15 - ETH is Undervalued

Episode: #15 June 3, 2020 The bankless boys think ETH is undervalued and they explain why. Also, a talk on governance why putting it on-chain is a money killer. Join Ryan and David in this special bonus episode. Covered: ETH fundamentals are fire Metrics Gas usage at all time higher Daily active users up Stablecoins on Ethereum up BTC tokenized on Ethereum up Network fundementals up! So why isn't price up? Maybe ETH is Undervalued! New Crypto.com wallet is protocol sink thesis! Maker on Coinbase is a big deal On-chain gov hurts store-of value Decreases credible neutrality Handing the keys to plutocrats Join us next Monday for a fresh episode! ----- Tools from our sponsors to go bankless: Ramp https://ramp.network/ - the fiat onramp for DeFi (mention Bankless!) Monolith https://monolith.xyz/ - holy grail of bankless Visa cards Aave https://aave.com/ - money lego for lending & borrowing Multis http://www.multis.co/ - bank your business without a bank (1 mon. trial https://multis.co/!) ----- Resources discussed: (Article) ETH is doubly undervalued https://bankless.substack.com/p/eth-is-doubly-undervalued-market-7ae (Tweet) Why ETH is headed to bull market https://twitter.com/spencernoon/status/1265419615741644800?s=20 ----- Episode Actions: What do you think - is ETH undervalued? Give Bankless at 5-star review on iTunes! ----- 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. David, this is a special bonus episode. Why are we doing this, man?

• 0:32David Hoffman?

  We are doing this because so much good stuff has happened in Ethereum in the last couple of weeks. And also, our interview with the Winklevoss Twins was absolutely fantastic. So it was just too much good content to be put into one single episode. So we're splitting it out and releasing this as a bonus episode. The big-picture stuff, the topics that we have today, I think are crucial, and they definitely deserve their own episode. So we're recording this extra episode for all you Bankless fans. Speaking of Bankless fans, if you guys could, please go to wherever you listen to podcasts and give us those five-star reviews, so we could show up higher on the charts. There is a bunch of old crypto podcasts that haven't released episodes in months and years, ever since 2017.

• 1:16David Hoffman?

  And just because they came out in 2017, they still are there. So if you could go to iTunes, Spotify, wherever you listen, and give us those five-star reviews, so we can get Bankless to the top of the crypto podcast charts, we would really appreciate it.

• 1:29Ryan Sean Adams?

  Let's spread the revolution, guys. Let's do it. Before we begin, want to talk about our fantastic sponsors today.

• 1:36David Hoffman?

  Our first sponsor is Monolith. If you guys have your assets inside of Ethereum, but you also want to live your life, Monolith, for our European customers, might be the product for you. They have their DeFi card, which is a Visa card connected to a smart contract wallet on Ethereum, so that when you go to the store, you buy your coffee, you buy your groceries, you swipe your Monolith card, and then your dye gets deducted out of your smart contract wallet, sold for dollars, and then you make both a transaction on Ethereum and a transaction on the Visa network. Really crucial infrastructure for people that want to live a bankless life, but don't really want to compromise and be that weird friend that doesn't have any real money.

• 2:27David Hoffman?

  So you can download the app at monolith.xyz to get your Bankless Visa card today. And then you can get some of the world's economic activity placed onto the Ethereum network.

• 2:38Ryan Sean Adams?

  All right, guys, I am super excited to introduce you to our next new sponsor, Ramp. What is holding crypto back? It's really getting fiat into the crypto system. That's what's holding DeFi back. The problem is, a new user has to create an account with an exchange to buy some crypto. They have to wire funds. They have to go through a whole bunch of steps. What's holding DeFi apps back? The exact same thing. Users drop off in the signup process and it really limits the DeFi market to hardcore crypto people. But no longer. Ramp solves that. Ramp has a delightfully easy fiat on-ramp service. So it lets users get crypto, ETH, DAI, USDC in five minutes or less.

• 3:23Ryan Sean Adams?

  That's right, five minutes or less. No exchange needed and a new user can have crypto right into their account and start using the app. So if you are a developer, this takes about 10 minutes to implement. They've got very easy to use APIs. Apps like DeFi apps like Xerion, Ethereum, Torus are using Ramp. You can visit ramp.network to see how easy this is. This is really an opportunity for DeFi developers to 100x their addressable market size. This is like the ultimate growth hack. And here's what's cool. If you mention Bankless, they will on-ramp the first 100K from your app of USD free.

• 4:07Ryan Sean Adams?

  So that's 100K free when you mention Bankless. Go to ramp.network and check it out. R-A-M-P dot network. Mention Bankless and check it out. David, first topic, we're going to talk about four things today. First topic, does it feel to you like there is a massive mismatch between fundamentals and price going on right now? And specifically, I'm talking about Ethereum. Bitcoin's been covered a lot, but Ether, the asset, is there a mismatch going on? What's going on?

• 4:35David Hoffman?

  Yeah, it's really hard to value Ether because it's really hard to value these systems as a whole, right? Like crypto systems are inherently impossible to value. There's no price to earnings ratio. There's no, none of these fundamental metrics that we know about in the legacy world to price these assets. But at the same time, Ether has been, you know, volatile but flat over the last two years. And the fundamentals of Ethereum have never been greater. Spencer Noon has put out some fantastic charts on a tweet thread, which we are definitely going to link in the show notes. And if you guys are on Twitter right now, you should definitely just open that up and find his, his charts. Cause we're going to go through some of these.

• 5:17David Hoffman?

  It's, it's pretty crazy, the fundamental growth that we have seen in Ethereum metrics. If you guys have listened to episode seven, Ether's value mechanisms, a lot of the charts and graphs and data that Spencer put out in this thread, directly relate to some of the concepts that we talked about in that episode. What this data and information show is just the increase in fundamentals according to the concepts that we put out in that episode. So we're going to go through some of these today.

• 5:43Ryan Sean Adams?

  Yeah, let's take, let's take seven from that thread. I think it's a great thread. So the first is, right now on the Ethereum network, we are charting the highest gas that Ethereum has ever consumed. So that's higher than 2017 at peak mania, when, you know, everything was going crazy and everything was, was bogged down. It's higher than any time in 2019 and 2020. It's higher than it's ever been. What does that mean, David? Like gas usage, what are we talking about here? You know, why does that matter?

• 6:16David Hoffman?

  The gas usage metric is a really interesting one, and it really talks about a couple of things. The complexity of transactions being made. So a normal Ether transfer uses the minimum amount of gas at 21,000. And then more complex things like depositing money into a Maker Vault, drawing die, doing anything on Compound takes more gas because there's more complex transactions. And so what this means is that people are using Ethereum for more complex economic activity more often. A larger amount of fees per block is being spent on Ethereum block space. So Ethereum block space is being sold at a higher, faster rate than previous.

• 6:59Ryan Sean Adams?

  Yeah, so it means network usage is at all time highs. So more smart contracts, more token transfers, more moving of ETH. It's all at all time highs. And as you said, that's another metric. So maybe we'll talk about this as number two. Transaction fees on Ethereum are about 200K per day. So all of the gas that's being used, as you know, every time you use an Ethereum transaction or interact with a smart contract, you're paying gas. All that gas culminates in a total, all those gas fees culminate in a total revenue amount. Right now, that revenue amount per day is 200K on Ethereum. It's been higher in the past, but this is still a very high number. And really, when you compare the transaction fee revenue

• 7:41Ryan Sean Adams?

  to all other blockchains, the only comparable blockchain here is actually Bitcoin. So Bitcoin's doing about half a million a day, 600,000 a day, something in that range. Whereas Ethereum is hanging out at the 200K range. Everything else is like $100 a year, like $1,000 a year. Basically, nothing. The only valuable block space

• 8:07Ryan Sean Adams?

  On the market today is the block space of Bitcoin and Ethereum. And I'm just saying that from a market perspective because no one else is paying for any of the other block space. They're only paying for the block space on these two networks.

• 8:21David Hoffman?

  This is such an important metric. This directly reflects how much people value these systems. Like, how much are people willing to pay to have a transaction included into the respective blockchain? So Bitcoin and Ethereum have really high daily revenue of block space sales per day. And this really relates to how well you can depend on these protocols being here into the future. All blockchain protocols need some amount of sustainability through fees. And so the higher fees being paid per day to the blockchain just kind of illustrates the longevity that these systems are going to have. Like, all businesses need revenue to survive, and blockchains are the exact same thing.

• 9:05David Hoffman?

  So if you see your blockchain of choice bringing in a ton of fee revenue, you know that your product is in demand. And that's exactly what's going on with Bitcoin and Ethereum here. And Ethereum especially, I don't know if you guys have been trying to make transactions over the last month, but Guey prices have been super high, and that just means that everyone wants to use the network. And so it just means it's just a fantastic indicator that the demand for Ethereum is increasing. And it's, and the cool thing, like, we've, we've had higher transaction fees on a daily basis that you've said, Ryan, but I don't think we've ever seen it this high sustained for so long. It's been a very high number for like two months now, where previously it was maybe just a couple blips, you know, a couple of days of really high transaction fees.

• 9:49David Hoffman?

  This is slow, steady growth in daily revenue from transaction fees, which I just think is, is super bullish for the long-term health of Ethereum, because that's what blockchains need. But then also, we need to talk about EIP 1559. When we, EIP 1559 comes in, the majority of these transaction fees are burned, which means that the scarcity of Ether is increasing because we are burning all of these transaction fees.

• 10:16Ryan Sean Adams?

  Got to plug episode seven again. Because that's great. We go over that in episode seven. Every time a transaction on Ethereum is used and consumes gas and consumes some fees in the future, ETH will actually be burnt. So Ether, the asset, will be burnt and the amount of Ether in existence will actually decrease. That is a scarcity mechanic that is going to be coming to Ethereum possibly this year and certainly in ETH 2.0 when it ships. So that sort of links all of this usage to actual scarcity of Ether, the asset, establishing it further as a store of value. So super exciting to see that.

• 10:56Ryan Sean Adams?

  Now, some people are concerned that the gas fees are high and transaction fees are high and they can't get their transactions through, you know, the gas is too damn high, right? I am concerned about that a little bit in the short run, but I think in the medium term, what that's going to do is put more pressure on layer two scalability options on Ethereum and get more of these transactions off-chain, still secured by Ethereum, but push them off-chain. There's some roll-up technology coming down the pike for that. Even Edamar, our guest in the last, the previous episode, episode 13, I believe it was, he talked about incorporating that in the Argent wallet. So I think this kind of pressure,

• 11:38Ryan Sean Adams?

  while painful a little bit in the short run, these high gas fees will actually lead to a more scalable Ethereum with more transactions per second in the medium to long term. So I'm bullish there. But let's talk about the third fundamental indicator here, and that's users. So daily active users is now 300 and K wallets, so 300 and K, possibly individuals, groups. We don't know exactly who they are, but this is close to the highest it's ever been. So in this number, David, it hasn't been seen in over two years. So we're at the highest amount of users we've been since the previous bull market. What does that mean?

• 12:19David Hoffman?

  That just means that there are, there's a lot of life on Ethereum, right? And so the ICO mania was the last time that Ether really experienced this bull. Market, right? So for a couple of months, Ether was, the Ether price was between $400 and $1,400. And that's the last time we had, you know, 380,000 daily active addresses. Uh, addresses are never a perfect measure of users, but daily active addresses is actually pretty, uh, it's actually much closer than just raw aggregate addresses because, you know, if you're using Ethereum, you're probably using the same address in, in a single day period. So it's more reflective of the actual raw number of people using the Ethereum blockchain on a daily basis.

• 13:01David Hoffman?

  So like the, the interesting thing is, is that the last time we've saw this amount of daily active users, Ether price was, you know, a thousand dollars, $800, somewhere around that mark. And, and today it's $200. And so there's this just mismatch. Not to say that the right price of Ether was a thousand dollars back in 2017, but that's also to say that maybe the right price of Ether today isn't $200 either. Um, it's likely somewhere between those two numbers and, and maybe a thousand dollars or $1,400 was too high. But, uh, if, if we have the same amount of daily active users as we did when it was, it was then, maybe the $200 price range for Ether is a little bit too low.

• 13:40Ryan Sean Adams?

  One other thing about daily actives is, um, it's important to think that each Ethereum address is really, it's like a bank account. So, um, you know, I own multiple ETH addresses. I'm sure you do too, David. So it doesn't necessarily map one to one to a user. But the sec, the second thing I'd say is, you know, some of these addresses can actually represent entire companies, entire organizations, entire capital pools. So in that way, it's a, it's sort of a one to many kind of mapping. So we can't tell exactly how many users are using this, but we know we've got 380K bank accounts that are active on a daily basis on the Ethereum network.

• 14:24Ryan Sean Adams?

  Some of these are individuals with multiple addresses, but some of these are entire companies, entire capital pools with just one single address. So it definitely is a positive indicator.

• 14:34David Hoffman?

  And it's also worth noting that Ethereum and blockchain systems care much more about capital being used more so than individuals using them. Like, the fundamentals of blockchains depend on the total amount of capital being pushed through their system rather than the total individual number of users. And so I really like that analogy. There's 380,000 individual bank accounts. Never mind if that's 380,000 bank accounts owned by one person, which would be ridiculous. But just for the example I'm about to talk about, like, that's still 380,000 different users of Ethereum. Like, that's still kind of the metric that we're really going for.

• 15:12Ryan Sean Adams?

  Yeah, one of these addresses is Coinbase, for example, right? And Coinbase has billions in assets under its purview and under its care. So, yeah, that's absolutely the right way to think about it. Another really interesting metric here is the sheer amount of stable coins that have been issued on Ethereum in the past few months, really. We're at 7 billion in stable coins. What's this about?

• 15:39David Hoffman?

  So this is definitely a function of the macro environment at large. Like, everyone wants dollars, and crypto dollars are especially sought after because of some of their advantages. Like, you don't need a bank account to use them. There's no... They're very easy to get a hold of. They're very easy to transport. But what this really goes towards is the narrative of Ethereum as an internet settlement layer, a settlement layer for value. So if you have an asset, you might as well put it on Ethereum. And, you know, since the world wants dollars, there's a global squeeze for dollars, and especially a global squeeze for dollars that are not hosted in a bank account. Ethereum is just a great platform to use that for.

• 16:23David Hoffman?

  So for the dollar, the international dollar market, Ethereum is being leveraged as a settlement layer to manage internet dollars, crypto dollars. And it's just a fantastic use case of Ethereum.

• 16:34Ryan Sean Adams?

  So on that theme, there's also an increasing amount of Bitcoin getting sucked into the Ethereum gravity well. So that number has drastically increased as well. There's now 25 million in Bitcoin. Now, some of these are Bitcoin IOUs, basically secured by BitGo, a custody agent. An example of that is WBTC. But 25 million in Bitcoin on Ethereum, many of this amount, starting to use other DeFi protocols like Maker, it just seems like Ethereum is establishing this use case of sucking all of these other assets, assets like gold,

• 17:14Ryan Sean Adams?

  assets like US dollars, now assets like Bitcoin into its economy. What's your take on that? Bitcoin tokenized on Ethereum?

• 17:24David Hoffman?

  Yeah, we've had WBTC for a pretty long time, and it's kind of just been quiet. You know, there's been some amount of BTC issue, and it got integrated into Compound. But it really wasn't this like rocket of a product that really launched. And you know, there's plenty of criticisms about WBTC because it's, you know, just a, it's basically an ERC20 token that the centralized company commits to redeeming for a real Bitcoin if you ever use it. So it's not really that crypto economic pure system that we really are looking for. But it's kind of like the beta of Bitcoin on Ethereum, in my opinion. It's a signal of what's to come. And as soon as MakerDAO put WBTC into Ethereum, we saw the amount

• 18:04David Hoffman?

  of WBTC on Ethereum just skyrocket, right? One day, in one single transaction, the amount of WBTC doubled from like 1,500 to 3,500. And then, and then a couple of days later, we saw another minting of 1,000 BTC on Ethereum. So the, the gravity well of Ethereum is definitely pulling in all assets, and Bitcoin is definitely one of the lowest hanging fruits for assets to come to Ethereum. We've seen Bitcoin have difficulties in finding utility other than just being held by, by your people's ledgers, by people's cold storage wallets. And, you know, the Lightning Network really hasn't done what Bitcoiners have wanted it to do. And I think Ethereum is offering a very compelling, like, alternative settlement

• 18:47David Hoffman?

  network for Bitcoin, because you can do things in DeFi with Bitcoin. And so, the, the, the compromise of using WBTC apparently isn't that big of a deal for people who are interested in getting their Bitcoin inside of MakerDAO, inside of Compound, you know, Doing a non-taxable event by minting die so you don't have to sell your Bitcoin. All the things that we love DeFi for Ether for, but now you can use it for Bitcoin. And that's just WBTC, right? So ren protocol BTC has also just launched and it launched a couple of days ago, starting with two BTC. And now I believe there's 35 in there today. I haven't checked this morning.

• 19:26David Hoffman?

  TBTC is having some struggles to get out the gate, but when it does, I suspect that people will also be minting TBTC. So the race for tokenized Bitcoin on Ethereum is on, is on.

• 19:39Ryan Sean Adams?

  Yeah, absolutely. So, so one of the big questions I think people are asking, and you asked as we were going through those metrics, David, is, all right, so why the mismatch here? Why isn't the price of ETH up right now? Now, I think there's a really important distinction that people have to get in their minds. And I think we've, we've talked about this at numerous times across our previous episodes, David. But, but that's this, the asset is not the network. So there are two things here, two commodities within Ethereum. The first commodity that we talk about a lot is Ether, the asset. So this has limited scarcity. There's 110 million ETH, you know, producing at about 4% per year.

• 20:24Ryan Sean Adams?

  That's going to drop to close to 1% after ETH2 is deployed. That's an asset with some level of scarcity. But there's also another scarce commodity within the Ethereum economy, and that's actual block space. So block space is produced at a rate of about 6,000 per day. Each block has about 10, you know, space for 10 million gas. So those are the computational units that you can fit within block space. But those are two separate commodities. You've got the asset and then you've got the, the network. So Ethereum block space and Ethereum asset. And those are two separate markets as well.

• 21:05Ryan Sean Adams?

  So people can be bullish and excited about Ether, the, the asset, independent of being bullish and excited for Ethereum block space. So those two markets don't have to go up in tandem. That said, they often have in the past. So when there has been increased demand on Ethereum, the network, that is highly correlated with increased ETH price. So. And previously, when we saw the highest gas ever consumed on the Ethereum network, that was back in late 2017, early 2018, we also saw the highest ETH price as well. So one question about ETH prices, well, will that sort of revert to its mean?

• 21:50Ryan Sean Adams?

  And will all of this network activity start to translate into more direct, short to medium term price increases of Ether, the asset? What's your take on that?

• 22:00David Hoffman?

  So we need to remind ourselves that this is the early days of these systems, right? And so, you know, really, you only find true price discovery after a strong period period of maturity. And we are simply not there yet. Like Ethereum, the fundamentals change on a whim. We don't have that much historical comparisons to make. Like price discovery for not just Ether, but also Bitcoin, still hasn't taken taken hold, right? Like, that's why these systems are so volatile. And it's worth reminding ourselves that Bitcoin is not a store of value. It is a speculative store of value. People are speculating on it becoming a store of value like gold into the future, but it's not one today. And the same goes true for Ethereum, right?

• 22:43David Hoffman?

  Ethereum is a speculation on Ether is a speculation that Ethereum will be the internet economy platform for the whole entire world. It is not that today. And so I've heard people call like Bitcoin is an option on a store of value. And if Ether is the same thing for the world economy, like Ether is an option for the the fundamental asset of an internet settlement layer for value. And we're not there yet. And so when when prices change, these markets are so incredibly reflexive because the value of these things are really inside of people's heads. They're not on pen and paper. They're not, the fundamentals of these things are not yet discovered. Price is not yet discovered.

• 23:26David Hoffman?

  And so really what dictates price is people's opinions as to what other people will value these things, not necessarily by the fundamentals. So over time, as these systems mature, I expect fundamentals to really start to take over, but I don't. Don't really expect that to happen anytime soon. I'm talking like plus five, 10 years out before fundamentals really start to dictate the price. We're going to be in this long speculative period where speculation dictates price. But at the end of the day, speculation is determined by fundamentals, right? Like I would hate for my asset of choice to be something like EOS or Litecoin, which doesn't have any meaningful like block space demand or utility, right?

• 24:08David Hoffman?

  And so speculation does get driven by fundamentals, but it's always speculation first.

• 24:13Ryan Sean Adams?

  Yeah, so I wrote a post, a post on Bankless this week about Ether being potentially double undervalued. So it's undervalued in two ways. Like the first way we talked about Ethereum network is going crazy in terms of usage and ETH price really isn't following, right? Ether Ethereum network usage is all time high, but Ether price is like 85% down from all time high, right? So there's a delta there and that's the first sort of undervalued, potentially undervalued like, like way the market's thinking about it right now. But there's a second too. And that's I don't think the market has fully priced in that Ether, the asset can become a, like a store, a speculative store of value in the same way that Bitcoin does.

• 24:56Ryan Sean Adams?

  And everything you were saying about Ether, the asset being sort of the, the underlying reserve asset of this whole decentralized economy. I don't think that the market has fully appreciated that and priced that in. And if you look at some of the charts back in 2015, they didn't really appreciate that about Bitcoin either. So back in the first five years of Bitcoin's existence, the narratives were a little bit different. Yeah, Bitcoin as a, as a, as a digital gold was part of it, but it was a tiny part of it. A lot of the narrative was around Bitcoin being used as a peer-to-peer cash system. So a payment system, if you will, transactional system.

• 25:40Ryan Sean Adams?

  And the, the value of Bitcoin being used to pay for block space was a huge part of the value proposition. But that started to split off in 2017 and for the past three years. We've seen a massive delta between the market of Bitcoin block space use and the market of Bitcoin, the asset Bitcoin has been has sort of blasted away from that and the asset is valued far more than the network is valued because it's established itself as a store of value asset. That happened in the second five years of Bitcoin's life, not the first. And now we're approaching the second five years of Ethereum's life and Ether, the asset's life.

• 26:22Ryan Sean Adams?

  And it feels to me that that second narrative, that you know, second area where Ether is undervalued might start to kick in, people might start to see this more as a speculative, non-sovereign, you know, store of value asset that's going to be important to the future of money.

• 26:40David Hoffman?

  I believe it was Chris Bernisky who who said this a while ago, but he talked about how Ether is in its 2015 bear market for Bitcoin, where in Bitcoin in 2015, it was not certain and in the same and it was not certain that Bitcoin was going to be what it is today. There was a lot of uncertainty, there's a lot of doubts. People were not sure about the future of Bitcoin. But at the same time, there were still some believers that saw this coming, right? Saw that the fundamentals of Bitcoin were destined to improve. And that's exactly what happened in the following two to three years. You know, the 2013 bubble popped and it was this slow, drawn out bear market,

• 27:25David Hoffman?

  where there were definitely some fundamentals building, like companies were building on Bitcoin, but it was just uncertain. And Ether is and Chris Bernisky said that Ether is in that same bear market, right? There's this very long, very slow, drawn out, brutal bear market where people were really doubtful about the the long term certainty of Ether and Ethereum. Fortunately, things are like we talked about in previous episodes, these fractal patterns repeat, but they're not always the same. And because we saw Bitcoin come out of it, there's a lot more indication that we're going to see Ethereum come out of it and people. Like like me and you, Ryan, are really beating this drum, talking about how the fundamentals of Ethereum are really going to carry it forward.

• 28:08David Hoffman?

  And there's really not too much to be uncertain about. And so we are Ethereum is in its big bear market where it's just getting hammered by Bitcoin maxies, telling it telling all Ethereum ETH heads that it's totally worthless. But me and me and Ryan are here to fight back and say, like, look at these amazing fundamentals. And so I'm extremely optimistic about the future. I wake up every single day saying like, man, the future of Ethereum is going to be sick. I can't wait for it to show up. And I still feel that to this day.

• 28:37Ryan Sean Adams?

  Yeah, I agree. I mean, it's it's hard not to be bullish when you see data like this for sure. Of course, this could take a long time to play out and, you know, it's a thesis, so we could be wrong on it. But take a look at the data for yourself and and come to your own conclusions on that. Another thesis that we've talked about in the past that we're seeing some more evidence for is the protocol sync thesis. So we went over this in episode 12. And just last week, a week and a half ago, crypto.com, which is a non custodial crypto bank, actually took a step to to proving this thesis, at least, you know, in my mind, they rolled out a non custodial wallet.

• 29:22Ryan Sean Adams?

  So previously, crypto.com primarily facilitates lending and borrowing in a in a custodial way. So you have to deposit your assets, whether it's Ether or Bitcoin or DAI with them. You have to give up your private keys. They essentially become your bank. But they took their first first step in releasing a totally non custodial, non banked app that you can deposit Bitcoin and Ether into. So you own the private keys. And it seems like they are starting the process of rolling out DeFi protocols as well on top of that. So David, is this the the protocol sync thesis playing out?

• 30:03David Hoffman?

  This is absolutely the protocol sync thesis with a healthy dose of settlement assurances as well. Non custodianship is Settlement assurances. It's you get the assurances that the centralized company that you're storing your assets with can't mess with your funds. You get the assurances that your funds will be available to you and to you alone, which makes the crypto.com offering much more compelling. It's much less of a crypto bank and much more of a be your own bank. And so crypto.com, what they're doing is they're saying, uh, we are going to go with a settlement or we are going to follow along with these protocol sync thesis because we want to be dense.

• 30:42David Hoffman?

  And that makes our users and future customers able to depend on us as infrastructure into the future. Uh, and so there's no, even if crypto.com goes away, you still have your assets. Uh, and, and they don't go away with crypto.com. And so because of these assurances, crypto.com's product is simply better. Uh, and then like, like you said, Ryan, they're just rolling out DeFi apps on top of that. And the reason why they can do that is because they can depend on DeFi apps being there, especially the ones with strong settlement assurances and are super dense that fall to the bottom of the protocol sync. Uh, anything that you can depend and rely on gets customers because you can depend and rely on it.

• 31:24David Hoffman?

  Uh, and so this is just the protocol sync thesis playing out this. I'm really glad that we, we put out that episode because this, this, it's already been super useful so many times over ever since, uh, ever since we released it.

• 31:37Ryan Sean Adams?

  Yeah, I heard someone call it the new fat protocol, uh, thesis just last week. And I, I think it's really a thesis for how this entire crypto space and everything in DeFi, uh, plays out. And the beauty of it is these crypto banks like crypto.com, you know, slick marketing, really seamless onboarding experience, but they become the recruiting mechanism and the onboarding experience to all of the other DeFi protocols. So that crypto.com app, maybe it'll be a year, maybe it'll be less, but I bet they will add a deposit your die to the die savings rate button within their app. And in a really seamless way, somebody who's a crypto.com user and kind of new, doesn't know DeFi.

• 32:21Ryan Sean Adams?

  But they've connected their bank account to crypto.com. They've got that fiat on-ramp. They can just click a button and start using DeFi protocols. And what have we done? We just onboarded someone else to the bankless movement and the bankless system. That's really what we were talking about too with the Winklevoss twins, right, David? Like, you know, they see Gemini as basically a bridge, an interface layer for money protocols. So they're the user experience that they provide the, you know, regulatory quarterbacking, if you will, to hold kind of the regulators at bay and appease them and provide a safe experience, right? But what are they doing? They're onboarding the world into DeFi protocols, into bankless.

• 33:04Ryan Sean Adams?

  They're onboarding the world first into Bitcoin and Ether and assets like that. But then they're eventually going to start to incorporate these more dense assets or these more dense money protocols like the DAI savings, right?

• 33:18Ryan Sean Adams?

  It feels like the future to me. We'll see, right? But I mean, it feels like the thesis is starting to play out in real time.

• 33:25David Hoffman?

  I really enjoy the fact that all of these different centralized companies like Gemini, crypto.com, Zirion is a good one, like they are all interfaces for the same protocols. And that's really what makes up a good protocol is that you can find it wherever you go on the internet. You know, one day you'll be able to access Uniswap through Coinbase, Gemini, crypto.com, Zirion, you know, even uniswap.exe where you would find it normally. But protocols appear everywhere, right? Like they're part of the substrate and they just appear, you know, poking through the earth and wherever you find, wherever you go. And that's what makes a good protocol is it's dependably found no matter what. So yeah, I'm super bullish about this.

• 34:05Ryan Sean Adams?

  All right, let's take a moment and pause and tell you about our bankless sponsors. These are some fantastic tools for you.

• 34:11David Hoffman?

  Ave is a DeFi lending and borrowing platform with some new cool features that you might not be used to compared to other borrowing and lending applications on Ethereum. First and foremost, the feature that stands out to me the most is their fixed interest loans. And so, you know, variable interest loans can get pretty hairy, right? So Maker Dow At point five percent and then it slowly skyrocketed, it slowly ramped up to 20%, which is which is a very wide range of possible interest rates and it's not really sustainable for you know some of the more typical things and so that's where Ave comes in with their stable non-variable interest rates where you can lock in a specific interest rate and borrow against uh borrow assets

• 34:54David Hoffman?

  using that interest rate and being able to depend on that fixed interest rate really important a really important money Lego that we need in the DeFi space to really have DeFi grow and mature in a dependable way but that's not all you can do you can also do flash loans on Ave which is also a brand new money Lego where you can borrow uh you can borrow assets at without any collateral so long as you also repay it back in the same transaction uh so there's a lot of potential here in case you want to you have collateral in one application that you want to pay back but then open up that same uh a similar vault or some if you want to pay back collateral

• 35:36David Hoffman?

  but open up a different loan with different collateral you can do that all in one transaction without all the slippage costs so Ave and their flash loans allow you to do that they are the number four biggest application in DeFi coming in at 70 million locked in DeFi right now uh the bankless community really loves Ave and how do I how do I slip in that we've been pushing them up up the uh and we've just been watching Ave climb the ranks of the of the DeFi market cap so check them out at Ave.com deposit crypto to start earning or borrowing any Ethereum wallet will work so try it out

• 36:14Ryan Sean Adams?

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• 36:59Ryan Sean Adams?

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• 37:38Ryan Sean Adams?

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• 38:11David Hoffman?

  Okay, Ryan, here's a cool one that I'm really into. MKR, the token that governs the Maker Dow system, just got added to Coinbase today, this morning, as we are recording. So that's, that's super interesting to me. The, the things that I think about is that's a really bold move by Coinbase because people have been hesitant around adding MKR, especially to exchanges because of the nature of the MKR token. People think that the buyback and burn model turns it into something like a security. Now, I've never heard any official legal opinion as to what MKR is in regards to a security or not, but we have seen different companies kind of be hesitant with adding.

• 38:51David Hoffman?

  MKR onto their platform because it's security like quality. So like that's why you don't find it in set protocol. That's probably why you don't find it on any other exchange inside of the US, but Coinbase is is rolling with it and just integrating it right into the platform. And the reason why this is so important is because, you know, Maker Dow is kind of like a a private bank in a sense. Like it's a bank governed by shareholders and the difference between shareholders of the traditional sense where you see like a big room with a bunch of dudes sitting at a table. Shareholders in this sense is whoever owns the MKR token. And it's really important that the MKR token is accessible globally and easily.

• 39:33David Hoffman?

  And so getting it on to an exchange makes governance over the MKR system as free and accessible as buying Bitcoin and buying Ether. And that's really the difference between, you know, equity over a company that you can't have access to no matter what, especially the voting shares tokens. Versus something like MKR where it's a governance over the protocol is available on the open market. And all you need to have is the capital to provide skin in the game. And so having MKR accessible to be of more and more mechanisms is is really is really fundamentally important to how the protocol works. Because everyone deserves the right to be a governor over Maker Dow. And that's exactly what Coinbase is enabling by putting MKR onto their exchange.

• 40:16Ryan Sean Adams?

  Yeah, it really is the birth of a new asset class, a capital asset that has all of its cash flows on chain and is settled completely on chain. Rather than off chain in the legal system. So everything that happens with respect to fees earned, revenue earned. And essentially a portion of that revenue used to to burn Maker tokens, that all happens not in legal meat space. But settled on the Ethereum chain. So that is a new type of capital assets, one with on chain cash flows. And I really think this Coinbase move is is a further move into the Protocol Sync thesis, not to get back to that again, but not only are they.

• 41:01Ryan Sean Adams?

  Listing Maker and adding additional liquidity for Maker, which is good for the Maker decentralized central bank, if you would, if you will, but they are also starting to incorporate other features. So the ability to actually vote with your Maker tokens in the governance process. So making that seamless within, right now, it's on the Coinbase custody side. So it requires being a credit investor and some of these other details. But I bet they will open that up as they can in the future. And essentially Coinbase is providing a nice interface for us to do on-chain governance of some of these money protocol systems. So they're becoming an interface to governance of DeFi as well.

• 41:47David Hoffman?

  Absolutely. That's a really good point. I like that you brought that up. Maker Dow, its shield is the value of MKR, right? And not only the value of MKR, but the liquidity of MKR. And so on days like Black Thursday, where MKR needed to have been minted, as a result of Black Thursday events where Maker Dow lost some collateral and was a little bit underwater, MKR needed to be minted and sold to the market. And if MKR is on markets like Coinbase, this makes MKR more liquid and allows Maker Dow to have to mint less MKR to achieve the same result. So this is, you know, a really strong defensive barrier for Maker Dow, the system.

• 42:28David Hoffman?

  The more liquid MKR is, the stronger the backstop is then, and that ultimately protects DAI and keeps DAI at a dollar. So this is just the Maker Dow system spreading its roots and integrating itself into the world via these exchanges. And hopefully Coinbase is just the first of many.

• 42:45Ryan Sean Adams?

  Yeah. And while we're talking about governance, I'm actually curious your thoughts here, David, because I truly don't know. So we were talking about Maker on-chain governance, right? The ability to essentially you take your Maker stake and you can vote. That's what on-chain governance is. You get to control aspects of the protocol through a coin vote. There are some new base layer blockchains that are incorporating on-chain governance as part of their system. So Polkadot is one rolled out last week. It has on-chain governance. Baked in. So the more dots you have, the more you can change the direction of the of the protocol. You can influence issuance, for example, you could decide to create a proposal

• 43:30Ryan Sean Adams?

  and vote on it to issue more tokens for a specific, you know, investment that that you want to make inside of the the Polkadot economy. What's your take on that? Is on-chain governance a good thing or a bad thing?

• 43:46David Hoffman?

  Well, let's go back to the Protocol Sync thesis, the thesis that keeps on giving. If there is on-chain governance, there is a commitment to have a vehicle, a pathway for changing the protocol. That's the whole point of on-chain governance is that you want your protocol to be nimble and to be ready to change. That's the same thing with the Tezos blockchain as well. Like, Tezos is also on-chain voting, which means that they can change the protocol as they see fit. And, you know, there's there's benefits to that. Like, you know, it's there's always benefits to being nimble and being able to respond to the environment. However, if we are looking through the lens of the Protocol Sync thesis, on-chain governance reduces people's ability to depend on the protocol.

• 44:29David Hoffman?

  Maximum social scalability, the ability for these systems like Bitcoin and Ethereum and all these other protocols, on-chain or off-chain governance, the ability for these systems to scale up to you to be used by the entire globe, everyone, is really a function of how dependable these systems are. And if on-chain governance is a mechanism for changing the protocol, that is going to reduce people's ability to depend on them staying the way that it is. And Bitcoin is the ultimate instantiation of this, right? So Bitcoin doesn't fork, and all updates to Bitcoin nodes require what's called backwards compatibility, which means that the first node ever running on Bitcoin is still in alignment with all the other nodes that are also running on Bitcoin. Even though there might be different

• 45:14David Hoffman?

  software, the nodes still work with each other. And if you update the protocol, that breaks that. And that this is what Bitcoin is really, really harping on. They always want the network to be able to talk to each other. That's one of the fundamental values of Bitcoin. And I believe you and me, Ryan, we also want that to Be true for Ethereum one day after we innovate and get all the technological innovations of these crypto systems into Ethereum. That's also what we want with Ethereum, right? We don't want to be forking every six months because that reduces the density of Ethereum. We want eventually Ethereum to calcify and be dependable. On-chain governance flies in the face of this thesis. It says that we are going to change and we are going to have a commitment to changing by on-chain voting mechanisms,

• 45:56David Hoffman?

  which means that users of these of these applications won't know what the protocol is like in one year, five years, 10 years, 20 years. And so it really threatens the store of value narrative because store of values, store of value assets require long-term thinking. And any, any protocol changes threaten that.

• 46:15Ryan Sean Adams?

  Yeah, we're actually in closer alignment than than I thought on that, David. So, so I think what you're saying is through the lens of the protocol sync thesis. If you have on-chain governance on your base protocol, you're a less dense protocol. And you're maybe not even dense enough to sync to, to, to the bottom of the world economy and create a reserve asset. That's a, that's a store of value. And I think like, if people think about this for a minute, they can sort of see why. So if you are in a network with on-chain governance and the, the folks with the most capital, the hold the most Tezos or, or hold the most dots in a given network.

• 46:56Ryan Sean Adams?

  If they can by vote through the social contract of the system and through the, the formal governance of the system, vote to issue more or less of an asset, basically at a whim. I mean, what you have is a plutocracy. It doesn't feel a whole lot better than the existing system of, you know, the Fed and 12 guys from different areas of the country, different banks, setting rates. I mean, it feels maybe even worse because there's no. Democratic elected accountability, it's like oligarchs and capitalists and plutocrats running the show. Like, that doesn't feel like a base money system that you want to

• 47:38Ryan Sean Adams?

  scale to the world. So what has to happen, I think, if we're looking at this through the lens of the Protocol Sync thesis, is that networks go the way that Bitcoin has gone, which is no on-chain governance and you eventually ossify. And Ethereum is in the process of ossifying now. Now, it's taking a longer time to ossify because it's essentially adding two things. It's adding, one, this whole notion of programmability, but second, this whole notion of scalability, so that it can be a more scalable base layer for the world. So it can be a more scalable base layer for the world, but its path is

• 48:22Ryan Sean Adams?

  eventually to ossify and not change and not be subject to the whims of ETH whales who hold their tokens. They shouldn't be able to print more ether. So that, to me, seems like a base qualification to compete as a reserve money store of value for the world. And if you have on-chain governance, it's hard for me to see how you're competing on that dimension.

• 48:49David Hoffman?

  I remember a few years ago, there was the issue of net neutrality going around the internet, where institutions like Comcast and AT&T and all these massive internet giants wanted to remove net neutrality and allow for the throttling of some websites in the benefit of others. And the people of the world, especially the people of the United States vehemently rejected that concept. And that is because of the protocol density of the internet. Like, the Protocol Sync thesis doesn't only work for crypto systems. The internet is a protocol, and it's, more importantly, a protocol without governance.

• 49:30David Hoffman?

  And what Comcast and these other big internet gargantuan wanted to do is they wanted to govern over the internet and say, like, "Okay, we want to be able to choose who to throttle and who not to." And that was the whole issue of the internet neutrality issue.

• 49:45David Hoffman?

  Having a on-chain voting mechanism is commitment to non-neutrality. And that is the opposite of the protocol sing thesis. And maybe in an even less generous criticism of things like Polkadot or things like on-chain governance, the incentive system is totally fucked up. Right. Because you have these massive VC funds who are investing millions and millions and millions of dollars because of the incentive to buy something that can be governed. Like, imagine if the internet had this governance token. It would just be bought up by the large head funds of the world. And then we would just have this internet protocol that is just managed by these people with a ton of capital. And it wouldn't be the internet that we have today. This free, fair and open internet.

• 50:30David Hoffman?

  It would be something else. And so, you know, shame on all the VC firms who thought that they could just buy their way into this protocol that they thought would just like turn into the, what Ethereum really is, is this settlement network for the internet. And then they would just be able to be the gargantuan's behind like this new internet. Like, no, that's not happening. And the people reject it. And that's why Ethereum is strictly a non-on-chain governance system.

• 50:57Ryan Sean Adams?

  Yeah, I totally agree. I think one way to say this is the future of the internet of money will not be owned by Andreessen Horowitz. That cannot be the case. That is not what the people want. Guys, this has been a special edition of Bankless. This has been a bonus edition that we're providing you. I hope you enjoyed it. Guys, risks and disclaimers. Of course, everything that we talked about with respect to ETH is risky. So price may not go up. We have no idea what the short-term direction will be. Crypto is risky. DeFi is risky. The protocols we talked about are also risky. But we are headed west. We are on the frontier. This isn't for everyone, but we are glad you are with us on the Bankless journey. Thanks a lot.

• 51:43David Hoffman?

  What, uh, what non-custodianship is? Non-custodianship, is that real? I think that's real.

• 51:49Ryan Sean Adams?

  I think you made it up, but, you know, real? Like, we're making it up all the time.

• 51:53David Hoffman?

  We're rolling with it.

• 51:53Ryan Sean Adams?

  Oh, good, good, good, okay.

• 51:57David Hoffman?

  I'm definitely putting that in the bloopers.