Bankless - ROLLUP: $300M DeFi Hack Fallout | Arbitrum Freezes Funds | AI Deflation Debate | Productive ETH

Episode Date: April 24, 2026

Markets are hitting new highs, but crypto just took a major hit. Ryan and David break down the $300M KelpDAO exploit and why it exposed deeper flaws across DeFi and Layer 2s, including Arbitrum’s controversial decision to freeze funds. They also explore whether AI will drive deflation or inequality, unpack a new bullish ETH thesis, and debate why the biggest risks in crypto may be building beneath the surface. --- 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium --- BANKLESS SPONSOR TOOLS: 🔮POLYMARKET | #1 PREDICTION MARKET https://bankless.cc/polymarket-podcast  🦊 METAMASK | DOWNLOAD NOW https://go.metamask.io/BL-Pod-Download  🌐BRIX | EMERGING MARKET YIELD https://bankless.cc/brix  🧭OKX | TRADE, EARN, PAY https://bankless.cc/OKX 💰NEXO | YIELD + CREDIT LINE https://bankless.cc/nexo 🎯THE DEFI REPORT | ONCHAIN INSIGHTS https://thedefireport.io/bankless --- TIMESTAMPS & RESOURCES 0:00 Intro 1:57 Markets Still Bullish? https://x.com/EricBalchunas/status/2047282771664453641 https://thewolfden.substack.com/p/strategy-owns-more-btc-than-blackrock https://x.com/SecScottBessent/status/2046703137541837285 https://polymarket.com/event/us-x-iran-permanent-peace-deal-by/?via=bankless? https://x.com/danielisdizzy/status/2047037188500554010  https://x.com/MikeZaccardi/status/2045855067710914995 https://polymarket.com/event/kevin-warsh-confirmed-as-fed-chair-by-may-15/?via=bankless? https://polymarket.com/event/fed-rate-cut-by-629/?via=bankless? https://x.com/ylecun/status/2045610129119117574 https://x.com/pdmsero/status/2046943519101661561 https://x.com/KobeissiLetter/status/2045675498529808886 https://x.com/KobeissiLetter/status/2046071375446606125 27:32 KelpDAO $300M Exploit & DeFi Fallout https://www.galaxy.com/insights/research/kelpdao-layerzero-exploit-defi https://defillama.com/protocol/aave-v3 https://x.com/LayerZero_Core/status/2046081551574983137 https://x.com/0xdoug/status/2045988844718453186 https://x.com/arbitrum/status/2046435443680346189 http://l2beat.com/scaling/projects/arbitrum https://x.com/TheCryptoNexus/status/2046569510442787209 https://x.com/0xfluid/status/2046971208550486244 https://www.coingecko.com/en/coins/spark https://www.coingecko.com/en/coins/aave 50:26 Productive Money ETH Thesis https://thewolfden.substack.com/p/the-250k-eth-thesis-sounds-great 55:28 Prediction Markets & Perps Expansion & Tether $344M Freeze https://x.com/polymarket/status/2046653304810156283/?via=bankless? https://polymarket.com/perps/?via=bankless? https://x.com/aaronjmars/status/2047017251270734309 https://polymarket.com/event/highest-temperature-in-paris-on-april-23-2026/?via=bankless? https://tether.io/news/tether-supports-freeze-of-more-than-344-million-in-usdt-in-coordination-with-ofac-and-u-s-law-enforcement 1:00:11 MegaETH & New Chain Activity https://x.com/bread_/status/2047336293462589788 https://app.hyperliquid.xyz/trade https://www.coingecko.com/en/coins/monad 1:01:52 Device-Level KYC / Surveillance State https://x.com/RyanSAdams/status/2044491861125996617 https://x.com/RyanSAdams/status/2045232433197695392 1:06:58 Closing & Disclaimers --- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures

Bankless Nation, it is the fourth week of April, time for the Bankless Weekly Rollup. We got the most consequential defy hack, I think, in history. Yeah, big words. I think they're true. I think they're true because there was so much fallout. It reverberated all around crypto and all around defy, including our layer twos. A lot of questions were raised. This was a $300 million hack.

We'll talk about who's to blame. Was Arbitrum right to freeze some of the funds? and what does this mean for defy and for the rest of crypto? Zooming out to all the markets still bullish, still all-time highs in equities just last week. Can that be sustained? We're also going to be learning a little bit more about Fed chair, incoming Fed chair, Kevin Warsh, and what he believes about AI and how it is going to be factored into Fed policy. It's interesting to have a Fed chair thinking about how the Fed as an institution will need to adapt to the AI world.

And then also we've got, according to the words of my co-host, and also me, the best ETH thesis sends ultrasound money and the triple point asset. We're on to a new one. Yes. Productive money. The best case for E's. We're going to talk about this whole thesis and why we think it's the best. Oh, yeah. Productive money.

There you go. Also, if we get to the end of this and we still have some time, David, I'm going to get into a rant, okay? Ryan's got a rant. Yeah. It kind of feels like the U.S. government is trying to K.C., that's, know your customer, all of our devices. There's some bills I want to talk about. I feel like the surveillance state is the final boss here.

What does that mean? I need to link my driver's license to my iPhone? Yes. And have that registered with the state? Not just your iPhone, like your MacBook, you're like any device. Anything connected to the internet. I think we got to talk about this and what's at stake if we lose this battle because it's not great.

But let's get bullish for a minute. And let's look at the market. So, David, I know you love sharing your screen. You love showing me some charts. I've taken over the charting section of the weekly roll-up. Six years into the bankless podcast and finally figured out that... What do you want to show me? David should do the charts.

We are looking at the S&P, which is at all-time highs again for the second week in a row. Last week, we were right above 7,000 at like 720, 720 points. We're right now 7,100 in the S&P, and so the equities continue to look good. We can take a peek at Nvidia. Not at all-time highs, but pretty close, pretty close. And if you kind of go down the list, Amazon, basically at all-time highs, Apple is at near highs. And so if you're a tech equity investor, you're probably doing okay in recent times. The markets are kind of just resuming their normal thing, which is just going up into the right.

Not universally true. And it's not universal good news. We have oil going up, which we don't want. We want oil to go down. Yeah, it's up on the week. last week I think I called it wartime lows Wartime being high because we're in war and a war around oil

but lows in the sense that it's a lower end of the prices that oil has seen during the war we are at now war middle warm prices and so we're up on the week we're about up 10% on the week on the oil prices for both Brent and WTI and so That's about what upper 90s price per barrel? Yeah so 100.

dollars for a barrel brett and then $95 for for excesses intermediate crude. And so what does that tell us? It just means oil coming out of the Strait of Hormuz is increasingly constrained. That is not resolved. And then also importantly, inputs into inflation. Inflation numbers are going to be downstream of oil prices. Oil prices are, I was hoping they were going to go down this week again, seeing as like the conflict of war in Iran has like somewhat found some sort of like, equilibrium, I guess. We'll talk about that in a second. We'll get there. And then 10-year yields also

going back up. So again, they were going down. Now they have kind of trended back towards like the middle highs of wartime 10-year yield prices. Yeah, 4.3% I believe on that. How about our crypto assets, David? I think you said Bitcoin was up. Bitcoin up 5% on the week. So we're almost at $78,000. We almost touch $80,000 this week. We're a little bit down from that, but up 5% on the week, so a healthy week for Bitcoin, flat on the week for Ethereum. And that dichotomy is going to be because of the hack that we're going to talk about here in a second.

Oh, you think that's fallout from the defy? Almost certainly, because of how significant this was in the edges word, like the idea of trust in defy, I think that is showing up in the ETH BTC price. We talked, Ryan, about the ETH BTC ratio last week. Yeah, you were bullish. and how we, it was trending upwards. And we were like, we're not going to talk about this because we don't want to jinx it. We jinxed it.

We jinxed it. You take credit for that, not me. I said, never look at the eth Bitcoin ratio again on this show. We won't look at it anymore. But the thing that I'll know, just zooming out and talking about like, what does all this mean? A, this the war markets are painting a not short continuation of the war. Like there's more of that. But the equities markets and even with the crypto markets, it seems to be.

when they are left to their own devices, they inch upwards. They like to go up. They want to go up. And then, like, we do a war thing and they go down. And there's a defy hack and they go down. But, like, when you leave them alone, they go up. And so I'm, that is my, like, last week I came out as bullish.

Yes, he did. I will, I'm maintaining that position just because I assume at some point the bad news will stop or the bad events will stop probably as my default case. Like they can always, there can always be more than you expect. But it is nice to know that when they are left alone, things still go as planned, which is going up. That's my take. It does seem like there's still upward momentum here, right? It's hard to keep the balloon underwater a little bit. Let me show you some more upward momentum here in the Bitcoin ETFs. This is Eric Belchunis on Bitcoin ETF flows. He's showing a Bloomberg terminal here, and he's looking at Ibit. That's a Black Rock ETF. You see this.

On the one-day flow, on the one-week flow, on the one-month, on the three-month, on the year-to-date, it's all green. We got green, green, green, green, green, across the board. This is what he said. Bitcoin ETF flows are back in the high life. Every single rolling period for what we track is now positive. Haven't seen that in months. So Bitcoin ETF buyers, they're hanging in there, David. They are proving themselves to be diamond hands. Eric Dr. Curtis's Gen X is being shown there in his team. Yeah. The only more diamond hands, though, than the Bitcoin, BlackRock ETF holders,

is actually Mr. Michael Saylor or Michael Strategy, as you call him. Michael Strategy. You should just name his name to that. He just flippened, so he just flippant Ibit. That's wild. Yeah. So MSTR, that's strategy. Michael Strategy,

owns more Bitcoin than the Ibit ETF. So more Bitcoin than BlackRock, which is pretty impressive. I guess they've been kind of neck and neck, but you can see this red line. Michael's strategy just passed. I got you saying it. So impressive, fun fact. They're competing to own a little bit more.

Of course, Ibit is the aggregate demand of many thousands, tens of thousands of investors, whereas, well, I guess so is, So is strategy. But anyway, too big orders here. The conversation of is strategy a big Ponzi kind of continued this week? Oh, did it? We talked about CoffeeZilla last week.

There was a debate from some, maybe some guy at Strategy or just a big Michael Sailor Bull, like went and tried to like challenge CoffeeZillah to a debate. Peter Schiff got into like some Twitter spaces and was taking the side that like he wished that coffee Zilla was. said the Ponzi word more strongly than he actually did. It's all so silly to me. It's all so silly to me. Of course, Bitcoin is a faith and flows asset.

That's the thing. Just like gold. No, no, no, no. Stretch and strategy is the Ponzi. That's just a little sauce on top of the faith and flow asset. A big posse on top of a Ponzi. Yeah. I mean, it's not that much more, right?

Again, if Bitcoin keeps going up at the rate that it's been going up, Michael's going to be just fine and it's all going to work out. If not, then we got bigger problems. And yeah, well, speaking of bigger problems, what is the update on the war this week? Why is oil, I guess, ticking up, you know, do some of the headlines have anything to do with that? Yeah, relative to previous weeks, I'll call it kind of a quieter week. And that's not just happened since. That's because I think the United States has found itself in a position that it's kind of content with for the short term.

So like the ceasefire, first off, was set to expire Tuesday of this week on April 21st. Trump then, as a deadline approached, Trump moved the deadline just one day later to kind of like allow Iran to collect itself and coordinate. But then ultimately Trump extended this ceasefire indefinitely until Tehran submits a proposal and then talks actually like move forward. And so that's kind of where the kinetic war is. Connecticut Corps is seemingly just indefinitely paused, allowing room for actual talks and negotiations to happen. Why are we okay with the kinetic war pausing? Like, why is that the status quo? Definitely downstream of the strait, of course.

Everything's downstream of the strait. The U.S. naval blockade of Iranian ports has continued throughout the ceasefire. There's been just significant tension in the strait. The United States struck and seized an Iranian vessel trying to make it through the blockade. it does appear that the U.S. blockade is leaky, so some ships are getting through, but the closure is nonetheless doing the job that it intends to, which is like constraining the flows by 95% plus. So the economic pressure on Iran is happening, and that is importantly threatening the longevity of their oil facilities. Secretary Scott Bessent, who is like, so the kinetic war, Operation Epic Fury, is now basically, I think in the rear-view mirror, now we have moved on to Operation Economic Fury, which is being led by Secretary Scott Besson,

the Treasury Secretary. And that's blockades. And that's the blockades. And then specifically the acute pain, this is reading from the tweet from Scott Besson, in a matter of days, Karg Island, which is where all of the Iranian oil flows out of, it's in this rate, Carg Island storage will be full and the fragile Iranian oil wells will be shut in. Something I learned, Ryan, when you pump oil, and then you stop pumping oil. because you're forced to, because you have nowhere to put the oil,

then you stop pumping and then water floods back in, and it causes irreparable damage to the pumping. And so they need to get oil out of Karg Island so that they can continue to pump. Otherwise, their actual oil production capabilities will be deleted. And it's costly and time-consuming to get those things up and running. And you can imagine that Iran just doesn't have the capability of fixing those things if it gets to that point. And so this is why the United States is like,

oh, we're cool with the where things are right now. Iran is just getting choked out. And we don't need to resume the kinetic war because they are going to just lose economically under the current conditions. And so that's kind of where things are. Connecticut war is seemingly over because we have the chokehold around Iran

and they are just slowly getting suffocated. And so the U.S. Iran permanent peace deal that really hasn't moved too much, I suppose, on the prediction markets. We have Polly Market pulled up here, and there is a 54% chance, I guess, up a little bit, that we will have a permanent piece deal by the end of June. Yeah, yeah. 50-50 chance? It's interesting that it's not being priced in that much.

We're just in this kind of like wait and see position. And like if the story that I just told is correct, which is the story being told out of like United States government and a lot of the analysts, is like it's up to Iran to kind of like tap out and say like we can't take this pain anymore. And that's going to become downstream of the fact that their oil wells are going to be just damaged. And then also they're not going to be able to fund the paychecks of people in the regime causing dissent and fracturing. I mean, they have shown some resistance to economic pain in the past. and particularly in the form of sanctions. I guess this is more blockade, oil-based pain, which is perhaps more painful. It's more severe.

More acute. Yeah, this could last for a while, though. That's what the markets are telling us. Let's talk about Fed Chair Kevin Warsh. We talked about him last week. Now he is testifying in front of Congress as part of his nomination as the incoming Fed share. By the way, the polymarket around this is an 82% chance by the end of June.

So it looks very probable that Kevin Warsh is, going to be our next Fed chair. But he had some interesting takes that I think separate him from his predecessors, particularly on AI. Let's play the clip. What we call AI in a couple of years, we'll just call business. And AI is going to make almost everything cost less. And the U.S. can be a big winner.

And it's a hugely exciting moment. If I were to step back for a minute, if I were the president, what I'd be worried about is a central bank that doesn't see any of that, a central bank that is stuck. with models from 1978, governance from a prior period, and don't recognize we could be at the front end of a productivity boom. And if I were the president, I'd be worried that they might not see it. And they might think economic growth is somehow going to be inflationary. I think we were probably in the early innings of a structural decline in prices.

Ken sees it on the front lines of real businesses. And I think if you look over the period of the next year or two, it's a pretty special moment. Wow. So this is Kevin Warsh saying that he actually forecast because of AI productivity. He actually forecast deflation rather than inflation. I kind of think these are huge statements. We did a podcast. It'll come out next week. And one of the big themes of the podcast was like, is AI doing the things that everyone thinks that is doing or is there just a bunch of hype? And we don't know shit.

Yeah. And I'm kind of in the latter camp by default, just like until there's data proven to prove that AI is doing anything to the economy to actual revenues to anything, then like I'm in the camp of just like it's business as usual until we can get something to prove otherwise. When a Fed chair is saying that there is going to be an AI-led productivity boom, it's hard to, it's hard to like I would like to see why. he thinks that reasoning, but like, he's the guy with the job that's supposed to take those things into account. So it's hard to argue with. Do you think he genuinely believes it? Let's let's take the case that he genuinely believes it. So he thinks AI productivity is going to lead to deflation. Well, that would cause him to want to, I guess, lower rates, right? Which is what Trump wants him to do. Which is conveniently what Trump wants him to do. Conveniently what Trump wants him to do.

So there's there's that aspect, although it is the thing. probably should be doing if we are going to get, you know, once in a lifetime productivity gains and deflation accompanying that. Now, we might see, this is what Jordan, Jordie Vaseer, he came on the bankless podcast, that was the guest that you were talking about. That episode comes out on Monday. His take was like we might, we'll see a lot of deflation as a result of AI, but we'll see inflation in some commodity type goods, energy type goods, kind of the hard physical items that are getting more expensive as their scarcity. becomes greater because we need these kind of hard physical products in order to feed the AI machine.

There are some economists that disagree with Kevin Warsh's take. This is Ed Yarden, he disagrees. He's bullish on productivity, but he says that stronger growth will likely push the neutral rate. They call this our star in Fed circles higher, not lower. So he said this productivity, you should actually be raising rates in that productivity. because if you don't do that, he warned you could fuel speculation, financial instability, bubbles that you actually don't want. So people are divided even if you get this productivity gain on what the outcome of the Fed should

actually be, which is interesting. You brought this chart into the agenda, which is a productivity boom graph. What are we looking at here? Yeah, this is a report out of Morgan Stanley. It goes all the way back. It's a graph that goes all the way back to the 1960s, and it has the era of, of productivity boom because of the personal computer adoption from the 1980 to 1995. And then again, with the internet adoption from 95 to 2010.

And then we had like a kind of a bottoming in productivity right at COVID. Huge slump. Yeah. And a huge slump from the 2010s where just basically productivity decreased growth. Yeah. But it's been up since then. And it's labeled AI adoption. We are likely in the early stages of another productivity boom due to AI.

again, a report from Morgan Stanley. So, like, big names with a lot of, a lot at stake, a lot on the line to be putting their weight behind, like, AI adoption. And then we can go and just talk about unemployment, because unemployment and AI is also a big conversation. There's another report, this is out of UK, that says that after all this new data, three years of data after the release of chat, GPT, there is no evidence for significant impact of AI on overall employment in the UK. surprisingly, occupations with AI exposure have actually grown faster than lesser exposed ones. And there's a bunch of just data to correlate all of this. Now, I think it's early, Ryan, because chat, GBT 3.5, the thing that kind of started off all this AI revolution was not replacing anyone's job.

And I will kind of say that, like, competent AI is a late 2025, early 2026 thing. And so this data might be preliminary. and so saying the last three years of data, I think, could, it could be argued that it's just too soon. But nonetheless, like, it is data. People are making these statements, you know, big people, big institutions are making these statements that AI is leading to productivity gains. AI is actually leading to employment, not unemployment. And, again, I think it's very early, but it's trending in the positive direction, which is good. Yeah, I think, but this is very counter to what some of the AI CEOs are saying.

Dario, the CEO of Anthropic, keeps going on the media circuit saying like this, this was just this week too. Dario Emote, 50% of all tech jobs, entry-level lawyers, consultants, and finance professionals will be completely wiped out within one to five years. He needs to stop saying that. But you get the sense that he thinks it's true. I genuinely think he's true. I agree that I think that he thinks that what he's saying is true.

It doesn't really seem to have any nuance to it. I just think he's just connecting some dots and saying AI agents are becoming much more capable. They're able to do these things that entry level consultants, professional services, workers are able to do. Therefore, those jobs will go away. Jan Lacoon says, who's another AI leader, Dario is wrong. He knows absolutely nothing about the effects of tech revolutions on the labor market. Don't listen to him. Listen to these economists.

And you list a whole bunch of economists. I think the UK study in the point that he said that occupations with higher exposure to AI have actually grown faster than the least exposed one, that's the biggest data point in favor of AI not causing unemployment issues, but actually creating more opportunity. And this doesn't mean that, I mean, the case of the radiologist, you know, Jensen went on Dwar Cash, he talked about the radiologist, how everyone expected radiology jobs to kind of drop and go away. What's in fact happened is there are more radiologists being hired than ever. and they're becoming much more productive

through the use of AI tools. We're also seeing this happen with software developers, where software developer employment's actually only gone up. I come down on the side that AI is actually going to not reduce jobs, but it's going to make some jobs obsolete, of course. It's going to shift job demand. It's going to make some super users of AI more valuable. And overall, I think it means that people can't keep doing their job

been the same way they've always been doing it, so they're going to have to shift. But once they do shift, I don't necessarily think it's going to cause massive unemployment issues in the way that Dario says. I mean, this is not how previous tech revolutions have worked. The creative destruction powers have always produced more jobs. They've just been in areas that we can't imagine, you know, before we started the revolutions. Yeah. I think like, I think people like Dario and Sam Altman and they kind of think in these big, grandiose terms where, no, a huge, will be replaced by an AI agent. And man, that is just not how things work.

Like our entire society is built on humans talking to other humans. And the AI is not a human replacement. It is a tool like every other tool that we've ever had. And so maybe one radiologist can actually be 10 times more productive. And maybe that's why people think that like, oh, there's going to be job displacement because, you know, one good radiologist is actually going to equal 10 other radiologists. And so that's the way the wipeout comes. But then also at the same time,

like how many people have cancer that can't afford treatment and who would otherwise would have demanded those services had those things been better priced because of a supply of them? So much more radiology demanded, right? That's kind of the Jevin's paradox aspect of it. We just keep demanding these things.

There is one thing that I think they should actually be talking more about, which I do think we'll start to fray our social fabric in the social contract. And that is the increase increasing wealth inequality that will probably just continue to be exacerbated by AI. In particular, like, wealth gains to those with assets. This is, say, a report from the Kobayasi letter, wealth inequality in the U.S. has never been wider. The real wealth gap of the top 0.0001% of

U.S. households has grown 3,500% since 1976. So here's a chart showing the wealth gap in the various tiers. And you could see. I mean, these top percentiles are just getting super gains as a result of this. This is all like digital network effects at work. And I think this will be exacerbated by AI productivity as well, where a lot of the gains will go to the, you know, to the 1% who are leveraging AI to continue to be hyperproductive. And of course, these gains are going into asset holders and capital holders rather than labor. This is another chart. U.S. wage growth turns more K-shaped.

The gap is widest since 2015. You can see higher income individuals are receiving like higher wage growth than the lower and middle, lower and middle are barely keeping up with inflation. So this is a continuing fraying, I would say, of our social fabric. Like wealth inequality, it has a way of biting back in society and causing political problems as we're seeing now, the rise of populism, et cetera. Yeah, I definitely think the gap in wealth inequality has got to be an input into consumer sentiment that we know has been just very, very low. Yeah.

And it's kind of like the tail that wags the dog. Like, you're going to see that show up in 28 politics. Absolutely. Well, do you see it like the White House is tweeting stuff like this out, you know, as this is a picture of Trump. S&P 500 and NASDAQ close at record highs, big picture of Trump smiling. That is a real thing. And that isn't a Iran war victory lap that he's doing. But that's his scoreboard, right?

It's S&P, it's market prices, it's equities, it's stocks, right? What Americans care about, the average American cares about is their cost of living. Yeah. Which is higher because gas is higher. Yeah, exactly. So that's going to play into our midterms, I'm sure, into our politics into the future. David, we've got to talk about the defy hack, Kelp Dow, the bank run on Ave, $300 million dollars hacked, $200 million in bad debt from AVE, all of this. But before we do, we want to

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significant consequential defy hack, not even breaking the top 10 in terms of dollar value lost. I think it's something like 13, 14, or 15. So like not small, like 280, $290 million. That's crazy that a $300 million hack doesn't break the top 10.

Yeah. Yeah. Yeah. You definitely include a lot of the centralized exchanges. That's right. Those are some billion dollar buy-bit hack. And so centralized exchanges here is probably a top 10 defy on chain hack. Definitely. But nonetheless, like the reason why this is so consequential is because it touches everything. And so it was pretty sure the first ever large exploit of Avey.

We'll get, I'll get into the details. So this happened on April 18th. It's assumed that this is North Korea. This is assumed that it's Lazarus Group exploited the Kelp Dow's implementation of the Layer Zero bridge. And just to be clear, you said this is a, exploit of AVE. It wasn't actually an exploit of AVE itself, actually.

The bad debt rolled over and is causing some pain for AVEA depositors, of course. But AVE itself was not exploited. I just want to make that clear. The code of AVE was not broken. Right. An economic exploit of Ave, I still will call an exploit. A failure of some of this collateral, that's for sure. Yes.

It's a risk management failure. And it's not like a marginal one. It's like a big one. But we'll get into this. So, like, layer zero, it's a bridge. Kelpdow has this token called R.S. ETH. It's a restaked Eth from Kelpdow.

They use layer zero to have it exists across many, many layer twos. And so you can take your RSEth and have it be collateral in the Arbitrum version of Avey or on base or just like spread it around all the chains. When you do that, you give layer zero the ability to lock up tokens on one chain and then mint IOUs on another chain. That's the part that got exploited. There is a validator network. Layer Zero has a DVN, a decentralized validator network that Kelpeda out uses that everyone around Layersero uses. And that's just like an auditor, a verifier of the validity of messages being passed around.

Kelpedow only used a one-of-one DVN, and so it only took that one-of-one verifier to be exploited for this attack to occur. About 40% of Layer Zero's customers. clients implementations use a one-of-one so you know there's a big blame game going on here some people will blame layer zero and say your guys's software got exploited this is on you that's a true statement the other people will say well kelpdow should have been using something more robust than a one-of-one because they had three hundred million dollars at risk because being secured by only one validator node which is also true also true statement

when the North Korea was able to mint all of this RSEE that it should not have been able to, it was able to deposit these tokens into AVE as collateral, and then they were able to withdraw ether as a result. And so basically gave AVE AVE fake vapid tokens, and then we withdrew real ether as a result. And they did that because this is the fastest way to get liquidity, to actually get ether as cash back rather than just market selling all the RIS. if they would have received far less cash, better to deposit it into AVE and get the cash that way.

Overall, an incredibly sophisticated attack, a lot of moving parts that on-chain data shows that Lazarus Group was prepping for months ahead of to exploit this attack. So they knew that they had this exploit available to them. They patiently waited until they just decided it was the right time to take the $300 million of opportunity. And then they got out, not with actually all of the money. And so there is another event that is part of why this is such a big deal. About $70 million of this exploited funds was on the Arbitrum implementation of AVE. And Lazarus Group, North Korea, left some of that exploited funds on Arbitrum for a couple days. And the Arbitrum Security Council, which is a 9 of 12 multi-sig, got nine people to

agree to freeze and recover $70 million of the stolen ETH. And so unprecedented, I don't think this has ever happened in a layer two, an asset seizure. What happened was they just basically changed the state. No transactions were rolled back. No blocks were rolled back, but they just moved the ether from one wallet to another. I think that's how that worked. And recovered the funds, which you can presume will go back to people who lost the funds who deposited into AVE.

There's so much to discuss here. I mean, just to underscore, this was a very sophisticated nation state level attack. I mean, some of the ways they infiltrated where they, like, replaced RPC nodes with malicious versions. Anyways, incredibly sophisticated on the layer zero side of things. I mean, there is a question as to who's to blame for this. And you indicated, hey, layer zero has some blame. Kelp Dow has some blame. There's another party we didn't discuss as much, which is Ave.

I mean, their risk parameters. let a significant amount of RS-Eath into the global system. That is part of the reason. Now, some of the AVE loans, the AVE system is under collateralized by about $200 million. So AVE has a role in this. You could also say, and this was an argument made by, I saw Doug Colquitt and others, that really the roll-up-centric roadmap is to blame. He says this, can't help but reflect on how much of this mess is downstream consequences of the roll-up-centric roadmap. For years, we were told L-2s are just Ethereum, roll-up share a security zone, every app needs its own chain. He's basically saying the role-up-centric roadmap is the reason we have all of these bridges that are multi-sigs,

you know, the U-X of moving from Ethereum Mainnet to a roll-up wasn't fantastic, so we had to put in these security holes, these bridge-based multi-sigs, and that's how a lot of these These hacks are actually happening, including this one. It was a bridge hack. And so it was because Ethereum had a bad architecture in place and bad plan for the roll-up-centric roadmap that this hack happened. Of course, you could use the roll-up native bridges, optimistic, fraud-proof roll-ups on something like arbitram, but that's, you know, seven-day withdrawal period.

So no one practically uses that. They all use solutions similar to layer zero. Of the different pieces of blame, David, how would you allot the blame that goes around tier um layer zero got hacked so i want to i think it's fair to start with them um the maybe i maybe i want to zoom out uh defy as a whole collectively is not built to withstand these attacks uh because there is like trust going around and so avey trusted uh layer zero to not get hacked Kelp also trusted Layer Zero to not get hacked. Layer Zero trusted Kelp to use an appropriately sophisticated level of safety when using their own protocol.

Everyone was kind of trusting each other to operate as they intended. And that is not the correct disposition to build in Defi. If you are going to build in a public permissionless protocol, you actually need to assume that every component of your stack is malicious, not in alignment with you. And that was the universal failure. And so, but I'm happy to play the blame game. I like drama.

Like layer zero got infiltrated and exploited. So like they take some of the blame. Kelpdow had the reason why, I said earlier, layer zero had like 47% of its implementations using its one-of-one setup rather than a two of two or three-of-three or whatever. well why do they choose kelpdow if you know kelpdell is just one of many one of ones well it's because kelpdow had the most economic bandwidth at risk and so kelpdow shouldn't have been the tallest poppy they should have had a two of two or a three of three or a four or four just something something better than a one

of one uh and so kelpdow also takes some risks and then ave needs to fundamentally reconstruct its risk parameters it needs circuit breakers it needs uh like rate limiters so that somebody can't deposit $300 million in one block and withdraw $300 million in the next block, we need to be a little bit more pragmatic here. These are nuclear weapons of mass destruction in terms of financial tools. And we need to just like, if you want to withdraw $300 million, I'm sorry, you can wait two days, like you can wait a couple days to make sure that you are not North Korea and our defy apps need to be built around that assumption. So the whole system, has failed at various levels.

It needs to be rebuilt. Which is why, which is why this is such a consequential exploit. Right. The other philosophical debate here or consequence is the arbitram recovery, which you talked about. And so this Security Council, this 9 of 12, some people weren't aware that this could actually be done,

including, it seems like North Korea. Question. Did you know or think that this could be done? Or were you surprised? I think hypothetically, I knew it could be done because it all comes down to this L2B, right? So look at all the, remember the pie slices on L2B? Well, there's this one pie slice that's called exit window that's still yellow.

This is why Arbitrum is a stage one rather than a stage two, which says this. The Security Council can upgrade with no delay. So there is this 9 of 12 group that can upgrade anything. They basically have root access to anything on Arbitrum, any state on Arbitrum. and they could do whatever they want if they get nine out of 12 to agree. I knew that hypothetically, that was a possibility, but I was still surprised that it happened. And I didn't actually know that North Korea had the 70 million on Arbitrum at the time. Yeah.

Obviously, North Korea didn't think that this was a possibility because, as you said, it was unprecedented. They wouldn't have kept it there. So there's a debate, though. It's kind of a code is law type of debate, right, which is should Arbitrum have done this? What about immutability? What about, you know, Coda's law? And some people are saying, here's a critique here from a poster. This is a perfect example of how when left to their own devices,

people will overwhelmingly cheer on the loss of freedoms for the sake of security. Obviously, in this case, North Korea is indefensible, but that's just how it starts. Personally, only really in favor of things like this, this is the intervention, when it's survival of the chain itself that's at stake. So there was some division, right? Some people were saying, oh, yeah, like, well done. You stole from the thieves.

You got the funds back. You did right by your users. Well done, Arbichum. It was the right thing. This is the right thing to do. It was the right thing to do. Others said, no, this is a breach of decentralization and immutability and code is law. What's your take on this debate?

Yeah. I understand this slippery slope argument of, well, like, now this has set a precedent. this is almost like a court case of sorts. Like this is a legal precedent of sorts that if you have assets on a layer two and the layer two has the means to protect your exploited assets if they ever get exploited,

then that layer two kind of needs to do that because Arbitrub did it this one time. So we know that it's possible. And so now not doing that is much more of a conscious, explicit choice than it was in the past. And so it kind of puts, puts pressure on layer two's to like you either need to actually get to stage layer two so you

cannot do that. Yep. Or you need to remain at stage one and then make codified rules about when you do and when you do not do that. And that was not. And so now this, that impacts the whole entire industry. And honestly, not even layer two. It's like, salon of validators might need to like make a decision around what this looks like for

them or any other like layer one. This isn't even a layer two versus layer one conversation. That's great. I mean, I think ethically, I think morally, if you have the ability to do this, like, you should do it. You kind of have to. Now it's a question for arbitram in all layer two is whether they want to keep this responsibility or not, because what this responsibility implies is taking intervention in maybe far less severe cases.

Maybe they have not only moral and ethical obligations around that, but maybe they also will have legal obligations in the future. And so I was thinking of this as like. Do you see the statement out of the arbitralum doubt was like we seized the $80 million down the downstream of communications with law enforcement. So like law enforcement was a part of the influence to make this choice. Right. And so this is, I think this is going to be a hollowing out of the middle.

I think layer two's and maybe all crypto protocols will really have to make a choice. Do they go full decentralization, like full stage two in this case, where they don't have the ability to intervene even if they want to? or do they intervene in many cases? Do they automate the intervention? Do they become a bit more like fintech have the ability to block fraud to reverse, you know, hack transactions and all of this?

And it's unclear what users would prefer. In the case of RSEath, of course, the RSIth holders on Arbitrum, I'm sure they were overjoyed that Arbitrum had the ability to like freeze and redeem some of their stolen RSEE, right? but I mean like I guess I guess what's good about this is we have the experiment playing out on Ethereum which is like never going to do this.

This would not have happened on the Ethereum. The bar would be so much higher. The bar would be so much higher. That's right. And they did. That's right. So the bar would be so much higher for something like this to actually take place. And so we have that experiment.

I just wonder what happens with the layer two is right. I mean, base put out a release this week saying they were getting closer. to stage two. They have the tech in place to actually go to stage two with their Azul upgrade that's happening on May 13th. They have multi-proofs. This is T-E-E and Z-K multi-proofs. So the ability to kind of get to stage two, they just have to disband with the Security Council, not have the ability to upgrade or to do these state changes in the future. And I'm not sure what direction they're going to go in. Wait, so is it planned that they will go to stage two on May 13th? No, that's not a stage two on May 13th.

They just have the... They have the technology. They need to make the, like, the moral choice or the strategy choice about, like, do we want this for us and our users? Yeah. And, I mean, we did an episode earlier this week. We had two, I guess, guests who had different views. They said, oh, base will move towards stage two because they don't want the responsibility. They don't want the liability.

Yeah. And so it's an interesting predicament because I think that is worse off for their users. and it's better for Coinbase to not have the liability. Coinbase gets to do more this way. They get to kind of probably get to put more things like securities on chain because they aren't doing the transaction ordering responsibility and other things like this. And so it just benefits the Coinbase by removing liability,

not necessarily to the benefit of their users. Yeah, maybe you could argue that. It depends. They might go in that direction. The other guess was making the opposite case. They see that this will push Coinbase to be able to be able. bit more like fintech and automate some of the freezing and discovery here. I mean, that seems to be the direction that Circle is going with USC, for instance. The worry that I have if layer two's and

companies like Coinbase choose to go in the more fintechy direction is that like they're probably going to want to have more like custodianship and control over user assets. Yes. It's like, well, North Korea is not going to hack you guys if you stop being so dumb with your bearer assets and keep getting fished all the time and putting them into stupid protocols. So we're going to build you a fintech app and you can put your money in our custodial wallets and we're going to protect you guys that way. And then all of a sudden, this whole like bankless thing that we're doing is like, ugh, not, is not really the vision that kind of thought.

But maybe that's an okay fit for layer two. So long as that doesn't happen on Ethereum. Yeah. Yeah. Remates to be seen. There's still some issues to deal with, which is like, defy is still in limbo. So there's a bank run on AVE, you know, a bunch of assets could no longer be withdrawn. And so there's, at the end of the day, still $200 million in bad debt wrapped up in AVE. So what are we going to do with that?

This all comes down to, I think, Kelpdow and what they decide to do next. And at a high level, there's probably two different options for Kelpdow. They have to decide how they split the loss to RSETH holders. So they could do option one, which is spread the loss. loss to everyone to all the RSEath holders, both on Ethereum mainnet and to all the layer twos. And of course, the effect happened on the bridge layer two assets, not main net assets. So that would be a 15% haircut across the board for everyone equally. That's right. And that would bring AVE's bad debt to like 120 million or so.

Avey has an insurance fund for $55 million. What do they do with, you know, the 70, 75 million remaining? Well, who knows? Avey governance would have to decide that. Or, Kelpdow could decide to hit only the L2 users. So technically the RS-Eath on Ethereum L-1 was just like not affected. It's always remained fully backed and fully collateralized. But that would mean... The argument there is that RS-Eath holders on the Ethereum layer one never chose to have themselves exposed to the bridge. So therefore, why do they deserve their haircut?

Because they chose safety. So why expose them to the thing that they never expose themselves to? It was a fair argument. Yeah, I guess so. But if they did that, if they pushed it all to the L2 RSETH holders, they could lose 70 to 75% of all their values. So they'd get pretty much wiped out. So that's the main point of decision making next, and then everything will fall downstream of that. So there's got to be a tremendous amount of pressure on Kelpedow right now.

Yeah, yeah. Overall, I'll kind of just zoom out and say that this is just a very real world event happening to defense. that I think kind of just informs us of like a lot of the things that happen in Tradfai. We are in our Tradfai era, Ryan. I don't know if you've noticed everything about Cryptos like Tradify these days.

Except bare assets. Except bare assets. But like the lessons that we learned here is like we need circuit breakers and like rate limiters. And maybe this doesn't really look like traditional finance because they don't really have this bare asset problem.

But one of the guests on our podcast, which I recommend everyone just go listen to that podcast with Odysseus and Dan that came out yesterday. Odysseus wrote this article that is like, we need DeFi to start looking like our aeronautics industry, which is building a piece of a system

that every part of that system is designed to fail and the system remains intact. And that was not the way that our DeFi ecosystem is built. Our defy, the reason why this hack happened and this actually happened was because only one thing failed and it caused the whole cascading set of interdependencies to also fail with it. And we just cannot,

inside of an adversarial environment, we just can't build that way. And so all of, the fabric of defy needs to get rewritten under this assumption of like, all components will fail and you need to mitigate harm for the day that they do.

And so like, you know, the silver lining here is like, we actually have an opportunity to build defy in a way that on boards and is more secure to more TVL. And so it hurts. It sucks.

Like, the morale in the industry wasn't even high to begin with, and now we have this. But our work's cut out for us, and at least the path is clear, and like, we're going to do it. We're going to get there. And at least we know the destination, and that's exciting for some reason. That's right. Well, it doesn't kill defy. It makes it stronger.

This is not killed defy. And I think we're going to come out of this stronger. More to talk about coming up next. We've got to talk about the productive money thesis for Ether and the case for why Ether could be, at some point in the future, not now, David, 250K per East. Go. Let's go. I'm here for it. I'm here for it. We'll do some updates on the Clarity Act and other things. Before we get there, let's get to the sponsors that made this episode possible. In 2024, emerging markets generated over $115 billion in annual yield for investors, with yields ranging between 10 to 40%. These are some of the highest, most persistent yields on Earth. The problem, Defi can't access them.

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Even the best carry trades can be within reach. Bricks brings DeFi's promise to the emerging world and brings the emerging world. market yield to your wallet. Let the yield flow with bricks. Some exciting news. We are launching a new podcast to help people figure out the crypto cycle, how to navigate it. The best crypto cycle investor I know, his name is Michael Nato. He runs the defy report. This is the guy that sent me a sell alert before the 1010 price drop happened. His cycle analysis has been absolutely on point. I've been following him for years. And this year, we started recording weekly podcast episodes. Each one we get into his portfolio,

what he's holding, the market structure, entry. targets, fair market value of Bitcoin and Ether, and where we are in the cycle, there's new episodes that are released every Wednesday. They're 30 minutes. They're short. They're punchy. I think this crypto cycle is harder to navigate than most. So let's do it together. Go subscribe to this podcast. Search the Defi Report. Wherever you get your podcast, YouTube, Apple, Spotify, or find a link of the show notes. There's a new episode waiting for you now. The Ethelize team and Mike McGinnis put out this paper this week that you and I thought was fantastic. We did an episode on it. It was called the productive money thesis. And this is a thesis for Ether, the asset. David, I thought this was

the best thing I've read on Ether since you wrote the triple point asset thesis since, you know, the meme of ultrasound money. That was a long time ago. Since the meme of ultrasound money came into existence, it felt like a cousin of those two ideas. Really? The modern, modern reincarnation of the thesis around Heath. That's right. And part of the reason it was powerful is because it was a synthesis between Menger. Is Carl Menger, notable economist, he laid out the attributes

of what makes a good money and Ether has many of those attributes. That's what the thesis is arguing. And also Warren Buffett, who quite famously, just like only invests in and buys productive assets, assets that generate capital

and generate yield over time. Compound, compound. Compounding, always compounding. And so the author of this post argues essentially Ethereum is both of those things. It is bringing the money-like properties that manger values and the productive yielding capital compounding asset that Buffett admires so much,

and it's pushing them into one single asset, which is eth a not just a money, but a productive money. You know, we've said often the most bullish thing for ether is to be understood. I think this is a paper that really helps ether be understood to investors. There's a whole website about it, productive money.org, that shows the productive money thesis, compares ether, the asset to gold and to Bitcoin on all of these dimensions that Menger cares about so much, scarcity, fungibility, divisibility, and really makes the case. It was a well-written paper, a fantastic podcast guest in Michael and Vivek, who we had on, and I think this is worthy of pushing far and wide. There were some dissenters about this idea, of course, David.

Yeah, if always hesitators. Yeah, I read one from Scott Milcour, you know, the The wolf, I think Wolf of All Street guy. So his main take was like, hey, don't get too out of yourselves. Like, Ether has so far to go on this score. Stop focusing on Ether. Has a money. Just focus on the network. You know, Bitcoin already has that covered.

Bitcoin is special. Ether is not. You're so far away from gold. It's embarrassing to even talk about, you know, prices of 250K. Like, what are you smoking? So obviously there's non-believers out there. What was your take on this overall, though? The pushback is like normal and expected because, again, like, Ether just it rubs people the wrong way for some reason.

Like, $250,000 is a very large number. That is how many times larger? A hundred times larger than we are now. Okay, let's just specify it. That wasn't a price prediction in the article itself. That was a if you, if ether became a civilizational store of value asset of the size that gold is and Bitcoin is, that's what it would be worth. Sorry, Ryan, that's a price prediction.

You're just saying a price prediction and saying, well, actually, it's not a price prediction, but like, why are you saying the number, though? Let me ask you, do you think this is crazier than Michael Saylor saying that Bitcoin is going to $21 million per Bitcoin? or is it? I think that is also crazy. It's in the same order of magnitude of craziness, right? So just crunch the numbers, Ryan.

So if Saylor thinks that Bitcoin is going to go to $21 million, it's currently at $80,000, that is a 262X from its current price. And as we just did the math, $250,000 ether is a little bit more than a 100x. Yeah, conservative. And so that is the, Saylor's 21 million is roughly, scientifically speaking 2.6x times more crazy to answer your question.

Yeah, exactly. And also, I just think this moves the Overton window to talk about ether the asset more. You know, there's been one of our criticisms of the entire crypto community and just investors in general. This obsession with the theorem of the network without talking about ether the asset, this gives a nice narrative to ether the asset as a store of value asset, which I think in the future increasingly people will come to view it as such. but I guess we're still early with $2,000 Ether. Yeah, yeah.

My kind of bullish, I'm as bullish on Ether as the next guy. Maybe that's not totally true these days. But I will say that the bowl case for Ether kind of just depends on Bitcoin rattling apart. And we do kind of see that. Like, fees keep on dropping. Quantum is an existential threat. And so, like, Ether, I think will kind of always be a call option to, like, leapfrog Bitcoin because people realize that actually safety and security and longevity are the properties that you want in your money,

and Bitcoin doesn't really have as many of those. But anyways, since we're into the world of making predictions, let's talk about prediction markets. First off, prediction markets are adding perps, perpetuals, perpetual futures. Both Polymarket and Kalshi have announced their perpetual futures platform. Now, this is regular perps as opposed to prediction market perps. To my knowledge, there's no such thing as a prediction market perp. So this is like 10x long Bitcoin or 10x short. like Nvidia or something.

Regulated inside the United States, or the call sheets is regulated inside the United States. I'm assuming polymarket is offshore because that's where polymarket is really based. And so interesting that the prediction markets are going into like an adjacent strategy at an adjacent vertical that is separate from prediction markets, but they're just saying like,

hey, the window is open for us to build a perps platform. Let's go ahead and do that. The window is open. They can expand perps. are a very exciting, interesting product. A lot of growth ahead. They have a common user base, I'm sure. So this would be competing against coin base, Robin Hood, Hyper Liquid Crack and all of the other

perps asset, you know, investment and trading platforms out there. It's a good move. Yeah. Yeah. Speaking of prediction markets, do you hear this story, Ryan, about this one, actually, surprisingly not small market about the temperature in Paris prediction market. and it getting exploited. Did you hear this?

I saw something about this, yes. Okay, okay. So there were two odd temperature spikes registered at the Charles Dugall temperature that's the airport outside of Paris, a temperature sensor on April 6th and April 15th. Each of them just lasting a few minutes. Also, with no corresponding changes

in nearby temperature monitors or any sort of like humidity or wind data. So people are like, why did the temperature just jump seven degrees? both anomalies occurred precisely at the threshold needed to resolve this one polymarket contract about the highest temperature in Paris that apparently this event happens every single day

so like we can look at it right now the highest temperature in Paris on April 23rd and then you can go and bet on April 24th and April 25th it's a surprising amount of volume there's a $190,000 volume on today's market and on yesterday's market it was another $180,000 of volume. And it was just weird that there was this temperature spike on April 6th and then also on April 15th that paid out $14,000 and $20,000 respectively. And at least one winning

account had been created days before the first anomaly, suggesting that there was some premeditation about this lucky speculative bet. There has been a criminal complaint filed by entities in Paris about this. And somebody suspected, this is unconfirmed, but this is why it went viral that somebody is just taking a heat gun or like a hairdryor or a lighter or something and pointing it at the thermometer. The sensor. Right as they have like a $10,000 bet on the line. And why this is a problem is because the Oracle for Polymarket, the Paris temperature of

polymarket is just this one thermometer. Yeah. And so whatever the, whatever the thermometer reads is the is the, is. the outcome. It's a meat space oracle attack, I guess. Yeah, funny. Funny. What is the chance is this is somebody from North Korea, just, you know, make their way over to France and hacking this market too. I think it's just some hooligan who's having a good time. You're going to get busted. This is not going to work. Speaking of getting busted, Tether has frozen $344 million in Tether on Tron in coordination with OFAC and U.S. law enforcement. The biggest ever. The largest

stable coin freeze ever, $344 million. We do not know why. We do not know whose assets got frozen. You have a guess. I have a guess. OFAC. You know who's doing what OFAC is busy with right now, Ryan? Yeah, I bet they're economic fury. Operation economic fury. $344 million in Tether on Tron. You know, who might be doing that? You know, who we know works with Tether on Tron, the IRGC. I'm making the claim that this is the IRGC is $344 million. I bet we'll find out pretty soon. You think so?

I'll find out by the next roll up. Next week we'll report in on this. Do we just get that money? Do we just have that? Who gets that? Does it go into the strategic reserve? U.S. government? Yeah.

But they probably can do that. It's kind of like the arbitram, you know, counsel there. Just freeze and reroute that. Uh-huh. They have a firmware level access there. Mm-hmm. And for all the crypto natives out there

who are still paying attention to on-chain stuff and new chains, Mega-Eath. The Mega-Eath TGE is happening on Thursday the 30th. That is next week. They put their T-G-E behind a bunch of KPIs. One of those KPI's, they just need to hit one of the KPI's. One of the KPI's was 10 live apps. They had their 10th live app go live yesterday.

Nice. And so now there is a T-G-E count down for seven days. So we're going to get the Mega-Eth token trading on-chain on next Thursday, which is pretty exciting. Hyper Liquid is currently valuing Megaheat at $1.7 billion. which is above the pre-sale price. It's hanging in there. The pre-sale was at $9999 million.

So we are at $1.7 billion, so all pre-sell buyers are up. And just for context, I think we can also check in on Monad, which is, for some reason, lumped together with Mega-Eath. Both are very high-throughput, high-performance, EVM chains that are kind of launched at the same time. The Monad token launched a while ago, currently clocking in at $3.3 billion dollars fully diluted, also above the pre-sale price of 0.025 cents.

It is at 0.032 cents. So it's nice, Ryan, to have healthy tokens, healthy new tokens, because usually in bear markets, when consumer sentiment, if you will, is down bad, prices don't go up. And so the fact that prices are above pre-sale prices, I think it's pretty up to be sitting.

It's not much supply, though, I will say, in this monad, right? So the market cap, you know, supply, 386 million. A little bit over, like 11% float. 11% flow. Yeah, that's not a lot of flow. But they're hanging in there.

You are ready about that. David, let's end with this. I am becoming increasingly concerned with governments taking action on what you might call device level, know your customer, KYC. So this is an age verification bill coming out of the U.S. Congress. And it's not really an age verification. bill because what it is specifying is that every operating system, so Windows, MacOS, iPhone,

you know, Android would need a proof of age requirement in order to just set up the device as part of the install package. And what that means practically in order to prove your age in a verifiable way, that means government ID. That means a photo. It means something we're quite familiar with in crypto, which is KYC. The implementation of this, that we've seen in other setups like Discord, for instance, who's implemented age verification, is you have to send your driver's license or your passport and a selfie to a third-party company called persona,

and they verify that you are indeed who you say you are. Okay? So imagine if this type of legislation gets passed, and that is the default, it would effectively mean K-Y-C know your customer for every device that anyone uses in the U.S., right? and for anything that's connected to the internet, that destroys, like, if you're talking about what are the implications of, for crypto, basically, we could have private crypto, but if we have

firmware level at the device at the operating system level, K-Y-C, none of that matters, okay? Wait, this is just for phones, right? No, this is broad enough that it would cover any sort of device. Now, this is a draft bill. My computer, anything that talks to the internet. That's right. If it talks of the internet, it has to have a government issued ID to go along with it. That's right.

That's wild. It's crazy. This is a bill in Congress and you'd read the full text. I don't think that this will actually make it through the process, the bill creation process in Congress. But there are about like four or five states that have already passed through the state legislators something pretty similar. So I'm very concerned about the Overton window shifting on this. And it's terrible from multiple angles. One is the way they're actually implementing it, the defaults, where it's your government

passport, KYC to persona, I mean, that creates the biggest honeypot for hackers. That is a bow-wrapped gift to North Korea where they get identification information of every single American who uses a device. And like, we have the tech to do this differently. ZK passports, for instance, that's a way to do, if you're going to do this, you could do government-mandated identification, age verification, without actually creating a honeypot and giving up your passport and a selfie photo. So from that perspective, it's offensive. The other way it's offensive is, of course, like, this is a government mediation of any device

or connectivity, right? The amount of surveillance that can come out of this. You know the Marauders map from Harry Potter where you have the names running around Hogwarts? Yeah. This is just a Marauders map for the United States. government of just like names attached to devices running around. Yep. In real time.

Yep. That's scary. So it's not great. And they're already rolling this out. I don't know if you've seen this was a couple of weeks ago in Claude. For new Claude users, this is not fully rolled up, but you can look at this in Cloud support. They're already requiring the same K-Y-C persona, where you have to submit a government ID and

also a selfie toad persona in order to start using Clod. And they're doing this for age verification. reasons. And this is Claude and Anthropic just adopting this, not by government regulation. They're trying to be kind of the good boys that are staying ahead of this thing. Anyway, AI, like, KYC for AI, right? KYC for devices. We got to keep this stuff on our radar because this could create, you know, like a massively dystopian surveillance state for sure. Ryan, I know you're a Claude power user. I know you like your Claude. If you had to continue to use Claude to give up your, but you had to show your ID to Anthropic. Would you do it?

What else are you supposed to do, right? Like, I think I would, I would run it in parallel to some sort of self-sovereign system that I have to go figure out how to set up, right? And I would have these two systems in parallel. So you would, uh, but how does just, how do you just not erode yourself to the good U.S. version? Because your, your self-sovereign AI is going to be so comfortable. some and produce worse results for you. I know. That's the whole prisoner's dilemma coordination trap we have right now. That, you know, I hope these don't become system defaults or else we're all in a world of hurt. Yeah. I think the idea of government logs of humans is always scary.

Yeah, I agree. Well, let's send it there. Got to let's let you know, none of this has been financial advice. Crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.