15 Bad ETH Takes with Justin Drake

Kicking off Merge Week with a livestream with Ethereum researcher Justin Drake, it's time to debunk some myths and bad takes about ETH. As we watch Ethereum make its historic transition to Proof-of-Stake, we explore claims against the merge, the Ethereum Roadmap, ETH supply, and many others. ------ ConsenSys | Mint a Merge NFT! https://bankless.cc/themerge Converge 2022 | Register with code Bankless250 for $250 off https://bankless.cc/Circle ------ SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ ️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: ROCKET POOL | ETH STAKING https://bankless.cc/RocketPool ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave MAKER DAO | DECENTRALIZED LENDING https://bankless.cc/MakerDAO LEDGER | SECURE STAKING https://bankless.cc/Ledger ------ Timestamps: 0:00 Intro 7:30 The Merge 10:30 Media Hype 13:30 The Merge Will Never Happen 15:30 Ethereum Roadmap 20:15 Jack of All Trades 26:32 Ether Supply 36:54 Unpredictable Supply 45:10 Staker Tyranny 51:10 The Value of a Fork 54:00 Rich Get Richer 58:36 Deflation is Bad 1:07:05 Higher Fees 1:11:05 ETH is a Security 1:15:03 Reduced Burn 1:22:12 ETH is a Tech Stock 1:25:55 Changing Narratives 1:29:56 Ultrasound Money is Cringe ------ Resources: Justin Drake https://twitter.com/drakefjustin Justin Drake Episodes https://youtu.be/1m12zgJ42dI https://youtu.be/dHpAC0m8Rkk https://youtu.be/FQTZSb3Rc9I https://youtu.be/bWqhn1hXvVc ----- 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.

• 0:05Ryan Sean Adams?

  Hey, Bankless Nation. Welcome to another State of the Nation. Guess what, David? It's Merge Week. It's finally here. We're talking to Justin Drake on Merge Week, and we're talking about some bad ETH takes. 15 bad ETH takes. We're gonna give them to you. It was probably a year ago, a year and a half ago, when Justin Drake dropped the legendary ultrasound ETH episode, ultrasound money episode on Bankless. And since that time, I guess headed into this monumentous week of the merge, there've been a lot of takes about that episode. Some good takes, some not-so-good takes. And I think Justin is here to talk about some of the bad takes and clear up some misconceptions

• 0:48Ryan Sean Adams?

  about ultrasound money. What are we in store for today, David?

• 0:51David Hoffman?

  Yeah, it seems to be impossible for people outside of the Ethereum ecosystem to produce good takes about the Ethereum ecosystem. And I'll say that knowing, full knowingly, that I'm biased towards the Ethereum ecosystem, but there's just some real low-hanging fruit out there, as well as also some good nuanced arguments about some classic bad ETH takes. So some conversations that we're gonna be going to, getting into is like, "The rich get richer," which is a very common take you hear about proof of stake. So we're gonna talk about that. Also, Ethereum is trying to do everything all at once. And it's also being bad because it's having to split its attention into so many different categories,

• 1:33David Hoffman?

  as well as unpredictable supply, deflation bad, it's a security, et cetera, et cetera, et cetera. Some very common takes that you've heard around the cryptosphere. We're gonna take them one by one and go through 15 of the baddest ETH takes that you've ever heard.

• 1:47Ryan Sean Adams?

  All right, get ready for the countdown. Justin Drake dropping some bad ETH takes. I thought this was impossible, but I guess he's refuting them. Also, since it's Merge Week, of course, we want to remind you, our friends at Consensus have sponsored this, and they want to let you know that they are going to be launching a commemorative NFT coincident with the launch of the merge, which is about 21, is this right? 21 hours away?

• 2:12David Hoffman?

  Yeah. No.

• 2:13Ryan Sean Adams?

  Thanks.

• 2:14David Hoffman?

  A little bit more than that.

• 2:15Ryan Sean Adams?

  Yeah, that can't be right.

• 2:16David Hoffman?

  Yeah, 30, we're a little bit more than 36. Oh, but it's 21 hours until the launch of this NFT.

• 2:20Ryan Sean Adams?

  Ah, 21 hours until the launch of this NFT, and it's free. That's the great news. Of course, you need something to commemorate and to show your kids that you were there during, during the Ethereum merge. And so what a great way to do that from consensus. You can click a link in the show notes and make sure you mint that NFT and it looks like in less than 24 hours. David, there's also a conference coming up and it looks like they're dropping some new speakers at this conference, Converge 2022. That is happening in September. What are people in store for?

• 2:52David Hoffman?

  Yeah, it's going to be just probably the leading West Coast Ethereum crypto fintech conference of the year. Serena Williams is the new speaker that was not announced previously, but also of course Vitalik Buterin is going to be beamed in and some other people as well. Kane Warwick is of course going to be there, Stani. So it's going to be a fantastic time. So if you are interested, if you are on the West Coast or just want to come into San Francisco to go to this conference at September 27th through 30th, there's a link in the show notes if you want to get a ticket and you can also use code BANKLIST250 to get, you guessed it, $250 off of a ticket.

• 3:29Ryan Sean Adams?

  I don't understand why Serena gets her head, her face bigger than Vitalik. You know, Vitalik's a bigger deal to me, but what do I know? Come for Serena or come for Vitalik. Those would be some reasons. All right, David, I want to ask you the question. I always ask at the beginning of these episodes, what is the state of the nation today?

• 3:45David Hoffman?

  Ryan, the state of the nation is none other than merging because how else, what other state would it be? We are merging this week in the Bankless world, in the Ethereum world. I don't feel like that needs any explanation.

• 3:59Ryan Sean Adams?

  Okay, well, give me the latest date and time because I think last roll up when we checked in, we thought it would be Thursday morning. I'm now hearing like Friday evening?

• 4:09David Hoffman?

  No, no, Wednesday evening.

• 4:11Ryan Sean Adams?

  Sorry, not Friday.

• 4:12David Hoffman?

  Right.

• 4:13Ryan Sean Adams?

  Wednesday evening.

• 4:14David Hoffman?

  Right.

• 4:14Ryan Sean Adams?

  Late or possibly into like the wee hours of Thursday morning, like 12 a.m., 1 a.m.

• 4:21David Hoffman?

  That's the most updated timeframe that we have so far. Yeah, 11 p.m. Wednesday tomorrow. So that puts us at 36 ish hours, 34 ish hours from the time of recording. Yeah, so that's going to be the new time. So it's going to be late.

• 4:35Ryan Sean Adams?

  Ultrasound Money is now saying 1 day, 9 hours, 47 minutes, and 8,691 blocks is the exact time that Ultrasound Money is predicting.

• 4:45David Hoffman?

  I have to rewrite that Rent song.

• 4:45Ryan Sean Adams?

  Alright guys, nice. We will be right back with our episode, clearing up some misconception, 15 bad ETH takes with Justin Drake, but before we do, we want to thank the sponsors that made this episode possible.

• 4:59David Hoffman?

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• 5:42David Hoffman?

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• 6:27David Hoffman?

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• 7:11David Hoffman?

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• 7:42Ryan Sean Adams?

  Hey, Bankless Nation. We are back with Justin Drake, talking about 15 bad ETH takes that he is going to refute and talk about specifically around ultrasound money. Justin Drake does not need an introduction on Bankless, of course. He's been here more than a few times, but he is a researcher at the Ethereum Foundation. He is blazing a trail through the world of crypto economics, and it's great to have you back, Justin. Welcome.

• 8:07Speaker 02

  Thanks for having me again.

• 8:08Ryan Sean Adams?

  It's Merge Week. How are you feeling about what's going to happen this week? And for those that maybe aren't as in tune, why is the Ethereum merge such a big deal in your eyes?

• 8:21Speaker 02

  Right, so I'm feeling extremely excited, but at the same time, a little powerless, because it's now in the hands, pretty much, of the devs and the operators, the staking operators. So, a little anxious. I'm sure there will be some bugs, but the good news is that we've really hedged our bets with client diversity. So even if one client, even if two clients, even if three clients, even if four clients go down... It's probably okay, and you know, these bugs will be fixed and we'll have a smooth merge. For me, a successful merge means finality as soon as possible.

• 9:04Speaker 02

  It's possible that the participation rate will drop. You know, it might drop to 95, 90, we'll see, percent, but that's okay, so long as it stays above 66%. In terms of why the merge is, you know, amazing is that, you know, it's basically updating the core consensus engine within Ethereum. If you think of Ethereum as a car, like the engine's the most, one of the most important components, and we're making a massive upgrade here. But it turns out that as a second order effect, we're also doing a massive upgrade to Ether, the asset, the native money of Ethereum. And oftentimes, you know, we talk about money Legos, right?

• 9:49Speaker 02

  We talk about Uniswap being a money Lego, Aave, Maker, etc. But we forget about Ether itself. Ether is the primordial money Lego. It's the meta money Lego. Even, you know, non-financial applications like ENS use Ether to make ENS possible. And I think Ether, the asset, is about to get a massive upgrade here with the merge.

• 10:13Ryan Sean Adams?

  So I know that analogy that you used, in fact, a year and a half ago, you used that in our original Ultrasound Money episode of Ethereum really getting its engine swapped out. This, you know, old combustion engine that was inefficient, didn't work very well, being replaced for like a battery-powered engine. You know, something like Elon Musk would dream up. But this story, the Ethereum merge and Ether's ultrasound money, has not yet broken into mainstream. So of course, Bankless listeners listening to this now, you're familiar with it because David and I, we talk about it a lot. You know what the merge is. But Justin, when we were talking during the break just now, you had just given us a rundown of your recent interview circuit.

• 10:58Ryan Sean Adams?

  And a whole bunch of major mainstream media outlets are now maybe putting some attention on the merge. Can you tell us a little bit about that experience and what you're seeing from your vantage point?

• 11:12Speaker 02

  Yeah, for sure. So I guess in the last few weeks, I've been overwhelmed by the media. They really want my attention and I've been interviewed by many large publications. Wired, Forbes, I have the list here, The Economist, Time Magazine, BBC, Politico. And yeah, I'd say that the merger is definitely not priced in in the sense that we're gonna have you know, a much bigger audience now, you know, looking at Ether and starting to appreciate it. But I think another reason why it's not priced in is that the questions that are being asked and the articles that are being written are still so, so, you know, early.

• 11:56Speaker 02

  You know, I think there's a big focus on the energy reduction. That's something that mainstream can understand. But this, you know, more subtle stuff going on. One of the things that the press is starting to understand is the massive issuance reduction. You know, 10x issuance reduction. I'd say that's the next easiest thing to understand after the reduction in electricity consumption. But, you know, going all the way to ultrasound money meme, that's just way too far. You know, I've been trying to plant some seeds with these reporters, you know, mentioning ultrasound money, but it's still too early.

• 12:37Speaker 02

  And then when we talk about security, you know, the fact that this is a massive security upgrade from the perspective of economic security, the amount of dollars that you need to attack the system, as well as 51% attack recovery with slashing, that's, you know, way over the head. Despite the fact that security is the product that Ethereum is delivering, its secure block space. So it's, you know, the most important property arguably, and the one that's the least appreciated by the mainstream.

• 13:06David Hoffman?

  I'm just imagining that meme, a Justin Drake meme where, you know, he's being asked by mainstream media about how Ethereum is reducing its energy footprint by 99.9% and Justin Drake is in the corner just saying, "They don't know about ultrasound money." "They don't know about how secure Ethereum is gonna be." Does it feel a little bit like that?

• 13:25Speaker 02

  Exactly, yes.

• 13:27David Hoffman?

  Well, this is probably a lead into the conversation that we want to have today, which is bad takes about Ether, bad takes about Ethereum. And I know a lot of these reporters are trying to do their best. They're trying to report on Ethereum to the best of their ability. And granted, crypto is hard, especially when you get down to the relationship between something like ultrasound money and the security of Ethereum. But I think this episode is going to be a little bit for the crypto natives, the people that have been passing ideas back and forth, giving out takes left and right on crypto Twitter or whatever medium they're on about the various takes that there are about Ethereum and about Ether, the asset. And we're going to get you to weigh in on 15 of them. Justin, you ready?

• 14:10Speaker 02

  Sounds good.

• 14:11David Hoffman?

  The first one we want to talk about is "The merge will never happen." Justin, what would you say to this very frequent take that you hear being put out on crypto Twitter that "The merge will never happen"?

• 14:25Speaker 02

  Wow, okay. So, the good news is that there's two types of takes. There's what I call falsifiable and non-falsifiable takes. Now, the non-falsifiable takes are those that kind of linger on and on and on because it's very, very hard to falsify them. But the specific take that you mentioned, the good news about it is that hopefully, within the next 36 hours, let's say, we're going to be able to falsify that. You know, we're going to be able to have a clear event that we can point to and say, "Hey, you were wrong." So unless things go wrong, which I don't want to say is not possible, because there

• 15:08Speaker 02

  is a possibility, you know, if I were to try and estimate it, I'd say there's at least a 1% chance that things, you know, go wrong. But overwhelmingly, like, this should go smoothly. So the merge will happen. It will happen within the next few hours, and everyone with that take will be, you know, proven wrong.

• 15:29Ryan Sean Adams?

  Here's another take that I think is related, which is Ethereum, the full Ethereum roadmap and the vision for Ethereum will never ship. It will never ship. So the subtext here is Ethereum is always full of promises, ever since the world computer, but it won't actually ship anything meaningful. What would you say about that take?

• 15:52Speaker 02

  Hmm, interesting.

• 15:56Speaker 02

  So I think there's a couple of things here. Like, one is kind of a misunderstanding of what Ethereum is. And to me, Ethereum is the settlement layer for the Internet of Value. You know, it's a very simple, well-defined thing. But people have been conflating Ethereum with the things that are built on top of Ethereum. Right? And we've had DAOs, we've had ICOs, we've had DeFi, NFTs. And some of these things have failed, or at least are no longer in vogue. So for example, ICOs, you know, that was a thing back in 2017, is no longer a thing. And so if you thought that Ethereum was ICOs, then arguably, you know, it hasn't fulfilled its mission. But that's not its mission.

• 16:39Speaker 02

  We don't want to conflate Ethereum being the settlement layer for the Internet of Value with its applications. Another thing that, you know, some people do is kind of conflate Ethereum and its mission with the technology. So people will say, for example, that Ethereum is a consensus layer, or Ethereum is an execution layer, or a data availability layer. But it's actually, these consensus, execution, data availability, these are components of Ethereum, it's not Ethereum itself, just like the engine, the wheels, and the chassis are components. And it's, it's, even though, like, the components are not fully mature,

• 17:25Speaker 02

  right? For example, the data availability layer is the main one that we haven't really shipped yet. It's, we have a credible roadmap. It's this idea that, you know, we have done a lot of research. We have proven to the community that we are able to do upgrades, that we are able to do hard forks. And it's okay for visionaries, for entrepreneurs, to come in and start building today, even though the technology is not fully mature.

• 17:58Speaker 02

  And thi- this is something that we that we experienced, um, you know, around uh crypto kitties, right? There was this uh argument being said that it's not worth for me to invest time building on Ethereum, because if I were to have a successful application, it would just use up all the bandwidth and we couldn't scale. But I think at this point in time, we're in a very, very different place, where we have not only the long-term vision and the goal set, but we have all the research done, specked out, all the details there. We have proof of concept and we have this willingness from the community to want to become a settlement layer for the incentive value. And so, you know, that's, you know,

• 18:43Speaker 02

  again, another falsifiable claim that I hope will be falsified, uh, you know, uh, uh, over the years. And one of the things that we've learned to do is to try and move incrementally, right? And do like these small upgrades. And so actually, the merge is the smallest and simplest upgrade that that we could have designed. You know, we had no withdrawals. We didn't clean up, you know, the ETH one voting, um, and we didn't do all sorts of other cleanups. We just did the simplest thing we could do. And I think for scalability is going to be a similar idea where we're going to release proto dank sharding, which is the simplest thing we could think of. And then full dank sharding will come, will

• 19:24Speaker 02

  come when it, when it's ready. And another thing I guess worth mentioning is that nowadays, it's not just the researchers and the devs pushing forward, it's hundreds of engineers outside of, of, of that, of that small team of a hundred people that are now, you know, pushing the, the execution layer to its limits via the rollups.

• 19:47David Hoffman?

  And on that note, since we are thirty-six away from the merge, you know, proof of sake has always been one of the things that The Ethereum will never complete its roadmap vision. These people that critique this outcome of Ethereum will always say like proof of stake will never ship. And so really, the burden of proof at this point goes on to the people that say that Ethereum won't ship because Ethereum has this history of shipping. So to tie that one off and moving on to the next one. Take number three, bad take number three is that Ethereum tries to be everything all at once. And therefore it suffers from being able to be optimized to doing anything at all. So Justin, what would you say to the critiquers that say Ethereum is trying to do too many things?

• 20:33Speaker 02

  Right, so there's, I guess there's two ways to interpret that that bad take. The first one is, as I mentioned, kind of conflating Ether, sorry Ethereum with the applications built on top of it. People could say it's trying to do too many things. They're trying to do NFTs, they're trying to do DeFi and ICOs and DAOs. But that's like saying the internet's trying to do too many things. No, the internet's trying to do one single thing, which is to be the communication layer for the digital world. And we're trying to do one single thing, which is to be the settlement layer for the intent of value.

• 21:06Speaker 02

  The other way to interpret this, this, this bad take is that people claim that Ethereum is simultaneously trying to be a smart contracts platform. And it's trying to be good money with, with Ether the asset. And that if it needs to be successful at one of them, it really needs to focus and only do one of these things.

• 21:31Speaker 02

  You know, be, be more like Bitcoin, for example, if you want to do just money. But my, my claim is that it's actually the exact opposite. Like if you want to be successful at either, you need to do both at the same time. And the reason that being good at money is critical to being good at, at smart contracts, at the settlement layer for the intent of value is for two reasons. One is because we need so-called economic security. We need to have. Trillions and trillions of dollars of economic security. So that's it's impossible even for the largest nation states in the world to go attack,

• 22:16Speaker 02

  fifty one percent attack if and the only way to get there is to have monetary premium. And the only way to get monetary premium is to be or like these large amounts of monetary premium is to be the the the the best money. And another reason that we need to be money is because ether, the the the the asset is also used as economic bandwidth, right? It's this money Lego in the context of of of of DeFi.

• 22:48Speaker 02

  And, you know, pe- pe- people have been, you know, to- talking about these these money Legos, you know, like, did I already say that, like Uniswap, uh, AVE and and Maker? But really, ether is this is this, you know, primordial, uh, building block, the oldest one, the most important one, the largest one, the most flexible, the most composable, the most pristine, etc.

• 23:16Speaker 02

  And if we are going to be successful at at building the incentive value, we do need uh, that uh, that that that component.

• 23:27Speaker 02

  What was the the, sorry, I I lost my train of thought there.

• 23:30Ryan Sean Adams?

  I think that I think that answers it. And by the way, with with that question, you also answered, you know, number four, because we were going to ask you specifically about whether ether, the asset, can be both,

• 23:41Ryan Sean Adams?

  you know, optimized as a as a currency for a smart contract platform and also be a good money. And your answer is not only can it be both, it needs to be both for for economic security reasons. I think that brings us to to number five. Oh, did you have something you wanted to add, Justin?

• 23:58Speaker 02

  Yeah, I wanted to actually give you the flip side, which is

• 24:01Ryan Sean Adams?

  Okay.

• 24:02Speaker 02

  that if you want to be successful at money, you need to be successful at smart contracts. And in a way, that's the one of the bad cases for for Bitcoin. And the

• 24:15Speaker 02

  The reason is that with with money, there is this competition for monetary premium. There's this idea that only the best assets, the most outstanding assets, will be worthy of this, you know, monetary premium, which is, in a way, a societal illusion. We all need to come to consensus on something, and the best way to come to consensus of something is to create these shelling points about the asset in ways that the asset can be outstanding. And it turns out that we've discovered a way to make an asset outstanding in the context of blockchains through income, through the burn.

• 24:56Speaker 02

  And if your blockchain does not provide utility, transactional utility, there will be very little burn. And so, in a way, Bitcoin, by focusing on just money and by focusing on the non-transactional aspects of money, it's sacrificing a huge amount of income, which could have gone towards, you know, towards its native money. And it's, for Bitcoin specifically, it's even worse, because over the long term, there is no issuance. And so, not only is it sacrificing, you know, income for the asset, but it's also jeopardizing its security.

• 25:41Speaker 02

  You know, on Ethereum, what the strategy that we've taken is always prioritize security. So we have this continuous tail issuance, which guarantees security, and then all the economic activity and all the income that comes through it is additive. And instead of being funneled to pay for security, it's funneled towards the asset and towards making it a better money.

• 26:11Ryan Sean Adams?

  So it sounds like you really believe that the utility of the block space in general, that the smart contract functionality is necessary because it increases the demand for highly useful and highly secure block space. And that's something that if you're not a smart contract platform, you actually don't have. But that gets us, I think, to another take that people have when you talk about ultrasound money. And these are takes related to supply, the supply of Ether itself. So the first take of these two is number five, ETH has an infinite supply. And the take often goes Ethereum supply, it can go

• 26:54Ryan Sean Adams?

  to infinity, the printers can keep printing because Ethereum has no tail issuance. So what do you make of this? Does Ether have infinite supply? Is that technically true? And is that also falsifiable?

• 27:10Speaker 02

  Right. So, no, it's not technically true. Ethereum does not have an infinite supply. Even if we were to wait a very, very long time, even though there is tail issuance, the supply would not go towards infinity. It is possible, well, pre-EAP 1559, yes, technically, it would have gone to infinity. But with the burn, we're actually in a position where there's going to be an equilibrium that forms at the supply level, where the burn and the issuance are going to exactly cancel each other. And one of the reasons why I have high confidence that there will be an equilibrium is because it's a little

• 27:52Speaker 02

  bit technical, but basically the issuance is sublinear in the supply. So with proof of work, you know, we had this constant issuance. So it doesn't matter, you know, how large the supply is, it's like a constant issuance, for example, 2 ETH per block. On the other hand, the burn is linear to the total supply. And so it grows as the supply increases because you can think of the burn as being a burn rate of the total economy. Let's say 1% of the total Ethereum supply is being burnt every single year.

• 28:30Speaker 02

  And so 1% of a supply of 1 million ETH is much, much lower, is 10 times lower than 1% of a 1 billion ETH supply. And so if the if the supply were to grow to infinity, the burn would grow to infinity. But we know that the the issuance doesn't grow as fast. It's kind of this sublinear growth relative to the burn. And for for proof of stake, the issuance is not linear, but it's actually, you know, the square root of the supply. So one grows linear, the other one grows by the square root.

• 29:15Speaker 02

  And then you can prove that if you were to to map out these two curves, square root and the line, you know, they would intersect and that would be the equilibrium. Now, one of the interesting kind of side notes here is that arguably, even before EIP1559, Ethereum would still have a supply equilibrium. And the reason is that there is another mechanism that ETH gets burnt, which is the natural process of losing Ether. People just lose their coins. And so we could maybe estimate, let's say, 0.1% of all the ETH every year gets gets gets lost. And the reason is that, let's say, 1% of all people on Earth, you know, die.

• 30:00Speaker 02

  And of these 1%, let's say, 10% didn't set up proper fallback for their lost keys. And that's a similar dynamic. If we have a percentage that's being lost every single year, that is going to outweigh eventually the the the sublinear nature of issuance.

• 30:23Speaker 02

  And this is actually an argument that was put forward by my Peter Todd, not that I agree with often with Peter Todd, but he's basically saying that even if Bitcoin were to have tail issuance, that still leads to a cap supply. And so in a sense, it doesn't go against the philosophy of Bitcoin being a hard money with a cap supply.

• 30:49David Hoffman?

  I just want to clarify some notes on the proof of work versus proof of stake and the burn. And this is really, I think, why the Ethereum monetary policy feels so elegant to me, especially the combination of having this naturally asymptotic supply growth. Because if, that's what you were talking about with the square root, right? As, because it's a square root function, as the number goes higher, it stops going higher so fast. So it slowly gets a slower decreasing rate of issuance. And so, and then because that the proof of, because of the EIP 1559 burn is always a percentage, there's, that's where you get that intersection point, right?

• 31:34David Hoffman?

  And the cool thing about this is that these are two market-derived algorithms that are finding each other. And this just feels so elegant to me versus some sort of like arbitrary top-down two ether per block monetary supply schedule where we have EIP 1559, which is market discovered as the correct gas price for that particular moment, because that's what the market decided. And then you have this monetary policy, which is also a function of as issuance goes up or down, it's a function of how much eth stake there is. So we have these two things, two mechanisms that are, are two forces that interact with each other that are both market-derived.

• 32:17David Hoffman?

  And when we have like these market-derived metrics, to me, that just feels like the logical conclusion of monetary policy for some crypto-economic model. That's, how would I would summarize these things? What would you say about that, Justin?

• 32:31Speaker 02

  No, that's exactly right. And so there is an equilibrium. We don't know exactly what it is because it depends on these two market forces, as you said. And if you want to visualize this, if you go to ultrasound.money, the website,

• 32:49Speaker 02

  you can play with these exact two market forces. There's two sliders. So if you scroll down a little bit, one slider is going to be around the issuance. So that's basically going to be how much ETH is taking. The lower the APR, the more ETH is taking. So here we have 30 million ETH. And then the other question is the burn rate. So historically, we've been burning at 2.2% a year, which is extremely high. But maybe that's too high because, you know, most of the data was around, you know, DeFi summer and the bull market. And so if we, you know, adjust this down, for example, as you just did, to 1.2% per year,

• 33:29Speaker 02

  then you can see the equilibrium would be at around roughly 1.7 million ETH. So yeah, it's just these two market forces. And the way to think of the issuance is to think of the cost of money, right? Because over the very long term in an efficient market, basically, the returns for stakers will effectively be zero. And the reason is that there is a cost of placing that ETH as collateral and locking it up, which is the cost of money. And so you want to get compensated for that. And in an efficient market, kind of margins go to zero. And so you need to ask yourself, what is kind of the end game cost of money? And, you know, maybe 3% is reasonable, maybe 4% is reasonable.

• 34:14Speaker 02

  I don't know. And that will dictate how much ETH is taking in the long term. And then for the burn rate, that's a bit harder to try and estimate because the fee market is so volatile and is also going to depend on developments, you know, like scalability and induced demand and competition.

• 34:33Speaker 02

  And so here, it's more of an art to try and predict it. But I think, you know, at least 1% per year seems reasonable in terms of the burn rate.

• 34:44Ryan Sean Adams?

  By the way, I think this supply projection is recently newer to ultrasound dot money. At least I didn't see it a few weeks ago. And I just want to do a shout out to this website. It's called ultrasound dot money. If you want to understand Ethereum's monetary policy, its issuance schedule, its block space demand, the way the algorithms work to set issuance, this is the website to go to. It's all very visual. The sliders that Justin mentioned, they slide up or down. So you can put your own projections in. And this, to me, is just the absolute best way to understand what's happening, what the dynamics are around issuance, around burn rate. And you can model it out.

• 35:28Ryan Sean Adams?

  It even has kind of a projection of the ETH supply moving forward. And what are we at with total supply right now?

• 35:38David Hoffman?

  120 and a half million.

• 35:39Ryan Sean Adams?

  120 million. So will this stay at 120 million? Will it go to 122 million? Will it drop down? You can project all of that here. So shout out to this website. It's absolutely fantastic. David, I think you have the next one.

• 35:55Speaker 02

  So there's this concept called the ultrasound barrier, which is basically what average base fee price do we need in order to have deflation?

• 36:08Speaker 02

  And so if you scroll up a little bit, there's this kind of interesting graph here with the base fees, which shows the ultrasound barrier at 14.9 guey. And every single point on the right here on the graph, every single point that is orange is above, and every single point that is blue is below. And basically, you want to be looking at the area under the curve. You want to be taking the orange area and the blue area and comparing those. And here, in the last hour, overwhelmingly, you know, we would have been in a deflationary mode.

• 36:42David Hoffman?

  So the last hour was a ultrasound hour, if you will.

• 36:46Speaker 02

  Exactly, yes.

• 36:48David Hoffman?

  Amazing.

• 36:49Ryan Sean Adams?

  I can't, I can't wait to look at this post-merge. It's gonna be that much, that much better.

• 36:54David Hoffman?

  Oh, gosh. Okay, Justin, let's go on to take number six, which is the ETH supply is unpredictable. As in, there is no knowing the future supply of Ether, the asset, moving forward into the future. What would you say to this take?

• 37:11Speaker 02

  Right. So this take is actually technically true, because as you said, the ETH supply depends on these two market forces. One is, you know, what is the fair, you know, cost of, of, of opportunity cost of, of money? And what is going to be the, the demand for block space and, and, and the fees paid for it? But it turns out, so this is often a take that's given by Bitcoiners, but it, it turns out that Bitcoin's supply is also unpredictable. And the reason is that mining is also...

• 37:43David Hoffman?

  Hot take, very hot take.

• 37:45Speaker 02

  It's, you know, it's, it's technically also a true statement for Bitcoin. And the reason is because there is a market, it's the hash rate market, and it, the hash rate can go up, it can go down. And that is going to affect the average block time and also affect the issuance rate. And also therefore affect the supply at any given point in time. And so there was this, this meme within the, the Bitcoin, which is that every four years there's a halving. But that's actually not true. It's less than four years. It's more like three and a half years. And so, you know, we should be having a, a halving in, in January 2025, I believe.

• 38:30Speaker 02

  But now it's, i- if we were on the, on the four years, on the original four-year schedule. But actually, the next halving is now scheduled in 2023. And the reason is, it has been advanced by so much is because the hash rate historically has gone up. Meaning that the average block time is less than, than, than 10 minutes. And so in a way, Bitcoiners have been rugged because they've had to suffer one year's worth of dilution prematurely. When, you know, they were promised this, this, this four-year schedule. I think really the more refined take, I guess, is that we want the supply to be fully programmatic, right? We want it to be like just code. And this is a property that Bitcoin has, and it's also a property that Ethereum has.

• 39:16Speaker 02

  And I think maybe what Bitcoiners will say is that, yes, it's just code, but the code has changed over time. And this is true, right? We've gone from five ETH to three ETH per block to two ETH per block. And now we're basically going to zero ETH per block with proof of work. And then proof of stake is on the order of 0.25 ETH per block. And you can also think of EIP1559 as, again, being kind of this monetary policy intervention by ultimately humans. But I think one of the responses here is that the social layer is in control of these changes.

• 39:58Speaker 02

  And the social layer will only do changes that are beneficial to itself. And these are changes that improve the monetary properties. And so we've always has this continual incremental improvement to the properties of VFRD asset. And it's possible that there will be future improvements beyond what we have, which is already, in a way, sci-fi economics, at least relative to Bitcoin. And so one of the possibilities, for example, would be to have a cap on the number of active validators. So there's like good security reasons to have a cap

• 40:41Speaker 02

  on the total number of active validators, because every individual validator has some overhead computationally on the beacon chain. And so if we want the beacon chain to run on Raspberry Pis, there shouldn't be millions and millions of validators, because that would be too much overhead. And by putting a cap, not only are we improving the security of the beacon chain, but we're also improving the issuance, because now, instead of the maximum issuance being, you know, the square root of the total supply, it would actually be constant. It would be like proof of work. It would be like a maximum issuance per block that could ever be issued. And that would, you know, further be an improvement over the current monetary policy.

• 41:25Ryan Sean Adams?

  I don't know what, why I've never thought about putting it in these terms, but what you just said just kind of triggered this thought in my mind, which is,

• 41:35Ryan Sean Adams?

  after the merge, Ethereum switches its monetary policy from the social layer purely to code. In the same way that Bitcoin's monetary policy has been algorithmic driven and code driven from the very beginning. And I do think at the heart, that is what crypto sound money advocates actually want. They don't want predictability necessarily. They want unbiased ability. They don't want it to be biased arbitrarily by humans. They want the code and the algorithms to decide. And that indeed is what's happening post-merge.

• 42:16Ryan Sean Adams?

  Ethereum switches its monetary policy purely to the robots. The code is in charge now. But that's a great point about unpredictability. Let's go to the next.

• 42:29Speaker 02

  One, one, just to reiterate your point around, so you're right. There pretty much is these numbers that need to be picked, you know, five, three, two. And, you know, we can bike share, then we can argue, and it's kind of not clean. So you're right, we're removing these numbers and we're replacing them by pure auctions and markets. The other thing that I want to highlight from an improvement, potential improvement to monetary policy is this idea of MEV burn. So right now, we're only burning the base fee. But it turns out that there is this, you know, crypto economic gadget called MEV smoothing, whereby the blockchain itself is aware of how much MEV is being extracted in the blocks,

• 43:14Speaker 02

  and it spreads the MEV equally across all the participants. And this awareness creates an MEV oracle that we can indirectly use to burn the MEV. And we could actually be in a position where the issuance is negative, meaning that you need to pay ETH to become a validator. And the reason that you pay ETH to become a validator is because you know that you're going to be able to receive the MEV income, which is going to be greater than what you paid for this validator slot. And so, you know, right now, the the issuance is, you know, on the order of 0.5% per year.

• 43:56Speaker 02

  But with MEV burn, it could actually be be negative. And so that's, you know, taking to the extreme this idea that, you know, we

• 44:09Speaker 02

  we we we shouldn't be giving the the transaction fees and and use that to pay for security because that's wasteful. Instead, all the transaction fees should should go to ether the asset and accrue there to make ether a a better asset because the the validators are already sufficiently compensated to guarantee that Ethereum as as a protocol is secure enough. And the other thing that I mentioned in the UltraSight Money episode is that there's multiple grades of of of rewards for validators. There's the, you know, super consistent, low volatility stuff, which you want to rely upon, and there's the really high volatility fees.

• 44:54Speaker 02

  And so in a in a in a way, by smoothing things out and removing this MEV component, which is extremely volatile, we're making the process of of being a validator, you know, more more more stable and therefore, you know, in a way, making it more secure as well.

• 45:14Ryan Sean Adams?

  Well, speaking of validators, that gets us to, I think, the the seventh bad take on our list, maybe misconception, and that is the statement that the stakers run Ethereum. They are the rulers. Welcome. Your new overlords are stakers. They're validators. The idea is that Ethereum stakers control Ethereum and they can actually change the rules of consensus. What do you think about this?

• 45:41Speaker 02

  Right, so this is one of the really hard to fight bad takes. But and the reason is that there's a lack of appreciation for two layers in the consensus stack. Right, there's what I call the machine consensus layer, which is which is run by by machines and software and code that operates on the order of seconds.

• 46:07Speaker 02

  And there's the the the social layer, which is run by humans. And ultimately, the social layer has precedence over the machine layer. It's the social layer that sets the rules because it decides what is, you know, a valid transaction. So the the machine consensus has to play within those rules and can't just create invalid transactions out of Finna. So for example, even if the Ethereum as a blockchain was 51% attacked, the attacker could not just create transactions that paid itself millions and millions of ETH. Right, because one of the rules that has been set in the social layer

• 46:47Speaker 02

  and is enforced by by by running nodes with these rules is that, you know, transactions can't just create ETH out of Finna.

• 47:00Speaker 02

  And so there's this conflation basically of two things. One is consensus and the other one is governance. Governance is the the idea of making upgrades to consensus. And governance is in the hands of the social layer, whereas the day to day consensus is in the hands of of the machine layer, which is just a service provider, right? They're just servants ultimately to the network. If they don't obey by the rules, they will they will get penalized. Now, there is this this one exception, right, which we discussed in the censorship resistance is that the validators, if they get 51% attacked, they do have the power to temporarily censor transactions.

• 47:47Speaker 02

  And the reason why I say temporarily is because, as we discussed, there's these two types of censorship. There's the weak censorship, which by definition is temporary. And then there's the strong censorship where the transactions don't make it on-chain forever. But even in that strong censorship scenario, it's still temporary. Because a few months later, when the social layer kicks in, it will boot out the attacker and re-enshrine the rules that have been set at the social layer, which is that there shouldn't be censorship and therefore restore the system. And so if you are going to exploit this one loophole,

• 48:32Speaker 02

  which is that you can censor if you do 51% of that data, that's going to be a one-time attack, it's going to be extremely expensive. And most likely, you won't do it in the first place because the cryptoeconomic incentives, the equilibrium are not in your favor.

• 48:51David Hoffman?

  I think, Justin, this argument really comes from the Bitcoiner camp. And they're really using proof-of-work as a reference point to make this argument, where there's no governance button built into an ASIC unit. And so therefore, of course, proof-of-work systems don't have governance. But proof-of-stake systems, they totally do, obviously, because it's the capital that governs over the system. When people make this argument that proof-of-work doesn't have governance and proof-of-stake is on-chain governance, where's the mistake coming from here on this one?

• 49:29Speaker 02

  Right. So proof-of-work, 100% has governance. 100% has a social layer. Even if Bitcoiners try to minimize it, it does have one. The social layer of Bitcoin is, you know, we're gonna try and minimize it and try and ignore it to the maximum possible extent, but it's it's still there. And, you know, it rears its head every once in a while because there have been upgrades to the rules of consensus, you know, over time. Every two years or so, Bitcoin makes an upgrade. And that is fundamentally something that comes from the social layer. And so what happens is that humans will go upgrade their nodes and they're now running, you know, a different version of Ethereum.

• 50:12Speaker 02

  If, you know, fifty-one percent of the hash rate were to just go off in their own direction, well, then that just created a new fork. And, you know, this is what happened with Bitcoin Cash, for example. It just went on in its own direction and, you know, ultimately did not have legitimacy and would not have had legitimacy even if more than fifty percent of the hash rate wanted to go in that direction. And actually, that's something that Bitcoiners are very proud of, right? There's this, you know, story which is retold and retold over and over again, which is that all the big players, Coinbase and like all the miners and, you know, all the big industry wanted Bitcoin Cash, but ultimately we won because we were stronger.

• 50:56Speaker 02

  Well, yes, that's exactly right. That's a very good point. Like ultimately, the social layer won out over the consensus participants because the consensus participants are subjugate, not in power relative to the social layer.

• 51:10David Hoffman?

  Could we replay that same story with ETH stake? Could fifty-one percent of staked ETH go off on its own direction? And then the Ethereum community's like, oh, that's the direction of OFAC compliance. We don't want to go that direction. Is it a one-to-one comparison on these two stories?

• 51:26Speaker 02

  Hundred percent, yes. So you can abstract away the notion of a consensus participant, whether it's a proof-of-work consensus participant as a miner or as a validator and proof-of-stake is the exact same thing. And, you know, the nice thing is that anyone can fork off at any time. You just need one consensus participant in the world to go do that. And, you know, you could have like a very, you know... A quiet chain with just one participant if they want to. But really, the value of these forks only comes when you have, you know, rough consensus, when you have a significant minority at the minimum wanting to go in such a direction.

• 52:09David Hoffman?

  So that was bad take number seven. We have definitely a handful of more takes in the coming up next. We have rich get richer. We have proof of stake is bad for distribution. We have deflation bad and it's a security and a few others as well. We'll talk about scalability and the burn rate and a few other hot bad takes on ether. But first, we're going to talk to some of these fantastic sponsors that make this show possible. Juno is bringing crypto-friendly banking straight into your checking account. With Juno, you can send money from your Juno checking account straight onto a layer two like Polygon, Optimism, Arbitrum, and they have ZK Sync and Starknet support on their way. You can skip the ACH wait times, you can skip all the gas fees and go straight from your checking account to an Ethereum layer two in seconds.

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• 54:52David Hoffman?

  And we are back with our 15 bad takes about ETH. We are halfway through. So we're going to lead into this very common one that I've heard echoed all the time. It's about proof-of-stake. And it's that in a proof-of-stake system, the rich get richer. It's a rich-get-richer consensus mechanism. Justin, what would you say to this take?

• 55:12Speaker 02

  Right. So my take is that the rich stay equally rich, and the poor stay equally poor. Like, proof-of-stake is one of the fairest consensus mechanisms that you could come up with. And the reason is that it's the same API for every single consensus participant, no matter how large you are. If you're staking one ETH or a million ETH, you get the exact same API. And the barrier to entry to becoming a consensus participant is very, very low, at least compared to proof-of-work. With proof-of-work, you know, you need to invest millions of dollars, you know, to have a remotely competitive system. With proof-of-stake, with tens of thousands of dollars. And soon, with, you know,

• 55:56Speaker 02

  with things like Rocketpool and Lido, you know, even just one ETH or even less than an ETH is okay to be benefiting from these rewards.

• 56:06Speaker 02

  The other thing I'll say about proof of stake is that it, you know, it doesn't suffer from these economies of scale that proof of work has. And so in that sense, it's much fairer than than than proof of work. Like, if you're extreme, if you're extremely large, you'll be able to get, you know, better deals on on on your hardware, for example. And actually, if you're so large that you can go manufacture your own hardware, then you get an even better deal because you don't even have to pay the the bitmain kind of profit margin. And, you know, this is a classic thing, you know, with with, you know, in hardware, like, the bigger you are, the the the the more profitable you are.

• 56:51Speaker 02

  And like, part of the reason is that there's a a large, what's called N R E, which is this upfront engineering cost that you you have to pay even to produce one single ASIC. You have to pay, you know, tens of millions of dollars. And so the more ASICs you have, the more you can amortize that.

• 57:13Speaker 02

  And so, yeah, like, it's it not only is it is it is it wrong, because the the rich are not getting richer compared to to to the rest, but it's kind of a an especially bad take if it comes from Bitcoiners, because Bitcoin is indeed the rich get richer. Like, the richer you are, the better economies of scale you have, the the larger the A P R. And so over time, as a miner, you become larger and larger. And we're actually seeing this in real time play out right now in the Bitcoin mining world with acquisitions. Bitcoin miners are in a really tough spot now. And the reason is that the Bitcoin price is not doing so well, the the hash rate is relatively high, the the energy prices are very, very high, so electricity prices are very, very high.

• 57:58Speaker 02

  And so a bunch of miners are just, you know, not doing so well financially and some of them are just going out of business. And so the best move is to get acquired. And it turns out that it's the larger fish kind of acquiring the smaller fish and getting even larger. And so that leads to centralization. And so this is, this is something that proof of stake doesn't have. Like it's kind of preserves the level of centralization that we, that we already have. And if you zoom out and you think of, you know, wealth around the world, you know, it's not perfectly distributed for sure. But it's, it is pretty damn distributed.

• 58:36Ryan Sean Adams?

  Okay, so now we're getting to number nine on the bad takes list to defang. At this point, I think maybe the bad take machine is going, okay, Justin, you got us ultrasound money. ETH as money is really good, but you know what? Deflation is actually bad. It's bad for the Ethereum economy. And the idea is here that ETH cannot be a good money because deflation incentivizes hoarding. And that ultimately will start to jeopardize the Ethereum economy. So what about the idea that, okay, you're deflationary ultrasound money, but hold on, deflation is bad for the Ethereum economy long term?

• 59:18Speaker 02

  Right, so that's an extremely prevalent take even within Ethereum circles. And I think it's because it's like the, the traditional economist thinking, right? That, that deflation is bad. Now, the thing is that I think it's important to distinguish two types of money. And I'll call them money and currency. So there's non-transactional money and there's transactional money. And actually, the non-transactional one is what I'll call collateral money. And the transactional one is what I'll call, you know, debt, debt money. And it turns out that there's these, these two sides to the coin, right?

• 59:59Speaker 02

  When you want to have debt money, you know, for example, fiat, you need to have some sort of collateral backing it. So for example, you know, every time you take out a mortgage and you put, put your house as, as collateral, then you have collateral money, quote money is the, the house. And then you have the debt money. Now, you want, it is true that you want your debt money to be inflationary, right? You want its value to go down over time. And the reason is because otherwise, you know, over time, it would be harder and harder to pay off your debts. And you know, there'd be, there'd be lots of defaults in the system.

• 1:00:41Speaker 02

  But on the other hand, when you focus on the collateral side of things, then you actually want your collateral to grow over time because that reduces the probability that you'll get liquidated. So if you want to have like robust systems that can, you know, that are less subject to kind of becoming more and more systemically risky as time goes on, you know, and potentially having a massive crash, you kind of want your debt money to reduce in value over time so that people can pay back their loans. And you want the collateral money to grow and grow over time. And so just like, you know, we have like, you can think of gold as being this collateral money and fiat as being this debt money.

• 1:01:28Speaker 02

  Ether is actually optimized to be collateral money, in my opinion. So right now, how is it used as collateral? Well, it's used as collateral in the context of staking, right? There's about, you know, I forget exactly the percentage, but something like 12% of all ETH, which is currently being staked.

• 1:01:48Speaker 02

  Ether is also being used as collateral in the context of DeFi.

• 1:01:55Speaker 02

  And in both of these cases, what does it mean to be a collateral? It means basically to be backing some sort of liability. And so Ether, the asset, is kind of this magical thing where you can create liabilities and start backing them. And so in the context of DeFi, like the liability is that the price action goes against your favor. You know, you want leverage along with your ETH, price goes in the wrong direction, you get liquidated. In the case of staking, is this idea that, you know, if you start misbehaving, you start accruing penalties. And

• 1:02:36Speaker 02

  I kind of also think as one third use case of Ether being collateral money is just simply being a savings mechanism, a store of value. And you can kind of think as the liability there as being your future spending, right? You know, it could be for education or for housing or for medical bills or whatever. Like, it's there to back a liability, which is your future spending. And like, the amazing thing about Ethereum is that it's a system which is extremely friendly and extremely welcoming of these two types of money. Both the ultra-low-velocity, non-transactional money, which Ether is optimized for, and for

• 1:03:20Speaker 02

  the high-velocity transactional money. And the reason why it's friendly to both is that when you look at the transactional money, this is what generates cash flows, right? This is what generates income. And so you can kind of think of the really high-velocity liquid portion as being like a mini-company, like a mini-tech company, basically. And you can start applying, you know, valuations that look at cash flows and look at P/E ratios and things like that. And this kind of mental separation of these two types of monies is, in my opinion, a very good model for monetary premium.

• 1:04:02Speaker 02

  And the reason is that we can try and compare it with gold. Gold has roughly 10% of its supply, let's say, that is actively being used and has cash flows through its use as an industrial metal, right? Every single iPhone, every single piece of electronics uses gold. And if you look at these cash flows, you might say that gold should be valued at $1 trillion. But it's only the 10% of gold that is actively, you know, subject to these cash flows that should be valued at $1 trillion. But if you look at the whole market cap and you add in the other 90 million, then now

• 1:04:40Speaker 02

  suddenly you get the, you know, the whole $10 trillion market cap of gold, which is to a large extent just monetary premium. And I think the same thing will happen with Ether, the asset. I think over the long term, the vast majority of ETH will be non-transactional. It will be just sitting there. Maybe let's say 80% of all the ether will be used as collateral in context of DeFi, staking and as a store of value. And only 20% will be liquid and subject to these cash flows. And so if we take this to be, you know, the case and then we should expect a monetary premium

• 1:05:22Speaker 02

  of 5X right over the cash flow valuation. And right now, you know, we're in a position where maybe only 20% of all the ETH is locked up. And so the monetary premium is actually negligible. It's only when it becomes very, very high than it starts accruing monetary premium.

• 1:05:44David Hoffman?

  Ryan, you're muted.

• 1:05:46Ryan Sean Adams?

  Sorry, I was saying that that's very fascinating. I really like this kind of, I guess, lens of collateral money versus debt money, right? And I guess applying the, you know, a traditional lens of money that we've seen before, store of value, medium of exchange, unit of account. I think what you're saying is the collateral money is better on the store of value side of things. The higher velocity debt based money is better on kind of the medium of exchange side of things. I guess both could serve a purpose as the unit of account, but maybe the high velocity money is kind of a better unit of account. But like, we see this in play right now, whereas for an asset like a staple coin like a DAI, right?

• 1:06:29Ryan Sean Adams?

  That is kind of a unit of account, medium of exchange. What is it backed by? USDC, yes, but also a vast amount of ETH as collateral backing it. So when you're talking about like deflation bad, deflation only bad for credit money, only bad for the medium of exchange type money, the high velocity money is definitely a very good thing for the store of value type of money. And I think that distinction in the fiat age has been somewhat blurred, but I think will become more clear in the crypto age. David, I think you have the next take.

• 1:07:06David Hoffman?

  Yeah, next take that we want to cover, Justin, is a higher ETH price means higher fees. And to elaborate, it's that, you know, high ETH prices, high ether prices, especially in bull markets, lead to high transaction fees, making Ethereum unusable. What would you say to this take?

• 1:07:23Speaker 02

  Right, so in my opinion, it's just, you know, largely wrong. And it like the the thinking is that people have to pay transaction fees in ETH. And so if the price of ETH goes up, then it means that my transaction fees must go up.

• 1:07:43Speaker 02

  But actually, there's like two very distinct markets here going on. There's the ETH market, which is denominated in US dollars per ETH. And then there's the gas market, which is, you know, denominated in US dollars per per gas, per unit of gas. And and in theory, like these two things like are totally separate. There's the different markets. And so we can be in a position, you know, hypothetically, where one ETH is a million bucks. But the the the gas price is is is is extremely low.

• 1:08:25Speaker 02

  Sorry, the the the gas market is denominated in ETH per gas. So basically, you could be paying like 0.0001 Gwei, let's say, and still have, you know, an extremely high ETH price. And actually, this is what I expect will happen over time. This, I think, is the the reasonable end game is that the the price of ETH is very, very high. Let's say a million dollars and the the gas price is extremely, extremely low. And when you take these two things in in combination, you know, you're you you're in a position where you have very, very low fees, but potentially lots and lots of transactions. And so if you if you bring in scalability to the mix, what I expect will happen is that

• 1:09:08Speaker 02

  we're going to have millions and millions of transactions, each paying a tiny, tiny fee, let's say, one one one cent. And that, you know, being kind of largely orthogonal, I guess, to the, to, to, to the price of ETH. Now, one thing that I, that I'll, I'll say is that when we look at the gas markets, there's, there's two components. There's, there's supply and demand. Now, the price of ETH going up definitely doesn't apply, doesn't reflect, uh, doesn't reflect on, on, on, on supply. But what tends to happen is that if the price of ETH goes up, it increases demand for the, the, the, the, the block space. And one of the reasons is because of volatility, right?

• 1:09:51Speaker 02

  If price goes up, that means that there's been a change in price, which means that there's been some amount of volatility. And every time there's volatility, there's arbitrage opportunities and things like that. But the other aspect is that as the price of ETH goes up, Ethereum becomes more valuable and more useful as, as a settlement layer. And the reason is because it has more economic security and it has more economic bandwidth. And so it can do more stuff and it has larger and larger network effects. And so it's natural that there is more demand for it. And so one of the things that we, that we have observed is that there is this kind of, uh, this, this, this, this correlation with, with bear and bull markets.

• 1:10:36Speaker 02

  When, when we're in the, in, in, in, in the bull market, there's, there's, there's a lot of activity. People are wanting to pay, uh, you know, for, for this block space at, at a premium. When, when the bear market, there's less, there's less activity. But if you, if you think in terms of long-term fundamentals, nothing prevents, you know, having a $1 million ETH with one cent transactions.

• 1:11:00Ryan Sean Adams?

  $1 million ETH with one cent transaction. That sounds kind of good right now. Sounds like a good day. Let's, let's go to number 11. This has been maybe a criticism I've, I've seen somewhat recently again. Uh, has it raised its head at certain times more recently by, I think, Michael Saylor. But ETH cannot be a good money because it's a security. The ETH take being Ether is a security, therefore it cannot be good money. What, what do you say to that?

• 1:11:29Speaker 02

  Right, so my understanding of securities is that it's on a jurisdiction by jurisdiction basis. And there's roughly 200 jurisdictions in the world. And to my knowledge, there's not a single jurisdiction in the world that has declared ETH to be a security. So in a way, this should be a falsifiable claim. I should be able to go to every single country and tell you, hey, it hasn't been declared a security in that country, therefore it's not a security. But I think what Bitcoiners and critics have been doing is basically saying that, hey,

• 1:12:11Speaker 02

  there hasn't been a clear claim that it's not a security, and so I guess it could be a security. And often, when they think, when they say ETH is a security, they actually mean ETH is a security in the United States, specifically. Okay, so let's look at the United States. Now, I'm just an observer of, I'm not even based in the US. I have relatively little knowledge of US securities, but my understanding is that the SEC has actually explicitly come forward a few years ago and had this informal guidance that it's not a security.

• 1:12:53Speaker 02

  Like, we had a representative of the SEC go ahead and do that. And then my other understanding, but again, I'm definitely not an authority on this, is that there's a statute of limitations, specifically in the US, of five years. And it's been close to eight years since we've had the pre-sale.

• 1:13:17David Hoffman?

  I think it's seven years, but your point still stands.

• 1:13:20Speaker 02

  Point still stands. It's been more than seven years since ETH, the asset, has been created. And so, in the US specifically, it seems that it's not a security. But of course, it could be declared a security in other jurisdictions. Now... What if, let's say, Bitcoin has turned out to be right? Like, some jurisdiction does declare it a security. Well, Ethereum in a way doesn't care, right?

• 1:13:51Speaker 02

  The Ethereum system will just keep on running. And what will have to happen is that exchanges within this jurisdiction will either have to stop trading the ETH for the asset because they're not registered as a securities exchange. But there's many easy ways now to go by ETH. Like, one of the ways, for example, is you buy wrapped Bitcoin, you go on Uniswap and you convert that wrapped Bitcoin to ETH. And so if Bitcoin is not a security, then it's still easy to go by ETH. And if one specific jurisdiction were to go ahead and declare ETH a security, they're putting themselves at a massive disadvantage.

• 1:14:34Speaker 02

  Because remember, the grand vision here is to become the settlement layer for the Internet of Value and basically for ETH to be the collateral money for the whole Internet. And they want to miss out on this opportunity? Well, that would be to their loss, obviously.

• 1:14:49Ryan Sean Adams?

  The collateral money for the whole Internet only traded from nine to five on the S and P, like on the NASDAQ or something like this, right? It does not make sense.

• 1:14:58David Hoffman?

  I opt out of that future. Justin, thank you so much for going that one. This one, we have this listed in the bad takes about ETH. But this one, I'm actually really curious for myself because I'm curious to hear the answer. This is a point that Jordy made in our bear versus bull about the merge argument. And it's that the scalability of Ethereum with EIP 4844 and just generally pushing transactions to Layer 2s reduces the ETH burn. So all these people who are just like super stoked with how much Ether that we're burning, how can we also be excited about the ETH burn, yet also excited about Ethereum scaling at the same time? So the take here is that Ethereum scalability reduces Ether burn.

• 1:15:44David Hoffman?

  Why is this a bad take? And actually, I need to know this for my own personal knowledge.

• 1:15:50Speaker 02

  Yeah, sure. So this is a very common take, even within Ethereum land. And basically, it's because, you know, the very naive thinking, which I guess Jordi is not thinking, but I'll just put it forward anyway, is that if we have scalability, then transaction fees, the per transaction fee will go down, and therefore, the total burn will go down. But what it doesn't take into account is the fact that there's going to be more transactions. So even though every individual transaction is going to be paying less, because there's more transactions, then there's going to be some counterbalancing going on.

• 1:16:29Speaker 02

  And so the real question is, you know, there's this very subtle market dynamics around, you know, scalability on the one hand, and, you know, how much people are willing to pay, given this total amount of scalability. And there's several scenarios. There's actually, you know, two, at least two scenarios. Scenario number one is that if, let's say, we scalability increases by 10x, the question is, will the per transaction fee be less or more than 10 times less? Because if it's less, then yes, I agree, the fee burn would be less. But if it's more, then actually it would be more.

• 1:17:11Speaker 02

  So there is a scenario where, for example, we scale by 10x, but the per transaction fee only goes down by 5x. And in that scenario, the fee burn, actually, the total burn goes up by a factor of 2. Now, there's a couple of things that we can say just, you know, abstractly, which is that there's two things that we can expect. The first one is this idea of a supply shock, which is that if we were to suddenly scale dramatically, then there wouldn't be an immediate response. There's kind of this latency for the response in the very, very short term. And so what would happen is that the per transaction fee would go down,

• 1:17:55Speaker 02

  and there wouldn't be a counterbalancing in terms of demand for lots of transactions. And so the total burn would go down. But there's this other kind of very interesting economic effect, which is this idea of induced demand, which is that the more you improve the system, the more people want to use it. And this is something that we observe with with with with with traffic, which is that, you know, if you have, let's say, a motorway with with two lanes, it's always full of traffic. Well, the the city council is going to say, OK, let's build a third lane. And then two months later, this third lane is like completely swamped. And you can ask yourself, why? Why does that happen? Why have you not solved traffic?

• 1:18:39Speaker 02

  And the reason is that because you've added this first this third lane, you know, people who used to take the train, now they start driving entrepreneurs who who, you know, see, oh, well, there's now more flow in this city. I'm going to set up a petrol station. I'm going to set up a restaurant. And now more people are interested to go there just because there's a restaurant. And this is the same thing is going to happen with Ethereum. Like, the more activity there is, the more, you know, attractive Ethereum itself becomes. And so what we should be really expecting when there's a scalability increase is like a dip, but then a counterbalancing increase for the induced demand. And then the real question is, where do we end up? Do we end up over or or under?

• 1:19:23Speaker 02

  And here we need to go back to historical data. It turns out that Ethereum has scaled, and in my opinion, it scaled roughly 50x since Genesis. Wow. So let me try, let me try and explain that. So at Genesis, there was a 3 million gas limit. And now we have a 15 million gas target. So that's already a 5x increase in scalability. The other 10x in scalability comes from the improvement that

• 1:19:59Speaker 02

  Developers have had when we're writing gas efficient code, right? Seven years ago, we would write extremely gas inefficient code. And we didn't have the tools to optimize this. And now, you know, seven years later, we're basically doing, you know, what's called gas golfing, where like if you can reduce your consumption by one gas, you know, you like you get a badge of honor.

• 1:20:21Speaker 02

  And you're, you know, you're, you get a social credit within your peers as developers. And we've been able to squeeze everything out. And if you look, for example, at Uniswap V2 versus Uniswap V3, that's, you know, roughly an order of magnitude improvement in terms of of gas efficiency per unit, per amount of volume traded. And so if you compound this 10x improvement in writing better and more gas efficient contracts with 5x increase in gas limit, you get roughly this 50x. And then you can look back with on all the data that we've had. Has the total burn increased or decreased despite this capability? And it's gone nothing but up, and it's gone up extremely dramatically.

• 1:21:06Speaker 02

  It's gone up 10x every single year for the last seven years. So it was like,

• 1:21:17Speaker 02

  something like $10 per day seven years ago, and then $100 per day, $1,000, $10,000, $100,000. And now we're at a point where we're doing $10 million per day of transaction fees. And so I think there is, you know, a possibility that this trend will continue. And that, you know, we are the very, very early days of Ethereum adoption. And there's a lot, a lot of network effects that still have to kick in. And therefore, a lot of induced demand that still has to kick in. And if I were to kind of zoom out as a heuristic,

• 1:21:53Speaker 02

  you know, I think it's fair to say that as Ethereum provides more and more economic activity to the world, you know, the total amount of value that it can extract should grow, right? There is this technological aspect. But, you know, as a rough heuristic, that doesn't seem unreasonable to me.

• 1:22:13Ryan Sean Adams?

  All right, for folks that have gone with us all the way to number 13 here, what you're describing maybe to some people sounds a little bit like a tech stock, Justin. And so what about this take that the ETH market cap is just a reflection of Ethereum's performance and it looks kind of like a tech stock, its outlook as a tech company. Is ETH a tech stock? What do you think of this take?

• 1:22:37Speaker 02

  Right. So I think it's partially true and partially false, right? I think as discussed, if you focus on the portion of the Ether supply, which has to deal with cash flows, you know, specifically the liquid portion of ETH that generates fees and is subject to issuance, then I think yes, it makes sense to look at this small portion as a tech stock. And actually, going back to this website, ultrasound.money, there is precisely this, there is a tech stock model, price model for ETH the asset.

• 1:23:16Speaker 02

  And so you can compare P ratios with companies like Google and Apple and Amazon and Disney, etc. And so if we, yeah, scroll down a little bit, the monetary premium, you had it. So right now Ethereum has a P ratio of 32.7, you know, with assuming zero monetary premium, you know, which is somewhere between Google and Apple. And so maybe that's, maybe that's reasonable, even though I'd argue that Ethereum has a huge amount of growth potential, you know, at least compared to very established, you know, companies like Google and Apple. And so really, maybe the P ratio should be closer to 100 than 30.

• 1:23:56Speaker 02

  But let's just keep it, well, we can keep it at 30 or put it at 100, whatever works. But, you know, the important thing, I guess, is that this P ratio model should only affect the liquid supply, which right now is about 80% of all ETH. And so, you know, there should be a tiny monetary premium, let's say maybe 25%, 1.25, that should be added. But really, the, one of the bull cases for ETH is that over time, the vast majority of Ether, let's say 80%, 90%, maybe 95%, is used as collateral, always lost. And so the liquid supply is only 5%.

• 1:24:42Speaker 02

  And that would basically give us a multiplier, monetary premium multiplier over the base valuation as a tech stock.

• 1:24:55Speaker 02

  And by the way, this is the only way that we can get to the trillions and trillions of dollars of economic security and bandwidth that we need. Like even the largest companies in the world, you know, like Apple is like low digits, trillions of dollars. And if you look at decentralized stablecoins, right now, we're in a position where we have these growing pains, right? Where we, the best stablecoin that we have on Ethereum is basically centralized stablecoins, like USDC and USDT. And this is not going to be the endgame. The endgame is fully decentralized stablecoins, but these need to be collateralized by some form of pristine collateral.

• 1:25:33Speaker 02

  And so because stablecoins are over-collateralized, we know from Luna and Terra that nonfully collateralized stablecoins don't work. So let's take the assumption that they have to be over-collateralized. Then if we're going to need tens of trillions of decentralized stablecoins, we need tens of trillions of dollars of collateral money as well.

• 1:25:54David Hoffman?

  Let's get in here to some of our last few bad takes that we want to cover. And that is that Ethereum always just changes. The narrative around Ethereum keeps on changing. First, we had ICOs. Before that, we had the World Computer to start. Then there was DeFi. Now there's NFTs. Ethereum, the narrative always changes. The story that's being told is always something new. What would you say to this?

• 1:26:19Speaker 02

  Right. So I agree that the narrative has changed. And I think it's largely because Ethereum has been misunderstood. And it's been conflated with, you know, what it ultimately is it very good at, which is being a settlement layer for the answer value and the applications that are built on top. And so, you know, these narratives, as I said earlier in the podcast, like DeFi and ICOs and DAOs, these are emergent stories that have happened on top of Ethereum. And just like the internet had all sorts of emergent stories, right? It had social media and then it had, you know.

• 1:27:03Speaker 02

  Chat applications and Wikipedia and email and all sorts of other stuff, you know, image sharing and video sharing and whatnot. We're going to see a richness. And so if you continue confusing, you know, Ethereum, the settlement layer with the applications built on top of it, you're in for even more confusion, right? Because we're going to see an explosion of new narratives at the application layer.

• 1:27:36Speaker 02

  And I think there's also been kind of this technological kind of mindset. You know, for example, the world computer. And now one of the new narratives is that, you know, we're just like a data availability layer, for example, for rollups.

• 1:27:51Speaker 02

  I think this technological take is a bit too narrow for a couple of reasons. Like, one is that sometimes it focuses on just one component, right? Just the data availability or just the consensus. Where actually really Ethereum is providing a bundle of services. And I think for me, like, the four big components are consensus, right? We don't have huge amount of economic security. And the consensus, which is efficient, economically efficient with low issuance. We want to have the data availability, which is critical indeed for rollups. We want to have just enough execution to be able to settle these rollups. And we want to have ultrasound money, EFA the asset,

• 1:28:35Speaker 02

  which is one of the key building blocks that's going to be used in the context of applications built on top. And so I'm not a fan of pushing for looking under the bonnet and looking at the components, saying Ethereum is this technical thing. No, like, when we focus on the wrapped, the whole holistic system and we include a bit of mission, right? Ethereum's mission is to become a settlement layer for the internal value. And I think that becomes a very, very simple narrative, which is extremely generic and encompassing and

• 1:29:16Speaker 02

  And hopefully one that will become stronger and stronger over time. Like you can think of the world computer as being a more awkward way of saying settlement layer for the internet value. And I think it's possible that, you know, looking back in five or 10 years, settlement layer for internet value is like a little too awkward, right? It's like eight words and it's a bit wordy. But I'm sure someone, you know, on Bankless will find something really snappy to say.

• 1:29:44Ryan Sean Adams?

  We definitely used to use some cringe words for the internet in the early, you know, like the 1990s, right? Like cyberspace.

• 1:29:51David Hoffman?

  Information super highway.

• 1:29:53Ryan Sean Adams?

  Yeah, these terms have gone out of vogue, certainly. But let's conclude with the 15th and thank you, Justin, for hanging with us so long. So this is the last and final take. For people who've made it this far around these bad takes on ultrasound money and you're refuting them, maybe they still don't resonate with ETH as ultrasound money. It's a cringe meme, they might say. The whole ultrasound money thing, you just stole that from Bitcoin. It sounds super cringey. You can't talk to normal people and talk about Ether as an ultrasound money. They won't get it. What do you say to that critique?

• 1:30:28David Hoffman?

  It makes them think of pregnancy, you know.

• 1:30:30Ryan Sean Adams?

  Yeah, ultrasounds.

• 1:30:33Speaker 02

  Okay, so there's two aspects to the question. One is the stolen aspect and the other one is the cringe one. Now, I think both are technically true, but I think both are terrible takes. So let's take them one by one. The stolen one is especially ironic coming from Bitcoiners. And the reason is they stole the sound money meme from, you know, gold bugs, basically. And they have zero innovation. They literally copied it verbatim and said, this is my meme now, when actually, you know, it came centuries earlier.

• 1:31:05Speaker 02

  And so, yeah, it's quite ironic for them to say we've stolen it. But also, we haven't stolen it. In a way, it's a derivative. It's an improvement. And the way that I, you know, think of memes, which is kind of interesting, is like it's a bit like viruses, right? There's these pieces of information, they're not genetic, they're kind of cultural pieces of information that mutate over time. And here it's, in my opinion, is kind of a superior and stronger, you know. Organism, mimetic organism that's been created and one which, you know, might, might, might spread faster and stronger across the world than, than, than sound money did. Like, sound money took, you know, many, many decades, if not centuries, to, to spread to, to, to the whole world.

• 1:31:50Speaker 02

  So that's kind of the, the stolen aspect. In terms of the, the cringe aspect, well, guess what? Like, sound money, when it was created, was really, really cringe. And the reason is, you need to go back to, like, where the, the word "sound money" come from. It came from this idea that if you had a gold coin, it made a certain noise. It's like this, you know, you could have this ping test where, like, ding. It was a test to see if it was pure. Exactly, like, the, yes. That is pretty cringe. And like, what if the test involved, like, smelling it? Would you have called it, like, smell money? Or like, taste money?

• 1:32:32Speaker 02

  Or like, like, sound money just sound like, just cringe. But people have forgotten, like, this original meaning of, of, of, of, of sound. And if you tell me "sound money," I, I don't think ding ding ding, like, la la la, like the sound money. Instead, I'm like, I have this very serious, you know... Austrian textbook, musty smelling room kind of feel to it. Exactly. And I think it's, it, it, it's possible that something similar will, will, will happen with, with, with ultrasound money.

• 1:33:04Ryan Sean Adams?

  Well, that's great. Justin, you've been very generous with your time. Thanks for going through fifteen bad takes on ETH and for, for clarifying them. I guess, Justin, we are about to, as long as the merge goes successfully in the next couple of days, in the next forty-eight hours?

• 1:33:21Speaker 02

  Thirty-three hours, yeah.

• 1:33:22Ryan Sean Adams?

  Thirty-three hours.

• 1:33:23Speaker 02

  There you go, I'm counting.

• 1:33:25Ryan Sean Adams?

  We will be entering the ultrasound money phase, so we're glad you could share some of these final, final pre-merge moments with us, and we appreciate your time.

• 1:33:36Speaker 02

  Thanks for having me again.

• 1:33:38Ryan Sean Adams?

  Bankless listeners, of course, risks and disclaimers. Got to mention that ETH is risky. So is all of crypto. So is DeFi. You could definitely 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.