Bankless - Is The Merge Priced In? with Hal Press & Ryan Berckmans

Episode Date: August 17, 2022

Is the Merge Priced In? The Ethereum Proof-of-Stake Merge looms around the corner, but how do the markets feel about it? Ryan Berckmans and Hal Press have a mutually bullish discussion about the Ethereum network today, tomorrow, and long-term. They're both bullish ETH, but differ on how it's going to play out. This is our favorite kind of debate.  ------ 📣 Chainlink | Register for SmartCon 2022 with promo code “BANKLESS” https://bankless.cc/smartcon  ------ 🚀 SUBSCRIBE TO NEWSLETTER:          https://newsletter.banklesshq.com/   🎙️ SUBSCRIBE TO PODCAST:                 http://podcast.banklesshq.com/   ------ BANKLESS SPONSOR TOOLS:  🌱 LENS | ACCESS CODE: VITALIK https://bankless.cc/Lens 🚀 ROCKET POOL | ETH STAKING https://bankless.cc/RocketPool ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave 🌉 JUNO | BRIDGE FIAT TO LAYER 2 https://bankless.cc/Juno ⚡️ ZKSYNC | THE LAYER 2 SCALING ENDGAME https://bankless.cc/zkSync ----- Timestamps: 0:00 Intro 7:00 Hal & Ryan Thesis 18:28 The Merge is Happening 23:30 A Crowded Trade 29:23 Risks and Catalysts 36:10 Structural Significance 41:40 Blockspace Demand 46:40 Real vs Nominal Return 50:30 Miners vs Validators 56:00 Proof of Stake Wins 59:00 Store of Value 1:09:45 The Flippening 1:18:00 Price Predictions ----- Resources: Hal Press  https://twitter.com/NorthRockLP Ryan Berckmans https://twitter.com/ryanberckmans ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

Bankless Nation, I hope you are ready for another state of the nation, an episode where we do a deep dive on an important topic. This topic is near and dear to our hearts. And it's coming right up. The question of the merge, specifically, the Ethereum merge, is the merge priced in? That's the question we want to get to the bottom of today. David, who do we have on? What are we going to talk about? Yeah, we have two bulls, two Ethereum bowls that are both bullish for the same reasons.

We got Halpress, who's been on the show before. and Ryan Beckerman's who's just talked a lot about this structural supply change that proof of stake brings to Ethereum, just like Hal Press does. So these two bulls are looking at the same data and they're bullish for the same reasons, yet they differ in their time horizons. So today on the episode, we get to talk about how bullish can we be? Can we be like super bullish or can we only be just like, you know, cautiously optimistic bullish? So that's going to be the subject of today's show.

I think it's going to be a fun one, especially when like, you know, usually. debate formats are like, no, I disagree on absolutely everything. This is a, no, we agree on like all the facts and circumstances. It's just a matter of time frame. The details. The details. The details. That's what's important. I think that's what everyone's trying to figure out is like, is the merge already priced in or not? Exactly. Like, how long is it going to take for the merge to be priced in? I know Hal has some fundamentals that he likes to look at. And Ryan has some great insights as well. So we're going to get right into it. But we also want to tell you about a event that's coming up. This is a message sponsored by a smart con and our friends at Chainlink. This is a conference, David. I feel like

it's conference season. It's maybe spinning up. We've got an Ethereum event in October, but we have SmartCon at the end of September. This is happening in New York City on the 28th and the 29th. What is SmartCon, David, and who should be looking at this event? Yeah, SmartCon is, it's ChainLink's annual conference. So they do this every single year. And this is actually the first time that they will be doing this in person. So you have some, you know, crypto gigabrains that we all know and love. Stanley from Ave, Kane, from Synthetics, Ed, from Arbitrum, SBF, of course.

But this is just a chain links yearly summit where they just put a bunch of the gigarrains who generally are all associated with smart contracts and oracles and are plugged into the chain link ecosystem. And they have a multi-day-long speaking event. Like I said, 2019 or 2020 was the first one. 2021 was the second one. But 2022 will be the first in real life smart con hosted by ChainLink that will be in New York at the end of September. There is a link in the show notes to go get your ticket. There is also a code bankless to get, I think, something like a little over 20% off of your ticket, if you so choose to go. So this will be in New York. Conference season is, rotating into New York. We got smartcom, we got mainnet. So this is kind of going to be the one to

kick this off. So thank you to our friends at Chainlink for sponsoring this message. Yeah, it's pretty cool too. Chainlink always brings the best speakers to Eric Schmidt, going to be attending this. Of course, former CEO chairman of Google as well. As a lot of this, David, looks like a roster of a previous bankless guess. So you got that as well. All right, David, I got to ask you the question we start all of these episodes with, which is, What is the state of the nation today? The state of the nation, Ryan, is cautiously bullish. I think, I mean, we have on every single weekly role,

I've talked about how bullish the merge is on a fundamental level. We don't really lean into like, okay, here is what the price on the chart is going to do at this moment in time. And so that's because I'm a little bit scared to do that. We depper it. There's macro events. Yeah, there's macro stuff, which is also a topic of today's conversation. So, Ryan, the state of the nation is cautiously bullish. And we're going to figure out, hopefully by the end of this episode, how much I can remove

that caution. Like, can I get really bullish? Is that allowed here? David wants to remove that caution quite a bit. And we're going to get, I guess, permission or some insights, some thoughts from our guests on whether it makes sense to do that or not. We will be right back with Hal and Ryan to talk about whether the merge is priced in or not. But before we do, we want to thank the sponsors that made this episode possible.

Lens Protocol is an open source tech stack for building decentralized social media applications. It is the new era for social media. We all have toxic relationships with our Web2 apps. We want to break up with them, but we can't. These applications own our digital lives and all the relationships that we've made. We need to break through to a new paradigm of social networking applications that we control rather than them controlling us. Lens isn't a social media app. It's a protocol to let a 1,000 Web3 social apps bloom.

Lens is a permissionless and transparent social graph that is owned by the user. In crypto, we say not your keys, not your crypto, and on Lens, we say not your keys, not your profile. With Lens, your followers go with you to whatever social media application you want to use. And instead of being trapped by an algorithm chosen by that app, Lens lets you choose the way you want to experience your social media. Lens is the last social media handle that you'll ever need to create. So in order to get started, there is a secret code word in the show notes. Enter that code word in the Google Forum links, and you'll be well on your way to entering the world of Web3 social. Rocket Pool is your decentralized Ethereum staking protocol.

You can stake your eth in Rocket Pool and get our ETH in return, allowing you to stake your ETH and use it in Defi at the same time. You can get 4% on your ETH by staking it with Rocket Pool, but you can get even more by running a node. Rocket Pool is the only staking provider that allows anyone to permissionlessly join their network of validating Ethereum nodes. Setting up your Rocket Pool node is easier than running a node solo, and you only need 16Eath to get started.

You get an extra 15% staking commission on the pool of ETH, that uses your node to stake. You also get RPL token rewards on top. So if you're bullish e-staking, you can boost your yield by adding your node to the decentralized Rocket Pool network, which currently has over 1,000 independent node operators. It's yield farming, but with Ethereum nodes.

You can get started at RocketPool.net, and you can also join the Rocket Pool community in their Discord. You can find me hanging out there sometimes in the chat, so I'll see you there. Arbitrum is an Ethereum layer two scaling solution that is going to completely change how we use Defi and NFTs.

Some of the coolest new NFT collections have chosen Arbitrum as their home, while Defi protocols continue to see increased liquidity and usage. You can now bridge straight into Arbitrum for more than 10 different exchanges, including finance, FTX, Whoobie, and Crypto.com. Once on Arbitrum, you'll enjoy fast transactions with cheap fees, allowing you to explore new frontiers of the crypto universe.

New to Arbitrum, for a limited time, you can get Arbitrum NFTs designed by the famous artist, Ratwell and Sugoy for joining the Arbitrum Odyssey. The Odyssey is an eight-week-long event, where you can play on-chain activities and receive a free NFT as a reward. Find out more by visiting the Discord at Discord.g.g.org.

You can also bridge your assets to Arbitrum at bridge. orgatrum.io and access all of Arbitrum's apps at portal. orghum.com. In order to experience defy and NFTs, the way it was always meant to be, fast, cheap, secure, and fiction-free. Hey, guys, we are back talking about the all-important subject of whether the merge is priced in. The Ethereum merge is a priced in or not. We've got two guests to introduce to you today.

Hal Press, he's been on the show before. Howell Press leads North Rock Digital, which is a fund that Hal has set up that he is betting the fund on the merge, basically. That's where the capital is going. He sees a massive asymmetric opportunity that the merge brings. We had on a bank list, I think back in May, Hal, if I'm remembering correctly. And I think that episode was really influential on a whole bunch of people and how they think about the merge, mainly on whether we are being bullish enough or not. and Howell's conclusion was, we are not being bullish enough. Howell, it's great to have you back on bankless.

Thanks. I'm glad to be back. Thanks for having me back. Guys, we also have Ryan Berkman's, who's also an Ethereum bull. Make no mistake. Ryan has been bullish on Ether, the asset for a while. He is an investor and a community member. Someone who thinks deeply about the merge, its impact on Heath Supply Dynamics.

He's also a developer, and he's got a different position on the merge, but also a closely related position. Ryan, it's great to have you on bankless. Thanks for having me on the show, guys. I'm going to summarize your takes here, but we'll kind of get into it through the rest of this episode. I think how your position is you're bullish on the merge,

both in the short run, in the medium run, and on the long run. I think, Ryan, your position is you're maybe not as bullish on the short run price action. You don't think the merge is immediately going to take us to Valhalla and from a pricing perspective.

But in the medium run, in the long run, you are a bit more bullish. Have I captured that accurately? Maybe I'll start with you, Ryan. What do you think? I think that's right. My bullishness on the merge comes from my near certain belief that Ethereum's going to win over the medium to long term. Yet the short term, I think, looks a little rockier for reasons predominantly outside

our community's control. And what are we talking about just to define short term here, Ryan? Are we talking about, like, what is short term to you where things remain rocky? And when does Ethereum, the merge start to get priced in? For me, the short term is six to 24 months. I'm not bullish over that time period. Unfortunately, I think that there's a lot of challenges going on in the world right now. Our community is doing an incredible job to move the merge forward.

And the merge represents the future of Ethereum. So when we look at all the great stuff enabled by the merge, it's going to put us on a path that will eventually make Ethereum the number one coin. It will make crypto environmentally friendly and put us on the road to really aligning with how the rest of the world works so we can continue to build a symbiotic, broader economy of the crypto and real world economy. However, you know, over the short term, I think I think a lot of the usual suspects may get in the way, including Bitcoin's dominance and, you know, kind of the Bitcoin maxi crew, as well as Russia's war, unfortunately. And, you know, it sounds like the economy was not necessarily doing so great before COVID. And so I think there are potentially some headwinds over the short term. Ryan, I want to just drill down on something you said, because I think this symbolizes a little bit of your position. You think that the macro is just a bigger deal than, you know, ether, proof of stake, the merge, etc.

And so part of the theme of this conversation, I think, is going to be who wins merge versus the macro. And I think your position is very much macro still wins. Is that right? That's right. I see the price of ether in US dollars as being just sort of the eth versus Bitcoin multiplied by Bitcoin versus US dollar. So this is something we all take for granted in our crypto adventure, where we open, you know, coin gecko every day, and we look at the ranks and we look at has ether gained on Bitcoin?

And that's fantastic. But I think that when we think about will the merge deliver the U.S. dollar all-time highs, we all want, I think there's a question of, okay, if it were to deliver the all-time highs, do we primarily see those gains as being versus Bitcoin or and or versus total crypto market cap? Is that total pie growing? And my view is that both of those components are going to, unfortunately, struggle over the short term and then just do wonderfully in the years to come. And Hal turning to you, can you summarize your position and perhaps also the timing on what you think this price action is really going to be expressed in? And also would you say it's accurate that you believe that the merge is more powerful than macro?

Yeah, sure. I mean, there's a lot of different pockets to really get into there. I'd characterize the timeframes a little bit differently. You know, I'd sort of think about the short term as shorter than six to 24 months. to me the short term is really from now until directly after the merge. And then a few days after that is when call it the medium term begins. And then that probably runs for another six to 12 months. And then after that's where the long term would begin.

And I kind of think about it in those three pockets. I think where I differ is that I'm not as bearish on the macro as Ryan. I generally don't think people have a ton of ability to predict the macro. So to say that to try to forecast a negative macro environment from here, I think is naive. And so I think about it more idiosyncratically as like what can I expect about ETH just versus the rest of crypto market cap. So just taking out macro. And what I'd say on that front is, you know, when I came on the podcast last time, and certainly really started kind of pounding the table in June after that capitulation that we had around 3AC and Luna, I felt like the case for idiosyncratic merge outperformance was extremely strong.

I felt like that was kind of a generate, that was when the generational opportunity really began. You know, we were kind of three months away from the merge. People still didn't believe it was going to happen in September. People didn't think it was going to be a big deal. And it was all starting to come into focus. And that's where I felt like, you know, that was the most, the most juicy opportunity. And I think since then, ETH has massively outperformed basically every other crypto asset on a beta-adjusted basis. So, you know, it's up close to 100% off the lows, whereas a lot of the higher beta alts, which you would expect, like if someone told you from June, Heath would be up 100 and you said, okay, what would the basket of Toulana, Avalan,

cosmos be up. You would have guessed, like, on the beta, at least 150%. But if you look, it's actually, they're only up 40%. So they've massively underperformed despite higher beta. And if you look versus Bitcoin, the ETH-BTC ratio is higher now than it was when Bitcoin was 30,000. So, like, ETH has dramatically outperformed pretty much every asset in crypto since that point on a beta-adjusted basis. And to me, it's almost entirely attributable. to the merge. So I think, you know, that's already happened. So I think like we no longer have to debate whether the merge is going to have an impact. It's already had one. However, you know, now we have a date. It's September 1516th. Everybody knows about it. A lot of people are talking

about the merge. So like whether the merge is priced in or not, I don't think it's a binary. I think it's more priced in now than it was in in June, but it is still not priced in, in my opinion. I think there's more room to go. But I think if you, like, if you had to rank it, it's probably a bit more priced in. And then to kind of get to why I think it's ultimately not priced in, I think it's useful to break down, you know, how I think about catalysts in general. To me, there's really three kinds of catalysts. I talked about this in the initial piece I wrote. And they all have to do with flow. So the first and easiest to price in type of catalyst is a fundamental catalyst. So if you have a stock that is going to report earnings and everybody knows that stock is going to probably have

good earnings and then they have good earnings, the stock generally doesn't move. And the reason is because even though good news came out, it didn't actually change anybody's view because they already knew the good news was going to come out. And fundamentals don't actually impact price directly. They only impact price through their ability to create flows on the other side. And if everyone was already positioned for the good earnings, it's not going to change anyone's mind. And therefore, no one's going to update their position and therefore the stock doesn't move. And so Those fundamental catalysts are like, okay, we know it's coming, it comes, and nothing happens in the price. And those are easiest to price in, in my opinion. And then you have what I'd call kind of a one-time flow

catalyst. So XYZ token or stock has a big holder unlock on a certain date, and the market knows about it in advance. But it's still harder to price in because the market has to actually go in and front run that flow. So let's say they know there's a thousand units unlocking, and 80% of those will be sold. So there's 800 that are going to be sold on that date. The market has to go in and sell those 800 units. And then when they actually unlock, buy them back to effectively price it in so it doesn't move on the date. And generally what happens is the market somewhat prices it in. They'll buy, they'll sell like 400 or 500 units, but not the full 800. And so it becomes somewhat priced in. And those one-time flow catalysts, even though they're known in advance,

aren't usually fully priced in. And then the last kind of catalyst that I think about is what's called the structural flow catalyst, which is what emerges, which is it's not at a certain date. There's going to be this one flow that happens and it's over. It's at a certain date, for the rest of eternity, there'll be a continuous flow and every single day. And that is the hardest to price in and really kind of impossible to price in because if you want to price that in, you need to have somebody doing the other side of that action every single day into the event and then unwinding it every single day after the event has occurred. And that's really not a practical thing.

There aren't any market participants that do that. And so a question becomes, okay, we know it's not priced in, but for how long is it priced in? That's really it. Like eventually, you know, you will chew through all of the supply that needs to come out. But it's kind of a question of looking at the magnitudes and how long is that going to take. And so ultimately, that's why I don't think the merge is priced in, like, if you ask me that as a binary, But I think ultimately it's probably a bit more price than now than it was, call it two months ago. That's kind of an overview.

And then, yeah, happy to get into any of the kind of specifics from there. Ryan, what thoughts came to mind while you were listening to Hal just now? I think that, that how. I never know which Ryan you're talking to. Always guessed Ryan. All right. There's Ryan A and there's Ryan B. This is Ryan B.

Thank you. Yeah, perfect. works just fine. How I think Hal is absolutely right that a huge part of the world, including those who are allocating into crypto or buying or selling tokens, they don't realize the merge is actually happening. They don't realize it's definitely, you know, more or less definitely going to work based on the robust track record of test nets

and due diligence from the community. they also don't realize that that so much in my view and I think Hal's view as well so much of the prices are are today in this era determined by this proof of work selling schedule like the amount of crypto that that we paid minors last year through the bull run was just stratospheric it was incredible so I think Hal's right that that going into the merge there is significant opportunity for short-term gains for ETH as those participants who just don't even believe the merge is real are disillusioned, you know, as well as I think just the general execution risk around the merge, which especially is difficult for the decentralized population of capital allocators to estimate.

So if you're a merge engineer, you know, maybe you're sleeping well, you think it's going to work no problem. But I think a lot of us are like, wow, they're changing the engine of the airplane while it's running. Let's see how that goes. So I have full, you know, full faith and confidence in the merge and our community's progress towards swapping, swap and main net off mining. But there are those who don't. And so I think, I think Hal's view that the merge poses significant, very near-term gain potential. It makes sense to me. I think what we're really getting at here is, is the merge trade crowded and is it over crowded? And I think if we look from the external world of crypto, the people who don't pay attention to crypto, they're not on the train. They are not on the train at

all. Like they got off the train if they were even on it like back when prices went down for like four months in a row. But really, I think the alpha that we're trying to get at is like how much of the internal to the crypto industry is on the train. And one of my signals that I've gotten is that there's so much like anti-Etherium, anti-merge, like fud and hate on crypto Twitter lately, that's telling me that there's a lot of people unexposed to the merge. And so before I throw it back to Hal, Ryan, do you have any insights or thoughts as to like how much exposure does the general crypto market have to Eath right now? I think a lot of folks picked their horses and they like to hold their horses for the long term.

And I don't think that the progress on the merge has changed. many people's minds about the overall distribution of capital in the industry. So you look at folks who own Bitcoin and Bitcoin's today worth but double ether. I don't think they look at the merge progress. And I don't think they say, wow, my Bitcoin thesis is wavering now that the merge is scheduled. My Bitcoin thesis is wavering now that the test net merge was successful. I don't think they feel that way. So no, I think I think a lot of folks are unprepared for the success of the merge. And I think while I have no specific trading expertise over a time horizon of like days to weeks, that's not my expertise. I would say there's a lot of folks who are not going to see the success of

this thing coming. And it's, it is important to note just for context for for listeners that like the merch has been kicked back for years and years. And so like, now that it's finally had a date, like it's kind of been like built into like, like, if you're not on the in the Ethereum world, like when it, there's an actual emerge announcement, like it's kind of built into your DNA to ignore that. Ryan, would you say that that's kind of, we're chalking that up to some evidence as to why people are still unpositioned for the merge? Oh, absolutely, David.

I have a good friend from college who's not a crypto fellow. He's a Silicon Valley engineer, sort of ardently anti-crypto, great buddy. and him and I had a bet about a year ago that the merge would happen this year. And I sent him a message last week and I said, hey, buddy, the merge has been scheduled. I'm going to win the bet. And he said, yeah, right, crypto bro is always saying the merge is scheduled. It's a bunch of crap. So I genuinely think that they don't believe us.

It's such a weird thesis to have, I guess, when it's so easily disprovable after the execution date happens and after it cuts over and after it actually works. But yeah, how, what are your thoughts on this in terms of kind of how crowded the merge trade is? Yeah, it's a really good question, and it's a thing that I think about a lot. And there's a few different ways to look at it, and I don't think you can really get an answer

from any one of the pockets. You kind of have to look at a mosaic and piece it together. So I'd say there's a few signs on either side. Like just as the first thing I'd say, I agree with David. There is a lot of pushback. I think it's almost become a consensus view now that the merge is going to be sell the news, which in my mind makes it less likely that it actually is sell the news if everyone thinks it's going to be sell the news. And there's also this a lot of FUD been building up about the execution risk and the timing risk.

I guess just kind of one quick point about how I think about that personally, is in my mind it's probably somewhere on the order of 95% likely that the merge goes smoothly. And I think you're probably looking, like, if we just, you're going to have to come up with numbers to handicap these things. So these, I'm not saying this is what's going to happen, but just for the sake of the exercise, if we assume the merge is up 10% assuming merge happens smoothly the next day. And Eath is down 40% on average in an adverse scenario. So that'd be like, you know, 2,100 by 1,200, which seems like about kind of the right scenarios. And if you apply a 95% probability that it's going to be successful in a 5% probability that it won't, you're still very positive EV holding the day of the merge.

And that's kind of how I think about it. So I actually don't worry too much about the executioner risk personally. But I do think the market will probably worry and is already getting someone concerned. So just I do agree with David's point that there is a lot of fear already built into the market. The other thing I'd say, though, on the other side is, you know, you don't have the moves like I just articulated where each step 100% and the higher beta ultra up 40 and ETH BTC is way higher than it was when Bitcoin was higher. Like that stuff doesn't happen without positioning changing.

So like clearly it is more crowded than it was two months ago, just like factually. Like that's just the way that it, that the market is. has evolved. And then the other kind of thing I'd look at to suggest that maybe there's something priced in is if you look at the options open interest data, ETH open interest is higher than Bitcoin for the first time in history. And a lot of that is calls, people speculating that ETH will go up around the merge. So those are kind of like the two signs that I'd say suggest that maybe there is some anticipation. However, if you look at like other near-term positioning data, like it's something I look at a lot as perpetual, is that.

data. Open interest is quite low, and funding has been negative for a long time, which indicates that there really isn't a lot of what I'd call hot money positioning for the trade right now. And that kind of flood has kept them on the sidelines. And what I kind of think has happened is that you've had a slow trickle of retail and longer-tum institutions kind of trickling in, and then this fast money continually trying to fade in. And that's why that data indicates that they're not long, but yet the price has continued to move up. So I'd say we're somewhere in the middle between crowded and not crowded. I would say two months ago, we were very not crowded, and now we're somewhere in the

middle. And that's one of the reasons that gives me confidence that the trade can continue to work into and through the event is because I just think, you know, this narrative is going to continue to circulate. And it is very attractive to both institutions and retail. And so as we approach and as the date comes into focus and as more and more people start talking about it, I think we will continue to see that trickle in of money that should continue to produce that positive flow dynamic. However, that is like somewhat unknowable. I think to answer the question of how it's going to trade in the short term, you kind of have to know how much retail participation are we going to have and how broadly is that thesis going to circulate. And I really don't know the answer to that question. I think it does depend somewhat on a macro.

I talk about this in the paper, which I'm going to be putting out tomorrow with bankless, that to me there's like some green shoots in crypto right now, some positive signs, but their survival will depend somewhat on the macro. And the macro has been very favorable. The SMP is up 15% off the low is basically in a straight line as people are starting to price in that inflation is less sticky. And if that continues, as I think is plausible, then in my opinion, like those green shoots

will probably continue to grow, and then ETH will continue to have this momentum through the merge. But if it doesn't, then they may not. And so it's hard, it's unknowable, and that's kind of how I'd frame it. By the way, my bias and my base case would be that it does continue, but it's obviously not 100%.

I was going to say, by the way, Hal mentioned an article. I would consider this more like a report that he's publishing tomorrow. And that's going out to all bankless subscribers. We'll recap where you can get that at the end of the episode. But make sure you're subscribed to the bankless newsletter. And you'll receive that report. Last I checked it was like 25 pages. And it was an update on Hal's merged thesis.

Just a fantastic report on this. David, I think you want to grab the next. Yeah. On the topic of just like how crowded this. merge train is again in the short term. I do want to start to kick this out into the medium term. So let's get to the actual date of the merge. Hal, Ryan, I'm assuming, and correct me if I'm wrong, that we are more or less pricing in, as in like these people on this call here, like a 95% plus certainty that the merge is going to work and there's not going to be any significant drama. Would that be

a fair take? Nods from you both. Absolutely. There's a reason it took seven years. We have some of the smartest, most earnest folks in the world that have been ensuring that it works, looking at edge cases that most of us couldn't imagine exist, never mind, get to the bottom of. It's going to work. It's just incredible the effort we've seen from the community to move all the parts of this forward into the big date here. I have some friends involved in the process and, you know, more closely, you know, who are developers and just the amount of burning the midnight oil and healthy paranoia to ensure that we have all the boxes checked. It's just, it's absolutely inspiring. Same from you, Hal. Yeah, I use that 95% figure and that's the figure

that I'm using. I think, like, as a fund manager, you have to have some level of conservatism so that you don't get complacent with edge cases. But if you put a gun to my head and said, what do you really believe the risk is, I would say it's lower than that. But that's kind of like the risk case that I'm really. using. And then the other thing, just to like go back for one second, I don't want to undersell like the importance of this catalyst though. Like to me, it truly is still a massive, massive event, probably the biggest event in crypto history in many years. And it's a like very big deal with a very strong positive bias. So while I think that the future is unknowable and there

are certainly multiple paths, I definitely still retain a positive bias. How much capital is out there in the crypto markets that when the merge does happen and it is successful and it's like the day after the merge is September 17th and all the Ethereum community is like super happy, how much capital is then like, okay, now I'll buy East versus I think there's a decent amount of like, you know, Bitcoin maxis out there that they're like still, they're just going to move the goalposts and they're like, no, I'm just never going to buy Eath. Like, how much capital do you think is sidelined waiting for the day that the merge is

a success? Ryan, do you have any indications about this? Ryan B. You know, I think that how much capital may be available, probably a better howl question. I come from the computer science and kind of strategy background. I, I, uh, how, what do you think? Um, I think it depends on where we are that day. Like I think you can answer that question if it happened today.

Like if it happened today, I think there's plenty of capital. Like I think people, the fast money is on the sideline. Like you can look at that from the data. A lot of people are still fading it. A lot of people are worried. There's going to be plenty of money to purchase it the next day. If by the time we get to the merge, you know, there's a frenzy that's developed and like the thesis is blaring from the loudspeakers of the mainstream.

media and the positioning data is different, you know, there may be less of that, more of that may have come in in advance. And then on the flip side, if macro worsens between now and then and some of the money that is already in actually exits in advance, then there will probably be even more money. So I'd say right now there's a moderate amount, but there's potential for that to change. And I'd say like that that moderate amount is probably on the order of low single digit billions. Low single-digit billions. Do you have any idea how much that would actually move the price? Like I said, my kind of base case is something around 10% next day move, assuming success.

Wow. I love that question of if there's $3 billion flowing into ether, how much does that move the price? And the thing that's interesting there is it's actually, I think as community members, you know, we're always seeing DGENs dumping things and prices skyrocketing and falling. And like, why do they do that? Why is there such extreme volatility? And the answer is that it's because of supply inelasticity. It's because when you dump a certain amount of money into a token, well, it depends a lot

more on the circulating supply. And it depends on whether you buying it actually. actually make the existing holders more bullish, so they raise their own personal price targets. And it really puts you in a situation where when you buy $3 billion, you know, market buy of ether over, you know, let's just say instantaneously, the market cap is going to rise a whole lot more than $3 billion. Well, how much more than $3 billion? Well, there have been some studies that have suggested that every dollar of new crypto purchased can raise the price between the market cap, pardon me, every dollar of net fiat inflows into a crypto could raise the market cap like $5 to $20.

That's the dump, the pump and dump phenomenon. And it's really this phenomenon of market cap being so enormously responsive to fiat inflows and outflows that I think is at the heart of halanized thesis around proof of stake taking us to the moon. Because while we look at that very exciting $3 billion that may be ready to enter Ether, you know, the week following the successful merge. Well, at the height of the bull run, we were paying a billion dollars a week combined to the miners of Bitcoin plus Ethereum, one billion a week to both miners. And most of that went to Ethereum miners because we pay them a lot more than Bitcoin miners. And so I just think there's sort of that interesting relationship between that short-term capital

entry versus, you know, to Halenai's point, that reduction in minor cell pressure after the merge. So just very, very, very exciting pump and dump type economics here. Ryan, you are sounding pretty bullish, my friend, even in the short run, but we'll get to maybe some more of the differences. I do want to get back to kind of the core structural shift here and the significance, and maybe the magnitude of it. And I know how that was part of the reason you came on our episode way back in May. I think you've got some kind of like updated numbers in your new report that you're putting out tomorrow.

But could you just remind us of the structural significance? So we've got maybe $3 billion or so in inflows waiting on the sidelines. But we also have a massive reduction of outflows. And that I think is the core merge thesis. Can you recap us on the mass? magnitude of this and why we're all bullish on the merge to begin with? Sure. And then, you know, the flip side of that is how much money has already come in that will look to exit post to sell the news and then what's the magnitude of that? And that's kind of like

the equation you have to counterbalance. But just to give you a quick recap. So about 15,000 ETH tokens get issued today, which is about $30 million at current prices. And I assume, you know, 75% 80% or so of that is sold daily. So just for math's sake, we can assume $20 million of daily supply at current USD prices. And so when you break that down, it's on the order of half a billion dollars a month.

And so when you think about the impact of the merge, you can think about half a billion dollars of supply gets chewed up every month going forward that didn't use to. So like when you think about that, like let's just say you had $2 billion coming in, $5 billion coming out, so net $3 billion of outflow, that might price in the merge for six months, because it would take you six months to create the $3 billion necessary to fully offset that $3 billion of net outflow post-merge. I'm not saying those are the numbers, but those are kind of like, that's the framework in which I would think about it. And then if you want to think about like purely the structural flow dynamic, it's hard to do this and you have to make a variety of assumptions. But for me, what I do, I assume after talking to a few sources that roughly 80% of the volume that occurs day to day is quants just batting it back and forth with no actual discretionary movement.

And then 20% or so is kind of real discretionary volume. And so I handicap all the volume numbers by a factor of five. If you do that and then you look at what is the mining volume, the mining selling volume as a percent of total volume, you get to something on the order of 1%. And now 1% might not sound like a lot, but 1% is a lot. It is a lot. So that structural flow dynamic is quite meaningful. You can think about it in that 1% context or you can think about it in the half of billion dollars per month context. And then the most useful context that's like for a lot of crypto natives to think about it and it's just in ETH terms, right?

Like I, the fund is relatively small, but I've transacted some relatively larger amounts of ETH over the last eight months. And you kind of get a feel for, you know, what actually impacts the market. And, you know, in that context, like if you told me someone was going to TWR, a buy of 70,000 ether every single week for the next year, I'd be like, all right, that's, that's pretty meaningful. Like, that's probably going to matter. That's what happens with the merge. But the only thing is, it's that 70K per week that that's the way that the math works out.

It's about 10,000 a day. And the difference is that it doesn't end after a year. It just continues forever. right. So that's kind of the context that I would think about it in and kind of how I'd think about the timeframes. And the reason for that how, of course, for people who maybe they don't know very much about the merge, but is because we no longer have to pay minors. We're no longer having to pay minors for the proof of work. It's completely big of stake. And so all of that expense to the network is essentially gone. The TLDR is that your issuance, your gross

issuance gets cut 90%. So instead of issuing 15,000 tokens per day to miners, you issue roughly 1.5,000 to stakers. But the impact is even more profound because the miners have very high op-ex and therefore sell a large portion of their issuance. The stakers have very low op-x. And also, by definition, are Ethereum holders to begin with and probably have a bullish view on Ethereum long-term and probably don't want to sell their rewards and don't need to because they have lower OPEX. So they both get much, much, much, much fewer issuance, or much less issuance, many fewer tokens, and they sell a smaller portion of what they do get. I want to bring in Ryan in just a minute, but one more question while you're on that thread.

So recently, since we last talked, I think Ethereum of revenue, block space fees have been down quite a bit. In fact, we're now like, I don't know, 10 Guay or something. David and I look at this. 11 right now. a weekly basis is kind of the median price, the average price for ETH. And that's actually, that means ether might not be deflationary post-merge. It may or may not. We're kind of right on the line.

How does this impact some of your analysis? How is this a bearish thing? Like block space demand has gone down and fee revenue is down? Or does this not matter for the sake of your analysis? Yeah. I mean, it's an interesting question. and it's something that I thought about in reference in the paper. Like, certainly, the short answer is yes, like fees and demand for block space is certainly lower than it was six months ago.

I think it's kind of interesting to think about why that is, too. It's not just a reduction in activity. It's also that a lot of the applications have become more efficient. So, for example, OpenC is 40% more efficient with their transactions than they used to be. So if you actually look at the daily active ETH users, they haven't changed all that much. I think they're less active on average and the applications are more efficient. But I think the absolute level of the declines is probably overstates the impact on the activity. But then when you think about that, I mean, yes, it does impact a lot of the numbers in various ways.

Like the staking rate that I'm predicting post-merge now is about 5%, whereas before I was predicting closer to 9%. And that's a function of the lower fees. However, it's not all negative. I'd say some a little bit more mixed. On the positive end of the spectrum is the fact that fees are low. People complain about when fees are high and they complain about when fees are low. The benefit that you get when fees are low is that it's just a more friendly chain to use. And the adoption is easier to keep in the Ethereum ecosystem than other L1s because no one's really fleeing the eth ecosystem

because they don't want to pay $2 feet. Like, yes, you could probably pay half a penny on some other chain, but it's not driving the decision nearly as much as when you're paying for a $200 uniswap transaction. So where, like you said, we're kind of right at this equilibrium where fees are high enough to burn almost all the issuance that we are admitting, yet they're still low enough such that they're not really inhibiting adoption. So in some ways, they're kind of optimal in that sense.

But yes, in terms of the kind of model outputs, it's definitely a negative impact. And then you said the 5%, does that, 5% staking APY, does that include M-E-V or not? That's maximum extractable value? It includes an estimate for it, yes. But it's like, it's debatable. If you want to apply like a maximum impact, you can get close. to six somewhere in that range. But yeah, you can call it 5 to 6%.

But I think, you know, one thing that I talk about in the paper, too, that I think is important when we're going to talk about the staking yield is a move from current rate today, which is about 4% to post-merg, which is 5%. It doesn't sound like a whole lot. It's like, all right, all of this for a 1% increase. But it's not, that doesn't tell the whole story. To understand kind of the true impact, you have to think about not just the nominal yield, which is like the sticker value, but also the real yield, which is

how much issuance you're having to emit to achieve that yield. So when you think about the yield of an asset, like let's just take Cosmos, for example, I think they have something like 15% APY. But the reason they have 15% APY is because they emit 15% of tokens each year. So their nominal yield is 15% but their real yield is 15% of APY minus 50% of issuance. which is zero. So as a staker, you don't actually make any money. It's just basically a game of issuing new tokens and you're getting diluted at this rate, but you're also receiving the more tokens. So your stake stays flat. So your real yield is actually zero. And if you look at the case of Ethereum today, your real yield is also very low. You're receiving about 4.2%, but the network is

inflating at approximately 4.1%. So your real APY is really only 0.1%. Now, post-merge, that 4.2 increases to 5, but much more meaningfully, your issuance decreases from 4.1 to pretty much zero. So you go from a 0.1% real yield to a 5% real yield. And that is a massive, massive shift. And that will create basically the first real yield in crypto, which is a really profound dynamic. I think your paper said there's nothing even close to this. The closest is maybe the BNB chain, which is something like 1%. And that's getting its yield from fees, or is that? That is getting its yields from fees.

So BNB is the one other chain that has legitimate fee pool that does have real yield, but it is lower. This difference is, this really starts to make Ether look when it's stake formed like a bond, like an Internet. bond as we've been talking about all along. And the way you're framing that real versus nominal seems to be the way that people talk about bonds, right? It's like what's your real return on bonds? Can you talk about that a little bit? Sure. So it depends the price of the bond. So like if you buy a bond at 95 on the dollar and it's yielding 5%, your real yield is going to be closer to 10 because you're going to

make up the par plus the yield. But like if we assume you're just playing par for the bond, then your real yield is just the yield of the coupon payment. I actually don't quite agree with the internet bond analogy, but this is kind of semantics. Like to me, it's not just bonds that have yield, right? Apple stock has a real yield. It's in the form of earnings. And to me, ETH is more akin to Apple stock than it is to the U.S. Treasury bond. Because if you buy a U.S. treasury bond, you know you're getting a fixed principal payment

at a certain date in the future, right? if you buy Apple stock, you know you're getting a yield for as long as you hold it. And then when you go to sell it, it's whatever someone's willing to pay for you, pay for it. That's the case with ether as well. It's not like you buy $100 of ether. You get this yield for 10 years. And then in 10 years, you know you'll be able to sell it for $100. It may go up.

It may go down. You don't know. And you get yield paid in the intro. So I think it's more similar to an equity. I don't want to say that word, similar to a stock than a lot. I do that, see that comparison. But going back to kind of the real versus nominal bond yield, right? It's like if you're buying a sovereign bond, for example, you're going to have to take out inflation to see if you're actually making real returns on that thing.

It's like if you're getting a return of like 4% on the bond, but inflation's like 9%. Your purchasing power is diminished by 5%. So that doesn't make sense. Whereas like it's different in Ethereum. this is a true real return of 5%. And if you want to compare the internet bond to other sovereign bonds in its class, that is a lens to compare it to.

You can compare to equities. I think that's fair. And we could spend the whole episode on the nuance of this so often. I'll pass. Well, to take this conversation forward about the same subject matter, though, is that one of the models I've had for this yield on Ethereum is that it might actually be something that attracts a lot of external capital.

Maybe it attracts more capital from the crypto space, but it might actually be the thing that penetrates out into the quote-unquote real world, the legacy world, and attract a bunch of new buyers to buy ether on the principle of the actual real yield. How do you have any sort of like measurement or magnitude of how much capital might flow in just based off of this or any like speculation there? Yeah, it's like impossible to say, you know, like, actually, it's not impossible. I haven't done the necessary analysis to say this is how much capital is out there with a mandate to invest in kind of bond like assets.

And I think X percent of it is going to come in and blah, blah, blah, blah. I haven't done that work. But what I would say is, I definitely agree with you. It's a very investable thesis for large institutions. If they know this is a product that actually generates revenue from actual. users and the revenue actually gets returned to the holders. And that's where the yield comes from. That is an important dynamic and an important part of a thesis for some of those larger investors. Ryan, turning this conversation to you, you've hinted at this once in the show. And I believe it's

also your pinned tweet on Twitter. But I also wanted to get your comment on just like the magnitude of this whole yield conversation. Can you talk about just the limitations? of ether going up in price under this proof of work dynamic and how as proof of work prices go up, then also proof of work selling goes up. And then also, any thoughts or comments that you have on this whole like real yield conversation? Certainly, yeah. So for me, one of the most important fundamentals to learn about crypto may be that different kinds of inflation are not necessarily in apples to apples comparison. And so when when you're running a proof of work chain and you pay your miners 5%, you know, to Howell's point, miners, miners have a cost structure

that makes them, they have a competitive dynamic of mining that makes them willing and able to pay up to $1 in new marginal expense of hardware and energy to capture that extra one juicy dollar of mining revenue. And so Ethereum's success, Ethereum's success creates its own drag coefficient. That like for last year, for example, part of the previous segment of the conversation talked about fees and the declining fee structure. And last year, during the bull run, fees exploded, right? Who benefited from that? It was just miners. And in what way did they benefit? Their mining revenue went up. And so they invest more in hardware and grow their mining operations, which increases their cost structure. And so when you pay 5% inflation to miners, that very significantly hurts

your chain's market cap versus 5% to validators. And so the fact that this cost structure scales with the market cap and hurts the price of the chain so much was the reason that my group, was very happy to go short at the top last year. You know, we got out of a lot of our stuff because we just, we just looked at the numbers and we said, you know, there's a lot of folks who think that, you know, there may be, you know, super cycle theory or that this is, you know, not yet the top because it's really just going mainstream. And we just looked at some of the, some of the money being spent on mining during the peak.

And it was just, it was just our view that those kinds of rallies are unsustainable under proof of work. And I think that, you know, shows why, you know, part of why the transition to proof of stake is so exciting, which is that next time, you know, whether it's three, three months or three years from now, we start to go back to all-time highs, well, this time we're not going to have proof of work weighing us down. And that weight is extremely significant. And, you know, the subject of much debate, I would say as recently as a year or two ago, almost nobody believed that the true cost of proof of work was non-trivial. They all just thought they were like, oh, miners sell some tokens, it's no problem.

You know, let's focus on the real stuff. So, yeah, I think a proof of work, very, very expensive. All inflation is not created equal. And, you know, proof of stakes can a, going to fix that for us. This phrase, a drag coefficient, I think, is really apt to describe really what's going on here. Because as the price of your proof of work asset scales, so does the size of the selling pressure of the miners of that same proof of work asset. So, Ryan, is it your opinion that no matter how many ways this crypto industry plays out,

it's going to be a proof of stake asset that finds itself as the number one store of value cryptocurrency? Like, if we re-roll the dice and did crypto over again, it would always be a proof of stake asset that comes out on top? 100%. As long as the gigabrain research community does not find any truly fundamental flaws with proof of stake, proof of work is a dinosaur. It's true that the proof of work is simpler and that mining is potentially a less risky process than validating because you're not having that validator hot wallet.

But all of these benefits pale in comparison to the fact that you just can't scale a chain on mining. It's too susceptible to 51% attacks. It can't secure more than its total market cap, which would be like very inconvenient when you're building a global settlement layer. and the chain just can't sustain multi-trillion dollar valuations because your miners just apply that drag coefficient to keep you out of those high prices. And unfortunately, for a chain like Ethereum, if we were to stay proof of work and their proof of stake had never been invented, there's no doubt in my mind that eventually we would pass Bitcoin and we would be a global settlement layer.

But the thing about proof of work is it's kind of insipid because you know, you get this great narrative where you distribute the tokens in a more egalitarian fashion because miners are dumping. And hey, it's only a very nominal inflation rate. The tokens you're selling don't really hurt the market cap that much. But at the end of the day, it's a very large amount of money. And proof of stake is absolutely the few. future. And so, you know, the Bitcoin is not only going to get flipped by Ether. Bitcoin's going to get flipped by more than one decent public chain, you know, even as Ethereum stays number one into the

years to come. You know, Justin Drake's model of like these consensus layers being like engines has really struck with me from the ultrasound money episodes we did with him. And it's almost like Bitcoin is kind of an engine that's running on like some coal or gasoline, a combustion engine. And then like proof mistake, if you do it well, it's like nuclear fusion. It's like an order of magnitude, more efficient in terms of dollars in versus value coming out on the other side. We've got a lot more to cover, David, though. What are we going to cover in the next part of this? Yeah, I think you guys can tell where I'm going with this conversation. We're going to talk about the flippinging, you know, and your guys is schedule for it, whether it's happening in this year, next year,

or the year after. We'll take a peek at that. And overall, just talk about like the remaining etheromics that we have not yet discussed. So we're going to get to all these conversations and more right after we get through some of these fantastic sponsors that make the show possible. Juno is bringing crypto-friendly banking straight into your checking account. With Juno, you can send money from your Juno checking account straight onto a layer two, like Polygon, Optimism, Arbitrum, and they have ZK Sync and Starknet support on their way. You can skip the ACH wait times, you can skip all the GAF fees,

and go straight from your check-in count to an Ethereum layer two in seconds. Inside Juno, you can buy and sell crypto with $0 fee. and your Juno checking account comes with a metal master card that gives you up to 5% cash back on your spending. Juno is also giving you $10 cash back on your first crypto deposit and $100 when you set up a direct deposit. This ad just writes itself, so go sign up at juno.finance slash bankless. ZK Sync is an Ethereum Layer 2 network that is pushing the frontier of high performance blockchains that don't compromise on security or decentralization. ZKSink has combined the power of zero knowledge roll-ups in the Ethereum virtual machine, enabling developers to build the greatest web three projects possible, ones we haven't even seen yet.

Crypto needs its killer applications to onboard the world, but crypto killer apps need ZKSink as a platform to build on first. It's generally accepted that zero-knowledge roll-ups are the conclusion of crypto blockchain scaling technology. And ZKSink is leading the charge into the final frontier of crypto economics. So if you're a developer who wants to build your app on a future-proof foundation, which gives your users the best UX possible, check out ZKSink's website at ZKSink.io. Yes, there's also going to be a token, so give them a follow on Twitter 2 at ZKSync. The Brave Browser is the user-first browser for the Web3 internet, with over 60 million monthly active users. And inside the Brave browser, you'll find the Brave Wallet, the secure multi-chain crypto wallet,

built right into the browser. Web3 is freedom from big tech and Wall Street, more control and better privacy, but there's a weak point in Web3, your crypto wallet. And most crypto wallets are browser extensions, which can easily be spoofed. But the Brave Wallet is different. No extensions are required, which gives Brave browser an extra level of secure. versus other wallets. Brave wallet is your secure passport for the possibilities of Web3 and supports multiple chains, including Ethereum and Salana. You can even buy crypto directly inside the

wallet with RAMP. And of course, you can store, send, and swap your crypto assets, manage your NFTs, and connect to other wallets and defy apps. So whether you're new to crypto or you're a season pro, it's time to ditch those risky extensions and it's time to switch to the Brave wallet. Download Brave at brave.com slash bankless and click the wallet icon to get started. And we are back. We are going to leave. into this conversation, a little bit more on this proof of stake versus proof of work, store of value. Hal, I want to continue this conversation with you. Can you talk about your perspectives as to what a proof of state consensus mechanism brings to the table when producing a store of value asset?

And does your answer have any sort of indication as to how fast ether might flip Bitcoin? Yeah, sure. It's a broad question, so excuse the long-winded answer, but I'll try to get into some of the kind of first principles about how I think about that dynamic. I think for a store of value, there's really kind of two variables and two characteristics that are most important to me. One is security. So I think, you know, gold has been the model store value historically. And the reason gold is such a good store value is because it has these two characteristics.

One is security, another is credible neutrality. So gold, if you own gold, you don't have to worry about whether it's going to exist in 100 years. It's just a physical object. and you can be pretty confident that it will remain in existence for long into the future. And it checks that box fairly easily. No one can control it, et cetera. And then gold is also credibly neutral.

It's not issued by one government. It's a natural resource. It doesn't have allegiance to anybody. It just is. And so that's why I think it has been such a successful store value over time because it is like a 10 out of 10 on both of those characteristics. So when you think about that in the context of a cryptocurrency store value, you kind of have to look at those two variables as well. So just to start on security, how a cryptocurrency gets its security is through the consensus mechanism. And really that security comes from the ability to protect against 51% attacks.

And so as you break this down between people of work and proof of stake, I think the relevant question is twofold. how efficient is each mechanism in garnering that security? And then after that, how difficult is it to attack efficiency agnostic? So on the efficiency front, you have to think about, okay, how does somebody attack the network? So if it's a proof of work network, you have to basically acquire as much hash as currently exists such that you control 51% of the hash, and then that will allow you to attack it. So the relevant question there is how much issuance? does a proof of work network have to emit to generate $1 of annual security?

And really what that boils down to is what is the rate of return of minor demands on his investment in order to mine? Because that's what determines how much the chain has to issue to achieve the security. And generally, this is not an exact number, but generally the way it works out in a proof of work system is approximately 100%. So if a miner is going to spend a dollar to buy a hard, rig, pay for electricity, et cetera, he's going to demand $1 every year to make that investment. And the fundamental reason for that is that this hardware does not last forever.

So let's say it lasts three years. He's going to demand that he receives payback on his hardware in the first year, such that he can make profit in the second and third years. And so generally it works out to that 100% figure. So if a proof of work network wants to achieve $100 of security, meaning that it would take $100, $51,000 to attack it. It must admit $100 every year to pay for that security. So it's about a one-to-one ratio.

Now, with proof of stake, it's very different. What is the rate of return that a staker requires? It's generally somewhere between 3% and 10%. In the case of ETH, obviously, we just discussed that it's going to be about 5. So they only require a 5% return. So what that means is to get somebody to lock a dollar of their stake in the staking contract and therefore provide $1 of security, you must only issue

5% of that dollar to pay for it. So it's 5% versus 100% on the order of 20x more efficient. So if a proof of stake network wants to generate $100 security, it only has to pay $5 versus a proof of work system has to pay $100. So just in terms of security efficiency,

proof of stake is dramatically more efficient than a proof of work system. And then this kind of the second factor for security is, okay, that's fine, but how hard is it to actually attack the network? And I think this is a part that's a little more nuanced that I don't think people really think about. But the proof of work system, you have to buy the mining rigs, you have to get the electricity, and you have to set up your hash rate.

And with each mining rig that you purchase, the next one does not become materially harder to purchase than the previous one. So you just need to buy them all up, et cetera, and then you have enough. And that's just a function of money. The problem on proof of stake is you're not buying hardware rates. You're buying tokens. And there's a finite number of tokens. It's not as if Bitmain or Nvidia is making your hardware rates.

You can only buy tokens. And with each token that you purchase, the next token becomes significant. Well, not necessarily significantly. I'll leave that aside. With each token that you purchased, the next token becomes a little bit harder to purchase than the past and so on and so forth. And so if you envision a scenario, where let's say the Ethereum staking rate got to 51%.

If you assume that those are good actors, the network is then mathematically impossible to attack because there does not exist enough tokens for somebody to have 51% of the stake because 51% of the stake is honest. But obviously, you know, we don't even need that. Let's just say the network gets to 30% staking rate. Only about one third of the Ethereum tokens are actually liquid and actually, you know, move around every three months. So even if you get to one-third, it becomes practically impossible to attack the network under any circumstance.

It doesn't matter how much money you have. It doesn't, like, first of all, it's really freaking hard to buy that many tokens because as you start buying them, the price is going to go up dramatically. And it's going to come very, very, very expensive to keep buying them. But second of all, it becomes like actually mathematically impossible because there's not enough liquid circulating supply. And so that is a kind of a reflexive defense that proof of stake has, that proof of work also doesn't have. it's more efficient and it's harder to attack. And then the part that I think is kind of really profound about this is that both mechanisms have a core fundamental problem, which is that the price or the security of the network

is actually directly tied to the price of the asset, meaning because it's tied to the issuance as the price of the token goes down, so does the value of the issuance and so does the security of the chain. And that creates the potential for a very toxic. and harmful negative feedback loop by which the price goes down, therefore decreasing the security, therefore making people lose confidence, which makes the price further go down, which makes the security further go down, and so on and so forth. And in a proof of work system, you really have no natural defense mechanism against that. Because as the hash goes down, it doesn't become

harder to buy mining rigs. Like Bitman and Nvidia are other standalone companies that are making these products for other things, and they can just keep making them. But for proof of stake, it's not just a function of the money, right, as we articulated. It doesn't matter how low the price goes. If there's not enough circulating supply, you still can't attack it. And it still becomes quite difficult, even if there is enough because you will start eating through it. And so the proof of stake system has a defense mechanism that's actually reflexive with price as the proof of work system doesn't, which makes it a lot more vulnerable to this negative feedback loop, eventually someday playing out. And in the case of Bitcoin, the Bitcoin asset has been quite fortunate, or if you don't want to say fortunate, it's just so it's happened this way, such that around every halving, the price has also gone up dramatically.

But price cannot go up exponentially forever, because I wrote about it in my paper. Like, if the price doubles every halving for the next seven halvings, the market cap of Bitcoin will be larger than all the M2 that exists in the world. So, like, there is a natural bound. And so in that context, you cannot keep relying on price going up to keep your security budget. If you keep having the security budget, eventually price will stop going up and then you're very, very vulnerable to this negative feedback loop. And so the only way to actually reliably generate the security over a long period of time is through a large fee pool.

You need to have a mechanism that is sustainable to pay for your security other than issuance. And Ethereum obviously has that, it has the largest fee pool in the space, and Bitcoin obviously does not have that. And so for these multiple reasons, on the security fund of this analysis, it's very clear to me that Ethereum is a better suited asset to be a store of value than Bitcoin. I think, honestly, I really don't know how Bitcoin is going to deal with these problems because they just don't generate any fees. And that's the only way to actually generate long-term security. Like their current roadmap, the security is compromised every four years into perpetuity, and that's simply not sustainable. And for a store value, this single most important

thing that you need is sustainability and confidence long-term. So that's what makes, that's just like the very large first principles structural issue that I have with Bitcoin as a successful store value. And until that's resolved, it's just very hard for me to see it really gaining adoption. And the main way that people would go to address that is with tail inflation. So basically, get rid of the having cycle, which has some of its own problems. But that also just guarantees inflation, which is also not what you want in a store value. So for that reason, like, it's fairly clear to me in that angle, Ethereum is far better suited. Now, the second angle that I think we have to discuss, I don't know if, Brian, you wanted to jump in with some.

something, but in the case, in the sake of fairness, I think we should also discuss the second sort of characteristic, which is credible neutrality, which I think Bitcoin is currently ahead of Ethereum. But I don't know if you want to jump in first. No, I agree with that on the credible neutrality front, though I think Ethereum is a fast catching up. I guess, you know, just to kind of round out this conversation, though, about sort of Bitcoin versus Ethan and kind of the flippening. So how do you think the flippinging is inevitable. And if so, how soon do you think this happens? It's like the merge, really the last ingredient needed. You know, Ethereum gets his monetary policy figured out, basically, and that's the

last thing necessary in order to flip in Bitcoin. And if so, when do you think that could happen? How soon? Can I, can I do the credible neutrality point for two minutes and then address that? Yeah, do that. Do that. Yes. I'll do it quickly. So basically, but the only point about credible neutrality is just that the second characteristic of store value needs is credible neutrality. It's not enough to just be secure if somebody can control you. And I think Bitcoin is the way that a cryptocurrency achieves that credible neutrality is through decentralization. I think Bitcoin is clearly the most decentralized network today. There's an awkward team for Ethereum that is meaningful. There isn't really for Bitcoin. I don't think there's really a debate there. However,

long term, I envision a place where I think Ethereum is essentially on a roadmap. And that roadmap has an end point. That doesn't mean the devs will go away forever at some point, but I do envision them, and call it 10 years, migrating to more of a maintenance role where even if some government controls the developers, they still can't touch the chain because the chain no longer depends on them. There's other people that can do their job. And then the chain is no longer reliant on that developer team. And I think Ethereum will get there.

And when it does get there, it's effectively on par with Bitcoin on credible neutrality. And so at that point, it will be clearly superior for security on par for credibly neutral and just like all around a superior store value. Now, going back to your question about the flippinging, I think, you know, we can talk about these fundamentals that are blue in the face, and I do think they matter, but ultimately it comes down to flows. And this is why I think the merge is so significant to basically ensure, or not insure, but to drastically increase that probability that a flippinging will someday occur.

Because once you achieve the merge successfully, you basically have this very powerful dynamic where after that date, time becomes a tailwind for Ethereum or remaining a headwind for Bitcoin. And what I mean by that is after the merge, every single day, you know there's money that needs to sell Bitcoin. And every single day, you know, there's money that needs to buy Ethereum. One has structural supply. One has structural demand. At that point, it's just a matter of having enough time pass before those flows eventually do their job. And so yes, I do think the merge dramatically increases the odds of a flippening.

Yes, I do think a flippening will someday occur. Like I often say, like there's no certainty in anything. So, like, of course, you don't know that anything will happen, but I think it's better than 50% odds. And in terms of the time frame, I'd look to that long term. I don't think a flippinning will occur before the merge. I don't think the EPDC ratio is going to double in the next four weeks. I think it will go up, but I don't think it will double. I think you'd be more in that call it six month to two to three year time frame.

It's a wide time frame. Yeah. It's kind of a cop-out answer. It's kind of a cop-out answer. Six months? I don't. Six months to one? Two to three years.

The two-year. I mean, that's not much of a cop-out answer. You know, that's definitely range-bound. What do you think about this, Ryan? What's your certainty of the flippinging? 99%, Ryan. 99%. There's only a, the only chance of the flippinging not happening is related to black swan type tail risk where proof of stake, they find a critical flaw in proof of stake.

You know, years later, some researcher eventually figures it out or, you know, we're talking about there would have to be some very, very unexpected, extremely significant new development to prevent the flippinging. We're absolutely going to flip it. My timeline for it is within four years. I think four years is sort of a good amount of time to have the flows accumulate. I have a longer explanation for why I think that's a good timeline related to when the next bull market starts to kick in and the fact that proof of work is more expensive in a bull market. And also, I just think there's a history in crypto of the inefficient market hypothesis where

it just seems to take the market some time to believe that a realized fundamental is definitely going to translate into some kind of market movement. It's almost like a game of chicken. They're like, all right, we all see the merger successful. Do you believe it's going to cause ether to gain on Bitcoin? Well, I believe it, but does she believe it? Do they believe it? So I think there's just sort of a natural time delay between the success of the merge and the accumulation of the flows and confidence and obviously continued growth of Ethereum in our L2 ecosystem, which will eventually definitely cause a flippinging. So while I'm 100% in, you know, 99% flippinging in general, I'm 90% within four years. And here we go. I'm a spicy 0% in the next 15 months.

Why? I knew you were going to say something like this. Why? Well, I believe that the accumulated confidence in Bitcoin is just going to take some time to dethrone. I think, you know, with the merge coming, there may be a great merge trade, you know, not my area of expertise where we really gain on Bitcoin. but then there could be a tradfai macro event that, you know, to Howl's point, I have no particular insight into, you know, the global, global macro economy, whether S&P 500 is going up or down. I don't know. But what I do know is the crypto cycle is real. And if you've been

around for a few years, you start, like, you get a sense that the crypto cycle is a highly significant, separate confidence cycle that causes the prices of these primarily today, confidence-based assets to rise and fall in some kind of like natural human cycle. And this crypto cycle is separate and distinct from the global cycle. And so what we have is a crypto cycle that ended last November and a global cycle that I don't know much about that guys like Jamie Diamond and Ray Dalio seem to think there's maybe a lot of challenges with. And so for me, I feel very confident that the crypto cycle is going to continue to play out over the next year or so.

And I feel some degree of confidence that the global macro economy could provide new headwinds, not my area of expertise. And so I think you just sort of put that all together. And I just don't see the crypto market. in November, or let's say January next year. January next year, merges four or five months old. We've saved however many, you know, possibly at that point about one to several billion in minor payments, you know, with the current reduced fee level for this crypto bear market. And I just don't think that having saved a few billion in fees

and the merge chugging along for five months is going to cause that kind of glacial, shift in the crypto climate, I just think it's going to take a little longer. So 99% flippinging, and I just think it's going to take a while. And no doubt in my mind that, you know, those of you who specialize in shorter term time horizons are going to have a lot of fun and a lot of volatility, you know, between now and then. Well, so let's end this. And this has been a great discussion, guys, but let's end this with one question, which is positioning relative to your thesis. So, Ryan, we'll start with you and we'll go to how, but Ryan, your thesis, is bullish long-eath, I'd imagine.

Now, in the short run, you don't think much will happen relative to the merge in the long run. You are bullish-eath. So how do you position a portfolio for something like that? Is it just simply buy-and-hold-heath? If so, that sounds real good. Is there anything else you do? Buy-and-hold ether, and for me, over the past few cycles, I was able to increase my ether position about 100% through some.

sort of judicious and conservative leveraged buys, you know, using our traditional facilities like Maker. And so for me, I think there's a question of when do I, when do I get in at leverage? I'm not there yet. That's just because I do think the prices we were at a few months ago were truly low. I would have been very happy to enter there. I'm just kind of rolling the dice in thinking that, you know, given the size of my ether stack already, which is considerable for my family, I'm, I'm ready to wait and bet that I can pick up crypto at low prices in the coming quarters. So for me, just already being a large ether holder, I'm going to wait a few quarters, and then I'm going to get in at leverage and, you know, sail through the flippinging.

And I think, I think we're going to see, you know, 10K to 25K towards the middle, middle of the decade. Is a triple digit eth on your bingo card, or did we hit that once, never again? Unfortunately, I think it's a possibility. Yeah, I think especially as a function of global macro. When you take your leverage with Maker, Compound Ave, or whatever, how long would you think that you would hold that? Is that like, that's not like a two, three week thing, right? That's like you're holding that leverage position for a long time, right?

That's right. I'll pick a liquidation price that I feel very comfortable sleeping with, although I won't, you know, step too far away from my, my hardware wallets. And then I just, then I just let it ride. I just, you know, you got a liquidation price of, say, 250. Great. You've just, you've just, it's free money, man. Like there's a certain level that we're not going below.

And we're definitely going, we're definitely going up, you know, eventually. Let's not recreate the sailor sound bite. I I uh mortgage your house mortgage house let's not do it that's a great sound by it's one of my favorites no no let's not do that quick story on that though leverage is not free money i i yeah i did think that at one point in time and i remember when we uh dropped down to double digits and i had a liquidation point point that got uncomfortably close um so just another reminder that anything can happen in crypto for sure but how how are you positioning yourself What is your most preferred way to get exposure to the upside and the merge here?

Yeah. I will not be levering long through the defy application. My investors do not have to worry about that. I will basically be, you know, I've talked about this at large and nothing changes for me. Long-Eath, long-Eath PTC, long liquid staking derivatives, long-eat call spreads. those four instruments are the four that I that I've had on for a long time and that I continue to hold can you tell us about like when like the timing are you like you percentage deployed did you have any information about that um yeah I mean I was it's it's it's it's it's a little bit

of a gray area I got in trouble for this the other day because I talked about it on Twitter and my lawyer messaged me and was like, you can't do that. That's solicitate. Well, I don't even know. I'm supposed to say that. Anyway, so it's a little bit of a gray area, which you can and can't talk about.

So I'll try to be cautious. We were very deployed two months ago. Over the weekend, we took leverage down a little bit, mainly just because I felt like I had a lot of alpha, two months ago and now, you know, with a date being set with everybody talking about the merge, I felt like some of that alpha had been pricing. Like we said, I felt like some of the merge is priced in, but not all the merge is priced in. So naturally, I feel like as an investor, my position sizing should match my conviction levels.

So we took stuff down a little bit, but we still have a large core position. The strikes that we have on the call spread is we bought the September 1,500, 2000. call spread for $50 about two months ago or six weeks ago. So above $2,000, that pays out $500. It's like a nine-to-one payout. And we're just going to hold that pretty much through the merge. And yeah, so I'd say we were very deployed. We're now moderately deployed.

And that, then the position that we, and part of the reason for that, honestly, was I want to be able to hold my position just through the. merge and not worry about it. And as just like an investment fund manager, there's a level of sort of risk management that you have to do. And even if we think this bad scenario outcome is only 3%, I still probably shouldn't have, you know, be too far over my skis going into that scenario, just in case it does happen. So now I feel like I've reduced to a place where I'm comfortable holding through the merge from here and whatever happens, happens. All right. So end us. The question this episode was, is the merge priced in? What's a final answer on that, Hal?

Oh. Ryan. It's the merge price. Absolutely not. We are going to the moon. Patience will be rewarded. There we go, guys. I think that wraps it up. Bankless Nation, none of this, of course, has been financial advice. You definitely have to make your own decisions. Some action items, though, for you. And I'm going to thank these two gentlemen in a second, but an action item is Hal's entire thesis on the Ethereum merge is coming out tomorrow. Okay?

This is like 25, 26 pages. It's got graphs and everything. It's fantastic. In order to get that, go to the bankless newsletter. You'll get that in your inbox tomorrow. That's newsletter.banklesshq.com. Subscribe. Some of you guys are just watchers and listeners.

Be a reader as well. Get this thesis in your inbox tomorrow. I promise you it's worth it. Hal and Ryan, thank you so much for joining us on bankless today. Thanks for having this guy. Thank you guys for having me. As always, I'll say again, none of this has been financial advice. Eve is risky.

All of crypto is risky. So is defy. You could definitely lose what you put in. But we are headed west to the Mergin Beyond. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey. Thanks a lot.