ETH Is NOT Ultrasound Money with Jon Charbonneau

In today's episode, Jon unpacks his relatively controversially titled new piece, "ETH Is Not Ultrasound Money: Part 1" Is ETH doomed? Was Ultrasound money a myth? Tune in to hear Jon's arguments. ------ MetaMask Learn https://bankless.cc/metamaskshow ------ JOIN BANKLESS PREMIUM: https://newsletter.banklesshq.com/subscribe ------ BANKLESS SPONSOR TOOLS: KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum EARNIFI | CLAIM YOUR UNCLAIMED AIRDROPS https://bankless.cc/earnifi ------ Timestamps: 0:00 Intro 5:06 Jon's Argument 11:30 Triple Point Asset Thesis 17:52 ETH 18:53 The Disagreement 22:10 Semantics 26:40 Profit 30:00 PoW vs. PoS 33:15 Does Issuance Matter? & L1s & L2s 37:57 Blockchain Sustainability 42:00 Deflation vs. Inflation Value 47:50 How is Jon's Argument Bullish? 51:35 Alt L1s Issuance 59:20 Jon's Model Spreadsheet 1:17:53 Closing & Disclaimers ------ Resources: Jon Charbonneau https://twitter.com/jon_charb Jon's Essay https://joncharbonneau.substack.com/p/eth-is-not-ultrasound-money-part Jon's Model Spreadsheet https://docs.google.com/spreadsheets/d/1UlxKC98STwN-AoonytC-qOscZ_99fAMpMvB6EfGGe9E/edit#gid=0 ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

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

• 0:31Ryan Sean Adams?

  For you today, ETH is not ultrasound money. I can't believe I said that. I almost choked on the words. David, why is that the subject of today's episode? What in the world are we talking about? Isn't this sacrilege?

• 0:44David Hoffman?

  Yeah, so we have a new framework on the scene for understanding ETH, the asset. And this is coming from John Charbonneau, who is proposing this alternative perspective on understanding Ether, the asset. And he is starting to push back against some of the frameworks that you and I have proposed, Ryan, things like blockchain profitability, inflation versus deflation, ETH as ultrasound money. So there's a new framework on the scene that John is bringing to the table. And so John perhaps has a thing to teach us about Ether, the asset, our beloved asset, Ryan. And so we're going to investigate this new framework, this new model for understanding Ether as put forth by John, and that is the topic of today's episode.

• 1:27Ryan Sean Adams?

  I'm not sure I'm ready, David.

• 1:29David Hoffman?

  Yeah.

• 1:29Ryan Sean Adams?

  I'll have to really open my mind on this one. But yeah, really looking forward to someone who's been down the rabbit hole and gone pretty deep pretty quickly. I remember the last time we had John on, he taught us a thing or two about Ethereum's roadmap, talked about the different execution, the different layers of Ethereum, data layer, execution layer, consensus layer, and kind of the roadmap for each. So he's definitely gone deep down the rabbit hole with Ethereum, and he's someone whose opinion I've come to respect about this. So I'm excited to hear what he has to say. So stay tuned for that, Bankless Nation. Why ETH is not ultrasound money. Ah, I said it again. It pains me, but we're going to get right into that topic right after we tell you about

• 2:12Ryan Sean Adams?

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• 5:07David Hoffman?

  Bankless Nation, I want to introduce you to John Charbonneau, formerly Research at Delphi Digital, but now a recent co-founder of DBA, Doing Business as a New York-based crypto investment firm. John here, I think, holds the record for the fastest person perhaps down the crypto rabbit hole, going from the entrance of the frontier of crypto to the, going from the entrance of the rabbit hole to the frontier of crypto, faster than I've ever seen anyone go before. And now John is at the point of making new definitions and new contributions to the frontier of crypto knowledge. And he thinks that he's got something to teach us about our beloved ETH. And so, John, you recently put out an article titled Ether is Not Ultrasound Money, Part One,

• 5:51David Hoffman?

  subtitled Why You're Wrong About Blockchain Profitability. So first, John, how dare you? Second, what is the high level argument that you're putting forth in this piece? Can you kind of give us a roadmap of your arguments?

• 6:05Speaker 02

  Sure. So as a good level set, I love the starting place that you guys have used for like the triple point asset. I reuse that in here. I definitely agree with that. So the simple idea being like something like ETH is this weird new mix of capital asset, like stocks and bonds, consumable, transformable asset, like commodities, where people analogize either Ethereum or similarly other blockchains and protocols to a company. So I think that is, we probably all agree, I think the company kind of analogy is almost entirely accurate for a lot of stuff like DAOs, which have like a very simple model of, you know, we run this protocol, we take a certain amount of fees, you know, a DCF is like,

• 6:48Speaker 02

  that kind of framework is a very accurate way of effectively.

• 6:52Ryan Sean Adams?

  Discounted cash flow.

• 6:53Speaker 02

  Yes, discounted cash flows of like, that's a pretty sufficient way to measure those things. I would say for something like Ethereum, that is a helpful component of looking at it and understanding it, valuing it. But I think we would all agree that's only part of it. So my disagreement has been over that portion of when you do analogize either Ethereum or something else to a company. The notion of profitability that most people have, I think, is incorrect. Where most people would basically generally say, certainly it's the ultrasound money type argument of if you're looking at the profit of this, you know, decentralized company, you have income either in the form of fees or some people only consider burn

• 7:37Speaker 02

  as effectively the income and then the cost, the expenses to this company or the issuance that it puts out like to its validators as block rewards. So that's the generally understood and then to be sustainable, you know, it's a business, you need to be profitable. So eventually you need to get to a point where, you know, you're not net inflationary. So you're offsetting whatever issuance you have such that, you know, you're a profitable, sustainable business. I just, that's the portion of everything that I disagree with. So on the income side, I think everything is effectively revenue that comes from external to the protocol actors. So any form of fees, whether they are burned or not, and any other forms of M V that occur to validators, I consider all of that revenue like that is all being paid by outside actors who are

• 8:21Speaker 02

  not accruing to the, who, all of that is accruing to token holders and to stakers in one form or another. However, you want to distribute it between stakers and token holders. And then on the cost side, I disagree that the issuance is an explicit cost in like, if you're analogizing it to a company. It's rather different. And I think the simplest example to understand it is let's imagine I have a chain and I own all of the tokens. I have all of them staked. Over the course of the year, people are paying transaction fees. So for simplicity, I'll say that in my chain, I charge transaction fees in U S D C. So that's what you use as the gas token or

• 9:04Speaker 02

  anything else that you want to pay with. So over the course of the year, I taken a million dollars in U S D C as revenue from transaction fees. Because I'm the only one who's taking all that goes to me. Because I am the only person who's staked and I have a hundred percent of the token staked. Whether the issuance is zero percent or one percent or 10% of my token, it doesn't actually make any difference to me. It's not. Versus if I played out that same year, made a million dollars and I issued a bunch of tokens. The only difference is from the beginning of the year to the end of the year is that there are more tokens in the second scenario that exist, but the market cap of the asset should effectively be the same. It's effectively acted as a stock split. You diluted the shares, but I still own the shares. So the price per token should go down, but the market cap should be unchanged.

• 9:49Speaker 02

  So effectively my profitability as that operator at the end of the year is very simple. As I made a million dollars in USDC. And then what did it cost me on the physical cost side to like literally run the boxes? So what did I have to pay in hardware costs, compute costs, et cetera, to like actually run that network? That's the profitability that I'm going to make. And in this case, I am the network because I own all the tokens and I have all of them staked. So that's an important distinction. And it is, I would note, very different also than the issuance in something like proof of work. Or a bit similarly for like a DeFi protocol that pays out, say, token incentives to LPs. In the corporate context, what that looks much more like is effectively stock-based compensation where you are paying out to employees.

• 10:32Speaker 02

  And those additional shares that you're giving out are not going to existing shareholders. So you are forcibly diluting all of them and you are effectively just paying that out as a non-cash expense, like via GAAP accounting. So that is very different and that was a very big change when Ethereum moved to proof of stake that I think people actually like underappreciate. Which is an interesting part of this is while I have probably upset a lot of ETH people with the title. The core of my argument is actually something like ETH is significantly more profitable than I think most people have been saying it is by that traditional framework. Because I consider all of it revenue and I don't consider that issuance to be like an explicit cost for something that is analogized to a company in this scenario.

• 11:17Ryan Sean Adams?

  See ETH bulls, John tricked you right there. You thought you were getting, you know, somebody who is anti ETH profit value accrual and really he's actually more bullish than we are and then we should be. John, you said a lot there and I think that was like, you encapsulated kind of the core of the post and the core of the argument, but I think. Probably some people listening to this and watching this might be like, whoa, like they feel like they just, we just waited all the way down into the deep end of the pool, 400 level content. I want to like go through this a bit more methodically and kind of break this down. So even for people that maybe start at the beginning, okay? The triple point asset thesis, this is an idea that I think we played some hand in helping to popularize. Actually,

• 12:03Ryan Sean Adams?

  We created the triple point asset. Hold on. David's taking full credit for it. Actually, I stole this from, and we stole this collectively from Chris Berninski, who stole it from Robert Greer, and now it's here. And so Robert Greer put together this idea of there being three different types of assets, super classes, he called them. And you talked about at the very beginning, a store of value asset. So that would be something like a money has some sort of monetary premium, like a precious metal or a currency or fine art. How do you quantify these things? It doesn't have a cash flow. You can't use art for anything. But some, for some reason, humans value it. And so it's a store of value. People store their wealth in it. A classic car, for example, might be for some people.

• 12:49Ryan Sean Adams?

  And then there's this consumable, transformable asset. Man, we haven't talked about this in a while, have we, David?

• 12:55Ryan Sean Adams?

  Which is like a consumption type of good. It's more like a commodity. You put it in to a system and something else pops out like wheat, for example, to make bread. That would be a consumable, transformable asset. Energy is like the best example of a consumable asset. A barrel of oil is a consumable asset. And then we have capital assets, which are things like equities and bonds and income. These things that produce cash flow for us. These are the three types of assets, capital, consumable assets and store of value assets. Now, we have contended, the idea of the triple point asset thesis is that ether is all three of these at once. And there was a time where that was actually.

• 13:38Ryan Sean Adams?

  Not the consensus view, for sure. There are a lot of people who didn't think it could be any of these three assets, actually. Didn't understand. Maybe a consumable transformable was something that people said. Ether is gas, for example, but no idea, no notion of it being a store of value, no notion of it being a capital asset, okay? We said it's all three at once. Now, you said, John, the place where you agree with us is those two categories, a store of value asset. So you do think ether can hold some sort of a monetary premium in a way that jewels, or precious metals do, or gold does. Is that correct?

• 14:15Speaker 02

  Yep. Yeah.

• 14:17Ryan Sean Adams?

  Okay. So we're in agreement there. There's this magical thing called monetary premium. And do you also believe that that's like, the way that this is created is kind of through social consensus, in a way? Like, it's this squishy, human consensus layer that decides what the money actually is? And generally, kind of the most liquid sorts of monies can tend to win in this game, but it's hard to pin down. It's just kind of this magic, metic value, as Justin Drake has called it. Is that, is that your idea, too?

• 14:46Speaker 02

  Yeah, it's definitely, I mean, a social consensus of what we decide to accept at this thing. But I would say that is obviously very heavily influenced by, people tend to pick the thing that is fundamentally has the good qualities to be that store of value. So while it is social consensus, that social consensus is a result of building this very useful thing that, you know, fulfills all the needs that we want out of it.

• 15:09Ryan Sean Adams?

  You wouldn't want to store your value in strawberries, because they rot and wither away, and, you know, you can't lock them in a vault, and, you know, there'll be mush the next time you open the vault.

• 15:18David Hoffman?

  Even when your favorite influencer's saying strawberries are ultrasound money, it doesn't really matter if the strawberries aren't truly ultrasound.

• 15:24Ryan Sean Adams?

  True. Is there an influencer saying strawberries are ultrasound money?

• 15:29David Hoffman?

  Not any of that, no.

• 15:31Ryan Sean Adams?

  Then we got consumable, transformable assets, of which we think ether kind of occupies that. And I think there's actually a deeper view of this, where, actually, I think Block Space, the theory of Block Space is the true consumable, transformable asset, and ether is just money to pay for that block. Space, that's another layer of distinction that that I would paint. So Ether itself is not the barrel of oil. The block space is the barrel of oil, but Ether is the unit of account for the barrel of oil. That makes sense. So my analogy here is it's, I know we as a shortcut say it's a consumable transformable asset, but really it's a bit more like the petrodollar, which became the unit of account for barrels of oil and thereby energy.

• 16:16Ryan Sean Adams?

  Because if you want to buy oil, it's going to be denominated in dollars, right? That's, you know, 1970s petrodollar came into kind of existence. I think it's the same here, but that's almost a

• 16:26David Hoffman?

  Well, hang on, if we're gonna get into the nuances of this, though, a petrodollar, in theory, you can kick out the dollar and replace it with a euro or the yen. That is a totally possible thing to do. With Ethereum, you cannot kick out Ether to buy block space. It is enshrined as the only currency that can buy block space. And so you can make a stronger transitive property statement, I think, because block space can only be bought by Ether. The properties of Ethereum block space are truly properties of Ether as a money. So I want to make that distinction since

• 16:59Ryan Sean Adams?

  I think that's, I think I totally accept that distinction that it's got a stronger pull on the petro, on the ETH block space as kind of the unit of account. And yet it's a different thing. I think sometimes think that Ether and Ethereum block space are sort of the same assets and they're not. Ether is just the money that you use to purchase Ethereum block space is the distinction I'd make. Are you with us so far on that, John?

• 17:23Speaker 02

  Yeah, I like that distinction because the difference that you're kind of highlighting there is like, kind of effectively when you use oil, I mean, you're burning it, you're getting an output out of it. Whereas with Ethereum, you are burning it potentially in some sense, but that value is transferring to somewhere else. You're not actually just, you know, it's not just disappearing away. Even if you do literally burn it, that value does effectively transfer to someone else via deflation.

• 17:48Ryan Sean Adams?

  Okay.

• 17:49David Hoffman?

  So the entire, so John, to keep on moving in this conversation, consumable, transformable, we covered that store value, we've covered that. These are not areas of contention, according to your new framework. It is explicitly the capital asset nature of Ether that you think we could understand Ether better if we understood it in a different framework. And so it's really all of the area of contention is contained inside of this vertical, correct?

• 18:17Speaker 02

  Yeah. And I think it's a particularly important one, because this is also the area that's applicable to almost everything within crypto. Whereas the capital asset part of Ethereum is effectively the baseline of Ethereum value, even if it had no monetary premium or value as a consumable asset, etc. You would still value it fundamentally based on its, you know, cash flows the same as you would any other project. Ethereum just goes above and beyond that because of those additional factors, which are arguably the majority of its value. But the corporate capital asset type part is equally applicable, whether you're understanding, you know, an app chain or roll up, anything like that.

• 18:54Ryan Sean Adams?

  Okay, so now let's get into this part that we disagree, that we might disagree. I'm not even sure that we do, because I just want to make sure I fully understand the argument here. So there's this idea of maybe what could loosely be called block space profitability. And Bankless listeners will have heard David and myself say, as a mental model, Apple produces iPhones, blockchains produce blocks. That's the thing that they sell. So blockchains are in the business of producing and creating a product. That product is blocks that the market

• 19:32Ryan Sean Adams?

  will want to buy. And the more demanded those blocks are, as denominated by, because they're going to be scarce, blockchains cannot produce infinite amounts of blocks. They have to be scarce in order to remain decentralized, or they're just a database. So the value, like you can kind of judge, almost like the revenue, I would say, and the quality of those blocks based on market demand. And how many iPhones are being sold and the value of which they're sold. So you can go to like something like crypto fees.com, which I'm sure you've been here and you can kind of look over the last seven days. Ethereum sold $6.6 million worth of blocks.

• 20:17Ryan Sean Adams?

  So that is a marker of its health. It has a product and it's selling that product. Are we like, do you disagree so far? Or what is the point of disagreement on this piece?

• 20:29Speaker 02

  Yeah, I generally agree with all of that on the kind of income side.

• 20:34Ryan Sean Adams?

  Okay, so income side, where your disagreement is more on the profitability side of things. So tell us about that.

• 20:41Speaker 02

  Yeah, so well, I'll say on what you said, I agree with. There I've seen two different arguments on what is considered income. Some people consider all fees effectively income. I've like seen that very popularly. Other people, as you can see in this here, like that picture that Justin had from his devcom presentation is profit equals burn minus issuance here. So that's only a subset of the fees. And I think if I recall, that's what was similarly showed in like effectively the token terminal table of like the financial statements. So there are two popular arguments I would say on that. I disagree with both of them. But yes, I would say that everything is is income to it,

• 21:24Speaker 02

  whether it's base fees, priority fees, or any MEV that occurs to validators.

• 21:29Ryan Sean Adams?

  So you would say all of this right here in crypto fees plus MEV? I don't know if crypto fees actually tracks MEV.

• 21:37Speaker 02

  So some of it would be because MEV is at least partially captured by priority fees. Like one of the simplest ways to, and this is how a lot of MEV is expressed is I expressed my bid via, I put a really high priority fee on my transaction. So that would be captured in the fees, but you can express it in other ways. Like if you put a direct coinbase transfer transaction in there where it's not expressed as a fee, but I added a transaction which just sent you the money. So stuff like that might have been captured or out of band payments, but a lot of it's captured in priority fees.

• 22:11David Hoffman?

  So this really sounds like a semantics conversation as to what is revenue? What is profitability more than it is a statement?

• 22:21Ryan Sean Adams?

  Not revenue, right? Because we agree on revenue, it's more like cost.

• 22:26Ryan Sean Adams?

  Like in order to get profitability, are we disagreeing about cost on the cost side of the equation? Revenue minus cost and what is the cost?

• 22:33Speaker 02

  Well, I'll ask you guys which part you do agree with. What would you consider the revenue? Would you consider it only the burn as showed in the picture here? Or would you consider all fees? So effectively including priority fees and like other MEV payments that go to validators. Cause that's what I believe is I believe all of this.

• 22:50David Hoffman?

  My economic analysis is aligned with what you said, Justin Drake's is, which is the soundness of the asset is a function of how much of that asset is issued versus how much of that asset is burnt. And so like most blockchains are only issuance and no burn. Ether has some amount of issuance, some amount of burn, and lately the burn has been higher than the issuance. And it's really just the delta between these two things that illustrates the soundness of the money in question. All other things are related to blockchain sustainability, but not necessarily soundness of the asset. That's, that's how I would define these things. That's how I think about it.

• 23:31Speaker 02

  Yeah. To be clear, that's the important point is all of this matters as far as like soundness for money. The issuance matters a lot, like which is why in reality, yeah, absolutely issuance can negatively impact the value of Ethereum over the long term because it hurts the monetary aspect of it. What I'm arguing is if you value strictly the corporate, you know, analogy part of it, because a lot of protocols are just companies where there is no monetary soundness component. Like there's no monetary premium to like Lido, like their token. It's, it's just an asset to capture the revenue for the most part. So.

• 24:06Ryan Sean Adams?

  It's just a capital asset to use or neglect earlier. It's not a store of value so much. Doesn't have monetary premium.

• 24:12Speaker 02

  Exactly. And for anything that's looked at as a company, which is effectively like what this part is showing here is the baseline for the income side. I would consider all of it income, not, not just the burn as like is shown here. I would consider all fees, all other MEV that accrues to validators in any form.

• 24:28David Hoffman?

  Right, okay, and I think that is because of there's two different perspectives here. There is like, what about the economics of Ether is relevant to me as an Ether holder who uses my Ether in DeFi? Versus, what is the economics of Ether related to me as an Ether staker? And so as an Ether staker, you get extra things and the extra things about the Ethereum economy are relevant to you like MEV payments, like tip payments and the burn. But the burn is only the thing that's relevant for people who aren't staking. So if you have your Ether as collateral and compound, you do care about how much Ether is burned because that is actual value flows to you. You don't really care about like how much is paid to stakers or how much MEV payments there are because you're not getting those.

• 25:13David Hoffman?

  But those numbers are relevant to you as an Ethereum staker because you do get the MEV payments and the tip payments as well as the base fee. And so like one conversation is like, how sound is the asset? And I'll say that that is the burn minus the issuance, is that function? And then there's like, how sound is the protocol? Which is what are the net payments paid towards validators? Which is the burn plus the tips plus MEV. I think we're aligned on that, right, John?

• 25:44Speaker 02

  Yeah, that's the important point is like, these matter a lot on your individual basis of, you know, if I'm a holder versus if I am a staker, how much money will I make over the course of the year? Like, it absolutely has a gigantic impact on that. But the key point is whether that revenue goes to validators via a priority fee or it's burned and it goes to all holders. That makes a difference for the monetary aspect of it. It doesn't change the fact that Ether as an asset as a whole is accruing all of that. It's not like there's a voting share class of you can only stake this ETH and this ETH like isn't unstaked.

• 26:22Speaker 02

  Like, if there is a lot of payment that is going to stakers, people should rationally pay more for ETH and stake more of it. It's not like the value of unstaked ETH is different from the value of staked ETH. So if there's a lot of payment going to validators all of a sudden because there's a ton of priority fees, people should be willing to pay more for that asset, even if they're not going to me as an unstaked holder. It's the same asset price.

• 26:44Ryan Sean Adams?

  I think I'm still confused by this different definition of profit. Or what is your definition of profit? So here we are on the screen, income minus expenses. Let's, let's ignore burn minus issuance. That's more of a monetary policy thing. Just ignore that for a second. Block space sales minus security budget. We've already kind of agreed that, yeah, all block space sales, whether it's MEV or any, any form of kind of fee is income. All right, so I'm with you there. Minus security budget equals profit. What, what's wrong with that? Isn't, isn't that correct?

• 27:17Speaker 02

  So, exactly. So the, the security budget is the part that I disagree with there again as well. I don't think that issuance is a cost explicitly in this context. Because again, ETH, I mean, or any similarly protocol is a function of the entire token's value capture. So it matters a lot for individual stakers versus individual holders. But you need to be able to understand what is the value to the entire network. And in this scenario, any issuance that is directly going down from unstaked holders is equivalently, equivalently going up to stakers.

• 27:53Ryan Sean Adams?

  Okay, so let me make sure.

• 27:54Speaker 02

  So it's, it's a, it's a transfer of value. It's not just going out the window, like as if you are paying it to miners.

• 28:00Ryan Sean Adams?

  But let's, so let's be clear on what security budget is. Security budget is, I guess, total fees paid, right?

• 28:11Speaker 02

  Security budget here is, is issuance. Yeah, like block rewards.

• 28:13Ryan Sean Adams?

  It's just issuance.

• 28:15Speaker 02

  Yeah, that's, that's what it is here is like, that's why you see minus security budget in the line below is like minus.

• 28:20Ryan Sean Adams?

  Okay, so security budget here is just issuance. And you're saying issuance isn't actually a cost to the network. So are you saying profitability is just block space sales minus the cost of like running a validator, let's say, and you know, your internet connection, your hardware, whatever, you know, if it's Ethereum, maybe it's just a laptop. If it's your Solana, maybe it's, you've got some hardcore machines in a data center somewhere, that would be the cost to you. Is that correct?

• 28:48Speaker 02

  That is, yes, that is the more accurate measure of it. If you are looking at the profitability of effectively an overall protocol or network.

• 28:57David Hoffman?

  And you're viewing this through the lens of a capital asset primarily, right? So like you're not viewing this through the lens of a store value asset. Then you might be like, well, if this is a money, then dilution matters. Right. And the amount that you're inflating, the underlying asset above zero actually matters a lot. But if you ignore that side of the triple point asset completely, and you just focus on the capital asset. What you're saying is we double count things. If we say profitability equals block space sales minus issuance. That's double counting in your book. My.

• 29:36Speaker 02

  It's not necessarily double counting. It's, I think that the issuance is treated as a cost. The issuance is the part that's treated as the cost here. And if it's treated as a cost, that's effectively saying it's leaving the company in this scenario. But it's not actually leaving the company. It's just being transferred from one shareholder to another shareholder.

• 29:56David Hoffman?

  I see.

• 29:56Speaker 02

  And all shareholders have equal rights to stake and receive that thing if they want.

• 30:00David Hoffman?

  I think this is really a re-articulation and correct me if I'm wrong, John, if I'm understanding this. But this is the main difference that is being brought to the table here is the difference between proof of work and proof of stake. And I think what perhaps you're saying is that proof of work issuance is a cost. Because issuance turns into electrical consumption and overhead for these miners. And so it is a cost because when you issue in proof of work, that goes into the electric electricity budget that miners have to pay for. And so that becomes a cost because miners have to sell. And I think you, what you're saying is this does not count in proof of stake. Because when you issue ether, there is no sell pressure, there's no net sell pressure.

• 30:41David Hoffman?

  What you're saying is that it's not a cost because we're transferring wealth from non-stakers to stakers. And there's no actual net sell pressure from the protocol based off of that transfer of value, correct?

• 30:55Speaker 02

  So I disagree with the sell pressure part. There absolutely can be sell pressure from this. But whether or not there's sell pressure is, that's a tangential issue to whether the value is leaking.

• 31:05Ryan Sean Adams?

  Like, like sell pressure could be like in the form of you receive the staking income and you have to pay your taxes.

• 31:10Speaker 02

  Exactly.

• 31:10Ryan Sean Adams?

  Government taxes, right? And so that's natural sell pressure.

• 31:13Speaker 02

  Exactly. So there is still sell pressure in that form. And like, that is something that I would expect if you jacked up issuance incredibly high and which is part of why a deflationary asset is likely more tax efficient. As compared to a highly inflationary one where you're issuing out a lot of rewards. It's similar to doing a buyback as opposed to a dividend where a buyback will increase the price over time. So you'll end up paying higher, some capital gains when you eventually sell that asset. But you're not paying money, you're not paying taxes on the dividend as income as it comes in. So deflation is more tax efficient, most likely to pay, I mean, not tax advice. Unclear how staking income is traded, you know, based on tax laws, et cetera. But if you operate by that framework of assuming it is comparable to a dividend.

• 31:58Speaker 02

  But yeah, but yeah, the point is that proof of work is very different in my mind. Because of effectively where that is going, like it is effectively leaving the system of all of the shareholders where it's much more like stock-based compensation that I am paying out my employees because I don't have the money to pay all the miners in dollars. So I just print new Bitcoin and I give it to them. I don't have enough money to pay my employees because I'm a startup. So I just print a bunch of equity and I pay them in that. So it's treated as a non-cash expense because like that, that is effectively what it is. It's very different than issuing shares back to existing shareholders. And all shareholders are entitled to receive those if they so choose to. And that is largely what you would expect to see if you see a network where

• 32:44Speaker 02

  the asset has very little utility. It's not a store of value. It's not any of those things. You've seen incredibly high stake rate, unlike Ethereum, which is why this stuff does matter a lot for Ethereum, because Ethereum is not purely a capital asset. But in that purely capital asset part, that is what you expect to see because it's not a use, a very useful asset other than the capital asset part. So if you have 100% stake, then the issuance is going back to you. It's not even diluting you. You're just reducing the price of the asset and keeping the market cap the same. It's not leaving the system.

• 33:12Ryan Sean Adams?

  John, what do we do with this? Okay, so it's crypto fees. What do we do with moneyprinter.info? Are you saying that this doesn't matter? This whole thing in the center, issuance rate? Issuance rate of Bitcoin right now is 1.94%. Issuance rate of Solana is 6.32%. If you quantify the cost of this issuance, the security budget, then Bitcoin is paying $25 million a day in printed Bitcoin in order to secure itself. Solana is paying $2.2 million in printed Sol tokens to secure itself and on down. Ethereum, of course, is kind of negative. You could see that on Ultrasound Money most days and over time. Are you saying

• 33:54Ryan Sean Adams?

  none of this matters when we're looking at this through the lens of a capital asset? And the only reason it starts to matter is if you're actually looking at these things as a store of value? Is this what you're saying?

• 34:08Speaker 02

  Uh, not quite. It's still important there, but it's not the same as a direct cash cost to a company. There, there is a difference. I mean, in the same way that a dividend versus buyback, you're still returning value to shareholders, but they mechanically do make a difference. For example, for the tax efficiency point that I just made of, it does make a difference how you reward them. So it does still matter, but that is very different than assessing what are the cash flows in and out of the system. And the point here is that it's not leaving the system. It's not being leaked out to random people in like a proof of stake chain, whereas mining it is. And that's because Bitcoin is not a capital asset in any way. So people are fine with that because they're not holding it. To generate revenue on it. They're fine with being inflated a little bit because they're

• 34:53Speaker 02

  holding it as a store value. And the inflation does matter as a store value a lot as well.

• 34:57Ryan Sean Adams?

  But aren't all of these, this is part of kind of the like, maybe part of the bankless thesis, right? Which is like, aren't all of these layer ones, we would argue, trying to, if you're a layer one, you're kind of in the business of competing for base money, you're competing for monetary premium. That's kind of how you win. Bitcoin certainly is in that race. Ethereum is certainly in that race. If you're a layer one, you kind of are in that game. And I wonder if we're making too much of the mistake of comparing these to companies to begin with. Like, part of our ideas, like, they're a little bit like companies, but also they're a lot like nation states, aren't they? Now, you know, what does, what does a government that's in trouble do if they want to fund their military for a war, their security defenses for a war,

• 35:39Ryan Sean Adams?

  and they don't have the actual money? What do they do? They print more money, and then they pay the military that way. And that dilutes, that inflates the value of their currency, at least relative to harder assets like commodities, for instance. And so maybe applying the, the, the model of a company just goes a little bit too far. Maybe these layer ones are a bit more like, kind of nation states. And so if you're comparing something like Lido to Ethereum, maybe you're comparing like, a company type of equity type model to a nation state type of model. And when I, when I see a whole bunch of layer ones, and I see sort of, kind of, the block space sales, their revenue, their tax revenue, if you will, and then we see kind

• 36:22Ryan Sean Adams?

  of the expenses, how much they're paying to their military, and they're paying more in their military than they're bringing in taxes, that's not a good thing for the value of the underlying token, if you're a layer one, if you're in that game. If you're not a layer one, if you're a layer two, selling value added, a seller of block space, maybe you're not in that game so much. Maybe you're operating a bit more like a company, maybe. If you're a DAO, if you're a Lido, if you're a Uniswap, if you're a MKR token or something, you're also not really in kind of the nation state game. How does this, you know, square with your ideas? What would you say to this?

• 36:55Speaker 02

  So I don't think there's as clear of a layer one versus layer two distinction is my main point that I would probably disagree with on that. Um, I think there is certain, there certainly are L ones that are very analogous. Something like Solana where the end game envision of something like Solana, if it is to be very successful is basically what Ethereum hopes to be, but we jam it all in one chain. In, in that kind of world, you see Solana acting as a, a money in some form, if that were to work. Um, but for example, if you look at Cosmos app chains, I would definitely disagree that all of them are looking to be monies. You're not going to have a million different monies. I think those are all protocols that are very well aware that they're effectively a business for the most part.

• 37:37Speaker 02

  Um, and they're just segmented on their own chain. Just because you have your own layer one, doesn't mean that you're necessarily competing for money. Um, and similarly for layer twos, a, a lot of them will just look a lot more like a capital asset. Particularly as you have like app specific rollups that you're, you know, it's treated the same way as if you were on a layer one. It just changes the accounting of them.

• 37:58David Hoffman?

  There's a, a quote from your article, John, that I want to pull out here because I think this can, uh, I think this is the, the next question I have for you. The quote goes, uh, a net inflationary network is not inherently unsustainable. If there is sufficient demand for the underlying token based off of various utility and value capture mechanisms, holders may be perfectly fine with a reasonable amount of positive net issuance. So when I, when I read this sentence, um, my, the, the way that I interpreted it is that, um, there are different chains with various levels of delta between their issuance and their burn. Right? Um, I, in fact, I think really only ether Ethereum really has any meaningful burn. Other chains have like EIP one, five, five, nine integrated,

• 38:38David Hoffman?

  but they don't really burn a whole lot. But, and, and so like the idea that Ryan and I have put forth on blockchain profitability is really to emphasize that delta between issuance and burn and trying to, uh, optimize for how much more burn you can have for issuance because of, that's, you know, ultra sound money, blah, blah, blah, blah. What you're saying here is that if there is sufficient demand of a Layer 1's token, based off of what you say, various utility and value capture mechanisms, maybe collateral in DeFi, we see Sol as collateral on Solana DeFi apps, for example, would be an example of this. If there is sufficient stuff like this, holders may be perfectly fine with a reasonable amount of positive net issuance. So even if you don't have the most perfectly optimized delta between how much burn you have versus how much issuance you have,

• 39:23David Hoffman?

  you're saying that a blockchain can be totally sustainable even with a suboptimal delta if there is sufficient reasons that holders may be perfectly fine with to experience a some amount of inflation. Is this the correct interpretation, right?

• 39:38Speaker 02

  Yeah, I mean, the simplest thought experiment is, say Ethereum changed its issuance policy tomorrow such that issuance is effectively calculated on a trailing basis of whatever the burn has been recently. And the issuance is calculated such that it, on average, over time, is set to like 0.1% positive. So for whatever burn there is, we're going to offset that and like a little bit more, we'll start issuing a little bit more. But if over that period, ETH is an incredibly just useful asset, and in part because, one, because it's, you know, it becomes money, slash, two, it's increasingly a profitable asset because Ethereum

• 40:19Speaker 02

  keeps getting more revenue, there's a ton of money going to stakers, and people want to buy ETH because they want to stake and capture that revenue. It's not like everyone's just going to sell their ETH because, oh, we guaranteed that it's now positive 0.1% inflation forever. Because it has sufficient utility and value capture such that you're okay to get diluted a little bit. And like that analogy works similarly across even stuff that is very just basically a corporation. If there is sufficient value for that thing, it's totally fine to do that. Bitcoin is the simplest example of that. It will never be.

• 40:57Speaker 02

  Neutral until, well, until 2140, um, or a little bit earlier, probably in reality, but it will never be flat until then. Um, and the reason people are fine to keep getting inflated is because they derive utility from it and it is a growing asset and they want to hold it. And so they're okay to get diluted a little bit on that thing. And I would argue that I think a lot of people would probably agree on this actually is Bitcoin's monetary policy would probably be better if they added a 1% inflation tail from the start. Like I, I honestly do believe that. I don't think that Bitcoin's real narrative was a supply cap. I think its real narrative was reliability, predictability and assurance. And if you added a 1% tail on the back of that, you would effects of, you would effectively fix the

• 41:42Speaker 02

  security budget issue and you guarantee that holders are diluted by 1% um, in perpetuity. But if people are okay with a very minor amount of inflation, that's very predictable and they derive utilities of store value, they'll keep holding it.

• 41:55David Hoffman?

  I think I, I totally agree with that take, but I also want to push back on the uh, idea that the ultrasound money thesis requires deflation. And Ryan and I talked about this in the first few weekly rollups post um, proof of stake, when there was inflationary, when ether was inflationary for a time being, like the question was, is ether still ultrasound money if it's also inflating? Like, does that make sense? And my answer is like, well, yes, because ether, the economics of ether are designed in a maximally optimized way to capture value, to like capture value for like, whether or not it's deflating or inflating, it's capturing the value that it can from Ethereum block

• 42:34David Hoffman?

  space. And then using that value capture, uh, and again, by preventing value leakage, it is pulling down on the supply of ether because it's, it's burning that supply of ether, even if the net effect of that is inflation, it's still ultrasound money because it is at its theoretical maximum in terms of value recapture because of proof of stake in the IP 1559. So I will, I'd say the ultrasound money never actually, uh, thesis never really requires deflation. It just really requires to have that maximum value recapture circulatory mechanism.

• 43:07David Hoffman?

  And so, and then, so that'd be like my one pushback is like the ultrasound money thesis doesn't actually require deflation. It just requires a theoretical maximum amount of deflation, given some certain amount of economic activity. And then the other argument is like, okay, so like there's Solana, it doesn't really deflate at all. In fact, it only inflates, but it's still a sustainable network because the stake or base of Solana are okay with accepting inflation because they get you some amount of utility for Sol. And I'm like, I don't, I don't think so. Like Solana is totally gonna like hyperinflate into economic unsustainability. That's not my conclusion. And that wouldn't be the ultrasound monetary thesis either, at least by my interpretation. And like, but the, the scenario I'll present

• 43:49David Hoffman?

  you with is that say there are two Ethereum's clones of each other, equally identical, but at some point in time, these, these two Ethereum's diverge and one just grows more in value and the other one doesn't. You mean like Ethereum classic, David? Sure. But, but now in a post ultrasound money state, right? Got it. And so like one Ethereum has more economic activity than the other. One ether gets a little bit more burned than the other. The, the other ether is inflating more than the one that's deflating. And eventually these networks will diverge and it will always tilt towards the deflating, more ultrasound version of Ethereum, whichever one that one comes to be. And then the one that starts to inflate, like those discrepancies will grow and grow and grow over time. And like, if you look back five, 10, 20 years in the

• 44:33David Hoffman?

  future, one was clearly the better asset to hold and one network ultimately is the more secure, higher economic activity network. And the other one is ultimately like the loser between those two things because of divergences in the soundness of the monetary policy. And so that'll, I'll apply that same argument with Ethereum versus Solana. Sure. Solana, economically sustainable, it's not going to go down. But when you have ultrasound money to compare it to, in the future, like it'll always, the network activity will always tilt towards the favor of the chain with the most sound asset. So those are my two core quips that I have with, with what's being presented here. So I'll give you a moment to react to that.

• 45:16Speaker 02

  I, if you agree that it is not strictly required for Ethereum to be deflationary, to be ultrasound money, I would agree with you on that. I will not name names then, but a lot of people I have seen who have very explicitly and loudly said the opposite of that. So.

• 45:33David Hoffman?

  I would disagree with that take. Yeah.

• 45:35Speaker 02

  Okay.

• 45:37David Hoffman?

  And so what about the idea that like if Solana inflates more than Ethereum, if it's providing equal value that Ethereum is also providing, but it's inflating more, the ultimately the winner will be Ethereum is also my claim.

• 45:54Speaker 02

  If they have the exact, if you assume that they're effectively the same chain, same amount of utility, economic activity provided is what you're saying. And they just basically have different monetary policies.

• 46:05David Hoffman?

  Right. The one has a, one has a stronger delta between value recapture versus value issuance.

• 46:12Speaker 02

  Yeah, it makes a difference to the monetary value of the asset like very significantly. And that's the important point is that Ethereum is not a company like, like that. That is the key point is that understanding how these cash flows work is a component of the system to understand how cash flows in and out. And that is a very wholesome analysis for more application specific types of things, which are effectively businesses. For Ethereum, it's only part of it and the money is arguably the more important part of it. And it has a very big impact on that.

• 46:40David Hoffman?

  So I actually don't really see too much disagreement here. Do you, Ryan?

• 46:43Ryan Sean Adams?

  I don't see, I don't see a lot of disagreement. I honestly, and I hope bank, bankless listeners are hanging with us here. I just have a lot of fun geeking out over this stuff because what you, what you're witnessing, basically, and what we've tried to do over the past, since the birth of crypto, really. And then, and then in particular for ether, trying to understand is we're trying to understand how to value these new assets that don't, they're not quite like nation states. They're not quite like company equity. They're some new type of thing. And so we're trying to use analogs from TradFi in the old world and apply them here. And we're all figuring it out as we go.

• 47:23Ryan Sean Adams?

  One thing that I think is useful is John is adding some nuance to this idea of ultrasound money that I think is important and would probably largely agree with. I think I do, in particular, if you kind of, you sort of look, look at the lens of ether as a capital asset purely and ignore the kind of the store of value, then yeah, then issuance really. Isn't a cost to the business if it was kind of viewed as a company? I think I mostly agree with that. Now, let me ask John, because we've got some more stuff to talk about, but just to kind of tie this up in a bow here.

• 47:59Ryan Sean Adams?

  You said this concept that you're kind of presenting, the subtle differences between maybe what you perceive as canonical ETH as ultrasound money kind of memetics and what you're proposing, you said your idea is even more bullish. How is it more bullish? So what about your, the concepts that you've, we've just been talking about for the past, you know, 40 minutes or so? What about that is even more bullish than kind of just going to ultrasound dot money? And, and, you know, getting real excited, real, real excited about the burn, as I'm told Ethereum people do. Why is your model even more bullish than that?

• 48:39Speaker 02

  Mostly because I don't treat the issuance as harshly as most people do. Like if you check the financial statement, quote unquote, of something like token terminal for Ethereum. Will explicitly have like very large losses in the past. Implying that Ethereum as a network is effectively losing money by operating because it's issuing. And I would strongly disagree with that. I think that it is perfectly sustainable, even the way that it is. My general motivation for wanting to do this was less even about valuing the asset. And more just trying to impress more, what are the actual things that matter in terms of sustainability?

• 49:23Speaker 02

  Particularly because increasingly upcoming Ethereum upgrades are, a lot of them are going to be economic. Either tangentially or like explicitly in their nature, stuff like MEV burn. So I, when Ethereum as a protocol is making decisions going forward, I want to like make it very clear to people. What the accounting is such that. People don't have this notion in the back of their head that whatever we do, ETH must be deflationary in the long term. If like an option doesn't do that, we have to throw it out. And I think that is like a very dangerous thing to like misunderstand those economics. And I do see that frequently.

• 49:59David Hoffman?

  That's also naive, because as Ether burn continues to get burnt, it becomes harder to burn Ether. It's on the Ultrasound Money website that this new equilibrium is discovered over time. Like, we're not going to zero ETH supply, that would be naive. The only reason why we're stoked about the ETH burn now is because with the introduction of proof of stake, the supply of Ether is the easiest it's ever been to burn because of in nature of how it's at, the Ether supply is the highest it's ever been. The more supply there is of Ether, the easier it is to burn. The lower supply there is of Ether, the harder it is to burn. So like, to think that we must be deflationary now and for forever is naive, and you're misunderstanding about how these economics work. Do you agree with that?

• 50:45Speaker 02

  Yeah, I agree. Yeah. And the thing that like wanted me to try to impress that more was the types of things that are upcoming that I like are going to get talked about a lot more, stuff like MEV burn, which is an explicit proposal. It's on Vitalik's roadmap now that it's at least being considered. And a lot of the argument for that is for to capture more value for ETH as the asset. And so to the extent that Ethereum is ever considering any changes to its economics in the future, like the burden of proof in my mind is you better have EIP 1559 level assurance, formalization, study of it, broad understanding, we all agree on it. And I think something like this is very far off

• 51:26Speaker 02

  on the understanding of why issuance is important. I think it's incredibly important, but the nuances make a very big difference in when you're like making future changes like that.

• 51:36Ryan Sean Adams?

  Does it also, John, that this idea caused you to treat alternative Layer Ones issuance less harshly than maybe, let's say, Bankless has in the past? Like, we see something like this and we're like, Ooh, that's a lot of burn.

• 51:51David Hoffman?

  6% inflation and no recapture.

• 51:53Ryan Sean Adams?

  Top line revenue that like, but maybe in your model, you're like, well, that's not an expense to the business. That's not a big deal at all. And you're just, maybe you're more excited about like this. And it's not about how much, how much they're issuing Ryan and David. It's about, you know, what their, what their growth in their block space revenue is. Uh, is that accurate as well? You're willing to treat alternative layer ones less harshly from an issuance perspective?

• 52:21Speaker 02

  Yeah. And I think that's naturally what you see with even Bitcoin and Ethereum. They had higher issuance to start, like much higher in the beginning and it was fine. Because they're growing at a high rate and that's how you bootstrapping. Um, and as your growth eventually tapers off and you mature, you have to lower that. Um, because it does have negative effects. Um, but it's not like your protocol is just lighting that money on fire. And everyone is losing that money every year as if it's a profitability loss to everyone who's participating in that. It's like the key distinction.

• 52:47David Hoffman?

  I want to push back on that because I actually do disagree with this. Um, it is not a cost to the network that Solana is issuing 6%. It is a cost from one side, the sole holder base of 6% to the sole stakers. And so the sole stakers are getting 6%. The Solana holder base are losing 6% because Solana has to pay the stakers that much. That is a knock, that is a, that is a negative mark to Sol as a store of value asset. Because, because the long-term holders are losing 6% in favor of the stakers. And so this is why ultrasound money, there's network, there's tailwind effects, there's synergy effects. For having strong store of value properties, because if your asset has strong store of value properties,

• 53:30David Hoffman?

  it will incur further buying from the market because of those properties. And when the value of ether on the secondary market is higher, the, it's more sought after as a capital asset to the stakers. And so more stakers want to stake because the dollar value of ether is higher. But when that happens, like, and there's more economic burn, like the store of value, the, the delta effect. Creates more demand for long-term holders of the asset. And it makes it so that the protocol doesn't actually have to issue as much because the secondary market value is stronger. And so I'd say to ignore the value of a store of value asset in the capital asset equation is missing the forest for the trees. Like you have to, you have to view these things as a holistic system.

• 54:14Ryan Sean Adams?

  Another way to summarize what David just said is we call it ultrasound money, not ultrasound equity.

• 54:18David Hoffman?

  Yes.

• 54:19Speaker 02

  Exactly. And I don't think that you disagreed with me in that at all, actually.

• 54:24Ryan Sean Adams?

  Right.

• 54:25Speaker 02

  Because cost in this line item scenario is an explicit like cash flow item. That is very different than, does it negatively impact the network because it hurts its soundness and sustainability? That it does. That is very different than understanding like how cash flows in the system and like how to strictly value something on cash flows. Like that, that is an important nuance, which matters in the sustainability thing in the long term. But I do agree, it is a, it is a highly negative thing for a blockchain like this to have a long-term high inflation rate. It would be bad if Ethereum had a long-term, very high inflation rate. That would be very, very negative.

• 55:03Ryan Sean Adams?

  Well, I think we've come to an understanding, Mr. Charbonneau. Appreciate this. This has been a really interesting topic of conversation. It's been a while since we talked about the ultrasound money in depth and you're adding some much-needed nuance to it. That's not all we have though, right, David? What do we have coming up?

• 55:22David Hoffman?

  No, John has also made a very dense Excel sheet that is modeling, a beast of an Excel sheet, modeling the future economics of Ether as it relates to the Ethereum scalability roadmap. And so this is some really frontier level knowledge, a frontier Excel sheet modeling out the throughput of Ethereum and all the other things that are related to that as it relates to Ether, the asset. And so we are going to walk through all of these details and more because I'm not very good with charts. Ryan's much better than, than I am, but even Ryan would like, I think, some guidance.

• 55:56Ryan Sean Adams?

  This scared me, yeah, John, I need help.

• 55:58David Hoffman?

  So that's going to come up in the second half of the show. We're going to look at the future state of the Ether economics as it relates to the Ethereum scalability roadmap. But first, a moment to talk about some of these fantastic sponsors that make the show possible. Uniswap is the largest on-chain marketplace for self-custody digital assets. Uniswap is, of course, a decentralized exchange, but you know this because you've been listening to Bankless. But did you know that the Uniswap web app has a shiny new fiat on-ramp? Now you could go directly from fiat in your bank to tokens in DeFi inside of Uniswap. Not only that, but Polygon, Arbitrum, and Optimism Layer 2s are supported right out of the gate. But that's just DeFi. Uniswap is also an NFT aggregator,

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• 57:25David Hoffman?

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• 58:07David Hoffman?

  Did you know that there's an ad-free version of Bankless that comes with the Bankless Premium subscription? No ads, just straight to the content. But that's just one of many things that a Premium subscription gets you. There's also the Token Report, a monthly bullish, bearish, neutral report on the hottest tokens of the month. And the regular updates from the Token Report go into the Token Bible, your first-stop shop for every token worth investigating in crypto. Bankless Premium also gets you a 30% discount to the Permissionless Conference, which means it basically just pays for itself. There's also the Airdrop Guide to make sure you don't miss a drop in 2023. But really, the best part about Bankless Premium is hanging out with me, Ryan, and the rest of the Bankless team in the Inner Circle Discord, only for Premium members. Want the alpha?

• 58:50David Hoffman?

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• 59:22Ryan Sean Adams?

  We're back. We've got John Charbonneau. We are learning a thing or two about Ethereum, which is always really fun. This is what David and I love to do. It's really where Bankless started, I think. So, back to our roots. This might be like 300, 400 level content, though, and I definitely know that the next data model, the spreadsheet that we're going to get to, is, because I've never seen anything as sophisticated as... As thorough, yeah. Yeah. You've kind of applied the economics of Ether, the asset, also to like the Ethereum roadmap and future block production in a really interesting way. And so, what are you calling this model that you've come up with, John? Is this a theory of everything for Ethereum? Like, what is this spreadsheet actually called?

• 1:00:07Speaker 02

  Ah, yeah, that's about right.

• 1:00:10Ryan Sean Adams?

  Theory of everything. Okay.

• 1:00:13Speaker 02

  Every future protocol upgrade.

• 1:00:15Ryan Sean Adams?

  Every future protocol upgrade. So like, um, this tape, this tab has, look, why don't you just guide us through this? Cause I'm going to make a mess of it. What should we look at? And by the way, bankless listeners, there will be a link in the show notes where you can open this in Google Sheets and see what we're seeing yourself. If you, if you're on YouTube, then you can see what I have in front of my screen. But do you want to walk us through this and what the goals of this spreadsheet are and your conclusions here?

• 1:00:39Speaker 02

  Yeah, sure. So all the like words and stuff at the top is basically just a high level explanation of this is basically intended as primarily an educational slash understanding tool of like how the Ethereum protocol works and what future upgrades will change in like how the numbers and the economic engine and everything changes underneath, looking at throughput, all of that kind of stuff. It's not intended as a valuation model at all. Like I, as mentioned before, a DCF is not a full analysis of ETH. So I don't derive any valuation based off of like what the cash flows that come out are. I literally just hard code in dollar values for ETH that basically just go up in a straight line.

• 1:01:21Speaker 02

  So take all of the economic dollar stuff in there with a lot of hopium straight line up type of stuff. They're not intended as valuation type.

• 1:01:29Ryan Sean Adams?

  But the roadmap is based on real world. Basically the latest graphic that Vitalik put out, which is the most comprehensive roadmap we've seen. This one is from November of last year.

• 1:01:41Speaker 02

  Yeah. So that's the primary purpose for like going back to the model. The main stuff is so you can play around with all of the future protocol, what those upgrades kind of look like. So this whole issuance section here is very simple. We have a current preset Ethereum issuance curve. The formulas are just preloaded in here. Um, anything throughout the model, when you see like the light blue box with the blue text on it, that means that's basically just any kind of hardcoded input. Um, so that's the kind of thing that you play around with different assumptions. You can change them. Um, all the stuff in white, those are formulas and stuff that you like, you don't need to change. So this is roughly the current Ethereum supply and amount state. So you can look at, you know, what does it look like? If I double the stake, then what does the issuance APR start to look like? That kind of stuff.

• 1:02:27Speaker 02

  But this is all very simple stuff here. Um, so it can kind of go down to the next section, the execution layer. And this is basically showing the different options of what the execution layer is. These are very loosely made up numbers on the stateless and try and roll up stuff. But the basic idea is our current Ethereum execution layer has a gas limit of 30 million gas per block, which is just the amount of effectively resources that you're giving out. But it targets 15 million gas on average. That's just how the few mechanism, the IP 1559 works. So on average, you know, this is saying this is the gas per block that we're providing is 15 million gas.

• 1:03:08Speaker 02

  From there, you can look at like those numbers 21,000, 50,000, 110,000 for the transfer and transactions. Basically, different types of transactions use different amounts of gas. Really simple stuff like if I send you ETH uses very little gas. So with 15 million gas, we could do a lot of those. If I do really complicated transactions that use a lot more gas, then we could do less transactions per block. So these formulas are just saying, based on what you assume the average gases per block, what's kind of the implied amount of transactions that you could do there? So you could do like 60 TPS if we're just doing roughly Ethereum transfers. When in reality, it's much lower because people do a lot more than that.

• 1:03:53Speaker 02

  And then the stateless and and try and roll ups, those are proposed future upgrades that would in theory allow you to increase the gas limit of the block. So that would increase the throughput of the L1 itself on the execution layer. Basically statelessness and potentially like a ZK EVM and try and roll up or future things you might have had discussed on the show before, but they're basically ways that make it much easier for validators to validate the chain that they don't need to carry the state anymore. And then eventually they don't need to validate all the transactions.

• 1:04:22Ryan Sean Adams?

  I actually didn't know statelessness would increase the gas per block.

• 1:04:26Speaker 02

  It could. So that's, that's part of what I want to note here is I put, I put 50 million and I put 100 million. Those are just ballpark kind of made up. Based on discussions, if you like, look at comments from like, whether Justin Vitalik, any of them before of, it's probably safe to increase the gas limit by like 3X or something like that.

• 1:04:45Ryan Sean Adams?

  Yeah, I got it. I got it.

• 1:04:47Speaker 02

  But that's a very loose, that's not a scientific thing that could be totally

• 1:04:51Ryan Sean Adams?

  And what

• 1:04:52Speaker 02

  different, yeah.

• 1:04:53Ryan Sean Adams?

  Stateless is kind, is on the roadmap that we saw earlier with Vitalik. Uh, and trying rollups feel like it's a more of a hypothetical future, maybe, probably, is that, that's about right. Yeah.

• 1:05:04Speaker 02

  Yeah, they're very far out.

• 1:05:07Ryan Sean Adams?

  Yes.

• 1:05:08Speaker 02

  This is the kind of thing that Justin has primarily talked about. Um, and I have a bit written on them and like the complete guide to rollups thing I wrote last year. Um, but I mean, you could basically think of the ZKM as turning the L1 into a rollup in a way.

• 1:05:21Ryan Sean Adams?

  Yeah.

• 1:05:22Speaker 02

  Um, at like, at the limit, what you're effectively doing as a validator, if you like, play that all the way out is to validate the chain, all I need to do is check a proof and then check the data availability of that block.

• 1:05:33Ryan Sean Adams?

  Totally. And when we're saying

• 1:05:34Speaker 02

  That, that, that looks like a rollup. At that point, it's just that it's enshrined in the layer one as opposed to being a smart contract.

• 1:05:39Ryan Sean Adams?

  And this whole

• 1:05:39Speaker 02

  It's effectively the same.

• 1:05:40Ryan Sean Adams?

  This whole category, execution layer throughput, that's all mainchain stuff, right? And

• 1:05:44Speaker 02

  Yeah.

• 1:05:44Ryan Sean Adams?

  But let's also remember this distinction, because sometimes we've talked about this before, that we've said like, the execution layer in a modular blockchain kind of world is moving outside of the mainchain, which is also true, but that's not what you're referring to here. Like, our concept of the execution layer is kind of moving a bit more to layer two. That's a different way to define execution layer throughput than you're talking about the

• 1:06:07Speaker 02

  This is the Ethereum protocol execution layer itself.

• 1:06:10Ryan Sean Adams?

  I'm with you. All right.

• 1:06:11Speaker 02

  The L1 that we're used to using today, like, what does that do? And then this is the data availability layer. Um, so here is basically planned upgrades. That we'll see the first one being EIP 4844. So that'll where we finally have an actual segmented data availability layer, where it will no longer be rollups just jamming call data into the same execution layer and competing with execution transactions. We're creating a segmented environment with a different fee market.

• 1:06:40Ryan Sean Adams?

  Blob space.

• 1:06:42Speaker 02

  Exactly. Exactly.

• 1:06:43Ryan Sean Adams?

  What are the numbers that we're looking at here? So in this totally useful DA, what, what number, what is that actually, uh, measuring?

• 1:06:49Speaker 02

  Yeah, so the it's yeah, 262,144. That's the number of bytes. It's roughly a quarter megabyte is basically what's that saying is like, that's the amount of blob space. That's that is two blobs. Um, is the initial spec for 4844. Um, is that's the amount of bytes you'll be able to post.

• 1:07:09Ryan Sean Adams?

  Blob space is the new block space. Yes, am I right?

• 1:07:12Speaker 02

  For rollups, it is. Yeah. Um, and then the 4844 plus is a hypothetical of I would expect this to happen is that end route to doing full dank sharding, you can easily kind of juice the 4844 parameters such that you could just allow for, you know, some more blobs. And then the effect of that is you're just providing more availability. It's just that we don't need it today. So there's no reason to just mass flood it from the start, but you could easily tune it up a little bit. If you know dank sharding is going to be years out, you know, you could just tune up 4844 like they actually lowered the initial 4844 parameters from what they were talking about.

• 1:07:49Ryan Sean Adams?

  What's crazy about this, right? Compared to execution layer throughput, which we go from current to stateless. And that's what like a 3X above a 3X increase in in gas per block. We in in data availability, we're going from zero to uh 262K for like with EIP 4844, which let's remind folks is actually not that far away. I mean, there has been some talk, maybe you know more about this, John, about potentially this year. I don't know if we're going to hit that, but like it's on the the fact that that's on the table is pretty crazy. And we go from zero to um, you said about a quarter of a uh

• 1:08:29Ryan Sean Adams?

  megabyte, so 262K, which is absolutely incredible in terms of the increase.

• 1:08:37Speaker 02

  Yep.

• 1:08:37Ryan Sean Adams?

  How how big is that?

• 1:08:38Speaker 02

  That should be later this year.

• 1:08:40David Hoffman?

  Help us reason about like 262 bytes per slot or 22,000 bytes a second. Uh, bytes a second is like a hard metric to understand in terms of like actual throughput. Is there, can you help us reason about this?

• 1:08:53Speaker 02

  Yeah. So if you scroll down below this table now, um, so to all of this stuff here, this is what matters. So yeah, so now we're thinking of bytes because like that is what Ethereum is providing. But what we really want to know is, okay, how many transactions can rollups effectively do with those bytes? So what matters is you need to be able to reason about on average. How many bytes of layer one data will an L two transaction take up? On average, will an L two transaction, when we post it down, does it take 10 bytes? Does it take 50 bytes? Does it take 100 bytes of that? So then from that, you can back out how many transactions you actually get from the rollups down there.

• 1:09:33Speaker 02

  So that's what this is showing here is like, what is the data compression of rollups going to be? And that is a very, very big factor because if rollups are very poor at compressing data, well, then they're not going to use that data very effectively. And you'll have low TPS. If they get really, really good at compressing it optimally, then you'll get really high TPS.

• 1:09:50Ryan Sean Adams?

  And we've seen them get a lot better.

• 1:09:52Speaker 02

  Exactly.

• 1:09:53Ryan Sean Adams?

  They launched like, was like Arbitrum's got a 90% like

• 1:09:56Speaker 02

  Yeah.

• 1:09:56Ryan Sean Adams?

  Uh, improvement in compression optimism similar?

• 1:09:59Speaker 02

  Yeah, optimism and Arbitrum are massively improving it. Um, and then at the theoretical limit, ZK rollups are probably the best at compressing it. If you want to take the little bit of a shortcut that they're kind of allowed to do. And that you don't have to, for a ZK rollup, you don't have to post the full transaction data. It's sufficient to prove, uh, just to post the state diffs. So what is the difference in state from, you know, state one to state two? Um, so that can let you save a bit for the simple example of like, let's say we trade back and forth a million times. I only have to post what was the difference after that? Where in the naive case, you would have to post like all of those transactions back and forth. So that allows, uh, like much better compression.

• 1:10:41Speaker 02

  Uh, for a lot of transactions, we only use very little data on the layer one.

• 1:10:45Ryan Sean Adams?

  That's really cool.

• 1:10:47Speaker 02

  Yeah. So then the like run scenario thing is basically, um, that box was like, you could choose what scenario do you want to run, you know, of like, are rollups really bad at compressing? Are they optimal at compressing them? And then what type of transaction are you running? Like really simple transfers, um, stuff like that. Um, and then basically what it does is I just set like a preset timing curve of. Assuming you start at, say, current compression, very broadly, it varies. And eventually, we get to optimal compression is what this says. So like by the end of this model, you get to optimal compression and it kind of just evens out that we progressively get like a little better every year.

• 1:11:28Speaker 02

  Is what that does. And then the the output section is basically where you decide what it is that you want to run. So for like the top of the execution layer revenue section is that's where you get to pick every year, you know, what execution layer do I want to run? So you're basically kind of forecasting, okay, what year do we get statelessness? Like what year, if ever, do we get a ZK EVM? I added like a toggle for what happens to the revenue if you turn on, if you do start to burn all the MEV. Because that obviously will change the issuance.

• 1:11:59Ryan Sean Adams?

  Is this right now? Is this preset to your kind of?

• 1:12:02Speaker 02

  Yeah.

• 1:12:02Ryan Sean Adams?

  Case, like your expected case?

• 1:12:05Speaker 02

  I would, I would say very loosely on the technical side, it is ballpark what I would expect. On the economic side, I would like, I'm not going to try to make any projections around what is the average transaction fee for an L1 Ethereum transaction in like 10 years. Like I, I don't think anyone can reasonably predict that because we have no idea what the hell it's going to look like or what people are using it for. So basically what I did for the like, the base fees and stuff like that of what is the fee changing per year? I basically just made it kind of grow really quickly and then like start to taper off with big divots when you have like a big increase in throughput.

• 1:12:45Speaker 02

  So you would expect that, you know, when we, if like, assuming that, you know, we go from today to we suddenly increase the gas limit to from 15 to 50 million, so that the average target, you'd expect that transaction fees go down on average because we just added a bunch of supply. So I kind of just reduced the average fees in those years where like there's a big output jump to kind of just like smooth out what it looks like.

• 1:13:08Ryan Sean Adams?

  So John, what are, what are the conclusions of all of this? I, I think people can fool with the parameters, but I, I think a lot of people listening will be like, well, John, you sound like more of an expert than me. So tell us, when you input these inputs in this model, what, what, what does this spit out? Does it tell us transactions per second per year? Does it tell us amount of block space? Does it tell us revenue? Where do we get to that in the model?

• 1:13:32Speaker 02

  Yeah, so if you go to the model output part, like the part at the top, which it says in ETH terms, that's the TPS table right here.

• 1:13:41Ryan Sean Adams?

  Okay.

• 1:13:42Speaker 02

  So that's basically showing with the assumptions that you like decide to select underneath. This is the implied transactions per second that you get while running those assumptions. So if you, you know, assume that we provide this much data and this type of compression, like this is the amount of transactions that you will get. And then the role of that is that feeds into the stuff below where you get to set, you know, what do I think the average transaction fees are going to be? And that's what spits out what the total revenue is. The implied number of transactions versus what is the amount that people are paying for those transactions? And that's where you get like the revenue stuff at the bottom of what would be implied transaction fees in aggregate.

• 1:14:23Ryan Sean Adams?

  So can we take like, can we take like the year, it's the year 2025, so two years from now. Give us some of the headline numbers with these model inputs.

• 1:14:34Speaker 02

  Uh, I probably think that's overly conservative, to be honest, what I have here. So part of it is that like, you'll notice that this is like, it gets very jumpy. Like you'll go from 90 TPS to 690 TPS, like the year after that. In reality, I wouldn't be surprised if people start to increase, like if Ethereum starts to increase, like the 4844 parameters, slash there's better execution. Like, I don't necessarily think that it's going to just like immediately jump up. Like, the reality is it's going to look smoother than this because these are full years and you have a full upgrade. But the reality is, yeah, you'll start getting in the hundreds of TPS on rollups, certainly within the, like, the shorter term.

• 1:15:15Speaker 02

  And then at the limit, well, that's part of it too, is like, the current proposed dank sharding spec is not necessarily the limit of like what you can actually provide, particularly as like hardware upgrades, et cetera. But if you look at something like the current proposal and you're looking at like pretty, I would say relatively conservative assumptions on like, what is the compression? They're not super simple transfers, like, yeah, you get well into the tens of thousands of TPS between all the rollups.

• 1:15:44Ryan Sean Adams?

  So by the year-

• 1:15:44Speaker 02

  Could certainly go higher.

• 1:15:45Ryan Sean Adams?

  The year 2030, we're probably looking at in the tens of thousands of transactions per second on rollups is a reasonable scenario then.

• 1:15:56Speaker 02

  My confidence interval for what Ethereum looks like in 2030, to be clear, is

• 1:16:03Ryan Sean Adams?

  Plus or minus 90%?

• 1:16:05Speaker 02

  Yeah, probably, probably more than that, but yeah, uh, yeah.

• 1:16:10Ryan Sean Adams?

  But the roadmap gets us there if the roadmap is implemented and if the demand is there?

• 1:16:16Speaker 02

  Yeah, like, yeah, the important thing on all of these is any of these parameters between like now and when they're done, like the amount of data that's provided by these, or how well a rollup can compress data slash how much demand there is. Like those can literally change by orders of magnitude in a heartbeat. So the numbers here are not to be taken certainly as like actual predictions is my main point. But rather to be able to play out under the different assumptions, what does it look like? And like be able to reason about what are all of those different things?

• 1:16:48Ryan Sean Adams?

  Cool. And there's some graphs at the bottom Ethereum annual supply chain where you can see the issuance, the burn percentage and net supply. It's like this model forecast, negative deflationary ETH, I guess, um, into, you know, 2030. And then you've got an Ethereum annual revenue as denominated in ETH as well. The bulk of this coming from base fees, it looks like.

• 1:17:14Ryan Sean Adams?

  Yeah, it's really cool, really cool, John. You know, for, for people who, um, like, like I said, this is 300 level, 400 level stuff, but to be able to model this is incredibly cool. Thank you for putting the time to, to, to go do this. I remember a time when the Ethereum roadmap wasn't like clear enough to just even describe in a, in a graphic like this that Vitalik has. Now the fact that we can actually apply numbers to these things, which are based on assumptions, of course, those assumptions could change, but we have the power to kind of do that is incredible to see. Just reminds me once again of how far we've come on this journey to understanding this, this incredibly cool network and this, uh, this asset behind it. So thanks for all your time today and thanks for putting out all this fantastic work on Ethereum.

• 1:17:59Speaker 02

  Of course, it's fun as always.

• 1:18:01Ryan Sean Adams?

  Awesome. Well, Bankless listeners, we will include, of course, some links in the show notes with some resources to John's articles that he's written in the past and this model, of course. And I gotta end with the way we always do, giving you a reminder that none of this has been financial advice. Neither John, myself, nor David have any idea what's going to happen to prices in the long run, of course. Crypto is risky, so is DeFi. You could lose what you put in, but we're headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.

• 1:18:44Ryan Sean Adams?

  Thanks. I'm just gonna leave then, so it's not like awkward for Solon and streaming.

• 1:18:50Ryan Sean Adams?

  Sound good, Dave?

• 1:18:53Ryan Sean Adams?

  Thanks, John. This has been awesome. Appreciate it, man.

• 1:18:55Speaker 02

  Thanks, guys.

• 1:18:56Ryan Sean Adams?

  See you guys later. Bye.