Bankless - 3 - Economic Bandwidth

Episode Date: March 16, 2020

Episode: #3 March 15th, 2020 While the internet revolution is all about data, the crypto revolution is all about value. Scaling the internet is all about scaling data bandwidth, but scaling crypto is all about economic bandwidth.  Join Ryan and David as they explore the concept of economic bandwidth and how it relates to crypto-systems. Links mentioned in podcast: (Article) Ethereum is an emergent structure (Article) ETH and BTC are economic bandwidth (Article) The trillion dollar case for ETH (Article) ETH is irreplaceable (Dashboard) Economic Bandwidth metrics ----- Tools from our sponsors to go bankless: Rocket Dollar - tax shelter your crypto ($50 w/ "BANKLESS") Monolith - holy grail of bankless Visa cards Aave - money lego for lending & borrowing Ethereal Summit - the most bankless crypto conference yet ----- Episode Actions: Subscribe to this podcast Subscribe to Bankless newsletter program Read the links above mentioned in podcast ----- Subscribe to podcast on iTunes | Spotify | YouTube | RSS Feed Leave a review on iTunes Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program Visit official Bankless website for resources Follow Bankless on Twitter | YouTube Follow Ryan on Twitter Follow David on Twitter

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Hey, David, how are you doing this morning? Doing pretty good, doing pretty good. Really excited for this episode. The first two episodes of this podcast, I feel, have really just led right into this topic that we're going to talk about today. economic bandwidth, a really important topic. Another phrase that you coined, which the community seems to have run with. So I'm really excited to peel back the layers of this one. Yeah, so my, this is a fantastic topic. So we are recording this on Thursday morning, and there are other events at hand.

What is going on in the market, my friend? What's happening with crypto? What's happening just with Corona? What's happening in general? Well, what's happening is that the economic bandwidth of these systems is going down, big time. Which we will explain in this later part of the episode. But it seems that coronavirus is a real thing. And it's impacting all markets equally across the board. Yeah. So what's going to happen?

Like, so part of me wrote a post in bankless earlier this week on not panicking, but positioning. How should we start positioning ourselves? Like, is this a risk off market? What should we do? What should we expect is going to happen? Right. Well, when people get fearful, people de-risk. And so people flee into safer and safer assets.

And so people that have leveraged positions are closing them. People that have open vaults with Maker are lowering their liquidation price, if not closing them entirely. People are moving to a less risky position, which is going from leveraged and from smaller cap coins into safer coins like ether or Bitcoin. And then at large, people are also moving from the large cap cryptocurrencies to dollars away from, you know, what is a pretty volatile asset like Bitcoin or Ether and moving into the asset that they, that causes them to feel security, which is the U.S. dollar. So everyone is fleeing away from risk and making sure that they have the resources that they need to make it through this pandemic.

Yeah. I think that's exactly what's happening. I think we are in the midst of shifting from a risk on environment for all assets to a risk off environment. And people are fleeing to those classic safe haven assets. I think there is an idea or there was an idea in the crypto community that crypto, specifically Bitcoin and possibly Ether would kind of catch a little bit of that be a safe haven asset. I've never been of that belief personally. I think that in certain conditions, say monetary policy, you know, inflationary conditions, conditions where the Fed is pumping money into the economy, then crypto assets like Ether

and Bitcoin can and may exhibit some of the quality of gold where people flee the US dollar or treasuries and go to those crypto assets. But we're not there yet. We're in sort of the first inning. And this is the time where everyone kind of gets out of what they perceive as risky assets. What I think could happen, and again, who knows? But what I think could happen is we continue to see stocks drop central banks around the world. They drop interest rates to zero. Many are already at zero, maybe even into the negative territory. And then we get into some really exotic money printing central bank stuff where, you know, where central banks around the world try to prop up their economies by injecting cash, by injecting liquidity into them.

I think with that backdrop, crypto may be poised to do a bit better. But we're probably a couple innings away from that, and it could take some time. So as I posted earlier this week, you position yourselves for this. Hopefully you've done some of that already, but this could take some time for recovery. And look for those next signs when the Fed starts printing, funds starts injecting liquidity into the economy. That might be a sign that crypto could start some recovery. But I am looking at gas on the Ethereum network, and it is as high as I have ever seen to get a fast transaction. out it's 101

gway and a low transaction is 80 for the folks that don't know what gas is can you maybe explain that a little bit gas is the fee that you pay to the miners to get included and if you

want to get included faster than everyone else you need to be paying a higher fee than everyone else so what is happening right now is that ether has gone from you know 170 down to 125 now back up to 140 and everyone who has a risk on position immediately needs to make some transactions on the blockchain

to take that risk off the table and create a safer portfolio. So closing leverage longs, lowering the liquidation number on people's vaults. And everyone needs to make these transactions all at once. And so people are going to have to pay a premium to get their transaction included. People are fleeing away, but everyone's doing it all at the same time. So the network is congested and probably these fees are about 10x what we typically see, I would say. So you could see sort of the strain happening in the network and the panic as people are transacting and try to close out positions and try to shore themselves up. So we'll be monitoring that situation.

Let's get to the topic at hand today, which is economic bandwidth. But before we do, want to give a shout out to our sponsors. The first is Rocket Dollar. I absolutely love the Rocket Dollar product. I use it myself for my IRA. I looked just this week, and if you were to buy Ether on a brokerage, say your Schwab or your Fidelity account,

the cost of that, there's an asset called ETHE that you can type in, you could buy, it trades at 400% more than what it trades on at Coinbase. So if you're to buy it in your brokerage, you're paying 4x more than the market price on Coinbase. I think this is complete retail rip-off. The only way that this Eth-E asset can charge those fees is because you're locked in your brokerage. What you need to do is get a self-directed retirement account, convert your IRA, roll it over to a

self-directed account. Rock a dollar can help. Then you can take those proceeds. You can use it in Coinbase, and you can buy ether or Bitcoin on spot markets at much less cost and not get ripped off. That's the way to do it. And if you go to rocket dollar.com, you can use the code bankless and you can get $50 off. On days like today where the markets are volatile, you need a quick way to view your position in the crypto economy. Check out zeron.io, which is the one-stop shop for a complete comprehensive overview of your crypto portfolio. It'll show you all of your assets that you have in all of your wallets and the total portfolio size of each one.

It will show you your lending and your borrowing activity. And if you need to, it will allow you to exchange assets right from the portfolio. Instead of going to four, five, or six different crypto protocols specific websites, you can just go to ziron.io and do all of your activity that you need to do all in one spot. The UI and UX of Xeron is absolutely fantastic. They have really perfected this and they're only getting better. So go to zirond.io, plug in your wallets, check out your portfolio, and see what you see. All right, let's dig into economic bandwidth.

You know, I think a good place to start is actually a thesis that became popular in 2016, 2017-ish, called the Fat Protocol Thesis. All right, so economic bandwidth is a little bit related to the Fat Protocol thesis, which you may have heard of. but let's define that for everyone really quickly David what is the fat protocol thesis the fat protocol thesis is this idea that as more and more things get built upon the same protocol that base layer l1 protocol becomes fatter it's a way of illustrating how things grow when other things are built on top of it so the idea is that

platforms like Bitcoin that have many, many different companies building products and services on top of it and also Ethereum with many different applications and projects being built on top of it. As more things are built on top of these change, these layer one change and these layer one assets, the value of that L1 protocol grows and becomes fatter. All the things built on top way down on the L1 protocol and make it fast. Fat, make it a fat protocol. Yeah, absolutely. And I think one thing that Joel was trying to do with the fat protocol thesis in this post

was to explain what was going on with Bitcoin to people in Silicon Valley, to venture capitalists. So venture capitalists, they'd gone through the Internet Revolution. They knew it very well. That was kind of their frame of reference. And what they saw in the Internet Revolution was that, the protocols at the very base layer of the internet. And remember from episode one, guys, what we mean when we say protocols, that's just, you know, rules in a set of code that that software needs to abide by. So the protocols of the internet are things like TCPIP,

which is a protocol that moves data across networks, or SMTP, which is a protocol, which is a protocol for email. These things are, you know, standards maintained by standards body. There's no companies, there's no stocks, there's no assets that you can buy around the core internet protocols. They're just free, they're public, they're available to the world, everyone uses them, but they don't accrue any value. You can't buy them, you know, there's nothing investable about them. Well, the VCs in Silicon Valley was kind of scratching their head and looking at Bitcoin. And seeing that Bitcoin is it's a protocol so it's like the internet protocol but somehow it's accruing all of this value and and why is that the case and how is that the case and so Joel's thesis

was basically that protocols like Bitcoin and in the future possibly other protocols that we could build in this in this crypto system would be the primary value accrual mechanisms for every that's created in these crypto systems versus the applications. So in the internet world, the VCs were used to. The applications accrued all of the values. So applications like Google, which sat on top of those internet protocols or applications like Facebook. They were very investable. You could buy them and they could 10, 100x, you know, 1,000x. They could IPO. They were very investable. The fat protocol thesis says maybe those applications are actually going to be skinnier, so they won't accrue as much value. And maybe the protocols themselves at the base layer in

crypto are going to accrue all of the value. They're going to be fat. That was the entire thesis, and that was a complete paradigm shift, I think, for many who had watched the Internet Revolution. So it sort of played out in 2017 when all of these new protocols started coming about in something called the ICU crazes, we sort of call it now. So that clearly shows a difference between the internet and crypto. But if you go to coin market cap.com, there are thousands and thousands of different coins. So why are these all going to be fat protocols? Yeah, I mean, so that's exactly what happened in 2017, is people just started creating all of these coins, all of these assets, and they sort of used the fat protocol thesis to say, well, this asset is clearly going to be massive in value. And they benchmarked the price of their asset to the price of other assets like Bitcoin and ETH. And, you know, ETH was rising in value. Bitcoin had grown into billions by that point. And they, they, assumed that value would accrue to their protocol and it could have been a cloud storage

protocol or a VPN protocol or all of these decentralized protocols that that were investable. And they basically put out the idea and the narrative that these assets themselves would accrue value like the monetary assets of a Bitcoin and Ether. But I think they got it wrong, right? because the FAP protocol requires some more subtlety. Just because you put an asset out there and a coin out there doesn't mean it's necessarily going to accrue value. It doesn't mean it's a protocol even that is going to accrue value. There has to be something else there.

And so what was happening in 2017 is everyone was putting out these coins and expecting them to be used as a medium of exchange within their system. and be expecting them to be used as a currency within their system. But the problem is these were subpar currencies. They weren't good mediums of exchange. They weren't good money protocols at all. And there were better protocols out there. People would prefer to use ether instead of, you know, a token money inside of some

application. People would prefer to use a stable coin like USDC or die. These assets inflated in value tremendously during 2017. and then kind of all came crashing down in 2018 when people realized the fat protocol thesis, you know, doesn't apply to everything. And I think some people took it a little bit too far and said the fat protocol thesis is completely false. You know, protocols do not accrue value. And maybe Bitcoin is the only thing that will accrue value. That's the only protocol that we've seen be successful. So in 2018, I started noticing this notion that ether even was just a utility coin, just a medium of exchange, just gas within its own economy.

And completely disagree with that because that's not what we're actually observing. You know, what are we actually observing, David, when we look at how ether is used in the economy? because it's more than just gas, it's more than just a utility coin. How are people actually using ether? I think the big takeaway from 2018 was, should have been, not that the fat protocol thesis is dead, but just that the fat protocol thesis is much harder than people thought it would be to achieve. When the, for example, the basic attention token is this ERC20 token that is used for payment

for attention on the brave browser. That's a very niche ecosystem. That's very hard to build a bunch of things on top of. But at the end of the 2017-2018 mania, people fled up the market cap, up the risk, just like they're doing today with coronavirus. They fled up the scale of risk into safer and safer assets. And the reason why people landed on mostly Bitcoin, but then also started to keep their eth is because of the eco-eastern. system that is being built on top of these individual platforms. And so that's what these open protocols have that all of these other niche assets don't have, is they have an agnostic platform for

anyone to build anything upon. And that's where the fat protocol thesis really kind of stuck after 2018. And it's a bit less fat protocol and it's a bit more like a fat money thesis. It's the money assets that are accruing the value, not just any. protocol, the protocol has to be a money protocol in order to accrue value. And I think that's the correction that the fat protocol really needs. And what we observe in at least the Ethereum economy is that ether is used as money in various ways. It's used sometimes as a medium of exchange to buy ICOs in 2017 fundraising. It's used as a store of value. It is the most liquid, most sale asset inside of the Ethereum economy. It's used as a unit of account, so things are priced

in ether, including the gas that we talked about at the opening of this podcast. And it's also used as collateral. And that's where we really get into this concept of economic bandwidth, which we're going to spend the rest of the episode talking about, because I think it is, it's almost the successor to the fat protocol thesis. The idea of of economic bandwidth being the rate capacitor for the entire money system that's built on top of it, particularly a rare form of economic bandwidth that we're going to talk about, which is trustless economic bandwidth. ETH and Bitcoin are both trustless economic bandwidth on their respective systems. So before we get into what economic bandwidth means and the ramifications of it,

I think we should probably define it for a minute. So economic bandwidth is actually pretty simple. Economic bandwidth is the liquid market cap of an asset. So the way I define economic bandwidth is it is just the equal and alternative to data bandwidth. The Web 2.0, the Internet Revolution, was all about how can we pass more and more data around the world. And as the internet has developed, you know, the bandwidth has increased. There was no point in time where we could have ever passed, you know, people's 4K streaming Netflix in the 90s.

That was never, ever going to happen. But we innovated and we figured it out. And so now we can send basically infinite data for our needs throughout the entire global ecosystem because the bandwidth for data has increased. Now, these internet protocols like Bitcoin and Ethereum, these are similar protocols, except their bandwidth isn't data, its value. When it comes to sending and receiving value, economic bandwidth is this new thing that maps onto the old internet, the old revolution of the internet, but now it's in this digital form, which is digital value. How much digital value can we send

across the world. And so Bitcoin has a market cap of 150 billion. Etherium has a market cap of 20 billion. And so these are the limitations. These are the bottlenecks, the maximum possible amounts of value that we will ever be able to send. And it's actually even smaller than that. What Ryan said was right, it's really the liquid market cap, how much is available inside of these protocols to send. And so the total value bandwidth, the total economic bandwidth that these systems have available to us is, you know, billions of dollars. But the world is much, much bigger than that. The billions of dollars, it's minuscule compared to the rest of the world. So we'll get this, get to this subject later on in the episode where we talk about how we're going to get there.

But right now, the economic bandwidth is small. Just like at the very beginning of the internet, we were never, ever going to be able to stream 4K through multiple devices under your home Wi-Fi. But we're going to get there. Absolutely. Yeah. I love how you frame that. That's exactly. the analogy to use the value of assets like Bitcoin and the value of assets like Ethereum, their total market cap, that is the size of the pipe. That is the capacity of trustless value that we can build on top of these systems. As that gets bigger, it increases the bandwidth and the trustless applications, money applications that we can build on top of the system. It's really a

rate limiter. And right now, we're in the, you know, 56K, modem days of Bitcoin and Ethereum. There's only a few hundred million, excuse me, a few hundred billion worth in economic bandwidth in these systems. But that's a lot more than there used to be. You know, five years ago, it was only 10 billion. So we're increasing in economic bandwidth. And I expect as economic bandwidth increases, we'll see more and more sophisticated money applications on top being used by more and more people. Now, we keep using this term, not just market cap, which of course is the total value of an asset. If you take the number of Bitcoin outstanding, and you multiply that by the price of Bitcoin, that's market cap. Same with Ether, of course.

But we keep using this term liquid market cap. And I wanted to find that a little bit for folks. So liquidity is basically how much an asset will move if you sell it at a given price point. So the folks at Masari put together a really interesting screener on this. So David, I just sent you a link and this links you to a screen on Masari.io, it's on-chainfx dashboard and it's like an economic bandwidth screen. And what this does is it sorts. various assets by not only their liquid market cap, but the percent the assets themselves, the crypto assets themselves, would move if you went and you sold one million worth of that asset.

You can look at this, and we've got a column called percent to clear one million, right? And folks can see this screen. We'll include it in the show notes. But when you sort it in this way, you can see Bitcoin is clearly, number one, if you sold $1 million worth of Bitcoin, you would only move the price of Bitcoin by 0.13%. Just 0.13%. That's a fairly liquid asset. If you go down, the second slot is actually tether, so it's not Ethereum. Tether is a stable coin, of course, and if you sold one million worth of tether, it doesn't move the price very much either. The price would only slip by 0.15%.

Ethereum is in third place here, and it has, you know, it would slip farther than Bitcoin. So it would slip probably four times farther than Bitcoin if you sold a million. The screen here is showing if you sold one million worth of Eath, you're going to slip by 0.44%. Now, you keep going down, and you could see the slippage increases. So something like XRP, well, if you sold a million worth, you're going to slip an entire percent in terms of the price. and your sell rate, and it gets a lot worse from there. So if you sold something like chain link, a million worth of chain link, the price would slip almost 4%. So that's what we mean by liquidity. It's really the slippage of these various assets at a given sell price. Does that make sense?

100%. And I really think that illustrates what happened in 2017, 2018. As the mania concluded, people wanted to move into the things that are acting as money, the things that are acting on as economic bandwidth. Whether they understood economic bandwidth or not, it's not really something that you need to understand to really be incentivized to move there when it comes time to take risk off the table. And so people don't want to, when they want to hunker down and hold for the long term, you don't want to hold an asset that is going to shift 6% when you sell your, your staff, of it. And so no one's going to hold Cardano when, you know, a million dollars drops the price by 6%. People are going to move up the stack into something that has guaranteed liquidity available to

you when you need it. And that's what a risk-off position is. And so that's what people are doing right now with coronavirus. They're moving to risk off positions, which means that they are going to be, you know, moving up the stack of economic bandwidth. Exactly. So you want to move to the most liquid acid as possible because, liquidity gives you an option. It gives you the option to sell. Exactly what you're saying is people moving to risk off assets. Those assets are things like cash, dollars. That's a risk off asset. Or treasuries, that's a risk off asset. And liquidity for dollars and treasuries, I mean, they're basically the most liquid assets in the world, the most liquid assets available. And that makes them the most money-like.

And so you can see this idea of liquidity is very related to this idea of money. In fact, I think liquidity is, if you were to ask me, what's the number one attribute you look for in money, right? And the economists say medium of exchange unit account store value. We've talked about that. But I would also say it's liquidity. Liquidity makes a money, a money. And the moniness of a money increases as you increase liquidity, as you increase the assets' economic bandwidth. And so here's the thing that I think many of the new Ethereum killers and new crypto networks

are missing. It's a similar flaw that I think was in like the popular investing ideas in 2017. It's this idea that crypto networks are all chasing scalability, but they're chasing scalability in terms of transactions per second. a popular knock against Bitcoin and a popular knock against Ethereum is Bitcoin can only, you know, send Bitcoin transactions at three to four transactions per second. Ethereum can only send it at 15 transactions per second. But I've got this incredible new crypto, ETH killer that can do it at 100 transactions per second or 1,000 transactions per second. So you should buy my asset, because this is going to kill Bitcoin and kill Ethereum and finally be the thing crypto needs to

scale up and beat Visa. But the fatal flaw of this is not only do many of these networks sacrifice decentralization and trustlessness when they scale up in that way. They basically aren't increasing trustless transactions per second. They're just increasing transactions per second in general. But they're also not paying attention. to the true limit capacity of scale. And that limit capacity is economic bandwidth,

the value of the underlying asset, the moneyness of the underlying asset. That's what you need to scale in order for this crypto system to be a money platform for the world. It's not enough to have high transactions per second. You have to have high, trustless economic bandwidth, and you only get that when the underlying asset

in your network becomes the money, increases in liquidity, and increases in moneyness. And this is just a fatal mistake that people have brought from the evolution of the internet and tried to apply it to the crypto revolution, which is just the wrong thing to apply it to. People understood that the internet needed to scale in bandwidth, in data bandwidth, and then they took that model, and then they tried to apply it to crypto, being like, oh, my crypto network literally has more bandwidth. And the mistake they made is they chose the wrong bandwidth to optimize for. The bandwidth you need in the crypto world is economic bandwidth, it's moneyness.

You need to maximize for being money, not for being a scalable platform. The scalable platform is the internet. We already have that. What's new and what's revolutionary is the money on the internet, not the data throughput of the money protocol, but the economic throughput of the money protocol. Absolutely. And here's the thing I think a lot of folks get tripped up on.

And I like to say this all the time. The asset is not the network. The asset is not the network. So there's Bitcoin as an asset, right? We know that that is you can send and receive Bitcoin. It's an asset. But then there's also Bitcoin, the network. Now, Bitcoin, the network is,

the blocks used to transmit Bitcoin the asset around. They're named the same thing, but they're completely different things. So Bitcoin the asset, that can have economic bandwidth. That's the value of Bitcoin. And it should have trustless economic bandwidth because trustlessness is the entire point of this whole crypto thing, this whole crypto experiment. If you want trusted economic bandwidth, go back to the traditional financial system. We already have it.

So Bitcoin, as an asset, can have trustless economic bandwidth. Now, Bitcoin the network, that needs trustless transactions per second, right? So you're measuring these things differently. And I think because they're named the same thing, Bitcoin, the asset and Bitcoin, the network, at least in Bitcoin, people get tripped up on that. And they say things like, well, Bitcoin is a digital gold and Ethereum is a smart contract platform. That statement is completely wrong because you're comparing two things that are in a

It's like comparing, you know, gold and Fedwire bank settlement network, right? These are different things. One is an asset. One is a settlement network. But people get tripped up because Bitcoin, the asset and Bitcoin the network, they're named the same thing. In Ethereum, there's eth the asset or ether the asset, right? That's like Bitcoin the asset.

And there's Ethereum the Network, which is like Bitcoin the Network. Now, on Ethereum the Network, of course, that's what you can use to transmit Bitcoin around, but you can also use that to transmit other assets around to interact with defy protocols, money protocols, all of these other things. And there's so much emphasis on Ethereum, the network, that we often forget about ether, the asset, and the economic bandwidth scale that we need, as well as the transactions per second scale that we need. So economic bandwidth, I think, restores the balance in this conversation a little bit. We put just as much focus on ether, the asset, as Ethereum the network, and realize that we have to scale both

in order for crypto and Ethereum to become a global financial system for the world. So, Ryan, if economic bandwidth is so important, how do we get more of it? In the early days of the internet, when we wanted more bandwidth, we had to lay more wire. We had to lay more wire. We had to innovate on the protocols. We had to do all these things that would increase bandwidth. We had to use bandwidth more efficiently. With economic bandwidth, how do we get more of that? Where does that come from? You know, this feels like a future article that we need to write on bankless. And I think you did a pretty good job laying out some of the scaffolding for this argument in your article this week. There's one line in it that said liquidity begets liquidity. And liquidity is one of this

these rare things, I think, in the universe and in nature that actually gets stronger the more you use it. So the more liquid it becomes, the more it entices more liquidity to come into it. And it's this very powerful flywheel effect, network effect that just keeps getting bigger and bigger and bigger. It's almost like a, you know, a black hole sucking in other stars, right? You know, as it takes in that liquidity, it just gets even bigger and more massive and increases its ability to take in more mass, take in more matter and get bigger still. So the way we increase economic bandwidth in a system like Ethereum is to increase the value of ETH. And the way we increase the value of ETH is demand for ether the asset. And as that demand increase,

increases, the economic bandwidth of the network increases too. So again, it's this nice flywheel effect. And I think that economic bandwidth and value of ETH and liquidity of ETH in general are very much tied to the moniness of the system. And so as people start to trust the system more and more, people have a lot of trust in the U.S. dollar. That's why it is as a as valuable as it is and as liquid as it is, as that trust transfers to these crypto-economic systems like Ethereum, the value of ether will increase. So the nice thing about it is we won't run out of economic bandwidth, really, at least not unless people stop using Ethereum the system and stop demanding ether the asset.

The really elegant thing about these crypto systems is exactly what you said. The more people use them, the more bandwidth becomes available. The more demand for ether, the more ether is needed. We don't run out of ether. And even though that there is an inflexible supply of these assets, especially with Bitcoin with its 21 million hard cap, but also ether with its algorithmically issued supply, if people want more and more ether, there isn't more to be printed.

And that's not even where this economic bandwidth comes from. If you print more ether, you don't have more bandwidth. And that's because when you print something, the value of it theoretically declines due to inflation. So this is an interesting comparison to make, where if the U.S., the dollar needs more economic bandwidth, if demand for dollars is going up, the Federal Reserve will print more of it to stabilize the value of the dollar and keep that value across time stable. And so the economic bandwidth of the U.S. dollar is actually the total number of outstanding dollars out in existence. And that's why no one invests in dollars. People save in dollars, but you don't buy dollars

because you think the price is going to go up. That's a fatal flaw. With these crypto systems, it's the exact opposite. No one's going to print more when there's more demand. And so what happens instead, when the demand for these things go up, the price goes up and the liquid market cap goes up, meaning the economic bandwidth goes up. If you need to do some things in Defi, if you need to buy some Bitcoin to send it around the world or just to hold it, what you do is you take that asset off of the table, you take it off of the secondary market, and you've increased the demand while reducing the supply. And as a result of that, the price of these things goes up. And so when MakerDAO has like 2% of all ether pulled off of the secondary market.

We call this eth locked in defy. And so the 2% of eth that's in MakerDAO has reduced the supply by 2% on the secondary market, which increases the value of ether to some degree. And that is what increases the economic bandwidth because it makes more value, more total value available for all other defy applications and all other users of Ethereum. it makes more total value available so while there's less ether available there is more value available and that extra value on the secondary market the u.s. dollar denominated value or the euro denominated value whatever there's more of that available and that is how economic bandwidth grows and it grows automatically we actually

don't need to innovate on this it happens in this emergent fashion it happens automatically as the fat protocol grows. As there becomes more reasons to buy ether, buy Bitcoin, pull it off the market and increase the price, that is how economic bandwidth grows and it grows organically. So we've just defined economic bandwidth and we've talked about how it grows. And I think all of this culminates into a reason to be really excited about assets like Bitcoin and Ether. I think it culminates in the trillion-dollar case for Ethereum, for example. I talk to people all the time, and sometimes in 2018, people would say things like, well, I'm really bullish on Maker, which is a money protocol that produces a stable coin called Die. I'm really bullish on that, but I'm not bullish on ether as an asset.

And that fundamentally does not make sense to me because of economic bandwidth. So die is an asset. It's a stable coin asset. I think this is worth an entire bankless episode, which we'll get to. But die is a stable coin asset. That stable coin means it's backed one to one with a dollar. It is completely backed, almost completely backed by ether in collateral. So in order to create to mint, one dye,

$1 worth of dye, you need at least $1.50 worth of ether, often $2, sometimes more. That serves as the collateral. You could think of die almost like U.S. dollars back during the gold standard. So at that time, every U.S. dollar was backed by some percentage of gold that the Federal Reserve kept in its vaults, right? Now it's not. We talked about that in episode two, the evolution of money. But that's what die is. It's backed by a hard money. It's backed by ether as its reserve. And so if you just kind of think about what that means, if there's right now there's about 100 million dye minted in existence. So that means there needs to be over 150 million worth of eth in economic ban. end-width backing all of that die. There can't be less because, again, each die has to be backed by that ether as collateral. Well, the interesting thing about die is it really fulfills the vision

crypto has always had, which is let's have a trustless currency that's globally available to anyone with an internet connection for the entire world. But let's remove the volatility from that currency. So it's a better medium of exchange and unit of account. And that's essentially what die is. It's completely trustless. So it's not like a stable coin. You might get at a Coinbase, you know, something called USDC, which is stable with a dollar, but is not trustless. You have to trust Coinbase and the bank behind Coinbase, the traditional system, bank called Silvergate, you have to trust those systems for USDC. So Die really is, it's kind of the culmination of a vision crypto that we've had for a while. It's a particularly interesting crypto money, if you will.

But people who are bullish on die, like, how do you get die to a billion dollars from 100 million today? How do you get die to $100 billion from what it is today? How do you get it to a trillion dollars? Well, the only way to do that in a trustless way is to have more economic bandwidth, to have more ETH, the value of ETH has to increase. We wrote an article on this on bankless. The title is basically, what's the trillion dollar case for Ethereum? And it sort of extrapolates this. The money supply in Argentina is about $26 billion right now.

Well, Argentina is undergoing massive inflation. They are getting rid of Argentine pay. pesos whenever possible and going to better money systems like the dollar other citizens are anyway. What if Dai captured 51% of Argentina's base money? It's economists call this M1. Well, in order to fulfill just that need, ETH, the price of ETH would have to reach anywhere between $2,500 and $10,000. dollars in order to provide all of the economic bandwidth that dye would need in order to serve as Argentina's currency. So a whole lot more economic bandwidth would be required to serve

die as a global money. That is essentially the trillion dollar case for Ethereum. What if die scales to a trillion dollars, for instance? Well, you're going to need at least 1.5 trillion worth of ETH to back it. So you said ETH needs to be between $2,500 and $10,000 to serve the needs of 51% of all value of the Argentine economy of its M1. So let's go through that math really quick. $26 billion is needed by Argentina to kind of serve their needs. If we want half of that to be covered by die, that's $13 billion die outstanding. And right now, the total market cap of all dye is roughly 120-ish million total die. So we need that to go 100x.

We need 100x more dye out there to be able to serve the needs of Argentina. Now, right now, like Ryan said, for every one die there is in existence, there's at least $1.5 worth of ether backing it. That is why the die has the value in the first place. And so if we want, you know, 13, 12 to 13 billion more dye, we're going to need to multiply 12 billion by 1.5, which means we need $18 billion worth of ETH locked up inside of Maker Dow just to back that amount of dye to serve Argentina. Now, the total market cap of Ethereum today is a little bit over $20 billion, which means

Maker Dow would suck up basically all of the ether in existence in order to supply this amount of dye. But that's just at current prices. If ether doubles in price, well then Maker Dow only needs half that amount. It only needs $9 billion. And if ether goes 10x in price, there's 10x more economic bandwidth available to Maker Dow, and it only needs one tenth of that amount. And so the more that the price of ether goes up, the less. MakerDAO needs to be able to serve the needs of Argentina to use a trustless internet-based version of the dollar. And again, that's just MakerDAO. There are many, many other protocols that need economic bandwidth to execute their function. MakerDAO is kind of just the biggest one, but there are many others. So, Ryan, what happens when all of these other DPI protocols are, you know,

what happens when they all need ETH? When they all need ETH, um, that, increases the economic bandwidth of Ethereum because it increases the value and market cap of ETH through demand like we talked about earlier. And yeah, make no mistake, all of these DFI protocols, the ones that are, you know, most interesting and most used, these protocols are ETH eaters. They're like their own kind of mini black holes. Uniswap, for instance, that is a trustless defy protocol for exchange and for trading. It eats eth in order to provide trading pairs, liquidity pairs, for everything it trades against. So it's like an exchange where you put eth into it, ether into it, and then it provides you a return as a liquidity provider.

And the more ether it has, the better trading environment you get, the lower slippage, the better liquidity there is in that platform. So it wants as much ETH as possible. And the protocol, the mechanism, incents people, to feed it ETH too. Compound works in a similar way. It is hungry for ETH. It uses ETH as a reserve collateral asset to borrow and lend against similar in some respects to make you in that way.

Synthetics, that's another money protocol that is going to become an eth-eater in the future. So I think synthetics is maybe a really interesting case here of how protocols can start with their own money asset, but then ultimately have to convert to and converge to the best money asset in the economy, which happens to be ether. Maybe David, do you want talk a little bit about synthetics and what they use as economic bandwidth today and what they are transitioning to you and going to be using more of in the future. So, synthics is a really interesting platform that uses their own token as their own money for their own ecosystem. And it's a structure that has a lot of people very bullish and a lot of people very skeptical and

scared that it is a self-referential system that may unwind. And so in order to combat this fear, synthetics is introducing ether as collateral. In the very first and second episodes, we've talked about how people always want to migrate towards using the best money. And so that's what we see synthetics doing. They are using ether as collateral for their synthetic assets and their SNX token is being used just as the fee collection token. So once again, ether replacing other things to be money inside of other protocols. The reason synthetics needs to incorporate eth as economic bandwidth is so it can produce more synthetic assets.

Synthetics deserves an entire episode in itself, but it can produce assets in tokenized form that represent anything like stocks like Apple or gold. or any asset. But all of those assets, they're ultimately backed by some sort of collateral. And what David was talking about, that collateral has been their own token, SNX. And its market cap, its economic bandwidth, is only about 150 million. So several orders of magnitude less than ethers. Now, as it incorporates eth, as its economic bandwidth, as it's collateral, to back the synthetics that it's minting and generate, it's going to be able to 100x its economic bandwidth. So it's inevitable that synthetics and protocols like it are going to adopt ETH, the most saleable,

most money asset on the network as economic bandwidth because it's in their best interest to do so. And that is exactly how an economy tends to converge on assets in the U.S. economy like dollars and like treasuries and assets in the ethereum economy like ether and like staked ether which is sort of an ethereum equivalent or will be an ethereum equivalent to treasuries so it's this network effect that that always wins the money game and so when all of these defy applications combine we can get to a measurement of the total bandwidth used by defy so maker dow has 2.3% of all bandwidth uniswap has roughly 1%, compound has roughly 1%, these numbers are difficult to calculate and difficult to keep updated. But the last time I checked, there was about 5 to 6% of all ether

locked in defy, which is another measurement for total economic bandwidth locked in defy. And so we're actually pretty unsaturated. And that's just kind of because of the early days of these crypto revolutions. We are young and we are developing these protocols, but the idea is that if we want the global monetary supply to be built on top of Ethereum, we are super short in economic bandwidth right now. And the price of ether will need to increase commensurately to be able to host all of that transactional capacity, all of that demand for money. And that's just money. That's just a very small component of the overall economy. If we want stocks and bonds on, top of Ethereum, the price of ether needs to increase by like 5,000 times in order to host that

economic activity. And as we, as the Ethereum community, as the Ethereum economy grows, it automatically increases its economic bandwidth from demand, but so does the need for more ether to host more economic activity. And this is really the bull case for Ethereum, is just hosting more and more of the world's economic activity and grow in. its economic bandwidth. In the same way that the internet hosted more and more of the world's data and the bandwidth grew commensurately, Ethereum is going to hopefully host more and more of the world's economy and then increase its economic bandwidth as it's needed to. Speaking of Ethereum and awesome protocols, we should probably pause for a minute and talk about

our sponsors. I want to tell you about a D5 protocol you absolutely have to check out. It's called AVE. AVE is a lending and borrowing protocol on Ethereum, so it uses some of that economic bandwidth we've been talking about. You can put dye into it. You can even put ETH into it. And when you do, that die or that ETH starts earning interest immediately. You can also borrow from it. And I think this is a feature I haven't seen anywhere else. When you borrow from AVE, you can actually create a fixed rate loan. So it's not variable. The rates aren't going to change on a day-to-day basis for you. Developers, you've got to check out their flash loan protocols.

They're incorporating that in a defy saver, I believe, this week. So you could swap out the collateral of a CDP. If that doesn't mean anything to you right now, don't worry about it. You'll level up. You'll get it soon. If you want to get started with AVE, it's super easy. You can deposit die there at AVE.com.

So that's A-A-A-V-E-com. Speaking of getting the world's economic activity onto Ethereum, monolith is a great way to do that. If you want to be able to spend your dye in the real world while also earning interest on that die at the same time, get the monolith Visa card. The Monolith Visa card connects to your die balance and allows you to spend that die at any merchant that accepts visa, which is basically the whole world. And so Monolith is a great way to take some of the world's economy and put it on Ethereum. And so you can go to monolith.xyz to get your first ever defy card. And it's pretty powerful to be able to hold your crypto assets on the crypto economy while also being able to spend your money in the real world.

So hats off to monolith for really taking the challenge of bridging these two worlds. And thank you for increasing the economic bandwidth of Ethereum. So I just put out an article in bankless called Ethereum is an emergent structure. And this to me is kind of a thesis. It's a concept as to how all of these different Ethereum applications are going to compose together and generate one single large structure. And the core thesis of this is that every application on Ethereum generates surface area. So MakerDAO has huge surface area, right? Because it produces a bunch of different things for other applications to use and leverage and build off of, mainly die.

But every application on Ethereum produces surface area for others to build. So compound has a really big surface area. A lot of applications put their assets inside of compound. Uniswap has a very big surface area. A lot of applications go through Uniswap to swap assets. Every time you build something on Ethereum, you build it with just being one transaction away from all other things on Ethereum. So all of these things are very close in proximity. And that's why data, data throughput for Ethereum isn't that big of a deal because the data required to go from one application to another is very small.

It's just one transaction. We're not going between blockchains. We're not going between protocols. It's all built in the same spot. And that allows all of these applications to coalesce into one single structure. This is what we are referring to as composability. And it's one of Ethereum's key characteristics that make it so powerful. All applications on Ethereum.

are composable with all other applications. And so when we talk about the eth locked in defy, the metric of how much economic bandwidth is being used by this one single composed structure, we are talking about the weight of this structure and how much ether it is sucking into it. And so I have always viewed the price of ether as a three-way tug-of-war, one between the eth-locked in defy, how much demand there is from, defy applications to put ether inside of them. And then there's also in proof of stake Ethereum, how much ether is being staked on the network to provide security. And so these two things compete for ether. And then the last thing that competes for ether is the market price of

ether on the secondary market, the price for how much people are willing to pay for one ether on the secondary market. And these things are in a three-way tug-of-war. And the more and the stronger the gravitational pull of the defy structure, the more it pulls on the secondary market price of ether. People will have to pay more to get ether when the defy structure, the composed structure of applications on Ethereum are sucking up all of the ether. And so that's why I kind of view this structure as having a weight. It has mass. It has gravity. It sucks in value into these applications because of the demand for economic bandwidth. And so the more economic bandwidth is required,

the more it produces on the secondary market. I view the secondary market price of ether as the weight of this total structure on top of the scale. If you were to be able to just place this structure itself onto a scale, the number that would show up would be the price of ether on the secondary market. And that's how this economic bandwidth is going to scale organically. When you build something on top of this structure that sucks in ether, that brings in ether to be deposited to execute the function of the app, it adds to the weight of the structure, which adds to the weight on the scale, which reflects a higher number in the secondary

market price. Absolutely. You guys have to check out David's article that we published this week. It's one of my favorite that we've published on bank lists. It's called Ethereum is an emergent structure. That's what he was just talking about. It goes through those concepts. We'll put it in the show notes.

And everything that you were talking about with Ether as economic bandwidth, you know, a question that I think some people raise at this point is, why does it have to be Ether? Why can it be some other token on Ethereum, like a tokenized gold or, you know, tokenized real estate, or, you know, a token like Rep or B. B&B from Binance. And I think the answer to that question is because it has to be trustless. We should probably define what we mean by trustless a little bit.

You can also look at an article that we wrote last week called ETH is irreplaceable, and it goes through the quadrants of trust that various assets fall into. There are four quadrants of trust, and the most trustless asset has to have two attributes. That's in the top right corner quadrant, the zero trust quadrant. It has to have trustless issuance, so the supply can't be changeable by a small group of people, you know, the Fed chair, for example, and his merry men. And it has to have trustless settlement. So the settlement of the transaction can't occur in a centralized system.

It has to occur in a decentralized system. You think of trustless settlement in the physical world. If I give you a dollar in cash, you know, cash money, then that is trustlessly settled because it's moved from my possession to your possession. The settlement is over. We've settled it on our network. Same thing with a bar of gold. If I give you a bar of gold, it's trustlessly settled.

Everything else that we move through the banking system today, if I were to send you some money, David, on Venmo, that's not going to be trustlessly settled. That's going to be settled in the banking system using Fedwire that is ultimately all controlled by the U.S. government. They can impose sanctions on it. They can stop us from transacting. It requires their trust. a zero trust asset is one that is settled on a network like Bitcoin or settled on a network like Ethereum. It can't be stopped. It can't be shut down. It's a bit more like the transaction of cash or the transaction of gold in that when you send me ether or if you send me die, David, I have it. Once that die has moved from your account to my account, as long as I have the private keys, I own it. It's mine.

just like the settlement of cash or just like the settlement of gold. So ether and Bitcoin have that trustless settlement. And as we've talked about in previous episodes, episode one and episode two, they also have the element of trustless issuance. It is not issued by a central government. It is algorithmically issued and maintained through social consensus. A bit more like the issuance of gold. So a zero trust asset that we'd be used to in the traditional world would be, again, a bar of gold or a nugget of gold that is settled trustlessly, and it is also issued trustlessly.

Well, Bitcoin and Ether, those are also in this upper quadrant of zero trust assets. If you look at the other assets, even tokenized assets on Ethereum and put them through that lens of which quadrant do they fall in, how trustless is their issuance, how trustless is their issuance, how trustless are. are, is there settlement? Not many others, if any, fall in that zero trust quadrant, that upper right. tokenized gold, for example. Well, if I have an ERC 20, that's a token on Ethereum and I send it to you, well, there's an element of, that's kind of trustlessly settled, but not really, because once I send you that token, the token itself doesn't, isn't the gold itself. It just represents a voucher for the gold that can be redeemed in a bank vault in London somewhere or a bank vault in Singapore.

So ultimately, it's settled in the legal system. Now, maybe the issuance is somewhat trustless, maybe as long as we can trust the issuer of the token. So again, not trustless settlement, not trustless issuance. Real estate tokens the same way, security tokens, the same way. almost all other tokens on the Ethereum platform are not zero trust. And Ether is. So if we want trustless economic bandwidth at the very base layer of these money protocols, at the base layer of die, for instance,

then we need the asset that's collateralized and that's backing these assets to be trustless as well, or else everything we build on top becomes a trusted asset. And if everything that we're building on top of our trustless system is trusted, well, it starts to resemble more of the traditional financial system. And then what's the point? Right. So the bet on Ethereum, I think, and the bet on Bitcoin as well is that people will value that the world will need trustless economic bandwidth and trustless money systems in the future. future and that demand for these systems and for these types of transactions and money systems will increase over time and that Bitcoin and Ether are not replaceable as assets on their

respective networks because those are the only assets that are zero trust. I think a great way to illustrate why Ether is the only native trustless asset on Ethereum is well illustrated but from the Genesis block of Ethereum. The very first block, block number zero, has nothing inside of it except for one thing, which is ether. Today, there are thousands and thousands of different contracts, you know, thousands of addresses that you can go to and do things and thousands of tokens on them. But at day one of Ethereum, there was one thing and there was one thing only, which was ether, and there was nothing else to do.

And this kind of illustrates that all other tokens or all other assets on the Ethereum blockchain came after Ether. And they were placed there. They were added there by other people. And so this kind of illustrates why Ether is the first class citizen of the Ethereum blockchain. And the same model is true for Bitcoin as well. There's tether on a Bitcoin side chain called Omni, but it wasn't there on day one.

And so the only real trustlessness that you can get from the assets on a network come from the main asset itself because any other asset was placed there afterwards and is trusted to some degree. And that's actually kind of why die is so special. Die is the only other asset on Ethereum that has a decent amount of trustlessness. The Maker Protocol itself has done a great job removing trust, but when it comes to comparing Ether versus Die, Ether will always be more trustless than die because ether is the single point to which the entire defy structure is built upon. So we've talked about ether and we've talked about Bitcoin being in this zero trust quadrant. But what happens if we take Bitcoin and we put that on Ethereum?

We tokenize Bitcoin. There are a number of projects doing this today. Some fantastic projects out there. TBTC is one of them. They're looking to tokenize Bitcoin and put it on Ethereum to increase the economic bandwidth. of Ethereum. The trouble with these approaches is that they're not actually increasing the trustless economic bandwidth of Ethereum. At least I haven't seen a design that does. So if you take something like TBDC, it actually requires that you post ether in collateral to secure it. So every

TBDC might every $1 in TBDC, or maybe I should say every one Bitcoin in TBDC requires 1.25 Bitcoin's worth of ether to back it. So when you do kind of the math, it's actually a net consumer of trustless economic bandwidth on Ethereum. Now, TBDC is trying to get the collateral of, the collateral backing TBDC down from 1.25 to lower. Maybe they get it to one. Maybe they get it a little bit lower than that. But it is right now a net consumer of economic bandwidth, and it will look to be an economic consumer of trustless economic bandwidth on Ethereum into the future. That's not to say I'm not excited, and we aren't excited about tokenized Bitcoin on Ethereum. I think we are. I think Ethereum is a platform that will suck in all the assets of the world.

it will take in tokenized real estate. Just last week, there was 40 million in tokenized bonds that were issued on Ethereum and accessible in Bloomberg terminals. I totally expect it to take on all the assets from the traditional financial system. But all of those assets, including tokenized versions of Bitcoin, at least in the designs I've seen so far, are not in that T0 trust quadrant. and that's really what you need in order to create an end-to-end, trustless, permissionless, open financial system for the world. All right, so we've covered a ton today. We've talked about what trustless economic bandwidth is, why it's important,

and how it can actually create a trillion-dollar, multi-trillion dollar use case for assets like Ethereum and also Bitcoin. It's a super exciting concept. We've put some more information in the show notes on this, including some articles that you absolutely have to check out. Just a quick reminder, risks, assets like ether, assets like Bitcoin, highly volatile, all of the stuff we talk about on bankless. This is a new frontier. There are risks associated with it. Don't put more money into the systems than you're able and willing to use. This is not financial advice.

What we want you to do, action items for this podcast, obviously continue subscribing to the podcast. Also go to the newsletter and check out four articles that we mentioned explicitly. So there's three on economic bandwidth and there's one article that David wrote this week. These are fantastic for understanding what economic bandwidth is and why it's important. We've included them all in the show notes. Guys, really excited to have you on this journey. This has been episode three of Bankless. See you next week.