143 - UNIChain is Inevitable with Dan Elitzer

✨ DEBRIEF | Unpacking the Episode: https://shows.banklesshq.com/p/debrief-unichain-is-inevitable Dan Elitzer is the co-founder of Nascent, a VC firm working on the frontier of crypto Previously, he was previously leading IDEO CoLab Ventures, and has been on the frontier of crypto innovations for as long as we can remember. Dan helps us unpack The AppChain Thesis, a possible outcome where every big DeFi app is going to have its own chain. How will this reshape crypto? Where do we find opportunities? Does this thesis even make sense? Further, Dan, Ryan, and David cover the case for why Uniswap is going to have its own chain, why Dan thinks there’s an inevitable economic incentive for large DeFi apps to start their own chains, the main objections to The AppChain Thesis, and so much more. ------ 📣 Earnifi | Check For Your Unclaimed Airdrops, POAPs, & NFTs https://bankless.cc/earnifi ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across 🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave 💠 NEXO | CRYPTO FINANCIAL HUB https://bankless.cc/Nexo 🔐 LEDGER | NANO HARDWARE WALLETS https://bankless.cc/Ledger ⚡️FUEL | THE MODULAR EXECUTION LAYER https://bankless.cc/Fuelpod ----- Topics Covered 0:00 Intro 6:45 Dan's Predictive Track Record 9:52 Roll-Apps 14:00 The App Chain Prediction 17:46 UNIChain 23:30 MEV 29:22 Summarizing the Costs 33:50 Who Gets the Money? 36:07 Are the Taxes Worth the Services? 43:48 Why DeFi Apps Haven't Launched App Chains Yet 48:40 Uniswap Nation State 55:33 Uniswap's App Chain Model Sovereignty 1:00:04 Uniswap's Control & Ethereum's Alignment 1:03:38 Uniswap's Composability 1:08:56 What Does This Mean For L1s 1:16:50 Investing in the Apps? 1:20:57 Aggregation Theory 1:23:22 Censorship 1:27:21 Final Takes 1:29:37 Closing & Disclaimers ------ Resources: Dan Elitzer https://twitter.com/delitzer The inevitably of Unichain https://medium.com/nascent-xyz/the-inevitability-of-unichain-bc600c92c5c4 Aggregation Theory - Stratechery https://stratechery.com/aggregation-theory/ ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

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

• 0:07Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, this is an episode about Uniswap, about the uni-chain, about the app chain thesis. That thesis plainly stated is every big DeFi app is going to have its own chain, including Uniswap. That's what Dan Elitzer says today. "How will this reshape crypto?" is the question. "Where do we find opportunities?" If Dan is right, "And does this thesis even make sense?" That's what we get into today. A few takeaways for you. Number one, we go through the case for why Uniswap is going to have its own

• 0:49Ryan Sean Adams?

  chain. That is the thesis here. We also go through the economic argument, why Dan thinks there's an inevitable economic incentive for large DeFi applications like Uniswap to start their own chain. We get into the true trading costs of using Uniswap, and who gets the revenue from these trading costs? Also, objections to this app chain thesis. We talk composability, we talk user experience. David and I have our own objections as well. And then finally, number four, if the app chain thesis wins, does that mean Ethereum has to lose? No, maybe. It depends. That's the answer. How about this whole competition between Ethereum and Cosmos? This is a recurring theme on Bankless that we get into a bit

• 1:31Ryan Sean Adams?

  more today. David, why are we talking about this subject, and what should listeners pay attention to in today's episode?

• 1:36David Hoffman?

  First, Dan is using Uniswap simply as the largest and biggest DeFi app on Ethereum. It's the one that produces the most block space demand, it burns the most ether out of any other DeFi app. So he's not picking Uniswap as a special case, he's picking Uniswap as simply because it's the biggest. And the general thesis is, the bigger DeFi app you are, the bigger the DeFi app becomes, the more likely it is that it will produce its own independent chain. And so since Uniswap is the biggest chain, we're using Uniswap as the thing to talk about, as the premier example, is why Uniswap Has the largest incentive produce its own app chain? But it's not the only one. The general theory is all DeFi apps, when they hit a certain threshold, will produce their own chain. And so that's the first thing to look out for.

• 2:21David Hoffman?

  It's like, how do we measure that threshold? What is that threshold? How do we consider the incentives for DeFi apps as they become larger to produce their own chain? So that's the first thing to consider. I think people should also just think about, in what ways does this tilt the balance of power from ETH, the money, to DeFi token, the asset? How does that change that game? And also just consider who wins here? The Cosmos app chain? Or the Ethereum Layer 3 roll apps, if you will? And so I think those are the three main things to consider in this podcast.

• 2:52Ryan Sean Adams?

  Of course, premium subs, you can stick around after the episode. David and I have a debrief episode where we talk about our thoughts on this episode. It's our episode after the episode. Can I say episode again? If you want that episode, then become a premium subscriber. David, I've got some thoughts for you in that episode. I'm not sure I wholly subscribe to the app chain thesis. I think parts of it I identify with and makes sense to me. Other parts, I'm not so sure about. So I want to talk to you in more detail about kind of my thoughts on what Dan presented today. What do you want to talk about in the debrief?

• 3:24David Hoffman?

  I think the thing I want to talk about most is parse apart the different DeFi app categories, where some categories might be better suited for a sovereign app chain versus some categories which might not be. Like, I think there's an argument to make that DEXs produce a stronger argument for an app chain than borrowing and lending protocols. So I want to dive in on that subject in the debrief.

• 3:44Ryan Sean Adams?

  Of course, the debrief is only for our premium subscribers. So join us there. If you are a premium subscriber, you get a whole separate RSS feed that is dedicated to you. Guys, we're going to get right to the episode with Dan. But before we do, we want to thank the sponsors that made this possible.

• 3:59David Hoffman?

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• 4:43David Hoffman?

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• 5:29David Hoffman?

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• 6:14David Hoffman?

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• 6:30David Hoffman?

  Bankless Nation, I'd like to introduce you to Dan Elitzer, a co-founder at Nascent. And I previously met Dan while he was also working at IDEO CoLab Ventures. And he's been on the frontier of crypto innovations as long as I can remember. Dan, welcome back to Bankless. It's good to have you back.

• 6:47Speaker 02

  Thanks, Dave. It's always great to be here with you guys.

• 6:49David Hoffman?

  And so, Dan, you have a good track record of making very precise predictions that have, I think, basically all come true pretty closely to as described. You wrote about the concept of composable collateral, called superfluid collateral is what you call it, in like February of 2019. And this was before a lot of DeFi apps really did stitch themselves together. And so you got that one. You wrote about the perils of liquid staking derivatives. The article is called "The Death of Ethereum", the D-E-T-H of Ethereum, the delegated ETH of Ethereum, two whole years before liquid staking derivatives even existed. Now, we are coming into ahead with some of those conversations today. You also wrote about DeFi yield farming after you saw the writing

• 7:31David Hoffman?

  on the wall, not due to Compound's governance token, but due to an even earlier experiment from FutureSwap in April of 2020. And so, Dan, your track record of very few, but very precise articles has been really, really strong. And you recently wrote a new article titled "Unichain is Inevitable: How a Uniswap App-Specific Chain is Inevitable", and this is, I think, not just a prediction for Uniswap, but for every single DeFi app with sufficient activity on Ethereum might produce its own app-centric chain. So, Dan, that is the topic of today's show. But first, before we get into the show, how do you feel about your track record? It's pretty damn good. Can you just reflect on that for a moment?

• 8:11Speaker 02

  Have you ever been wrong, Dan? I've been very wrong. And I think, you know, I feel fortunate to have done a decent job calling out some trends. I think the level of precision hasn't always been there. And one of the things that I tried to make clear in this latest piece is, My degree of confidence is very high that app chains and app-specific rollups. Someone actually shared the term "roll app" with me recently that I love.

• 8:37David Hoffman?

  Wait, not roll up, roll app?

• 8:38Speaker 02

  Roll app, yeah, I love that. But I'm very confident that these will be an important part of the ecosystem in the future. I'm really bad at nailing timing. So I said, you know, it's probably about three-plus years out till there's major, major players at the scale that we think of as like large L1s and such today that are happening via these application-specific chains or rollups. But it seems inevitable to me that it is going to happen.

• 9:08David Hoffman?

  Well, I think we can definitely relate to that at Bankless, where at the top of the 2021 bull market, we were all about "rollups, rollups, rollups." And everyone else was like, "Alt layer 1s, alt layer 1s, alt layer 1s." But now, in the bear market, it definitely seems to be a rollups world. As we go into this thesis, I just want to ask, you titled the article "Why UniChain Is Inevitable," saying like Uniswap will eventually produce its own chain. But this is not necessarily about Uniswap. We're just using Uniswap as like a very like easy and obvious application to discuss, while talking about the general idea of roll apps or app-specific layer 1s. Is that a fair summary, fair analysis?

• 9:47Speaker 02

  Yeah, well, I would say that it doesn't mean that all DeFi apps are going to do this, and as a number of people have pointed out, there are some things like games that might have less benefit from composability, especially atomic composability within their application. Those may be the first ones to do it. We just saw OP Craft announced, along with Optimism and Lattice working together on this, and that's an example of kind of an application-specific rollup. And I think that is something that seems very obvious, where there might be a little bit of difference in opinion, is how much this is applicable also to DeFi. I believe it is very applicable to DeFi, not necessarily every protocol or application

• 10:30Speaker 02

  in DeFi, but to many of them, once they reach, I would say, some level of escape velocity, it's going to become important. That they have this as one of the tools in their bag. It doesn't mean that Uniswap or other applications will cease to have deployments and meaningful deployments on Ethereum or Optimism or Arbitrum or any of these rollups or other chains. It just means that there's a large incentive for them to consider making the place that they try to funnel users to the extent that they have a more direct connection with them and the ability to redirect them there. They're going to want to migrate a significant chunk of the activity to their own rollup or chain.

• 11:14David Hoffman?

  Okay, and just to really drive this point home, you're not making this like sweeping blanket statement that every single DeFi app will produce its own chain.

• 11:21Speaker 02

  No, certainly not.

• 11:22David Hoffman?

  But I think as listeners go through this episode and kind of hear some of the arguments and theses and motivations, listeners might be able to decide for themselves. Like at some point, some DeFi app using this model that we're about to talk on this podcast, the incentives might like tip over to like, okay, now with these incentives, if you like, take everything into account, the incentive to produce an app, a rollup or app specifically or one will become significant. And this is the kind of the nuance to unpack here.

• 11:47Speaker 02

  Yeah, and one of the analogies I like to use here is looking back at some Web 2 platforms. Like, look at Zynga doing Farmville and other games on Facebook as a platform and King Digital Games and folks like that. They were paying these huge taxes and they were very much at the whims of the platform they were on that was not just trying to optimize for game playing, was trying to optimize for a whole bunch of different types of users and use cases. And there was a large tax then associated also with being active on these platforms. And so the smart game publishers started saying, okay, how can we move and do a native mobile app? How can we do a web app? How can we?

• 12:28Speaker 02

  More directly own this relationship with the users and avoid certain types of platform risks and platform taxes. And we're seeing that play again with certain, again, game publishers and some streamers and others who love the distribution of the App Store and the Google Play Store early on. But once you've gotten to a certain size, you have a certain amount of economic activity, a certain number of customers who highly value your application, you're going to necessarily look to say, how do I reduce the take rate that some of these other platforms are charging me? And how do I ultimately maintain better control over the user experience so that

• 13:13Speaker 02

  I can better deliver to my users and to my community?

• 13:16Ryan Sean Adams?

  Okay, so what's interesting is we're starting to get into the why, the economics of why. And I want to return to the kind of that Uniswap example, because this is a really interesting example you picked. But before we do that, every thesis has to have a prediction, obviously, that can be invalidated. And if this is maybe something we're calling kind of the app chain thesis, if you will, or roll apps, or the world of layer ones, either the Cosmos world or the Ethereum world, something like that, or maybe some combination of both. What does that mean exactly? Like, what is the prediction on the other side? So you said just now, Dan, that it doesn't mean every single DeFi thing, app, will roll its own app chain. But I think it probably does mean we are maybe, in your opinion, entering a new era, kind of an app chain era, where these

• 14:01Ryan Sean Adams?

  things will be much more common, maybe as common as DeFi apps were on Layer One, maybe even more common. What are kind of the predictions of the app chain thesis? How can we tell if you're actually right, you know, two years from now, Dan, about this?

• 14:14Speaker 02

  Yeah, I would say, you know, you guys did a fantastic conversation with Sonny and Zachy the other week, talking about the Cosmos ecosystem and how that is developing. I think if we start to see more people using Cosmos chains, I don't know what the kind of user numbers are that we would want to put on this, or maybe I hadn't actually thought about quantifying. Find this in a way that is falsifiable, but if we see something like the top five highest user counts or highest volume DeFi applications, if in five years, the top five all have a sovereign

• 14:56Speaker 02

  chain as something that they have launched and is active, then I would say this has played out. It does not necessarily mean the majority of the activity attributable to, say, Uniswap or Compound or somebody like that is necessarily all happening on that chain, but that it is a core component of their strategy and of their economics.

• 15:21Ryan Sean Adams?

  So that would be a paradigm shift. And let me make sure I understood you correctly. So you put some time ranges on that, five years or something, but like you're envisioning a world where we go to like CoinGecko and we look for the top DeFi apps, right? And, you know, the top, say, five DeFi apps all have their own chain. And that chain could either be something in the Cosmos world where it's kind of a layer one mesh network sidechain type of thing, or it could also be a roll app, which is kind of like an Ethereum secured roll up that also has some of its own sovereignty and is kind of its own chain.

• 15:56Speaker 02

  And that's also largely a part of the Ethereum layer three narrative. So roll apps and layer threes are largely synonymous. So just to put that into listeners' heads.

• 16:05Ryan Sean Adams?

  And so if we see that, Dan, that would be like, okay, and that's a big paradigm shift. Cause right now, and we envision like, okay, I don't know what are the top five DeFi tokens right now or usage. It's like Uniswap, you know, Lend, MKR. What you're predicting is all of these will have their own app chains, essentially.

• 16:22Speaker 02

  Yes. I think the prediction is like, the bigger that they get, the more likely they are to produce a chain.

• 16:28Ryan Sean Adams?

  Yes. Let's dig into that. And I think the example that you select is actually really good example. You're actually going for the big one, which is Uniswap. And the thing I like about Uniswap as an example is that it's our purest representation of DeFi at some layer. It's very much on-chain. You can easily see something like DYDX with kind of an order book. That needing its own sort of order book app chain, but like Uniswap having its own app chain, that is a tough one. It's hard for people to wrap their minds around. It's also very interesting in that it's like the highest usage, highest volume, biggest DeFi app that we have. And also, I would argue that it requires a lot of composability, doesn't it? I mean, you have to have all of these ERC 20 tokens and other DeFi apps

• 17:12Ryan Sean Adams?

  kind of like interacting with it in some way. And so you've picked off a really hard one in order to prove your case. But the case, I think, starts with economics. This to me, like, I always like the economic arguments because those are the arguments that always tend to be like sticky regardless of people's opinions. Can we start here, though? Because you start your post and you talk about the three costs to trading on Uniswap. There's a swap fee cost to LPs, which I think people notice. There's also this transaction fee cost to validators, which is kind of like a gas fee. And there's also MEV. Can you talk about those three buckets of costs in trading on Uniswap? And how the economics kind of converge to incent an DeFi app like Uniswap to pursue the app chain model?

• 17:57Speaker 02

  Sure. Well, the first cost, the kind of swap fees, that's something that if you look at Token Terminal or any of these tracking sites, that's always emphasized as kind of like the revenue, whatever, from the protocol. This is actually trading fees. But Uniswap has framed it as a, you know, initially 30 basis point fee and others from day one. But if you think about it, it's really enforcing a spread because it's not being extracted by a third party. But everybody calls it a fee, so let's take it as a fee. That's the place where the fee switch, literally what we call it in Uniswap, is positioned to be able to take a slice of those kind of swap fees. That's what people have typically

• 18:38Speaker 02

  thought of the universe of, these are the costs traders pay. And this is where if uni token holders want to kind of capture any value here, they would flip the fee switch and take a piece of that.

• 18:50Ryan Sean Adams?

  Importantly, it's what Uniswap has control over.

• 18:54Speaker 02

  Yes.

• 18:54Ryan Sean Adams?

  So like, while there's nuance here, like, is this revenue for the Uniswap protocol?

• 18:58David Hoffman?

  No, it's revenue actually for the liquidity providers, but the Uniswap protocol has control over it. And so that's why we've kind of like lumped it together as like this is Uniswap revenue.

• 19:08Speaker 02

  Right. Then the next piece is actually the transaction fee, right? The Ethereum transaction fee where you're paying gas to get a transaction confirmed, included on the Ethereum blockchain. And that has been a very significant piece. And the analysis that I was able to do was kind of looking at doing dashboards and other things that I could find. And it was easier for me just to, to look at kind of the mean trade data rather than looking at median. And obviously for smaller trades, the fixed fee associated with making that trade, that transaction is going to be a much larger piece of it. There are some very large trades that I, my understanding is that it has skewed up

• 19:54Speaker 02

  what we look at as the average trade size. But you have a pretty similar portion of the fee being paid by a trader going in the form of this fixed transaction fee. And if you comp that to a centralized exchange, if you're trading on Coinbase or FTX or anywhere, there's no fixed fee. You're paying just that kind of variable, you know, percent of your transaction that is being charged by the exchange. There's no fixed fee saying you want to trade $1 or $1 million, you're still going to pay a $5 fee or 50 cent fee. That just doesn't exist in a centralized exchange world. And it's very economically inefficient if you're looking at it just through the lens of a trader. And so that is a meaningful component.

• 20:39Speaker 02

  I would say especially during the bull market that we saw in 2021, there was, I would say for smaller traders, often there are probably a lot of trades that didn't happen because you were seeing the majority of the trade cost, the trade size even, get eaten up in a transaction fee just to get that fee on chain. And it fluctuated so much. So having this, I would say like fixed fee, that's irregardless of trade size, there is a fee, but also having that vary in the size based on the activity going on, on Ethereum overall, that's really bad UX. And it represents a huge cost being paid by traders that.

• 21:20Speaker 02

  Could be controlled better through the use of a RollApp or AppChain.

• 21:26David Hoffman?

  We'll talk about how a RollApp or AppChain can actually produce more control by the actual app later on in the show, but really just to emphasize this, we've talked about two costs so far. The 30 basis points cost that Uniswap, the app, charges to go to liquidity providers, which Uniswap controls, and that's considered revenue for the protocol. The next cost that we've talked about is the gas fee cost. And you're saying just like, that's outside, that's external to the Uniswap protocol. That's something that Ethereum kind of loosely controls, kind of dictates to Uniswap, you must pay this in order for a transaction to go through. And the chart that Ryan was showing on the screen just a second ago showed that in like over 2021, that cost ranged from $10 to $80. You're

• 22:07David Hoffman?

  taking this example and saying $80 compared to what Coinbase or FTX charges you is like insane. An $80 transaction fee on a trade, like you need to be trading something like much larger than like $1,000 for that to be just like economically viable or cost competitive with other exchange mechanisms. So you're saying this fixed cost that comes externally to Uniswap has prevented a significant amount of trading activity happening during this time of high gas fees and is just like overall bad UX and bad economics for Uniswap, the app. Is that a good summary of where we are so far?

• 22:44Speaker 02

  That's a great summary of where we are so far. And now I assume you want to get to that third one that's a very hot topic these days around MEV or maximal extractable value. So this is something that is currently being captured by some combination of searchers who are kind of going in there and extracting value via MEV and validators and ultimately ETH holders, right? To the extent with 1559 that we're now seeing a lot of Fees burns, you know, to be fair, the fees are getting burned anyway. A lot of the values then, you know, being paid to validators for inclusion in these MEV blocks. But there's multiple types of MEV and the analysis I did was very, very rough. I'm 100% sure it is wrong.

• 23:28Speaker 02

  I just hoped to get it within effectively an order of magnitude. The analysis that I based that off was done by ZeroX that was looking at effectively sandwich attacks, which are when you're trading on Uniswap or another DEX and you have some sort of slippage tolerance that you include there in your transaction. And you say, you know, basically have this trade fail if the price moves outside of these bounds. And what these searchers are doing that are doing these sandwich attacks is they are pushing the price, they're basically taking your transaction that you've broadcast into the public mempool and they're putting a transaction in front of it to push the Uniswap pool price

• 24:10Speaker 02

  just to the very edge of what will allow your transaction to go through, having you execute at that like a highest price you want to tolerate. And then they're putting another transaction afterwards to kind of like move it back. So they're essentially atomically doing an arbitrage here where you as a trader are getting a worse price and they are capturing the difference between what you thought you were going to pay and the most you stated your willingness to pay. Now that is just bad for traders, right? Traders lose. The market makers. The Uniswap customers lose. But that, to be fair, is not the majority likely of MEV. And we've seen, as was mentioned by Sunny, on the Osmosis DEX, right?

• 24:51Speaker 02

  On Cosmos and a kind of Cosmos ecosystem, they're partnering with Skip Protocol to look at another type of MEV, which is just back running, which is just saying like, look, you've made this trade. We're not going to try to front run your trade and give you a worse price, but we will back run it and balance that across pools, potentially across other venues to capture an arbitrage opportunity that exists as a result after you've made your trade. And there is a huge amount of opportunity there and talking to people far smarter than myself, there is large consensus that that is probably the vast majority of MEV exists there, and it's not harmful to users, but it's a revenue opportunity to be captured.

• 25:34Speaker 02

  So for the purposes of costs, we really want to look at kind of sandwiching a malicious MEV, and that's also a significant cost. But as we're talking about MEV, I just want to emphasize, and we'll also go back to that later, the revenue possibilities around the non malicious MEV that is still kind of thrown off as a byproduct of trading on the stacks.

• 25:56David Hoffman?

  So to parse that apart, there's two parts of MEV. There's malicious MEV that like jades customers and is bad for them. And then there's MEV that is universally accepted as like, this is good and efficient and just like a rational arbitrage opportunity that doesn't jade customers. And that part can be made significant. And also in the Ethereum composability layer one context, it's hard to prevent the malicious MEV from happening as well.

• 26:23Speaker 02

  Yeah, it's not impossible. There are ways to go about it. I've heard some very smart ideas that have not been put in production yet, but a lot of it gets easier to control on a roll app or app chain.

• 26:34Ryan Sean Adams?

  Okay, so let's just summarize this for folks. What the costs are through each of these three areas that you mentioned, and then kind of who gets the money. So what the costs are is kind of what the customer of Uniswap pays. So I'm a Uniswap trader. I just want to swap one asset for another, right? And so we have the swap fees. What does that look like if we're to translate that in terms of a percentative trade or basis point? That can range, but what's kind of an average size there for the swap fee, the first category we're talking about?

• 27:07Speaker 02

  Yeah, so the average size we're looking at there, I believe, was around like 17 basis points. So 0.17% of the average trade.

• 27:18Ryan Sean Adams?

  Got it. And that's because some pools have a very small fee of 0.1%, other pools have a 1%, and you're saying the average is about 0.17% for fees a customer will pay for like the swap fees themselves.

• 27:31Speaker 02

  Correct.

• 27:32Ryan Sean Adams?

  And then the transaction fees, when you've looked at that, just at a high level, I know these numbers should be, back in the napkin.

• 27:38Speaker 02

  Yeah, about 23.5 basis points, so 0.235%. It was the average that I'd looked at over from like, it was like June to June, from like 2021 to 2022.

• 27:50Ryan Sean Adams?

  Okay, so we have 23 basis points and we have 17 basis points. You add that together and we're starting to need a picture of the cost. And how about the third category, the MEV category? How many basis points does that cost a customer?

• 28:02Speaker 02

  And again, this is by far the roughest one, that I don't have a lot of confidence in this. But the very, very back in the napkin math that I was doing on the malicious MEV here was around 25 basis points.

• 28:16Ryan Sean Adams?

  Okay.

• 28:17Speaker 02

  And again, my degree of confidence is not super high there, but saying that is roughly, it's at least in line, not greater than each of the other two types of costs.

• 28:26Ryan Sean Adams?

  Wow. Okay, so if you add all of that up and recognizing that the first two categories, those are fairly strong predictions, like we can kind of see that in the data and we already get to 41 basis points there. So that's 0.41% on a trade. If you add MEV based on Dan's estimates, we get to 0.66% of every trade. So over half a percent of every trade, customer is actually paying in fees. And so let's just benchmark this across fees in the exchange world, for example. So a competitor to Uniswap is maybe centralized exchange. So what is a Coinbase or a Kraken or a Gemini or a, insert your favorite exchange here, FTX? That's not my favorite, I don't have favorites, but what's the range of fees for their trades?

• 29:10Speaker 02

  Yeah, so it depends if you're going through the brokerage or going straight to more the advanced trade mode with the exchange. Coinbase has been, in my view, somewhat notorious for continuing to charge about a 1% fee to retail traders for many years. If you go to actually trade on an exchange, usually you're talking anywhere from like 10 to 30 basis points.

• 29:30Ryan Sean Adams?

  10 to 30 basis points versus 0.66% or 66 basis points. So it's more expensive to do something on Uniswap.

• 29:41Speaker 02

  You know, to be fair, right, we know that doing things in a decentralized manner is more expensive, right? There are costs to the decentralization, to the censorship resistance that we're getting here. But there are ways that we can reduce some of these costs while still maintaining the values and the aspects of composability and censorship resistance that we value so highly.

• 30:08Ryan Sean Adams?

  Right. So we're paying maybe a little bit more in some cases. But of course, we get this decentralized Uniswap system. As a customer, isn't that a glorious thing? It has this long tail of assets that you couldn't find anywhere else and a host of other benefits that DeFi brings. Now let's talk about the other side of the ledger. So who actually gets that money, right? The first category, back to the swap fees. The Uniswap protocol is getting the money, but it's also distributing that to different like sides of the market. A portion to LPs and then maybe hypothetically a portion back to governors of the uni token, although that's not in place yet. How do you think about that first off? The who gets the swap fees piece?

• 30:54Speaker 02

  It's going to LPs, but again, that makes it more like a spread. So but from a trader's perspective, kind of coming in, it certainly feels like a fee versus the kind of like Quoted price here.

• 31:06Ryan Sean Adams?

  But from the protocols perspective, like it's something that I guess the protocol gets and can manage versus the other two categories, and this is maybe where the distinction is. For transaction fees, that's extra outside of the Uniswap protocol, right? That is back to the Ethereum protocol and same with MEV. So maybe a distinction I thought was useful here, and Dan, you tell me what you think about this, was the swap fees go to the Uniswap protocol in some way for it to distribute. It has autonomy over that, has sovereignty over that.

• 31:35David Hoffman?

  They go to where Uniswap wants it to go.

• 31:38Ryan Sean Adams?

  Right, but the transaction fees and MEV fees go to this other protocol, which is called the Ethereum protocol. And eventually, these fees, of course, go to ETH validators. You know, critics of Ethereum would call these the feudal lords, the evil rent collectors.

• 31:54David Hoffman?

  They pay rent to the ETH holders, yeah.

• 31:56Ryan Sean Adams?

  Yeah, is this an accurate framing of things? What do you think?

• 31:58Speaker 02

  To some degree, sure, that I would say there's also a lot of benefit, right? Uniswap wouldn't exist without Ethereum. And today, I'm not advocating that Uniswap go try to launch a uni-chain today and make that a big strategic focus for themselves. I still think there's a lot that needs to be built, but yeah, there's a lot of fees being paid, but they're being paid for a service that's being provided, right?

• 32:25Ryan Sean Adams?

  To me, this just seems like tax. So it's basically, I live in a nation state. I choose to register my LLC in Delaware. I'm in the US, I'm based in a particular state. I'm in this country because it provides a set of public goods, which includes like defense, for example, a court system, a settlement layer, all of these benefits I get by being in the system. So I pay a tax on all of the earnings from my LLC. Is this kind of the model? And why do I do that? Because like I can't just go found my own country. I can't like for my company, I can't like get all of this infrastructure out of the box. So I choose to live in a nation state. Or maybe there's no other option for people other than to live in a nation state.

• 33:08Ryan Sean Adams?

  But at some level, these are kind of like public good taxes that Uniswap pays. And so they're paying validators and they're paying. Kind of the MEV builders, which in an efficient market, a lot of that goes to validators. They're paying a tax for these services provided to them by the Ethereum network. So is the real question to all of this in the app chain thesis, are the taxes we pay worth the services that we get from the public network? Is that the question?

• 33:35Speaker 02

  I think that is a good, high level framing of the question. And while we can kind of debate elements of that within each of these different costs, I think at a high level, that's absolutely right. And one of the beauties in this system that we are collectively building in the crypto ecosystem, the web three ecosystem, this open financial ecosystem, it's the ability to exit and to opt out. And so there is this kind of free flowing nature where there is not lock in, that you must stay always paying taxes, paying fees to the same platform. You can migrate.

• 34:18Speaker 02

  And because we are building these standards, these connections, these bridges, these ways to interoperate across different blockchains, across different rollups, it's going to be possible to not leave all your users behind, but to bring them with you to a new place that you establish based on the rules that you've collectively determined you want to set. And hopefully, if you've done this well, right? Users will follow, activity will follow, and you'll actually grow and be even larger in this new home that you've created for yourself. But you don't have to give up the old one. The nice thing, one of the many nice things about Ethereum, right?

• 35:03Speaker 02

  And the way that, as you pointed out, Uniswap is in some ways like the best example we have of true DeFi in that the contracts aren't meaningfully upgradable other than flipping a fee switch. They will just keep running as is, as long as the Ethereum blockchain is running. And so you still get that. And if people see the value there and for certain types of activities, it still makes sense to pay those taxes to the Ethereum network to have Uniswap natively deployed there and be used there. People will keep paying those, but you now can kind of segment out the user base and say, for people who don't necessarily

• 35:45Speaker 02

  Value as highly the atomic composability with other applications on Ethereum that really what you want to be doing is doing a lot of permissionless trading. You want to do a relatively high volume of trading. You don't want to pay a lot of like fixed transaction fees on this. You want to maybe get a rebate on some of that MEV. You want to have tighter spreads, better price execution on your trades as just a retail trader. Great. There's going to be a place that you can do that, too, that's going to be familiar. It's going to be under the same brand that you're dealing with. Like, there's so much that can happen there. It's just a new

• 36:27Speaker 02

  additional option for what I believe is a very, very large customer segment. It may not be the largest segment in the users who are here who are using Uniswap today, although I believe it probably is. But I am very confident that will be the case for a lot more users in the future. The people who are not using DeFi yet, who are still stuck on centralized exchanges, and who still value it. Nascent is a very DeFi forward fund and group of builders. We still do a lot of our trading on centralized exchanges because the execution is just much better there.

• 37:06Speaker 02

  And it would be amazing. We want to do more of our trade volume in DeFi. And systems like this enable it to be cost competitive while still getting us the great UX that is possible in doing things in a DeFi context.

• 37:23Ryan Sean Adams?

  Well, what I think is really interesting, Dan, is like to your point, it's not that Uniswap is necessarily like, you know, changing jurisdictions, moving from the US to say like Ireland or something for, you know, better tax advantage status. It's more like they're keeping a office in the US and they're also expanding into Ireland and opening up another office there. But I think that the question on kind of like this idea of taxes for public good is kind of also a question of like, have you thought abstractly as to what does a Uniswap user? Or the Uniswap application itself get in exchange for those taxes? So it's paying for those taxes. What is it getting?

• 38:04Ryan Sean Adams?

  A few things that come to my mind are obviously settlement guarantees, the decentralization of Ethereum. Also, network effect. I think there is a reason my co-host David moved to New York City from the West Coast in San Diego. You know, I've heard him say this before, so I don't think I'm putting words in his mouth. It was because of the network, because of the people that live there, kind of the opportunities. It was just like- Shout out my friends. Oh, yeah. He wanted to be co-located with a specific network of people, right? And so that can be an advantage to like where you live, right? You don't want to like move your company out in kind of like, you know, rural somewhere. I don't want to offend any particular place, but like you want to be where the network effect is and where the customers are. So that could be another reason.

• 38:47Ryan Sean Adams?

  Are those reasons for why to pay the public taxes? And when you think about this abstractly, why do you think DeFi applications are paying taxes to validators and paying the MEVs? Why haven't they already gone and launched their own app chains?

• 39:02Speaker 02

  Well, I think one of the reasons is, as you said, just it's where everybody else is. And you lose a lot by going remote in this case, right? If you're trying to set up, if David was literally trying to go off and set up his own city, right? That's going to be a pretty lonely place at first, but we have this ability-

• 39:22Ryan Sean Adams?

  What would you call your city, Dave? Well, there is Dave Dow.

• 39:26Speaker 02

  There you go. Dan Dow's gonna have to come over and visit sometime. So there's the ability, right? Because we have this digital ecosystem, right? There's not as much of the physical world friction that we see when you're talking about like moving. But over time, it's going to get even less, right? Right now, there is still a lot of friction spinning up your own chain, having your own validator set, making it interoperable with different wallets, allowing people to bridge freely and easily and at low cost. The infrastructure isn't there. And that's why I'm saying this is going to take three plus years to be a major like economically relevant trend. I think we're seeing already a lot of chains launch in the Cosmos ecosystem especially.

• 40:11Speaker 02

  I think Polkadot and Avalanche, and the mothers are seeing it, Celestia, all these others are trying to- Enable more of these sovereign chains, but the infrastructure isn't there yet to allow people to move and have a reasonably approximate user experience. So right now, you're going to pay those taxes because going off and setting up something different and getting the benefits of a vertical stack for these applications, for these DeFi applications, it just isn't there yet. And so it makes sense to pay the Ethereum tax. We've seen actually a lot of teams, a few teams in Nathan's portfolio, and then a number of other teams that we've talked to, who were launching on Solana initially, or other

• 40:56Speaker 02

  chains initially, and are like, actually, we need to come to Ethereum because in the current market conditions, Ethereum is really where all the activity still is happening. And so they want to be there. And so there is this kind of almost migration into the city center for now. And I think that at some point, we will see this, I would say loosening of the boundaries around the city center, and it will be able to grow and people will be able to have the experience of being in the city center, very, very close to it, without having to pay the taxes of the city center, because we've built out all this ancillary infrastructure that

• 41:36Speaker 02

  enables you to get the vast majority of those benefits while still controlling your own vertical stack.

• 41:43David Hoffman?

  I really like this metaphor, and I think there's a lot to unpack here. The Brave Wallet is your secure multi-chain on-ramp into Web3, and it's built directly into the Brave privacy browser. Gone are the days of managing multiple wallet extensions that put you at risk of phishing, spoofs, and tracking. With the Brave Wallet, you can securely manage your crypto assets across more than 100 different chains, including Ethereum, Layer 2s, Solana, and more, all without downloading risky extensions. The Brave Wallet is easy to set up and removes the headache of jumping between wallets and extensions. It's lightweight but packed with great features like built-in token swaps, buying and holding NFTs with a gallery view, and support for hardware wallets. But also much more than that, because Brave is shipping new features every single month

• 42:24David Hoffman?

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• 43:09David Hoffman?

  Their new version focuses on higher capital efficiency, Layer 2 to Layer 2 transfers, and a brand-new chain with Polygon, all while prioritizing high security and low fees. You can be a part of Across's story by joining their Discord and using Across for all of your Layer 2 transferring needs. So go to across.to to quickly and securely bridge your assets between Ethereum, Optimism, Polygon, Arbitrum, or Boba Networks. In all of my years in crypto, I have never been hacked, scammed, or lost money to a thief. And a lot of that credit goes to my Ledger hardware wallet. The Ledger Nano X and the Ledger Nano S Plus hardware wallets allow users like you and me to secure and manage all of our crypto assets and our NFTs, all with the security of storing users' private keys offline and out of reach from hackers. The Ledger Nano X is the perfect hardware wallet

• 43:54David Hoffman?

  for managing your crypto and NFTs on the go because it connects to your phone with Bluetooth and has a nice big screen for easy transaction readings. Ledger has also upgraded the iconic Ledger Nano S and made the new Ledger Nano S device more DeFi and NFT friendly, making it the perfect hardware wallet for beginners. Ledger has truly maximized for both ease of use and security. So discover which Ledger device is best suited for your journey by going and visiting shop-ledger.com. We keep using this word "taxes", and it's one way to illustrate what's going on, but I think it's incomplete, and it also might put just a bad image into users' heads, like, "Oh, taxes, those nation-state things that we're trying to get away from." It's just one way to describe this.

• 44:33Speaker 02

  You're paying for services, right? It's not taxes, right? You're paying for services. You can choose to pay them or not. And if you don't want them, there are other places that will offer you a service that clearly there's less demand for. If it's provided somewhere else, then if it's provided by Ethereum, and so people are willing to pay for quality.

• 44:50David Hoffman?

  ETH's not gonna throw you in jail.

• 44:53David Hoffman?

  But also, like, I think a better, or at least a different way to illustrate this is just cost of living. I moved from San Diego to New York, close to Manhattan. The costs of living have gone up. And that is kind of the same thing that we're calling taxes in this one metaphor. So like, maybe if you don't like the taxes word, you can replace that with costs of living. And now that there's this Manhattan place, everyone wants to be here. There's only limited supply. There's much more demand. Rent is high. Restaurants are high. And like, so Uniswap has this line out the door, and it's like Manhattan location. And so Uniswap has this like downtown Manhattan, like embassy of sorts. And there's a big line out the door because we're all in Manhattan, and that's where all the people are. And so naturally, the Uniswap location in Manhattan has a large amount of demand

• 45:36David Hoffman?

  for it amongst. And it's also right next to Compound. It's also right next to Ave. It's also right next to Maker Dow. So the subway system to get to these places are very congested because everyone wants to go here. And so like, yeah, one way you can call it taxes, we can also call it just generalized cost of living is really high in New York. But people pay that because it's fun to be here, right? It's fun to be on the Ethereum Layer One. It's where all the rides are. It's where all the lines are. But Dan, you're saying that like, okay, so Uniswap can keep its embassy, its location, its headquarters on the Ethereum Layer One in downtown Manhattan on Times Square. And it can also go and build out its own goddamn country elsewhere. It's like, wow, there's

• 46:17David Hoffman?

  so much demand to use Uniswap. We can keep our embassy on the Ethereum Layer One. We can keep our app on the Ethereum Layer One. We will also build out our own city, our own nation. And there's a proven sufficient demand of Uniswap in Manhattan, that if we build out this new nation state, this new country, this new security system called the Uniswap Roll App or App Chain, that we know that actually there's going to be sufficient demand of both the Uni Chain and the Uniswap app on the Layer One. And we can actually have best of both worlds. And you talked about how at nascent, you guys actually still use centralized exchanges. To me, this like Roll App model of Uniswap is somewhere in the middle of just like the application on the Ethereum Layer One and a centralized exchange where like, if you fund your account on the Uni App Chain, you get some

• 47:02David Hoffman?

  Of the very strong execution abilities of a sovereign role app that can compete with FTX and Coinbase. And so it starts to feel like a blockchain that's meant to do one thing, which is compete very, very strongly on execution. That doesn't have to compete with the execution of all of the nearby applications like Maker, Aave, Compound. And so this like embassy on the Ethereum layer one model in this very high cost of living of the Ethereum layer one slash Manhattan. Versus like Uniswap building out its own like city state out in the burbs. Or just like, I don't know, terraforming some land in the Atlantic Ocean. If you want to really stretch that metaphor, I think this is really, really a useful mental model. Would you add anything to this perspective?

• 47:47Speaker 02

  I think that's great. And I think one of the reasons why it's going to take some time to get to that future. Is because right now, if Uniswap were to go set up its own like city, state, nation, state. You need to have an airport and you're going to need to like go there and it's going to take hours to fly there. And it's just, it's a real hassle and getting anything else there is just going to be a pain. And the future that we are heading to is it's going to be more like teleportation. And so it is not exactly the same as walking next door to Compound, but it's going to be pretty close. And I think, you know, while there may be some costs to getting there, I think those costs are going to get fairly low.

• 48:32Speaker 02

  And it's not going to seem as far away and as different, right? Again, Cosmos has, you know, talked for a long time about like the interchain. And thinking about this as like, we're going to have a network of networks is really what the future is going to be here. And, you know, I'm a deep believer in Ethereum. I love the Ethereum ecosystem. That is where the vast majority of the teams that I work with are operating today. But I do think that we're not going to be in a future state five years from now. Where the majority of activity is going to be happening on. Ethereum L1. At the very least, we're going to move to L2s, probably going to have these L3s.

• 49:14Speaker 02

  Other L1s and their ecosystems are not going to go away. They're still going to be there. We'll probably see, you know, some amount of, say, concentration within a handful of other economically relevant blockchains. But you're going to be very limiting if you're only thinking you're going to work in the purely Ethereum-centric universe. And consumers are going to want to be able to access all of this. And so we are going to build better bridges, better UX in moving between different chains, different execution environments. And I just view that as effectively inevitable. I believe that we're going to get there on a technological front and get close enough.

• 49:56Speaker 02

  There are going to be places where maybe there are certain trust assumptions that are going to be introduced. But at the very least, those will be transparent and people can choose to accept them or stay in what they view as a more fully trustless environment. They're going to be able to bridge all over the place. This is just what, if we want to compete with Web2, if we want to compete with TradFi, like, we're going to need to grow and be more accepting and adopt the idea of people operating across a broader ecosystem than just Ethereum.

• 50:29Ryan Sean Adams?

  So I think the economic case that you're making for why Uniswap would leave kind of an embassy on main chain, but then expand to an app chain is because on the app chain, whether that's a roll-up app chain or its own kind of self-sovereign app chain, it can basically reduce the training costs down from like, what did we say earlier, 0.61, 0.66% basis points? It can reduce that down and/or if it doesn't reduce that, it can also just collect its own rent, right? So why would a Uniswap move to get more customers, to drive down the cost per trade

• 51:09Ryan Sean Adams?

  in a new app chain and to collect more revenue itself rather than paying more in like taxes to ETH holders, essentially? Like, these are the Economic drivers for this, and this all exists in kind of like a multi-party game theoretic construct where if they don't do it, then their competitor will. And so this, you know, almost forces them to do it in order to remain competitive. And this is kind of the world that you're painting. Am I getting that part correct? And then also, like, what new sovereignty do they gain, other than the kind of the economic argument for why they might move? What new sovereignty do they gain in an app chain model that they didn't have on Ethereum layer one?

• 51:47Speaker 02

  Yeah, that's a great question. So one of the things that I think is really exciting here is the ability to tweak where the costs sit, right? I think we would all agree that you can't have zero cost transactions on a blockchain, right? There needs to be some cost associated with transactions. So there's going to be some fixed fee. Is that $7 the right amount? Probably not for a lot of use cases. 70 cents, 7 cents, .7 cents, .07 cents? I don't know where that is relative to the variable cost on those swap fees. And so when you have your own roll up or your own chain, you can kind of jigger with those to figure out what is the right setting

• 52:30Speaker 02

  that you need. There's a great experiment in Kanto that is looking and saying, hey, like, what if we actually have native DEXs and, you know, native lending protocol and things like that? How do we actually build that into the validation for the chain or for the zone? And you're able to redistribute fees in different ways. So one of the things that I'm most excited about here is looking at that MEV, right, that's going out to these kind of third parties in a lot of ways. What if we take a piece of this, which is part of kind of effectively Skip's proposal, what they're doing with Osmosis, and saying, well, we can now redirect what happens with some

• 53:11Speaker 02

  of this MEV revenue that was being captured by other parties. We can take it, we can actually rebate it to traders, we could rebate it to LPs, or we can capture it within the DAO and use it to fund future development. And so you get access to this whole new piece of revenue that you can use to tighten spreads, reduce fixed trading costs, or fund future development. Like, that's incredible, the amount of, I would say, like, economic tweaking you can do there to make the best trading environment and also to ensure the health and development of the protocol in the long term. The same way that we look at exchange, centralized exchanges play with essentially

• 53:53Speaker 02

  maker taker fees, right? Where they say, how much do you pay for a fee if you post an order versus you take an order off the order book? And even to the point of like creating negative fees for market makers, in some cases, we're going to like a rebate. We can start to do that in a decentralized context by looking at this other revenue flow that isn't strictly part of the kind of pricing baked into the AMM formula itself.

• 54:22Ryan Sean Adams?

  So you get full control over all of the revenue flows and how you allocate that?

• 54:26Speaker 02

  Yeah.

• 54:26David Hoffman?

  And very simply put, like why the inevitability of the uni-chain, why that exists, the raw inevitability of it is because the uni-chain will be able to capture more revenue for itself while simultaneously being able to produce better execution for its customers and better fees likely for their liquidity providers. So it's a win-win-win. All right. Well, who loses in that scenario? Well, it's the ETH holders, actually, and it's the malicious MEV bots. Some would say that this is good for the Uniswap app chain. Just kind of recapping the numbers, Uniswap LPs get 17 basis points. That's 26% of all the total costs of transacting on the Uniswap outlayer one from your number

• 55:09David Hoffman?

  stand. Then the ETH burn is 23 basis points. That's 35% of all costs on Uniswap. And then there's MEV arbors, which is 25 basis points, about 38% of all costs trading on Uniswap. You're saying we can eliminate the ETH burn by putting all of those transaction fees onto its own independent app chain where Uniswap might even collect those own transaction fees. That's good for the uni-token in theory, the Uniswap protocol. MEV arbors, call it, you know, very roughly 50% bad, 50% good. You eliminate the bad stuff and that can also be recirculated back to either better execution for customers, better revenue for liquidity providers, which then creates better liquidity, which is a good service to customers, or can this also be a fee collected by the Uniswap token? And so just the net

• 55:54David Hoffman?

  of it is that the control that Uniswap has allows It to just overall go like, cut out the middleman, cut out the rent paid ETH holders. And since it can control its own execution, because it's its own blockchain, it can also determine the MEV that is good and emphasize good MEV while eliminating bad MEV. And so the net of it is like Uniswap produces its own domain, which can like optimize for the best possible version of itself. The only cost is you actually have to get there. You actually have to move your assets over to that chain. Is this a good summary?

• 56:28Speaker 02

  Yeah, one thing that I will add here is I think based on knowing personally and also through public statements, like members of the Uniswap team, these are folks who are very aligned with Ethereum as an ecosystem and the ethos here. And one of the pushbacks that I often see around app chains is that people are assuming you're going to go and have a completely sovereign validator set. And I think that's very unlikely to be the case for Uniswap especially. I would be shocked if they didn't tie back into Ethereum via some sort of like roll up. They're very friendly with the optimism team, obviously one of the early kind of launch partners there. And so I would very much expect them to still be relying on Ethereum

• 57:11Speaker 02

  for some amount of their shared security and to make sure that the bridges to Ethereum are especially strong of any of the ecosystem. So I don't think that Ethereum would totally lose out here. And again, literally even if like Uniswap token holders wanted to vote for it, you can't shut down Uniswap on Ethereum. It will always be there.

• 57:31David Hoffman?

  One of the costs that I see of the Uniswap chain, I think some listeners might be like, oh, I totally see how uni-chain is inevitable. This sounds great, like better win-win-win. But I think one of the costs I highlight of the uni-chain, something you lose, is composability. So I think to make this very reductive is that there's better execution on uni-chain. It can compete with something like Coinbase or FTX on execution because it has higher levels of control. But what it gives up is composability. And so if you want composability, you go back to Manhattan. You go back to the Ethereum layer one, you pay Ethereum for composability. That's ultimately what you get from paying EIP1559 the ETH burn. What's your take here?

• 58:11Speaker 02

  I think you give up certain types of composability. So you're giving up atomic composability, where all these different things you want to do are happening in the exact same transaction are all essentially settling simultaneously.

• 58:27Speaker 02

  I think that that has been a lot of what I talked about with like super fluid collateral and others like were based on that. But there's a lot of activity, a lot of composability that's important that doesn't have to be purely atomic. So for one example, right? One of the things that I talked about in super fluid collateral was the ability to take uniswap LP shares and then use them as collateral in a lending protocol. So let's say you have LP shares on uni chain, you could bridge them over to compound chain and still post them as collateral. You still get that composability. One of the things

• 59:08Speaker 02

  you don't get is like, say, using flash loans to facilitate liquidations in a lending protocol, right? Things like that, that gets a little trickier, right? Certain types of atomic composability. But when we talk about the benefits of composability in crypto, I think a lot of it, it's almost like these open APIs and the ability to take assets anywhere. You can have a wallet that can make transactions on multiple chains. You've got, this is a nascent portfolio company, but Socket, which is being used as the kind of bridge provider in the Coinbase Wallet app today for kind of Polygon and Ethereum. They're creating this new class of effectively super apps where they're really abstracting

• 59:50Speaker 02

  away a lot of the challenges on the developer side and the user side around deployment on multiple chains and managing liquidity across those chains. So I guess what I'm getting at here is like, you don't, period, give up composability by moving to another chain. You give up a certain type of composability that we have gotten used to thinking about over the past however many years in Ethereum as being what composability means, but it's not. It's a specific, very valuable type of composability. But I would posit that In the future, 80% plus of the benefits that we think of as composability, like we still get those even with different chains.

• 1:00:31Speaker 02

  So we just need to kind of broaden our minds a little bit and think about these definitions a little more carefully.

• 1:00:38David Hoffman?

  Yeah, that was really good. I really like that. And just to drive that point home, the nuanced one packing here is that there's two, maybe more, but two main kinds of composability. What you're calling atomic composability, which is what you see when you see like a really complicated transaction that calls 13 different DeFi apps at once and it executes based off of the inputs and outputs of all of these DeFi apps in the same transaction. We lose that ability. But I think what you're saying is that the other form of composability where you can like tokenize a vault and you can take that token and put it on a different chain is totally retained. And that might actually be the much more significant kind and meaningful kind of composability. And also the other nuance here is that that atomic composability where we're like integrating

• 1:01:22David Hoffman?

  many, many different DeFi apps at once and we're doing an atomic transaction that calls Compound and Maker and Uniswap all at the same time is also like now that we are losing that, that is a lot of MEV. That's what MEV is, is like this atomic composability. And so this is how we've like controlled some of the, perhaps the malicious MEV by eliminating some of the atomic composability properties.

• 1:01:44Speaker 02

  In some ways, it might actually be a little bit of the reverse in terms of MEV. Like there's already a lot of cross-chain MEV and there's going to be, I think, more of it. So we do need to be careful in thinking about how we design around this, but it doesn't eliminate MEV. Let's be very clear about that.

• 1:02:00David Hoffman?

  The nuanced rabbit hole goes very deep here.

• 1:02:01Speaker 02

  Yes.

• 1:02:02Ryan Sean Adams?

  All right. So for people who are with us so far here, so I think you've given a articulate economic reason for why the app chain thesis, I think, like your posts in previous years, right? It's also, and you're also saying this, a little ahead of its time. You have to do a little bit of hand waving around, look, composability will be fixed, right? Like we'll have these bridges, it'll feel very seamless, the UX will flow very nicely. And you're starting to see some of that getting built. But this is why people, even though- We can paint the world of a kind of multi-chain composability. We don't really see it right now. It's because it hasn't really been built yet. So that I feel like is a part of the app chain thesis. You almost have to take on faith that the builders will build the infrastructure to get us there.

• 1:02:44Ryan Sean Adams?

  But let's take that on faith. I think one of the big questions and maybe a theme recently on Bankless is, okay, what does this mean for our layer ones? And I want to talk specifically about Ethereum and kind of its roll apps ecosystem, right? Kind of, you know, some the ZK sync folks are calling this like layer three, for instance, right? So you have a application-specific rollup on top of a layer two, and that's a layer three. And then there's the Cosmos world. We just had a conversation recently with Zaki and Sunny about the Cosmos world of all of these app chains, you know, they have some level of mesh security across them. So here's what I kind of can't figure out, right?

• 1:03:25Ryan Sean Adams?

  I think that in the short run, some of this could be net neutral or net negative even for Ethereum. If we get some migration away from kind of the main chain and to like layer twos and layer threes. But ultimately, layer twos and the layer threes, they still pay their taxes. It's at a much lower tax rate, which is kind of nice for them, right? But they still pay their taxes, don't they? And all of this settles back down to Ethereum. So if you're kind of an ETH holder, for example, then this is a good thing. You'd rather cannibalize your own main net than have another chain cannibalize your main net. And it's a beautiful thing. Hundred percent. So I'm very happy as someone who's bullish on ETH the asset.

• 1:04:05Ryan Sean Adams?

  The Cosmos world, of course, it's this world of, there is no kind of empire. There is no monolith. There is no central federal government that we're all paying taxes to. It's all of this world of kind of city-states. My question here is, how can the world of city-states compete with the world of like layer threes? So if I can get an app chain on Ethereum and I get all of the sovereignty benefits that you just outlined, including a way to tinker with all of my business model around kind of like who gets the MEV, what my fees are, where the validator revenue is distributed, I get all of that. And I also get

• 1:04:46Ryan Sean Adams?

  The security by kind of like the Ethereum National Defense Force, the Ethereum Military at the end of the day, then I don't have to bootstrap that security fee. This has always been part of my economic argument, or like the thought of why layer threes on Ethereum will ultimately outcompete individual Cosmos app chains is because they don't have to bootstrap and pay for their own defense costs. But tell me, because I know you're involved in both ecosystems, your bullish app chains, let's say, whether that's an Ethereum app chain, Rollapp, or whether that's a Cosmos app chain, I think you're bullish on the thesis of app chains. What light can you lend on this debate?

• 1:05:27Ryan Sean Adams?

  Because as a lowly L1 holder, trying to predict the future of all of these layer ones and how that turns out, I'm trying to figure this out for myself, Dan. What would you say?

• 1:05:36Speaker 02

  Yeah, I mean, it's really hard for me to play out because I don't think it's inevitable. One of the things that I really liked you guys kind of laying out is that Ethereum and Cosmos have very similar visions of what the future looks like, the people, developers in the ecosystem especially, and they're just approaching it from different angles. And it was inevitable that these two models would emerge, whether it was Ethereum and Cosmos or two different projects. These are things that almost must happen.

• 1:06:07Ryan Sean Adams?

  And The line that I use is that if you reroll the dice of crypto, you'll come out with Ethereum and Cosmos 100% of the time.

• 1:06:13Speaker 02

  Exactly. And I think that when I'm looking at it in terms of which of these win out and where does value capture happen, I don't know. I agree with you that like these models are inevitable. I don't know which is the right way, and I'm not sure that it is in some ways like technologically like deterministic. There may be a lot of stuff that has to do with kind of like BD and where do large things get built sooner? Who creates a better developer experience? We are natives, we are kind of purists in a lot of ways, but I think that there's a lot of people, a lot of developers, a lot of users coming who maybe don't, they're certainly not going to get as deep into the weeds like technically and philosophically.

• 1:06:58Speaker 02

  They're going to look at the end benefits. And the trend has been away from, I would say, pure decentralization and strict ideology. And I think that the challenge is going to be, how do we maintain? As much of this core ideology and the kind of technical underpinnings of that as possible, while still moving quickly and being able to bring more people in. And this is one of those ways that I think Cosmos and Ethereum as ecosystems are very aligned. I see the kind of technical and philosophical lineage of pure crypto ecosystems being Bitcoin to Ethereum to Cosmos. And that doesn't mean that anything that came earlier stops

• 1:07:43Speaker 02

  being relevant. I just think that these ecosystems have a lot of beliefs and values that are shared in a way that they may not be as commonly shared with, let's say, the Polkadot ecosystem, or the Solana ecosystem, or the Aptos ecosystem, or anything like that. And so I think there's going to be a lot of kind of shared learnings. But we who tend to operate within this lineage need to execute well and quickly, because there are some really fast-moving actors in some other ecosystems that may not be as philosophically aligned. And if we move too slow and they move fast, they're going

• 1:08:27Speaker 02

  to bring end-user benefits and onboard a billion people who don't realize that the underpinnings there for censorship resistance and for self-sovereignty, that those are important to what we're building here and it's kind of why we're building this.

• 1:08:44Ryan Sean Adams?

  Dan is calling for a great alliance between the Ethereum ecosystem and the Cosmos ecosystem to forge ahead along some of these shared goals.

• 1:08:51Speaker 02

  There have been bigger asks out of the crypto world than that.

• 1:08:54Ryan Sean Adams?

  Yeah, sure. I remember there was a vision where Bitcoiners and Ethereum could get along. And maybe that's coming to fruition. We've had an increasing amount of Bitcoiners on the podcast lately.

• 1:09:02Speaker 02

  Perhaps.

• 1:09:03Ryan Sean Adams?

  Dan, I still have that question about kind of the economics of it, of sovereign app chain in a Cosmos versus kind of a Layer 3. But perhaps we kind of that resolves over time. But I guess maybe the larger point around this that maybe someone like you would make is if this app chain thesis proves out, I'm just like, I don't know what the Portfolio is, I don't know what your personal portfolio is, but like the play here is not necessarily to bet on the layer ones, is it? It's you're betting on the apps, you're betting on the app chains themselves, aren't you? Is that the way to interpret kind of the not financial advice? But like a move for an investor who's thinking critically about this is the new meta, the new alpha actually investing in the apps?

• 1:09:46Speaker 02

  Yeah, I mean, very much not giving financial advice here. And I'll say that, you know, nascent, you know, for what it's worth, we hold a fair amount of layer one assets like Bitcoin and Ethereum especially. But we are also investing in a lot of these applications. I think there's a lot of things that we've invested in, you know, we're a relatively small fund and there's a lot of people with a lot more capital who they can pour into these, you know, hundred million dollar plus raises. We haven't kind of played that game. So we've almost like just the meta game and our position within it has been such that we've chosen to focus largely on applications, but most of those today have not been looking at app chains and roll apps.

• 1:10:28Speaker 02

  I think over time, the successful ones will have a major strategic question to look at doing that. But I don't think in any way the rise of application specific rollups and chains is going to wipe out L ones. I still think they will be hugely relevant as these kind of generalized platforms. When people do want atomic composability and when they do want just that kind of like city center and access to all the infrastructure that's already been built up for Ethereum, you're still going to go launch there early on or launch one of the L twos or do something.

• 1:11:05Speaker 02

  So I don't think that the app chain thesis is anti L ones, especially ones like Ethereum that have like really focused on with you guys really.

• 1:11:16Speaker 02

  Leading the charge a lot of ways, like kind of the monetary premium aspect to that. So I still think that is hugely important.

• 1:11:22Ryan Sean Adams?

  It's not anti L1 for sure, but it is a different way to kind of think about like your bets in the space. Right. And that's like, what's interesting about this app chain world is, and indeed we're already seeing, and we might continue to see, app chains kind of switch allegiance. So an app chain starts as a Cosmos app chain, for example, and then some roll up is, you know, they're looking over their shoulder and looking at that roll up and that's looking pretty nice over there on, you know, like the ZK EVM roll up as a layer three and they switch allegiance. Or we've seen like recently DYDX.

• 1:11:52Speaker 02

  I was just gonna say, yeah.

• 1:11:53Ryan Sean Adams?

  They were in the Starkware ecosystem and they were like, uh, hmm, we still don't have the sovereignty that we want. And now they're going the direction of moving to Cosmos. And so what's interesting about the bet that you make on an app chain is, well, you could just like, I'm using DYDX as an example, but you could bet on DYDX the app. And that is a different sort of bet than betting on a layer one, because it might be on Ethereum. It might be like in Cosmos, it might be in both of these places. And so it's a different way to kind of, I think, look at the crypto portfolio as an application kind of specific portfolio. It's a different framing of things than then we've had in the past.

• 1:12:32Speaker 02

  Yeah. And one thing that I've encouraged people to think about from a strategic standpoint, there was a good post that I think MultiChain put out, like the 2018 timeframe. And they were taking this idea of aggregation theory and saying, how does this apply? And I remember one of the examples they were using, they were looking at Augur as this kind of prediction market protocol. I can't even remember the name of it. There was something building on top of it. And they were making the case for, hey, if this application built on top of Augur, this front end, becomes the largest driver of transactions and usage of Augur, they can actually kind of like.

• 1:13:10Speaker 02

  Backwards like verticalize their stack and they can like fork out Augur and do their own version of the protocol underneath. And the aggregation theory generally has been written a lot about it. I think it was formulated by Ben Thompson, who writes the Strategery Newsletter. And I think aggregation theory doesn't cease to apply in a crypto setting. So there's going to be a lot of applications. And maybe some of these like, you know, fintech like neo-banks and potentially some web two companies that will start to come into the web three space. And they may use existing platforms and protocols and applications like at first,

• 1:13:51Speaker 02

  but at some point, there may also be the incentive for them to fork or build their own thing and redirect some of that. And so I think it's really up in the air how a lot of this plays out and who the big winners are. I do think that there is very strong strategic position from some of the OG DeFi applications and folks who can grab large market share now. But I would definitely have my eyes on, and I do have my eyes on some of these, I would say, more forward thinking players who may not have started out web three, but who can make that transition and look to kind of backwards integrate and potentially fork some of the

• 1:14:34Speaker 02

  protocols because they'll control enough of the users and the flow of assets to be able to do so.

• 1:14:42David Hoffman?

  Dan, I think this has been an awesome exploration into this app chain, roll app thesis. There's one last thing I want to unpack before I think we can formally tie a bow on this conversation, and that is the topic of censorship. And I think this is one of the other big costs of an app chain where governance by the token is a thing. And this is something that I think will always kind of keep Ethereum layer one a very vibrant place to be. And that is because, like you said, the Uniswap contracts on the Ethereum layer one will go on in perpetuity as long as Ethereum exists. That's how they're coded. That's how they're built. That's kind of the promise of Ethereum is unstoppable applications. If Uniswap makes its uni-chain, and it will govern over the uni-chain in a particular way.

• 1:15:26David Hoffman?

  And one of the benefits of that, we talked about, is that the Uniswap chain will be able to dictate and determine what is good MEV and what is bad MEV. And that will improve execution for its traders. It will also road some of the credible neutrality of Uniswap, as it will make political choices as to what is an allowable transaction on uni-chain. Front-running might be determined to be an unallowable transaction on the uni-chain. And so, front-running might be censored by the Uniswap app chain, because that produces better execution for its users. But it's a little bit like content moderation, right? Like, we are now moderating the types of transactions that are allowable on this uni-chain. And so, the trade-off here is that the Uniswap app chain allows

• 1:16:12David Hoffman?

  some censorship. It determines what is good and what is bad, which Ethereum will never do. And it will lose some credible neutrality in the name of providing a better service for its customers. And I think that that is a good trade that it will make. But of course, the world of crypto always is a world of trade-offs. Perhaps some people really value that censorship resistance, and they want to be on the Ethereum Layer 1. I think that's the last nuance to unpack here. Do you have anything else to add to that?

• 1:16:39Speaker 02

  Yeah, I mean, I would say it's not that there is no attempts at censorship and control on Ethereum L1, or necessarily that there would be on these application-specific chains, right? It's going to come down to how you draw the circle around your community, and who's got control, and what values they want to build into the protocol that are, I would say, enforced via code. And then what things are enforced by social consensus. And then, there's the whole other angle about what's going to happen with governments and regulators trying to exert their influence in different ways. And I would say, one of the strongest cases for the app-chain thesis not taking off would be if we're seeing a lot of the validators

• 1:17:24Speaker 02

  that are required for these chains, even if you're using shared security models and Rolper, validators, sequencers, whatever, if some of those are easier to target from a regulatory perspective as known entities, and to be shut down for a specific activity. Whereas, I would argue that Ethereum infrastructure providers, they look a lot more like they're helping to run like servers or developing like web browsers and like their general platform things. And so it's not about any particular application and how regulators may view that. They're providing this general platform. And I think you lose some of that argument and it becomes a little bit harder to make. I think there are some things that can be done to soften it and to

• 1:18:05Speaker 02

  position it. But yeah, that is something that becomes more of a concern as you move, at least to certain formulations of roll apps and app chains.

• 1:18:16David Hoffman?

  Dan, my last take that I want you to check, the Bankless Weekly rollup listeners will be familiar with my .13 DPI versus ETH bottom call, which totally broke and failed. And now we're at like .06 or something. My take here is that the roll app or app chain thesis for DeFi tokens that get their own app chains, they don't lose any of the value that they gain from their applications on Ethereum layer one or Ethereum layer twos. They also get an additional value capture source in their own app chain. And so an app chain paradigm for DeFi tokens perhaps could allow DeFi tokens to reclaim some lost territory in their Ether DeFi token ratio, as in they might actually be able to gain

• 1:18:59David Hoffman?

  some ground that they've lost because DeFi tokens tend to be down only versus Ether over like the last two years now. So maybe the app chain world for DeFi tokens is a way for these DeFi tokens to regain some lost value in the ETH terms. That's my last take of the show.

• 1:19:14Speaker 02

  I mean, it's certainly possible. I think we shouldn't look at it as going and trying to capture an L1 premium or something for these tokens by moving to their own app chain. I think it's more about they're able to do their core function more efficiently if they do this. I'll throw out a teaser here is, you know, we've talked about some of this MEV and internalization and that being something that can be really great for a lot of these things. I'm becoming increasingly convinced that there are ways to Design protocols today on Ethereum that internalize more of this MEV and can get some of these benefits. And I think it opens up a whole new design space for these protocols and for ways that

• 1:19:59Speaker 02

  they can actually capture value while creating a more efficient protocol for their users. I'm very excited to explore that more and hopefully we can talk about that in the not too distant future.

• 1:20:11Ryan Sean Adams?

  Amazing. Not Dan's take necessarily, but maybe a take to come from this is the next DeFi renaissance, the bull market shall resume. Once we figure out DeFi governance and once we figure out app chains, maybe we'll start to see, you know, an uptrend start. David, helping you out on your ratio bet. Dan, it's been so much fun having you on. Thank you so much for joining us and exploring the app chain thesis today.

• 1:20:34Speaker 02

  Always a pleasure, guys. Thanks for having me.

• 1:20:35Ryan Sean Adams?

  Bankless listeners, a few items for your action list. Number one is read the inevitability of Unichain. That is the post from Dan that we talked about on this episode today. Great post. Also, we'll add a link to aggregation theory. It's a classic from stratechery. Is this stratechery?

• 1:20:51Speaker 02

  I think probably stratechery is.

• 1:20:53Ryan Sean Adams?

  Stratechery. Thank you, Dan. Fantastic. And also stick around. If you are a bankless premium member, David and I are about to record the debrief, which is our thoughts after the episode. You could stick around and hearing that. If you're not a premium member, you can become one by clicking a link in the show notes.

• 1:21:09Speaker 02

  Risks and disclaimers. Crypto is risky. You could lose what you put in, but we're headed west. This is the frontier. It isn't for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.