose sort of that asynchronous composability. Yeah.

• 48:43Speaker 00

  Well, real-time, like per-block composability is what you lose.

• 48:46Speaker 03

  Yeah, yeah, exactly. Flash.

• 48:48Speaker 00

  But you retain, yeah, you retain interoperability.

• 48:51Speaker 03

  Yeah, but but you get like a bunch of customizability. You get sort of like if you don't want your fee markets to be intertwined with the fee markets of all these other chains, you get that sort of isolation. And then you also get some level of protection from like what the L2 would do. So like if you're an app on Arbitrum, for example, and Arbitrum does some governance thing that you just think is like a terrible decision, you're kind of stuck because you're an Arbitrum now, like you're you're an app on Arbitrum. Whereas if you're sort of like this app-specific chain, you can actually then say, hey, you know, I don't really agree with this. Like, maybe I'm gonna move to Optimism. Right? And so you get you get a lot more flexibility that way. So there are these like, I think,

• 49:35Speaker 03

  clear sort of orthogonal trade-offs. And I think some lend itself to like, the asynchronous composability means that there will be a set, especially like DeFi, that will be on this general purpose rollup. And then there will be a lot of app-specific L2s, because I do think that there are some clear advantages that. So a good mix of both is sort of what I would think.

• 49:57Ryan Sean Adams?

  One pushback against the millions of chains idea here is that maybe there's some UX power law here, network effect, right? And I'm just looking at today's world. In today's world, if you're on Arbitrum, you want to get to Polygon or Optimism or something like that, there's a Work involved, right? Like you go a bridge and then you're somewhere else and like the experience is different, different set of applications. Like it very much feels like moving like to a new neighborhood, a new town. And there's some friction in the UX. Do you think all of that gets abstracted away in the millions of chains? Because it feels like it would almost have to. The security issues, the UX issues would have to be abstracted

• 50:42Ryan Sean Adams?

  away from the user in order for millions of chains to actually work.

• 50:45Speaker 03

  Yeah, I think that's a great point. I think the UX today is really tough for users. But I mean, already you can see sort of the budding of how this would get abstracted away. You have a lot of stuff around shared sequencers, which would help increase interoperability. You've seen the Polygon 2.0 vision that was laid out recently. You've seen the ZK stack recently visioned by ZK Sync, which allows for a lot more interoperability. So already, I think we're getting sort of maybe a little snippet or a little preview of how some of these things might get resolved. And I think over time, I do think that they will get significantly better.

• 51:23Ryan Sean Adams?

  Okay, but to push back on that, though, what those look like is a bunch of architectures for different superchains. And still, if I'm going to go from Polygon to Arbitrum, do you know, it feels like that could be an argument more for a world with a small number of big winners that all kind of make the UX very good inside of their stack, but it becomes very difficult if you're moving from like a Polygon 2.0 to an optimism or some other stack.

• 51:51Speaker 03

  Yeah, well, I mean, I think it depends on standards, right? So if there are some standards that are set, right, across different chains, and I think you could have similar interoperability across different chains, as long as two chains are sort of speaking the same language. And you know, right, like, that's how sort of like, right now, we have all these chains that are all sort of like speaking different languages, I would say. And if you look at sort of how the Internet works, right, everybody's on this like sort of TCP IP protocol. And so I do think that there could be a world in which these sort of superchains can also interoperate with each other. And the shared sequencers are sort of independent of these superchains. That's sort of just a separate concept where multiple chains that are all speaking different languages can kind of go there and sort of interoperate.

• 52:36Speaker 00

  Yeah, I'd add a couple of things, a couple of threads to pull on. So yeah, I think folks like Espresso building shared sequencers. I think, you know, there's IBC as a bridge tech and messaging tech. Like, I think a lot of the infrastructure significantly reduces the friction to sort of moving between different things. And it becomes effectively a standard. And so then you can sort of move assets around. I think there's a lot of work to do on the user experience. This is, this is something we talk about a lot internally, and we've, we've tweeted about and written about is like, this is probably the big bottleneck now. It's actually the thing, like, at this point, if I think about, you know, going back to your highest order question about conviction, what is the thing that I worry about the most? Like, why won't crypto work? Like, why will the L2s not work? Why will Ethereum

• 53:20Speaker 00

  not become this third digital country? And so on and so on. I think the biggest risk is actually user experience, which is, like, so many people can get exposed to this technology because everybody has a phone. There's now 5 billion phones in the world, that if the guardrails aren't in place yet, and there's too much friction, and people come in and they just lose their wallet keys, or like, you know, something bad happens, that you could actually poison the well. And so actually, like, being able to get to a billion people overnight is as much a curse as it is a gift. And so I actually think if crypto were to not succeed, like, what's the bear case overall for all of this stuff just not working? I think it's actually that the UX burns people. Like, it's so like, like, our ability to, to get people to try this thing is so far ahead of our ability to build good user

• 54:02Speaker 00

  experiences right now, that we could actually burn a lot of people. And so I actually It's funny, like I basically have the opposite. I have like the inverse concern as you Ryan, which is like, I don't worry that the UX is gonna like prevent people from doing it. I actually think it's like too easy to get into the into the flow of this stuff. And then you can get caught and you can lose your assets and then that just burns you and then you don't want to touch this stuff. And then we kind of have to cycle out an entire seven or 10 years of people to like forget the pain of having lost their money because the UX was bad.

• 54:29Ryan Sean Adams?

  Well, I mean, case in point is 2022, wasn't it? I would argue a lot of people used centralized lending platforms because

• 54:37Speaker 00

  Great example.

• 54:37Ryan Sean Adams?

  As opposed to DeFi because the UX is better. It was easier to use Celsius or BlockFi. You know, than it was maybe to go get your MetaMask and do a bankless wallet and go use something like like Ave or Compound. And so, and now what's that generation they're paying for it? And they, some of them have left crypto with a very bad taste in their mouth as a result.

• 54:57Speaker 00

  Yeah, that's right. Or you look at NFTs and like, I think fortunately, NFTs did not get big enough this cycle. I think there's a chance that they get really big in the next cycle and they come back. But my concern would be that if like, it's too easy to get into the NFT world and it's too easy for money to flow in there. That actually people will get burnt before we have the guardrails in place, which is the other side of UX. Like it has to be, basically, it has to be easy to use this stuff. But we also have to put like the safety measures in place so that people can't just lose all their money and lose the private keys and you need password recovery and you need, like you need to have ways for it to be, you know, decentralized and the centralized guys can't just like be opaque about what they're doing and take a bunch of risk and lose all your money. This is like, I actually worry about the other side of it is if it's too easy to use, a lot of people may may just get burned.

• 55:42Speaker 00

  So there's like, there's a, there's a, there's a really difficult tension here. Like you want this stuff to be easy to use, but in very particular ways and still let people protect themselves. And I actually think if, if this stuff becomes a little too easy to use, that that people may just get burned. Like it, I kind of, I kind of like the. The sort of contrarian take I have a little bit is like, I kind of hope we have a long bear market. Because the longer, like, like, like, three years, right? We're already 18 months into it. But the reason is that, like, if you start, to your point, right? If you look at the quality of experiences that are being produced today, like, every six to 12 months, like, the user experiences get better and better, and it gets easier and easier to use this stuff without totally burning yourself. So like Coinbase's NPC mobile wallet is like, actually pretty good.

• 56:26Speaker 00

  Or like institutional custody is way better than it was even 18 months ago. You have companies like Fortify. And so I think if we give people like another 18 months or 24 months to actually make these experiences good and safe, then we have a shot at not burning people and poisoning the well. So I'm, I'm actually kind of like, I kind of secretly hope that like, that we just have this like sideways burn for like another two years so that like, we can build really good experiences. So that when, I mean, you look at ChatGPT, it went zero to 100 million people basically overnight, like in 30 days, right? And so like, I'm not, I'm not at all worried about whether or not people show up here because there's so much utility. And so I just want it to be like really good and easy and safe when people actually show up, when we go to like the next billion people.

• 57:04Ryan Sean Adams?

  As investors, selfishly, I mean, valuations are a bit lower than they were before, right? So it's kind of nice to have an accumulation phase.

• 57:13Speaker 00

  Always be skeptical of anything a VC says. So yeah, that's fair, fair point.

• 57:17David Hoffman?

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• 58:00David Hoffman?

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• 58:44David Hoffman?

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• 58:58Ryan Sean Adams?

  Since you brought it up of each other, NFTs, burning people. Are NFTs dead is the question here? And I think a lot of people are wondering this in the bear market. And I think your answer to this is probably no, because I snuck a look at one of your tweets prior to recording this episode, and eventually you said this. "NFTs are this cycle's altcoins. We are seeing liquidity flee and rotate out as the excess comes to an end. Just as with ICOs, the ADIQ belief is actually right, just too early. Ethereum, Solana, Layer 2s, DeFi, and stablecoins all came out of the excesses of the ICO boom. It just took a few more years. NFTs are this cycle's altcoins." So I think you're saying they're not dead.

• 59:43Ryan Sean Adams?

  You're bullish. Get into that a little bit more. Why are NFTs, I guess, maybe underhyped at this point in time or oversold?

• 59:53Speaker 00

  Yeah, and it's not a comment about any particular NFT collection or anything like that. It's more the concept of NFTs, and it goes back to this idea of, if you look at LVMH, you look at Nike, you look at Rolex, like, a lot of the world is about non-fungible items, right? Like your purse, or your watch, or your shoes. And they're special to you because they're imbued with value, because you as a human imbue emotion into these physical objects. And so if you look at just, you know, like... 20 years ago, there were these graphs that used to circulate that was like, hey, here's how little time is spent on newspapers, but look at all the ad dollars on newspapers. And here's how much, look at all this time being spent on the internet and look at how little money is being spent on online ads. And you're like, okay, well, that just has

• 1:00:38Speaker 00

  to reconcile. Like, over the next decade, that's just going to fix itself. The ad dollars are going to go where the people are. And I kind of look at digital goods the same way. Just like, look at us right now. It's like, you don't know what pants I'm wearing. You don't know what shoes I'm wearing. You don't know what watch I have on.

• 1:00:51Ryan Sean Adams?

  I don't even know if you guys are wearing pants, to be honest.

• 1:00:56Speaker 00

  Especially with Sanjay, anything goes. So, you know, like, why would you spend $500 on shoes, or $1,000 on shoes, or $500 on pants? Like, the whole, like, yes, there's going to be some segment of those people that appreciate the craftsmanship, like that menswear guy on Twitter that somehow is like, always in my feed. Right? Like, that guy is going to continue to buy great clothing no matter what. But a lot of people do it. The bulk of people, I would argue, do it because of the social signaling. And NFTs are, it turns out, way more effective at accomplishing that end goal.

• 1:01:23Ryan Sean Adams?

  So the internet, the internet flex is much more important than the real-life flex?

• 1:01:26Speaker 00

  1,000%. And it's not only is it more important, but it's actually, from a utilitarian perspective, it's more efficient. So, so think about the math here, right? Like, let's say you're going to buy a $200,000 Patek Grand Complications, and it's on your wrist. How many people are going to see it on your wrist? Like, maybe 10,000 people over the life of you having that watch are going to see it and spot it and say, oh, that's a $200,000 watch. And so it's effectively $20 CPA, like, per conversion of person that sees it and now you get their social capital. Now, it's a very particular group of people, and you might want that group's approval, but it's effectively $20 CPA. If instead, you buy and spend $200,000 on digital items, whether that's skins in Fortnite, or NFTs on your Twitter profile, PFPs, or whatever else, a million people could see it on your Twitter profile, no

• 1:02:10Speaker 00

  problem. Right? You have one tweet that goes viral, and a million people will see that tweet, and they see your picture. So it's effectively 20 cents in impression. So it's literally 100x more efficient to accrue social capital using digital goods versus physical goods. And one of the really interesting properties with digital markets tends to be that because of the friction being lowered so significantly relative to physical... The market sizes tend to be much, much, much larger. And so, you know, if you look at, take Uber versus taxis, right? Like, the big knock against Uber at the Series A was, well, if the entire taxi industry is only worth 10 billion, how could you possibly be worth more than 10 billion? And here we are, and you have Uber and Lyft and Didi and Grab and like all these companies all over the world

• 1:02:53Speaker 00

  that in aggregate are worth more than 100 billion. And so, my opinion actually is that if you think LVMH and Nike and Rolex and, you know, these are Tiffany, like, these are monster brands in the offline world, that actually by opening up brand and opening up luxury and opening up social signaling digitally, like, that could actually be 10x bigger. And so, what we now have is this, like, shared infrastructure to be able to do that. And so, like, every game is going to use NFTs because it's just better to use them. It's just interoperable with every game now, so you can recruit other people to come in. Every brand is going to do NFT drops because it's actually 100% gross margin. Like, Nike just minted $20 million for doing, like, some digital art. And then they did this Fortnite thing where you can, like, see Nike apparel in Fortnite. LVMH is going to do this.

• 1:03:36Speaker 00

  It's just, like, lower cost of production of the item and people are still willing to pay whatever they pay for it because of the brand value. And you now have a direct pipe to your fans. So, like, Nike or LVMH or Tiffany know who their biggest fans are, their most loyal fan base because they're seeing them and have a direct pipe to them. They can actually talk to them directly. And there's now an advertising network that gets built on the back of that. Right? So, I can look on chain and I can figure out exactly which people are actually the super fans of Nike or the super fans of Rolex. And if I want to do a collab or if I want to try to recruit those people, instead of me going to Facebook and paying the ad network to acquire another mobile app install for a game or for a key type of customer, I can just incentivize that customer. I can just say, "Hey, look, if you show up and you prove to me that you've spent this much money on these types of goods

• 1:04:21Speaker 00

  or that you've spent, you know, you bought 10 pairs of Nike goods or you spent a bunch of time in Roblox and you can cryptographically prove that to me, I'll just give you something in my ecosystem. I'll just give you a free digital good worth $1,000." And now, you're actually paying the end user to come use your thing. So, you start playing this out and so, it's not just like... That it's more utilitarian as a starting point, but like the interoperability and then the network that you build around everybody doing this on top of one standard and one network itself creates five to 10x more value, in my opinion. Until like the downstream effect of this is just like all of this digital good spending, I think, just moves digital over the next 10 to 20 years. And the beneficiary is the whole ecosystem, actually, because you can now build a network effect around all these people doing it on top of one standard.

• 1:05:00Ryan Sean Adams?

  You don't think we've burnt out too many people in 2022 with kind of the UX mistakes of buying an NFT you thought was going to moon and then the, you know, the company or the centralized product kind of exit scams you or like the asset that you thought was going to go to the moon decreases 99% in value. You don't think we've burnt people out?

• 1:05:19Speaker 00

  No, it goes, it's very, very, in my mind, I was having this conversation with a friend of mine over the weekend, and that's what sparked that tweet was the realization was that's basically how ICOs were. Right? If you go back to the ICO boom of 2017, there were all of these ideas, like DeFi is going to be awesome, and you're going to be able to do real world assets on chain and like, we'll have stable coins, and it'll be super fast and settle quickly. And like, we'll have L2s. And we had all these ideas, and they were basically directionally correct. Like, all the ideas were right, but it really taps into that human psychology. There's this adage to make Bill Gates to sort of offset my, my Bill Gates.

• 1:05:48Ryan Sean Adams?

  Disparaging of Bill. I mean, he's a listener, so we gotta set this right.

• 1:05:52Speaker 00

  But yeah, to inflate his ego a little bit, he has this quote that's like, you know, people dramatically underestimate what's possible in two years, or sorry, dramatically overestimate what's possible in two years and dramatically underestimate what's possible in 10 years. And that's kind of what happened here, right? Like, over the last two years, everybody dramatically overestimated what would happen with NFTs. And it just, it takes a decade to build a brand. It takes a decade to build a real community. But I think we're going to look back in 10 years, and there's going to be, A, some really big winners that come out of this cycle, or even earlier, you look at something like CryptoPunks. And it takes 10 years to have that Lindy kick in. But I think the next wave of stuff might actually be the wave of stuff that works, because it's sort of from the ground up, uses NFT infrastructure in the right ways and does the right things and incentivizes

• 1:06:36Speaker 00

  the right behavior, having learned from just this graveyard of mistakes that have been made over the last two to three years in NFTs.

• 1:06:42Ryan Sean Adams?

  This is where the art, maybe the science, I don't know, which you lean on more in your investing, comes in, though. Is because of the things that you mentioned. Let's say somebody is bullish on the category of NFTs and what you mentioned. I mean, there's 100 different startup ideas there and thousands of different assets that you could purchase. And so many of them will end up in the graveyard because there are so many different ways this NFT space could emerge. So let's say I'm bullish NFTs, right? Okay, so what do I go buy? Do I go buy the Zuki collection? Do I go buy an index of the top 25 NFTs right now? Do I go invest in picks and shovel infrastructure? Do I go look at, maybe this goes with established brands like the Nikes of the world?

• 1:07:27Ryan Sean Adams?

  This comes from the established brands leak into NFTs. So do I look at their assets or companies that are making like, or do I do all of the above? So how do you distill that I'm bullish on NFTs into navigating the idea maze of what specifically to invest in? Because you don't want to end up in the graveyard, do you?

• 1:07:46Speaker 00

  Yeah, so obviously not financial advice. And so kind of without saying here's what people should do or go do. I think there's a meta framework for this, which is you can only really generate value as an investor if you have a deeper understanding of what's happening than anybody else. Like effectively, alpha in a market comes from depth of understanding. If you can see the actual value of the thing and there's a disconnect between perception and reality, right? So if the world thinks something is worth X, but it turns out to be worth 2X. And that's a delta between perception and reality. And so what you really have to do as an investor across all of the categories that you mentioned, picks and shovels, if you're an early stage equity investor, you know, NFTs themselves, if you're more of like an art curator, what you really have to do is understand the thing better than anybody else.

• 1:08:31Speaker 00

  You have to have some perspective on it that says, actually, reality is different than perception. And that's fundamentally what you're betting on. And there are a million different ways to do that. Like art, art curators and collectors can be wildly successful. People who invest in picks and shovels can be wildly successful. People who, you know, maybe you say, hey, I think there are certain brands that are really going to benefit from this. And so like, I should just go buy stock, like public stock in companies. And you know, you looked at if you really understood AI. Five or seven years ago, maybe you just bought up a bunch of Nvidia when it was down big time and that's how you sort of played that market. So there are a lot of different ways to do it. But I think the crux of it is like you have to more deeply understand what's happening in some subsector than anybody else and be able to identify that delta between perception and reality.

• 1:09:16Ryan Sean Adams?

  And if you don't, you're just better off with an index or something like this.

• 1:09:20Speaker 00

  Or just finding the place in the world where you do have that. You know, like there are a lot of ways to make money, right? It's one of the things that we've had to learn just as early stage investors is like, or you know, Stan Druckenmiller is a public market investor, Warren Buffett, they sort of have their own versions of this. And you know, I think Stan calls it a fat pitch. Like really, the way you make money is like, you find a thing where you're like, I'm pretty sure I understand this better than anybody else. And it's just such a good setup. It's kind of like a heads I win, tails I win. You know, it's like, no matter what happens, like you're going to do great. And there are enough such opportunities in the world that you don't have to be like fomowing into stuff. It's actually like patience, patience is a virtue here in all investing.

• 1:10:04Ryan Sean Adams?

  I'll tell you my worst fear, and maybe this should be every investor's worst fear though, is you see what you just saw. Let's say you see the opportunity in crypto, right? And then, and then within that, you see the opportunity in NFTs. And guess what? You, us, we, people listening to this, may be among the 1%, less than 1% of people who see the opportunities in NFTs, the NFT category in the world doesn't. My worst fear as an investor is I see that opportunity, and I make all the bad bets in that category and lose all my money, or I don't make the return, right? So it's like, imagine, NFTs are big, we all kind of make that prediction, but then you, you make a series of bad choices in the NFT segment, and you don't end up accruing the rewards of that. You end up

• 1:10:47Ryan Sean Adams?

  losing anyway. Is there a way to prevent that from a meta perspective as an investor?

• 1:10:52Speaker 00

  I think you have to.

• 1:10:55Speaker 00

  I actually think probably most people should not be looking at NFTs or early-stage crypto as an investment. I think if you look at it as an investment, like, you're probably gonna lose. This is why, like, a Warren Buffett or Vanguard people will tell you to just buy the index, because it turns out most people are not good investors. It's a really hard thing. And it's been, well, like, if everybody were a great investor, especially with really high-risk, highly volatile assets, then everybody would be rich, right? And it turns out, it's really hard to make money doing these things. And so, actually, I think most people should not be looking at this as an investment. Buy it for the art, like, buy it for the community, buy it because it brings you joy. Size those things so that, like, if you lose a little bit of money because you bought the art and you supported some artist that you really believe in, then you don't feel bad about it. You're like, well, the whole point was to support,

• 1:11:39Speaker 00

  like, I'm subscribed to, like, some Patreons, and it's like, I've forgotten how much it is, but it's just because they're like these people creating great content. I'm just like, yeah, five bucks a month, let me just chip in, and I don't think about it, right? That's, I think, the right lens that most people should have on it. And if somebody does want to become an investor, I think one of the things you have to learn is that discipline of, like, how do you size your positions appropriately? How do you not take undue risk? Like, rule number one is don't blow up. And if you're taking so much risk that you're gonna implode, then, like, you won't be here. And that's, again, it's not financial advice. Like, I actually think most people should not be investing in this stuff. I think most people should not be trying to think of it as an investment, because you're probably gonna lose your money. But if you're gonna go down that path, size it appropriately, and it goes back

• 1:12:22Speaker 00

  to this idea of, like, what do you, like, great startups and great early-stage investing and great early-market intuition, and I think, you know, NFTs are very early-market, it's based on some secret. Like, you have to understand something that's true, that other people haven't figured out that's true. And if you don't know what that secret is, then, like, you don't know the secret. And if you don't know that insight, then you probably shouldn't be investing. Like, the poker equivalent of that is, like, if you're, if you look around the table and you don't know who the sucker is, then you're the sucker, right? Like, that's the poker equivalent. And so, you better, you better understand the market better than anybody else and have some deep insight in order to be able to invest and make money.

• 1:13:03Speaker 03

  I think the other component, Ryan, to your question is, when do you invest in these things? So we're sort of very early into NFTs. And as an individual investor, you could, I mean, I understand it's like, it's a crap shoot at this point. Like, what's, are all these NFTs gonna be? Are I gonna pick the right NFTs or not? But you could wait a few years, and then maybe what emerges is sort of like a blue chip layer of sort of NFTs. Like, if you just think about cryptos in general, right? Like, you as an investor on the sideline, you can say, well, I'm gonna invest in Bitcoin and ETH, and like, those can be like, my holdings. And so like, maybe in like, three or four years, the equivalent will emerge in NFTs.

• 1:13:43Speaker 03

  So maybe the answer is, you just hold off for some amount of time until some sort of reliable index or

• 1:13:50Speaker 00

  This is also a good observation, too. Like, if, a lot of times, people really underestimate the size of the market. And so if things work out, the market will likely be 10x to 100x bigger than you could have imagined. And again, it goes back to this idea of patience. It's like, buying Bitcoin in 2012 was easy, holding on for 10 years was hard. Like, the patience is the hard part. Or a lot of times, when you see a lot of activity happening, like, not investing is the hard part, until you really have conviction on a thing. And I suspect if this stuff works, the markets are gonna be much, much, much larger. It's just like the internet. Nobody could have imagined, you go back to the year 2000, and you're like, hey, in 20 years, all of the world's largest companies are gonna be internet companies?

• 1:14:35Speaker 00

  Would have been sort of unthinkable. Like, Apple's gonna be a $3 trillion company when Steve Jobs comes back in the late 90s, and it's like, a failing enterprise that's gonna go bankrupt? Like, these were just like unthinkable statements, right? So patience, I think, is like, the key thing. And patience oriented towards, how do you understand more deeply what's happening with the user, with the business, with the market than anybody else? And only then should you really be thinking about investing? And I think that's usually the failing. Like, most people don't actually deeply understand the things that they're investing in, and therefore, they end up losing money, because they just don't deeply understand what actually makes money in the space.

• 1:15:09Ryan Sean Adams?

  Speaking of patience and testing conviction, I think the alternative, the non-ethereum layer one community is definitely going through that right now, right? These communities like Solana, Cosmos Token, Avalanche, these sorts of things that had a massive run-up. And now, some of them are kind of in existential crisis mode, down bad, as we would say in crypto. And this brings kind of another question I wanted to ask you guys is, the future? Do you think there will be a contender for Ethereum's throne in the future? Will the Ethereum killers make a comeback as they have in previous cycles? And what about this broader question of modular versus monolithic chains?

• 1:15:51Ryan Sean Adams?

  Bankless listeners will know, of course, Ethereum has taken the modular route with scaling via layer twos. There are other ecosystems that have taken kind of a modular route, though a little bit different. Maybe Cosmos is sort of one of those, more modular. And then there's this question of monolithic chains, of which Solana has maybe most famously gone in that direction. So what do you think about all of these questions? Alternative layer ones, ETH killers? Are we going to have? You said that layer ones are more of a network effect game than layer twos. Are you sure about that? So let's dig into this. Avichal, what do you think?

• 1:16:29Speaker 00

  So, okay, so zooming back on modular versus monolithic. You know, I think, Sanjay touched on this earlier, the fundamental trade-off is, do you want real-time composability or not? Like intra-block composability. And the L1s, like Solana, give you this property. And sort of, you know, as soon as you start moving into L2s and you start fragmenting liquidity and execution, you lose that. Now, you retain interoperability. And so there are a lot of use cases that are, you know, you need the interoperability, but you don't need real-time composability. But I think a lot of monolithic people would argue that that real-time composability is like the, one of the killer features of these blockchain architectures. And so why would you give that up? You should really lean into that.

• 1:17:12Speaker 00

  And then the fundamental trade off you have to make is around decentralization. And so, you know, like the monolithic argument, which I actually do think is compelling for certain kinds of use cases is can you be sufficiently decentralized to still be decentralized and censorship resistant even at state level attack kind of censorship resistant while retaining composability? And that's like, that's an interesting design exercise. Like, can you design a blockchain that does that? And I think that that's compelling because I think there are use cases that will want that set of trade offs. And so I think it's really good from an ecosystem perspective for both of these things to exist and the search space to include both. And I think if you step back even to like 100,000 foot view, I mean, like, part of the idea here, right?

• 1:17:52Speaker 00

  Like, the whole reason this space was invented in the first place was that centralization is not healthy. And if we only end up with, if we end up with only Ethereum, I think we have failed as a space because that's not resilient at the ecosystem level. Like Ethereum can be resilient, but what if there are like critical day zero issues with like clients or with the EVM or, you know, like, you know, I just, I worry that if we don't have multiple approaches, that we're not actually as an ecosystem being resilient. And I think that if we think of it as a non-zero thing, which is like, well, they can both be successful, they could both be 100x bigger than they are today. I think that's the right mindset on it. So I'm a huge fan of everybody trying to do both of these things.

• 1:18:37Speaker 00

  Or like the fact that Solana doesn't do EVM, I think that's awesome. Like, I think that's actually really important to have a totally different technology tree that we're exploring, to like, use a, use a video game term, right? Like, I think that's really, really important for this space to survive and be thriving 10 years from now. And I don't think of them as, like, I don't think of Solana as an ETH killer. I think they both coexist and they just solve different problems with different ecosystems. And I think that's awesome. And so our approach has been they make different technical trade offs, applications and ecosystems will emerge that take advantage of those different trade offs and they should both coexist. And they'll just solve different problems and they can both be, they can both be ridiculously successful as ecosystems and coexist.

• 1:19:16Ryan Sean Adams?

  One thesis that Bankless has had for a while, and I'm wondering your take on whether you agree or disagree with this actually, is that if you're a Layer 1, you're sort of competing at the money game, basically, where you want to need your asset to accrue monetary premium, which is basically like, selling block space isn't enough if all of your alternative competitors are also selling valuable block space and creating revenue that way, and also valued as a money, because if you're valued as a money, just the kind of the network effect game, the liquidity game, the economic security game is tilted so much in your favor that you end up winning anyway. What do you think about that? Do you

• 1:19:57Ryan Sean Adams?

  think Layer 1s are all playing for the Bitcoin, Ether, more recently, game of monetary premium? Or do you disagree with that?

• 1:20:05Speaker 00

  Yeah, I disagree with that. I'm curious what Sanjay thinks. But yeah, I disagree with that. And you know, a thought experiment here is like, well, if you look at Amazon's market cap, like, what percentage of Amazon's market cap is due to AWS? Or what percentage of Microsoft's market cap? Like, if Azure were a standalone business, what would that be worth? And I think it turns out that computational networks are extremely valuable at scale. Like, if all of Wall Street and, you know, all of TradFi were running on one platform, that was 100% interoperable with each other, so every bank could immediately calculate how much leverage they have, and, you know, you could know exactly who owns which mortgages and mortgage-backed securities, and that were all on one platform, that platform would be tremendously valuable. Now, this actually goes back, I think, to the L2 question, which is like, what kind of pricing power does that L1 need to have on top of that platform

• 1:20:49Speaker 00

  existing in one place? And I think if you think of it like a country, there are real network effects, and there's real brand value, and there's real, you know, the ability for a new application to launch and acquire a bunch of customers, because the infrastructure exists there, right? There's accounting tools and MPC wallets and, you know, distribution platforms for people to find users. Like, those things are real network effects that create pricing power. And so I think these things, if they're able to be successful, will be computational networks with pricing power on top of it. Like, I don't think they collapse to zero, because I think network effects give you pricing power, the same way that Apple or Facebook have it. So I don't think you have to have, you don't have to become base money. Like, I don't think you have to compete with the US dollar. I don't think you have to compete with Bitcoin. All you need is pricing power, above the cost of running the network. And that can, you know, that looks a little bit more like

• 1:21:33Speaker 00

  a company, right? Like, Apple has pricing power, or Facebook has power because of the network effects. And I think that's actually how these things will eventually operate. And then you'll have cash flow coming off of them. Like, I think these things will extract some premium on top of the cost of running the computation and the cost of the block space, and the token holders can benefit from that.

• 1:21:51Ryan Sean Adams?

  Would you value the Bitcoin network and the Bitcoin asset based on cash flow? Or do you ascribe a kind of a monetary premium to that? Is that like a special case?

• 1:21:59Speaker 00

  Yeah, it's a special case, I think.

• 1:22:00Ryan Sean Adams?

  Why is Bitcoin a special case?

• 1:22:01Speaker 00

  I think that the reason that Bitcoin is a special case is that it behaves a little bit more like a commodity. It's a fixed supply. Like, the idea is for it to move slowly and not evolve, rather than a computational network that needs to sort of evolve as a platform to acquire, keep acquiring developers. Like, Bitcoin is, Ordinals is kind of an elegant hack, but it's not a developer platform. That's really not what Bitcoin is designed for. Bitcoin is designed to be more or less static and evolve very, very slowly. So I think it behaves a lot more like a base money, or a lot more like a gold or a commodity. So I think you just have to value that differently. But I think that's a special case. Like, I think comparing Bitcoin against Ethereum, or, you know, these other computational networks,

• 1:22:42Speaker 00

  I think it sort of, it doesn't really lean into what makes Bitcoin special and unique.

• 1:22:47Ryan Sean Adams?

  That's fascinating. I feel like we could have an entire podcast just kind of debating that, or getting into that discussion a little bit more. I tend to think that the lines are a bit more blurry here between like money versus pricing power of, you know, network effect, and they may, at the end of the day, be one in the same. But, yeah, it's definitely.

• 1:23:05Speaker 00

  Maybe, maybe one way to put it is like, you know, I think there's this very binary approach that people have, which is like, either you have a monetary premium, or you're going to collapse to the price of running the computational network. And I think this is actually a legacy of sort of early Bitcoin maximalism, like circa 2015. And there were some papers that were circulating around that time that people basically framed Ethereum as that. And they were like, look, if you don't have monetary premium, your token will just collapse to the price of running the network, because it's a computational commodity. But I think there's this thing in the middle, which is, if you have cash flow and you have pricing power due to network effects, then you don't have to be base money to get a monetary premium, and you're not going to collapse to the price of running the computational network.

• 1:23:49Speaker 00

  And I think the open question is, how significant is that? Does that mean that you get a 15% margin on top of it? Does that mean you can charge 2X what it costs you to run it? Can you, you know, like, where on that spectrum are you, I think, is the open question? I think Ethereum is a great proof point for this, actually.

• 1:24:02Ryan Sean Adams?

  I think I agree with that. Like, there is a spectrum of moniness and memetic value. And I do think that's more complicated to say something is competing as money or it's not. In reality, probably all assets are competing as a money. I mean, you just think of S and P 500 and stock. Is that competing as a store of value? Well, it sort of is. My house, my property, it sort of is as well. One last question for you, and then we'll kind of draw this to a close. So, restaking, let's get to that really quick. Is it a big deal or is this overhyped? We've had some panels lately about the existential, I guess, threat of staking. And some of the Ethereum researchers actually think restaking poses some existential threats

• 1:24:47Ryan Sean Adams?

  in the same way that MEV is. But let's take those issues separately. So first of all, restaking, is it a big deal or is it overhyped at this point? And then what do you think about the existential risk to underlying blockchains that have restaking on top of them?

• 1:25:03Speaker 03

  Yeah, I mean, I think restaking is a big deal, right? Because it's really hard to bootstrap a trust network. It's just one of the hardest things there is to do. And we've just seen that, that lots of chains have difficulty doing that. And so if you can take the existing trust of Ethereum and reuse that, I think that's a big deal. Now, I maybe have sort of a little bit of a nuanced opinion here, which is that rollups...

• 1:25:35Speaker 03

  So I think maybe what will play out is, I think there's this sort of envisioning of like thousands of protocols maybe using these restaking layers. And I think that it may not actually play out like that. But I think it may be a few really big, important protocols using these restaking layers. So as opposed to thousands of chains being restaked, it might be like 12 really important ones. And so like, what are the things that could really benefit from restaking? A decentralized sequencing layer, a DA layer. Bridging. So there's a few like really, really core use cases. And if you think about these use cases, they're massive, right? Like a scalable DA layer, that's a massive

• 1:26:16Speaker 03

  use case. Scalable sequencer layer that can basically support, you know, thousands of rollups. That's a huge use case. So I'm sort of, I'm super bullish on restaking as a means to provide decentralization, decentralization beyond Ethereum to the broader ecosystem. Do I think it's going to, and it's going to be massively impactful. Do I think there's going to be thousands of protocols running on these restaking layers? That I probably think will not happen.

• 1:26:45Speaker 00

  And we should call out, we're, we're investors in Eigenlayer and Espresso. So the premier restaking protocol and the premier shared sequencer protocol. Just again, back to this idea of like, don't listen to VCs, like VCs, VCs are going to talk their book. And so, you know, always keep that in mind.

• 1:27:00Ryan Sean Adams?

  Well, I imagine you guys are also investors at some level in Ethereum, which brings up the question of existential risk to Ethereum for staking. Avichal, what do you think of that? I know you listened to the, the recent panel with Talak and Drake and.

• 1:27:11Speaker 00

  Yeah. And Tim. And yeah, it was really, really good. That was a great conversation. And Shri Ram did a great job too. And I think, yeah, you know, kind of two thoughts. I agree with Sanjay. You know, I think it's, it's really probably a handful of use cases that are really critical for restaking. Um, you know, there's a question of do those start to get so large that it, you know, that they start to pose some sort of existential risk to Ethereum, like, you know, from that shared security cross? The answer is maybe. I mean, it's kind of like TBD. I think it kind of goes back to, you know, people tend to think either, people tend to have these sort of binary approaches to thinking about this stuff. And I think there's like a messy middle a lot of times. And so I think there's a world where restaking gets big enough that it's interesting and useful, but not so big

• 1:27:52Speaker 00

  that it's existentially a threat. I also think that ecosystems tend to be pretty resilient. And so I suspect if it starts to get into that kind of like existential risk territory, we'll figure it out. Like the Ethereum ecosystem has been remarkably resilient about these kinds of existential risks and like fixing them. And so I have a lot of faith in generally the ecosystem and the researchers and the developers and the community to sort of evolve and figure it out. And so we start getting to that point, I suspect there will be, you know, like, I think, I can't remember if it was Justin or Tim, but somebody was talking about like, how would the protocol need to evolve to account for this potentially? And so, you know, that might be a solution, or there may be things that, that you could do kind of at the protocol level above Ethereum protocol. So I think. If you look at liquid staking tokens, you know, people talk about existential risk if

• 1:28:37Speaker 00

  it's all sort of going through one protocol. And I think there are simple ways to mitigate that, right? There's multiple protocols and you move your ETH between multiple protocols or you do some self staking, right? I think there are ways to like mitigate that. And there's enough well-informed actors kind of at that base layer that basically the right things will happen. So it feels to me like an inevitability. And if we get into sort of existential territory, if we if we're truly, it's so successful and so useful that you get into existential territory, I suspect the ecosystem will figure it out.

• 1:29:02Ryan Sean Adams?

  And for Bankless listeners, if you're newer here, in crypto, we tend to get an existential risk every six months or so that we think is going to be the downfall of Ethereum or crypto in general. And we're still here.

• 1:29:14Speaker 00

  We're still here. Well, that's the thing is that's why I have so much faith in the community. It's just like, it's turned out, there are so many places where it could have died for the last six years, or you know, if you look at Bitcoin 12 years, and it keeps going. And so it's given me a lot of faith in the people, the developer community. Like, it's just so amazing that people figure it out and solve the problems and we keep going.

• 1:29:32Ryan Sean Adams?

  Something else I think you have to understand at a deep level in order to understand the space is that crypto is much more anti-fragile than I think the layman or the person looking at it from above thinks. I remember someone once told me that the reason they're not investing in Bitcoin is because software has bugs. I'm a software engineer. And so what are the chances there's going to be some bug that expands the supply of Bitcoin to like, you know, hundreds of millions rather than 21 million, right? What's interesting about this is as you dig in deeper, you realize, well, that's actually not what secures the Bitcoin network. It's actually a social protocol. Like, there's a layer zero here that would just fork that out and would continue running. And so if that's a reason not to invest, I think that's a mistaken reason. But you see that at the surface level.

• 1:30:14Ryan Sean Adams?

  Well, guys, this has been so much fun. I want to close this out with a question related to the mood in crypto right now. And this is a tweet I put out. And I don't know if you agree with it or disagree. And I'm not entirely sure how I feel about it, but I'll give you a sense for the mood here. Crypto feels lost right now. Right? That idea, crypto is lost right now. And how can it find its way was the question I posed. Do you think crypto is lost this 2023 bear market? And if you do, how can it find its way out? Avichal, what do you think?

• 1:30:48Speaker 00

  I think we know exactly what to do, just like L1s need to scale, we need L2s to work, we need like modular blockchains to work, we need stable coins in DeFi, like, you know, there's $120 billion of stable coins and 40 billion sitting in TVL and ETH protocols. That's about the 20th largest bank in the United States, which is very real. You know, I tweeted a while ago that eBay at IPO was doing about $340 million of GMV. NFTs do more than that today.

• 1:31:16Speaker 03

  GMV is what?

• 1:31:17Speaker 00

  Gross merchandise volume, so like total value of the goods that they'd sold. So eBay 96 when it IPO'd had done about 340 million and, you know, Bitcoin ordinals probably do more than that today in the depths of the bear market. And so like sentiment is very, very low. And so it feels, it can feel bad. But when I look at the numbers, it's just, it's actually, it's like working. I mean, it's amazing. If you go back to 2017, there's all of this stuff that was theoretical, like, hey, one day Ethereum's gonna move to proof of stake and, and, you know, we'll have L2s and we'll have stable coins and we'll have DeFi and like, we'll have these brands coming in and like, we might have an ETF and like all this stuff. And it was all theoretical. ZK, you know, ZK proofs will work one day and like, you know, all this stuff. MPC will happen one day and like, we'll have institutional

• 1:32:02Speaker 00

  custody and like yada, yada, right? And then like governments will be pro crypto. And all of that stuff was theoretical. And basically five or six years later, it's basically all true. Which just goes back to this adage of like, people way overestimate what's possible in two years and they dramatically underestimate what's possible in 10 years. And so like roughly halfway through that 10 year cycle, we're like basically where you'd expect, which is all the tech is now real. And so now it's just a question of like, how quickly does it get to people? So I definitely feel like it's a, we're down on sentiment. But like on fundamentals, it's, I've never been more optimistic. It's just like everything that was vaporware five years ago is actually real now.

• 1:32:36Speaker 03

  Yeah, I actually on Twitter saw this video, it was like with Jeff Bezos and he was talking about the 2000.com bust. And it was like, you know, I think, don't quote me on the numbers, but I think it was like Amazon stock went from like 131 to 6. But then he was there like sitting looking at his metrics. And I was like, everything was up, right?

• 1:32:56Speaker 00

  He's scratching his head.

• 1:32:58Speaker 03

  Yeah. And, you know, it's the same thing. I mean, he's just, look at the tremendous progress that's happened in crypto, like just even on the ZK side, right? It was like a year ago, nobody thought like ZK chains were like four years away. And now we have ZK chains and, you know. We have now frameworks for ZK interoperability and the OP stack. And so we just have so much progress that's been made that at least for me, it's hard to be bearish long term.

• 1:33:21Ryan Sean Adams?

  People don't understand how fundamentally different this bear market is than 2019 and 2020, where I would argue we had much more of an existential, where's our product market fit type of conversation than we have now. Guys, this has been a lot of fun. I think we got to the answer this question of what you guys are convicted on by exploring these different questions in your thesis for each. So thank you so much for joining us on Bankless. It's been a lot of fun.

• 1:33:47Speaker 03

  Thanks for having us. Thanks, Ryan.

• 1:33:49Ryan Sean Adams?

  Action items for you, Bankless Nation. There's a post that we refer to in the episode. It's called "Understanding Roll-Up Value Accrual", written by one of our guests, Sanjay. Also, encourage you to read the Electric Capital Developer Report. They put this out every year. It's always a fantastic read. The builders keep building, folks. That's what the bottom line of that developer report is. It continues to go up. Risks and disclaimers. Got to end with this. Another time, I need to tell you, none of this has been financial advice. Never is on Bankless. Crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.