Bankless - 180 - Top 5 Bear Market Bets with Avichal Garg & Sanjay Shah of Electric Capital

Episode Date: July 17, 2023

Nothing tests your conviction like a bear market. This is an opportunity to test what you think you know, refine your thesis, and make your bets for the next leg up. Avichal and Sanjay are long time crypto investors and at VC fund electric capital. What are they betting on during the bear market? We discuss 5 of the most pressing questions facing crypto investors during the bear market including… 1) L2 tokens - Are L2 tokens they worth something or they just worthless governance tokens? 2) AltL1s…Will the ETH killers make a comeback? 3) Multichain world - Millions of L2 chains or a few big winners? 4) Restaking - big deal or overhyped? 5) What Avichal things are this cycle’s alt-coins. Episodes like this are an opportunity to sharpen your insights as a crypto investor. Don’t take these ideas as gospel. Wrestle with them. Test them. Make them your own. We’ll have other Bear Market Bets episodes with other perspectives, so this isn’t the last. ------ 🚀 Join Ryan & David at Permissionless in September. Bankless Citizens get 30% off. 🚀 https://bankless.cc/GoToPermissionless  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 🦊METAMASK PORTFOLIO | TRACK & MANAGE YOUR WEB3 EVERYTHING https://bankless.cc/MetaMask  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 👾POLYGON | VALUE LAYER OF THE INTERNET https://polygon.technology/roadmap  ------ Timestamps 0:00 Intro 8:00 L2 Value Capture 15:12 How Rollups Make Money 20:20 Harmful vs. Good MEV 25:00 Transactions Fees & L2s 38:05 Are L2s Valueable? 40:00 Multichain L2s or Few Winners? 43:05 Multichain Applications 49:09 Multichain Friction 59:02 Are NFTs Dead? 1:06:45 Investing in NFTs 1:10:00 RSA’s Worst Fear 1:15:10 Ethereum Killers & Modular/Monolithic Chains 1:19:22 L1s Playing the Monetary Premium Game 1:22:00 RSA vs. Avichal Moneyness Debate 1:24:30 Is Restaking Overhyped? Risky? 1:29:35 Crypto’s Antifragileness & Are We Lost? 1:33:40 Closing & Disclosures ----- Resources Avichal Garg https://twitter.com/avichal  Sanjay Shah https://twitter.com/sanjaypshah  Read https://mirror.xyz/electriccap.eth/SD0wT7qSSfis9gLT_Ki1gY6_oTYEqgwcGE0hDw7kMDY https://www.developerreport.com/developer-report  ------ 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://www.bankless.com/disclosures⁠ 

You can only really generate value as an investor if you have a deeper understanding of what's happening than anybody else. Like effectively alpha in a market comes from depth of understanding. If you can see the actual value of the thing, and there's a disconnect between perception and reality. So if the world thinks something is worth X, but it turns out to be worth 2X, that's a delta between perception and reality. And so what you really have to do as an investor across all of the categories that you mentioned, Picks and shovels if you're an early stage equity investor, you know, NFTs themselves, if you're more of like an art curator. What you really have to do is understand the thing better than anybody else.

You have to have some perspective on it that says actually reality is different than perception. And that's fundamentally what you're betting on. Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. And I'm here to help you become more bankless. Yep, just me on the episode today. No, David. He's off climbing mountains this week, so I'm taking this episode solo. One day, I'm hopeful we'll just use an AI simulated version of David, but unfortunately, the tech is not here. So I had to take this episode on my own. The topic today is about bear market bets, investor conviction during the bear market. And one thing I'll say at the outset is nothing tests your conviction as an investor like a bear market. In particular, a crypto bear market. In particular, a crypto bear market. market. I think they can be particularly deep and sinister. But if you look at this from the right

angle, this is actually an opportunity. It's an opportunity to test what you think you know, to refine your thesis, your ideas, and to make your bets for the next leg up at a lower price point. So that is the topic for today. Avichal and Sanjay are longtime crypto investors. They're the guests in today's episode. They're also VCs at Electric Capital. And I ask them, what ideas are they betting on during this bear market? We discussed five of the most. pressing questions, I think, that are facing all crypto investors during this bear market, including, number one, L2 tokens. These are layer two tokens. Are layer two tokens actually worth anything? Are they just worthless governance tokens? We get into that. Secondly, we talk about

alternative layer ones. Will the Eve killers make a comeback this cycle or not? Number three, we talk about what a multi-chain world really looks like. Will we have millions of layer twos and app chains, or will there be a few big winners. Number four, we talk about restaking. Is restaking a big deal? Is it overhyped? Will it pose an existential risk to Ethereum? And number five, Avedchel explains why he thinks NFTs are this cycle's alt coins and what he actually means by that. Also, toward the end of the episode, I get in a quick debate with Aveditchell on the moneyness of ether, ether the asset. He disagrees with me on that. I wish we had some more time for that debate, but we touch it briefly. perhaps in another episode we can get into it in more detail.

Last thing I'll say before we begin, episodes like this are really an opportunity to sharpen your insights as a crypto investor. So you don't have to take these ideas as gospel. Not everything that these investors say will be right. You, of course, have to wrestle with the ideas. You have to test them. You have to make them your own.

And we'll have other bear market episodes with other perspectives. So this certainly isn't the last word. All right, guys, we're going to get right to the episode on bare market bets with, Avichal and Sanjay from Electric Capital. But before we do, we want to thank the sponsors that made this episode possible, including our number one recommended crypto exchange, Cracken, go create an account. Cracken has been a leader in the crypto industry for the last 12 years. Dedicated to accelerating the global adoption of crypto, Cracken puts an emphasis on security, transparency, and client support, which is why over 9 million clients have come to love Cracken's products. Whether you're a beginner or a pro, the Cracken U.S. is simple, intuitive, and frictionless, making the Cracken app, a great place for all to get involved and learn about crypto. For those with experience,

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solutions. Hundreds of projects have already deployed onto Arbitrum 1 with a flourishing defy and NFT ecosystem. Arbitrum Nova is quickly becoming a Web3 gaming hub and social daps like Reddit are also calling Arbitrum home. And now Arbitrum Orbitrum Orbit allows you to use Arbitrum's secure scaling technology to build your own layer 3, giving you access to interoperable, customizable permissions with dedicated throughput. All of these technologies leverage the security and decentralization of Ethereum and provide a builder experience that's intuitive, familiar, and fully EVM-compatible, faster transaction speeds and significantly lower gas fees.

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incredible annual crypto developer report they put out every single year. the most recent I think was put out in January. I don't miss this. Measures all of the dev and dev activity across crypto. Avichel and Sanjay, welcome in bankless. Thanks, Ryan. Nice to be here. Thanks for having us. I'm excited to do this episode here and now in 2020, summer of 2023, when we are, I think most listeners would agree, we are in the bear market. And the reason bear markets are interesting to me is they are this fiery crucible where our investment ideas actually get tested, where we actually have an opportunity to kind of rebuild our ideas from the ground up and place our bets accordingly. So I want to ask a few questions today.

I've got five teed up and then maybe some bonus questions if we get some time. And I think these questions are some of the biggest, most important questions that crypto investors are asking during this bear market. So I want to get your thoughts on this, the thesis that you're rebuilding during the bear market and really get a sense for your conviction, what you're convicted on. Does that sound okay? That's great. That sounds great. Actually, and maybe before we get in all that, we can do the standard disclaimer of, oh yeah, you got to do that, right? Go for it.

This is not financial advice. You should not listen to anything we have to say basically about anything. Wow, that's great. Bankless listeners, that goes for me too. All right, so we're going to echo that. Bankless listeners. Don't listen to us about anything.

None of this is financial advice. None of this is financial advice. And beyond. This is not advice. This is not life advice. It's not life advice. I don't know what it is. It's another category.

It's just a conversation. Hopefully you're entertained by it. Just a conversation. A conversation amongst friends. Yeah. So a few of the conversation. starters then amongst friends. And some of these questions are, I think, controversial questions, actually, which is among the most interesting. But I'm going to tee these up, the first five,

to give listeners a sneak peek into where we're headed. All right? The first question I want to ask is about layer two tokens. Are they worthless governance tokens, is the question. Second question, want to get into ETH. Will the ETH killers make a comeback? Alternative layer ones. Number three, I want to talk about layer two. Is there's, are we going to live in a world where there's millions of chains or just a few big winners? Number four, I want to to talk about restaking. Is restaking, I can layer all of these things? Is it a big deal or is it overhyped? Is it an existential crisis for Ethereum? And then number five, NFTs, man, they've been down bad recently. I don't know if you guys have noticed, but are they dead or will they make a comeback? So that's a little

agenda item. I got some surprise bonus questions for you as well. Why don't we start, though, with the big question. I think part of the reason I wanted to have you both in the podcast, is Sanjay, you wrote fantastic blog post about layer two value capture. And let me just frame the question. and you put it nicely at the beginning of your post. The question is, these layer two tokens worth many billions of dollars, double digit billions of dollars, I don't think triple digit billions of dollars. Are they actually worth anything right now? Or are they just worthless governance tokens?

I'll throw it to either one of you. How do you think about this question right now? To me, the way I sort of think about it is it always comes back to cash flows at the end of the day. So you always have to say, okay, let's look at this from a fundamental perspective, and where the cash flow is going to come from. And I think that if you really dig deep into layer two's, there are very concrete sources that they can actually generate sustainable cash flows and sustainable profits. And so there is a real, and I'm happy to sort of dig deeper into this, but just based on that idea alone, there is a real fundamental basis for why these tokens should

have values based on cash flows. Yeah. So there's cash flows, just like a company, just like any type of business, these layer twos actually have a problem. that they're selling. Yeah. Yeah. Well, I would add one thing to that too is, I mean, this is how we model things internally, is ultimately cash flows. Because if there's no cash flow coming out of the thing, then like it's, you know, what is the thing actually worth? And finance in general or investing in general, that's like the great normalizer. It's like, what are the cash flow and what kind of discount rate do I apply to that cash flow? And then I can start to normalize across things like bonds and stocks and tokens. And so I would add maybe two or three nuances or

dimensions to this. So one, just because the thing has cash flow, it doesn't make it a security. and I think this gets into a lot of nitty-gritty about regulatory. But we firmly believe that there are ways to have cash flows coming out of these without necessarily making them securities. Did you hear that, Gary Gensler? I'm listening right now. It gets into sort of how we test, and there's a lot we could go there. But I think it's important people not necessarily conflate cash flow with security.

Those are actually two different things. Second is I think what's really interesting about crypto is the global nature of it. And so the fact that there's so much capital all over the world that would like to be able to invest in cash flow assets or any sort of asset outside of their local fiat regime. And actually for most of the world is not possible. Most of the world can't easily access U.S. equities, for example. And so our belief is there's actually a lot of latent demand all over the world for these kinds of assets that are sort of, they exist outside any singular jurisdiction. Like, ETH doesn't exist only inside the United States. And that's actually what makes it so compelling, too, from like a

global perspective, is that there are a lot of people who otherwise would not be able to participate that can participate. And I think the framing that you had around conviction at the front end was really compelling. And I think one of the things that we have, we personally have not lost conviction on, but I think in the bull market really gets lost in the noise and tends to come back in the bear markets, is that that's fundamentally what this stuff is about. It's about empowering people all over the world to participate in these open systems. And that's what's so interesting about the L2s is there are actually ways for people to participate all over the world and capture value in that in a way that doesn't make them security, but still has cash flow, which I think is

actually, that's one of the interesting breakthroughs here as a technology. By the way, just on the cash flow, but not security, just as a brief segue here. So there are other real world assets like this, right? So let's say you have property. I own a house. I'm a landlord. Well, that is a cash flow producing asset that's not a security. I don't have to register that thing with the SEC. There are tons of categories in the real world pre-crypto that actually fit this mold of being a cash flow but not a security. How come people are so hung up on this? Yeah, well, it goes to this general problem of like our regulatory frameworks tend to have been designed with certain use cases in mind. This is why you have to be really careful with the regulation,

I think. I spent a lot of time on the regulatory side. I think some people know this in conversations with senators and Congress people and people at the White House and so on. And there are a lot of good people in the ecosystem that spent a lot of time behind the scenes on this stuff. And I think one of the challenges is that like you don't want to bake technology solutions into the regulations. And every now and then, every 50 or 100 years, like a new technology comes along and it sort of breaks your mental model of what's possible. I think AI and crypto are kind of of are going to both face this right now because I'll give you one concrete example right like this stuff doesn't really exist inside a singular jurisdiction and that creates a whole new dimension

of challenges from a regulator's perspective right like ETH is not a thing that exists only in the United States or only in Europe it exists cross jurisdictionally because it lives in the cloud so anywhere there's a server this thing can exist and I think that creates a whole host of challenges because our entire regulatory framework has been based around the notion of a nation state with physical geographic boundaries and capital controls and this really starts to break a lot of that. AI is similar in all sorts of ways, right? Like, shouldn't AI pay taxes? Like, it's kind of unclear. If it pays taxes, like, who does it pay taxes too? Because it can run on any server anywhere. So, like, what does that mean? Right?

Does the question even make sense? And this happens every now and then. I've talked about this in other contexts, but like, to me, crypto, like the idea of this non-jurisdictional coordination mechanism, the last time we really had to face something like this was with the invention of the joint stock corporation, which was like 1650. It was like, oh, we can put money together and like take risk without it being my personal property at risk. Before that, you just had the cottage industry. And so between like 1650 and 1850, we put a lot of regulations in place around how that should work. And it used to basically be that only kings could give you a charter to go start a corporation. And then around 1850, we said, wait a second, that doesn't

make any sense. Anybody should be able to start a corporation. And so we created entirely new regulation that said, oh, here's what it means to register a company. And that unlocked the industrial revolution. Like the reason railroads could get built is because a bunch of people could pool capital, at a scale that wasn't previously possible from one human. I actually think a lot of crypto and AI, it's like the first time in 150 or 200 years that we've had to face this kind of a problem, which is like it just breaks our existing model of regulation in a lot of fundamental ways. And so we need to rethink it. I know that's like super high level meta, but like that to me is what makes this so interesting because the properties of this stuff are like truly internet

native in a way that I don't think we've ever experienced before. And that creates a whole host of challenges downstream, one of which is, well, how can you have a cash flow entity that a bunch of people participate in that I can track, that I know exactly what my cash flow stream is going to be, but it's not a security. And I think that's one of the side effects

of this new technology. Well, regulatory is going to be one of the bonus questions to do you. There's a lot to unpack there. There's so much to unpack there, but I don't know that's exactly comforting that it took us like about 200 years

from the joint stock company, the first joint stock company, to get the regulation in order. I hope crypto can happen at a faster pace. It'll have them way faster. All right. We'll get to that too. But okay, so,

Bull case, I think what you just gave was sort of the bullcase for maybe these capital assets that are tokens in general, right? Which is they're global, they're digital, their cash flow producing assets that aren't security. Anyone with an internet connection can own one of these things. So, well, how cool is that? All right. But so there's another piece here, though, that I want to get to is just because there is a token out there that can accrue value doesn't mean it's sort of set up to actually accrue value. So this idea of cash flows is like, where does the revenue come from for a layer two? Maybe you guys could give us a refresher, Sanjay, you could give us a refresher on how roll-ups make money today.

How do they actually generate revenue? Yeah. So in the future, roll-ups, I think, will generate value from sort of two different streams, MEV and transaction fees. Today, roll-ups don't actually generate any revenues from MEV because the sequencers are centralized. So optimism, arbitram, and of course, they don't want to be extractive to their user. So they've decided, hey, we're not going to extract any MEV. So they've just turned it off, basically.

They could, as a centralized sequencer, they could charge some fees for MEV and for transaction fees, but they've just set it to zero right now. Is that correct? For MEV. Yeah, MEV. And then, of course, they are charging transaction fees. And so that's the primary source of revenue today for layer twos. So that's today.

and in the future for the MEV, that can be turned on in the future. And I think that could be a sizable form of revenue for roll-ups. So in the blog post, I sort of put a little bit of a framing around this. So there's sort of like good MEV and bad MEV. And sort of harmful MEV is anything that's sort of harmful to the user. So let's say a sandwich attack, et cetera. Good MEV is something that actually helps the ecosystem. So, for example, an arbitrage helps keep prices consistent across different X's.

And so sort of my view is that as far as MEV, I think the harmful sort of MEV will ultimately be sort of either mitigated or rebated back to users. And sort of like, why do I say that? Well, one, you know, businesses, there's not like a line I have in the post, which is like typically businesses don't really gain adoption by screwing their users. that's not a good strategy. And so I think it's the same way with blockchains. And so there's sort of incentive at every layer of this, whether you're talking about wallets, whether you're talking about the roll-ups themselves,

whether you're talking about shared sequencers. Like, hey, let's figure out a way to get rid of these sandwich attacks. Let's figure out a way to sort of mitigate these harmful sort of form of MEV. And I think right now there's like 12 different projects that are working on trying to do this. And so I think with so many people sort of working on this, I feel fairly good that. we're going to figure out a way to sort of combat that. Okay, so let's break this down a little bit for people and spend some more time on kind of definitions to make sure we've got everyone with us today.

So you think that the sources of revenue for roll-ups, the way they make money, are two form, M-E-V and transaction fees. And then we just went into M-EV for a second. Defining M-EV for a second, this is basically block ordering. There's some value for anyone who's sending a transaction or doing something on chain on one of these layer twos and getting their transaction in first. And it turns out that we can sell that value. And layer two is indeed can in the future start selling that value. I believe that's what you're saying here. And there are two forms of not the selling of that value, but I guess the maybe the effect of blockchain ordering. Maybe you can find better words for this. One is there's harmful blockchain ordering. They're calling that harmful MEV. And then there's

good MEV. And what you're saying, Sanjay, is, is you think that the harmful MEP will actually be mitigated over time so that the layer two designers will effectively try to minimize that as much as possible or rebate it to users. So if you're a user in Metamask, you're creating a transaction, there's some future world where you actually receive some of the proceeds of that transaction in the form of a rebate. You get kind of your MEP money back.

That's what you think will happen to harmful. The good MEP, you think these layer twos will effectively take in the form of revenue under that MEV category. Is that right so far? What would you add to those definitions? And also, can you give us some examples of harmful versus good MEV? Yeah, so that's exactly right. I think you've phrased it really well. So let me give you an example of harmful MEV is like a sandwich attack. So for example, you want to go and you want to buy an asset on a decks, let's say ether, someone sees your trade incoming. They're going to actually put in in order to trade that asset ahead of you, and then your order will actually push the price up, and then on the back of that,

they'll actually sell what they bought. So they've just made money sort of risk-free, and you, as a user, you've actually gotten to execute at a worst price. So that's probably the most sort of common, prominent example of harmful M-AV. And then as far as sort of good or beneficial M-AV, like one example is just arbitrage. So, you know, if you have different dexes on a roll-up or a cross-roll-ups, You obviously want prices to be the same or consistent across the different decks. That's good for users. Liquidations is another example of beneficial MEV. You want people to get liquidated as soon as possible, which helps the protocols not accrue

bad debt. And so the faster that can happen, the better. And so that's another example of beneficial MEV. One good example is sort of like how I see this playing out. There's a new shared sequencer radius. that has sort of come out in the last couple of months. And they're sort of implementing this thing where they're using encryption

to actually block sort of this harmful M.EV. So using encryption, nobody can see what your transactions are. And then after some sort of transactions are finalized, then they're actually running an auction to allow people to backrun these transactions. And so they're essentially blocking the front running of transactions, which allow for the sandwiches, et cetera. And they're running an auction

to sort of optimize the backrunning of the transactions, which allow for arbitrage and liquidations, et cetera. So it's sort of in line with sort of this framework that I've laid out. So how does this MEV? We'll talk about transaction fees as the other pocket of kind of revenue in a second, but just for MEV in general. Right now, you said the sequencers are kind of centralized, haven't turned the dials on, so no one's actually charging for this.

And in the future, they could. But how does this get to value in the token? If you're a token holder of something like the arbitrarial, token or the optimism token or something like that, how do you experience that value? One way in the Ethereum ecosystem that holders experience value is through EIP 1559, the burn effectively, where supply is kind of destroyed. In the world of capital assets, I mentioned a property that I might hold and I might get a rental income from that.

So my asset actually generates income that I can take home. It's not quite a dividend, but it's sort of a dividend. I suppose. Can an arbor optimism or layer two token holder expect to sort of receive this as a share of income or is it burnt or is there some other mechanism at play here to actually link the token itself to this value creation mechanism? Yeah, I think any of the above and I think different layer twos are going to experiment with different models. So you could burn it, you could give it as a dividend, you could invest it in retroactive public goods, which ostensibly will then increase the value on protocol further. How I expected to happen in practice is through some sort of like auction mechanism.

Like right now you have a centralized sequencer. And so, you know, it's sort of like up to the goodwill, I guess, of the sequencer to sort of give that back and how much to give back. Inevitably, I think that once you have sort of auctions, just like, you know, you have at the proposer layer on Ethereum where, you know, builders are actually competing to get proposers to choose their block. In the same way, I think you'll have. people competing to build a block, and then that value will then go back to the protocol, and they can choose what to do with it, what they want. Okay.

So you think MEV will be a big source of revenue here. Let's talk about transaction fees, which is the second kind of source of revenue of value creation, value capture here. So how do layer two's today charge transaction fees inside of their ecosystems? I'm going to pull up a screen just to kind of start this conversation. I believe that was in your blog post. This is Arbitrum annualized revenue. If you've never looked at kind of Arbitrum from this perspective,

I encourage you this is the way that investors should and are looking at this. This is, I believe, a set of metrics from May of this year. And this says Arbitrum annualized revenue. If you annualize Arbitrum's revenue in May of 2023, this isn't a bear market, mind you. We get 115 million in annualized revenue. revenue being the term for kind of the top line, right? So this is not necessarily profit.

We can talk about the costs of the arbitram business, or a capital asset, if that's what we want to call it. But revenue, $115 million. And I believe this is from transaction fees. Can you explain this a little bit, Sanjay? Yeah, I mean, it's very impressive. Yeah, essentially currently, later two sort of break down their costs into sort of like an L1 cost.

So what are they paying to Ethereum for essentially the data availability? and then there's sort of an L2 operational cost essentially, like how much are they, does it cost to actually sort of like operate the chain, et cetera? And then there's like an L2 gas fee, which essentially makes up the transaction fee. That's how sort of the revenue model works today. And it's sort of broken down into these three chunks.

I think the way it can be broken down in the future can sort of be different. Like it doesn't actually have to, you know, be on a menu where here's your L1 cost, here's your L2 operating cost, here's your L2 fee. But I think those basic components are going to always be baked in there. And are they essentially, is the way to look at this,

like a layer two is essentially a value-added reseller of layer one block space? Is that what they're doing? They're basically taking, like something like Arbitrum or Optimism is basically taking the Ethereum block space and creating another layer of feature functionality, value on top of it,

and then charging for that in the form of transaction fees and then also MEV. Is that what's going on here? Yeah, I think that's a reasonable way to think about it. I think one of the sort of like, you know, mental models that I wanted to at least put out there with this is that, you know, I think some people think like, okay, EIP 4844 is coming. Blockspace is going to drastically reduce. And so as a result of that, okay, yeah, Arbitrum's revenues look great right now.

But that's just because L1 data fees are super expensive right now. And once L1 data fees plummet, like, hey, Arbitrum's revenue. news are going to, you know, go down the toilet because, you know, maybe they're just making a 10 or 15% margin on top of what the L1 is charging. And sort of the model that we can get into it that I at least sort of propose here is, hey, that's not actually true because there's actually some block space that's actually valuable on the L2, and they don't actually have to price it at just like a fixed percentage above what the L1 block spaces. So as an example, like if you, you know, getting coffee at Starbucks, just because it costs Starbucks 10 cents to make it, that doesn't mean you're paying

10 cents or 11 cents. You can be paying $5 or $10 for a cup of coffee. And so I think it's going to essentially be sort of similar in the L2 block space. I think you guys have a pretty famous saying, which is blockchain sell block space, right? And I think it's very similar to L2 block space as well. Yeah, I think a lot of people don't understand how layer twos actually make money and how much value is created here. And I wonder from your perspective, what this sort of looks like, right? So there are multiple analogs that we could use. Yes, we have said on bankless many times

is a mental model. Blockchain sell blocks. That's the thing that they do just because it's a simplification. I feel like so many times the crypto investing world get stuck on narrative value, meme value, and like it's helpful to view this as almost like a company, right? So Apple sell, they sell iPhones, right?

How do they create value? Well, they take all of these commodity-type components and they create an incredible user experience in a phone that you can use. and apps that give value to everyday life, and they're able to charge $1,000 per phone, right? That's kind of amazing. And so looking at these layer twos almost as kind of like companies,

and they're not securities, but maybe from the perspective of there is something that all of them are trying to sell. They're trying to make their block space as valuable as possible. And to Sanjay's point, they can charge whatever they want for that, whatever the market is willing to pay. And so that's one model of looking at it. The other way to look at it, though, is as an emerging economy.

It's almost like the nation state type model, right? And if, you know, another analog we've used is think of like a province in a nation or like a state in the United States, the state of California. And it is kind of, there's a federal government, that federal government in the L2 world is maybe Ethereum, it has its own currency, but then there's a state's economy, the state of California, it can create value. So you're almost valuing it as an emerging economy. It makes sense of this.

How do you think? of layer twos. Yeah, so two thoughts on this. So I think your second point around thinking of these things as digital countries and states is exactly right. That's very much the conclusion I've come to. We wrote a paper about Ethereum as a digital country a few years ago, sort of as a little bit of a detour into that for a second. You know, I think that's actually what the, like, if you think about what the world wants and kind of what happened after Russia invaded Ukraine and the U.S. flipped on sanctions, what the world kind of realized was that the economy of the world, international trade, commodities trade, pricing, all this stuff runs on U.S. dollars. But ultimately, the U.S.

can shut you out of that economy if they feel like it. And that's really scary, right? If you're Turkey, if you're India, if you're Brazil. And what the world actually wants is a U.S. dollar denominated system because they don't necessarily want to be beholden to the Chinese government either and denominate things in C&Y. And you're seeing a little bit of a move towards that. And so what the world actually wants is a U.S. dollar denominated system that the U.S. government cannot unilaterally shut them out of. That's effectively credibly neutral and sufficiently decentralized, such that you can get the bad actors, but that you can't be shut out unilaterally. And that's effectively what Ethereum is becoming. And so our sort of like long-term

view on this is Ethereum is slowly evolving into this third space, which is not the U.S. space, which is not the Chinese space, but is this sort of credibly neutral decentralized space. And I think your analogy of if that's kind of like the federal government in a sense, or that's the country, then L2 start to behave a little bit like states. And, you know, if you think about how a state like California operates and what they're able to do. In effect, you know, like, why does California have such high taxes? Or why can Apple charge a 30% tax? It's because they have pricing power, right?

So the general term for this of it is not collapsing to the commodity price of the compute power on the thing, which is, I think, a thing that a lot of technologists and economists both miss. Like, they think of these things as purely computational networks, and therefore they don't have pricing power. But there are forms of pricing power that states and companies have, which are really interesting, right? So, like, for example, California, essentially having a monopoly on useful coastline on the West Coast, like all these beautiful beaches and Big Sur and it's just, it's a beautiful

place to live, means that real estate is tremendously valuable. And as a result, there's this, like, source of income, which they effectively have a monopoly on, which allows them to do a lot of other things. Or there's brand value, right? Like, why do people pay for, you know, an $8 cup of coffee? Right? Why do they go to a blue bottle or whatever? Yeah, it tastes better. But, like, part of it is the experience. Part of it is the brand. Part of it is the ethos. You're holding the cup, you're being seen by other people. So there are these emotional motivators or there are network effects, right? And so like Silicon Valley is a network effect around capital, which has been written about many, many times. Entrepreneurs will generally relocate to where they can get great capital.

And there's so much tribal knowledge about how to build companies in Silicon Valley that it's not a surprise that sort of that network effect continues to perpetuate. Crypto being a really interesting counter example we could talk about. And if you look at the L2s, they kind of have all of these, right? There are network effects in terms of like DFI, all being on arbitrum right now, or there are technical motes, right? Like actually building an iPhone is really hard. And so you look at something like Starware and that you might argue that that's a real technical moat. There's just not that many people that could build a ZK-based system or ZK Sync. You look at brand effects. And so like if all the cool kids are in one place for the NFTs, then like that's where all the NFTs will be. That's

where the creators will want to be. So there are going to be these different forms of pricing power that these networks have on top of the L1 that's going to allow them to have some spread there, I think. And I actually really, I hadn't heard somebody talk about it as a state on top of the federal government, but I think that's a great analogy. And I think, I think that's a great analogy. states like California or New York or Washington, D.C., where you have this combination of network effects because of the industries that are there, the company towns, effectively, the brand value. It's like if you want to do anything in government, you have to be in D.C. Like, that's where the network is. That's where the flow is. And that gives them pricing power,

and I think L2s will behave very similarly. That's super fascinating. Just maybe to extend this a little bit further, this line of thought, because what you're saying kind of brought some thoughts up in my mind. So I think what you're saying is that layer twos are a bit more like California than they are like Apple. But where that, I think that mental model falls apart for people is there's no way right now to invest in California tokens. Like how would I invest in the California economy, right? If you had a token that represented that or some sort of asset that represented that, it would probably be the value of California's tax base, I guess. Yeah. Well, there's another example. Yeah, go ahead. Like Alaska, right? So you get an oil

rebate. So like the state has all this oil revenue coming in and they just refund it via tax revenue back to the citizens of Alaska. Right. Yeah. I wonder if there was some sort of composed asset that gave you an index of all of California's property assets, let's say, for instance.

And then also the number of public traded companies that were all based in California, something like that, that could almost give you a proxy for like what an investment in California would look like. But we don't really have that at the state level or even at the nation's state levels. I guess the best proxy for investing in the United States is probably buying the

SMP or something like that or NASDAQ, something like that, right? But you sure wouldn't want to buy the dollar. So maybe that's what we're saying, you guys are saying these L2 tokens are. They're effectively, they're an investment in this emerging network state, let's call it. And just like if you live in California and they're not providing the services, it's not worth it, network effects aren't worth it. You can defect and you can move to Texas, for example. Well, all of the different layer twos are competitive with one another and they have to provide the network effect, the services, or the population applications on top will kind of defect. I think the analog kind of holds. So is this making sense? Or are we stretching the metaphor too far?

Well, it's a little bit stretched. And I mean, it is, it's one of the things that's generally tricky about technology, early stage technology is like we have to reason through analogy and schemorifically. Like, if you remember the original iPhone apps, we're all kind of like leather and paper. And it's because that's like all we were used to when it came to touch. And so we're like, well, if it's a flat screen, let's make it look like paper and leather. But that just like doesn't make any sense, actually. So I think it's, it is a little bit stretched. But, you know, I think analogs are still illustrative.

They can still teach you things. So I do think there's a lot to that, you know, I think the idea that there are network effects, the idea that there is a notion of brand. There's community. There's cultural alignment. And so like by choosing to live in San Francisco, you're making sort of like a cultural statement about your values as much as you are physically where you choose to live. So I think a lot of those drivers will exist in all twos as well.

And then I think your point around, you know, what is the ease of switching, given that all of these things are EVM right now on top of Ethereum and the ease of sort of moving things around. I think, at least in the early days, you know, it's sort of like if I could effectively pick up and move to Nevada or Texas or Florida without having to uproot my entire family and like, you know, would I do that? I think a lot of people would actually consider doing that. So like lowering the difference, I guess, here with the L2 is like the switching cost is significantly lowered as the infrastructure gets better and better. Like I can just use optimism or arbitram as an end user, or if I, as a developer, can just move my code because

it's all EVM and it basically works the same way everywhere, then the switching costs are significantly lower than they are in the physical world. So to answer the first question, and the question I think investors are rightly asking during the bare market, are layer two tokens valuable? You guys are saying, hell yeah, they're valuable. Just look at the kind of the on-chain revenue profile. And in fact, for those saying that it's impossible to value different crypto assets, I think you guys are saying you can actually value this as a capital asset and forecast revenue and profit over time and plug in the numbers and excel a spreadsheet and it'll give you the valuation. Is that what you're saying here?

One caveat there is I think everybody should do their own math on this and figure out whether or not that that's actually true. But the general statement I think definitely holds, which is you can absolutely make an assertion here that there can be cash flow coming out of this thing. There is some sort of pricing power. You can figure out what your assumptions might be for that, what the costs are for running the network. And there's certainly a spreadsheet model that you could produce here that would produce

positive cash flow out to token holders over some period of time. That doesn't necessarily make it a great investment. That doesn't necessarily mean that people should do it. It's extremely risky. But that's generally how we think about these things. If there isn't ultimately going to be cash flow coming out of it, the market in the long term will not value the thing. Anything to add, Sanjay?

The only thing I'd add is I think they'll be valuable, but the ones that will be the most valuable are the ones that can generate sort of like a unique state that you cannot easily just move to another roll-up and get it. So if you think of, you know, if you have a roll-up that's sort of like the Defy Hub, let's say the New York of L2s, right, you can't just go to Texas or you just can't go to Chicago and sort of get that same liquidity, et cetera. And so any of the roll-ups that can actually build this like sort of unique state that cannot easily be replicated are going to be the most valuable. Well, then I think that brings me to the second question that I highlighted early, which is another question for the bear market right now,

where everyone's trying to test their thesis. Forecast the future of L2s for us. There are two paths and give them to you in their most exaggerated forms that we can discuss the one side of the spectrum versus the other. There could be a world where we live in with millions of different chains and layer 2s. Or there could be a world we live in where there are a few winners with kind of big network effects, right? So which of those is the most likely outcome?

Like one is a world where we might have tons of app chains. I don't know if you could put some more color on that. But the other is a world where there's a few big mega chains that kind of win. Like defy and Ft use cases, they all sort of accrue to a couple of megachains. We're sort of seeing that, I think, on the main chain, layer one side of things. But we'll get into that discussion next. So what do you think? Millions of L2s or a few big winners. Vichel, what do you think about this? Yeah, this is actually probably one of the things. I've most changed my mind on over the last two years. I mistakenly assumed there would be some sort of power law the way I think the L1s will have a power law where ether is really big. Maybe the Cosmos

ecosystem can be big. Salana might be big and you're going to have a long tail. I mistakenly assume that the L2s will work that way. And the sort of belief I've come to is actually there are going to be millions of L2s. There will be a relatively small number of generalized ones that are permissionless and open. But what I think optimism really did by open sourcing the OP stack was they made it really easy for people to spin up their own instance of optimism while still being a part of the ecosystem. So you look at things like base. And as a result, I think what you're going to get is not just the truly open permissionless ones. You'll get everything from that to ecosystem chain. So I think there are probably going to be things that are like an NFT ecosystem chain. So to use

Sanjay's analogy, maybe that's like the LA of Ethereum. Right. And there will be like the KYC chain where you have the KYC to get in. Maybe base wants to do that with Coinbase. I'm not implying anything. I don't have any inside information or anything, but you could certainly imagine Coinbase taking that killer asset that they have with 100 million KYC'd accounts and saying, hey, you can actually trade in a KYC'd way here. And that looks like TradFi, New York. And so you'll get sort of these ecosystem ones all the way out to the other extreme of like the only user of that L2 is a specific application. So you essentially get an app chain, like the Cosmos style. You know, like I have a game and I want to control the sequencers and I want to have those be hypercentralized to lower gas

fees. And I just want interoperability with Ethel 1. And so I'm using all the same standards, like the same NFT standards, but I actually want to control it. I think you'll get the full spectrum there. And so if you believe there could be millions of applications, then certainly all of a sudden you end up with millions of app chains. Well, let's maybe test that assumption. Millions of applications? What are all these applications going to be? I somewhat wondered now, I guess this is a reflection in the bear market. It felt like during the bull market, we had too many apps, not enough block space, right? It's like chain fees were incredibly high. Now it feels like we're moving towards the opposite world. We have all this block space, but we don't have

enough apps to actually use it. Why do you think we're going to have all of these applications? Why millions of chains? How come all of these applications need their own chain? I think there's a couple of things to pull on there. So, you know, one, sort of more abstractly, it's interesting. When you look at the history of available computational power, whether that CPU or RAM or hard drive space, whatever, it just gets sucked up. Like, as soon as you make it available, some developer finds a way to use it. This is like the infamous Bill Gates quote that like 64K of RAM is enough for everybody and you just don't need more than that. And here we are. He really said that. Yeah, something, I don't forget the exact quote,

was we should look it up in the late 80s. And it's probably misattributed in some form, I'm sure. He's a very smart guy, so he probably meant it in a different context or something. But the observation is, like, you know, my, like, how much faster are computers today and, like, how much slower do they feel than the 1990s? There's a great video that was circulating a couple weeks ago. I don't know if you saw this about, like, Windows NT or Windows 3.1, and you look at, like, the boot times and, like, how quickly apps come up, and it's instant, and it's, like,

slower today, even though computers are 10 million times more powerful. And so there's just, like, this property of, computational markets, which is like as soon as you give developers some computational resource, somebody will find a way to use it and break through somehow. And so you're just sort of perpetually sucking up all the available capacity. And so I suspect that will be the case here. If I had to guess what is the initial set of use cases there, I think it's probably going to be games. I think often you see that in a lot of early platforms. And, you know, in some sense, defy and NFT are games. They're actually just real world, real money games being played across the

entire internet, rather than being played in like some executable that you run on on your computer, it's being played on Discord and Telegram and Twitter and in the real world at events. And they're just games that we're playing. There's social games that we're playing. I'm almost collapsing down to the idea of how much of real life is actually a game. I don't know. It's all made up. Is this all a game that we're all playing kind of, you know, some alien simulator somewhere? Yeah. Well, that's a point of position too. But no, I mean, if you look at like a lot of primate behavior, I mean, this is the thing too is right, like look at the world's richest man, Bernard Arnold, right? He runs LVMH.

like what does that guy do? That guy basically makes money by selling you a $300 leather item for $3,000 because you're playing a social game. Like what you're doing is converting capital capital into social capital. And it turns out billions of humans want to play that game. And that's just a totally socially constructed game that all these people need to play. And hence this is the richest man in the world. But it's hard, I think, for a lot of engineers and a lot of tried, like rational. You know, you like look at finance analysis or economic analysis and like the center actor and all of that, is always like a rational adult. You know, that's like somebody who only, like,

behaves 100% rational. And you're like, but that's like a disconnect with reality. That's just like not how things work in reality. And so we're all playing games. That's like 80% of life is playing games. I just wanted to hone in on that because if anyone hears Vichal listening to this

and it's like, well, just games. Well, that's kind of a small use case. You're talking about like hundreds of billions. It's like, no, like expand your definition of what a game actually is. You know, a game can kind of encompass everything. It can be all of the use cases. Like, you know, what is buying property being a real estate agent in Manhattan?

Is that a game to acquire more and more kind of real estate tokens? I also find that, like, the best training I've had for crypto is actually playing video games. I've talked to many crypto investors who said something like similar. So, like, just playing RPG games and, you know, RTS games or all of these things as they were growing up. I mean, like, now what do we do as crypto investors? Well, we just try to level up and collect coins. Like, okay. No, it's true.

That's a thousand percent correct. Sanjay, what do you think about this question? Millions of L2s are big winners. Yeah. So I think to think about that question, you first have to maybe drill down into what do you get by being on sort of a general purpose chain versus like what is the advantage of being on a specific L2. And so when you're on a general purpose chain like arbitrum optimism, you get that asynchronous composability. That's like key, especially for defy. But there are actually like really big advantages to being on an app specific chain. you lose the interoperability, well, not like total interoperability, but you lose sort of that asynchronous composability, yeah. Well, real time, like per block composability is what you lose the yields here. Yeah, yeah, exactly, flash loans, et cetera.

But you retain interoperability. Yeah, but you get like a bunch of customizableability. You get sort of like if you don't want your fee markets to be intertwined with the fee markets of all these other chains, you get that sort of isolation. And then you also get some level of protection from like what the, L2 would do. So like if you're an app on arbitram, for example, and an arbitrum does some governance thing that you just think is like a terrible decision, you're kind of stuck because you're an arbitram now like you're the app on arbitram. Whereas if you're sort of like this

app specific chain, you can actually then say, hey, you know, I don't really agree with this. Like maybe I'm going to move to optimism. You get a lot more flexibility that way. So there are these like clear sort of orthogonal tradeoffs. And I think some lend itself to the asynchronous this composability means that there will be a set, especially like Defi, that will be on this general purpose roll-up. And then there will be a lot of app-specific L2s because I do think that there are some clear advantages that. So a good mix of both is sort of what I would think. Mantle, formerly known as BitDAO, is the first Dow-led Web3 ecosystem, all built on top of Mantle's first core product, the Mantle Network, a brand new high-performance Ethereum Layer 2, built

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One pushback against the millions of chains idea here is that maybe there's some UX power law here, network effect, right? I'm just looking at today's world. In today's world, if you're on arbitram, you want to get to Polygon or optimism or something like that, there's work involved, right? Like go a bridge and then you're somewhere else and like the experience is different, different set of applications. Like, it very much feels like moving, like to, a new neighborhood, a new town. There's some friction in the U.S. Do you think all of that gets abstracted away in the millions of chains?

Because it feels like it would almost have to. The security issues, the UX issues would have to be abstracted away from the user in order for millions of chains to actually work. Yeah, I think that's a great point. I think that UX today is really tough for users. But, I mean, already you can see sort of the buddings of how this would get abstracted away. You have a lot of stuff around shared sequencers, which would,

help increase interoperability. You've seen the Polygon 2.0 vision that was laid out recently. You've seen the ZK stack recently vision by ZK Sync, which allows for a lot more interoperability. So already I think we're getting sort of maybe a little snippet or a little preview of how some of these things might get resolved. And I think over time, I do think that they will get significantly better. Okay, but to push back on that, though, what those look like is a bunch of architectures for different superchains. if I'm going to go from Polygon to Arbitrum, do you know? It feels like that could be an argument more for a world with a small number of big winners that all kind of make the U.X very good

inside of their stack, but it becomes very difficult if you're moving from like a Polygon 2.0 to an optimism or some other stack. Yeah, well, I mean, I think it depends on standards, right? So if there are some standards that are set, right, across different chains, and I think you could have similar interoperability across different chains, as long as two chains are sort of speaking the same language. Right now we have all these chains that are all sort of like speaking different languages, I would say. And if you look at sort of how the internet works, right, everybody's on this like sort of TCBIP protocol. And so I do think that there could be a world in which these sort of super chains can also interoperate with each other. And the shared sequencers

are sort of independent of these super chains. That's sort of just a separate concept where multiple chains that are all speaking different languages can kind of go there and sort of interoperate. I'd add a couple of things. It's a couple threads to pull on. So yeah, I think folks like espresso building shared sequencers, I think, you know, there's IBC as a bridge tech and messaging tech. Like I think a lot of the infrastructure significantly reduces the friction to sort of moving between different things and it becomes effectively a standard. And so then you can sort of move assets around. I think there's a lot of work to do on the user experience. This is something we talk about a lot internally and we've tweeted about and written about is like, this is

probably the big bottleneck now. It's actually the thing, like at this point, if I think about going back to your highest order question about conviction, what is the thing that I worry about the most? Like, why won't crypto work? Like, why will the L2s not work? Why will Ethereum not become this third digital country and so on and so on? I think the biggest risk is actually user experience, which is like so many people can get exposed to this technology because everybody has a phone. there's now five billion phones in the world that if the guardrails aren't in place yet and there's too much friction and people come in and they just lose their wallet keys or like you know something that happens that you could actually poison the well and so actually like being able to get to a billion

people overnight is as much a curse as it is a gift and so I actually think if crypto were to not succeed like what's the bear case overall for all of this stuff just not working I think it's actually the ux burns people like our ability to get people to try this thing is so far ahead of our ability to build good user experiences right now that we could actually burn a lot of people. And so I actually, it's funny. Like I basically have the opposite. I have like the inverse concern as you, Ryan, which is like, I don't worry that the UX is going to like prevent people from doing it. I actually think it's like too easy to get into the flow of this stuff. And then you can get caught and you can lose your assets. And then that just burns you. And then you don't want to touch this stuff.

And then we kind of have to cycle out an entire seven or 10 years of people to like forget the pain of having lost their money because the UX was bad. Well, I mean, case and point is 2020. I would argue a lot of people used centralized lending platforms. Great example. As opposed to defy because the Ux is better. It was easier to use Celsius or blockfi than it was maybe to go get your metamask and do a bankless wallet and go use something like Ave or a compound. And now what's that generation they're paying for it?

Some of them have left crypto with a very bad taste in their mouth as a result. Yeah, that's right. Or you look at NFTs and like I think fortunately NFTs did not get big enough this cycle. I think there's a chance that they get really big in the next cycle and they come back. But my concern would be that if it's too easy to get into the NFT world and it's too easy for money to flow in there, that actually people will get burned before we have the guardrails in place, which is the other side of UX. Basically, it has to be easy to use this stuff, but we also have to put the safety measures in place so that people can't just lose all their money and lose the private keys and need password recovery.

And you need to have ways for it to be decentralized. The centralized guys can't just be opaque about what they're doing and take about a risk and lose all your money. I actually worry about the other side of it is if it's too easy to use, a lot of people may just get burned. There's really difficult tension here. You want this stuff to be easy to use, but in very particular ways and still let people protect themselves. And I actually think if this stuff becomes a little too easy to use, that people may just get burned. Like the sort of contrarian take I have a little bit is like I kind of hope we have a long bear market because the longer. What's long? Like three years, right? We're already 18

months into it. But the reason is that, like, if you start, to your point, right, if you look at the quality of experiences that are being produced today, like, every six to 12 months, like, the user experiences get better and better. And it gets easier and easier to use this stuff without totally burning yourself. So, like, Coinbase's MPC mobile wallet is, like, actually pretty good. Or, like, institutional custody is way better than it was. Even 18 months ago, you have companies like fortify. And so I think if we give people, like, another 18 months or 24 months to actually make these experiences good and safe, then we have a shot at not burning people and poisoning the well. I'm actually kind of like, I kind of secretly hope that like we just have this like sideways burn for like another two years so that like we can build a really good experience.

So that when I mean you look at chat GPT, it went zero to 100 million people basically overnight like in 30 days. Right. And so like I'm not at all worried about whether or not people show up here because there's so much utility. And so I just want it to be like really good and easy and safe when people actually show up when we go to like the next billion people. As investors selfishly, I mean valuations are a bit lower than they were before, right? So it's kind of nice to have an accumulation phase. Yeah, yeah, always be skeptical of anything a VC says. So, yeah, that's fair point.

Since you brought it up, Avichel, NFTs and burning people, are NFTs dead is the question here. And I think a lot of people are wondering this in the bear market. And I think your answer to this is probably no, because I snuck a look at one of your tweets prior to recording this episode. And Avichel, you said this, NFTs are this cycle's alt coins. We're seeing liquidity flee. and rotate out as the excess comes to an end. Just as with ICOs, the ADIQ belief is actually right, just too early. Ethereum, Solana, Layer 2's defy and stable coins all came out of the excesses of the ICO.

Boom, it just took a few more years. NFTs are this cycle's alt coins. So I think you're saying they're not dead. You're bullish. Get into that a little bit more. Why are NFTs, I guess, maybe underhyped at this point in time or oversold? Yeah, and it's not a comment about any particular NFT collection or anything like that. It's more the concept of NFTs, and it goes back to this idea of if you look at LVMH, you look at Nike, you look at Rolex. A lot of the world is about non-fungible items, right? Like your purse or your watch or your shoes. And they're special to you because they're imbued with value because you as a human imbue emotion into these physical objects. And so if you look at just 20 years ago, there were these graphs that used to circulate that was like, hey, here's how little time is spent on newspapers, but look at all the ad dollars on newspapers. And here's how much,

look at all this time being spent on the internet and look at how little money is being spent online ads. And you're like, okay, well, that just has to reconcile. Like, over the next decade, that's just going to fix itself. The ad dollars are going to go where the people are. And I kind of look at digital goods the same way. Just like, look at us right now. It's like, you don't know what pants I'm wearing. You don't know what shoes I'm wearing. You don't know what watch I have on. I don't even know if you guys are wearing pants, to be honest. So, especially with Sanjay, anything goes. So, you know, like, why would you spend $500 on shoes or $1,000 on shoes or, you know, $500 on pants?

Like, yes, there's going to be some segment of those people that appreciate the craftsmanship, like, that men's wear guy on Twitter that somehow is, like, always in my feed. Like, that guy is going to continue to buy great clothing no matter what. But a lot of people do it. The bulk of people, I would argue, do it because of the social signaling. And NFTs are, it turns out, way more effective at accomplishing that end goal. And so if you... So the internet flex is much more important than the real life flex then? A thousand percent.

And it's not only is it more important, but it's actually from a, you. utilitarian perspective, it's more efficient. So think about the math here, right? Like, let's say you're going to buy a $200,000 pat-tech grand complications. And it's on your wrist. How many people are going to see it on your wrist? Like maybe 10,000 people over the life of you having that watch are going to see it and spot it and say, oh, that's a $200,000 watch. And so it's effectively $20 CPA, like, per conversion of person that sees it and now you get their social capital. Now it's a very particular group of people and you might want that group's approval, but it's effectively $20 CPA. If instead you buy and spend $200,000 on digital items, whether that's skins in Fortnite or NFTs on your

Twitter profile, PFPs, or whatever else, a million people could see it on your Twitter profile. No problem. You have one tweet that goes viral and a million people will see that tweet and they see your picture. So it's effectively 20 cents an impression. It's literally 100x more efficient to accrue social capital using digital goods versus physical goods. And one of the really interesting properties with digital markets tends to be that because of the friction being lowered, so significantly relative to physical. The market sizes tend to be much, much, much larger. And so, you know, if you look at Uber versus taxis, right, like the big knock against Uber at the series A was, well, if the entire taxi industry is only worth 10 billion, how could you possibly

be worth more than 10 billion? And here we are. And you have Uber and Lyft and DED and Grab and like all these companies all over the world that an aggregate are worth more than 100 billion. And so my opinion actually is that if you think LVMH and Nike and Rolex and, you know, these are Tiffany, like these are monster brands in the offline world that actually by opening up brand and opening up luxury and opening up social signaling digitally, that could actually be 10x bigger. And so what we now have is this shared infrastructure to be able to do that. And so every game is going to use NFTs because it's just better to use them. It's just interoperable with every game now.

So you can recruit other people to come in. Every brand is going to do NFT drops because it's actually 100% gross margin. Like Nike just minted $20 million for doing like some digital art. And then they did this Fortnite thing where you can like see Nike. apparel in Fortnite. LVMH is going to do this. It's just like lower cost of production of the item and people are still willing to pay whatever they pay for it because the brand value. And you now have a direct pipe to your fans. So like Nike or LVMH or Tiffany know who their biggest fans are. They're most loyal fan base because they're seeing them and they have a direct pipe to them.

They can actually talk to them directly. And there's now an advertising network that gets built on the back of that. Right. So I can look on chain and I can figure out exactly which people are actually the super fans of Nike or the super fans of Rolex. And if I want to do a collab, or if I want to try to recruit those people, instead of me going to Facebook and paying the ad network to acquire another mobile app install for a game or for a key type of customer, I can just incentivize that customer. I can just say, hey, look, if you show up and you prove to me that you've spent this much money on these types of goods or that you've spent, you bought 10 pairs of Nike goods or you've spent a bunch of time in Roblox, and you can cryptographically prove that to me,

I'll just give you something in my ecosystem. I'll just give you a free digital good worth $1,000. And now you're actually paying the end user to come use your thing. So you start playing this out. And so it's not just like that it's more utilitarian as a starting point, but like the interoperability and then the network that you build around everybody doing this on top of one standard and one network itself creates five to 10x more value in my opinion. And so like the downstream effect of this is just like all of this digital good spending, I think just moves digital over the next 10 to 20 years. And the beneficiary is the whole ecosystem actually because you can now build a network effect around all these people doing it on top of one standard. You don't think we've

burnt out too many people in 2022 with kind of the UX mistakes of buying an NFT you thought it's going to moon and then the company or the centralized product kind of exit scams you or the asset that you thought was going to go to the moon decreases 99% in value. You don't think we've burnt people out.

Now in my mind I was having this conversation with a friend of mine over the weekend and that's what sparked that tweet was the realization was that's basically how ICOs were. If you go back to the ICU boom of 2017, there are all of these ideas. Like, defy is going to be awesome and you're going to be able to do real world assets on chain and like, we'll have stable. coins and it'll be super fast and settle quickly and like we'll have L2s and we had all these ideas and

they were basically directionally correct like all the ideas were right but it really taps into that human psychology there's this adage to make Bill Gates to sort of offset my Bill Gates go from earlier disparaging of Bill I mean he's there so we got to set this right but you know to inflate his ego a little bit he has this quote that's like you know people dramatically overestimate what's possible in two years and dramatically underestimate what's possible in 10 years and that's kind of what happened here right like over the last two years. years, everybody dramatically overestimated what would happen with NFTs. And it just, it takes a decade to build a brand. It takes a decade to build a real community. But I think we're going to

look back in 10 years and there are going to be, A, some really big winners that come out of this cycle, or even earlier, you look at something like Cryptopunks. And it takes 10 years to have that Lindy kick in. But I think the next wave of stuff might actually be the wave of stuff that works, because it sort of from the ground up uses NFT infrastructure in the right ways and does the right things and incentivizes the right behavior, having learned from just this graveyard of mistakes that have been made over the last two to three years in NFTs. This is where the art, maybe the science, I know, which you lean on more in your investing comes in, though, is because of the things that you mentioned, let's say somebody is bullish on the category of NFTs and what

you mentioned. I mean, there's a hundred different startup ideas there and, you know, thousands of different assets that you could purchase. And so many of them will end up in the graveyard because there are so many different ways this NFT space could emerge. So let's say, I'm bullish. I'm bullish NFTs, right? Okay, so what do I go by? Do I go buy the Zuki collection? Do I go buy an index of the top, you know, 25 NFTs right now? Do I go invest in picks and shovel infrastructure? Do I go look at maybe this goes with, you know, established brands like the Nikes of the world? This comes from the established brands leak into NFTs. So do I look at their assets or do I do all of the above? So how do you distill that I'm bullish on NFTs into navigating the idea of

maze of what specifically to invest in because you don't want to end up in the graveyard, do you? Yeah. So obviously not financial advice. And so kind of without saying here's what people should do or go do, I think there's a meta framework for this, which is you can only really generate value as an investor if you have a deeper understanding of what's happening than anybody else. Like effectively alpha in a market comes from depth of understanding.

If you can see the actual value of the thing and there's a disconnect between perception and reality. So if the world thinks something is worth X, but it turns out to be worth 2x, that's a delta between perception and reality. And so what you really have to do as an investor across all the categories that you mentioned, picks and shovels if you're an early stage equity investor, you know, NFTs themselves, if you're more of like an art curator, what you really have to do is understand the thing better than anybody else. You have to have some perspective on it that says actually reality is different than perception. And that's fundamentally what you're betting on. And there are a million different ways to do that. Like art curators and

collectors can be wildly successful. People who invest in picks and shovels can be wildly successful. People who maybe you say, hey, I think there are certain brands that are really going to benefit from this. And so I should just go buy stock, like public stock in companies. And you know, you looked at if you really understood AI five or seven years ago, maybe you just bought up a bunch of invidia when it was, you know, down big time. And that's how you sort of played that market. So there are a lot of different ways to do it. But I think the crux of it is, like you have to more deeply understand what's happening in some subsector than anybody else and be able to identify that delta between perception and reality. And if you don't, you're a bit just better off

with an index or something like this. Correct. Or just finding the place in the world where you do have that. You know, like there are a lot of ways to make money, right? It's one of the things that we've had to learn just as early stage investors is like, or you know, Stan Drucken Miller is a public market investor, Warren Buffett. They sort of have their own versions of this. And I think Stan calls it a fat pitch. Like really the way you make money is like you find a thing where you're like, I'm pretty sure I understand it's better than anybody else. And it's just such a good setup. It's kind of like a heads I win, tails I win. It's like no matter what happens, like you're going to do great. And there are enough such opportunities in the world that you

don't have to be like fomoing into stuff. It's actually like patience is a virtue here in all investing. I'll tell you my worst fear. And maybe this should be every investor's worst fear, though, is you see what you just saw. Let's say you see the opportunity in crypto, right? And then within that, you see the opportunity in NFTs. And guess what? You, us, we, people listing this, may be among the 1%, less than 1% of people who see the opportunities in NFTs. The NFT category in the world doesn't. My worst fear as an investor is, I see that opportunity and I make all the bad bets in that category and lose all my money or I don't make the return, right? So it's like, imagine NFTs are big. We all kind of make that

prediction, but then you make a series of bad choices in the NFT segment and you don't end up accruing the rewards of that, you end up losing anyway? Is there a way to prevent that from a meta perspective as an investor? I actually think probably most people should not be looking at NFTs or early stage crypto as an investment. I think if you look at it as an investment, like you're probably going to lose. This is why like a Warren Buffett or Vanguard people will tell you to just buy the index, because it turns out most people are not good investors. It's a really hard thing. Well, like if everybody were a great investor, especially with really high risk, highly volatile assets, then everybody would be rich. And it turns out it's really

hard to make money doing these things. And so actually I think most people should not be looking at this as an investment. Buy it for the art. Like buy it for the community. Buy it because it brings you joy. Size those things so that like if you lose a little bit of money because you bought the art and you supported some artists that you really believe in, then you don't feel bad about it. You're like, well, the whole point was to support. Like I'm subscribed to like some patrons and it's like I've forgotten how much it is. But it's just because they're like these people creating great content. I'm just like, yeah, five bucks a month. Let me just chip in and I don't think about it. That's, I think, the right lines that most people should have on it. And if somebody does want to

become an investor, I think one of the things you have to learn is that discipline of like, how do you size your positions appropriately? How do you not take undue risk? Like rule number one is don't blow up. And if you're taking so much risk that you're going to implode, then like you won't be here. And that's, again, it's not financial advice. Like, I actually think most people should not be investing in this stuff. I think most people should not be trying to think of it as an investment because you're probably going to lose your money. But if you're going to go down that path, size it appropriately. And it goes back to this idea of like great startups and great early stage investing and great early market intuition. And I think, you know, NFTs are very early market. It's based on

some secret. Like, you have to understand something that's true that other people haven't figured out that's true. And if you don't know what that secret is, then like you don't know the secret. And if you don't know that insight, then you probably shouldn't be investing. Like the poker equivalent of that is like, if you look around the table and you don't know who the sucker is, then you're the sucker, right? Like, that's the poker equivalent. And so you better understand the market better than anybody else and have some deep insight in order to be able to invest and make money. I think the other component, Ryan, to your question, is when do you invest in these things? So, you know, we're sort of very early into NFTs. And as an individual investor, you could,

I mean, I understand it's a crapshoot at this point. Like, what's like, are all these NFTs are, you know, are I going to pick the right NFTs or not? But you could wait, you know, a few years. And then maybe what emerges is sort of like a blue chip layer of sort of NFTs. Like, if you just think about cryptos in general, right? Like you as an investor on the sideline, you can say, well, I'm going to invest in like Bitcoin and Eath. And like those can be like my holdings. And so like maybe in like three or four years, the equivalent will emerge in NFTs. So maybe the answer is you just hold off for some amount of time until some sort of reliable index or blue chips emerge. This is also a good observation to like if a lot of times people really underestimate the size of

the market. And so if things work out, the market, will likely be 10x to 100x bigger than you could have imagined. And again, it goes back to this idea of patience. So, like, buying Bitcoin in 2012 was easy. Holding on for 10 years was hard, right? Like, the patience is the hard part. Or a lot of times when you see a lot of activity happening, like not investing is the hard part until you really have conviction on the thing. And I suspect if this stuff works, the markets are going to be much, much, much larger. It's just like the internet. Nobody could have imagined. You go back to the year 2000 and you're like, hey, in 20 years, all of the world's largest companies are going to be internet companies would have been sort of

unthinkable. Like Apple is going to be a $3 trillion company when Steve Jobs comes back in the late 90s and it's like a failing enterprise that's going to go bankrupt. These are just like unthinkable statements, right? So patience, I think, is like the key thing. And patience oriented towards how do you understand more deeply what's happening with the user, with the business, with the market than anybody else? And only then should you really be thinking about investing. And I think that's usually the failing. Like most people don't actually deeply understand the things that they're investing in and therefore they end up losing money because they just don't deeply understand what what actually makes money in the space. Speaking of patience and testing conviction, I think the alternative, the non-Etherium layer one community

is definitely going through that right now, right? This communities like Solana, the Cosmos token, avalanche, these sorts of things that had a massive run-up. And now some of them are kind of in existential crisis mode, down bad, as we would say in crypto. And this brings kind of another question I wanted to ask you guys is the future. Do you think there will be a contender for Ethereum's thrown in the future. Will the Ethereum killers make a comeback as they have in previous cycles? And what about this broader question of modular versus monolithic chains? Bankless listeners will know, of course, Ethereum has taken the modular route with scaling via layer twos. There are other ecosystems that have taken kind of a modular route, though a little

bit different. Maybe Cosmosis is sort of one of those, more modular. And then there's this question of monolithic chains, of which Solana has maybe most famously gone in that direction. So what do you think about all of these questions? Alternative layer ones, Heath killers, are we going to have, you said that layer ones are more of a network effect game than layer two's. You're sure about that? Let's dig into this. Avichel, what do you think? So, okay, so zooming back on modular versus monolithic, you know, I think, Sanjay touched on this earlier. The fundamental tradeoff is do you want real-time composability or not? Like intra-block And the L1s, like Solana, give you this property.

And sort of, you know, as soon as you start moving into L2s and you start fragmenting liquidity and execution, you lose that. Now you retain interoperability. And so there are a lot of use cases that are, you know, you need the interoperability, but you don't need real-time composability. But I think a lot of monolithic people would argue that that real-time composability is, like, one of the killer features of these blockchain architectures. And so why would you give that up?

You should really lean into that. And then the fundamental trade-off you have to make is around decentralization. And so, you know, like the monolithic. argument, which I actually do think is compelling for certain kinds of use cases, is can you be sufficiently decentralized to still be decentralized and censorship resistant, even at state level attack kind of censorship resistant, while retaining composability? And that's an interesting design exercise. Like, can you design a blockchain that does that? And I think that that's compelling, because I think there are use cases that will want that set of tradeoffs. And so I think it's really

good from an ecosystem perspective for both of these things to exist and the search space to include both. And I think if you step back even to like 100,000 foot view, I mean, like part of the idea here, right, like the whole reason this space was invented in the first place was that centralization is not healthy. And if we end up with only Ethereum, I think we have failed as a space because that's not resilient at the ecosystem level. Like Ethereum can be resilient. But what if there are like critical day zero issues with like clients or with the EVM or, you know, like I worry that if we don't have multiple approaches that we're not actually. actually as an ecosystem being resilient. And I think that if we think of it as a non-zero thing, which is like, well, they can both be successful. They could both be 100x bigger than they are today. I think that's the right mindset on it. I'm a huge fan of everybody trying to do both of these things. Or like the fact that Solana doesn't do EVM, I think that's awesome. Like, I think that's actually really important to have a totally different technology tree that we're exploring to like use a video game term, right? Like, I think that's really, really important for this space

to survive and be thriving 10 years from now. And like, I don't think of Solana as an Heath Killer. I think they both coexist and they just solve different problems with different ecosystems. And I think that's awesome. And so our approach has been they make different technical tradeoffs. Applications and ecosystems will emerge that take advantage of those different tradeoffs and they should both coexist. And they'll just solve different problems. And they can both be ridiculously successful as ecosystems and coexist. One thesis that bankless has had for a while.

I'm wondering your take on whether you agree or disagree with this actually is that if you're a layer one, you're sort of competing at the money game, basically, where you want to need. your asset to accrue monetary premium, which is basically like selling block space isn't enough if all of your alternative competitors are also selling valuable block space and creating revenue that way and also valued as a money because if you're valued as a money, just the kind of the network effect game, the liquidity game, the economic security game is tilted so much in your favor that you end up winning anyway. What do you think about that? Do you think layer ones are all playing for the Bitcoin, ether, more recently,

game of monetary premium, or do you disagree with that? Yeah, I disagree with that. I'm curious what Sanjay thinks. But yeah, I disagree with that. And, you know, a thought experiment here is like, well, if you look at Amazon's market cap, like what percentage of Amazon's market cap is due to AWS? Or what percentage of Microsoft's market cap? Like, if Azure were a standalone business, what would that be worth? And I think it turns out that computational networks are extremely valuable at scale. Like, all of Wall Street and, you know, all of TradFi were running on one platform that was 100% interoperable with each other. So every bank could immediately calculate how

much leverage they have and, you know, you could know exactly who owns which mortgages and mortgage back securities and that were all in one platform, that platform would be tremendously valuable. Now, this actually goes back, I think, to the L2 question, which is like, what kind of pricing power does that L1 need to have on top of that platform existing in one place? And I think if you think of it like a country, there are real network effects and there's real brand value and there's real, you know, the ability for a new application to launch and acquire a bunch of customers because the infrastructure exists there, right? There's accounting tools and MPC wallets and, you distribution platforms for people to find users.

Like those things are real network effects that create pricing power. And so I think these things, if they're able to be successful, will be computational networks with pricing power on top of it. Like, I don't think they collapse to zero because I think network effects give you pricing power the same way that Apple or Facebook have it. So I don't think you have to have to become base money. Like, I don't think you have to compete with the US dollar. I don't think you have to compete with Bitcoin.

All you need is pricing power above the cost of running the network. And that looks a little bit more like a company, right? Like Apple has pricing power or Facebook has power because of the network effects. And I think that's actually how these things will eventually operate. And then you'll have cash flow coming off of them. Like, I think these things will extract some premium on top of the cost of running the computation and the cost of the block space. And the token holders can benefit from that. Would you value the Bitcoin network and the Bitcoin asset based on cash flow? Or do you ascribe a kind of a monetary premium to that? Is that like a special case? And if

so, why is Bitcoin a special case? Yeah, it's a special case, I think. I think that the reason that Bitcoin is a special case is that it behaves a little bit more like a commodity. It's a fixed supply, like the idea is for it to move slowly and not evolve rather than a computational network that needs to sort of evolve as a platform to acquire, keep acquiring developers. Like Bitcoin is, Ordnals is kind of an elegant hack, but it's not a developer platform. That's really not what Bitcoin is designed for. Bitcoin is designed to be more or less static and evolve very, very slowly. So I think it behaves a lot more like a base money or a lot more like a gold or commodity. So I think you just have to value that differently. But I think that's a special case.

Like I think comparing Bitcoin against Ethereum or, you know, these other competition, computational networks, I think it doesn't really lean into what makes Bitcoin special and unique. That's fascinating. I feel like we could have an entire podcast just kind of debating that or getting into that discussion a little bit more. I tend to think that the lines are a bit more blurry here between like money versus pricing power of the network effect. And they may at the end of the day be one and the same. You know, maybe one way to put it is like, you know, I think there's this very binary approach that people have, which is like either you have a monetary premium or you're going to collapse to the price of running the computational network. I think this is actually a legacy of sort of early Bitcoin maximalism, like circa 2015. And there are some papers that were circulating around that time that people basically framed Ethereum as that. And they're like, look, if you don't have monetary premium, your token will just

collapse to the price of running the network because it's a computational commodity. But I think there's this thing in the middle, which is if you have cash flow and you have pricing power due to network effects, then you don't have to be based money to get a monetary premium. And you're not going to collapse to the price of running the computational network. And I think the open question is how significant is that? Does that mean that you get a 15% margin on top of it? Does that mean you can charge 2x what it costs you to run it?

Can you, you know, like where on that spectrum are you, I think is the open question. But I think Ethereum is a great proof point for this, actually. I think I agree with that. Like there is a spectrum of moniness and memetic value. And I do think that's more complicated to say something is competing as money or it's not. It's in reality probably all assets are competing as a money. I mean, you just think of S&P 500 in stock. Is that competing as a store?

value, well, it sort of is. My house, my property, it sort of is as well. Sort of. One last question for you, and then we'll kind of draw this to a close. So, restaking. Let's get to that really quick. Is it a big deal or is this overhyped? We've had some panels lately about the existential, I guess, threat of staking. And some of the theorem researchers actually think restaking poses some existential threats in the same way MEV is. But let's take those issues separately. So first of all, restaking, is it a big deal or is it overhyped at this point? And then what do you think about the existential risk

to underlying blockchains that have restaking on top of them? Yeah, I mean, I think restaking is a big deal, right? Because it's really hard to bootstrap a trust network. It's just one of the hardest things there is to do. We've just seen that, that lots of chains have difficulty doing that. And so if you can take the existing trust of Ethereum and reuse that, I think that's a big deal.

Now, I maybe have sort of a little bit of a nuance opinion here, which is that roll-ups, so I think maybe what will play out is I think there's this sort of envisioning of like thousands of protocols maybe using these restaking layers. And I think that it may not actually play out like that, but I think it may be a few really big, important protocols using these restaking layers. So as opposed to thousands of chains being restaked, it might be like 12 really important ones. And so like what are the things that could really benefit from restaking, a decentralized sequencing layer, a DA layer, bridging. So there's a few, like, really, really core use cases. And if you think about these use cases, they're massive, right?

Like a scalable DA layer. That's a massive use case. Scalable sequencer layer that can basically support, you know, thousands of roll-ups. That's a huge use case. So I'm sort of super bullish on restaking as a means to provide decentralization beyond Ethereum to the broader ecosystem. it's going to be massively impactful. Do I think there's going to be thousands of protocols running on these restaking layers that I probably think will not happen. And we should call out we're investors in eigenlayer and espresso, so the premier restaking protocol and the premier shared sequence of protocol.

Just again, back to this idea of like don't listen to VCs. VCs are going to talk their book. And so, you know, always keep that in mind. I imagine you guys are also investors at some level in Ethereum, which brings the question of existential risk to Ethereum for staking. What do you think of that? I know you listened to the recent panel with Vitalik and Drake and others. Yeah, and Tim, and yeah, it was really, really good.

That was a great conversation. And Shri Rom did a great job, too. And I think, yeah, you know, kind of two thoughts. I agree with Sanjay. You know, I think it's really probably a handful of use cases that are really critical for restaking. You know, there's a question of do those start to get so large that they start to pose some sort of existential risk to Ethereum, like, you know, from that shared security across. The answer is maybe. It's kind of like TBD.

I think it kind of goes back to, you know, people tend to have these sort of binary. approaches to thinking about this stuff. And I think there's like a messy middle a lot of times. And so I think there's a world where restaking gets big enough that it's interesting and useful, but not so big that it's existentially a threat. I also think that ecosystems tend to be pretty resilient. And so I suspect if it starts to get into that kind of like existential risk territory, we'll figure it out. Like the Ethereum ecosystem has been remarkably resilient about these kinds of existential risks and like fixing them. And so I have a lot of faith in generally the ecosystem and the researchers and the developers and the community to sort of evolve.

evolve and figure it out. And so we start getting to that point, I suspect there will be, you know, I think Kimmer if it was Justin or Tim, but somebody was talking about like, how would the protocol need to evolve to account for this potentially. And so that might be a solution or there may be things that that you could do kind of at the protocol level above Ethereum protocol. So I think if you look at liquid staking tokens, people talk about existential risk if it's all sort of going through one protocol. And I think there are simple ways to mitigate that, right? There's multiple protocols. And you move your eth between multiple protocols or you do some self-staking, right? I think there are ways to like mitigate that. And there's enough well-and-finding. And there's enough well-

informed actors kind of at that base layer, that basically the right things will happen. So it feels to me like an inevitability. And if we get into sort of existential territory, if we're truly, it's so successful and so useful that you get into existential territory, I suspect the ecosystem will figure it out. And for bankless listeners, if you're newer here, in crypto, we tend to get an existential risk every six months or so that we think is going to be the downfall of Ethereum or crypto in general. And we're still here. We're still here. Well, that's the thing is that's why I have so much faith in the community. It's just like it's turned out.

There's so many places where it could have died for the last six years. Or if you look at Bitcoin 12 years and it keeps going. And so it's given me a lot of faith in the people, the developer community. It's just so amazing that people figure it out and solve the problems and we keep going. That is something else I think you have to understand at a deep level in order to understand the space is that crypto is much more anti-fragile than I think the layman or the person looking at it from above things. I remember someone once told me that the reason they're not investing in Bitcoin is because software has bugs. I'm a software engineer.

And so what are the chances there's going to be some bug that expands the supply of Bitcoin to like, you know, hundreds of millions rather than 21 million, right? What's interesting about this is as you dig in deeper, you realize, well, that's actually not what secures the Bitcoin network. It's actually a social protocol. Like there's a layer zero here that would just fork that out and would continue running. And so if that's a reason not to invest, I think that's a mistaken reason. But you see that surface level.

Well, guys, this has been so much fun. I want to close this out with a. question related to the mood in crypto right now. And this is a tweet I put out. And I don't know if you agree with it or I disagree. And I'm not entirely sure how I feel about it. But I'll give you a sense for the mood here. Crypto feels lost right now. That idea. Crypto is lost right now. And how can it find its way was the question I posed? Do you think crypto is lost this 2023 bear market? And if you do, how can it find its way out? Avichel, what do you think? No. We know exactly what to do, which is like L1s need to scale.

We need L2s to work. We need modular blockchains to work. We need stable coins in defy. Like, you know, there's $120 billion of stable coins and $40 billion sitting in TVL and ETH protocols. That's about the 20th largest bank in the United States, which is very real. You know, I tweeted a while ago that eBay at IPO was doing about $340 million of GMV. NFTs do more than that today. GMV is what?

Gross merchandise volume. So like total value of the goods that they'd sold. So eBay 96 when at IPO did. done about $340 million and, you know, Bitcoin Ordinals probably do more than that today in the depths of the bear market. And so like sentiment is very, very low. And so it can feel bad. But when I look at the numbers, it's like working. I mean, it's amazing. If you go back to 2017, there was all of this stuff that was theoretical. Like, hey, one day Ethereum's going to move to proof of stake and, you know, we'll have L2s and we'll have stable coins. We'll have

defy and like, we'll have these brands coming in and like, you might have an ETF and like all this stuff, and it was all theoretical. You know, ZK. Proust will work one day and, like, you know, all this stuff. MPC will happen one day and, like, we'll have institutional custody and like yada, right? And then like governments will be pro-crypto. And all of that stuff was theoretical. And basically five or six years later, it's basically all true. Which just goes back to this adage of like people way overestimate what's possible in two years and they dramatically underestimate what's possible in 10 years. And so like roughly halfway through that 10-year cycle, we're like basically where you'd expect, which is all of the tech is now real. And so now it's just a question of

like how quickly does it get to people? So I definitely feel like it's a, we're down on sentiment, but like on fundamentals, I've never been more optimistic. It's just like everything that was vaporware five years ago was actually real now. I actually on Twitter saw this video. It was like with Jeff Bezos and he was talking about the 2000.com bus and it was like, you know, I think don't call me in the numbers, but I think it was like Amazon stock went from like 131 to 6. But then he was there like sitting looking at his metrics. And it was like, everything was up. And it was like, okay. scratching his head. Yeah.

And it's the same thing. I mean, you just look at the tremendous progress that's happened in crypto, like, just even on the ZK side, right? It was like a year ago. Nobody thought like ZK chains were like four years away. And now we have ZK chains. And, you know, we have now frameworks for ZK interoperability and the OP stack. And so we just have so much progress that's been made that, at least for me,

it's hard to be bearish long term. People don't understand how fundamentally different this bear market is than 2019 and 2020, where I would argue we had much more of an existential, where's our product market fit type of conversation that we have now. Guys, this has been a lot of fun. I think we got to the answer this question of what you guys are convicted on by exploring these different questions and in your thesis for each. So thank you so much for joining us on bankless. It's been a lot of fun.

Thanks for having us. Thanks, Ryan. Action items for you, Bankless Nation. There's a post that we refer to in the episode. It's called Understanding Rollup Value Accrual, written by one of our guest, Sanjay. Also, occurred you to read the Electric Capital Developer Report. they put this out every year. It's always a fantastic read. The billers keep building folks. That's what the bottom line of that developer report is. It continues to go up.

Risk and disclaimers, got to end with this. Another time, I need to tell you, none of this has been financial advice. Never is on bankless. Crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.