Bankless - 82 - Investing in the Future | Cathie Wood, Chris Burniske, Yassine Elmandjra

Episode Date: September 13, 2021

Cathie Wood is Founder, CEO and CIO of Ark Invest, the investment management firm specializing in disruptive sectors. Yassine Elmandjra is an analyst at Ark, and Chris Burniske is the former blockchain lead at Ark and is now a partner at Placeholder VC. We’re incredibly excited to bring Cathie on the podcast for her industry-leading insights and perspective on the innovative investing space. The thesis is simple: invest in the future. As a society, we are entering a new age of exponential and unprecedented growth, afforded by compounding technological advancements and a turning point of innovation. Ark Invest is poised to capitalize on these opportunities and has eyed cryptoassets as an important vehicle for this substantial, societal change. Dive in and learn about Wright’s Law, managing haters, Ark’s thoughts on the triple point asset, and DeFi. ✨ GET THE EXCLUSIVE DEBRIEF ✨ https://shows.banklesshq.com/p/exclusive-debrief-investing-in-the  ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  🎖 CLAIM YOUR BADGE: https://newsletter.banklesshq.com/p/-guide-2-using-the-bankless-badge  ------ BANKLESS SPONSOR TOOLS: 💰 GEMINI | FIAT & CRYPTO EXCHANGE https://bankless.cc/go-gemini  🔀 BALANCER | EXCHANGE & POOL ASSETS https://bankless.cc/balancer  👻 AAVE | LEND & BORROW ASSETS https://bankless.cc/aave  🦄 UNISWAP | DECENTRALIZED FUNDING http://bankless.cc/uniswap  ------ Topics Covered: 0:00 Intro 7:42 Cathie, Chris, and Yassine 12:00 Investing in the Future 17:57 Wright’s Law & Retail 22:02 Fear of Change 28:17 Ark and Bitcoin 38:19 Ether and Ethereum 47:12 NFTs 49:28 Triple Point Asset 55:55 Yield, Banks, and Regulation 1:03:24 ETH’s Risk Free Rate 1:06:35 Fintech & DeFi Mullet 1:16:50 DeFi and AI 1:26:07 Regulatory Limits 1:33:53 Crypto’s Challenges 1:41:46 Closing & Disclaimers ------ Resources: Cathie on Twitter https://twitter.com/CathieDWood?s=20  Chris On Twitter https://twitter.com/cburniske?s=20  Yassine on Twitter https://twitter.com/yassineARK?s=20  Episode with Chris https://newsletter.banklesshq.com/p/-ethereum-opportunity-chris-burniske  Cryptoassets https://www.amazon.com/Cryptoassets-Innovative-Investors-Bitcoin-Beyond/dp/1260026671  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

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. Wow, David, all-star cast today. Kathy Wood came on the podcast, two analysts, former analysts, Chris Berninski, whom Bankless listeners already know, and also Yassine Elimadra. and wow, it was just a fantastic conversation. I almost felt like we were in the room with them brainstorming the future of crypto

with these incredibly savvy investors, just a wealth of information, almost like insider information as well as you were kind of witnessing an Ark Invest meeting on crypto. Yeah, this was an interesting peak inside of the dynamics of Arc Invest, right? It felt a little bit like a reunion. We have Kathy and current crypto analyst, Yassine, also back with, Chris Berniske, who, you know, has his thoughts, like intertwined into the crypto side of Ark Invest. So seeing that dynamic in this episode was really, really powerful. I think my favorite part about this was, and we talk about this a lot at Bankless, these aging, fragile, antiquated

institutions. And Kathy and the team over at ArkInvest really put this into a new perspective that I really, really enjoyed, which was these institutions keep on looking backwards in order to form their investments. They keep on looking into history. And that has left such a massive opportunity for people who are actually forward-looking, which is the whole point of investment in the first place. And so the institutions of the world, which on the bankless program, we criticize, like I said, as being just old, antiquated institutions, have really given a ton of opportunity for retail investments, retail-educated, retail investors to make some of the brightest and most informed and most precise investments in this space. And that has really caused a massive division

in Wall Street about the approaches to things like Tesla. And of course, the approach to things like crypto, where the traditional institutions of the world rejects crypto, yet the retail investors of this world really help bootstrap these networks in the decentralized way that they were always supposed to be in the first place. And gosh, there are so many other things in this conversation that... Yeah, I totally agree. with that, though, David. Like, even their metrics are wrong. Even their investment metrics are wrong, because what? They're based on the past, and they're based on assets that existed in the past. Kathy, at one point in time, called herself rebellious. People in Wall Street thought she was rebellious,

called herself an odd duck. And I was just reflecting on, wow, that fits exactly into into crypto, crypto natives. We are odd ducks. We are rebellious by nature, but we are looking at this asset class and projecting it into the future. And sometimes we look at the outside world and we're like, what are you guys doing? Like, how are you missing? Waving our hands. How are you missing this? It's so obvious. And I think Kathy sees some of that too, just the obvious nature of how big crypto is going to be and how quickly it's going to get there. At one part in the conversation, David, she actually blew my mind too. Won't reveal like where exactly that is. But when we were talking about banks and asking whether they felt threatened. Yeah, she had a really interesting

response on that that totally blew my mind. Yeah, the other part I thought was really cool, Ryan, is that their crypto analyst, Ysene said that he's actually used some bankless content to inform some Ark invests analysis onto Ether and Ethereum, which I feel very, very proud of that we've actually been able to influence the way that ARC treats some of these crypto networks that we hold so dear. Yeah, and that's what this is. This whole crypto discovery process, it's like just one big group conversation online, right? Like so many of our ideas were actually influenced by Chris Berninski, who is also in this conversation today.

So it's just this feedback, this open source feedback loop of discovery on what this asset class is, what the relevant metrics are. And this is all about how Kathy and Arc Invest think about this asset class. So absolutely fascinating discussion. Guys, I know you are going to enjoy this. So sit back, enjoy. One last thing before we begin. David and I have a special debrief today.

There were some after the podcast conversation that we had with Chris and Kathy and Yassine want to fill you in on what they said after the podcast. I think some interesting tidbits there. So to get access to that, you have to subscribe to the bankless premium feed. That is available for all bankless premium members. We'll include a link in the show notes.

So you become a premium member and get access to that as well. without further ado, we want to thank the sponsors who made this episode possible and then get to the conversation. Bankless is proud to be supported by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system where trades are matched with other humans, uniswap is an autonomous piece of software on Ethereum, which is what Ryan and I call a money robot. No human counterparties or centralized intermediaries, just autonomous code on Ethereum. input the token you want to sell and receive the token you want to buy.

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We are honored to introduce our next guests to you. We've got three individuals assembled here. I'm going to introduce them one by one. The first is Kathy Wood. She is the founder of Arc Invest, legendary investment firm. Kathy founded ARC in 2014, Focus, Disruptive Innovation. They do actively managed ETFs. That's the product.

Arc just passed 50 billion in assets under management earlier this year. And they've delivered some of the best returns that Wall Street has had to offer all through one thing. And that's investing in the future. So it's no surprise. They were also early to crypto. Kathy, great to have you. How are you doing? Great to be here, Ryan.

I'm doing fine. and I have you have two other individuals. I know you're going to introduce of whom I am so proud. So why don't you take it away? Well, these are fantastic individuals as well. The next is Yassine Elmandra. Yasein joined ARC in July 2018 as the lead crypto asset analyst, where he focuses on crypto assets, of course,

the portfolio allocation of them, the institutionalization of them. He also has a specialty in on-chain metrics. You've seen, great to have you as well. Great to be here, Ryan. Thanks for having me. And Bankless Nation, you also know Chris Berninski from a previous bankless episode. He's a venture capitalist and partner at Placeholder VC. Before starting Placeholder, he actually worked for Kathy as a crypto analyst back in 2014,

back when crypto was called Next Generation Internet, and he led the firm to become the first public fund manager to invest in Bitcoin. Chris, thanks for coming back with friends. friends this time. Good to have you, sir. Thanks for having us. Are those asset numbers outdated by now? Oh, yeah. We're, I think we're a bit north of 75 billion. There you go. Gross fast. Yeah, well done. Congrats. He's been blessed with great talent. So, fantastic. And you've been blessed with some foresight, too, which we're going to get into first. But just to give everyone some context of how we're going to do this podcast, I feel like what we're trying to do is paint this beautiful tapestry of crypto investing. So Kathy's going to help paint the

picture. Ysene's going to add the detail and Chris is going to add color as we go. And I got to ask before we begin, when was the last time this dream team, the three of you guys, were assembled together, or is this the first time? I don't know. Believe it or not, it was earlier this week. Oh, okay. Did we not forget that. That's true. We were on a, I'm the, I think. I think. I think. thought you meant physically together. Physically might have been your book signing, Chris. I might be wrong on that.

Yeah. The crypto assets book, Chris? That's how I met Yassin. Three and a half years ago. And that's actually how I like to think how I landed my job at Arc. But it was a funny story where I actually stumbled upon Arc through Twitter. And I was following both Chris and Kathy at the time. and I was a college, I was a senior in college.

And at 11 p.m., right before I was going to sleep, I see a tweet from Chris of, make sure that you come to my book signing tomorrow in New York at 5 a end. And I was like, all right, I have to go. So I ended up booking a train ticket that night. And that's where I met both Kathy and Chris. And that was kind of in the middle of my interview process. Look, you see, I don't know how many people that book brought into crypto, but I am one of those people, actually.

So I started to really get interested after reading Chris's crypto asset book. It was kind of foundational to me coming up in the space. So Chris, you brought a lot of good people into crypto, sir. Thank you. Thanks, you guys. That's gratifying to hear. And I learned a lot of it from Kathy. And Yassine's hustle worked for everyone who's out there trying to get a job in the space,

showing up physically and displaying your passion and your ability to commit in that way. is meaningful. Attend those book signings, guys. That's what you have to do to get a job in crypto. All right, so we're definitely going to talk about crypto today. But first, I think we want to do some high-level orientation here. And, Kathy, we want to understand a bit more about how you think, how you think about investing. And I think as David and I were talking about doing this show, one thing that really struck us is Arc has seen an insane level of success, I think, by doing one thing very simply.

and that is pricing in the future today. Like no one is pricing in the future like Kathy Wood and Arc Invest and your talented analysts. And that seems to be the investment thesis for Arc. And I want to ask this question to orient us. What makes you think this future that we're always talking about is so close? Oh, my goodness. We are on the threshold of an explosion in innovation. And crypto is symptomatic of it.

The seeds for what is about to happen were planted during the 20 years that ended with the tech and telecom bubble. Those seeds have been gestating for 20 to 25 years, sometimes 30 years, and are now beginning to blossom. And that's not even the right word. They are exploding into existence. So we think there are five major platforms, 14 different tech. technologies that are all getting ready to move into the sweet spot of their S curves. And there are going to be convergences between and among these technologies. So you're going to have one S curve feeding another, feeding another, and creating explosive energy and explosive growth.

And I think in the crypto space, we're going to see blockchain technology and artificial intelligence converge and cause explosive reactions. So it's pretty exciting. Just to get back to investing in the future, when I was trying to explain to someone what I wanted to do before starting arc and who's not in our business, he said to me, oh, you mean that the future of investing is investing in the future? And I said, you got to. You got. You got. You. You got. You. You. it. Well, now, when I started in the business, that's the only way people thought about investing. And then we went through the Tech and Telecom bust and then the 0809 meltdown. And we ended up with huge risk aversion in the markets and a tendency to invest very much like the broad-based

indices out there. In other words, not adding much more value than the indices themselves. And the indices are where they are because of what has happened historically. The largest companies, the most heavily weighted companies in these indices are there because of their past success. But if we're right and all of this disruptive innovation is about to explode, well, they are in terms of presentation that Arc gave in that the big idea is 2019. There's a slide that you guys have that talks about, illustrates some sort of relationship between innovation and investment and just the development of technologies and the future. And on the very right side of this graph, where we are currently today, 2020, you guys have it just like soaring up into the right with

exactly what you just said, like so many different technologies all hitting the peak of steepness of their S curve all at once. So a couple of question here. Have we ever seen any sort of alignment of the stars with how many different technologies are like really hitting their strides all at once? And what makes you believe that this is actually true? Yes. Well, this chart was drawn by Brett Winton or developed by Brett Winton, who's our director of research. And he was working with academic literature to try and understand what would be the productivity or the impact on productivity of the combination of these platforms. And what he's depicting here is the productivity uplift is going to be unlike anything we've ever seen.

We've only had multiple platforms evolving at the same time, only once before. And that was in the early 1900s, telephone, automobile, and electricity. And that world, that was the technologically enabled innovation of the time and transformed our world completely. Let me put some numbers on where we are now. In 2019, when we did this chart, we evaluated the market cap around the world, associated with truly transformative innovation. That was, that year it was $7 trillion.

So it was less than 10% of the global equity market cap. That's public equity. The next year, last year, that doubled to $14 trillion. And we did have a very good year last year. We believe that in the next five to 10 years, that number is going to north of $100 trillion. But what we're not saying when we said, so that's the upside. The downside will be in the broad-based benchmarks, which have been beneficiaries of the traditional world order and are now going to be disrupted and disintermediated.

So in order to summarize this section about like this explosive innovation, what, What is the current market holding true that you think the market is fundamentally wrong about? I think the pace of innovation and the convergence between and among these platforms. Most investors have never seen exponential growth. Well, they recall seeing it once. It was during the tech and telecom bubble, and that ended badly. and that's why there's been this allergic reaction to innovation and high valuations. Most investors have a one-year time horizon, maybe 18 months.

We have a five-year investment time horizon. The early years of exponential growth, when we're at low numbers in terms of the base, the numbers don't look that much different from linear growth. but when you go out five years, the difference between exponential, so revenue growth rates in the 25 to 50 percent range per year and, let's say, GDP growth, which might be 5 percent at best, night and day. And I think what gives us the differentiation is our starting point. We start from the top down, trying to size markets, and we center our research on something called Wright's Law.

Wright's Law is a relative of Moore's Law. Moore's Law is a function of time. Wright's Law is a function of units. And actually, Wright's Law has worked better in the semiconductor industry than Moore's law itself during the last few years. And so that's how we get to numbers like the electric vehicle space, 2.2 million last year. but the costs are dropping to such an extent now that we think that number is going to 40 million, almost half of global cars sold in five years, actually more like four years now.

No one has that kind of accelerated growth in their models. They've never seen it before, so they're not modeling it in the future. But Wright's law is a very good guide. Just to hop in and emphasize this point, because I'm sure Yassine and I both have built these rights law models. Kathy's saying, like, as you increase the units of production, there's a certain cost-declying curve to that technology. And so that's a lot of ARC's work of being able to predict out five, ten years. What are the costs of these things going to be based on the units produced? there's this other thing that was coming to my mind as Kathy was talking, and Elon Musk has this line of fate loves irony, which always messes up my head.

But when I think about how backward-looking a lot of traditional finance has become, that comes at the same time. And the backwards looking is, as Kathy's saying, focusing on indices and investing based on the past. That's happening at the same time that the world is changing at an accelerating rate. And so there is this tragic irony that people are more and more backwards looking in their investing, at least institutions are, while, you know, the opportunity is getting larger and larger in the future. And I think that what's great about that actually is it opens up a space for retail. And, you know, ARC is predominantly, I think, retail favored with growing institutional respect. And I think that will only grow over time. but the opportunity is really for retail to catch up to institutions. You guys say front run the opportunity, but it's just retail being future looking while the institutions are backwards looking. Well said, absolutely.

And this kind of this tragic irony that you're talking about, Chris, kind of gets into another question that's been on my mind, which is this. Like, we all have haters out there. David and I, we have haters, you know, doesn't take long. Go scroll our YouTube comments every once in a while. There's lots of people who are willing. to trash what you're doing. And Kathy, you have some haters too. There's an anti-Cathy Wood ETF out there. I've heard critics call what you're doing unprofitable tech. That's what they call

your sector. Our friend from Real Vision, Raul Paul, was just on recently. And he says part of this is because people are fundamentally afraid of change. Is there something to that? Why do you think there are like the haters of the world disparaging the work that you're doing in kind of your method. Actually, I feel very comfortable when I'm in that kind of situation. If everybody loved what we were doing and they were chasing it, I'd feel much less comfortable. So I'm kind of used to it. I've faced it actually inside the traditional world as well as I became an otter and otter duck and my counterparts were becoming more benchmark sensitive. So, you know, it was kind of, seemed like to them at least, rebellious. So are they afraid of change? I think there's muscle

memory associated, certainly at the high level management associated with the tech and telecom bubble and many equity leaders went down and basically ceded power to the fixed income market. So many of the leaders of financial firms came out of the fixed income world because of the tech and telecom bust. Many equity leaders lost their jobs then. And then again, 0809. And so you have this very conservative group of people who, really haven't managed equities ever. And actually understand more benchmark sensitivity, since that's how that work world works. And I suppose this just seems like, again, an odd duck

running around with her head cut off. They're not willing to look at the kind of research we're doing, which we provide freely out there. In fact, we provide our Tesla model, right? And to help to educate people saying, look, we've done the research that supports these numbers. And I think the biggest surprise to me is that giving the research away, spoon-feeding them with the models, has not changed much. But I think it will change. we're just going to if we're right, if we are right, then those who are wedded to benchmarks are going to lose their jobs. I would only add that your research has educated retail, right?

Institutions might be dismissing it currently, but you have your following, Kathy. Yassine has his following, like, ARC's team has been empowered to connect with their audiences. and while there are haters of Arc, there's a much larger army, I think, of lovers on, you know, Reddit and Twitter and everyone cheering on what Arc is doing based on the open source research. Which is, it has been wonderful. In fact, there's a concept called accredited investors in our world. Accredited investors have to meet certain income. and asset thresholds before they can invest in anything risky, which the SEC deems risky. Now, Hester Perce at the SEC is fighting this concept, and so are we.

We're trying to democratize investing and give these opportunities to anyone. Now, if you ask me, who are the accredited investors in our space? I'm going to tell you it's the retail. They know because they're reading our research. And, you know, these investments, they do not, many of them do not make lightly. They want to study everything we put out. Those are the truly accredited investors. So hopefully we're going to be working with the SEC over time to change that dynamic.

Well said. Yassine, what do you want to add to this? Yeah, I was going to add that, you know, hate really kind of. of signals that you're onto something most of the time. There's that whole, like, famous quote of like, first they ignore you, then they laugh at you, then they fight you, then you win. Like, that's, that's kind of what we're seeing in real time here. You know, I'd also add that it, I don't think it's a coincidence how align kind of the crypto adoption curve or the crypto ethos has been with kind of arc's trajectory as well. You know, it starts obviously at the open source research ecosystem

level where, you know, we want the information, we acknowledge that the information is commoditized. So the best way to use that information is to share it with the world so that it can battle test our assumptions. It's going to be out there. It's open source. Same thing as happening in crypto, right? You have readily available data that anyone can access. It levels the playing field. And then in terms of the adoption curve as well, I mean, the first to kind of bootstrap these networks are retail investors. And they, in a lot of ways, were way ahead of the curve relative to institutional investors. We're now institutional investors have just begun to dip their toes in Bitcoin, let alone,

you know, other crypto assets. So there's some high alignment. And it's really interesting to kind of see that play out in real time. So bankless listener, I hope you can begin to see the lens through which arc views everything. and it's very much aligned with a crypto lens. I heard things like open source analysis, heard things like S curves and exponential growth. You know, Kathy talked about herself as an odd duck.

I feel like an odd duck. I feel like a rebellious investor when we're talking about these things. I'm sure many of you listening will resonate too. So let's get to that topic of maybe one of the oddest things around. You guys started doing crypto in 2014. That had to be, that had to turn a lot of heads, of course. And I know you have five technology platforms you're investing in.

So genomics is one. Artificial intelligence is a second. Robotics is a third. Energy storage. And then also blockchain. We can call it crypto on this podcast. So let's talk about that last one, the weirdest one, maybe the most understood, maybe the most rebellious to date.

I'm not sure. This question for Kathy, I'm curious at the highest level, what do you see in crypto? Well, again, my aha moment. was after Chris had really written the paper, could Bitcoin serve the role of money? We're just working from a very basic level. And we were talking about a $6 billion market cap at the time or network value, as we were calling it. And we had Art Laffer take a look at this paper. And he looked at it. and helped us. We wanted it to be absolutely correct from an economic point of view.

He looked at it and he looked up and he said, wow. He said, this is what I've been looking for all my life. This is a rules-based monetary policy, a global rules-based monetary policy. And I ended up saying, oh, okay, well, if that's true, how big could this become? And he said, well, how big is the U.S. monetary base? And at that time, it was $4.5 trillion. Now it's $8 trillion.

Because he was dimensioning it as though it would be the reserve currency, a reserve currency out there. So a global rules-based monetary system, hugely important for humanity, I believe. I share art view. I was educated by him, so that's not surprising. And then I think the idea, again, Chris wrote the book, we're dealing here with a new asset class also for investors,

unlike anything we've seen before. And, you know, unlocking huge productivity and creating, creating inclusion like we've never seen before globally. So I think and decentralized finances just mushrooming as we see. So, you know, it's becoming, it's going viral. You see, I want to pick your brain here with this next question. Kathy just talked about in 2014 peaking into the world of crypto, seeing Bitcoin, seeing that it might actually compare to the monetary base of the U.S. dollar. And again, that was in 2014, 2015, we're in 2021 now.

How has ARC's model for what Bitcoin can be or what it is perhaps changed over time? And then are there any like on-chain metrics that you like to peek at that help you back up this belief that has either stayed the same or changed since the initial impression that Ark Invest got in 2014? Sure. So I'd say I want to continue kind of that narrative evolution that Kathy mentioned, right? where we started off in 2015 with could, could Bitcoin serve the role as a disruptive currency? Chris, a few years later, kind of wrote, you know, is Bitcoin the birth of a new asset class?

And then more recently, we published a paper on kind of a new mental model around, you know, defining Bitcoin in these crypto networks as novel economic institutions, like as a new form of institution. That kind of introduces a new form of economic guarantee. And I think that that is a very kind of interesting mental model, you know, especially as we're shifting from the physical to the digital world, of what these institutions represent. You know, there's a massive innovation now in basically kind of shared state where as opposed to with traditional databases, here you have kind of this read-only database that is open source in which the right axis is mediated by open-sour. and fair markets. And so the coordination mechanism is completely,

has completely evolved from what we traditionally rely on in centralized institutions. And so when you kind of think about what this is really good for, it's great for money or digital gold, as we're seeing with Bitcoin. You know, what excites me the most about Bitcoin is that it's really kind of the first legitimate attempt at a non-state money. It's a representation of sovereignty. It's a tool for freedom in developing nations. And so the way that we kind of our thinking has evolved,

and I recall in the early days, Chris was sizing the opportunity, we were looking at the remittance use base. We were looking at kind of the potential digital store of value use base. You know, now in the context of the macro conditions and the context of, you know, the broader adoption than developing nations, you know, I see Bitcoin as really this novel economic institution. that transcends borders, that is politically neutral, and that sort of introduces a new mechanism to facilitate economic activity. Now, how does this kind of, how do we see this play

out in real time and what sort of data supports this investment thesis or kind of the general adoption curve that we're seeing? I think you can segment this in a few ways. I think there's the qualitative aspect of it, right, where we're seeing the actual adoption for in real time. El Salvador this week announced that they have now rolled out Bitcoin as legal tender and people are able to kind of get their $30 with the Bitcoin air dropped on their wallet. You know, this last year we've also seen, you know, corporations adopt Bitcoin on their own balance sheet, institutions.

So there's been like kind of a general adoption curve that has extended beyond retail and particularly this year that I think is as excited as the most. On the quantitative side of things, and you kind of alluded to this in terms of on-chain data, I think investors are increasingly starting to realize that the conventional frameworks to analyze these crypto assets aren't suitable. And in fact, I'll credit Chris again for really bringing that conversation in the early days with how you value crypto assets, right? you can't really apply a discounted cash flow model to valuing Bitcoin or Ethereum.

And increasingly, we're starting to realize that the answer is actually right in front of us. It's with the wealth of data that these crypto assets provide, given their open source nature. And I think increasingly the power of on-chain data to assess the network health fundamentals on the first layer, but then on the second and third layer to actually identify the relative value of these assets based on what this data is telling us is going to become a very meaningful part of how investors broadly assess these assets. So we recently published kind of a framework by which to analyze on chain data. We have this three-layered pyramid where we're at the first level, it's really just network health

and fundamental. So thinking about things like hash rate or transaction volume or minor revenue, it's like, is the network working as designed? You know, that can't necessarily give us an idea of the relative value of the network, but still gives us kind of a long-term fundamental view on it. But then a layer above that, the beauty of this data is that you can then segment the data based on, you know, the number of coins that is located in each address and the amount of time that those coins have been in each address.

And so that kind of creates these really interesting metrics that in the traditional asset space doesn't really exist. So imagine being able to, you know, have the cost basis of every single holder and being able to identify the flows in and out of exchanges versus miners versus retail investors. So there's a wealth of data that you can track that can assess buyer and seller behavior. And then upon that assessment, you can further manipulate the data to then identify that short to midterm price inefficiencies based on how holders are interacting, you know, with their asset. And so, you know, a famous example of that is the NBRB ratio, right, which takes the ratio of the market cap over the realized cap, the realized

cap being giving the cost bases of kind of crypto holders. And there you can kind of identify, you know, when the market is underwater, when the market might be, you know, prime for profit taking. And so, you know, I think that this is really the only, the beginning stages of creating this framework and tool set, but one that we're, and I am in particular, quite interested in and heavily focused on. Yeah, it's super interesting. There's so much we could unpack there. I love what you're saying. You've seen about this new form of institution that's really taking hold. That's, that's definitely a sentiment we share on bankless. You were also talking about, like, the open source nature of this. And, hey, the answers are all available to us in the blockchain. And that data is

free and open and accessible to anyone. It just takes the whole open source analysis thesis that ARC has and blows it out even further because now you don't even have to look at 10K filings, right? We have all of the secrets, all of the answers are available to us in this on-chain data. I want to ask, we talked a bit about Bitcoin and kind of the sound money thesis as a digital gold, But it seems to me, and I think the crypto industry is increasingly recognized that the story doesn't end there. You know, Chris's book was titled Crypto Assets with an S, right? So we have Bitcoin, but now we have this wealth spring of all of these other crypto assets that have come to the forefront. I want to ask you about Ether and Ethereum next.

So what are your thoughts on Ether as an asset and the Ethereum network? Kathy was talking about decentralized finance earlier. Maybe we can couch it in those terms. I'm wondering if we could start with you, Kathy, your thoughts on Ethereum and what's going on in the decentralized finance landscape and how that adds to the sound money value proposition that Bitcoin brings. Yeah. I think we've been evolving our point of view on ether.

When we started our analysis, we were pretty much, and this was with Chris, Bitcoin was what we needed to understand first. But we were keeping our eye on all of the other assets. And we stuck pretty closely to the thesis, the FAP protocol thesis, that Chris's partner, Joel Mnegro, came up with at Union Square Ventures, which says that the value accrual will take place more at the currency level. And we believe there would be only a few currencies in the world, much like there are today. We thought Bitcoin would be the reserve currency, and we were looking for the other currencies.

And Ether was showing – was showing up as – a very strong second. And I have been surprised at how, how ether and the Ethereum network is mushrooming with stable coins, NFTs, decentralized finance. It's clearly satisfying, a huge unmet need. One of those needs is yield out there. And we see that in the fixed income market, It's the ridiculous rallies that have taken place, taking junk bond yields down to, you know, just a couple of hundred basis points above treasuries. That's kind of nuts. So this hunger for yield is being satisfied by a much more efficient financial ecosystem.

And I think many more people are more open-minded to it as well. let's see, one of the things that has struck me from the beginning, and when Chris started at ARC, which was very close to the beginning of the firm, I remember saying very early on, follow the developers, follow the developers. Well, using that metric, Ethereum is off the charts, you know, whereas Bitcoin is steady as she goes, still increasing steady as she goes, but Clearly, Ethereum, decentralized finance, NFTs have hit a responsive chord. I think bringing the creator community into this ecosystem is, you know, helping it go a little bit viral more quickly than we would have expected. So you guys are bullish then on Bitcoin bullish ETH.

Yes, indeed. I would add to when ARC was beginning its investigations into crypto, Ethereum didn't exist. Right. If you go back to 2014, it was just an idea. When ARC first established its Bitcoin positions, Ethereum the network had just launched a few months prior. I remember, you know, knock down, drag out, fights, arguments in ARC brainstorms. I mean, that's putting it too harshly, but contentious debates around the Dow in 2016. And, you know, Arc is full of varied viewpoints, and I think that's part of its strength, right?

Allowing everyone to express their viewpoints. But when the Dow happened in 2016, that was, at least for me, the catalyst of, oh, my God, this thing just raised over two. $200 million from people all over the world. Yes, it got hacked. Yes, it's a disaster. But the fact that this happened is indicative of power, basically. And I would say that with Ethereum, you know, in particular, because ARC dives so deep into the tech and wants to understand things through and

through, Ethereum has had a lot of problems in a way in which Bitcoin hasn't. And so also as a at-scale investor, you know, even though ARC is as risk-tolerating as they come on the institutional side, the risk profile of Ethereum for a long time, I would say wasn't suitable for Arc. and it's in the last year to enter a sweet spot of suitability for ARC. And I think I've seen the whole team embrace that and say, okay, you know, even though I'm not an explicit part of the ARC team, we're still in close contact. I see, you know, focus and openness to what's going on in the Ethereum space. Chris will always be an important part of the ARC team. and his DNA is in ARC.

I want to reflect on a meetup that you organized, Chris. Remember, we brought the Bitcoin and the Ether developers together or investors and developers in our first office, you know, one of those startup offices. And Chris was preparing, he was thinking about how to manage the discussion so that there would not be a war. And what I remember at the time, as I was sitting there, and I was listening to these developers. This was late 16, early 17, just to place people. So, like, Ethereum was in decline.

It was like at, like, six or seven bucks. Seven dollars. It was seven. Yeah. Like, we'd come off, like, the middle of 16 kind of frenzy around the Dow, sold off from, like, 25 to 7. Bitcoin was like kind of pushing up and we tried to bring the focus was to bring Ethereum and Bitcoin together. Anyway, go on. Yeah. So and I said, oh my gosh, this is crazy. You know, this is so interesting listening to the developers, but also understanding there would be a

place for both. This was not an either or. That was a bit of an aha moment. The Dow, that, Chris came in and presented the Dow at a brainstorm. And I was fascinated. I was saying, wow, that's pretty wild. But then there were others on the team who were just like pushing back and saying, this is going to blow up. And felt, which it did, they were right. And felt vindicated when it blew up.

But that, my experience in innovation is when you're onto something early, there are bound to be problems. and when it blows up is when you invest. That's when you really think about the investing. And I'll say just in terms of ether and the NFTs and the creator community, I was listening to one of placeholders calls. And they featured the CEO of ASync Art. And I had never heard ASync Art.

I had never heard about this phenomenon at all. He starts speaking and I'm on a walk and I am smiling from ear to ear. I have not smiled that wide a smile since I first heard of the internet just to give you a sense. Wow. That's the impact that NFTs had on you. This idea of ASIC art and what they're building on NFTs. Yes. I was saying, oh my gosh, the layering, sort of get the creators involved with this.

This could go nuts. Why? What did you see? What was comparable to the early internet, Kathy? Just the awe of how new and differentiated, how a different way of thinking, a way to reward creators, which we've been looking for for generations or forever, right? And this idea that you could have, you know, a piece of art and then layer it and sell pieces of it off and have the underlying creators still get rewarded for, you know, thinking up such an interesting idea. I just thought, wow, this is so collaborative.

It is so collaborative. And that's where the world's going. That's how arc is set up, too, as being very collaborative and iterative in our thinking. And so that's what I felt when I heard the CEO of Aync Art talk. Balancer is a powerful platform for flexible automated market makers. Typical AMMs just have two tokens inside of one liquidity pool, which can lead to fractured liquidity across the many pairs in Defi. With Balancer, you can access the full power of multiple tokens inside of one single AMM,

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Here, you can see me borrowing 200 USDC against my portfolio of a number of different DeFi tokens in ETH. I'll choose a variable interest rate because it's a lower rate than the stable interest rate option, but I could choose the stable interest rate option if I wanted to lock in that interest rate in permanently. V2 also features the ability for users to swap collateral. without having to withdraw their assets, trade them on Unswap, and then deposit them back into AVE. With AVE users can do this in one seamless transaction, saving you time and gas costs. Check out the power of AVE at AVE.com. That's AAVE.com. I think viewing Ethereum as like, so in all of crypto as kind of a new capital coordination system

is a powerful lens of this thing. And I want to bring Yassine into the conversation here as we're talking about ETH as an asset. And we're talking about valuation earlier. And it's always been this question of how do we value these weird crypto assets that are coming down the pike? I feel like, you know, Bitcoin got this valuation method based on a store of value, based on being kind of a gold. Chris actually surfaced a paper that was written, I'm not sure, 1997, 1998, about these three different asset superclasses that was super helpful for my own mental model, where we talk about capital assets, They produce cash flows, and that's one super class. And the second is commodities, so things like wheat and grains and oil.

And then we have store value assets, right? And it feels like Bitcoin has been placed in that store value asset category, maybe a little bit commodity. I mean, you have to use Bitcoin to pay for Bitcoin transactions, but it's in those two categories. You're seeing, how do you view Ether as an asset? How do you attempt to value that? Does it fit in one of those asset categories for you? Does it, does it fit in all three? What's your take there? That's a really good question. And quite honestly, I'd say that a lot of my thinking here has been inspired by what you guys put out. So there's definitely a back and forth here. I think you hit the

nail on the head in terms of how the market has really accepted Bitcoin, I'd say as a digital gold since really 2017, right? When we kind of think about this, you know, from an institutional pitch standpoint, it's like the narrative for Bitcoin is pretty much set in stone. And it's kind of one, very easy to make the case for Bitcoin as an investment, but then by extension, kind of value the different opportunities. I think with Ethereum, it is a little bit different in that investors have really yet to converge on a primary narrative on how to value ETH. And I think that that also has do with the fact that the narrative is evolving in the same way that Bitcoin's narrative has evolved. One of my biggest breakthroughs in thinking about how to value ETH, especially compared to

Bitcoin and something that Kathy alluded to is that Bitcoin and Ethereum are differentiated enough where they can coexist. And in a lot of ways, it isn't really a zero-sum game. It's a positive sum game where you're unlocking kind of new pockets of value that otherwise were not existent. With Ethereum specifically, I think there's a question of ether as like this natural resource, this digital commodity. And if you think about as the general economy transitions from the physical to the digital world, that Ethereum can command a sizable premium relative to, to physical commodities that otherwise Bitcoin could not. And so when you kind of think about oil or coal or kind of general commodities,

those are in the hundreds of trillions of dollars in market cap earn value. I think increasingly we're starting to see ETH as this productive financial asset and something that you guys kind of introduced as sort of that internet bond. And that is sort of broken away from Bitcoin specifically, kind of with the general consensus algorithm of Bitcoin versus ETH, especially as ETH transitions to proof of stake. But when we kind of think about valuing ETH as a productive asset, that's where I think it's deviating a little bit from Bitcoin as sort of that nonproductive monetary asset. And so when we kind of think about the potential value accrual there,

you can kind of think of it as the same way that you might value a traditional bond. And so you can kind of guarantee this sort of yield, this kind of risk-free rate perhaps that ETH can generate. And I think that because it's native to the Internet, that's what makes it so unique, right? And then that's sort of that last narrative of perhaps, you know, Ethereum is a new country or a new nation state, that sort of digital country. And so that's one that kind of transcends borders and one that is native to the Internet. And so the way that I kind of like to look at Ethereum, what excites me most about Ethereum is in the context of kind of this ever more globalized world, right, where we're all increasingly connected to each other. And so there's going to necessarily be demand for cooperation on an

equally global scale. And one that doesn't rely on traditional means of identity or legal assurances. And so when you think about Ethereum as an experimentation layer on which you can build these economic privatives with little counterparty risk, that's something that's very exciting. And I will admit that that's not something two years ago that I would have been completely sold on. You know, I think a lot of the bitcoinsers, they tend to look at Ethereum as something that isn't worthy of existence because it has a much larger attack surface, right? So they look at kind of the technical security risk of Ethereum and say, why do you need Ethereum? And I've sort of started to realize that there is actually a need for that higher programability

than is currently being offered by Bitcoin. And I think the potential benefit is bigger than the attack surface that it introduces. And so that's ultimately kind of where I stand with Ethereum. And I also had one last point, which was at ARC. And I love what Chris said about kind of the risk. risk appetite that Arc had and how that's sort of evolved over the last few years. I think one of our biggest aha moments when it came to even comparing Bitcoin to Ethereum was early in 2020 when Ethereum flipping Bitcoin in terms of fee revenue.

And so that was something where if you think about fee as a proxy for demand to use the network, and now Ethereum has not only exceeded on transaction through, and transaction settled. But on actual sort of demand to use it, that was something where we're like, you know, the usage and the interest is undeniable. And when you couple that with the community and sort of the ideals that Ethereum has been able to build for itself, it makes a very compelling case for why there's a tremendous upside. So I want to double click on what you were talking about, Yassine, with the whole yield side

of ether the asset, right? This is a very core component of the relationship between ether and Ethereum. Proof of stake allows the Ethereum protocol to issue ether yield. And as we started talking with this whole crypto section, we talked about Bitcoin as a non-sovereign money. It's a money that transcends nations, that transcends borders. And ether, as this new, similar sort of technology that transcends borders, offers a new protocol issued yield. in ether terms and ether denominations that has no counterparty risk, right? Like the ether is always solvent. Ethereum is always solvent because it can always issue new ether,

which is kind of a paradigm shift in where we can find yield in the world. Now we can find yield in crypto terms in crypto-native assets, internet-native assets that have no nation-state dependencies. So I want to turn this question to Kathy. the cost of capital in the traditional world is really dependent on, you know, the bond market. How much, how risky are you going to get based off of the yields you can get in dollars on the bond market? But now that we've unlocked this new internet native risk-free rate with ether staking, do you think that's going to, how do you think that's going to impact global yields and global, like,

investment appetite as Ethereum gets more and more adopted if it does get more and more adopted over time? Well, I think part of the heightened regulatory talk here in the United States and elsewhere, but it's really taken off in the last few months here, is because what you are talking about, the yield, has attracted so much interest that the banks themselves are beginning to feel it. I have been shocked. I listened to, especially J.P. Morgan's call, it's a good kind of staple to understand what's going on in the banking industry. And, you know, in a V-shaped recovery, Jamie Diamond was telling us that their loan growth would be negative through the end of this year.

I said, what? And I began to think, could it be? Could what's going on in the Ethereum world already be impacting banks? You know, prices are determined at the margin. And so this could be really hurting the banks. And I think I'm going to take a very close look during the next few earnings. seasons to to see if we can dimension it. It doesn't seem like it is big enough yet, but I'm beginning to wonder, you know, the search for yield, which again, the extremes, the bond market in the traditional world, I believe is in a bubble, certainly on the corporate credit side, which is where the risk is. And I can't help but believe that others believe the same and are

searching elsewhere for yield, especially the hedge funds, I would say. So that's the first thing that comes to mind when you ask your question. And I'm beginning, and now you're going to have to rephrase your question if you want me to go any further. Well, I just want to ask, I just want to follow up on that because the podcast and the movement we have here is called bankless, right? So we've seen this for a while. But we're actually not sure that the banks are actually worried about it right now. You think they are? Oh, definitely. I think. I think part of the regulatory heat that is taking place now is because the banks are beginning to see how much this is going to hollow them out.

There's a really key thing that Kathy said of prices being set at the margin. And I would layer in another thing that I learned from her of what really matters is the share of incremental growth. and so you have very large bases. And so you could look at the banks and be like, well, how could crypto, you know, this kind of small thing be disrupting these very large based banks? But if crypto, when you look at these growth rates in the hundreds of percent, if that is eating the incremental growth share, that starts to weigh on bank growth expectations and all assets are priced based on expectations. right? And so that's where these seemingly small things that are hyper growth can have a significant impact on the growth expectations of much larger asset basis. And so, you know, when we when we think

about the yield market, you you have the people who are lending and then also the people who are borrowing, right? And when I at least think of myself down, I feel old for crypto, right? I'm 31. I'm basically a crypto boomer now. I'll admit it. But like myself down, I see people like increasingly asking like, hey, like, can I use this to borrow against, right? Like if you think of something like MakerDAO, that I can take out a loan 365 days a year, 24-7. it's a flat rate. And, you know, the while makers rates, and when I say flat rate, like everyone gets the same rate,

there's no preferential treatment. There are other systems that give you fixed rate lending. And so that whole world is mushrooming. And that's some of the incremental share. I think a thing I want to piece apart a little bit more here is this idea of the risk-free rate. because I think it could be so fundamental. So when you think of the, you know, U.S. treasuries providing risk-free rate, this is something that you look at a lot, Kathy, as like the base of valuation for assets.

And I want to call it a risk-minimized rate because I think that we just presume, you know, the U.S. is always going to remain solvent, but there is still counterparty risk there. And so there's a risk-minimized rate in the meat space on T-bills. And then Ether is going to provide the most risk-minimized yield in the crypto space. And I want to call it risk-minimize because people are going to say, there's way too much risk in crypto. You can call it risk-free. So then we disagree, okay, it is risk-minimize. And then you start to look at what are the components that go into risk-minization.

And this is where we get into the importance of decentralization, right, where not all proof of stake is created equal. And you've got, you know, delegated versus the more pure proof of stake that Ethereum is working towards. I've got a plane flying nearby. But, Kathy, I guess a question I would have for you is, can you envision a future where Ethereum's risk-free rate or risk-minimized rate, is starting to influence the broader internet economy and be that baseline for how people think about valuing other internet-based assets? I absolutely can see that, especially since monetary policies around the world have pretty much become unhinged.

And talk about trust. I think there's more trust in this ecosystem. system, you know, in the way you've defined it, risk minimized, then there might be in the traditional world as if we're right, there's going to be a lot of creative destruction and counterparty risk. And these banks are going to be losing share to the crypto world. And I want to get back to that in a moment because you seem so surprised. And I think it's so obvious. but now I realize what the disconnect is there.

But yes, absolutely, I can. And if I could say something, I learned an important lesson in the, it was the currency crisis, the Asian currency crisis in the 90s, 97, I think it was. And the Thai bot devalued. And nobody thought anything of it. You know, Thailand was, you know, hardly measurable.

out there. But it ricocheted. There was an Asian crisis that took place, domino effect. And so we began to ask companies, like Boeing at the time, oh, what's your exposure to Asia? It seems as though something's unraveling there. And they'd say, ah, nothing, you know, not even 5%. Well, what they didn't say is it might have been 4% of their sales, but it was more than 100% of their growth. And so when Asia went down, Boeing's earnings imploded in a way that most people couldn't understand because they said, wait a minute, they told us it was only 5%. Yes, but they didn't say what percent of the growth it was. And I think we're talking about something equivalent here. And so, oh, yes, the banks are on to this. You know, I'll tell you why I was a little bit surprised. I think it's because like we're in sort of the crypto trenches and to you seeans like you quote early, right, we're somewhere in that stage of them ignoring us and them laughing at us.

That's the stage we've lived in in crypto. And so to hear somebody outside of that crypto bubble say, no, actually they're in the stage of maybe fear, fight. And for you to talk about it as like a hollowing out of the banking system and they see that, they see that on the margin. and it's starting to affect their growth rates is pretty amazing, actually, for me to hear. But let's talk about that a little bit more. So this is not the first time an industry has been hollowed out, and you hearken this back to the early days of the Internet. And, of course, a lot of early fintechs have been born since the birth of the Internet.

I'm curious about your thoughts here. So I think we agree that banks, big banks, are going to be completely disrupted. I'm curious how fintech sort of fits into this. We've got Visa, we've got MasterCard just bought a crypto company, CipherTrace. We've got PayPal entering. We've got Jack Dorsey and Square doing things in crypto. We call it, Kathy, the defy mullet. We think there's actually going to be like an increasing number of fintech companies

who have sort of the fintech in the front and the defy in the back, right? That's where the party is. How do you see this shaping out, right? FinTech and Crypto. Is this a match made in heaven or are they opposing factions? Oh, so MasterCard and Visa, I consider them part of the old world, old DNA, and they see the writing on the wall. They're trying to figure out how to cut their costs and insinuate themselves into the crypto world. But they are really hostage to the banks, right, when you think about it. So I wouldn't put them in, they would call themselves FinTech.

I don't call them FinTech, but, you know, I've been wrong on Visa for a very long time. I've always thought, you know, someone would come and knock off that kind of duopoly. As far as the others, so PayPal and Square have digital wallets, we really, so Max Friedrich, our fintech analyst working with yassine has has done an incredible job analyzing the potential for digital wallets we've looked obviously at we chat pay and learned a lot we do believe that this is becoming a winner-take-most market and in our big ideas from last year i believe one of the charts is J.P. Morgan's account user base, customer base, and charted against Venmo and cash app. And what you'll see is that J.P. Morgan's is up and to the right, but every step

up was an acquisition. It was acquired growth, which is not real growth. It's called consolidation in a mature industry. Whereas you look at square. and Cash App, they have surpassed J.P. Morgan in terms of number of digital accounts, more than 60 million each now. And they did it in, you know, five to seven years, which is unbelievable. And we believe that these digital wallets are effectively bank branches in our pocket. And they're going to be, right now there's a lot of peer to peer and so they've gone viral. Their cost of customer acquisition is $20 per or less while the banks are paying anywhere from $350 to $1,500 per user to bring them into checking accounts, savings accounts, mortgages and so forth. Those banks grew up and

became dependent on the loyalty of their customers. The customers couldn't go anywhere. else. And there was a lot of friction if they tried. But again, the digital world changes that, right? And so we're seeing this adoption of digital wallets. And I think two-sided marketplaces feeding each other. The consumer and the merchant side square was very smart starting on the merchant side and then looping in consumers who worked for many of these merchants. And then the peer to peer, got the viral network going. So we're, we think banks are being hit on that side as well. You know, their customer base is being, especially the younger customer base, not as profitable

in the early years, but absolutely need them in the later years. They're not going to be there. They're going to have digital wallets. I see for crypto natives even, right? They can't wait to close out their Wells Fargo account and like even just move to Coinbase. That seems to be like this hybrid between fintech and crypto that's sort of a bridge layer. Yes. And Coinbase has a shot.

We're looking very carefully. Who is going to be that, who's going to dominate? And it might be regional dominance. I don't know, though. I don't know now that we've got crypto in the mix because crypto is becoming an important part of these digital wallets. That's why you see PayPal, once Square, launched with big. Bitcoin, PayPal sat up and said, oh my gosh. And even PayPal, I'm watching them aggressively move

into crypto now. I think Square's doing it more to infiltrate the rest of the world. PayPal's doing it not to lose out to Square and cash app. So it's been pretty interesting. I don't know, Chris or Yassian. Yeah, I was going to add two things. One, this is right on time. If you read Carlotta Perez's technological innovations and financial capital. I might have butchered that name. But Carlotta Perez's book talks about how you have, you know, the early innovators that get things going. And then when you start to see private sector adoption, that is the precursor then to public sector adoption. And so we're very much in the like private sector adoption. structurally, when you look at, you know, PayPal, Square, Coinbase, what's happening here,

I think is a continuation of on-premise hardware to private cloud, to public cloud, to now we could call it CryptoCloud. But what, like, if you look at Coinbase's cost structure, when they're using Bitcoin, when they're using Ethereum, when they're using these other networks, for financial or monetary services, they've outsourced a lot of their CAPEX to these networks, and they're paying on-demand operating expenses. It is vastly more efficient to operate that way than to manage it all in your own. We've seen this play out already from people managing all their own servers to then going to private clouds, to now adopting public clouds. And so one way to think of this is like the banks in the existing financial system kind of provide this on-premise

slash private cloud financial services layer where they hold everyone hostage. And it's not really a free market. When you look at crypto, it is so open and so competitive, all those costs get driven down as close to zero as possible. And so I see it as the next iteration of public cloud where people are going to be outsourcing large amounts or as much as they can of their CAPEX, of their OPEs, these companies will operate way more profitably. They will get a lot more investment in the public markets. And that's going to draw just even more people in this trend. And so that's like these companies, yeah, they're doing it to be sexy and branding, but they're also doing it.

because it improves their profitability. The only people who are fighting it are like the very traditional guys who operate the private cloud right now because it hurts their profitability. That's such a good point. And I think on the other side, so you have like the companies themselves

that have declining cost structures. But then if you look at the barriers to entry from users as well, there's so much lower than with traditional banks. Like to have a crypto-native bank account literally just requires you to have a private, key. And so then you just some sort of user interface. With a traditional bank, you have to go through these massive kind of compliance and regulatory hurdles. So it's like there's a, there's a, there's like a catalyst on both sides where there's a massive incentive for these fintech companies

to continue to bootstrap their their operations by leveraging these technologies. And then on the other side, you go to a random like teenager of, look, here, just download the metamask and we'll just deposit some ETH, and then you can go and buy an NFT with it. It's like it's very hard for JPMorgan to compete with that. And then I'll and then and then and then finally what I think a lot of these fintech companies are realizing and what they've done quite successfully is that if they don't want to get disrupted in the same way that they disrupted traditional financial services, then they have to embrace crypto. And for those who aren't, then then then they're likely going to be left in the dust. And that's not just from an infrastructure standpoint, but also from like a cultural standpoint as

well, which I think is a really important component of these like cutting edge fintech companies that is often dismissed. If you look at like the way that cash app has insinuated itself in, in the like the grassroots culture movement of artists and their designs and the merch, it's like no one's ever going to buy a J.P. Morgan T-shirt or merch unless they want to kind of as an ironic statement. You have cash app dropping these. flash sales on merch and it's like selling for for hundreds of dollars. So just the completely different dynamic and one that I think is is fascinating. At the beginning of this interview so far, we talked to, we asked the question, why does ARC think that the future is so close? And then when we also

talked about the Dow, Kathy, you talked about how astounding it was that it could actually source so much capital so fluidly, so quickly. And when it blew up, that was a buy signal for you because, you know, you said, you know, buy when something blows up. But my question is, we're talking about how all these public crypto networks collapse costs down to zero. And one of the answers you gave about why the future actually is way closer than everyone thinks is that all of these S-curve adoptions are going to interact with each other. And so I want to open up how Defi actually plays a role in that and how this capital allocation and collapsing costs of public networks play a role in that. Kathy, can I get you to elaborate about how DFI specifically and these lowering costs

of financial services can help actually spur innovation in all the other sectors that ARC is bullish on? Okay, that's a big question. I'm probably going to bring Yassine and Chris into this one. As you were asking the question, what pinged for me, and I'd love to hear Yassine and Chris weigh in on this. You know, the convergence of artificial intelligence and blockchain technology. You know, I've been, Chris knows this because we first talked about it after a meetup that a placeholder had.

And I remember, I've forgotten the name, was it live peer? Live peer, is that the name of it? There was live peer. I mean, we've done quite a few meetups. There was a Numerine meetup. There was a MakerDAO meetup. And I was trying to think, wow, I hear them talking and I think part of the solution will be bringing artificial intelligence into the ecosystem. So I would love to know from Chris and Yassin, you know, if they see that happening or how they see that happening, because artificial intelligence costs, training costs are drawing.

dropping at a 68% per year rate. Think about that. You drop the cost of anything 68% per year. You're going to get a lot more of it. And it, right? And it solves problems. So, Chris? Yeah, so two things.

One, I'd say the clearest example we have, at least a placeholder works closely with, that's the convergence of machine learning and crypto would be numerai. where, and this is going to apply, I think, to the way DFI is going to play into a lot of these overlapping S-curves. You know, Numeri, because of the collapsing costs of compute and the scale of data is able to employ thousands of data scientists all around the world, right, who are able to submit models that help manage Numerize hedge fund. The way in which they incentivize that is effectively using DFI, right? like defy is like at a very simple level is like transacting and saving um and based on everything we're saying with traditional finance those systems cannot scale to coordinate people globally there's

way too much friction and so if you want to coordinate global sets of digital actors you have to use defy you like you would spend hundreds of millions of dollars and you know lose all your hair by the time you're able to pull it off using traditional finance. And so, like, when you look at the sharing economy movement, which now feels dated, but which I think is still just really getting started, that movement, you know, it's messed up in two ways. One, the capital is all owned typically by a concentrated shareholders, concentrated set of shareholders as we see with Uber or Lyft or whatever. So the value accrual doesn't go out to the supply siders, the demand siders, the people who actually create the network. And then two,

you know, a lot of the sharing economy to date has been meat space focused, you know, and so then it has to go region by region by region. What defy enables is like the financial back end to scale the sharing economy for any digital service globally from day one. And like, you know, for us who exists all day in crypto, it's like, okay, yeah, cool, that's obvious. But like, for the rest of the world, who's not paying close attention to crypto, that's pretty mind-blowing if they could conceive of it that way and not get lost in, you know, all the chaos and mistakes and, you know, get rich quick schemes. Yeah, I want to add just one more thing that that Chris had alluded to earlier, which is exactly, you know, what we're discussing here

in the relationship with cost declines. But it's like in the traditional banking services, there is no real free market. The market is much more inefficient in its ability to kind of determine that cost. So now you're opening up this layer of experimentation where it is highly transparent. It is open source. It is ruthlessly competitive. You know, you're able to kind of spin up a new project by forking it and changing the rules. and then seeing whether or not the free market, you know, the decides to migrate to that new protocol. Well, it's like that is obviously going to drive cost declines downward.

And so I think the general premise of being able to provide this permissionless unfettered access to financial services is going to yield much lower cost than what we see in the traditional world. There's one more thing I want to add, and it relates to something we're talking about the start of this. And I know we're probably running low on time here. But I don't think people still realize the radical amount of openness that crypto has. And it's, you know, the open source code.

It's the open data. And it's also the open market structure. And when you have so much openness, you cannot hide inefficiencies. All the inefficiencies continue to exist in the existing political and financial system because they are closed and opaque. So I basically see it as like a bunch of light flooding into all these opaque, inefficient sectors that then eradicates all of the inefficiencies over time. It doesn't happen overnight.

It takes years. It takes decades. But the directional trend is obvious. So all of this makes ARC very bullish on crypto, right? And there are a number of ways I suppose an individual or an investment fund like yourselves can get exposure to crypto. I know some of this because some of this is public, but, you know, a GBDC is a gray-scale product, Ark holds some of that, ETHE, another gray-scale product, exposure to ETH, Ark holds some of that, some other things as well.

But I'm curious, a broader picture because we've talked about regulatory a few times. We've mentioned it. And I'm curious from your perspective, Kathy, if you think the structure of Arc actually limits what you can do in cryptos, there are more that you'd like to do but can't because of how arc structured, or you could ask the same question another way. Does the regulatory environment itself limit you? Not just the structure of Arc, but the regulatory environment itself. Do you find that limiting to Arc or to crypto in general? Well, GBT and ETH, yes, that is how we gained our first exposure to both. And yes, in 2015, September of 2015, we had to, we had to,

to go to the New York Stock Exchange and explain what the heck we were doing. And they said, well, okay, 1%, you know, limit the risk. So we put it in at 1% and never sold. It went to 10%. Wow. Which is then the max. Yeah. Yeah.

So it was limiting, but I'm just happy we're able to do it. You know, we were allowed to do it. And so what you're talking about is the ETF structure. And in the ETF structure, we can only own securities. The gray scale, GVTC and ETH are securities. They're grant or trusts. And so that's the only way in an ETF we could access. We're looking at other wrappers as well,

which are going to give us more degrees of freedom. So we're going to help evolve the market in any way that we can, certainly from the public, you know, SEC registered company point of view, because that is what we are, and we are predominantly retail. So yes, the ETF itself limited, but we are maneuvered. around that. We're pivoting. Just like we had to pivot at the beginning of Arc, we described ourselves in terms of the active equity ETF that invest in disruptive innovation. We shouldn't have even mentioned active equity ETF because the main point was disruptive innovation and let's see how we can

harness that. It doesn't matter what kind of wrapper is out there. So that's what we're trying to do. And just to clarify, ARC's not pivoting into becoming a crypto firm. I would say ARC is going to continue doing what it is great at doing and finding ways to adapt itself and some of its structures to more wholly be able to embrace crypto. I'm actually curious your take on this too, Kathy, because you've seen technologies blossom. Change is hard, right? It's hard for everyone. It's scary at times. This is a massive change for regulators.

They're trying to figure out what the scope of their regulatory agency is supposed to be in crypto. I think some of them are doing their best. Some of them are still trying to understand this. But there's been a sentiment that this is very bearish. Some recent things in the U.S. have been bearish for crypto. Others have said, no, actually, the fact that regulators are talking about this, this is bullish. I'm curious if we can learn anything from other industries that are leaning into the future, where there are things that are scary to regulators that could apply to crypto.

What are your thoughts here? Sure. We had a good brainstorm on this topic led by Yassin, so I'd love to have Yassine way in after. But I agree with a more positive interpretation. And one of the reasons is we have gotten to know the research people in FINHUB at the the SEC, and they know what they're talking about. When we first went to them, well, actually, Chris actually was at the firm when this happened too, and he wrote an answer to the SEC's request for information about were we ready

for a Bitcoin ETF at that time. And we were not ready. 2016. Yeah, 2016. We were not ready. and the SEC took in and basically used a lot of what Chris wrote in its own response. So we've gotten to know over time the kind of research taking place at the SEC, and it's excellent.

It's really good. Now, you have Gary Gensler coming in. He had been at MIT, we all know, focused on blockchain technology, especially Bitcoin. So at least, at least he understands. He was an advocate. So that's good. Now, what you have in the United States, I think, are six financial regulators who are fighting for power. And I think that might be a little bit of what's going on right now. And the fact that the SEC has issued Coinbase a Wells notice might seem like a very scary thing. When I see, saw that. I said, what? They haven't even launched the product yet. What, what is this? And really, this is the SEC's and the industries way of pushing the discussion forward, moving it forward. Three IQ sued the Canadian regulator and won in the courts. And so this this has precedent, you know, if

if Coinbase were to turn around and sue, I'm not saying how this is going to work out. But, you know, 3 IQ against all odds at the time, and this was not that long ago, this was last year, they won. So I think that the discussion will move forward and we will get more regulatory clarity. In this case, we're dealing with the Howie test

and now the Reeves test, which was 1990. And there's something in the Reeves test having to do with promissory notes that might need to be clarified as it relates to what coin base wants to do with lend. So we will get some answers. I think it's good. I'm never happy when I know regulators are trying to vie for a certain amount of power because then it can get a little dramatic. But I do think the discussion is going to move forward, and we need it to. We absolutely need it to. Kathy and team, this has been an absolutely fantastic discussion so far. We've covered so much already. And everything you're talking about, I think we definitely resonate with. I want to maybe end with this question to all three of you.

I'm wondering if you have the same take or similar takes or different takes. very much like David and I, some of us in the crypto industry, we're in this crypto bubble. We feel like cryptos may be inevitable, but there are technologies that also fail, right? I'm curious your perspective on what is holding crypto back at this point in time. So like we've made so much progress, but we're not there yet. What's holding us back? I want to start with Yassin on that question and close out with Kathy. It's a good question.

I mean, I would say that at a high level, I'm fairly happy with the way that crypto has played out in the last, call it 10, 15 years. Like, if you were to really ask yourself that, like state that Bitcoin didn't even exist 15 years ago, and today, this week, there's a sovereign state that is adopted it as legal tender, you know, it's hard to say that there are things that are, quote, unquote, holding it back. obviously there's always room for improvement, but I'd say for the most part, I'm quite optimistic at the evolution of crypto and since its inception. I think that there's obviously still a need for education and for regulatory clarity, as Kathy said. So if we want to continue to catalyze that adoption, some people just don't really understand its value proposition. And so I think it's on us to continue to educate. And then if you were to ask specific to, you know, a particular network, call it, you know, Bitcoin or Ethereum, you know, if you were to ask maybe potential failure points, you know, while crypto has done tremendously well, I still think that, you know, at the, at the protocol level, you know, is, I'm sorry, sorry about that, it is certainly a risk. And so when we kind of think about Bitcoin specifically and the tradeoff between institutional adoption and preserving its ethos, it's like Bitcoiners, you know, should not remain

or should not be complacent. They should kind of continue to kind of think at the cutting edge. And then, and then obviously even with Ethereum, we're seeing some interesting traction outside of it and kind of should encourage that experimentation. So, you know, crypto generally, I think we should keep treading along as we have. And then at the protocol level, you know, not remain completely. place in. Chris, same question of you. What's holding crypto back? So I would agree with what Yassine said around we've gotten really far for the short period of time that crypto has been around. And I operate from the place that crypto is inevitable. Like it is the new financial, economic coordination rails for the digital world. And it's going to be absolutely pervasive in a way that we can't

imagine in 20 to 30 years. So where I spend a lot of my time is thinking about where power and capital is going to concentrate within this inevitable future. And so while I think nothing is holding crypto back from this pervasiveness, I think what's holding crypto back from its maximum societal impact is the way that power and capital have gravity and a tendency to corrupt. And I see it all throughout crypto. I started much more as an idealist, I would say, in 2014-15 than I am now as a VC. And seeing how concentrated ownership is of some of these networks is really sad. When you look at the scale of the returns and who those returns are going to. Like most of the LPs of large institutions are also large capital allocators who manage

for high net worth individuals. And so there is this almost inescapable truth that like capital is created from capital, just as life lives off of life. And so when you when you have things go through 100 or 1,000 X's, you need to make sure that that's as distributed as possible before the 1,000 X happens. Otherwise, you just enriched a very small group of people enormously versus enriching a very broadly distributed set of people pretty, pretty well. And so I would just go back to like, nothing is going to stop crypto. Crypto is inevitable. But the amplitude of societal impact will be controlled by our own self-control. Wow.

Well said. There's a lot to unpack there. But Kathy, I want to ask you the same question. What do you think? I have to follow that. Yeah. What is holding crypto back? I'll just put maybe a fine point on this.

Two trillion dollars. So nearly 10% of the U.S. economy or 2% of the global economy already. remember the Asia example I gave where only 5%, 4%, but growing enormously. So in many ways, crypto has arrived and is not going to go away. I completely agree with Chris. I think going through the big volatility bouts as we were just getting institutional interest, you know, May, I think there, you know, there was a little bit of a point. pullback. But, you know, I think, and you could see this with Ether, well, especially, you know,

it didn't skip a beat. It didn't skip a beat. It worked brilliantly. Whereas most in the financial world are just saying this, you know, just because they don't understand exactly how it's set up. They're just saying, this is leverage upon leverage. This is upon leverage. This thing's going to come from, come crumbling down. So the, the, the, more times we go through volatility and the network comes out stronger for it, the more credibility it will have and the more confidence investors will have in it. And then the other thing, and we did the B word you might have heard about. And a large part of that was, okay, how do we support this ecosystem. So it does become stronger. And with Bitcoin, that would be supporting

developers. It seems like there's no problem with developers because of the economic model on the Ethereum network. So supporting, but also I think you've got just listening to Chris and Yassine. And I don't know you so well, but it's clear you know in great depth what is right and what might be wrong, just going out there, fine minds surfacing and exposing bad behavior and, you know, coming down on it, certainly from the new governance platforms that are evolving. Absolutely. Well, Kathy, you've seen, Chris, this has been a fascinating discussion. And, you know, thank you for spending some time to talk about the future. We do think that crypto is inevitable. We're glad that it's part of ARCS innovation platform, and it was so good to talk to the three of you today.

Thank you, Ryan and David. Thank you so much. This is come. Thank you, Chris. You ask great questions. Yep. Need to get you three together. More often, I think big ideas come out of conversations like these. Of course, Bankless Nation, we've got some action items for you, as we always do. Go check out ARCS innovation platform, the diagram that we were talking about earlier in the show. That'll be a link in the show notes. Also, download ARCS investment case for.

Bitcoin, a fascinating extrapolation of that idea. You can also see Arc's Big Ideas Report for 2021. We will include those links in the show notes. Risks and disclaimers, guys, none of this has been financial advice. Bitcoin is risky. ETH is risky. Defi is risky. You could definitely lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.