Bankless - 20 - The Ethereum Opportunity | Chris Burniske

Starting point is 00:00:01 Welcome to bankless where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman and we are here to help you become more bankless. Bankless Nation, we have an absolutely incredible episode for you, super honored to have Chris Berninski on the podcast. He doesn't do many podcasts, but there were some ideas. I think he wanted to do. talk about specifically with the bankless community. And this is just a killer episode. David, what stuck out to you? Chris, to me, is this quiet thinker who is always lurking in the background, just absorbing information and really stitching them together in the ways that makes sense to him.

Starting point is 00:00:59 So when he gives his thoughts, it's coming from a place of like patience and contemplation. And I think that is really reflected in his like deliberateness in his ideas. And so when he comes to bankless and shares what he has been thinking about lately and what he's seeing going on in the defy world and the greater crypto world at large, I take pause and I try and integrate his ideas into how I'm seeing things. And so I have a ton of respect for Chris and the way he thinks. And I'm really happy that we were able to get him on the bankless podcast to kind of share what he's been thinking about, especially as the crypto world has seemed to have rounded a corner in the last few months or so. Yeah, he's one of these guys with some crypto wrinkles to use a metaphor,

Starting point is 00:01:46 right? So he's been in this space for a while, got in his 20s, but wrote the ringing the bell on a new asset class in 2014, 2015-ish, which was like an incredible paper for its time, way ahead of things. So he's kind of, he's got this wisdom that's built up in crypto and having witnessed a few market cycles. And that certainly comes through. when we talk to him about where we are in the market cycle. We ask him about ETH specifically. We ask him about defy tokens. We talked to him about economic bandwidth

Starting point is 00:02:23 and what these new capital assets can mean for the world. So this is like an episode that ties a lot of things together that we've talked about previously, but also projects forward. Like if you want to hear what the next three to four years are going, to look like starting now. I feel like this is the perfect episode to start with. It's very obvious that Chris has pretty strong convictions about the values of both himself and these systems at large. I think that's really important when it comes to actually looking as to where these systems are going. Because if you're in the crypto space, you are here because

Starting point is 00:03:05 of the new values that are instantiated in the code of these protocols. And having somebody like Chris, who has very strong values and very strong convictions about those values, who is also a leader in this space. In a way, Chris is kind of directing the memes, directing the narrative in a way that resonates with his values. And the values that he has that he's communicated through his writing, I really resonate with. So I'm really glad that we have Chris in this space kind of leading the thoughts, leading the charge into this new world, going westward, but going in a specific direction that will be good for humanity rather than just bringing about the same old systems in a new form. But before we get into the interview, we need to talk about some of our

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Starting point is 00:05:48 using it. What you need to do is check this out and visit ramp.network to see how easy it is. You can get set up in 10 minutes or less and 100x your addressable market size as a developed. This is like the ultimate growth hack. And when you mention bankless, they'll on ramp the first 100k in U.S. dollars for free. So go to ramp.com. Network, mention bankless and get started. All right, guys. Let's go ahead and get right into the interview with Chris Berniske. Hello, everyone, Bankless Nation. We are so excited that we have Chris Berninski on the podcast today. He is a VC and partner at Placeholder. He's the author of the book Crypto Assets.

Starting point is 00:06:36 He's really the founding father of many of the mental models that we talk about here, on bank lists on a weekly basis. Chris, it is fantastic to have you here today. How are you doing, sir? I'm doing great. Thanks for having me on, guys. Yeah, absolutely. How's COVID going? You're surviving everything that's going on in the East Coast there? I am surviving. Some people know this, but I grew up on Hawaii, and so I did retreat to the islands for a little bit, and I'm back in New York at the moment. And New York's a pretty surreal place. It's maybe half as full as it typically is, which in some ways makes it more pleasant. But then there's the constant paranoia of contracting COVID, although it's safer than a lot of the rest of the U.S. at the moment.

Starting point is 00:07:23 So it's got its puts and its stakes. Yeah, absolutely. I guess the nice thing about being immersed in the digital world is we don't have to deal with that sort of thing so much. So, you know, I've been mostly camped in my office. I know David's been sort of the same. And, yeah, different world there. But, Chris, we want to dive right in here. We've got so much to talk about today, so many cool topics.

Starting point is 00:07:46 So I think we should just, you know, dive in with, maybe we could start with what's going. I think everyone has your background. Everyone knows your story from previous podcasts. And many have read your book. You definitely have a big fan following in the bankless community. So maybe we could just talk about. what's going on in defy these days, particularly these defy tokens, these almost these proto capital assets. You popularized one point in time in 2017, the like some value formulas,

Starting point is 00:08:21 mv equals pq. You know, can you talk about capital assets and, you know, how you're thinking about valuation of them and maybe the evolution of token valuation over time? in the context of these defy tokens. Definitely. The toughest thing here is we're dealing with programmable value, right? And so the programmability can lead to any kind of value capture and therefore any kind of valuation model. And so typically when I'm investigating these things, I start off with the superclasses of

Starting point is 00:08:55 assets from Robert Greer. It's just a formula of looking at the world that I like. And those superclasses are capital assets, which are an ongoing source of something of value. They're valued on the basis of the net present value of their expected returns. There's consumable. So capital assets would be like bonds, equities, income producing real estate, that kind of stuff. There's consumable, transformable assets where you can consume it, you can transform it into another asset.

Starting point is 00:09:26 It has economic value, but it does not yield an ongoing stream of value. So that's more your typical physical commodities or Bitcoin, for example, or precious metals. And then the third superclass are your store value assets. So cannot be consumed, nor can it generate income. Nevertheless, it has value. It is a store value asset. So that's like fine arts or some of the precious metals like gold overlap into this. And certainly Bitcoin does.

Starting point is 00:09:54 So if we look at those three superclasses and we say, well, where does? Bitcoin fit in that? Bitcoin really started in the consumable, transformable, and has bled into being considered store value very similar to gold. And so the equation of exchange, MV equals PQ, that I did a lot of work with in 2016 and 2017, was really the best attempt at creating price targets for a consumable transformable asset that has a store value characteristic. And typically when you look at, your typical commodities, which would fall in these consumable transformable buckets, their price floor is the marginal cost of production. And we have seen that be effective, actually, for BTC, you know, in the bottom of the market in 2015.

Starting point is 00:10:45 Again, in the bottom in 2018, 2018 and 2019, you know, in 15 marginal cost of production was around $200. That's where we bottomed in 18 and 19. Similarly, it was in that $3,000, $5,000 range. So that's a good bottom. and that sticks to prior rules that we know. And then it's a bit more novel to use mv equals pq to solve for the necessary size of the monetary base of an economy size pq at velocity B.

Starting point is 00:11:17 And that's basically what I was doing with the consumable transformables. But then in that stands, I want to make clear that I think that continues to be the best way to approach the consumable transformable aspect. assets that overlap with store value assets, though the store of value has a financial premium, which makes it very hard to accurately project the price.

Starting point is 00:11:44 Now, if we fast forward to now, and we compare now with 2017, there's been a total explosion of stake-based assets. And so I wrote a piece, I guess it was in, it's either in 2018 or 2019, that was updating some of this valuation work and really focusing on the stake-based assets because what became clear to me is a stake-based asset is a capital asset. It gives you a source of something value and it will be valued on the basis of the net present value of its expected returns. And so what that means is, in particular for a lot of these defy assets, anything where I'm staking the asset and I need that asset to perform work to get value flows from the network.

Starting point is 00:12:32 I can value that using some variant of, you know, DCF or a dividend discount model. There's different ways to approach it, but it's a much more familiar model, say, to a traditional valuation analyst coming from equity, the equities world or the bonds world, or, yeah, the bond world. And so really wanting to get people to understand, okay, you can look at these as new fangled capital assets. So let me pause there because there's more to go into. Yeah, I don't want to derail from the defy token conversation because that is definitely this new phenomenon that's going in on in the defy world. But first, Chris, I want to talk about the three asset classes from Robert Greer that you are a fan of. Superclasses. Yeah, asset superclasses. Yeah, because then we have

Starting point is 00:13:21 the typical asset classes that we think of underneath those superclasses. Yeah, excuse me, the three asset superclasses. And I use those superclasses as a model for understanding ETH in my talk slash paper that ETH is a triple point asset where I made the claim that ETH is perhaps the only asset that fits inside of all three asset superclasses. And I actually never got your opinion on whether that statement resonated with you or not. So does it? It does. And I think it's good branding. I mean, we're all aware of how important these different shortcuts or memes are. So I like the idea of it being a triple point asset. I think the silence that you might have felt for mine,

Starting point is 00:14:12 typically I'm silent if I'm uncertain about something, you know, because then I don't want to put an uninformed opinion out there. And the reason I was a little uncertain is we've just never had an asset like that. And it's not to say that it can't happen. But it is complex in terms of approaching how to value that thing and what it will be conceived of. Now, I think that when I look particularly ETH 2.0, right, their ETH will be staked for consensus. And so that will make it a capital asset and you will be able to value it on that basis. it will have additional demand as a consumable transformable,

Starting point is 00:14:56 and with this growing understanding of ethos money, it will have a financial premium. And so on that basis, I think you're spot off. That's super interesting to get your take on that, Chris. Let's switch back to the DeFi assets conversation. So that was a great summary of the three asset superclasses, right? So we've got our capital assets, which can be valued as a discounted cash flow, a DCF type model, right?

Starting point is 00:15:20 and then we've got our store value and our consumable assets. And that's really the MV equals PQ equation was really built for those. Now, it seems like in 2017, the market went a little bit wild with valuing every single token that existed as a MV equals PQ type token, right? As if it's going to become a store of value asset. It seems like with the resurgence of. of defy tokens that actually have these on-chain cash flows. We're talking with Dan Elliser in a couple episodes ago.

Starting point is 00:15:58 It seems like this is a more healthy type of capital asset because there are actually cash flows associated with these defy tokens like comp or like balancer or like some of the others that are coming out. Is that your take too? Is the best way to value these defy tokens as a capital asset in a discounted cash flow model. And does that mean these assets are a bit healthier, I might use that term, than the asset valuation models we were using in 2017?

Starting point is 00:16:29 So I definitely think there's more fundamentals here, right? And so the only thing that makes me a little uncomfortable is using the discounted cash flow. Idea I was trying to use discounted value flow because a lot of these things, you know, it's not specifically cash that's flowing. And so there is a little bit of extra complexity in terms of the type of asset that is flowing to the holder, be it the native crypto asset or die or some other asset within this realm. But it is certainly the case that there's more fundamentals here and it's more familiar to your traditional analysts. And what that means for me is, you know, we had these exploding markets of assets.

Starting point is 00:17:21 And, you know, when I got started in this industry, most people didn't care because most people thought they were worthless. And now a lot of people care because a lot of people think they're valuable, but no one knows how to value them. And so everyone's trying to figure out how to value them. And that was more so the case in 2017, and that will come back around. We've got kind of our core crypto group that is, of course, nerding out and fascinated by all this. But as we have more of these models that come out, there's this phenomenon that starts to happen that's specific to humans, which is theory is following price. So we're creating theories to try and predict these prices. But once we create the right theories and they backtest and these models are panning out, then price will follow the theory.

Starting point is 00:18:10 And so then we actually start to build in more price stability. you know, less volatility, more consistency in these markets. So it's actually a critical part of the functioning of these markets that would be able to better value and understand them. And that's also very important for, you know, the larger scale money, the institutional investors that crypto is always talking about. Because, you know, those are the types of conversations I'm having often with placeholders' LPs around, you know, how do you value this thing? And if people can't get a handle on, you know, it's fundamentals, then they're likely to not be comfortable, at least from an institutional basis. There's one other thing I want to add here, and that's the difference between, say, a fundamental valuation model and a relative valuation model. So, you know, the discounted value flows, or let's just call it variance of net present value of flows.

Starting point is 00:19:09 those models are fundamental models. Then there's the whole world of relative valuation models, which inequities are things like price to sales on a trailing or forward basis or price to earnings, or there's dozens, if not hundreds of them. What's interesting with crypto is, you know, we had things like NVT, right, for the consumer transformables,

Starting point is 00:19:33 the network value to transaction ratio. But now with the capital assets, we're seeing things where people are looking at these from a price to sales or price to earnings basis. So token terminal. XYZ now has a ranking where you can look at assets and you can say, oh, wow, this asset is quite cheap in that it's only trading five times earnings going to the supply sider, whereas this other asset is trading at 500 times. And so actually what you've seen partially in defy with some of these assets, like Bankor or Ave or Kiber, they were valued very cheaply as a multiple of the value flows going to

Starting point is 00:20:20 their supply siders. And so you really had a repricing or you could call it a multiple expansion where you had people realizing, oh, wow, these are capital assets, these are solid networks. They're producing these value flows and they're trading, you know, at one-tenth the multiple of their peers. And so you have people piling into them and there's basically a repricing to bring those relative valuations more in par. And so I think we can expect to see both a lot more fundamental valuation work and that's kind of the bedrock. But then the, say, the pricing game with your peers becomes a lot of relative valuation comparisons. That has been one of the most exciting things I've seen, I would say in the past six months or so, this sort of relative valuation metrics that

Starting point is 00:21:08 we're seeing, we will include a link to token terminal in the show notes for folks so they could see that. Also, a couple of articles on bank lists where we've talked about, you know, how to value it. It's almost what you're talking about, Chris, almost is kind of analogous to a price to earnings ratio. Right. That people might be used to evaluating in the equities world. Definitely. Yeah. And it's really fascinating. It's fantastic that we're getting to this place in crypto and it makes me super excited. And I'm admittedly in marriage for being excited about that. But the danger here is that we don't standardize.

Starting point is 00:21:44 And so I actually haven't talked with the token terminal guys. But like if you think about it for this, this price to earnings that they're listing, I've got a suspicion that it might actually be more price to sales, right? Because sales is the top line flows. To have a price to earnings, you would have to. to be understanding what the margins are of the individual supply siders. Now, I think they list it as a price to earnings if I'm not interested. The other thing is, you know, to create that ratio, let's just say price to sales, you would have the network value of the assets and you divide it

Starting point is 00:22:22 by the value flows going to the supply siders. Now, for that network value, are you using circulating supply or are you using fully diluted supply, right? Are you using trail or are you using Ford? And so once you start to ask these questions, you can see, oh, you know, there's four or there's eight different potential price to sales ratios that I could project. And really for a comparison to be useful, every single one, every single asset has to be computed in the same way. And so I think we need, you know, price to sales off of circulating and off of fully diluted

Starting point is 00:22:58 because you'll start to see that will start to reveal kind of what's hidden in the under billy of coin market cap and some of these sites of, you know, okay, yeah, this asset might look cheap, but it's got 90% dilution in it because only 10% of the supply is circulating. So we need to standardize and we need, now that we're kind of giving the big overarching ideas, we'll have to standardize and become more nuanced in our comparisons and understandings. And I totally share your excitement with like the fact that we've gotten to this place is incredibly exciting. The fact that we are now talking about the nuances of relative valuations across different defy and crypto capital assets is incredibly exciting. And I think all of that will come.

Starting point is 00:23:47 You wrote a fairly famous paper in the crypto space talking about the birth of a new asset class. And it feels to me like we are birthing new asset classes, if you will, each of the super asset categories, like as we speak. I mean, the emergence of this capital asset, well, that's an asset of defy tokens as capital assets. That's an asset under the capital asset, you know, super asset category. When you originally wrote the paper, you were talking more about Bitcoin, right, which was more the store of value asset. Are you seeing like essentially what we're doing here is we're digitizing, like there's going to be the birth of new assets in digital form that are crypto-native across each of these

Starting point is 00:24:36 asset superclasses. Yeah, you know, it's funny you say that because I have from our notes the new asset class paper and I had written down, I should have titled that Bitcoin ringing the bell for new asset classes. Yes. Pretty much exactly what you just said. Yeah, I, you know, I guess if we, if we think of blockchains as this 21st century accounting system or blockchains as 21st century accounting systems then I expect all of the traditional assets to get digitized and you know accounted for and exchanged on these rails and then exactly as you were just alluding to the creation of new examples within each asset superclass so you know, this crypto capital that we're talking about, it's not quite like equity. There are some

Starting point is 00:25:31 really important differences. And so you really couldn't call it equities or stocks. Nonetheless, it would still be a capital asset and therefore a new asset class. And there will be a bunch that fit that bill. Similarly, under the consumable transformables, Bitcoin is not a commodity like wheat is the commodity. There are some things that are quite different about it, especially, you know, you look at the marginal cost of production tends to go up, whereas for most commodities, the marginal cost of production tends to go down. So, you know, you're spot on there. And we're going to have, you know, these liquid assets soups kind of floating around as bits on the database. So, Chris, I just have one more. We want to get through some other stuff,

Starting point is 00:26:18 but one more, as you said that, you kind of jogged my memory. So, My mental model has shifted a little bit away from a Bitcoin or an ether being the actual consumable asset itself and more toward the block space as being the consumable asset. And Bitcoin and Ether as the currency that is required, the protocol mandated currency that is required to pay for the block space. I'm wondering what you think about that idea. So it's basically the idea that, well, the true. commodity here, the true consumable asset is the Ethereum block space itself, the gas, if you will,

Starting point is 00:26:57 that's the kind of denomination or the Bitcoin block space. And Bitcoin or Ether are more the the currencies that are required to pay for them. I'm wondering if that factors into your thought process or what you think about that idea. So I see what you're getting at. I would still say they're one and the same. And the analogy that comes to mind is, you know, let Let's take gasoline, which is composed of different commodities, but is this commodity soup. That gasoline then goes into an engine and then runs that engine. But it's still the gasoline that is valued and that you buy and that you pay for and that you consume. You're not consuming the engine directly.

Starting point is 00:27:45 Like you consume the engine over 10 years or 15 years as the car depreciates and all of that. And the reason I'm using that analogy is, you know, Bitcoin's block space or Ethereum's EVM and block space, those are the engines. And, you know, Bitcoin is the fuel and Ether is the fuel to run computation through those engines. And so it's the direct value, the direct valuation of access to those engines. So you're absolutely right that like the utility you're getting out of it comes from the block space and that computational engine. but the fuel that goes into it that values it directly are these assets, the BTC and E. So, Chris, I want to turn to another difference between the traditional world of equity assets and assets you would find on traditional markets and the assets that we are seeing come around

Starting point is 00:28:37 in this most recent era of crypto development. And I mostly want to focus on fairness and equality with how these assets are coming to be. and maybe compare and contrast them with the traditional system, right? And so this new emergence of defy tokens, the SAFG, the simple agreement for future governance, and the emergence of liquidity mining, what these really all are are distribution mechanisms. And importantly, I think the compound comp token has had no shortage of headlines, but what has had a shortage of headlines, in my opinion, is that the comp token and the liquidity mining that is going on with the comp token is the compound protocol, quote unquote, going public, right?

Starting point is 00:29:25 And importantly, it's going public in a, using that metaphor. It's going public in a way faster rate than what you would find a typical company is on the stock market, where there are multiple and multiple and multiple rounds of VC funding that allow certain special interest groups, special people, privileged people to gain access to the upside of a certain business, right? And then finally, the public gets to have access to it last, right? But compound really just took the shortcut and said, like, well, we're not going to go public on the public stock market. We're going to turn the governance over the protocol into this comp token. And we're going to allow users to work for this token, right? And in your article, a blank slate of state,

Starting point is 00:30:15 which I was a huge fan of and is definitely going to be included in the show notes. You talked about the need of baking labor into capital and how that can solve some of the rampant wealth inequalities that we find in this world, which I think during the times of money printer go burr, during coronavirus, it's extremely salient. So I'm wondering how if I'm speaking of the right ideas when it comes to baking capital into or labor into capital with this whole liquidity mining phenomenon as like perhaps a first step towards generating a more fair financial system. Definitely. And there's a lot to unpack there. But if we look at Bitcoin as kind of the mother of all of this innovation, right? Bitcoin used a hardcore

Starting point is 00:31:06 supply side subsidy that is the minting of new Bitcoin to capture a bunch of supply siders to provide security to the network and actually create the service. And so what we see compound doing or Balancer doing or some of these others with liquidity mining is really the same supply side and to some extent now demand side hack of give away the and this is specifically with Compound and Balancer, which are capital assets, whereas Bitcoin is as we discuss consumer transformable and store value. but for compound and balancer, you are giving away the capital of the network to the people who make the network great. And that is the laborers, as you were just alluding to, David. And then also, to some extent, the demand side, I think we're going to see people play around with how they use these incentives. But it really is a bootstrapping hack to pull together marketplaces and solve the chicken and egg problem, which is a very hard problem to solve.

Starting point is 00:32:12 And I think it's super elegant to do that by giving away the majority of the capital to the supply side and the demand side and leave the investors in the minority position. There's more we can go into in terms of de-emphasizing investors and path to liquidity in the costs. But let me pause for now. Well, Chris, do you think that this model is going to solve, some of the rampant inequality issues that we've seen with equity, where it sort of pools among the Uber rich? Or is that a different problem to solve?

Starting point is 00:32:50 I hope so. And I think it has a good chance of doing it. You know, if we zoom out and we look at equity, really what equity is, you know, it was invented about 400 years ago, and it's the pooling of capital to take risk in a joint venture for something. And so the Dutch East India Company is the earliest and most famous example of this. And that has worked great in the industrial era where you kind of always needed more capital to make more investment in the the CAPEX of the machines and the systems that are producing things. And so, you know, in a way, investors constantly dumping in more capital is a much needed function within that company, that that company that's backed by equity.

Starting point is 00:33:42 But as we have turned to the software era, and you can produce new units at zero marginal cost and just continue to scale out and scale out and scale out with on a relative basis very little capital, then what that means is in the software era and the digital era, you kind of have these massive systems that scale out are really capital efficient, but are captured at the beginning by the shareholders.

Starting point is 00:34:05 And then those shareholders, because it's just the shareholders that hold the capital of the system, it's concentrated governance, and in only having shareholders governing it, I think it allows those shareholders to dehumanize all other parts of the system. So you don't take them into account because they don't have a seat at the table, and so you maximally extract in that process. The other thing, and maximal extraction is the name of the game, right, in equities.

Starting point is 00:34:33 The other part of the process here is in terms of who gets access to a productive asset, with an equity, if an equity is yielding dividends, then everyone is getting those dividends. Whereas with a lot of these crypto capital assets, you have to be an active participant to be getting the yield. And if you're not an active participant, you're getting diluted. And so, you know, if we look at the access to the assets, the governance of the assets, the productive nature of the assets, there are leveling forces that I see in these crypto capital assets that should help us with the inequality that has come from, you know, our equity systems as we know that. So it becomes less of a model where you've got the capitalists versus the users and more of a model where the users become, you know, shareholders. they become part of the capital structure. Is that kind of what you're saying?

Starting point is 00:35:34 Yes. Placeholders, governance researcher, Mario Lal has a joke where I think it was Keynes who said, you have to do away with financiers. And Mario's joke is with crypto, we're just trying to make everyone a financier. And yeah, if you're going to have a capitalist system, which is very effective, at least the most effective coordination system that we've invented to date, economic coordination system, then everyone needs to have access to capital. Because if you have capital, then they're basically swimming downstream.

Starting point is 00:36:20 You're accruing value. And that is like, you can look at the point of capitalism actually is solely to great. capital like it's actually kind of set up such that all the way through from the creation and the production and that whole process and the growth it is just set up to continually expand the amount of capital within the system and it does this you know quite reliably there are bumps along the way and so that is that perpetual growth engine is kind of a miracle and it is It does exist within our minds only, but the really important thing with it or where we've messed up thus far is we haven't put that perpetual growth machine in everyone's hands. And with crypto, we have a technology that is low cost enough to now do that.

Starting point is 00:37:13 Now, we're still probably a good five to ten years out from having really good candy-coded interfaces and really good public key management. and all the world's languages available on these interfaces and all those kinds of things that will truly take this technology the last mile to everyone. But the wrong ingredients are there, certainly, to open up that access. You know, I think what would help is if we actually applied this. So these defy tokens, these opportunities to get involved as users, also in the capital side of things, are so new right now

Starting point is 00:37:51 that people are just trying to wrap their heads around. them. So I think it would help to have, you know, some, you know, a tangible example to talk about. I know you are close to the Balancer project. And for folks that don't know Balancer, Dave and I have talked about Balancer often on bankless. It is an automated market maker. So and, but, but it's got some unique characteristics, a little bit like Uniswap, but, but also some unique characteristics that, that Chris can get into. It, it's now at, about 8% of all defy trading. We're just looking about that at this yesterday.

Starting point is 00:38:28 So it's grown quickly. And they've recently rolled out their balancer token, the BAL token, to liquidity providers. Can you talk about balancer as a case study in the context of what you were just saying about this new asset class and about users getting more involved as financiers, as you say? Certainly. So balancer is just totally wild. It's an amazing system.

Starting point is 00:38:54 And you can see Balancer as collapsing together asset management with exchange, right? Because with Balancer, you're able to create pools of up to eight assets with any percentage weighting that you want. And so that is basically allowing you to create your own ETF, your own exchange traded fund. And then the pool auto manages those weights holding them that, you know, let's say you want. 70% maker, 20% meath and 10% die. It will auto manage those weights. Now, what's fascinating is you get paid for having contributed your assets to those pools because those pools serve actually as the back end for an exchange, a decentralized exchange

Starting point is 00:39:41 that sources liquidity from these pools. And so what you've done is, you know, you look at traditional asset management in finance and you have an extraction system where you contribute your assets, you have to pay people. In the index world, you pay people for doing very little, but you pay them anyway, and they extract from you year after year after year. In Balancer, you contribute your assets and you get paid year after year after year because you are actually providing a service for people who want to exchange. And so I think that's a good example of actually compressing and collapsing inefficient parts

Starting point is 00:40:19 of the existing financial system and just creating something wholly new that, in my opinion, is much better for the supplier and the user of this system. Now, what Balancer has also done is they've committed to giving, and

Starting point is 00:40:35 it's not so much giving, it's allowing the liquidity providers to earn 65% of the capital that makes up the network. And so you're giving, or you're allowing the user to earn the vast majority of the capital that makes it for the network. The team, you know, has their upside slice for having created this out of their minds, as do the investors. And then there's

Starting point is 00:41:03 a pool for insurance and for a few integration partners in the future. But it's a good example of, it inverts actually what happened from 2017, where you were selling, you know, say 60, 70, 80% of the supply. Here you are allowing 60, 70, 80% of the supply to be earned for, quote, unquote, free, but you're really providing service, which is why it's better to think of it as earning rather than giving away. And then those people, if you earn something, that labor earns more loyalty than buying.

Starting point is 00:41:42 And so those people earn this asset, become strong hands, and then become involved. in the governance and when balancer does implement you know something that makes this a capital asset right something that directs value flows to bowholders the way i see that playing out is the valuation of the asset will be based upon those value flows but the governance is what makes those value flows credible and so if you have bad governance then you have to hike the discount rate, which will discount all of those value flows to a smaller value. If you have good governance, then you'll have a lower discount rate. And so all those future value flows are less discounted,

Starting point is 00:42:26 meaning the present value is more. So I just want to recap the ways that balancer is similar to, but also meaningfully different from the legacy systems that it relates to. So balancer is a place where you can deposit assets and it simultaneously acts as an exchange for people outside of the system to leverage. And in a similar way where you can buy an ETF as an index with Balancer, you can submit assets and get exposure to a generalized set of tokens. But this one pays you for keeping your assets in the ETF from the utility that you are providing people that are looking for liquidity. So as a capital or value depositor, you get returns on your capital simply for making it available for exchange. And at the same.

Starting point is 00:43:23 Exactly. Balancer is bribing your loyalty as a capital depositor with the BAL token, which is a governance token of the system, which, like I said earlier with the comp model, is a balancer system, quote unquote, going public, right? making the governance over the protocol, giving it directly into the hands of the users of the system, which one analogy I really like is that the Uber drivers and perhaps even the Uber riders are receiving shares of Uber as an incentive to use the product, right? So it's getting the upside potential of the whole entire system into the hands of the people that are providing the value in the first place.

Starting point is 00:44:08 and is doing this in a much more streamlined way. And all of these things just resonate with me so much in the way that they make, it's the same systems and the same mechanisms that we've had, but with more equity built into it, and with more fairness built into it. And I'll pause there and let you comment before I ask my next question. No, I think that that was a great summary. There was something I wanted to say about going in public,

Starting point is 00:44:33 but I forget what it was. So continue on. Okay. So the query or qualm that or worry that I have is that Uber drivers or Uber riders or people that are, you know, users of this system might not be or have the background or experience or the education necessary to make decisions about governance over these systems. Does that worry you? It does. This is where I think of, so there's actually a few things that worry me here. So starting there, I think that this design, this governance capital asset design is really most relevant to investors and suppliers, and less so to the demand side.

Starting point is 00:45:22 Now, you just reference, you know, an Uber driver, and maybe an Uber driver doesn't want to be involved in the governance of Uber. but I do think that they should have still have exposure to the capital of the network that they're working for and that they should be able to delegate and you know maybe they have a really eager friend who's nerding out on governance and maybe that person makes it their full-time job. What I anticipate longer term is I think these governors of these networks as the network scale need to become prestigious positions. And I'm not sure that the direct coinholder vote is the right long-term solution. And I know that's a little contentious given how widely used it is.

Starting point is 00:46:15 But when I look at, say, how our biggest systems in the world are governed right now, and those systems really are governments, people in Congress or in the Senate or the president or whatever it might be, they get full-time salaries. They're professionals. It's a prestigious position. And so if we expect these systems to evolve past this toy stage, I also think, and I've been having this conversation with the Maker Dow team,

Starting point is 00:46:42 that you need governors who are earning full-time salaries and then have those conversations with ZECAST in two, full-time salaries, prestigious positions that, you know, people are working for, that they're training for, that they're studying for right now we're still very much you know in the tinkerer hobbyist working from our from our garage stage and so we do need to grow past that and i i don't think we have found all of the right solutions i think that there is this constant tug to go towards more um you know representative democracies rather than direct democracies um and there is also

Starting point is 00:47:28 going to need to be a stratification between, okay, what is something where every coinholder vote versus where, you know, there's a council or, you know, there's some elected group that's voting on things. It's kind of like board level decisions, you know, decisions that are made at a board meeting once a quarter versus, you know, the day-to-day operational decisions. And so So just to divide and conquer and have the right amount of expertise and the right amount of effort put into some of these decisions, I do think we need more governance stratification. And I've been influenced somewhat here by Carlotta Perez, who, you know, just zooming out from crypto, believes that we need more microscale governance and more supranational or international governance and then kind of more trimming down at the fat middle. And so what I'm getting at here is, you know, let's automate the bureaucracies, the paper pushers, where there's a lot of corruption and there's not the transparency we want. And it's just kind of commodity work anyway. Automate that and then take the value that you would have paid to those people and pay, you know, the governors at the supernational or the microscale more.

Starting point is 00:48:51 So there are a number of things jumbled up into that around governance. I think the other concern I have here is what balancer is doing, what compound is doing, is not sustainable. And I say that loving the balancer team and working closely with them since last year, it is a supply-side subsidy, right? It does have an APR now. It does generate a lot of yield. but just as with Bitcoin, that needs to turn over into paying customers, right? That needs to turn over into true value flows. And so the subsidy works for the bootstrapping stage, but it is not the end-all-ve-all.

Starting point is 00:49:32 You have to get to a point where, you know, there's real people that are paying for the service because that shows the utility that the service is providing to the world, and that's really where we kind of get to the equilibrium capital asset law. Yeah, I think those are both great points, Chris. see it. So I want to riff off your first for a minute because it does kind of frustrate me a little bit when people talk about on-chain coin vote governance as being decentralized governance, right? Because what I see is the really unique thing about these assets is that they are settled on-chain. These are all on-chain cash flows, and that's global and that's permissionless, and that's

Starting point is 00:50:12 amazing. That's incredible. But essentially, a coin vote governance, that is, corporate governance. We've had that for a long time in equities. That's essentially shareholder governance. And I wonder if that's kind of what you're getting at. My worry is that CoinVote governance for some of these systems, once the equity is distributed to some of the users, it sort of collapses to the model that we have today with equities, where you have large capital pools who serve on the board of directors. And then you have small investors who are essentially proxy voting to them. Do you think that it will kind of collapse in that way? Or do you think we'll uncover some of these new governance models that you're talking about that

Starting point is 00:50:54 make this more unique? So I agree it has echoes of corporate governance. I think that it is marginally better in that even if you take something like decred, right, one of the more famous and robust models of pointholder governance, you can earn that asset. And you could say, okay, you know, there's, there's, you know, equity-based compensation if you're early on at a startup. And so you could also earn a seat at the table in corporate governance as well. And that's fair pushback. I do still think that the general involvement when I look at who's involved in governing, like, decred, it's pretty flat in terms of like anyone's,

Starting point is 00:51:47 can talk with the leaders and anyone can kind of can raise an issue and put it in front of the board, let's say. And that's not the case with corporate governance. So maybe one of the biggest differences here is the access to put information on the table is super open in these systems in a way that it's not open in corporate governance. I agree that there are troubling. amounts of concentration around some of these coinholder governance systems, and that's where distribution is absolutely critical. And this is where I actually think it's quite neat what Ethereum has been able to do of, you know, yes, there was the original sale, and, you know, there's all the kind of maximalist propaganda around that sale. But a lot of that sale has been

Starting point is 00:52:43 distributed out, you know, Ethereum Foundation almost ran out of money at one point in time. because he feels so low. And so that has become distributed. ETH is as well distributed as PTC. And a lot of that is thanks to proof of work and these cycles. And then now in switching over to proof of stake, you can do that somewhat equitably because you've distributed out the asset well. I think it's quite hard to start from, you know,

Starting point is 00:53:11 if you don't have a mining mechanism or some earning mechanism, it's hard to avoid capital capturing a system. And here's the other kind of just unfortunate reality of human nature is, you know, it's the quote of power corrupts and absolute power corrupts absolutely. Or, you know, you can come into a system being a progressive, but once you capture power, you tend to become a conservative, and you try and conserve that power and amass more of it. And so, like, these are very base human things,

Starting point is 00:53:45 happen time and again and I'll reference Mario again because he wrote a piece called resource distribution of power dynamics and decentralized networks it's on placeholder.bc. And these are age-old problems that we've struggled with and we're always going to continue to struggle with. What I would hate to see is the path that Maximilus take where they're like, oh, this is too messy. We could never improve upon this. Why should we even try?

Starting point is 00:54:12 You know, there's 21st century accounting systems only for one asset. That is totally the wrong perspective to take on this. It's more, this is a very sticky problem. We have a new technology that can help us solve some parts of it, not all parts of it. Human nature is still going to be human nature, but it would be a lost opportunity to not, you know, have one more turn of the wheel in working to better govern ourselves. Yeah, I agree. By the way, though, that is why I worry about the current crop of eth killers, because they don't have the distribution that Ethereum does and Ether does. They're going straight to proof of stake with on-chain voting, coin vote.

Starting point is 00:54:55 Do you share that worry? Yeah, I mean, look, the only placeholder looked at most all of the headline quote-unquote, Heath Killer deals at different points or had those desks, those decks cross our desks. And the only team that we chose to back that's not Ethereum is PolkaDot, which, you know, I'm sure could become contentious with time. And PolkaDot did have a large sale. And so that is on my mind. But they also, you know, led by Gavin, who, while he's contentious,

Starting point is 00:55:36 is a rock star in the space, and they have been building community for the last three plus years. And so I think that we're going to see these concerns play out with PolkaDot, and PolkaDot will be the best comparable to Ethereum, because it's got a lot of this, you know, like core crypto ethos and cypherpunkey and a community that loves the technology and all that kind of stuff. but it won't ever have proof of work, right? And so if there's material differences between how the community behaves or, let's say, you know, different amounts of apathy or those kinds of things, I think with all other

Starting point is 00:56:20 variables kind of equal, we'll be able to say, okay, you know, some of this is coming down to the way in which this system's capital was bootstrapped and distributed. it. But as for, you know, a bunch of the others, I think, you know, a lot of the Ethereum killers look at their systems as companies, right? And they want to hold the technology close to their chest and the capital close to their chest. And they just don't fully get it. And they're actually kneecapping the promise of their network in applying company-based silicon. So if Valley techniques to, you know, globally sovereign crypto networks. Hey guys, I just want to pause the interview with Chris real quick and talk about AVE.

Starting point is 00:57:14 AVE is a borrowing and lending protocol on Ethereum. So what that means is that you can deposit your assets into AVE and then take out a collateralized loan or simply deposit just to earn an interest rate. So you pay an interest rate for borrowing, you earn an interest rate for some. applying, but what the magic of AVE offers you is stable interest rate loans, which is a really important money Lego for building out a bankless revolution. Having an interest rate that doesn't change under your fee is really important for long-term thinking and being able to plan out your own personal finance futures, but also make strong business decisions based on an interest rate that you can depend on. In addition to their stable interest rates, there's also flash loans, and flash

Starting point is 00:57:58 loans are where you can borrow any amount of any asset without any collateral so long as you are also paying it back in the same transaction. The use cases for this are absolutely endless and I'm really optimistic that some creative developers are going to make some really cool tools using the Ave money Lego system. We have been watching Avey climb the DefyPulse leaderboard just growing and growing and growing in the assets deposited into their application, which just shows how strong of a system they have created. So you can go and check them out at AVE.com deposit crypto to start earning or borrowing any Ethereum wallet works. So check it out.

Starting point is 00:58:34 I want to tell you about another bankless tool that I personally use. It's fantastic. This one is for our U.S. listeners. It's called Rocket Dollar. So if you have an IRA or a 401k, the problem is it's jailed inside of your brokerage. So your Fidelity account, your Schwab account, that means you don't have good access to crypto. The only crypto that you can buy, is in a trust form and it's marked up like 5x, 6x, 8x, the price. You're getting ripped off. So what you need to do is break your retirement account out of jail, set up something called a self-directed IRA or self-directed 401K.

Starting point is 00:59:15 We've written articles about this that will include in the show notes. Rocket Dollar takes care of all of the pain in getting set up. They help you with the paperwork. You could break your retirement account out of jail and also use the bankless code to get $50 off. So make sure you use that code bankless when you sign up on rocket dollar.com to get $50 off. All right, let's dive back into the interview. So Chris, I've heard you make the statement that if you have good governance, you can have anything, right? And so I'm hoping to get out of you, perhaps an illustration of what good governance

Starting point is 00:59:49 is and why that can get you anything. And then perhaps also illustrate a system that does have governance, something like Decred, something like Compound or Balancer, in a world where governance over these systems has been maximally successful, what has good governance enabled these systems to do at maturity? Sure. So it's hard to answer because none of these systems are at maturity. But I remember for the Decred thesis, we wrote, I think it was with good governance, you can have any feature you want. and the key there is you can, not necessarily you will. And one of my learnings since having written that is, you know, there is a trade-off between centralization and execution speed.

Starting point is 01:00:46 So the more centralized you are, the faster you can execute. Now, you can execute in the wrong direction, but you can execute really fast. The more decentralized you are, it slows execution. And even if you can just think about a centralized system technologically versus a decentralized system. Now, there are more things I'm going to have to layer in here. So what's interesting is there's a study from Harvard's Kennedy School of Business that looked at democracies versus dictatorships. And what's interesting is in expansionary times, so basically bull markets, the two perform on par economically. But then it's in times of duress when dictatorships can fall apart, whereas democracies tend to hold together better.

Starting point is 01:01:44 And if you're thinking on a decade-old time scale, you know, times are not always good. And we've seen this happen with different crypto networks. But if you don't involve people in the governance of your system and then things start to go south, then they'll defect. And often in crypto, that's forking. They'll go create another community or they'll raise hell within your community and that becomes its own mess. If you look at something like decred, you know, this bear market has been tough on decred. but it stirred up a lot of conversation within the decred community, and we haven't seen decred forking, right?

Starting point is 01:02:26 You look at, say, something like Bitcoin, Bitcoin has had numerous forks because there's no governance venue to reconcile disputes. Whereas with decred, there is a venue to do that. And the system is designed to remain coherent. So with something like Bitcoin, you end up having governance by defection, which might work solely in the case of Bitcoin for the value add that it's trying to provide the world of being very stable and unchangeable and hewing to 21 million units if they can assure that the security model is sufficient. But then with anything that wants to evolve more, you know, you ideally want to remain coherent through your evolution

Starting point is 01:03:12 and not constantly be losing limbs of your community because you lack of a, a venue to debate and agree on the path forward. And so, you know, I think that over the long term, good governance, equitable governance, is things that involve people, that give people a voice to at least be heard, are key to to surviving and to resilience, even if they may slow down, you know, week to week execution through a little bit of analysis, paralysis, and being too distributed. So I'm not one to ascribe the current market prices to a successful thesis or not, but I'm about to do it.

Starting point is 01:03:59 Decred's price isn't very high in relation to what it once was, and Bitcoin's price is. And Bitcoin has absolutely no governance, right? And we have seen applications on Ethereum follow in the same absolutely no governance model, mainly uniswap, right? And we also, and there are versions and iterations of balancer that can follow in uniswops, no governance footsteps. But there does seem to be a pretty large role for no governance systems like uniswap that have been really, really successful.

Starting point is 01:04:32 And with these new emergence of governed protocols like compound and balancer and Avey, the lindy on these resets. and compound has updated three times, balancers just fresh out the door. So perhaps a lot of this conversation is skewed by just how young defy is at large. But do you see a role for just ungovernable systems like Uniswap, like Bitcoin, in the world of social scalability? How does the governance over these systems limit scale if governance can't become fine-tuned or perfected? So I would say that there's a few things here. One, going back to this study between dictatorships and democracies, when things are in growth, right, like uniswaps in growth, and Bitcoin in a macro sense is still very much in its growth stage.

Starting point is 01:05:35 You can tolerate less representative governance because everything's been. going well, right? People are happy because they're making money that anesthetizes any concern. It's more when things are not going so well that you will have a lot of defectors and that you need a decision pathway for how decisions are made. One basic way of thinking of it is the most important decision a group will ever make is how decisions get made. As I said earlier, I think that you know, Bitcoin could end up being a M&MM. here. But when I look at human history, governance has actually, governance is the thing that allows us to scale, right? Like we as primates, as part of the primate order, we tend to show aggression

Starting point is 01:06:28 towards beings that are not of our tribe. And some primates kill beings that are not of their tribe and so we're kind of constantly finding ways to peacefully coordinate with other tribes and having governance of different forms has allowed us to do that over time and i'm not sure if you guys have read the sovereign individual but he gives really good arguments around kind of the economics of violence and protection and how governance interplays with those with basically coordinates coordinating around violence and protection. And so the way I see it is these systems are giving us a super national, so global means to govern really important economic industries. And to not have a means to change those or to give the people that make up the systems any form of representation would be a

Starting point is 01:07:35 mistake. Now, I do think that we need to automate the fat middle. And so this is the difference between like rules and discretion. So as much as possible, automate the commodity, bureaucratic, fat middle where it's really just paper pushing and very little discretion needed in those decisions. And then automating you kind of stomp out all corruption. But then you will still, in my opinion, you always need discretion at the super high level, like the super macro scale and super micro scale. And certainly you need legitimate governors. You need people who the community elects or puts in place, the community trusts. But to presume that we can create kind of these automated machines that don't need any oversight from us,

Starting point is 01:08:32 I think would be a mistake. So, Chris, you mentioned in tribalism, how it's hardwired into the human psyche. And I think many utopians have tried with digital technology will eliminate tribalism, but we see a lot of tribalism in crypto. I mean, it's everywhere. And I know you've spoken about tribalism in the past.

Starting point is 01:08:54 My question, I guess, is do you think tribalism is good or bad? Like, is it healthy in some way, or is it always bad? and have your reviews evolved at all on that? So they have evolved. I put out a tweet, I think, around Thanksgiving last year about tribalism. And I think on a personal basis, I would much prefer for tribalism to go away. But I accept that that's naive and that tribalism is, as I was saying earlier, baked into our evolutionary hardware.

Starting point is 01:09:27 And so, you know, short of a consciousness revolution, which maybe we'll have in a few thousand years, tribalism is always going to exist and is going to be a motivating force. And, you know, that's, again, where I feel we will always need venues to debate and to decide and to choose the right decisions forward because those choices are always subjective, right? like pretty much everything is subjective, at least within what humans have constructed, because it's just human constructions. And so the most important human construction is to decide upon how we're going to decide about future human constructions. And so circling back all the way to tribalism, if we don't have those constructions, then at least from what I see on crypto Twitter and, you know,

Starting point is 01:10:27 some of the nastiness that happens when we devolve into just being the animals that we are, you know, conversation goes out the window and it becomes a bunch of bites. So I tend to share like your view that, like, personally, I don't like tribalism, right? I mean, let's talk about this rationally. Although I have said this before, and I'm wondering if you share this view, it does feel like the tribalism, specifically the maximalism that is imbued in the DNA of Bitcoin is actually good for Bitcoin for the price of Bitcoin. And of course, price means security. It means liquidity. You know, prices economic bandwidth. We've talked about all of those things. Do you agree

Starting point is 01:11:09 with that? Do you think some element of the maximalism and the tribalism and Bitcoin is good for it? So I think it's been critical to getting this movement off the ground. Like, you know, I wasn't here at the very beginning. But once I started getting professionally involved in 2014, I was very different from today. Like every other conversation I had, I was basically battling it out with someone on why Bitcoin was worth something. And so there was a certain amount of stubbornness and hardheadedness and borderline religious belief that was needed in order to get Bitcoin off the ground.

Starting point is 01:11:53 And specifically, Bitcoin, where it is really hard to. to value, right? And it's not a capital asset. And so, you know, you have to use more newfangled valuation model like the equation of exchange we were discussing earlier. So I think it was all necessary. I think at a certain point, and, you know, the same goes for different religious movements that we've seen over time, you can turn into an extremist and you can actually push people away. Right. And so there's a moderation that's necessary. And I think that, you know, we probably buy into the representation on crypto Twitter too much. And, you know, the cast of characters, especially on the Maximus side, that appear there.

Starting point is 01:12:46 I think at this point, kind of the economics and ideological underpinnings of Bitcoin speak for themselves. And so my hope is that, you know, the maximalists we see on Twitter just become more and more irrelevant as this space becomes bigger. And, you know, I think people increasingly do recognize the really hardcore maximalists as extremists that are not, you know, the engineers or the builders. There are exceptions here. But I guess to sum up, it was necessary. that doesn't mean that that form of extremism is always right. It's kind of like as a company grows, sometimes you need changeover of management, right?

Starting point is 01:13:34 Sometimes you need different skill sets at different periods. And I certainly don't want my grandmother getting screamed at for where she chooses to bank. I like that's just not appropriate at all, and that's going to turn her away. Yeah, she's not going to think crypto is a very strange social social social. system. Yeah. I want to compare and contrast the tribalism found in the crypto worlds, which I think we're all in agreement. At the genesis of these protocols, you do need a healthy dose of tribalism

Starting point is 01:14:07 because that is like the autoimmune system, the immune system of a network, right? It protects it against all costs. And we've seen, going back to the lens of the sovereign individual, we've seen this play out. And I think most saliently in America in the 17th, 1800s, right, where America needed to have these band of patriots to defend the nation against all costs, right, like to work for something bigger than themselves. And that's really kind of the founding principles that America was founded on using the concept of America, the concept of individual liberties, the concepts of freedom as this rallying cry to generate the patriots of the system. And now I think we're seeing that play out in these digital.

Starting point is 01:14:54 nations as well, where baked into the values of the digital nation are individual sovereignty, individual freedoms, and escape from tyranny. But however, there's a big difference between the physical nation state and the digital nation state where, you know, if you are born in America, you are an American citizen, whether you like it or not. You are born, you are an American citizen, you know, before you can even, like, have the concept of what a nation is because, you know, you're a baby and you don't know anything. However, with digital nations, Bitcoin and Ethereum, they're entirely opt-in.

Starting point is 01:15:29 And so, like, they will never have any person in their constituency that doesn't want to be there, which really changes the game when it comes to tribalism, right? Because when something is an opt-in system, it both generates pride and, you know, loyalty because it's a non-coercive system. However, it also doesn't even need it anymore because, of the way that these systems are grown. And so the point, the question I'm trying to get to, Chris, is when you compare and contrast the model of, you know, the physical nation state versus the digital nation state, and you invoke the lens of tribalism and how a digital nation state can

Starting point is 01:16:13 scale to the entire globe without needing to consider the physical nation state even relevant, where does tribalism come in when there is one single, quote unquote, digital nation that we have all opted into? So that's an awesome question. The first thing I'll start with is while I agree in the meat space that we've been born into, you are just the member of one nation state. The really cool thing with crypto networks is you can be a member of all the nation states or all these digital economies. right um i heard your guys podcasts with hosu and similar to him and i think similar to both of you i would consider myself a bitcoiner and an ethereum and you know a member of dozens of other networks where i've been interacting or conversing or know the founders or you know some form of

Starting point is 01:17:13 community engagement and then often asset ownership and so we're we we we we we we We've gone from monogamy with our nation state to a polyamorous, if we want to use that way of being with different digital economies. And so to say, oh, you know, because I was, you know, just a patriot to my one country, I can only be a patriot to one digital equivalent. I think actually loses the opportunity of what this movement provides, right? this movement provides us the ability to be a participant, to vote with our feet, to get involved and be interested in the things that we want to be interested in, and not be relegated to land in which we were born. The other thing I'd add here, and this goes back to the prior question as well, is the tactics that you use as an underdog are unbecoming once you become a champion.

Starting point is 01:18:14 and that is, you know, the underdog, you know, can be boastful and gritty and, you know, hard-headed and all of that. But once, and that's endearing. It's like, you know, you go, you go get an underdog. But then if that underdog becomes a champion and is doing all of those things, that's unbecoming. It's like, oh, wow, like you're really conceited and you're not very humble and, you know, why are you doing that? And so I think that when we look at these different crypto networks, they do need to be gritty getting up and running and it's a highly competitive environment and all of that. But once you're at a certain escape velocity, you are much better off being, you know,

Starting point is 01:19:02 having open arms, being very accepting, absorbing people into you. And we've actually seen this play out between Bitcoin and Ethereum. In a way, Bitcoin, yes, it is the champion, but it has always kept this kind of like hardcore antagonistic kind of surface level reputation. And I'm not talking solely from personal experience. It's, you know, I get this question a lot of, you know, why are things so hostile or antagonistic, right? I don't get it.

Starting point is 01:19:36 versus Ethereum, which has been much more welcoming, much less to judgmental. And, you know, Ethereum's vision is a bit more multi-purpose, and so there's more flexibility within it. But, you know, look at which system has, you know, 4X more developers. It's Ethereum. And then if you start to look at the network stats, you know, Ethereum starting to come on par with Bitcoin, even though it's half as old. or if you look at, you know, the economic systems or the tokens, Ethereum is just dominating.

Starting point is 01:20:10 So Ethereum has become the king of the smart contract land and has chosen to, you know, be open, to be accepting. And that is bringing more and more and more people into the community. And, you know, I'm still a fan of Bitcoin. Bitcoin is still growing. There's still good innovation going on. But I think it's growing less than it would have had it been more welcoming. it reached the champion stage. Yeah, I, you know, I definitely resonate with that, Chris. One thing that I would say is I feel like I'm a patriot to a particular set of values,

Starting point is 01:20:47 right, particularly bankless values, replacing that fat spot in the middle, as you call it, the kings with protocols. I mean, I think that's the basic idea of the sovereign individual. And I worry sometimes that back to your point, you know, the revolutionaries ultimately come to power and they become a lot more like the kings and the tyrants they tried to replace. I worry a little bit about that in the Bitcoin network, right? You know, maybe these crypto banks become sort of the new power structures in this world and we're back resembling something that we just left.

Starting point is 01:21:25 That's really like why I think the, for me, certain networks have absolutely no interest. Like, Tron, I don't care about Tron whatsoever because it doesn't align with my patriotic value system of going bankless and replacing kings with protocols. What's your take on that? Why are you here? What, you know, why, what social contracts in these systems are important? So I'm here, and this goes back to the blank slate estate, to help create a more fair, effective, and generative society. And each of those is a conversation in of itself, but you know, the fair is really just giving everyone a fair shot, which the majority don't have right now. And that kind of goes into the idea of putting capital in everyone's hands. Effective is it has some efficiency in it,

Starting point is 01:22:23 but, you know, it's creating systems that do more with less and hopefully with less environmental damage that is a big one from childhood and my formal schooling. And then the generative is really, you know, that speaks to I think the human mind and the human organism is extremely generative. And so if we operate with zero-sum thinking, then we're actually missing the infinity of the universe, missing the infinity of our minds. And that's a huge shame. And I want for everyone to be able to live in kind of this generative state of mind. And that's not currently available for even the majority. So those things really bring me or brought me to the space and have fired me up.

Starting point is 01:23:18 I think, you know, I started off. When I first played around or got to know even the idea of Bitcoin, it was really just through tinkering on the Silk Road in college with friends and just being like, what is this thing? And I was actually more intrigued by the Silk Road at the time. And then even two years later, 2014, you know, I more wanted to be a revolutionary. And, you know, it's just kind of fired up in my young 20s. And now I think I recognize that all of these are, you know, turnings of the wheel.

Starting point is 01:23:52 We start off as revolutionaries, but all revolutions temper with time. and we do a bit better. I think maybe one way of phrasing it is, I've never been more convinced that this technology is going to change a lot of the underpinnings of the way the world works. I've also never been more humbled or accepting of the fact that we're going to get a lot of it really wrong.

Starting point is 01:24:21 And so long as we get more right than wrong, we will do more, quote, unquote, right, than wrong. But it's not, nothing is ever the end-all be-all. And this is where, you know, I like the idea of revolution, just being recurring evolutions. And crypto is a big one. But, you know, even if we put all these systems in place perfectly, then, you know, our kids or our grandkids, they'll want to rebel against it because at that point it's the status quo and you can't make a name for yourself as a young kid, if you're going in line with status quo, there's no leverage with that. You're going to go do something different. So, you know, the revolution swings towards

Starting point is 01:25:06 another underdog. So a bunch of thoughts in there. But I think the last thing I'd say as to why I'm here is it's just fascinating. Like, there's no more interesting place to work in my opinion than in the crypto space. No, no, I think that is echoed by all of us here. And one thing that I think is true of of all of us here, us three, um, you me, Ryan is, we're all pretty like big thinkers,

Starting point is 01:25:31 right? Like, we like to try and hypothesize things in the macro view, uh, and, and, and daydream about the, the future crypto economic sci-fi world that we think is coming.

Starting point is 01:25:44 David, uh, I just copy a lot of my thinking from Chris, honestly. Yeah, let's be honest. Um, um,

Starting point is 01:25:53 but when it comes to the rubber meeting the pavement, and making real progress and change in people's lives, mainly people outside of crypto, right? Because, like, you know, crypto's already changed. My life has already changed all of our lives. Like, the majority of my personal finance activity is on Ethereum. So, like, my life has already been changed. But I'm one of the people that resonates with this industry. And so, of course, it's going to change my life first.

Starting point is 01:26:17 My friends that care about sports or my mom, who's a boomer, or the people just walking down the street, what things, what signs or just flags or indicators do you look for when you are trying to find ways that crypto is meaningfully impacting the average individual? Like what, when crypto actually does impact the world and the ways that we hope it to, what do you think will happen first? How will we see the indication of a crypto world actually manifesting by our, through our peers? So I think we're already seeing it with the financial services sector that's booming both between Bitcoin and Ethereum.

Starting point is 01:26:59 I wrote a piece recently called Superior Financial System that speaks to really how between Bitcoin and Ethereum, we are creating something that will be featured complete with the existing financial system. and I think you need this system in place, this accounting and distribution system, to then be able to build all other socio-political institutions. And so this is the first installation, really. And it's global from day one. It's much more resilient.

Starting point is 01:27:39 It's much more lower costs. It's providing both new services and striving. for feature completeness, and maybe most importantly, it all runs on the same data, right? I can go into competitors like Xerion versus Instadap, and I have the exact same view of all my Ethereum wallets. And that's just so mind-bendingly superior to what we have in the existing siloed data systems that I think it's almost impossible for both users and entrepreneurs and developers to be attracted to the system over time.

Starting point is 01:28:17 So certainly, you know, keep an eye on the financial services first, and that is why, you know, of late there has been this boom of interest in DFI. I think, you know, from there, I really want to see people earning their wages directly from these networks and making it such that you need as little capital as possible to get started earning in these networks. because if we make the gate capital, then you will only get people involved who already have capital. And that's actually not solving one of the key problems that I would like to see solved here.

Starting point is 01:28:56 And so if people are earning their wages, earning their livelihood directly from these systems, in more human work ways, so, you know, that could be working for Aragon's court or for Claros or for, you know, setting up mini-validator systems where you, you borrow the capital from someone. There are different things popping up. I actually wanted to write a book called The Hitchhiker's Guide to Crypto, where it would be a book basically about how you could make a living from these networks, really just with an internet connection.

Starting point is 01:29:30 And I realized we're not quite there yet. There's not quite enough to write about. But I think the writing is on the wall, and we need to see more of that. You combine earning wages, so your day-to-day month-to-month livelihood within your investments and your basis of wealth in these systems, I think you'll start to see,

Starting point is 01:29:52 and we already are seeing large wealth transfers. It's kind of like the new settlers, right? The people that went west from the East Coast. They struck out west. The people on the East Coast were kind of like, I don't know what you're doing, you're crazy, that's too risky, you're probably going to die. You know, let's see what comes.

Starting point is 01:30:11 of it, the people who went west, you know, some of them, many of them did die. Fortunately, in crypto, this is a digital migration and so our physical cells don't die even if we lose some of our assets. But we are, you know, trotting the roads and creating the systems that will lead to large wealth transfers that will then bring more people into the space. And those people brought into the space, both because of, you know, the nature of the services I described earlier in terms of cost superior, cost superiority and accessibility and resilience. But they'll also just be drawn by the allure of people that they knew living better

Starting point is 01:30:52 lives because they migrated to this world, right? We're extremely memetic. And we are also by and large a society that is obsessed with novelty. And so, at least with the way our brains work, with dopamine, once we get the things that we wanted, the dopamine stops firing. Like, dopamine is really just an aspirational chemical in our brains. And so this is why a lot of people get bored within, you know, a job that they once always wanted or a relationship they once always wanted, whatever it might be. And people just consistently keep looking for the new thing.

Starting point is 01:31:30 It's actually an evolutionary basis to keep us looking and surviving and iterating and reproducing. And the reason I'm saying all of this is, you know, a lot of the meat space, at least to me as a millennial and all of the younger generations, feels kind of old and outdated and not that interesting. And so I want to go exist in the new stuff. And so this new stuff that crypto is creating is, you know, there's infinite white space to innovate and build and earn from. And so I'm not, I've given a few points to your question of, you know, what do we look for? But I think that, and one of my troubles is maybe always going to philosophical or zoomed out. But when I look at it from that, that broader perspective, it feels inevitable to me that people migrate into this digital West. Chris, you are speaking our

Starting point is 01:32:27 language, sir. Everything you just said, we talk about that weekly in the podcast. We call it going bankless. There you go. We like those words. Yeah, we like those words. And, you know, we're in, you talk about memetic, we, it's kind of, we talk about, you know, slowly breaking up with your bank, basically, right? And your existing money system. But what you're also doing is like, to your point, you're kind of breaking up with the old economy for this new economy, this new unsettled Western economy that has infinite white space.

Starting point is 01:32:58 That might be the episode title, David, infinite white space. I love that you said that. So here's a question for the journeyers who are going out. in this infinite white space. They're going out west. So a question about all this defy growth that's going on right now. So these tokens are increasing wildly over the past two to three weeks. I think there's sort of an, I guess, not an existential question, but an important question that people are asking, which is, does some of this growth flow back into ETH? Just had a conversation on Twitter and somebody said, like, Ethereum is going to be super successful.

Starting point is 01:33:37 but ETH will remain at the same price, you know, maybe Bitcoin or, you know, staple coins might become the reserve asset on Ethereum. You've tweeted some stuff out about this. What's your take? Yeah. So the headline take is, you know, 2017 was one service within the financial services sector, and that was capital formation. And we all know what that did to ETH.

Starting point is 01:34:04 And DFI is all services within the, the financial services sector. And so, you know, expect a multiple of the impact. Now, people will push back and say, well, you know, 2017 was a leverage machine and that drove ease higher and higher and higher. I also think that a lot of what we have going on right now has echoes of a leverage machine. and there will no doubt be booms and bus,

Starting point is 01:34:40 and that is why it is still the Wild West. But I see it as a much more efficient leverage machine than efficient and adapted than we have in the meat space because the meat space has a hard time taking real-time asset valuations and liquidating people quickly, and there's all these legal contracts and there's all this kind of muck that gets in the way. Whereas ETHs leverage machines are, you know, really fast, really snappy, can be, you know, vicious on the way up and down.

Starting point is 01:35:19 And I guess the way I see it is, you know, that is going to fuel. That alone will fuel a fair amount of ETH growth. But then, and I'm sure that makes some of the listeners queasy, but then when I look at it, fundamentals. I was writing this down earlier. I don't have it with me. But I think, you know, top of mind, Ethereum is processing about double the number of transactions as Bitcoin. It's got, I think, on-par amount of daily active addresses. It processes half the USD value. if you just keep going down the fundamentals, eth is anywhere from half the fundamentals of Bitcoin

Starting point is 01:36:05 to, you know, one to two X the fundamentals of Bitcoin. But it's valued at one-seventh of Bitcoin. And so just to make the math easy is, let's say it was valued at one-sixth, the value of Bitcoin. If all the fundamentals point to it even just being half as good at half as good as Bitcoin, you would expect it a repricing to cause ETH's price to triple relative to BTC. And so I think, you know, the fundamentals and what's going on here, if I zoom out and remove

Starting point is 01:36:39 myself from, you know, the different ideologies, Ethereum is extremely strong. You definitely wouldn't want to bet against it. And then, you know, saying that, oh, this isn't going to accrue or it only accrues to BTC, I feel like that is just kind of like, I don't know what the word is for it. It's inconsistent. Yeah, it's inconsistent. And so there's a lot here in terms of like the models that you could build. another thing that I would just say through these cycles is BTC is still the reserve asset of the space and then the ETH-BTC pair so how ETH performs in BTC terms is kind of the rallying cry for the long tail it's one of the things I look at the most on a dated basis and if ETH BTC is outperforming then it gives a lot of life to long tail and basically

Starting point is 01:37:46 you know, in uptrends and bullish environments, risk appetite grows, value flows into the long tail, into these higher beta assets, which tend to outperform BTC. And then in the down cycles, a lot of those riskier assets as still being higher beta will underperform BTC. And so one of the kind of ironies here is I've seen, and I'm sure you guys saw this too, for a lot of the people, of which there were many that joined in 2017 and that speculated in true shit coins and just got absolutely destroyed. I understand how painful that process was,

Starting point is 01:38:28 but the kind of irony here is they speculated in assets with zero fundamentals as opposed to, you know, kind of sifting through the quality crypto assets out there. Through the bare market, they capitulated into being maximalist. and basically at the bottom of the bare market, there have been maybe the most maximalist because people are like, oh, look, BTC is gaining on all these other things.

Starting point is 01:38:55 But the grand irony is that is the setup for all these other things to then massively outperform BTC. And it's going to happen. Like I don't care what any maximalist says. This kind of risk on risk off appetite expands beyond crypto, right? like this is just kind of the nature of the beast. And another thing to incorporate here is Bitcoin being the biggest and the most liquid crypto asset makes it the hardest to move relative to a lot of the long tail.

Starting point is 01:39:26 So let's say even half as much value flows into ETH as BTC, ETH will move more. And so I think everything is set up at this point. I forgot what the original question was. But everything is set up for a lot of these long tail assets, including ETH. to outperform VTC. Yeah, that makes sense. So it's like a subset of the question, right? It's within that, within people who believe that, right?

Starting point is 01:39:52 We're not talking to the maximalist tribe. Right now, you're talking to the bankless nation tribe. What are you more bullish on? More of these defy tokens or more ETH? It's almost a question of asset superclasses too, right? Are you more bullish on the capital asset side or on the store of value? You call it computational money side that ETH is on. Right.

Starting point is 01:40:11 Right. So I wrote a piece on middleware protocols in 2018. And at that time, Placeholder was building out, I don't think we had the term D-Fi at the time, but was building out positions and things like Uma or Numeri or foam, a number of these middleware protocols, many of them financial built on top of Ethereum. And our thinking there was along the line of what I was just saying, in these down cycles, a lot of these assets will underperform. They're quite attractive in terms of their valuations, and so you want to build those positions in the down cycle. But then the other thing is they can migrate, right?

Starting point is 01:40:58 If Ethereum hits trouble, those mineral protocols can go to other smart contract systems or can go multi-system, right? Could be on Ethereum and Pocronod and POSmos or whatever, relevant construction. And so the way we saw it is develop positions in a lot of these assets, which just as I was describing how ETH performs relative to BTC, a lot of the ERC 20s will show the same dynamic relative to ETH. So they'll underperform ETH in a bear market, but outperform ETH in the whole market. And so it's kind of like a leveraged ETH portfolio, I guess you could think of it. And so we did that for a while and then when East just got so cheap, we were buying for ourselves in our personal accounts, BTC and ETH, which is really all that Joel and I are allowed to hold that scale.

Starting point is 01:41:55 And when we were buying BTC and ETH for ourselves personally, you know, we had that conversation with our LPs. Because when we'd originally been raising, sorry, I'm giving you guys more backstory here, when we'd originally been raised, We didn't think we would hold BTC and ETH. We told our LPs, our investors, buy BTC and ETH. You know, that's very low cost to do. You can do that for yourselves. That'll be your market beta, and the placeholders fund one will be your alpha.

Starting point is 01:42:23 And that's all well and good in theory, but the truth is with the nature of our LPs, most of which are large institutions, they're not in a place yet where they can get over the hump on directly holding BTC and ETH. And so when these assets, when BTC and ETH were so depressed, we had to buy that, really.

Starting point is 01:42:47 Otherwise, we wouldn't be doing our job for LPs, and we're fortunate to get very good prices on those. And so now we have, you know, the portfolio of store value assets and the monies. And so that would be Bitcoin, DECRE, Zcash, Ether, and likely PolkaD. and then we have, you know, these, a number of defy assets and kind of these middleware capital assets. Yeah, that makes a lot of space, like a lot of sense. And, you know, not to be tribal, but Chris, I'm glad to have you in the Ethes Money Tribe, sir. We've been talking about that for a while.

Starting point is 01:43:25 And just the usage of ETH as a store of value asset, I think, is something that the market has not wrapped its head around because they are a bit backward-facing. and, let's face it, Ether lost 95% of its all-time high market value over the past two and a half years. So it's understandable that people are feeling that way a little bit. Last question for you, Chris. So in 2017, when I was trying to wrap my head around this, you wrote an incredible book on crypto assets. If you were to write a book today, you mentioned the Hitchhiker's Guide to Defi or, or to getting revenue in these bankless systems.

Starting point is 01:44:08 But would you write that book? Or what book would you write today if you had the time to write a book? So I do like the idea of a very thin, kind of manual, and it would be the hitchhiker's guide. And, you know, design such that you could hitchhike with it and wouldn't take up as much room in your backpack as perfect assets did. So, you know, that's been on my mind. the blank slate of state essay could expand into its own book.

Starting point is 01:44:45 But interestingly, I've been starting to kick around in my mind whether Jack and I should do an update to crypto assets. When I first published it, I was so sick of the book in that whole process and it thought we're giving in actual birth that I never wanted to do it ever again and I never wanted to touch that material ever again. But now when I look at everything that's happened and all the different things that could be said, I still think that that structure is good.

Starting point is 01:45:20 I might do a what and a why and drop the how because professor says what why and how and the how was just like really dry and got dreary to write at the end. but the what and the why are really important and have expanded so much. Like that book, Jack and I started writing it in November of 2016 and submitted the first draft

Starting point is 01:45:48 end of March of 2017, March 31st, 2017. So in the last three weeks of writing that book, March 10th, 2017, ETH went to the moon because the link of loss they called the ETF was rejected and everything started popping off. And then, you know, ICOs had been gaining steam ever since the Dow, but they really started to rip. And so, you know, we've got one section in there

Starting point is 01:46:14 on the wild west of ICOs, but I think there's so much more that could be added and layered in. And now that going back to the start of this discussion, the market is recognizing capital assets. And it's becoming less theoretical and more practical. I think there's a lot more nuance that we could write about, I think one of the struggles from where I sit and where you guys sit and, you know, the work that Placeholder does is sometimes you feel like you're crazy because you're talking

Starting point is 01:46:47 about things that don't exist yet and you can develop a lot of conviction in those things, but sometimes it can take years for consensus to catch up with that. And so the process of writing a book is so kind of high stakes. that I would want to make sure that, you know, things that I'm writing about aren't five years into the future, but more, you know, two to three years in the future such that with the lifespan of the book and also giving me the energy and, you know, kind of conviction to write it, I know that it's not going to, you know, come out looking like crazy talk for five years, but more, you know, it's relevant within, all of it's relevant within a year or two or three. So we'll see. Hopefully, Jack and I get another version out. Would you guys, I mean, I'm curious, would it be interesting to you guys to have quick do assets become kind of this legacy where there's, you know, V2 and B3 and B4? Or would you prefer new books? Oh, so I'll speak first. Maybe David has an opinion on this, different opinion on this, but I would say it would be incredible to have this updated in, every market cycle. So like 2017 for it to come out at that time was a perfect time to onboard an entire wave

Starting point is 01:48:13 and onboard them in a responsible way is what you did with that book. So it was it was very much about valuation, how to think about the space and giving them the history. It feels like now if this is 2016 again, as we've been talking about, it'd be a great time to onboard that next wave. So, you know, one every four years sounds about right to me. It is about that time. Yeah. I think if we had our way, Chris, we would just have you producing endless amounts of writing and we would consume it all.

Starting point is 01:48:42 I think if I had my way, I would ask for a expanded version of blank slate of state just because that's what personally interests me. But I wouldn't be too picky either way. Awesome. Well, thanks you guys. Chris, we can talk to you all day, man. It's been great to have you on the bankless podcast. Thank you for coming on, sir. This has been fantastic. It's been really fun. Thanks for all the good conversation and good questions. You guys got me lost in thought a number of times with the richness of the questions. Well, it's fantastic. Fantastic. That is absolutely our goal. So thanks for entertaining us as well. Hopefully our listeners got lost in thought too. So listeners, action items for today. What we're going to do is include

Starting point is 01:49:23 all of our favorite of Chris's writing in the show notes. So make sure you check that out. some of our favorite articles. A lot of these articles, as I said, have been influential in the things that David and I have written in the bankless community is consumed. Also follow Chris on Twitter. We will include his Twitter handle. Fantastic insights always there. And then listen to you episode four. So if you're curious about what Chris was talking about with the asset superclasses earlier in the conversation. In episode four, we sort of lay that out and talk about ETH as a triple point asset. So do that. And then lastly, you got to subscribe to YouTube for our new state of the Nation show. David, why should they subscribe? You should subscribe just because it is a much easier,

Starting point is 01:50:05 faster way of getting information right into your brain. This is a podcast, so you are listening to it, but the state of the nation is a video cast where you get to look at the data, look at the tweets, look at the graphs that we are also looking at as we kind of digest it and analyze them. So it's a faster way to get new information into your brain and it's always updating, right? So every new week, there is a new state of the nation. And so we go through. what that state is on our weekly YouTube state of the nation. And Dave and I get to look at each other too while we're doing it, which is kind of a unique experience.

Starting point is 01:50:38 We don't do that on podcasts. All right, guys, risks and disclaimers. ETH, of course, is risky. None of this is financial advice. Crypto is risky. Bitcoin is risky. You could lose what you put in, but we are headed west. This is the frontier.

Starting point is 01:50:52 It's not for everyone. But we are glad you have joined us on the journey. Thanks a lot.

Bankless - 20 - The Ethereum Opportunity | Chris Burniske

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