The Element Airdrop & DAO Launch | Will Villanueva & Jonny Rhea

Element Finance is an open-source protocol for fixed and variable yield markets. Yield markets you say? Like the incoming Trillion-dollar ETH Staking yield market? Come learn about how Element is putting a financial layer on top of Ethereum staking, and the other cool new inventions that the Element team has for the DAO space. ------ CONSENSYS | M·A·C: NFT Collection for a Good Cause https://bankless.cc/MAC ------ SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ ️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: ️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across ALTO IRA | TAX-FREE CRYPTO https://bankless.cc/AltoIRA AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave ️ MAKER DAO | THE DAI STABLECOIN https://bankless.cc/MakerDAO BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave ------ Guests: Will Villanueva - CEO of Element, previous worked at Consensys doing research on Ethereum Sharding Jonny Rhea - CTO of Element, previously worked at Consensys working on an Ethereum client. ----- Topics Covered: 0:00 Intro 8:30 What is Element? 13:37 The ELFI Airdrop 19:05 The zk Claim Process 25:48 Non-Transferable 29:20 NFTs & DAO Governance 35:57 Council Governance 41:14 Voting Vaults 49:58 Maximally Expressive Governance 53:55 ETH Staking Yield 1:01:06 Protocol Security 1:07:50 Bullish PoS Merge 1:15:10 What's Next for Element? 1:18:22 Closing & Disclaimers ------ Resources: DAO Launch Announcement: https://mirror.xyz/0x3fcAf7DDf64E6e109B1e2A5CC17875D4a5993F39/bctuLRkf7oBL4mMJ9lPf0y0blFjBDslTUfUL0CEk1gc Guide to Element: https://newsletter.banklesshq.com/p/a-guide-to-fixed-income-on-element?s=w Yield Token Compounding: https://ytc.component.fi/ytc?base_token=0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48 Previous Bankless show with Element https://www.youtube.com/watch?v=iF5O1rPbsm4 ----- 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://newsletter.banklesshq.com/p/bankless-disclosures

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

• 0:19Ryan Sean Adams?

  Hey Bankless Nation, welcome to another episode of State of the Nation. We are super excited to talk to you guys a little bit about the Element airdrop. Element, this is a DeFi protocol, DeFi primitive. We've talked about them before on Bankless. Basically fixed interest rates, a new sort of DeFi primitive. And there's actually a lot to unpack with this Element story. So David, I know you've got three things that you think are going to be super valuable alpha in this conversation that we're going to cover. Can you talk about those and the guests that we have on today?

• 0:49David Hoffman?

  Yeah, yeah, this is not your typical DAO launch. While that is where the conversation begins, it is certainly not where the conversation ends. Element with the launch of Element DAO is bringing a lot to the table. First, they have a brand new money Lego governance primitive that all DAOs are freely able to use and plug into. They explained it to me yesterday and I'm already pretty well convinced that this is going to become the new standard when it comes to DAO governance tokens. It's called a voting vault and it allows you, Ryan, to have your cake and eat it too. At least when it comes to...

• 1:23Ryan Sean Adams?

  I love cake.

• 1:24David Hoffman?

  Yeah, cake's great. So we're going to unpack what a voting vault is and why we think, at least why I've been convinced that basically every single DAO is going to adopt a voting vault structure. Second, they are also pioneering a DAO governance model, a new governance structure, which they think is faster and more effective and more efficient at governance, which is something that all DAOs need to improve and iterate on. But lastly, Ryan, and most importantly, and most excitedly, they're going to show us how we can get exposure to the merge. Like you said, it's a fixed interest yield...

• 1:56Ryan Sean Adams?

  Upside exposure, right?

• 1:57David Hoffman?

  Upside exposure, yeah. Or maybe the inverse, if you so...

• 2:00Ryan Sean Adams?

  I don't want the inverse. Why would anyone do the inverse?

• 2:03David Hoffman?

  Yeah, right. But, okay, as you said, like Element is a fixed yield interest rate protocol, but with... That tool with this money Lego, you can express bullishness as to the APY, the yield rate of Ethereum. And so if you think that yield rate is going to go up, I don't know why someone would, Ryan. Maybe they're expecting the

• 2:20Ryan Sean Adams?

  I do think this. I do think maybe it's someone who's listened to a few bankless podcasts might think this.

• 2:24David Hoffman?

  Yeah. So Element as a tool allows you to get exposure to the merge. So that is what we are talking about today. The new governance primitive, the new governance structure, but then also how Element is going to be useful going into the merge. We are bringing on the CEO and CTO of Element, Will Villanueva and Johnny Ray. They have been in the Ethereum ecosystem for a long time now. They are both ex Consensus before they went off and built off their own thing with Element. So they have been around for a long time and they are fantastic community members and now builders, building out a DeFi app that is actually a little bit closer to the actual protocol of Ethereum rather than just in the application layer, which is another topic that we will get into.

• 3:07Ryan Sean Adams?

  Yeah, that's super cool. And by the way, we'll, we'll start this whole conversation talking about the eligibility criteria for the airdrop. And of course, Element, I think was an airdrop that we had predicted would happen, that probably would happen when we put out our big beefy airdrop guide, like all the way back in November of last year. So if you were listening, if you're checking those boxes, you might want to see if you're eligible for this airdrop as well. So we're going to talk about that. David, before we do, man, we got an announcement, super important. So it is National Youth HIV AIDS Awareness Day on April 10th. And a new NFT collection has just been launched. This is powered by Consensus NFT. And I think this is a fantastic opportunity for first time NFT buyers

• 3:51Ryan Sean Adams?

  because it's an opportunity to support a really great cause with the NFT. Could you tell them a bit about this NFT and, you know, how the proceeds from this? Where the proceeds from this go, David?

• 4:04David Hoffman?

  Yeah, this is from MAC Cosmetics. Maybe, maybe the, the men in the channel don't know what that is, but the, but the women in the channel certainly probably do. Makeup, makeup company making a bunch of cosmetic products. They are working on an NFT project with Consensus. Where 100% of the revenue of the incoming money is being donated to AIDS Awareness, Youth HIV AIDS Awareness Day, which is on April 10th. There are three tiers of rarity. You've got red tier, blue tier, and yellow tier. And so if you have never participated in an NFT drop, maybe you just don't know which one is for you. This one might be a nice one to start with. $25 for the minimum tier, for the red tier, 250 blue tiers for

• 4:46David Hoffman?

  at $150 each, and then only 25 yellow tiers at $1,000 each. And again, 100% of the money goes to youth HIV and AIDS awareness.

• 4:55Ryan Sean Adams?

  Yeah, I'm going to be participating definitely because this is a good cause. The art is by Keith Haring, by the way. So to get more details on that, click the link in the show notes. It's banklist.cc/mac. David, let me ask you the question before these episodes I start with. What is the state of the nation today?

• 5:11David Hoffman?

  Ryan, the state of the nation is yielding. We are yielding. Our crops are yielding. Not only, like I said, Element is bringing to the table some brand new technology for all DAOs to be able to use regardless of plugging into Element or not. Brand new governance primitive that's going to allow us to have our cake and eat it too. We're going to talk all about that. Some new tooling in the Discord space, allowing Discord users to discreetly and privately claim tokens without doxing themselves. That's also coming. So all these technologies that Element is bringing is being yielded by the rest of the DAO ecosystem because of the nature of open source protocol. When somebody builds something, we all benefit. But of course, Ryan, it's also we are yielding from the merge, which Element is also going to help us with.

• 5:54Ryan Sean Adams?

  Look, man, three words, cake, yield, and merge. All right? And they all go really well together. We'll all unpack all of those things in this episode. Really excited to get to it. Before we do, we want to thank the sponsors that made this episode possible.

• 6:09David Hoffman?

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• 6:54David Hoffman?

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• 7:07David Hoffman?

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• 7:48David Hoffman?

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• 8:32David Hoffman?

  or any other DeFi protocol that you use. Follow Maker on Twitter, @makerdao, and learn from the oldest and most resilient DAO in existence.

• 8:41Ryan Sean Adams?

  Hey guys, we are back on the podcast with Will Villanueva and Johnny Ray. Super excited, the CEO and CTO of Element, respectively. I think they both did some time, I make it sound like a jail sentence. They both worked at Consensus previously. Will on Ethereum sharding was pretty cool. And Johnny on the Ethereum client. So both like protocol layer devs that moved up the stack into DeFi. That's a conversation in and of itself. But Will and Johnny, we are here to talk about Element. How are you guys doing today? Welcome to Bankless and welcome back, Will.

• 9:15Speaker 02

  Yeah, thanks for, thanks for having us. Really excited to be here, really excited to jam out and talk about everything. And yeah, always fun to be here.

• 9:24Ryan Sean Adams?

  Well, let's jam out. Let's talk about everything, guys.

• 9:27Speaker 03

  Thanks for having us. I'm hungry with all this talk of cake.

• 9:32Ryan Sean Adams?

  We're gonna get to the cake, alright? But first, we gotta eat our veggies as we do on Bankless. And give us the quick speedrun, the 101 of Element for people who haven't caught up on what Element actually is. We talked about yield. We talked about cake, of course. But tell us about yield. What is the 101 on Element? What does the protocol do?

• 9:53Speaker 02

  Yeah, so Element's pretty simple at the most fundamental layer. So what we do is our set of contracts basically allow you to put, go for any yield position in the market. Currently, we're wrapping the positions on Urn. And it lets you split that position, that yield position into two basic components. So there's the principal and there's the interest. So to give you like a really, really simple example, if I put down a million dollars on the USDC vault in Urn, and let's say it's going for 10% APY, the principal is $1 million. At the end of a year, the interest that I can redeem for is $100,000, that 10%.

• 10:35Speaker 02

  And so what we do is we create a market around both, both those components, the principal side and the yield side. And allows for some really interesting things. And particularly, the one that's really interesting is the the markets around principal tokens. So we use something called yield space. Shout out to Alan over at Yield Protocol. It's the constant power product invariant. And essentially, what we what we do in this case is it's sort of this concept of I give you 90 cents for a dollar. So Ryan, I'm going to give you a dollar. How much is it worth it to you? But you can't use it for a year. So you might say, okay, I'll give you 90 cents for that because I sort of, you know, miss out on the opportunity costs of money, right?

• 11:20Speaker 02

  I I'm not able to stake it on different different positions in the space. And this is sort of what creates that market, which sort of tracks the going variable yield rates in the space. And so when you make that deal, it's it's safe, it's conservative, you know exactly what you're going to get upfront. And it's sort of fueled by people who are going long on variable interest and using our platform to do that and sort of degenerate a little bit as well.

• 11:44David Hoffman?

  And Will, this is this is super common, right? In the traditional finance world, what is this subset of assets called? And like, what happens in traditional finance?

• 11:53Speaker 02

  Yeah, so there's this, there's this pretty like, you know, basic concept, you know, of the opportunity cost of money. If you give someone, you know, a certain amount of funds and it's locked for a certain period of time, that sort of accrues that differential interest. One way you can see it is the person who's buying these principal tokens or getting that fixed rate, you can almost see it as a really, really high interest rate CD that they're locking in.

• 12:19Speaker 02

  But those rates are, you know, significantly higher than what you see in traditional finance. Also, yeah, the splitting of variable interest from from the principal is also a pretty common thing in that space as well.

• 12:30David Hoffman?

  So this allows somebody who is particularly bullish on an asset to be able that and that asset has a yield associated with it. It allows people to buy that asset at a discount. So like if Ether is like $3,500 and it's got a certain amount of yield, I could buy it for like $3,200 at a discount. But the only thing is I just am locked up for Certain amount of time, but if you're already bullish, you're and you're already going to hold it anyways, you could buy it today at a discount. And that's like probably like the most basic way to leverage Element, but then things can get really a lot more creative. The splitting of a yield-bearing asset into a principal and its interest into two different tokens, the principal token and the interest token,

• 13:15David Hoffman?

  allows for a lot more of expressivity, a lot of more creativity. And that's where we're going to get into the section later on in the show about how one can gain exposure to the merge. Anything to add on that? Or should we get into some of the Dow launch subjects as well?

• 13:30Speaker 02

  Yeah, let's get to the Dow launch.

• 13:31David Hoffman?

  Okay, cool. Because of course, like we said, got to eat the veggies before we eat the cake. And so veggies first. Congratulations, guys, on the launch of Element Dow and the Element Token airdrop. Let's go a little bit into the details about the the dynamics behind the airdrop and the Dow launch. The snapshot was taken March 1st. So anyone that has interacted with a with the Element Protocol since then, sorry, you're you're out of luck. But if you're before then, you probably got some of the airdrop. How did you guys determine how much of the airdrop to give out and who of the Element Protocol users actually got the airdrop?

• 14:08Speaker 02

  Yeah, so I'll actually let like Johnny, I think Johnny can, you know, describe a lot of this in more depth as well. But basically, we sort of broke it out into a few few components. So one, we wanted to reward the users of the protocol. These are people who traded principal tokens. These are locked in a fixed rate. These are people who LP'd in the protocol. We also wanted to reward active community. So this are, these are people who are active and actually had engaging discussions in our Discord. And then also, we were, you know, pretty passionate about rewarding both ecosystem developers. So these are core Ethereum developers. You know, there's a number of reasons why I think Johnny can articulate that really well. We're both, you know, really passionate about that.

• 14:53Speaker 02

  But also other sister protocols. So we also rewarded people, basically protocols we built on. And then other protocols that we felt were like good for the space, good for the DeFi ecosystem that we that we really appreciated. And the way we did that, right, is we actually had scripts that analyzed GitHub contributions. And based on your GitHub contributions that, you know, allow us for your eligibility on, you know, some of those repos. But I'll go ahead and pass like this one off to Johnny. I know he has a lot to say. Or yeah.

• 15:22David Hoffman?

  Yeah, Johnny, help us just understand this a little bit more. What are the unique elements of the Element airdrop that isn't really found in other airdrops or other DAO launches?

• 15:32Speaker 03

  Yeah, I would say just like high level, like the main takeaways. So, you know, on the user side, like we provide like, you know, like 3.5% liquidity providers, you know, 3.5% to traders, and then like half a percent to mentors. And really what we did is we decided early on to do it in a proportional manner, which is like, you know, it's good and bad. Like proportional is nice because it's basically like, you know, the amount that an individual has like interacted with the protocol is going to like directly be proportional to like how many votes they're awarded.

• 16:08David Hoffman?

  A simple resistance, right?

• 16:10Speaker 03

  That was probably the most complicated, you know, you know, part of the of the process. But really, our goal was to keep it simple. You know, like, I think when you're looking at the data initially, you could see that like there was a lot of people that were like trying to take advantage of like, hopefully the fact that we would have some sort of like blanket distribution for anyone, you know, like sort of you saw with like the Uniswap, you know, airdrop that they did, like anyone who'd made a trade gotten a certain amount of UD right away. Well, since then, that ship has sailed. People have kind of got savvy to that. And so rather than try to come up with some really complicated logic, we figured, hey, let's just do it proportional. You know, if if people are sprinkling, you know, little like two cent buys or sells

• 16:54Speaker 03

  here or there, or just Lping a very small amount, well, you know, they'll, they'll, that's the slice of cake they get, right? And if they did more, well, it essentially takes all of the all of the subjective kind of like decisions like out of our hands. So, so that was one thing. It was also interesting sort of looking at the data and noticing like how many people had figured out some of the interesting art opportunities there are on Element with minting and swapping and yield token compounding, which which I think we'll explain a little bit more. But, um, but yeah, that's, that's basically the TLDR with the. The distribution and how it worked from the user point of view.

• 17:36David Hoffman?

  And Will brought this up and I want to dive into it. You guys have also allocated, I believe, one and a quarter percent of tokens to a cohort of people that typically are not included in airdrops, being the ecosystem contributors and developers. Can you, Johnny, can you just unpack that decision and who are these people that are receiving this share of the tokens?

• 17:55Speaker 03

  Yeah, yeah. So this was like, when Will and I first started Element, this was like the one thing we couldn't wait, you know, to incorporate. We didn't know how we were going to do it. We didn't know exactly what form or how it manifests, but it was something that we were really passionate about. It was basically kind of like bridging the gap between, you know, the core protocol layer and the application layer. And so like, you know, one thing to, one thing to mention is that like, the people who get this, yeah, like Will mentioned are people we built on. So that's core protocol devs, even, you know, even core like DeFi Legos like Maker or like YieldSpace.

• 18:38Speaker 03

  Like we love and respect Dan Robinson and Alan and all the work they did on YieldSpace. You know, we adopted that. So people like that all took advantage of it. They all got included in the airdrop. There's going to be people we missed out on. But one thing that's kind of interesting about the way it was implemented, you know, was this, was this ZK claim.

• 19:01Speaker 03

  You know, airdrop process that we've kind of like pioneered here.

• 19:06Speaker 02

  Yeah, the ZK, oh, sorry, go for it.

• 19:08David Hoffman?

  No, no, keep going. If you're going to keep on going, that's where I was going to go.

• 19:11Speaker 02

  Yeah. So the ZK claim process is pretty dope. So we, you know, worked with Sam on this and he sort of, you know, worked on the contracts. We gave a call out and, you know, the write-up that we did, the distribution write-up. But essentially what it, what it lets people do is if you're going to reward people by their GitHub ID or by their Discord ID, you want to do it in a way where they can still keep their privacy, right? You don't want to be able to connect their Ethereum address to their identity. And so the ZK claim was sort of. A cool innovation because it basically enables what we're doing. That you can claim by your GitHub ID and then you don't need to be doxed. And so this is sort of why we have this one week period. If you go, if you qualified on the Discord side or the GitHub side,

• 19:55Speaker 02

  you go through this really cool dashboard, you generate a public ID, a key, a public key, a private key. You, you know, generate randomness by moving your mouse around. It's a really fun process. And then essentially a week and a half later, once everyone's posted their public IDs on the GitHub issue thread or in the Discord, you know, channel that we have, we use that to be able to build a Merkle tree where then they can claim. And when they claim, you can't, you can't track it to, to the identity to GitHub ID that's being claimed. So it's, it's sort of a necessary part in doing it this way. And it's, it's pretty cool. I'm like excited to see others sort of follow, follow suite.

• 20:39David Hoffman?

  So I want to just recap and make sure I understand you guys in, when you guys started Element. And, and again, you guys came from consensus. One of you guys worked on sharding, one of you guys worked on Ethereum client. So app developers that are really close to the Ethereum protocol and also just, you know, open source values and, and something that really a lot of the core people around Ethereum really embody. And so you guys came and you guys started Element with the intention of when it came time to have a token or what, however you guys intended on generating liquidity when you first started Element. You're like, okay, we're going to give back. The protocols that Element is built on top of and the, the shoulders upon which Element lies on, the shoulders of giants.

• 21:22David Hoffman?

  You guys are going to give a, a share of the tokens back towards, you know, the MakerDAO protocol, I think is one you, one you listed, but also the other, the people that have contributed provably via GitHub.

• 21:36David Hoffman?

  And so you guys have embodied this ethos of giving back to the platforms that you guys have been building upon, right? Giving back to open source, which is very honorable and very true to the nature of Ethereum. The issue with that is that if you want to give away tokens, you would also inherently be doxing the contributors. And so you guys have made this ZK claim technology that allows the elements, the elements of the element it's built upon to be able to have their share of the tokens, but not also doxing themselves on Ethereum at the same time. Is that, is that the full story here?

• 22:11Speaker 02

  Yeah, you nailed it.

• 22:13Speaker 03

  Yeah, 100%. And Will mentioned it, but shout out to Sam Raxdale, who we were just like riffing. Me, Will and I were just riffing with him about it. And he brought up this idea for his ZK claiming process. And we were like, dude, I think that would be a sweet way to do, to do what we're kind of like looking, you know, looking to do for our, our distribution. So.

• 22:36David Hoffman?

  Well, I know, I just, we just talked about how we can remove the ability to be doxed with his ZK claim tech. But who is, who is receiving all these tokens? Like, how is that part of the distribution been allocated? Is that public knowledge?

• 22:50Speaker 02

  Yeah.

• 22:51Speaker 03

  Yeah, we have a, we have a gist that basically lists, it's a, it's a bunch of Ethereum, like, so basically like all the client, all the client repos. So Geth, you know, Taku, Lighthouse, you know, Besu, Nethermind, you know, all, all of the, all of the client teams, all of the, you know, even the, even Protocol Labs and Lit P2P, right? So like, you know, the Ethereum, you know, Ethereum and Protocol Labs like work together to, to kind of be like the first big protocol to like really integrate like Lit P2P into their networking stack. So we included

• 23:31Speaker 03

  them, you know, also like, you know, additionally, like, like we mentioned, like the Maker DAOs, you know, the compounds, the Aves. We missed a big one, like in Uniswap, like Uniswap, like, I mean, we knew this was going to be, like, we knew we would like, kind of like, that would be a, you know, sort of a risk, you know, like trying to remember every single repo or every single thing. And honestly, like, you know, really, the takeaway is here is like, we hope people like, take our approach, build on it, give us feedback. And then the next, the next team that comes around and does it, maybe they can, they can make improvements on it.

• 24:09Ryan Sean Adams?

  Tony, did you guys give any to that, that Vitalik guy? I've heard he's, he did something.

• 24:15Speaker 02

  He, he does have a distribution. Yes, yes.

• 24:18David Hoffman?

  Because of his contributions to Git, to GitHub?

• 24:21Speaker 02

  Yeah, because of his contribution. So pretty much all the core ETH2 researchers have have a claim amount that they can go for.

• 24:30David Hoffman?

  And this wasn't you guys just manually saying like, oh, they deserve this amount or they deserve this amount. This is just an out like an algorithm of sorts programmatically going through the GitHub repos saying, oh, these guys contributed, these, these people contributed, this system contributed. And so you guys are leaving like, it's a, it's like a retroactive airdrop, but for protocols that came before your element's time. And so it's literally like, again, building on the shoulders of giants, but doing a retroactive airdrop to the open source, like all the open source contributions that has been contributed to Ethereum at large.

• 25:06Speaker 03

  Yeah, that's right. And we tried to keep it simple. It's like, we could have, again, like, we could have gone into like, you know, judging quality of commits and stuff like that. But instead, what we tried to do is like, basically said, if you have a commit that's merged into main, whether it's a comment or, or whatever, like, everyone gets, you know, the same out for that, you know, for that, for that particular repo. So just any kind of questions there, keep it simple. Yeah.

• 25:35Speaker 02

  Yeah, we wanted to keep it objective. So we just basically picked a list of the organizations. And then from there, the script looked at all the merged, merged commits. So.

• 25:45Ryan Sean Adams?

  I love that. It's a really cool precedent to set, I think. One, one other thing, while we're on the subject of the token, my understanding is the token is non-transferable right now. Is that correct?

• 25:55Speaker 02

  Yeah. So the current setup, and we can go into this in a bit. So we have the Council Governance Protocol. This is a new governance primitive, new protocol overall. It's not a fork of Governor Bravo. But essentially, it introduces these things called voting vaults. And I think we'll talk about this in a bit as well. And the way that we have it set up is when you claim your, your drop, you're put into a locking vault. And this is to encourage people, you know, from the start to actually play a part in governance, to delegate in governance. So in the current, in the current setup, the locking vault keeps you, keeps you into the governance system.

• 26:36Ryan Sean Adams?

  So what, what are kind of the reasons for, for the lockup? Like, why, why did you guys, or the non-transferability? Why did you guys want to start with that?

• 26:47Speaker 02

  Yeah, I think it's good to sort of, you know, bring, bring everyone who's contributed to the protocol and who's excited and start everything off with everyone being involved in governance and having a, having a say in that. And then from there, right, like the governance system, voting vaults, everything is upgradable by the community. So they can sort of situate changes that they want it, they want to, but the idea here is we wanted everyone to be like playing a role, being a part in governance from the start.

• 27:13David Hoffman?

  And will the community have to vote their vote in transferability into the token? Or is the token unlocked to be transferable at a certain point in time?

• 27:22Speaker 02

  So if they wanted to make changes, you know, you can always upgrade the governance system or upgrade, you know, the set of voting vaults. But that's sort of up to governance and, you know, I think we're, we're focused on, you know, trying to keep, keep people using this to vote and being a part of that dynamic. So.

• 27:41Ryan Sean Adams?

  I think that's interesting. I guess like not being distracted by like price and all of that too. I mean, with many air drops, the minute it starts trading, everyone's like, when the moon, you know, what's the price going to be? And you guys don't have that dynamic here. It's just like, okay, there's an allocation of supply. And now the next step is not go look at it on CoinGecko. The next step is like, go, go vote, go plug into governance in some way.

• 28:06Speaker 03

  But honestly, it's, it's really like the way we wanted to approach it is like, I mean, this is an experiment in radical decentralization. And I don't mean that like, you know, it's, it's total chaos, but it's like, we wanted to do this in a way like, everything is up to the community. It's out of our hands. Like every decision is going to be completely up to the community. You know, these are valueless.

• 28:32Speaker 03

  You know, like we didn't want to make any decision, you know, without the community being involved. And so, you know, some of that is, you know, the, the very first step was basically just launching, you know, the governance protocol, launching a way to distribute some initial votes. You know, kind of getting the governance system, getting the, you know, like the, basically like the, you know, the community. You know, the culture, you know, like the vibe kind of in place. Um, it just like you said, it like, you know, price and all that stuff like, I don't care what it does. Like, we're here to like, just try weird shit. We just want to experiment, you know, let the community take it where it wants to, you know?

• 29:13Speaker 03

  And, um, you know, we'll see what happens. So, so that's, that's really what we're looking to do. It's out of our hands.

• 29:20Speaker 02

  I love the theme of experimentation and trying things. Um, and I think we'll talk about this later, but we even launched like an NFT project. Um, there are these like really cool kind of badass, uh, pixelated elves. And, uh, this is part of, this is part of the whole thing where basically we're, um, incentivizing people to delegate right away. The first, you know, N number of delegates got whitelisted to, to mint these. Um, and this sort of like, it, it's really cool. I, I did a whole tweet thread on this. I believe that, uh, NFTs are now going to be a core part of, um, of DAO governance. Because NFT sort of build community better than any primitive we've seen in the space.

• 30:01Speaker 02

  So you combine the community of the NFT world with the community around DAOs and this, you know, sense of belonging. Um, and then you sort of integrate them and you find ways that these, these NFTs can play a part in governance. You sort of supercharge things. And so this, this is, you know, Johnny put it really well. We like to do weird things. We like to experiment. We like to throw things out there and see what happens. Uh, this is just like one of, one of those examples. So.

• 30:26David Hoffman?

  Yeah. So we'll, we'll go, we'll get into it here since we're already on, on the subject. Uh, we had just had, came out of a podcast with, uh, Olaf Carson. We, that podcast will come out on Monday. And he talked about how, uh, there's just this natural fit between DeFi applications and DAOs. Like DeFi applications are awesome. DAOs are awesome, but DeFi applications need governance and DAOs can offer governance. So it makes sense just to smash these things together. But you, so you guys are doing that with the launch of Element DAO, but you guys are also doing the NFT thing as well. So you have a DAO that's not only about a DeFi app, but now it's also about like an NFT ecosystem. Can you, can you just go into the, uh, the angle on that? Like, why split your attention?

• 31:05David Hoffman?

  Like now you guys are doing two things or, or do you think that this is actually going to be a worthwhile, uh, uh endeavor to help? Just the DeFi app side of, of Element. How does, how does the NFT project actually end up helping the DeFi app?

• 31:19Speaker 02

  Yeah, so again, I did like a really long thread on this. And I I sort of come with the hypothesis that NFTs are now going to be an integral part of DAOs from the future, from this point on. I think people are going to start experimenting with it more. I think it's just going to be, it's a natural fit. DAOs represent, you know, community, right? Like the the voting share you have in the DAO, you feel connected to that DAO, its mission, what it's doing, the research it's doing, the things it's launching, its treasury that it owns. So you combine that with, you know, an NFT project, which also, you know, is sort of builds a natural and organic community in general. And you can sort of see like what what it can do.

• 32:02Speaker 02

  And, you know, there's a number of things that we can play with, right? So not just using NFTs as like a community aspect or like gating certain, you know, channels or discussions or events with it. But you could also have like NF, the NFT world be a part of governance. So you do certain things in the application, you, you know, try certain behaviors, you put a proposal forward, you vote on something, you're active. Maybe you can level up that NFT with, you know, external set of potions that you can show in your profile. You know, there's, there's a lot of experimentation here. There's a lot of, a lot of cool things. And so this is sort of what what we're playing with.

• 32:43David Hoffman?

  Johnny, you have anything to add to that?

• 32:45Speaker 03

  Yeah, I was gonna say that, like, um, you know, in addition to to all of the, you know, all the things Will said, like, I mean, honestly, like, if nothing else, like, the project was like a great design exercise, you know, it was like, we have, we have awesome, like incredible designers and artists. And we wanted to also give them a chance to spread their wings and experiment. We like to experiment too. And so like, this seemed like a great way for them to express their creativity, kind of really, really find the soul of the project, you know, which is like, it's more, you know, DeFi, like Ethereum, all this stuff is, you know. It's more than just like, you know, uh, you know, magic internet money, right?

• 33:29Speaker 03

  Like, we really, really think it's important to like, kind of, you know, figure out like, what is the soul of this project? And, and art, you know, is like a really good way, you know, to express that and to reach people. And so, you know, from like a more philosophical point of view, that's why I think it was like a powerful thing to do as well.

• 33:49Ryan Sean Adams?

  Johnny, what, just for people, uh, what's the alpha here? Uh, like, how do I get an elf? These things look amazing. How do I get an elf?

• 33:57Speaker 02

  Yeah, so it's basically the first, so what we did the first 2,000 to, uh, whitelist, uh, sorry, to delegate on the governance app, uh, would get whitelisted. But, but, but, um, we're going to open that up again very soon, in the next few days, because there's a total 5,000 in supply. So 2,000 have been whitelisted. We're going to whitelist another two, put up another 2,000 for whitelisting here very shortly. Um, particularly geared towards the Discord, um, and the GitHub contributors community as well. So they have a shot at getting these. So that's, that's coming soon. We'll make an official announcement. I may have released too much alpha.

• 34:38Ryan Sean Adams?

  You can't release too much alpha on bank.

• 34:42Speaker 02

  There will be more soon.

• 34:44Speaker 03

  Yeah, I do want to say that there's no minting fee. You just pay gas too. So that's all that's important, recognized.

• 34:50Ryan Sean Adams?

  What magic is this? Free NFTs? I thought you have to pay for those. Okay, but it's not free because you have to participate, David. Okay, so like, uh, delegate.

• 34:59Speaker 03

  We're just a bunch of hippies, really, you know?

• 35:02Ryan Sean Adams?

  All right, delegate Discord.

• 35:03Speaker 02

  We give free NFT love. I love it.

• 35:06Speaker 03

  Oh, also, that's the meme version of our lore, you know? If, you don't have to do it now.

• 35:11Speaker 02

  Yes.

• 35:13Speaker 03

  That's definitely some.

• 35:14Ryan Sean Adams?

  I saw this. You know? I saw this. All right, so read this text carefully, is what I'm hearing. I don't know.

• 35:19Speaker 03

  Yeah.

• 35:20Ryan Sean Adams?

  Read this text carefully.

• 35:21Speaker 02

  Oh, there we go, the inverted. Yeah.

• 35:23Ryan Sean Adams?

  And, uh, see if you can.

• 35:24Speaker 03

  I don't know, it might be important later, I don't know.

• 35:28Ryan Sean Adams?

  And the more we camp on this, though, David, the more alpha they're share, that they're gonna share.

• 35:34Speaker 02

  Please change, change the topic ASAP.

• 35:39David Hoffman?

  Of course, they're, they're, they're elves, of course, because the token is called E L F I. So just for those that don't know why they're elves, they're elves, because that's what the token name is.

• 35:50Ryan Sean Adams?

  Also because elves are awesome.

• 35:52David Hoffman?

  Yeah.

• 35:52Speaker 02

  Oh, yeah. They're cunning, they're cool, they're like, yeah, I love elves. Yeah.

• 35:57David Hoffman?

  Okay, so I want to get into the last two bits of Alpha before we get into the actual yield markets and the theory merge subjects. There's two governance innovations that you guys are bringing to the table. One is an alternative form of how the element Dow governance structure works. And then also one is the voting vault, and that's the have your cake and eat it too. So we'll talk about that one. Second, first one is council governance. Can you guys explain this new Dow governance model that you guys are pioneering? What is council governance and why is it better?

• 36:26Speaker 02

  Yeah, so we, we launched a new protocol called the council protocol. It's a new governance protocol. Most, most teams in the space and they're launching a Dow are sort of forking off of Governor Bravo.

• 36:41Ryan Sean Adams?

  And is that, that's the compound, the original compound governance?

• 36:45Speaker 02

  Yeah, yeah. So there's a number of different, you know, directions as forks have gone in and that people are, you know, playing off of. And so what we decided, you know, from the start, I Charles St. Louis, he came from Maker, he helped Ruin build, you know, the original setup over at Maker. One of the things we talked about from the start is let's innovate, let's push the space forward on governance. It's super important. Setting a Dow framework is like the right thing to do for this space element. We want to innovate and experiment in everything. And so that's sort of, that's sort of the result of that conversation, the council protocol. And so council protocol has a couple, a couple of major, you know, innovations. One, it's from the ground up. So that sort of, you know, brings the learnings that we've seen from Dow's and governance systems before.

• 37:28Speaker 02

  A couple of things that it comes with is a governance steering council. So this is built in delegation where the governance steering council can have certain privileges within the system to push essentially proposals forward in an expedited manner.

• 37:44Speaker 02

  To be able to spend, you know, certain allocation of treasury for events and other things. And they're sort of voted in real time and they can be removed in real time based on a minimum quorum of votes. Then we have the, and we actually already have like seven GSC members that have been elected, which is cool. So the governance steering council, it's, it's working and that's, you know, been happening in real time. The second thing, this is what I'm like most excited and passionate about. I did like a awesome, you know, fun thread on this at one point. Is voting vaults and voting vaults will go into this. I won't, you know, go too deep yet, but voting vaults are essentially.

• 38:26Speaker 02

  What I call governance Lego pieces, they're a new primitive. And they let you redefine what constitutes a vote. So I'll just leave it at that so far.

• 38:36David Hoffman?

  Well, I actually think we want to go into that. We'll, we'll, we'll leave that one because that's the have a have your cake and eat it too. It is the, is the council governance, is this just like another form of like representative democracy where just like, you know, if every single person in America all had to like come to consensus about every single issue, we would just be bogged down in. Snapshot votes, basically. Is this basically just, we are electing council members who will steer the element Dow on our behalf? And then we can choose to remove or add our voting weight to different council members as we see fit. Is that basically the story?

• 39:13Speaker 02

  Yeah, that's essentially what it is. It's pretty cool and it's done in a liquid way, right? It can be removed and added based on, you know, how people delegate. And if they remove or change their delegation, we even saw people like sort of do campaigns on Twitter. It was fun.

• 39:29Speaker 02

  And we saw a lot of people in the discord sort of campaign. We sort of left it, left it open for people to, you know, make it, make it their own. But yeah, we sort of make that code and everything really simple and build that into the protocol.

• 39:43Ryan Sean Adams?

  I think this is funny. This is a kind of what happens when you move protocol devs into the app layers. Is they, they end up going to the protocol layer of the app layer.

• 39:55Ryan Sean Adams?

  So now we have a new like governance framework and I'm curious if you guys see that, you know, this might take. Like, well, DAOs that are on the Bravo governance framework, for example, will they be able to like port over to this? Do you see this being used by a lot more DAOs moving forward? Like, do you think this is a improvement, a big improvement from previous DAO governance structures that have been in place previously?

• 40:22Speaker 02

  Yeah, so I think, so the council part is really cool, Governance Steering Council. I think the Lego pieces, this is the huge one, voting vaults. So basically, you know, if someone wants to launch a new DAO, right? If they want to do one with compound voting integration, a vesting vault, a locking vault, let's say uniswap integration. They can just pick all the components they want, boom, launch new DAO. They have all these things that have been situated in that the open source world has already built, you know, in these voting vaults. And so I sort of see it as a huge, huge innovation, a huge evolution. It's going to be cool what everyone does with these voting vaults. They're, you know, in my opinion, they're like life-changing, world-changing.

• 41:07Speaker 02

  DAOs are on basically can, you know, exponential, you know, increase at this point with this. Yeah.

• 41:14Ryan Sean Adams?

  Well, can we talk about that then, the voting vaults? Johnny, you were talking about the cake, man. So this is your moment to talk about the cake here because this is, this is the cake. Why is this, why are voting vaults? Can you explain what they are, why they're so important and why they're, as Will said, potentially world-changing?

• 41:32Speaker 03

  Yeah, I can, I can give a quick explanation. So one nice thing about it is like, it basically allows you to, you know, if you, you know, if you're, let's say, like, you know, some new protocol like wants to use the council government system, like by all means, come in, steal the code, you know, or contribute to it, whatever, fork the code, like absolutely encourage that, want people to do that. Say they come in and say it's food DAO, right? And they have a food token. And um, and they want to, um, you know, one of the nice things about the voting vaults is, is that like, a lot of people want to, um, there's things you can do with a food tip. Maybe you want to provide liquidity on Uniswap pools.

• 42:17Speaker 03

  Um, maybe you want to, um, you know, add it as a, you know, so people can, you know, add as a, you know, collateral on compound, um, whatever. What we can do is, is create these voting vaults that, that will mention, that basically allows you to, um, you know, deposit those, um, you know, those, whatever the LP shares or, um, you know, the collateral on compound. And what they'll do is they'll inspect and figure out like how many votes they, you know, that that corresponds to. So like the, the actual council protocol will query these voting vaults and figure out

• 42:56Speaker 03

  what the associating voting power is, you know, with that. So you can, you can participate in governance and you can still like participate in DeFi. You don't have to choose one or the other. So, so that's, that's sort of the-

• 43:10Ryan Sean Adams?

  This is, this is super important because that's been missing so far, right? It's like, and, and I would argue that the people who are actually doing something with the governance token inside of a DAO are actually like DAO super users because they're doing things like providing liquidity for the underlying token or like lending it out. Um, so, but the problem right now in the current state of DAOs is once you do that, once you take that token and start to use it in DeFi, say you're providing liquidity or something, then generally you lose the ability to participate in governance. And that's not what we want in, in these structures. So you're saying, if I'm understanding you correctly, Johnny, it's like, I don't lose that ability. As I am providing liquidity, as I'm lending out my DAO native tokens,

• 43:53Ryan Sean Adams?

  I still have the full ability to participate in a vote, a snapshot vote, uh, for instance. And so I get to maintain my, my voting rights while doing all of those things. Is that correct?

• 44:03Speaker 03

  You know that, yeah.

• 44:04David Hoffman?

  Yeah, so we actually, one of my favorite podcasts in that we've ever done was with Joel Monegro from placeholder and we titled it capital and governance and it was an exploration as to what capital actually is and his definition was well, capital is the ability to influence the world. So governance and capital are actually two sides of the same coin. But in DeFi, in the current state of DeFi, they're not because, because you can't vote and also like yield farm with your token at the same time. You actually have to choose between using your token as capital or choosing it to use it as governance. And you can't really have both and most people end up just using the capital route because that is what

• 44:45David Hoffman?

  ends up getting them more, more money at the end of the day. But with voting vaults, again, you get to have your cake and eat it too. You get to have the capital, you get to use your token in DeFi, you get to lend it out, you get to yield farm with it, you get to do your DGEN stuff. But with a voting vault, you also get to vote on stuff at the same time. And Will, Johnny, we were talking yesterday and you guys were walking me through some of these use cases. This is going to become really, really important for so many DAOs that exist on the Ethereum layer one, but when the tokens exist on layer two, because not only can you yield farm in DeFi with it, you can also send tokens onto layer two and also still have your governance powers. And so when you guys told me about this, I was like, oh, well, this was obviously the way that every single DeFi application is

• 45:29David Hoffman?

  going to do this going forward. Obviously necessary. Obviously, yeah. It's like, it's a disservice to their users to force them to not yield farm in DeFi while also being governors. It's basically going to become table stakes in my mind. Would you guys agree?

• 45:45Speaker 02

  Yeah, definitely. And I mean, you nailed it, right? Other use cases. So people can now hold the, you know, the token on L2. They can vote. So you could have an L1, L2 bridge voting vault where you pass the Merkle route in and the vote is counted on basically the L2 that they're on or, or the other chain that they're on as well. So yeah, it sort of opens up this whole world. And this is what I was talking about earlier. Now that we have context, if you're launching a new DAO, you can now say, you know, I want the L2, L1 bridge. I want the, the compound integration. I want the Uniswap integration. I want the locking, you know, system, you know, deploy. And this sort of creates this new, new like amazing ecosystem.

• 46:27David Hoffman?

  Right, right. And the cool thing about this, for listeners who like mental models, which I hope you do, because we're really good at making them here on Bankless, it's like urine strategies, where like, somebody will write up a urine strategy, and then urine governance will accept it into the new strategy. It's a little bit like that, in the sense that anyone can write a pathway. So like, here, you got the element governance token, and then it's going to be LP'ing between ETH and element governance token inside of uniswap LP tokens. But then that LP token can go inside of like Maker DAO, right? And so you can write a strategy that is like a uniswap LP token as collateral in Maker DAO, write that for code for the voting vault. But then, as soon as somebody writes that one piece of, that recipe,

• 47:11David Hoffman?

  that recipe becomes known to the whole rest of the open source community. So anyone can like, go into the voting vault, you know, candy store, pull it off the shelves, and plug it into their voting vault for their DAO. And anytime anyone writes a strategy, we can get even crazier, right? Like, uniswap governance token ETH LP, deployed onto the optimism layer 2, and then also being lent out in AVE. So it's an optimism A LP uniswap token, but it's also functioning as governance on the Ethereum layer 1. And as soon as one person writes that, it becomes usable for every other single DAO that uses a voting vault structure. So it's only progress. You can't lose progress. You can only add more and more optionality

• 47:55David Hoffman?

  as to how these DAOs can leverage their capital while also enabling their users to have governance.

• 48:03David Hoffman?

  No questions, any comments?

• 48:06Speaker 02

  That's exactly it, yeah. I'll leave with like, a really funny, funny one that we talked about. It's the vampire vault. So you give people voting powers by getting, you know, the token of, let's say, a competitor protocol. And then they burn it, they send it to, you know, the zero address, and then they gain votes in your protocol based on that behavior.

• 48:30David Hoffman?

  Wait, so you don't even need your own governance token? You can determine governance voting power based off of interactions with your non-native tokens?

• 48:39Speaker 02

  You could do that. Yeah. So you could do even DAO mergers. There's some cool things that could happen here and it's sort of up to governance to, to, you know, discreetly.

• 48:48Ryan Sean Adams?

  Wait, wait, wait. So Bill, what's that? What's that vampire vote thing? So you're saying like, I would have to show a proof that I

• 48:55Speaker 02

  I should have opened this.

• 48:56Ryan Sean Adams?

  No, no, please continue. Please continue. So you're saying that I would have to show proof that I burnt a, another protocols token in order to be eligible for voting rights?

• 49:10Speaker 02

  Yeah, you could get basically additional voting rights for burning the other, the other protocols token as an example. So the governance system would query that voting vault. The voting vault would respond and say, okay, these people burn this amount. They get this certain allocation in, in the next vote that's going to happen.

• 49:28David Hoffman?

  But if we were being super malicious, you wouldn't want to burn their token because people associate burning with number go up. I think, I think maybe you could like,

• 49:35Speaker 02

  Yeah, that's true.

• 49:36David Hoffman?

  Maybe you could, you could have like a short position on DYDX where like if you have a competitor, you can like probably short there and then, and then you have governance powers based on how significant your short is.

• 49:47Ryan Sean Adams?

  Proof of short?

• 49:49David Hoffman?

  Proof of short.

• 49:51Ryan Sean Adams?

  I didn't know my co-host was so evil. Gosh, I'm sorry. Stop the broadcast. We gotta stop this.

• 49:58David Hoffman?

  I think, I think that the point lands though. It is maximally expressive governance. And so it's really allowing like perhaps Turing completeness to be coming to go to the governance layer, which I think is a, a huge unlock to DAO governance. Guys, that is a really cool feature. Again, like, thank you for building that for all of DeFi because all of DeFi is going to use this. This is not something that you have to tap into the Element protocol to use. This is open source software, which Element is innovating on and now has given to the rest of the world. But thank you for your contributions. We want to get into details around the Element protocol, especially as we get into the merge. We want to learn about how Element is kind of integrating itself into the Ethereum protocol more than

• 50:42David Hoffman?

  the typical app. There are a certain cohort of apps out there that are more related to the Ethereum protocol itself than other applications like Rocketpool and Lido come to mind and Element finds itself shoulder to shoulder amongst some of these apps. And then all of course, where we get to the candy is to how users can actually gain exposure to the merge as Ethereum finally merge. So we are going to get into all those subjects right after we talk about some of these fantastic sponsors that make the show possible. If you're trying to grow and preserve your crypto wealth, optimizing your taxes is just as lucrative as trying to find the next hidden gem. Alto IRA can help you invest in crypto in tax-advantaged ways to help you preserve your hard-earned money. Also, Crypto IRA lets you invest in more than 150 coins and tokens with all the same tax advantages of an IRA.

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• 53:41David Hoffman?

  All right, guys, we are back. And here is where we get into the Ethereum yield markets, the coming merge, and how Element is embedding itself straight into the actual protocol level of Ethereum, not formally with code, but more informally with economics. And so with the launch of Element DAO, Element is now becoming more and more embedded into what Ryan and I call the Protocol Sync, getting deeper and deeper into the structure of DeFi. And because Element is a yield, an interest yield money market, it is very, very relevant to the native ETH stake rate on Ethereum. As ETH turns into a capital asset that has a native yield to it, all of a sudden, Element turns into a financialization layer around the next

• 54:26David Hoffman?

  generation of the bond market. If you guys were, if you guys read the Monday opening note that we wrote yesterday on Bankless, it's all about how Ethereum will be the next bond market for the digital age, at least that's the plan, which makes Element and what Element does extremely relevant as a financialization layer on top of the native ETH stake rate. And so this is where, and this were, these are, I'm stealing these words from Will, who I was talking to yesterday, DeFi is now responsible for Ethereum security. And so Johnny, I want to throw this one to you. Can you, can you just elaborate on this aspect of Element as it relates to Ethereum and how it's impacted some of the design choices that you guys have at Element?

• 55:07Speaker 03

  Yeah, just like, I mean, at a high level, really, like, you know, like, are, you know, from a mechanism point of view, like, we, we put a lot of effort ensuring that the core protocols just solve through, like, analysis, simulation, audits, all of that stuff. We definitely want to be like embedded in the stack, like you mentioned, like, this is another primitive for people to build on. You're already seeing it, uh, you know, there's a, there's a tool that Componentphi released for yield token compounding, which allows you to basically go along on, um, or I'm sorry, sorry to basically lever up on, you know, on a, on, on a variable rate. And so they make it really easy to yield token compound essentially.

• 55:47Speaker 03

  Um, and so since we actually wrap assets like state D, um, you know, this is another, you know, this is another example of, uh, you know, how we're getting more embedded and really all of DeFi is getting more embedded into the security of the network. Um, that's, that's one of the great things about proof of stake, right? Is the internet bond. It's also something that we have to use responsibly as well. Um, that's another reason why we actually wanted to give voting power to Cordas, uh, is to enable that two-way communication.

• 56:19Ryan Sean Adams?

  So can I ask, basically, you, you're doing the same, uh, the same trick that, that Will outlined that at the very beginning of the episode when he was talking about, um, what element actually does, is which is separating like, uh, principle and interest. So is there, is there the ability, uh, to basically lock in my ETH staking rate? Because, uh, with element, that, that's the core functionality. So, uh, of course, you know, ETH staking right now might be 5% uh, post-merge. Maybe one day it's 8%, maybe another day it's 12%, maybe another day it's 15%. Hard to know. It all depends on kind of the market supply, that demand dynamics, uh, all sorts of things go into that.

• 57:00Ryan Sean Adams?

  But what element allows you to do is basically turn this into a fixed staking rate for yourself. Like, like a fixed bond essentially where it's ETH staking would be variable. Every single day it could be something.

• 57:13Speaker 03

  Right. Yeah. It's market driven. Yeah. So.

• 57:16Ryan Sean Adams?

  Market driven.

• 57:17Speaker 03

  Yeah. So basically like, uh, Will mentioned before, it's like, if you want to sell for 90 cents a dollar. So it's basically, think about like, I want to sell you a stake ETH for, you know, 0.9, right? So whatever the market rate is at that moment. Um, that's what you lock it in at. And through the magic of, uh, you know, yield space, um, by that you know that whatever you buy it at, it's going to mature to one to one with the base asset. Um, you, you know, at the end of the term. So, so whatever you buy it at, at the market rate that locks in your fixed rate. And that's the magic of how the fixed rate side works.

• 57:57Speaker 03

  Where it becomes more interesting is, is when you actually can yield token compound and, and, and sort of speculate on what's going to happen with variable rates.

• 58:07Ryan Sean Adams?

  Yeah, and I want to get into that, but even just the ability to kind of lock in a fixed rate. Um, we are starting, we've talked about this last few weeks on Bankless. Uh, we're starting to actually see TradFi understanding the ETH narrative ether as a, an internet bond, right? Turning into this capital asset productive asset. And what you're doing is you're unlocking a whole new group of institutional buyers who are just like, yeah, and I also want a fixed rate on that staking yield. Do you think that this unlocks a whole new cohort of institutional buyers?

• 58:45Speaker 03

  It absolutely does. Yeah. And, and the, and the beautiful thing is, is so like, you're going to get like, from the institutional side, yeah, they'll see like a, they'll see a juicy rate, you know, on like staking, for example, on like steak ETH and they'll want to lock it in. Well, what happens when you, when you, because like I said, you're buying, right? So they see a juicy rate they want to lock in. Well, the more they buy, the higher the actual price goes up. So the lower the yield, you know, actually becomes, right? So, so, so there's a, you know, the, it, so, so you have that side. And then you have the more the gin side, the side that's going to come into the protocol and they want to mint principal and yield tokens, right?

• 59:30Speaker 03

  And then they mint that principal and yield token and they go take a look at the fixed rate market side. They're like, oh, huh, I can sell my principal token right now, you know, like for a 1% discount or one and a half percent discount. And they can exit out of their position quickly while keeping their exposure to the variable side. And so this really comes into play when you start doing that recursively. The more if you do that recursively, as you sell into the fixed rate side, the actual price is going to go down, right? So the rates go up. So as you sell into that, you actually go, you basically, you basically end up, as you sell into it, you basically end up kind of balancing the two sides of the market out that way.

• 1:00:14David Hoffman?

  This is cool. And so what we're basically doing is we're financializing Ether, the internet bond here and making it accessible to more people. And like, one other point to note, of course, Element is not doing the staking itself for something like ETH. Would you work with other liquid staking protocols like a Lido or a Rocketpool? Is that?

• 1:00:32Speaker 03

  Yeah, that's right. We don't have any of the infrastructure. It's literally just wrapped yield positions. That's what the protocol is. It's completely agnostic to what the yield source is. In fact, it's permissionless in that fact as well. Anyone can go and wrap a yield source, write an adapter for it. We don't, you know, anyone can use the protocol that way. There's, there's nothing preventing them from doing that.

• 1:00:56David Hoffman?

  And we are at the very beginning stages of the conversation is how to get exposure to the merge, but not yet, not yet. Still got to wait, still got to wait. That's coming again towards the end, which we're almost there. But Will, I want to unpack a line that you said yesterday that stuck with me. I mean, you said, DeFi is now responsible for the security of Ethereum. How is Element now related to the Ethereum, to the security of Ethereum?

• 1:01:18Speaker 02

  Yeah. So essentially, once we have, you know, these staking derivatives, things like Lido, Rocketpool, what they end up doing is they end up bringing, you know, tokenizing those actual stake position onto the core DeFi layer. So now, right, these Lido, you know, Lido tokens that staked ETH, you know, can trade on, you know, Curve, it can be used as collateral, people can leverage long on it, they can, you know, short, they can do all these different things and all these behaviors within DeFi, which then extends to the actual behavior and.

• 1:01:52Speaker 02

  Security on, you know, that core layer. So you have sort of this two, two way road of how they're affecting each other now. And this is sort of what's, what's happened with this, with this inclusion of the stake.

• 1:02:04David Hoffman?

  So with the unlocking of fixed yield interest rates, which is where institutions are going to feel more comfy. Do you think that will just add to the total security of Ethereum because it'll add more demand towards staked ETH through Element as an Element will be bridging the wants and desires of institutions to more Ether being staked at the L1? Do you think that that's going to happen?

• 1:02:28Speaker 02

  Yeah, I think so. So it locks up more of those positions. I think it brings a, you know, a strong sort of calculable, accountable, you know, asset that you have. And so I do, I do think it does bring, you know, additional security and liquidity into that, that aspect as well.

• 1:02:46Ryan Sean Adams?

  You're ready to throw it in a pension fund now. It's a fixed yield.

• 1:02:51David Hoffman?

  All right. One last question before we get into how to get exposure to the merge. Johnny, you're ex-consensus. You worked at the Pegasus client back in 2018 to 2020. Will, you're also ex-consensus. You worked on sharding research in 2019 to 2020. Application devs don't usually have this much exposure to the protocol level. This has been a theme so far in this, in this podcast. Even talking with the, the actual distribution of the Element token towards people that aren't working on Element, but were working on the things that made Element possible, you know, the protocol devs, other DeFi apps. How has this shaped what you're building at Element? And also we could, we could just, we can just zoom out and reframe this conversation into

• 1:03:31David Hoffman?

  the world of open source and the world of development. Like, why, why is this link between the Ethereum L1 protocol and the DeFi application layer important?

• 1:03:41Speaker 03

  Yeah. Yeah. So I have an answer that actually kind of goes back to, to my, you know, my working with Will back in, you know, on Ethereum research back in the day.

• 1:03:53Speaker 03

  It was interesting, like being a developer, core dev researcher, like in consensus, like, you know, like on a personal level, like we all have a good relationship. And so, um, but the struggle was always like alignment, right? So like, uh, you know, initially like I had to rely heavily on personal relationships, you know, with individuals just to ensure, you know, like there's constant communication, um, you know, that we're working on, you know, whatever we're working on remains relevant to the roadmap. Um, and this was informal. Um, it was efficient as long as I was, um, you know, as long as I was diligent about it. Well, what struck me immediately about Will like is he came in, you know, to the, to the ETH research scene,

• 1:04:38Speaker 03

  starts Quill, immediately sets up the steering committee, um, you know, that was basically comprised with a bunch of people, you know, from the EF, um, key researchers, uh, from the EF, um, that were contributing to the roadmap of E2. So he, he formalized it had immediate impact, you know, to make sure that Quill's resources, you know, like were directed on whatever is the most relevant thing, like it's basically like, but I mean, the, the whole point of it is like, how can we help the EF, right? And so I saw firsthand, cause I would go on side bus with Will, I would like join their standups, not any excuse to collab with them. And, and so like, I saw this and I saw how effective it was.

• 1:05:19Speaker 03

  And so I, I took and applied the same model back to, you know, TXRX, the research team that, um, that I was on. And, and, and it was really effective. And so I, I say this, it's really a long way of saying that like, that lesson right there, um, really resonated with me. One, it speaks to just like the leadership ability and just kind of like the dynamic personality that Will is, um, but also just like it spoke to me in the way that like, that's a way to kind of like get core developers and the application side working. You know, we, we build as that on the application side on these key technologies. Um, and so we need a way to formalize this feedback, feedback loop. So giving them votes and governance systems

• 1:06:02Speaker 03

  that are like directly, you know, tied in, um, just really only makes sense. It, it just strengthens that feedback rule. So.

• 1:06:11Speaker 02

  Yeah. And another thing I'm. I'm actually really excited about. So I loved when I was, you know, researcher on ETH two. I loved logging into ETH research, the forums. And really just like the community that had been built there, the community of research, experimentation, discussion. Having really deep sophisticated conversations. And, and that was, that was so much fun. And so one of the things that I want to experiment with and play with, and I'm super passionate about is how do we recreate? Some of that atmosphere into our own Commonwealth forums, the forums and governance discussions that we're having element. And then how do we take that and, you know, connect that to the core?

• 1:06:53Speaker 02

  The core layer as well, and the things that we talked about, the security on the core layer and make sure that that's an open part of the conversation. And so part of that is one, including, you know, the right people. This is the reason, another reason we gave voting power and drops to. People that have contributed something towards this space. They're more likely to be involved in sophisticated and research-based conversations. And then the second is basically fostering and cultivating that ecosystem. So. You know, getting key people as part of element and others to contribute in that and making the place where like people are excited to log into like the element. Commonwealth forums and governance discussions, because that's where a lot of the innovation in the DeFi space is happening. Right? So that's like, that is my vision. That's my goal.

• 1:07:39Speaker 02

  I want to create that as part of element and, and the Dow and everything that's happening there. And I want to foster that, that, you know, that juice and recreate what we had.

• 1:07:48Ryan Sean Adams?

  That's really cool, guys. All right. So let's, uh, let's talk about the last thing on our agenda that we've been talking about that we're promising this entire episode. So. That is upside exposure to the staking rate post-merge. So it's, it's hard to know whether ETH price, what ETH price is going to do, going to the merge up, down, like, who knows, right? We all have our sort of ideas on, on what'll happen, what's likely to happen. But one thing that seems super obvious, if anyone runs the numbers, is that staking yield is going to increase, right? It's going to increase. Uh, maybe right now it's like 4.8%. Some people are forecasting as high as 10, 12, 15%, even higher. Is there a way to speculate on that?

• 1:08:33Ryan Sean Adams?

  And get upside exposure to, to that bet going into the merge with Element? And if so, how do we do it? Tell us how to do it. Will, do you want to take that?

• 1:08:43Speaker 02

  Yeah, yeah, I'll take this. Cool. So, um, I actually did a talk at ETH Denver. You should watch it. I went into like the background of Xerox Sifu, the Wonderland ecosystem. Uh, that whole scandal and like connected all these things. If you're, you know, into like a fun, really interesting, deep conversation, look at it. And it connects to a lot of these things as well. So, um, one of the things I'll give like a quick background story. When we first launched Element, um, we were in sort of a market lull. The yields, the yield rates had gone down. And we were actually pleasantly surprised because all the fixed rates were actually higher on our launch than the variable rates. And this actually caused a lot of confusion to people at first. But what ended up happening is people are actually predicting that yield rates in the market were going to increase.

• 1:09:29Speaker 02

  Um, and so they were leveraging into the variable rate, bringing the fixed rate up. And so let's say USDC, right, was at, you know, 5%, but it ended up averaging to 20%. They're okay to bringing it up to 10%. Um, because it's, you know, the market's going to go up and it's going to reach that higher APY. And so what we saw was a ton of people actually profited, um, in the beginning by bringing the fixed rate higher and leveraging into that, into that yield rate. So, how does this work? Um, so like if, and by the way, I want to, you know, mention and give a disclaimer. Um, you know, I can't predict anything in the market or where it's going to go. But if you do believe that yield rates are going to go up on, uh, Stake ETH, then this could be a really cool strategy for you.

• 1:10:13Speaker 02

  Um, and so how does this work? So currently you'll see that our, on our platform, there's like 3% and 5%, uh, fixed rate APY on Stake ETH. So, um, if you assume that that's going to, on the variable side, reach 15%. What you do is you mint principal and yield tokens into that stake ETH position. And then you sell your principal tokens, right? So if I put $100,000 in, I get 100,000 yield tokens. I get 100,000 principal tokens. I sell my 100,000 principal tokens at 5%, right? And then I get $950,000 in liquidity immediately. Then I use that $950,000 to mint again.

• 1:10:57Speaker 02

  And now I have, now I have basically $200,000 of yield tokens. I sell the principal tokens again. I do this multiple times. And so what happens is if the fixed rate is at 5%. And I believe the variable rate is going to hit 15%. That's a 10% spread. So each time I do this minting, selling cycle, I basically multiply my 10% increase that I have. So if I do this 10 times, I leverage in 10 times. I can get 10x leverage into the staked ETH exposure, the variable exposure. And I could, on that 10% spread, essentially achieve around 100% APY.

• 1:11:39Speaker 02

  And there's a tool that does this for you, does all the calculations, does it all in one step. Component build it, built it, I believe it's YTC dot component type dot phi dot FI. And that sort of lets you do that. And so another thing that this, you know, requires is like a deeply, you know, liquid market. So you can, you know, put, push more and more capital into it. And we, in about 10 days, our, our staked ETH term is going to come to expiration. I think there's about 60 million, 70 million dollars of ETH in there. It's deeply liquid. And I would expect that that will roll over into this next term, which expires six months from now.

• 1:12:23Speaker 02

  And so we're going to have like a pretty deeply liquid playground that you can, you can do this speculation. And, you know, you can take 15% variable yield and you can change that into 100% if you believe that it's going to hit 15%.

• 1:12:37David Hoffman?

  And so you also have to speculate on the actual timing of the merge in order to get the strategy done, correct?

• 1:12:45Speaker 02

  This is correct. So you'd have to take a speculation on when, when the merge would actually happen and you know, all these aspects, which is why there's some risk involved. And you know, this is just a suggestion on how you could play and but we've seen a lot of people do very well through these strategies.

• 1:13:03Ryan Sean Adams?

  Okay, that is super cool. We will, guys, we'll include links to these things in the show notes as well. I'm wondering if the market is going to tell us when the merge is going to happen through, through tools and mechanisms like this. David, you look like you're going to say something.

• 1:13:16David Hoffman?

  Yeah. Is this YTC component? Is that just an application that's on top of Element? As in like this is a UI for doing, is this a just a UI layer? Or is this also its own kind of DeFi app that's hooked into Element?

• 1:13:28Speaker 02

  It's just a UI layer. So it just basically recursively strings this, this process together. And actually, like a really cool way to make this even more efficient. So let's say I do 10, 10x leverage. And let's say after the 10 iterations, it leaves me with about 500,000, you know, dollars and I put a million dollars in just to make for an easy example, you could actually just flash lower that, that initial 500. So that's, I believe, a iteration they're going to do as well, which makes it even more capital efficient. And actually, once you have that in place, then it's 20x exposure versus, you know, 10x.

• 1:14:06Speaker 03

  I think the other cool thing they do is they also simulate what's going to happen as well. So, so, so it provides a lot of useful information when you actually use the tool.

• 1:14:17David Hoffman?

  Yeah, I would imagine I have a hard time wrapping my head around like the holding in my brain, how Element really works in the background, just because, you know, psych major here, not a finance major. And so having these, these UI layers on top of things like Element really is really, really helpful. And I think listeners can start to get a gist as to how big the Ethereum bond market is going to become, especially when it's aided by financialization layers like Element. And that's not even to mention just the actual innovations going on and the other aspects of the Ethereum bond market, like the shared secret validator innovations and the Staking network innovations, the Ethereum bond market is going to be absolutely huge and Element is one of those tools to harness into that power of the bond market.

• 1:15:02David Hoffman?

  So guys, thank you for building Element and also thank you for handing over power to the community with the launch of the DAO and the launch of the token. And congratulations for making it thus far. What's next? What's next in the Element story? What do you guys have on the three, six months timeframe? And then also, what is like the 10 year timeframe for Element too?

• 1:15:19Speaker 02

  Yeah, so major things. So we have an amazing team, really, really, really solid, really, really smart people. We're really proud of them. So a lot of it is research towards a V2 on the AMM that we're doing, making that more efficient. Auto rollovers. So people basically can get perpetual exposure to the fixed rates and to these LP positions. This sort of also locks in liquidity for years and makes, makes the markets a lot better to be built on. So we're sort of finishing some of the work there. Also a redamp of the current UI and current system. Making it easier to come in through other assets instead of having to get obscure like curve based assets, things like that.

• 1:16:05Speaker 02

  So a lot of things like that were even like, we have some research on a new liquidity, like mining primitive as well. And it'd be interesting to see if, you know, later down the road, the community, you know, takes that into account. I believe it's a lot better than the curve model. I believe it's a huge iteration on that. So stay tuned. So just a lot of innovation, also continuing to build out the council protocol, things like that. So.

• 1:16:33Speaker 03

  You know, I would say additionally, like also, like, you know, Will and I came, you know, we were, we were protocol deaths. So, so also, you know, continuing to kind of keep an eye and help out at the core level, you know, where we can. And also like efforts like the, you know, like Protocol Guild, that's kind of being proposed by Stateful Works and Trent Van Ups. It's, that's kind of an interesting way to kind of iterate or really more formalize sort of like the, the idea. Kind of sharing, you know, the, you know, the stake in some of these application layer protocols with the core devs. That's a whole interesting conversation as well.

• 1:17:14Speaker 03

  And something that I think probably even deserves a whole, a whole episode on, on Bankless, but, but it's really cool. Y'all should, y'all should reach out to Trent and, and check that out. It really, it removes a lot of the legwork from what we had to do.

• 1:17:28Ryan Sean Adams?

  This is, this is awesome. I'm, I'm so glad. There has been in the past in Ethereum, I, I know you guys will test this, like, it's felt like at times there's some division between, like, what the protocol devs are doing and like what the, the DeFi builders and the users are doing. So it's really cool to see builders like you, starting on the protocol side, then moving to the app layer. So you have a way to bridge both of these, both of these communities and find some shared alignment between them. I think that's really good for the overall ecosystem. So I would still love to see some, some app layer devs move to the protocol side. I think that would be, that'd be pretty fun to see too. But then again, I'd love to see more protocol devs up the, up the app stack. I wonder what Vitalik, what kind of app Vitalik would build

• 1:18:13Ryan Sean Adams?

  if he was a DeFi developer.

• 1:18:16Speaker 03

  He'd keep it weird, you know?

• 1:18:17Ryan Sean Adams?

  Yeah, he would. I bet it would involve public goods. Will and Johnny, thank you so much for joining us on Bankless. This has been a blast.

• 1:18:28Speaker 02

  Awesome. Thanks for having us. Yeah, this is really awesome and really appreciate the time.

• 1:18:32David Hoffman?

  For all the listeners out there who are looking to the resources, there are a number of links in the show notes. The first episode that we had Will on the State of the Nation, that is in there as well, as well as Bankless's guide to Element, the how to actually use Element for yield. Those are in your show notes as well. And of course, please like and subscribe, because that's how we bring you the alpha all the time. And so if you're on YouTube, please subscribe. And then also, if you are listening on a podcast, give us those five star reviews wherever you are listening to that podcast. So Bankless can start to take over the world.

• 1:19:06Ryan Sean Adams?

  Rest and disclaimers, guys, as always, none of this has been financial advice. Of course, ETH is risky, so is DeFi. You could lose what you put in, but we are 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.

• 1:19:20David Hoffman?

  Hey, we hope you enjoyed the video. If you did, head over to Bankless HQ right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence. We recommend joining our daily newsletter, podcast, and community as a Bankless Premium subscriber to get the most out of your Bankless experience. You'll get access to our market analysis, our alpha leaks, and exclusive content, and even the Bankless token for airdrops, raffles, and unlocks. If you're interested in crypto, the Bankless community is where you want to be. Click the link in the description to become a Bankless Premium subscriber today. Also, don't forget to subscribe to the channel for in-depth interviews with industry leaders, Ask Me Anythings, and weekly rollups where we summarize the week in crypto and other

• 1:20:05David Hoffman?

  fantastic content. Thanks, everyone, for watching and being on the journey.