Bankless - Betting the Fund on the Merge | Hal Press, North Rock Digital

Episode Date: May 11, 2022

What happens when a guy becomes so convicted on ETH that he bets HIS ENTIRE FUND on the Ethereum Proof-of-Stake merge? How much alpha is there in the All Core Devs calls? How should YOU play the merge?  Hal Press of North Rock Digital joins us as we discuss how to value tokens, and how to trade the biggest moment in crypto history. ------  OPOLIS | Sign Up to Get 1000 $WORK and 1000 $BANK https://bankless.cc/Opolis ------  SUBSCRIBE TO NEWSLETTER:          https://newsletter.banklesshq.com/   ️ SUBSCRIBE TO PODCAST:                 http://podcast.banklesshq.com/   ------ BANKLESS SPONSOR TOOLS:  ️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum  ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across  ALTO IRA | TAX-FREE CRYPTO https://bankless.cc/AltoIRA  AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave ️ MAKER DAO | THE DAI STABLECOIN  https://bankless.cc/MakerDAO   BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave ------ Topics Covered: 0:00 Intro 7:00 What Sets ETH Apart 18:09 Revenue and Cost 24:50 DeFi Utility 31:00 Blockchain Expenses 35:45 Inflating and Revenue 39:48 Supply and Demand 45:56 ETH vs Alt Layer 1s 56:06 Will the Price Lag? 1:03:36 Who Leads the Market? 1:05:35 Modeling Ethereum 1:11:45 ETH Staking Numbers 1:20:00 Wen Merge? 1:30:18 Trading the Merge 1:35:50 Closing ------ Resources: Hal Press: https://twitter.com/NorthRockLP?s=20&t=ZONa4ZJl5kcxbE43zFZKBg Crypto Fees: https://cryptofees.info/ Nillion: https://www.nillion.com/ The Ethereum Thesis: https://twitter.com/NorthRockLP/status/1484926691990556675?s=20&t=ZONa4ZJl5kcxbE43zFZKBg ----- 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 

Hey, Bankless Nation. Wow, what a week it has been. I'm actually really refreshed to get into this show, David, because we're not talking about Tara. We're not talking about UST today. We're not talking Elgo Stable Coins. We're talking about one of our favorite subjects, which is ETH, Ethereum, the merge. I ran across a guy, his name is Hal Press, who started a fund and he's betting his entire fund on the ETH merge. This man is bullish on Ethereum, okay? We'll share that in time. Yeah, I think we do. And I wanted to bring him on, David, so that we could hear a little bit of his thesis, because it has some similarities with ours. But he extrapolates a few different dimensions like supply and demand. And I mean, he's betting his entire hedge fund on it. So it's a pretty big deal. So I want to talk all about that. I'm excited to just get into this, David. Do you have any thoughts as we dive in and talk to Hal? Yeah, it's just always refreshing to hear the merge, the alpha of the merge make its way out of the Ethereum community and into the world around it, right? And this has always been the goal. This is always the goal of Ethereum. But it's just nice to see and hear people articulate the case for the merge that aren't like deep inside the Ethereum community. How has it, because Ethereum has this culture of building out in the open, building thinking out loud, you know, building transparently. There's a bunch of information for people to like glean onto and, you know, some, you know, Some people have caught the bug and Howl's one of those people. And so he's been paying attention intimately, not just to like the merge thesis, but also the all-core devs call meetings where people like Tim Bako and Dankrad and Danny Ryan are all talking about the Ethereum merge. And there's a bunch of there's a bunch of alpha there. And like it's just sitting out there for people to take it and Hal has taken it.

Yeah, it's super cool. His strategy. I thought this would happen. I thought investors would start like, you know, how many investors all around the world hang on every single thing, Jerome. Powell says, right? And Ethereum in the all-core devs call is not the Fed. They're not really setting rates, but they are setting like timelines for the merge, right? They're talking about Ethereum issuance in the future. It's a massive amount of alpha. And so people who are smart like Hal have clued into that. And so I think he's got some insights into when the merge is coming. So I hope

we cover that as well. Some unique insights about that because he is a neutral third party that is responsible for his funds. So he doesn't have any bias about when the merge happens. He can approach this with sober, sober eyes. It's like when Teleb says, skin in the game, that when you have skin in the game, that's the ultimate bet. And Hal is putting his skin in the game. Anyway, guys, also want to share that there's still an opportunity to get in on this Opolis bankless deal. Okay, David, why don't you tell them what Opolis is and what the deal is? Opolis is a Dow that supports other DAOs. If you have risks or a family to take care of or health care that you don't want to lose from your Normie Tradfai Web2 drop, but you do want to join the world of Web3.

Opolis can help. They are basically a DAO that helps you onboard yourself into the world of the self-solven worker, working for DAO's, working for Web3 protocols that don't really have health care options, but Opelis does. So it's a DAO that services other DAO. You can also get your payroll service by Opolis as well, and you can also get paid in crypto, as well as join their competitive health care rates because it's a collective. You join a collective, which is very, very Web3-centric. And then, of course, Ryan, if you sign up before May 25th, you get a thousand bank tokens, that's the bankless token and a thousand work tokens, which is the Opelus token,

so long as you sign up and get going by May 25th. So there is a link in the show notes for you to get started. Yeah, yeah, that's the deal. Guys, you're running out of excuses to quit your corporate job and join it. And Bankless is making sure of that. Yeah, that's right. This is now you can no longer say, well, what about my health insurance? Because it's right here.

Oplas will provide that out of the box. Guys, we are going to get into our conversation soon. But David, I want to ask you the question I ask before every single state of the nation, which is this. What is the state of the nation, Ryan, is giddy. We are giddy. GIDDI-D-Y. G-D-Y. Yeah.

The merch really isn't anywhere. close, but you can still feel it, right? The drum roll is out there. And so, like, I mean, if we're, if we're, like, we're going to have to ask how, as to how far he way, how far away he thinks the merge is. But if we're like, I don't know, six months away from the merge, and I'm already giddy now, I think you can imagine how much more giddy I'll be in the future, Ryan. Well, look, we need reasons to be optimistic right now because the, uh, looks like the bear market is in full effect. Cryptop prices have been going down lately. So, uh, stay tuned for how case on why he is bullish on Eath going into the merge and why he is betting on it.

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and learn from the oldest and most resilient Dow in existence. Bankless Nation want to introduce you to Hal Press. He's the founder of North Rock Digital. Howe is doing something really unique. He's betting his entire hedge fund on the merge. Okay, he's been too. tuning into Ethereum AllCore Devs calls, paying a lot of attention to the progress that's been made on the merge. We were talking about setting up this episode a few times previously, but he said, no, not ready yet, not ready yet.

Now he's ready. So what does that tell you? Of course, the great thing about Ethereum is all of this information is out in the open. And Hal is certainly taking advantage of all of that with this case that he's about to give us. Hal, welcome to Bankless. How are you doing? Thank you. Nice to be on the show. Can you start with just the elevator pitch, the high level? Why are you betting your entire fund on ETH and the merge? Why does that make sense? Yeah.

I mean, so at a high level, I think that there's a strong fundamental case, and we could talk about that the whole episode if we wanted to. But really, I think what differentiates it from other fundamental cases, because quite frankly, I think the crypto space doesn't trade on fundamentals so directly. I think what ends up happening is that the assets trade a lot more in line with supply and demand and just where the price can finally equally be in between buyers and sellers. And as a result, I think ultimately the most important factor is about structural supply and demand factors. And we see that with the Bitcoin having event every four years and it is understood well in advance,

but yet it seems to have an impact every time. And so in my opinion, the merge is the most powerful structural. flow catalyst to ever occur in the crypto space. And in my view, it's very, very hard to price those in. And so I expected to have a dramatic impact. So that's really the crux of it. And then there's a lot more detail to get into around that. So a lot of people think that the crypto industry trades on narratives.

But you're saying that it's more about flows as in just the, so I have enough. It's an interesting point that you raise. And in my opinion, it does trade on narrows. But generally what happens is that actually, I think about this in a lot of markets. In my opinion, price leads narrative, not the other way around. So generally, price will move for some reason. Usually it has to do with some technical factors. And the narrative will form to try to explain while that's happening.

And if you can identify something where you have that structural force that's going to move the price and you can see a narrative that's going to be strong and sticky and catch on to reinforce it, that's when you get those moves. but I find that the price actually is what leads the narrative and not the other way around. And so you could have a narrative that makes a lot of sense, but it doesn't catch on. Why? Because the price isn't moving. And so in my opinion, actually, I think the flows and the price lead and the narrative follows.

This is a really important point. And exactly the reason we wanted to bring Hal on is because this focus on supply and demand. I think you'll hear that a lot throughout this episode is really the lens through which Hal views Ethereum and the merge event. So before we unpack that, and I feel like we're going to spend the rest of this episode actually unpacking everything you just said in summary, can you give us some context?

How did you even find ETH and Ethereum in the first place? Why did it capture your attention? Yeah, so I think one useful thing to discuss before we get into sort of how I landed on Eith in the Ethereum ecosystem is kind of some context around how I think about crypto assets in general. And I think there's a lot of consternation. and kind of struggle to try to value these assets. And the main reason is because they're unlike any other asset.

They sort of fill this hybrid role. In my opinion, crypto assets really derive value from three different sources. One, as the name implies, as a currency, they are currencies of their native economies, they are units of exchange in that economy, and you need them to transact in the economy. And I think that creates some demand for the assets as the economies grow. But it's much easier to sort of gauge that on a qualitative level than a quantitative level, than a quantitative level. It's very hard to say quantitatively what that implies for a valuation of an asset.

But I do think that is one mean of value accrual. But beyond that, I think the term cryptocurrency is somewhat of a misnomer because they're not really currencies purely in that sense of it. I think they also have a lot of other aspects. I think the second primary aspect is as a store of value a la gold. So gold does not produce any cash flows. It's not really used as a union in exchange, but it still has accrued historically a tremendous amount of value over time. Why? Because people have faith that it will be scarce and because

it will retain value over time. And I think certain crypto assets also tap into that store of value pool as well. I think obviously Bitcoin is the first one that comes to mind and it has certainly been the most successful at accruing that value. I think personally that EVE has a good chance of continuing. I think if you had to rank them, Bitcoin would be first and ETH would be second in terms of store value. And I think that ranking will trend more in the each direction post merge. And we can get into a little bit about that specifically if you want later. But then the third factor that I think is really underappreciated is I really do think of crypto assets as equities. And I think, especially when you talk about L1s, the point that's really kind of underappreciated is that the second

that you move to proof of stake, the actual cryptocurrency becomes very akin to an equity stake. because the actual revenue and profit generated by the network actually accrues to the holder of the token. And likewise, the expenses paid out by the network are used to dilute the holder. In much the same way that a traditional equity has stock-based comp, cryptocurrencies also have issuance, which is very similar to stock-based comp. And then in much the same way that traditional equities earn money and pay out dividends or buyback stock, cryptocurrencies also pay out a staking rate or a burn, which is effectively a stock buyback. So they become extremely similar in that sense to equities.

And I think that's the part that's probably least understood. And I think, you know, when the market is in a very frothy stage where people are just basically voting on whichever token they want to think is the next cool trend, the value, the actual value of approval mechanisms are less significant. But when you get into a more mature market, which I think is where we're entering, I think the true value that you can actually derive from the token starts to matter a lot more. And then the other point that I'd add onto that is that as an investor personally, just to sort of move into the Y Ethereum question. And it'll really be focused on that equity aspect. As an investor, I really do think it's important to separate investing in the utility of the network versus investing in the actual.

actual utility token of the network. And so I kind of frame that as you invest in ETH, not Ethereum, or Saul, not Salana. You invest in Avax, not Avalanche. So I think that distinction between the token and the product is quite relevant. And so in that context, to me, it's not so much about how useful the network is. I mean, I do think that Ethereum network is extremely useful. But when I think about it from an investment standpoint, I think less about that and I think about more about what is the actual value of the token. And so in that context, like the way that I frame the ETH versus Alt L1 investment debate is kind of, I like to compare it to the smartphone industry.

And it's sort of like, would you rather invest in a business that only services the high end of the market has extremely high net income margins and generates extremely sticky revenue? So I'd compare that to something like Apple or a business that only services the low end of the market has negative net income. income margins and no path to positive than income margins and is a very, and has proven to be a very disruptable revenue base over time. And I compare that more to like one of the low end providers, like oppo or vivo. And in my opinion, that's the ether versus Altel1 debate. Heath only services the high end of block space demand. And they charge a premium for it. And as a result, they have extremely high margins. And that's proven to be very sticky over time. Altel ones, by definition, only service the low end of the market because their value proposition is

low fees. And as a result, they have very low margins. Actually, they have very low margins. Actually, all pretty much right now lose money. And over time, you've seen that the, the, the, the, the, one narrative has changed from one to the other to the other to the other because they are, that revenue is more interchangeable. So for me, it's pretty obvious in that context that you describe a higher multiple to the, that the high margin sticky business. And you see that in the market, Apple trades at 28 times an op-o and vivo trade in the teens. And so in the equity market, which is, in my opinion, very efficient, that's, that's depicted. And I think if you look at it in crypto, though,

ETH trades at the lowest multiple of all of those assets. And that's kind of where I think the opportunity exists. And then the last, so that's one reason what brought me to Ethereum as like an investment case. And then the second thing I'd say is it really was about the community and specifically the developer community. I've found over the years just as an investor that if you find companies and teams that are due, things for the right reasons and the right way and not trying to maximize short-term financial upside. Generally, they will do the best in the long term, even from a return of the asset perspective. And in my opinion, the youth developer community really epitomizes that and really

puts forth a strong focus on sustainability and actually doing things the right way for the right reasons. I think, to be frank, in all the communities, there's Moonboys that are toxic. I think that's just a factor of the space. But what I'm talking about is, and I think those exist for E2, just like every other community. But I think the actual developer community itself is strongest in the theorem. And I think personally that comes from the top. And I think Metallic has set an extremely strong example, historically and continues to do

so and is very active in the space. And I think it's kind of trickled down from Vitalik to the rest of the developers. And that's another thing that really brought me to the ecosystem. And then the last thing, which obviously will talk. about a lot in the episode is that I think there's a truly generational opportunity with the merge just from a pure investment catalyst perspective. So kind of all of those things are what together drove me towards Ethereum. So it's so much to unpack here. And, you know, I think we will how, like one question I think we're going to come back to and I, you know, might continue to push

on you toward the end is what you were talking about is a lot of fundamentals, right? And it's like something that we've said forever. I remember we wrote a blog post in 2019 that said the asset is not the network. And we said, look, the Ethereum asset is different from ether the network. Bitcoin, the asset is different than Bitcoin the network. And if you're evaluating Solana, you actually have to look at the kind of the revenue and the cost, the issuance of sold tokens, because that's what you're actually investing in. But here's the problem. We put that post out in 2019, we've been talking about it until now, the market doesn't necessarily price it that way from a fundamentals perspective, okay? And I want to hear your case for why you think the merge is

going to be different. I feel like it's a different lever here. It's less about fundamentals, more about supply and demand, which is actually super interesting. But can we just go back? And I think bankless listeners will have heard us say some of the three things. You had three kind of pillars to how a token like ether is valuable and why it's valuable, right? You said currency, store of value and equity, and equity being the least understood. We've used the term capital asset to describe equity. Revenue and cost, can you describe what the revenue and the cost is for something like ether? And how do you get to that, like an equity has to have net profit, has to have cash flows? How do you get to cash flows for a chain like Ethereum or a chain like

Solana or a chain like Tara? It's actually a fascinating question and one that I've spent a lot of time thinking about. I think the revenue side of the equation is extremely straightforward. It's just the fees. That's the revenue. It's how many fees do they generate? When you use any of the L-1s, you pay native tokens for the service they provide, which is the block space, and that payment that you pay, that revenue, accrues to all the holders of

the asset in the form of stake. rewards. And so that part of the equation is very straightforward. The revenue is the fees. And I mean, you can look at it. Obviously, you can pull up cryptofeas. Info and you can show kind of the fees if you'd like. But Ethereum is obviously the only one that really generates any fees. But, and obviously that's a big criticism by a lot of people. And, you know, I think that is valid in terms of the utility of the network, but again, we're talking about the value of the asset and unnecessarily the utility. And of course, they're linked in certain other ways. But just from a pure fee perspective, that is the revenue. The more interesting side of the equation is actually the expense side of the

equation, which you brought up. I think, you know, for a long time, I sort of thought of expenses as issuance. And I think for proof of work assets, the issuance is an expense because the issuance does not accrue to the token holder it accrues to the miner and so right now the expense of ethereum is the i think it's like four million eth that they issue each year which is a tremendously large amount of expenses and same thing for bitcoin but actually and so that's that's one expense um but then when you think about it for proof of stake i think what's really interesting is that that issue, I would no longer characterize as an expense because it no longer goes to an external third party. In fact, it actually goes to the token

holders. And so if you have an equity that decides to pay out a stock-based dividend to its holders, that payout is not treated as an expense because it's not an expense. It doesn't leave the system. It just goes to the holders. And so I actually double down on that is the proof of work costs. electricity cost is a literal expense of a proof of work network, as in that is something that costs money to people that operate the network. And that same thing doesn't actually exist in proof of stake as well. I just wanted to add that on that. I mean, for sure. And there is some cost of proof of stake, right? You still have to run the note. You shouldn't pay electricity. But it's just much, much, much, much more efficient. So that cost is dramatically reduced. And I would say,

of course, there's cost of proof of work like you said. And they're very correlated with the actual issuance cost. But the interesting. thing is, yeah, when you go to proof of stake, that issuance is actually no longer an expense. And what's actually really interesting is that it actually becomes, depending on how you want to think about it, it becomes a form of revenue. Because what happens is not everybody stakes. And so what happens effectively is that the people that don't stake are essentially forfeiting their share of those issuance rewards to those that do stake. And so if you can produce a network where there's a lot of demand for the asset outside of staking, such that the staking rate is actually low, the value that that accrues to those that decide to stake is really profound.

And that's kind of an interesting point that I think is really relevant for Ethereum, because Ethereum only has about 10% staking participation rate. And so, like, let's just extrapolate that it goes to 15% after the merge, because the staking rate will come up, those 15% of stakers are effectively eating the free lunch of the other 85% of people that aren't staking. And so you can actually get a really outsized return for those stakers in exchange.

And because Ethereum is such a useful asset in the Web3 ecosystem, there's a lot of other demands for ether, and therefore that keeps the staking rate low, which actually allows a tremendous amount of value to accrue to those that do stake. So that's kind of an interesting point. But then to finish on the last point of sort of what are the expenses then, they're really everything else.

And for an L1, they're actually quite low. Like it's, okay, paying the developers in Native tokens, that is an expense. Like that's effectively like R&D expense. And then also any sort of ecosystem fund or fund or L1 incentives. like, you know, when a new L1 will launch and they'll have an ecosystem fund that will provide incentives, that is a real expense. But for the case of Ethereum, there is no more ecosystem fund. So the only expense is really what the EF pays out to the developers and salary. And we actually did see that EF report go out not too long ago.

Actually, the first time that the EF has really put in a financial report. And so, again, like the whole like working in public thing and working transparently, all this information is available to us. And I can't remember the number specifically, but like as far as total ether market cap goes, the amount of funds that the EF is spitting out from its treasury is like actually not, not that crazy at all. It's completely insignificant. Right. So like 4 and L1, like like right now, ETH by my math is, it's about 15% net income margins.

And then after the merge, you'll probably be like 99% net income margins. The angle that you talked about with the defy utility impacting the stake rate is something that we have not talked on bankless about in a really, really long time. This component was in a very old article, but that is a really awesome dynamic that I want to drill down on, where people use ether to push bids on OpenC for NFTs. They put their ether into Make or Dow to Borrow die. and every single application that ever comes on top of Ethereum that uses Ether as collateral, which is like most of them, it creates some sort of incentive for users to deposit Ether into those applications. And so this is another like roundabout byproduct in the way that the Ethereum ecosystem actually does induce a value into the ether of the asset, right? Like the Defy apps have some amount of utility and those utility comes from depositing Ether into those accounts.

But then what you're saying is like the more and more useful every single defy app that comes to Ethereum becomes, that you're actually increasing the stake rate for the stakers because you're incenting some of those stakers to stop staking and go use the apps instead, leaving a larger share of the pie left behind for people who stake. And so as the app layer of Ethereum becomes more and more useful, you're also increasing the value of the stake rate on Ethereum as well at the same time. I just wanted to drill down on that a little bit more. East Rose and Ryan is isn't he yes he is how do we lose you you're also muted Ryan

okay it's just David he's alone in here well I can keep on going on the the Heath application stake rate let's see if how returns do we have him in like one of our chats let's see

if he does you know I guess I guess I think one of the one of the things I haven't talked about so I think that was one of his points we haven't talked about enough on bankless. The other thing I really want to drill down on is he has a different definition of expenses than we do, which I find somewhat interesting, right?

So, like, I would just sort of take this, this whole thing, daily issuance as expenses for layer ones, you know, Ethereum, Salana, Pocodot. But he said, no, that's not actually the expenses. And I think because he's seeing this from a very supply. and demand dimension. So he's almost seeing it as cash flows. And if the cash flows don't actually exit the system, if they just go into validators' pockets,

he's not actually seeing that as like an external cash, you know, cash flow, you know, push out. He doesn't actually see that as, I guess, an expense in his terminology, even though there is dilution to anyone who is not staking and holding the asset. I wonder if he thinks that if it doesn't actually make it, if his definition is that secondary market sales are the expenses and things that induce secondary market sales create expenses, then just like... That's what I think is definition is, yes.

So like the actual proof of stake, here's how bringing them back, the actual like proof of stake nature of this means that like because staking basically is free, assuming the cost of computer and the internet and the very meager like electricity. expenses. What's up, Hal? Sorry about that. There aren't expenses. Sorry about that. My internet cut out for a second there. What's up? No worries. No words. I was on my monologue. Anyways, I was talking about the tug-of-war between the utility of

D-5 versus the stake rate. So just any final thoughts on that before we move on? Yeah. And another thing, I think the one application that you didn't mention is just the fact that ETH is the base pair in every LP pool with every other year I I see 20 that's built on the network. But yeah, no, I totally

agree. And then I think there's a lot of reasons, I mean, that Ethereum benefits from being a more mature chain. Like the token distribution is just much more broad. And I think for a lot of these other proof of stake assets where you have more concentrated token distribution and a lot of it is still held by VCs, you know, those parties are basically like 100% staking participation rate. So the more distributed you have it and the more mature of the network is I think that staking rate trends lower anyway. I think it's a combination of those few things. But I think for like a new investor entering the space, it's kind of counterintuitive, but you'd prefer the staking rate to be as low as possible if you are planning to stake

because you get an outsized share of the earnings generated in that case. You want the network stake rate to be as low as possible because that's actually. Yeah. Like if I could choose, if I could choose, if it wouldn't mean that Ethereum wasn't secure, I would prefer everybody except me not state. And then I would just get it. Yes. And then I would basically accrue the entirety of the fees generated by the whole network.

So that's obviously like an edge case, but it's helpful just to think about it. I would also prove that thing, Hal for myself. Yes. Correct. Yes. You guys don't stake. Just let me. Yeah.

So everyone listening to Stone State. You know, we'll be the stakeholders here. I heard actually on the latest All-Corp devs that you're going to get 100% penalty if you stake. Yeah. That's right. That's right. Some alpha from how. For the next year, the slashing rate is 100%.

I want to go back to this because this is actually different than what we've, our mental model for things. So I want to hear how you think about it. So on the expenses side, totally agree. Block space sales are basically revenue for any layer one chain, right? But let's go to the expenses side of things, right? You don't think issuance. This is money printer.

This is how much. No, no. No. So that is right now because ETH is proof of work. Get it. And proof of work, but like this, seven million dollars stealing issues. Okay. No. Because your definition of an expense is actually an outflow from the system, basically.

That's just going to the sole holders. So those sole holders are not being diluted by that. They're just maintaining their, assuming they state. The sole holders aren't anyone who is not staking is being diluted, but you still don't think of that as kind of an expense in your terminology. If you want to be technical, it is an expense for. those who do not stake, but it is actually, in fact, a revenue for those who do stake because they're taking that from them. And the reason is that the distinction is like miners, they have to sell the ETH to pay for the electricity and A6 and operating costs, right? And proof of work.

It's actually not that. It's the distinction is that your percent of the issuance is correlated with your holdings of the asset, not with your secondary thing that you're doing in terms of how much work you're putting up. That's what makes an expense or not expense. It makes it an expense as if it doesn't actually accrue to the token holder. If there's no correlation between how many tokens you hold and how much of the issuance you get, the moment that those two are one and the same, it's no longer an expense. So you're taking a staker-centric perspective on these networks? Well, for a proof of stake asset, it is not an expense. It's just a issuance that's paid out to you. So it's essentially it's essentially a stock-based dividend, if you want to think about it in equity terms.

Would you consider something like this? So a staker lives in a country where there's like 50% taxes, let's say, on any staked income. Staker receives staked income, has to pay 50% taxes, has to therefore pay 50% of stake. Would you consider that an expense in the system? I wouldn't consider an expense. Like, okay, do you pay taxes on the dividends that Apple stock pays out, yes. Do you consider Apple dividends and expense? No. So it's the same thing as that. But it is for selling, right, of Apple stock. So there's two, there's two, there's two things we can, you could talk about does it show up in the supply demand dynamics as an outflow? Potentially. But is it actually an expense in theory as you think about like the income statement of the

network? No. And what's the distinction then? Why does that matter? Aren't we just measuring outflows? I mean, if we're doing supply and demand, that's like... Yeah, so if you want to get to the supply and demand, then yes, it's important dynamic to think about. But the reason why you wouldn't think of that is because, like, for example, if those issuance changed, if they reduced it or increased it. And instead of doing that, they did something else with it, then it wouldn't change the net income of the network. But, yeah, I mean, if you want to talk about the actual flow, potentially you could think of it as an expense. But the other interesting thing,

and we'll come to this when we start talking about the merge, is that I don't think a lot of staking issuance gets sold. I think the majority of the time, the staker is staking because they like the asset. And by definition, when you go to the state, you must hold the asset to stake, right? And so then you are invested in the asset. So those holders are much less likely to sell their issuance,

and they're much more likely to just want to accrue more, of it. And also, they don't have any external expenses because proof of stake is so much more efficient. Whereas the minor, ETH minor or a Bitcoin manner doesn't have to like ETH or Bitcoin. They're just like running a business, right? And so, and they have a lot of expenses. So I think a ton of the minor issuance gets sold. But I don't think a lot of the staking issuance gets sold, which is actually a reason why I'm one of the reasons why I'm so constructive on the merge is because you have a gross reduction in issuance from proof of work to proof of stake, but you have an even stronger net reduction.

Because if you say, like, okay, right now we're issuing 15,000 ETH tokens a day, and then post-merge, we're going to issue 3,000 tokens a day. But of the 15,000, a much higher percentage gets sold than of the 3,000. So if you actually think about the issuance that gets sold, it's an even greater reduction. And we'll get to that when we go through the merge. I want to drill down onto something because what you're saying is that with proof of stake assets, because you don't have to sell them, the issuance of these proof of stake assets don't count as a cost to the network because people can just keep on holding these things so it never makes it to the secondary market. And if you're bullish on these things, you get to stake it and you get more. And so there's one aspect is that like proof of stake naturally rewards people that are bullish on the asset because if you are bullish, then you don't sell, you just stake.

but that is discounting the role of total net issuance of new supply of tokens, where you are actually incentivizing people to hold even more if the asset itself is more and more scarce. And so there is a role of minimizing issuance, allowing people to be more bullish on the asset, because even if you just juice up total issuance and no one's selling, and you're with a highly inflating proof of stake system, sure, like maybe the stakers aren't, selling the tokens now, but it could just be viewed as deferred selling later. And it will ultimately come to a cost on the secondary market because of very high issuance. Well, the way that I think about it, so like, I can see, I can see where you are coming from

with that, but I actually don't agree. And the way that I think it's probably useful to think about it is in sort of an edge case. Like, if you assume there's a network that's worth $100 dollars and it has a hundred tokens and like you have 10% of the tokens so you have 10 tokens and that network always is going to be remained worth 100 whether they inflate or not right and let's just say they inflate to the point where they double the the they double the number of tokens so now there's 200 tokens but the network's still worth 100 so your token went from a dollar to 50 cents but your number of tokens doubled too because you received the issuance and so you're holding actually did not change in value.

If it were an expense, you would expect that your holdings changed in value. They would expect that that money left the system. And so the reason that it's not an expense is because those rewards actually accrued to the holders. It's only an expense if it leaves the network. So if you choose to then sell your tokens as issuance, that actually doesn't change the value of the tokens and it doesn't change the value of anyone else's tokens. that could put cell pressure on it, but you also are accruing more tokens anyway, so that

that should offset it. And if we're talking in theory, I feel pretty strongly that actually it is not an expense. Well, with a highly inflating network, sure, you can match the amount of issuance by staking so your share doesn't get diluted. But with a highly inflating network, you are disincentivizing the non-stakers to hold in the first place because they're getting diluted. Yes. That is for sure.

They are being insensitive to sell. Then maybe your share of the network stays the same, but your real cost, your real value does go down. Well, actually, I think your real value would go up because you're basically just eating the people who's not staking piece of the pie. So, like, you're basically just getting paid out a greater than you deserve percent of the... But if your token price is going to zero, because everyone is... But I feel like... So I feel like what you guys are doing is like you're talking about which category it fits in. What you're saying, David, is if you're doing too much dilution, you're a real thing.

from the store of value category that you were talking about earlier, Hal. And what you're saying is- Yeah, I still think you should trend towards lower issuance. But I think in theory, if you want to actually talk about it, and that's involved, it is not an expense in the pure form of an expense. Yeah, you're just saying it doesn't really affect the equity-type use case or the capital asset type use case. It doesn't. But David's saying it does affect the store-of-value use case.

But in any case, Ethereum is pretty strong on both of those, right? because we're looking at like some pretty low issuance. And we'll get to some of these numbers when we get to the merge. And I do want to make the case, like here you make the case for the merge. But have we talked enough about like supply and demand mechanisms? Because that does seem to be this. No. So that's your case here.

What is supply and that? That is a necessary. Okay. What is that? Why does it matter? That is a very necessary piece of context to frame the merge discussion. And yeah, today we've mainly spoken or it mainly spoken about fundamentals. And actually, my thesis has very little to do with fundamentals.

So it's good that you segue into the more interesting part. Yeah, so supply and demand is just what it sounds like. It's just that's basically the price that you see when you look at the price of any of these assets is just the price at which buyers and sellers are at equilibrium. And that's the clearing price in the market. And the only thing that actually impacts that price is supply and demand. Now, fundamentals can impact price as well, but only through the indirect link, of the fact that the fundamentals actually impact the supply and demand, which then impacts the price. The fundamentals don't impact the price directly. They only impact the price in their ability to

change supply and demand. So like if you think about it from a stock perspective, if a stock has improving fundamentals and that creates more buyers of the stock, then that can impact the price. But if everyone already knew about those fundamentals and it doesn't impact supply and demand, the price doesn't move. And that that shows you is that the fundamentals only impact price through their ability to affect supply and demand. And so ultimately, all that actually matters if we're just talking about pure price of the assets is the supply and demand.

And so in that context, like in the equity market, there's a fairly strong link between the fundamentals and their ability to impact supply and demand. And so as a result, the fundamentals end up driving the price because that link is quite strong. However, in crypto, as you noted yourself, Ryan, that fundamental link is very weak. And so often what will happen is that the fundamentals will change.

But because the space isn't dominated by fundamental investors, it doesn't actually impact the supply and demand. And so it doesn't actually impact the price. And so as a result, the crypto assets end up trading much more as a product of the supply and demand forces. And then what you'd find is that the narrative's form to fit what's going on in now supply demand structural forces. And so in that context, I think those structural supply demand, forces are extremely important. You look at any token that has like in the middle of a vesting period,

and it's essentially down only no matter what's going on with fundamentals. Why? Because crypto's trade on flows, not fundamentals. You look at Bitcoin every having event. The having event actually is a negative event for Bitcoin fundamentals. It reduces the security. But yet, what happens? Bitcoin price goes up every having event because it's about the flows.

So as a result, it's pretty, it's pretty, pretty clear in this space that things trade on flows and not fundamentals. And these are not binary. None of this, none of anything in investing is binary. It's just like weighted this way and weighted that way probabilistically. But I do think that the flow. One example. So from our original conversation where you really piqued my interest with this lens on this, this way of looking at things, I asked you, okay, Hal, if you're right, then how do you explain the rise of all of these alternative layer ones? And you said to me, it's basically still supply and demand. I, recall the series that I'm paraphrasing. You're saying basically someone who starts using an ecosystem

like Seoul because of lower gas fees or or Matic or Avalanche or which have you because they're using that one they're they're glaming onto the narrative of high Euth gas fees and but avalanche is useful but then too they just become more familiar with the avalanche ecosystem and so they're going to go and buy AVA tokens right because I think what they're familiar with so it's basically free marketing, essentially. If you're using the network, you're going to buy the native token of the network, and that accounts for the additional demand force. Is that how? I think there's a few things at play. I think first of all, one thing I would just articulate is I am by no means like an ETH utility maxi. Like I have used Avalanche and Solana and Maddoch. And to be frank with you,

they often are a better user experience. That is just the reality of it. That is the truth. You have to be honest. So I am not like, I would never debate that. But what we're talking about is the actual value of the asset. So anyway, just that's like a disclaimer. Second thing I would say is that there's a couple reasons for it. First of all, like to your point, when you attract these new users, because people don't understand, well, I think most people or a lot of people don't understand these dynamics,

they don't think of like the value of the asset. They just think of like, oh, this is really cool. Like this network's really easy to use. Like everyone's just going to come here. This clearly is going to go up in value. And like, okay, I'm just going to buy it because I like it. And I like I want to be part of the community. So then they buy the asset.

But they don't actually think about like, okay, is this asset cheap or expensive? Am I getting good value for my money? They're just like, okay, it's useful. I'm going to buy it. And then the second thing is, because, Because those assets are already proof of stake, they have almost no structural cell pressure other than VC vesting. And this is something that I'm going to get into, like I'm explaining to do right now, is that proof of stake assets just in general have much more favorable supply demand dynamics because there is no minor issuance that must be markets sold every day. And so as a result, that lays the foundation for greater and more consistent price appreciation, which allows those narratives.

to form. And that's kind of what I mean by saying that the price leads the narrative, not the other way around, right? The Alt-L-1 will do well because there's no structural selling and the VCs are all locked. And as a result, people would be like, oh, this thing's going up because it's the next like Eith killer. It has to be like that, that, that's the reason. And then the narrative will form because the price is going up. But the price wasn't going up in the first place because the narrative was going up because the structural flows. And then the narrative will follow that. Can you contrast that really quick, Hal, of like, what's the difference between, is there any

investor unlocking with ETH versus what's the difference between some of these layer ones? Yeah. Yeah, so there isn't. And that's one of the best and most attractive things about Eath is that, like, you know, we're many years since the inception. And so all of the vesting has occurred and there is no more vesting to occur. Well, there was no vesting in the first place. There was no vesting with Heath.

Yeah. And I don't know my history as well as you guys. Everything was unlocked on day one. Okay. So everything was unlocked day once. There was the supply that went to the ETH Foundation and that has basically gone. And whether you want to call it vesting or not vesting, I'm sure a lot of those initial investors slowly sold out of their holdings over time.

So regardless, that was still structural self-fessure, even if it wasn't technically vesting. But anyway, yeah, there is no more of that token distribution that needs to occur. again, nothing is absolutely definitely like a cardinal sin of investing to think in absolutes. So like I wouldn't say there's no more. I'm sure there's some existing token holders from the early days that are still slowly selling out, but that is very drastically reduced obviously. Whereas some of the old ones, obviously there is actual investing that still needs to occur. But to go back to the initial question of like going into the merge, how do I think about the space?

So if you break it down for a second and I think this is kind of an interesting, sort of starting point. The crypto space is really dominated by two primary assets, Bitcoin and ETH, their largest market at by far. And like the rest of the market tends to follow their behavior. I mean, generally it's Bitcoin that leads, obviously, because it's larger. But ETH over time, it started to have a bigger position. And I think ETH also has an impact now.

But those are really, those are really the two things, the two assets that have an impact. And both of those assets are proof of work. And so I think what ends up happening is that the space at large and like the macro crypto cycles end up being governed by these proof of work supply demand dynamics. And so what are those proof of work supply demand dynamics? I think they're very important to understand. They are the fact that you're, so the structural seller of a proof of work asset is the minor. And every day the miner gets a fixed number of tokens for mining the network.

And I think what's really important, I mean, use eth as an example because I know it better than Bitcoin, is that that issuance that they receive is denominated in tokens and not fiat currency. And so what that means is that the miners get 15, I mean, it's 14 and a half, but we'll call it 15 for math to say 15, 15,000 ETH tokens every day. And one other important kind of assumption here is that I think, let's just assume miners sell two-thirds of their tokens. I actually think the number is probably higher over long periods of time, maybe lower over short periods of time. But I think two-thirds is a good just working assumption for math. So then what that means is that 10,000 tokens get sold every day. And I think one point that people will make is that maybe that fluctuates, but really it doesn't actually fluctuate because, Well, it fluctuates in short periods of time, but not large periods of time because the market is efficient.

And so if the asset goes up a bunch where it becomes really profitable, you have more miners come on. And that's why you see hash rate tend to follow price over long periods of time. So let's just take the 10,000 token for sale as a given for the sake of this discussion. What happens then is that if eth is $100, then you have a million dollars of market selling every day that needs to be absorbed. And a million dollars of supply is not very hard to absorb. You know, that just takes one million dollar buyer, which is not that much. However, when ETH goes to $5,000 a token, then you have $50 million every single day that needs to be absorbed. And if you extrapolate that, it becomes $1.5 billion a month that needs to be absorbed.

Now, that's a lot of money. And then when you add on to it that the Bitcoin issuance is actually almost exact same, then you're talking about at those prices, like when ETH was 5K and Bitcoin was 60K or whatever, 4.5K, it was $3 billion of proof of work issuance that needed to be absorbed every single month. And that is just extremely hard to sustain. And what's relevant about that and what's so important is that that issuance linearly correlates with the actual price of the asset. And so, it creates a very reflexive price action, where when the asset goes up in value, it pushes naturally the price back down because you create more sell pressure. And the reason for that is that your supply is denominated in tokens, but your demand is denominated in fiat. Because you and I, whether we like it or not, we get paid in fiat. So our buying power does not expand when the price of the asset expands. So the demand is relatively close.

constant over longer periods of time. But the supply increases with the price. And so what it happens is that when price goes up, that will naturally push price back down. And then when price comes back down, that will naturally allow for a bottom to form as the supply is reduced and so on and so forth. And so in my opinion, this is the actual most important fundamental driver as to why you see crypto cycles the way that you do. Because what will happen is you'll have a period of parabolic rise of interest and FOMO. And I think the industry is very gamified. So you get a lot of this like FOMO and kind of excitement around these rallies. And so you'll have this sort of parabolic rise. And during that parabolic rise, you know, all the new money entering the space is enough to offset

that increased minor cell pressure for a period. But inevitably, it can't offset it forever. And so by the very nature of the fact that you reset the price higher, you actually start to push it back down. And so ultimately what happens is prices can never sustain any parabolic rise in crypto history. The reason is because you create so much cell pressure by actually producing the parabolic rise. And so that kind of governing dynamic is, in my opinion, the force that drives the macro crypto-cryptoc cycles and is really important to understand. understand. And then you throw on top of it the fact that the vesting is also token denominated. And so it also adds into this. And then also just the natural human behavior of like the people phomo in and then it can't sustain and then it starts going down. And then all those people that fomo then obviously get stopped out on the way back down and then you over exaggerate to the way down. And then just to touch on a few smaller things, like the reason why I think you see that very cyclical price action is because of what I said. And then. Obviously, as crypto gains adoption, you end up with higher highs and higher lows within those cycles because you have more money during those periods. But then the point that is so relevant for me then and what makes the merge so attractive is that finally, when it merges, it fixes this problem.

And this actually goes away forever. And in my opinion, that creates the sort of lifting of the ceiling that has capped the price. of the asset for so long because you no longer have this problem and you no longer have the minor issuancy dictating the entire market. And not only that, and we'll get into this more with the merge, but with ETH, because you pair that with the fact that it actually does generate revenue and that revenue does flow into buy pressure, which I can also articulate as to why I think that, not only do you switch from having this, not having this cap, but you, you switch from what will be for the first time in the history of L1 assets, a structural

demand asset, where instead of needing new money flowing into the network to sustain price every day, you will instead need new money leaving the token every day to keep the price from rising every day. And the fact that you flip, especially after you formed like a seven-year equilibrium in one set of dynamics, and you flip at one discrete moment in time, like literally one block to the next, you just flip the switch is what's so profound for me. And then furthermore, it's paired with a very dramatic fundamental increase in value that will also probably stimulate discretionary demand. And then on top of that, it's paired with a massive increase in the staking rate, which will also fuel

discretionary demand. So like, again, just to put the high level and then we can dive into each of the specifics on this, when the merge occurs, you're going to have this structural seller that has filled every Ethereum buyer for the last seven years is going to disappear at one moment in time. At the very same moment, there's going to be multi-billion dollars that needs to buy ETH for staking, and then another set of multibillion dollars that needs to buy ETH for fundamentals. So just from a pure supply demand perspective, you're going to have all the daily buyers, that buy ETH every day because we've established this equilibrium where they need to buy it. Otherwise, the price goes down because the miners sell.

They're still going to need to buy. And you're going to have both the discretionary forces that also need to buy. And then you're going to have the one force that was filling all those buyers gone. And so that to me is what makes the catalyst so profound. And that's why I titled the Ethereum piece as a generational investment, in my opinion. That is what makes it generational. I told you you'd like this guy, David. Yeah, yeah, I'm a little bit at the moment.

So how you talked about how this is like, it just happens at the sound of the fingers as soon as we merge. But do you think that it manifests in the price that fast? Like how much lag time do, like there's still be sellers around, there will still be buyers? Like, how much lag time do you think? It's going to be like three days, three weeks, three months? Like what's a lag time that we're talking about here? I would actually think about it in the opposite, for stuff. and actually like how much in advance does it happen?

I don't think there will be a lag time. Yeah, I think the market is not stupid. I think, frankly, the crypto people might be offended by this. The crypto market is less intelligent than other markets, but it's not outright unintelligent. And there are plenty of intelligent players that exist in the market. And so I definitely think it will be front ran.

It's extremely complex because there's like so many components, like people will worry about the actual technical execution risk of the merge and something bad happening. But generally, what I would think is that when the merge starts to actually be clearly visible on the horizon, and narrative will start to build. And it'll be like I talked about, it'll be the price will start moving. And then the narrative will form to fit the price. And actually, it's funny because we actually already saw this. Like in June, or not in June, it was like March, whatever Eath went on the run from,

whatever it was like 24, 200 to 3,500, like that run. And Arthur Hayes put out his like ETH merge piece. Like the merge narrative, you could feel it was at like a fever pitch. And like, why was the ETH narrative at a fever pitch? Well, because ETH was going up. And why was Eth going up? Because Doe Kwan was buying billions of dollars of Bitcoin and it was taking the whole market

up with it. It wasn't actually because the merge was coming. It was just because the price happened to be going up. So what happened? People scrambled to find a narrative to try. try to explain it, and so they attributed it to the merge. But actually, in that period, the merge fundamentals were trending down. And then actually in the period where each price has been trending down, the merged fundamentals

have been trending up. But no one talks about the merge. Why? Because the price isn't going up. So again, it's just another example of the narrative following the price and not the other way around. Cool. I'm bullish.

Hal, I think what you're describing is pretty interesting and profound, because I think this is bigger than just the eth merge. I think what you're describing is a structural change in how major crypto assets are priced. It totally is. It was like previously, it was, you know, in the old old world, it was Bitcoin happening supply demand dynamics. And that was the thing. And then we had kind of a newer world, which was, you know, maybe the more recent world

that most crypto investors literally bankless have lived through, which is like narrative-driven sort of demand, right? And so whatever the hot narrative is. that drives, that is the propeller, that is the motor behind supply and demand dynamics. And now we're moving to a completely new post-merge in one seamless transition from one block to the next, where the merge is actually flipped from on to, or the proof of work is actually flipped on to off, is we are completely changing the structural nature of the entire supply and demand dynamic for crypto.

and it actually starts to get for the very first time linked to fundamentals in a new way. By fundamentals, we mean block space demand on Ethereum. And that is a first. And that's going to have repercussions, not just for ETH price, which I think it sounds like you're very bullish on. We'll talk more about that later. But like that will have a profound change into the way all crypto assets are priced. Is that what you're saying here?

Yeah. I think it will certainly have a profound. on the way ETH is priced. And I think, yeah, to your point, it could start to flow into other things. But I also think that I do it, like, okay, we don't need to predict whether ETH will flip Bitcoin or not. But I think ETH will certainly, like, ETH dominance will increase post-merge. Like, I think ETH will rise. The bet that I'm comfortable making is that ETH will rise relative to product crypto market cap.

And so naturally, when that has. happens, ETH will become a larger factor in terms of driving the whole market. And so because to your point then that ETH will be trading more on these dynamics, that may start to have an impact of affecting the rest of the market. And the other point I'd make just like kind of while we're on this topic, I like, so we talk about the fact that fundamentals don't necessarily have a link with price. However, post merge, that link actually increases.

Because especially with EIP 1559 where fees are burned, basically your revenue, and there's a lot of interesting places we could go with this too, but your revenue does actually flow into buy pressure. So your fundamentals do actually directly then start to correlate with flows, which means that they should start to matter more for price. And it's a little bit interesting to understand how they flow in. So like if I spend one ether, let's say gas prices are super high and it costs me an ether to do a transaction. that ether does not actually get bought on the open market. It's not buy pressure. And whether it goes to a validator or whether it gets burned, it doesn't matter. It's still not bought.

So that kind of actually doesn't really matter. But it does go into buy pressure. Why? Because I need to replace it. Like if I only have one eth and I use the eth to do something and then I want to do something else, guess what? I need to buy another eat. And so if you make the assumption that people want to. to keep their actual ETH investment holdings constant, which I think is a fair assumption,

then every dollar spent on fees must be replaced with new ETH purchased. And therefore, the revenue of the network actually becomes directly linear or directly correlated with buy pressure. Like an equity-ish. Not necessarily like an equity, because when you pay for something in equity space, you don't pay with the actual share. Right. Like when I go to an Apple store,

I don't give them an Apple share for my iPhone. I give them dollars. And so then the only way that that dollar flows back into buy pressure is if Apple turns around and goes and buys back stock with it. So in equity, it only occurs if the company happens to do stock buybacks. But if they don't, it doesn't. But if you actually make the payment itself in the native token, then the link becomes direct.

I guess it would be as if Apple only accepted, you know, currency in Apple shares for all the iPhones. Exactly. If Apple instituted a rule that you had to pay for all Apple products with Apple shares, then Apple's revenue would be directly linked to buy pressure. Right. But they didn't do that. Or if Apple implemented the policy where they said,

we are going to buy back 100% of free cash flow, which a lot of companies do, then it also becomes directly linked. Yeah. Yes. So a lot of the, the crypto markets historically generally oscillated around Bitcoin, or at least that's what the Bitcoin or narrative is. Like every four years there's a happening. I think that's been correct.

And every four years, there's a bull market. Now, with the coming proof of stake with Ethereum, where like the second largest asset transitions from the structural selling to the structural buying, do you think we, we, break free from that Bitcoin four-year happening cycle and Ethereum starts to dictate its own bull markets? I do. I do. I'd also like to get into some of the specifics of the merge. I don't know if I want to do that before or after, but just on this point particularly, I do like, okay, if you want my honest opinion, I'll just go on record. I do think Heath will flip Bitcoin. I do think it will happen around the merge. And I do think it will be very healthy for

the industry because I think then you will finally go to an asset that isn't, is no longer capped by this proof of work structural supply dynamic. So all of a sudden, the industry will not have that very cyclical price. Well, it will not have that forced cyclical price action in the same way, because the primary asset driving, it will no longer be driven by it. So I do think that will happen. Could I be wrong? Of course.

But that is my opinion. But you are betting your fund on it. So I am. I am high conviction. I'm high conviction on it. But as I said, certainty buys as a cardinal sin in investing. So I will never say I'm certain of anything.

How can we run through some of the numbers then? I think you've got some stuff to share with us. So just like taking a look at like what are the, you know, puts and takes on supply and demand from a from a pre-merge perspective and then a post-merge perspective. And the difference in issuance, maybe any fee difference, difference in staking demand, all of these things. Yeah. What do you have to show us?

Because I know you've been crunching numbers. Yeah. So I think, yeah, I can share my screen here. There's a few things here to discuss, but I think like the kind of important point to understand from a current perspective is that right now there's about there's about, so there's about 10,000 tokens for. sale every day on ETH, which is, call it $25 million. And then fees have been running at like a or burn had been running at like a 12 or $13 million run rate. So when you take the net of those two, it works out to about $13 million a day of daily

sell pressure. So every day in Ethereum, if you don't find $13 million dollars of new buyers and it's actually greater in Bitcoin because they don't even have the buy pressure. So for Bitcoin is more like $30 million. And for ETH, it's called it $13 million. So if you don't find enough buyers to offset that, then the price of the assets go down. And if you find just enough buyers to offset that, the price of the asset stays constant. And so that's kind of like an uphill battle that you fight every day.

But after the merge, it flips. And so all of a sudden then you need to find $12 million at current prices. And like I'm using somewhat conservative assumptions on fees here that I think will probably proved to be too conservative because I think as we approach the merge activity will probably pick up as price picks up. But using the conservative assumptions, you'll need to find $12 million every single day to sell ETH or else ETH will go up every day. So like that's kind of the high level of the supply demand dynamic. And I think that flip from from negative to positive is very important. Just to read that. The network will need to find 12 million.

million dollars a day of sellers in order to prevent the price from going up. Yes. And to make it a little bit more profound, not only is that the case, but also I think what's kind of more important and not really understood as well is that, tell me, exactly how long has it been since the ICO? How many years has it been? 2014 was the ICO. Okay, so eight years.

So we have now spent the last eight years forming an equilibrium where there is enough buyers to offset the current dynamic of $13 million selling every day. So you have formed over a long time in equilibrium where you've built up this behavior of these people. Like all the Eath diehards that every day or every week or every month they put their paycheck into E. And you've built up this behavior over a long period of time because you've had to. The token has found the price where that exists because otherwise it will keep going down until it does find the price. So one way or another, we have now found that price. And so those buyers are there every day because the token price is stable. Relatively, obviously, everything moves, but it's found in equilibrium.

And you move from that equilibrium to the state which you just described, where you then all of a sudden, going to need the $12 million of sellers every day. But those $12 million of sellers don't exist. And in fact, $12 million of buyers exist. So you're actually going to need to find $25 million of new sellers every single day or else the price will go up. It's more profound than even the 12 because you've already reached the equilibrium at the previous negative 13. And so ultimately, what will happen is that the price will naturally need to reset to a level where people are willing to sell $25 million a day. And it's not this price or else the price wouldn't be at this price right now.

So we will reset to whatever that price is. And frankly, I'd bet that that price is a lot higher, but we'll see. And then the other thing is that's so profound about the structural forces, you might, for the first month, you'll reset to a price where there's, you know, $500 million willing to sell that price. But then after a month, you'll chew through that demand and you'll have to find the new price. And that's the key is that there's a time element to it too. where every day you will chew through new supply every single day.

And this actually just brings me back to one quick point that I wanted to make, which is that the equity market is already like this. The equity market is already a structural demand market. And the reason for that is because the SMP is positive in income and they do a lot of buybacks. So the equity market already, like the forced flow in the equity market every single day is that companies buy back their shares. And so there is a structural buyer of equities. And in my opinion, that's the primary reason that equities, if you look at like a long-term chart of equities, they grind higher, crash lower for some small period of time, and then start grinding higher again.

And it's that grind lower crash, ground higher, crash lower type price action. And if you look at crypto, it's actually very, very different. It's actually a grind lower market. You'll have like a six-year bear market or a four-year bear market, followed by like a one or two-year bull market. and then a four-year bear market followed by another one. And it's the opposite of equities, right? Equities will have like a six-year bull market followed by like a six-month bear market. So crypto has actually been this grind, lower, crash, higher market.

And I think both of those things can be explained by the structural flows. Equities are structural demand. Crypto is structural supply. So naturally, when there's not some strange event going on that's creating the crash another direction, crypto will grind lower, equity will grind higher. But then when you flip, I would explain. expect that cryptos, well, specifically, ETH will start to exhibit more of that grind, higher, crash, lower price behavior, which will have all kinds of other unintended consequences, which we can

discuss if you're curious. But that's just kind of a way that I'd contextualize it a little bit. So that's the special demand piece. Yeah. Where do you want to go to next? The ETH staking seems really relevant. Yeah. Yeah. So I think this is an important point, which is that like, and there's a lot of assumptions involved in this. So depending on how many fees you want to assume get burned, like your staking rate obviously changes, but I think 80s is a fair assumption. And then depending on what percent of tokens you want to say stakes are right now, it's only, it's only 10 percent. But I think that will probably increase post-merge. So like if we say 15 then you can arrive at some reasonable assumption. And then obviously it depends a lot on fee run

rate. So I'm assuming that you have a 5,000-Eth fee run rate, which is much lower than it's historically been, but has been more in line with where we've been out late. But if, you know, we get to the merge and fees return to where they've been before, then it's going to have a profound impact on the staking rate. Like, we were averaging 15K for a while. That'd be 11% staking rate. Right now, we're at 5. That's a 7% staking rate. But the point is that there will then be a fundamental link where the actual revenue of the network will directly flow into your staking rate. But under all the assumptions, if we try to be conservative, we say that fees are going to stay low, if we say that staking rate's going to go up and we say that 80% is going to be burned,

you still have a 7.1% staking return, which is obviously a big increase from today where it's like four or three and a half. And so that on its own will produce a massive increase in demand. Because ultimately, like, if the percent of token stake is going to go from 10 to 15, some portion of that, let's say two thirds, will come from dormant ETH that decides to stake. But there is going to be some portion of it, which comes from new buyers that say, okay, now I can get twice the yield. I'm going to buy ETH because I want to now stake it at that new yield. And that will be new demand. So if you assume a third of that delta is going to come from that, it's about a percent.

and a half, which is call it $4 billion of ETH that needs to be bought after the merge. And like, we can debate how much impact that has. You've seen over the last few days the impact that a $2.5 billion Bitcoin buyer or a seller can have. So I think that anything in that billion dollar plus range has a very profound impact, especially if it's concentrated in one specific asset. So that's one point I'd make. Then kind of the more interesting point, I think, is,

this, which I've never really seen anyone else articulate, and it kind of brings together a lot of the things that we were talking about. This is what I'd call like an adjusted equivalent PE ratio. That's a really weird term. But this is, if you think about what is a PE ratio trying to show in its purest form, in my opinion, it's basically how many years will it take for the earnings of this asset to pay off the price of the asset? And so there's a couple ways to kind of think about that. And you can think about it as like you just take the market cap of the asset and divide it by the earnings. However, with a proof of stake asset, it's not that simple because you have a very different P.E.

multiple for those that stake and those that don't stake. For those that don't stake, their only form of income is the burn less the issuance. So right now, if you're not staking Eid, you're losing 3.3% every year. because that's how much issuance is being put out, and you're not getting anything back in yield. But if you do stake-Eath, then you're actually getting 0.7% because you're getting a 4% yield,

and the issuance less burn is 3.3%. Now, post-merge, so what that means right now is that, like, on the proof of work Ethereum, you're getting, if you're staking, so this is really like what we're talking about is the P.E. ratio for stakers, which I think is quite a relative. thing because anybody that buys ETH can obviously decide to stake.

So this is like your incremental buyer has this option. If you do it right now, ETHs basically trading at 134 times earnings, which is like expensive but potentially justified given how fast it grows, but maybe not. More interesting, after the merge, you will then get a 7.1% staking rate, which we calculated it over here. But much more profound than the 7.1% you receive is that you get that in addition to the network actually deflating. So that 7.1% is not a fake issue. It's like this is where I'd go back to the other discussion about whether it's an expense or not. Like whether it's an expense or not, if we take like Solana and say or whatever, don't we don't pick on Slana, any other proof of

asset and say that they issue a 10% staking rate, but that comes all from new token issuance, which is all dilution, then this number would be positive 10 and this number would be negative 10, and your actual net income would be zero. So what's profound about Ethereum is that you can generate this yield and have negative issuance. That's what's ultimately so important. It's a real yield. It's not a fake issuance yield.

And so as a result of that real yield, the actual normalized P-E ratio to the staker is 13 times. So post-merge, at all of the current numbers, you'll be buying an asset at 13 times earnings, which is like well below the S&P multiple, well below any sort of possible growth asset. And that doesn't even factor into any store of value, any store of value, value accrual, any currency value, accrual, anything. This is purely the equity component of value to the staker. You're buying it at 13 times earnings. And that, to me, is very powerful.

That's incredible. So how you're running the numbers and you're saying that buying ETH right now is way cheaper than buying the S&P 500. Not right now, after the merge. But we're assuming the merge is going to happen, right? Assuming the merge is going to happen. where the opportunity is. If you make that assumption, yes, I agree.

What's the probability that it doesn't happen? You know what? How we're going to have to hold that question. All right. So yeah, that's fair. We can, we can go to that next question now. This kind of like summarizes the numbers. Let's hold that question. I think we have a few other questions for you.

It's like about how you can actually capture the trade that you're talking about. Yeah, sure. When the merge, that sort of thing. But guys, we've gone a little bit over just because this has been so interesting to us. And, you know, but we got to, we got to cut for. sponsors for a minute. We'll be right back with Hal. We're going to talk about what he thinks the trade angle is how you actually capture the upside of this and when the merge might happen. So stay tuned. If you're trying to grow and preserve your crypto wealth, optimizing your taxes is just

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But in addition to the numbers, Hal, you've also been tapping into the all-core devs call, which this is where the Ethereum core devs, the Ethereum coordinators, the Ethereum client teams all get together and work towards the merge. And this is out in the open. Anyone can watch these. They're on YouTube every other Friday, I believe.

And so many people just forget to tap into these things. And so this is where, like, like the merge is ultimately going to be decided. And so since as you are an external third party who's got a fund on the line, can you give us your best estimation as to win the fund, when the merge is coming? I can. And I first of all,

I just say I agree with what you said. I think there's a ton of alpha to be gleaned. It's actually not just an all-core dev call. There's a consensus layer call as well every other Friday. So there's multiple calls. If you go to the Ethereum Foundation YouTube page, they post them there. And also the, I'm just going to drop all the alpha here.

If you go to the Ethereum R&D Discord is where you can really start to actually get a feel for things. Try not to bother them too much. Just watch because that's actually where they coordinate all the R&D. But certainly you can go and just observe the conversation there. And they put all the links of all the calls there and everything. There's a ton of alpha to be had from that. Like it's really funny because there's so much money on the line with Ethereum. And I tune into these all-core dev calls every.

two weeks and there's like a hundred listeners. And it's like, you guys got to be kidding me. Like this is like this is like the equivalent of the earnings call and nobody's here. Like people are so busy running like technical analysis of like which moving average we're going to break and they don't even like care about the actual alpha. But anyway, that's okay. Enough on that. There is a lot of alpha to be gleaned and I spend a lot of time thinking about when murder. And there's a lot of moving parts and a lot of interpretation because a lot of people,

a lot of people have different incentives to push different timelines and different incentive structures. And so trying to kind of navigate it all to a realistic view of when merge, I think can be challenging. So early on, you know, I was actually much more pessimistic than most. Like I think most people thought the merge was going to occur in June. And I've been very public on my Twitter that like the merge is not happening. in June. Like, I've been saying that for six months. There's no chance the marriage is happening in June because I just know the timeline and I know like there's enough things that need to happen that haven't even started yet that it's not happening. And everyone was like, oh, no, you're crazy. Like, it's coming in June. It's coming in June. And then like, obviously Tim Baker was like, it's not coming in June. And then, like, all right, it's not coming in June. And then, but then, like, there's this uncertainty. It's like, when is it actually going to come? And for the first time, my view has,

actually become more positive than everyone else's view. And this is why I was like, you know, you said it yourself. Like I didn't want to do the podcast because I was saying like the time's not right. The time's not right. The time is right now in my opinion. And like to be clear, that will be confirmed in the next few weeks. But I'm very confident now that we're close. And I can put some intervals on it. But just to give you a sense, okay, where we are in the process. So we've been running these shadow forks for and when I say we I don't mean we I've been doing anything okay the devs have been doing it I have not contributed but um the devs have been running shadow forks forks for multiple months now and they start and what a shadow fork is is basically you you take the existing blockchain

you fork it and you run that fork through the merge but it's essentially a dress rehearsal it tests almost everything that an actual real merge would attest. And so we've gotten to the point now. And I think we did some proof of concept test nets. And they worked. And people were like, oh, so excited. Like, okay, it worked. But then the thing that they kind of didn't understand is that there's a lot of different

Ethereum clients. Like you heard all these names like Keith, Prism, Aragon, et cetera, like all these different clients that actually run the Ethereum network. And they all need to implement. the merge in their software. And that is actually a hard thing to do and involves a lot of edge cases and a lot of software testing and hardening. And that's the stage that they've gotten stuck on is the client implementation issues.

It's not actually anything to do with the core merge spec, which has been finalized for a while. So that's what I'd refer to as code complete. We have been code complete for quite some time. But the client implementation issues have been what's holding it. it up. And for the first time, the last couple of weeks, we've been doing main net shadow forks where clients have been having zero major issues. And that is ultimately the main hurdle that remains. And so we did, the last shadow fork was last Thursday. And we've gone to the point now where none of the clients are even having issues anymore in terms of like Aragon having an issue

with every interface. So what happens is that the clients will interface with other. clients. So like Aragon will interface with Geith and then Prism with Nethermind, etc, etc. And at the beginning it was that like one of the clients was having issues just generally. And now we've already debugged all of those issues. So it's to the point where the only thing that remains is certain clients are having issues with certain other clients. But even those client pairs now have basically gone almost to zero. Like I think on the last, it's called Maynett Shadow 43. I think on Maynett Shadderfurt of 3, I think on Maynardt 3, there was only two client pair issues and the whole thing.

Every client finalized after the merger, there was only two, like, minor issues. So, like, we're extremely close. So give us some dates, Hal. Give us some dates. So there's another shadow fork this Thursday. If all goes well, they will try to set a test net date for the actual public test nets. At I'm going to try to be a little bit conservative. the next all-core dev calls.

So not this Friday, but the two Friday after that, they will set a date potentially, if things go well, for the public test nets. When that happens, that's the sign that, okay, the technical aspects of the merge are finished now. And it's just a matter then of practicing the coordination exercise. So let's say that let's play that time frame forward. Let's say that that would be May 27th.

Let's say we get to May 27th and they set a date. That date will likely be, call it, five or six weeks into the future because you need to give all the valetors enough time to update their notes. So then what you're looking at is an initial test net date. And I forget which test that they're doing first, if it's Robsden or Sopoya or Gourley, but one of them. They'll do one of those. So what will happen then is that one of those existing public tests will actually that go through the merge. and it'll happen probably in mid-June. And then the next one will go after that, which will be at the end of June, and the next one after that, which will be mid-July.

After that, you are finally ready for main-net merge. So I think by in a everything-go-well scenario, you could be ready to start talking about main-net merge towards the end of July, in which case you would schedule it for the middle of August. So I think there is a realistic scenario that we are actually merging in August. Wow. And that is three months from now. I'd be happy. And look, you've sat through the calls. You've really gotten in there.

So I think you've got a good feeling for it. And I know. I do not say that lightly. Like it's been a long time coming that I even feel comfortable saying that. That doesn't mean we're going to merge in August. There's always unknowns that are unknown. For sure, for sure. But I think it is realistic that it happens.

And I think if not August, September. This is not. I think it's 75%. You go ahead. You're not going to get dates from anyone in the development community either. So it's left to investors to actually do the due diligence to try to figure out what the dates actually are. And so that's what you're doing. And of course, you could be wrong.

You're not representing the Ethereum Foundation. You're not representing any of the developers. This is your best guess based on. public form observations. So can I ask you, and we've got to close with this, unfortunately, how this has been so much fun. But can you tell us how you're actually going to trade this? And like my question is why, so I understand why you're betting the fund. This seems like a very obvious bet the way that you've laid it out, right? But and then you do think you are betting that we're going to shift from, you know, narrative-based pricing to actual kind of fundamentals flowing

through and you supply and demand metrics to make eth valuable. So how are you actually playing this? And are you playing this on a time horizon at all? Like why why get fancy? Why not just go long eth like many in the. The primary position is just long traditional staked Eth. And I actually stake my Eth on stakewise. But yes, the primary the primary position of the fund is essentially staked ethon stakewise. But I think there are a couple ways that are actually really interesting to play the merge outside of that.

One is actually through the staking derivatives. So you can buy the Stakewise token. It's called Suize or you can buy the Lido token of Lido or you can buy the Rocket Pool token, RPL. Those staking derivatives actually get exponential increase in their fundamentals on the merge because one, if staking participation goes up, two, ETH staking rate goes up, which they get their revenue is correlated with, directly correlated with that.

And three, the price of ETH goes up. And all three of those compound each other to the point where if ETH doubles and Staking Participation rate doubles and the staking rate doubles, then you have two cubed, which is eight X multiplier on their revenue. So like those staking platforms revenue could eight X when the merge. occurs. And then the kind of the more interesting part that's not so well understood is that their primary form of expense is issuing their token to incentivize a tight peg between their liquidity token, like the for Lido, it's the S-Eath token and ETH, and they have to pay out Lido to incentivize like a liquidity pool there. But after the merge, you'll be able to redeem S-Eth directly for ETH, and so they won't need to pay out any more incentives. So you've got an 8x multiple in revenue

and a very drastic reduction in expenses at the exact same time. So that makes the staking tokens an attractive way to play the merge. And then the second thing, if you want to just go more direct, and I'm a fan of this as well, in my opinion, the most underpriced asset in the history of liquid financial assets that I've seen is ETH upside calls. So actually trading the options on ETH, because historically you've been in this environment where price has been capped.

And so as a result, those upside calls aren't priced like you could just blow through the cap. But given that I think we are now lifting the cap, I think that those options change structurally and they're not priced like they're going to change. And furthermore, ETH options, especially with the expertise that I'm talking about, like the September options, are pricing in almost zero event around the merge, almost zero. And obviously, I think this is the largest event in the history of crypto. I'll accept probably the inception of Bitcoin. So I think there should be a lot of event risk priced in, and there's none.

So personally, the most attractive trade, the most attractive trade that I've seen, and I actually have this trade on, so it's like full disclosure, the December 5,000 strike, 8,000 strike, ETH call spread can be purchased for around $70 and pays out 41 times return if Eve closes above 8,000. And on where do you do this? By the end of the year. Yeah, where? So, yeah, the, guys, so I use an OTC counterparty, but you can use Deribit is the best, is the

most liquid options exchange. Unfortunately, they don't offer for U.S. counter parties. But, yeah, Deribit. I use an OTC counterparty called GSR. Three Arrows has another OTC desk. Like, there's some OTC. desks you can use. But yeah, that call spread. It costs $70 and it pays out $2,930 of profit if eth closes anywhere above $8,000. So yeah, it's a 41x return if ETH3Xs. How is the bear market

factor into your decision-making equations at all? Absolutely. But I would just say, macro is very hard to predict. I have a view, but I wouldn't overweight it and I wouldn't overweight anyone's view on macro. Macro is extremely hard to predict. Macro's going to do what macro is going to do. If you want to play the merge from the purest standpoint, buy eth, short everything else. And the easiest thing, I mean, I don't mean to like rag on Bitcoin, easiest thing to do is trade ETH BTC, buy ETH sell Bitcoin. That's the purest way to play the merge. And I do think a lot of the flows into ETH will come from BTC. How do you feel about the trade of putting ether into compound, borrowing WBTC, selling it for ETH, and then trading, literally trading.

Yeah, that's good. I think, I think that's good. And I actually might look at that because when I try to do the trade, it takes up too much capital and costs too much margin. So I might look at that. Yeah. And I don't know if you want to discuss like anything else. There's a couple other things that are interesting or if we don't have time. I think, I think Ryan, we tease that and bring Hal back as the merge approaches. Yeah. And let that steep for a long. There's so much content that the community just absorbed in this video.

Hal, I think you graduated to like, you know, one of our major merge correspondence in this episode. I'm happy to come on again as we get closer. Yeah. Yeah, you have anything else to close with? Because I know we've gone for an extra long episode, but we've... One other just... Yeah, of course.

One other project that I just want to discuss quickly because I think it's super interesting and just want to raise sort of like the awareness of it. There's one project I've been looking at a lot and I'm not an investor in it so it's not like bias just think it's super interesting. I'll probably write some more about it on my Twitter in the future, but it's called million. Million is it's like million but with an N and I'll share the white paper and some FAQs. But basically it's what's called an MPC platform. It's a multi-party compute. It's a cut. What I think of, what makes me really excited about it is that it is, in my opinion,

has zero to one innovation in crypto, which you don't see that often anymore. But basically what it does, and I think it will actually resonate a lot with the Ethereum community, so I'd be happy to talk about it at some other time. But it decentralizes the compute itself. And so what that allows is it opens up a whole white space where, let's say you have two banks that want to run a computation on their data sets, but they don't ever want the other bank to see it. They can plug their data sets into the million technology, spit out the output. No node will ever see the actual data, but they can utilize it together in a way that they

couldn't before. And it all runs on cryptographic technology. So that's one that I would definitely keep an eye on, and I'll share some more info on. We could talk about it again later if you want. But yeah, happy to be on for any other merge-related discussion or anything else. Howell, what's your Twitter handle if people want to follow you? It's a good question. I don't know. You need to be on Twitter more, sir.

I'm on Twitter, but I know that my name is NRD. I think my Twitter is North Rock LP, which is just North Rock Limited Partners. I ran across Hal on Twitter after he wrote just a killer post that I hadn't seen before on much of what we discussed today, the supply and demand dynamics of the Ethereum going to the merge. So we'll include a link to that article as well. Hal, that's all we have time for, man. but thanks for coming on. Really appreciate you exploring this with us.

Yeah, sounds good. I really appreciate the time, guys, and I look forward to continuing the dialogue. Look forward to merging, man. Wrists and disclaimers, of course. Ultimately, I got to tell you, like, I am extremely excited for the next three months. If we can merge in August, watch out.

It can be a great summer. But, of course, we don't know the true date of the merge. None of this is financial. device. Eat is risky. All of crypto is risky. Defi is risky. You could lose what you put in. I'm guessing this episode made you a bit more bullish, but you never know what could happen. 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.