20 - The Ethereum Opportunity | Chris Burniske

Episode: #20 July 6, 2020 We sit down in this episode with Chris Burniske to talk about crypto, DeFi, and the Ethereum opportunity. Why are we here? How will crypto make the world better? Where are we going next? Oh...and is ETH money? Chris has the incredible ability to drill deep into intricate analysis one moment then zoom out across history to tell us what is means for the future of humanity. Enjoy this conversation with our favorite crypto analyst-philosopher. We cover: Evolution of token valuations Fixing the inequality of capital Is DeFi a better system for the world? Balancer as a case study Have his views on governance changed? Tribalism! The reason we're here Going west toward the Infinite Whitespace The Ethereum opportunity! Bullish ETH? Chris's next book Join us next Monday for a fresh episode! ----- Tools from our sponsors to go bankless: Rocket Dollar https://bankless.cc/2C57MVW - tax shelter your crypto ($50 w/ "BANKLESS https://bankless.cc/2C57MVW") Ramp https://bankless.cc/2ZDJQRU - the fiat onramp for DeFi (mention Bankless!) Monolith https://bankless.cc/3e2TG4E - holy grail of bankless Visa cards Aave https://bankless.cc/aave - money lego for lending & borrowing ----- Resources discussed: Read our favorite writings by Chris: A Superior Financial System https://www.placeholder.vc/blog/2020/6/13/a-superior-financial-system The Likely Fate of Ethereum Killers https://www.placeholder.vc/blog/2019/10/22/fire-before-growth-the-likely-fate-of-ethereum-killers Protocols As Minimally Extractive Coordinators https://www.placeholder.vc/blog/2019/10/6/protocols-as-minimally-extractive-coordinators Value Capture & Quantification: Cryptocapital vs Cryptocommodities https://static1.squarespace.com/static/5a479ee3b7411c6102f75729/t/5cc4ad03f5a50f00010525e7/1556393220303/Value+Capture+and+Quantification_+Cryptocapital+vs+Cryptocommodities_Final.pdf Cryptonetworks Are Not Companies https://www.placeholder.vc/blog/2018/11/30/cryptonetworks-are-not-companies Follow Chris on Twitter https://twitter.com/cburniske Listen to Chris Read "A Blank State of Slate https://unchainedpodcast.com/chris-burniske-a-blank-slate-of-state/" Check out Crypto Assets Book https://www.amazon.com/Cryptoassets-Innovative-Investors-Bitcoin-Beyond/dp/1260026671 ----- Episode Actions: Read our favorite articles from Chris (see above) Listen to episode 4 on ETH as a Triple Point Asset http://podcast.banklesshq.com/4-ether-the-triple-point-asset Subscribe to State of the Nation on YouTube https://www.youtube.com/playlist?list=PLmkdAgtxf3ahHup7h1dxjs0SNwCSGdjVb! Also...subscribe to Bankless YouTube https://www.youtube.com/c/bankless to watch State of the Nation https://www.youtube.com/playlist?list=PLmkdAgtxf3ahHup7h1dxjs0SNwCSGdjVb every Tuesday. ----- Chris Burniske is a partner at Placeholder, a New York venture firm that invests in decentralized information networks. Prior to Placeholder, he co-authored, Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond, and spearheaded ARK Investment Management’s crypto efforts, including its 2015 bitcoin investment. His commentary has been featured on national media outlets, including the Wall Street Journal, New York Times, Financial Times, and Bloomberg. Twitter @cburniske. ----- Subscribe to podcast on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 | Spotify https://open.spotify.com/show/41TNnXSv5ExcQSzEGLlGhy | YouTube https://www.youtube.com/c/bankless | RSS Feed http://podcast.banklesshq.com/ Leave a review on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Watch Bankless shows and tutorials on YouTube https://www.youtube.com/c/bankless Visit official Bankless website http://banklesshq.com/ for resources Follow Bankless on Twitter https://twitter.com/BanklessHQ Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState ----- Not financial or tax advice. This podcast is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Do your own research.

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

• 0:13Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we are here to help you become more bankless. Bankless Nation, we have an absolutely incredible episode for you. Super honored to have Chris Berninski on the podcast. He doesn't do many podcasts, but there were some ideas I think he wanted to talk about specifically with the Bankless community, and this is just a killer episode. David, what stuck out to you?

• 0:49David Hoffman?

  Chris, to me, is this quiet thinker who is always lurking in the background, just absorbing information and really stitching them together in the ways that make sense to him. So when he gives his thoughts, it's coming from a place of patience and contemplation. And I think that is really reflected in his deliberateness in his ideas. And so when he comes to Bankless and shares what he has been thinking about lately and what he's seeing going on in the DeFi world and the greater crypto world at large, I take pause and I try and integrate his ideas into how I'm seeing things. And so I have a ton of respect for Chris and the way he thinks, and I'm really happy that we were able to

• 1:33David Hoffman?

  get him on the Bankless podcast to kind of share what he's been thinking about, especially as the crypto world has seemed to have rounded a corner in the last few months or so.

• 1:42Ryan Sean Adams?

  Yeah, he's one of these guys with some crypto wrinkles, to use a metaphor, right? Like, so he's been in this space for a while, got in his twenties, but wrote the ringing the bell on a new asset class in 2014, 2015-ish, which was like an incredible paper for its time, way ahead of things. So he's kind of, he's got this wisdom that's built up in crypto and having witnessed a few market cycles. And that certainly comes through when we talk to him about where we are in the market cycle. We ask him about ETH specifically. We ask him about DeFi tokens. We talked to him

• 2:21Ryan Sean Adams?

  about economic bandwidth and what these new capital assets can mean for the world. So this is, I don't know, this is like an episode that ties a lot of things together that we've talked about previously, but also projects forward. Like, if you want to hear what the next three to four years are going to look like, starting now, I feel like this is the perfect episode to start with.

• 2:46David Hoffman?

  It's very obvious that Chris has pretty strong convictions about the values of both himself and these systems at large. I think that's really important when it comes to actually looking at as to where these systems are going. Because if you're in the crypto space, you are here because of the new values that are instantiated in the code of these protocols. And having somebody like Chris, who has very strong values and very strong convictions about those values, who is also a leader in this space, in a way, Chris is kind of directing the memes, directing the narrative in a way that resonates with his values. And the values that he has that he's communicated through his writing, I really resonate with. So I'm really glad that

• 3:31David Hoffman?

  we have Chris in this space, kind of leading the thoughts, leading the, leading the charge into this new world, going westward, but going in a specific direction that will be good for humanity, rather than just bringing about the same old systems in a new form. But before we get into the interview, we need to talk about some of our bankless sponsors. As we all go westward, we need to get our values into the crypto world, but hopefully escape the tyranny of centralized rent-seeking institutions. And that's where Monolith can help you get your value into the crypto world while skipping over the crypto banks. Coming soon to Monolith is an unwrap directly from your old world bank account into your smart contract wallet on Ethereum. And for

• 4:13David Hoffman?

  those that don't know, Monolith also has a DeFi card which uses DAI in your smart contract wallet. But on the Visa network, so you can go to your grocery store, swipe your DeFi card, pay for your groceries like a normal person and still be part of the crypto bankless, crypto economic future that we are all excited about. So you can get your value from your bank account directly into your crypto Visa card without having to go through any crypto bank intermediary, which is just absolutely fantastic. So in order to get started, go to monolith.xyz and get your bankless Visa card today.

• 4:49Ryan Sean Adams?

  So the biggest thing that's holding crypto back is actually getting fiat into the system, moving from that old world to the new crypto world. What you have to do is create an account with an exchange, you have to wire funds. That's also holding your app back if you are a DeFi developer and are building something on a network like Ethereum. What that means is in the fiat process, your users drop off when they're signing up and you're limiting your market to the hardcore crypto people. But what if you could make it super easy to on-ramp to your application using a fiat on-ramp? Ramp is that. It is a delightfully easy fiat on-ramp.

• 5:29Ryan Sean Adams?

  It lets first time crypto users get ETH and DAI, USDC, whatever asset they want in five minutes or less. So this reduces the dropout rate and lets you build products for the real world. Xerion is using it, Ethereum is using it, Taurus is using it, DeFi apps that you probably know and use today are using it. What you need to do is check this out and visit ramp.network to see how easy it is. You can get set up in 10 minutes or less and 100x your addressable market size as a developer. This is like the ultimate growth hack. And when you mention bankless, they'll on-ramp the first 100K in US dollars for free. So go to ramp.network, mention bankless and get started.

• 6:13David Hoffman?

  All right, guys, let's go ahead and get right into the interview with Chris Bernuski.

• 6:24Ryan Sean Adams?

  Hello everyone, Bankless Nation. We are so excited that we have Chris Berninski on the podcast today. He is a VC and partner at Placeholder. He's the author of the book Crypto Assets. He's really the founding father of many of the mental models that we talk about here on Bankless on a weekly basis. Chris, it is fantastic to have you here today. How are you doing, sir?

• 6:47Speaker 02

  I'm doing great. Thanks for having me on, guys.

• 6:49Ryan Sean Adams?

  Yeah, absolutely. How's COVID going? You're surviving everything that's going on in the East Coast there?

• 6:55Speaker 02

  I am surviving. Some people know this, but I grew up on Hawaii and so I did retreat to the islands for a little bit. And I'm back in New York at the moment. And New York's a pretty surreal place. It's maybe half as full as it typically is, which in some ways makes it more pleasant. But then there's the constant paranoia of contracting COVID, although it's safer than a lot of the rest of the US at the moment. So it's got its puts and its takes.

• 7:26Ryan Sean Adams?

  Yeah, absolutely. I guess the nice thing about being immersed in the digital world is we don't have to deal with that sort of thing so much. So I've been mostly camped in my office. I know David's been sort of the same. And yeah, different world there. But Chris, we want to dive right in here. We've got so much to talk about today, so many cool topics. So I think we should just dive in with, maybe we could start with what's, I think everyone has your background. Everyone knows your story from previous podcasts and many have read your book. You definitely have a big fan following in the Bankless community. So maybe we could just talk about what's going on in DeFi these days, particularly these DeFi tokens,

• 8:09Ryan Sean Adams?

  these almost these proto-capital assets. You popularized at one point in time in 2017, the like some value formulas, MV equals PQ. Can you talk about capital assets and how you're thinking about valuation of them? And maybe the evolution of token valuation over time in the context of these DeFi tokens?

• 8:36Speaker 02

  Definitely. The toughest thing here is we're dealing with programmable value, right? And so the programmability can lead to any kind of value capture and therefore any kind of valuation model.

• 8:50Speaker 02

  Typically, when I'm investigating these things, I start off with the superclasses of assets from Robert Greer. It's just a formula of looking at the world that I like. And those superclasses are capital assets, which are an ongoing source of something of value. They're valued on the basis of the net present value of their expected returns. There's consumable, so capital assets would be like bonds, equities, income-producing real estate, that kind of stuff. There's consumable, transformable assets, where you can consume it, you can transform it into another asset. It has economic value, but it does not yield an ongoing stream of value.

• 9:31Speaker 02

  So that's more your typical physical commodities, or Bitcoin, for example, or precious metals. And then the third superclass are your store value assets. So cannot be consumed, nor can it generate income. Nevertheless, it has value, it is a store value asset. So that's like, you know, fine arts, or some of the precious metals like gold overlap into this, and certainly Bitcoin does. So if we look at those three superclasses, and we say, well, where does Bitcoin fit in that? Bitcoin really started in the consumable, transformable, and has bled into being considered a store value, very similar to gold.

• 10:09Speaker 02

  And so the equation of exchange, M V equals P Q, that I did a lot of work with in 2016 and 2017, was really the best attempt at creating price targets for a consumable, transformable asset that has a store value characteristic. And, you know, typically, when you look at your typical commodities, which would fall in these consumable, transformable buckets, their price floor is the marginal cost of production. And we have seen that be effective, actually, for BTC, you know, in the bottom of the market in 2015. Again, in the bottom in 2018 and 2019. You know, in 2015, marginal cost of production was around $200, that's where we bottomed.

• 10:54Speaker 02

  In 18 and 19, similarly, it was in that $3,000, $4,000, $5,000 range. So that's a good. Bottom and and and that sticks to prior rules that we know. And then it's a bit um more novel to to use MV equals PQ. To solve for the necessary size of the monetary base. Of an economy sized PQ at velocity B. And that's basically what what I was doing uh with the consumable transformables. But then um as in in that stance, I want to make clear that I think that continues to be the best way to approach the consumable transformable assets. That overlap with store value assets. Um though the store of value.

• 11:37Speaker 02

  Has a financial premium, which makes it it very hard to accurately um project the price. Now, if we fast forward to now, um and and we compare now with twenty seventeen. There's been a total explosion of stake based assets. Um and so I wrote a piece, I guess it was in it's either in twenty eighteen or twenty nineteen. That was updating um so so some of the this valuation work. And really focusing on the stake based assets, because what became clear to me is. A stake based asset is a capital asset. Um it it gives you a source of something of value and it will be valued on the basis of the net present value of its expected returns.

• 12:20Speaker 02

  And so what that means is in in particular for a lot of these DeFi assets. Anything where I'm staking the asset and I need that asset to perform work to get value flows from the network. I can value that using some variant of, you know, a DCF or a dividend discount model. There's different ways um to approach it. But it's a much more familiar model, say, to a traditional valuation analyst coming from equi- the equities world or the bonds world. Or or um yeah, the the bond world. And so really wanting to get people to understand, okay. You can look at these as new fangled capital assets. So let me pause there because there's more to go into.

• 13:02David Hoffman?

  Yeah, I don't want to derail from the DeFi token conversation because that is definitely this new phenomenon that's going on in the DeFi world. But first, Chris, I want to talk about the three asset classes from Robert Greer that you are a fan of.

• 13:17Speaker 02

  Super classes.

• 13:18David Hoffman?

  Yeah, asset super classes.

• 13:19Speaker 02

  Yeah, because then we have the typical asset classes that we think of underneath the super classes.

• 13:25David Hoffman?

  Yeah, excuse me, the three asset super classes. And I use those super classes as a model for understanding ETH in my talk/paper, that ETH is a triple-point asset, where I made the claim that ETH is perhaps the only asset that fits inside of all three asset super classes. And I actually never got your opinion on whether that statement resonated with you or not. So, does it?

• 13:52Speaker 02

  It does. And I think it's good branding. I mean, we're all aware of how important these different shortcuts or memes are. So I like the idea of it being a triple-point asset. I think the silence that you might have felt from my... Typically, I'm silent if I'm uncertain about something, you know, because then I don't want to put an uninformed opinion out there. And the reason I was a little uncertain is we've just never had an asset like that. And it's not to say that it can't happen, but it is complex in terms

• 14:31Speaker 02

  of approaching how to value that thing and what it will be conceived of. Now, I think that when I look particularly ETH 2.0, right, there ETH will be staked for consensus, and so that will make it a capital asset, and you will be able to value it on that basis. It will have additional demand as a consumable, transformable, and with this growing understanding of ETH as money, it will have a financial premium. And so on that basis, I think you're spot on.

• 15:03Ryan Sean Adams?

  That's super interesting to get your take on that, Chris. Let's, let's switch back to the DeFi assets conversation. So that was a great summary of the three asset super classes, right? So we've got our capital assets, which can be valued as a discounted cash flow, DCF type model, right? And then we've got our store of value and our consumable assets. And that's really the M V equals P Q equation was really built for those. Now, it seems like in 2017, the market went a little bit wild with valuing every single token that existed as a M V equals P Q type token, right? As if it's going to become a store of value asset.

• 15:47Ryan Sean Adams?

  It seems like with the resurgence of DeFi tokens that actually have these on-chain cash flows. We were talking with Dan Elitzer in a couple of episodes ago. It seems like this is a more healthy type of capital asset because there are actually cash flows associated with these DeFi tokens like Comp or like Balancer or like some of the others that are coming out. Is that your take too? Is the best way to value these DeFi tokens in that as a capital asset in a discounted cash flow model? And does that mean these assets are a bit healthier? I might use that term than the, the asset valuation models we were using in 2017?

• 16:29Speaker 02

  So I definitely think there's more fundamentals here, right? And so the only thing that makes me a little uncomfortable is using the discounted cash flow idea. I was trying to use discounted value flow because a lot of these things, you know, it's not specifically cash that's flowing. And so there is a little bit of extra complexity in terms of the type of asset that is flowing to the holder, be it the native crypto asset or DAI or some other asset within this realm. But it is certainly the case that there's more fundamentals here and it's more familiar to your traditional analysts.

• 17:14Speaker 02

  And what that means for me is

• 17:19Speaker 02

  You know, we have these exploding markets of assets and, you know, when I got started in this industry, most people didn't care because most people thought they were worthless. And now a lot of people care because a lot of people think they're valuable, but no one knows how to value them. And so everyone's trying to figure out how to value them. And that was more so the case in 2017 and that that will come back around. Um, we've got kind of our core crypto group that is of course nerding out and fascinating, uh fascinated by all this. But um, as we have more of these models that come out, there's this, this, this phenomenon that starts to happen that's specific to humans. Um, which is theory is following price. So we're, we're creating theories to try and predict these prices.

• 18:02Speaker 02

  But once we create the right theories and they, they back test and these models are panning out, then price will follow the theory. And so then we actually start to build in more price stability. Um, you know, less volatility, more consistency in these markets. So it's actually a critical, a critical part of the functioning of these markets that we'd be able to better value and understand them. Um, and that's also very important for, you know, the larger scale money, the institutional investors that crypto is always talking about. Um, because, you know, those are the types of conversations I'm having often with placeholders, uh LPs around, you know, how do you value this thing?

• 18:42Speaker 02

  And if people can't get a, a handle on, you know, its fundamentals, then they're likely to um, not be comfortable, at least from an institutional basis. There's one other thing I wanna add here and that's the difference between, say, a fundamental valuation model and a relative valuation model. So, you know, the discounted value flows, or let's just call it variance of net present value of flows. Um, those models are fundamental models. Then there's the whole world of relative valuation models, which in equities are things like, you know, price to sales on a trailing or forward basis, or price to earnings, or there's, there's, you know, dozens, if not hundreds of them.

• 19:25Speaker 02

  What's interesting with crypto is, you know, we had things like N V T, right? For the consumable transformables, the network value to transaction ratio. But now with the capital assets, we're seeing things where people are looking at these from a price to sales or price to earnings basis. So, you know, token terminal dot X Y Z now has a ranking where you can look at assets and you can say, oh, wow, this asset is quite cheap in that it's only trading five times earnings going to the supply sider, whereas this other asset is trading at 500 times. And so actually, what you've seen partially in DeFi with some of these assets like Bankor

• 20:09Speaker 02

  or Aave or Kyber, they were valued very cheaply as a multiple of the value flows going to their supply siders. And so you really had a repricing, or you could call it multiple expansion, where you had people realizing, oh, wow, these are capital assets. These are solid networks. They're producing these value flows and they're trading, you know, at one tenth the multiple of their peers. And so you have people piling into them and there's basically a repricing to bring those relative valuations more in par. And so I think we can expect to see both a lot more fundamental valuation work, and that's kind of the bedrock.

• 20:51Speaker 02

  But then the, say, the pricing game with your peers becomes a lot of relative valuation comparisons.

• 21:00Ryan Sean Adams?

  That has been one of the most exciting things I've seen, I would say, in the past, you know, six months or so, this sort of relative valuation metrics that we're seeing. We will include a link to Token Terminal in the show notes for folks so they could see that. Also, a couple of articles on Bankless where we've talked about, you know, how to, how to value it. It almost, what you're talking about, Chris, almost is kind of analogous to a price to earnings ratio.

• 21:23Speaker 02

  Right.

• 21:24Ryan Sean Adams?

  That people might be used to evaluating in the equities world.

• 21:27Speaker 02

  Definitely.

• 21:28Ryan Sean Adams?

  Yeah, and it's, it's really fascinating.

• 21:30Speaker 02

  It's fantastic that we're getting to this place in crypto and it makes me super excited. And I'm admittedly a nerd for being excited about that. But the the danger here is that we don't standardize. And so I actually haven't talked with the Token Terminal guys. But like, if you think about it, for this this price to earnings that they're listing, I've got a suspicion that it might actually be more price to sales. Right, because sales is the top line flows. To have a price to earnings, you would have to be understanding what the margins are of the individual supply siders. Now, I think they list it as a price to earnings, if I'm not mistaken.

• 22:12Speaker 02

  The other thing is, you know, to to create that ratio, let's just say price to sales. You would have the network value of the assets and you divide it by the value flows going to the supply siders. Now, for that network value, are you using circulating supply or are you using fully diluted supply? Right, are you using trailing or are you using forward? And so, once you start to ask these questions, you can see, oh, you know, there's four or there's eight different potential price to sales ratios that I could project. And really, for a comparison to be useful, every single one, every single asset has to be computed in the same way.

• 22:53Speaker 02

  And so I think we need, you know, price to sales off of circulating and off of fully diluted. Because you'll start to see that will start to reveal kind of what's hidden in the underbelly of coin market cap. And some of these sites of, you know, okay, yeah, this asset might look cheap, but it's got 90% dilution in it because only 10% of the supply is circulating. So we need to standardize and we need, now that we're kind of getting the Big overarching ideas will have to standardize and become more nuanced in our comparisons and understandings.

• 23:27Ryan Sean Adams?

  And I totally share your excitement with like the fact that we've gotten to this place is incredibly exciting. The fact that we are now talking about the nuances of relative valuations across different DeFi and crypto capital assets is incredibly exciting, and I think all of that will come. You wrote a fairly famous paper in the crypto space, talking about the birth of a new asset class. And it feels to me like, like we are birthing new asset classes, if you will, under each of the super asset categories. Like as we speak, I mean, the emergence of this capital asset, well, that's an asset of DeFi tokens as capital assets.

• 24:12Ryan Sean Adams?

  That's an asset under the, the capital asset, you know, super asset category. When you originally wrote the paper, you were talking more about Bitcoin, right? Which was more the store value asset. Are you seeing like essentially what we're doing here is we're digitizing? Like there, there's going to be the birth of new assets in, in digital form that are crypto native across each of these asset super classes?

• 24:38Speaker 02

  Yeah, you know, it's funny you say that because I have from our notes, the new asset class paper. And I had written down, I should have titled it Bitcoin ringing the bell for new asset classes.

• 24:49Ryan Sean Adams?

  Yes.

• 24:50Speaker 02

  Pretty much exactly what you just said. Yeah, I, you know, I guess if we, if we think of blockchains as this 21st century accounting system, or blockchain as 21st century accounting systems, then I expect all of the traditional assets to get digitized and, you know, accounted for and exchanged on these rails. And then exactly as you were just alluding to, the creation of new examples within each asset super class. So, you know, these, this crypto capital that we're talking about, it's not quite like equity. There are some, you know, really important differences.

• 25:33Speaker 02

  And so you really couldn't call it equities or stocks. Nonetheless, it would still be a capital asset and therefore a new asset class. And there would be a bunch that that fit that bill. Similarly, under the consumable transform goals. Bitcoin is not a commodity. Um, like wheat is the commodity. There are some things that are that are quite different about it. Especially, you know, you you look at the marginal cost of production tends to go up. Whereas for most commodities, the marginal cost of production tends to go down. So, you know, you're definitely you're you're spot on there. Um, and we're gonna have, you know, these liquid asset soups. Um, kind of floating around as bits on the database.

• 26:15Ryan Sean Adams?

  So Chris, I just have one more. I we want to get to some other stuff, but one more, as you said that you kind of jogged my memory. So, um, my mental model has shifted a little bit away from a Bitcoin or an Ether. Being the actual consumable asset itself. Uh, and more toward the block space as being the consumable asset. And Bitcoin and Ether as the currency that is required, the protocol mandated currency. That is required uh to pay for the block space. I'm wondering what you what you think about that idea. So it's it's basically the idea that, well, the true commodity here, the true consumable asset is. The Ethereum block space itself, the gas, if you will, that's the kind of denomination.

• 26:59Ryan Sean Adams?

  Or the the Bitcoin block space. And Bitcoin or Ether are are more the money, more the the currencies. That are required to pay for them. I'm wondering if that factors into your thought process or what you think about that idea.

• 27:13Speaker 02

  So I see what you're getting at. I would still say they're one in the same. Um, and the analogy that comes to mind is, you know, let's take gasoline. Um, which is composed of, you know, different commodities, but is this commodity soup? Um, that gasoline then goes into an engine and then runs that engine. Um, but it's still the um, the gasoline that is valued and that you buy in the. You pay for and that you consume. You're you're not consuming the engine directly like you consume the engine over ten years or fifteen years as the card depreciates and all of that. And the reason I'm using that analogy is, you know, Bitcoin's block space or Ethereum's EVM and block space.

• 27:57Speaker 02

  Those are the engines and you know Bitcoin is the the fuel and Ether is the fuel to run computation through those engines. And so it's the direct value, uh, the direct valuation of access to those engines. So you you're absolutely right that like the utility you're getting out of it comes from the block space and that computational engine. But the fuel that goes into it and that values it directly um are these assets, the BTC and E.

• 28:25David Hoffman?

  So Chris, I want to turn to another difference between the traditional world of uh equity assets and assets you would find on traditional markets and the assets that we are seeing come around in this uh most recent era of of crypto development. And I mostly want to focus on uh fairness and and equality with how these assets are coming to be and maybe compare and contrast them with with the traditional system, right? And so thi- this new emergence of of DeFi tokens, the the SAFG, the Simple Agreement for Future Governance, and the emergence of liquidity mining. What these really all are are distribution mechanisms.

• 29:05David Hoffman?

  And importantly, I I think uh the the compound comp token has had no shortage of headlines. But what has had a shortage of headlines, in my opinion, is that the comp token and the liquidity mining that is going on with the comp token is the compound protoc- uh protocol, quote unquote, going public, right? And importantly, it's going public in a uh using that metaphor. Uh, it's going public in a way faster rate than what you would find a typical company is on the stock market, where there are multiple and multiple and multiple rounds of VC funding um that that uh allow uh certain special interest groups, special people, uh privileged people to gain access to the upside of a

• 29:50David Hoffman?

  Certain business, right? And then finally, the public gets to have access to it like last, right? But Compound really just took the shortcut and said like, well, we're not going to go public on the public stock market. We're going to turn the governance over the protocol into this comp token, and we're going to allow users to work for this token, right? And in your article, A Blank Slate of State, which I'm a hu- I was a huge fan of and is definitely going to be included in the show notes, you talked about the need of baking labor into capital and how that can solve some of the rampant wealth inequalities that we find in this world, which I think during the times of money printer go bird during coronavirus, it's extremely salient.

• 30:34David Hoffman?

  So I'm wondering how if I'm if I'm speaking of the right ideas when it comes to baking capital into or labor into capital with this whole liquidity mining phenomenon as like perhaps a first step towards generating a more fair financial system.

• 30:51Speaker 02

  Definitely. And there's a lot to unpack there. But if we look at, if we look at Bitcoin as kind of the mother of all of this innovation, right? Bitcoin used a hardcore supply-side subsidy, that is, the minting of new Bitcoin, to capture a bunch of supply siders to provide security to the network and actually create the service. And so what we see Compound doing, or Balancer doing, or some of these others with liquidity mining, is really the same supply-side, and to some extent now, demand-side hack of give away the, and this is specifically

• 31:34Speaker 02

  with Compound and Balancer, which are capital assets, whereas Bitcoin is, as we discussed, consumable, transformable, and store value. But for Compound and Balancer, you are giving away the capital of the network to the people who make the network great. And that is the laborers, as you were just alluding to, David. And then also, to some extent, the demand side. I think we're going to see people play around with how they use these incentives. But it really is a bootstrapping hack to pull together marketplaces and solve the chicken and egg problem, which is a very hard problem to solve. And I think it's Super elegant to do that by giving away the majority of the capital to the

• 32:19Speaker 02

  supply side and the demand side and leave the investors in the minority position. There's more we can go into in terms of de-emphasizing investors and path to liquidity and the costs. But let me pause for now.

• 32:34Ryan Sean Adams?

  Well, Chris, do you think that this model is going to solve some of the rampant inequality issues that we've seen with equity, where it sort of pools among the uber-rich? Or is that a different problem to solve?

• 32:51Speaker 02

  I hope so, and I think it has a good chance of doing it. If we zoom out and we look at equity, really what equity is, it was invented about 400 years ago, and it's the pooling of capital to take risk in a joint venture for something. And so the Dutch East India Company is the earliest and most famous example of this. And that has worked great in the industrial era, where you kind of always needed more capital to make more investment in the CapEx of the machines and the systems that are producing things.

• 33:30Speaker 02

  And so, in a way, investors constantly dumping in more capital is a much-needed function within that company, that company that's backed by equity. But as we have turned to the software era, and you can produce new units at zero marginal cost and just continue to scale out and scale out and scale out with, on a relative basis, very little capital, then what that means is, in the software era and the digital era, you kind of had these massive systems that scale out, are really capital-efficient, but are captured at the beginning by the shareholders. And then those shareholders, because it's just the shareholders that hold the capital

• 34:10Speaker 02

  of the system, it's concentrated governance, and in only having shareholders governing it, I think it allows those shareholders to dehumanize all other parts of the system. So you don't take them into account. Because they don't have a seat at the table and so you maximally extract in that process. The the other thing and maximal extraction is the name of the game, right, inequities. And the other part of the the process here is um in terms of who gets access to a productive asset with inequity, if inequity is yielding dividends, then everyone is getting those dividends. Whereas with a lot of these crypto capital assets,

• 34:54Speaker 02

  you have to be an active participant to be getting the yield. And if you're not an active participant, you're getting diluted. And so, you know, if we look at the um the access to the assets, the governance of the assets, uh the productive nature of the assets, there are leveling forces um that I see in these crypto capital assets that should help us with the inequality that has come from um, you know, our our equity systems as we know them.

• 35:22Ryan Sean Adams?

  So it becomes less of a model where you've got the the capitalists versus the users and more of a model where the users become, you know, shareholders, they become part of the capital structure. Is that kind of what you're saying?

• 35:34Speaker 02

  Yes, um, placeholders governance researcher Mario Lawl has a joke um where I think it was um Keynes who said, you know, you you have to do away with financiers. And um Mario's joke is with crypto, we're just trying to make everyone a financier. And um, yeah, you you, if you're gonna have a capitalist system, which is very effective, um at least the most effective coordination system that we've invented to date, um economic coordination system, then um everyone needs to have access to capital.

• 36:15Speaker 02

  Because if you have capital, then you're basically swimming downstream. Um you're accruing value and that is like it it it. You can look at the point of capitalism actually is um solely to grow capital. Like it's it's actually kind of set up. Such that all the way through from the creation and the production and that whole process and the growth, it is just set up to continually expand the amount of capital within the system. And it does this, you know, quite reliably. There are bumps along the way. And so that is that perpetual growth engine is kind of a miracle. And it is, it

• 36:56Speaker 02

  does exist within our minds only. But the really important thing with it, or where we've messed up thus far, is we haven't put that perpetual growth machine in everyone's hands. And with crypto, we have a technology that is low cost enough to now do that. Now, we're still probably a good five to 10 years out from, you know, having really good candy coated interfaces and really good public key management and, you know, the, all the world's languages available on these interfaces and all those kinds of things that will truly take this technology the last mile to everyone. But the wrong ingredients are there certainly to open up that access.

• 37:41Ryan Sean Adams?

  You know, I think what would help is if we actually applied this. So these DeFi tokens, these opportunities to get involved as users also in the capital side of things are so new right now that people are just trying to wrap their heads around them. So I think it would help to have, you know, some, you know, tangible example to talk about. I know you are close to the balancer project. And for folks that don't know balancer, Dave and I have talked about balancer often on Bankless. It is an automated market maker. So, and but, but it's got some unique characteristics, a little bit like Uniswap, but, but also some unique characteristics that, that Chris can get into. It, it's now at about 8% of

• 38:25Ryan Sean Adams?

  all DeFi trading. We were just looking about that at this yesterday. So it's grown quickly. And they've recently rolled out their balancer token, the BAL token, to liquidity providers. Can you talk about balancer as a case study in the context of, of what you were just saying about this new asset class and about users getting more involved as financiers, as you say?

• 38:48Speaker 02

  Certainly, um, so Balancer is just totally wild. It it's um, an amazing system and you can see Balancer as collapsing together asset management with exchange. Right, because with Balancer, you're able to create pools of up to eight assets um, with any percentage weighting that you want. Um, and so that is basically allowing you to create your own ETF, your own exchange traded fund. And then the pool auto manages those weights, holding them at, you know, let's say you want seventy percent maker, twenty percent ETH and ten percent DAI, it will auto manage those weights.

• 39:28Speaker 02

  Now, what's fascinating is you get paid for having contributed your assets to those pools. Because those pools serve actually as the back end for an exchange, a decentralized exchange that sources liquidity from these pools. And so what you've done is, you know, you look at traditional asset management in finance and you have an extraction system where you, you know, contribute your assets, you have to pay people. And the the index world, you pay people for doing very little, but you pay them anyway. And they extract from you year after year after year. In Balancer, you contribute your assets and you get paid year after year after year. Because you're actually providing a service for people who want to exchange.

• 40:12Speaker 02

  And so um, I think that's a good example of actually compressing and collapsing inefficient parts of the existing financial system. And just creating something wholly new that, in my opinion, is much better um, for for the supplier and the user of the system. Now, what Balancer has also done is they've committed to giving. And it's not so much giving, it's allowing the liquidity providers to earn sixty-five percent of the capital that makes up the network. And um, so you're giving, you're you're allowing the users to earn the vast majority of the capital that makes up the network. Um, the team, you know, has um, their upside slice for having.

• 40:57Speaker 02

  Created this out of their minds, um, as do the investors and then there's a pool for uh insurance and for a few uh integration partners in the future, but it's a good example of um it it inverts actually what happened from twenty seventeen. Where you were selling, you know, say sixty, seventy, eighty percent of of the supply. Here you are allowing sixty, seventy, eighty percent of the supply to be earned for quote unquote free, but you're really providing service, which is why it's better to think of it as earning rather than giving away. And then those people, if you earn something, that labor earns more loyalty than buying.

• 41:42Speaker 02

  Um, and so those people earn this asset, become strong hands and then become involved uh in the governance. And when Balancer does implement, you know, something that makes this a capital asset, right? Something that directs value flows to bell holders. The way I see that playing out is

• 42:04Speaker 02

  the valuation of the asset will be based upon those value flows, but the governance is what makes those value flows credible. And so if you have bad governance, then you have to hike the discount rate, which will discount all of those value flows um to a smaller value. If you have good governance, then you'll have a lower discount rate. And so those, all those future value flows are less discounted, meaning the present value is more.

• 42:30David Hoffman?

  So I I just wanna recap the ways that Balancer is similar to, but also meaningfully different from the legacy systems that it it relates to, right? So Balancer is a place where you can deposit assets and it simultaneously acts as an exchange for for people outside of the system to to leverage. And it in a similar way as a where you can buy an ETF as an index. And with Balancer, you can submit assets and get exposure to a a generalized set of tokens. But this one pays you for keeping your assets in the ETF from the From the utility that you are providing people that are looking for liquidity.

• 43:13David Hoffman?

  And so as a capital or value depositor, you get returns on your capital simply for making it available for exchange. And at the same

• 43:23Speaker 02

  Exactly.

• 43:24David Hoffman?

  Balancer is bribing your loyalty as a capital depositor with the BOW token, which is a governance token of the system, which, like I said earlier with the comp model, is a balancer system quote unquote going public, right? Making the governance over the protocol, giving it directly into the hands of the users of the system, which one analogy I really like is that, you know, the Uber drivers and perhaps even the Uber riders are receiving shares of Uber as an incentive to use the product, right? So it's getting the the upside potential of the whole entire system into the hands of the people that are providing the value in the first place.

• 44:08David Hoffman?

  And is doing this in a much more streamlined way. And all of these things just resonate with me so much in the way that they make, it's the same systems and the same mechanisms that we've had, but with more equity built into it, with more fairness built into it. And I'll pause there and let you comment before I ask my next question.

• 44:26Speaker 02

  No, I think that that was a great summary. There was something I wanted to say about going public, but I forget what it was. So continue on.

• 44:36David Hoffman?

  Okay, so the query or qualm that or worry that I have is is that Uber drivers or Uber riders or people that are, you know, users of the system might not be or have the background or experience or the education necessary to make decisions about governance over these systems. Does that worry you?

• 44:59Speaker 02

  It does. This is where I think of, so there's a, there's actually a few things that worry me here. So, starting there, I think that

• 45:10Speaker 02

  This design, this governance capital asset design is really most relevant to investors and suppliers.

• 45:20Speaker 02

  And less so to the demand side. Now, you just referenced, you know, an Uber driver and maybe an Uber driver doesn't want to be involved in the governance of Uber. But I do think that they should have, still have exposure to the capital of the network that they're working for and that they should be able to delegate. And you know, maybe they have a really eager friend who's nerding out on governance and maybe that person makes it their full-time job. What I anticipate longer term is I think these governors of these networks as the network scale need to become prestigious positions.

• 46:02Speaker 02

  And I'm not sure that the direct coin holder vote is the right long-term solution. And I know that's a little contentious given how widely used it is. But when I, when I look at, say, how our biggest systems in the world are governed right now, and those, those systems are really our governments. People in Congress or in the Senate or the president or whatever it might be, they get full-time salaries. They're professionals. It's a prestigious position. And so if we expect these systems to evolve past this toy stage, I also think, and I've been having this conversation with the MakerDAO team,

• 46:42Speaker 02

  that you need, you know, governors who are earning full-time salaries and then having this conversation with Zcash team too. Full-time salaries, prestigious positions that, you know, people are working for, that they're training for, that they're studying for. Right now, we're still very much, you know, in the tinkerer hobbyist working from our, from our garage days. From our garage stage. And so we do need to grow past that. And I, I don't think we have found all of the right solutions. I think that there is this constant. Tug to go towards more, um, you know, representative democracies rather than direct democracies.

• 47:25Speaker 02

  Um, and there is also gonna need to be a, um, stratification between, okay, what is something where every coin holder vote? Versus where, you know, there's a council or, you know, there's some elected group that's voting on things. It's kind of like, um, board level decisions, you know, decisions that are made at a board meeting once a quarter. Versus, you know, the day to day operational decisions. And so just to divide and conquer and have the right amount of expertise. Um, and the, the right amount of effort put into some of these decisions. I do think we need more governance stratification. Um, and I've been influenced somewhat here by Carlotta Perez.

• 48:10Speaker 02

  Who, you know, just zooming out from crypto believes that we need more micro scale governance. And more supranational or international governance and then kind of more trimming down of the fat middle. Um, and so what I'm getting at here is, you know, let's automate the bureaucracies, the paper pushers. Where there's a lot of corruption, um, and there's not the transparency we, we want. And it's just kind of commodity work anyway. Automate that, um, and then take the value that you would have paid to those people. And pay, you know, the governors at the supranational or the micro scale more.

• 48:52Speaker 02

  Um, so there are a number of things jumbled up into that around governance. I think the other concern I have here is, um, what Balancer is doing, what Compound is doing is not sustainable. And I say that loving the Balancer team and, you know, working closely with them since last year. Of, um, it is a supply side subsidy, right? It does have an APR now, it does generate a lot, a lot of yield. But just as with Bitcoin, that needs to turn over into paying customers, right? That needs to turn over into true value flows. And so the subsidy works for the bootstrapping stage, but it is not the end all be all. You have to get to a point where, you know, there's real people that are paying for the service.

• 49:37Speaker 02

  Because that shows the utility that the service is providing to the world. And that's really where we kind of get to the equilibrium capital asset model.

• 49:46Ryan Sean Adams?

  Yeah, I think those are both great points, Chris. So I want to riff off your first for a minute because it does kind of frustrate me a little bit when people talk about on-chain coin vote governance as being decentralized governance. Right? Because what I see is the really unique thing about these assets is that they are settled on-chain. These are all on-chain cash flows, and that's global, and that's permissionless, and that's amazing. That's incredible. But essentially, coin vote governance, that is corporate governance. We've had that for a long time in equities. That's essentially shareholder governance. And I wonder if that's kind of what you're getting at. Like, my worry is that coin vote governance for some of these systems,

• 50:31Ryan Sean Adams?

  once the equity is distributed to some of the users, it sort of collapses to the model that we have today with equities, where you have large capital pools who serve on the board of directors, and then you have small investors who are essentially proxy-voting to them. Do you think that it will kind of collapse in that way? Or do you think we'll uncover some of these new governance models that you're talking about that make this more unique?

• 50:57Speaker 02

  So I agree it has echoes of corporate governance. I think that it is marginally better in that even if you take something like Decred, right, one of the more famous and robust models of point-holder governance, you can earn that asset. And you could say, okay, you know, there's equity-based compensation if you're early on at a startup, and so you could also earn a seat at the table in corporate governance as well. And that's fair pushback. I do still think that the general involvement, when I look at who's involved in governing, like Decred...

• 51:43Speaker 02

  It's pretty flat um in terms of like anyone can talk with the leaders and anyone can kind of um can raise an issue and put it in front of the board, let's say. Um and that's not the case with corporate governance. So maybe one of the biggest differences here is the access to put information on the table is super open in these systems in a way that it's not open in in corporate governance. I agree that there um are troubling amounts of concentration around um some of these coinholder governance systems and that's where, you know, distribution is absolutely critical.

• 52:27Speaker 02

  And this is where I actually think it's quite neat what Ethereum has been able to do of, you know, yes, there was the original sale um and you know, there's all the kind of maximalist propaganda around that sale. But a lot of that sale has been distributed out, you know, Ethereum Foundation almost ran out of money at one point in time because ETH was so low and so that has has become distributed ETH is as well distributed as BTC. Um and a lot of that is thanks to proof of work and these cycles. And then now in switching over to proof of stake, you can do that somewhat equitably because you've distributed out the asset well. I think it's um it's quite hard to start from um, you know,

• 53:11Speaker 02

  if you don't have a mining mechanism or some earning mechanism, it's hard to avoid capital capturing the system. And um here's the other kind of

• 53:23Speaker 02

  just unfortunate reality of human nature is, you know, one i- i- it's it's the quote of power corrupts and absolute power corrupts absolutely. Um or, you know, you can come into a system being a progressive, but once you capture power, you tend to become a conservative and you try and conserve that power and amass more of it. And so like, these are very base human things that happen time and again, and I'll reference Mario again. Um because he wrote a piece called Resource Distribution of Power. Dynamics and decentralized networks, it's on placeholder dot V C. And these are age old problems that we've struggled with and we're always going to continue to struggle with. What I would hate to see is the path that maximalists take where they're like,

• 54:08Speaker 02

  oh, this is too messy. We could never improve upon this. Why should we even try? You know, there's twenty first century accounting systems only for one asset. That is totally the wrong perspective to take on this. It's more, this is a very sticky problem. We have a new technology that can help us solve some parts of it, not all parts of it. Human nature is still going to be human nature, but it would be a lost opportunity to not, you know, have one more turn of the wheel in working to better govern ourselves.

• 54:41Ryan Sean Adams?

  Yeah, I agree. But by the way, though, that that is why I worry about the current crop of ETH killers. Because they don't have the distribution that Ethereum does. And Ether does, they're going straight to proof of stake with on-chain, on-chain voting, coin vote. Do you share that worry?

• 54:57Speaker 02

  Yeah, I mean, look, the only placeholder looked at

• 55:04Speaker 02

  most all of the headline quote unquote ETH killer deals at at different points or had those desks, those decks cross our desks. And the only team that we chose to back that's not Ethereum is Polkadot, which, you know, I'm sure could become contentious with time. And Polkadot did have a large sale. And so that is on my mind. But they also, you know, led by Gavin, who while he's contentious, is a rock star in the space. And they have been building community for the last three plus years.

• 55:43Speaker 02

  And so I think that we're going to see these concerns play out with Polkadot. Because and and Polkadot will be the best comparable to Ethereum because it's got a lot of this, you know, like core crypto ethos and cypherpunky and a community that loves. The technology and all that kind of stuff. Um, but it won't ever have proof of work, right? Um, and so if there's material differences between how the community behaves, or let's say, um, you know, different amounts of apathy or those kinds of things. I think with all other variables kind of equal, we'll be able to say, okay, you know, some of this is coming down to, um,

• 56:27Speaker 02

  the way in which this this system's capital was was bootstrapped and distributed.

• 56:33Speaker 02

  Um, but as for, you know, a bunch of the others, I think, you know, a lot of the Ethereum killers look at their systems as companies, right? And they want to hold the technology close to their chest and the capital close to their chest. And they just don't fully get it. Um, and they're actually kneecapping, um, the promise of their network in applying company-based Silicon Valley techniques to, you know, globally, um, sovereign crypto networks.

• 57:10David Hoffman?

  Hey guys, I just want to pause the interview with Chris real quick and talk about AVE. AVE is a borrowing and lending protocol on Ethereum. So what that what that means is that you can deposit your assets into AVE and then take out a collateralized loan or simply deposit just to earn an interest rate. So you pay an interest rate for borrowing, you earn an interest rate for supplying. But what the magic of AVE offers you is stable interest rate loans, which is a really important money Lego for building out a bankless revolution. Having an interest rate that doesn't change under your feet is really important for long-term thinking and being able to plan out your own personal finance futures, but also make strong business decisions based on an interest rate that you can depend on.

• 57:54David Hoffman?

  In addition to their stable interest rates, there's also flash loans. And flash loans are where you can borrow any amount of any asset without any collateral, so long as you are also paying it back in the same transaction. The use cases for this are absolutely endless. And I'm really optimistic that some creative developers are going to make some Really cool tools using the Ave money Lego system. We have been watching Ave climb the DeFi Pulse leaderboard, just growing and growing and growing in the assets deposited into their application, which just shows how strong of a system they have created. So you can go and check them out at ave.com, deposit crypto to start earning or borrowing any Ethereum while it works. So check it out.

• 58:34Ryan Sean Adams?

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

• 59:18Ryan Sean Adams?

  Rocket Dollar takes care of all of the pain in getting set up. They help you with the paperwork. You could break your retirement account out of jail and also use the bankless code to get $50 off. So make sure you use that code BANKLESS when you sign up on rocketdollar.com to get $50 off. All right, let's dive back into the interview.

• 59:38David Hoffman?

  So Chris, I've heard you make the statement that if you have good governance, you can have anything, right? And so I'm hoping to get out of you perhaps an illustration of what good governance is and why that can get you anything. And then perhaps also illustrate a system that does have governance, something like Decred, something like Compound or Balancer. In a world where governance over these systems has been maximally successful, what has good governance enabled these systems to do at maturity?

• 1:00:12Speaker 02

  Sure. So it's hard to answer because none of these systems are at maturity. But I remember for the Decred thesis, we wrote, I think it was with good governance, you can have any feature you want. And the key there is you can, not necessarily you will. And one of my learnings since having written that is, you know, there is a trade-off between.

• 1:00:42Speaker 02

  Centralization and execution speed. So the more centralized you are, the faster you can execute. Now, you can execute in the wrong direction, but you can execute really fast. The more decentralized you are, it slows execution. And even if you can just think about, you know, a centralized system technologically versus a decentralized system. Now, what the, there are more things I'm gonna have to layer in here. So what's interesting is there's a study from the, from Harvard's Kennedy School of Business that looked at democracies versus dictatorships.

• 1:01:25Speaker 02

  And what's interesting is in expansionary times, so basically bull markets, the two perform on par economically. But then it's in times of duress when dictatorships can fall apart, whereas democracies tend to hold together better. And if you're thinking on a decadal time scale, you know, times are not always good. And so, and we've seen this happen with different crypto networks. But if you don't involve people in the governance of your system, and then things start to go south, then they'll defect, right? And often in crypto, that's forking. They'll go create another community, or they'll raise hell within your community,

• 1:02:10Speaker 02

  and that becomes its own mess. If you look at something like Decred, you know, this bear market has been tough on Decred, but it stirred up a lot of conversation within the Decred community, and we haven't seen Decred forking, right? You look at, say, something like Bitcoin. Bitcoin has had numerous forks, because there's no governance venue to reconcile disputes. Whereas with Decred, there is a venue to do that. And so, and the system is designed to remain coherent. So with something like Bitcoin, you end up having governance by defection, which might work solely in the case of Bitcoin.

• 1:02:51Speaker 02

  Bitcoin for the value add that it's trying to provide the world and being very stable and unchangeable and queue into 21 million units if they can assure that the security model is sufficient. But then with anything that wants to evolve more, you know, you you ideally want to remain coherent through your evolution and not constantly be losing limbs of your community because you lack of a venue to debate and agree on the path forward. And so, you know, I think that over the long term, good governance, equitable governance is things that involve people that give people a voice to at least be heard

• 1:03:36Speaker 02

  are key to to surviving and to resilience, even if they may slow down, you know, week to week execution through, you know, a little bit of analysis paralysis and and being too distributed.

• 1:03:52David Hoffman?

  So I'm not one to ascribe the current market prices to a successful thesis or not, but I'm about to do it. Decred's price isn't very high and in relation to what it once was and Bitcoin's price is. And Bitcoin has absolutely no governance, right? And we have seen applications on Ethereum follow in the same absolutely no governance model, mainly Uniswap, right? And we also, and there are versions and iterations of Balancer that can follow in Uniswap's no governance footsteps. But there does seem to be a pretty large role for no governance systems like Uniswap that have been really, really successful.

• 1:04:32David Hoffman?

  And with these new emergence of of governed protocols like Compound and and Balancer and and AVE, the it's the the Lindy on these it resets. And, you know, Compound has updated three times, Balancer is just fresh out the door. So like perhaps a lot of this conversation is skewed by just how young DeFi is at large. But what do you see a role for just ungovernable systems? Like Uniswap, like Bitcoin in the world of social scalability? Like, how does the governance over these systems limit scale if if they if governance can't become fine tuned or perfected?

• 1:05:13Speaker 02

  So I would say that.

• 1:05:17Speaker 02

  There's a few things here. One, going back to this study between dictatorships and democracies. When things are in growth, right, like Uniswap's in growth and Bitcoin in a macro sense is still very much in its growth stage.

• 1:05:36Speaker 02

  You can tolerate less representative governance because everything's going well, right? People are happy because they're making money. Even that emphasizes any concern. It's more when things are not going so well that you will have a lot of detectors and that you need a decision pathway for how decisions are made. One basic way of thinking of it is the most important decision a group will ever make is how decisions get made. As I said earlier, I think that Bitcoin could end up being an anomaly here. But when I look at human history, governance is the thing that allows us to scale.

• 1:06:22Speaker 02

  Right, like we as primates, as part of the primate order, we tend to show aggression towards beings that are not of our tribe. And some primates kill beings that are not of their tribe. And so we're kind of constantly

• 1:06:41Speaker 02

  finding ways to peacefully coordinate with other tribes. And having governance of different forms has allowed us to do that over time. And I'm not sure if you guys have read The Sovereign Individual, but he gives really good arguments around the economics of violence and protection and how governance interplays with those, with basically coordinating around violence and protection. And so the way I see it is these systems are

• 1:07:16Speaker 02

  Giving us a supranational, so global means to govern really important economic industries. Um, and to not have a means to change those or to give the people that make up the systems. Any form of representation would be a mistake. Now, I do think that um, we need to automate the fat middle. And so this is the difference between like rules and discretion. So as much as possible, automate the commodity bureaucratic fat middle where it's really just paper pushing. And very little um discretion needed in those in those decisions. And then automating, you kind of stomp out all corruption.

• 1:08:01Speaker 02

  But then you will still, in my opinion, always need discretion at um the super high level. Like, you know, the super macro scale and super micro scale. And certainly you need legitimate governors. You need people um who the community elects or you know, puts in place who um the community trusts. But um to presume that we can create kind of these um automated machines that don't need any oversight. From us, I think would would be a mistake.

• 1:08:35Ryan Sean Adams?

  So Chris, you mentioned uh in tribalism, how it's hardwired into the human psyche. And um I think many utopians have, you know, tried with like digital technology will eliminate tribalism. But we we see a lot of tribalism in crypto. Um, I mean, it's everywhere. And I know you've spoken about tribalism in the past. My question, I guess, is, do you think tribalism is is good or bad? Like, is it healthy in some way or is it always bad? And have your views evolved at all on that?

• 1:09:04Speaker 02

  So they have evolved. Um, I put out a tweet, I think around Thanksgiving last year about tribalism. And I think on a personal basis, I would much prefer for tribalism to go away. Um, but. I accept that that's naive. And that tribalism is, as I was saying earlier, baked into our evolutionary hu- hardware. And so, you know, short of a consciousness revolution, which maybe we'll have in a few thousand years, tribalism is always going to exist and is going to be a motivating force.

• 1:09:40Speaker 02

  And, you know, that's, again, where I feel we will always need venues to debate and to decide and to choose the right decisions for, because those choices are always subjective, right? Like, pretty much everything is, is subjective, at least within what humans have constructed, because it's just human constructions. And so, the most important human construction is to decide upon how we're going to decide about future human constructions. And so, circling back all the way to tribalism, if we don't have those constructions, then,

• 1:10:24Speaker 02

  at least from what I see on crypto Twitter and, you know, some of the nastiness that happens when we devolve into just being the animals that we are, you know, conversation goes out the window and it becomes a bunch of fights.

• 1:10:38Ryan Sean Adams?

  So I ca- I tend to share, like, y- your view that, like, personally, I don't like tribalism, right? I mean, let's talk about this rationally. Although, I have said this before, and I'm wondering if you share this view, it does feel like the tribalism, specifically the maximalism, that is imbued in the DNA of Bitcoin, is actually good for Bitcoin, for the, for the pri- for the price of Bitcoin. And, of course, price means security, it means liquidity, you know, pri- price is economic bandwidth, we've talked about all of those things. Do you, do you agree with that? Do you think some element of the maximalism and the tribalism in Bitcoin is good for it?

• 1:11:14Speaker 02

  So I think it's been critical to getting this movement off the ground, like, You know, I wasn't here at the very beginning, um, but once I started getting professionally involved in two thousand and fourteen. Um, it was very different from today, like every other conversation I had, I was basically battling it out with someone on um, why Bitcoin was worth something. And so there was a certain amount of stubbornness and hard-headedness and um, borderline religious belief that was needed um in order to to get Bitcoin off the ground and specifically Bitcoin where

• 1:11:56Speaker 02

  it is really hard to value, right? And it's not a capital asset. And so you know, you have to use uh more new-fangled valuation model like the the equation of exchange we were discussing earlier. So I think it was all necessary. I think um at a certain point, and you know, the same goes for different religious movements that we've seen over time. You can turn into an extremist and you can actually push people away, right? And so um there's a a moderation that's necessary. And I think that, you know, we probably buy into the representation on crypto Twitter too much.

• 1:12:41Speaker 02

  Um, and you know, the cast of characters, especially on the maximalist side that that appear there. I think at this point, kind of the economics and um uh ideological underpinnings of Bitcoin speak for themselves. And so my hope is that, um, you know, the maximalists we see on Twitter just become more and more irrelevant as the space um becomes bigger and, you know, I think people increasingly do recognize the really hardcore maximalists as extremists that are not, you know, the engineers or the the builders. There there are exceptions here. Um, but. I guess to sum up, it was necessary.

• 1:13:25Speaker 02

  That doesn't mean um that that form of extremism is always right. It's kind of like as a company grows, sometimes you need changeover of management, right? Sometimes you need different skill sets at different periods. And um I certainly don't want my grandmother getting screamed at for, you know, where she chooses to bank.

• 1:13:45Speaker 02

  I like that's just not appropriate at all, and that's going to turn her away.

• 1:13:49Ryan Sean Adams?

  Yeah, she's not gonna, she's gonna think crypto is a very strange social system. Yeah.

• 1:13:57David Hoffman?

  I I want to compare and contrast the tribalism found in the crypto worlds, which I I think we're all in agreement. At the at the genesis of these protocols, you do need a healthy dose of tribalism because that is like the autoimmune system, the immune system of of a of a network, right? It's it protects it against all costs. And we've seen, uh, going back to the lens of the sovereign individual, we've seen this play out. Um, and I think most saliently in America in the seventeen eighteen hundreds, right? Where America needed to have this band of patriots to defend the nation against all costs, right? Like to work for something bigger than themselves. And that's really kind of the founding principles that America was founded on.

• 1:14:40David Hoffman?

  Using the the the uh concept of America, the concept of individual liberties, the concepts of freedom, as this rallying cry to generate the patriots of the system. And now I think we're seeing that play out in in these digital nations as well, where baked into the values of the digital nation are individual sovereignty, individual freedoms and and uh, you know, and and escape from tyranny. But however, there's a big difference between the physical nation state and the digital nation state, where, you know, if you are born in America, you are an American citizen, whether you like it or not. You were born, you are an American citizen, you know, before you can even like have the concept of what a nation is, uh, because you know, you're a baby and you don't know anything.

• 1:15:24David Hoffman?

  However, with digital nations, Bitcoin and Ethereum, they're entirely opt in. And so like they will never have any. Any person in their constituency that doesn't want to be there, which really changes the game when it comes to tribalism, right? Because when something is an opt-in system, it both generates pride and, you know, loyalty because it's a non-coercive system. However, it also doesn't even need it anymore because of the way that these systems are grown. And so the point, the question I'm trying to get to, Chris, is when you compare and contrast the model of, you know, the physical nation state versus the digital nation state,

• 1:16:07David Hoffman?

  and you invoke the lens of tribalism and how a digital nation state can scale to the entire globe without needing to consider the physical nation state even relevant, where does tribalism come in when there is one single, quote-unquote, "digital nation" that we have all opted into?

• 1:16:28Speaker 02

  So that's an awesome question.

• 1:16:31Speaker 02

  The first thing I'll start with is, while I agree in the meat space that we've been born into, you are just a member of one nation state. The really cool thing with crypto networks is you can be a member of all the nation states or all these digital economies, right? I heard your guys' podcasts with Hasu, and similar to him, and I think similar to both of you, I would consider myself a Bitcoiner and an Ethereum and, you know, a member of dozens of other networks where I've been interacting or conversing or know the founders or, you know, some form of community engagement

• 1:17:15Speaker 02

  and then often asset ownership. And so we've gone from, you know...

• 1:17:22Speaker 02

  Monogamy with our nation state to a polyamorous, if we want to use that way of being with different digital economies. And so to say, oh, you know, because I was, you know, just a patriot to my one country, I can only be a patriot to one digital equivalent. I, I think actually loses the opportunity of what this movement provides, right? This movement provides us the ability to be a participant, to vote with our feet, to get involved and be interested in the things that we want to be interested in and not be relegated to land in, in which we were born. The other thing I'd add here, and this goes back to the prior question as well,

• 1:18:06Speaker 02

  is the tactics that you use as an underdog are unbecoming once you become a champion. And that is, you know, the, the underdog, you know, can be boastful and gritty and, you know, hard headed and all of that. But once, and, and that's endearing. It's like, you know, you go, you go get a underdog. But then if that underdog becomes a champion and is doing all of those things, that's unbecoming. It's like, oh, wow, like you're really conceited and you're not very humble. And, you know, why are you doing that, right? And so I think that when we, when we look at these different networks,

• 1:18:50Speaker 02

  they do need to be gritty, getting up and running. And it's a highly competitive environment and all of that. But once you're at a certain escape velocity, you are much better off being, you know, having, having open arms, being very accepting, absorbing people into you. And we've actually seen this play out between Bitcoin and Ethereum. In a way Bitcoin, yes, it is the champion, but it has always kept this kind of like. Hardcore antagonistic um kind of surface level reputation and I'm not talking solely from personal experience. It's, you know, I get this question a lot of, you know, why are

• 1:19:32Speaker 02

  things so hostile or antagonistic? Or I just, I don't get it. Um, versus Ethereum, which has been much more welcoming, um, much less judgmental. And, you know, Ethereum's vision, vision is a bit more multipurpose and so there's more flexibility within it. Um, but, you know, look at which system has, you know, four X more developers. It's Ethereum. Um, and then if you start to look at the um, network stats, you know, Ethereum started to come on par with Bitcoin, even though it's half as old. Or if you look at, you know, the economic systems or the tokens, Ethereum is just dominating. So Ethereum

• 1:20:11Speaker 02

  has become the um, king of this smart contract land and has chosen to, you know, be open, to be accepting. And that is bringing more and more and more people into the community. And, you know, I'm still a fan of Bitcoin. Bitcoin is still growing. There's still good innovation going on, but I think it's growing less than it would have, um, had it been more welcoming, once it reached the champion stage.

• 1:20:36Ryan Sean Adams?

  Yeah, I, you know, I definitely resonate with that, Chris. Um, one thing that I would say is, I feel like I'm a, I'm a patriot uh, to a particular set of values, right? Particularly bankless values, replacing that, that fat spot in the middle, as you call it, the, the kings with protocols. I mean, I think that's the basic idea of the sovereign individual. And I worry sometimes that, um, back to your point, you know, the revolutionaries ultimately come into power and they become a lot more uh, like the kings and the tyrants they tried to replace. I worry a little bit about that in the, the Bitcoin network, right?

• 1:21:14Ryan Sean Adams?

  You know, maybe these crypto banks become sort of the the new power structures in this world and we're back resembling something that we just left.

• 1:21:26Ryan Sean Adams?

  That's really like why I think the it for me, certain networks have absolutely no interest like Tron. I don't care about Tron whatsoever because it doesn't align with my patriotic value system of going bankless and replacing kings with protocols.

• 1:21:46Ryan Sean Adams?

  Yeah, like, what's your take on that? What like, why are you here? What you know, why? What social contracts in these systems are important?

• 1:21:54Speaker 02

  So I'm here and this goes back to the blank slate of state to help create a more fair, effective and generative society. And each of those is a conversation in and of itself. But, you know, the fair is really just giving everyone a fair shot, which the majority don't have right now. And that kind of goes into the idea of putting capital in in everyone's hands. Effective is it has some efficiency in it, but you know, it's creating systems that do more with less and hopefully with less environmental damage. That that is a big one from childhood and my formal schooling. And then the generative

• 1:22:37Speaker 02

  is really, you know, that that speaks to, I think, the human mind and the human organism is extremely generative. And so if we operate with zero sum thinking, then we are actually missing the infinity of the universe, missing the infinity of our minds. And that's a huge shame. And I want for everyone to be able to live in kind of this this generative state of mind. And that's not currently available for even the majority. So those things really bring me or brought me to this space and have fired me up. I think, you know, I started off.

• 1:23:21Speaker 02

  When I first played around or got to know even the idea of Bitcoin, it was really just through tinkering on the Silk Road in college with friends and just being like, what is this thing? And I was actually more intrigued by the Silk Road at the time. And then even two years later, 2014, you know, I more wanted to be a revolutionary and, you know, it was just kind of fired up in my young twenties. And now I think I recognize that all of these are, you know, turnings of the wheel. We start off as revolutionaries, but all revolutions temper with time and we do a bit better.

• 1:24:01Speaker 02

  I think maybe one of the ways of phrasing it is I've never been more convinced that this technology is going to change a lot of the underpinnings of the way the world works. I've also never been more humbled or accepting of the fact that we're going to get a lot of it really wrong. And so long as we get more right than wrong, we will do more quote unquote right than wrong. But it's not, nothing is ever the end all be all. And this is where, you know, I like the idea of revolution just being recurring evolutions.

• 1:24:43Speaker 02

  And crypto is a big one, but you know, even if we put all these systems in place perfectly, then you know, our kids or our grandkids, they'll want to rebel against it because at that point it's the status quo and you can't make a name for yourself as a young kid. If you're going in line with status quo, there's no leverage with that. You're going to go do something different. And so, you know, the revolution swings towards another underdog. So a bunch of thoughts in there, but I think the last thing I'd say as to why I'm here is it's just, it's fascinating. Like there's no more interesting place to work, in my opinion, than in the crypto space.

• 1:25:20David Hoffman?

  Oh, no, that I think that is echoed by by all of us here. And one thing that I think is is true of of all of us here, us three, you, me, Ryan, is we're all pretty like big thinkers, right? Like, we like to to try and hypothesize things in the macro view and and ideate and and daydream about the the future crypto economic sci fi world that we think is coming.

• 1:25:44Ryan Sean Adams?

  David, I I just copy a lot of my thinking from Chris, honestly.

• 1:25:49David Hoffman?

  Yeah, let's be honest.

• 1:25:53David Hoffman?

  But when it comes to the rubber meeting the pavement and making real progress and change in people's lives, mainly people outside of crypto, right? Because like, you know, crypto has already changed my life, it's already changed all of our lives, like my my, the majority of my personal finance activity is on Ethereum. So like, my life has already been changed, but I'm one of the people that resonates with this industry, and so of course, it's going to change my life first. My friends that care about sports, or my mom, who who's a boomer, or the people just walking down the street. What things, what signs or or just flags or indicators do you look for when you are trying to find ways that crypto is meaningfully impacting the the average individual?

• 1:26:37David Hoffman?

  Like, what, when when crypto actually does impact the world in the ways that we hope it to, what do you think will happen first? How will we see the indication of a crypto world actually manifesting by through our peers?

• 1:26:51Speaker 02

  So I think we're already seeing it with the financial services sector that's booming, both between Bitcoin and Ethereum. I I wrote a piece recently called Superior Financial System that speaks to really how between Bitcoin and Ethereum, we are creating something that will be feature complete with the existing financial system. And I think you need this system in place, this this accounting and distribution system, to then be able to build all other sociopolitical institutions. And so this is the first.

• 1:27:29Speaker 02

  Installation, really, and it's, you know, global from day one. It's much more resilient, it's much more lower cost. It's providing both new services and striving for feature completeness. And maybe most importantly, it all runs on the same data, right? I can go into competitors like Xerion versus Instadap. And I have the exact same view of all my Ethereum wallets. And that's just so mind bendingly superior to what we have in the existing siloed data systems.

• 1:28:08Speaker 02

  That I think it's almost impossible for both users and entrepreneurs and developers to be attracted to the system over time. So certainly, you know, keep an eye on the financial services first. And that is why, you know, of late, there has been this boom of interest in in DeFi. I think, you know, from there, I really want to see people earning their wages directly from these networks. And making it such that you need as little capital as possible to get started earning in these networks. Because if we make the gate capital, then you will only get people involved who already have capital.

• 1:28:50Speaker 02

  And that's actually not solving one of the key problems that I would like to to see solved here. And so if people are earning their wages, earning their livelihood directly from these systems in more human work ways, so, you know, that could be working for Aragon's court or for Claros or for, you know, setting up mini validator systems where you borrow the capital from someone. There are there are different things popping up. I actually wanted to write a book called The Hitchhiker's Guide to Crypto, where it would be a book basically about how you could make a living from these networks, really just with an internet connection. And I realized we're not quite there yet. There's not quite enough to write about.

• 1:29:34Speaker 02

  But I think the writing is on the wall and we need to see more of that. You combine earning wages, so your, you know, day to day, month to month livelihood, with then, you know, your investments and your basis of wealth in these systems. I think you'll start to see, and we already are seeing, large wealth transfers. Um, it's kind of like the new settlers, right? The people that went west, um, from the east coast. They struck out west. The people on the east coast were kind of like, I don't know what you're doing. You're crazy, that's too risky, you're probably gonna die. Um, you know, let's see what comes of it. The people who went west, you know, some of them, many of them did die.

• 1:30:16Speaker 02

  Um, fortunately in crypto, this is a digital migration and so our physical selves don't die, even if we lose some of our assets. But we are, you know, trotting the roads and, and creating the systems that will lead to large wealth transfers, um, that will then bring more people in, into the space. And those people will be brought into the space, both because of, you know, the, the nature of the services I described earlier in terms of cost superior, cost superiority and accessibility and resilience. Um, but they'll also just be drawn by the allure of people that they knew, um, living better lives because they migrated to this world, right? We're, we're extremely memetic.

• 1:30:57Speaker 02

  Um, and we are also by and large, a society that is obsessed with novelty. And so, um, with, at least with the way our brains work, with, with dopamine, once we get the things that we wanted, um, the dopamine stops firing. Like dopamine is really just an aspirational, um, chemical in our brains. And so this is why a lot of people get, you know, bored within, you know, a job that they once always wanted, or a relationship they once always wanted, whatever it might be. And people just consistently keep looking for the, the new thing. It's actually an evolutionary basis to keep us looking and surviving and iterating and reproducing. And the reason I'm saying all of this is, you know, a lot of the meat space,

• 1:31:41Speaker 02

  at least to me as a millennial and all of the younger generations, feels kind of old and outdated and not that interesting. And so I want to go exist. In the new stuff. And so this new stuff that crypto is creating is, you know, there's infinite white space to innovate and build and earn from. And so I'm not, I've given a few points to to your question of, you know, what do we look for? But I think that, and one of my troubles is maybe always going too philosophical or zoomed out. But when I look at it from that, that broader perspective, it it feels inevitable to me that people migrate into this digital West.

• 1:32:25Ryan Sean Adams?

  Chris, you are speaking our language, sir. Everything you just said, we talk about that weekly on the podcast. We call it going bankless.

• 1:32:33Speaker 02

  There you go.

• 1:32:34David Hoffman?

  Where we like those words.

• 1:32:35Ryan Sean Adams?

  Yeah, we like those words. And you know, we're in, you talk about memetic, we it's kind of, we talk about, you know, slowly breaking up with your bank, basically, right? And your existing money system. But what you're also doing is like, to your, to your point, you're kind of breaking up with the old economy for this new economy, this new unsettled Western economy that has infinite white space. That might be the episode title, David, infinite white space. I love that you said that. So here's a question for the journeyers who are going out in this infinite white space, they're going out west. So a question about all this DeFi growth that's going on right now. So the these tokens are increasing wildly over the past two to three

• 1:33:20Ryan Sean Adams?

  weeks. I think there's a sort of an, I guess, not an existential question, but an important question that people are asking, which is, does some of this growth flow back into ETH? Just had a conversation on Twitter and somebody, you know, said, like, Ethereum is going to be super successful, but ETH will remain at the same price, you know, maybe Bitcoin or, you know, staple coins might become the reserve asset on Ethereum. You've tweeted some stuff out about this. What's your take?

• 1:33:50Speaker 02

  Yeah, so the headline take is, you know, 2017 was one service within the financial services sector, and that was capital formation. And we all know what that did to ETH. And DeFi is all services within the financial services sector. And so, you know, expect a multiple of the impact.

• 1:34:17Speaker 02

  Now, people will push back and say, well, you know, 2017 was a leveraged machine and that drove ETH higher and higher and higher. I also think that um a lot of what we have going on right now has echoes of a leveraged machine. And um there will no doubt be booms and busts. Um and that is why it is still the Wild West. But I see it as a much more efficient leveraged machine. Um than efficient and adaptive than we have in the meat space. Because the meat space has a hard time, you know, uh taking um, you know, real time uh asset valuations and liquidating people quickly.

• 1:35:02Speaker 02

  And there's all these legal contracts and there's all this kind of um muck that that gets in the way. Whereas ETH's leveraged machines are, you know, really fast, really snappy, can be, you know, vicious on the way up and down. Um and I guess the way I see it is, you know, that is going to fuel, that alone will will fuel a fair amount of ETH growth. But then, um and I'm sure that makes some of the the listeners queasy. But then when I look at fundamentals, um I was writing this down earlier, I don't have it with me. Um but I think, you know, top of mind, Ethereum is processing about double the number of transactions as Bitcoin.

• 1:35:46Speaker 02

  It's got, I think, um on par amount of daily active addresses. Um it processes half the USD value. Um it's, if you just keep going down the fundamentals, ETH is anywhere from half the fundamentals of Bitcoin to, you know, one to two X the fundamentals of Bitcoin. But it's valued at one seventh of Bitcoin. And so, um just to make the math easy, is, let's say it was valued at one sixth the value of Bitcoin. If all the fundamentals point to it even just being half as good at Bitcoin, uh half as good as Bitcoin,

• 1:36:24Speaker 02

  you would expect it uh a repricing to cause ETH ETH's price to triple um relative to BTC. And so I think, you know, the fundamentals and what's going on here, if I zoom out and remove myself from, you know, the different ideologies, um.

• 1:36:44Speaker 02

  Ethereum is extremely strong, um, you definitely wouldn't want to bet against it. Um, and then, you know, saying that, oh, this, this isn't going to accrue, or it only accrues to BTC. Um, I feel like that is, um, just kind of like, I don't, I don't know what the word is for it. Um, it's inconsistent. Yeah, it's, it's inconsistent. Uh, and so there's a lot here in terms of like the models that you could build. Um, another thing that I would just, uh, say through these cycles is, um, BTC is still the reserve asset.

• 1:37:27Speaker 02

  Um, of the space and then the ETH BTC pair, so how ETH performs in BTC terms. Is kind of the rallying cry for the long tail. It's one of the things I look at, um, the most on a, on a daily basis. And if ETH BTC is outperforming, then it gives a lot of life to the long tail. And basically, you know, in uptrends and bullish environments, risk appetite grows. Value flows into the long tail into these higher beta assets, which tend to outperform BTC. Um, and then in the down cycles, um, a lot of those riskier assets are still being higher beta.

• 1:38:05Speaker 02

  Will underperform BTC. And so one of the kind of ironies here is I've seen, and I'm sure you guys saw this too. For a lot of the people, of which there were many, that joined in 2017 and that speculated in true shitcoins. Um, and just got absolutely destroyed. I understand how painful, you know, that, that process was. But the, the kind of irony here is they speculated in assets with zero fundamentals as opposed to, um, you know, kind of. Sifting through the quality crypto assets out there through the bear market, they've capitulated into being maximalist.

• 1:38:45Speaker 02

  Um, and basically at the bottom of the bear market, there, there've been maybe the most maximalist because people like, oh, look, BTC is. gaining on all these other things. But the grand irony is that is the setup for all these other things to then massively outperform BTC. Um, and it's gonna happen like I don't um care what any maximalist says this kind of um risk on risk app. Risk off appetite uh expands beyond crypto, right? Like this is just kind of the nature of the beast. And another thing to incorporate here is um Bitcoin being the biggest and the most liquid crypto asset makes it the hardest to move. Um, relative to a lot of the the long tail.

• 1:39:26Speaker 02

  So let's say even um half as much value flows into ETH as BTC, ETH will move more. Um, and so I think everything is is set up. At this point, I forgot what the original question was, but everything is is set up for a lot of these long tail assets, including ETH uh to outperform BTC.

• 1:39:46Ryan Sean Adams?

  Yeah, that makes sense. Uh, I so it's like a subset of the question, right? It's within that of within people who believe that, right? We're not talking to the maximalist tribe right now. We're talking to the bankless nation tribe. What are you more bullish on more of these DeFi tokens or more ETH? It's almost a question of asset superclasses too, right? Are you more bullish on the the capital asset side or on the the story of value? You called it computational money side that um ETH is on.

• 1:40:11Speaker 02

  Right. So I wrote a piece um middleware protocols in 2018. And at that time, place holder was building out. I don't think we had the term DeFi at the time. Um, but was building out positions and things like Uma or Nummerai or Foam or um a number of these um middleware protocols. Many of them financial built on top of Ethereum. And our thinking there was along the lines of what I was just saying. In, you know, these down cycles, a lot of these assets will underperform. Um, they're, you know, quite attractive in terms of their valuations. And so you want to build those positions in the down cycle.

• 1:40:53Speaker 02

  Um, but then the other thing is they can migrate, right? If Ethereum hits trouble, um, those middleware protocols can go to other smart contract systems or can go multi system, right? Could be on Ethereum and Openai and Cosmos or, you know, whatever the relevant construction. And so the way we saw it is um. Develop positions in all of these assets, which just as I was describing how ETH performs relative to BTC, a lot of the ERC twenties will show the same dynamic relative to ETH. So they'll underperform ETH in a bear market, but outperform ETH in a bull market. And so it's kind of like a leveraged ETH portfolio, I guess you could think of it.

• 1:41:39Speaker 02

  And so we did that for a while and then when ETH just got so cheap, we were buying for ourselves in our personal accounts BTC ETH, which really all that Joel and I are allowed to hold that scale. And when we were buying BTC and ETH for ourselves personally, you know, we had that conversation with our LPs. Cause when we'd originally been raising, sorry, I'm giving you guys more backstory here. When we'd originally been raising, we didn't think we would hold BTC and ETH. We told our LPs, our investors, buy BTC and ETH. You know, that's very low cost to do. You can do that for yourselves. That'll be your market beta and the placeholder's fund one will be your alpha.

• 1:42:24Speaker 02

  And that's all well and good in theory, but the truth is with the nature of our LPs, most of which are large institutions, they're not at a place yet where they can get over the hump on directly holding BTC and ETH. And so when these assets, when BTC and ETH were so depressed, we had to buy them really. Otherwise we wouldn't be doing our job for LPs and we're fortunate to get very good prices on those. And so now we have, you know, the portfolio of store value assets and the monies. And so that would be Bitcoin, Decred, Zcash, Ether and likely Polkadot.

• 1:43:07Speaker 02

  And then we have, you know, these, a number of DeFi assets and kind of these middleware capital assets.

• 1:43:14Ryan Sean Adams?

  Yeah, that makes a lot of space, like a lot of sense. And, you know, not to be tribal, but Chris, I'm glad to have you in the ETH is money tribe, sir. We've been talking about that for a while and the, just the, the usage of ETH as a store of value asset, I think is something that the market has not wrapped its head around because they are a bit backward facing. And I mean, let's face it. Ether lost 95% of its all time high market value over the past two and a half years. So it's understandable that people are feeling that way a little bit. Last question for you, Chris. So in 2017, when I was trying to wrap my head around

• 1:43:53Ryan Sean Adams?

  this, you wrote an incredible book on crypto assets. If you were to write a book today, you mentioned Hitchhiker's Guide to DeFi, or to getting revenue in these bankless systems. But would you write that book? Or what book would you write today if you had the time to write a book?

• 1:44:15Speaker 02

  So I do, I do like the idea of a very thin, kind of manual, and it would be the Hitchhiker's Guide. And, you know, designed such that you could hitchhike with it and wouldn't take up as much room in your backpack as crypto assets did. So, you know, that's been on my mind. The Blank Slate of State essay could expand into its own book. But interestingly, I've been starting to kick around in my mind whether Jack and I should do an update to crypto assets. When I first published it, I was so sick of the book and

• 1:44:59Speaker 02

  that whole process. And I thought we're giving in on crypto birth, that I never wanted to do it ever again. And I never wanted to touch that material ever again. But now, when I look at everything that's happened and all the different things that could be said, I still think that that structure is good. I might do a what and a why and drop the how, because crypto assets has what, why, and how. And the how was just like really dry.

• 1:45:32Speaker 02

  Got dreary to write at the end, but the what and the why are really important and have expanded so much. Like that book, Jack and I started writing it in November of 2016. And submitted the first draft end of March of 2017, March 31st, 2017. So in the last three weeks of writing that book, um, you know, March 10th, 2017, ETH went to the moon because the link of loss, they call ETF was rejected and everything started popping off. And then, you know, ICOs had been gaining steam ever since the Dow, but they really started to rip. And so, you know, we've got one section in there on the wild west of ICOs.

• 1:46:16Speaker 02

  But I think there's um, so much more that that could be added and layered in. And now that, uh, going back to the start of this discussion, the market is recognizing capital assets. And um, it's becoming less theoretical and more practical. I think there's a lot more nuance that we could write about. I think one of the struggles from where I sit and where you guys sit and, you know, the work that placeholder does is sometimes you feel like you're crazy, um, because you're talking about things that don't exist yet. Um, and you can develop a lot of conviction in those things. But sometimes it can take years um, for consensus to catch up with that.

• 1:46:59Speaker 02

  And so, um, the process of writing a book is so kind of high stakes. That um, I would want to make sure that, you know, things that I'm writing about aren't five years into the future, but more, you know, two to three years in the future. Such that with the lifespan of the book and also giving me the energy and um, you know, kind of conviction to write it. I know that it's not gonna, you know, come out looking like crazy talk for five years, but more, you know, it's relevant within all of it's relevant within a year or two or three. Um, so we'll see. Hopefully, um, Jack and I get another version out.

• 1:47:40Speaker 02

  Would you guys, I mean, I'm curious, would you, would it be interesting to you guys to have quick to assets become kind of this um, legacy where there's, you know, V2 and V3 and V4, or would you prefer new books?

• 1:47:55Ryan Sean Adams?

  Oh, so I'll speak first. Maybe David has an opinion on this, different opinion on this, but I would say it would be incredible to have this updated in every market cycle.

• 1:48:07Ryan Sean Adams?

  So like 2017, for it to come out at that time was a perfect time to onboard an entire wave and onboard them in a responsible way is what you did with that book. So it was, it was very much about valuation, how to think about the space and giving them the history. It feels like now, if this is 2016 again, as we've been talking about, it'd be a great time to onboard that next wave. So, you know, one every four years, sounds about right to me.

• 1:48:33Speaker 02

  It is about that time.

• 1:48:34Ryan Sean Adams?

  Yeah.

• 1:48:36David Hoffman?

  I think, I think if we had our way, Chris, we would just have you producing endless amounts of writing and we would consume it all. I think if I had my way, I would ask for a expanded version of Blank Slate Estate, just because that's what personally interests me, but I wouldn't be too picky either way.

• 1:48:52Speaker 02

  Awesome. Well, thanks you guys.

• 1:48:54Ryan Sean Adams?

  Chris, we could talk to you all day, man. It's been great to have you on the Bankless Podcast. Thank you for coming on, sir. This has been fantastic.

• 1:49:02Speaker 02

  It's been really fun. Thanks for all the good conversation and good questions. You guys got me lost in thought a number of times with the richness of the questions.

• 1:49:12Ryan Sean Adams?

  Well, it's fantastic.

• 1:49:13David Hoffman?

  Fantastic. That is absolutely our goal. So, thanks for entertaining us as well.

• 1:49:17Ryan Sean Adams?

  Hopefully our listeners got lost in thought too. So, listeners, action items for today. What we're going to do is include all of our favorite of Chris's writing in the show notes. So make sure you check that out. Some of our favorite articles, a lot of these articles, as I said, have been influential in the things that David and I have written and the Bankless community has consumed. Also, follow Chris on Twitter. We will include his Twitter handle. Fantastic insights always there. And then, listen to you, episode four. So if you're curious about what Chris was talking about with the asset super classes earlier in the conversation, in episode four, we sort of lay that out and talk about ETH as a triple point asset. So do that. And then lastly, you gotta subscribe to YouTube for our new State of the Nation show. David, why should they subscribe?

• 1:50:02David Hoffman?

  You should subscribe just because it is a much easier Your faster way of getting information right into your brain. This is a podcast, so you are listening to it. But the State of the Nation is a videocast where you get to look at the data, look at the tweets, look at the graphs that we are also looking at as we kind of digest it and analyze them. So it's a faster way to get new information into your brain, and it's always updating, right? So every new week, there is a new State of the Nation. And so we go through what that state is on our weekly YouTube State of the Nation.

• 1:50:34Ryan Sean Adams?

  And Dave and I get to look at each other, too, while we're doing it, which is kind of a unique experience, which don't do that on podcasts. All right, guys, risks and disclaimers. ETH, of course, is risky. None of this is financial advice. Crypto is risky. Bitcoin is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we are glad you have joined us on the journey. Thanks a lot.