Bankless - Diaries of an ETH Maxi on Wall Street | Sam Jernigan

Episode Date: June 19, 2024

Sam Jernigan, the “Unofficial ETH Maxi of Wall Street”, has been evangelizing Ethereum to institutional funds and billionaires from inside the house for the past five years. Having the perfect blend of deep Ethereum knowledge and the full Wall Street experience, Sam guides us through how he became an ETH Maxi, why the lack of understanding of ETH in TradFi is the most bullish case for the asset and what the future holds for ETH institutional adoption. ------ ✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/17  ------ 📣STAKEWISE | LIQUID SOLO STAKING https://bankless.cc/Pod_StakeWise  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2    ⁠ 🌐 TRANSPORTER | CROSS CHAINS WITH CONFIDENCE https://transporter.io/  🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo  🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle  ⚡️ CARTESI | LINUX-POWERED ROLLUPS https://bankless.cc/CartesiGovernance    ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum   ------ TIMESTAMPS 0:00 Intro 7:47 Defining TradFi 20:05 Ethereum’s P/E Ratio 23:49 Sam’s Background 40:44 Becoming an ETH Maxi 52:57 The State of ETH in TradFi 57:38 ETH Bull Case 1:06:11 The Flippening 1:12:11 ETH ETF 1:19:26 Security vs Commodity Debate 1:24:00 TradFi: Friend or Foe? 1:34:39 Regulation 1:46:07 Closing & Disclaimers ------ RESOURCES Sam Jernigan on X https://x.com/sjerniganiv   Sam Jernigan on LikedIn https://www.linkedin.com/in/samjernigan07302015/   ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠    

The most bullish thing about ETH right now is the fact that the understanding of TradFi is that it's this crypto-hazard like Bitcoin. Because I think when they fully understand it, it's going to blow their brains out. Welcome to Bankless, where today we're exploring the Diaries of an ETH Maxi on Wall Street. Yes, David and I came up with that title. I think it's a perfect description. As usual, this is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Our guest today is Sam Jernigan. He is the unofficial ETH Maxi of Wall Street. Now, those are his words. Sam's been evangelizing Ethereum to institutional funds and to billionaires, really rich people, from inside the house for the past five years, and giving them the ETH narrative so that ETH killers don't take all of the marketing oxygen. That was a discussion we had in today's episode. I think this was a fascinating look at the inside baseball of Wall Street's crypto adoption and the Ethereum narrative. We're early.

is an expression Sam kept coming back to. And I definitely felt like that in the episodes very early in Wall Street's understanding of the Ethereum narrative today. Before we get into the conversation, our friends and sponsors over at Stakewise want you to know what they're up to in the world of liquid staking on Ethereum.

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was open enough to crypto to really get pilled on crypto, like in a very deep way. And Sam's connected to a lot of just like the Ethereum OGs. People like Justin Drake have been like going back and forth about like the Ethereum narrative, why it fits inside of Wall Street. But for a long time, Sam's been more or less hat like wearing the Wall Street gag. if you work in Wall Street, you can't really talk. You don't really have total freedom of ability to express your thoughts and opinions about things.

But Sam has since left Wall Street. So we get an exclusive peek into the stories that Sam has from being on Wall Street in 15 years as well as just all of the times that different crypto people have come into the world of Wall Street to pitch their layer one, among other things. And so just hearing the takes about somebody who's a Wall Street veteran, that's also crypto native, who's finally get to tell their story after such a long time, is always a pretty interesting episode. All right, guys, let's get right to the episode with Sam.

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perfectly straddles both Tradify and Ethereum. Sam Jernigan is a macro investor who spent the last 15 years trading many different asset classes, including crypto. He built and ran crypto at More Capital, which is one of the largest, oldest macro funds in the world, space in New York. And before that, Sam launched a global macro fund that could trade digital assets. This is one of the first out of Mike Novogratz's family office. So he's done so many things in finance. He pioneered crypto options, executed the first ever option on ETH. And before that, he even spent some time in the belly of the beast at Bear Stearns and J.P. Morgan. And to give you a sense of the straddle and what he's up to right now, Sam is currently both a participant at the U.S. monetary policy form.

So that sounds pretty central banker. And also at the same time, an Ethereum ZK. EVM advisor to the Project Scroll as a layer two, which you've heard about. So that is deep crypto and central bank, again, straddling these two worlds. Sam, this episode has been a long time coming. We've wanted to get you on for a while, but you have not been able to because I think you've been under some Tradfai rule sets that have not allowed you just to speak out and talk about crypto in the way we're about to talk about it. So welcome to the bankless episode.

Thank you, guys. So thank you for having me. I am a long time listener. I rarely miss an episode. I'm a big fan. I think you guys do a public good. Appreciate it. Wow. Let's talk about, we want to get your background in a minute and how you kind of ended up here and like what you've been up to, just like behind the scenes, because that's super interesting for bankless listeners, what it's like in the belly of the beast.

But I think the context for this episode is we want to talk about Ethereum and Ether and how to sell it to TradFi, like what narratives resonate. In order to do that, I think we need to set up this term, Tradify. is something that crypto natives use. I don't know that institutions call themselves tradfai. They're just like finance. They're just like finance, right? But I think that like for crypto natives, yeah, finance. For crypto natives, right?

It's basically anything not crypto is tradfi. I mean, that is maybe a simple way to explain it. But when we say the word tradfi, like what does that mean in your world? Right. I remember the first time one of my best friends is a chief economist at one of the largest banks. I remember the first time we were out one night. Remember the first time I said this word tradfied him. He's like, what is that?

What is that mean? And that was not long ago. I think I would say, you know, we think about, when I say finance, you know, I think about basically like the investment banking world. So sales, trading, research, investment banking. And then that's what we call the sell side. And then the buy side would be what most people would usually consider. that are like hedge funds and private equity funds.

Venture funds are really outside of Wall Street, really. You know, I was pointing out to somebody that like, Andriesenhorowitz may be a huge fund, but I doubt they're even a client of JP Morgan. So they're just, they're not, I think they probably use Morgan Stanley or something, maybe, right? But in general, venture funds are just separate really from Wall Street or what I call Tradfi. Or what most people I think call Trotify, I think you would be thinking of Goldman, J.P. Morgan, Citibank, you know, etc. The investment banking world that comprises institutional buy and sell side.

So what I want to get out of this episode, Sam, is we are entering the era in which crypto and tradfi are becoming closer than ever. We now have the Bitcoin ETF. We're about to have the Ethereum ETF. And now our conversations are going to go directly into the ears of quote-unquote tradfy. And so I'm trying to learn. how to best sell what crypto has to offer.

And right now, that's Bitcoin and that's it. That's ETH. But in order to really, like, put the correct words in the correct order, we really need to understand the audience. And so understanding that the audience is not venture capital, but it is Wall Street, let's keep on going down that path. Like, what is, what's the makeup of TradFi? Who are these people that we are actually, like, connecting to via the ETFs?

Right. Well, I mean, I think the ETFs, I mean, there are some hedge funds that probably, okay, so I mean, I think I remember probably a couple years ago. I actually in a chat, I mentioned you guys that most major funds are now papered up. That means that they are now papered. They have legal documents in place with say Coinbase in particular to actually trade spot. That can be a very long process. I would say we got about maybe a third of the way through that process in the last cycle. I remember at one point, like, I think Coinbase had a backlog, but like a thousand funds that were waiting to onboard.

They simply couldn't do it. And then the things kind of went off the rails. And then I would say like half those docs probably didn't get done. And they have of the last year or a third didn't get done. And then the last third probably have been getting done over the last brief kind of emerging bull market. So, yeah. So most funds are actually now like more wired or more. papered, as we say, to trade

crypto. And the infrastructure for that's gotten a lot better. Like Coinbase Prime, which will be the primary platform that institution I'm going to use. I can't even describe the evolution of that platform has gotten a lot better. It's also much more crypto-native. We

could say that for another conversation, but the web wallet integration, particularly on the back of their win at the SEC, is going to really change things. I haven't seen that picked up on crypto Twitter. But So, yeah, so the infrastructure is very good. That kind of actually goes back to my origin.

You know, Tagomi is the smart order router that was acquired by Coinbase and is now what's integrated into Prime. And I was one of the first people ever demo that back in 2018. So, yeah, so the infrastructure is very good. And a lot of accounts are, quote, papered up to be able to trade spot. But there are still other funds. And I would say, like, even like just smaller props. and then like family offices, some family offices I would consider like

TradFi institutional, right, in the Wall Street sense. And then the next tier I would kind of, you know, I would almost kind of put them in the next tier out because they don't trade a lot or they're not as active. The next tier out are going to be, you know, more like pensions and endowments. And they're obviously also, you know, part of TradFi, but this is kind of like permanent allocated portfolio capital. And there's, that's actually a very compelling story. I'm actually not surprised by the adoption of Bitcoin ETFs by large long-term allocators.

And we can get into this, the portfolio allocation benefits. And that was to having not just Bitcoin, but ETH and other crypto assets. That was understanding that story from an academic standpoint, based on some work, a former senior Fed official friend of mine had done while he was actually at the IMF, is what actually convinced me to start the first fund. So I guess that's a long way of saying, you know, TradFi is definitely going to be very involved. I think in terms of selling it, Bitcoin is digital gold.

Maybe we're seeing a little bit of a change to that with OPECat and some of these other initiatives. I saw the Starkware actual little video earlier from earlier today, really kind of trying to prod the Bitcoin community into embracing scaling, embracing a lot of the technologies that Ethereum is pioneer, by the way. But for the time being, you know, Bitcoin is just digital gold. And look, I understand why that has been very attractive for Bitcoin investors, right? It's like if we ever get to the size of gold, like, we're all rich, we've done great.

Like, what more do we, why risk, why take any of these risks, you know, or potential risks that they perceive anyways to try and do more? And that opened up this opportunity where Ethereum, you know, entered and said, hey, we can do a lot more with this ledger than just have a meme coin on it or something that we all agree has value, like gold. I do think, by the way, that Bitcoin is a superior gold. That was also part of my evolution into the space, and I can kind of explain that. And it is a, you know, I was one of the first people to really begin advocating for it. as a macro asset and telling the story of that as this permissionless non-sovereign asset that can be transferred, you know, but, you know, the part that getting to Ether, you know, ETH took this one step further and added a Turing complete, adding a Turing complete, which maybe

is a little overused term, but adding a Turing complete programmable environment now, I think the reason people think it's very difficult to tell the story of ETH is because it's so compelling. You can really almost do anything with this environment. And that is a good problem for us to have. Telling the story of ether being difficult is okay. I can tell you the way I kind of view it, the way I've tried to explain it to try to find people. It doesn't always stick.

This is going to be a long process. But again, that's, you know, to the hashtag early, these are good problems to have. The actual way that one simple way to think about a functional of ETH that every triad-fied person can understand is very simply to explain that Ethereum, the network, is a little bit like Swift plus chips. So, chips, so everybody now knows what Swift is. Swift is a messaging system.

It does not settle, right? So it is literally just a format for banks to communicate or even, you know, banks to communicate basically on sending of dollars and increasingly other types of securities. But at the end of the day, banks have to settle, and they use primarily chips, which stands for the Clearinghouse Corporation. It goes back, you should look into it. It goes back probably almost 200 years. It's owned by the 25 or 30 largest banks in the United States. You know, we're talking about gross settlements every year of hundreds of trillions and Fedwire. and these are basically 24-hour cycles.

And what Ethereum is, again, in this one very narrow definition where I can show you what it can do that's game-changing to this otherwise massive and critically important global financial system market infrastructure is to think about Ethereum,

the network as SWIFT plus chips, so messaging of financial transactions, not just cash, but any type of financial transaction, plus the settlement of those transactions, and you pay a fee. And that fee then accrues to ETH, which is basically this equity. And that is then transferred via a buyback, right? So when you pay a fee to do a transaction on Ethereum, that ETH is then burnt.

And it's the same as, you know, one way that you can take that application. Then kind of another analogy is to say it actually, lines up well from a modeling standpoint, actually, is to look at Ethereum a little bit like MasterCard or Visa. So MasterCard and Visa, you usually do not pay the fee yourself when you

check out at the grocery store or a restaurant, but the merchant does. They pay anywhere from a 3 to 5 percent fee. And imagine if that 100% of that fee was basically cash flow, which it's not. It has to

pay for OPEX, and it has to pay for taxes. So the drop through from cash flow, those fees, actually to net earnings is about or cash flow is about 50%. So that model has very high margins. But ETH basically has 100% margins. But at any rate, so you know, you have to pay the employees that run MasterCard and you have to pay some marketing expenses maybe. And then you have to pay taxes. And the net of that, if it were all to be used to buy back stock, that would be very similar to what Ethereum is. Right. So, but here, MasterCard Visa traded like a 25 times price earnings multiple.

And I think that, you know, I've generally thought that a reasonable framework is that Ethereum should have roughly a 2x that multiple. So 50 times price earnings multiple, one, because it's growing faster, but two, because it doesn't have to pay for OPEX and it doesn't have to pay for taxes. It doesn't have to pay taxes. So it's a very clean revenue and return of revenue. to holders of the equity-like asset, ETH. And it's important to understand that for the system to be permissionless,

the ownership of that asset, which you have to use to pay the fees like oil, has to also be permissionless, and it has to be highly decentralized. And so that's why it can't be, you know, eat the security or eat the publicly traded stock. It has to be this permissionless crypto, crypto were used, but, you know, crypto asset that anyone anywhere in the world can have access to and can use to access the network. So Sam, I think you've given us a taste of preview of the rest of this episode, right,

where we're going to be camping on some of those subjects. I guess a few things. Just to tie off one thing, what is ETH's PE ratio right now, just out of curiosity? I don't know if I had that. It's like in the hundreds, right? Like, I don't know. I saw like 150 something in that range. So maybe a bit more than like 2X what MasterCGarden Vs are.

Right. So I think I would have to check. I don't know offhand, to be honest. And so if I don't know the answer, I don't want to make it up. I think you also need to make sure, to be clear, issuance is a cost. And I want to kind of set the record straight on this. I just, like a lot of people,

watched your episode with Justin and Anatoly. And, you know, Anatoly's had a very strange, I think I said on Twitter last night, naive understanding of economics for some time. I remember he said something very similar to this back in December. And on Twitter, it is definitely a cost. You can think about it a little bit like paying the employees, right? So issuance pays the miners or it pays validators. and if earnings are the net of that what you're taking in in terms of the fees minus your costs, that's your net earnings going back to that Visa or MasterCard example.

So Ethereum is the only system that has positive net, you know, net earnings, net yield also for staking validators. And, you know, I've seen your previous episodes. on, you know, the risk-free rate. Another issue I'd like to get into is I feel like I was trying to, I saw a previous episode you guys did on, you know, the risk-free rate and this, you know, the staking yield. I feel a little bit guilty in a lot of ways. I actually helped point out to a lot of the people behind the scenes.

I point out to people that this was a positive real yield, the only positive real yield that is economically sustainable and generated by user activity. That's very important. It's the only positive yielding, positive real yielding asset in all of crypto. And part of that has accrued through that buyback mechanism and part of that can be a staking. But I think that one of the reasons I say that I kind of regret

heavily pushing this understanding is that, you know, this is now running into this issuance problem. We're having that several very bright researchers like Ansgar and Casper have been talking about, and it's worth us having a follow up episode on that. But, you know, it is very important that eat the asset, maintain this quality of a positive real yield and being ultrasound, deflationary money in the same way that every year Apple is able to buy back its stock and it's the outstanding stock of Apple's equity declines in value.

That is how value from the network is returned to Apple shareholders. And we need to make sure that the issuance curve is adjusted to maintain that same quality for a lot of reasons that a company that returns its earnings via buybacks. In our case, buy and burn, the burning of ETH use for transactions. that we're able to retain that this unique and very powerful differentiation. So Sam, there's there's so many like ways we could like fork this conversation, right? Like we've just brought up a ton of different topics, right? You know, one is I'd still kind of like to get your, your background and how you came

for this place of straddling sort of tradfai and Ethereum. That's important. We, you know, I feel like we've mostly talked about who tradfai is and what we mean by that. But I don't think folks to understand the sign. of Tradfai right now. And then you just branched out into a conversation around eth kind of monetary policy and like how issuance is a cost to the network. And Ethereum is kind of like the only crypto network with a true source of yield. So like I want to hit all on all of those things. I'm just like not sure where to go first. So let's do this. Let's backtrack. And could you give us

some of your background on how you came to be? And then we'll hit some of those other items, how you came to be here. So I have sort of, you know, like, seen your personal trajectory a little bit from afar. I've, like, heard rumors of Sam sort of, you know, in the, in the Tradfai space as this liaison role between kind of Tradfai and particularly Ethereum. Like, I think you've been described to me as, like,

you know, a Tradfai, ETH Super Bowl, you know, kind of like a, you know, Michael Saylor behind the scenes only for Ethereum, right? And so I'm wondering how you took that rule. Can you give us how you got into crypto? You said you were originally pilled with Bitcoin. How did that start? And then how did you come to the place where you are like,

Heath Pilled and having conversations with the movers and shakers in the institutional Tratify world? How did that come to be? And why are you doing this? Sure. So I started my career in New York at Bear Stearns in sales and trading. I successfully made the transition over to J.P. Morgan. And while there, you know, it got the crisis right, the 08 crisis right internally.

I was, they almost fired me, actually, because I was trying to tell people that all hell was about to break loose. And they're like, if you don't stop telling people with this, we're going to, like, fire you. Anyways, thankfully, all hell broke loose. and I kept my job and got promoted. And I worked on a internal desk that basically traded the banks' capital or what's called proprietary trading. So I worked on a portfolio that reported to senior management, and we did both long, short, equity, and global macro. you know, one of the early trades I had there, so just to kind of, you know, I having got the crisis right, I was very deeply learning about economics, and J.P. Morgan has probably the best

economics team, period. And I had this unlimited access to this huge resource, both of the publications, but also to the economists. And I took advantage of that. And became very good friends with several, one in particular, former Fed, but senior economist Jake Morgan. That's how I developed a lot of my Fed network and former staffers. And one of the early, you guys had a recent interview with Timothy Massade, and where you talked a lot about the Yer Dollar Futures Market. That was a great interview for everyone watching. I highly encourage you to go watch that.

Your Dollar Futures was actually one of the biggest trades I had early in my career at JPMorgan. So they're commonly used to bet on their, it's a, it's, the market has evolved since, since then, but at the time they were the most liquid asset for trading, basically expectations about Fed rate hiking cycles. And as compared to everyone, whether, you know, you know, Bitcoin maxis at the time that emerged in this period of time of the crisis, or. tradified people, everyone thought that the Fed was printing money and we're going to have hyperinflation.

And I didn't think that was the case. And so the way you would do that is you would buy your dollar futures that were pricing in Fed rate hikes, betting on quote, lower for longer. And so that was a trade we nailed both in 2010 and 2011. Proproprietary trading was outlawed, though, under the vocal rule. And so in 2012, I left, I worked at a few different macro funds. I think the kind of the next kind of little anecdote here, I think that fits well as I think where I was exposed to Bitcoin a few times between 2012 and 2014. And I probably cost people being billionaires talking them out of this asset that I viewed as like, yeah, look, I think, you know, I thought it was a joke. I thought it was an incarnation of the reach for yield or this incarnation of this view that I felt was wrong, that the Fed was printing money and they were going to have hyperinflation. I disagreed with that.

I thought that the Fed would have to keep rates low for longer to facilitate a slow recovery and that inflation expectations have been significantly de-anchored to the downside or at least, you know, were very low. And so I missed it. In fact, I remember it went from 100 to 50 and I declared victory and I never, I don't think I looked at it again for like two years. I was like, see, it went from 100 to 50. And that was, you know, that was, that was the extent of it. What changed for me was in 2015. I was at a different fund.

I actually told this story just before COVID at the first macro conference to talk about Bitcoin for Wall Street that I ever helped put on back in 2019. and my former boss was in the room. We were betting against the Chinese R&B. So in 2015, 2016, we had a very large options trade in the forward market on basically that the dollar would go up against the Chinese R&B. And when you're playing against something like, you know, when you're betting against the, you know, C&Y or C&H offshore,

you're playing for like this like 4 to 6% move, right? This very small move. And, you know, I remember I was on the phone with our HSBC, a salesperson in Hong Kong. And I was like, hey, you know, or like the Chinese billionaire are still trying to get money out of China. Like, they still want dollars, basically. And he was like, yeah, the only thing they want more is Bitcoin. I'm like, what are you talking about? He's like, he's like, they love Bitcoin.

They can't get into Bitcoin. They basically buy Bitcoin. They move it out of the country and they swap it, the OTC brokers into dollars. And I was like, oh, my God. this is unbelievable. You know, he's like, pull up the chart, overlay dollar C and H versus Bitcoin and put Bitcoin on log,

which you have to do. So I do that. And of course, it's like this perfect correlation. I was like, holy shit. You know, we're playing for this like 4% move

and this Bitcoin's moving like 400%. And so I printed out this chart. I remember I took it into my boss's office. And he did not like being disturbed during the daytime, by the way. He liked to read in his office. He's, you know, whereas I'm a little bit the opposite.

He did not like, like to be disturbed. So I went on that. I was like, David, I'm sorry, I need you to look at this. We have the wrong trade on. And he's like, what are you talking about? I was like, look at this. I was like, we have the wrong trade on him. He looks down at him. He goes, what is this? I said, it's Bitcoin. He looks back up at me. He goes, we don't trade Bitcoin. I was like, and you're like, yeah. I was like, but we should be. I was like, but we should be, You know, and, you know, that was, I think, you know, that was the first realization that this was a macro asset. And, you know, I think that an important thing I wanted to kind of communicate.

I did it recently at a elite Denver, actually, at this panel I spoke to, like, I think, you know, when you think about macro, we spend so much time, I think the popular press and CNBC really over, like, dramatizes, like, 25 basis points, even 100 base point hikes here from the Fed. if you're dealing with an asset like Bitcoin, who cares, right? If you're dealing with crypto, this is much bigger than a small Fed cycle, right? Don't, you know, this is about the movement of capital, global capital, about people, about politics. This is about for the first time in really ever that you've been able to instantly and permissionlessy transfer assets across borders and around capital controls. This is so much bigger in a lot of ways than anything the Fed can. can do. And don't let, you know, that is why every macro person on the planet is literally blowing their brains out that the Fed is much higher than they ever thought they were going to hike to.

And yet Ethan Bitcoin are basically at all-time highs. That was not possible for anyone you could have gotten on your show, you know, a year or two ago. And it's because they just, you know, don't let the noise let you lose sight of the forest here. So, or what is it, the forest for the trees? Maybe I have the throng. So anyways, but I think, and this will come back when we talk about, like, what do Tradify people understand about crypto? Like, look, after that experience, I was like, well, you know, we can't trade Bitcoin, right? And frankly, I didn't think about it again until later in 2017.

I was hired away to another fund to cover U.S. policy, so Fed policy and D.C. policy for another fund and um you know one of the things i realized was that a lot of the hedge fund billionaire founders were and this was coming out some of this in the press but a lot of them were trading bitcoin and ethin their p as and i was hearing this from friends that i know it at a lot of funds when we say pas we mean personal account personal account yeah okay yeah i was hearing this from a lot of my friends who work at these funds. And I was, you know, so, but, but none of these hedge fund macro billionaires and, and guys running these funds were doing it in the fund because they didn't want to take the risk of alarming or startling existing investors in their fund or what we call the,

you don't want to take LP risk on the 2%, basically, right? So they, you know, so I saw an opportunity there. So I saw an opportunity to basically a greenfield opportunity to start a macro fund with the ability to trade digital assets in the docs. But I'll admit, I wasn't completely convinced just because people are speculating on something doesn't mean it's a, you know, it belongs in a macro fund. You know, people speculate on Ferraris or art doesn't mean it belongs in a macro fund. And even with the experience I'd had, seeing how it was being used in the context of capital flight. out of China, that still wasn't enough. What really moved the needle for me was that a friend of mine, I think I can use his name because his work is published and he still updates it.

Benson Durham, who was then a, I think he was a deputy director at the IMF under Christine Lagarde. He had previously been an associate director of monetary affairs at the board, the Federal Reserve Board. And he had been asked by Christine at the time to look into whether or not, this is 20 late, probably mid-2017, whether or not what was going on in crypto was a reach for yield, was this just pure speculation, or was this the emergence, was it possible that we were seeing the emergence of a new asset class? And for Fed economists and, you know, people of this ilk, like, that is a very high bar. And there's a lot of statistical tests that I would never even begin to explain, much less do I barely understand them.

But the short answer was that there was surprising result was yes. And the reason I knew about this, because Benson knew that I had some interest and he was reaching out and talking to me and asked me to kind of review a draft. And I was taken aback because one of the findings was that it was bumping out on what's called the efficient frontier. And that basically means that, and this, a lot of this, he ended up publishing this research in the portfolio of journal portfolio management in 2019. But it basically means, and now BlackRock is like running away with this whole theme.

But it basically means that almost every portfolio should have a little bit. Because on a volatility adjusted basis, because it is uncorrelated or has no correlation to any other asset, it provides diversification benefits. And the benefits are massive. We're not talking about, you know, one or two percent portfolio diversification. We're talking about, you know, huge, huge benefits to what's called, again, the efficient frontier. And so I was like, that was really convinced me to that I had to do this. Unfortunately, we were just way too early.

Mike Novigratz, you know, a great macro. PM who had very publicly gotten into crypto. I was introduced to someone who was working out of his family office. Anyways, Mike gave us some sort of capital and space to start up the fund. But, you know, I think that, you know, I, you know, everything takes longer than you think that it will, even when you would take account for how long it's going to take. you know, Hofstadter's law. And it was definitely the case, not only was the whole realization of crypto as an asset class, not yet mature, the tooling and the infrastructure, and just like

the accountants and the, you know, the auditors, like none of that stuff. It was very difficult. But it was still an amazing experience. I, you know, just to kind of put you back in this period of time, you know, I remember my then future partner said to me, you know, Sam, just FY1, you I, Mike is not convinced that, you know, Bitcoin belongs in a macro portfolio. If you remember, like, it was really confined to venture funds at the time. And Paradigm had just raised a lot of money, I think, at this time. And I remember the first question Mike said to me was, why is Bitcoin a macro asset? And I said, it's a macro asset by birth.

It's written in the Genesis block, Chancellor on Brink of Second bailout, Jan, 2008. He's like, that's a great answer. I'm going to use that. And, you know, but, you know, it was a very long and difficult bear market. But it was great. You know, I mentioned earlier that I was one of the first people to use to GoMe, which ultimately was acquired by Coinbase and became integral to Coinbase Prime, you know, paradigm trading, which is now where 70 plus percent of all options,

Bitcoin and Eth options, even CME is now block trades are done through paradigm. I was one of the first people to do that. Anon is an amazing builder. We were probably 10% of the Bitcoin options open interest at this period of time. You know, Bitcoin was at like 3,300. And we put it, you know, we were the first people, which this is crazy in retrospect. People watching this will laugh that know this derivative space. We were the first people.

It even got written up by Ledger X. LedgerX, by the way, was the only, like, legitimate place to, that was CFTC registered. and to really trade Bitcoin options. It was difficult, though, because it was fully collateralized and liquidity was low. But it took, and there was only one market maker. It took us, I think, two or three weeks just to get like a few million notional of options premium amount in Bitcoin, which is not a lot. But at that time, that was like 10% of the options open interest, which is crazy

for something that's now 20 billion market. So it was an amazing. experience. I got to, you know, see a lot of the early infrastructure that now is being used by institutional investors that are papered up to trade spot and help facilitate the growth of that market. We were very early on Deribet. So to finish out your story, Sam, what got you kind of Heathpilled as well? Because that's how you've been introduced to me as well. I think like maybe like three years ago. It was just like, hey, meet Sam, the guy who is popular. popularizing the Ethereum narrative to a bunch of unbelievers in Tradfai.

And so you told the story of basically crypto and Bitcoin and how you kind of like dialed in there in Bitcoin. But correct me if I'm wrong, I don't think it's stopped there. And now I know you as more sort of a, you know, Tradfey's Ethereum evangelist. So tell me how did that happen. The unofficial self-proclaimed Heath Max in Wall Street. Yeah. Is that what they say?

So, you know, you mentioned earlier, we traded the first option on ETH. We did that with a via an ISDA, an OTC trade. I remember ETH was at $100. I'm sorry, 160. And we bought, no, I'm sorry, it was at 120, and we bought 160, six-month calls. I remember there was no Volker for ETH at that time, because Derry, of it had not yet launched. And so I remember when we were negotiating and we were like,

what are we going to use for this for the volkerb? I was like, we'll just take Bitcoin and add five points to it. That was like that was the logic that went in to figure out what the forward volatility curve of Ethereum should look like. You know, I was, I never really expected to get as deep into the, into the Ethereum ecosystem as I did. I was pretty happy playing this more tradfai, you know, being an allocator and trader in the space.

What kind of happened? So, in a flash forward a little bit, I was hired to come in and I was pretty much the person who had really built to what is a sufficiently credible institutional setup for trading digital assets. At that time, I was asked to come in and build out crypto for more capital to a sufficient standard. And during the course of 2021, in particular, and I think it reached kind of a crescendo for me. It's actually in December, 2021, I think it was when J.P. Morgan had its first and only digital asset conference. You know, I've, and this goes a little bit into one of the

bullets I put that I wanted us to talk about, like, what does Tramify know about crypto? the knowledge level is very low in a lot of ways. You know, I joke that TradFi is worse than retail. And the reason why, when it comes to FOMO, and the reason why is because TradFi often is not allowed to use Metamask or is very highly concerned about getting caught by combines. It's a little bit vague in my prior job, whether or not even I was allowed personally to use it

or did that $3, you know, ETH transaction count as something I need to report, you know? Like, that, you know, people, this is not sufficiently important enough for people that they, like, even want to play with it, right? In a lot of cases, that ambiguity. And it's not until you really get into these deep bull cycles that people are like trying out metamask. You see those usage spikes. So knowledge is unfortunately low because Trotify doesn't actually know what private keys are. You know, they just haven't interacted with it the same way retail has. So I've actually said, I think, at a permissionless conference a few years ago with you.

you guys. And I actually think retail has a little bit of an advantage over Tradfai or the billionaires because they actually engage with the technology. And that's very helpful. So I became very concerned that I was seeing a lot of, at that time, what we called Heath Killers coming through, making the rounds in New York, telling institutional investors that Ethereum was going to die, that, you know, that so-and-so was going to be. be the new, it was going to replace Ethereum. And we, you know, we still see some of these coming coming around, but not to the degree it reached then. And I, I don't think Anatoly was as guilty of this. And again, I'm referencing conversations that and pitches that I saw happening in

Tradfai type environment and conferences. Emon van Goon definitely went around saying this. Yeah. That's the founder of Al-Dun for people who don't know. Yeah. Anatoly not as much. Kyle Samani did. But that was not actually a new thing for Kyle. Kyle told me the day we bought those first call options on Ethereum, it was at 120. I remember we were, I met Anatoly during the seed round because Kyle had introduced us.

And I remember I wasn't going to tell the story, but I remember it was like 9 o'clock. and I was talking to Kyle on the phone. And we had just, again, ETH was at 120. We bought six month forward, 160 strike calls. And I was like, Kyle, what do you think of Eth here? He's like, it's going to zero. Focus.

It's focused on Solana. I was like, it reminds me of a younger version of myself, this kind of, you know, overconfident. You know, when you're younger, you think you know a lot. You're very overconfident. You know, as you get older, get beat up in the market enough, you become a little bit more humble. But, yeah, flash forward to 21.

I think he in particular was out there telling, I remember seeing on Twitter this comment that he said he was getting called by all the billionaires. You know what? I think that was probably true. I think they probably were. And he was telling them like, Solana's going to kill Ethereum, basically. And so that whole thing was very frustrating to me. And the reason why is because, guess what, Ethereum does not have a market.

department the way that Solana does. It does not have a marketing department the way Eva Labs or whatever it is does that plasters the New York City subways with avalanche advertisements. And then we had Luna. And this thing, I knew within 15 minutes of looking at it on the website, this thing was a Ponzi scheme. There were little toy versions of this on Eos and Ethereum back in the prior bear market. Everybody knew there were jokes. And here, this thing's actually become like a real, this thing. I was genuinely alarmed. And so I reached out to Justin Drake and I said, look, I understand that Ethereum and the EF, etc., doesn't, you know, have any interest in or doesn't have like any type of interaction. I mean, one of the problems was

like, J.P. Morgan didn't even know how to get in touch with the EF. The, the, team that is building their blockchain solution could not get into terms of anybody at the EF. And I would assume like TradFi deals in like handshakes and meetings and conversations. And so if they can't have that form factor, they probably just have to sit on their hands. Well, I mean, they're certainly not supposed to use messengers as the SEC has like enacted these very large fines on messaging apps. I don't know if you've seen these like billions of dollars on the banks.

and now they've been looking at some of the funds. That's why I was not allowed to use message or apps until I left my prayer employment. So what I would say is, you know, it's just that Ethereum doesn't have a marketing department. There is no single person you would reach out to. Like I remember I said to Tyrone Loban, you know, who like runs on Exitimmon. I was like, oh my God, Ethereum is so decentralized. This is like this.

Call me to court in the future and I get like testified as to hell decentralized. Ethereum is that literally the group running a getth client at J.P. Morgan cannot get in touch with anyone at the EF. And so I facilitated an introduction and the first call that took place between JPMorgan and the EF in 2021, which is just a, it's pretty remarkable. But it's also a beautiful story. And I think it really speaks to the robustness. And I think it's getting back in a long way. I apologize to like why I ended up getting pulled into this, right? You realize, that these are assets, this is a space where you've got to do

a little bit of your part when the opportunity or when you're kind of called upon to do that. I had to do it in a very careful way in my prior job. That included, for example, trying to do reference calls for Coinbase to keep people

from going on to FTX because anybody who was close enough to these markets looking at what shenanigans Alameda was doing, I was terrified, frankly, that it was going to drag down my career and the respect for this space, or not that we had a lot begin with, but, and so I was trying to do my little, my part, right, both to say, you know, on the, on the sex side, prevent a lot of Wall Street firms from onboarding at FTX. Unfortunately, I was not sufficiently successful and that really set us back, but that was me trying to really protect my career

in a lot of ways. I didn't want us to go through this. But it was also that there was an opportunity for me to play a little bit of a role in the Ethereum ecosystem that wasn't being filled. And part of this again was that because nobody, you know, if even even Van Gogh or Anatoly and to a much of lesser extent, Cala Samani comes in and tells Tradfai people something that's slightly sophisticated sounding, they don't know any better than just to like nod along and be like, yeah, that makes sense. You know, Anatoly in particular, has this debate style where he says something kind of complicated sounding, and then he laughs about it as though you should have, this is obvious.

Everybody knows this. And it kind of almost makes you feel, if you're not Justin Drake or Danker advice, you're not sufficiently competent or confident in your view to really refute that. And I'm not saying that he always does that in a malicious or negative way. I think it is just part of the way he communicates. But there was a lot of, there was just, you know, again, Terraluna was just a, I felt a need to try to stop a Ponzi scheme from promulgating throughout all of crypto, all of, sorry, traditional finance.

And that meant that we needed to have people that could speak on behalf of what I feel is going to be the global settlement layer for the global financial system, Ethereum. And, you know, people like Justin Drake or Dan Kred or Ansgard, these like really brilliant, really smart, earnest, great communicators that are also researchers in the Ethereum space and try to get them or at least be no enough to then communicate. it back to people in TreadFar. Well, I feel a lot of residents with that story, actually. One of the reasons why Ryan and I started bank lists is because there was just a void about the story about Ethereum. Like, no one was really telling it. And as a result of that void, that if the Ethereum community wouldn't really fill,

just didn't really have that sort of desire. Like you said, there's no marketing department at the Ethereum Foundation. Because the Ethereum community didn't fill that void, like the big of the Bitcoiners did. And like the Alt Layer 1s did just because it was free real estate. And so that was like one of the main motivations of starting bankless is like, well, let's make a media organization that actually can effectively tell the fair story of Ethereum, at least how we see it. And you did it. I consider myself a, you know, a bankless acolyte, a follower. I appreciate that. And also doing our same role inside of the world of Wall Street, right, where there is a void that many of the VCs with. with East Killer Investments will happily fill the void of like the lack of understanding around Heath with her own with her own narrative.

I'm wondering, and maybe you can kind of give us the download on on what is the current understanding of ether and Ethereum in Tradfai. Like what is the average Tradfai member, the Wall Street goer, understand about Ether and Ethereum? Like how should we think about this? You know, I once asked someone, you know, a Tradify person, what is ETH? What is Ethereum? And the answer was, Ethereum is a cryptocurrency like Bitcoin, but it has some utility.

And I was like, that's actually a very good answer, right? You know, it's very concise. It's like a very high level and it is descriptive, but it under the surface of that simple statement is like all the juicy details, right? And so that is probably a good line to just to think about when you're like, what does try I know it's a cryptocurrency like Bitcoin, which is digital gold, and it has some utility. But they don't really know what that means. And, you know, one of the other topics, this person will be okay with me telling this story. One of the other topics that we're going to get into later is like, you know, have there been like Tradfai or like, in particular like,

Fed people that have been pulled in, you know, been eathilled. And, you know, besides my friend Benson who had written this paper, one of the first papers on the portfolio benefits of having crypto assets in a portfolio, there was a guy who worked for him at the time. And we met like five years ago. And I haven't seen him since, but I was in Dubai representing scroll. And I was actually at Arthur Hayses party. And this guy comes up to me behind me, he goes, you're Sam Jernigan. And you know my friend Vincent Durham who I used to work for the Fed. And I was like, oh, my God, who is this? You know, I turned around and I couldn't remember his name at first.

He was like, Dion. I was like, oh, my God, Dion, how are you? He's like, good. I was like, what are you doing here? You know, this guy used to be, used to work for, you know, an asset pricing theorist at the Federal Reserve. I was like, Dionne. I was like, what are you doing here?

Like on this, you know, this like beach party for Arthur Hayes in Dubai. And he goes, oh, I, I come into crypto now. I'm a defy founder. And I was like, what did you start? And he was like, term lending. I was like, oh, my God, it's brilliant. One of the missing pieces in defy is actually fixed rate lending. So Dion and his partner have started a term dot finance.

And he goes, you know, what have you been up to, blah, blah. And I told him, he asked me, he goes, what do you think tradified people understand about crypto? And I used this line. And I remember Dion looked at me. He goes, so you're saying I should still be buying. ETH. I was like basically, you know, like the most bullish thing about ETH right now is the fact that the understanding of TradFi is that it's this crypto as like Bitcoin. Because I think when

they fully understand it, it's going to blow their brains out. You know, I had a breakfast last week with a financial institution that has some periphery exposure to crypto, let's say. And I had to explain this. So we walked through what is digital gold. Bitcoin is digital gold. And, you know, they had knew the Michael Saylor routine well. And then I was like, but you know, for example, tether, which you probably heard of, USDT. He was like, of course, I was like, you know, none of that is on Bitcoin. He's like, what do you mean? I was like, there's no tether on Bitcoin. And he did not know this. I was like, I was like, you know, I was like, all of it is on Ethereum. and Tron, which we don't want to talk about, is on Ethereum and Tron, and, you know, Tether the company

pays fees to the Ethereum network. They do not pay any fees to Bitcoin. And this was, he, I think he said something in effect of, tell me more, explain this. He did not know this. So that, the understanding is, is pretty low even for, you know, I would say people that on intradfi, that are reasonably exposed to this to already to the space. And so that's a very, that's very bullish, but it also should, again, hashtag early. It's, it's early. Okay. So Tradfi has very limited understanding of Ethereum.

They sort of like now have barely wrapped their minds around Bitcoin, but by and large, they don't understand Ethereum. Sam, you said something interesting there. You said once they do understand it, minds will be blown. Like, so why? And maybe this gets back to the conversation we were having earlier around sort of the risk-free rate in Ethereum and this idea of ETH producing positive yield was a term you said. And we said we'd get back to this in the podcast. But does this have something to do with why you think Tradfai's mind will be blown when they understand what this asset actually is?

Give us the case here. Well, you know, this is where this is where like you risk, you run a lot of risk doing an hour-long podcast for this because I tried to give you one very simple vertical, one simple utility of Ethereum, say Swift messaging of financial money assets and this simultaneous settlement of those funds. That alone is going to change the world. you can think about stable coins as having pressed a button on an unstoppable progression at this point. But that alone is a huge deal. But, you know, and I think, you know, the natural kind of evolution of that is that if you have this decentralized permissionless asset, ETH, that is effectively accruing value and becoming, whether you want to call it outright deflationary, or ultrasound or whatever kind of description you want to put around it, now it becomes collateral because this is a cash flow bearing asset.

The cash flows from that asset are returned right now via two primary issues, primary means. The first is cash flow is bought and burned like Apple buys back its stock to return the earnings to shareholders here. The eth is burned to return the cash flows to eath holders. and then some of it is accrued to stakers. But the system as a whole is over a meaningful period of time. Fees are very low right now.

That's partly because we're still in bare market, basically. I mean, I think traditionally a bull market is when you're making new highs. You know, we're not quite there yet in Ethereum. Part of that's because we're in a bare market. And, you know, we haven't started that virtuous process of bringing in a lot of new people playing with Metamask or Argent, etc. Part of it is because the recent upgrade, Proto-Dank charting was a scalability enhancement, right?

So this was not a minor upgrade. This is one where we actually scaled Ethereum in a very meaningful way. We scaled it so much that fees are cheap, and that's what we wanted. And that is likely to be a temporary phenomenon, right? You know, you've had Justin on here to talk about this, But it's, you know, if Anatolese, like, you know, they used to be that the Salon of Bearcase on Ethereum was that fees are too high. But, you know, guess what?

We did a lot of really advanced cryptographic work. I mean, you know, the work Dankrad does. I think he's probably the smartest person all of crypto. You know, Dankard's team, these are, you know, cryptography, ZK and very advanced cryptographic schemes are scaling Ethereum in a way that I don't even think crypto understands. Certainly, Tradfide does not. One of the things, you know, this line that Vatollic has that I think is hugely underappreciated is that, you know, ZK is and maybe even eventually fully homomorphic encryption,

but ZK is Ethereum's transformer moment, right? You know, this is hugely underappreciated. This is largely not just a crypto manifestation driven by Ethereum, but even in academia. You know, Ethereum community has driven the academic community within cryptography around ZK and now with H.E. And, you know, so fees are the burn right now temporarily is low because we have proto-dank sharding significantly, you know, via the addition of blobs has made it cheaper to transact on Ethereum. It's made it cheaper for L2s to consume Ethereum DA. And that's great. But over time, the cheaper fees will onboard a lot more users and eventually they'll go back up.

And that's why we will progressively increase the number of blobs. And we'll also eventually have a full dang shorting, which will, you know, as you guys know, well, basically allow infinite scaling for pennies. And the number of transactions will be much higher. So right now, temporarily, the burn looks a little bit lower. But again, that's for good reasons. it's because we have actually scaled Ethereum to make, to allow more onboarding cheaper or via cheaper fees. But long term, you know, again, with the right thoughtful changes to the issuance curve or other appropriate adjustments such that we can keep a outright deflationary asset, it acts like collateral.

And now you have a permissionless decentralized collateral that exists in the world that has never existed before. And I think one of the most underappreciated bull cases that Justin Drake has laid out actually a few years ago at DevCon in Bogota, I guess maybe a year and a half or so ago, where he explained how, you know, what would be the, what would be if you had a ETH only governance free, eith collateralized stable coin. what would the price of ETH need to be in order to provide for this utility? We need ETH to be ultrasound collateral to use the meme, but basically deflationary collateral such that it cannot go to zero. And that is really crucial because then you can very safely, again, with the addition of removing as much governance as possible and keeping it capital efficient,

which we have a plan for, but we're not there yet, you know, ETH can be collateral, not just for stable coins, which there's a trillions of demand for that, but for other types of assets as well. You know, I remember it was like five or six years ago. I think it was Joe Lubin who like had this idea. You said, hey, like you could make an, you could have a smart contract in Ethereum that was an agreement between, say, the U.S. and Iran that is collateralized by ETH, this permissionless collateral where they both have to put up, and if one of them violates it, you know,

neither of them can control Ethereum or ETH. And so this would be a slashable type of penalty, right? So you can you can enforce behavior, good actions. You can basically enforce contracts using this, this asset. And that's, I don't think people have even like really wrapped their head around the design space beyond just again, crypto collateralized stable coins that we can have. But we're talking about trillions of additional value for this, of collateral value on top of the cash flow value. So you have this, you have the cash flows that are accruing to this swift plus chips or Fedwire settlement system, right?

This moving of financial assets and the fees that accrue. And then that then allows you to have this permissionless collateral that can be, that has an additional value. So I think this is one of the reasons that's very difficult to tell the story. story of of of of of eith is that it is it's well it's infinitely kind of infinite possibilities but i would say like that is the at a high level you have the cash flow story and then you have the potential value of this permissionless collateral uh and the smallest what i i used to jokingly say this is the sam or the smallest addressable market for eith is five to ten percent of chinese deposits so call it $2 to $4 trillion.

That is the smallest addressable market for eth the asset. Do you think the addressable market for ether the asset is bigger than the addressable market for Bitcoin? This is a test of your eth-maxiness, Sam. So do you believe in the flippinging? Do you think that's going to happen? You think these are equivalent assets or is just like one destined to always be larger than the other?

Or is Ethereum going to flip in Bitcoin? Does that question even matter in your world? The answer is yes. The market opportunity is definitely larger. I think that the Bitcoin community is probably figuring that out. That's why all of a sudden you're seeing efforts like O.P. Cat and some of these turning on up codes that previously, you know, the religion of Bitcoin said was unacceptable. Yes. unquestionably so.

Does that mean that they'll ever evolve or evolve on time or evolve sufficiently or enable sufficient functionality to challenge it? Probably not even in like the 100% scenario of a Bitcoin maxi or let's say like a

let's say a you had a great guess on recently who kind of walked through some of this. I don't remember his name. Is Eric Ball from Bitcoin? On the Bitcoin side I'm talking about. I'm not sure. I remember he was from North Carolina actually

because I grew up in North Carolina. What are we talking about? So many guests, Sam. But anyways, you know, like, I think people who want to do more with Bitcoin and have been inspired by what Ethereum has done and want to enable some of that capability, even in their wildest dreams,

I don't think they'll ever really get there, I think. But, and look, I mean, I think, you know, even if you were able to get all that, the Bitcoin community is, may not, you know, at the end of the day, these are social systems. I think it's underappreciated the degree to which at the end of the day, these are social systems. And, you know, one of the things that caused me to want to put my reputation, my career behind Ethereum is, after spending a few years now, getting to know and interacting regularly with the Ethereum community, the breadth of

but also the individuals that, like say, like on the research side, this is probably the highest functioning and executing group of people anywhere in the world. And, you know, I had a better, I said that better probably a year or so ago to someone, and I wish I could remember the exact wording, but, you know, it really is. I mean, I'm close enough to understand. just how both functioning, but also like the values and the way that people interact with each other. You know, this is one of the reasons you don't hear on Twitter. You know, maybe with a couple of exceptions, a lot of screaming about ETH or degrading Bitcoin,

etc. The same way the Bitcoin Maxis do, it's just not part of the culture. So I was both impressed with the people, the culture, the way that people communicate with each other, the focus on research and not noise. and that, I guess I was ETHBild. And, you know, now I'm trying to tell that story to a broader Tradfai audience. New projects are coming online to the Mantle Layer 2 every single week. Why is this happening?

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settlement, right? So like there's that part of the story. and then as this collateral asset that is like, you know, supra-national and exists outside of the nation-state control. That's the dual story. Now we have a new narrative that's sort of entering. This is maybe on the shorter-term time horizon, which is the Ethereum ATF. And going to this episode, the reason, like Dave and I kind of prefaced it the way we have

is because now it's time to explain some of these things for Tradfai. And I'm just wondering in your mind, as you see, the Ethereum ETF, finally being approved. What's the significance of this for TradFi? Does it de-risk things? Do you have any assessment of what the impact might be for ether the asset, like what the flows might look like? Just in the broadest of terms, how big of a deal is this for TradFi?

To begin with people watching, people that spend too much time on Twitter or just a normal person to spend some on Twitter, don't worry so much about what happens in the very short term. You know, I remember when Bitcoin ETFs launched, people were like, oh, it was priced in, fell down for like, you know, went sideways for a month, and then it, you know, kind of ran off again and blah, blah. You know, don't be so short-term focused.

I have no expectations as to what the initial adoption of Bitcoin ETFs will, I'm sorry, or Ethereum ETFs will look like. And in the short term, it just doesn't matter, right? But when that does happen, again, partly, again, this, if you want to be able to accrue a little bit more, ETH over time, like myself included, like, I hope it actually goes a little bit slower, to be honest. I hope that I get a little bit more time to buy ETH below all the time eyes. So I would not pay a whole lot of attention what happens in the very short term.

Again, but over time, it's. It's kind of inevitable that more people will get exposure to this asset class and a broader audience. And they'll be able to do it more comfortably. Even those firms that are, quote, papered up in like the Wall Street firms, the hedge funds and family offices that are papered now to trade spot at Coinbase. They're never going to do it in the same size as if they can hold it in an ETF form. So I think that's one of the reasons the ETF flows on the Bitcoin side have exceeded people's expectations. It doesn't surprise me. It's just a form factor that an organization, a Wall Street organization, can get more comfortable with.

And when I mean comfortable, I mean size, right? Like hundreds of millions, billions of dollars. And so I think what will happen with ETH, you know, it seems likely just based on my understanding of how they're arriving at this or my understanding until now as to as to why how the process has worked. You know, they've been able to, the ETF issuists have been able to show a tight correlation between Spot and Bitcoin CME futures and ETH CME futures. And there are no CME futures on any of their assets. So these two are likely to be kind of quasi-entrined, unfortunately, but, you know, kind of quasi-enthrined

because of that narrow path by which we're going to have spot ETFs for Bitcoin and ETH. And over time, when flows do come into ETH, say they, let's say that they're organic, new flows into ETH, there simply will not be any ETH for sale. You know, the, the dollar values, even with fees very low. on ETH. And of course, once ETH starts making new highs, you know, transaction, transactions are going to go up, fees are going to go up, and that means you're back into a deflationary mode. So even with the very modest amount trickle of new ETH that is flowing onto the market with activity low post-prudadank charting, it's nowhere near, you know, one average day of Bitcoin ETF inflows

is 10x, the net issuance of ETH, whereas that barely often. sets the issuance of Bitcoin on a daily basis. So I think the price reaction could be actually pretty absurd. What about the clearing of the regulatory? And by the way, once it starts making new highs, then you have new users and you're entering that cycle where now it's like supplies contracting as more money is flowing in via these ETFs. I think it could be quite dramatic, to be honest.

I don't, again, I don't know if it'll take two days to happen. I don't know if it'll take two years, and it doesn't really matter, like hope that it takes longer, to be honest, for me personally. What about that? Hold on, but let me just, let me just, there's a second derivative here is that I don't care if you are, you know, a $100 retail investor or a $100 billion, you know, Bitcoin, a billionaire investor. Everyone chases. And so you've got, what, $25, $30 billion in Bitcoin ETFs. when eth out starts to outperform, this is going to your question about the flippinging, that money that's sitting in those Bitcoin ETFs, again, this is just simple economics.

This is relative, so in FX, you value currencies on relative inflation, right? And the relative inflation of ETH is lower. So, you know, when, when, when, when ETH starts outperforming Bitcoin, people will chase. And so money will not, we're not just talking about new money into ETH. We're talking about money that is the 20 or 30 billion that is sitting in Bitcoin ETFs is now going to start chasing Ethereum ETFs. And so you already have this large pocket. In the beginning, they'll call it a diversification of their crypto asset investment.

So it's like maybe it's 2% of some pension fund, right, that they've got in the BlackRock Bitcoin ETF. And so they'll say, oh, well, the market waiting of, you know, when ETH starts outperforming, After a while, everybody gets FOMO, remember? You know, they'll start saying, oh, well, we shouldn't have all Bitcoin. We should have some of the ETH ETH ETF as well. And so they'll do like a market weighting. You know, we'll start with 10%.

And then, well, you know, we should have two to one, right? Because Bitcoin is twice the market cap, right? So then they'll add more ETH to get a market weighting of Bitcoin to ETH. But it's just a, it's just human nature. They just phomo. I do think the whole happening. I, again, I don't know the timing. It is very difficult.

in markets. I've got a lot of gray hair at this point. One of the things I've learned in markets is that it's hard enough to get the direction and the magnitude correct. Don't try to also get time correct. Leave that one alone, expected to take longer, and focus on the direction in the magnitude. How about this breaking of the kind of the regulatory haze? I don't know if that's made a big difference for Trad 5, right? But it's like Ethereum because of the lack of action of the SAC or, you know, the sort of the banning about of people like, you know, Chair Gensler, it's been unclear what its status was, was, is it Ethereum a security? Is the SEC going to try to claim this? Is it a commodity? And now with the SEC's approval of the Ethereum ETF,

it's just quite clearly a commodity. Has, has, was there, is there a group in TradFi that was just like waiting for this to happen? Like, there was some regulatory haze over Ethereum and they had not purchased ether, but now they will because it is securely a commodity? Or does that not matter very much? I'm not sure. I'm not sure I have a view on that. One thing I would say that I know from, you know, in 22, I think that there were some large, well-known hedge funds that were long some eth. And I remember I got a message from one of the large bank sales coverage. And I remember she basically was like, hey, like,

somebody's telling me it's going to be declared security. This was like two years ago. And I was like, that's not going to happen. It actually, I wanted to give you guys credit. You guys, you know, this is the reason why you need to watch bankless every single one is because there are alpha drops in bankless episodes that people don't realize. The biggest alpha drop that nobody realizes was in a bankless episode. where Justin Drake, it was right before the merge,

towards the end of a conversation, he, you remember this, the list of reasons to, like, be bullish on ETH or, like, ETH won't be a security or something like that.

And one of them was a statute of limitations. Yeah. And I went and looked into this because I had never heard anything about this. I had, this was, so I went and spoke to several big law firm lawyers, including a former head of long, time head of enforcement at the SEC, she almost would not engage with me on the conversation

because she said, East not a security. And I was like, but if it was, she's like, but it's not. And I'm like, please help me here. I was like, if it was, would this, would it the, the, and and here's specifically what I don't think he gave this detail, but here's what I figured, I found out. Basically, there was a change to the National Defense Authorization Act of 2021. somebody if you want to by the way we can talk about politics and i had a brief career on capital hill in the prior life but you know if you want to get something into a bill you want to get in what's called the omnibus which is a spending bill and you want to get in the defense authorization bill because everybody's got to vote to pay the troops right you got to vote to

you know there's all these bases you got to raise salaries and that's that's done the authorization bill at any rate so somebody slid in a change to the statute of limitations into the National Defense Authorization Act of 2021 that changed the statute of limitations from 10 years to five years. And so he was correct that there was, and I, again, did some due diligence to double-check this. I was pretty confident that ETH was not going to be a security.

And having done some due diligence on that amongst other things, and I said as much. And so the way I would answer David's question is to say that I don't think recently people have like not owned it because of or rather they've owned Bitcoin and not ETH. I think there's some of that, right? Like it was just, you know, nobody wants to take headline risks. Like what if it is a security?

That's a small segment of the market. But what I can say was certain is that there were people, say back in 21, 22 that weren't just worried about the Fed racing rates and selling or FTCS blowing up or whatever. there was also in Wall Street this concern even back then that, I guess, 22, that ETH was going to be deemed to security. So I think that there were people that otherwise probably would have been around long for the ride or maybe on the ride on and, you know, on again, off again. And they kind of got off due to that concern back then. But I think it had, people just don't own Eith right now really on Wall Street. still pretty small relative to Bitcoin.

People are very crowded in that concentration, that exposure. Sam, one general question, I think for a lot of crypto natives is like, is it a good thing to have Tradfai on our side? It's like it feels kind of good right now to hear Larry Fink talk about the Bitcoin ETF, and he's also talked about tokenization and with Black Rock getting an Ethereum ETF approved.

I know he's going to be on the media circuit talking about ether, the asset as well. and all of that is great. Like, great, right? We're excited about that in general. We're not really sure what they think about defy, though. We're not really sure what they think of the concept of a decentralization. If we create another privacy mixer on Ethereum,

like not really sure where they'll fall on some of these issues like decentralization. And like the broadest of questions is, do they consider crypto a threat? You know, could they use it the way they want, maybe for tokenization of real world assets, but then also be concerned and try to choke off the defy touch points because those are threatening to the large institutions. You know, you got a bank like Wells Fargo and has 200,000 employees. And then you have a, you know, a protocol like Uniswap with just like a few dozen got to like, you know, trillions in terms of a trading volume. Like we can do so much with far less people. And is that not threatening to the existing institutions and incumbents?

So where do you come down on this? I know you're kind of like representing Tradfai, but you're also straddled in the in the crypto world here. So you've got like a foot on both sides here. Do you think TradFi is going to be a friend of crypto or a foe of crypto or just like something in between? So I think it's good. I do not think we want those Ethereum ETF staking. You know, if there were a mass slashing event, that would cause. that would cause governance risk, right?

You could imagine if this is actually why we need to limit the percentage of the network that is staked or evolve staking in a way where a portion, that only a portion of it is slashable staking versus non-slashable. Fetalicus introduced proposals around this. So I do not think for the time being we want those ETF staking. They should be simply receiving that. the risk-free rate, which is the deflation you get from holding native eth, that is the real risk-free rate because you can be slashed. And it hasn't happened sufficiently up to now for

people to be worried about it. But it freaks me out to think about, you know, BlackRock having getting slashed. Like, I just don't, I don't want that day to happen. I, we need to keep the network such that, you know, the risk-free rate is the deflation that 50-bips or 1% you get from holding native Eath. That's really a side conversation. The next part I would say is like, I think that, look, defy is super cool, right? I mean, this is an evolution and they love it. I think this is why I think I was surprised that somehow Larry Fink was able to become

a crypto maxi within such a short period of time after I'm anxious. I never, I will admit, I did not see that happening that quick. I thought that that would take two or three times longer. It's still this one I got a good example of why I don't do timing, right? Like this, I did not expect this to happen. So I think that this is, remember I said like their minds are going to be blown when they figure this out? This is an example. Like Tradfai is going to be blown away when they figure this out.

And I think actually getting back to this unified ledger, you mentioned this, you know, the BIS introduced this piece around what they call the blueprint for the future. financial system and the unified ledger. And I remember when I read the first half of it, I texted a former Fed friend of mine. I was like, the BIS is trying to fork Ethereum because what they're trying to do is basically deploy a central ledger that all other banks and financial institutions and central banks would then settle to. And that is, you know, the power of a unified ledger that enables just infinite composability

and tokenization is. an insanely big concept and it's going to happen. And it's what I would almost say, it's a little bit like defy growing up. You know, I think you'll always have the uniswops and these and compounds and Aves of the world. But I think you're going to have, remember we talked about J.P. Morgan onyx, JP Morgan's onyx that uses basically a, the geth client that consensus maintains. Consensus bought that from JP Morgan in 2020. after J.P. Morgan had been maintaining it for a long time. But it is trivial. So right now, J.P. Morgan

basically tokenized dollars and tokenized treasuries and solved one of the last remaining problems from the global financial crisis. And this was what's called tri-party repo. This is where banks basically can't trust each other during the period of time it takes for these two assets to settle at different times. So dollars and treasury settle at different times. but if you tokenize them, they settle at the same time. And right now, they're basically just doing it with a small handful of counterparties. So it's basically just like Goldman and J.P. Morgan doing what's called repo, loaning each other money for a short period of time overnight,

barring dollars using Treasury as the collateral, which again have both been tokenized. But it is trivial to, and it's private and permissioned, right? So, but it is trivial to connect that to the Ethereumel one. And so now put yourself back in my Sam Dernigan in my prior seat in a very large global macro fund. And let's say we have, you know, let's say we have JP Morgan and, you know, tri-tified institutions on the by side, so hedge funds, etc. We want to trust JP Morgan. We need to trust JP Morgan.

But we would love to have the ability to also immediately move that asset with finality to settle, say, a margin. requirement at Deutsche Bank. And so if you were to connect, you know, the JPMorgan, um, onyx geth client and basically make it a validity proof or basically an L2, right, you connect it to Ethereum L1. And now if Deutsche Bank or Goldman Sachs has a, has a, uh, their own ZK rollup, maybe it's a, maybe it's a L2, maybe it's an L3 construction or a validityam in most, it most likely will be some sort of a validium construction so that all of the data is not posted to the L1, it'll be posted to a data availability committee, which is fine because, again, you know, we're talking about hedge funds that want to trust, that need to trust JPMorgan,

so we're okay that the data is housed there, the data availability is there, but we want the interconnectivity of being able to utilize this unified ledger, the Ethereum L1. So I actually think that most major banks and financial institutions will have their own execution environments that will allow their clients to, that are permissioned to interact and execute in these permissioned environments and then move those assets around via the L1. And this is not a new concept, by the way. Like this is, I would, I've had conversations where like, this is the holy grail. This is the goal.

And this is why, from my perspective, when I read the BAS paper, I was like, oh, my God, they're, they're forking Ethereum, basically. because this is really transformative. Like, you know, stable coins pushed a button that really can't be undone. You know, it was, you know, stable coins were a phenomenon of the prior bull market that did not go away. And in fact, they've grown and proliferated and they have really legitimized the use case for open public systems. But you could imagine this is going to reach a limit. like J.P. Morgan is not going to allow 100% of its balance sheet to be monopolized by this,

this corporate squid, you know, circle, right? So if circle were to grow to a certain size, JPMorgan, we're not going to just like, let you take over all of our deposits. They're going to tokenize their own. And so you have pushed a button. I, you know, I don't know if you're familiar with tokenized deposits. You know, we should have that conversation to follow up. But stable coins pushed a button that can't be really undone. This is basically the global proliferation of dollars that for the first time ever, really, anyone and everyone in the world, no matter where you are, is allowed to save, hold, and transact in dollars. And that's never existed before. China alone has more than 500 billion of capital flight a year.

This is this, we, this is not reported, obviously, but it shows up in what's called IMF error and omissions data. It's the difference between the current account and the capital account. And so we know that money flows out. Like the average Chinese citizen is only allowed to hold 50, is, is it was only allowed to buy $50,000 a year. And they have to hold it with their domestic bank. But if you have an Ethereum account, you can hold as much circle or tether as you want, right, in your, in your Ethereum wallet. it. So this is a really big deal, right? Like, I mean, we see it, this is why like adoption in parts of Asia and in South America has been very high for stable coins and the number of individuals

in these countries that have either held or used stable coins for transactions. But ultimately, that is going to result in banks saying, hey, we want to get on this too. And we, you know, we can't have this like corporate entity with 30 employees monopolizing our balance sheet. We're going to, we want to tokenize our deposits. And they will go on public blockchains because private, we know this from the era of the internet. You know, there used to be what's called the intranet and, you know, the internet before the internet of the World Wide Web, right? And now you still have, I'm sure maybe you guys have like a little bankless corporate, you know, intranet with your HR or whatever most companies do, J.B Morgan intranet. But you spend your time on the internet.

And I think it'll be very much the same way. you know, you, the, the analogy of you'll have businesses and banks that will have their small permissioned, private and permissioned execution environments, but they're going to be connected via the Ethereum L1, the unified global ledger. So you're painting a world here, Sam, where Tradfai doesn't try to choke off crypto and defy at all because it's not in their best interest to do so, right? The idea of tokenization on this unified global ledger is very appealing to them, gives them an opportunity to just like upgrade their infrastructure. It gives them new products to sell. It gives them

more things to financialize, which is I think bullish. I mean, as we end this conversation, one other topic we haven't uncovered yet is regulators and how they'll feel about all of this. Because it's a similar sort of, you know, cost benefit analysis when you get into kind of a regulator's head or like a big government's head. There are some things about crypto that are threatening to nation states, incumbent powers and regulators. And there's, there's all also clearly some benefits. They're almost in a similar position as the banks. And so from a regulatory perspective, I'm just curious your general take on what you think needs to happen. And you also, I think, wanted to talk about, we asked you part of this episode, hey, Sam, do you

have any, like, any alpha to share, any, like, you know, thoughts on various topics? And you brought up this term that I'm not super familiar with, but I want to ask you about it's called Chevron deference. And that sounds like a legal. mouthful, something that only a regulator could love. But maybe you can explain the regulatory landscape, what's needed, this concept of Chevron deference. What does that mean? Why is that important to this story? Sure. So the first one, again, I think regulation, I once said this with Matt from Van Eck on a panel. I was like, I never worry about regulation because it takes care of itself. And I certainly recommend 95% of the people watching this podcast. Don't worry about regulation.

Since I've been in the space, people have always worried about regulation. And if that kept you out of it, well, it has kept a lot of people out, unfortunately. So it doesn't mean that you don't need to call your congressman and calls work better than an email, by the way. Call when, you know, when important bills are coming up, et cetera, or when, I mean, you get the point. But don't let it keep you out of this space. That is noise. That is short-term noise. So I think regulation will evolve fine. And we, at least in the very near future, we are awaiting this, this basically 40 years ago, fascinating story, 40 years ago, there was a Supreme Court case involving the Chevron Corporation, EPA, and environmental.

defense agency organization. The short version is that the Supreme Court ruling at the time gave the power, basically said, hey, agencies are experts, we judges are not. So when a law is written ambiguously, we should give deference to the agency. And as it turns out, the head of the EPA at that time, and this was a win for the EPA, the head of the EPA was Neil Gorsuch's mother. Neil Gorsuch is a Supreme Court judge. His mother was head of the EPA at this time. Now, this, it basically, again, it basically says when there's a law that is ambiguous, say, is crypto a security or a commodity?

if it is ambiguous, the courts should defer to the agency expertise, basically. And this has been used to varying degrees by both Republicans and Democrats. Republicans used it actually to reduce a lot of protections in the Clean Air Act and the Clean Water Act under Bush W. People might remember that. but then that turned very hard the other way under Obama and also under Biden. And so, for example, the EPA in particular, you know, this has had huge implications. I mean, we haven't had immigration law in, God knows how many, I mean, the 50 years. So like everything that is done is interpreted by the agencies and courts give them different.

When you say agencies, you're talking about the regulators, right, the SEC, the CFTC. Yes, sorry, the regulators. Yeah, yeah, yeah. the executive agency regulators, okay? So, and the courts simply have to defer to them. Over the last, there have, the Supreme Court is currently very conservative, as most people know, and has taken a couple of strikes at this Chevron deference. Again, goes back to the original company Chevron Corporation 40 years ago,

has taken a couple strikes at it. Most recently was actually last year, they did what was called the major questions doctrine. The Coinbase actually took advantage of that decision and part of their defense against the SEC. The idea being that, hey, the court said, hey, if a topic is of national significance, it's a major question, the court should not defer to the agency, for example, right? But then the question is, like, what's a major question? Right. Well, in October of last year, not many people noticed it, I almost missed it. the Supreme Court agreed to hear a case of, I believe it's herring fishermen.

There's actually two cases. One's called Relentless. The other is called Loper Bright v. Ramondo. Ramondo is the head of commerce. And what's at issue here is basically that these fishermen, these fishermen, there was a law passed years ago that said that the National Marine Fisheries should require observers on. commercial fishing boats. The problem was that it cost money and the Congress did not say how to pay for it and that didn't provision money for it. And so the agency interpreted it to say that they could charge the fishing boats. It turns out that, and you see this in the case, that the cost of

having an observer on every single boat was going to cost as much as 20% of the profits for these fishermen. So they sued. And they lost straight up into the district circuit, the D.C. Circuit where Katangi Brown Jackson was sitting at the time. And they lost based on the National Marine Fishery Commerce Department claiming Chevron deference, that they had written these rules under Chevron deference. Of course, this was then appealed by Loper Bright Enterprises, the name of the fishing boat company. And the SEC took up, I'm sorry, the Supreme Court accepted the case. So they had three options. They could hear the case on its merit. They could hear the case on curtailing Chevron deference or completely removing Chevron deference, striking it down.

And they elected the latter two. And Katanji Brown Jackson is recused from that case, having previously heard it. As a result, the conservative, on the court, led by Neil Gorsuch, whose mother originally is responsible for this being in place, he's leading the charge to remove Chevron deference. And so they don't have just a normal majority, as they normally do. They have a super majority because one of the liberal justices is recused. And we must, the way that the Supreme Court term happens works is they accept cases and it runs from October to June. So any day now, that's June 4th and, recording this. It could be this coming Monday. It could be the Monday after, but anytime in the

next, I would say, two to three weeks, we are likely to get a decision in Loper Bright v. Ramondo on Chevron deference. And, you know, if you Google this, you're going to see articles that talk about the potential chaos that could ensue from this because the agency's ability under Chevron deference to interpret and write rules and regulations. It was so broad, it stretches across finance, it stretches across, like I said, immigration and the environment. But in the hearing, you should go and listen to the oral arguments for the Supreme Court. Crypto comes up a number of times in the oral arguments. And it's even used as an extreme example of how Chevron deference has effectively caused a problem

where this, quote, uniquely 21st century phenomena, digital currencies, is seeing overreach by a regulator that clearly doesn't have authority. So the implication there being that if and when, most likely, I would say 90 plus percent probability Chevron is at minimum significantly curtailed, if not completely removed, there will be no question, but that like the regulator assault on crypto is basically done. I mean, it's done. And that actually has significant implications about whether or not you actually want to see legislation. Like as it stands, I can tell you, you know, I personally do not want any legislation passed. You know, it's much better. Like, we're so early in crypto.

If you write something with a certain definition or understanding now, it may not be relevant six months from now, much less 30 years from now. And it is almost impossible to get something taken out of law once it is put in law. This is why you, you know, like you hear about like, these laws are like the 1800s. You know, they, like, very difficult to appeal the, to repeal them. You know, Arizona is having to do this now, uh, in, in the context of Roe v. of the Roe v. Wade and the abortion decision that's like, there's like 1800s law that they, they're having to quickly repeal. So you don't want, I mean, I think in my opinion, with the exception maybe

of a very narrow stable coin bill, I personally would just prefer to have no regulation. And that is especially true because almost any. day now, the agencies are going to be completely neutered. The SEC is going to be done. Their assault on crypto is basically going to be cut off of the legs. I think they know that. And I think it's one of the reasons why they have implicitly, you know, kind of pivoted. So this is cool. So just like maybe just to connect the dots and then, you know, I finish this out. So if Chevron deference is overturned, then it defangs one of the core problems that crypto has had with regulators, which is like regulatory overreach, these unelected officials.

Gary Genslers of the world that are basically like hating on crypto and doing everything they can to just like put up roadblocks that. And I guess if we were able to thread the needle, at least in the U.S., is we'd have regulators, aggressive regulators defangmed from their ability to do kind of like over a broad role-making. And then we'd also probably have a hung Congress, at least for a while, so that they only get through legislation on like, stable coin bills and they don't go full, you know, like prying into the business and trying to overregulate everything, which would draw us into a quagmired crypto. Very interesting. I had no idea that that case had anything to do with crypto. And so, yeah, it sounds like it's a big deal.

Well, Sam, this has been excellent. Thank you so much for guiding us through this. Do you have any just like parting thoughts on, you know, like David and I have this bet right now, which is on the next roll up. We're going to give our, like, pitch for Ethereum, like, to TradFi. And I just, like, I feel under-equipped to do this, although he's like, I'm definitely going to beat David, right? So, David's got no chance here, but he's shaking his head. But when we're talking to Tradfy, what is kind of the simplest pitch that we can give them? Is it what you said earlier, which is like, hey, this is a Bitcoin, but it has extra utility. Is that what Ethereum is? Yeah, how would you close this out?

You know, I say to myself that, to myself, that ETH is like Apple. And, you know, Jim Kramer has this line, you know, own it, don't trade it. And that's the way I think about it. You want to own Eith. It is a platform. It is a secular shift with, you know, unbelievable fundamentals underneath it. You want to own it. Don't trade it.

That's how I approach it personally. There you go. Own it, don't trade it. We will leave it there. Of course, got to let you know. None of this has been financial advice. It never is on bankless. Crypto is risky.

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.