Bankless - 16 - What's an Etherean? | Nic Carter

Episode Date: June 8, 2020

Episode: #16 June 8, 2020 Nic Carter is one of our favorite writers in crypto. He's shaped our thoughts on many subjects over the years. Now we got to sit down and talk the challenging stuff. The stuff typical podcasts never as him...we dive right in. He's a bitcoin yes...is he an Etherean? He's bullish on stablecoins...is he bullish ETH value accrual? He thinks free banking is good...does he think Maker is good? Nic believe in bitcoin values...does he believe in bankless values? This episode is jam packed with insights. Covered: Is Nic an Etherean? What does Etherean even mean? Are stablecoins good or bad for ETH? Why the entire point is blockspace demand How economically dense transactions win Settlement assurances & property rights Why crypto banks aren't all bad Emerging digital nation states Will this bankless thing work? Plus Ryan and David discuss: How David got pepper sprayed last weekend Bankless as an anti-authoritarian movement Building it up not burning it down Join us next Monday for a fresh episode! ----- Tools from our sponsors to go bankless: Multis - bank your business without a bank (1 mon. trial!) Ramp - the fiat onramp for DeFi (mention Bankless!) Monolith - holy grail of bankless Visa cards Aave - money lego for lending & borrowing ----- Resources discussed: (Article) It’s the settlement assurances, stupid - Nic Carter (Article) Visions of Bitcoin - Nic Carter (Article) Crypto-fiat: Mutualistic or Parasitic - Nic Carter (Article) While the cities burn below - RSA ----- Episode Actions: Read some Nic Carter articles! (see above) Catch up on previous episodes (#2, #7, #12) Pump Bankless by giving us a 5-star review on iTunes! ----- Subscribe to podcast on iTunes | Spotify | YouTube | RSS Feed Leave a review on iTunes Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program Visit official Bankless website for resources Follow Bankless on Twitter | YouTube Follow Ryan on Twitter Follow David on Twitter

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. This is Ryan Sean Adams. I am here with David Hoffman, and we're here to help you become more bankless. David, this is an incredible episode. We've been waiting a long time for this. We are talking with Nick Carter today. What did we cover? So much, so much. Nick Carter is always a valuable person to get on any podcast. particularly in the way that Nick clearly thinks and thinks differently from most people in this space that get caught up in the tribalism, caught up in the maxi warfare, something that I would definitely say I do from time to time. So getting Nick's perspective on here and making

sure that when we make comparisons, when we make claims, that they are grounded in something that is useful outside of crypto rather than just comparing, you know, crypto system A to crypto system B, Nick's perspective really makes sure that we are anchoring these things in time in relation to the systems that have come before crypto and using the lessons of historical financial mechanisms to compare and contrast mechanisms that we find today in the crypto land. Yeah, and I think Nick would definitely consider himself a bitcoiner, but he'd probably put an asterisk by that. And I don't think Nick would consider himself at all a Bitcoin maximalist. He's very open in terms of ideas.

One of the first questions we asked him was whether he identified with the Ethereum community and with the DFI movement. And his answer to that was really interesting. And then we talked some more about stable coins, which has been a topic I've wanted to pick Nick's brain on for a while, whether particularly stable coins on Ethereum and there's over $8 billion dollars worth of stable coins on Ethereum, whether those are good or bad for Ethereum. Getting his take on that was super interesting. And then, of course, we got into settlement assurances. Really, I feel like this episode tied a lot of other episodes

together. So if you're just listening to Bankless, you haven't caught up on the archive, go check the archive out. Episode two, we talked about monetary policy and monetary theory that relates to this. Episode 7, we talked about Ether's value mechanism. So we talked about EIP 1559. So that comes in here when we're talking about stable coins. Episode 12, we talked about the protocol sync thesis. Nick has some really interesting perspectives on how to apply that lens of things to Ethereum transactions. So overall, this is an episode that puts a lot of the previous episodes together.

And they all kind of feed into this conversation with Nick Carter. It was great. He's always good. And then we finish off the conversation with two topics that Bitcoiners and Ethereum's always butt heads about. And that is kind of the juxtaposition between a defy world and a crypto banks world. Nick Hark calls this movement free banking. It's like the banking 2.0, but instead of gold, it's Bitcoin. And without all the limitations of gold, there are all the benefits of Bitcoin. And Nick believes that the competition, the free market competition for banking services with minimal regulations from the government

is a interesting thing that is unfolding. And where the regulations from the government break down, the rules and regulations from the Bitcoin blockchain come up to replace them, you know, the $21 million hard cap, the easy to verify, et cetera. So that's always an interesting perspective that Nick particularly thinks a lot about. And then we go into one of my favorite subjects, which is also going to be the subject of my next article coming out in Banking, next week is the progress of these nations that have, that human civilizations have moved through

throughout time. So these different organizational schemes, such as religion and then the nation state and now Bitcoin and Ethereum, these all represent very similar constructs that humans organize and stitch themselves together through. And so we kind of talk about the commonalities found in each one of these different nations, civilization schemes that, that enable humans to coordinate and transact with each other. And so that's where we finish off the episode. And I'm really excited to release that article next week in bankless. Yeah.

By the time you guys listen to this, it's coming out on a Monday, it'll probably be the Wednesday. So it'll be like this week, your time when you're listening to this, that you'll be able to catch David's article on bankless. David, let's get to the big picture. But before we do, want to talk about some incredible bankless tools from our sponsors. Our first sponsor is Monolith. If you guys have your assets inside of Ethereum, but you also want to live your life, Monolith for our European customers might be the product for you.

They have their defy card, which is a Visa card connected to a smart contract wallet on Ethereum, so that when you go to the store, you buy your coffee, you buy your groceries, you swipe your Monolith card, and then your dye gets deducted out of your smart contract wallet, sold for dollars and then you make both a transaction on Ethereum and a transaction on the Visa Network. Really crucial infrastructure for people that want to live a bankless life, but don't really want to compromise and be that weird friend that doesn't have any real money. So you can download the app at monolith.xy Z to get your bankless visa card today. And then you can get some of the world's economic activity placed onto the Ethereum network. All right, guys, I am

super excited to introduce you to our next new sponsor ramp. What is holding crypto back? It's really getting Fiat into the crypto system. That's what's holding DFI back. The problem is a new user has to create an account with an exchange to buy some crypto. They have to wire funds. They have to go through a whole bunch of steps. What's holding DFI apps back the exact same thing? Users drop off in the sign up process. And it really limits the DFI market to hardcore crypto. people, but no longer. Ramp solves that. Ramp has a delightfully easy Viat on-Ramp service. So it lets users get crypto, ETH, D-USDC in five minutes or less. That's right, five minutes or less. No exchange needed. And a new user can have crypto right into their account and start using

the app. So if you are a developer, this takes about 10 minutes to implement. They've got very easy to use APIs. Apps like DeFi apps like Xerion, Ethereum, Taurus are using Ramp. You can visit ramp.network to see how easy this is. This is really an opportunity for Defi developers to 100x their addressable market size. This is like the ultimate growth hack. And here's what's cool. If you mentioned bankless, they will on-ramp the first 100K from your app of USD free. So that's 100K free. So that's 100K free when you mentioned bankless, go to ramp.network and check it out. R-A-M-P-D-Network, mention bankless, and check it out. All right, David, big picture. I got to ask, man, how was your weekend? It looked like you had some wild stuff going on. What happened last weekend?

Last weekend was a big weekend. After this last weekend, a lot of my attitudes and perspectives and and focus has really shifted. I'm of course speaking of the riots, the protest, and the police brutality that has flooded the nation in almost every single major city. On Seattle, me, my sister and my brother-in-law went down to downtown Seattle to protest, extremely peacefully, and I worked my way up to the front of the crowd just to be there, just to experience it all, spent about 10 minutes there before the police started marching forward and indiscriminately pepper spraying, which I got a faceful of. Then I went home to shower and clean off because pepper spray is not fun. And then I watched the news, and I watched the news about the protests, and I watched the news

give a police report account of what happened, which was, from my perspective, a total fabrication. And everyone else I talked to at the march was a total fabrication. And then we watched, I watched on Twitter how this played out in basically every single major U.S. city. And so I felt, and I still feel very radicalized about this. I feel that the police are not the police, but they are instead a police militia. I feel like they are over-equipped with thousands and thousands of dollars of gear, bulletproof vests, bulletproof helmets, like hard face masks, you know, heavy batons,

riot shields, the full works, and the civilians of the city are people in jeans and running shoes, and that's it. And it doesn't feel like they are the police. They are, they are a tool of the state. And that's some people have been always saying that that's what the state is. The state always has this stance towards the people because the people are the one thing that can remove the power of the state, especially in America, where the American government, and every state government, the federal government, is a protocol that allows for the people to change the protocol. And so the current instantiation of the people in power are always at the whim of the people who hope that they can remove them from power if they so choose. And so I've just become extremely cognizant of this stance, again, from the state towards the people that does not always have the best interests of the people.

And that, I've been focusing on that, especially as it relates. to how crypto systems work at large, where crypto systems are inherently neutral and cannot have a stance towards people. They just are tools. They just are protocols for us to use and leverage. And this is something that I've just been thinking a lot about lately. Well, I want to get back to that some more, but I've got to ask just like practically, I've never had pepper spray in the face before. What is that like? What does that feel like? How do you get it off? Pepper spray is oil-based. It's oily and sticky. And it should, shoots out like a super soker.

And so when you get it on your skin, it doesn't, you don't wipe it off. It's not like a liquid. It is like a paste. And they were aiming for the eyes. And I got it right in the eyes. It felt like bee stings in my eyes like everywhere. I was immediately disoriented and discombobulated. I could not see two seconds later.

And I had to, people were around me and I just had to ask for help because I needed, because they were the police officers were advancing, right? without warning, by the way, they just told all the police officers that were they're going to start advancing and they started taking steps forward and the pepper spray was brought out two seconds later, two full steps into the crowd. And so I had to turn around blinded. And I had my video on my camera on Instagram live. And so you guys can see this video in person and be with me if you guys want to experience that. But I had to ask for help. I had to say like, hey, I need help. I can't see anything. and so people put their arm around me and walked me back from the police officers as they advanced.

I was immediately disoriented. I think it's important to listen to people's experiences because everyone has experienced what's going on in the U.S. in a different way. But you were talking about the protocol of the United States, David, and written in the First Amendment of that protocol is the freedom to peaceably assemble. And when that starts to get taken away to the extent that it is, it's a breach of our protocol that the U.S. Constitution, the amendments are essentially America's settlement layer. That's what preserves law and order. That's our social contract. And so I certainly get alarmed when that is looking like it is being breached.

and I can understand from your experience how you felt like that was being breached. You know, here you guys are assembling peaceably. And you're just broken up for seemingly no reason. I do think that a lot of the media wants to paint this as a right versus left thing. And I would say that, you know, bankless is not a commentary on nation state politics, but it does have a political position. The bankless platform is. absolutely, it's not a right versus left thing, but it is absolutely an anti-authoritarian movement.

Authoritarians, of course, want to control, they want to dominate, they want to take over, and the bankless movement is about self-sovereignty. It's about freedom. So whether you're right on the political spectrum or left on the political spectrum, if you're listening to what we're talking about, if you're involved in crypto and involved in defy, chances are you believe those things too. You believe in the self-sovereignty of individuals and are against authoritarian states that would try to strip those things away. Protocols not kings is our mantra, wouldn't you say? Absolutely. Absolutely. Every single protocol on Ethereum and Ethereum itself and Bitcoin itself is a protocol that used to be in the responsibility of the state that the protocol is now, can now

assume. So, you know, the state and the IRS and taxes and reporting and auditing, all of these things that companies and individuals and businesses have to do is give the IRS and give the state, give the powers that be like a report of where all the value is. And it's really the tool that the United States system at large uses to understand where all the value is in the world. And because the world is on the dollar system, the United States government gets to see in a penopticon type of way where all the money is. And because they control the protocol of the U.S. dollar, they control the auditing of the U.S. dollar. And so getting back home, I immediately understood much better why Ethereum nodes need to be able to run through Tor. Why we need to be able to run an Ethereum

node with or without the state's permission in whatever capacity that we want. Because if Ethereum can run through Tor, there's nothing that they can do. If the United States got hyper authoritarian and they banned Ethereum nodes and Bitcoin nodes, that would make these systems a little weaker, a little more fragile. But putting these systems through the Tor network so that everything can be hidden from the state is really important. And this maybe seems like something radical that only a radical person might do. But we've seen people get arrested for the things that they have put on Twitter even in the last three days, things that people put on Instagram. The state is watching social media and they're arresting people from what they have been

posting. Granted, what they were posting was illegal, but that's where it starts, right? Like, first it starts from just the illegal stuff and then it moves forward into maybe more subjective stuff. And so I'm immediately cognizant of how incredibly exposed I am because of my the exposure I have towards being such a pro-crypto person on Twitter, on Instagram, talking about how this removes the power from the state and puts it into the hands of the people that I have left a trail of that sort of behavior.

And so in China, I would have been arrested, absolutely. And so I'm now cognizant of privacy and the ability to run Ethereum through Tor in a private manner so I can have my freedoms. Yeah, absolutely. And this is not about. about doing anything, you know, illegal in the current system or illegal with respect to the constitution, but authoritarianes could crack down for whatever reason that they want to. And bankless and crypto is really a hedge against the rise of authoritarianism. I want to maybe leave this kind of our big picture with one thought.

And that's the focus of this movement is also not burning down the existing system. You know, the response to this can be, we're frustrated, let's burn everything down. I think, you know, that's one response. It's not necessarily the response that we want to take. The response we want to take is build it up. So what we're doing in crypto is we are building from the ground up an entirely new monetary system. that enshrines self-sovereignty at its core. It enshrines algorithmic issuance, non-state interference at its core at the base layer,

and then builds up from there. And I think that is something in these increasingly authoritarian times that is worth spending time on. Okay, before we get to the Nick Carter interview, want to talk about our sponsors. Avey is a defy lending and borrowing platform with some new cool features that you might not be, used to compared to other borrowing and lending applications on Ethereum. First and foremost, the feature that stands out to me the most is their fixed interest loans. And so, you know, variable interest loans can get pretty hairy, right? So Maker Dow launched at 0.5% and then it slowly skyrocketed, it slowly ramped up to 20%, which is, which is a very wide range of possible

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He is the co-founder of Castle Island, which is a venture capital company. He's also the co-founder of coin metrics, which I use on a weekly basis. Nick, we've been waiting a long time to have you on bankless, and we are really excited to dig in today. Happy to be here. Thanks for the invitation, guys. Nick, you know what? I think there's a lot we could cover today. We want to keep this conversation dynamic and casual. We've been very influenced by a lot of the things you've written in the past. But I'm just going to dig in with sort of an initial question to get us started here, which is, are you an Ethereum? Is there any part of you that is an Ethereum? We know,

you're a Bitcoinser. And you can be both, by the way. David and I would both consider ourselves both. What's your take on that? Man, you guys have thrown me right into the deep end first. That's how we do it. Feels like a trap. So maybe we should define what that means, you know, Ethereum Bitcoiner. So like my preferred definition of Bitcoinser is like someone that just believes or kind of effectively endorses the like the values inherent in bitcoin so um you know a acknowledges that it's important that there's like monetary commodities that exist outside the state and then be like you know is is pretty interested in property rights and uh and then see you know like the other kind of like assorted values that like underscore bitcoin um so

I think you don't you know you don't have to like own bitcoin to be a bitcooner you just have to kind of agree with the, um, with the kind of the thrust of the philosophy. Um, for Ethereum, like I would say the values are like slightly more diffuse. Like they're not as well codified. Like there aren't, uh, totems to rally around like 21 million units. Um, it's more like uh, commitment to like rapid iteration and more expressivity. Um, But I would say it's like probably slightly harder to define what the the core values in Ethereum are. The other thing is probably just owning Ethereum makes you an Ethereum, right? So, I mean, I own some.

Like I've made Ethereum transactions. So in that sense, yes. In terms of the values, like I would want to see them like codified so that I I can evaluate them. So let me ask this, Nick. What's your impression of the Ethereum value system today? Just raw impression? I think it's still fairly malleable for better or for worse.

You know, it was interesting to see the Prague-Pow debate develop because that was something that was like kind of stipulated. The ASIC resistance was stipulated in the, at the yellow paper, I think. And then there was like a constitutional debate almost. And it was like, well, you know, like these stipulations don't matter. Like the world has moved on. We've learned a lot.

It's kind of like how in the Second Amendment debate, it's like, well, the founding fathers didn't envision, not to like make this super topical or anything. The founding fathers didn't envision, you know, machine guns or, you know, really treat consumer grade, like, you know, technology that would give civilians lots of killing power. So, like, you have to read the text and context kind of thing. Yeah. It was reminiscent of that in that, like, there was a rejection of, like, a constitutional stipulation and, you know, an embrace of, like, modernity, so to speak. I don't know if that answers the question. B, I'd say fairly malleable. However, it seems to be getting more like Bitcoin

like over time. I don't know if you guys have noticed. 100%. 100%. Like A, the governance process has become more difficult as like more stakeholders have emerged and they are heterogeneous and they're like objectives. The pace has slowed down, the pace of change, which is necessary. The focus on Ether as a financial, like a monetary commodity has intensified. So in a sense, like, there's been a convergence of sorts in terms of the, like, values. And the other thing is, I would say there's been much more of a focus on, like, how does Ether itself monetize, which is maybe the focus of this conversation. as opposed to in the very earliest days, like from what I remember of the discourse, it was more like, well, you know, it'll just happen. And the monetization is just kind of a contingent function of the system's growth.

And like, we don't know exactly how it's going to happen, but it probably will if we build something important, valuable. Now I would say there's a much more deliberate focus on, well, how do we ensure that ether is valuable? you know, how do we retain the monastery premium that's developing, which is like reminiscent of Bitcoin philosophy, I would say. I really want to emphasize my beliefs of an agreement that Ethereum is trending towards a lot of the same values that uphold Bitcoin. And I think that we would see this. And it's not Ethereum dependent or Bitcoin dependent. I think all crypto systems that would have emerged, that were like crypto systems that were predicted to emerge back in the 90s, right, before crypto was even a real thing. We could have, in hindsight, this is more obvious now,

but some of these values are required for these things to work, right? And so the Prague-Pau debate was this debate about removing politics and governance from the system, saying that Prog-Pow is a system that benefits one group of people over another, and for that reason it should not be included. And we saw that also with the vehement rejection of on-chain block reward funding for developers. That was a very contentious proposal that got swiftly struck down because of the political nature and the inherent acceptance of the need to have a neutral protocol on Ethereum. And then also, as you said, the moneyization, the financialization of the L1 blockchain, the value of the block space needs to be scarce and needs to be in demand and perhaps only is

really suited for financial activity. I see all of these things that maybe perhaps on accident, I don't think a lot of Ethereum would say that they agree with Bitcoinerism, but at the same time, all these values are emerging regardless. And I think it's not, and they're not Bitcoiners values, right? They're not Bitcoin values. They're just the correct values that match what needs to be involved in creating a successful crypto system. Yeah, that's very well put, actually. And I think there's a few things where you can say definitely Ethereum has become more proximate to Bitcoin value-wise.

As you say, the monetary primacy of the system, you know, although there's still non-monetary uses of ether, but I think the monetary ones are kind of outweighing them. the layered approach to scaling. I mean, you know, TBD, I guess, but like certainly there's been much more of an embrace of layered approaches as like it's become clear that like there are real constraints in terms of the data overhead that a system can tolerate. And what was the other one? Oh yeah.

So this thing that you mentioned like a rejection of protocol derived financing, that's like a very important thing, in my opinion, because that kind of thing leads to capture, in my opinion. It kind of really dramatically raises the stakes and turns engineering debates into political debates. And yeah, I think that would have been a recipe for disaster. And, you know, that's certainly something like Bitcoin prides is not converting ownership of units of the currency. into political power, which can then turn into a positive feedback loop. So, Nick, you've written quite extensively about sort of how these networks change over time, specifically their narratives, and we'll include one of your articles on this in the show notes here.

Bitcoin in its early days was many things, but store of value digital gold was a smaller portion of it than it is today. There was a contingent that wanted to make Bitcoin a peer-to-beard. peer cash system. That contingent ultimately left. They forked out. They created their own community ecosystem network, Bitcoin cash, right? Do you see a similar sort of thing happening in Ethereum where people who believed more in this sort of the more nebulous Web 3 vision, decentralized internet vision, people who are okay with issuing tokens to developers in an arbitrary way as a reward system. Those people are essentially forking out in creating their own

ethel killers. Is that how you're seeing what's going on in Ethereum right now? Yeah, I think that's a correct interpretation. I haven't paid too much attention to like the politics of the various eth killers, but from like the shallow look that I've given it, it does seem that there was like kind of a big tent kind of mentality early on when things were like pretty harmonious. and like the nature of the protocol hadn't really been clearly defined, and people were projecting onto it features that they wanted. And then when it wasn't borne out that way, and when it kind of failed to develop in the way that they may have liked,

they, you know, express frustration or just left and sort of alternatives, which is, I guess, like the beauty of the industry, but also, you know, like if you're interested in having the biggest possible network of users, it's also a loss. But just like on the topic, that article, it's like, it's funny that it has so much currency and it gets quoted so much. It was like a 10 minute exercise that I did. And then I was like, I made the chart just like on my kind of like gut feeling. And then I was like, I went to Hasio. I was like, do you want to write this into an article? And then it became this whole thing.

And now people cited it as if it's like canonical. It's like, oh, yeah, like the digital cash contingent was like 10% of the discourse in Bitcoin's early days. And like those numbers are pretty much made up just based on my recollections. So it's not canon. Like I would welcome another attempt, you know. Someone else should try it and, you know, come up with a better. version or something. Yeah, and I'm hopeful somebody actually writes one for Ethereum, too.

I've seen sort of one version of it that I personally didn't agree with. Yeah, there was one for Ethereum. Yeah, you know, I felt like I sort of agreed with the take, but I feel like, you know, there should be multiple interpretations for the narratives. It's very subjective. I mean, we're talking about, like, trying to do what historians do, you know, and, like, there's no, like, canonical history written, as we all know. And I have like subjective views.

The fact that your subjective views, you put them out there and they caught fire, basically, and they're oft quoted and everyone refers to this particular article, that gives it some, I call it meme density, right? Like, you kind of, that's how canon maybe is set in these types of social communities. Yeah, I mean, I guess like, I'm, I sort of like have objections with that article. I think maybe, I was representing it in a pretty flat and linear way. There definitely were like competing intellectual threads in the cypherpunks, like pre-Bitcoin. So for instance, there were debates over privacy, you know, like Bitcoin isn't that private. Chomium digital cash is much more private, you know. There are debates over whether they should just create dollar, like just wrapped dollars.

in like digital format or like new native units like bitcoin you know so like they didn't agree and like i think there are even debates over scaling like uh nick zabo's model was uh was kind of meant to be layered in a certain way so like whether they were creating digital cash or a settlement medium which was digital like there were big debates even before bitcoin and so in a sense those debates just got transposed onto bitcoin once it was created yeah Absolutely. We're going to talk a bit more about ether the asset and its economic density. But I think this next concept sort of leads into this. You've written a lot about stable coins recently, including an article in bankless, sort of posing the question, are stable coins good for ether the asset or not? And our listeners know that stable coins are absolutely exploding in popularity. So I don't know, 10 billion. or so across various crypto networks, the bulk of those stable coins are now on Ethereum. Can you talk about that a little bit? Are stable coins on Ethereum good for eth the asset?

Yeah, that's to me like the existential question right now. And it's not surprising that a lot of debate has focused on this in the last couple months. I think it's a pretty important general question for not just ether, but literally every cryptocurrency out there, can you ultimately compete with dollars or sovereign currency? And now that it's clear that there are ways to kind of insert sovereign currency on chain that seem to work and like seem to be getting traction, it's really night and day in terms of the usage modes in terms of like what people are using for, you know, means of wealth transfer for medium of exchange. People love the stability afforded by dollars for better or for worse. And there's this existential question emerging.

It's like, is there even a role for the native assets in this world? And that's kind of the challenge I would pose to Ethereum's. The reason that it's, Like, Bitcoin did this interesting, this is one thing where Bitcoin diverges very strongly from Ethereum, is that it asserts the primacy of the native unit, and it really kind of repudiates non-native units. And this is, like, fairly deliberate, I would say. So Bitcoin, I like to say Bitcoin is interested in cultivating its own UTXO set, and not really interested in, you know, giving the time a day to alternative tokens that exist on chain. And even historically, there have been cases where, you know, counterparty tokens were sort of deprivileged in a certain way,

whereas Ethereum has been very consistent about wanting tokenization, you know, and so now that stable coins have migrated to Ethereum and other places like Trump, to a lesser degree. The question is, like, are people going to still use the native token? Certainly, I think it can be configured such that there's always a usage for ether in gas as a taxation, you know, kind of element. But you can't, I mean, the protocol can't mandate that, you know, transfers occur in the medium of ether. So that erosion is, I would say, potentially troubling. But then you know, the reaction, the response of that is to say, well, actually these are not the same asset. They don't have the same settlement assurances. One of them is liability free and one of them is

impregnated with liability. And native crypto assets are worth something just because by virtue of the market, whereas dollars on chain are worth something because there's an administrator somewhere that is guaranteeing their value and guaranteeing access to redemption. So there is a difference in terms of the assurances. So it's just a question of whether that is a material enough difference such that there's always a room for ether. So I would say it's very much an open question. The other side is that, you know, USDT and other tokens are driving demand for gas. So they're, you know, they're using a block space, which you could say, is good because it means that, you know, people need to buy ether to pay transaction fees.

So I don't know. It's like a very complex issue. I actually haven't kind of made up my mind on it yet, to be frank. I think we're circling around the, in my opinion, what is the one central thing that differentiates Bitcoin and Ethereum at their core. I believe that like the 99% of the genetic makeup of all crypto systems overlap. But what we're talking about here is really that one, that big differentiator where Bitcoin, and you said this in my other podcast, POV, Cryptopod, and it's stuck in my head,

where the Bitcoin blockchain serves BTC, the asset. But with Ethereum, Ether, the asset serves Ethereum, the chain. And this has always been baked into the values of Ethereum, right? Like Ethereum, there's no, there was never any doubt that in order for Ethereum to be successful, it needed to have other things on it, not just Ether. You know, Ether is meant to support other economic activity on Ethereum. And Ethereum has always been designed to be expressive and flexible enough to have a maximum amount of economic activity. And as you said earlier, we just, I think the designers of Ethereum were like, just assumed. that with high amounts of economic activity on Ethereum, that the value of ether would just

increase commensurately for whatever reason. Like, we don't really know what that reason is, but where there is high value and high value flow, ether is just highly, highly exposed to that just by being proximate to it. And so I just wanted to get your thoughts on that. Yeah, I mean, I think in, I would say in both communities, you have these assumptions which are kind of just taken as given, which aren't like sufficiently interrogated. So, you know, in Bitcoin, there's been this roiling debate for a while about the security. And there's a big camp that just states effectively, it's fine, don't worry about it.

And in Ethereum, I would say the kind of this, the analog there would be the folks that just presume that ether would be valuable. if enough usage, you know, accrued to Ethereum, the blockchain. And I'm interested in interrogating that for sure because I'd like to, you know, really identify the causal mechanisms there. And I've seen probably some complacency around this. I wouldn't accuse you guys of complacency. I mean, I've definitely seen your work trying to identify those mechanisms. But this is a new science, you know.

There's no established valuation template here. So it's kind of up to us to determine how value sustainably accrues to a system, which is novel, and which doesn't have kind of a nation state to, you know, insist on its usage, you know, within its borders, so to speak. So the two mechanisms that Ryan and I have identified that aren't just guesses that proximate ether location to economic activity means that ether price is going to go up. Two concrete mechanisms that we've landed on are the fact that with a stable coin like die, a trust minimized stable coin like die has increased value capture mechanism to the collaterals below it, which is by and large ether. And so ether is acting as this very trustless,

as the most trustless asset on Ethereum, ether has undue, more exposure to the existence and economic activity behind die. And so for any, if we believe that these crypto systems are, the success of these things come from the value of being permissionless, decentralized, trust minimized, ether, then ether has exposure to that because there is never, ever going to be any asset on Ethereum that has those qualities better than ether, the asset. And then there's also EIP-1559, which is a direct linkage to any and all economic activity upon the scarcity of ether and creates ether deflation. So do these two mechanisms resonate with you? And how have you seeing these two mechanisms play out from your perspective?

So I'm totally convinced on your point about make or die. Although Maker seems to be diluting this slightly, which I find to be strange, given their mandate. But yes, so to me, in an abstract way, Maker is a Neo-free bank with Bitcoin, or sorry, I got Bitcoin on the mind, with Ether. acting as the trustless collateral. It's kind of a digital species. When you had the free banking system, you had a liability free asset at the base of that pyramid, which was gold. In contrast to Maker, that was actually a fractionally reserved system, you know, historically. But there still was this

redemption for species. And Maker is kind of, you know, pretty similar with the difference being that because ether is pretty volatile, it actually has to be over-reserved. But yes, you're absolutely right that that closes the feedback loop between using a dollar-denominated asset and actually inducing reservation demand for the native unit. So that's like really harmonious. That's a really nice closed loop. And the value isn't bleeding out of the system. You contrast it with a stable coin, which is redeemable for plain old dollars in a bank account, and you could argue there's some value leaching out of that system. And it's not clear to me that it's fully being returned in the form of fees. Like if I, you know, were the

dictator of ETH and I could tinker, I would actually probably, like, you know, do something crazy, like impose a tax on those dollar redeemable stable coins. Say, if you, you know, if you, you like in addition to the fees. Like if you want to use our block space, you know, you really, you owe us, you know, kind of thing. That's sort of maybe a heretical idea. What's the number of the EIP that you mentioned? I should probably know this.

1559. It needs its own name by now, but yeah, 1559. Yeah, honestly, it's, it shouldn't be up to you. It shouldn't be up to you to know it. It should be up to the Ethereum community to meme it better. Yeah. You guys should do a catchy name. I mean, it's just a hard number to remember.

But, you know, so the idea there is that there is fees being burned, a fraction of all fees paid or burned, right? Yeah, the bulk of the fee. Like, we don't really know these specific parameters, but we're estimating above 90% of the fee gets burned and the rest gets tipped. This is something that I wonder about for sure. So color me not 100% convinced on this in terms of being value creative. So I also depart from the Bitcoin community where, you know, it's the same idea.

Like when coins are lost, Bitcoiners like to say it's a donation to everyone because Satoshi said that, right? But I actually don't know if I agree with that. To me, the question is like if they're lost and they're subsequently replaced, if that demand doesn't evaporate. But if, you know, like my great uncle dies and I inherit his coins, but I'm, you know, like something it's lost in the shuffle and I'm a bitcoiner and I wanted those coins anyway. Am I going to like if I go ahead and replace them then fine. The impact of that loss really is

deflationary. But you know, let's say he dies and he doesn't have any errors and, you know, his bitcoins are just lost. Does that really, you know, like how mechanically does that actually, you know, inject value? You know, he just kind of falls off the global order book. I'm not 100% convinced that all, you know, coin burnings or losses are like homogeneously affecting the value in the same way. And so I think, I guess the question for this EIP is like, are the people who are having their ether burned? Are they going to subsequently replace that ether, you know, and fill up their cup again to subsequently spend more and burn? I guess you would say like heavy users of the chain probably would be incentivized to do that

because they just need the block space, you know, in an industrial capacity because they need to do transactions. But, you know, just more generally, I think I would like to actually question this notion that all burn coins are necessarily deflationary, if that makes sense. Yeah, that does make sense. what is your thought on the narrative value of this though, right? So, you know, some might say a lot of the value appreciation of Bitcoin goes back to its scarcity narrative, the 21 million, the like the memeification of that. If Ethereum has a burn mechanism that reduces its issuance on an annual basis, does that increase the narrative around it being a non-sense?

sovereign speculative non-sovereign store value? I would say it depends. So one thing I don't like, not to keep relating this to Bitcoin, but just to make the point. So I actually don't like how people enumerate Bitcoin's issuance rate and say that that's an inflation rate because it's kind of a totally predefined thing. And so to me, like all the coins already exist and they're just sort of being gradually unlocked over time. I guess for Ethereum, there's more uncertainty about what the rate will be, you know, in a few years.

So then it is probably important for investors to know what that rate of change is. And, you know, I think probably the biggest fraction of the narrative value is just the message to investors that the developers, you know, are really interested in driving valley to the asset directly. And then the exact mechanism probably doesn't matter as much. But yeah, so it's kind of a way to, you know, establish that vote of confidence. Like, yes, we're interested in backstopping the Valley of Ether. And here's our, you know, our current approach. That I would say should be balanced, counterbalanced against the risk of its seeming,

too arbitrary in terms of like how changes are made. I think there's always the risk that the some of these changes that that happen you know without this long period of deliberation are interpreted as being arbitrary and kind of capricious. I mean historically like that hasn't been an issue for theorem but as like the governance becomes more ponderous and kind of more deliberate, it, I think that might be an issue in the future. So I would say generally yes, like in terms of just being a general signal. But I think there's still that risk that it's interpreted as being, you know, too malleable, too easy to change the system. You know, that has been a strength of Bitcoin, basically the credible neutrality of its algorithmic issuance policy.

like no one has edited it. Everyone knows what it is. It's not going to change. So as we're talking about contrast between Bitcoin and Ethereum, I was thinking about this. It sort of strikes me that both of these networks, what they're trying to do is essentially bootstrap the value of their block space. So Bitcoin does this through establishing kind of this 21 million fixed meme, right, establishing the value of its asset so that it becomes so valuable that transactions on the Bitcoin network, the block space, become infinitely more valuable in the future. And ultimately, this bootstrapping mechanism ultimately makes security of Bitcoin depend on the value of that block space as issuance decreases to an approach of zero. Ethereum is kind of doing the same thing, increasing the value of its

block space, but it's doing this in a sort of a polytheistic way, right? Like a poly asset way. where it's bringing stable coins and NFTs are welcome and all of these tokens are welcome because they increase the value of its block space. And the strategy has been fairly effective. So if you look at coin metrics, you can see like daily revenue volume on Bitcoin and Ethereum and they're close. Bitcoin is a bit higher, but nothing else. No other networks are close to them.

Everything else is virtually. Is that a way? Yeah, everything else is reduced. ridiculous. Is that a way to kind of see these networks as both are taking different approaches to bootstrap the value of their block space in order to increase and perpetuate their long-term security? Yes, they are clearly approaching it in different ways. And like you, I think it's absolutely critical to have robust fees and just sustained demand for block space. and I think that's what frees you from the like specter of inflation in a blockchain context,

you know, and I think that this has been acknowledged for a while, you know, but if you don't, like, because it was interesting, you like, you saw this like some of the blockchains 2.0 were like, yeah, we're eliminating fees and we're just going to pay for it with inflation. It's great. It's like much more convenient and no one has. to worry about fees ever again. And now we have this, like, reaction where there's a realization that that actually has lots of, like, issues and, like, all sorts of, like, ugly, you know, outcomes there.

And I think there's been a recognition that the fee-driven model or, like, primarily fee-driven model is better in some ways. So fees are like a proof of work. Like they disincentivize you from submitting un-economical or spammy transactions. And that's totally worth something because there's a real externality in terms of node operation. And, you know, just by pricing this commodity, block space, you know, like I'm in favor of markets, you know, wherever they can exist. And just paying for things with inflation is. is to kind of reject that doctrine and say, well, maybe we can price, you know, we,

the administrators of their protocol can price things appropriately and manage it. And I think that's, that's probably been kind of a failure. So yes, it is interesting to look at the data and see that there's meaningful fees on Bitcoin and Ether and virtually nothing else. And I think that says a lot about where economically-minded entities are actually apportioning their attention these days. And it's a really interesting question. Like we've seen Tether leave Bitcoin. Tether was a source of fee pressure for Bitcoin. There still are kind of arbitrary uses of Bitcoin. There's, you know, open timestamps, similar things. I have mixed feelings on the non-monetary uses of Bitcoin, but undoubtedly they help as far as fee pressure goes.

So I think you guys are right to focus on this as like the key distinction, you know, in terms of philosophy between the two projects, native assets versus just like arbitrary, arbitrary usage. So let's play this idea out a little bit. And when we're talking about this podcast, Nick, you brought up this idea of monetary primacy. And, you know, I think what you're referring to is. is basically that maybe you see Ethereum sort of taking the route of Bitcoin. So Bitcoin is

primarily used to transfer Bitcoin in large quantities. There are a scarce, you know, there's scarce space in Bitcoin block space. So the more economically dense transactions tend to be high value Bitcoin transactions, right? That only makes sense. You've used the shipping crate analogy to sort of talk about that. And then USDT, stable coins, they move off of Bitcoin. because they are less economically dense. They don't need the security protections of the Bitcoin network. And I think you would probably, your framework probably celebrate that. I guess the question is, does the same thing start to happen with Ethereum?

So there's more block space on Ethereum. And in the future with sort of the social contract around scalability, there will be probably more block space on the base layer, but still a scarce amount. I mean, this is never going to be Amazon Web Services. Yeah, and it has to be or else it doesn't preserve its decentralization. But is that kind of what happens with Ethereum? Do these less economically dense, the CryptoKitties, do they move off of the base layer chain and go somewhere else?

Yeah, it's definitely hard to forecast. I would say on the topic of Tether, like, I probably wasn't actually popping the champagne when Tether left Bitcoin. Some Bitcoin is for sure. It was like a weird event in that both Bitcoiners and Ethereums were happy about the same thing. It was like the first time I've seen that. Does that mean that one of these parties is wrong? Yeah, someone has to be wrong, right? Exactly.

But it's also kind of a relief. It's like, well, maybe Tether isn't linked to Bitcoin anymore. So maybe that's good. I don't know. But you're right, you know, and one like very straightforward example of this is Vera Block. So Vera Block was this, I think it still exists. It was this protocol that would borrow Bitcoin's security and use it for other Alcoins. So they could sort of, you know, link their their blocks to Bitcoin, you know, periodically and sort of inherit Bitcoin's security, which is a pretty common idea.

We've seen a few alcoins do this. Kind of like a merged mining style thing. But Vera Block was offering a fixed amount of, you know, it was bidding a fixed amount for Bitcoin Blockspace. And when Bitcoin Blockspace was really, really cheap in 2019, it was occupying, you know, 20, 30% of Bitcoin Blockspace. And then as fees rose, VeriBlock got marginalized because, the fixed amount it was bidding, you know, that bought, that acquired less and less block space.

So that's a very simple example of this process whereby the most economically dense transactions eventually, you know, price out the kind of less, I don't want to call them spam because people, that's like a really loaded word and so on, but, you know, the less economically-minded transactions. And, like, the analogy I would use is, like, if you think of each block as, like, an empty cup and you have liquids of varying densities, and the more dense, the more, kind of, the larger the transaction is, the happier you are to pay, you know, a heavier fee. That, you know, imagine large transactions is, like, very dense, like viscous liquids.

in each block, they sink to the bottom. They get inclusion. They didn't get inclusion in the cup. And then the lighter liquids, you know, they spill over the edge. They don't even make it into the cup, right? And so because block space is scarce and bounded, I think in the long term, it's the largest transactions that are going to, those transactors are going to be willing to bear a higher fee in absolute terms,

to move their large amount of assets. And those basically price out the smaller or even not economic transactions. So that's the theory behind this idea that blockchains probably in the long run have this kind of economic primacy or monetary primacy. And like we kind of see this in Ethereum too.

As fees have risen due to mostly stablecoin usage, I would say, And like if you look at stable coin transactions, they tend to be pretty big. These are like kind of bigish settlement transactions. As fees have risen, stuff like deploying a Dow on Aragon has gotten really expensive because it's pretty complex. Like it requires a lot of gas. So to a certain degree, those are being priced out. And so like Vitalik had a thread today saying, you know, blockchain started out being purely monetary in nature and now they're moving on to harboring a real diversity of use cases and actually

minimizing the monetary element, I actually think it's the opposite. I would say as long as there is scarcity in block space, the monetary usage is probably going to win out just for simple economic reasons, for the simple reason that if I'm transferring a million dollars, I'm happy to pay $10 in fees. Whereas, you know, so that out competes like a smaller transaction, basically. Yeah, can I just say, like, David and I were talking about that thread, and, like, I totally agree with you. Like, I disagree with those aspects of Vitalik thinking that the blockchain can be useful

for everything. It just tends to be the case that money use cases outprice everything else. Yeah. It's just a question of economics, right? I think so. And, like, unless, I mean, you know, I've misunderstood. charting or something in the roadmap for Ethereum, in which case, like, there really will be an abundance of block space, and then things will change. But, you know, under the way that I currently

understand blockchains, you don't ultimately really even want to allow arbitrary usage. I think it was actually Greg Maxwell that said this. He said something like there is unlimited demand for highly available replicated storage, which is free. And we kind of see this. Like, if you look at the usage traits of BSV or BCH, people just use these to store data. And that usage mode is like pretty wasteful, I would say, because that data is only relevant to the person uploading it. And they may never want even to retrieve it. Whereas a moving money around, moving the native unit around in particular, that's likely to be relevant in the future. So the cost that that data is imposing, that's a cost that, you know,

the system should be happy to bear because it's likely that that those, you know, that storage requirement isn't just being wasted long term. So what you, a lot of what we are illustrating is, is talking around the concept that Ryan and I have been harping on, which is a term that I got from you. You said you didn't coin it, but I don't know who else did. It's settlement assurances. And the primacy of a base layer that is money-ness and monetized contributes to what we've been calling settlement assurances, which is the assurances that your transaction is going to settle in a way that you is expected to. And this is in stark contrast with something like stellar, which you have called like a

landfill blockchain where just all of the trash just gets dumped on stellar because it just doesn't matter because there's no fees. Whereas the high fees on Ethereum and high fees on Bitcoin contribute to the settlement assurances of these systems, which allow for protocol density, like a high weight system because all of the money and all the finance and all the value are being added to these systems. And ultimately, therefore, fees are being paid. And the fees are the livelihood of these systems. I think you can accurately predict into the future how long a system like this is going to last based on how much fees that they have.

So one, can you comment on that? And two, can you kind of illustrate how you see settlement assurances and its role in these crypto systems? Yeah, yeah, yeah. So, you know, I think you can predict safely that systems that are meant to be capped, like, you know, coins where issuance is meant to be capped, absolutely need fees in long term. And the ones that are capped and have zero fees right now, which is a lot of them, a lot of the forks of Bitcoin, will be forced to reintroduced inflation if they can't, you know, accrue a sufficient amount of fees. And I would add this is also a challenge the Bitcoin has to face too. And I'm not exactly sure what sufficiency is, but I know that zero isn't sufficient. So, you know, that much we know. And if you reintroduce inflation, I think, you know, and that's contrary to kind of the established social contract, I think you've basically failed. So, you know, that much is clear to me.

It's interesting that the kind of core logic of blockchain security changes as you go from a subsidy-driven regime to a fee regime. Because in the subsidy regime, you really want the native unit to be valuable. And so it's important to emphasize reservation demand for the native unit. But then in the fee-driven regime, the kind of unit value of the native token, doesn't matter as much, and what matters is just inducing transactional usage. So the nature changes somewhat. I think we still don't know for sure. We're still in the hypothesis stage here of determining whether the public blockchain model,

the dominant model, does generate sufficient assurances in long term. One thing I worry about is that the assurances, change from being crypto economic assurances to being kind of institutional ones where you have a certain kind of consortium of entities that actually guarantee settlement. And so then settlement becomes less a fact a function of being buried under a certain number of blocks and more a function of just effectively being in the good books of the guarantors of the system. And there's a few ways this could happen. One would be, you know, if mining became strongly cartelized and you had big custodians that had

contractual relationships with miners and independent miners got forced out. And then the custodians could be the arbiters of what got mined. And, you know, let's say a custodian got hacked, they would have a really strong incentive and having the ability to conduct reorgs and so on. That's one way I could see this getting institutionalized. The capture of a lot of the token supply on exchanges is a risk, I would say, in this context, you know, with custodial institutions. And especially as you move towards a proof of stake world,

it's kind of an even bigger risk because they start to have kind of discretion over the system features, which we saw with Steam. I think that was a great example. The fact that so much steam ended up on exchanges introduced this like principal agent problem where the entity controlling steam and using it to vote on things was not the owner of that steam, but merely the custodian. So I think it becomes much more likely to have the, kind of failure modes in a proof-of-stake world. So then the challenge is to make sure it doesn't end up

with third parties. So I do think there's a risk that these systems go from being, you know, crypto-economic in terms of the settlement assurances to being institutionalized, which would turn them into systems that are pretty similar to like the normal payment systems that we have today. So one of the concepts that I keep on harping on is the linkage between your settlement assurances and the promises that you have that you can plan out your financial life into the future and long-term thinking and planning, right? Like a lot of bitcoins speak of low time preference, and they say that Bitcoin and how stable of a system it is and the 21 million hard cap and the Austrian money produces and the strong

settlement assurances of Bitcoin, including its censorship resistant, resistance all gives these assurances that Bitcoin is going to be the same thing as it is today into the future. And that allows you to plan around that. And settlement insurance provides that, which is also linked to property rights. So I was hoping to get your perspective on just the intersection between settlement assurances, property rights, and long-term thinking and planning, and why all of this is important.

Well, settlement assurances does. doesn't fully do it justice. There's settlement is just one part of the life cycle of using a blockchain. You have the acquisition, you have the steady state, you know, and then you have like the divestment state. And what you're referring to, I think, is actually the study state where if you own, if you have the private key corresponding to a public key, which has a balance in that address, then you have an absolute claim on that indefinitely. And that is, you have a private key, a very strong property right. It might even be the strongest form that has ever existed. I mean, it's so strong that it's brittle. Some of the strongest metals, like tungsten are really brittle.

But the reason it's brittle is that if you can easily lose access to your coins, then it's a problem. But yes, I think this is the most profound thing about, you know, cryptocurrencies that they give the individual power over their money, which has not existed previously. And it's very concealable. It's very transportable. Those are new. There aren't other forms of property that you can do that with. And that's a very, very profound thing. So it's kind of important to sanction that, absolutely and make sure that that never gets impaired. So when there are, and this is why I was cautioning about arbitrary changes to the system, if there are things which impair those kind of property rights for users, I think that really decreases the credibility of the system.

So if there are confiscation events or unexpected inflation, you know, which is kind of a more subtle former confiscation, those are things which really damage those nice assurances that your coins are going to be there in the future. you had this happen. It happens a lot with forks because forks tend to be really messy. But I think if you look beneath the service of a lot of coin, like a lot of long-tail alt coins, you'll notice that these confiscation events happen a lot.

Like dev funds will get enlarged or they'll be, you know, increased into perpetuity. You know, certain coins will become anyone can spend and they'll just get swept. Like there's lots of protocol tweaks. you know, hash functions will get changed arbitrarily to like, you know, let's say ProgPow had gone through, you might have said that would be an example of this. So there's a lot of protocol tweaks which can like really impair the actual property rights of the users of the system. And I don't know if there's enough of an of an acknowledgement of that. You know, I think like the task of protocol

developers is like first and foremost to safeguard the rights of the users in this like, you know, cryptographic way, and then to develop around that in a way that's safe. I know, like, Vitalik has, like, really consistently stressed that he doesn't really believe in, like, truly absolute property rights, which is, you know, consistent with, like, the radical exchange philosophy. That would probably be one of the... I mean, radical markets? Radical markets, yeah.

You know, that's... Because they stress, like, really alternative compositions of property. property. That I would say is another really significant distinction between Bitcoin. Well, I don't know if Italica speaks for all of Ethereum. But yeah, I would say that one would be in that particular case. Yeah, because I would say that's a pretty risky view because you really do want the the holders of the account space or the UTXO set to to know and to be able to forecast many years in the future that they'll be able to spend their coins, which is why I was so cool to have those coins from February 2009 be spent recently.

You know, everything worked as intended. The holder of the keys was able to spend them. You know, like there is a beauty in that. Totally. And one thing I'll add there is if you read Finn Brunton's book, Digital Cash, which is pretty good. It's like a prehistory of Bitcoin. He talks about the extropians, I think they're called.

And this was like an idea that, um, We should invent digital cash so that I'm probably like bungling it, but digital cash should exist so that people could have a currency that worked for them as they were like sublimated into a kind of digital afterlife of, you know, of either being uploaded into the cloud or being cryogenically frozen and coming back in a hundred years and they would need to take their wealth with them. And that was, and he claims this, that that was one of the inspirations for the creation of a lot of these digital cash schemas. So the notion of like a truly persistent digital asset that you truly own has kind of, that's been an inspiration behind the stuff even before Bitcoin. So I want to turn this conversation a little bit to something I know that you paid attention to and I think are optimistic for with the world of Bitcoin and how that contrast to the world of defy.

and that is the concept of free banking. If I'm correct in my perception, and I'm not familiar at all with free banking, but I think that you think that free banking using Bitcoin as the underlying asset is something that is ahead of us in this world. And that I think that that is the, the bitcoiner version of what we are calling Defi, where where all of that same sort of financial services is found as applications on Ethereum. Do you believe, does that distinction resonate with you? Is that correct? Yeah, that's, yeah, I think that's probably a fair way to put it. I would say there's probably

some things which you can't foreseeably do on defy. This might change maybe that you can do in a private banking context. So one of the big ones is maturity transformation, which is like the core business of banks. I would allege that that's not really possible on DFI right now, which is, you know, making loans and taking deposits and, you know, turning those illiquid loan, like getting a yield on those loans that you're issuing and paying that interest to depositors. you know, it's kind of hard to imagine how you would, a bank would issue you a mortgage in the conventional sense of the word in like a defy context.

And you guys are probably going to interrupt and be like, oh, no, there's like a project doing that. But you kind of get the point. Because basically, you know, underwriting loans is like something that requires like credit, you know, and, you know, I don't think credit per se really exists in the defy context. You know, it sort of relies on this like web of interpersonal relationships and like social security numbers and stuff. And I'll probably be accused of having a very constrained vision here. But I'd say that's probably the big distinction between, you know, like conventional commercial

banking and defy. But yes, generally I think the inspiration is pretty much the same. Like the maker's system is a great example of, um, something that is transforming risk in a way that gives a token that users want to use, which is die, but also leans on the systems collateral. And in the same way, if Bitcoin banking were to develop, it would be kind of a similar thing. I think it's both a scaling method and something that is convenient, like people like financial services and they desire them. we've seen really explosive growth of BlockFi in the last year to give an example.

So Bitcoin native financial services are growing. I think there's demand for that. I think that's really going to be the case for the whole cryptocurrency industry, to be frank. I think you're going to have centralized financial service companies on Ethereum complementing defy, most likely, because they have different strengths. you know the worry is like too much of the supply being captured by this but a certain part of it is in inescapable and so yeah i'm definitely of the school thought that banking is and credit creation on top of these assets with the assets as the native collateral is probably a good thing and it can be

better than the free banking era because digital species you know, like native units are like natively auditable. They're cryptographic in nature. So it's easy to take physical delivery of them. It's easy to verify that someone has them. That's pretty different from gold, which previously was the collateral of these systems. You know, it was hard to take physical delivery of gold. It's hard to verify an audit gold.

So in a sense, those, those like nice auditability qualities make this system potentially a more stable, and kind of honest system. So that's why I'm always talking about proof of reserves. That's kind of a way to return the guarantees of the collateral to these centralized providers. And I think that is inevitable. I think it's going to happen. And hopefully we can sort of ameliorate it by instituting stuff like proof of reserve protocols.

So the Ethereum attitude here, and the Bitcoiner in me, when I put my Bitcoin head on and compares the, free banking with Bitcoin world to the current world and sees just a paradigm shift of improvement that I think we could expect from that sort of world. However, the Ethereum in me is pessimistic about the commitments to a trust, minimized, trustless, protocolized world where the use of cryptography is kind of just where Bitcoiners are on this train moving into. a crypto economic trust minimized sci-fi future, and they get off on the first stop.

And they're like, well, you know, I'll call it good at Bitcoin banks, whereas like the Ethereum seemed to be like riding this train until it goes to its logical conclusion and seeing how far that they can take it. Is that a fair take? Yeah, that's probably a fair critique. I think it was like Arjun Balaji that wrote this great essay about the constrained versus unconstrained vision, which he felt was the big distinction between Bitcoiners and Ethereum's. I think, you know, don't like ascribe my opinions to all bit corners, for sure. You know, lightning is still pretty interesting, and that is trust minimized in a really genuine way. And then what I think will and should happen is for there to be

lots of degrees of gradualism between like full custodial intermediation and, you know, true base layer of Bitcoin with lots of steps along the way. But there hasn't been, you know, there aren't like that many, you know, smart contract. There aren't that many kind of like lightning analogs or alternatives on Bitcoin that exist right now. And so you could say that's because of a lack of expressivity, for instance. So that's why I'm hopeful that we get stuff like Jeremy Rubin's proposal through, which would add expressivity because that's definitely an easy win, adding some more elaborate, like smart contracting capability.

One follow-up question I have for you then, Nick, is, I do think not necessarily that your view representative of all bitcoins, but that a number of bitcoins do share this view. In the gold standard, excuse me, in the Bitcoin standard, Safedin talks about a world where possibly in the future, you know, there are a thousand banks that, you know, are the only ones able to use the Bitcoin network. Because of this scalability constraint, we've talked about why, you know, blockchains will always have a scarce set of block space. It's necessary as part of the design.

But going back to David's analogy of the sort of the first stop, are we sure we optimized that design space in 2009? And is it really a compelling world? Is it really a bankless world if we limit the transactions on the Bitcoin network to those who afford it? Like, it's no longer peer-to-peer. It's no longer bankless. The transactions are just high-ne-worth individuals and crypto banks. And then we're kind of back to where we started. That would be, I would say, the bankless main critique of it, but it's not necessarily a better world. Yeah, yeah. And I've certainly followed, you know, the bankless editorial view, so to speak.

I would say my first reaction would be, blockchains aren't fair. You know, they always do privilege whatever entity is willing to outbid someone else, you know. That was the whole discussion of economic density. So that's just kind of intrinsic to their nature as long as there's a scarce resource. The highest bidder is going to win that auction, right? So I would reject a teleology of blockchains, which insists that they have to be open to anyone. I mean, they're open by their very nature, and that's kind of the reason they're not fair. is that they'll let anybody outbid anyone else.

But, you know, there's no notion of having guaranteed access to block space. And I don't really see that changing. But I do, I do, the point is taken. What I would say is, I think where we are in terms of actually compressing economic, economic value down into bytes is still very primitive. a lot that we can do in terms of compression. The other thing is that as exchanges move from individual settlement to a net settlement idea between custodians and exchanges, you actually free up a huge amount of block space. So right now the way it works is like individual

transactors deposit on exchanges and then they make withdrawals from those exchanges. And that's like a very very kind of data intent. way to operate. What might happen in the future is that, and then what they do is then they withdraw those coins and they send them to other exchanges. You know, they might get started on Coinbase and then they send their coins to Benance, right? What we might have in the future is just exchanges or custodians where, you know, you deposit and then instead of honoring those individual deposits and withdrawals as they occur, the exchanges start to trust. each other a little bit more, and they actually, maybe they only settle up with each other once a day,

and they settle the net difference between whatever the users have deposited and withdrawn. And so instead of having 10,000 transactions between Coinbase and finance a day, you have one, or you have two. And so this is actually already happening, this, like this move to, like, kind of real-time gross settlement. And in a sense, it, like, frees up a lot of block space because the big consumers of block space are actually being much more parsimonious about their usage. And so there's this interesting effect where block space kind of gets easier to access, in a sense. Now, you might, like, so Haseu wrote an article about this. He said that in the end, exchanges would be the only consumers of block space. I'm a little bit more optimistic than that, actually.

I think right now we are in a really primitive state in terms of being able to compress information. Thanks to bad fee estimation and kind of poor industrial block space management techniques, you know, like not using batching, we're still really being very wasteful in the usage of block space. The other phenomenon is like rising fees is an inducement to become more, more statured. in your use of block space. So there's a lot of factors which I think are combining to actually open up block space. But I would say that I would expect that it would be fairly rare for lots of users to make base layer transactions.

It'll likely be processed through a layer or two, whether it's kind of a more trustless layer like lightning or a more intermediate layer like banks and extradited layer like banks and exchanges. But yeah, I think that's just the nature of the beast. I think the base layer is kind of a wholesale network with the retail activity happening higher up. I think we've talked a lot about the differences between Bitcoin contrasted them anyway between Bitcoiners and Ethereum's, but there is a major difference where we're all united on, if I could say this, is against the centralization of these networks, against the institutionalization of these networks. And I do think it's incumbent upon us to guard against that centralization wherever it might creep in.

So a lot of shared values across these communities as well, for sure. Yeah, definitely. And I try and be pragmatic. You know, if big owners want credit creation, they want financial services, I'm not going to deny reality and pretend that doesn't exist. And things like credit, those naturally develop, you know, that's like kind of the cornerstone of civilization, is credit relationships. I'm optimistic that the nice guarantees of these networks can be preserved even in a financialized world. And there is definitely a contingent of people that are, you know, really resistant to the financialization of these networks. but I think that's kind of out of stuff with reality.

I have one more topic I want to harp on, Nick, before we wrap this up. And it's the concept of this march of progress of these civilizations, these organizational schemes that we've seen throughout history, starting, perhaps there's one earlier than this, but perhaps starting with the most salient one, which is religion, which is this organizational system of people that all ascribe, to this same set of rules, and it's a protocol of sorts, and there's documentation there in the form of like the Bible or the Quran or the Torah, and each of these religions has a group

of people that are organized around it, and there's zealots, believers, patriots, and then these religions seem to get supplanted by nations, which basically had more or less the same construction, right? Like a set of documentations, protocols and rules for how to live, patriots that would consider themselves to be a part of the system and responsible for upholding the values of the system. And we're seeing that same pattern emerge with these cyber civilizations, these cyber systems like Bitcoin and Ethereum, where there is like a white paper, a protocol for describing how to operate and then the maximists that make up the system. How do you view the, is that an accurate representation and how do you view this progress

of these digital whatever they are in context of history? Yeah, I think that's the nation's analogy is an apt one. And people often say that there's a religious element to blockchains or to Bitcoiners in particular, you know, cryptocurrencies don't make any ontological claims about reality. So I don't know about that. I think that's maybe a bit of a stretch. But yeah, these are digital commonwealths. They are fundamentally arranged around property and rules for how property can be allocated

and distributed and moved. And that's kind of the most fundamental thing about that. the state, really. There's a set of protections that property is kind of upheld. And there's no police force, per se, because cryptography helps with all that. Well, that's what the miners and stakers are. Are they not? Yeah, yeah, sure. But it's, you know, that's kind of like the system design is intended to remove subjectivity and conflicts. So you don't need that kind of reactive police force. And, you know, that's been attempted. I think EOS had this thing where you could like steal back coins if you like

convinced enough block producers to do it or something, which totally didn't. Oh, God. Like arbitration form or something. So yeah, they're new. But like most of them, you know, to be honest, are like plots of land in the desert and there's nothing growing there. And there's some like, you know, beleaguered settlers that followed their leader. and their nice promises that they made of their being an oasis

and then they got there and it was just like a dusty wasteland. That's what most blockchains are like. There's very few that are actually thriving and where people are actually building things on their newfound plots of land. But yeah, I totally see them as like homesteads, you know, out there in the wilderness and people are trying to figure out how to take advantage of their little plots. And with all the messiness that that intends, tails. So the digital frontier is how I think about it.

Nick, as we wrap up, I want to get kind of a last take from you on this. So we've talked a lot in this episode about Ethereum and Bitcoin. And I think there are some in both communities that are rooting for the other community to fail. I don't think that's you. You are definitely pro Ethereum. You don't want it to fail. But to David's analogy, it does feel like the Bitcoin community is kind of getting off the train in the first stop. And maybe Ethereum, you know, Defi, this bankless movement is seeing if the train can get a little bit farther down the track first. But I want to ask you this question. Do you think it's going to work? Do you think this bankless thing, this defy thing, can actually work? Yeah, should we just bail off the train now or what?

Can Defi work? Well, I don't know what DeFi is. I don't know if I've ever seen a great definition for it. Can banklessness work? Is that the question? Yeah. So this whole thing of DFI protocols, doing less with banks, incorporating other money verbs on the base layer like borrowing and debt and lending, essentially creating a blockfi in DFI, essentially creating a coin base trading exchange and a uniswap in DFI. These base layer protocols to allow you to accomplish money verbs, the same sorts of things that would be accomplished in crypto banks. Is this whole idea going to work in your mind? I think another way to phrase it is just replacing as many financial institutions as possible with protocols.

So like instead of the NASDAQ we have the UNISWAP, right? Yeah. Yeah. So there are lots of functions in financial services, which are, which can be both codified and automated. I think that's absolutely true. you know like what ETF like what black rock does is like pretty straightforward right and vanguard um so yes there are definitely and uh you know structuring certain derivatives uh you don't necessarily need a human and a lawyer to do that each time uh so absolutely yes um for a subset of of financial services

activity. I'm kind of yet to be convinced on whether, you know, genuine commercial banking can be kind of inserted on-chain and represented as a set of contract relationships. I think the low-hanging fruit still remains to be exploited in terms of identifying the kind of tedious and automated functions, which happen in the back office right now, which can be. be represented in contract form. So there's kind of a, there's like a blue ocean there. And then some of the more complex functions are being targeted now, which is maybe premature. So it's definitely a question of timing for me. But yeah, I'd give you a qualified yes on that. You heard it here, guys. Nick Carter, this has been a pleasure to chat with you. David and I are

big fans. Read everything that you write. It's been a pleasure to have you on the podcast, man. We're riding the train all the way until the end. Nick, thanks for coming on, bankless, and sharing your thoughts with us. Really appreciate it. Thank you. This was fun and, dare I say, challenging. Well, I'm glad to hear it.

I'm glad to hear it. Thanks, Nick, for coming on and giving us your time. Yeah, thank you. My pleasure. All right. Actions, guys. A few things that you can do. The first is we're going to include some links to some of our favorite Nick

Carter articles that you should go. read. One is called a peaceful revolution, another on settlement assurances. Go and do that as your first action. The second, which we want you to do, is go back and listen to you some previous episodes. Maybe you're, you know, you haven't heard them yet. You haven't heard the archive, but we referred to a lot of them in this episode. So episode two, episode seven, episode 12, really those episodes build on top of the things that we talked with Nick about. So go check them out. Lastly, We need those five-star reviews. David, how are we doing on that?

We're doing okay, but we could be doing better. And so if you guys think that the bankless podcast and the bankless revolution belongs at the top of the iTunes charts and that it should show up when you type in Bitcoin, when you type in Ethereum, when you type in Defi into your podcast search engine, we want to make sure that bankless shows up there. And the way that you can help us do that is by giving us those five-star reviews. There's a bunch of old podcasts that haven't put out episodes in years, but since they came in during the ICO mania, they are still kind of sticky at the top of the crypto iTunes podcast charts.

So help us replace those ICO type podcasts and get them replaced by the bankless revolution. And the way that you do that is those five-star reviews. Guys, thanks for voting for bankless. Risks and disclaimers. Okay, Eath is risky. We talked about Bitcoin today. Bitcoin is also risky. All of crypto is risk.

ski, as is Defi, you could lose what you put in, but we are headed west. This is the frontier. It's not for everybody, but we're glad you're with us on the bankless journey. Thanks a lot.