12 - The Protocol Sink Thesis

Episode: #12 May 18, 2020 When someone gives you money how confident are you that it's really yours? That's a settlement guarantee. It operates at the base layer of our societal tech stack and usually requires law and nation-states to enforce. With crypto we have something new, we have settlement assurances. That changes everything. Protocols with higher settlement assurances are more dense. They sink to the bottom of our societal tech stack and become the foundation for everything else. This is the protocol sink thesis, that DeFi protocols with the highest settlement assurance will become the base layer..the base layer for crypto banks, commercial banks, and even nation-state banks. When enough value is locked and enough time has passed, the money protocols win. That's what the thesis predicts! Dive into the protocol sink thesis w/ Ryan & David! We cover: Settlement guarantees through time Legal system settlement & traditional finance Why protocol settlement changes everything Protocol Sink Thesis ("How DeFi Wins") Why Trusted things get built on How DeFi protocols sink Time Value Locked as the meter stick How to test the thesis The transition to long-term thinking Understanding this thesis will help you become a better crypto investor. Before the episode begins we also talk about: ETH FUTURES! Grammy-award winner RAC issues on Ethereum ----- Tools from our sponsors to go bankless: Rocket Dollar https://www.jdoqocy.com/click-9261763-13920047 - tax shelter your crypto ($50 w/ "BANKLESS https://www.jdoqocy.com/click-9261763-13920047") Monolith https://monolith.xyz/ - holy grail of bankless Visa cards Aave https://aave.com/ - money lego for lending & borrowing DYDX https://trade.dydx.exchange/r/bankless - trade, margin, BTC perpetuals (10% off with this link https://trade.dydx.exchange/r/bankless) (trade.dydx.exchange/r/bankless) http://trade.dydx.exchange/r/bankless ----- Resources discussed: (Article) It's the Settlement Assurances Stupid https://medium.com/@nic__carter/its-the-settlement-assurances-stupid-5dcd1c3f4e41 (Article) Crypto-fiat: mutualistic or parasitic? https://bankless.substack.com/p/crypto-fiat-mutualistic-or-parasitic (Article) Great protocol sink https://bankless.substack.com/p/the-great-protocol-sink-market-monday (How-to) How to buy $TAPE token https://bankless.substack.com/p/how-to-buy-tape-on-zora (VIDEO) David's Settlement Assurances talk https://www.youtube.com/watch?v=z3ufil39z5o ----- Episode Actions: Watch David talk about this at Ethereal https://www.youtube.com/watch?v=z3ufil39z5o Watch for evidence of protocol sink thesis: Crypto exchanges add DeFi protocols Trustless stablecoins like DAI taking from USDT Stablecoins issued on public chains like Ethereum More value flowing into BTC and ETH Give Bankless a 5-star review on iTunes right now! ----- 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/ Visit official Bankless website http://banklesshq.com/ for resources Follow Bankless on Twitter https://twitter.com/BanklessHQ | YouTube https://www.youtube.com/c/bankless Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState

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 am here with David Hoffman, and we're here to help you become more bankless. Hey, David, how's things?

• 0:31David Hoffman?

  Things have been absolutely crazy. Ethereal Conference just wrapped up, which was a great conference, and this is actually going to be the subject matter of this podcast. The talk I gave at the Ethereal Conference called "The Settlement Assurances and the Protocol Sync Thesis," I really want to dive deeper with that with you, Ryan, and so we're gonna focus on that this podcast, so it's gonna be a good one.

• 0:55Ryan Sean Adams?

  Yeah, I can't wait. I watched that live, by the way, David, and somebody, I think, in the YouTube comments said, "Get this man another Red Bull, because you were talking so fast and you compressed so much awesome information in 18 minutes." It was fantastic. We'll include that in the show notes, right? That's out now, isn't it?

• 1:11David Hoffman?

  That is out. That's out on YouTube, yeah. And that's definitely the benefit of being a podcaster and also really prepping and practicing your talk. I could just burn through. I talk, Mariano Conti said that David talks at 1.5x. You've got no time for ums, man. You've got no time for ums.

• 1:31Ryan Sean Adams?

  It's great. Yeah, absolutely. People probably don't have to speed up our podcast. Maybe the portions where I speak, they speed it up, but then he drop it back for you. All right, cool. Well, hey, before we get there, we should talk about our fantastic sponsors today. So, want to take a minute to tell you about Rocket Dollar. This is for our US listeners. If you've got an IRA or a 401K, it's jailed inside of your brokerage. That means you don't have good access to crypto. The crypto you can buy in brokerages is going to rip you off. It costs 5x spot price to buy ETH. Don't do that. What you should first do is break your crypto out of brokerage jail. Set up what's called a self-directed IRA

• 2:14Ryan Sean Adams?

  or a self-directed 401K. You could do that with Rocket Dollar. They take care of the pain for you. I've done this. A ton of folks in the Bankless community have done this. They've broken their crypto out of jail. Go to rocketdollar.com to get started with your tax advantaged crypto account. That's rocketdollar.com. Use the code BANKLIST and get $50 off.

• 2:38David Hoffman?

  DYDX is the leading and most performant decentralized exchange in the crypto space today. DYDX is a place where you can go and make spot trades, just buying and selling Ether for DAI, which is, and it's also an extremely liquid platform, so it's a really great place to do that. But you can also margin trade, then you can also borrow and lend DAI, borrow and lend Ether. And something that's brand new is their perpetual contract swaps, which have just released for Bitcoin. And I'm a huge fan of this. Every time I see some new feature that uses Bitcoin on Ethereum, I get really excited. So DYDX has really pushed forward the financialization of Bitcoin on Ethereum

• 3:19David Hoffman?

  with their perpetual contract markets. Think of this like BitMEX, but using a DeFi app on Ethereum, a non-custodial app that doesn't have a centralized exchange operator and can get you all the things that you want to do on BitMEX, but instead on DYDX. So they just launched this very recently. You can get up to 10x leverage with price exposure to Bitcoin with the underlying USDC asset. So after you're done leveraging long, you'll get paid out in USDC. Really exciting new feature coming out of DYDX and really enjoy what they're doing. If you want to go and trade on DYDX, you can get a special offer for Bankless listeners. You get 10% off trading fees if you sign up with the Bankless referral link,

• 4:02David Hoffman?

  which is trade.dydx exchange slash R slash Bankless. It's a long one, so it's in the show notes. So you can go there, click that link, go to DYDX and get 10% off of all trades.

• 4:16Ryan Sean Adams?

  David, let's talk about some big picture stuff today. So the first is this. This has been prophesied in the Ethereum community for a long time, and it finally happened. ETH now has a CFTC-regulated futures market in the US through an exchange called Ethereum.

• 4:36Ryan Sean Adams?

  Eris X. That's super exciting. What are your thoughts on this?

• 4:40David Hoffman?

  Yeah, so this is a really important area of progress that Ethereum needs to go through in order for it to grow into what we want it to in the future, which is this global financial system. I view these two worlds as Ethereum has its own world and it's becoming financialized inside of it. And that's just DeFi apps that we all know and love. But then there's the old world, the legacy world, where you buy Bitcoin Ether crypto assets inside of your brokerage account, like inside of your Charles Schwab, inside of your TD Ameritrade account, which you can't do yet. But these two worlds each take steps towards each other. And this is

• 5:21David Hoffman?

  a really big step for the legacy financial world, taking a big step towards Ethereum. Having physically settled futures where like when the contract closes, you are actually delivered Ether, the asset, not just some synthetic asset that gives you price exposure, is really important. And so this is the old legacy world, taking a big step towards Ethereum and just the financialization of Ether, the asset in general.

• 5:47Ryan Sean Adams?

  Yeah, I totally agree. I mean, we've talked in episode three about economic bandwidth and economic bandwidth being basically the rate limiter, the capacity limiter for the open financial system. And of course, economic bandwidth is basically price of ETH, market cap of ETH, the liquidity of ETH. So this adds sort of a third engine to an economic bandwidth accelerator. So the first is, of course, ETH gets liquidity and value through crypto banks, like exchanges like Coinbase. The second is all of the DeFi protocols that we talk about so much in the Bankless Program. And now this third engine of traditional finance means folks like Paul Tudor Jones, the hedge fund manager, who just announced he bought Bitcoin

• 6:30Ryan Sean Adams?

  options, can now buy ETH options. They're regulated by the CFTC. And that's a that's a pretty big deal for that third engine, the traditional finance engine, because there are only two crypto assets that the CFTC has deemed as commodities. First is Bitcoin. They did that a couple of years ago. And the second is Ether. And now we see US-regulated futures of Ether. I think it'll be a long time before we see any other crypto assets get over the hurdle and be approved by the CFTC as commodities. So it seems to me Bitcoin and Ether have a fairly significant lead in that respect. What's your take?

• 7:13David Hoffman?

  Yeah, 100%. And even more so on that, on that same note, it took Bitcoin eight years, nine years to get futures. It got futures in like January of 2018, if I recall correctly, which means that Bitcoin, you know, got futures at eight years old. And Ethereum seems to be following Bitcoin's same path, but like sped up, at double the speed, because it's following in Bitcoin's wake, where Bitcoin is really the thing that people think of when they think of crypto, at least from the outside world. But it's really just carving a path and making it really easy for Ethereum to do all the same things that are necessary for financialization, but at a faster rate. And so Ethereum got its futures in five years, where it took Bitcoin eight

• 7:56David Hoffman?

  years. And so, you know, thanks Bitcoin for making this easy on us.

• 8:02Ryan Sean Adams?

  Wait, didn't you say something about that earlier this week, David, about Ether being like Bitcoin in 2015?

• 8:10David Hoffman?

  Yeah, I wrote a tweet that said Ethereum is where Bitcoin was in 2015, except if Bitcoin had an abusive older brother that kept telling it that it's worthless. I thought that was pretty, summed up the relationship between these two communities pretty well.

• 8:29Ryan Sean Adams?

  Yeah, there's definitely a contingent in the Bitcoin maximalist community that likes to tell Ether it's worthless all of the time. And they mean that literally, by the way.

• 8:38David Hoffman?

  They mean that it's going to zero.

• 8:41Ryan Sean Adams?

  That's what they think. Um, let's talk about something else too that happened this week. I tweeted this out, David, because it is so cool. Like every week, it feels like something magical happens in the bankless space, in the DeFi space, in the crypto space. For me, last week, that was RAC repping the bankless T-shirt on a live stream.

• 9:02David Hoffman?

  Yeah, that was really cool to see. RAC, I listened to him a ton in college. Uh, and then, uh, since college, my, my music taste has gone really old, like Beatles type stuff. But, uh, having him circle around, he's, he's coming on to the, into the Ether Podcast. I'm excited to listen to that. But, um, he was on, yeah, he was on a live stream, just being a DJ, repping the bankless T. And then people were in the live stream, like talking about, asking him questions about like, what, what are you into in the DeFi world? And, and what are you up to? Like, what, what do you like about crypto? Uh, and so he was talking about the tape token that he issued, uh, which are a hundred, there are a hundred tokens and they're redeemable for a cassette tape, a unique cassette tape.

• 9:46David Hoffman?

  And it's kind of just a way for fans to show their, their, their appreciation. It's a way for fans to signal that, hey, I'm, I'm, I'm a big fan of RAC. I really like your music. Uh, and so, and so on the live stream, RAC was talking about his tape token, right? And he said like, yeah, so I issued these tape tokens and, and now I put them all into the open market with this thing called Uniswap. And it's all about price discovery, right? This, this is what really resonated with me. He says, it's all about price discovery, right? Like you let the market decide how much it's worth. Right? And so, and so I don't, I'll, I'll just issue the tokens and, and my fans will decide to buy or sell those things according to how much they value it.

• 10:29David Hoffman?

  And, and the guy, I listened to that and it was music to my ears, man. I was like, this guy gets it. This guy gets it. And I think it's just a really great way for artists to connect directly with their fans. And this is the entire revolution of peer-to-peer finance, right? Like no intermediary finance. The, the world of music and artists has been so insanely captured. By legacy companies that act as just the most rent-seeking middlemen that stuff like this, I really think has great product market fit on Ethereum where where artists can just go directly to their fans in order to in order to reward them for their fanhood and and then

• 11:10David Hoffman?

  also benefit financially. So they don't need some record label or issuer or anything. I'm I'm a big fan.

• 11:17Ryan Sean Adams?

  Yeah, so here's a Grammy award winning artist who's saying stuff like, I've been super into Ethereum for a while. He is a liquidity provider on Uniswap, which we talked about in episode 10. He's also into Compound and Maker, which, you know, that that completes the bookends in our DeFi series. Like, this guy is one of us. He's he's legit going bankless. And he issued his own artist token on Ethereum. So there are only 100 tape tokens in existence. And the price on this went crazy. I was watching while he was live streaming. It started at at 20 earlier that morning, and it got all the way up to $929 per cassette tape. So these are scarce

• 12:01Ryan Sean Adams?

  digital assets redeemable for a cassette tape. They're all issued on Ethereum. It totally feels like like we might see, you know, Kanye West issuing Yeezy tokens on on Ethereum at some point down the road. I just got like chills of like what the future could bring in terms of bringing mainstream to Ethereum and and bringing to to bankless. So I totally agree with you. Super exciting. There was one criticism I saw of it, though. And that was the criticism that basically speculators, not true fans, are the ones snapping up these deals. So, you know, addresses that purchase more than one tape token in order to sell them back to to the fanbase.

• 12:46Ryan Sean Adams?

  What's your take on that?

• 12:48David Hoffman?

  Yeah, yeah, I can see how that would be an issue. And, and we are at the bleeding edge of this, right? And so I don't expect, you know, when, when, if this, if and when this gets adopted by hundreds of different artists across the world, that we're using the same infrastructure that we are today. Like, RAC is a bankless pioneer, just like the rest of us, so he's experimenting too. But I do think the fact that these tape tokens just skyrocketed in value, what that means, and, and the fact that people are gonna make money off of this, to me, it's an indication that there is untapped value to, for artists to get into, right? Like, that, that just means there's more room for artists to do more of this stuff.

• 13:33David Hoffman?

  I, I, I don't think that we can really say that the price run from, from wherever it started at, which was below a hundred dollars all the way up to nine hundred dollars, was perhaps logical. There definitely might have been traders in there, for sure. But it's doing the thing that it was supposed to do, which is to reward the artist for their, for their work, right? For their product, for, for connecting to their fans. And so I think that that is just a signal that there's plenty of room for more artists to do more stuff like this. And the thing is, like, this really works out for both parties really well. Both parties being the artists, and then also Ethereum, right? So, the artists want to, they want to shill Ethereum, because that's a new financial

• 14:17David Hoffman?

  platform for them, that, where a record label doesn't take sixty, or seventy, or eighty percent of the profits, right? The artist gets to retain a hundred percent of the profits, minus whatever the costs of the cassette tape are. And then the fans, you know, get to connect right into their, into their, into their favorite artists, but also Ethereum can shill these people too, right? And so, you know, Ryan, you and me are shilling RAC right now. Like, we're shilling, we're shilling him, and maybe some people are gonna go listen to his music. And so it's really a symbiotic relationship between, like, the artist that's trying to shill Ethereum, and then Ethereum people trying to shill the artist because they're using Ethereum. And so I think that this, because of this mechanism, this is just going to kind of

• 15:01David Hoffman?

  turn into a self fulfilling prophecy of success.

• 15:03Ryan Sean Adams?

  Yeah, totally. It reminds me a little bit of like early YouTube, right? The idea behind YouTube is we don't need big media conglomerates to produce and distribute our media, right? Individuals can do that. Well, with Ethereum, you can do the same thing with assets. And it reminds me of what we've talked about so many times in Bankless, particularly Episode 7, where we talked about all of Ethereum's scarcity games. This is just another scarcity game, right? So the entire crypto revolution, basically, the big discovery in 2009, when Satoshi releases White Paper, was digital scarcity, right? And Bitcoin is just one manifestation of a digital scarcity game.

• 15:45Ryan Sean Adams?

  And on Ethereum, you have all of these digital scarcity mini-games that can be played. This is just one of them, but I think it's going to be an absolutely massive use case. Excited about it, and we'll see which artist goes next. Hey, if you had a vote, David, what artist, what celebrity would you like to see? Or like sports figure, would you like to see start issuing stuff on Ethereum?

• 16:08David Hoffman?

  Oh, man, I think Jack White would be a great candidate. Jack White is a great blues-rock artist who is also spinning up the, like bootstrapping the world of vinyl records again after it's kind of died. And so he's made some limited-edition vinyl records. And so he's kind of already one foot into the world of quote-unquote NFTs, just not through Ethereum. And Jack White has been one of my favorite artists for a while, so I think he could come next.

• 16:37Ryan Sean Adams?

  Nice. Well, if we're doing Jacks, then I'll vote for Jack Black. Get some Tenacious D. Get some Tenacious D going. I'm sure he'll release some interesting stuff. All right, man. Well, we should dig into the episode. David, I'm super excited to talk to you about this, about settlement guarantees, and about this thesis that you and I have been batting around for a while, the Protocol Sync thesis, as we're calling it. Maybe we should start where you started in your presentation at Ethereum and define what exactly we're talking about with settlement guarantees and like why they're important. Can you help with that?

• 17:20David Hoffman?

  Yeah, absolutely. And this concept is something I'm still chewing on to this day. And so the really cool thing about producing podcasts and writing and just sharing thoughts on Twitter is that ideas always morph and change and get updated the more you talk about them. So I actually don't expect this to be the final form of whatever the hell this idea is. It's just what you and I are thinking about today. And so each ideas go through an evolutionary process, just like everything else. So this is where we are today. And hopefully we update you in the future with where we are going.

• 17:54Ryan Sean Adams?

  I totally agree. This is a, you know, we call it a thesis, because at some level, it's a, it's a, it's a narrative, it's a guess based on current information at how this whole thing will take, take shape and play out. But it is a thesis, right? And so along the way, we can actually test that thesis against events that may actually occur. So I think we'll get into that in today's episode, David. It's like, how folks can look for signs, look for events that occur that actually start to validate this thesis? Because I think we're starting to see some already, and I expect to see some more soon.

• 18:35Ryan Sean Adams?

  But it's, it's completely something that can be validated and proved true, or proved, you know, null hypothesis, if that's how it turns out being. Talk to us about settlement insurances, David. What are these? Like, in the real world and then in the crypto world?

• 18:50David Hoffman?

  It refers to how strongly you can believe that a settlement is going to be settled permanently and in a way that you agree with. In the legacy world, we have these different payment rails, right? We have the ACH system in America, we have the SEPA system in Europe. And each one of these has a specific time to finality. There's a time that, once you cross that time window, that transaction isn't going to get reversed ever. Now, in the legacy world, these times are really, really long. Like, the ACH system gives you a 90-day window to dispute a transaction. The SEPA system in Europe gives you a 13-month window, which is insanely long. And then there's also like- This eight week, no questions asked return policy where you can just say,

• 19:34David Hoffman?

  "Hey, reverse this transaction and give me my money back," and then they'll do it, no questions asked. The reason why you can do that, however, is because the settlement assurances, the promises that you have that a transaction isn't going to get rolled back unless it should be correctly rolled back, comes from the legal system of each respective payment rail, not the actual payment rail itself, right? So the payment rail acts as infrastructure, but it's the court system, it's the, it's the, the police force, it's the court, the, the rule of law. That's what keeps these things from, from breaking down and still having decent settlement assurances. So the important thing is to know like the ACH system, your debit card, your credit card, the SEPA system, SWIFT payments,

• 20:19David Hoffman?

  they operate on legal system finality, uh, finality based off of a court, court of law, not protocol finality. And that's where Bitcoin comes in back in 2009, 2010, and Bitcoin invents protocol finality, which is a huge game changer. Protocol finality is, is great because it means that you don't have to use a legal system to get your settlement guarantees. It means that you can just look at the Bitcoin blockchain and know that your transaction has been settled with a decent amount of assurances and you don't have to, if the, and you don't have to dispute that anywhere. Or you don't have to, there's no central authority for you to go and say, "Hey, I disagree with this, with this transaction."

• 21:04David Hoffman?

  The central authority is Bitcoin, and that is really like the very genesis of what it means to be bankless, right? Settlement assurances is at the heart of this whole crypto system because it, it just removes the, the need to have a court system or a, or a government or an authority, some sort of centralized third-party authority to, to say, "Yes, this transaction is settled and that is final and now you can, you can depend on that." Bitcoin offers you, uh, protocol settlement guarantees, protocol finality, and that's just a huge game changer.

• 21:38Ryan Sean Adams?

  Okay, so this is super cool. Like, let's dig into this a little more. So what you're saying is basically, when you say settlement assurances, this is just like the guarantee or the assurance that you have when someone gives you the money, it's yours, right? Like, it's permanently yours. And it seems to me, in the early days, right, you know, cavemen era, before civilization, before community money, that sort of thing, possession really was the law, right? So if I had a hunk of gold, and I wanted to settle a transaction with you, well, you know, nature provided me a way to do that, because I could take my gold, and I could give it to you. And once it's, you know, transitioned from me to you, then it's settled.

• 22:23Ryan Sean Adams?

  You have it, right? You know, possession is the law in that case. Now, if we got into a dispute, and you said, "Well, Ryan, you didn't give me enough gold for the item that you purchased." We have a problem. We could settle that transaction with violence, of course, right? You could, you know, punch me in the face, and get the rest of your money. Or, we could get an arbitrator involved. And you could sort of see why this legal system was invented. The legal settlement system was invented. It was to set the protocols, set the rules, for how settlements should occur in meatspace, in the non-digital world.

• 23:03Ryan Sean Adams?

  And over time, of course, the legal system has morphed into the massive institution that it is today. And we've somewhat digitized the legal system, in what you're saying, with sort of the ACH transfer systems, and SEPA, and SWIFT, and all of these, like, protocols, that essentially transact and settle money transfers via the legal system. But what Bitcoin did, is what you're saying, David, it was super profound. It kind of brought us back, almost, to the bearer asset days, where, without legal system, and in the digital realm, and without any kind of central authority involved, I could send you Bitcoin. I could take some of it.

• 23:47Ryan Sean Adams?

  My Bitcoin, if I had my private key, I could transact it to you in a peer-to-peer way. And you could receive that. And once you do, you have assurance that it's fully settled.

• 23:59Ryan Sean Adams?

  No legal system involved, no centralized party involved. That's what you're saying, right? This is kind of the the protocol settlement era where we've transitioned this basic digital scarcity, peer-to-peer asset transfer into into the digital realm, and that's new.

• 24:16David Hoffman?

  Exactly. That's exactly right. And not only that, but we can also start to compare blockchains with each other. And they're given amounts of settlement assurances that they can provide. I don't know if you remember those charts back in 2017, Ryan, but it would put like three or four or five different cryptocurrencies up against each other and compare them on different like metrics. And it was it was just about like the mania of 2017 and trying to find the next coin that was going to to moon. But it would always compare like the speed of the Bitcoin blockchain with the speed of these other blockchains, right? And so that's right, why Litecoin was invented, right? Like Litecoin is like Bitcoin, but faster, so it's better.

• 24:58David Hoffman?

  And so like they just took the Bitcoin code, they tweaked the block times from 10 minutes to 2.5 minutes, and then they marketed it as a faster Bitcoin. But going back to how this whole entire industry rides on settlement assurances, just because you have faster block times doesn't mean that you have faster settlement assurances. And settlement assurances in the crypto world comes from the rewards paid to the validators of each specific chain. And so the Bitcoin miners, which are receiving, at the time, just before this episode, they were receiving 12 and a half Bitcoins, and now the weight of a single Bitcoin block was 12 and a half Bitcoins

• 25:38David Hoffman?

  plus the fees being paid in every single block. And that amount, you know, is tens of thousands of dollars. Depending on the price of Bitcoin, it's between like 70,000 and 130,000 dollars for a single block. So that's over 10 minutes of time. Now Litecoin comes in and each block every 2.5 minutes is just 2,000 dollars. And so, you know, You get four of those and then you get $8,000 worth of rewards paid to the miners of that blockchain. And that is really the strength of your settlement assurances when we compare these two crypto systems. And so like Bitcoin already sweeps the floor with, you know, comparing it to the legacy system, right? Like the ACH, SEPA, whatever, payment rails. Like the settlement assurances that offers by Bitcoin is just,

• 26:23David Hoffman?

  it's a difference between existing and not existing almost between those two systems. But then you can also compare Bitcoin to Litecoin and you can compare like the, the $90,000 worth of rewards paid to miners over 10 minutes compared to the $2,000 worth of rewards paid to Litecoin miners over 10 minutes. And you still get really strong settlement assurances. And the reason why this is important is because the amount of value that is paid to the miners of the Bitcoin blockchain is a measure of the settlement assurances for Bitcoin. And so if you were to send a $1 million transaction on Bitcoin, which happens every single day,

• 27:04David Hoffman?

  you need to know how long do I need to wait in order to consider that transaction settled? And really the answer to this is you should wait for the ledger, the costliness of, or the rewards paid to miners, or the costliness of the ledger to match the value of the transaction. Because if, if one block is rewarded with $90,000 worth of rewards to a miner, but then you transact $1 million, like you need to wait for those, the proof of work to accumulate its, its rewards incentives to the miners. So that the, the, the value of the transaction is less than the cost of mining all the blocks of that transaction. And that's where you get your final settlement assurances.

• 27:48David Hoffman?

  That's where you get the game theory soundness that it doesn't make any sense for a rational miner to attempt to roll back a transaction because it's going to cost more than the transactions itself. Did that make sense?

• 28:00Ryan Sean Adams?

  Yeah, I think it totally does, right? So what you're saying is basically if I want to send that $90,000 with Bitcoin, because Bitcoin is so valuable and every block it produces is so valuable to miners, it's not worth it to them to actually roll back the chain and steal your $90,000, right? And so the net effect is Bitcoin can settle a $90,000 transaction in minutes. Whereas on Litecoin, that might take longer. And we could scale that up, right? Scale that up from 90,000 to 900,000 or 9 million or some higher number.

• 28:40Ryan Sean Adams?

  And the reality is the more economic security that the network has, so basically the more Bitcoin is worth, the faster it can settle its transactions in a secure way. And so other networks don't have that kind of throughput. They might produce blocks faster, but they're not producing settlement assurances faster. Is that right?

• 29:01David Hoffman?

  That's totally right. That's 100% right. And you tapped on something there, like the value of Bitcoin, the value of the native asset is where Bitcoin gets its settlement assurances. Because when the value of Bitcoin doubles, well then the rewards paid to miners for a particular block also doubles. And so if Bitcoin 2X's, well then the speed of settlement assurances also 2X's. It just layers on more security faster and faster and faster. Nick Carter, who coined the term settlement assurances in his paper, always talks about Bitcoin mining or proof of work casting something in amber.

• 29:41David Hoffman?

  And so one block in, you're not really that embedded into the blockchain. Different exchanges usually require six blocks of confirmations before they allow you to use your asset on their exchange. And that's just them saying, like, we want six blocks of settlement assurances. That's how long we've decided to wait in order to consider a transaction settled, you know, six blocks. And so Nick calls this being cast in amber. Like, the deeper you are in the blockchain, the stronger your settlement assurances are. And it's just a fact that Bitcoin casts amber faster than every other blockchain ever. And that's where it gets its settlement assurances from.

• 30:25Ryan Sean Adams?

  And that speed, of course, scales up with the value of Bitcoin, just like the amount and the speed of settlement assurances scales up with the value of Ether on the Ethereum network. Now, today Ethereum is proof of work, so it operates in a similar fashion as Bitcoin, essentially. Its settlement assurances are less than Bitcoin right now because its market cap is smaller. I mean, I don't know right now, but roughly 10% or something. With proof of stake, settlement assurances change in some ways, but are the same in other ways with Ethereum. Can you talk about that?

• 31:04David Hoffman?

  Yeah, so proof of stake, among other reasons why we are transitioning from proof of work to proof of stake, one of them is the speed of settlement assurances that you are able to get with proof of stake. And so with proof of stake, after your transaction has been included in one epoch, which I believe is six minutes, you get the full weight of all settlement assurances that you are ever going to get upfront. And so that's really the big change between proof of work and proof of stake. Proof of work layers it on over time, and so you get probabilistic settlement. And so the longer your transaction is in the chain, the more secure, the more assurances that you can have.

• 31:45David Hoffman?

  With proof of stake, it takes the full weight of settlement assurances and frontloads it. Once your transaction is in the Ethereum blockchain for six minutes, you can be assured that it's not going to get rolled back unless somebody is interested in burning the value of one-third of all staked Ether. That's how the Ethereum proof of stake system works. And it's really higher than that. There's different levels of how much you can really mess with the Ethereum blockchain. The lowest threshold is one-third of staked Ether. Once you get to that threshold, you can start to do some funny stuff. At 51%, that's where you can really mess with stuff. So it's much more like a 51% attack. So once your transaction is in the blockchain, you can be assured that it's going to be

• 32:30David Hoffman?

  in there unless somebody burns 51% of all staked Ether. And so the Ethereum protocol is looking to have somewhere between 10% and 30% of all Ether staking. And then, once Ether is staking, say we have 30%, you get the assurances that your transaction isn't going to get rolled back. Unless somebody burns 50% of the 30% of all-staked Ether. So, somebody would want to burn 15% of the outstanding supply of Ether in order to roll back your transaction. And that, you get those assurances in six minutes, which is really, really fast.

• 33:07Ryan Sean Adams?

  This is why it probably seems like in the bankless, like, program on this podcast, we are obsessed with the value of these assets. Like, the value of Bitcoin, the value of Ether absolutely matters for the economic security of these systems. The more valuable these assets are, the more economic bandwidth you have, the more settlement assurances you have. It's, you can, you can settle more cash, more value faster. It's the difference between being able to settle, you know, $10 million and $10 billion. It's incredibly important. And these systems operate in the same way. They're all based on economic finality. So whether it's proof of work with Ethereum and Bitcoin today, or whether it's proof

• 33:52Ryan Sean Adams?

  of stake as Ethereum is moving to in the future, the amount of security and the amount of settlement assurances you have all scales up with the value of the underlying asset, ETH. I think a lot of people don't understand this. I think they get, once you see it, it becomes obvious that you can't be obsessed with transactions per second in isolation. You have to also understand that the weight of those transactions per second and the value of the underlying reserve assets. That's why I think that the open financial system will be based on a reserve store of asset, a reserve store of value asset like Ether, or, and even like Bitcoin.

• 34:36Ryan Sean Adams?

  Because those assets will accrue so much more economic security versus other networks that don't have a reserve asset that is a store of value.

• 34:45David Hoffman?

  In our Uniswap episode, we talked about how Uniswap gets more useful as people use it, right? So liquidity providers provide liquidity, then that enables people to come and trade, and then those, those trades generate trading fees for the liquidity provider. Traders, which, you know, they, that's profit for them. And that profit incentivizes more liquidity to get deposited, which makes that market more liquid, which means that more traders are viable to come and trade inside of Uniswap with less slippage. And then that attracts more traders, which attracts more fees, which attracts more liquidity, which attracts more traders. This same feedback loop is in the settlement assurances of proof of stake. If Ether is $50,

• 35:29David Hoffman?

  then you get the settlement assurances of 51% of all staked ETH. And so if there's 30% of staked ETH, then you, 50% of that, 15 is 15% of all Ether ever. And so if Ether is $50, you have that amount of settlement assurances. And you can't really send, because proof of stake frontloads its economic security, just throwing out numbers here. Say, say that, that 15, 15% of Ether, that market cap is like $4 billion. Well, if, if Ether 10x is in price, well, then that market cap is $40 billion. And so there's a lot more room for more people to come and transact on Ethereum and access the settlement assurances that they need to not roll back their transaction.

• 36:14David Hoffman?

  And so the higher the ETH price, the more room there is for larger and larger transactions to come to Ethereum, which just makes Ethereum itself a more vibrant and valuable economy, which contributes to the value of Ether, which means the Ether price is going to go up, which means it can offer even greater settlement assurances. And so this same feedback mechanism is also built into the settlement assurances consensus mechanism of Ethereum.

• 36:41Ryan Sean Adams?

  People don't realize how big this is for civilization, for humanity. Because previously, in our traditional system, the only way we can get settlement assurances is by maintaining the infrastructure and overhead of a nation state. People with guns, people who lock other people in, in cages. Basically, all of that, that tax system, that, that government system, all of that infrastructure is required fundamentally to maintain legal.

• 37:11Ryan Sean Adams?

  Settlement assurances. What we're doing with crypto is we're able to get settlement assurances in a digital way, in a peer-to-peer way, without all of that nation-state infrastructure. I mean, we talked about this in our very first episode of Bankless. This provides settlement assurances without a nation-state. It's a separation of money and nation-state.

• 37:36David Hoffman?

  It really goes to the heart of why I'm here on this bankless journey. Settlement assurances allows us to go bankless. A lot of the settlement assurances of the traditional system, of the centralized body system of the United States government or the world, comes from the fact that the United States has a massive military. It has a massive military and internal police force and just they get to control what force is. The United States has control over what violence is. And that is really the ultimate version of settlement assurances. The United States government and the country and anyone with any sort of military, that military is the instantiation of settlement assurances for a government,

• 38:21David Hoffman?

  for a nation-state, saying like, things are going to settle the way we want them to. And that's why like so many countries, so many third world countries, really do not like being under the thumb of the United States, is because they have control over what things settle as. Not just with payments, this isn't just for payments, but also for laws and basically anything in the world. And so, and Bitcoin has its own military. It's the energy wall of all the miners that prop up the system. And Ethereum and proof of stake also has its own military, its own military, its value wall. And these are inherently peaceful revolutions. Ethereum is not going to knock on your door and seize your assets because they don't like the way that it's settled,

• 39:04David Hoffman?

  which is what Argentina is doing with their military and their government. It's the most peaceful revolution possible and it's one that I can really get behind.

• 39:12Ryan Sean Adams?

  Yeah, absolutely. And I mean, to be clear, I don't think either of us think that these systems are going to completely replace the nation state, right? There's a lot of need for, I mean, there's always going to be need for roads and school systems and healthcare and these sorts of things that the nation state could do. But what can humanity achieve when it doesn't need to base its settlement assurances on the massive infrastructure of nation states, which can corrupt them, which can control them? What if it had an independent money system, settlement assurances, property rights system that was independent of all of these things and maybe becomes part of the base layer of these things? I

• 39:57Ryan Sean Adams?

  mean, that's really what we're exploring here with with bankless and with crypto. And I think it's profound. You know, before we get to the protocol sync thesis piece of it, we should talk about two more of our sponsors, David. So the first I want to talk about is Aave. Aave is a DeFi protocol that you absolutely have to check out. It's a lending and borrowing protocol on Ethereum. That means you can lend to it. So assets like ETH or assets like DAI, you can put those assets into it. It will magically transform those assets into interest-bearing assets. Recently, they've just released the ability to actually take tokenized liquidity pools in Uniswap and add those, start receiving

• 40:39Ryan Sean Adams?

  interest earning and borrowing on those assets as well. So they're doing some really interesting things, really innovative stuff. Developers, you've got to check out their flash loan protocol. Go to ave.com to find out more. Deposit your crypto and start earning or borrowing. That's A-A-V-E dot com.

• 40:59David Hoffman?

  Speaking of settlement assurances and payment rails, the Visa network is hard to argue with the size and reach and magnitude of those payment rails. But most people don't realize that Visa is just payment rails. It's not a currency. Any currency can really run on Visa payment rails. So that's why if you are interested in expanding the bankless world, you should go to monolith. And sign up and get your DeFi Visa card because that is a statement that you think that maybe perhaps DAI should run on those payment rails instead of US dollar or government fiat. The Monolith DeFi card is a Visa-enabled debit card, except instead of, you know,

• 41:41David Hoffman?

  connecting to your bank account, it connects to your smart contract wallet on Ethereum and your DAI balance in that smart contract wallet. So when you go to your store, at your preferred coffee shop, your groceries, whatever, and you swipe your Monolith Visa card, a fiat transfer is executed, but it ultimately goes into your DAI balance on your smart contract wallet. And so if you are interested in perhaps Visa offering their payment rails for crypto assets like DAI, I think that Monolith in getting a DeFi card is a great way to voice that opinion. And so if you are interested in getting some of the economic activity of the world onto Ethereum, go to monolith.xyz and get your bankless Visa card and use different

• 42:26David Hoffman?

  settlement assurances. Use the settlement assurances of the Ethereum blockchain.

• 42:31Ryan Sean Adams?

  Okay, so we've talked about settlement assurances. I think listeners probably have a baseline understanding of what we mean when we say that. What is the protocol sync thesis? And how does that fit in here?

• 42:42David Hoffman?

  The protocol sync thesis, we've talked about, we've hinted at this before, and you describe it as that experiment that at least most of us have run at some point in our lives, where you put different densities of liquids in a glass, and then those different densities of liquids stratify and separate. And the less dense liquids rise to the top, and the more dense liquids rise to the bottom. And that's, we're using that as a metaphor for DeFi, right? And not just DeFi, but crypto systems at large. Things that have high density will sink to the bottom, and we can measure the density of these crypto systems by their settlement assurances. Things that have strong settlement assurances that are also credibly

• 43:26David Hoffman?

  neutral platforms will sink to the bottom of the protocol sync. And the idea is That if you can depend on it, then you are going to build on it. And then you are going to make that thing heavy and you are going to force it to sink. So things that are credibly neutral, that have strong settlement assurances that are permissionless, that allow anyone to build on top of, will sink to the bottom. And so like Bitcoin is a great example of this. You don't need a political system to back up transactions on Bitcoin. And so Bitcoin offers really strong settlement assurances, which means that lots of businesses can come build on Bitcoin and make it really, really dense and push it to the bottom of the stack.

• 44:08David Hoffman?

  So when it comes time to it, Bitcoin is going to be under the ACH system. It's going to be under the Visa system. And the same is true for Ethereum. Ethereum is a credibly neutral system with very strong settlement assurances. All the applications, all the DeFi protocols, all the companies that are building on Ethereum, are building on this thing that offers very strong settlement assurances and that makes that thing very dense and falls to the bottom. Just like how the internet, everything's built on the internet. And the internet is the ultimate credibly neutral platform. The internet is very dense. It's at the bottom of the protocol sync thesis. And so are these very credibly neutral, strong settlement assurance blockchains like Bitcoin and Ethereum.

• 44:53Ryan Sean Adams?

  So David, I'm looking at a picture of a glass of liquid from your slide deck. And I want listeners to kind of visualize this. So this has all of these different liquids. There's like a lamp oil, there's a rubbing alcohol, a vegetable oil, water, corn syrup, honey. And then it also has these, you know, more physical, more solid items, like a ping pong ball and a soda cap and dice and a popcorn kernel. And what it's showing is all of the layers of, you know, what happens when you mix all of this stuff together? The honey sinks to the very bottom. That's the most dense liquid in the glass, along with a bolt that sinks to the very bottom. I was surprised with looking at this, like dice is less dense than maple syrup.

• 45:36Ryan Sean Adams?

  So dice is actually floating like above maple syrup. So go maple syrup, go Canada, well done. I mean, great settlement assurances in your liquid. But what we're saying basically is that DeFi and crypto protocols operate in the same way. So Bitcoin is kind of like that bolt. It will eventually settle. It'll like pierce its way through all of the different layers. It'll pierce its way through the water and the dish soap and the milk and the corn syrup and make its way to the very bottom of the system. And we think that effectively, that's what's happening right now as Bitcoin is being financialized and monetized. Ethereum is the same way.

• 46:20Ryan Sean Adams?

  Ether is sinking down towards the bottom and you can build things on top of Ethereum that you can't build on some of the other layers because you have greater settlement assurances. I tweeted this out a couple of weeks ago. It was basically like there are two people who can steal USDT. That's Tether on Tron. It's the issuers of Tether themselves and it's also Justin's son and the Tron network. Tron is not as credibly neutral as Ethereum. It's much more centralized. There are block producers who can effectively reverse transactions, reverse settlement assurances. But Ethereum has much stronger settlement guarantees.

• 47:03David Hoffman?

  That visualization of both the physical objects and the liquids inside of a glass that are stratifying, I think that's really interesting because I think you could also say that there is two different types of things that will sink to the bottom of a protocol sink, which are DeFi applications, which I would call the liquids, the substrates, and then also the actual assets, which are the physical objects. And so like these different DeFi protocols offer these different substrates for these assets to run through. And so assets, both DeFi protocols like Maker and Uniswap and Compound have their varying amounts of settlement assurances. There are different protocol densities, but then so do the assets that run inside them.

• 47:47David Hoffman?

  And that also goes back to why we focus on Ether so much because Ether, of all the assets on Ethereum, will always have the strongest settlement assurances on Ethereum. And the reason for that is because Ether has this privileged position in Ethereum as the native asset. Ether, in order to send Ether to anyone else, or to any contract, or to any other protocol, or to any money robot, doesn't need to run through a contract. It is, and Nick Carter actually talked about this in his most recent article on Bankless, where Ether, in order to send Ether, you only need 21,000 gas. But in order to send an ERC 20 token, you need like 54,000 gas, or some larger number.

• 48:31David Hoffman?

  And the reason for that is because when you send a token to someone, it runs through the ERC 20 contract. Now, the ERC 20 contract is really robust and really secure. And if that got hacked, that would be, or if there's an exploit found, that would be a huge deal. And so we generally assume that the ERC 20 token contract has very, very strong settlement assurances. But it will never have as strong settlement assurances as Ether, because Ether doesn't need to run through a contract in order to get settled. And so that's why I think Ether as collateral inside of MakerDAO, or Ether as collateral anywhere, will always be the best collateral with the strongest settlement assurances. And it will always benefit from that truth,

• 49:16David Hoffman?

  because of its privileged nature in Ethereum as the asset with the strongest settlement assurances.

• 49:23Ryan Sean Adams?

  Yeah, I like the way you frame that, as you've got the solids, which are like the assets, and you've got the liquids, which are like kind of the DeFi protocols, the crypto banks, that sort of thing. So I guess maybe a follow-up question here is, you hinted about at this a little bit, but what sorts of things makes and gives an asset better, higher settlement guarantees? And what sorts of things give a protocol, like a DeFi protocol, higher settlement guarantees? I mean, for that, on the asset side, credibly neutral issuance has got to be one, right? You know, is that correct? And are there others?

• 50:00David Hoffman?

  100%, yeah, and this is a really important subject matter that we're going to go into. Before we go into that, I want to talk about on the other side of things, there are assets that have much less settlement assurances. And these are tokens like WBTC or, you know, real tokens from my company, which we are any tokenized security. We have the ability to burn and mint tokens from your wallet, by the way. And so even though that you have a real token in your wallet, technically, we could burn it from your wallet. Meaning that the settlement assurances of proof of stake of the Ethereum blockchain don't actually relate to things that are like security tokens on Ethereum.

• 50:44David Hoffman?

  And that's just because of the way a token is brought up. And so when you receive a real token from us, you are actually depending on the central issuer for that final settlement, not on Ethereum. And so that would make real tokens much more like that ping pong ball, very high up, where you are still trusting like a traditional legal system settlement for your settlement assurances.

• 51:08Ryan Sean Adams?

  I think that's a great point, David, because what you're saying is with Realty, you have to be above the legal settlement layer. You have to, your assets have to float above that, can't sink below that. Because the only thing, or the big thing preventing you guys from, you know, destroying tokens, obviously ethics aside, is the legal system. You'd get in trouble if you did that.

• 51:31David Hoffman?

  Yes, right. And we also provide all of our investors, all of our real token purchasers with the documents to prove so, right? Like, but they're documents, right? They're not, they're not transactions on Ethereum. They are, they are legal system documents with signatures on them. And so you would take those documents to the legal system. And that actually kind of speaks to the flexibility of the Ethereum protocol, right? Like, you can have both, like the full spectrum of settlement assurances is possible on Ethereum. You can have the fully robotic, fully trustless end of the spectrum. But then you can also do, you know, the traditional stuff, which is what Realty is doing on Ethereum as well. You get to have both.

• 52:08Ryan Sean Adams?

  Okay, so let's get back to some of the other things. Those are things that make an asset or a protocol less dense in terms of its ability to sink to the bottom. But what sorts of things make an asset or a protocol more dense?

• 52:22David Hoffman?

  Well, credibly neutral is certainly a very important part of it. Things that, or applications or assets that are perhaps part of a for-profit business are likely to not be as dense as things that are built to be credibly neutral and just an agnostic protocol. And when we had Robert Leschner on our podcast talking about Compound, he said, he was talking about how they have designed Compound specifically to act as a protocol, act as an infrastructure rather than a for-profit company. Robert isn't in Ethereum, isn't in DeFi to build a application that is his own business that puts money in his pocket.

• 53:04David Hoffman?

  He's here to build a credibly neutral protocol that allows others to build on top of. And that was really the motivation behind the C tokens, right? Just using C tokens is a really valuable and easy way to build on Compound without actually having to directly integrate with the actual application. You can just build on the C tokens. If you are using C tokens inside of your protocol or in your business, you are by proxy using Compound. And the more applications that build on other applications, like a lot of things are built on Compound, a ton of things are built on Maker Dow, a ton of things are built on top of Uniswap. And that's really why we picked those three protocols, those three applications

• 53:48David Hoffman?

  in our King Protocol series that we recently wrapped up. That's because those are really dense protocols. They have sunk down to the bottom of the protocol sink because a ton of other applications are building on top of them. And the through line between all of those applications is their credible neutrality to varying degrees. Like you could argue that Maker isn't totally credibly neutral, but it is still a, it's both decently credible and credibly neutral and a ton of applications build on top of it, which make it very, very dense and push it down to the bottom of the protocol sink.

• 54:25Ryan Sean Adams?

  I think this is gets to the heart of what we think of in crypto. The shorthand way of expressing all of this. Sometimes we say credibly neutral, but other times we say decentralization or decentralized. Right? And I think the word decentralized captures a lot of what you just said, a lot of what we're getting at, right? Because more dense protocols would would seem to have characteristics of being decentralized. So issuance is decentralized. It's credibly neutral. There's transparency. So you see exactly what's going on. You can, anyone in the world can audit it. There's some immutability. It's very difficult to change. You know, it's not, the governance is not captured. Maybe there's even an aspect of governance minimization.

• 55:09Ryan Sean Adams?

  So it's not sort of a, you know, a shareholder governance plutocracy where a bunch of coin voters can kind of get together and vote on something. So those seem to be some of the characteristics of highly dense protocols. And I think shorthand, a lot of times in the crypto space, we just call that decentralization. We bucket it all together, that word.

• 55:29David Hoffman?

  Yeah. And so this is us really parsing apart that word and defining it a little bit better because the word decentralized has definitely gotten bastardized and has turned into something meaningless. And so this is, this is our attempt to put some meaning back into that word. And now you can, now you can know that when people are talking about it's decentralized, you can really say it's got strong settlement assurances. It's down deep in the protocol sync. That's really what we're talking about.

• 55:54Ryan Sean Adams?

  So I guess back to the protocol sync being a hypothesis, right? A thesis that can be tested. What sorts of things might we see happen? What's evidence that this thesis is proving correct? Do you have any examples of things that are happening now or we might expect in the future?

• 56:13David Hoffman?

  Well, I think we can say that any company that is built on top of a protocol that we would hypothesize as being a very dense starts to prove that thesis. And, and one really good example is the existence of Dharma. Dharma is this company that is using two very dense DeFi protocols, MakerDAO and Compound.

• 56:35David Hoffman?

  To build on and to offer services to customers. And so Dharma is really a UI UX company. They make using MakerDAO and Compound and receiving interest from those applications really, really easy in a really elegant way. It's an iOS app. It looks like a designer from Apple designed it, so it's really gorgeous. And getting money into it is really easy. And then all of a sudden, you're earning interest on in Compound using DAI. And so these protocols are hidden from the users, but they're still there. They're still being built on from by companies in the DeFi space. And the reason why they're choosing DAI inside of Compound

• 57:17David Hoffman?

  instead of USDC inside of some other lending protocol like Celsius Network is because of the credible neutrality. Like the USDC is issued by a central issuer and Celsius Network is the centralized company. But Dharma used DAI inside of Compound, those credibly neutral platforms.

• 57:37Ryan Sean Adams?

  Yeah, I think that's a great example. So aggregators, UI interfaces, Monolith is another example. Argen is another example. They're building on these DeFi protocols rather than kind of creating their own because these DeFi protocols are more credibly neutral. You know, one of my favorite examples of protocol sync actually is something we often overlook. And that's the existence of crypto banks, exchanges, exchanges like Coinbase, exchanges like Binance. They effectively built entire businesses on top of money protocols like Bitcoin, like Ether, by incorporating these store of value reserve assets inside of their trading pairs. They built entire multi-billion dollar businesses, right?

• 58:22Ryan Sean Adams?

  That's an example of protocol sync, the financialization of assets like Bitcoin and Ether, you know, in getting them incorporated into futures and approved by the CFTC. That's all. Protocol sync, wouldn't you say?

• 58:38David Hoffman?

  Absolutely, that's exactly right. And so here's one that is perhaps a more bold prediction that if this comes true, we can really start to lock in the validity of the protocol sync. I think that MakerDAO will be able to scale better and faster than Tether into the distant future. Now, Tether and MakerDAO actually have a lot of similarities. Tether has assets in its balance sheet, it has real estate and bonds, and then also a lot of dollars on its balance sheet. And MakerDAO has Ether, dollars, and Bitcoin on its balance sheet. And so, and these things are competing for scale. These things are competing for how much total stable

• 59:22David Hoffman?

  coins can they put out into the world, because that's really the direct measure of success of these two protocols. Now, my thesis is that MakerDAO in the long term will be able to scale more than Tether, even though Tether is already at like $9 billion worth of outstanding Tether that are out as stable coins in the world, and MakerDAO is only at 120 million dimes. So MakerDAO has a lot of ground to make up. But over the long term, people won't be able to build on Tether. Like, there is huge political risk there. Tether has real-world bank accounts, real-world tangible vaults where their assets can be seized. There's tons of political risks. And if Tether gets too big, those political risks might be very,

• 1:00:07David Hoffman?

  very large. And on top of that, there's no way for other companies to build on top of on Tether. You can use the Tether token to transact, but you can't build on Tether in the same way that you can build on MakerDAO. And so, I can totally see companies, like traditional finance companies like JP Morgan, or any company or anything with an asset, you can build on top of MakerDAO, get your assets into the MakerDAO protocol, use the DSR. The thing is, like, MakerDAO is a credibly neutral platform. And if that allows for companies to build on top of MakerDAO without having some sort of political... Political risk, which I totally think is the whole point of the decentralization of MKR.

• 1:00:52David Hoffman?

  That makes MKR MakerDAO really, really dense. The more companies that build on MakerDAO will make it more scalable. The more assets in MakerDAO, it's just, I hypothesize that the assets in the balance sheets of MakerDAO are, over the long term, far more scalable than the assets inside of Tether. And so I think that's really the ultimate long-term test of the protocol sync is MakerDAO versus Tether.

• 1:01:17Ryan Sean Adams?

  Yeah, absolutely, guys. So you heard it first. A way to verify that, as predicted by David, verify the protocol sync by looking at Tether versus DAI over time or other credibly neutral stablecoins like DAI into the future. You know, another one that might be more near-term on the same theme, which is kind of a prediction is, I think a major crypto bank, a Coinbase or Gemini or something like it, will actually add the DAI savings rate to their platform sometime in the next year or so. You know, like a button where if you're holding DAI in Coinbase, you just click a button and it's deposit your DAI in the DAI savings rate to receive X percent interest, right?

• 1:01:59Ryan Sean Adams?

  Super simple to integrate, but that would be evidence that the Maker Protocol is actually syncing a layer below the crypto banks themselves and, you know, collecting and pooling liquidity from those crypto banks. And all of them could incorporate the DAI savings rates. As you said, some of this is reflexive and it's a self-fulfilling feedback loop. Once a Coinbase incorporates the DAI savings rate and offers better interest rates on your DAI, then all of the other exchanges are going to need to do the same thing. So look for things like that in terms of proving the thesis out. When you see signs like that, it might be evidence that the protocol sync is coming true.

• 1:02:43David Hoffman?

  We're actually doing that at Realty. People that use the Fortmatic Wallet to store their real tokens inside the Realty website, they're going to collect their rent in the website and we're going to offer them a button to submit it into the DSR. And so that's what we're doing. We're not a crypto bank like Coinbase, but we are doing that, which definitely helps to add to the density of MakerDAO. And I also ask you, do you think that if Tether offered interest on your deposits, that companies like Coinbase or Gemini would? Latch into Tether would integrate with Tether's interest rate vehicle. And instead of using the DSR, would use Tether's equivalent. I don't think that, I think that's totally unreasonable. I don't think they would ever do that.

• 1:03:28David Hoffman?

  And that's an example of the protocol sync.

• 1:03:30Ryan Sean Adams?

  Yeah, I agree. I think they're a lot less likely to do that. Why? Because Tether is effectively a product from a competitor. It is not credibly neutral. You know, the rules for it can be changed by the Bitfinex folks, whoever kind of controls the keys behind Tether and has essentially the bank account backing Tether. Lots can change with it. So it's not going to be a stablecoin that, you know, the Coinbase is the world, other crypto exchanges are going to, are going to want to build on top of. And I even think that the fact that Tether and other stablecoins are issued on Ethereum

• 1:04:08Ryan Sean Adams?

  speaks to the interest in credible, the credible neutrality of an asset system itself. So why didn't Bitfinex create their own private blockchain and issue Tether on top of that? Why didn't Coinbase create its own blockchain and issue USDC on top of that? Well, they issued on Ethereum because it is the most credibly neutral asset registration system that exists. Even JP Morgan, they have a, you know, JP Morgan coin on a private instance of Ethereum. You know, evidence of the protocol sync would be basically JP Morgan starts to settle their JP Morgan stablecoin on Ethereum.

• 1:04:51Ryan Sean Adams?

  So their, their private instance of a blockchain, their private Ethereum network starts to settle on the public network. I think that would be further evidence of the protocol sync. So you can see it in all sorts of ways, these assets and these protocols starting to sync to the bottom, if you know where to look.

• 1:05:07David Hoffman?

  Alright, so moving into a new subject, we need to find a way to measure density of these different DeFi protocols, right? So with proof of work, measuring the settlement assurances, measuring the economic weight of every single block is really easy. You can just measure the rewards of every single block and that the rewards paid by a block are your settlement assurances. DeFi is different, applications are different. There isn't a proof of work or proof of stake or any consensus mechanism that allows us to measure the settlement assurances of every DeFi protocol. And as we know, in DeFi, each different DeFi application will offer you different settlement assurances because sometimes they get hacked.

• 1:05:52David Hoffman?

  And so we need a way to measure the settlement assurances of every single application. And so this is what I proposed in my talk, and then we'll talk about it here, is the way that we measure the settlement assurances of every DeFi application is this unit called time value or time value locked. And so I think we are all familiar with going to DeFi Pulse and looking at the ETH locked in, you know, DeFi or total value locked in Maker, total value locked in Compound. Now, the time value locked measurement is basically the area under the curve of the total value locked across all of time. It's the how much, really it's distilled in how much total value has been locked for

• 1:06:37David Hoffman?

  how long inside of an application. And so this offers you some levels of assurances of, you know, well, this amount of money has not been hacked or not been drained, or people have been trusting this application for this amount of time with this amount of value. And so it's a way to poke at and proxy measure the settlement assurances of every single DeFi protocol. And so it's really just a, it's a trust equation and the whole crypto system world is based in trust. And so if there is an application that has a lot of value that has been deposited in it over a long amount of time, you can have reasonably strong settlement assurances about that DeFi application.

• 1:07:22David Hoffman?

  You know, Ryan, what would have had a terrible time value locked score was the Lend F Me application, which had- Which had three days worth of a few million dollars worth of assets deposited into it. If you were using the time value locked measurement of that application, you would have known that that application is not at all very dense and doesn't offer settlement assurances at all.

• 1:07:46Ryan Sean Adams?

  Yeah, lend F me appropriately named, I think.

• 1:07:51Ryan Sean Adams?

  Oh, yeah, I like how you put that because I think it is that time value locked is a measure of trust. And the two variables that are most important is the amount of value locked. That's a measure of how much you trust whatever you're putting your money into, your value into, and the time value, how long that protocol has been in existence. I think those are the exact right variables. And even to zoom out a second, I mean, that's even true for something like Bitcoin. I was reading the Paul Tudor Jones letter, who's a hedge fund investor. We talked about a little bit in the opening, who recently bought Bitcoin futures.

• 1:08:31Ryan Sean Adams?

  And one of his main points in the letter is why he did this was, look, it's 10 years old now, right? Like, it's time. The liquidity is there. It's time. So the value of Bitcoin was large enough for him to take an interest in it. And the time it's been around, it's been around a decade now, just crossed the threshold for someone like that to start considering investing upwards of 1% of his wealth inside of it. Like, there's no replacement for those things. Time and the value locked inside of it are absolutely the measures of progress for settlement assurances and for trust in this entire space.

• 1:09:13David Hoffman?

  Yeah, I actually really like that. I haven't applied that to the idea of time value into Bitcoin yet, but I really like that concept. Because when people like Paul Tudor Jones or legacy finance people with legacy money, when they look at Bitcoin, they don't look at the price to guide their decisions. They look at the time value, right? They look at how long, how much has this thing been worth for how long? Because That's really the assurances that you have that Bitcoin isn't going to go to zero. I remember back in 2017, everyone would say like, you know, crypto is risky, it can go to zero. We stopped saying that. We stopped saying that altogether. No one says that anymore. And that's probably because of the time value of these systems.

• 1:09:57David Hoffman?

  It's turning into really, a really high number. There's really strong assurances that these things aren't going to go to zero because of their time value.

• 1:10:06Ryan Sean Adams?

  Dave, there's one other thing that you mentioned in your talk, which I think is important. And that's this idea that settlement insurances, Protocol Sync, it promotes long-term thinking. What did you mean by that?

• 1:10:15David Hoffman?

  Yeah, yeah, this is really important, really important. And I'm going to take a step back and we're going to go and compare the traditional United States legal system, the United States government as a metaphor here. And so for those that don't know, there's three wings of the United States government. There's the executive branch, which is the president. Then there's the legislative branch, which is Congress. And then there's the Supreme Court, which is the judicial branch. And really, these things correlate to different times to final settlement. The executive branch, the president, has this executive order that he can just write and sign. And then whatever he signed is immediately law. It's law from the moment he signed it. But that doesn't have very strong settlement assurances.

• 1:10:59David Hoffman?

  In the sense that it then goes to Congress for the next two weeks. And Congress is like, hmm, let's think about this and vote on it. So like they ponder the evidence, they debate, and then they vote. And then that vote is then the next instantiation of is that thing law or not? So either that vote will uphold it as law or it will remove it as law. And then if, then it goes to the Supreme Court. If there is ever a problem with people vote, the vote of Congress, the Supreme Court will again ponder that law, think about that law. And then they will rule with absolute finality. This is true. This is, this is what it is. Now,

• 1:11:41David Hoffman?

  No one is going to make a business off of somebody's executive order. If something is law for one day, no one's going to start clamoring and start spinning up a business because they're putting a lot of capital at risk while they're spinning up that business when the executive order might be overturned in two weeks from Congress and then it also might be overturned in two years from the Supreme Court. And so the idea of final settlement of laws, but then also of value, really promotes long-term thinking. And this is something that with the human civilization at large, we haven't able to access this level of settlement assurances with our value. And value is really the substrate that businesses and people's personal finances run on.

• 1:12:26David Hoffman?

  And so what makes me really optimistic about the future of humans at large is that we are now able to tap into these crypto protocols like Bitcoin and Ethereum and receive these settlement assurances that they are going to operate and these DeFi protocols are going to operate for a very long time, longer than we could have ever had assurances before this. And this long-term thinking is healthy. Long-term thinking allows us to plan out for our future and design our future in the way that we want it to. And so what I'm really optimistic for is that these settlement assurances allows the

• 1:13:06David Hoffman?

  human species to just move faster in a healthier way because of these settlement assurances, because it promotes long-term thinking.

• 1:13:18Ryan Sean Adams?

  Yeah, that's a really great way to kind of close this out. And I think you're right. I mean, this is why we're so optimistic on crypto. It's not clear to me, honestly, that a lot of the technology that's being developed today is good for the future of humanity. I have worries about artificial intelligence and the centralization that that can bring with the public governments and large tech companies. I have worries about biology and genetic engineering and what that could do to our species. But the beautiful thing about crypto, and the reason why I think both of us are here, David, is that these tools and these systems

• 1:13:58Ryan Sean Adams?

  Inherently preserve sovereignty. They give us all another option, a way to opt out. They're empowering technologies fundamentally by their nature. And we need some of that. It honestly gives me hope for the future to think about our species being empowered with this sort of technology and to engage in this kind of long-term thinking that a decentralized digital property rights system, that's what crypto is, that that gives us really cool, really exciting, I think, really empowering.

• 1:14:31David Hoffman?

  And this is why I really think that the bankless movement is something similar to a nation state. I've always assumed Ethereum and Bitcoin as these cyber nation states because they really allow you to opt out of your traditional subjective rule of law system and then move your value on to these things, these protocols that allow you to have these stronger settlement assurances. Like the DeFi applications and the Ethereum protocol is its own nation state that allows you to opt into it and use it as financial and business infrastructure.

• 1:15:12David Hoffman?

  And so when Ryan and I talk about going bankless and joining the bankless movement, we're really asking you to put on your patriot hat and wear the bankless badge and be a patriot for the DeFi movement. That's what really banklessness means to me.

• 1:15:28Ryan Sean Adams?

  Absolutely. It's a lining around a set of ideologies and a purpose for where we want to bring the future of humanity. All right, so we've talked about a lot. We've talked about this move from legal settlement, settlement assurances by the legal system, the nation state, to protocol settlement and protocol finality. All the ways that that is a game changer and the stronger assurances that we get as a result. We've also talked about the great protocol sync. So this is the tendency for more credibly neutral, more decentralized protocols to sort of sync to the bottom, maybe below the base layer legal system. Maybe below even the nation state in some respects.

• 1:16:10Ryan Sean Adams?

  We can observe that in what's going on with DeFi protocols today as crypto banks and other applications, interfaces are built on top of that. We can observe that with the financialization of assets like Bitcoin, assets like Ether. They're even being financialized in the traditional world of Wall Street with futures. We talked about that in the opening. Lot going on today. This has been super exciting. Let's talk for a minute about actions. So one thing that we want you to do is take a look at David's talk from Ethereal. It's probably a, you know, 15 to 18 minute condensed version of everything we talked about today. It's got some excellent graphics and images. We will include that in the, in the show notes. Check that out as an action item.

• 1:16:55Ryan Sean Adams?

  The other thing I think you can do is watch for evidence of the protocol sync. So it's a thesis, you know, we're putting this forward and like any good thesis or any good hypothesis, hypothesis, you can sort of see evidence that either proves it or disproves it. We think there is some evidence that is proving it now, but watch for evidence either way in either direction. David, last thing, how are we doing on, on the five star reviews?

• 1:17:20David Hoffman?

  We're getting there, but we still need more help. Those five star reviews really allows us to push the bankless movement forward. And so if you have not yet, please go to wherever you listen to this podcast and give us those five star reviews. Write us a review so that we can get the bankless gospel into more people's ears. It's really a very easy way to, to help support us and me and Ryan and doing what we do with, with preaching about how beneficial that these systems can be for the world at large.

• 1:17:52Ryan Sean Adams?

  You heard it here, folks. Play your role as a bankless patriot and give us those five star reviews. Let's talk about risks and disclaimers. Of course, ETH is risky, crypto is risky. The tools and technologies that we talked about today are risky, but we are headed west. This is the great journey. This is the frontier. We're going bankless. It isn't for everyone, but we are glad that you are with us. This has been episode 12.

• 1:18:19David Hoffman?

  Fantastic.

• 1:18:21Ryan Sean Adams?

  Good dude. That's great.

• 1:18:30David Hoffman?

  Ability to control violence and have a monolith.

• 1:18:34Ryan Sean Adams?

  Monopoly?

• 1:18:35David Hoffman?

  Monolith, uh, monopolistic.

• 1:18:38Ryan Sean Adams?

  Monolithic? Monopoly?

• 1:18:41David Hoffman?

  And having the monolith, Jesus.

• 1:18:46David Hoffman?

  Monolith, mono.

• 1:18:48Ryan Sean Adams?

  It's a great time.

• 1:18:49David Hoffman?

  Monolith, monolith.

• 1:18:53David Hoffman?

  Mon, mon, yeah, the, the monolithic.