SotN#16 - EXPLORING w/ Dan Robinson (Mempool Monsters, Optimism Launch, MEV, ETH/BTC Correlation with legacy, KuCoin Hack, FEW, Spinalda)

Fill out the questionnaire! https://forms.gle/aiWfvAvePx5qGJkC9 ---- 🚀 SUBSCRIBE TO NEWSLETTER: http://bankless.substack.com/ ✊ STARTING GUIDE BANKLESS: https://bit.ly/37Q17uI ❤️ JOIN PRIVATE DISCORD: https://bit.ly/2UVI10O 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ 👕 BUY BANKLESS TEE: https://merch.banklesshq.com/ ----- GO BANKLESS WITH THESE SPONSOR TOOLS: 🌐 UNSTOPPABLE DOMAINS - HUMAN READABLE ETHEREUM & CRYPTO ADDRESSES https://bankless.cc/unstoppable 🌈 ZAPPER - ULTIMATE HUB FOR DEFI - ZAP INTO DEFI http://bankless.cc/zapper 💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDS https://bankless.cc/monolith 🌈AAVE - LEND & BORROW YOUR CRYPTO W/O A BANK https://bankless.cc/aave ------ State of the Nation is EXPLORING, special guest Dan Robinson of Paradigm. 1) ETHEREUM'S DARK FOREST Short article from Dan: https://medium.com/@danrobinson/ethereum-is-a-dark-forest-ecc5f0505dff Unofficial Part 2 From samczsun https://samczsun.com/escaping-the-dark-forest/ 2) OPTIMISTIC ROLLUPS LIVE! Launch post!https://medium.com/@optimismPBC/light-at-the-end-of-the-tunnel-c390a05bbcb8 3) LIGHTNING ROUND - Why isn't crypto uncorrelated w/ stocks? - KuCoin hack showed who's centralized - $FEW and $EMN - Spinalda Testnet ------ Don't stop at the video! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Visit the official Bankless website for resources http://banklesshq.com/ 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 channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time we may add links in this channel to products we use. We may receive commission if you make a purchase through one of these links. We'll always disclose when this is the case.

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

• 0:00David Hoffman?

  The.

• 2:10David Hoffman?

  The.

• 5:37David Hoffman?

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• 6:14Ryan Sean Adams?

  If you want a better way to understand your DeFi portfolio, I recommend you go to zapper.fi and plug in your Ethereum addresses to get a comprehensive report as to your currently owned assets and where they are in Ethereum. If you were around for the 2017 bull market, it was characterized by refreshing Blockfolio over and over and over again. And anytime you would ever make a trade, you would have to manually update your Blockfolio to make sure that your portfolio was accurate. With Zapper, you don't have to do that because Zapper looks on-chain at your Ethereum addresses to see the assets that you have in various DeFi protocols. Not only does it tell you the assets that you own, but it also tells you if they are deposited into AVE, into Compound, what yield farm they're in, your predicted APY,

• 6:59Ryan Sean Adams?

  and it'll even let you make investments into DeFi protocols right through their zapper.fi portal, making it really easy to compare and contrast different places as to where you can deploy your capital. Check them out at zapper.fi.

• 7:16Ryan Sean Adams?

  All right, everyone. Welcome to episode 16. This is State of the Nation. We have a jam-packed episode for you today, guys. We have our special guest, Dan Robinson, who's a researcher at Paradigm. He's going to talk about the evil things that lurk in Ethereum's dark forest. We're also going to talk a little bit about Layer 2, optimism, big rollout last week on Testnet, and touch on the KuCoin hack, few and EMN tokens, but I'm in a testnet. Really, the goal for State of the Nation is to update you on what's happening in the DeFi and crypto space and related to the big-picture

• 7:58Ryan Sean Adams?

  stuff that we talk about in the newsletter and on the podcast, and hopefully drop some insights and action items. So David and I do this every Tuesday. We stream it live on YouTube. That may be where you're catching it now. Also comes out on Wednesday in podcast format, if that is your preferred, if that is your preferred way of digesting all of this material. David, how are you doing today, man?

• 8:24David Hoffman?

  Just fantastic. The Ethereum ecosystem continues to move at a mile a minute. So it's actually valuable for me to even do these things because it forces me to keep up with it.

• 8:35Ryan Sean Adams?

  Yeah, I know. It's like, it's like, it definitely takes two of us to try to keep tabs on like, you know, the 10 to 20% of things that are going on that we see. All right, man. So I want to do some announcements really quick first and then ask you the question I always ask. First, let's talk about our NFT podcast. So that came out on Monday. Why should folks tune into that?

• 8:56David Hoffman?

  You know, there's this really good line from, from Andrew. And then also I've heard it, you know, expressed elsewhere where, you know, currencies and money are the units that we choose to denominate value, but it's property that are that the things that we actually value, right? The whole reason behind a currency is to value property, right? And like, that's what the NFT side of the equation is, right? So Andrew Steinwald on the podcast had this great line where he said, you know, I think that, you know, the NFT market is going to be 100x the size of the DeFi market, simply on the rule of thumb that like, yeah, it was totally insane. But then, but then it makes sense when you, when you kind of think of like, well, an NFT can be anything other than

• 9:37David Hoffman?

  money. Like, everything else that's not money is, is some sort of, could be some sort of NFT, right? And so like, there, he's very bullish on what he calls the metaverse, which is just this world that exists that, you know, is everything else other than money, right? And so I think that's a pretty interesting take. And I hope that the metaverse continues to grow in the way that Andrew sees it.

• 9:58Ryan Sean Adams?

  Yeah, if you're trying to get caught up on NFTs, trying to figure out if it's the next big thing, make sure you catch up or you catch that episode. It's like an intro on NFTs, but we also go pretty deep in that one, too. It's also Badge Mint Week at, at Bankless. So every month, we mint the new member badges from the previous month. And so that's happening on October 1. David, you also put together a questionnaire, right? So we're trying to level up ourselves. And we're going to include that questionnaire in the show notes. But what, what's the purpose of that questionnaire? Why should folks check that out?

• 10:33David Hoffman?

  Right, yeah. So it's been like, two weeks since I've gone bankless full time. And I want to make sure that I'm producing what the bankless nation wants, right? And so like, it's a, it's a chance for you to give feedback on like, How you value different parts of like the bankless like media, you know, arms, right? So we, we have the podcast, we have the newsletter, we have the YouTube. Like which parts of these things do you value the most? What do you want to see expanded on? This is your chance to give the bankless, uh, the bankless team feedback as to what you guys want. And so, uh, that, that link will be posted everywhere in the bankless Discord. I, in the show notes after this episode is done, uh, in the, the YouTube, in the, in the podcast. So make sure that you take, it's just a very quick two to five minute questionnaire.

• 11:16David Hoffman?

  And it's, it's how you get the bankless media, uh, bankless propaganda division to start to propagandize exactly what you want. So take the, take the time and listen and fill that out, please.

• 11:26Ryan Sean Adams?

  Absolutely. And thanks in advance for everyone who fills that out, uh, fills that out and helps us level up. David, I'm going to begin with a question I ask you every single week on State of the Nation. What is the state of the nation today?

• 11:41David Hoffman?

  The state of the nation is exploring. We are exploring, right? So we all, and this is kind of fundamental to what the bankless nation is. Like we are on the frontier, right? But it feels particularly relevant in the last couple of weeks that we are kind of pushing the fold in, in many different ways. And it's extremely relevant to our guest that we're going to bring on in a second. Dan Robinson, who kind of started off this, this, uh, you know, uh, illustration of like the mempool is like this really unexplored territory. Right? And now there seems to be a bunch of effort in trying to illuminate the mempool. Also, we are on our last dress rehearsal of, uh, the test net for Ethereum 2.0. And so that we're kind of pushing the fold in, in that domain. And then there's a lot of conversations on, on Twitter that are also exploring new social domains as well.

• 12:26David Hoffman?

  So lots of exploring lately, lots, lots of expanding the reach, uh, and so we are exploring.

• 12:32Ryan Sean Adams?

  All right. Well, let's, let's start with that. Let's bring on Dan Robinson, who is a researcher at Paradigm. We're going to talk about the dark forest. You mentioned some concepts there, David, that we want to define for our watchers and our listeners, like the mempool. Dan, are you there? It's great to have you on State of the Nation, my friend.

• 12:51Speaker 02

  Yeah, thanks for having me.

• 12:53Ryan Sean Adams?

  You guys have one of the most interesting, I think, crypto-native funds in the space at Paradigm. And I know you're a researcher in the space, and you guys have been an asset to many of the protocol designs and many of the DeFi protocols that have come out. And I think the post that you put out called Ethereum is a Dark Forest was another way that you and Paradigm are giving back to the community. It starts with this line, which I love. It says, "This is a horror story." What you're about to write and describe in Ethereum being a dark forest is a little...

• 13:49Speaker 02

  So I was glad that it did, where I think a lot of people were then just the Ethereum smart contracts.

• 13:54Ryan Sean Adams?

  That. So we're in Ethereum, but what the heck is the Ethereum mempool?

• 14:00Speaker 02

  So the mempool is a set of transactions that have been submitted to the network and propagated to miners and other full nodes on the network, but haven't yet been confirmed or included in a block.

• 14:11Ryan Sean Adams?

  So if I'm like on MetaMask and I submit a transaction, I want to buy something on Uniswap, right, and I put my gas fee, there's this period of time where if I go on EtherScan and look up that transaction, it just says, "Transaction pending," essentially. So when the transaction is pending, when a miner hasn't picked it up and actually validated it and committed it to a block, it's sitting in the mempool, is that right?

• 14:36Speaker 02

  Yep. And this is a very dangerous time for your transaction because it's public. Anybody can see it, and people can submit transactions that come after it or that come before it, but there's no guarantee that it will be included, that how it will execute. And so people can basically mess with your transaction while it's visible in this mempool, but hasn't yet been confirmed.

• 14:55David Hoffman?

  Wow. Okay, so who is looking at this mempool? So you said it's visible, but I don't see a place necessarily. I haven't seen it on EtherScan, for example. Well, there's no aggregated place for me to see. So who's looking at the mempool? And where is that visible?

• 15:12Speaker 02

  Yeah, so if you're running an Ethereum full node, then your node has a mempool. If you're running a miner, then there's a mempool, which is basically the block template that you're trying to build. There are some tools that are being developed for mempool visibility that are more accessible for anyone. So like BlockNative is an example, which just came out with a mempool explorer. But I think usually this mempool is, you know, it's stuff happens very fast in the mempool. So it's mostly bots reading this. So basically, someone's hooked into their Ethereum full node, is watching transactions come in and is creating transactions programmatically in response to that.

• 15:48David Hoffman?

  Okay, so everyone that runs a node has their own version of the mempool. And what the mempool does is it broadcasts transactions out to the rest of the world. And the reason why you called your article Ethereum is a dark forest is because like, you know, in order to get your transaction into Ethereum, you need to broadcast. But then you are also broadcasting what we are calling your miner extractable value, right? You're broadcasting, therefore, the arbitrage opportunity that you're willing to commit to insofar that you are ready to commit to that transaction being included. So can you, first, can you elaborate on that? And if you wanted to just spin it in using different words. But then also, I want to get to like, okay, who are these monsters that are listening to our broadcasting our arbitrage?

• 16:32David Hoffman?

  Like, who are these people?

• 16:36Speaker 02

  So there's this a certain kind of specialized arbitrage or front running that happens that is kind of analogous to the front running that's described in like the Flash Boys book. And it happens in traditional finance, which is whenever there's a trade, you're broadcasting your intention to buy it, set up some particular limit price, say a trade on Uniswap. Somebody can potentially buy ahead of you, have your trade move to market and execute at a bad price and then trade after that. So that's in that. That can happen. And there are a lot of bots that specialize in this kind of arbitrage. And that's almost, I think it's fairly well known, although I think a lot of people probably underestimate how sophisticated these bots can be and how intense the race can be that happens when one of these

• 17:18Speaker 02

  transactions goes in the pool. There was actually a post that came out sometime after this one. Someone just dug in on an example of this kind of arbitrage that happened, I think, in the pickle token, when there was a big trade on pickle. There is a, the scarier kind of what I talk about in this post, at least scarier to me, although it's only applicable in a subset of cases, of which this was one, is this thing that we call generalized front runners. So the reason we were worried about generalized runners when we were writing this post is the concept of this post is that I realized that there was some money that somebody had accidentally sent into a Uniswap contract that could be retrieved by anybody.

• 18:03Speaker 02

  Anybody could just make a call to the Uniswap contract and get this money out. And it was about $12,000 worth. And when you're in a scenario where anybody can pick up money, which is often the case, especially with hacks, where like the idea of a hack, of a Ethereum smart contract hack, is that like anybody can get it, not just the owner, you have to worry about these generalized front runners. So what the generalized front runners do is, you know, the specialized ones just like look for Uniswap trades and then apply this particular formula to it. The generalized ones are much simpler in some ways. They just run your transaction, see what it does, test programmatically whether if they did that, if they did exactly what your transaction or one of its internal calls did, possibly mutating some of the arguments to like replace an address with their own address,

• 18:49Speaker 02

  would that cause them to realize a profit? And they don't have to know anything about how the contracts work, just sort of basically run this deterministic and just see what would happen if they did this. And if they see this, then they front run your transaction with something that makes that internal call.

• 19:05David Hoffman?

  So they just look at the out.

• 19:07Ryan Sean Adams?

  All this happens within a block time, right?

• 19:09Speaker 02

  All this has to, yes, has to happen basically immediately before your transaction gets included. And yeah, and yeah, it does.

• 19:18David Hoffman?

  So there's thousands of different ways that like people can leverage arbitrage, right? And so like smart traders, sophisticated investors, like they're incentivized to go out and find this arbitrage. But then the miner, when they hear the broadcasted transaction, they just listen to the listen to the transaction and they're like, well, did this person just find arbitrage? Let me find out by replacing all the receiving addresses and with my addresses and then I'll before I broadcast or include my own transaction. I'll just replace my address, their address with mine. And if I make money, then I will broadcast that transaction with more gas. Right? And so they're letting the laborers labor to find out where the arbitrage is on Ethereum.

• 20:01David Hoffman?

  And then they're just swapping out their address into their place so they could access that arbitrage instead, right?

• 20:10Speaker 02

  That's right. Currently, it's not miners, or at least we're not aware of any miners that are actually doing this at a sophisticated level. It's mostly other participants in the in the mempool who are running basically bots that do this and submit transactions. And as a result of it not being miners, there is some competition, even for a particular piece of MUV. There's often a bunch of bots that try to have to race each other for it. But yeah, that's exactly right. And it's true that this is kind of generalized running vulnerable case happens with hacks. It also happens with arbitrage when it's when it's like a pure arbitrage.

• 20:48Speaker 02

  It's just like, it's just like, for example, something with a flash loan where you know, you basically just make this call and you don't have to have any kind of permissions. You don't have to have any even assets starting out. You're just kind of like picking up this free money that's on the street.

• 21:04Ryan Sean Adams?

  So what is the dark forest analogy, like kind of the, I guess, the sci fi analogy that here, Dan?

• 21:11Speaker 02

  Yeah, so one of my favorite sci-fi book series, The Three Body Problem, which was translated from Chinese, is it's about, well, I think I don't want to spoil the books or especially even the concept of the dark forest, which is it's a fairly philosophical spoiler to give, but it's a the book is a philosophical mystery, so I don't want to I don't want to spoil it too much. But the book introduces this concept of a dark forest where you're in an environment where there are extraordinarily advanced predators. And the only thing that's keeping you alive is that they can't see you. And so to publicly identify somebody else is as good as essentially destroying them.

• 21:55Speaker 02

  And so in this in this environment, basically, you the only way to be secure is if nobody is if nobody can see you. And the problem, the reason that this was a problem for us is that in order to pick up this free money that was sitting there on Ethereum in this Uniswap contract, we would have to make it visible. We have to submit a transaction that alerted everybody to it. And then we just we just sort of knew that there would be that people would be watching and potentially would would steal it. I was lucky that when we when we encountered this scenario that I'd actually heard about these generalized contractors from Poldion, who studied this and wrote the Flash Boys 2.0 paper. And I'd never actually, you

• 22:37Speaker 02

  know, I'd never seen one of these bots before, but we sort of knew they existed from the effects that they have had.

• 22:44Ryan Sean Adams?

  So did you see them in practice when you're trying to claim that 12K, right? So I remember Phil's Flash Boys paper, and it very much seemed like, okay, in the distant future, we're going to have to worry about that, right? But are you you saying you saw it in practice here?

• 22:59Speaker 02

  Yeah, so when we when we encountered this scenario, basically, we wanted to be really careful because I'd heard about these things. And we would only get one shot at this. So I called in some some great smart contract security researchers like Sam Sun, Scott Bigelow, who helped who helped out with basically designing an obfuscation plan for this. And so, you know, I didn't want to just directly call the Uniswap contract, that would make it really obvious. So instead, we created a contract, actually created a system of two contracts, one of which had to be called by one transaction and would activate the other. And then we created another transaction to call the second one and would only work once it had been activated. And the idea of this was just to kind of make it somewhat more computationally difficult

• 23:41Speaker 02

  for the attackers to detect what was going on, actually, and what was going to happen in the second transaction until it was too late. Unfortunately, and you know, like, while we were doing this, it feels kind of, you feel kind of silly, because you're like sneaking around to hide from this kind of monster that you don't even, you've never, you've never seen and aren't really sure exists. And so, whereas, we also wanted time, under some time pressure, because, because of the way the, the, the contract was set up, anyone could accidentally even pick up this money by just, by just making, making up with liquidity, a burn call to the, to the Uniswap pool. So we were, we were on a tight timeframe.

• 24:23Speaker 02

  Unfortunately, what happened was we actually, we did get front run. So our transaction, when, when we tried to do this obfuscated scheme, the second transaction got immediately front run. And this was money that had been on the chain for eight hours. But basically, as soon as we submitted this transaction, I was going to go pick it up. Somebody else sniped it.

• 24:43Ryan Sean Adams?

  Wow, so one of the monsters in the dark forest basically identified the, the free money, went and front ran you and stole it before your transaction could get, could get through.

• 24:54Speaker 02

  Yep.

• 24:55David Hoffman?

  So this, this kind of reminds me of that story where, maybe it was Darwin, Darwin like hypothesized the existence of a very particular kind of bird that had a very, very long beak, because in order for that, this one particular flower on this one particular, you know, place, place of land, in order for that flower to even be able to exist, it would need a bird to pollinate it that had a very long beak. And he didn't know that the bird existed, but because of the conditions set by the environment, he kind of just was able to assume that this bird would exist. And so, Dan, you were kind of doing that same thing, like, well, there's this set of conditions, and therefore, I'm hypothesizing that this monster is going to be there, ready to snag it up, regardless of whether I know that that monster's there, right?

• 25:38Speaker 02

  That's right. And in this case, you know, we, we, we had some evidence. We'd heard about people who had encountered a monster like this before. But in theory, from first principles, you could figure out like this would, this would be a risk. And in fact, when trying to figure out what kind of obfuscation tactics would work on it, we had to, we had to basically reason about what would, what would, could someone build? Or what would be profit, what would be worth the trouble to build? Um, yeah.

• 26:02David Hoffman?

  So Dan, so what? Like, why does this matter? Like, what's, why, why do we need to pay attention to this? Why isn't this just like, okay, so like some people, more sophisticated people can like have, you know, privileged positions that arbitrage versus others? Like, why is this a big deal?

• 26:19Speaker 02

  So I think the, um, you know, right now, there's sort of a limited set of cases where this particular kind of generalized front running is, is dangerous. It's mostly bad for white hat hackers. Um, that's like, that's maybe the people who deal with it, deal with the most. Um, but there was, there was a general worry about MEV extraction, which is uh, potentially the amount of minor extractable value that could come from um, submitting, reordering, censoring transactions uh, within a block or possibly across, across a number of blocks is potentially much greater than, especially in a complex chain like Ethereum, much greater than the amount that you can get from transaction fees or from block reward.

• 27:01Speaker 02

  And if you have a, a blockchain where there's, there's that much of a prize in terms of minor extractable value, um, potentially if miners are going to have to extract it or be outcompeted by miners that do. And some of this, I mean, you know, honestly, the kind of, what we saw here was, was, wasn't quite benign. Um, but it wasn't even as dangerous as some of the others that you could imagine would be like censoring payment channel uh, closures, for example. There's all kinds of evil stuff that miners could get up to. They don't right now because it is, you know, it's, it's kind of difficult to, and a lot of them are, are at least to some extent altruistic, but potentially they could be outcompeted by ones that do.

• 27:36David Hoffman?

  Right, okay.

• 27:36Ryan Sean Adams?

  So what that means basically is that we lose the credible neutrality of transactions on Ethereum, right? So that like it's no longer sort of a fair bidding process of kind of just simple gas fees. There's this whole class of monsters in the dark forest that can just front run you and outbid you. So it no longer becomes fair. It's a class system.

• 27:57Speaker 02

  It gets even more unfair once miners are the ones actually doing this, especially if they're extracting some of the more malignant kinds of MEV. One interesting thing is miners being unfair was actually the solution that Samsung recently found to the dark forest problem, which happened when, last week, when he, or a couple of weeks ago, when he found a $10 million vulnerability in a contract that could potentially be called by anybody.

• 28:25David Hoffman?

  Really up in the stakes.

• 28:27Speaker 02

  Yep. Yeah, it was about 1,000 times as much at stake as when George and I were dealing with our contract. The solution that they found was to bring in a miner, a mining pool, Spark Pool, to basically include their transaction without propagating it to other miners.

• 28:47David Hoffman?

  And so why, so the theory is though that, you know, Spark Pool should, could do that just as like a service, but also Spark Pool could then take that same transaction and do the same thing that we've been talking about, where they redirect the funds to their own pool, right? As rationally incentivized actors, that might be, and maybe, maybe Spark Pool are a bunch of good guys, but like all the other mining pools in Ethereum don't have to be, right?

• 29:13Speaker 02

  That's right. And potentially whichever mining pool is most malignant and most able to extract MEV will outcompete the others because it can afford to spend more on hash rate.

• 29:24David Hoffman?

  Right. So this is a classic, classic Moloch dilemma, right? Where like whoever defects is the one that wins more money. And so therefore everyone has to defect, right? And so like maybe, maybe this was like the one time where Spark Pool would do this. But as soon as all these other miners are seeing this happen, like, well, Spark Pool can't afford to not do it, right? Or else they'll go out of business. And so miners, the worry here is that miners are going to take a more active, direct role in ordering transactions because it means, it means the world to their bottom line. So in order to stay, you know, afloat as a company, they have to do this.

• 30:03Speaker 02

  Yeah, that's right. And you know, I think we may well be some ways away from that really unfortunate state where the miners are stuck in this yeah, in this Moloch scenario where they have to do this to compete. Generally miners in both Bitcoin and Ethereum have acted like somewhat long term or sort of rationally altruistic parties. But I think it potentially could be only a matter of time before the barriers entry on this get lowered.

• 30:33Ryan Sean Adams?

  So Dan, is it also the case that there's kind of an arms race going on here in the mempool, in the dark forest, between people who want their transactions to remain hidden? And those, I guess, predators that are trying to seek out those transactions and front run them? So you mentioned BlockNative, who just came out with, and we're showing it here on the screen, a mempool explorer, which is the first time I've seen this. And it's a whole suite of API services that allows you to just basically see transactions in the mempool and kind of program your own robots, right, in the mempool? And so before this, we put in a uniswap contract address. This is liquidity pool for an ETH pair, basically.

• 31:18Ryan Sean Adams?

  And we can see all of the transactions that are in the mempool that are pending, that are like just rolling through, right? So you can see this one, this is a Tether USD one. You can see the exact amount of gas that is being proposed here. Like, the whole dark forest is visible to us in a block explorer. So does this just create this entire arms race?

• 31:41Speaker 02

  Well, I think arguably, any technology that is available to like ordinary users, or makes it easier to basically see in the dark forest, is potentially just leveling the playing field for this. So that could be positive. On the other hand, it's also to some extent accelerating this inevitable future, where everybody has the tools to do this. And so basically, MEV, I don't know, overfarmed, I guess would be the term, or potentially captured by miners.

• 32:11David Hoffman?

  Okay, so the end state of this, what we're worried about is that, you know, people that are, the bots that are front-running these arbitrage opportunities, eventually that software and that logic gets integrated into miners, right? And what this really illustrates is like, while Bitcoin and Ethereum are trying to push control from the center out to the edges, at any one particular block, there's actually just one person that controls what a block looks like, right? For so like, while the whole entire system over many, many, many blocks is completely leaderless, every single individual block has one single individual leader, right? They're the ones that mines the block and gets to propose it. And proof of stake actually doesn't even fix this, right? It actually just kind of formalizes it, and it just like allows people to take turns formalizing blocks, right?

• 32:56David Hoffman?

  And so, the, what we're really starting to worry about is that the miner extractable value for other blocks can be really significant, which contributes to chain insecurity. Can you, can you comment on that?

• 33:09Speaker 02

  I'm sorry, could you be the question?

• 33:11David Hoffman?

  So, yeah, so since, since each individual block, there's one specific person that is able to order transactions based on, you know, the activity for, that's included in one specific block, that can make one block more valuable than the next block, right? And so, the miner extractable value, all the value that, you know, all the arbitrage bots could have happened, goes to the miner for one block. And that could be a lot of money if there's a lot of arbitrage in just this one block, right? And that makes the security of Ethereum for the next few blocks up in the air, right? Because there's a lot of opportunity to go back and mine that one particular block. Can you kind of talk about like what this problem looks like at maturity when it comes to chain consensus?

• 33:54Speaker 02

  Yep, so there's actually a paper that, I think may even predate Ethereum, called "On the Insibility of Bitcoin and the Actions of the Block Reward", and that talks about this problem in Bitcoin, where the only miner extractable value, at least the only one that's talked about, is just the transaction fees. And the issue is that if you have transactions with really big fees, potentially it's worth it for the next miner to reorg your block instead of, instead of letting them do it. And that causes, that causes a, a lot of rollbacks and an unstable Chain on Ethereum, potentially the problem is worse because yeah, there's so much M V that you can get. And when you can do it across multiple blocks, you have what's called a time band attacks, which could potentially be even more even more serious. So one, it's not exactly a solution to this problem. I do think the I P fifteen fifty nine

• 34:40Speaker 02

  potentially improves this situation by basically socializing some of the some of the transaction costs and in effect, spreading them out over a lot of blocks by saying like, we're going to keep the block reward. We're just going to burn some of the transaction fees. So ultimately, like the value of those transaction fees end up in the block reward, basically.

• 35:00Ryan Sean Adams?

  Yeah. So this is kind of the a grim picture. I guess we've we've painted a little bit like there is this whole kind of arms race in the dark forest. And, you know, there could be a future state where transactions, there's multiple parties and some parties have privilege over transactions versus versus others, particularly those with capital, those with wealth. Is it all grim, Dan? Or like, is there some light at the end of the tunnel here? How do we? How do we solve this?

• 35:29Speaker 02

  So I think there is there are, I think, a few possible solutions. So one is you could imagine technologically just figuring out a way to blind transactions. And this would would either have to be done at the layer one level or

• 35:48Speaker 02

  or potentially, you know, within within some particular layer two system, which should be have some way that transactions get ordered before the miner knows what is actually included in them. And I think there's a lot of potential questions about that kind of solution, a lot of arms race that could happen there. But there's at least potentially some promise of just like a technical solution. That that kind of removes this problem. And you can you could imagine an ecosystem that implements this kind of of solution out competing one that doesn't, because ultimately, this really predatory environment, no one's actually going to want to use it. People and and as a result,

• 36:27Speaker 02

  you know, like the the predators won't have anything, there won't be any prey. So they'll they'll just like overfish the environment.

• 36:35Speaker 02

  I think another possibility, and this is one where optimism, which Vol'skozhur paradigm is invested in optimism, has been thinking about, which is some MEV is inevitable. You could call up a nine MEV, and that's like the first trade on Uniswap in a block, for example. And then some other kinds potentially more controversial, but you could imagine a system where a DAO basically captures all the MEV. This actually is also proposed by KeeperDAO. We have basically a benevolent cartel that effectively captures the MEV, can redirect it toward other users, can give it back to users, can potentially prevent some of the worst kinds of MEV from being extracted.

• 37:19Speaker 02

  And this is sort of the escape from Moloch, where you have, if you have like a single Leviathan, that's powerful enough not to be subject to the same incentives.

• 37:29Ryan Sean Adams?

  Very cool. Dan, we've got to pause for a quick sponsor break to tell folks about our sponsors. But do you have a few minutes to talk a little bit more about that specifically later too in optimism when we come back?

• 37:42Speaker 02

  Yeah, I'd be happy to.

• 37:43Ryan Sean Adams?

  Awesome. Thanks so much. All right. We want to tell you a bit more about our fantastic sponsors.

• 37:49David Hoffman?

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• 39:17David Hoffman?

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• 39:40Ryan Sean Adams?

  All right, Dan Robinson is still here and we're going to be talking about, we want to talk about something else that is exciting that is happening on, in the Ethereum and DeFi landscape. So if that first segment got you a little bit down, here's some optimism for you. And optimism published posts this week. They are a layer two scaling solution that kind of contrasts the, you know, this is a horror story. Ethereum is dark forest, it's called light at the end of the tunnel. All right. And so for a very long time, the context here is, of course, Ethereum has had a scaling challenge and not just Ethereum, other blockchains have as well.

• 40:22Ryan Sean Adams?

  And for a very long time, the holy grail to that challenge has been some form of a layer two Ethereum environment, where you can run the Ethereum virtual machine and all of the smart contracts, MetaMask and infrastructure that you're running on the Ethereum mainnet can run in this layer two more scalable solution. And it feels like finally, we might be making some breakthroughs here. Dan, can you tell us a little bit about optimism, what it is and what they just launched?

• 40:57Speaker 02

  Yeah, so again, just to repeat the disclosure, Paradigm's invested in optimism. And generally here, I'm speaking about my own views and not that we're not representing the fund or the company optimism. But what optimism has built and is continuing to build is a layer-two scaling solution for Ethereum that combines two innovations. One of them is this optimistic roll-up, which reduces the execution costs of running smart contracts on-chain within the fully- grown environment by optimistically saying,

• 41:36Speaker 02

  "Let's assume that this worked and that when this was submitted, the state was valid until challenged." And then there's a challenge-response protocol for actually saying, "No, this was an invalid state transition." Otherwise, you just have to show the blocks on the Ethereum chain and you just say what they do, what the resulting state from them is. And after some period of time, that state is finalized and it's possible to, for example, exit back onto Layer 1. So that reduces, you know, right now, the most serious scaling challenges and costs on Ethereum involve the state storage opcodes.

• 42:18Speaker 02

  Actually, just having data in the block is relatively cheap. And that scales, maybe bandwidth eventually scales a little better than this sequential computation and state accesses. So that's a way to relieve some of the burden of these complex calculations on Layer 1 by saying Layer 1 just has to see the blob of data that represents the block and what someone asserts to be the state that results from it.

• 42:49Speaker 02

  The other innovation that optimism is including in this is having a sequencer. And this is the one that's that most directly relates to MEV. So this and this is orthogonal to to the optimistic roll up. You could have this on a security roll up, you can have this even without a without a roll up at all. Um, this it's it's this gives priority in terms of transaction ordering to a particular entity. So by basically giving the sequencer a monopoly in the in the short run, there's there's, I think, maybe a 10 minute period. Um, on the ordering of transactions, you eliminate this arms race to get the to get your transaction included.

• 43:31Speaker 02

  So as long as that party is is honest, they can potentially just confirm your transactions and tell you. So this reduces latency and they can just not front run your transactions and therefore mitigate front running.

• 43:45Ryan Sean Adams?

  Does that mean, Dan, we're trusting that entity, though?

• 43:49Speaker 02

  So in the in the short run, yes, for particularly MEV extraction, although arguably what it falls back to in the case of a dishonest sequencer is not that different from the Ethereum Alwan assumptions, or at least possibly the inevitable result of them. Um, in the long run, I think the and this, you know, this is I can't speak that much. It was a long term roadmap, but the idea is there should be, um, there should be a governance, a governance mechanism that ensures that the sequencer can't just, uh, extract all the all the value on this. Now, uh, even even without that kind of governance, though, you can always exit. It's always safe to exit the the roll up and potentially go back to the main chain.

• 44:33Speaker 02

  Um, so a rational sequencer may not want to to extract that MEV. And this is different from a rational miner who might have no other choice because they're in this in this MOLX situation. The sequencer is somewhat more aligned with the long term goal of keeping everybody on the roll up and therefore not interfering with the way they use it.

• 44:52Ryan Sean Adams?

  It always feels like with these coordination tools, we're like squeezing the balloon, right? Like a little bit, right? Where we're trying to like get the MEV problem somewhere else. We come up with a solution to kind of solve it for a while, but we're squeezing the balloon and it it starts to seed in in other places. So it just does feel like this perpetual arms race. I want to talk, Dan, really quick, and we can come back to MEV in a second, but just about the benefits of optimism. And I think Hayden Adams, who is founder of Uniswap, kind of put it well, how big this potentially could be to have an Ethereum native EVM running L2. You get security from Ethereum, right?

• 45:35Ryan Sean Adams?

  So this is not like a sidechain. This is not like a, an exchange. You are actually imbuing the L2 with Ethereum security. You have the scalability benefits. You don't have the data availability issues that are present in other Layer 2 solutions like Plasma notoriously. You've got interoperability with other DApps on the Layer 2. So you preserve at least within Layer 2 this composability, this Money Lego type nature. And it works with Ethereum infrastructure. So people don't have to rewrite what they've already created. So that means like, you know, MetaMask can work more natively out of the box.

• 46:17Ryan Sean Adams?

  Uniswap and Synthetix are much easier to port. And he lists these other benefits as well. Do you think Hayden is kind of overblowing some of these benefits? Or do you think this is that big of a deal, Dan?

• 46:29Speaker 02

  I think in the long run, these are, these all are exactly what makes us so excited about optimism. I think, you know, there are costs, trade offs that come with using Optimistic Rollup as a solution rather than, than something else. And those include, there's a withdrawal to the main chain to allow this fraud proof process to happen.

• 46:53Ryan Sean Adams?

  How long?

• 46:55Speaker 02

  So I'm not actually sure where they've learned. I believe it may be, it may be one week, but don't quote me on that. But it's, you know, it's configurable and it really depends on the security assumptions of the, of the rollup.

• 47:09Speaker 02

  The other one is you're limited ultimately by the data availability throughput of the main chain. But what is really exciting about this is that, you know, with Eve2, there's been a lot of progress on it, but some parts are still really far off. But one thing they're pretty sure they know how to do is massive scaling of data availability throughput through Phase 1 shardchains. And so if you combine Eve2's ability to like, basically have a ton of data availability proofs without having to worry about execution, and then the optimistic roll-up approach of all you need to prove is data availability,

• 47:51Speaker 02

  and then execution is proved with this interactive process, there's a lot of great synergy there. That's what I was really excited about, is we think that the problems, like some of the challenges to optimism, are exactly the ones that we think are, there's been serious progress being made.

• 48:09David Hoffman?

  One thing I don't think that the average person is quote-unquote "pricing in" to like the future of Ethereum is like the compounding nature of all of these solutions, right? And so, one solution, one domain can really complement another solution in another domain. And while maybe any one particular solution wouldn't have worked in silo, when you kind of combine all of them together, you get something like that's greater than the sum of each individual parts. So there seems to be a lot of optimism about optimism, which makes me optimistic. So, I'm cool. And so, thank you, Dan, for helping. I know the optimism team has been very complimentary, is that a word? About paradigms, support

• 48:54David Hoffman?

  of them. And so, you know, thank you for being good stewards of the ecosystem. And I do want to bring this all the way back to MEV, right? Which is kind of, we started this conversation on, you know, Ethereum is this dark forest with these bunch of monsters that are coming to eat your arbitrage, right? And, you know, the worst-case scenario for this is that, you know, this just is a recentralization of power and control over these supposedly decentralized systems. And so you you mentioned like the optimism has this sequencer that allows the the what is so incredibly valuable, which is the role of sequencing transactions to be formalized, right? And I think in the social contract of optimism is that the formalization of these these sequencers

• 49:37David Hoffman?

  allows the users to have say as to where they're they still get some amount of their value extracted, because that's what sequencing does, but they at least now have some say in where this value goes. Can you talk about that component? I'll expand on that component of optimism a little bit more?

• 49:54Speaker 02

  Yeah, so I think it's really important and part of what optimism is doing is to not build too much of a of a moat or barrier to people running their own optimism's optimistic rollups or people other running other ones. There's some competition at the at basically the rollup level that will incentivize a sequencer to basically be a be a good sequencer. And so, you know, that's that, I think, that's very important, because you don't want sort of capture of this by by something that could could either, yes, censor transactions or or extract malignant MEV.

• 50:33Speaker 02

  But it can be valuable to have to basically delegate the ability to sequence your transactions to this to this party in order to get all the benefits that we talked about of avoiding the MEV arms race.

• 50:45David Hoffman?

  So one thing that concerns me is that like this, while it's good that we are able to harness the power of MEV and direct it, it kind of returns us to a very age old problem of governance, right? Like, and it seems to be that, like, with optimism and the sequencer, like, they are creating this oil well, right? This oil spigot that's coming out of the ground. And also, there's only one of these things, right? And so, all of a sudden, like, the value of being able to capture and coordinate the value coming out of this oil well out of the ground is becomes politically very strong, right? It becomes a very, very powerful force. And, you know, humans, as as, you know, as coordinated as we can be, we tend to be, we tend to succumb to thing like governance, right?

• 51:30David Hoffman?

  Like, when there's a money printer, like, there is a lot of incentive to try and capture it, right? So why and and the optimism team seems to be, again, optimistic that they have overcome this governance issues. Do you know why they're so optimistic about like this not being a problem?

• 51:47Speaker 02

  Well, I can only speak for myself, but I think part of it is what I was saying before about competition, which ultimately, at least in my view, markets are often are better, often better coordination mechanism than governance. And there's always this, this exit, right, from a, from a roll up if, if the sequencer is malicious. And that's, that's independent of what the, of what kind of the voice process is for, for choosing the sequencer and who governs that. That said again, I think it, it partly may just, may just depend on, yeah, on, on solving some of these problems with DAOs. And I think it is kind of cool how the DeFi revolution has, has, I think, really pushed DAOs forward

• 52:32Speaker 02

  because now there's something very valuable to govern. There's a lot at stake here with a lot of these DeFi protocols and with something like optimism. And I think we're going to find that there's pressure now to basically, yeah, to, to try to develop better governance mechanisms. I don't think we're there yet.

• 52:47David Hoffman?

  Right. So, so the Gitcoin model is, you know, donations and funding from the market, right? And so, you know, no one, if you go to Gitcoin, you donate your money and then you get quadratically matched. And so, according to the free market, only good grants get funded because the free market tends to fund those. And that seems to be like the same kind of thought process with like sequencers. Maybe, maybe there's a, a sequencer which is donating toward like, towards like money laundering or human trafficking. And so people like opt out of that sequencer for something that, you know, is, is a sequencer that promises to send money towards, you know, COVID research or cancer research or something like that. Is that, is that the kind of the idea?

• 53:31Speaker 02

  Yeah, yeah. So I think that and, or just, you know, if a roll up is a bad user experience, because there's a lot of them EBIT on that, then potentially people can, people can switch off of that.

• 53:40David Hoffman?

  Sure, sure.

• 53:42Ryan Sean Adams?

  Dan, this has been fantastic. Thanks so much for telling us about optimism. So for folks that are just kind of proliferating, just viewing this from time to time, optimism now is in testnet. So Synthetix has gone live with a testnet version of it. There's going to be an incentivized testnet. So we'll be monitoring how that progresses. One of the most exciting things I think about optimism is with Layer 2, you're not just solving a technology problem and a security problem. You're solving a coordination problem. And to see at least, you know, Chainlink, Synthetix, Uniswap sort of step up and say, hey, we're going to do this together

• 54:22Ryan Sean Adams?

  is very encouraging, I think, for the Layer 2 and Ethereum scalability space. Dan, thanks so much for spending time with the Bankless Nation. We really appreciate it. We will be looking at your work in the future as well as you explore how to stymie and stifle the monsters in the dark forest.

• 54:43Speaker 02

  Thanks so much for having me on.

• 54:45David Hoffman?

  Cheers. Thanks, Dan.

• 54:46Ryan Sean Adams?

  All right. Excellent. All right, guys. Wow. There's a lot there, David. I mean, like, I am blown away when I think about optimism and when I think about kind of the dark forest and the MEV, all the implications there. We've got a podcast coming up that's going to get into some of this, right? Do you want to tease that a little bit?

• 55:07David Hoffman?

  Yeah, absolutely. And I feel really, really strongly about this, too. So like, you know, I've been working my, quote unquote, well, let's go ahead and say it. I've been working my ass off ever since like 2018, learning how to produce content, like learning how to write, learning how to write in ways that people resonate with, and then learning how to make podcasts, right? And so now I'm pretty good at it. And so now you and me, Ryan, created this platform that a lot of people listen to. And now we're going to try and do something a little bit more direct, a little bit more intentful, right? And that is injecting the thought and process of Moloch into people's brains at the peak of the bull market rather than at the bottom of the bear market, right? And so we're bringing on Amin Soleimani and Kevin

• 55:51David Hoffman?

  Milwaukee, two guys who are basically if you wanted to say sum up their job in a very simple sentence, it's they're each trying to slay Moloch in their own particular way, right? And so maybe you guys are kind of just tuning into what Moloch is. Well, that's A, what the podcast is going to be about. And in order to prepare for that podcast, you can read a recent Market Monday that I wrote, but then also read the Meditations on Moloch blog. Basically, Moloch is the god of human coordination failure, right? And it's basically the reason why we can't have nice things. And a really good example for this that maybe a lot of people can resonate with is like when we were delegating people, when people were delegating yams in order

• 56:35David Hoffman?

  to save yams, right? They were foregoing the opportunity of earning more yams from the yam staking system. So other many, many people withdrew their yams to delegate yams to save yams. But then that made it more lucrative for other people to defect from that in order to earn more yams, right? And so there for every anytime there's a human coordination success, there's incentive to defect, right? And that's the god of Moloch. And we're going to talk about this concept with Amin and Kevin. And I truly believe that like Ethereum is this platform for learning how to slay Moloch, right? Learning how to coordinate with each other. And anytime there's like a new yield farm, anytime there's a new project like Ethereum 2.0 itself,

• 57:19David Hoffman?

  these are all coordination mechanisms that are tools and infrastructure for humans to coordinate more effectively, which is like the great

• 57:27Ryan Sean Adams?

  Going on in the S and P? What is up with that, man?

• 57:29David Hoffman?

  Dude, and it's not just the S and P, right? So like, I think the if you take the DXY, which is the dollar index chart, and you flip it, it like lines up so perfectly with the ETH chart, right? And so what this means is that like, when the dollar becomes more valuable, Ether becomes less valuable, right? And Bitcoin is also doing this as well. And which is really frustrating for me who like totally signed up for an uncorrelated asset inside of an uncorrelated industry. And it's just like, oh, it's just not happening. For some reason, you know, there's a perfect storm of things happening in the world that's making our industry super correlated with the rest of the world, which is a little bit frustrating.

• 58:09Ryan Sean Adams?

  So this is a

• 58:11David Hoffman?

  The Bank List Day in the Nations are also brought to you by

• 58:13Ryan Sean Adams?

  matched with NASDAQ and you could see how the lines just sort of match together. And I think we're seeing a lot of that. So when does it end? I guess is the question. Right now, it seems like a lot of crypto is sort of responding to what's going on in we call macro. So what is the Fed doing with respect to printing money? What is the dollar doing? Is it going up or down relative to other currencies? What are stocks doing? When does that stop? And when do we finally get our uncorrelated asset, David?

• 58:43David Hoffman?

  Yeah, well, at some point, we do have to think that like there is going to be correlation when these things mature. Right like they are going to fit into the rest of the world. And when they fit into the rest of the world, then they're going to be have relationships with the rest of the world. So like at some point, it's inevitable that these things become correlated. However, I'm not ready for that yet because like we still have Ethereum 2.0. We still have EIP 1559. We still have staking and all of these things are things that only Ethereum has. Right? And so in the sense that these things are valuable, those things should be, that should make Ether uncorrelated until maturity. Right? Like, I don't consider Ether as an asset mature in the slightest. Right? Like, that's why I'm bullish. Like, you're buying in before it's mature. Right? You get to ride its maturity wave up.

• 59:28David Hoffman?

  And so I'm hoping that like the phase zero testnet gets up and running and we can start staking our Ether. And some of these like novel investment theses start to become really, really salient. And that starts to decorrelate us once again.

• 59:42Ryan Sean Adams?

  All right, man. That's all the time we have for that. We're just over two minutes, so we're doing OK on that. So let's talk about another thing that happened last week. And this is the KuCoin hack. So KuCoin is an exchange. I've never used it myself, but it is a fairly large exchange. And over 150 million was stolen from their hot wallets. A lot of these wallets contain Bitcoin, Ether, and also ERC 20s. I felt like, wrote a post on this on Monday, so just yesterday, I felt like this served as almost an asset, an acid test on how decentralized these Five protocols work because what we saw is a lot of the tokens and a lot of the assets and even some of the non Ethereum blockchains just they they press their freeze button

• 1:00:27David Hoffman?

  Right.

• 1:00:27Ryan Sean Adams?

  On the the tokens. And, you know, some people see that as a pro, but I think that is definitely, you know, fits into our protocol sync thesis on If an asset is not in a protocol is not decentralized, right? It's it's not going to settle to the bottom. If an asset can be frozen, or there's governance, or there's a small party that can affect its credible neutrality. It's not going to be a good base layer for all sorts of things for, you know, property for the world or for money. What's your take on this, David?

• 1:00:59David Hoffman?

  Yeah, no, I think you got it exactly right. And really what this whole event was, was like a big, a big test as to whether or not there's decentralization theater going on, right? And so, you know, when when the time comes, when when, you know, something happens that you didn't intend it to, are you able to do something about that? Or are you a completely trustless, decentralized, permissionless platform? Right? And so and and there's like a spectrum here, right? And so like Kane from Synthetics wrote a blog post about or a tweet thread about, you know, how he doesn't think it's worth his time to like put in a proposal to freeze funds, right? And so like what that's suggesting is that like Synthetics may have the ability by vote to freeze funds.

• 1:01:42David Hoffman?

  But he doesn't think it's worth it. And he also doesn't think that it's like it's a net positive in the long run. Other protocols just went straight for it, including Ample4th, right? Like Ample4th just said, like, press the freeze button, right? Like top, which is kind of odd from a money that's trying to be fully decentralized and fully governanceless. They just decided they decided to govern as instead of non-governing, which is kind of in their social contract. So that's kind of weird. And then there's also Bitcoin and Ether, like you said, that just no one has that ability whatsoever. So it's not even a conversation, right? It's a very interesting spectrum going on here.

• 1:02:16Ryan Sean Adams?

  Yeah, so David, I don't know what podcast we talked about this. It might have been our Protocol Sync podcast. It might have been another State of the Nation, but we've kind of speculated. We've probably talked about it a lot, but we've kind of speculated, okay, what would happen if a criminal stole money? What money would the criminal prefer? Chances are that the money the criminal prefers is the most credibly neutral money, the most decentralized, the most unstoppable money on the planet. Liquidation process, so we can view all this in real time on chain. And the address of the hacker had all of these funds, including Ampleforth, which was frozen, and SNX, and other assets that couldn't be frozen. And what does the hacker do?

• 1:03:00Ryan Sean Adams?

  Immediately tries to sell them for ETH on Uniswap.

• 1:03:04David Hoffman?

  Right.

• 1:03:04Ryan Sean Adams?

  Tries to go to the most credibly neutral money that is available to him. So I do think that is maybe, I guess, some more credence, some more evidence of the Protocol Sync thesis coming true.

• 1:03:19David Hoffman?

  As if we needed it anymore.

• 1:03:20Ryan Sean Adams?

  Yeah, and I think, you know, there's obviously, there's obviously the counter to that. I think that people would say, so you're saying, Ryan and David, that the only people who need crypto money or these base monies are criminals, right? Well, not quite. I mean, dissidents fighting for their freedom also need credibly neutral money that their government can't stop. So do companies that compete with one another. If one company can influence the monetary policy or freeze a transaction, that's not good. So do countries at war. So again, we need a credibly neutral monetary system and property rights system to essentially solve what we were talking about earlier, which is these Moloch, these coordination problems across humanity.

• 1:04:05Ryan Sean Adams?

  So it's not just for criminals, but it is, I think, enlightening when you see an actual acid test of how decentralized these monetary systems are and these assets are. And you see what criminals effectively do with the assets. So, super interesting.

• 1:04:21David Hoffman?

  I think another take to have here is that, you know, once again, this is another centralized exchange that got hacked, right? And so

• 1:04:28Ryan Sean Adams?

  Yeah.

• 1:04:28David Hoffman?

  When we think about like a DeFi protocols with rug pulls that steal $10 million, $20 million, or there's a contract bug and people lose a few million dollars. Like this was $150 million and it could have been even more like they're still up in the air as to how large this was, right? And so anytime a centralized exchange gets hacked, compare the size of that hack to like the most recent DeFi bug exploit, right? Because like every single time the centralized exchange hack is orders of magnitude bigger, right? And exchange hacks don't happen on DeFi. Like they don't happen on Uniswap. And so like, it's a good reminder as to like, why we want to live a bankless life is because if a bankless life is at all possible, it's because there the

• 1:05:12David Hoffman?

  systems that we're using to do to live this life are unhackable, right?

• 1:05:17Ryan Sean Adams?

  Absolutely. Now, let's talk about our next topic because everything you just said doesn't mean there's not risk in going bankless. We emphasize this just about every time we talk about something or have a podcast or have some sort of conversation. There have been a number of a token debacles, let's call them, that have started to happen in DeFi. So one was few, which we could talk about. Another is the EMN token, MN token, which which happened just yesterday. It was a token that a whole bunch of people poured into. There was a flash loan hack and apparently money was stolen. I don't know, $8 million, something to that effect. It's getting to the point where I can't keep up with it.

• 1:05:59David Hoffman?

  It came into existence and then was hacked in the same day. Like, what? Like, this already happened?

• 1:06:05Ryan Sean Adams?

  Well, and that's also the story of few, of few, excuse me. It was just like an hour and hour and a half long sort of episode. And we're still talking about it. So what's your takeaway from these token debacles like few, like few and like EMN, David?

• 1:06:20David Hoffman?

  Right. Yeah. So, so with few, I think, you know, so few, I think, happened right after our last date of the nation, Ryan, where we were talking with Jordan Lyle, who created the meme token. And what meme token was, was like, some people just minted a token

• 1:06:35David Hoffman?

  called meme and then they figured out something to do with it after the fact right and so like I think what happened with few was like kind of that same thing where like let's make a few token and then we can figure out what to do with it after the fact and so what a bunch of people did is they got a bunch of other people into a telegram to help bootstrap this thing right and so they wanted they naturally wanted to pick the people that had like influence and and had reach and so they brought in people with a following into this telegram say hey we're gonna we're gonna top down this token we're gonna call it few it's gonna start off as a meme and then we're gonna figure out how to bootstrap it from zero to one right and so a bunch of people just randomly got pulled in some people maybe were thinking like yeah I'm totally gonna get rich off of this by dumping it because I'm part of the the you know the privileged few in the telegram group others people just got added into telegram without even knowing what the hell is going on so there's a massive spectrum of people who are involved with these in these things and then there was the that person that took a screenshot of like you know people saying like yeah we're gonna we're gonna you know dump this token and then others and and anthony sanzano got caught up in this and he said it was a joke and me as a as somebody who you know talks anthony a lot it was a fucking joke like anthony was joking maybe it was irresponsible joke but like he doesn't deserve to have gotten the backlash that he got in the slightest but I think the through line here is like things are hairy and especially on twitter especially when there's personalities and reputation at stake because like when you even mention a a token itself it's almost an endorsement especially if you have like 20 30 40,000 followers right and so I'll let you hop in there

• 1:08:14Ryan Sean Adams?

  yeah I mean it's funny because that came off our conversation with with jordan right where we're talking about meme and the whole meme for meme is don't buy meme right and so like even when if you say hey this token has no value and like don't buy this token it becomes like an endorsement in this weird defi subculture that we're in like so was what's striking to me is the whole few thing blew up or is like mass outrage and I think part of it is you know part of it is justified right and I think there are individuals, we should be vigilant, I would say. I think there are individuals who would prey upon DeFi in the space. But what happened yesterday, I think in like, did we learn anything?

• 1:08:58Ryan Sean Adams?

  I don't know, because yesterday a token comes out, a few DeFi Twitter accounts start talking about EMN. Andre's name from YFI gets associated with it. And people don't even know what they're buying.

• 1:09:13David Hoffman?

  Right.

• 1:09:13Ryan Sean Adams?

  And they suddenly pile into this token. There's no website, there's nothing.

• 1:09:16David Hoffman?

  We don't even know what the hell it does.

• 1:09:18Ryan Sean Adams?

  Yeah, people, it's like the token mempool. This is like the YFI mempool where people are trying to front run the next thing that Andre's built. They have no idea what's going on here, what they're purchasing, and they pile into it. What happens within the hour or something, within like two hours, it gets drained.

• 1:09:37Ryan Sean Adams?

  I guess the takeaway here, guys, is at least, at least for me, if you choose to ape in to follow into a token without knowing what the heck it is, or why it's valuable, and you lose money, you know who you have to blame.

• 1:09:54David Hoffman?

  Right.

• 1:09:54Ryan Sean Adams?

  You gotta blame yourself.

• 1:09:55David Hoffman?

  Right.

• 1:09:56Ryan Sean Adams?

  Right? Like, I understand that influencers and builders and creators also play a role. I'm not downplaying that at all. They totally do 100%. But you, as somebody who's on the bankless journey, also play a role, right? If you're just chasing the next big thing and you're going where, you know, your greed tells you, that's not a good way to build long-term wealth in this space. But if you do it, only do it with a portion of your funds. And don't be surprised when this sort of thing happens.

• 1:10:27David Hoffman?

  Right.

• 1:10:27Ryan Sean Adams?

  Right? So, like, we have to, as people on the journey, take some personal responsibility for the things that we're invested in. I mean, people who bought EMN token, nobody pushed the button on their ledger. They did it.

• 1:10:42David Hoffman?

  Yeah.

• 1:10:42Ryan Sean Adams?

  Right? So, and I don't know, it's just, so, so there is, I guess there's, there's an interplay here. There's definitely an ecosystem of builders and, you know, people who

• 1:10:55Ryan Sean Adams?

  Our influencers and there's a ton of people who need to take some responsibility here, but you individually take responsibility for what you're doing, what you're buying as well, and make sure you know why you're buying it before you do it.

• 1:11:06David Hoffman?

  You are always the final backstop to like your bags, right? Like you are the reason why your bags are what they are, right? And also at the end of the day, like if you've been listening to the Bankless Podcast, and if you've been listening to me and Ryan articulate why Ether is valuable, like you already have so much more information than anyone else in the world about about the value proposition of Ether. Like it's a triple point asset, staking is coming, EIP 1559. Like, and so if you understand these things, you are in like the 0.01% of the world that understands these things. You already have such a strong lead over the rest of the world with just owning Ether that like you should be satisfied just about that, right? And so like if you're trying to like shoot for the moon like and get to the moon like this year,

• 1:11:51David Hoffman?

  and then you get rug pulled, like that's kind of on you because you have Ether that is like super safe and also the ROI is so insane to begin with, right? And so at the end of the day, you you kind of need to compare everything to Ether. Like what is the what is the rug pull chance and like the the shitty uninformed influencer risk to like aiming into some random token that's some random three letters versus the value of Ether, right? Like at the end of the day, we should be satisfied with the value proposition of Ether.

• 1:12:20Ryan Sean Adams?

  That's that's something I think Ethereum community can continue to learn from Bitcoiners, right? Which is this time preference idea of like not necessarily chasing the short term gains all the time. And I felt like we had that in the Ethereum community, even at the first half of 2020, and certainly in 2018 and 2019. But with the yield farming mania of the past three months, it's starting to fade a little bit as it did in 2017 where everything went manic and and bananas. So yeah, just keep these principles in mind. This is a marathon, it's not a sprint.

• 1:13:00Ryan Sean Adams?

  If you're going to try to get rich overnight, just do it with a small portion of your funds that you can lose. Don't do it with with, you know, like your main stack that that you're trying to hold for the long term. David, we I think we went over time on that one, but let's talk about one last thing. And this is the How do you pronounce it? The new Ethereum 2 testnet?

• 1:13:21David Hoffman?

  Spinalda?

• 1:13:22Ryan Sean Adams?

  Spinalda?

• 1:13:23David Hoffman?

  I think?

• 1:13:23Ryan Sean Adams?

  Spinalda, okay.

• 1:13:24David Hoffman?

  It sounds like a fake sweetener.

• 1:13:27Ryan Sean Adams?

  Alright, so it's like Splenda, Spinalda, okay. Alright, so this testnet is the last testnet for ETH2 before the actual phase zero, is that right?

• 1:13:39David Hoffman?

  Yeah, it is the final dress rehearsal, so like full costumes, you know, I'll put the full effort into it. It is the last thing, right? And so that went live this morning. Apparently, there's a little bit of a hiccup. I think I'm gonna, I think it was because there wasn't enough participation. There weren't enough people participating, which kind of makes sense because it was started at 4:00 in the morning, my time, Pacific time. So that's pretty early for America. And so I'm going to chalk it up to that as why it didn't go start off so smoothly. But it is started, it has started. And like it's a three-day-long testnet, which is the last testing phase of the deposit contract. Basically, all the actions to spin up phase zero.

• 1:14:21David Hoffman?

  And once this three-day testnet is over, like the only thing that needs to happen between now and the start of phase zero is nothing, right? Like, everything needs to just continue according to plan, like nothing needs to change. So if this testnet is successful and then nothing else happens, we have phase zero. Like, lock it in.

• 1:14:42Ryan Sean Adams?

  Very cool, very cool, very exciting. I think a lot of people are going to be surprised. There's been a longstanding meme that ETH2 is never going to happen. When it does start to happen, I wonder what the critics will say. I'm certainly going to be excited for that. And I think the entire Ethereum community is going to be excited to see this progress. So we could be months, maybe even weeks away from the launch of ETH2. Weeks, not months. That's it. David, I think that's all we have time for, man. So this has been a fantastic roll-up round, my friend.

• 1:15:19Ryan Sean Adams?

  Yeah, so alright, guys, this has been State of the Nation, number 16. Thank you for joining us. As always, risks and disclaimers. Everything we talk about ETH is risky, the crypto is risky in general, so is DeFi. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we are glad you are with us on the journey. Thanks a lot.