27 - DeFi in the Eth2 Metropolis | Haseeb Qureshi

Episode: #27 August 24, 2020 ----- Tools from our sponsors to go bankless: Loopring https://bankless.cc/loopring-VIP - trade & pay on Ethereum w/ near-0 gas fees! (use "Bankless" for VIP4 status & trades at 6bps!) Monolith https://bankless.cc/3e2TG4E - holy grail of bankless Visa cards Aave https://bankless.cc/aave - money lego for lending & borrowing Rocket Dollar https://bankless.cc/2C57MVW - tax shelter your crypto ($50 w/ "BANKLESS https://bankless.cc/2C57MVW") (Read this on IRAs https://bankless.substack.com/p/tax-shelter-your-crypto-in-an-ira and 401ks) https://bankless.substack.com/p/how-to-setup-a-crypto-401k-for-your ---- Haseeb Qureshi likes the question: what did I miss? That's how he improves his mental model for investing in crypto. That's how he sharpens his mind. That's how this former Airbnb developer and professional poker play became a notable investor at DragonFly Capital. And that's where we start the conversation. It leads us into a discussion on Uniswap and automated market makers, and why he thinks Uniswap will be unbundled. Which leads into Ethereum scaling, DeFi in Eth2, and an articulation of the clearest analogy for DeFi scalability in Etheruem that we've ever heard. Use this episode to sharpen your crypto investing mind. We cover: The big thing Haseeb missed Explain Uniswap like I'm 5 Why AMMs are eating orderbook exchanges The Unbundling of Uniswap Smart Automated Market Makers (SAMMs!) DeFi in Eth2: Cities, suburbs, and farms Economic load balancing across shards Layer 2 as the shopping malls The Shard for crypto banks What about the ETH killers? Sorry boys... ETH ain't money Haseeb's High conviction Bets Join us next Monday for a fresh episode! ----- Resources discussed: What explains the rise of AMMs https://medium.com/dragonfly-research/what-explains-the-rise-of-amms-7d008af1c399? - Article by Haseeb Unbundling Uniswap https://medium.com/dragonfly-research/unbundling-uniswap-the-future-of-on-chain-market-making-1c7d6948d570 - New Article by Haseeb DeFi in Eth2: Cities, suburbs, farms https://bankless.substack.com/p/defi-in-eth2-cities-suburbs-farms - Article by Haseeb ETH must be money episode with Charlie Noyes http://podcast.banklesshq.com/26-eth-has-to-be-money-charlie-noyes More on Automated Market Makers: Rise of the Liquidity Robots https://bankless.substack.com/p/rise-of-the-liquidity-robots- - Bankless Article Going Bankless with Uniswap https://bankless.substack.com/p/10-going-bankless-with-uniswap-caleb - Podcast Epsiode Uniswap is Infrastructure https://bankless.substack.com/p/uniswap-is-infrastructure - Bankless Article When DeFi meets Rollup https://bankless.substack.com/p/when-defi-meets-rollup - Bankless Article on Rollups ----- Episode Actions: Read DeFi in Eth2: Cities, suburbs, farms https://bankless.substack.com/p/defi-in-eth2-cities-suburbs-farms Read What explains the rise of AMMs? https://medium.com/dragonfly-research/what-explains-the-rise-of-amms-7d008af1c399 Read Unbundling Uniswap https://medium.com/dragonfly-research/unbundling-uniswap-the-future-of-on-chain-market-making-1c7d6948d570 Give Bankless a 5 star review on iTunes! ----- Subscribe to podcast on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 | Spotify https://open.spotify.com/show/41TNnXSv5ExcQSzEGLlGhy | YouTube https://www.youtube.com/c/bankless | RSS Feed http://podcast.banklesshq.com/ Leave a review on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Watch Bankless shows and tutorials on YouTube https://www.youtube.com/c/bankless Visit official Bankless website http://banklesshq.com/ for resources Follow Bankless on Twitter https://twitter.com/BanklessHQ Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState ----- Not financial or tax advice. This podcast is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Do your own research.

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

• 0:13Ryan 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, and how to front-end the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, how are you doing today?

• 0:31David Hoffman?

  I'm doing absolutely fantastic, Ryan. We had Haseeb Qureshi on the Bankless podcast. I am the son of an urban planner. My dad's an urban planner, and Haseeb reminds me of an urban planner. And so we get Haseeb on, who wrote this fantastic article about Ethereum 2 and how the landscape of Ethereum 2.0 will kind of stratify and separate into, you know, a downtown Manhattan area, an urban, urban and suburban lands, and then also farmlands. And it was a really great piece that kind of triggered our interest in getting Haseeb on. We also talked a ton about automated market makers, Uniswap, Curve, Balancer, and how these applications, these systems, really are at the heart of crypto

• 1:16David Hoffman?

  and why they are so revolutionary and different, and what they really have to offer. Ryan, what was your favorite part about this episode?

• 1:22Ryan Sean Adams?

  You know what? I don't know if I liked the first half or the second half better, because they were both awesome, right? So in the first half, we talked about automated market makers. And if it's never clicked in for you, like what Uniswap actually is and why it's powerful and why it's grown to like, you know, 30 billion in annualized volume over the past few months, I think this will make it clear. I think you'll get a clearer understanding based on the way Haseeb explains it. Also, a lot of people do not have a vision of what ETH 2 looks like. They know abstractly that it's coming and it's this thing for Ethereum. But Haseeb's analogy, where we talk about the cities and the suburbs and the farms,

• 2:02Ryan Sean Adams?

  like nails it, at least for me. I have a very clear vision of what ETH 2 with 64 different main chain shards will look like. And that's really exciting. I tend to think, probably like you, David, like I think in analogy, and I think in like kind of imagery and pictures. And this just paints the pictures on both automated market makers and ETH 2. Haseeb is just a fantastic communicator.

• 2:27David Hoffman?

  And then we finished off the conversation with an is ETH money or is it not money conversation, which is always a good conversation to have because getting people's varying perspective on that answer is always how we come to the true answer of whether ETH is going to be money or not, or what that even means.

• 2:43Ryan Sean Adams?

  Absolutely. Yeah, it was a good take by Haseeb there. And I actually probably agree with many of the things that he said in the way, in the language he used, more than disagree. So it's definitely an interesting conversation. David, before we get into the interview, we should talk about our sponsors. The first sponsor I want to tell you about is Aave. Aave is a DeFi protocol that you absolutely have to check out. What can you do with it? You can lend, you can borrow, banklessly, all on Ethereum. So you could do things like lend DAI to the protocol. It will magically transform that DAI into an interest-bearing DAI account, not just DAI, all sorts of crypto assets on Ethereum. You can also borrow against it. Aave has been climbing up the leaderboard as well, and

• 3:28Ryan Sean Adams?

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• 4:05David Hoffman?

  For those of you that have been transacting on Ethereum, you've noticed that the gas prices have just been insanely high. You know, 60 Gua on a good day, and sometimes all the way up to 100 Gua, which is really reducing the amount of activities that is really feasible to be able to do on Ethereum. This is where our newest sponsor, Loopring, comes in. Loopring is a ZK rollup scaling protocol for Ethereum for both trading and for payments. ZK rollups, that stands for zero knowledge rollups. It's basically cryptographic magic. It allows you to combine activity and transactions into one single bit of information, which means that massive amounts of transactions can be bundled into a very small chunk of information, which reduces the gas per transaction.

• 4:50David Hoffman?

  At loopring.io, you can find a ZK rollups based exchange and also a payment mechanism, all with the same security guarantees of the Ethereum L1 blockchain, which is really important. So Loopring and ZK rollups allows you to scale up transactions, tradings, payments into thousands and thousands of transactions per second, but with the same security guarantees of the main Ethereum blockchain, which is just incredible. In September, Loopring is releasing the Loopring Wallet. This will be a mobile smart contract wallet with ZK rollups tucked in natively. I'm really excited for how this is going to impact the adoption of Ethereum. The rest of the world will be able to experience Venmo type transactions,

• 5:32David Hoffman?

  but with the same amount of trustlessness and security of the decentralized future ahead of us. So if you're a trader that's being eaten alive by gas fees, visit loopring.io to get on boarded into Ethereum's cheapest and fastest exchange. All it requires is an Ethereum address and you can trade on a high performance order book, completely gas free and transferring Ether and ERC 20 tokens on the platform is completely free. If you visit loopring.io, enter the code BANKLESS in order to get the highest VIP tier for six months. So check that out. There's a link in the show notes. Visit loopring.io, enter code BANKLESS. All right, guys, let's go ahead and get right into the interview with Haseeb Qureshi of Dragonfly Capital.

• 6:23David Hoffman?

  Bankless Nation, we are so excited to have on the podcast Haseeb Qureshi. He is a partner at Dragonfly Capital, formerly worked at Metastable, another crypto fund. He was a dev formerly at Airbnb, so he's got some technical background. He also has some pro poker playing background. I've heard a ton of intros to Haseeb and he's got a very interesting eclectic resume and the way he got into this space was interesting as well. Haseeb, you are one of my favorite thinkers and investors in this space. Welcome to the Bankless Podcast, sir.

• 6:57Speaker 02

  Thank you and thank you for having me.

• 7:00Ryan Sean Adams?

  You know what? We're not going to do this like we do typical podcast episodes and do kind of intro and everything like that. We're going to get right into the meat here. You had a really fascinating tweet, I think, it might have been a month ago, six weeks ago, and it went like this. It was, "What's the big intellectual miss you've had in crypto within the last year?" And then, you talked about yours, which was missing decentralized exchanges, in particular, missing automated market makers. I want to get into automated market makers in just a minute, and like, maybe explain that, run through it, but can you talk about why you tweeted that?

• 7:40Ryan Sean Adams?

  Why is it important to talk about the intellectual misses that we've had in crypto as investors?

• 7:47Speaker 02

  Yeah. I think crypto is such a weird industry in which to be investing, because it just evolves so fucking quickly, that as an investor, you need to be changing your mind every year or two about your fundamental understanding of how this space works. Like, there are so many things that I believed in 2017, that I didn't believe in 2015, and there's so many things I believe today that I didn't believe in 2017, and I'm sure that two years from now, many of my assumptions and mental models are also going to get invalidated. So you have to constantly be willing to change your mind, and to listen to what the industry is telling you. And so, anybody I know who's thinking very deeply about the space, who's coming up with theses and mental models of

• 8:32Speaker 02

  how these things work, some of that stuff is going to be wrong, and the worst mistake you can make is not to notice that your mind has changed. That, I think, is the biggest possible error you can make in crypto investing. Because it's one thing to be wrong. Everybody is going to be wrong about a lot of stuff. But the biggest thing is to not learn from the fact that, "Hey, you incorrectly predicted how this thing was going to turn out," and kind of do a little bit of intellectual postmortem on yourself, right? Of like, "What did you miss? Why did you get that one wrong?" For me, AMMs were the big miss for me. I was a big bear on DEXs in 2017. And my whole theory on why DEXs were not going to work was beyond the obvious stuff of just like performance and fees and blah, blah, blah.

• 9:17Speaker 02

  The big, the big thesis that I had about why DEXs weren't going to work was because of the huge amount of adverse selection on DEXs. So if you look, you know, you remember like Ether Delta and Fort Delta back in the day, the, the assets that were getting traded on these exchanges, most of the trading volume was in really low quality assets. So it was in the really crappy stuff that basically would never get listed on a Binance or on a Coinbase or whatever.

• 9:42Ryan Sean Adams?

  It was all the lemons, basically.

• 9:43Speaker 02

  Exactly, exactly.

• 9:44David Hoffman?

  A long tail of assets.

• 9:46Speaker 02

  It was a long tail of like obvious securities or like kind of shady tokens or, you know, you know, like spank coin and stuff like that. Like that was the kind of thing that was really thriving on Ether Delta and the other decentralized exchanges. And it, it seemed very difficult for it to break out of that loop, right? Like that, it, it's like, okay, great. This, this exchange is going to get known for listing and trading the stuff that nobody else is willing to trade. That is not a strong, like that's obviously not a strong place from which to build a really significant market. And so I basically wrote off DEXs and I remember having a lot of conversations with people back in 2017 who were very excited about ZeroX and, you know, on-chain exchanges and iDEX and all this stuff.

• 10:30Speaker 02

  And I basically wrote off the entire category because I thought this is just a fundamental problem that isn't going to go away. If anything is really valuable, it's going to get listed on a centralized exchange and then people are going to trade it there and liquidity begets liquidity and liquidity is a network effect, right? Like, I mean, all these really obvious arguments. And I, I missed what AMMs could do to change that equation. And that's been, that's been a real educational process for me is trying to, trying to sort of do the five whys excavation on why did AMMs win in DeFi?

• 11:01Ryan Sean Adams?

  All right, so let's dig into that. So I'll confess, like, I missed it, too. Like, I saw Uniswap, and I saw it as an interesting project. But at the time, I would not have predicted the success and the rapid success that it has seen. But you've written an article about this that kind of explains the rise of automated market makers. And for folks that have listened to the Bankless Podcast for a while, we'll include some other episodes where we explain automated market makers in the show notes, what those are, the Uniswaps of the world. But I've actually heard people in the Bankless community tell me, Haseeb, that they didn't truly understand AMMs until they read your article. Like, you articulated it in a fantastic, simple way.

• 11:44Ryan Sean Adams?

  Maybe you could articulate it for us here. Like, what the heck are AMMs? We've called them money robots. We've called them, you know, constant function market makers. But like, what are they? Explain it like I'm five.

• 12:02Speaker 02

  Explain it like you're five. Okay. Well, I don't think five-year-olds know what market makers are, so that might be a little bit hard. But I'll explain it. I'll explain it like you're, you know, like you're a financial newbie, but you know some of the basics.

• 12:15Ryan Sean Adams?

  Good deal. So, sorry, five-year-olds.

• 12:17Speaker 02

  Yeah. Five-year-olds, now you're trying to drop off. Maybe you'll rejoin us in 10 minutes. So, basically, an AMM... And so when I say an AMM, I'm realizing you're going to be describing me this way because it's the easiest to explain and to understand. You know, so every market maker, their job is to provide liquidity to a market. Basically, they are willing to buy or sell an asset, whatever it is that you want, and they're always willing to put you a price, or usually always willing to put you a price. And the critical question for any market maker is how do they price those assets? So let's say I've got, you know, the example that I give in the article is let's say that I've got some apples and I've got some bananas. And that's the currency of our weird little fruitarian universe.

• 13:01Speaker 02

  And I'm willing to buy apples for bananas, or I'm willing to buy apples, or willing to buy bananas for apples. Okay? And what I need to decide is what is the exchange rate that I'm going to offer you based on how much you want and what is in my inventory? So there are lots of different ways that you can do this, right? Like you could, you know, if you're a real market maker, what real market makers do is they like, look at the big fruit exchanges and they look at like, what's the exchange rate? And they try to figure out, you know, can I, if I, if I buy this from you, can I go arbitrage it on the real exchange? What's the liquidity? What's the volatility? All this stuff they're trying to figure out, these like hundred different dimensions that go into some big model that decide how they quote a price to an end user, right?

• 13:43Speaker 02

  This, this is what market making is, and it happens every single day on exchanges all over the world in crypto and outside of crypto. It's the oldest thing in the world. So AMMs are a way to create a completely, like you said, a robotic, algorithmic market maker that lives entirely on chain. Basically meaning that it has a very simple formula that decides how it buys and how it sells, all on chain. And all of its inventory, meaning all of the apples and bananas that it owns, so that it can buy and sell to people. All of that also lives on chain, except it's not apples and bananas, it's people, it's to see whatever. How does Uniswap actually work? And the answer is probably a lot easier to read and to see a visual metaphor for this,

• 14:28Speaker 02

  rather than try to hear it explained through audio. But just for the sake of completeness, what Uniswap uses is it uses a pricing function called the constant product pricing function. And basically it means this, so I, I have some apples and I have some bananas. When you multiply those two together, the number of apples multiplied by the number of bananas, let's say I have 50 apples and 50 bananas. Or actually, let's make it easy, let's make it 10 and 10. Let's say I have 10 apples and I have 10 bananas. Multiply those two together, you get 100, right? And so the rule in Uniswap is that the, the product of my apples and my bananas, no matter whether I'm buying or changing the amount of apples versus bananas in inventory, the product of those two numbers must always be equal to the same value. So it started with 100, it has to always be 100.

• 15:13Speaker 02

  So if I, let's say that I then, uh, let's say that I then sell five bananas. So I'm gonna have five bananas less, right? If I have five bananas, I need to figure out how many apples I'm gonna charge for those bananas. Well, we, we said the rule is that it needs to will equal 100. So 5 times x needs to equal 100. Solve for that. The answer is 20. 5 times 20 equals 100. So I need 20 bananas, which means I need to charge, uh, because I originally had 10 bananas. I need to charge another 10 bananas to sell you five apples. Okay. That was a mouthful. Probably hard to follow that verbally, but if you read the article, it's easier to understand visually. And so basically what that results in is most of the time Uniswap, given this very simple pricing curve,

• 15:56Speaker 02

  if people are buying relatively small amounts, is going to give you a pretty good price. But the more that somebody buys and the more lopsided the market maker's inventory becomes, the worse and worse price it's going to give you. So that's how Uniswap works in a nutshell, and it sort of automatically tries to rebalance itself by basically doing what I just said, right? Like if it, if it, if its inventory gets too imbalanced, then it starts quoting more and more ridiculous prices going one way and more and more generous prices going back towards equilibrium. So it's almost like this like rubber band is pulling Uniswap or pulling this automated market maker back towards the equilibrium of trying to have balanced bananas and apples in the pool, assuming that the real exchange rate of bananas and apples is one to one. So that's Uniswap in a nutshell.

• 16:41Speaker 02

  There's way more that we could talk about, but like honestly, it's, it's, uh, it's not the easiest thing to understand from, uh, listening to it from somebody just talking to you.

• 16:50Ryan Sean Adams?

  But that provides me a way to buy one apple without, you know, the thing I'm trying to avoid, which is a bad price, you know, market makers would call this slippage, but it does not provide me a way to buy, say, 50. Because if I buy 50, what's going to happen to me?

• 17:07Speaker 02

  So if you buy 50, well, so the example I amended it to, there are 10 apples in inventory, right? So if you want to buy all 10 apples, you want to sell out the market maker. One of the properties of Uniswap, of course, is that, uh, it must always be willing to quote you a price. So if I want to, so if you just do the math, right? Like so 10 times 10 is supposed to equal 100. If I want all 10 of the apples, then 0 times x has to equal 100. So then you have to divide by zero. You basically get to divide by zero, which means that literally it's charging infinite bananas in order to get, in order to. So you, you cannot buy all of the inventory in Uniswap. That's one of the rules of Uniswap is that as you start buying up more and more and more and more of its inventory, as the inventory gets arbitrarily small, the price gets arbitrarily high.

• 17:52Speaker 02

  And so, you know, if you want to buy, uh, you know, 9.9 apples, like Uniswap is going to charge you some fucking absurd price. You can charge like, you know, 10,000 bananas in order to buy 9.9 apples or something, you know, in order to make the math work.

• 18:06David Hoffman?

  And some people may think this is a flaw, right? Because, you know, apples will never really cost infinity dollars. That will never, that's not a realistic scenario. However, it is important for this primitive, which is Uniswap, to be able to price things in such a wide, uh, such a wide discrepancy. And, and it's largely also just a function of needing to be able to count for like the different, uh, uh, decimal places or, or supplies of tokens that are on Ethereum where I can go mint, you know, 10 trillion tokens and then supply them for, for one ether. And, you know, it looks like that that market is completely, uh, off balance, but that's

• 18:49David Hoffman?

  just because of a function of the, the decimal place for that particular unit. And so it's actually really important that this, uh, the automated market maker model can price things out to infinity because it allows for any token to be able to fit somewhere in that curve. It doesn't really matter what the decimal, where the decimal was placed or where the supply was initially created.

• 19:12Speaker 02

  Yes, absolutely. Now that said, uh, since the invention of Uniswap, there's been an explosion in different kinds of AMMs that use different kinds of curves. So, you know, the, the AMM, uh, the, the Uniswap curve is this X times Y equals K. So the two acids multiplied together equals a fixed constant. This is called the constant product pricing curve. But there's a, but there's a bunch of other ones that people have come up with. So there's one called CURV, which is now this. Mixture of constant product and constant sum, which is better for stablecoins or for mean reverting assets. There's one, you know, the balancer uses kind of arbitrary, sort of kind of constant product, but across arbitrarily many

• 19:55Speaker 02

  or pairs, so not just, not just sort of two assets together. And then there's foundation, and actually, foundation uses a variant of Uniswap that actually can run out of inventory. Because the foundation, what it does is it tries to sell limited edition goods. And if you're, if you're selling goods, like, let's say I'm selling like t-shirts, right? And I'm like signing each of these t-shirts or whatever. Well, I, I actually do want all of the inventory to get drained at some point. Like, I want, I want to sell out. Like, that's kind of the point, if you're selling assets. So for, you know, if I'm, if I'm selling apples and bananas, maybe I want to make sure the, the AMM never runs out. But for other AMMs, actually, maybe it's completely reasonable that the AMM should at some point run out of inventory. Because when it does, you know, what happens is just, okay, well, all that's left is profits.

• 20:38Speaker 02

  That can be, that can be taken, you know, the fees that were generated by the pool can be taken out. And then other people can come in and recapitalize the pool. So there's, there's no issue in principle with a, with, with an AMM running out of inventory. But it, it just so happens that, that, you know, most of the AMMs today, balancer, Uniswap and Curve, they, they are designed to never run out of inventory.

• 21:03David Hoffman?

  So one of the, there's a few things about the AMM model that formalizes different market participants. And I see the efficiency of the AMM model comes from this formalization. So in, in the old world, in the world of order-based exchanges, or just the order book model, you have market makers and you have traders and they're kind of just lumped together. Like, they have different behaviors, but they're really, that's the same participant. They're, they're all looking at the same exchanges, they're all doing the same thing. In the AMM model, they have been placed into two different buckets. And that's actually where a large amount of efficiency comes. Because the market makers can, their job is much more simple, which is to simply supply,

• 21:48David Hoffman?

  deposit assets into a contract. Where on the order book model, the market makers have to actually do things. They have to actually engage in activities, right? And that actually requires like actions over and over and over again. And when the AMM model has just relegated this to a money robot, right? Where you just deposit your money and then the algorithm takes care of that for you. And what really is innovative about this is that it turns going from a peer to peer model, which we like, we like the terms peer to peer, but in terms of exchange, that's actually relatively slow. And it goes from, it goes to a peer to contract model.

• 22:31David Hoffman?

  Are you, I'm assuming you're familiar with the term peer to contract?

• 22:35Speaker 02

  Yes.

• 22:35David Hoffman?

  Yeah, can you go into the peer to contract model, what that is? And then just the implications behind a peer to contract model versus a peer to peer model?

• 22:43Speaker 02

  So in a peer to peer model, the idea is that, you know, you can sort of imagine like, let's say there are 10,000 people who all want to trade, right? And in order for those 10,000 people to all want to trade, each of them needs to get mashed up on the other side. You can imagine left side and right side of your imaginary wallpaper here. 10,000 people on the left side. If you're doing a peer to peer model, you need those 10,000 people to somehow get mashed up on the right side and to get this big web of connections all going together to match them up with people who are taking the opposite side of the trade. And while in principle, like that makes sense, and that's how most exchanges in the real world work and how most price discovery works, trying to translate that into an on-chain environment

• 23:25Speaker 02

  basically means lots and lots and lots of transactions, lots of gas costs, lots of people having to, you know, post orders and take orders and fill orders. And there's, there's an enormous amount of complexity that has to be foisted on chain. And it wasn't obvious three years ago that that was going to be a big constraint. But in the pure contract model, it looks a little bit different. So you have the 10,000 traders on the left side, but on the right side, you just have a single contract. And everybody on the left side is just talking to this single contract. You can imagine this like big web of like a thousand threads all pointing to one node. And that, and that's unanimous or a curve or a balancer. And in this world, it's one, it's much more transaction and gas efficient.

• 24:10Speaker 02

  There are many fewer things that need to happen on chain when everybody is just talking to a single contract. And the second thing, of course, is that the liquidity, meaning like the amount of capital that actually needs to get locked up in the orders and put in different places. It's much easier for all that to get aggregated in one place. And the network effect of, hey, here's where all the money is, and therefore here's where all of the liquidity for trading is. It's very easy for that to not get splintered into a bunch of different places. So you don't have to worry about, oh, well, you know, am I going to find this token on Ether Delta or on IDEX or on Radar Relay or on this thing or that thing? Instead, it's like, look, Uniswap is just like the natural point of convergence for all of the liquidity that wants to coagulate

• 24:55Speaker 02

  onto ETH, USDC, or you know, whatever are the big markets in crypto. Uniswap has sort of served as this natural shelling point for all of that. It's the, and the other thing that I think is also very different about providing liquidity to Uniswap versus providing liquidity in a peer-to-peer model is that, of course, providing liquidity in a peer-to-peer model on an order book.

• 25:17Speaker 02

  The peers need to themselves be very active in putting up that liquidity. The makers, the people who are actually putting up the orders, they need to be constantly deciding, okay, what exchange am I going to put the order on? When am I going to put it on? How am I going? It's a very active process to do that. Market makers generally charge money for the obligation to provide liquidity on your platform. And if it's not worth it to them, if it's not profitable for them to do so, then they're going to charge you a lot of money because it's not in their interest to just do it anyway. Whereas with Uniswap, it's incredibly easy. You just click one button, you send a transaction and boom, now you're providing capital to the market.

• 25:55Speaker 02

  And this sort of one-click, set it and forget it experience that Uniswap has created, that has been, I think, a big boon to making the Uniswap market more and more liquid and thus more and more competitive with other alternatives for, for trading some of these assets.

• 26:11David Hoffman?

  So I think we've seen Uniswap just become the shelling point of liquidity, especially over the last like month or so, where Uniswap volumes have started to really get competitive with centralized exchange volumes, right? And so. Where does the role, in a world where the AMM model really just takes over and it kind of positions itself as kind of a center point of Ethereum and liquidity on Ethereum, what is left for the world of the order book model? Does the order book model still provide something useful? Or is it kind of just inferior in every way?

• 26:47Speaker 02

  So I don't think the order book model is dead. I believe personally that the dominance of AMMs has really resulted from the extraordinary constraints of Ethereum 1.0. Basically, if you're constrained to highly expensive transactions, not a lot of computation that you can do per unit time, and all the other things that we understand about what makes Ethereum fairly difficult, right? Being a maker on Ethereum, if you're actually posting transactions on chain continually to an order book, that is just very expensive and it doesn't really work well for the model that Ethereum uses.

• 27:28Speaker 02

  And so, of course, most of the order book exchanges that we see today are using off-chain order books that then get only settlement really happens on chain. So DYDX, IDEX, most of the order book exchanges that we see today, they actually host their order books off-chain. So there are a couple of things that I think are important to understand about why order books have not been successful on Ethereum and what would make them successful. So the first thing is that right now, order books are too expensive. And if they're too expensive and you can basically get lower trading fees and better liquidity through AMMs, then people are going to, they're going to do that, which is unsurprising in some sense, right?

• 28:10Speaker 02

  Like an AMM is almost like the OTC desk experience. Basically says like, look, instead of us going on an exchange and having all these complicated moving parts of orders and limit orders and these various different kinds of trading types, which are very difficult to implement, you have to worry about gas costs, you have to worry about settlement time, you have to worry about trusting the coordinator, all that stuff. The coordinator itself, like they might be operating an exchange, or is that illegal? What do they need to do in order to protect themselves? There's all this complexity that goes into running an order book exchange on Ethereum today. And if you're willing to do all that shit, why not just run a centralized exchange and like make your life a lot easier, right? So to that end, I think order book exchanges... Have a much more difficult time competing today. And so Uniswap kind of just looks like an OTC desk.

• 28:55Speaker 02

  It's basically like, hey, come here, tell me what you want. I'll fill it using using some set of rules. Right. And it's unsurprising that the OTC desk experience is simpler and it's easier to implement. And there's less moving parts and it works better in a very constrained environment. But there are two things I think that will change that. One is that there's going to be, of course, more scaling solutions on top of Ethereum. So talking about layer twos, you talk about, you know, interoperability solutions like Okadot or Cosmos, and then of course, there are other layer ones that are, and I'm sure we'll get to talking about this, other layer ones that want to, you know, sort of build bridges with Ethereum and take on some of the Ethereum overflow traffic. So that's, so that's one thing is that the scalability constraint is going to at some point get ameliorated.

• 29:40Speaker 02

  But the second thing is that Uniswap works very well for certain assets and works less well for other assets. So what do I mean by that? So one is that derivatives, which I think are a big thing that Uniswap, or that trading demand in crypto is going to increase for. Already in centralized exchanges, derivatives account for the vast majority of the trading volume rather than spot. Uniswap works reasonably well for spot trading, but it's not particularly well suited for trading derivatives. And a large part of the reason for that is that derivatives, because of the fact that they're often traded with very high leverage, it's, they're extremely sensitive to relatively small changes in the, in the price and they need fast liquidations. Right?

• 30:25Speaker 02

  Your ability to get highly leveraged is contingent on your ability to unwind a very highly leveraged position in a time of high volatility. That's what constrains you from being able to offer 2X leverage to 5X leverage to 10X leverage to 50X leverage to, you know, bit max 100X leverage.

• 30:43Speaker 02

  Nothing on-chain today can offer 100x leverage. It's just absolutely impossible because the amount of capital you need to liquidate would be way, way too much for you to do in a reasonable amount of time on Ethereum today. And that's one of the reasons why, you know, that kind of thing would not work through a pure AMM model. AMMs just aren't sensitive enough to quick changes in price and volatility. Order books are designed exactly for this, right? The ability to cancel orders, move orders around, to totally reshape the shape of liquidity in a market. That's why order books exist the way that they do, right? Like, if you look at an order book and you see the buy, the shape of the buys and the shape of the sells, that's a price curve.

• 31:25Speaker 02

  But it's a price curve that's rapidly changing in real time, responding to real-time volatility. That is very important if volatility is really, really big and leverage is really, really high. But in a world which is very low leverage, such as if you're trading stablecoins or if you're trading, you know, ETH, SEC, spot market, then the trading, trading just, you know, through an AMM for spot works totally fine. So I think these two variables are the biggest things that are going to drive more demand for order books in crypto trading. But it's very clear that that stuff is probably not going to work today on Ethereum 1.0, given how incredibly congested Ethereum 1.0 is.

• 32:04David Hoffman?

  Yeah, we definitely want to get to the topic of congestion on Ethereum 1.0 and charting and scaling and all that. But to tie off this AMM conversation, is the order book, the order books in AMMs are kind of like opposite ends of the spectrum, but is there like a room or a potential for these two, these two mechanisms to have like some sort of elegant marriage where there is an order book that is based on top of an AMM? Is that a reasonable thing or is this more like oil and water?

• 32:36Speaker 02

  So it's possible in principle, right? You can imagine in AMM that, you know, AMMs, you often see this smooth price curve, right? You can imagine an AMM where in the middle of this price curve, somebody decides, hey, you know what? I'm gonna set a limit order and I'm willing to buy, you know, 5,000 USDC at this exact price of ETH, right? And you can imagine if you, if you sort of juxtapose that onto the curve of the AMM, what you would see is in fact, the AMM goes up to that point of that limit order. And then suddenly there's a flat line where, you know, basically any trading volume is eating into that limit order. And then the curve continues after the limit order is eaten out. Does that make sense?

• 33:18Speaker 02

  You guys seeing the sort of, the, it's almost like the sickle shaped thing that goes back to being curved at the end of that limit order. You could do that. That totally works and makes sense in principle as being a, a way to intersperse limit orders with an AMM. Now, the question of course is like, okay, well, so on the curved part of the trading volume, the liquidity providers to the AMM are getting the fees, right? On the flat parts, the people who are providing the limit orders get the fees, right? Because they're posting orders basically to an order book change. And so you can imagine like having a, an order book slash AMM hybrid, that some parts of it are curved, but in between there are these like jagged parts that are the limit orders. And anything in between is getting filled by, by AMMs.

• 34:02Speaker 02

  So it sounds kind of cool, but I personally don't believe that this is a stable equilibrium. And why do I say that? I say that because I think what would end up happening is that the limit orders would all center around the, the, they would, they basically all center around the, the true price, right? So let's say the true price of ETH, USDC, just for simplicity, let's say it's a hundred dollars, right? And that's the true price. And so basically a bunch of people would be willing to put limit orders at a hundred dollars. And so you'd get this really flat portion of the curve right at a hundred dollars, right? This is big, long, flat line, a bunch of people are willing to buy and sell and take a 0.3% fee. But then, once all of this liquidity gets eaten up and people want to keep buying past this point, well, then the people with the limit orders are kind of like, wait, wait, hold on. If you guys, if you're buying past that, something might have moved in the price, right?

• 34:47Speaker 02

  Like something weird is going on. Somebody is buying tons and tons and tons of, of ETH, thinking that somehow it's like super cheap. That must mean that. Ethos pumping out in the real world and that suddenly, you know, I was mispricing myself. And so what's going to happen is that when you start eating into the Uniswap curve and you're no longer in limit order land, what's happening is that you're just getting pure and permanent loss, right? Only the trading all around the mid-market price is happening through limit orders. And the trading farther up the curve is just like big volatility moves that are basically screwing over the Uniswap LPs. And so I think what would happen is that you end up getting this, again, this sort of tug of war,

• 35:30Speaker 02

  where all the good fees, the good trading, which is around the mid-market price, gets eaten up by the limit orders and all the bad trading, which is just like, you know, getting run over by bad pricing. That is going to be eaten by the Uniswap LPs. The Uniswap LPs will drop their liquidity because they're now losing money. And basically you devolve into an order book. That's my theory of what happens when you try to combine the two. But of course, that only really works if like the limit orders can be withdrawn and placed fast enough for this whole thing to work and make sense. Which only really works if like the gas fees aren't insane, for people to pull it, to add the liquidity and to pull the liquidity and to do the kind of stuff that people do in limit order land. And so it's kind of like, when that's too expensive for it to make sense, people aren't just going to, people just aren't going to provide limit orders at all.

• 36:15Speaker 02

  Because it's just too expensive for them to manage their limit orders on this exchange. But once they do, and once it starts becoming profitable for them to do that, then you're going to get this very quick move into this other equilibrium where it's all limit orders and no programmatic curve-based liquidity. That's my theory.

• 36:32Ryan Sean Adams?

  Well, I mean, all these theories need to be tested, of course, but that theory seems to match some of the contours or the constraints, let's call them, of Ethereum and of blockchain. Which, like, that appears to be why automated market makers have been so successful, right? Back to your point, I think you used the term that Ethereum has the computing power of a decentralized graphing calculator right now, right? I thought that was a very colorful way to put it, but, you know, play to your strengths, right? So what are the strengths of Ethereum? It's global, pooled, stable. It's completely permissionless, low regulatory surface. It's programmable infinitely. What are its weaknesses? There's no price oracle. You have no idea on chain what the price of something is.

• 37:15Ryan Sean Adams?

  Low throughput is obviously a weakness as well. And that's why you've got something like automated market makers succeeding on Ethereum. But I want to ask the question. So in traditional finance, is there any kind of analog to this? Like, are automated market makers, do they exist in the traditional finance world at all? And we talk so often about DeFi and crypto is basically replicating all of traditional finance over time, right? Maybe they much accelerated a rate, making it digital, making it programmable. Is there anything like a Uniswap in the analog world?

• 37:50Speaker 02

  I mean, in a sense, there is in that, you know, if you ask like, you know, are there programmatic market makers today? Well, yes, of course there are, you know, like most market makers today who are, you know, trading on stock exchanges and filling orders in fractions of, you know, in like fractions of seconds. They are almost entirely run by algorithms. But those algorithms are not publicly viewable. They are not easy to manipulate, or I mean, they obviously people try to manipulate these algorithms, but they're not trivial to manipulate. And so in some sense, like, yes, absolutely. This is, this has precedent, right? Like most market making today is algorithmic. You can't see the algorithm. And the algorithm moves and updates much faster and it takes in a lot more inputs.

• 38:34Speaker 02

  So there's a bunch of machine learning and there's looking at, you know, order books and modeling liquidity and all this stuff. It goes and inputs to this algorithmic pricing when you hit some API and actually request a quote. But the difference is really one of degree, not one of kind, I think.

• 38:51Ryan Sean Adams?

  Yeah, that makes sense. All right. So let's talk about Uniswap versus other curves, right? So we talked a lot about the specific way Uniswap sort of calculates its price curve. Is Uniswap the final answer on automated market makers? Like, will everything network effect pool into Uniswap? Or are there places for other curves? We've called this before, like the, you know, the automated market maker, robot wars where one curve fights another curve and they're all in this big battle for, you know, a bunch of liquidity. Is that how you see it?

• 39:26Speaker 02

  I think this is, this is right to some extent in that it's pretty clear that there's going to be a lot of competition among price curves that are better and better suited for the particular assets that are being traded, right? So in a way, Uniswap, you can sort of imagine Uniswap with always using this X times Y equals K price curve. Basically implies like, look, I don't know absolutely anything about how these two assets should be trading relative to each other. Right? So it's sort of the, the no knowledge assumption, so sort of zero prior about how these two things should be trading relative to each other. But if you know something about how these two assets should be trading relative to each other, then in principle, you should always be able to do better than Uniswap, at least to some extent, right?

• 40:08Speaker 02

  So if you know, for example, that this, these two assets are less volatile relative to each other than the average pair of assets, then of course you should be able to get a tighter pricing curve than Uniswap and do better, right? And of course, if you know these two assets are especially volatile, or they're especially inverse correlated relative to each other, then perhaps you should create an even more aggressive pricing curve that has even more slippage than Uniswap does. Uniswap is sort of like this Goldilocks thing that basically doesn't make any assumption and it's kind of good for everybody, probably helpful. But as the universe of AMMs opens up and more and more people innovate, in particular AMMs that are designed sort of handcrafted for particular markets, then of course you're going to get better pricing.

• 40:52Speaker 02

  So, you know, the way that, the way, I think the clearest way to think about it is that what Uniswap really ought to be doing is emulating what real professional market makers do, right? So there are real professional market makers who market make on Binance and on Coinbase and on all these exchanges. And they decide how they're going to price things for different orders, right? And very often, you know, they're like OTC desks that will get an order from somebody and they say, hey, I want to buy, you know, you know, 5,000 each, some huge order, right? And they're going to decide, okay, I'm looking at exchanges, I'm looking at what else is out there and I'm decide for you, I'm going to tell you, look, here's my quote, and then let's execute it, right? So Uniswap, the ideal version of an AMM should really be closer and closer to,

• 41:37Speaker 02

  if you actually did your homework, right, and you actually asked that OTC desk, or all the OTC desks, and you averaged, what does their pricing curve look like? If I ask you for 1 ETH, or 10 ETH, or 1,000 ETH, or 10,000 ETH, right? Like, what is the shape of that curve?

• 41:53Speaker 02

  You want, the ideal version of Uniswap would have as close of a curve to that real optimal market maker as possible, right? Now, of course, that's not possible in principle, because that real optimal market maker is taking in a lot of inputs that aren't available on-chain. But insofar as you can closer and closer emulate that real market maker, you're becoming more and more competitive with the sort of final form of what an arbitrarily unconstrained market maker would be able to do. So, now, one very obvious thing you can do is just get a sort of more price-competitive curve. So, Curve, Curve.FI, that is the, it uses this thing called the stable swap curve, which is a mixture of constant product and constant sum.

• 42:33Speaker 02

  But, long story short, what it does is it gives you a very flat part of the curve near 1:1, which basically implies that the two assets in the pool probably should be worth about the same. And in a very large band of potential trading volumes or balances of inventory, really, they should be priced around the same. They should be priced very close to each other. And you don't want to offer a lot of slippage until the trades start getting really, really big. And that makes sense, because you expect, if it's USDC and USDT, those two should probably trade really close in line to each other, because you know about that, those two assets, yeah, they're supposed to be worth the same.

• 43:11Speaker 02

  But I think, in general, this march of more and more intelligence being baked into the curve, that trend is going to continue. But I think it can go even more broad than just choosing a curve. There, there, you can imagine other inputs that you could take into the market to determine not just the, you know, the two assets that you have in the pool, how much of X and how much of Y do I have, which is right now, the way that all of these assets are being priced using AMMs. But you can imagine using other signals as well to make you determine in real time how you're going to change your price, right? Because that's what real market makers do. Real market makers that are actually competing in the largest markets in the world,

• 43:53Speaker 02

  they take in lots of inputs in order to decide what the real price should be, more than just knowing what their inventory is. And so they look at other order books, they look at volatility, they look at all this other stuff, right? So you can imagine a real, another market maker that would start taking in readings of volatility. And if an asset is particularly volatile, like, let's say we're like in a Black Thursday scenario, right? And like, things are going off like crazy and, you know, coins are dropping in price and suddenly you don't want to be offering anywhere near the level of, you know, the generosity of quotes that you were offering before. Now you want to really start blowing out your spreads and really start offering really bad slippage because the market's moving fast and you don't want to be giving

• 44:33Speaker 02

  away a lot of money right now. In a situation like that, you can imagine an oracle that that sort of gives you some reading of volatility and tells you, hey, guys, market situation's getting worse, let's make the curves more aggressive right now. Now alternatively, you know, we had a, we had a good period of time when volatility was really low before this recent, you know, DeFi bull run. And in the, in a period of low volatility, you might say, hey, you know what? Normally with USDC ETH, we quote X times Y equals K, but it's really low volatility right now, prices haven't been moving much. Let's just start flattening out the curve a little bit and offer lower slippage, right? And so you can imagine all sorts of different inputs that you could be taking in to determine the way in which you're changing your pricing curve. And I think we're going to see more and more innovations

• 45:16Speaker 02

  around AMM design that allow more mutations of the, the way in which you do pricing based on these other external signals.

• 45:26Ryan Sean Adams?

  Let's talk a bit more about some of those next generation. Maybe, I don't know if the term's used anywhere, but like smart automated market makers. You tweeted out something about like, I just caught this recently about a smart AMM of the type, I think you were describing called Dodo, maybe Do Do. And that is an automated market maker whose curve receives like updates in real time based on some third-party oracle, right? Or external oracle, I'm not sure whether it's a non-chain oracle or an external oracle. Is this the kind of thing you're talking about? Like, how does something like Dodo work?

• 46:02Speaker 02

  So, yes, so this is exactly the kind of thing I'm talking about. So Dodo is a, is an AMM that basically, or you could call it an SMM if you want to be cute about it. Dodo, Dodo is an SMM that, you know what, I like that term, I'm gonna start co-opting it.

• 46:16Ryan Sean Adams?

  We did it. We just made, we created a new meme right here, Bankless Podcast, that's what we do.

• 46:21Speaker 02

  Dodo is an SMM. And the way that Dodo works is that, so here's kind of the abstract problem you can imagine that Dodo's trying to solve. So, let's say you're Uniswap, your mid-market price is X. And, you know, we talked before about like this limit order problem, right? If you're mixing limit orders and, you know, regular AMM slippage. Like, what you really want to do at any given time is concentrate more liquidity around the mid-market price. Because you know that like, look, if the real price of ETH is, or ETH USDC is like, you know, a hundred dollars, then I'm kind of, you know, most people are willing to provide quite a bit of liquidity at that price because I can go hedge it out on Binance or whatever. And, you know, it's perfectly fine, right? Like, I don't actually want to offer that much slippage away from the mid-market price.

• 47:07Speaker 02

  The problem, though, is that it's very difficult for Uniswap to do that. It's very difficult for Uniswap to say, you know what? I'm gonna take your mid-market price, flatten out the curve over here, and offer a lot of liquidity at this price. And then, once you start moving away from this, then I'll start offering more and more slippage, right? Why is it hard for Uniswap to do that? The reason why is that it's very easy to manipulate Uniswap using a flash loan. So, or even without a flash loan. At any given time, if, let's say Uniswap had this rule that at, at the mid-market price, you can do a lot of flat trading at the mid-market price, just pay the 0.3% fee. But then as you get more and more, then suddenly the, the slippers start to belittle you, right? The problem is that what I could do is I could first move the price to some like ridiculous, you know, use a flash loan, move the price to some ridiculously high number,

• 47:51Speaker 02

  and then do a bunch of trading at that ridiculously high number. Because now you flatten out the price curve at this ridiculously high number, and Uniswap has no idea what the real price is. Uniswap is just responding to like whatever's happening in, in the pool, right? And so then I would allow a bunch of trading at this like stupid, stupid price. And then the flash loan could move everything back because Uniswap is symmetric. You'd get all your money back, minus 0.6% fees, 3% of the way up and 0.3% of the way down. And then you could just basically make like a bandit away from Uniswap. So that's why Uniswap can't do this. It can't do this because Uniswap does not have an oracle that it can rely on to know what the true price is. If it did, then it could consider flattening out the, the, the curve around wherever the true price is and, and concentrating more liquidity there.

• 48:37Speaker 02

  This is what Dodo tries to solve. Because you cannot use Uniswap's mid-market price as an oracle, or any AMM's mid-market price as an oracle. It's actually kind of weird to think about, right? Because at any given time, because of the way these AMMs work, you should expect them to have the correct price within the margin of the transaction fee, right? Why? Because if it didn't have the correct price, then somebody could go and arbitrage it. And at any given time, everybody, you know, there are kajillion bots sitting there trying to arbitrage Uniswap and all these AMMs. And so you can sort of take this as an invariant, basically, that at any given time, any AMM should have the correct price. Because otherwise it would have already gotten arbitrage. However, you cannot rely on it. Because the moment you rely on it, you're going to get fucked. Because somebody is going to manipulate the price in a split moment,

• 49:22Speaker 02

  move the price way out of line, and then fuck you. So it's all, it's like this weird quantum thing where it's like, it is, the, the price is always correct except when you're looking. And so you can never use the AMM itself as a price oracle unless you're using like a T-WAP, which is kind of what Uniswap is doing, but even that is like kind of an idea, but to a lesser extent. So what Dodo does is says, look, we can't use our mid-market price as an oracle, but we still want to concentrate liquidity around the true price. And so what we're going to do is we're going to use an external oracle that is not like a Uniswap-style oracle. And so what happens, you know, let's say they're using Chainlink. Chainlink gives an update every 20 minutes and/or every 0.5% change in price. And so every 20 minutes and/or 0.5% change in

• 50:04Speaker 02

  price, you can start to flatten out the curve, flatten out liquidity around that point, because that you know is not going to get manipulated, insofar as you believe that Chainlink is not going to get manipulated. And so that is a reliable way for you to actually do the thing that most market makers do, which is to flatten out liquidity at the real price and to treat the real price as like a specially, a place where you want to be especially generous in offering liquidity without giving too much slippage. So that is the idea behind Dodo. And it's an example of what we were talking about before, about emulating more and more what real market makers do, right? They give a lot of liquidity around the true price, and then the farther you move away, the more it's like, oh shit, hold on, something is happening in the market, we're getting bowled over, maybe we should start offering more and more

• 50:48Speaker 02

  slippage because we don't really know what's happening right now.

• 50:51Ryan Sean Adams?

  Okay, so that's a smart automated market maker, which is fascinating. At the end of your post, you offered this kind of tantalizing, I guess, a sequel option, which was a post called Unbundling Uniswap. I'm not sure if you wrote that yet, but this is kind of what like you were talking about, if I'm going to guess. Basically, that Uniswap is sort of the general purpose, but all of these specialized AMMs, including smart AMMs, are going to rise up and take pieces out of the general purpose because they can succeed at something that Uniswap cannot succeed at. Is that what you meant by unbundling Uniswap? Was that what the post was going to be about?

• 51:30Speaker 02

  That is a part of it, but there's a lot more to that piece. I'm kind of, that piece I hope is going to get published in the next week. So I have a rough draft, and right now it's getting edited. It's taken me a while because crypto has been insane this month. But in short, yes, but I don't want to give too much away.

• 51:49Ryan Sean Adams?

  Well, fantastic. Hopefully, by the time this episode comes out, that post will either be live, which we can include in the show notes, or it will be on its way. But it kind of appears to me that what we're sort of, I guess, maybe contrasting, or seeing which of the weights is higher, is there's definitely a liquidity network effect that happened with automated market makers, right? That's undeniable, right? So part of what Uniswap is doing really well is it's getting, it's sucking in all of the liquidity, and the more liquidity it has, the lower the slippage, the more liquidity it gets. Liquidity begets liquidity, as we've said so often here. But that is, you know, doesn't necessarily guarantee it's going to

• 52:29Ryan Sean Adams?

  win, because the counterballast for that is all of these other new automated market makers are going to try to take chunks out of Uniswap. Because Uniswap is basically a fairly, you know, called dumb, simple automated market maker. So it's almost this war against like liquidity network effects versus sort of the specialization that can be gained. But, you know, people will come to different conclusions on how that will pan out, right? It's like, you know, amazon.com did sort of win with the general purpose e-commerce, you know, retail site over a diapers.com and, you know, many other sort of specialized niches. Is that kind of the battle in your mind? Are those the two opposing forces here?

• 53:12Speaker 02

  So what are the two opposing forces in your mind?

• 53:15Ryan Sean Adams?

  Network effect versus specialization, I suppose.

• 53:19Speaker 02

  Ah, yes. I think that's right. That said, I don't think it's necessarily correct yet that Uniswap has a network effect. I think it's a little bit too early to call that one. And here's what I mean by this, is that Uniswap clearly is successful, and it has a great brand. But there's no obvious thing in principle that allows Uniswap to say, "Look, if you want to create the next liquidity pool, you should obviously do it here." That's what a network effect is, right? A network effect says the bigger you grow, the more difficult it is to unseat you. Right now, if Uniswap's quote-unquote network effect is purely around slippage that it's offering, then I think its network effect is going to be very short-lived.

• 54:04Speaker 02

  There's really more of a scale effect than a network effect. And I think in that sense, like, you know, something I described like Dodo, which does more work to concentrate more of the liquidity near the mid-market price, can very quickly actually offer better slippage than Uniswap can. And so that, to me, does not feel like a real moat. It's certainly true, however, that Uniswap has become the natural selling point. So that, you know, if you want to get quickly integrated into, you know, all the wallets and all of, you know, CoinMarketCap is automatically indexing Uniswap markets and, you know, all these different integrations that Uniswap has, that is something. It's not a network effect, but it is obviously an advantage that they have

• 54:46Speaker 02

  in just being integrated into a lot of different applications. To me, I think there's, it's still an open question how this market is going to play out. So I think in the long run, you're right, the specialization of network effects are the two natural counterbalances. But the thing that we tend to see in normal financial markets is that the exchange venues themselves are the ones that gain network effects. But individual market makers are ultimately beholden to whoever actually owns the relationship with the customer, right? And so who is the customer, in a sense? The customer is the person trading on DeFi. Does Uniswap own the DeFi trader? That's the real question I have at the end of the day, right? Like, where is the DeFi trader going?

• 55:30Speaker 02

  Are they going to Uniswap? Are they going to their wallet, right? Are they just owned by Coinbase Wallet? And when Coinbase Wallet has a, or, you know, IM token, or whatever wallet they're using for Ethereum trading, you know, are they, do they have allegiance to Uniswap? Or will they just say, you know, eventually there'll be some token, like buy-token, sell-token interface that will route to the best AMM on-chain? In which case, Uniswap will just be commoditized. To the extent that it offers the best price, it'll get used. And if it doesn't offer the best price, it won't get used. Or will something like One Inch, or Dexag, or Matcha, will these become the things that actually own the front end of DeFi? And I think, to me, that's the really most important question.

• 56:11Speaker 02

  If you own the customer and the customer ultimately cares about you and you're the way that they're going to interact with this universe, then it doesn't really matter if anybody can offer better pricing than you because you own them. But if people are only coming to you when you offer the best price, then you don't have a network effect. You're commoditized. That is the real question that I think is still unresolved in DeFi.

• 56:36Ryan Sean Adams?

  That is the question I think we will see playing out in the months and the weeks and the years to come.

• 56:44David Hoffman?

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• 57:29David Hoffman?

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• 57:54Ryan Sean Adams?

  I want to tell you about another bankless tool that I personally use. It's fantastic. This one is for our US listeners. It's called Rocket Dollar. So if you have an IRA or a 401k, the problem is it's jailed inside of your brokerage. So your Fidelity account, your Schwab account, that means you don't have good access to crypto. The only crypto that you can buy is in a trust form and it's marked up like 5x, 6x, 8x the price, you're getting ripped off. So what you need to do is break your retirement account out of jail, set up something called a self-directed IRA or a self-directed 401k. We've written articles about this on Bankless that we'll include in the show notes.

• 58:38Ryan Sean Adams?

  Rocket Dollar takes care of all of the pain in getting set up. They help you with the paperwork. You can break your retirement account out of jail and also use the Bankless code to get $50 off. So make sure you use that code, Bankless, when you sign up on rocketdollar.com to get $50 off. You wrote this fantastic article in Bankless exploring how DeFi would actually look in ETH 2.0. So it's called "DeFi in ETH 2.0: Cities, Suburbs, and Farms", and there's a fascinating analogy that I'm hopeful you can explain. But just to relate this to the automated market maker conversation, right? It may be the case also that location matters a lot,

• 59:21Ryan Sean Adams?

  network effect inside of a specific geographic location. By geographic, I'm being imprecise. I don't mean like, you know, physical boundaries. I mean sort of the chain that the protocol resides on. So Uniswap right now has a fairly decent place on the Ethereum main chain, which is kind of like the Manhattan, if you will, of Ethereum and of DeFi. That's the center of all activity. And it also has value proposition of being optimized to have fairly low gas fees. So that gives it some competitive advantage here. But let's talk about how this all plays out in ETH 2.0, because ETH 2.0, we don't just have one main chain, essentially. We have 64 of them, so they multiply.

• 1:00:06Ryan Sean Adams?

  At least, that's the vision. So can you talk about your article, "Cities, Suburbs, and Farms"? What's the analogy here when we get to ETH 2.0 and sharding? How is DeFi going to pan out?

• 1:00:18Speaker 02

  So the motivation for that piece was, I've been having a lot of discussions with people about Ethereum 2.0, especially because Ethereum is struggling to handle all the congestion from DeFi. And a lot of people have the natural question when they think about how sharding is going to work. And so for those who are not familiar, sharding is basically this idea that instead of having just like one blockchain, you now have, I guess, 64 blockchains that are sort of all moving together and they can all talk to each other asynchronously. So they can send each other messages and the messages take a little bit of a while to arrive, but they can all transfer assets to each other and so on. So that's the vision of how Ethereum 2.0 is going to scale. And so the natural thing, of course, when you're looking at a complicated system like this, is you want to ask the question of like, well, how are the applications that

• 1:01:02Speaker 02

  we use today going to fit onto this new vision of the sharded blockchain? And if you think about it very long, you'll notice that so many things in DeFi work because they are composable, meaning that they all live on the same blockchain and therefore in a single transaction, you can atomically, you know, get a flash loan, trade on an exchange, you know, refinance a CDP or Vault or whatever. You can do all that stuff atomically in a single transaction because everything lives on the same chain. And if Ethereum 2.0 looks very similar to Ethereum 1.0, you can imagine that the day that we all begin on Ethereum 2.0, there's going to be one shard that becomes the DeFi shard. And that DeFi shard is going to attract all the projects and then all the products are

• 1:01:46Speaker 02

  going to come onto the shard and they're going to use up all the space and it's going to get congested and we're going to be right back where we started, where you have like one congested shard and 63 shards where nothing's happening and like, what was the point of all that? Right. And this is a common argument that I hear people making when they describe the problem with sharding. And I think they are absolutely correct, that that is what's going to happen. But I think they're wrong in being concerned as that being what's going to happen. And that was the motivation behind trying to give this metaphor of the cities, the suburbs and the farms. So I'll sort of walk through it very briefly.

• 1:02:22Speaker 02

  So you can imagine the day that Ethereum 2.0 launches. There's gonna be a lot of people who show up and say, wow, look at this big empty, this big empty blockchain and all these empty shards. I want to start, I'm gonna start setting up shop and start doing stuff, right? And the first thing that naturally is going to happen is that there are going to be people who, you know, let's say the first thing that happens is that, you know, some DEX sets up shop and they say, hey, great, you know, D Y D X, we're finally here, we want to, we want to start trading on chain, and so we're gonna pick this shard, right? And some other token projects is like, oh, D Y D X is here, probably some assets are gonna show up here. So I'm gonna, I'm gonna build here too. And very quickly you get this coagulation that people are predicting is going to happen. And that, and that's natural because of course, you know, these different token projects,

• 1:03:06Speaker 02

  they're going to want to decide where they live and they're going to want to choose, if I really value composability over anything else, then I want to choose the chain where I'm most composable without the things. For the same reason that, you know, if, if you're deciding where you want to start a business, well, you can decide to start it in San Francisco, where there's lots of, lots of other businesses and lots of talent and this big network effect of all these things. But of course you have to pay higher rent. It's a lot more expensive to, you know, the taxes are higher. Like the cost of staying here is in San Francisco or in New York City is baked in to, to your, your, sort of the contract that you have to sign in order to stay here and to make your home here.

• 1:03:45Speaker 02

  And so the same thing is true in crypto. If you're gonna decide to home yourself on a chain that's very congested and very expensive, you'll only do that if you're willing to pay the cost of facing the higher congestion and the higher, the higher gas fees. But you'll only do that if it's worth it to you because the value that you're gonna derive from being in that quote unquote city. So, isn't that terrible? There's gonna be this one DeFi shard, all the DeFi stuff will be happening there. And then, you know, it's gonna price the rest of us out, the same way that Ethereum 1.0 is pricing out the little man. But I don't think that's correct. Because what will happen is that there will be, you know, there will be other shards. But basically, people like you and I, who are not whales, we're just average Joes. We decided like, hey, you know what?

• 1:04:28Speaker 02

  I'm going to take my assets and I'm going to go park them over here on this other chain where, you know, I can get reasonable rents. It's not super crazy to do transactions on this chain. And these chains will sort of be the place where kind of ordinary people decide to live. And these will sort of be like suburbs. You'll have some token services, right? Like there will be Tether, there's going to be U S C, there's going to be some DAI that's tokenized and made available on these things. There will probably be some market makers, you know, some simple AMN pools and some, some simple things that you can use for, for the random things that you want, you know, like sort of ATM machine style, style things that you'll see out of the suburbs, right? You'll have a McDonald's, you'll have a Burger King, but you're not going to have, you know, these really, really fancy,

• 1:05:08Speaker 02

  you know, like Bloomingdale's type department stores, you know, like those, those are really, if you want to, if you want those, go into Manhattan, right? Go do a cross shard transaction, go into the really expensive shard. That's where you can buy the crazy exotic stuff. But most people don't need that. At any given time, most people are, are happy to sort of live their lives out in the suburbs where the transaction costs are cheaper, congestion is lower, and you'll be able to do most of the things that you want to do, right? So there will be a shard purely for DeFi that's very expensive. There might be a shard purely for exchange settlement that's also very expensive, where there's lots of transactions going on. Then there'll be a lot of shards for people like us, just living out our lives. Then there will probably be some shards where nothing much at all is happening. And those I liken to being the farm shards, where there's basically almost no important economic value happening on those shards.

• 1:05:52Speaker 02

  And in that case, you know, those are the places where, you know, today, people have talked about, oh, you know, what if we, we put our data up on IPFS or put it up, you know, put our supply chain data or, you know, this or that, write it onto Ethereum? Well, those will be the places where basically nobody is living. There's no financial economic activity. And so anything that's happening there is really just kind of people using the blockchain as kind of this big dumping grounds, kind of like farmland, you know, like you can go build some, some big warehouses out in the middle of nowhere where you can put your stuff, where you can just build this big farmland and put cows there. And it's okay, cows don't have to be super, super valuable for you to use the land as long as nobody else is there, you know, have at it. And so this, this vision of this heterogeneity between different shards, having different levels of congestion and different economic value.

• 1:06:37Speaker 02

  Is very consistent with the vision of the world we already understand. Like, that's how the world looks. That's how different economies look, right? There are high-value economies where, look, if you're going to Singapore, or if you're going to Hong Kong, those are really expensive places. You don't want to go, you know, build a farm in Singapore. It's just a really bad idea, you know? But it's okay for Singapore to be that. It's okay for Singapore to be, or Hong Kong to be, these financial centers, and instead have different locales be used for different things and optimized for different economic equilibrium. And that was the core insight of the piece that I tried to convey.

• 1:07:11Ryan Sean Adams?

  It's a brilliant piece, and folks should go read that piece. Certainly, we'll include it in the show notes. I, you know, I think for folks who maybe had the question, all of this doesn't happen in a centrally planned way, right? It's organic. It's supply and demand mechanisms, the way a city sort of evolves. It's not necessarily centrally planned. It just kind of evolves in the way that it does. And part of the reason for that is, as you were saying, Aziz, if I'm understanding it correctly, one shard will have a different block space, supply and demand dynamic versus another shard. So you might have gas fees in the DeFi mainchain shard that are like 300 Gua, for example. But in the farmland shard, where there's no activity,

• 1:07:56Ryan Sean Adams?

  it's basically like near-free to get a transaction in. So all of this economic activity, almost organically, naturally, load balances. Is that the case?

• 1:08:07Speaker 02

  That's right and wrong. I mean, when you say load balances, I certainly don't think, which is what many people imagined was going to happen with Ethereum 2.0, that you're going to get uniformity across all the shards. You're not going to get uniformity. You're going to get heterogeneity. But that heterogeneity, like you said, is good. Like, the idea that you want everything to be uniform is the hallmark of central planning, right? It's the idea that, you know, like, okay, we want to make sure that, you know, when somebody builds their next business inside New York City, like, well, New York City is too crowded. We're going to pick up that business, and we're going to go and move it over into, you know, Jersey City, because New York is too crowded. We're gonna pick it up and worse yet, move it over into some farmland in Wyoming because New York is too crowded.

• 1:08:52Speaker 02

  Right. That would be, that would, that would make sense if your goal was to achieve economic uniformity. But that should really not be your goal. That's a terrible idea.

• 1:08:59Ryan Sean Adams?

  Right.

• 1:09:00Speaker 02

  It's totally missing the point of like, why cities form in the way that they do. And I think the same thing will be true in block shows. Block shows are fundamentally, they're, they're, they're fundamentally economies. And as economies, you want them to be able to sort of engage in their own organic reasoning about where things should go and why they should go there.

• 1:09:19Ryan Sean Adams?

  Okay, so it's not load balancing the way a network router might route traffic from one place to another in an evenly distributed way. But this is more, Danny Ryan has used this term, more economic load balancing that sort of just happens because I'm in New York City and my gas fees are too expensive, so I'm moving out to the suburbs. No, I'm moving to the, to the farmland way outside somewhere in Jersey. Right. That's, that's kind of what happens. Where does Layer Two fit in the mix here in this, in this whole set of analogies? So you've got different shards that are cities and suburbs and farms. And then you have Layer Two out there. Is it interacting with, with any of these shards? And what's kind of the analogy for that? How do you think about that?

• 1:10:02Speaker 02

  That's a good question. I think Layer Two, so I, I, I'm, I'm mindful that at the point at which I introduced Layer Two, I'm starting to really distort the analogy. So I don't want to, I don't want to lean too much on, on any of this. But you know, the way that I describe Layer Two in the piece is that Layer Two is kind of like a shopping mall. You know, it's a, it's a very condensed, very highly efficient place where you can bring together a bunch of stores that kind of work together or sort of have, have some natural synergy and allow everybody to sort of come to this one place to go shopping in the, in these relatively small number of things. And that, and it works. It's, it's efficient. It's great. It's an awesome way to scale commerce. And of course, we have shopping malls everywhere in the world. People realize, yeah, it's a great idea.

• 1:10:43Speaker 02

  However, it doesn't, so one thing is that Layer Two's, almost everything that we've seen in the realm of Layer Two, they have very, very natural scalability limits, right? So looking at something like OR, it's something like a, somewhere in the neighborhood of Of 10 to 100x, probably on the very lower side, maybe like 10 to 20x.

• 1:11:02David Hoffman?

  And OR stands for optimistic rollups.

• 1:11:04Speaker 02

  Optimistic rollups, yes.

• 1:11:05David Hoffman?

  Yep.

• 1:11:06Speaker 02

  Optimistic rollups, like your throughput limit is like something in the order of 10 to 20x. ZK rollups have much higher throughput limits, but the problem with ZK rollups is that it's much more difficult to do arbitrary computation on ZK rollups, right? So if I want to port like synthetics over to ZK rollups, there's a lot of work that it takes in order to rewrite all the contracts in ways that they can be proven in zero knowledge. It's extremely non-trivial. Optimistic rollup is nicer. It's sort of just like having a theorem 2.0 where you can just drag and drop contracts into this new model. But the scalability limits are significantly constrained relative to what you could get otherwise. So the answer is that like nothing, nothing today on layer two is a real magic bullet, I think, for solving the scalability problem.

• 1:11:50Speaker 02

  There's going to be more need for heterogeneity, and it's already obviously true today that, you know, the, once we're going to get, once we get some layer twos, like there, there, one, there, you know, I, I had a much more coherent layer two pieces a year and a half ago, when, you know, I, I remember like backing Matter Labs, which was one of the very first ZK rollup projects that innovated a lot of this stuff. But the honest answer is that it's taken way longer than I think anybody thought it was going to. You know, starting with like plasma back in, you know, what was it, 2017, I think the plasma paper came out, all the way to today, and having very little unfortunately to, to show for it, given all of the amount of hype that, that has gone into this stuff. So I think we have ZK rollups starting to really work.

• 1:12:33Speaker 02

  Optimistic rollups haven't really shown their faces yet, but it's very difficult to generalize these things across all of DeFi. And so I do think that it's going to take, you know, other, other, you know, transition to a much more scalable, underlying substrate for this full blossoming of economic potential to happen.

• 1:12:54David Hoffman?

  So Haseeb, in this cities, farms and suburbs metaphor, which I'm a huge fan of, by the way, because it fits right into the bankless metaphor of being like a nation, right? Being like a nation, right? And so it's a geography full of economic activity. And while these things aren't physically located, you can still get some sort of relational, a physical relational space, right? Like these things have borders with with other things. And we can kind of position these applications in relation to other applications. And that's kind of how we get this geography.

• 1:13:31Ryan Sean Adams?

  And they all share the same security, same military.

• 1:13:35David Hoffman?

  Same, yeah, same military.

• 1:13:38Speaker 02

  I like that.

• 1:13:38David Hoffman?

  Yeah. So in this world, where does the liquidity live? So imagine I am a apple farmer in the farms of New York, upstate New York, and I need to get my apples to the market in like Manhattan, or maybe just outside of Manhattan. Do I have to go and make a cross charred transaction in order? Excuse me. Do I have to go and make a cross charred transaction in order to find the liquidity to sell my apples? Or is there going to be liquidity kind of spread out in all of these shards? How do you think, how do you think that's going to unfold?

• 1:14:10Speaker 02

  I suspect that liquidity will be very tiered across these shards. In the sense that, you know, it's kind of the same answer as today, right? Like if you're, if you, if you want to buy, let's say, let's say you want to buy, let's take an example, let's say you want to buy a thousand apples, okay? And for whatever reason, in the real world, we're not making a theory of analogies, real world, you want to buy a thousand apples. If you're out in the middle of nowhere and you want to get liquidity, like buy these thousand apples at a reasonable price. If you literally just go and like you're in some small town in the middle of nowhere and you want to buy all the apples, like well, the apple shipment comes once a week and the truck only comes in every Sunday morning and they only bring in, you know, 200 apples. And if you want to buy up all the apples that everybody in town owns, it's going to cost you a lot of money because a lot of people don't want to sell you those apples.

• 1:14:54Speaker 02

  And so you're, you're basically going to be screwed, right? So that's like the farmland. So if you want to get liquidity in a farmland, there's just not going to be that much, right? And so you might go into the nearest town. And the nearest town, they have like a bunch of supermarkets and you go to all the supermarkets and you, you buy up all the apples, but like you can't really get a good wholesale price because the wholesalers just aren't really there in like that small town. But you can buy up more apples. And you're going to get a better, you're going to get a better price than you could buying it in like the tiny middle of nowhere town. Uh, and then furthermore, if you go into a bigger city, then now, okay, you can actually go find some apple wholesalers, you know, there, there are the farmers who come in and sell their stuff there and so on and so forth. And if you go all the way to like the big, big city, then like, you know, you can find super mega department stores that can, you can, you can literally just like check out a thousand apples on the way out the door.

• 1:15:35Speaker 02

  So I suspect the same thing is going to be true in DeFi is that, you know, if you want to sell some ETH for USDC, right? And you're on a farmland shard, there might be like some little AMM over there, some like tiny pool or some, some, or even like a small private market maker who's sitting around in that shard. And if you ping him, he's got a little bit of inventory sitting around and he'll say, yep, I'm willing to, I'm willing to mint this trade for this price. Right? Uh, and maybe it's not a great price. And so if you want to get a better price, you go into the suburb shard. And you know, you, you, maybe you don't want to go all the way to Manhattan into the super expensive DeFi shard, because the, the transaction costs are just going to be really significant. So you go into the, uh, the suburb shard, you go in there, uh, the cross shard transaction is the same cost, but once you're there,

• 1:16:15Speaker 02

  you know, the actual transaction cost is much lower. Uh, and then you, you trade there on like some tiny, you know, there's a little Leno swap pool, where there's a, a moderate sized pool, or there's a, you know, a bunch of private market makers there who will, who will fill your order. Or if you really have a gigantic order, then like shit, you're not going to be able to do that on a DeFi shard, or sorry, on a, on a suburb shard, you gotta go all the way into DeFi land if you want to sell like a million dollars worth of ETH. Then, okay, fine, go into the DeFi shard, that's where all the big boys live. That's where the wholesalers live and that's where you're going to be able to, you know, do a really massive order. But then of course you're much less sensitive to the transaction costs. So I suspect that's the way it's going to look.

• 1:16:53Ryan Sean Adams?

  Okay, let's, let's continue this analogy. It's just such a fascinating analogy and it's really painting a vision for what ETH two or sharded blockchain like ETH two could look like, right? So there is another player in the mix here. We've talked about, you know, shards, we've talked about DeFi, we've talked about layer two. And, uh, we opened this entire episode with kind of the, the question, what's the big intellectual miss you've had in crypto, right? I, I will confess one intellectual miss, one thing I didn't realize about Bitcoin was it's Uh, scalability potential. The way Bitcoin really is scaling right now isn't so much through Lightning or Layer 2. It's scaling through crypto banks. It's scaling through the Binance's and Coinbase's of the world.

• 1:17:38Ryan Sean Adams?

  Almost like if you think of crypto banks as sort of side chains, that's sort of Bitcoin's primary scalability strategy. These, these side chains, the crypto banks essentially settle on top of Bitcoin. They do the big transactions on Bitcoin. How does a Coinbase, a crypto bank, like a Binance, how do they fit into this, this shard world? Could they just set up shop, you know, in multiple places? They could start settling in Manhattan if they want, but oh, you know, it's expensive to settle transactions in, in this particular city, in New York City. So we're going to move to the farmlands and settle transactions there. Have you given any thought to that?

• 1:18:15Speaker 02

  Yeah, so I suspect there will actually be one shard that is also sort of city-like, Manhattan-like shard that will be specifically for exchange settlement. And specifically because of course, many, many, many of the times when funds are moving from exchanges, they're moving to other exchanges. And so there's a natural tendency for these, for exchanges to sort of coagulate and clump together because they all want to be sending funds to each other. Whereas most of the time, like if you're, if you're, if you have funds in DeFi, you're touching a lot of other DeFi apps. You're sending money from Compound to Uniswap, to this, to that. But it's not very often that like you're moving funds from Coinbase to Compound and then Compound to Coinbase. Right? That's not, that's not a very high throughput connection.

• 1:18:56Speaker 02

  And so I, I think I, I would expect for there to be sort of this like, this Manhattan in the Chicago, where Manhattan is like the DeFi shard and Chicago is like the exchange shard. And, and for the most part, like if exchanges want to send, you know, if you, if you want to get money from an exchange onto shard A, shard B, shard C, shard D. I mean, I, I don't know exactly how an exchange might do it, but I can imagine it wouldn't be surprising to me if the exchange were just say like, look, screw it. Let's just like consolidate our liquidity in, uh, let's consolidate our liquidity in the exchange shard. And then let's put a little bit of liquidity in each of the suburb shards so that we can easily and then of course more in the DeFi shard. So that if somebody wants to withdraw to that shard, we don't have to do a cross shard transaction every single time.

• 1:19:42Speaker 02

  We've got a little bit of sort of working capital to send money, you know, here and there at any given time with lower transaction fees. When somebody is wanting to buy and sell, right? So it's it's sort of the same thing. You know, it's like the correspondent banking system where capital is sort of put in the most efficient way in different places to allow people to kind of rebalance capital wherever it's needed from different banks at different times. In the same way, I expect that to be how exchanges manage their inventory in a world of, you know, sort of a sharded universe with heterogeneous shards.

• 1:20:13Ryan Sean Adams?

  Okay, two other parties we could talk about in this world. You know, the first is assets, right? And maybe we don't spend much time on that because I think people can envision the way a tokenized Bitcoin or a tokenized gold or a tokenized real estate would look in a sharded Ethereum world, simply some sort of token standard near C20 that gets moved from shard to shard. But let's talk about maybe the

• 1:20:37Ryan Sean Adams?

  this second kind of player. And these are what I might call the other main chains, right? The quote unquote ETH killers of the world. The Polkadots, the Cosmos, the the nears, if you will. How do they interact with this ETH 2.0 world?

• 1:20:53Speaker 02

  So the first thing I'll say is that I think the Ethereum killer narrative is basically over in that nobody is going to kill Ethereum. It's sort of like, you know, it's sort of like I mentioned Ethereum is the Manhattan of crypto. And the only real question is, is there going to be a Chicago of crypto? And there may well be. But I think the idea that like that Chicago is going to kill New York is just, I think the ship has sailed.

• 1:21:20Ryan Sean Adams?

  But what if it's China versus America? You know, Ethereum is the US and, you know, some other chain is a different country.

• 1:21:27Speaker 02

  Basically, why? I think like, well, I think what we're likely to see is, I mean, actually, that analogy is a little bit twisted because, of course, it seems like we're kind of entering into a sort of Cold War relations with China. But what we saw was just like globally connected supply chain. I mean, it is the case today that the reason why we're not actually in a Cold War with China is because of our enormous economic interests connecting us together. I think it's very clear now that if another chain does rise to prominence, sort of becomes the second city within crypto, it will be purely because it is able to communicate and share resources and financial activity with what's happening in Ethereum. So all of the assets that have been issued on Ethereum, you know, all the tether and the VSDC and the DAI and the BAL tokens and blah, blah, blah, all this stuff, right?

• 1:22:10Speaker 02

  Whoever it is, whether it's, you know, Near or Avalanche or Polkadot or Cosmos or whatever, they need to have some story for how those assets are going to come over if you actually want to have a viable financial system. And

• 1:22:27Speaker 02

  and, you know, today, I think the story for how those chains fit in is that if they can offer a credible alternative to this heterogeneous vision and allow there to be sort of these new cities formed that still connect back to the Manhattan of crypto, there still is a road back to Ethereum that allow, you know, assets to get tokenized and pulled across some bridge, whether it be, you know, an interoperability bridge like Polkadot or Cosmos, or, you know, in the case of Layer One, a direct bridge to Ethereum. I think that's going to allow them to siphon off a lot of the economic activity such that, again, the mid to low value stuff that doesn't really fit in a, you know,

• 1:23:08Speaker 02

  200-guey environment on Ethereum, which is just not economical for like someone like you or me to do like a $20 trade. Look, that used to be possible and now it's just, it's just not economical anymore. But if you, if you pull it across to this newer city where, you know, the land is cheap and, you know, anybody can start their own thing. And now suddenly, you know, entrepreneurship and the ability for Small people to start small businesses, that starts to open up again. I think that's going to revitalize a lot of the uh that that's the road to starting a second city.

• 1:23:38David Hoffman?

  So between sharding, which is very similar to just making a bunch of alternative blockchains that have easier ways to communicate with each other. And then also layer two, which is in a way kind of like making another type of blockchain or a similar blockchain construction, but with much more freedom in its architecture and its parameters. Why, what's the real advantage of spinning up a whole entire, you know, own native L1 blockchain? Like an Ethereum killer, when you have the opportunity to just build an L2 on Ethereum that uses very similar construction?

• 1:24:16Speaker 02

  Well, I'd say the first thing is that those L2s right now, so we have ZK rollups today. And we're getting, we're waiting on optimistic rollups, and they haven't really arrived yet. The answer is that like layer twos on Ethereum today are just, they're very constrained. They're not, it's not very easy to build good layer twos on top of Ethereum. And of course, you know, I think everybody knows this at this point, that Ethereum just has a lot of technical baggage. And so to the extent that, you know, Ethereum 2.0 is so compelling because it allows Ethereum to basically force off any poor design choices that it made. And to rebuild itself with it with a clearer, more lucid vision of what a blockchain should look like today.

• 1:24:57Speaker 02

  And I think today, the clearest path to getting that is, you know, another layer one. We already have layer ones, other than Ethereum, that have sort of more modern design choices. They're built on proof of stake, they have finality. These are all things that you really want in a financial system, especially, you know, having a fast finality. You know, I talked earlier about one of the problems being, excuse me, being latency. Latency is addressed much, much more compellingly in a world with proof of stake, where you can actually get finality than in a proof of work type setting. But all these things in aggregate, I think, really tell you that there's, there's.

• 1:25:38Speaker 02

  It's a battle. I don't think it's obviously a foregone conclusion that one of these is going to win over the other. It really, I think honestly, the thing that matters most, more than any theoretical argument, more than any technological argument, is just a simple answer is, look, who is going to have the first solution ready that I can click a button, send my ETH here, and then start trading on some other platform? Who's going to have that first? Right now, no one has it.

• 1:26:06Ryan Sean Adams?

  Jumping on the analogy of Ethereum being a nation with all of these cities, that sort of thing. We just had Charlie Noyes from Paradigm, I'm not sure if you know him, Haseeb.

• 1:26:16Speaker 02

  I know him well.

• 1:26:17Ryan Sean Adams?

  Okay, so we just had Charlie on the podcast, that's episode 26, included in the show notes, this is episode 27. And we got in a discussion about basically the requirement for mainchains to have a monetary premium. Their underlying asset must be a money, was Charlie's conclusion, in order to provide sufficient security, such that it beats all of the other chains, essentially. So, if I could boil it down, maybe I'm putting some words in Charlie's mouth, he says it very eloquently, basically like, if you're a mainchain, you kind of have to be a money. Your reserve asset has to be a money in order to succeed. And if your asset

• 1:26:57Ryan Sean Adams?

  that's backing your chain is not a monetary asset, a store of value of some kind, doesn't have some sort of monetary premium, then it's basically a sidechain for some other chain that does. What's your take on that thesis, that idea?

• 1:27:12Speaker 02

  So I think that's a, I agree in part with that argument, but I also disagree in part with that argument. And I disagree for two reasons. So, one is that, and I know that this is very much going against the bankless party line, but this is...

• 1:27:30Ryan Sean Adams?

  Please do.

• 1:27:31Speaker 02

  I don't believe that ETH is money. I think that ETH today is still a speculative asset. And it's very unclear how Ethereum is going to evolve. And whether or not, there's this classic thesis that I think was first articulated, most clearly by... John Pfeffer in describing sort of ETH as being like the oil of Ethereum, right? Like the sort of fundamental commodity that drives Ethereum operation. But the like, it's clear today, I think, that the core properties of money, store of value, medium of exchange and unit of account, they don't really describe anything in crypto today. The only thing that is used as a true store of value, medium of account and asset of exchange

• 1:28:16Speaker 02

  is stablecoins. And that's okay. I don't think, I don't think we need to fool ourselves about that. I think what's going on in Ethereum today is that people are very excited about Ethereum and they sort of see Ethereum almost as like this, almost like the equity of whatever it is that Ethereum is doing. If you invest in ETH, somehow you get, you capture some of the upside of whatever is going on in Ethereum. And that certainly has worked. And I think the one time that Ethereum has been a true reserve asset for crypto and truly was the money of crypto was in 2017, when Ethereum served as the reserve currency for ICOs. That was the one time, I think, when Ethereum was money, or sorry, that Ether was money. And I think since then, it is really kind of stopped being the case.

• 1:29:00Speaker 02

  I don't know anybody who pays each other with ETH. I don't know anybody who denominates their, their cost services, whatever in ETH. Everybody I know who looks at ETH is constantly looking at the USG price of ETH and modulating what they're doing based on that.

• 1:29:15Ryan Sean Adams?

  And has he, before we move on here, would you say the same is true of Bitcoin?

• 1:29:19Speaker 02

  Yes, absolutely. Same is true of Bitcoin. They're both in the same boat. And so to that, to that extent, the, you know, the question of like, well, the, the asset of a chain needs to, needs to have a monetary premium. I don't think it's true that Ethereum has a monetary premium because a monetary premium means it has a premium from being money. So you're, in a sense, you know, I think this is the kind of game that crypto investors like to play is they say like, look, Ethereum is worth, Ether is worth, you know, this, you know, tens of billions of dollars. Clearly that's not justified by transaction fees alone, therefore monetary premium, therefore ETH is money. And I think that's sort of setting out what you're presuming to prove, or sort of presuming

• 1:29:59Speaker 02

  what you're setting out to prove in that, look, Ether is clearly trading at a premium to what it should purely based on the transaction fees that are getting paid out in Ethereum today.

• 1:30:10Speaker 02

  What's causing that? Why is that happening? And monetary premium could be one explanation for it. But another one could be that people are speculating, that other people are speculating. People don't really know what Ethereum is going to be worth. Nobody has any idea how to value this thing 10 years from now if it ends up becoming this like financial substrate for a bunch of financial activity out in the world. Nobody has any fucking idea what this thing is going to be worth or how to value it. And I think that's, to a lesser extent, that's true for Bitcoin because I think it's a much clearer model of what Bitcoin can be. It can be this sort of, you know, this kind of, this gold-like, you know, non-sovereign sort of value thing. It's very clear now, I think, that the role that Bitcoin can play and how it can slot into a financial ecosystem, nobody has any clue where Ethereum is going to fit into

• 1:30:55Speaker 02

  the future of finance. And so I think, so for that reason, I'm arguing that it's really not obvious to me that if there is another, that, first of all, the reason why Ethereum is especially valuable is because it's quote unquote money-like. And if you assume that that's not true, and it's sort of, we're not really sure why Ethereum is so valuable today, then if another platform were to arise, let's say, you know, smart contract chain X, this smart contract chain X started gaining tons of traction and becoming very successful, then we wouldn't also see a ton of appreciation in its token price. And from everything that we see, it sort of seems like we would. Like, my assumption would be if something else started really, really taking off and becoming very successful, that we would also see a lot of appreciation in that token,

• 1:31:39Speaker 02

  as we seem to have seen in EOS and in Tron and in Tezos, in a way even maybe disproportionate to how successful they've been because they have almost no real organic activity on any of those chains right now. And so, so long story short, pulling all these threads together, what I'm trying to say is that I think that argument makes a lot of sense if you assume that the reason why Ether is valuable today is because it's money-like, and therefore there's only going to be one money, therefore ETH is going to win, and everything else is going to be a sidechain. And I've talked with Charlie about this before, and I think this is basically the thrust of his argument. And I think it's a little bit too elegant. To describe the messiness of crypto as it actually is today, which is that we have no idea why this stuff is valuable. We have no idea, you know, if there's another smart contract chain that becomes extraordinarily successful, how is it going to get valued?

• 1:32:24Speaker 02

  We don't really know. I think trying to be too sort of philosophical or analytical is going to lead you to make really, really big mistakes. You know, it's like, why, why is Chainlink worth, you know, whatever it is, like $15 billion fully diluted? Trying to be too analytical about that is going to lead you to making lots of mistakes. And the same thing is true with, with a lot of stuff going on today in crypto. And I think I would, I would make the same argument about Layer Ones, is that we don't really know what makes these Layer Ones valuable. If the argument is that, well, one thing should be money and everything else should be fuel. And therefore, you know, if there is a, you know, an avalanche or a near or a polka dot that's successful, then it's, it's currency should just be valued as fuel. And that's going to be really, really cheap and not so, not so valuable.

• 1:33:08Speaker 02

  And therefore it's not going to be able to drive enough economic security to secure itself. And therefore blah, blah, blah. I don't know. To me, you're multiplying like 20 probabilities together. And there's sort of this, you know, to me, you're just getting so much noise that's amplifying by, by taking together all those propositions that I just don't think that we know that. I don't think we know what makes these things valuable. But I, if I had to guess, and I would guess that you guys would probably put your mind the same way, if some other chain started taking off, it would start pumping. And not because of the transaction fees that are getting paid on the platform.

• 1:33:38David Hoffman?

  Hey guys, when I asked Haseeb this next question while we were recording, I had some troubles with my microphone, but I'm going to summarize the question here. Basically, he just gave a critique of ETH as money as with a more strict and rigid definition of the use of money. And I agree that in the sense that we don't use Ether to pay for our groceries, that ETH is not money in that sense. But then I tried to reframe the ETH is money statement as more of a commitment to the fact that Ether is valuable. Like it's a, it's a planting the flag and putting a foot down saying Ether is valuable. And we needed this to happen in the Ethereum community because Ether needs to be valuable for the Ethereum blockchain to work.

• 1:34:20David Hoffman?

  I rerepresented ETH is money as a different definition and asked Haseeb if just Ether is value instead of ETH is money resonated with him better. So let's get into his answer.

• 1:34:33Speaker 02

  Yeah, so that's a really good point. And I, look, I obviously, I'm a big ETH bull, and I love the Ethereum community. Basically, I could not be more bullish and excited about what you guys are doing in spreading the message of the power and the vibrancy of the ethos of the Ethereum community. And, you know, I think ETH is undervalued even today. That said,

• 1:34:59Speaker 02

  like, I think this is, you call this a personal failing of mine, but I think I'm somebody who, I'm particularly, I'm particularly literal, and that makes me very bad at politics. And so I think, you know, the ETH is money thing is a very powerful political statement. But it's a powerful political statement in the same way that, you know, defund the police is a very powerful political statement, but when you ask them, like, well, what do you really need to fund the police? Like, well, it's not exactly, it's sort of more complicated. It's like 12 different things, and they're kind of like defunding the police, but it's really more subtle than that. And so I personally don't like those kinds of slogans that sort of have this like Motte and Bailey-type mechanic to them. But I understand their utility, and they are very important. And look, you know,

• 1:35:41Speaker 02

  crypto is a, crypto is a fucking war zone, and you guys are fighting crusades against the Bitcoiners and the, and the whatever Tron shillers and whatever. And so I totally understand that. You need ammunition, and this is one of these pieces of ammunition. But at least for myself, as an investor, like, I just know that for myself, it's very difficult for me to walk around saying ETH is money, and still like really understand what I'm saying, and really understand, like, because I need to ask myself the question of like, look, 10, 15 years from now, or, you know, if another platform starts to succeed, or another smart contract chain starts to become like this sort of L2 that comes through its own, what is that going to be? And how does it interact with ETH? And what do I really think drives the value of these things? And where do I think crypto is going

• 1:36:23Speaker 02

  if there's another winter and blah, blah, blah, blah? All these questions, I think, are super complex and very, very difficult to probe. And so I like the way that you put it, is that, look, I think it's going to be, you know, our enterprise for the next decade is like, really understand what the fuck is ETH? You know, what actually is it? And right now, it's like evolving before our eyes. It's changing in all these different ways. People are valuing it in different, you know. Eventually, there's going to be a textbook written about Ether and Ethereum and spot contract chains and all this stuff. And I, what I really want to know, like, I think what I see my job as an investor is to try to get as fast as possible to whatever that person is going to write in that textbook of like, ah, here's what it was. Here's what it actually was. Here's how it actually worked.

• 1:37:06Speaker 02

  And all those people alone, those 10 years, they just had no clue. You know, they were, they didn't know the germ theory yet. They thought it was like devils and, you know, curses and hexes and all this stupid stuff that they were running around, not able to figure out what the real underlying mechanics were that made these things function the way that they do. That's what I see my job as trying to figure out. And so, look, God bless you guys. Obviously, I love you both, but I can't get behind the Ether money thing. And it's probably more my fault than yours.

• 1:37:32Ryan Sean Adams?

  I actually, for my part, Haseeb, don't really, like, the way you articulate it is, is totally fine to me, right? So where I have more of the problem is when people look at Bitcoin through a different lens than evaluating other crypto assets. And not just Ether, but other main chain layer, you know, one crypto assets and give preferential, a preferential thesis to Bitcoin, for example, without looking at all of the ways also Ether or some other asset of some other layer one blockchain accrues value. Because I think the arguments that make sense for Bitcoin could also potentially make sense for Ether.

• 1:38:14Ryan Sean Adams?

  I know Pfeiffer, Pfeffer, excuse me, explores that a little bit in his paper, but I do think it's an unexplored area of at least Bitcoin maximalism. But I'm content to leave it there. Haseeb, it's a, you know, fantastic articulation. Why don't we, why don't we end with this question? We're kind of zooming out all of the, you know, ways we've sort of, you know, changed our minds, intellectual misses that, that we've had over the years. I think people who have listened to Bankless will understand, like, we're, we're all very much trying to figure this out together. Like, it's, it's like a collective journey and you have to adjust your thesis mid, midstream. But if you were to lay out some maybe high conviction bets that you'd make at the risk of having to adjust

• 1:38:56Ryan Sean Adams?

  in the, in the not too distant feature, future, what are some high conviction ideas that you have right now that you think would be important for us to know?

• 1:39:07Speaker 02

  High conviction ideas that I have right now. Let's see here. The first thing, I mean, we touched on this already, but I think that Uniswap is going to get unbundled. And there's going to be more and more price competition and more and more complex forms of market making that are going to make their way to L1. I think that's the first thing. The second big bet that I would make in this space is that I think, so you know, as an investor, I spend a lot of my time, of course, in the Ethereum world and I spend a lot of time kind of in the world of exchanges and other kinds of businesses. And I think what we're, what we're seeing across the board, both in, both in DeFi land and in non-DeFi land, is increasing financialization of crypto, right?

• 1:39:50Speaker 02

  So we're starting to see options take off, not, not so much in cryptos, and we're actually lead investors in open. And options are still very, very tiny in crypto land, or in sort of on-chain DeFi land. Whereas in, if you, if you look at like, you know, options volumes on Deribit and on Paradigm and on some of these other options platforms, they're really starting to grow rapidly. And I think you're seeing things like, you know, structured products and all sorts of fancy financial primitives that are finding their way and starting to disseminate more and more through crypto. And eventually, I think what, what you see almost, almost inevitably between centralized finance, which I like to call C-Fi, and DeFi is convergence.

• 1:40:30Speaker 02

  Where is that over time, DeFi starts to basically converge with the things that people are buying and selling on C-Fi. And so one of those things as well, that I think is going to be a big, a, a big growth area in DeFi is, you know, already, you know, right? We talked today about how a lot of the volumes that are growing in DeFi today are, are in spot markets. So, you know, Uniswap is basically almost all spot. So it's buying and selling the, the raw assets, it's buying USCCs, selling Ethereum, whatever. But there's, but there's not a lot of derivatives right now on-chain. DoIDX is really the only platform that's doing it today. But we think there's going to be a lot of growth here. There's a huge cohort of platforms that are coming live very soon that are going to offer

• 1:41:12Speaker 02

  basically Bitmex-style trading experiences directly on-chain that allow people to get more leverage and trade also arbitrary assets. And that, you know, especially with Bitmex, the recent news of Bitmex enabling KYC for everybody. I think it's also very timely that this stuff is going to start coming live. So the big meta thesis to my, in my mind to look out for is DeFi and C-Fi converging and offering the same set of products and evolving in the same way. So like, you know, getting perpetual swaps onto Ethereum, getting options and other kinds of financial instruments onto Ethereum, getting more complex market making onto Ethereum. All these things will start to look more and more similar to eventually the point at which you can start doing all the same things you wanted to do on a centralized

• 1:41:56Speaker 02

  exchange. You can do it all from your Ethereum wallet. I think that's the future that's coming. And that's what I'm excited about.

• 1:42:01Ryan Sean Adams?

  Very cool. Haseeb, it has been an absolute pleasure to have you in front of the the Bankless Nation. Thank you so much for your time.

• 1:42:08Speaker 02

  Thanks for having me. This is a lot of fun.

• 1:42:10Ryan Sean Adams?

  I will leave listeners with this. It's a tweet that Haseeb recently made. It said, Ethereum 1.0 isn't big enough for what DeFi is about to become. I think that is important for the Bankless Nation to understand, whether it takes the form of Ethereum, whether it takes the form of ETH 1.0 or ETH 2.0, Bitcoin, other chains that develop. The idea around DeFi and the idea behind Bankless being self-sovereign over your own resources and money is the core thesis of crypto. At least that's what the Bankless Nation believes. Some action items, guys. There are two articles you absolutely need to read from Haseeb. The

• 1:42:49Ryan Sean Adams?

  first is published on Bankless. It is called "DeFi in ETH 2.0: Cities, Suburbs, and Farms", which gets into that analogy. We will include it in the action list. Also, read "What Explains the Rise of Automated Market Makers." Haseeb wrote that one as well. It gets into his thoughts on automated market makers. Lastly, we are looking for four more five-star reviews to get us to 100. So I just looked at the podcast on Apple iTunes. We've got a ton. We've got like 94 and we just need, excuse me, we've got 96 and we just need four more five-star reviews. So get out there. If you're excited about the Bankless Podcast, you're

• 1:43:29Ryan Sean Adams?

  excited about the movement, get out there, give us a five-star review and get us to 100. Risks and disclaimers, everyone. ETH is risky. Bitcoin is risky. DeFi is risky. Everything in crypto is pretty risky right now. 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.