Bankless - 15 Bad ETH Takes with Justin Drake

Episode Date: September 14, 2022

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 

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 going to 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 monumental week of the merge, there have 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 about ultrasound money.

What are we in store for today, David? 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 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 going to be going to get into is like the rich get richer, which is a very common take you hear about proof of stake. So we're going to 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, as well as like unpredictable supply deflation bad it's a security etc etc etc some very common takes that you've heard around the cryptosphere we're going to take them one by one and go through 15 of the baddest east takes that you've ever heard all right get ready for the countdown uh justin drake dropping some bad eith takes i thought this was impossible but i guess he's refuting them also since it's merch week of course we want to remind you our friends at consensus uh uh have sponsored this and they want to let you know that they are going to to be launching a commemorative NFT coincident with the launch of the merch, which is about 21.

Is this right? 21 hours away? Yeah. No. It's a little bit more than that. Yeah, that can't be right. Yeah, we're a little bit more than 36. Oh, but it's 21 hours until the launch of this NFT.

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 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 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 22. That is happening in September. What are people in store for? 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 Buteran 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 bankless 250 to get, you guessed it, $250 off a ticket. 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 the beginning of these episodes, what is the state of the nation today? 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. 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? No, no, Wednesday evening. Excuse me, sorry, not Friday. My God.

Wednesday evening, late, or possibly into like the wee hours of Thursday morning, like 12 a.m., 1 a.m.? That's the most updated time frame 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. Ultrasound money is now saying one day, nine hours, 47 minutes, and 8,691 blocks.

That's the exact time that Ultrasound money is predicted. I have to rewrite that rent song. All right, guys. Nice. We will be right back with our episode, clearing up some misconception, 15 bad eat takes with Justin Drake. but before we do, we want to thank the sponsors that made this episode possible. Lens Protocol is an open-source tech stack for building decentralized social media applications.

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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's blazing a trail through the world of crypto economics. And it's great to have you back. Justin, welcome. Thanks for having me again. 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? right so i'm feeling extremely excited but at the same time a little powerless because you know it's now in the hands pretty much of the devs and the operators the staking operators so um you know a little anxious you know i'm sure there will be some you know some bugs but the good news is that we've really

you know 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, will be fixed and, and, and we'll have a smooth merge. You know, for me, a successful merge means finality as soon as possible. It's possible that the, the participation rate will drop. You know, it might drop to 95, 90, we'll see a percent, but that's okay, so long as it stays above 66%. So 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 engines, 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? We talk about Uniswap being a money Lego, Ave, Maker, et cetera. 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 merch. So I know that that analogy that you used, in fact, a year and a half ago used that in our original ultrasound money episode of Ethereum really getting its engine swapped out.

This 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 ethosound 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. 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?

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, you know, 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 going to have, you know, a much bigger audience now, you know, looking at it. 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. I think there's a big focus on the energy reduction. That's something that mainstream can understand. But there's, 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, I mean, that's 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. 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 way over their head, despite the fact that security is the product that Ethereum is delivering. It's secure block space. So it's, you know, the most important property, arguably, and the one that's the least appreciated by the mainstream.

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 going to be. Does it feel a little bit like that? Exactly, yes. 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. their ability and you know 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 your get you to weigh in on 15 of them jesson you ready Sounds good. 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? Wow. Okay. So the good news is that there's two types of takes. There's what I call falsifiable and non-forsifiable takes. Now, the non-forsifiable 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,

you know, within the next 36 hours, let's say, we're going to be able to falsify that. You know, we're 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 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.

Here's another take that I think is related, which is Ethereum, the full Ethereum roadmap and the vision for Ethereum will never show. 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? Interesting. So I think there's a couple things here. 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 DALs, we've had ICOs, we've had DFIs, NFTs. And some of these things have failed, well, 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. We don't want to conflate Ethereum being the settlement layer for the intent of value with its applications. Another thing that 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, of Ethereum, it's not Ethereum itself, just like the engine, the wheels and the chassis are components. And it's even though like the components are not fully mature, 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,

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 for folks. And it's okay for visionaries, for entrepreneurs to come in and start building today, even though the technology is not fully mature. And this is something that we, that we experience, you know, around crypto-kitties. There was this argument being said that, 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 if we have all the research done, speced 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 insertive value. And so, you know, that's, you know, again, another falsifiable claim that I hope will be falsified, you know, 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 the EF1 voting, and we did 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 dang sharding will come 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 that small team of 100 people that are now, you know, pushing the execution layer to its limits via the roll-ups. And on that note, since we are 36 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 sake will never ship. 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? Right. So I guess there's two ways to interpret 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, he's trying to do too many things. They're trying to do NFTs. They're trying to do DeFi and ICOs and DOWs. 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. The other way to interpret this bad take is that people claim that if it is simultaneously trying to be a small 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.

things. Be more like Bitcoin, for example, if you want to do just money. But my claim is that it's actually the exact opposite. 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 smart contracts, 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 impossible, even for the largest nation states in the world, to go attack, 51% attack, if they're 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 best money.

Another reason that we need to be money is because ether, the asset is also used as economic bandwidth, right? It's this money Lego in the context of, of, of, of, of, of, of, of, and, you know, people have been talking about these money Legos, you know, like, did I already say that? Like Uniswap, Ave and Maker, but really, Ether is this, you know, primordial building block, the oldest one, the most important one, the largest one, the most flexible, the most composable, the most pristine, etc. And if we are going to be successful at building the intent of value, we do need that component. What was the, sorry, I lost my train of thought there.

I think that, I think that answers it. And by the way, 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, you know, optimized 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 economic security reasons. I think that brings us to number five. Oh, did you have something you wanted to add, Justin?

Yeah, I wanted to actually give you the flip side, which is that if you want to be successful at money, you need to be successful at smart contracts. And in a way, that's one of the bare cases for Bitcoin. And the reason is that with money, there is this competition for monetary, There's this idea that only the best assets, the most outstanding assets, will be worthy of this 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 shunning 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. 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, know, if towards its native money. And it's for, 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, for the asset, but it's also jeopardizing its security. You know, on on on the firm, what the, the, the strategy that we've taken is always prioritized 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 assets and towards making it a better money 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 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 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? 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 bit technical, but basically the issuance is sublinear in the supply. So with proof of work, we had this constant issuance. So it doesn't matter how large the supply is. It's like a constant issuance, for example, two eave 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. And so 1% of a supply of 1 million if is much, much lower, is 10 times lower than 1% of a 1 billion if supply. And so if the supply were to grow to infinity, the burn would grow to infinity, but we know that the issuance doesn't grow as fast. It's kind of the sublinear growth

relative to the burn. And 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, and then you can prove that if you were to map out these two curves, square root and and the line, you know, they would intersect and that would be the equilibrium. Now, one of the interesting kind of site notes here is that arguably, even before EIP-1559, Ethereum would still have a supply equilibrium. And the reason is that there is another mechanism that EF gets burnt, which is the natural process of losing EFER. People just lose their coins.

And so we could maybe estimate, let's say, 0.1% percent. of all the EF every year gets lost. And the reason is that, let's say, 1% of all people on Earth, you know, die. 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 sublinear nature of issuance. And this is actually an argument that was put forward by my Peter Todd, not that I agree often with Peter Dodd, 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.

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 that's what you were talking about with the square root, right? Because it's a square root function, as the number goes higher, it stops going higher so far. 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? 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, as a function of how much ETH stake there is. So we have these two things, two mechanisms that are two forces. that interact with each other that are both market-derived. And when we have 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? 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, visualize this. If you go to ultrasound.money, the website, 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 EF is staking. The lower the APR, the more EF is staking. So here we have 30 million EF. 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 most of the data was around, you know, defy 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, then you can see the equilibrium would be at around roughly 1.7 million if. 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 if 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 maybe 3% is reasonable, maybe 4% is reasonable. I don't know. And that will dictate how much EF 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 induce demand and competition. 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. 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, it's issuance schedule, it's blocks-based 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. It even has kind of a projection of the ETH supply moving forward. And what are we at with total supply right now? 120 and a half million 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

this concept called the ultrasound barrier which is basically what average base base fee price do we need in order to have deflation 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 way. 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. You know, maybe... So the last hour was a ultrasound hour, if you will.

Exactly, yes. Amazing. I can't wait to look at this post-merge. It's going to be that much better. 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? Right. So this take is actually technically true because as you said, the EF supply

depends on these two market forces. One is, you know, what is the fair, you know, cost of, opportunity cost of money and what is going to be the demand for block space and the fees paid for it. But it turns out, so this is often a take that's given by Bitcoin. but it turns out that Bitcoin's supply is also unpredictable. And the reason is that mining is also... 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 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 meme within the Bitcoin, which is that every four years, there's a happening, 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 happening in January 2020, 25, I believe. But now it's,

if we were on the, on the four years, on the original four year schedule, but actually, the next happening 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 10 minutes. And so in a way, bitcoins have been rugged because they've had to suffer one year's worth of dilution prematurely when they were promised 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. 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 5EF to 3EF per block to 2EEEE per block, and now we're basically going to zero EF per block with proof of work,

and then proof of stake is on the order of 0.25 eave per block. And you can also think of EIP-1559 as, you know, again, being kind of this monetary policy intervention by ultimately humans. But like I think one of the responses here is that the social layer is in control of these changes. 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 the asset. And it's possible that there will be future improvements beyond what we have, which is already, you know, 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 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 Pi, 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 the square root of the total supply, it would actually be constant. It would be like proof of work. There 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. I don't know 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 after

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.

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... Just to reiterate your point around... So you're right. They're pre-merged as these numbers that need to be picked, you know, 5, 3, 2. And, you know, we can bike shared and 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 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, 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 if to become a validator.

And the reason that you pay if 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 issuance is, you know, on the order of 0.5% per year. But with MEV burn, it could actually be negative. And so that's, you know, taking to. the extreme, this idea that we shouldn't be giving the transaction fees and use that to pay for security because that's wasteful. Instead, all the transaction fees should go to ether the asset

and accrue there to make ether a better asset because the validators are already sufficiently compensated to guarantee that Ethereum as the protocol is secure enough. And the other thing that I mentioned in the ultrasound money episode is that there's multiple grades of rewards for validators. There's the super consistent low volatility stuff, which you want to rely upon and there's the really high volatility fees. And so in a way, by smoothing things out and removing this MEV component, which is extremely volatile, we're making the process of being a validator more stable and therefore, in a way, making it more secure as well. Well, speaking of validators, that gets us to, I think, 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? Right. So this is one of the really hard to fight bad takes. And the reason is that there's a lack of appreciation for two layers in the consensus stack. There's what I call the machine consensus. layer, which is run by machines and software and code. It operates on the order of seconds. And there's 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 machine consensus has to play within those rules and can't just create invalid transactions out of Finner. 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 EF, right? Because one of the rules that has been set in the social layer and is enforced by running nodes with these rules is that, you know, transactions can't just create. create ephatof thinner. And so there's this conflation basically of two things.

One is consensus and the other one is governance. Governance is 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 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 get penalized. Now, there is 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. 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 a 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 and 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, which is that you can censor if you do 51% of that, that's going to be a one-time attack is going to be extremely expensive. And most likely you won't do it in the first place because the crypto economic incentives, the equilibrium, are not in your favor. I think, Justin, this argument really comes. from the Bitcoin or camp,

and they're really using proof of work as a reference point to make this argument where there's no like governance button built into an ASIC unit. And so, like, 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 chain, is on-chain governance. Where's the mistake that the where's the mistake coming from here on this one? Right. So proof of work 100% has governance.

100% has a social layer. You know, even if Bitcoin has tried to minimize it, it does have one. The social layer of Bitcoin is, you know, we're going to try and minimize it and ignore it to the maximum possible extent, but it's still there. And, you know, it rears its head every once in the world because they 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 a different version of Ethereum. If 51% of the hash rate were to just go

off in their own direction, well, then they just created a new fork. And this is what happened with Bitcoin Cash, for example. It just went on in its own direction and ultimately did not have legitimacy and would not have had legitimacy even if more than 50% 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 story which is retold and retold over and over again, which is that all the big players, Coinbase and all the miners and all the big... industry wanted Bitcoin cash, but ultimately we won because we were stronger. 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. Could we replay that same story with ETH stake? Could it 51% of staked ETH go off on its own direction? And then the Ethereum communities, 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? 100%. Yes. So you can abstract away the notion of a consensus participant, whether it's a proof of work, consensus participant as a minor or as a validating 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

quiet chain with just one participant if they want to but really the value of these forks only comes when you have rough consensus

when you have a significant minority at the minimum wanting to go in such a direction 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 the show possible. Juno is bringing crypto-friendly banking straight into your checking account. With Juno, you can send money from your Juno checking

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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? Right. So my tech 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 APR for every single consensus participant, no matter how large you are. If you're staking one eph or a million if, you get the exact same APR. And the barrier to entry to becoming a content 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 to have a remotely competitive system with proof of stake with tens of thousands of dollars. And soon with, you know, with things like Rocket Pool and Lido, you know, even just one Eiff or even less than an EF is okay to be benefiting from these rewards. The other thing I'll say about proof of stake is that it doesn't suffer from these economies of scale that proof of work has. And so in that sense, it's much fairer than proof of work.

Like, if you're extremely large, you'll be able to get better deals on your hardware, for example. And actually, if you're so large that you can go manufacture your own hardware, then you get a even better deal because you don't even have to pay the bit main kind of profit margin. And, you know, this is a classic thing, you know, with, you know, in hardware, like, the bigger you are, the, the, the, the more profitable you are. And, like, part of the reason is that there's a large, what's called NRE, which is this upfront engineering cost that 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 A6 you have, the more you can amortize that.

And so, yeah, like, it's not only is it, is it, is it wrong? Because the rich are not getting richer compared to the rest. But it's kind of 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 larger the APR. 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. The Bitcoin miners are in a really tough spot now. And the reason is that the Bitcoin price is not doing so well.

The hash rate is relatively high. The energy prices are very, very high. So electricity prices are very, very high. And so a bunch of miners are just 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 something that proof of stake doesn't have. Like it's kind of preserves the level of centralization 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 is pretty damn distributed. 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. The idea is here that ETH cannot be a good money because deflation is, 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. Right. So that's an extremely prevalent take, even within Ethereum circles. And I think it's because it's like the traditional economist thinking, right,

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 debt money. And it turns out that there's these two sides to the coin. right 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 as collateral then you have collateral money quote money is the the house and then you have the 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 lots of defaults in the system. 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 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 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. 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 EF, which is currently being staked. Ether is also being used as collateral in the context of DFI. 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 defy, like the liability is that the price action goes against your, your favor. You want leverage long with your if 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 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, you know, 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, 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 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 ratios and things like that. that. And this kind of mental separation of these these two types of monies is no in my opinion a very good model for monetary premium. 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 subject to these cash flows that should be valued $1 trillion. But if you look at the whole market cap and you add in the other $90 million, then now suddenly you get the whole $10 trillion market cap of gold, which is to to 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 EF will be non-transactional. It will be just sitting there. Maybe, let's say, 80% of all the EFER will be used as collateral in context of

defy, 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 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 EF is locked up. And so the monetary premium is actually negligible. It's only when it becomes very, very high, then that it starts accruing monetary premium. Ryan, you're muted. 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 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 die, right, that is kind of a unit of account, medium 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 we'll

become more clear in the crypto age. David, I think you have the next take. Yeah, next take that we want to cover, Justin, is a higher eth price means higher fees. And to elaborate, it's that high EFs prices, high ether prices, especially in bull markets, lead to high transaction fees, making Ethereum unusable. What would you say to this take? Right. So, in my opinion, it's just, you know, largely wrong.

And it, like, the thinking is that people have to pay transaction fees in EF. And so if the price of EF goes up, then it means that my transaction fees must go up. But actually, there's like two very distinct markets here going on. There's the EF market, which is denominated in US dollars per EF. And then there's the gas market, which is, you know, denominated in US dollars per gas, per unit of gas. 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 eph is a million bucks,

but the gas price is, is, is, is, is, is, is, is, is, is extremely low. Um, sorry, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the market is denominated in eph per gas. So basically, you could be paying like 0.0.001 let's say, and still have, um, you know, an extremely high eif price. And actually, this is what I expect will happen over time. This, I think, is the reasonable endgame is that the price of Eiff is very, very high, let's say, a million dollars. And the gas price is extremely, extremely low. And when you take these two things in combination, you're in a position where you have very, very low fees,

but potentially lots and lots of transactions. And so if you bring in scalability to the mix, what I expect will happen is that we're going to have millions and millions of transactions, each paying a tiny, tiny fee, let's say one cent, and that being kind of largely orthogonal, I guess, to the price of Eiff. Now, one thing that I'll say is that when we look at the gas markets, there's two components, there's supply and demand. Now, the price of EF going up definitely doesn't reflect on supply. But what tends to happen is that if the price of Yves goes up, it increases demand for the block space.

And one of the reasons is because of volatility, right? 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 Yves goes up, Ethereum becomes more valuable and more useful. 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 have observed is that there is this kind of this correlation with bear and bull markets. When we're in the bull market, there's a lot of activity. People are wanting to pay for this block space at a premium. When in the bear market, there's less activity.

But if you think in terms of long-term fundamentals, nothing prevents, you know, having a $1 million if with one-cent transactions. One million dollar eth with one-cent transaction. That sounds kind of good right now. Sounds like a good day. Let's go to number 11. This has been maybe a criticism I've seen somewhat recently again. It has 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 ETH is a security, therefore it cannot be good money. What do you say to that? 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 Eve 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, you know, it hasn't been declared a security in that country. Therefore, it's not, it's not a security. But I think what Bitcoin has and critics have been doing is, is, is Bitcoin. saying that, hey, there hasn't been a clear claim that it's not a security. And so I guess it could be a security. And often, you know, when they think, when they say if is security, they actually mean if is a security in, in the United States, like specifically. Okay. So let's let's let's let's look at the United States. Now I'm, you know, just an observer of I'm not even based in the US. You know, I have very.

relatively little knowledge of US securities. But my understanding is that the SEC has actually explicitly come forward, you know, a few years ago and kind of had this informal guidance that it's not a security. Like we had a representative of the SEC go ahead and and do that. And then my other understanding, but again, I'm definitely not an authority on this is that there's a statutes of limits. specifically in the US of five years. And it's been close to eight years since we've had, I think it's seven years, but your, seven years, but your point still sense.

Point still sense. It's been more than seven years since, you know, EFA, the asset has been created. And so, you know, 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, you know, Bitcoin has turned out to be right?

Like some jurisdiction does declare it a security. Well, you know, Ethereum in the way doesn't care, right? Like the Ethereum system will just keep on running. And, you know, what will have to happen is that exchanges within this jurisdiction, you know, will either have to stop trading the e for the asset because they're not registered as a securities exchange. But, you know, there's many easy ways now to go to go by EFA. Like one of the ways, for example, is you buy a rap Bitcoin, you go on Uniswap, and you convert that rap Bitcoin to Eif.

And so if Bitcoin is not a security, then you, you, it's still, you know, easy to go to, to go by EF. And if one specific jurisdiction were to go ahead and declare EFA security, they're putting themselves at a massive disadvantage. Because remember, like the grand vision here is to become. the settlement layer for the internet of value and basically for Eif to be the collateral money for the whole internet. And like they want to miss out on this opportunity. Well, you know, that would be to their loss, obviously.

The collateral money for the whole internet only traded from nine to five on the SMP, like on the NASDAQ or something like this, right? It does not make sense. I don't I opt out of that future. Justin, thank you so much for growing that one. This one, we have this listed in like the bad takes about Eith. 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 ETH burn? the same time. So the take here is that Ethereum scalability reduces ether burn. Why is this a bad take? I'd actually, I need to know this for my own personal knowledge. Yeah, sure. So this is a very common take, even within Ethereum land. And basically, it's it's because, you know, the very naive thinking, which I guess Jody 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. And so the real question is, you know, there's this very subtle market dynamics

around, you know, on 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. 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 two. Now, there's a couple of things that we can say just,

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, 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 traffic, which is that if you have, let's say, a motorway with two lanes, it's always full of traffic while the city council is going to say

okay let's build a third lane and then two months later this third lane is like completely swamped and you can ask yourself why does that happen why have you not solved traffic and the reason is that because you've added this first this third lane you know people who

used to take the train and start driving entrepreneurs 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 transit activity there is, the more 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 under? 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 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 developers have had when we're writing gas efficient code. 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 consumption by one gas, you know, you get a badge of honor. And, you know, you get 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 roughly an order of magnitude improvement in terms 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 on all the different. data that we've had has the total burn increased or decreased despite this scalability and it's gone nothing but up and it's going up extremely dramatically it's gone up 10x every single year for the last seven years so it was like something like ten dollars per day seven years ago and then a hundred dollars a thousand dollars ten thousand a hundred thousand and now we're the point where we're doing ten million dollars per day of of of transaction fees and so I think there is a possibility that this trend will continue and that we're at 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, 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. All right. For folks that have gone with, 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 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 right so i think it's it's partially true and partially false right i think as discussed if you focus on the the portion of the ether supply which has to deal with cash flows um you know specifically the liquid portion of eve that generates uh fees and 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 EFD asset. 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. monetary premium, you had it. So right now, Ethereum has a P-E ratio of 32.7, with assuming zero monetary premium, which is somewhere between Google and Apple.

And so 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.E. ratio should be closer to 100 than 30. But let's just keep,

it, well, we can keep it at 30 or put it at 100, whatever works. But, but, you know, the, the important thing, I guess, is that this P ratio model should only affect the, the liquid supply, which right now is about 80% of all if. And so, you know, there should be a tiny monetary premium, let's say maybe 25%, 1.25, that, that should be added. But really the, one of the ball cases for if 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%. And that would basically give us a multiplier, monetary premium multiplier over the base valuation as a tech stock. 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, there's like low digits trillions of dollars. And if you look at decentralized table coins, right now we're in a position where we have these growing pains, right? Where we, the best stable coin that we have on Ethereum is basically centralized stable coins like USDC and USDT. And this is not going to be the end game.

The end game is fully decentralized stable coins. But these need to be collateralized by some. form of pristine collateral. And so because stable coins are over collateralized, we know from Luna and Terra that non-fully collateralized table coins 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 table coins, we need tens of trillions of dollars of collateral money as well. Let's get in here to some of our last few bad takes that we want to cover. And that is that Ethereum 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 it was defy. Now there's NFTs. The narrative always changes. The story that's being told is always something new. What would you say to this? 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. what ultimately is it's very good at, which is being a settlement layer for the internet 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 DOWs,

these are emergent stories that have happened on top of Ethereum. And just like the internet had all sorts of emergent stories, It had social media and then had, you know, 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. 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 roll-ups. 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. We're actually really a firm is providing a bundle of services. And I think for me, like the four big components are consensus, right? We have a huge amount of economic security and a consensus, which is efficient, economically efficient, with low issuance. We want to have the data availability, which is critical indeed for roll-ups. We want to have just enough execution to be able to settle these roll-ups. And we want to have ultrasound money, EFARD asset, 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. And Ethereum is this technical thing. No, like when we focus on the whole holistic system, and we include a bit of mission, right, film's mission is to become a settlement layer for the internet value. And I think that becomes a very, very simple narrative, which is extremely generic and encompassing 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 of value. I think it's possible that, you know, looking back in five or ten years, settlement layer for the internet value is like a little too awkward, right? It's like eight words, and it's a bit worthy. But I'm sure someone, you know, on bankless will find something, you know, really snappy and to say. We definitely used to use some cringe words for the internet in the early, you know, like the 1990s, right? Like cyberspace, for example. Information super highway. 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 cringy. you can't talk to you normal people and talk about ether as an ultrasound money. They won't get it. What do you say to that critique?

Makes them think of pregnancy, you know. Yeah, ultrasounds. Okay, so there's two aspects of 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 ticks. 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.

from, you know, gold bugs basically. From, 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. 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? 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 spread, you know, faster and stronger across the world than, than sound money did. Like, sound money took, you know, many, many decades, if not centuries to spread to the whole world. So that's kind of the stolen aspect. In terms of the cringe aspect, well, guess what?

Like sound money when it was created was really, really cringed. And the reason is you need to go back to like where 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, 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 or like, like, sound money just sound like, just cringe? But people have forgotten, like, this original meaning of sound. And if you tell me sound money, I don't think ding, ding, ding, like, la, la, like sound money. instead I have this very serious you know Austrian textbook musty smelling room kind of feel to it exactly and I think it's possible that there's something similar will what will happen with ultra sound money that's great Justin you've been very generous with your time thanks for going through 15 bad takes on Heath and for for clarifying them I guess Justin we are about to you

as long as the merge goes successfully in the next couple of days, in the next 48 hours? 33 hours, yeah. 33 hours. I'm counting it. We will be entering the ultrasound money phase, so we're glad you could share some of these final pre-merged moments with us, and we appreciate your time. Thanks for having me again. Bankless listeners, of course, risks and disclaimers. Got to mention that ETH is risky, so is all of crypto.

So is DFI. You could definitely lose what you put in, but we're headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.