Bankless - Ethereum and The Trillion Dollar Internet Bond | Chris Perkins

Episode Date: February 29, 2024

Chris Perkins has a fascinating background as a marine who was shot at in Iraq, was at Lehman bros when it all came crashing down, was a Citigroup trying to pick up the piece of the financial crisis where he first ran across Gary Gensler, and now he’s in crypto. We talk about all that, but that’s not even the main event. The Main Event is Ether the asset and a new reference rate he’s building on top of it. This sounds in the weeds but it’s actually actually key to unlocking trillions in new financial products. You might call this new rate the Libor for ETH.  ------ 🏹 USE PODCAST24 FOR 10% OFF https://bankless.cc/Citizen2024  ------ 🎧 Listen On Your Favorite Podcast Player:  https://bankless.cc/Podcast  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2    ⁠   🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo    🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku    🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle    💸 CRYPTO TAX CALCULATOR | USE CODE BANK30 https://bankless.cc/CTC  ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum 🦄 UNISWAP | Swap Smarter https://bankless.cc/uniswap  ------ TIMESTAMPS 00:00:00 Start 00:11:33 Intro to Chris 00:13:17 From Banks To Crypto 00:16:27 Hostility Towards Crypto 00:19:16 National Security 00:25:23 Takes on Regulation 00:31:12 TradFi Response To Crypto 00:33:58 ETH ETF 00:37:24 Libor for ETH? 00:42:43 Libor Recap 00:45:35 How Was Libor Corrupted? 00:53:21 ETH Reference Rate 01:04:13 Risk Free Rate 01:10:08 Real vs Nominal Returns 01:21:51 DeFi Applications 01:26:01 Market Size 01:33:17 Going Forward ------ RESOURCES CESR home page:  https://www.coindesk.com/indices/ether/cesr  CESR methodology document:  https://coinfund.io/cesr/  CESR Tearsheet: https://downloads.coindesk.com/cd3/CDI/CESR+Fact+Sheet.pdf  More Reading: https://www.coindesk.com/consensus-magazine/2023/09/26/how-staking-rates-can-drive-the-crypto-economy-forward/  https://www.coindesk.com/business/2023/09/27/five-reasons-why-the-world-needs-a-standardized-ethereum-staking-rate/  https://www.risk.net/derivatives/7957405/new-hope-for-crypto-derivatives-as-markets-urged-to-hail-cesr  ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠ 

I think the Tradify mind really understands Ethereum because like Bitcoin, it's like, okay, what makes Bitcoin special? All right. There's 21 million coins that there can't be any more than that. So like it's limited supply totally. Okay, I get it. It's store value. Then they go to like Ethereum and they're like, wait a second. You're telling me that there's yield on this thing and I can have smart contracts.

That's pretty cool. And so I do think that that ETH as an asset class is going to be super appealing as people take the time to really understand it a little bit. It's a matter of when, not if. Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is Ryan John Adams, and I'm here to help you become more bankless. Yep, just me today, solo episode, David's at a conference. The guest today is Chris Perkins, and my, my, this is definitely Frontier of Finance Material.

So Chris has a fascinating background, as I've come to learn. He was a Marine. He was shot at in Iraq. He was at Lehman Brothers, when all of that came crashing down. down in 2008. Then he was at Citigroup trying to pick up the pieces of the financial crisis. That's when he first ran across Gary Gensler. Now he's in crypto. All of this, as you might imagine, gives Chris Perkins a very unique perspective on crypto, on national defense, on traditional finance. So we talk about all of that in the episode. But that's not even the main event.

The main event is ether the asset and a new reference rate, an interesting, benchmark, if you will. He's building on top of it. So this probably sounds in the weeds to a lot of people, but it's actually key to unlocking trillions in new financial products and capital. You might call this the LIBOR for ETH. Truth be told, I didn't fully understand what LIBOR was or why it was so useful in traditional finance, but we get that education today. I want to give you some context on why this is important in the scope of bankless and crypto and crypto investing. So on bankless, we've described ether the asset as the internet bond. That's a narrative that we've used, a way of understanding an analogy, since probably 2020, before proof of stake on Ethereum even existed, before

ether even had yield, we called it the internet bond, because it's simply the best way of describing ether the asset in its future. Ether is money. Staked Ether is the Internet bond. So what do we mean by this? Ether is like the bond of a sovereign country. It's kind of like a T-bill. That's a comparison we've made in the past. When you stake dollars into a government bond, like a Treasury, like a T-bill, you get yield that's denominated in the dollar. And when you stake ether into a validator, you start staking your eth. You get yield denominated, not in dollars, but in ether. And where does this yield come from? from? Well, you know you've listened to previous bankless episodes. It comes from revenue produced by the Ethereum Protocol itself. In the world of nation states with sovereign bonds, you might call these revenues taxes because the revenue is proportional to the overall size of the economy. And that's true for Ethereum as well. The revenue produced by the Ethereum Protocol and given out as a yield to stakers, to validators, is proportional to the overall size of the Ethereum

economy. You have more goods, you have more services, more blocks-based demand on Ethereum, you get more transaction fees, you get more revenue, you get higher yield for those staking. So what is the next step to establishing Ethereum as an internet bond to making this narrative, to making this meme even more true than it is today? Well, according to our guests today, what we have to do is standardize on a global reference rate for ETH daily yield. So traditional finances has done this in the past using things. like LIBOR, which we'll discuss in the episode. So we need to create a LIBOR for Ethereum. A reference rate on the yield on a daily basis that can be used both on-chain and off-chain

has to be open, has to be public accessible. It can't be corrupted in the way that traditional finance reference rates were like LIBOR. And why is this all important? What's the summary here? Well, in Tradfai, interest benchmarks like this, like formerly LIBOR and other reference rates, underpin hundreds of trillions of capital. Chris mentioned in the episode, $500 trillion in derivatives markets, all underpinned by these types of reference rates. They also set the risk-free rate. They determine the cost of capital. So this is a metric for investors everywhere. And they are also part of the reason the dollar is the global reserve currency. They're the reason Jerome Powell is the high priest of global finance. And the world stops, all of Tradfi stops,

to listen to what he has to say. So here's how this connects. For Ethereum to become an internet bond worth trillions of dollars, it will need a reference rate, something similar to the reference rate Caesar that Chris talks about today. This is how ether the asset scales and becomes central to the functioning of the global economy, which, of course, you know, we believe is its destiny. So hang on, fascinating episode ahead, essential learning for the bankless journey. Let's get right to our episode with Chris Perkins. But before we do, we want to thank the sponsors that made this possible, including our number one recommended exchange, the place to convert your fiat for ether. That is Cracken. Go create an account. If you want a crypto trading experience backed by world-class security

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Click the link in the show notes to sign up for the extension waitlist and download the mobile app. Start swapping smarter with uniswap. Are you launching a token? Is it already live? How are you managing the legal and tax obligations for providing token grants to your team? It's no secret that token management gets complicated. Between learning all the legal language and tax obligations in every country that your team is in, token grant management can feel like an obstacle course. But it doesn't have to. That's where Toku steps in. Toku provides practical tools to handle token grants, allowing for effective oversight of token distributions and payroll tax compliance

for employees, contractors, advisors, and investors. They also handle tax withholdings through their real-time tax calculations that can be done by Toku or integrated into any payroll EOR providers in any jurisdiction. Toku is a trusted provider of protocol labs, D-Y-D-X Foundation, Mina protocol, and many more. Get started for free and make token compensation simple at Toku.com slash bankless. Bankless Nation, I'm extremely excited to bring on our guests. Chris Perkins. He's the president of Coin Fund, which was one of the world's first crypto funds. We've actually had Jake from Coin Fund on the podcast previously. It's a VC fund. They do liquid crypto assets as well. And Chris himself has led quite the interesting life, I would say.

Three professional careers. First, he was a Marine Corps officer, served in Iraq in 2004, in a unit that actually experienced some of the heaviest casualties of the war. And then he made a switch over to TradFi, spent some time there, and now he is in crypto and has been for the past three years or so, I believe. Chris, welcome to bankless. Hey, thanks, Ryan. And I guess to sum it up, I guess I'm used to getting shot at. Oh my God. Wow. So is that a continuation in crypto? Are we metaphorically getting shot at? I mean, not to diminish it. I'm sure in Iraq, it's quite a bit different than what we're dealing with in crypto. But yeah, well, you know, maybe let's start there, Chris. Take us through the web of your life. How are these three things related? So

in the Marines, in Iraq, actually getting shot at, and then you switch to TradFi, doing that for a while, and now you're in crypto. What's kind of the unifying theme of your career so far in your life experience? Yeah, I guess always wanted to be on the cutting edge. Went to the Naval Academy, studied national security of all things at Georgetown after that, and then I went into this adventure called the Marine Corps. I volunteered in Iraq. My family was impacted by 9-11. I'm from the New York City area. Couldn't get out and volunteered to go really to the front lines. Ended up in part of the Battle of Fallujah and then also really the Battle of Ramadi for nine months in 2004 to 2005. Saw a ton of combat there. And then long story short, I was going to go in a bunch of different

directions. I came back home, knew a Marine who was at Lehman Brothers. And went down there. They actually hired me on the spot. When you say Lehman Brothers, what day are we talking? Because that's like very important. I guess it was before the collapse, right? There's only the before and after. But when did you join? So I joined in 2006 and literally started building out a derivatives business. And then, you know, TLDR was got blown up in Iraq. And then I went to Lehman brothers and I learned what it was like to get blown up there. I was on the ground floor of Lehman when we went bankrupt, right? I had a derivatives book. awful, awful experience.

But man, when you hit those types of experiences, it's also where you learn the most. And I'd been in finance for two years, but coming out of that incredible learning that happened. And you learn that like when you hit the biggest crises, like that's when you build the biggest relationships. I could tell you all different types of stories. But phone rang and it was Citigroup and they said, hey, do you want a job? And I said, well, what kind of package do you have arrogantly? And they said, it's called a great package.

It's called the job. So I literally had to get on the train the next day and I had to go to Citigroup where I started cleaning up my own mess. And then, okay, so I'm at Citigroup and then I got involved in the derivatives industry and we had to take the $700 trillion derivatives industry from unregulated to regulated. I led that initiative. And guess who my regulator was? It was Chairman Gary Gensler. Chairman Gary Gensler. Oh, we know him.

Right. So, you know, under, you know, it was different back then. He was totally empowered by Dodd Frank and built the largest regulated derivatives business in the world, took over a few other businesses. By the time I left Citigroup, I ran our foreign exchange prime brokerage business and then I took over our futures business. So I had about 725 direct and indirect reports. I found myself running, Ryan, the largest derivatives intermediary in the world. by nights and weekends. And I'd gotten into, you had Sandion, like, we'd gotten into crypto years prior. And I'm like, what am I doing, man? I'm running the largest intermediary in the world. But I can go home. I'm scared to death because my yen's not settling for days. I go home and I'm messing around with the ABE and compound.

And I'm seeing technology. In fact, like, I'm like, why am I even needed at this point? So rather than I decided to go all in. And, yeah, it was my third year at Coin Funds, having a great time. And it's been quite an experience. I, it's such an interesting background. I don't need,

I want to camp on that for a while. I know we're going to talk about something a little bit more financially geeky, something that I'm calling at least. And you've got to educate me in this, the library for Eith. So we'll talk about that in the context of a reference rate and why it's important, what you're building over at a coin fund.

But, you know, I've got to ask a bit more about your background because it is just, I don't know, You've let a very interesting life, my friend. I guess maybe starting from the last part. So give us some more detail on how you went from derivatives and traditional finance in one of the biggest banks in the world to crypto. Like how did that happen?

Because not many people cross that chasm, right? There's a lot of people in Tradfai who, even still today, and certainly at the time when you join, think crypto is smoke and mirrors, a scam overrated or something technical doesn't really impact them. But you somehow found a reason to move over. Why? I mean, it was pretty obvious to me years prior. You know, we all learned about Bitcoin. I couldn't tell you what year it was, 2014 or something like that. And read a book and I'm like, wow, these smart contracts are really interesting.

And the utility of settlement was so obvious to me, right? When you're sitting and running a big derivatives clearing business, it's all about settlements. And the latency, you just accumulate so much risk when things don't settle appropriately. And so in the beginning, you know, started to think, wow, this blockchain thing can really solve a lot of our problems. But, and I kept trying and trying to implement it and get it off the ground. And there was incredible resistance to really embrace superior technology that could have actually lowered risk. And then, you know, as I started getting into understanding, really I dove deep into the

Ethereum ecosystem and really understand the financial applications of Ethereum and how it could change the world and lead to much more accessible. So I bought into the ideals, right? And the last thing I did at Citigroup was I was actually able to get Bitcoin and Ethereum futures approved on the CME. This was a brutal, brutal feat. Wow. You know, you could imagine, I think there were like 65 people that tried to say no.

And like, I'm a Marine, right? So I just had to battle, battle, battle. And explain to them how, you know, we could risk manage the product, why it was useful. And look, I've spent a lot of time, even in my current job. I'm on the CFTC's Global Markets Advisory Committee. I testified in front of Congress on derivatives market structure. We have a lot of work to do. And, you know, here's the TLDR.

that our entire regulatory apparatus is predicated on intermediaries. Now we have tech. And the reason for that is because we didn't have technology prior that could allow people to monitor and regulate it effectively. But now we do. And so it's very scary for, you know, for certain regulators. And I feel for them, right? They should, when I went through what I went through with derivatives, like they were

fully backed by Dodd-Frank. Their mission was clearly articulated. Now, they're really not empowered by legislation. And so it's a very challenging position that they're in. But like what I'm trying to do is not shitpost on crypto Twitter, but rather engage, right? Like try to explain to them, look, I understand how it works. I built businesses in Tradfi. We can use the technology to make the market safer, more efficient, and more accessible.

And so I'll keep trying. And, you know, we're engaging wherever we can. Look, thanks for doing that. Thanks for trying. Thanks for bridging the gap. We need a lot of that with respect to Tradify. And certainly Sandy from Franklin Templeton, who actually connected us, Chris. We had her on the podcast a few weeks ago. She's kind of fighting that same fight. I got to ask you, though, because you've had experience with, you know, like Gary Gensler in the past and Dodd-Frank. And now you're kind of like talking to regulators right now. You said you feel for them and that there's kind of like they're maybe scared. of the future that they're a little bit uncertain, that sort of thing. I think that's a great framing

of it. And also, Chris, it assumes good faith. And sometimes when we're in crypto, I know crypto Twitter can dial it up a lot and turn extra toxic. But some of the actions coming out of some of our regulators, some of the time, and maybe particularly the SEC a lot of the time, and Gary Gensler himself, don't actually seem in good faith. It doesn't actually seem like it's coming from a position of we're uncertain about the future, we're scared, there's no good regulation legislation. It seems to, at least the tone and tenor of it, has seemed like there is this kind of grasping for power, maybe, or control, and it's not like good faith engagement. Disabuse me of that, if you will, or maybe you think that's the case in some

corners, not in others. How should crypto natives think about, or regulators and some of the, I guess, actions that are coming out of like the U.S. has really turned hostile, Chris, and we're not, we're not really sure why they're so hostile to crypto. Yeah, a couple of thoughts. I think what I try to do is stay maniacally focused on the truth, right? And the truth is, is that this is a technology that's very good for national security. It's a technology that's very good for our markets. It follows American ideals. And so you just got to stay really, really focused on the truth. We'd love to talk about some of the work we're doing around the national security front as well. But the good news is that, like, we're on the right side of history.

You and I both know it, Ryan, right? And when you talk to, you know, the younger members of Congress, they get it. And, and like, my son is 16. He had a real difficult job opening a bank account. But you know what? Opening up a wall on a metamask, no problem. And so I think that the inevitability is that, you know, we're on the right side of history. We need to stay focused on engaging and focused on the truth and really educating

and engaging because like we know how this how how this is going to end but yeah it's unfortunate when things become political because that's not good for anyone so like I continue to stay focused on the truth do you think it's the right framing that there are many regulators who are operating in good faith and some that are not operating in good faith um I can't speak for their motives or their career desires um but there are some that are working in good faith like I work closely with Caroline Pham. She's asking for regulatory recommendations. And so one thing that we're doing right now on the CFTC Committee that I'm working on

is trying to put forth recommendations on how, you know, working with like powerhouses like Rebecca Redding, you know, how do we put forth recommendations that they should follow? And a lot of it is like on us to educate and engage. As far as other folks, look, I can't speak to their political agendas or motivations, but all I can do is continue to speak for the truth. You know, maybe we can talk a little bit about national security because that also seems to be a huge issue right now. Is that all right? Yeah, I would say, Chris, yeah, let's do that because the conversation is really shifted, I think.

I mean, there's less talk of like Bitcoin being kind of like a Ponzi scheme, I would say. And a lot of the conversation has shifted to national security concerns, to financial surveillance types of concerns. I know there have been many call it kind of Elizabeth Warren anti-Christop. crypto army kind of types that have said that crypto is actually a tool that is being used by terrorists, by being used by just like that illicit finance enemies of the United States. And I know you've you've had some takes on that. And I think you came into your professional career. It sounds like from a national security perspective.

So I would love to hear a bit about that. One note for the audience. And I learned this when we were first. like meeting Chris is bankless listeners might remember a letter that Elizabeth Warren sent. I'm trying to look this up here. It was a letter that basically targeted some folks in the crypto industry, you know, crypto lobbyist type groups, you know, Coin Center, Rebecca's group, others, and basically charged crypto with perpetuating kind of a revolving door,

basically taking folks from D.C. and then, plugging them into the crypto industry and using that to kind of bend policy to their will. And I think this letter from Senator Warren was basically like, stopped doing this, kind of implying that that crypto was kind of corrupting the process of engagement with lawmakers and DC. I believe, Chris, were you actually named in that letter? I wasn't named, but I did sign the first letter. And I have visited Congress and talked to them about the imperative of national security. So, yeah, I've been involved in those circles. Okay, so tell me about it.

What's the context for a letter like that? And, yeah, what's your take on this concern about national security and crypto? Yeah, so like I said, Ryan, I was in Ramadi in 04 and 05. It was a super violent place. I was shot at. I was RPGed. I was blown up by IDs. And there were some really bad dudes in that town.

And they were terrorists. They were foreign terrorists. And all of that funding that they received to, you know, come after us, that was all before blockchain, right? And they made very good use of technology. They used the Internet. They would make these video CDs. They use cell phones. And one of their technologies of choice were garage door openers, right?

So as we would drive down the streets, they would have these IEDs and they would trigger them with garage door openers. And so, like, as you move forward now, you say, okay, these technologies are so dangerous. Like, I don't know why we have an outlawed garage door openers. Because, you know, they're so dangerous. And they were used to attack me for nine months in Iraq. And so, like, that's the paradigm that I'm attacking this problem with, right? Anti-Crypto Army.

What is crypto? It's technology. It's not good or bad. It's just technology. Right? And in fact, if you look at all the analytics that we have, it's an, you know, with crypto, you can generally find the transactions and it leads you to the bad guy, whereas Fiat is pretty obvious. So had the opportunity to work closely with XCIA officers, military

officers. We go down and say, look, this is how it works today. Fiat has failed us. Fiat, the sanctions regime that we have today is just not working. I mean, before I came into crypto, I just did a lot of research and I looked across the OFAC sanctions list and the amount of violations that we've seen amongst the banks. People don't know it. Even Berkshire Hathaway, got in trouble for funding Iraq. Sorry, Iran. Take a look at it. So the existing system's not working.

However, this technology that we have, I believe, is an improvement. And I don't know why we're focusing on the technology. We should absolutely focus on the illicit actors, right? And oh, here's the other trick. We don't need legislation for regulators to go after illicit actors. They're fully empowered. So when you hear regulators say it's full of hucksters or fraudsters, that's great. please please from the bottom of my heart go after them right you have the power to do that please do it and

you'll hear as you know any crypto native will tell you we have no time for fraudsters in our space they're stopping us or slowing us down so that's my take my friend where do you think that energy's coming from sort of the the anti-crypto energy just just in general is it um is it is it a place of just not understanding a place of ignorance is it a place of fear or like once it again is it sort of some malevolence towards crypto coming from like, I don't know, an undetermined source. Yeah, I think it comes back to a lack of control and understanding. And I think if we were to step back and look at first principles and values, you know, obviously the technology that we work in every day is actually very congruent with American values of like providing additional

access to markets. So, you know, I think time is on our side. I think we're going through elections here shortly. I think as time moves on, you know, we're going to be in a very good spot. I'm very long-term bullish. What's your take on what the regulation should be with respect to crypto then? So, like, maybe just to steal man the arguments a little bit, like against crypto and in favor of the existing banking structure that at least the U.S. and the West kind of has today. Right now, they have the power to freeze bank accounts, let's say. In a crypto world, they lose that power. They can't freeze an individual's Ethereum address necessarily. Maybe they have that power versus stable

coin like USDC in Tether, but if it's denominated in Bitcoin, if it's a denominated in Ether, they lose that ability. There are as well privacy mixing types of tools. And many and the vast majority of usage of those privacy mixing tools are, you know, basically people wanting just individuals wanting privacy so that, you know, somebody can't like connect all of their, all of their addresses together and drive their full financial history. And yet, that can be used by actors that are, you know, like acting against the U.S. It can be used by terrorists. It can be used by North Korea. And indeed has been in some small cases. So, like, what do we do about this? Because if you say that crypto is a permissionless censorship-resistant technology,

it's a money outside of the existing Fiat system, right? That can sound scary for someone who is trying to centrally control the flows of money across the world in order to stop the bad guys. So, I mean, is there some merit to the national security arguments that the critics of crypto might might be making here. The important thing to do is to have very clear guidelines and definitions, right? And so, like, let's look at it in a couple of ways. There's a difference between technology and individuals that use that technology or entities that use that technology. And so we need to have an activities-based regulatory regime. And so a couple of the things that I'm trying to advance in my work is as follows. Clear guidelines, right?

So today, what is a security and what is a commodity? It shouldn't be that hard. And what I'm trying to push through are working with regulators to come up with clear empirical measures about which goes into which bucket. Okay. If it goes into a security, wonderful. We have a lot of regulations that apply. Perfect. If it goes into a commodity, guess what?

The CFTC still has full authority to police, for instances, of fraud manipulation and abuse. And we really, really owe it to our entrepreneurs that I deal with every single day to give them that clarity, right? The other thing that we need to have very clear guidelines are is what is the separation between technology and entities and activities, right? And so, like, what does that mean? The Internet today, right? Nobody controls it. It's available for use. Bad guys use it.

Good guys use it. I don't think we want to take it away at this point. I think it's here to stay, right? But regarding crypto, what are the properties upon which, you know, a technology is not controlled? It is technology available to all. That doesn't mean that you shouldn't, you know, ruthlessly pursue any kind of illicit activity that uses that technology, right? And so if a bad guy is using the internet today, we'll go after the bad guy. You're not going after the internet, right?

And so working closely, you know, which is separate and distinct from an entity that builds technology. for something nefarious, that's different, right? So really working on with regulators to come up with clear guidelines around that, and frankly, lawmakers as well. I'm wondering how this argument is landing. It's been something that I've been thinking about a little bit. You know, like it felt like very much the United States in the 90s was all about finding ways to export freedom, export a kind of like democratic principles.

to the world and the U.S. government of the 1990s saw the internet as a way to do that. And now we're in 2024 and we see this kind of like rising, let's call it authoritarian access, right? That's just rising throughout the world in other countries. And like from my vantage point, Chris, like crypto is instilled with values of freedom, values of democracy, values that the United States, our nation was founded on. And this is a confounding factor. to authoritarian regimes. Any free society should be wholly embracing of this, right? It's a problem if you're Russia. It's a problem maybe if you are CCP China and you're trying to maintain totalitarian control of your capital and who uses your money system. Why would it be a problem

for a democracy that is trying to advance freedom? And I haven't heard a coherent response on that point from D.C., they just kind of continuously point to, well, crypto is full of frauds and hucksters and look at Sam Beckman-Fried. But do you think that argument can land over the long term? You know, I was at Black Rock's Digital Asset Symposium yesterday, and they had a human rights activist on stage, and that's the exact point he made. It was that these dictators, these regimes, they are scared to death of crypto. Why?

Because it espouses all of those true American ideals that we believe. even. So I couldn't, I couldn't agree with that more. How about TradFi, Chris? So we're moving maybe from your Iraq, Iraq era in the Marine Corps to kind of like Lehman Brothers into Citigroup. So what's your sense of the relationship between crypto and TradFi now in 2024? So are we making progress? Is Tradfai starting to really understand the potential here? It felt to me like the Bitcoin ETF was maybe a breakthrough moment. But like maybe, maybe, you know, like it's happened before that. Anyway, what's kind of the temperature in how well TradFi is responding to crypto at this point? Yeah, it's a great question. I think within every single Tradfy shop, there's the resident DGEN

at this point who's trying to advocate to get things off the ground. I think the Bitcoin ETF is a really, really big deal, right? Because it's so funny. Like, we made, a lot of progress in explaining how Bitcoin is not a security, but then we make it a security by wrapping it in an ETF and it's starting to scale. I'm very excited about the ETHETF as well. But, you know, I think a light bulb is going on now. I think when BlackRock really engage, like BlackRock moves markets. When I was at City, they were the biggest, most important client in the world. When they say they want something, it generally gets done, whether that's through a regulatory lens or otherwise because, you know, they, they're huge and they represent a huge

amount of wealth. So that's a big deal. That said, it's going to take time. The banks are going to be constrained by their ability to embrace crypto because of these things called the Basel rules. I don't want to get too technical here, but like there's capital that they have to hold against their exposures and that capital is just too high. And so it's very difficult for them to be profitable. So it's going to take them a long time because these capital rules are going to hold them up. And again, we go through these crazy cycles where it's like, oh, Bitcoin, blockchain, not Bitcoin and public, no private. So I think like currently there's a little bit more focus on this private DLT stuff, but everyone knows where we're going. I think Sandy articulated it brilliantly.

We're going to end up in a public arena. And I think TreadFi is going to come along. It's just going to take some time. And there will be naysayers because it's scary. But tokenization is important for TradFi right now because it addresses some real utility, which is quicker settlement, lowering risk. But yeah, it's just a process and they'll come around. But it's also scary, right, because it undermines business models. A lot of Tradify is predicated on intermediaries. And now you don't need them as much in certain places. I don't think you're going to get rid of intermediaries because some clients want that high touch. But other other folks are going to say, I don't need that intermediary. I can go direct. So it'll be a process. So Chris, he said Black,

Black Rock being the size that it is. Black Rock gets what Black Rock wants. And BlackRock at some point wanted a Bitcoin ETF. And poof, there we go. We have a Bitcoin ETF. I've heard Larry Think talk about tokenization as well as kind of like, you know, some excitement for Black Rock there. I imagine he sees kind of a budding growth opportunity. But another thing kind of on the list for BlackRock, and you tell me, might be the Ethereum ETF. And we're going to talk about Ethereum a lot in kind of the next part of the conversation. But does BlackRock want an ETH ETF?

Because if so, you know, that bodes well for our chances here. Do you have any takes on this? Yeah. So let me flash back to back in the day when after the global financial crisis, Dodd-Frank came out. right? And Dodd-Frank was very prescriptive about what was required for the regulators to execute. It's so funny because the CFTC diverted away from that playbook once. And that was because BlackRock didn't like the level of asset protection that the law was delivering. And so they said, we need to change, you know, guys, regulators. We want you to better safeguard our collateral.

And that was the only real deviation from that playbook with the CFTC back in the day. And so, yes, I think BlackRock is focused on the ETTF. I think the correlations that we saw that stood up in some of the court rulings that we saw with DCG stand up. I think it's not a matter of if it's a matter of when. But I think the challenge, and by the way, I think it's going to, I think the tradify mind really understands Ethereum. Because like Bitcoin, it's like, okay, what makes Bitcoin special? All right. There's 21 million coins that there can't be any more than that.

So like it's limited supply totally. Okay, I get it. Store value. Then they go to like Ethereum and they're like, wait a second. You're telling me that there's yield on this thing and I can have smart contracts. That's pretty cool. And so I do think that ETH as an asset class is going to be super appealing as people take the time to really understand it a little bit. And so I look, it's a matter of when, not if.

And hopefully sometime this year. So you're doing some work on that front, Chris, at Coin Fund. And that's where we get into kind of the more financial geekery point in the conversation. I think this could be absolutely massive in terms of advancing Tradfai's ability to understand Ethereum and maybe their ability to build products in the Ethereum ecosystem in general and based on Ether as a productive yield-bearing asset. And I'll just maybe frame this up for bankless listeners and kind of like give folks a sense to the extent of my understanding. and I'll be kind of dependent on you, Chris, to sort of take us forward. So after our conversation with Sandy from Franklin Templeton, we were just having a chat

after the fact, and she's like, you know what, you got to check out, Ryan. This is going to be, and David was there too. This is going to be massive for crypto is there is a new, I'll call it a benchmark, but you might use a different word like reference rate, for instance, for crypto, that this guy named Chris is heading up over. at Coin Fund, and it's called Caesar. And I said, okay, well, tell me a bit more. And she told me more. And I said, well, that sounds a little bit like LIBOR for ETH, right, of reference rate LIBOR, which I understand is kind of like a big deal in traditional finance. And I said those words, not fully understanding,

actually, what LIBOR is used for in Tradfai, just knowing that it's one of those things that is incredibly important. And I'm wondering if you could kind of take up the conversation from there. Both tell us what you're building and why it's relevant for Ether and Ethereum and what you think the potential is here. But maybe start the conversation in this context of when somebody talks about a LIBOR for ETH, what are we talking about? Like, what is LIBOR? Maybe we'll, we should start there. Yeah, let's step back. So interest rates drive. They're the pillar of modern-day finance, right? There's nothing more important than interest rates. You turn on your Bloomberg in the morning. They talk about companies a little bit, but they mostly talk about the Fed,

and they talk about interest rates, because interest rates drive everything. The thing about interest rates previously is that they're very centralized and highly controlled, whether that's the Fed that sets rates. They do it a few times a year. You know, it's not open. It's not transparent, per se, and people are always betting, what's the Fed going to do, right? That is modern finance, like it or not. Libor was a rate, and I said was, because it was incredibly important back in the day. It underpinned hundreds of trillions of dollars in underlying financial assets, right? It underpinned hundreds of trillion dollars in derivatives. Everything keyed off of this rate. And this rate was set by a bunch of, it was the London Interbank overnight

rate. So it was a function of the rate at which banks lend it to each other. And the funny thing was was that it was determined by a handful of traders at a couple of banks where they would submit bids every day and that rate would be produced. Over time, it suddenly leaked out that that rate was being manipulated. And think about it. You have hundreds of trillions of downstream products that people either have to pay or receive based on this rate, highly controlled, and totally manipulated. Insane. And so after that, and I don't even think they understand yet just the financial consequence of this manipulation. Go back and you can read about it. But fast forward to today, there's been a lot of rates reform across traditional finance.

They've replaced LIBOR in many cases with a new rate called sulfur in the U.S. The other thing about rates is that they're very regional, right? So you have Eonia, you have Sonia, you have all these different rates throughout the world set by different governments. But let's fast forward now to why this Ethereum, why Ethereum staking is so, so incredible, right? And by the way, in traditional finance, even today, the largest derivatives market in the world is the interest rate swap market, interest rate derivatives. This is a $500 trillion market, right? Just like, I mean, the size of this is incredible. And why?

Why are interest rate derivatives so important? Because they give incredible utility, right? If you want to go get a mortgage, you know, you can get a floating rate or you can get a fixed rate. Well, you know, how do you get that fixed rate? Somebody swaps fixed versus floating, right? So it gives incredible utility to the consumer. So before the merge, we were sitting around at Coin Fund and we were just like, wow, when we go through the, when we transition from proof of work to proof of stake, oh my gosh, we're going to have the first real interest rate in crypto. go. And this is going to be incredible because, and really what it comes down to, it already exists, right?

Like, it's out there. You can observe it. It's on chain. But if we can build social consensus around an observation period, right? You can compose so much around it, right? And again, how do we bring in all of that utility of whether it's the interest rate swap market? There's a bunch of different applications I'll get into. But the whole idea here, is that with proof of stake, you essentially have a kind of like a LIBOR, but it's global in nature, it's open source, it's completely observable and completely replicable. And if you build social consensus around a standardized snapshot, you can effectively build, like what we have in traditional finance, which is a forward curve.

So you can project that rate in the future. and you can build all next generation financial products around it. And so really, there are two primary use cases for a benchmark of this nature. And maybe I can talk through before I get into that, maybe how we constructed it. But really, there's two fundamental use cases. One is for benchmarking. And the other one is to transfer risk. In one way, it seems like this reference rate is kind of like what we in crypto would

call an Oracle. right? It's kind of like a data feed that power, you know how like chain link oracles power so much of defy. You know, Liber was essentially a reference rate that powered many of the, we'll call them contracts, tradfai contracts in real life. Is that a useful way to think of that for a crypto native, like LIBOR just being sort of like an Oracle? Not really an Oracle. So like an Oracle would deliver that rate to a smart contract. So that makes better sense. Yeah, so it would, like, it's more, it's more of a price itself rather than an Oracle. It's more of a price itself rather than the Oracle. And yet, maybe the way it was related in my mind is that it, that rate really matters, right? Like it sets a lot of the, I guess, like, you said there were hundreds of trillions of dollars that were underpinned by LIBOR. When you say underpinned by LIBOR, what do you actually mean? So how is this price feed essentially being like,

like fed into the hundreds of trillions of dollars. And what happens or what did happen in the case that there's an inaccuracy? Yeah. So one of the most prolific products in traditional finance is something called an interest rate swap. Okay. We call swap something different in crypto land. But in traditional markets, a swap is a derivative. And usually it's where one side pays fixed and the other side receives float.

Okay. And so, or you can have something called a basis swap where it's floating versus floating, which I'll get into in a second, right? But why would somebody want to receive or pay fixed? It's because they have a view on where those interest rates are going. And if somebody wants to hedge themselves from a spike in the rate, well, then maybe they're going to pay fixed and receive floating, if that makes sense. the opposite way around, where they want to understand, where they're keen to receive a fixed

cash flow, they're happy to pay a floating rate. And so, like, a good example of that is, like, a fixed rate mortgage, right? People want a fixed rate mortgage. And so what the bank does behind the scenes is they'll swap out fixed for floating in order to give that product out to a consumer. And so interest rate swaps. And I think you guys had Simon on from Volz back in the day. He talked about this market.

But it is the largest derivatives market in the world. or you can have a view on two different floating rates that's called a basis swap, which is floating versus floating. And so, like, you know, I can talk about why that's applicable in Ethereum land, but this is a very, very, it's the most common, most prolific derivative in the world. Okay. And I called that an Oracle earlier. And your comment was maybe it's more like, think of it as a price feed. But it is determined by, you said, a handful of traders, right? And you were talking, you kept using the term was for LIBOR because it sounds like maybe it doesn't exist in the same form it used to. I recall in, was it 2012, kind of the LIBOR scandal, you know, took hold or became evident and became public information. And it was essentially being corrupted, right? So this is sort of like the traders who were corrupting it, like what were they doing?

What benefit? Were they sort of corrupting it in ways that would give them an advantage? Or how exactly was it being corrupted back in 2012? So they would have a – traders would have a book, and they would be positioned in that book to make money depending on whether that rate went up or went down. And so – or people within the bank would have certain positions where, like, if the rate went up or down, they would stand to make or lose a lot of money. And so there would be, you know, according to public. documents, they would whisper in some of these folks' ears and say, hey, you know, bump that rate up.

And a little change could result in billions of dollars of P&L. And so there was manipulation of that rate. And when they submitted their levels to create and settle that rate every day, it reflected the risk that they had on their books and so that they could profit in certain cases rather than lose money for their own books. But the downstream implication was just massive. This was a huge scandal at the time, right? Like, what happened in Tradify when this was revealed? Yeah, huge issue. There was all types of fines, billions of dollars of fines to the various banks. You can go back in history and look at it. And then there was a number of benchmark reforms where LIBOR was essentially phased out in favor of rates that were more transactional based.

One of them was called SOFER as an example. So there was, I mean, it was a massive, massive issue, cost the banks billions of dollars and fines and then even more money to try to figure out the way forward. So it was a huge challenge. Yeah, I was going to ask you because it's so fascinating because in, you know, in crypto, we're all about creating corruption-resistant protocols. And it sounds like this price feed in particular was not as corruption-resistant as it needed to be. And I'm wondering with some of these other reforms like the Sofer that you mentioned, are they, I guess they're trying to add a layer of corruption resistance through better protocol design, just trying to translate this for crypto natives a little bit,

and through regulation, right? And so that's kind of like, I guess, the traditional financial system, that's their way of doing it. Hey, we'll kind of design this a little bit differently. We'll add additional regulation. We'll put some more kind of like checks and balances. And are these new reference rates, these new benchmarks? Are they, more corruption resistant? Are they better? Did they like, quote unquote, fix the problem that was with LIBOR? Or do they still have like some, some holes in them as well? Well, I guess time will tell, but they tend to be more transactional based now. But, you know, this is just one of many different rates. I mean, look at the Fed itself. It sets rates as well. And I think the point with traditional

rates that we see is that they're very centralized, right? And wouldn't it be amazing if we had decentralized rates that were more transparent and observable. So, you know, is anything perfect? Maybe, maybe not. But they're trying to get away from this like dark room. They're trying to abstract and eliminate an ability to manipulate. But I don't know. We'll see how it goes. It's everyone's favorite season in crypto tax season. And crypto tax is always an absolute headache, especially for all you DGens out there. But it doesn't have to be a nightmare. That's where Crypto Tax Calculator comes in. The software built for DGens by DGens.

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might be, but how is this designed? Yeah, so before the merge, before the movement to proof of stake, we realized that, gosh, these validators, and at the time, it wasn't the close to a million now, but they're receiving rewards every single day, and they're receiving those rewards in the form of emissions and transaction fees. And if we're able to look across, Now, it's between 900,000 and a million different validators. And if we were to take those rewards of those emissions and those transaction fees, take the mean and annualize it, we would essentially have this, and I don't want to use the word risk-free rate, but we'd have this like standardized rate for Ethereum.

And if we can build social consensus around it, you can really build on top of it. And so there's two components to Caesar. there's those emissions and transaction fees. Emissions are a function of the number of validators. And we're watching this number grow. There's a lot of talk within Ethereum circles around, you know, what's the endgame here? But generally speaking, the more validators you have, the lower the emissions. Okay.

And then you have transaction fees. And transaction fees come from existing supply. Those get rewarded to those 900,000 validators. And when you step back and we started observing this rate, it was fascinating. Because, of course, as you saw more validators come on, you see the baseline rate come down, the emissions come down. But those transaction fees were really, really interesting. The first thing that we identified was during FTX, November of 22, right? Massive spike in the rate.

And why is that? It's because those transaction fees went through the roof. people were willing to pay whatever they had to pay to get those assets off of the exchange on chain, get them safe, right? So it jumped, you know, up to like 7%. It was, it jumped materially. Fast forward then to March of 23, another like massive spike. And we're like, gosh, what's happening? What's happening? And wouldn't you know it? SVB happens. And again, whether it's the activity between Tether and USDC, or, again, fear of something terrible happening, look, I got to get my assets on chain.

We again saw those Ethereum transaction fees go through the roof and the rate spiked materially. But then the one thing that people don't get, and like I show them the graph, we can maybe put it in the show notes, but we saw the staking rate go through the roof in May of 23. And you know what happened in May, right? What's that? Pepe, right? So Pepe started happening. You saw that all this activity on the layer one. And again,

those transaction fees went, went very, very high. And so this is really important because this rate is now showing a lack of correlation to like external macro market factors, which is very important. But anyway, that's how it's constructed. What we do is we take the mean annualized return of emissions plus transaction fees. And what we see is something that's really interesting. Right now, like yesterday, the print for Caesar was about 3.5%. Okay. And people are like, oh, that's terrible.

Eat staking rates are so awful. Tadfi rates are so much better right now. But that's actually not true because there's a concept of something called a real yield. And when you adjust for inflation, you'll find that, that this Ethereum rate, Caesar, is actually very, very competitive when it comes to the yield that you can get through traditional finance. So that's the construction. Okay, so many questions about this then, Chris. And like one basic question is, so there is sort of a percentage yield on like websites like ultrasound.money, for instance, right? So if I go to ultrasound.money right now,

I see the issuance reward that you mentioned that's about 3% per year. And then, yeah, I think I also see a transaction reward. And you can kind of calculate the like how much eth yield do you have. Or if you deposit your funds into like a rocket pool or a Lido, you know, you generally know what you're getting. You're getting 4.2%. How are those numbers different than Caesar? Yeah. So it all depends.

Like what we really need to do is an industry. The most important thing we could do is build social consensus on an observable rate. Because if you have social consensus, then you can start like, I'm an old naval officer. And if you look at like containerized shipping, right? Like ships are really hard to pack back in the day. And then all of a sudden one day is like, guys like, listen, if we put them all in a box, we can really stack them and we can build all types of things. And so those rates, they use different types of methodologies.

You know, our methodology is transparent and online, and we're not competing with them in any way, shape, or form. But what we've done is we've laid out a methodology, and we've used some of the regulatory, there's principles around constructing a benchmark. It's called these, it's called an IASCO principle. So we've followed IOSCO principles in creating this rate, ensuring that there's sufficient redundancy, etc. And then when you institutionalize a rate, you have someone who administers the benchmark. Then you have somebody who calculates and distributes it. And so we've got a partnership with CoinDesk indices. You know, what we do is like we're trying to find like the baseline return across the ecosystem.

And so rather than take a small number of validators, we try to take as many as possible. And then what we do is we've actually found. some of them, some of these validators don't operate very efficiently. And so, and that's okay. And so what we're trying to do is take that mean annualized return, standardize it, and then allow institutions to use it as a benchmark upon which they can build. Like, you know, why was LIBOR so adopted? It was because it was a standardized rate. And if that was the standardized floating rate, then you can also build, because everyone observed it socially, then you could observe these products where, okay, hey, I need a fixed rate, so I'm going to trade fixed versus floating.

Today, when you go to a staking protocol, right, do you know what rate you get? It's like their pool, right? The rate of their pool. You get what you get. You get what you get, and they take 5 or 10 percent, right? Right. As we get into more of an institutional market, I think. think things are going to shift a little bit because a lot of institutions are going to say,

well, wait a second, I want you to achieve the minimum standard, right? If you earn above that, then, yeah, I mean, you earned it. But what consumers will want is they're going to want transparency of a third-party calculation. And of course, that provider can price, you know, either above or below, but that's a much more sustainable, transparent model than, hey, you get what I get and I take 10%. By the way, like having been around for a long time, when you have a model like that, pretty soon people are like, oh, I don't want, I don't want you to take 5%, you know, show me a better price. And then those fees get compressed very closely to zero. I think by introducing benchmarks, it's actually going to be really healthy for the staking community,

because they can price relative to that benchmark. I think what you'll find is that most professional stakers outperform that benchmark. And then consumers want a third-party transparent benchmark rather than saying, oh, what's my rate? Well, I don't know, whatever I get. Well, what is it? So that's one instance. And then you can actually get even more sophisticated.

And remember that thing I talked about, fixed versus floating. If you have a standardized rate, you can say, well, wait a second, you don't want three and a half percent? Well, you don't want this floating rate. What if I pay, you know, what if I give you a fixed rate of three percent, right? And you can do that through swaps. And so I think you're going to see a lot of, a lot more sophistication around the staking industry because like this is like, this is what makes Ethereum great. The staking yield is a beautiful structured product. And so many, so many things can be composed around it to meet the financial obligations of the consumer on the other side.

I see. So this is just a mass standardization. It's kind of the mean. It's kind of the average of all validators, basically. And it's not specific to one pool like Lido, and it's not constructed in like kind of like we don't really know how maybe ultrasound money sort of derives its percentage. This is meant to be a standard representation of how much yield the average staker will get at a particular period of time.

is that right so if chris if this says like 4% if the caesar says 4% then that's basically what the average staker is making less any fees that they pay to a third party that's kind of like the 4% is sort of the number uh you know of eith staking on that particular for that particular time period is it like how often is it refreshed is like daily is it like you know minute by minute is hourly yeah so we can do it fairly often but what we do is we publish it once a day we publish it at 4 p.m. New York, we calculate it over a 24-hour period. We start calculating it right after 1 o'clock. We look back 24 hours and then we produce it at 4 p.m. What we don't have yet and what we're really excited about is a forward curve, right? And so we have the baseline rate that we set every day. But now the

question is going to be, hey, what's it going to be like in three months? And as you start seeing derivatives trading, and we're hopeful that that's going to happen pretty soon, you can start having this thing called a forward curve, and that will start informing a lot of really interesting applications. So, Chris, you hesitated when using the term risk-free rate to describe this. And I want to talk about what risk-free rate actually means in traditional finance and why you reach for that word and then also kind of hesitated or put a caveat around it and applying it to this particular instance. my understanding of like risk-free rate from just an investor perspective or like you know a business class 101 is that is kind of the the cost of capital the cost of money so you can

evaluate all your other existing investments if you are making more than the risk-free rate let's say which is again determined generally by by kind of like the Fed and that you know that's where you get the rate and so if the Fed is is paying 5% interest as you're paying now, and you make an investment, and that investment is only yielding like 4% annualized per year. Well, you're not doing very well on that investment, right? Because 5% is the threshold. That's the risk-free rate. Why would I do any other investment at less than 5% or less than the risk-free rate? So it's kind of like, call it the cost of capital in general. Anything you consider investing in, it better make over 5%. Why? Because if you can't make over

5% and just put in T-bills. You know you're going to get the money back. The U.S. has a money printer. It's going to pay you that 5%. So your investments need to be making 6, 7, 8, 9, 10%, and out on the risk curve. That's why the concept of risk-free rate is so important. And it's generally for the entire world because the U.S. is the global money, basically, is kind of determined by the Fed rate. And so that's the concept of risk-free rate. Chris, would you add anything to that? no i think i think you nailed it so if i'm by the way i wouldn't even say like the risk-free rate is risk-free at this point um there's been a couple of things that we've seen over the last few years but um yeah in in theory if if you don't take any risk that's the return that you should achieve

right and we've and the other thing is like you did talk about how the u.s is global reserve currency for sure but like ethereum is actually truly global right and in a way we constructed this in a similar manner right if i have capital what's the the minimum that I should be able to achieve without, you know, liquid restaking or anything else. We can talk about that another time, right? So what is that baseline foundational return that I should receive? And like, that's how we constructed Caesar, right? Because you should be able to achieve pretty much that mean annualized return. Yeah. So I want to apply this to, um, to, to crypto then, Chris. And maybe you were, you were kind of going there. Um, so basically when I think

about the fiat world and the traditional finance world or just, you know, general investing. Any sort of investment I want to make with my dollars, right, it better achieve more than the, you know, whatever the Fed's paying, the risk-free rate. And at least I view this in a similar way in the crypto ecosystem, the crypto economy. I sort of have selected for myself ether, the asset as kind of the denominator, right, as kind of like the unit I use. I know other. Other use Bitcoin and other things. But like for me, it's, it's actually been Ethereum the entire time. And so the ether rate. And so if I'm making an investment in, let's call it a, some yielding product that's taking my eth and like restaking it, something in the eigenlayer, let's say.

Or if I am taking my ether and I'm selling that for some sort of alternative investment in crypto, say a token, I want to go buy some some hot defy token. Well, my risk-free rate is actually basically what Caesar is saying. So it's, you know, if it's 4% right now, the investment that I'm about to make had better make over, like, using that equivalent ETH and like 4% in a token investment. Otherwise, it's not worth it for me. Why? Because I could just take my capital. I can, you know, transmute it into ether, and I can get the kind of the internet bond yield, if you will, of the Caesar rate. And I'd be quite happy with that. So from that vantage point, I kind of, have started, at least from my own calculation, to consider the yield on ether, the Caesar type of

rate, to be the risk-free rate for me and kind of the cost of capital rate for me. What's your take on that? Do you think that Caesar can be used in that way? Am I alone in thinking this? Does it really depend on how the world basically thinks about ether as an asset in comparison to Bitcoin or other assets? Yeah, what's your take on this overall? You said it much more eloquently than I could have ever said it, my friend. That's exactly what we set out to design. You know, if you're, and when in finance, you're taking, you take risk and you want to be rewarded for that risk. That's something called the efficient frontier.

This is exactly it. Like, if you have capital, you know, what's the minimum you should achieve in crypto? It's hopefully it's Caesar. Now, what gets really interesting is how does this rate compare? to Fiat, right? And everyone's like, oh, you know, 5%. Treasuries are at 4%. Again, when you adjust it post-EIP-1559, and you look at inflation, this is actually a very, very interesting yields because it outperforms Fiat from a real yield perspective. And so now you start thinking about even productionalizing, like, how can you express a view on this rate? Well, maybe I have a view that, like, that rates are going to come

down in fiat, you know, versus Ethereum, you can actually do a swap, a basis swap, floating versus floating. And I think that's going to be a really interesting on-ramp for rates as you look at east relative performance to other rates around the world, like super, super interesting going forward. So talk about real versus nominal returns a little bit in kind of the Fiat context, which is just kind of cascigated a little bit and versus the the Ethereum context. So Chris, correct me if I'm wrong, but when people are talking about nominal rewards versus yield rewards, or sorry, nominal interest versus like real interest rates, right? If you take something like a

treasury and you are receiving 5% in terms of yield on your interest, that is the nominal yield, right? It's 5% as denominated in U.S. dollars. The problem is, If inflation and your purchasing power of those dollars decreases, then you have to kind of like subtract that from and get the real return. So if you are 5% nominal return, but inflation in any particular period of times 8%, well, you're not losing in terms of real returns 3%. So you kind of like do the math there. You're only making real returns if the inflation is kind of less than the nominal return that you're getting. So ideally, like, 5%, inflation would be 3%. All right, I'm making 2%. Now, this depends on some calculation of purchasing power, right, which traditionally

we also depend, I believe, on the U.S. government for that calculation with like some form of consumer price index type of calculation. We don't generally use, I mean, correct me if I'm wrong in finance circles, but we don't generally use like issuance as the inflation rate. So the supply of money. If you go look at kind of like base money, M0 or M1 and the supply of Fiat money, man, that's a weird denominator. And it's not generally what people mean when they say real returns, is it? And yet I think you are using that as sort of issuance as the denominator for Ethereum. And you're saying, well, positive real returns because the protocol itself is issuing less than kind of the actual return on the yield and what C.D.

or says, and therefore it's always real return. I'm wondering if you could, you square that a little bit for me, because we don't have this notion of pricing, I guess, do we, or CPI inside of an ecosystem like crypto. Does that line of questioning even make sense to you? Yeah, I guess so. I guess it's just a much more pure, cleaner, observable calculation to do with Ethereum, right? We, you know, post EIP-159, you go to ultrasound money, you know, exactly, you know how inflationary or deflationary Ethereum is. And the point that I'm just simply trying to make is that this is very transparent, it's very open, it's very easy to see that the real rate here does just fine against the real rate of traditional, of, you know, things like treasuries today.

So a lot of times in Crypto land we get very focused on nominal rates, but I think if you step back a little bit, maybe it's a little bit more interesting. What do we make of these spikes? You know, I think listeners will be looking at, or if you're watching this on YouTube, you'll see kind of the Caesar historical values on the screen, hopefully. And when you were talking, introducing us to Caesar, Chris, you're mentioned these various spikes, you know, one in kind of like the October, October, November, 22 period of time where we jumped up from something like, it looks like, you know, 6% to an 8% or something like that. And there's some other spikes. and these are primarily like usage-based spikes, I would think, because the bulk of this is not consensus rewards, that is sort of issuance. The bulk of this is in Ethereum, what we call M-E-V or transaction fees, right? So it's like the ordering of transactions, the tips people

it just indicates, I would guess, a time when the gas fees on Ethereum were particularly high and so they spike up. This is a much different set of values than you'd see for like a Fiat, Lybor type of rate, which I would imagine would be dependent on like Fed policy a lot more. Wouldn't be a spiky? I don't know. What do you make of this? And what should we learn from the spikes? So it depends, right? Labore had a counterparty risk element to it. And so when the banks were really teetering those rates had idiosyncratic impact. But this is really important because why are rates important? One of the reasons is for risk transfer and hedging. Our entire derivatives industry actually started with agriculture and it was it was designed to hedge against

price, right? So let's talk about the use cases because this is very important. Today, you have a lot of people who are focused on tokenization. You have layer twos that have to pay gas. You have exchanges that subsidize gas. They get very, very nervous when gas prices spike materially, right? And that's a bad day for them because it's coming out of pocket. Okay. So gosh, wouldn't it be wonderful if they paid a fixed rate and received floating? Because if they're receiving floating and gas prices, transaction fees go up, well, they're hedged because they're paying that fixed rate and they're receiving floating. All right. So that's one side of the trade. Who's on the other side of the trade? Who would want to receive fixed? Well, remember those stakers? You know, they have big

teams, they got to feed them, they got to pay them. What rewards do they get if they're staking? Well, they're getting these variable rewards. And so if the rate goes way down, how do they run a business, right? And so what they want to do, they would love to receive a fixed return and they would love to pay floating because that allows them to run a sustainable business model. Or you take it a next step further. If they receive fixed, they can actually pass that on to a consumer that wants a fixed rate of return. And so it unlocks a lot of opportunities. And so now you have a two-way market that's starting to form where people, some people

want to pay fixed, some people want to receive fixed because it helps their business model. And that's the beauty. And this is the reason why interest rate derivatives and traditional finance are so big, because you have a two-way market where you have people that are trying to hedge real risk. And you can only do that. I mean, you can create the most liquid products only if you have that social consensus around a standard. Look, you know, there are ways you can design things much more specific and bespoke. And that's fine.

And people do that all the time in structured finance. Or you can have a baseline reference rate that allows people to help accomplish their goals. And so that's why these spikes are so material. That's why people need to figure out how to hedge against the. these spikes. Otherwise, they're taking risk that doesn't help their business model. What's the early way we should be kind of thinking about this then, Chris? Is it a bit more like a typical commodity, like an oil, let's say, or like, I don't know, wheat. You mentioned derivatives were basically based on these types of commodities. And I can

imagine, at least right now, with respect to Ethereum, you could have some parties that are purchasing blocks based or denominated in ETH. want to just hedge various positions. So for example, just this week, Reddit added Ether and Bitcoin to its balance sheet. And according to its SEC filings, one of the reasons it added Ether is a store of value, but also because it anticipated purchasing Blockspace in the future, right? So it's like buying some Ether in order to purchase it. And so you can imagine, let's say we get into a world where all of the banks and you have like Coinbase and such, they're going to need to settle some transactions on Ethereum in some way. And so they want to kind of hedge those types of positions.

And so they might purchase a product like this, right? And it'd be similar, I guess, to maybe an airline or something that is looking at the cost of fuel as being an important cost of goods in terms of providing its product. And it wants some hedges against that. And so is that where you kind of start to see this market evolve? Because if we go all the way to sort of dollars, right, it is, dollars are much more than a commodity, right? It's like, well, I mean, you just gave the example that's very consumer-centric of how a mortgage interest rate is kind of, you know, moves from floating to a fixed. And then I can, you know, take a mortgage out at a fixed rate for 30 years in the U.S. because of these derivatives products, basically. But I don't know that we'll get there.

Or like we certainly won't immediately with Ethereum, at least I don't think. Is it more similar to the commodities type case? Yeah. So those are the businesses I ran in Tradfai. And to your point, airlines hedge their gas or their jet fuel all the time. So this is an obvious, beautiful example of ways that industry participants can mitigate their risk. A couple things to unpack. Number one, like I see this as a rate just like any other rate.

And for that matter, like the ETF, right, it fits really, really cleanly into legacy systems. So I do think it can be pretty easily adapted. The regulatory construct should be very clear as well. Interest rates are commodities under, I know it doesn't sound like it, but like under the law, interest rates are commodities. That's why we have futures on interest rates, like the euro dollar contracts. And so literally we're working with a number of different regulated exchanges, futures exchanges, right now on offering fixed versus floating contracts, you know, or the other one that's really neat right now is total return. And, you know, getting back all the way to the ETF, right? The ETF is

going to be awesome. The problem with the ETF is it's going to be really, really hard to give yield, which is like one of the greatest benefits of Ethereum is yield, right? And so why is that? It's because like bonding and unbonding and redemptions are going to be, you know, there's going to be some liquidity risk on bonding and unbonding periods when you have to unstake versus liquidity risk. And so my sense is that the SEC is not good to allow staking out of the gate. If you look in Canada, the Canadian regulators have approved 50% staking. So it's kind of like a partial return, not a total return. And so it's going to take some time to enhance that yield for ETF products.

And so, you know, in the meantime, I do expect for a very, for a number of them, we're already talking to a number of players in the space, and how can you deliver, like, truly benchmarked total return institutionally? Because that's what we want, right? Like, you know, do you want to have, like, just ETH sitting there, you know, if you read it? No, you want ETH plus yield. And you want to make sure that that yield that you receive is, you know, for most institutions, benchmarked and very observable.

So that those are some of the things that we're looking at. But yeah, this is very much like a commodity. And that hedging, this is what's exciting about these next generation products that are coming in, right? We're going to allow industry participants to hedge their risk or to express market views on the direction. And what is this? It's about the liveliness of Ethereum. Ethereum gets very busy, rates go up, right? And so, yeah, very, very exciting applications going forward.

that's very interesting yeah Ethereum gets very busy rates go up and sort of the cost of capital for the crypto I guess ecosystem the crypto economy kind of goes up and you have to reflect that in all various ways is this a is this a price feed

that can be used it sounds like definitely in traditional finance can it also be used on chain as well and yeah like is it is it kind of amidextrous in that way it's both off chain and it can be on-chain for Defi? Totally.

Super excited about some Defy applications. We're integrating with a couple of oracles as well. We're delivering it. I've got partners at CoinDesk that deliver it via API. So yeah, it's totally applicable on-chain. We're excited about that. Like, look, we're crypto-natives, always want to do whatever we can to help the Defi ecosystem. It's one that we love.

So for sure. And you can see those same products apply on-chain as well. well. So yeah, very excited about that. How do you make sure you don't become LIBOR and get corrupted in that way? Are there some mechanisms against that? Is it sort of more on chain? Is it more auditable than something like LIBOR was? A hundred percent. Yeah, I don't touch this thing at all. We have the methodology. We run it very clearly. Everything is transparent. So 100 percent, like everything here is designed to to read off the beacon chain and produce those results. And so there's no manual intervention or anything else.

Again, like if there's one thing I can emphasize, we need social consensus around a benchmark. You know, we designed it one way. We threw something out there. If our rate, I like the way we constructed it, but like the industry needs a benchmark or series of benchmarks so that we can build and compose and allow people to hedge risk. But of course, you know, unlike LIBOR that was centrally controlled and manipulated, you know, the methodology is public. It's on our website. I'm happy to walk anyone through, you know, what we observe anytime. So it's social consensus around that benchmark is the important thing. And, you know, I'm wondering, going back to like traditional finance and Sandy who set up this conversation, he was very excited about this, right? What are the wins for traditional finance when we have social consensus around a benchmark? for Ethereum rates and Ether rates.

You mentioned the ETF, so possibly this gets used in that to have us have it like a more productive yielding asset inside of a future Ethereum ETF. Like what else? Why was Sandy so excited about this? Yeah. So Tradfai understands rates, right? It is a huge part of traditional finance. The thing that they struggle with are all the operations around custodying,

ETH and, you know, safeguarding and all other stuff. This is a fully synthetic, right? It's just a rate. You don't have to, you know, you don't have to, you know, you don't have to hold that ETH to earn the rate. You can find a dealer that will trade synthetic products or futures products that allow them to get access to this very exciting real yield that we talked about, right? So you kind of abstract all those operations.

You give them something that they get. like, oh, it's just another benchmark. Okay, I can trade that. I think it's going to go up. I think it's going to go down. I think it's going to perform this way or this way against these other rates, which is like, again, the largest derivatives market in the world. So that's interesting.

The other thing that they love is like this whole idea of you get what you get and I take 5% or 10% that doesn't work for the traditional mind. They say, hey, listen, no, you're going to pay me relative to a benchmark. And that's what I expect. And so those are the two things, whether it's the total return. aspect or, you know, what I just described that that is really appealing. Like, you know, the ETF is, you take it, you make a security and it fits into their, into their ops. Here's just another rate. Just another rate. And yet you can build so much in traditional finance on it.

Obviously in defy, you can build a lot into it, but in traditional finance, you can build so much more. I guess it's, you know, coming full circle on this conversation, you said at the beginning, there were like $500 trillion of derivatives built on top of these, these, these, types of rates in traditional finance. Those derivatives, right, it's not like if you add up all of the accounts, there's not like $500 trillion in actual money that people are custodying, right? It's just like the contract value of these derivatives. And I'm wondering if you could fast forward a little bit and forecast how this could maximally work with Ethereum. So could we come to a place where Ethereum is, say, worth like, you know, $5 trillion or something like that?

that's the, like, the base money of ether. Maybe that's like Ethereum's equivalent of, you know, an M-0 or something like that. And then we kind of go all the way up. And then we have a multi-trillion dollar, like tens of trillion dollar markets of derivatives built on top of Ethereum in the way that it's built on top of, you know, Tradfai reference rates. Could you see a world where that's the case and what would have to happen to get us there? 100%. I mean, such a no-brainer. As markets mature, derivatives markets tend to be much significantly larger than things like spot markets. So yeah, you know, look, it's early, right? But you could definitely see if we do have social consensus around benchmarks and you're able to compose. And, you know, if you see the adoption of Ethereum, like we think there's going to be and you see continued explosion across layer twos and an appellate. applications, the need and desire to hedge risk is going to be, you know, profound.

And so, you know, to the extent Ethereum keeps building like it's building, I think, yes, you're going to see, you know, a possibility of trillions of dollars of derivatives so that people can avail themselves of risk management. Like, this stuff needs to be managed. And so, yeah, super excited about that future state. and hopefully we can help get there. You know, another form of social consensus that I think is important in general

in TradFi and crypto anywhere is sort of like a central meme to kind of illustrate the concept. And I think Bitcoin has really taken off in Tradfy under this meme of like gold, right? It's like gold except it's digital gold. One meme that we've been kind of early on at Bankless, we've been talking about it for years

because I think it really fits. And when I say meme, I don't mean that it's just a narrative. It's just a way of describing what's actually going on, right? We're not building this out of a whole cloth. We're sort of like synthesizing what the thing is and we're using an analogy is ether as an internet bond, basically. Ether is kind of like when you stake it, it becomes a treasury, right? When it's unstaked, it's kind of like a dollar.

And then you build these global reference rates on top of it. And you can build the massive derivatives markets. And so I think that is a. meme that is catching on and that will catch on. Again, crypto natives are always early to these things, but Tradfi, I think, will catch on to this. And I'm wondering how the Caesar rates like can help with that. Do you think it will help with that? Do you think it will sort of cement this in, you know, you've got Bitcoin, that's the gold, and you have ether as the internet bond. And look, it has this, you know, like daily reference rate and we're building derivatives on top of it.

And they go, oh, okay, I see. It's, it's kind of like the dollar. It's kind of like a bond. It's kind of like LIBOR or the other rates that they've been familiar with. Do you think it helps in that cause? Totally, right? Like, again, the traditional mind, as you start looking at Ethereum, there's two things that, like, jump off the plate. First are smart contracts. You're like, wow, all this defy stuff. Well, it does stuff better than I can do in traditional finance. But then the other, like, really, really cool thing if you're, if you have a traditional mind, is this yield. And you're like, wow, this is, I get this. I understand yield. I understand the internet bond. And what we're proposing here with Caesar is, okay, traditional minds, here is something else that you understand.

It's that composable, observable benchmark that you can build upon. And you can build upon it to hedge your risk. You can build on it to speculate and to take risk. And so it like feeds so naturally into like how this mark, how an internet bond meme will evolve. I mean, it's just such a no-brainer. So very excited about it. I think you can see just the amount of utility it would bring to the ecosystem. Because, again, it's about risk management and there's just so much utility for all the players.

And look, I get even more excited as the busier that Ethereum gets, the more activity, the more you need something like this. We still haven't seen like a scaled out version of an interest rate swap type of product. in defy or in crypto and like what do you think is necessary to get there why haven't we seen that yet chris it's because you don't have social consensus around around standardized benchmarks right it's really hard to you know most defy exchanges etc like they they benefit through volume and scale and again getting back to the containerized shipping reference you can only build scale through standardization. And so hopefully, and again, like, I hope that by offering some standardization, you know, those defy protocols will be able to put much more activity and volume through

and also attract a new generation of users. And those users are not using it just to DGen. They're using it maybe to hedge risk and to actually, you know, deliver real, like, utility. So, yeah, I think that's the reason is we've lacked these standardized benchmarks across the board. I'm wondering, Chris, as you think about a standardized benchmark and Caesar, how does coin fund think about this as a product? Is it sort of like, is there revenue being built off this? Or is this like a public good? As I was looking at some of the, how the other benchmarks were made, it's basically like banking consortiums and financial consortiums that kind of come together. And I think one of the rates you mentioned, the sofa rate, looks like that is secured by J.P. Morgan. I believe, right? So, you know, are these like public goods for anyone to use? Like, why is coin fund even doing this? Yeah, I think, I think it's a combination of a couple things. So we have a

commercial relationship with coin desk indices that they go out and they license it. And so there are some economics for sure at stake. But I also do think that, you know, we haven't made any, you know, we haven't made any money yet. In time, you know, we do think that it's going to offer also offer utility. So I don't think like making, making some money and also providing utility are like mutually exclusive. So that's, that's where we are today. Well, as we end this then, Chris, this has been really, really cool. Actually, it got nerdy, but like, and geeky, but I think most folks will be able to kind of keep up with the flow of the conversation. It's a really interesting product you guys are building. Just want to end with this. So like, who are you

looking to talk to about Caesar? Who should get in touch with you? Who should get in touch with you? who should start thinking about integrating it? What are the next conversations you'd love to have? Yeah, we've spoken with a number of different industry participants, everyone from TradFi to exchanges to emerging defy protocols. And so, yeah, anyone who's interested, you can reach out to me, Perkins CR 97 on Twitter, or I guess we call it X these days. And yeah, I just think there's so many, there's a vast amount of applicability.

So happy to partner with anyone to help them get this all. the ground. All right. We are happy to promote the narrative of either the internet bond at bankless, of course. Very exciting times. Chris, thank you so much for joining us. Thanks, Ryan. Really appreciated it. And again, thank you so much for educating so many people. You provide an incredible public good. And I just want to say thanks again. Hey, we wouldn't be doing anything else. It's just it's never boring here. And we are speed running the history of finance. I think benchmarks and reference rates are the next area that we have to cover here. So thank you for. for your work in putting this together. Bankless Nation, we'll have some action items for you.

So Chris sent me a whole list of details about Caesar itself. We'll include those, including some articles on the concept that you can go research. Got to end with this, of course, crypto is risky, so our reference rates, 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.