Bankless - Crypto Thesis for 2023 | Ryan Selkis

Episode Date: December 22, 2022

✨ THESIS FOR 2023: https://messari.io/crypto-theses-for-2023  —— Ryan Selkis is presenting his Crypto Theses for 2023 on today’s State of the Nation. Every year, Ryan publishes a massive document that wraps up the year in the industry, and looks forward to what’s coming next. After an insane 2022, what does 2023 hold in store? Ryan Selkis of Messari brings the answers. ------ 📣 Kraken | The Crypto Exchange for Everyone http://k.xyz/bankless-pod  ------ 🚀 SUBSCRIBE TO NEWSLETTER:          https://newsletter.banklesshq.com/?utm_source=banklessshowsyt  🎙️ SUBSCRIBE TO PODCAST:                 https://availableon.com/bankless  ------ BANKLESS SPONSOR TOOLS:  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  👯 DESO | DECENTRALIZED SOCIAL BLOCKCHAIN https://bankless.cc/Deso  🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  📡 TRUEFI | CRYPTO FINANCIAL HUB  https://bankless.cc/TrueFi   👾 SEQUENCE | ALL-IN-ONE PLATFORM  https://bankless.cc/Sequence  ⚡️FUEL | THE MODULAR EXECUTION LAYER https://bankless.cc/fuel  ------ Topics Covered 0:00 Intro 7:00 Pain 10:05 Crypto is Still Inevitable 16:00 Surviving Winter, Redux 20:10 Who to Watch 26:30 How People Fall 32:20 CeFi Contagion 40:30 Institutional Capital 47:00 SEC vs ETF 51:30 SBF and Crypto Policy 1:03:00 Bitcoin 1:07:40 Smart Contracts 1:11:45 ETH Killers 1:15:00 DeFi Trends 1:19:30 DAOs and NFTs 1:24:00 Back to Crypto 1:26:30 The Block and Crypto Media ------ Resources: Crypto Theses for 2023 https://messari.io/crypto-theses-for-2023  Ryan Selkis https://twitter.com/twobitidiot  Messari https://messari.io/  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures 

Ryan Selkis is bringing on his crypto theses for 2023 in today's episode. Fantastic way to end the year and look at the next year. David, what are we talking about today? Every single year, Ryan Selkis comes with a massive document that is a fantastic way to snapshot the year. It always feels like this document that comes out every single year out of Missouri that Ryan Selkis spends weeks producing. It's a great way to tie a bow on one year and look forward into the next. So while this is a snapshot of 2022, it is also Ryan's 22-crophthesies.

And so this is just for all of the tunnel vision that we've got focusing on SPF and FTX and contagion, this is a nice way to zoom all the way back and talk about just the trends across the industry, which I'll remind the bankless listener, it's very broad and wide. So trends in Bitcoin, trends in Ethereum, trends in DFI, trends in NFTs, trends in CFI, And got to unpack, we do have to unpack the regulatory landscape, the gray scale and DCG landscape, and a number of other different topics, such as who to pay attention to in 2023. If you were on that list, that prior list, who to pay attention to in 2021 and 2022, it was either a very good or bad list to be on depending on who you are.

Yeah, exactly. Guys, speaking of who to pay attention to, we think you should be paying attention to our friends and sponsors over at Cracken. David, this is a crypto platform that didn't rug people in 2020. And they've been at this for like 10 years providing secure, solid service. Well, it feels like everyone else was,

a number of other competitors were getting distracted by the newest bright shining object in crypto. Cracken was just serving the industry without fail and it's really remained a rock during 2022. What should our listeners know about Cracken, David? Yeah, after interviewing Jesse Powell and investigating a little bit more into Cracken, the ethos behind what Cracken is really aligns with me and makes me feel good about having them as our strategic sponsor moving forward into 2023. So this is going to be a long-term ongoing relationship because the way that they are building that exchange is, I think, the product that the crypto industry deserves, especially with their emphasis on user verification of exchange liabilities is aligned with the ethos of crypto.

where we use cryptography to empower individuals to verify, don't trust. And so we think this is a great strategic sponsor for bankless moving forward into 2023 and we're excited to work with Cracken moving forward. And if you would like to learn more about Cracken, there is a link in the show notes to go and get started with Cracken. Also Cracken.com. Okay, David, in addition to the theses that we go over with Ryan Selkis, there's also kind of a bonus section to this episode where we ended the episode.

We finished, we hit the stop recording. button. But there was one question I really wanted to ask him. The question about crypto media and this news about the block, which is a crypto media publication being secretly owned by SBF. So we get into some of that as well in a bonus episode that will provide for bankless listeners. But apart from that, what else should folks be aware of going into this episode? Yeah, it's just a broad trend download. So it moves pretty fast. Ryan's got some very broad takes and because of how ingrained in this industry he is, he can connect so many different parts of the industry to other parts of the industry. And that's really the way to get a broad snapshot of what

the hell is the state of crypto at the end of 2022 and moving forward into 2023. We talk about CZ and Brian as the last remaining exchange leaders. We talk about Anatoly and the state of the Solana ecosystem. We go through the anatomy of a crypto credit crisis. And Selkis calls the grayscale trade crypto's widowmaker. There's just so many topics to pay attention to. And just as you are listening to this listener, remember that all of these topics in crypto hyper thread with each other. We are one industry. This is one spot. And so the trends in C-5 relate to the trends in D-5 relate to the trends in NFTs. So as you are paying attention to this, make sure to connect all of the dots to all the other dots that we are talking about as we go through this podcast. All right, guys,

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This one's a beast. I think it's 168, but that includes the cover and the disclaimers and, you know, all the other garbage. 168 pages of crypto information. Anyway, welcome to beg lists. It's great to have you on again. Okay, a word for the year. David and I were talking about this, but like you got 168 pages, a lot of words. If you were to summarize 2022 and give it a word, what word would you give it?

It's something that pops into mind right now. Well, I think that depends if you're looking forward or looking backwards. I think if you're looking at the urine review, it's pretty easy. Let's look backwards. 2022. What word? Yeah. Okay.

Full Mr. T-mean, right? Pain. I think if you're looking forward, I don't want to call it relief, but I think optimism is, is a pretty good starting point. And we'll get into that. I think the big thing that happened this year is the core crypto thesis remains unchanged over the next 10 years. One thing that did slow pretty significantly is, you know,

the institutionalization or the Wall Streetification of crypto. And that's got its benefits and its drawbacks. But I think most of the damage, most of the pain this year was certainly in the latter camp versus the true decentralization and some of those core projects that are going to be the backbone for this economy. David, I like that word. We're debating some words back and forth. Contagent, you said. Yield was another hubris shortcuts. But I think pain. That gets right to the point. My God, 2022 is painful. It's a good word because I think it's, you know, obviously from the economics of it, it's been a pretty disastrous year for investors. But, you know, I remember,

listening to your podcast when when this turmoil was really hitting its peak and and just listening to David like I could feel I could feel some of that of like we've been building here for so long and it's just so fucking disappointing right what's going on right it's like the the the parent like being you know disappointed not mad we were past the anger phase at one point and and I think everybody you know had some type of moment like that of dejection in the fall And, you know, once reality settles in and you realize, okay, this is, you know, just another con artist, just like anyone else, the industry is going to be just fine. And, you know, the core remains, then you can get to rebuilding and have some optimism for the new year. Ryan, Mr. Selkis, one of the reasons why I like these cryptotheses at the end of the year is that is such a cohesive and comprehensive snapshot of where we are in time.

It's a moment to reflect. It's a moment to look back on 2022 and to make informed takes as to what happens in 2022 and how is it going to determine what 2020 is like. So you've created a number of different overarching themes. And so looking at the table of contents, I'll just kind of read out the themes. The top 10 narratives and investment themes, top 10 people to watch, top 10 trends in CFi, top 10 trends in policy, Bitcoin and Crypto Dollars, top 10, Ethereum and Layer 1 trends. And then it continues into the second page, top 10 trends in Defi, Top 10 trends in NFTs and Decentralized Social, top 10 trends in DOS and Web 3, and then, of course, some bonus content as well. And so I think we'll definitely be touching on the SBF Contagion and all of the content that bankless listeners and everyone in crypto space has hammered, gotten hammered into the heads over the last few months. But I think what we also want to do is kind of get back

to our roots. Let's talk about the trends. in defy. Let's talk about the trends in NFTs. And so using the your thesis for 2023 and beyond, I think we should just get back to some of the basics of what is at the very root of this industry using some of the trends that you've identified here. So to start off this conversation going at the from the top, top 10 narratives and investment themes, there's two sections I wanted to pull out. You open the section with winter is here. It's time to build. And then also a section crypto is still inevitable. And I actually remember, I think almost every one of your thesis documents has a section like this, which is the crypto is inevitable section. And it's such a nice refresher to

remind ourselves that, yo, this technology is coming to steam roll over the world. It's different now because of what's happened in the last year. So, Ryan, while you were writing this section about why crypto is still inevitable, what was different this year that really bolstered your confidence to be able to once again say that crypto is still inevitably? inevitable. Why is, after all of 2022, why is crypto still inevitable to you? Well, I think my favorite slide that we've made as a company is, is this one that's in the deck or in the presentation in that section, which really lays it out in full detail. And it basically outlines three core drivers, which is, you know, generation change. You know, we kind of evolve, you know, one year at a time

to a more digitally native generation. The second is just the influx of talent that we've seen this cycle. And the level of talent is at a significantly higher mark than we've seen in any cycle previous in terms of business talent, legal, technical. And then there's just dry powder, right? Like real dollars that are on these balance sheets for different projects, whether it's infrastructure, you know, related companies, or whether you're talking about the projects themselves in their treasuries. that wasn't the case last time around, right? A lot of these ICOs, they raise beneath, they crashed in ETH, or they raised and had these big kind of native token treasuries,

but they didn't really have much dry powder. And so, you know, a bunch of projects, you know, fell by the wayside. And then more than anything, you've got a number of stepwise, you know, upticks in innovation, and like zero to one progress in defy, in NFTs, in B, Dow's layer two kind of scaling, the Ethereum merge. Another cycle of, you know, Bitcoin kind of proving its, you know, bona fides is as a very censorship-resistant digital commodity. They can be a form of money for people and, you know, that need a store of value that

they can, you know, secure in their head and move across borders with. And then stablecoins, which continue to have record months, month over month, right? So both the kind of derivatives that sit on top of crypto rail, and then many of the crypto primitives themselves have just continued to see, you know, pretty tremendous growth cycle over cycle. And even though the dollar, you know, values are down and now some of the volumes are down, it's still a higher or low versus the previous cycle, number one. And number two, there's sturdier foundations because of the capital talent and just, you know,

compounding growth of open source. So it's, I guess it's like a crypto twist on, you know, Jeff Bezos, quip. on the stock market. And I think Bezos, Warren Buffett, you know, maybe it's a few folks he can attribute this to about the market being, you know, a voting machine versus a weighing station, right? In the long term versus the short term, there are two different things. And we're certainly seeing a lot of people vote for the exit right now, but the weight of crypto is still getting heavier and heavier, right? And I don't think that that's going to change. It's going to be very difficult to displace. So that's one thing that I come back to. And for someone that's been

through multiple cycles, it's somewhat easier to feel a little bit of relief right now, because you almost feel like the air is near fully out of the balloon. And you can kind of get back to, okay, where, now that the tide is, is kind of washed out, you see, you know, not only who's swimming naked, but where all the dead bodies are. And now you know, you know, what was real and and what is going to have some staying power that you can build around for the next cycle. And we've seen that in 2013 and 2014, in 2017 and 2018,

and we're going to see it again in 21-22. So I think that's glass half full. I think a thing that makes crypto pretty powerful. And on that note of looking backwards as to some of the things that we've said previously in previous market cycles, I just wanted to pull out this quote from the surviving winter redo, redone,

Redux. And you were citing yourself that you had written at the top of the bull market. I just want to pull this out here. In addition to eating big paper or real losses, you'll see people having breakdowns, go bankrupt due to over-leverage or poor tax planning, quit otherwise promising projects, turn nasty, depressed, or apathetic, and generally lose sight of the longer-term potential of crypto. At the same time, the grassroots crypto herd will thin out because it's tougher to wage war when you've lost 90% of your savings and need to find a real job. This was actually not part of your thesis document, this was you citing an earlier thing that you wrote at this top of the bull market. And then you continue in this thesis for 2023. And you ask the reader, do you still believe? If you're reading this report, there's a good chance that you do, but are now wondering how to best navigate a prolonged winter. The answer is as simple as it is challenging and unglamorous build. In many respects, it's easier to build in bare markets than bull markets. There are fewer distractions. Real product market fit becomes easier to identify without the noise of a token. and the weak and flaky contributors wash out of the market.

Ryan, I can tell from this section in this document in just knowing you, bear markets excite you. And maybe you could pass a little bit of that excitement onto the listener. Why should they get excited to build during a bear market? And why is this just another part of the crypto cycles that people that have seen a thing or two like you just know what's up? Well, I would phrase this slightly differently. I'd say the slope of enlightenment excites me, right?

I don't take any joy in seeing my personal net worth go down or seeing people get blown up or, you know, all the investors. Yeah, exactly. Like, I'm not, I'm not like some of these Twitter space hosts, right, that are just like, you know, doom porning just shamelessly and, you know, kind of capitalizing in the situation. I think it's, you know, somewhat disgusting. for people to get some pleasure out of this. So I certainly wouldn't say that like that part of the bear market, the steep decline, right? This catastrophe that we've had this year is enjoyable.

But when you do find a bottom, it's not going to be a V-shaped recovery. And some people are going to get apathetic and they'll wash out. But for the rest of us, that's when it feels like, okay, we're on more stable ground. All of the folks that we didn't really, you know, think we're going to be here for the long term. if washed out.

And the people that we were, you know, jiving with and that we thought were going to be long-term builders and contributors and, you know, we're doing things for the right reasons and really excited about them for the right reasons. They're still here. And by the way, now they're getting a lot more oxygen and attention. That's, I think, the exciting part. And if you kind of come in with that mindset, there's plenty of problems to solve within the industry. and every single cycle, the biggest problems from the previous cycle tend to be solved,

and the solutions providers end up having the next unicorns in the cycle that ensues. So it's a pretty good entrepreneurial feedback loop, actually, if you're looking for ideas and if you're actually committed to the long term. I think that's worth just emphasizing is that this product feedback cycle and being able to build inside of a bear market where you have so much signal, is unique. It's a unique opportunity during the parts of the cycles, during, you don't get that in the manic part of the cycle. What you do get in the bear market is a lot of signal for product builders to understand that they are actually building something inherently useful and to also

take some of the idealized features of what made a mania a mania, NFTs, for example, and actually execute on that while shedding some of the short term things that only actually last in the peak of a bowl market. All right. So Selk is 10 people to watch. All right. We're in the bear market in this build season, of course. Who should we be watching right now? I noticed one of your picks were two exchange operators, CZ and Brian Armstrong. And you tied them.

They're tied for the number one leaders of the two largest central exchanges left. The central exchanges left. Can you believe SBF would have been on this list? a year ago probably now completely gone, but Coinbase and Binance. So why these two? Why are they two individuals to watch, particularly coming out of this year? Well, it's interesting you say that because last year in the report, I did refer to Coinbase, Finance, and FTX is the three biggest exchanges to watch, maybe. We were watching. Watching it collapse in slow-mo. We were definitely watching for all the wrong reasons. I think, you know, looking back,

FTCs probably had the most hype, institutional momentum and political momentum out of the three. That's obviously come crashing down and been exposed to be a hassle of cards. The other two remain. But the other two are front and center for, I would argue, the right reasons. And that's because of their volumes and trading dominance being finance. And then their custody market share being Coinbase, right? Because Coinbase is a mega custodian in its own right. but it also cussities the grayscale trust. So, you know, it has 11% of all the Bitcoin in circulation,

16% of all the ETH, you know, 11% of maybe the other, you know, camp of cryptos. So it is just a massive market participant, which everybody knows, but just to put that in perspective, you know, you are talking about 10% of the economy in crypto, essentially, is safeguarded by Coinbase. So how those two CEOs, you know, kind of navigate the next couple of years, I think, is going to be, you know, pretty critical. And for CZ, I think the challenges are really going to be headline risk related and regulatory and legal in nature. I think that there's a lot of fear, uncertainty, doubt around finance right now. We've seen this in the last couple of weeks, really pick up steam. And my nuanced take of whether that's good or bad is, I think it's overblown.

I think the FUD is overblown, but I think it's good if it reduces that market share. And it disperses some of that trading volume because it is, I think, unhealthy for the industry to have that much reliance on one centralized exchange. And I would actually argue that for Binance, they will be healthier. if there are several other, you know, very large competitors that are kind of going back and forth to them in terms of the volume lead. With Coinbase, you know, it's somewhat similar, but I think their fate and really their success is going to hinge on the U.S. regulatory situation and how effectively they're able to thread the needle the next couple of years, assuming that we don't get comprehensive legislation. I don't expect that we're going to get comprehensive oversight legislation, you know,

basically until we have a new administration. And we can maybe get into that in the policy section. The next character that we wanted to pull out of this section is that that was number one. Number one tied for first with CZ and Brian Armstrong. I wanted to skip over to number five. Anatoly Yacavenko. And the quote that I really liked here was that I saw firsthand how hard it was to kill Anatoly and his team in the last bear market.

In my eyes, that's the leading predictor of long-term success in crypto. As such, I'd expect the Salana core team and ecosystem to persevere once again, but can they ascend to new heights? Ryan Selkis, could you unpack a little bit as to how and why you put Anatolia and Solana as the number five person to watch in 2023? I think that they were the largest alt, they were or are the largest Altz L1 community that isn't EVM compatible, right? So in terms of other, you know, base layer blockchains that are using a fundamentally different design than Ethereum, I think Solana has been the project to watch, and it certainly attracted, you know, arguably the second most developer attention outside of Ethereum. It had an absolutely, you know, crazy, parabolic run in 2021, but there's also been quite a bit of innovation around that community.

and interestingly, they've made a big effort in mobile, right? I think what they're doing with the Salana phone and the Salana mobile stack is a differentiator, and it is pretty interesting and attracting developer talent if you're excited about, you know, bringing like crypto to the masses, you know, through handheld devices because you can't necessarily trust Apple and Android are going to let those apps through. So I think for those reasons, it is in a league of its own in some respects. You can look at where it stands from a market cap ranking now, and it's obviously slid pretty significantly, especially given the size of stake that FTX had.

A lot of those early investors, you know, there could be some overhangs, some sell-side pressure that's still kind of embedded in that ecosystem when you're just talking about the token. but when you're talking about the developers and the tech, I would say that they are, you know, the leading contender for the second crypto operating system, if you will. Cosmos being, you know, kind of similarly situated, maybe slightly behind. And traditionally, that's what you've seen in mobile,

in the browser wars, in PC operating systems. You've seen, you know, two major players and, you know, this duopoly, and then basically, you know, a pretty steep order of magnitude drop off for the other players after that. So will they be able to consolidate some of that market ownership around the second, you know, Alts L1 stack? So on this people to watch thing, right, what's interesting is how quickly people in this industry can go from like hero to villain, right? And, you know, so last year on your list, Doe Kwan actually made number 10. And these are people to watch. These are not necessarily people that I know you are saying, like,

Yeah, I don't know if people want to be on my, I don't know if people want to be on this list. It's not necessarily a good thing. Yeah, this is like the SI curse or the Madden Curse. But also, but, but, but also, you know. Sam was on a two years ago, Barry was on two years ago. Sousu, Kyle Simani. What do you make of this, right?

It's like, it's just this whole people to watch. There's an element of, yes, I totally agree, Brian Armstrong and CZR people to watch. We want to understand kind of what they're saying. And also, A major mistake, I feel like we've made this bull cycle is we paid too much attention to these demagogues and to these, you know, icrous, hubris types of individual, individuals who kind of rallied, you know, populist messages and, you know, Twitter armies, all of these things.

So I agree that we want to watch people. But also, like, what do you make of that dimension? Should we be not watching people? Should the actual people to be watched? Should it just be the protocols? Or what is this interplay between people and code and the tech and how much this industry is led by leaders versus how much we want it to be in the hands of individuals

and completely decentralized? It's just a thought for you because it's so interesting to see how quickly in this space people you thought were pinnacle, right? I mean, SBF, coming into 2022, too. This guy was unstoppable. This guy was somebody that Brian Armstrong, CZ, could not stop.

And now where is he? He's literally in jail as we're recording this. How the mighty fall so quickly. What are your reflections on that? Well, don't do meth. It was number one. And the other or whatever amphetamine he was

on. I don't want to get sued for mislabeling the drug year you run. But But, well, it's interesting. So I have a couple, I have a couple of thoughts here. One, if you're talking about relatively static tech or static ecosystems, I know the Bitcoin community is going to skewer me for this, but then you don't need leaders as much, right? Then it is much more community driven.

I think, you know, Satoshi was able to disappear and Bitcoin is operating just fine. And it has had some major upgrades over the years. But it has not truly had a leader. since he disappeared, right? Ethereum, as decentralized as community is, Vitalik is still the figurehead and the leader and the person that people look to, he's kind of the culture, you know,

standard setter for that community and still sets the vision in large part. And I think, you know, when you look at, you know, people to watch is, you know, pretty much shorthand for, you know, what does that person represent? In Brian and CZ's case this year, it's like, okay, the two exchange operators that have the biggest, you know, targets on their back, and they're holding the greatest weight of the industry on their shoulders, right? So I think thematically they fit as like the people to watch is the canaries and the coal mine. But I think looking backwards at like who's risen and who's fallen, it is, I think, good to draw lessons from his.

history, right? So, you know, SBF was on the list. Doquan was on the list in prior years. Suzu was on the list. But they flew too close to the sun and they overextended or got greedier or made some catastrophic error in judgment or, you know, in, you know, in some way, shape, or form. Judgment, you know, ethics or business or otherwise. There are other people that have been hit hard, but it's just because the market corrected fiscously, right? So you mentioned Kyle, you know, CMS holdings, you know, they were in that same category of Suzu. Look, I'm sure they, like us, probably lost a lot of money this year, but they didn't get extinguished, right, because they weren't over levered and, and they're still operating. I'm sure

they're going to get through this cycle and still be here for the long term. So it's interesting to kind of draw lessons from like, okay, who flamed out spectacularly versus who was just at such a high that they basically had nowhere to go but correct in the next year, those people I don't really think are targets or dunks. The ones that were on a pedestal had everything, the world in their hands, and then got knocked off from their own hubris,

big difference, right? Fair game. And I think it's good that we have those case studies each cycle so that, you know, people can point to priors and say, you know, this person is reminding me, I'm pattern matching a little bit too much with this new person

that looks and feels a lot, like Mark Carpellis did, or looks and feels a lot like SBF did, or Doquan did, or, you know, whatever. And, but because our history is speed run, right, we don't even need to go to the outside world, for examples. We can, usually there's, there's like a crypto equivalent that people can tie back to. I'd really, another person, by the way, I'd really love to get your thoughts on later in the show is Barry Silbert, because he's sort of somewhere that's not, maybe somewhat in the middle of these things, right? Well, I'm not going to comment on him in particular for different reasons,

but I'll comment on the situation at DCG and Jonathan. Let's definitely get to that later. But David, you want to keep us moving. That actually is exactly where we are going next. Because the next section here is top 10 trends in CFI. And what was 2022 other than contagion across CFI lending desks? And Ryan Selkis, the first section that you bring up, is called Anatomy of a Crypto Credit Crisis.

And it's got this great graphic that I'll show on screen here in a second. The quote that I really liked that you opened with is the Grayscale Trade, the GBTC trade, we've talked about this a little bit on bankless, the grayscale trade, aka Crypto's Widowmaker,

was integral in helping create much of the crypto contagion we saw this year. Starting with Grayscale and GBTC, can you walk us through this flow chart that you've put into your TSE stock that we're also looking out on screen. Can you walk us through this autopsy? Like what happened in 2022?

Well, I'll start with the punchline, which is this is all the SEC's fault, and I truly mean that. But so basically, Grayscale came public and offered these trust products, was able to raise money from accredited investors. Those accredited investors could create shares of GBTC by sending gray scale Bitcoin. And they took those shares public through something called Rule 144. And it's kind of like a side door ETF. With an ETF, you can create and redeem baskets of shares daily. So these synthetic instruments, these shares are going to map basically one to one with

whatever the value the Bitcoin is that's in the trusts. Through Rule 144, you had this bifurcation of the market where accredited investors can create shares, but then they have to wait six months, and then they can sell them, and that's when retail investors can get their hands on them. For a while, there was more demand than supply for the shares, because people wanted them in their 401Ks, or there just wasn't really public market access to Bitcoin exposure for a long time. And so, you know, for years, you had a 10, 20, 30, 50 percent premium at times on GBT shares versus the underlying value. Some funds, including Three hours capital and BlockFi, I saw that and started to think, hmm, well, we can just run this trade, you know, over and over again and clip the premium every six months.

And then in 2018, there were some, you know, the introduction of the crypto lending desks. And that included Genesis Capital, which is a sister company of Grayscale and all under the same DCG umbrella. But basically, we got into a situation in, you know, 2021 where three areas capital and BlockFi borrowed, you know, or, created new shares of GBTC with leverage, whether it was with outside lenders or with Genesis Capital, slammed this trade, and then all of a sudden, the premium started to slowly collapse.

And as soon as it started to come down, it fell off a cliff because one of those entities or some of those investors that were hitting that trade decided to offload their entire position. And in February 2021, that premium went from about a 25% premium to a 15, 20% discount in the matter of like a week. So it essentially killed the trade. And again, it turned this gray scale trade, which was a profitable trade, but not arbitrage because you were taking duration risk, time risk.

And it turned it into what we call the Widowmaker trade. At that point, 3AC and BlockFi had a combined about $4 billion worth. of GBTC shares. So now those levered positions are underwater versus the underlying trust assets. But again, because this isn't an ETF, the only path to liquidity is through the shares, right? It's in an ETF, you would be able to, if you had a discount like this persist, redeem those shares for the trust assets. That doesn't happen through Rule 144. It hypothetically could, but that's a longer, more detailed story for, that's kind of buried in the report. But the long and short of it is, now you've got these lenders or these borrowers in size that

borrowed a ton of money to create this gray scale trade. Now they're impaired to the tune of hundreds of millions of dollars. The only lender in the market, perhaps, that would have looked at them as somewhat creditworthy, would have to be an entity that's related to grayscale. Because from their perspective, Dennis's capital, it's money from one. one pocket to the other, right? They know that their sister company has the assets in the gray scale trust. They know that whether it's six months from now, five years from now, gray scale controls the redemption mechanism. So they would be able to look a little bit more favorably

upon GBT share, GBT shares now as collateral instead of the underlying Bitcoin. And so this is where the spiral started because three euros capital, I think blockify to a lesser extent, but especially 3AC began to basically just roll the trade over and say, you know what, we're going to just roll all of this, all of these underwater shares with Genesis Capital. And if you're Genesis Capital, you're like, this is great business because, you know, if you charge in 3AC 5% a year on $2 billion in shares, yeah, that's a good line of business. And that's basically an annuity. It's like $100 million a year guaranteed and captive as long as that discount persists,

unless and until like an ETF is approved and that window would close. So it created this really kind of, you know, weird dynamic in the market. And I think it was one of the first things that really set off some risk for 3AC. Now, having said all that, I don't think that there's anything that this is really kind of a comedy of errors or just like a perfect storm, right? That this sequence that happened because that by itself would not have been enough to do in three arrows capital, right? They had to make another couple of really bad, toxic, you know, synthetic bets in Luna Terra and then in State D Thief in Q2 of this year that ultimately put them under. But remember, I mean, they were in Avalanche. They were, it seemed like they could do no wrong with all their other crypto-related trades and investments in 2021.

So even that big number, $100 million a year in interest, if that's what it was, right? I'm just using it as a ballpark. That would have been, you know, easy to absorb in the context of what people thought was a $10 billion fund. But you fast forward and you get to Q2 of this year, Luna collapses, it turns 3AC bad, and then the bad credit really starts to just line up like dominoes one after the other.

That ultimately creates, you know, forces Genesis to reclaim or kind of call all the collateral the GBT shares that, you know, 3AC had pledged as, collateral in this trade. It, it, you know, ultimately still leaves a hole in the Genesis balance sheet. There's a crisis in Confidence in BlockFi at the same time. There's a run on BlockFi. Voyager has a bunch of exposure to three ACs, you know, some of the other lenders, you know, kind of all go under like one, one after the other after the other. And then we have a little bit of a breather, right? So it looks like all the bad credit is watched out in Q2, but we come to

find out months later that that wasn't quite the full story because we still had to deal with this backstop between digital currency group and Genesis. When Genesis had this billion dollar hole blown in it from 3AC's bankruptcy, DCG absorbed the liability, and then they had an inter-company loan. And now that's, you know, kind of created some issues in the aftermath of the FTX collapse and some withdrawal, rapid withdrawals from Genesis on the part of their creditors. that's created a run in the bank with DCG. Or sorry, with Genesis, which could impact both Genesis and DCG. So what do you think is going to happen to that, Ryan?

The DCG empire, I mean, that's kind of the last thing people are, well, hopefully the last thing. People are trying to figure out from this massive contagion event of 2022. Is DCG going to be able to make it? Like, and if so, sort of how, you know, people still can't, if any retail listeners listening, who deposited into the Gemini? earn account, they still can't withdraw their funds and that's all wrapped up into this too. Do you have any takes on how this might unfold? I think it's actually pretty promising that we haven't seen any bankruptcy filings or proceedings

or anything like that in the last few weeks. We're outside of the 30-day window that's kind of standard in some kind of cure periods for, depending on the lender. You don't know what the specific agreements were between Genesis and its creditors or DCG and Genesis, like all that's a little bit of a black box. So, you know, we'd run some analyses just based on public information on, you know, DCG and Grayscale. And then what we knew about the Genesis fundraising needs. And basically, you come out to a situation where, you know, DCG could either recapitalize the business, but at, you know, a 90% reduction in equity value versus is where they raised money last year.

Or you reach a resolution with the Genesis creditors directly. And at this point, given the market softness and how multiples are coming down and how people have cooled on crypto and this being a distressed situation, I think the path to a resolution here probably swings on whether the creditors are able to make a good offer

and they're able to come to a resolution where Genesis creditors, take some partial liquidity today and then maybe roll some of their exposure into DCG or otherwise have kind of upside and can be made whole through the other healthy businesses and healthy assets that are under the DCG umbrella. So you think they're going to make it? You think the probability is that they could make it through this? I don't want to speculate.

So I'll be coy and I'll say 50. 50-50. I think it's a coin flip. You know, the issue is, remember, you know, if right now DCG has two different options. One, you try your hand in court and try to limit the liability that you have with this bad subsidiary, and you basically let them go bankrupt. The other, so that's kind of like the hardball play. It's very risky because DCG was itself a borrower from Genesis. So they, you know, are one step removed from owing all of these creditors, you know, capital. The other is there's, you know, some resolution with the creditors. And so it's a little bit of a game of chicken, chess, whatever you want to call it. But it's not as if a resolution with creditors

is a panacea for DCG because it's still going to create a new, you know, massive either liability or preferred, you know, instrument at the holding company level. that, you know, could hypothetically wipe out a good chunk of equity value if things go sideways the next few years for DCG? So I think that answers a big question that I kind of had, which was, is this whole potential DCG bankruptcy going to overhang the crypto industry kind of in the same way that Mount Cox did for so long in a way still does? And from what I'm, the tone I'm hearing from you is that it's not really going to overhang all that much. Maybe there's some, some bad stuff,

but for like overhanging cell pressure, not that much. I think that there are some similarities in the reaction, not in the structure, right? Like these are totally, totally different, you know, stories. But in terms of the damage it has done potentially in the worst case scenarios of this resolution are somewhat similar to the worst case reactions that we saw after Mount Cox, right? Like Mount Cox was not, it actually wasn't that damaging at the time. because from a market pressure standpoint, because the funds had been slowly led away over the course of years, right? And people just didn't know that the funds weren't there.

So it was a disaster for everyone that lost money, right? But it was not necessarily like a situation where you just saw, you know, hundreds of millions of Bitcoin hit the market and kind of instantly become sellable because they were hacked. With this situation, and then in the aftermath of Mount Cox, we get the bit. license and we got, you know, a bunch of jurisdictions become hostile to crypto and, you know, took quite a bit of time for us to make progress after that. I think with the DCG Genesis situation, you know, one of the issues that we're confronting with this and one of the reasons I think we need like a good positive resolution is you've got Gemini as one of the primary creditors. Gemini earned customers are owed about $900 million. So now you're pulling.

pulling in U.S. retail. There's another similar earn-like program that I think we just reported on last week through a European Exchange, BitVavo, where they have 300 million in a similar earn-like program. So that could potentially pull in the European regulators, right?

And, you know, we're running out of bodies right now and turn like warm bodies and leaders in the industry. And, you know, DCG is extremely well-connected. They've got, you know, Larry Summers, is an advisor. They've got Glenn Hutchins, he's golfing buddies with Obama, you know, on their board.

And, and, and, and, and, and, and, and, and, and, and, you know, Gemini, you know, is, is one of the best regulated, you know, uh, exchanges and custodians, uh, in the U.S. So, you're starting to lose just like one too many chess pieces on the chessboard in terms of, like, the adults in the room if you can't figure out if, if, there can't be some, you know, kind of adequate resolution here. So I don't think about it as, as economically damaging in terms of, like, there's more credit. contagion risk still in the market. I think that's probably mostly washed out. But now we're at the part of the cycle where, you know, the black eyes are going to be potentially permanent in

nature if they get encoded into law. And I think that's the biggest concern right now and the reason everybody should be rooting for some amicable resolution here. Okay, so this is the top trends in defy just to gift gift drive. C-fi. Excuse me, the top trends in C-fine, just to wrap this in a bow. You call the gray scale trade, the widow maker. But you also said this was all the SEC's fault, all Gary Gensler's fault. Could Gary have really waived a magic wand and just convert that GBT thing into an ETF? And this whole arbitrage mess, crap, all of the fallout would have been solved. I know that doesn't help FTX necessarily and all of the other contagion, but would that have made the widow maker not make any widows?

If we had a spot ETF, none of this would have happened. None of it. Wait, what do you mean none of it? Three O's capital wouldn't have over leveraged. Sam Bankman-Fried would have been a fraud or like what specifically wouldn't have happened. I mean, think about the impairment the 3AC had, right? You know, you're talking about mid-nine figures worth of impairment plus all the interest payment that they had as they had to continue to borrow against these shares over the course of the last year. So this was a significant, you know, kind of deadweight loss for them. But, you know, the flip side is, yeah, I'm sure they made money on it in the beginning. The fact remains that this asset being publicly tradable. I mean, at its peak, it was a $40 billion trust, right? That retail investors are able to invest in. And it's just become like hot potato collateral for, you know, some of many of the entities that have blown up or faced significant distress this year. And at the end of the day, who's holding the bag,

it's a bunch of folks that are holding GBT, you know, and their retirement accounts, right? There's almost a million GBT shareholders that would benefit from the conversion to an ETF, which is the equivalent of a snap of the fingers of the SEC. It just has to do with treating spot ETFs the same way they treat these, you know, insane, you know, CFDC-derived derivative ETF,

these futures ETFs that are garbage. Do you think, do you think, Ryan, that, like, Gensler looked at this and was just like, you know, I don't know, evil villain in kind of an armchair somewhere and just like, let them burn. That's what crypto gets. Like, I could fix this, but I won't. Is it, is it that sort of nefariousness going on here? Do you think he really has it in for the industry? Or is this all bureaucracy and, you know, just couldn't get to the ETF? I'll, I'll give the, the, like, you know, conniving version. And then the, and then from like the regular, the, the, the, the most

charitable version, I guess, for someone like Cherokee Gensler. The most charitable version is we are not going to break policy which is we don't have oversight of the exchanges that are trading these spot instruments

and we're certainly not going to reward bad behavior. So just because this trade existed and it created a bunch of problems, like that is not our doing. This was a loophole that was exploited. You've made your, you know, you've made your bed now laying it. that's, I think, you know, the one hand and essentially it's just default, no.

The other is that, you know, this setback and this continued pain is, you know, arguably a good thing because it shows, it backs their position and it just shows the other, you know, policymakers that they're trying to convince, look, this is how unwieldy this crypto market is. we need full oversight of all of the centralized players. And these things are either securities or having an impact on the securities market. So it makes sense to empower XYZ regulator that already has this oversight responsibility in these other adjacent areas with the same power so we can clean this up. And so, I mean, unfortunately, like, I don't really see there being a resolution anytime soon. But now you've got a situation where, you know, GBTC shareholders are 50%, 50% under water. And the only people that win are counterintuitively, it's DCG through

gray scale, right, because they're still making their, you know, $300 million a year on these trusts. And the SEC, because they're able to play hardball and use this as a negotiating trip for their long-term position. Well, I think this underhands us right into this policy conversation, the policy section. So wrapping a, tying a bow on the 10 trends of CFI, we're going to go into the trends in crypto policy and there's a number of sections in here all about SBF and the insider baseball without giving too much of the juicy details away Ryan Selkis can you kind of just like I know you you are very involved with policy in Capitol Hill and like at that whole world can you kind of just like summarize this the insider baseball that was going on that we are still

learning about to this day yeah like what happened yeah what what one for real though like yeah what no seriously like I mean SBF wrote that post. There's talk of the DC CPA. We had him debate on Vorhe's like on the podcast defending that position. And 11 days later, he turns out to be short $10 billion. Like what happened? Well, I think that's the last 20% of the write-up because this really started in the fall. I think, you know, even folks within kind of DC policy circles for a while underestimated how far the FTX team had been able to push DCCPA, right? This stab-it-out-Bosman bill.

And it really started to become more apparent in September. We actually hosted a policy dinner around Mainnet and, you know, it was supposed to just be, you know, kind of a celebratory dinner. Look how far we've come since the infrastructure bill. We had a bunch of speakers in town that were from the policy side. So, you know, someone, you know, dropped a bomb during the dinner and essentially said, you know, can we just talk about the

elephant in the room, you know, Sam's trying to sell out the industry and create a monopoly for himself. Wow. It was, yeah, I mean, it was, it was kind of, it was, it was wild. Like, it was, you know, you could have heard a pin drop type of moment. And, but it ended up being very healthy because he's got a lot of people talking, you know, for all, for all reasons, right. Like, it was, you know, it was, it was an interesting night after that. But in the aftermath of that, I think, you know, people kind of woke up to, you know, how close

they were getting. And, you know, several people, myself included, started to push Sam and the FTX team to start being a little bit more open with some of the other groups, particularly those in the DFI side. And so, you know, there was a number of, you know, meetings that, you know, the casual like armchair observer on, you know, Twitter is going to say, oh, it's a smoke-filled room or it's this or that or the other thing. It's like, No, you had a situation where one entity was making enormous strides because of all the political investments they'd made. And a lot of people were not necessarily in tune. And a lot of those other people that were able to get in touch and start comparing notes with FTX after this dinner

and after these meetings were representatives of major DFI projects or some of the other major trade associations, and the hope was that we were going to be able to make some progress in the defy language in DCCPA as drafted. Then when things leaked, you know, all help kind of broke loose. Sam couldn't stop talking about it, and the circle retitened. And what I think, you know, there's, you know, there's, I'm not going to name names, but there's a couple people in the industry that are pat themselves on the back for, you know, basically like, oh, you know, it took down like SBF by, you know, you know,

doing this or, you know, we stopped the DCCPA because, you know, we kind of blew the whistle on this and brought the fight to crypto Twitter. I'm telling her right now that's nonsense. The thing that stopped the DCCPA is the FTX bankruptcy. It was, it had nothing to do with the leak. The only thing that the leak did was tighten the circle of people that were going to contribute from that on out. And it could have been pretty damaging if this has gotten pushed through the lame duck. So we dodged a bullet. We got lucky, I think, with FTX. And I'm not going to really, you know, spend much time arguing counterfactuals, but I had a few people call me out.

And so I decided to do the full postmortem since I was in some of those rooms. And that's what happened. Yeah, I haven't read all of that. And I want, like, that's so interesting to me. But, like, zooming out, was SBF really just kind of a puppeteer trying to control the strings in DC and, like, benefit his own exchange over DFI? Was he basically pulling up the ladder after, you know, it climbed up. pulling it up for everyone else?

Was there something nefarious going on here? Or, you know, is that not the case? It's just very tempting to look at everything he's doing now under that lens and be like, wow, this guy is, you call them political investments. It's basically campaign donations, right? Yeah, look, I mean, I think he was playing a game, right? And by the way, he was playing it very well, right, regardless of, you know. Just like a McAvellian-type game.

Yeah, he was a very McAvellan. type game. I think that he was looking out for, you know, his own self-interest, but every single company that lobbies, right, and every single company, you know, that is kind of advocating for themselves on the policy side is doing that out of self-interest, right? Now, there's operating out of self-interest, and then there's operating out of self-interest and only self-interest, right? And I think that's a difference with some of the other big crypto companies. You know, you've, you've seen Brian Armstrong tweet about, you know, not pulling a ladder up on defy, right? Like, we have to protect like he has every incentive to make sure that good exchange oversight legislation gets

passed because he is the incumbent. Coinbase is the incumbents. But if that's going to be at the expense of all the long-term innovation in the industry, I think, you know, he recognizes, for instance, that that's to the long-term detriment of his business as well because you're talking about the growth of the industry. FTX was a little bit different because they also had this relationship with IEX and, you know, Tom Emmer has been all over this. You guys should listen to the interview that, you know,

Representative Tom Emmer just did with Nick Carter on the Brink podcast. But he goes off. And I mean, it sounds like he wants to, you know, go after Chair Gensler Hard in the new year. But essentially, you know, saying, you know, okay, there's all these self-dealings between this, you know, securities exchange, you know, IEX and FTX was, you know, were they basically lobbying for FTX to have CFTC oversight? and then IEX to have a monopoly over the crypto securities market. And then these two would be joined at the hip,

they'd have de facto monopoly on the whole thing. And yeah, there's, that's definitely, you know, I don't know, maybe that's a possibility. My point in writing this is there was not a single piece of Sam's business that he didn't know exactly what was going on. He is extremely smart. He thought that he knew, like he thought that he saw the entire chess board. You know, he seemed to have his finger on the pulse.

of kind of the politics of the situation and this particular bill. And, you know, when he was in meetings with his policy team, the policy team was the supporting cast. He was the one predominantly that spoke and kind of led the discussion. So it's not like he was kind of following the advice of like the folks in his policy team. I'm sure he was, right? But he was also very much leading these discussions. And he seemed to just enjoy it. So I, I find it hard to believe that, you know, he was so detail-oriented and meticulous and 3D chess, 4-D chess-oriented in this regard, but, you know, somehow, you know, missed everything else in his $8 billion dollar balance sheet hole.

And I remember, I would imagine everyone in D.C. is just, like, who's been associated with him is just kind of running in the opposite direction now, trying to distance themselves. Is that what's going on? Maybe distance themselves from crypto. Who knows? It's maybe some of the cloud. Yeah, I mean, we got, like, long-term damage. control, right? So, you know, I think the only thing that's going to help that is time. Now,

the most important win this year on the policy side is that this didn't become law. The next couple of years, I think, unfortunately, are going to be a little bit of a war of attrition, right? It's going to be trench warfare, a lot of legal fights, warding off, you know, enforcement actions and regulation by enforcement from the SEC in particular, but also potentially from the CFTC. in some cases. And we might not get, you know, comprehensive legislation for exchanges or for like what constitutes a token versus a security or commodity until we have a new administration in place. The one exception, you know, potentially I think could be in the stable coin realm.

Maybe we'll see some positive stable coin action. There's always a chance that something more comprehensive gets done. but with the Republicans in control at the House and Democrats in control at the Senate still, it seems more likely than not that this is going to be gridlocked, which, by the way, is probably a net positive right now versus the alternative for some of the folks that have it out for us. Certainly. Well, the idea that SBF was a leader and knew everything and was playing the board is in stark contrast to his public speaking tour after every next collapse. Which was, I don't know a damn thing about my own company, which was definitely the vibe that he was trying to get off.

Ryan, we have so much more to cover. We got Bitcoin and Crypto Dollars, top 10 Ethereum and Layer 1 trends, trends in Defi, which if I'm reading the lines, you are calling the Defi bottom. I got my own story to tell you about that one. We'll see how that works. Ryan, so much more to come in the second half of the show right after we talk to some of these fantastic sponsors that help you go bankless. Sequence is the all-in-one developer platform you need to build Web3 games and applications. For your users, Sequence is a smart wallet, and it's the easiest, most intuitive onboarding your users will ever experience, and comes with all the features users need to feel empowered in the Web3 world.

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to be held hostage by one charismatic leader, and its volatility and boringness will deflect attention in different ways. Ryan, looking forward into 2023, how do you expect the conversation around Bitcoin to unfold? I really like this line. We will debate Bitcoin's role in society for as long as it exists. What are we going to debate in 2023? What's Bitcoin's role moving forward here?

Well, first off, I don't even remember writing that paragraph. So I'm like partly like, you know, terrified that I plagiarize it. And the other half is like maybe I was just like writing it in like a Stephen King like Bender mode. But yeah, look, I think in kind of going forward, Bitcoin has benefited great. greatly from its boringness, cycle to cycle, right? Like, it's, you know, people just have such ridiculously short memories that every single passing cycle, it's the same exact thing. People underestimate Bitcoin, all the excitement's over here, all the application development is over here, you know, this, that, the other thing. And it's just block by block, by block. The fees are

relatively low. The community is crazy, so no one really pays attention to them. There's no one to go. want to go after, right? You know, in terms of like a figurehead, the core developers truly are decentralized and extremely tough to like pin down for, you know, any type of, you can't really put that much pressure on anyone individual involved. It knows exactly what it wants to be when it grows up. I mean, it's just fair. And it's, it's, it's a borderline miraculous tech, right? And I think that's going to have staying power as a money. And we can, you know, argue about whether Ethereum will surpass it or, you know, or Bitcoin will remain number one. But it will have staying power for that reason almost by itself in a really chaotic global

environment. So, you know, just like we saw, you know, in the last cycle, I expect that people are going to, you know, underestimate Bitcoin, call for the flippinging. Maybe, maybe you not, you know, maybe this will finally be your year, guys. But I, but I, yeah. I think that if you as a country or you as a company are going to think about like a currency hedge, not an inflation hedge, but a currency hedge, then I think Bitcoin still remains like the first choice. And then Ethereum has probably moved into that number two spot. Yeah, I certainly remember going through the 2017 to 2018 mania.

And on the end of 2018, I definitely had more respect for Bitcoin than I did at the start of 2017. That's for sure. And it's a little bit after the chaos of a collapse of crypto, of the collapse of the industry. The appreciation for one block every 10 minutes definitely hits a little bit harder when we are down in the depths of a bear market. So I will give that one to you. I want to also, however, move on to the Ethereum and Layer 1 trends. And I just have a broad conversation. Oh, wow.

We're going right over all the good stuff in the Bitcoin sector. No surprise. No surprise. This actually isn't even diving into the Ethereum part specifically. I just from your perspective, from the outside of the Ethereum community, which my Ryan and I find ourselves very in the middle of very frequently. How would you describe the landscape of smart contract chains going into 2023? Like who are all the relevant players and who's showing strength? And with all of the Alt Layer 1 landscape, can the entire Alt Layer 1 landscape hold?

hold a candle to Ethereum's layer two ecosystem? What's your take on just this smart contract landscape in 2023? Well, I think you have to look at market cap, market dynamics, and then developer activity. Yeah, I think you have to look at all three for signs of strength. So I know that apps don't necessarily follow price, but price is what ultimately secures these proof-of-stake networks. and that's also, you know, kind of an indication of community health, right? It's the one barometer that you can kind of look at, you know, it's not perfect,

but it's directionally correct in terms of like, you know, order of magnitude importance of the different ecosystems. And then, you know, kind of the one A to that is the market dynamic, right? So this would be the changes to Ethereum supply, right, and the new issue and schedule and the post-merge economics of Ethereum. And I think if you just look at those like that one-a-one, and 1A. Ethereum is just so far ahead of everybody else, right?

Like in kind of a class of its own right now as a layer one that you're really looking at, as I alluded to in the Anatoli comments earlier, you're looking at Ethereum and EVM compatible chains, whether that's roll-ups, whether that's kind of this modularity thesis for different types of blockchains, or whether you're looking at other EVM-compatible like layer ones. like Avalanche and others that have these bridges. I think no matter what, that is going to continue to be one of the dominant ecosystems

and probably the dominant ecosystem for crypto not named Bitcoin for the foreseeable future, right? Everybody else is kind of playing for second, especially post-merge, right? I think last year, you know, when we had this conversation, as you know, my quip on the merge was always take the over, right? Whatever the date was, take the over. And for a while, that was money good. You'd make money hand over a fist if you just always took the over

when it came to, like, when people anticipated the merge would come. But the fact that it came, the fact that it was, that it went off without a hitch, I mean, just miraculous, just one of the most impressive technical achievements,

you know, of, you know, my career, my, you know, kind of professional life that I've seen. And it's something that I think solidifies, you know, Ethereum for the long term in terms of not only it's the stability of the platform, but I think it's attractiveness to other outside developers, right? Because that was such a hard problem to take on in such a tall mountain scale, I think there should be quite a bit of confidence that, like, other equally tricky problems will get solved over time. in a really thoughtful manner. So I don't underestimate that at all. And I think, you know, just Vitalik and the other core devs that spent years on this,

just, you know, there weren't the people to watch just because I didn't want to curse Vitalik. I was worried about the SILA Mademakers, right? Like, is that not that I, you know, I think Anatoly could probably not have much of a worse year than this year. So I think, you know, he's prime for him. It's up or trade atollic. Yeah, exactly.

But I think that those guys, I mean, just the bright spot in a really bleak year for sure. So, Ryan, can we just do this? All right, because we've had two cycles of the meme, Eith Killer, Ethereum Killer. Like, something is going to come kill Ethereum, right? Is that dead now? Are we going to have another Eith Killer cycle, the next cycle, and, oh, my God, repeat this whole thing. Not to say there won't be competitors with ETH, but, like, killing is different.

Yeah, I think the Eith killer cycle, like now everybody realizes it's not enough to kill ETH because the fees are high, right? And, you know, it's not enough to kill ETH because it's proof of work, right? Or it has this looming technical upgrade that's a bunch of smoke and mirrors and a, and, you know, this perpetual motion machine that's the roadmap, like, that's done, right? Like, that's in the rearview mirror. Now, there are still some challenges that need to be, you know, tackle, like the potential sensibility issues around, you know, MEP.

and those are all on the road map. But I think that those are significantly less challenging than what we just saw in terms of the merge. So you're going to have to compete on fundamentally new use cases. So, you know, I'm not a very deeply technical person, but would some of these move-oriented blockchains, right, the ones that spun out of the Facebook DM project like Aptos and Suey, you know, are they, going to, you know, introduce some interesting applications is Solana going to introduce some interesting applications that just, you know, run better, faster, cheaper, and you just can't do them on Ethereum, maybe. And then, you know, the other one to keep an eye on is, you know,

will the Cosmos app chain model ultimately attract, you know, more communities, more applications because of the customizable of the app chains themselves. So D-Y-D-X, like watching that experiments the next year, their migration from Z-K roll-up to an app chain on Cosmos is probably going to be the most important project for, you know, Ethereum killers, you know, proponents to watch because that would be one sign that may be some of the interesting use cases and some of the really scalable crypto apps are actually not going to be built on Ethereum, but maybe they'll move to something like the Cosmos Dap Chain model. I don't know what the right answer is, but I would say those are the three that are covered in the report in depth, Ethereum, Cosmos, Solana,

and then everything else is referenced, and we cover probably about a dozen different layer ones and, you know, layer 1.5s or whatever you want to call Polygon, which had a pretty monstrous year in its own right in terms of some of its wins. But we cover all them on a quarterly basis. So, you know, those are alluded to in reference, but I only, I can only write so many pages. I did my best, but I know that there's going to be some communities that are pissed off. I already know that, like, you know, fucking Goon is going to, he's going to DM me and be like, you didn't cover Avalanche again.

And just, you know, whatever. I love you, Goon. but, you know, come on then. I wrote 170 pages in two weeks. Give me a break. I do want to drill down on that app conversation because that brings us to the trends in defy. And there's one that I really wanted to pull out specifically

because it hits home for me. And so I'll read one of the quotes here. Ethereum transaction fees are way down this year and the competitive dynamics with DAPs have shifted. Uniswap, Lido, and OpenC, the three largest Ethereum-based apps now generate more monthly fees on a combined basis than the entire Ethereum layer one.

Avey and U.S. Unoswap launched their protocols on various emerging networks this year, and it came quickly to dominate their segments in terms of volumes in TVL. This shows that the shelling point for most users isn't around chain-specific native versions of lending and decentralized exchanges, but of the top applications by user. Just as Binance will likely steamroll the first top domestic Thai exchange in Thailand upon entrance into the country, Avey is also likely to dominate in whatever digital country, aka a layer one, it enters. Interesting. Right. Yeah. And so then Ryan concludes this section.

Mr. Selkis says, why then does DeFi still sit at all time lows versus Eth? I'm bullish on defy dominance versus Ethereum in 2023 absent ham-fisted new regulations. Ryan Selkis, are you calling the defy bottom? Is that what's going on? David, you've been saved. Selkis is coming to save your calls. Yeah, I mean, but I said it once, not like every month.

Three times. Yeah, I mean, I think, look, I would, I would, I personally own both, right? Is the way that I'd frame it. I think the reason to be bullish is because of the dominance and the feed generation of some of those Defi 1.0 apps, if you will, right? And, and, yeah, their ability to, I think, accrue value for the, for themselves and their communities long term. The reason to be bearish and kind of take the under on that is there are going to be significant regulatory headwind still, right?

And so that creates, that's like a known unknown. So you've got like those counter via veiling forces. The reason I am much more relatively bullish maybe on defy than Ethereum, though, has to do with my mental model for both, right? So, defy is, you know, about 0.1 to 0.2% of the market cap and TVL of traditional financial services. So do I think that, you know, decentralized finances penetration in the real world is, you know, going to be more than one, two, one, three thousandths or whatever of, you know, the, the traditional financial system? I think the answer is yes. With Ethereum, it's a slightly different calculation

if people's mental model of ether starts to change, right? So I made the point in here, you know, we're going to talk about either eth is money, in which case the sky's a limit, right? Or Ethereum is a platform like the cloud computing platforms or like a distributed bank. Right now, its economics is a problem. platform look a lot more like a distributed bank than they do a distributed cloud computing

platform in terms of margins, in terms of sustainability of the fees and whatnot. And it is a transaction fee-based kind of model that Ethereum has, you know, if you kind of net out like all the staking rewards. So if you think about like Ethereum as like the meta-decentralized bank of crypto and financial settlement platform, then, you know, its ceiling might be a little bit lower than the most bullish proponents think. And defy's, you know, ceiling is probably significantly higher than I think a lot of people currently handicapped for. So, you know, I think if we can get some resolution and some, like, sandboxes around defy in the next couple of years in the U.S. and Europe, it, you know, we could, we could, be close to the bottom here, David,

and one of these days you might just be right. So he's hoping for it. Ryan, this has been great. And look, we couldn't cover all 168 pages of this, but we'll definitely make sure that folks have a link in the show notes at the end. But we could only touch upon a few things. Is there anything that really jumps out at you from the report

that you just really were like, guys, we should have talked about this. tell us about that thing. What's something that you'd like to pull out for us toward the end of this as we begin to wrap up? Well, I'll do a buy sell for NFTs and then DALs, which are the last two sections that we didn't get to. So I think in like the NFT and kind of metaverse space, I am pretty bullish on decentralized social applications and identity. and pretty bearish on individual NFT projects and GameFi. GameFi, I think, is the most overhyped, ridiculous friend.

Oh, a strong opinion. Interesting. An absolutely capital incinerator for years to come. Wow. Van Spencer would like a word. And I think NFTs are best thought of an aggregate versus as particular projects, right? think that the picks and shovels businesses around NFTs will continue to do well. But the point that I make in here is, you know, Bitcoin in 2013 to 2017, if you do the digital gold versus physical gold comparison, right, you could see it's kind of steady march upwards and its market share,

you know, kind of capture, reflected the value of Bitcoin. NFTs, I don't think the same thing is going to be true. I think that we will see like a 10x in the NFT market, but it will be because of a 10, 20, 30x increase in the number of projects and the number of the number of supplies. So you want to bet on the category, like the collectibles category rather than the beanie babies, right, individual projects. Yeah, well, I think that's right, but I would also say that as a consumable primitive, right, I think it's really important. But I just don't think that people should be thinking necessarily about NFTs writ large as an

asset class. It might be better to think about them, you know, very specific niches. like digital art as an asset class. The example that I've used is your physical wardrobe. You buy fresh kicks or a new suit. When you're ready to sell that thing, it's going to be 20 cents on the dollar, if you're lucky. And I think that...

Give it to a thrift store, you know? Yeah, exactly, right? And so that's kind of the model that I have. Could be wrong, we'll see. But I don't think so. And then on the, on the, on the, on the, the, the Dow side, I'm still piper bullish on Dow's. We could do a whole episode on that.

But, so I'll gloss over that. But the, I think the one, you know, kind of critical area of investment next year, I expect we'll see an uptick in as what we call deep end, decentralized physical infrastructure networks. Cloud infrastructure companies are about $5 trillion dollars of market cap. You guys want to guess where. D-PIN is right now, if you include Filecoin, R-Weave, Helium,

LivePier, some of those projects? Okay, give us the numbers again. So what was, um... Five trillion for cloud. Yeah. What is the crypto equivalent? This is just a wild five. I'm going to say, yeah, I was going to say under 10, but I'll go under five, because that sounds, uh, that sounds right?

About two and a half. Wow. Okay. Yep. So, um, if you think about both the pressing need to decentralize our dependence on, on some of these, you have big platforms, and hardware networks, and just the enormous revenue opportunity, and the very clear unit economics here, too, by the way, of these projects. I'd expect that should be a good kind of tailwind for the industry.

The question is, you know, how quickly will demand pick up for those decentralized networks? Because the supply side is largely figured out through token incentives, but can we continue to see good kind of steep growth like we have the last few quarters, the teeth of the bear market in usage of some of those decentralized physical infrastructure networks. So that's a small sampling of the 95 and appreciate being able to run through it with you guys. No, that's great. And maybe just to close us out, Ryan, can you talk about 2023? So where do we go from here? You had this section somewhere in the report that talked about 2020 as a time, we need to get back to crypto, back to crypto in 2023. I think that's a good theme. If 2020,

22 was paying back to crypto is a great theme for 2023. And you said, you want more personal wallets from my cold dead hands rather than exchange margin accounts, which is bad. You want more privacy. It's none of your business what I do than institutional adoption. We could slow that process down. And you want permissionless financial and social applications, a live and let live policy versus Ponzi economics, the frauds that we saw in 2022. So you want the real manifestations of this crypto vision, not the fakes. Wrap this up for us. What could we expect in 2023?

What does back to crypto mean? Well, first off, I did a fine replace of Web3 anywhere that it accidentally slipped through the cracks in the trap. So you killed it? What did you replace it with? Crypto? Crypto. Yeah.

Okay. And I think there was one or two that slipped through the cracks in the graphics, which I'm not too happy about, but that's my fault. Wait, so we're putting Web3 in the first. the grave? I just, well, I don't, I'm not going to tell other people how to live their lives, but it's got bad juju for me. I'm not calling it Web 3 anymore.

Okay. All right. Every, ever since we all said, started saying Web 3, we started getting a high on our own supply and believing too many people that are full of shit. So I don't hate that. I remember reading the A16C report that came out that said that Web 3 pulled well with people. It was the best polling a term. Yeah, how's it polling now, David?

That was the absolute top of Web 3. It was down only for about... Should have bet on that rather than defy, David. All right. So back to the basics. Back to crypto in 2023. Ryan, this is amazing. Hey, action items for you, bankless listeners.

Of course, you can go download the report. We'll include a link in the show notes. Any special instructions on how to download and access that, Ryan? Oh, man, I should have the link handy, but it's going to be right on our homepage. So if you go to missari.io, it will be on our homepage when this drops live. Amazing. Guys, I hope you enjoyed this. We snuck this in before the holidays.

And you appreciate Ryan. You hanging with us. All right, Ryan, here's my only regret with that conversation is we forgot to talk about the block, crypto media. So I know, like I saw some of your tweets after this. My brain just about exploded earlier this month when I saw that. So basically the news that SBF had a controlling secret interest. entire time in one of the largest crypto media publications in our space. And here's why that

hit me so hard is for so long, I've been kind of preaching like, and David too, and I know you have, is the answer to our really shitty financial media coverage of crypto is crypto media. And here we are. Here's this entity who's caught up and evolved in this corruption, this SBF thing. And I look, I know it's not everyone there. There are tons of fantastic people at the block that goes without saying who are not aware of any of this. But to see it kind of seep in, I don't know, my jaw hit the floor. What was you, what's your reaction to this? Because I wanted to talk to you about this for a while since it happened. I feel like with anything like that, it had to have been an extremely small group of people

that knew about this, if not a group of one, because stuff like this always gets out, right? And I just don't really think that, you know, there's any reason to suspect that the vast majority, if not pretty much the entirety of the editorial and research teams of the block really adding any idea that this was the structure. I know that, like, the block's founder, Mike Dutis, like, was completely blindsided by this, Right. Like, you know, I think, you know, he had said that he thought that, you know, Mike McCaffrey's, you know, his source of funding for his buyout of the company was, was just from, you know, family money. And so it seemed like this, you know, kind of took everybody's surprise and was, you know,

very much an isolated group of people that knew about this. So, you know, in some respects, I think it's, you know, it's unfortunate, it's tough that a good chunk of the team is going to be, maligned over this or have their integrity called in a question. I don't think that's necessary. And I think it just also flies in the face of their actual coverage on some of the stuff, right? There are, I think, much more pernicious, you know, issues with, with, you know, pay to play within crypto media that is outside of, you know, Coin desk and the block, you know, Coindex broke the story that unraveled FTX and has now, you know, turned around and created contagion in his parent company, right? So I think, you know,

The coin desk and kind of the block editorial teams are two of the best, decrypts, you know, another one up there. You guys obviously do great work. But in terms of like traditional, like news, like journalists, you know, heavy outlets. Yeah, we are not journalists at all. I think, yeah, I think those three are, you know, definitely kind of pillars of the ecosystem. And so, you know, I didn't really spend a whole lot of time in like the shout and fright of it. I just thought it was, you know, like another, whatever can go wrong, we'll go wrong this year.

Because that one was more of just like an own goal that's going to look a lot worse than it really is. I think in terms of like the outside world. Because I think we know some of the folks that are over the block, right? And, you know, I would be shocked if, you know, Frankie Scoops had any idea of something like this. I mean, his reaction was like, you know, someone that just got stabbed in the back and the heart, right? So I think that's unfortunate and maybe unfair. But I think there is a bigger question in terms of should we have like an associated press of crypto, right? So something that is a little bit more open and that is focused on doing the journalistic grunt work, but where the information is ultimately like a public good.

Okay. Well, let's let's talk about that because that's very really where my mind went. And by the way, we hopped right into this question with Ryan because he's totally up to speed. But for bankless listeners who aren't aware, the block, large crypto journalism news institution and crypto turned out that their CEO was getting loans from SBF and Alameda, that entire thing and was using that to buy up a majority stake of the block. So in some shadow-type pseudo way, SBF and Alameda is actually the owner of the block. and the question of does that taint coverage?

What were the intents behind this? Also the CEO, former CEO of the block is obviously he's no longer the CEO. And the owner is also given like apartments in the Bahamas as part of this. So it's just some shady things. Anyway, that's the background that we're going into. But like what,

what Ryan can we do to not become like the legacy media? How do we make this corruption resistant? SBF won't be the last that tries to bribe out and buy out a crypto media publication. How do we develop some armor for this the next time around? And that maybe goes to the idea that you were talking about, like Associated Press.

So dig into this. What do you think the solutions are here? I actually think this is a pretty good case for a Dow. And the reason I say that is, like, I ran CoinDust for a couple of years. So, you know, the acquisition and restructuring that we did at DCG in 2016, you know, it was it was me that that led that turnaround and like a team of six, right? Like it was like Pete Rizzo, Mike McSweeney, who's now over at the block, and like an events team. Like our editorial team was down to like two people and like one one contract, you know,

like, you know, European that was doing the night coverage and helping on weekends. And so I know what controls we put in place in terms of like editorial firewalls just so that, you know, Coin Desk was was not perceived to be like, you know, just a mouthpiece for DCG. Like, we physically moved out of the office, you know, we had these like firewalls and this kind of, you know, code of conduct that's at me and Rizzo worked on and, you know, I didn't get in his way and vice versa. I stopped writing for 18 months. Like, that was the only time I didn't write, basically was the 18 months that I actually ran

Coin desk. And I think that model works. if you trust me. And that is kind of besides the point, right? Like, you shouldn't trust that I was, you know, not getting calls from Barry and then funneling that, you know, in a conference room to Rizzo, essentially saying, like, if you write about this, you're fired, right? Like, that's, that's something that, you know, I think, you know, gets taken for granted because I think, you know, coin desks, you know, body of work, so it in its own two feet, people had a lot of confidence on, like, the integrity of the editorial team that we had and that we wouldn't do something like that.

But it's still a leap of faith, and you can get unfairly maligned, you know, by association, just because that construct exists. And I think the same is true with the situation with the block, where you had a business-focused CEO, not really in the editorial, you know, function, not really in the research function, doing something totally outside of both of that that is going to make them look bad. and now it kind of impugns the integrity of the rest of the group or at least the brand, right? And so if you think about what a Dow could be really good for, you know, it could be good for funding a sustainable operation for journalism that is truly independent where the content itself is ungovernable, but the funding source is secure, right? So one of the issues that you always have is you want good news, but you never want to be the object of bad news.

And that can create a bunch of, you know, kind of gnarly, you know, incentive problems when it comes to, you know, running a commercial business. You know, I can't tell you how many folks on the coin desk side were like, we're not coming to consensus. We're not supporting you like this is a garbage publication because there was a negative article about them because they did something, you know, shitty or they had some like mishap and the journalist covered it. So I think there are ways to monetize a business like that and basically automate the business operations of like a decentralized media outlet. And we might be at an interesting moment in kind of crypto's life cycle where combination of a recession, layoffs, some of these kind of brand issues at at, let's forget the brand issues.

Some of the change of control issues that might exist at both the block and CoinDesk, since the block is probably going to have to restructure based on McAfrey's ownership, CoinDesk is rumored to be on the block because of DCG's other issues, that it's other subsidiaries. So you might have a perfect storm where there's going to be a lot of talent that is potentially looking to hit the market. Could you spin up almost like a constitution Dow, but for funding sustainable like cryptojournalism?

and then organize a business unit, just like you do, like you have a centralized, like, editorial desk in crypto. Could you have like kind of a hub and spoke model where you have a centralized editorial desk and then like a freelance kind of Dow model, kind of like what you guys have done with bankless Dow as some of the kind of specialist contributors? And I think if it's ever going to happen, like it's probably going to happen soon. So, you know, maybe you guys take it up and then, you know, just shoot, shoot, shoot me a tip if it works. I was going to ask you to do it.

Well, I mean, I'm Okay, well, I'm probably, you know, I, I don't want to get in trouble because my team's like, you have too many ideas. Yeah, people. I hear you. And so we have, we have to focus. So, but I do think it's really interesting. The other thing, the other thing that I think is really interesting about this idea at this point in time is, I think the economics of the journalism business have been total dog shit for forever. and that could potentially get flipped on its head with things like GBT3 in the coming years.

The reason I say that is with more automation of the writing process, you're still going to need the fact checkers and the architects of these stories and like the investigators, right? So even though you can do the write-ups, it's like a scientist, right? Like doing the write-up is the easiest part. You've got to design the experiment. You've got to get all the controls right. you got to, you know, basically set everything up. And then, you know, if the experiment is well constructed, then you read out the results and then the write up kind of, that's the easiest part is just explaining what you did.

But the concoction, building everything itself, that's the difficult part. And I think, you know, with something like GBT3, if you started recording all of your interviews, right, or you started like just inputting all of your raw notes into, you know, an NLP engine, And then more importantly, you had a trove of historical data and historical stories and historical notes that your entire desk had done. Now that model gets more efficient and smarter over time and can make many more lateral connections and maybe break stories like FTX far sooner because that model would say, okay, we're looking at all the market cap info for these assets over here. We know that Alameda was doing these investments. We know that the market corrected here. We know that this press release went out then.

We know what FTX's volumes were. And then they have a billion dollars to bail out BlockFi, and they have 500 million to bail out Voyager. And it could literally just slam all these together and say, something's broken here, right? There's something that doesn't add up about these numbers, and now you've got like your smoking gun. That's just one example,

but you could potentially do that with any combination of things and really kind of glean insight from the noise of most of today's news by having that source material. And you do need the source material to put into these models, otherwise you're going to run into copyright issues. So I think the economics of the news business are more interesting. I think doing it in a decentralized way is more interesting given the incentive mismatches. And, you know, every time I talk about it out loud, I kind of want to do it. So my team's going to be pissed at this is the bonus.

But we'll see. It's exciting, guy. And like, so the last thing I'll say, because I've been with us for a while. And I just wanted to get your thoughts on this. And this has been very helpful. It's, you know, I noticed number four, I think number four on your top people to watch list was citizen journalists. Now, that was actually success in 2022. If we look at like, you named Molly White and autism capital and autism capital is doing all these things about SBF.

Another one that comes to mind is that Twitter account Zach, XBT, just doing deep due diligence on like crypto influencers and surface. the grift and just being like, hey, look at this. So if we can coordinate and unify some of that citizen journalist energy in some sort of a Dow structure, I mean, that starts to get really exciting. I don't know what that looks like, Ryan. David and I certainly don't have time for it right now, but we are cheering on whoever's listening to this and wants to start spinning that up and thinking about it. And yeah, thanks for waiting on this.

Appreciate it. That's your bonus episode right there. Thanks, guys. Happy holidays. With that, we are done this time. Take care. Bye. As always, risk and disclaimers, got to let you know. None of this has been financial advice. You don't get any of that from bankless.

Defy is risky. So is ETH. So is crypto. So is Web 3. You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey. Thanks a lot.

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