Bankless - SotN #44: Modeling Ultra Sound Money | Justin Drake

Starting point is 00:00:00 All right, Bankless Nation. Welcome to another state of the nation episode. David, what are we talking about today? What's the theme? We are modeling out ultrasound money. We put out the episode with Justin Drake a while ago. So now we are getting Justin Drake back onto the show to get into the granular details of what makes ultrasound money, ultrasound money. There are numbers to discuss. And so we are going to discuss all of them. There are numbers to discuss. There are models to discuss. There are four different pieces to this. David, you tweeted this out pre-episode, and we're going to get into all of them. 25% staking annualized APY terms. In ETH terms? Wow. ETH supply, maybe it peaks at $121 million and never gets higher than $120 million. Kiss it. Kisses $120 million and comes back down. Long-term ETH supply target, possibly $100 million. that's the coming down part and the potential for cell pressure to be reduced by 90%. Justin Drake has brought the models behind some of those astounding facts that I think very few people have actually looked into.

Starting point is 00:01:22 I mean, the first exposure to EIP 1559 and to the merge, the staking merge in a comprehensive way, I feel like was almost the podcast that we did with Justin Ultrasound Money. Now, that was very metaphor-driven. That was very high level to help people. understand the narrative. Now, this is the supporting data. This is the supporting numbers, the supporting financial projections behind all of this. So I'm super excited to dig into this. And David, all-time high, Eith. Coincidence? I don't know. I think not, sir. I think it knew this episode was coming. I choose to believe that as well. All right, David, what's new in the

Starting point is 00:02:02 community before we get to Justin? Got to talk about badges. If you are a bankless premium member, pick up your badge. We've been saying it for two weeks. Definitely do it. Pick up your badge. This is the week. We're doing more raffles this week. So check your email for that email from Lucas at banklesshq.com. If you have issues with that, email support at banklesshq.com. Also, David, we've got a killer episode coming up on Monday. You want to just give a taste of what we're going to cover in that episode? Yeah, this episode makes some very, very bold claims. We like to make bold claims on the bankless podcast, but this one is brand new. Josh Rosenthal, who is probably a name that most people

Starting point is 00:02:43 aren't familiar with, but he is a historian of European art, money, wealth, history. And we make the claim that we are on the cusp of a digital renaissance that is equal to or larger than what the Renaissance that came in the 1400s. And the connections here are in the 1400s, we invented the Gutenberg printing press. Thank you. And also double entry bookkeeping. And in the modern day, the printing press is now the modern day internet. And the modern day double entry bookkeeping is blockchain. And that actually is unlocking a brand new renaissance, a crypto renaissance. And he did a fantastic job just going through the history and drawing the parallels. We talk about Renaissance meme culture. The meme culture actually started perhaps in the 1400s. We talked about the parallels between Martin Luther and Satoshi. And we talk about it. So cool, so cool. And so there's a lot of awesome throughlines here. And it's actually

Starting point is 00:03:42 already been one of my favorite episodes come out of the bankless pod. When we were recording that, David, I just like goosebumps almost the entire time when Josh was speaking, just talking about these various parallels between the kind of the old Renaissance and this renaissance. So be sure to check that out, Bankless Nation as well. David, Dharma is still cooking some things up. They wanted us to let you know that they have now rolled the Dharma app out. They have a direct connection your bank account in all 50 states in the U.S. And David, when people ask, like me, about defy, especially my friends who don't know much about them,

Starting point is 00:04:17 I'm increasingly pointing them to start with the Dharma app because that is a great onboarding experience. Direct from their bank account to defy in one tap. Super cool. Anything else you want to say about Dharma? Yeah, we know retail season is coming. And Dharma is probably the best place to send retail who are still looking for like that kind of tradfi

Starting point is 00:04:37 experience of like, you know, just good UX, but it's defy in the back, right? And so one tap, one tap separates you between your dollars in your bank account and ultrasound money on Ethereum. Ooh, Dharma.io, guys, check that out, download the app. All right, David, I'm going to ask you the question I ask at the beginning of every state of the nation. What is the state of the nation today, sir? The state of the nation, it was going to be bullish, Ryan, but I was chitch We've been bullish before. And I was chitch chatting with Justin before the show. And he asked him for inspiration or ideas about what the state of the nation is. And he said, ultra bullish. And so the state of the nation today is ultra bullish. As you can see, if you go and look at the ETH price chart,

Starting point is 00:05:19 and as well, what will be an ultra bullish episode coming to your ears in just a moment. It was crazy, dude. I have two emails waiting for me. One is an 80-page report on a why ether is sound money. And the other is an institutional report. These just came out today, an institutional report, I should say, around ether as an asset, ultra bullish that the narrative is spreading,

Starting point is 00:05:47 both in the institutional side and the story of ether, the asset is spreading among analysts too. So I've got tons of reading to do, but it's all ultra bullish news. And it all feeds back to what Justin presented to us the first time around with ultrasound money, right? So much of those reports tie into the ultrasound money thesis. And so, you know, tip of the hat to Justin for really pioneering this

Starting point is 00:06:12 message. And I'm absolutely stoked to bring him onto the podcast in here in a second. This is what bankless is doing, helping to develop the narrative layer, the meme layer, also helping to spread the education of what these bankless systems are doing in the real world. We're going to get to Justin in just a minute. But before we do, we want to thank the sponsors that made this episode possible. Metamask is your go-to wallet for the bankless journey. If you're going bankless, you need Metamask, period. Browser and mobile, get them both.

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Starting point is 00:08:37 meaning that your gas fees are reimbursed up to the cost of the transaction with the Balancer governance token. Balancer's mission is to become the primary source of liquidity in DeFi by providing the most flexible and powerful platform for asset management and decentralized exchange. dive into the balancer pools at pools.balancer.exchange today. Bankless nation, welcome back. We have Justin Drake back on the podcast again. This is the third podcast video show recording that we are doing with Justin. He, of course, is an Ethereum researcher. He was on two podcasts with us previously. One is on ultrasound money. The other was on cryptography, both incredibly important episodes for you to listen to and understand part of

Starting point is 00:09:21 Bankless Canon. Now, Justin, how are you doing today? I'm doing great. We are excited about this episode, and we're going to be sharing some models that you put together in a few minutes around some of the concepts that we really dove into quite deeply in the Ultrasound Money podcast. We're going to put some, like, numbers behind some of the concepts we were talking about. But before we do, I feel like we need to maybe ground the audience again in understanding Ether as an asset. And of course, we talked about the properties that are coming online for Ether soon, in particular EIP 1559, which adds a fee burn component and also the advent of full proof of stake in the shutting off of proof of work. We're calling that the merge.

Starting point is 00:10:11 Those are all important concepts in the case for ultrasound money. But there's also another analogy that I think bankless listeners are are familiar with that we want to want to get into here. And that is the analogy of ETH as a triple point asset that David and I have used so often before. And the concept of ETH as a triple point asset is similar to sort of the states of matter that people might have learned about in, you know, in science. I don't know, seventh grade science, eighth grade science, wherever you've learned about that. Perhaps lower as well. So, and the concept is that matter can be one of three states. It can be a solid. It can be a liquid, and it can be a gas. And ether as an asset can also be one of three states. It can be a solid, so it can be staked as a capital asset. It can also be liquid, so it can be used as a money. And it can also be used as a combustible consumption good to purchase. ether block space. So that is the triple point asset thesis and the triple point asset model for money,

Starting point is 00:11:21 which we have used. And it's kind of cool because it maps very directly to the asset superclasses, like an asset can either be a capital asset or a money or a commodity. And ether can be all three of those. You have now extended that metaphor a little bit with a new analogy, adding sort of this temperature dimension to ether as a triple point asset. Can we start there? Can we dig into that? So tell us about the temperature analogy you wanted to share with the bankless community. Yeah.

Starting point is 00:11:54 So I think the temperature metaphor is, as you said, a generalization of the triple point asset. So not only can we look at the individual state of, let's say, water that will represent, money, ether, but we can look at more fine-grained temperatures. So, you know, for example, money, you could have money as a long-term investment, which is kept cold in the fridge, so that's kind of cold money, or you could have hot money, which is, for example, if you're a day trader, or if you're in exchange processing lots of withdrawals and deposits in a hot wallet. And I think the reason why this temperature of money metaphor is useful in the context of ultrasound money is that really there's three big consequences of EIP-1559 and the merge, and they each affect

Starting point is 00:12:53 a different state of water. So there's one key innovation that improves the kind of liquid money, as it were, there's one which improves the characteristics of the solid money and one that proves the characteristics of gas money. And one of the interesting things, I guess, is that, as you say, Ethereum is this unique asset. It's a triple point asset in the sense that in addition to being this money and this narrow band, you know, between zero degrees Celsius and 100 degrees Celsius, it's capable of breaking boundaries, which were not previously broken.

Starting point is 00:13:32 So it can break down the zero degree and kind of freeze itself, but it can also break down the 100 degree kind of threshold and vaporize. So that's the analogy of having gas and literally vaporizing it, just like you would vaporize gasoline when you consume it. It leaves the system into the ether. So yeah, looking forward to kind of explain what are these three key changes to the cash flows, right? So in the previous episode, we had the energy metaphor, right? We had energy in the form of electric energy going through the various

Starting point is 00:14:14 components. And the reason why I chose the electricity metaphor is because I wanted to focus on the components, right? There was these three components. There was the battery, that was the engine, and there was the solar panel. But here, I really want to focus on the asset and on the cash flows. And as you said, I think this episode is all about modeling the cash flows and understanding how big they are and how they circulate. And what are the consequences maybe for total supply? What are the consequences in terms of cell pressure, et cetera, et cetera. So, Justin, let's hash out this temperature metaphor just a little bit more. So we have ether as a capital asset. We have ether as a store of value and we have ether as a transformable consumable asset.

Starting point is 00:15:00 How do these map on to the three phases of matter? Right. So maybe the easiest ones to understand is the solid state. So when you have ether and you lock it, you're essentially freezing it, because you're really reducing the velocity of money. You're putting it in deep freeze.

Starting point is 00:15:22 And one great example of this is staking in the context of the beacon chain. it's when you want to on stake, there's a de-frosting period, if you will. A thawing period, right. A thawing period, exactly, thank you. And, you know, we're also seeing this in the context of defy, right, where you have the notion of total value, locked. Like the locked at the L kind of suggests that there's some freezing going on.

Starting point is 00:15:47 You know, it's a spectrum. Like different defy applications might have different temperatures. So, for example, you know, you need, swap might be, you know, somewhere maybe close to the freezing point or, you know, just past the freezing point in the sense that the ether in uniswap technically can be removed with a single transaction. And actually, if you want to sell a EOSC20 for EIF, you know, you can do that immediately. But what we've, what we've observed kind of on a, on a holistic standpoint, is that the collateral is sticky, right? So we did have things like the vampire attack.

Starting point is 00:16:26 with sushi swap where liquidity would go from one place to another, but it still stayed within the realm of Dexas or the realm of defy. If you look at total value locked on DeFi poles, it just goes up only. And we also can talk about the metaphor of Maker Dow, right? So, like, Ether is collateral inside of Maker Dow. And in theory, Ether and Maker Dow is also just one transaction away from becoming liquid on the secondary markets. But as a, when we look at a systems level perspective, Maker Dow has three, over three billion dollars worth of dye, preventing that ether from becoming thought, right? So that ether in Maker Dow is stuck behind a three billion dollar dye supply that is keeping that ether being used as a cold store of value. It's frozen in its place, right? And so in the ether in MakerDAO, we would be frozen ether, very cold ether, right? Not liquid, not available to the secondary market. and definitely not being burned because it's not being used as transaction money.

Starting point is 00:17:29 It's just cold ether, frozen, right? Yeah, that's exactly right. I mean, if you place your ether as collateral and you take a die loan, for example, to buy a car or to buy a house, right, your income is going to allow you to gradually repay that loan, but, you know, it might take a decade for you to repay your maker loan. So if we're painting the holistic picture here, right, so we're almost looking at this whole spectrum of like temperature mapping to ether the asset. And on the far left side of this spectrum, what we're talking about is ether,

Starting point is 00:18:06 if we're thinking of ether as like, say, water, it's below zero degrees Celsius. So it is frozen, but there are degrees of how frozen it can be. And I'm guessing that you might say, Justin, that the far side, the coldest ether can actually get is when it's staked, right? As like sort of, it's not, it's not slushy, it's not in this in-between area. It's like deep freeze, very cold, locked inside of the staking contract. And maybe ether locked in defy might be a little right to that. So it might be like, you know, negative 10 degrees Celsius or so and getting close to the,

Starting point is 00:18:44 to the thawing point, something like that. So actually, you can go even more extreme than staking. So you could, for example, artificially put some sort of time lock on your eif. You could say, I'm going to lock my eath for 10 years. I'm going to create a smart contract that does that. They're kind of artificial and no one really does it. But in theory, you could do it. But there's something that does happen naturally.

Starting point is 00:19:06 And that's the process of losing coins or accidentally sending them, you know, to the zero address. So that's kind of zero degrees Kelvin. It's like maximum, you know, negative 10. temperature. And it's interesting because it's you've taken money and you've made it so cold that you've denatured money. It's no longer money, right? It's technically it's a balance somewhere, but it's no longer money is denatured because you can't move it anymore. It's frozen forever. And you could say the same thing, for example, for the parity multi-sick wallet. So there's this very famous bug where there's basically over half a million if,

Starting point is 00:19:52 which is provably at zero degrees Kelvin. And yeah, it's basically no longer money. And the interesting thing is that when you go at the opposite end of the spectrum, you have very, very similar behavior. Because on the hot side of things, on the boiling temperatures, you're basically destroying If you're vaporizing it and removing it from the supply. So you kind of have this spectrum,

Starting point is 00:20:22 And it turns out that on each extremes, you have very similar behaviors. You're basically improving the monetary qualities of ether, right? Because on the cold side of things, you're kind of taking liquidity, like literally liquid liquidity, and you're kind of freezing it and slowing it down. And on the other hand, you're kind of vaporizing it and having it leave the supply. And this is kind of a geeky kind of math analogy, you know, I study mathematics, so I'll share it. So when you do projective geometry, you know, you have you have a line that goes negative infinity, you know, all the way to,

Starting point is 00:21:01 on that side and that side. And you introduce this to one point called the point at infinity, where basically these two lines meet at the point of infinity. So you can kind of think of it as a circle and kind of the, from a monetary standpoint, the two extremes are really the same place. The same place. And the interesting thing is, about Ethereum is that you can think of it as a machine to take this liquid money and push it to the extremes. On the one hand, you're incentivizing this liquid money to become frozen, and on the other hand, you have this other mechanism where you're incentivizing this liquid money to vaporize. And so these are two very strong kind of scarcity engines that will suck out all the liquidity

Starting point is 00:21:50 in its liquid state. And by vaporize, what you're talking about is essentially literally being burnt through EIP 1559. That's it becoming vaporized, right? Yeah. So this is what I mean by vaporized. Guys, Justin Drake brought his own sound effects. That was the sound of ether being vaporized in EIP 1559. Okay, so go ahead, Justin.

Starting point is 00:22:21 Yeah, post EIP-159, every time you make a transaction, you should imagine this sound in your head. And that's one of three sound effects that we have on standby. And I want to make sure the listeners are up to speed with why we're talking about this temperature metaphor because we're about to go into Excel sheets and perhaps talk less about metaphors and talk more about numbers.

Starting point is 00:22:46 But the metaphor is really, really useful to hold in our brains as we model this thing out, both as a model with numbers, but also a model for understanding these things. And I think what we just finished on right there is a fantastic through line. We have me, I'm picturing like a cylinder, like a test tube cylinder. And we have the hot water at the top and we have the frozen water at the bottom and then the liquid water in the middle. Right. And that composes like the Ethereum system as a whole, right? Boiling water up up at the top, which is the ether being used as transatlantic. transaction fees, and then some of that being vaporized and leaving the system. And then also we have

Starting point is 00:23:21 ether being deep in deep freeze state, you know, in cryo at the very, very bottom, which is eth locked in defy and ethes being staked. And the met of the, the three line here is that currently in Ethereum, we have a very, very liquid center. And there's not that much boiling off the top and there's not that much frozen at the bottom. But that's what is all about to change when we introduce EIP-1559, which really starts to turn on the boiler at the top, and a lot of ether is being vaporized up at the top. And we are also introducing staking, which is freezing a lot of ether at the bottom of the cylinder, by incentivizing ether to be locked in the staking contract. And then there's also something to talk about with being locked in DFI. That's like the slushy ether,

Starting point is 00:24:08 the half melted, half not. But what's really changing is that this liquid center where there is a, Justin, you've called a fire hose of water being added into the system, which is ether issuance from proof of work, is actually going to be constricted into perhaps just a much more modest garden hose. And that liquid center is actually going to become much smaller in relationship to what is being boiled off the top and what is being frozen down at the bottom. And so this temperature frame of reference is we're going to come back to this throughout the rest of this episode as we talk about some of these numbers,

Starting point is 00:24:44 more explicit numbers as we model out ultrasound money. Justin, you want to add anything to that? Yeah, so I kind of want to highlight the three cash flows that are, I think, important for this discussion. The first cash flow you mentioned it is issuance. So issuance is you have just new liquidity that comes out of the sky. And right now, it's a huge amount of issuance. It's like, as you said, it's this fire hose of liquidity. And the market has to bear with it.

Starting point is 00:25:16 It's like this huge amount of cell pressure. It's costly to run proof of work. One of the big innovations of proof of stake is what I called economic efficiency in the previous protocol. We're reducing by, let's say, 10x the cost of consensus. So that's cash flow number one, issuance. Cash flow number two is related to this warm side, this hot side of the spectrum, the burning.

Starting point is 00:25:42 It's supply, right? So we have a new mechanism to reduce supply. And this is kind of where, you know, ultrasound money meme came from, right? Because we have deflation. But, you know, really the ultrasound money is a very holistic meme, you know, with strong fundamentals, with many pillars. You know, this deflation aspect is, you know, just one of them. One which is easy to communicate in this kind of catchphrase, you know, if Bitcoin's sound money, then if is ultrasound money. So that's cash flow number two, supply, cash flow number one was issuance.

Starting point is 00:26:20 Now cash flow number three is basically the if as collateral and like how much if will be drawn out from this liquid center and kind of frozen. And basically what we have here is when we have the merge, the transaction fees will be in two parts. One of it, one part will be burnt, we've already talked about this, but another part, which is the tip, is not burnt. And that goes directly to the validators. And so that will go, that will increase the staking APR. And that's basically going to increase the power of the freezer, right? We're going to go from minus five degrees to minus 10 degrees or I guess, you know, the APR could be like the degrees that you're targeting. So we're going to set it, let's say, at minus 25 degrees, right?

Starting point is 00:27:17 So that's a 25% APR. And it's going to be so cold that is going to freeze a lot of the neighboring liquidity. So yeah, these are the three cash flows that we could highlight one by one. Before we get to all of that, so can we talk about the part that we haven't talked about in depth very much, which is sort of this liquid piece, right, in the middle. So we talked about the freeze side that is staked, Eth, frozen ETH, ETH used in collateral. We talked about the burn side.

Starting point is 00:27:53 That is it being vaporized via EIP 1559. And of course, we use that analogy of new liquidity is coming into the system via issuance right now. And right now, there's a lot of issuance, like 4.2% or something issuance annualized per year. is coming into this squishy middle part. There's not a lot staked, and there's nothing being burnt. So we don't have the engine, and we don't have the deep freezer.

Starting point is 00:28:20 Let's talk about this middle portion, because that's mostly what we mean when we talk about money, right? It's kind of liquid. It can be used as a store of value. It can be used as a medium of exchange. It can be used as a unit of account. It can actually be spent. Is there anything more we need to talk about in this liquid phase? Or do we just need to hear the sound effect, Justin?

Starting point is 00:28:48 You tell us. Yeah, I think the sound effect is very important. So let's go ahead. This is the liquid phase. Yes. So we have 100 million ether roughly, which is in this liquid phase. You know, if we remove the three million, so four million now in the deposit contract. And the ether locked in.

Starting point is 00:29:11 in defy. So we have this 100 million pool, which is slushing. And as you said, you know, ether is used as as money is used as money in the context of NFTs. It's used as money in the context of, of trading. It's a unit of liquidity, right? On uniswap, like 95% of the of the volume is this is, is, is, is, is, is, is, is, it's, you know, and one of the interesting things is that, um, you know, and one of the interesting things is that, um, you know, you know, this this traditional power of being money is what Bitcoin has explored, right? So you can think of Bitcoin as exploring this range from zero to 100. And with Ethereum, we can really, you know, push the limits as I mentioned. But yeah, within this liquid phase, you know, we have all the various use cases for Ethereum, but we have this kind of internality. this externality, I guess, which is that the issuance is this necessary evil that we have to deal with. And it's flooding us and we're drowning in liquidity at the moment.

Starting point is 00:30:23 And this issuance is representing a huge amount of cell pressure. You know, we're talking tens of millions of dollars every day. And so one of the things that, one of the things for which we have a spreadsheet is looking at the cell pressure and how much it will be reduced. and we're talking billions of dollars of relief from this cell pressure. Okay, guys, so that's the metaphor going into the models. And just quick recap and we'll do it with sounds. So right now, Justin, you said there's about a hundred million or so of the total supply of Eth. And I don't know the total supply of Eth at the top of my head, 115 million?

Starting point is 00:31:03 Yes. Okay, let's say 115 million total supply of Eth right now. A hundred million is liquid. What does that sound like? That's our 100 million ETH liquid, the vast majority of it, the bulk. Now, we're starting to get some ETH that's frozen. It's frozen in the staking contract. I'm going to say 6 million or so frozen in the staking contract.

Starting point is 00:31:26 We also have some ETH frozen in DFI, 4 million frozen in the ETH staking contract. Justin's correcting me. We have some ETH in DFI as well. What does that sound like? So you sort of imagine like the water becoming ice and I'm imagining that. I'm also imagining my childhood in the in the cold winters of Canada

Starting point is 00:31:50 just when I hear that. All right. So, and we have not yet fired up the furnaces. We have not yet started to burn ETH, but remind us again, what's that going to sound like when we start burning? Sizzle. Cisling on the 15.

Starting point is 00:32:07 EIP 1559. Okay. All right. So that is the setup, guys. Let's dive into the numbers. And there are four models that you've put out recently. And I think maybe Justin, you could give us some context on why you created these models and how you came up with them. But for those that are watching and listening to this, I'm going to quickly go over them at a high level. One, we're going to look at the ETH peak supply model.

Starting point is 00:32:38 And you're claiming that ETH peak supply could be $120 million, no more than $121 million ever created. We're at 120 million, not 120 million, yes. I keep saying it's the bit coiner in me, Justin. 120 million could be ETH peak supply right now at 115. So we're going to get into that model. That's model one. Model two is the road actually going backward in time, going back in terms of supply, the road back to 100 million because again, we're going to start burning ETH.

Starting point is 00:33:12 And we might be able to reduce over the next decade 20% of the, the total supply of ETH. What's that burning sound again, Justin? Got to hear that burn. Vaparizing. From, vaporizing from 120 million to 100 million. That's Model 2 we'll get into. Model 3 is we'll get into the net buy pressure.

Starting point is 00:33:34 So David was talking about we have issuance of about 4.2% that is feeding this fat middle. There's 100 million supply ETH with 4% issuance or so per year. That is getting greatly restrained. So we're going to talk about the implications of cell pressure reduced in ether on Ethereum by as much as 90%. That's Model 3. And the last model we're going to talk about is the incentive for individuals and for people who own ETH to freeze their ETH. And that is a staking APY that is getting massively increased to possibly 25%.

Starting point is 00:34:14 We'll talk about how that's even possible because it's not coming from issuance. It's coming from transaction fees. And this is the first time I've actually seen transaction fees added to the revenue cash flows that Stakers receive. So we're going to go through those four models. Before we do, Justin, is there anything else? Like, why did you come up with these models in the first place? T these up for us? Right.

Starting point is 00:34:39 I mean, we've had, you know, these big structural changes with EIP-159 coming and the merge coming. But I wanted to quantify things. And I think the big story, really, of the last few months is that we have one kind of mega cash flow, which is the transaction fees. And that's the root of everything, really, because it unlocks, you know, the high APR when you're staking. It unlocks the burn. And, you know, I just wanted to see, okay, what were the numbers? Because no one was talking about it. So, you know, one number that I was, I was personally very surprised by was the 25% staking APR.

Starting point is 00:35:24 And, you know, we can talk about the consequences there. I guess, you know, in terms of the of the supply, I, you know, in my original, like, little graphic for which introduced ultrasound money, I had this, this projected kind of cap, very conservative cap at two to the 27. and you know I just like powers of two because you don't have to bike shed too much you know like 2 to 28 was clearly too high 2 to 26 was clearly too low like 2 to 22 27 was the right kind of binary order of magnitude but people were kind of confused like why did he choose 2 to 27 it's not a good meme number it's a bit too geeky um so it's like okay let's try and refine this you know to the closest million and it turns out we can we can refine it to the closest 10 million and you know like the spreadsheet kind of suggests that we will never hit 120 million,

Starting point is 00:36:22 we'll be able to peek under it, and then basically once we have the merge, the total supply can go down. And then like the reason why I created this other spreadsheet, like the road back down to 100 million, is because 100 million is kind of a nice meme number. And I was wondering, okay, is it actually feasible? for us to start at 120 and then go back down to 100 million.

Starting point is 00:36:50 And the answer is yes, you know, it might take a decade, it might take two decades, but it is definitely possible to have the total supply go back down to 100. And 100 million kind of has a bit of historical significance because Vitalik at some point, you know, had this Reddit post where, you know, he was making projections around the difficulty bombing. He said, you know, it's possible we'll never hit 100 million. And then, you know, we crossed 100 million and then all the all the Bitcoin maxis were like, ha ha, you know, you have no supply cap, infinite supply, blah, blah, blah. Well, it's possible it's kind of like the revenge of the 100 million where we're going back

Starting point is 00:37:27 to 100 million. And then the other thing that I actually, there was the very first spreadsheet that I created was around the, it was actually in preparation for our previous podcast. So the cell pressure, right? In the previous podcast, I said that EIP-1559 and the merge combined is going to be the equivalent in terms of reducing cell pressure of both the depotic contract and gray scale combined. So 7.2 million if annually, right? So it's like a huge amount of relief in terms of cell pressure that we're going to have

Starting point is 00:38:11 from these two kind of economic innovations, sci-fi economics, the EIP-159 and the merge. Okay, let's dive into it now, then Justin. This, of course, is the meme brought to life with numbers, with an actual model, a projection of supply and the economic implications, what would happen. Let's go to the first model, which is a spreadsheet that people will find in the show notes. Of course, if you're watching on YouTube, you'll find this. in the show notes on YouTube. This is a spreadsheet you put together

Starting point is 00:38:44 for a model of ETH peak supply. And the claim in this spreadsheet is pretty simple. There may never be more than 120 million ETH in existence, ever. Again, it's back to this diagram. We might hit a point where we go ultrasound. We grow ETH supply, and then it might bend back downward. And that point might be $120 million.

Starting point is 00:39:10 Can you explain? some of the variables behind this scenario and why 120 million is, it's kind of, it's an estimate, of course, but it's almost a conservative estimate as well. Get into this for us. Absolutely. So, you know, the way that you predict supply is, it's quite easy. Like, you look at the supply today and then you basically add the daily supply. And there's various things that will influence the daily issuance, I mean, they will influence the daily issuance. So right now, the daily issuance is composed of two things. Number one is the proof of work issuance, which is about 13,600. It's actually a little bit below that. So I've put 13,550. And then we have the daily

Starting point is 00:39:59 proof of stake issuance, which is, I think, around 800 eif per day. But I put a thousand if there in the best guess because that's going to be the average between now and emerge. And then there's these key dates that are, right. So the key key date number one is when will EIP 1559 be activated? Because from that point onwards, there's going to be a huge relief in cell pressure because part of the fees, which will normally go to the miners and be converted into electricity and electricity bills and sold, you know, it's like a forcing, forcefully sold, economically is forcefully sold, will now instead be burnt and not sold. So right now, the current plan that was announced a few days ago by Tim and the whole crew is 14th of July

Starting point is 00:41:00 2021. But of course, you know, we could slip. You know, we've slipped many times. And so you know, the, my conservative, like my, my conservative, you know, date for EIP 155.59 is, is the 14th of August 2021. And the reason why I've put it there is because we actually have to hard fork. And the reason we have to hard fork is because there's this difficulty bomb, which will stretch the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the fact of the time, the devs have extremely high confidence that, you know, EIP 1559 will go, in this four coming up in London. So just in the variables that really drive the difference between what you're calling the best guess, the more leaning conservative guess and the conservative guests are the activation date for EIP 1559, which is targeted for July, but could stretch into August possibly, maybe

Starting point is 00:42:00 likely not later. Also the merge date. So that's the date at which proof of work goes away and proof of stake becomes the consensus engine for the entirety of Ethereum. The proof of work issuance, that's going to not really an assumption. That's pretty static. That's definitely baked in. Daily average POS proof of stake issuance, that could vary some, but that feels pretty secure as an assumption as well. This other one, average daily fee burn. So there's kind of a range on that. On the conservative side, it looks like there's an average fee burn of about 3,000 per day, eat per day. And on the best guest side, it's about 6,000. What are we burning per day right now? Is it closer to 6,000? Well, right now we're not burning. Excuse me, not burning.

Starting point is 00:42:53 In theory, right. I met in transaction fees, yes. Right. So the 100 day and 30 day and even seven day moving average are 12,000 each per day. Okay, and then the 365 day moving average, which is like the really conservative one, which spans a very long stretch of time, is at 7.5,000 eph per day. But, you know, as I see it, you know, the total amount of transaction fees per day is one of these metrics, which is quite volatile, but directionally, it's up only. So, you know, let's say 10,000 Eve per day, over 70%, or let's say 60% fee burn, then that's how you would arrive at this, at the 6,000 each per day. Like the conservative one, 3,000 each per day, I just don't see how it could go below 3,000 each per day given that we have, you know, 10,000 each per day in transaction fees.

Starting point is 00:43:54 And there's no way, you know, the fee burn will be 30%. And then so, Justin, based on these assumptions, we get a best guess case where we have about 118, call it million eph in total supply, max total supply, right? Because at this point in time, it's going to start bending down and we're going to start burning more than we're issuing, right? That's the best guess side of things. If you were a bit more conservative, we get to a number that's closer to 120 million, ETH as the max supply? Absolutely, yeah. And the lean conservative is 119 million.

Starting point is 00:44:40 So, yeah, I'm expecting we'll peak between $118 million and $120 million. And as you said, from the point of the merge until kind of the foreseeable future, we will deflate very likely every single day, the supply will go down. down and down. And the reason is that proof of stake is so damn efficient. Like, you need very, very little issuance to run the proof of stake. And so like even a moderate amount of transaction fees will will more than compensate for the issuance. So Justin, it's your belief that after EIP 1559 and the merge, that there's no way that we are not burning more ether than we are issuing. You seem like you have complete confidence in that. Yeah. I'm

Starting point is 00:45:29 going to say 99% confidence that at the point of the merge we're going down. And I have high confidence, let's say, 95% confidence that for the years to come, you know, let's say 10 years, we're going to be going down pretty much every single day. This is a massive narrative buster because I think a lot of people have heard the narrative that eth supply is infinite, right? That it has no cap, right? What's the difference between those narratives and what you're what you're showing in the model? Because I think people even hearing this are so used to hearing the narrative being told that, like, ETH is, ETH supplies infinite, ETH has no, no cap whatsoever, ETH will continue to issue more and more into the future.

Starting point is 00:46:21 What's the difference between those narratives and what, and the model here? because I think people are still who are hearing this might still have a hard time, I guess, rationalizing the difference here, because this is not the narrative that is in mainstream. Like, few know about this. I'm not sure how many people have actually worked through the numbers and have a model like this in their mind, but it has to be not very many.

Starting point is 00:46:48 So can you talk about that? Right. So, right, I think given points, time the if supply is finite and there's always been a constraint on issuance right at genesis it started at five if per block and we've got nothing you know we've always respected that that constraint you know we've gone down you know to three if a block and two if a block but you know we've always been constrained from day one now um the the the claim that if has no cap is actually technically correct and the reason is that in theory if there was no fee burn and purely just issuance from

Starting point is 00:47:30 proof of stake we would just grow every single year now it turns out that um with proof of stake you can cap you can you can you can have a a provable cap which which is um under a million if you know we the the plan right now is to basically um cap the reward the reward beyond 33.5 million if stakes. So beyond that point, there won't be any more supply, and that represents roughly a 1 million if issuance maximum per year. But in practice, what's likely going to happen is that we're going to be burning significantly more than 1 million if per year, at least for the foreseeable future.

Starting point is 00:48:22 And so in practice, not only are we going to have a finite supply, which is de facto capped, it's not in theory cap, but it's de facto capped. But it's even better than a supply cap. It's a decreasing cap. And this is where the ultrasound, the ultra comes in. I think what we get to do with this narrative where, you know, many Bitcoin maxis will come and say that ether has no supply cap. But now with proof of stake and EIP-1559,

Starting point is 00:48:54 we get to say, well, there's no supply floor. Like, it could just keep on going down. Like, it could go in the opposite direction, and there's nothing to stop it from going to lower. It's equally true, isn't it? There's no supply floor. Fantastic, yes. All right.

Starting point is 00:49:09 Well, let's go to the second model here. So the first claim was there may never be more than 120 million. Right. It's not saying that. 120 million, ETH, and this is the model that kind of shows it. The second claim is, I think, equally interesting, but is also part of the first claim,

Starting point is 00:49:30 in that the supply might be going down, and it might go down as low as $100 million in a relatively short period of time. So walk us through the model where we get to 100 million ETH supply, a decrease of like, you know, 20 million from 120 million in 12 years time. Right. So I was asking myself, can we reach this meme number of 100 million if in supply? And basically, there's three key parameters or assumptions that you need to set. The first one is how much if is being staked. And here you can take kind of the maximally conservative, um, I

Starting point is 00:50:14 approach, which is to say we're going to have the 33.5 million if, which is the maximum amount of if, um, of, you know, in terms of of issuing rewards. The second, uh, assumption is the, the daily, uh, EVM fees and in the long term, right? So right now we're roughly order of magnitude with 10,000 if per day in transaction fees. Now I mentioned, you know, there's good reasons to believe that, um, the fees, uh, total fees is up. up only. By the way, when I say total fees, I don't mean the gas price, right? I mean the gas price multiplied by the number of transactions. So, you know, we can have our cake and eat it too, because we can have low gas price and lots of transactions with scalability and have this,

Starting point is 00:51:01 this high daily EVM fees. And then there's this third parameter, which, um, assumption, which will be removed once we have EIP 1559, um, which is what is the fee burn percentage, right? We're doing 10,000 Eve per day, roughly. How much of that is burnt? Is it 70%? 7,000 if per day, is it more? Is it less? And it turns out that it doesn't really matter too much. The ballpark is correct. If it's slightly more, it's good because we're deflating faster, we're reducing supply. If it's slightly less, then that's also good, because it means a higher staking APR for for the validators, which, you know, means more if that gets frozen. So either way we win, kind of the really important number, I guess, is the daily EVM fees long term. And so, like,

Starting point is 00:52:00 if we plug in the numbers, you know, you're welcome to plug in your own numbers, but my best guess was we're going to have 30 million if stake long term. We're going to have at least 10,000 if per day and we're going to have a fee burn percentage of roughly 70%. And that gives us about 12, 12 years to go down from 120 million if back down to a hundred million. So basically to vaporize 20 million east if it will take 12 years. This best guess of 10,000 eth being burned per day, that's actually where we currently are in right now in EVM fees. And so not only is that what you're saying your best guess is, but like we've actually already checked to that box in theory

Starting point is 00:52:45 according to current Ethereum gas demand. Is that right? That is correct. I mean, the gas market, as I said, can be quite volatile. You know, it depends on things like, you know, what is the activity happening on Ethereum. It depends on what the volatility is of the market. It also depends on competitors, you know,

Starting point is 00:53:06 Maybe some new blockchain project comes out out there, which is so much better than Ethereum, and all your users migrate away. There's many different factors that will influence the gas market. Do you know what I find funny is even the critics of Ethereum at this point, a point of critique is never that ETH block space demand will go down. That's never a point of criticism at this point in Ethereum's lifecycle. It was maybe 2016, 2017. No one will use defy.

Starting point is 00:53:35 I know when we use smart contracts, Ethereum is a solution in search of a problem. It's not anymore. In fact, their criticisms are the opposite. Gas fees are too high. And that's why Ethereum will lose in the long run is kind of a narrative playing out. So even the critics, you know, don't claim that block space demand is going down. Even they think ETH gas demand is going up. But what this would mean in your best guess case, where we are reducing.

Starting point is 00:54:05 total supply by 20 million over 12 years, that's an annual supply rate decrease of negative 1.4%. Right? So right now, we're issuing 4.2%. If this best guess turns out to be true, what you're saying, Justin, is we'd have an annualized decrease of 1.4% in supply. Am I reading that correctly? Yeah, that's about right. So every year, the supply would decrease by 1.4%. roughly. Even the most conservative, can we just maybe walk through that? Even the most conservative side of things where fee per cent fee burn percentage is lower. Daily EVM fees are about half of what we're doing right now. And there's a lot of beef stake locked up. Even that, we're still burning eth. Absolutely. We're still deflationary. Even in like this super conservative scenario, we're still

Starting point is 00:55:03 burning. More eastern. Exactly. That's crazy. Okay. All right. So that's the second model is the road to 100 million eth supply. And you can see how that works out. Fork these. Put your own variables in. Put your own estimates in. These are all available in the show notes if you'd like to view them and fork them and play with them. This next model, I think, is really interesting. You said you prepared this model, you know, after you were thinking through the ultrasound money podcast, this is a model called net cell pressure reduction. And the way I think about this model is right now we've got cell pressure coming from issuance and coming from transaction fees of about 8.1 million eth per year. And what you're saying is that that pipe is going to be reduced by a lot.

Starting point is 00:55:57 It's going to be reduced post EIP 1559 post merge to about 950K per year, ETH per year. I think that's if you take the daily and you sort of annualize that. So that's like an 88% reduction. So another way to say this is I think this model is claiming that there's about to be a cell pressure reduction of about 88% percent. Can you talk through this model with us? Right. So this goes back to, you know, proof of work being extremely inefficient economically. And so here, we need to look at several things. Number one, we need to look at what is the

Starting point is 00:56:38 issuance of proof of work versus proof of stake. And, you know, proof of work is fairly stable. It's 13.2.6,000. or 13.5,000 eph per day. And then for the proof of stake issuance, I'm assuring, let's say, so this, by the way, this was at merge, right? Right now we have about 4 million eif staked, and I'm kind of assuming, let's say, 20 million if stake, which is very conservative.

Starting point is 00:57:12 There's no way, I don't think, will be at 20 million if at the point of the merge. But let's assume conservatively that we're at, 20 million Eve steak, then the daily proof of stake issuance will be 2.1,000 EVE. Now, one of the things you need to look at is the profit margin of proof of work and proof of stick. For proof of work, you have a very small profit margin because almost all the EF, you have to, you're forced to sell economically to buy the hardware, to buy the electricity. So let's say that you have a 10% profit margin, but actually after tax, right, you have. You have a 10% profit margin, right?

Starting point is 00:57:49 have this income tax, which is about 50%, the 10% becomes 5%. So basically 95% of the if that you receive, you're forced to sell. Now, in proof of stake, you have a very different scenario where you don't have the electricity cost, you don't have the hardware cost, you only have the taxes. So your profit margin is 50% and you're only forced to sell the other 50%. And actually, on this point, I kind of want to correct one of the things that I said in my previous podcast. I said in my previous in the previous episode that proof of stake is not distributive, right? I was, we were basically claiming that if all the rewards accrue to the, to the validators, to the stakeholders.

Starting point is 00:58:31 But that's actually not correct because roughly half of your if that you receive as a validator, you're going to have to pay an income tax. In most jurisdiction, you know, income tax is around 50%. And so you have this, this natural cell pressure, which is a, a distribution mechanism for proof of stake. Anyway, you plug in all the numbers, and you also include the fee burn, and you go from 22,000 if per day in cell pressure,

Starting point is 00:59:07 which is an insane amount of cell pressure. We're talking, let's see, 2.5K if, that's about $50 million per day, which is insane of cell pressure. And we're going to reduce that down by roughly 10x to 5 million eph per day, which is much more reasonable. And so when you annualize this,

Starting point is 00:59:31 it turns out that the cell pressure reduction is the equivalent of the deposit contract, which is around 4 million eph, and grayscale holding the 3.2 million eif combined. But that's not like a one-time reduction in cell pressure. It's every single year we're going to have, you know, the equivalent of 7.2 million if that is not sold on the market. So you can, if you want, you can think of it as buy pressure, 7.2 million if per year of buy pressure. That is insanely cool.

Starting point is 01:00:07 And so just to reiterate, like removing cell pressure is the same thing at the end result of things as adding in new buy pressure is basically two size of the same coin. And what Justin Drake is saying is that by removing the cell pressure of proof of work issuance and then also also removing the cell pressure of EVM fees, fees paid to the validator slash minors, what we are able to get out of that is the equivalent of both Grayscale and the deposit contract every single year. And so this is a recyclable mechanism. We get, we get to generate an equivalent amount of buy pressure that Grayscale puts in and also an equivalent amount of deposit demand that the beacon chain staking contract also puts in.

Starting point is 01:00:52 And we get to have this this year and next year and next year and next year. And until we perhaps even break through that 100 million ether supply floor. You know, there's no floor for ether supply. I guess going back to the original analogy that we were talking about, David, you mentioned sort of this fire hose. that is feeding the center with the liquid portion of eath, and it's just feeding it more and more ETH every year, about 8.1 million ETH supply per year.

Starting point is 01:01:31 And that's being reduced by a massive amount. So that's being reduced to about 950K eth per year. So there's just like an 80 to 90% reduction. we're moving from a fire hose, as you said, to a garden hose of liquidity that is that is filling that center part in the states of matter, that that liquid part of ETH. And to to extrapolate on that as well, right? Like not only do we go from just a fire hose of ether issuance flooding this like metaphor of this like cylinder of various temperature where this middle part is just getting injected with just liquidity like ether selling pressure. But on top of that, we have the top part of this metaphorical

Starting point is 01:02:20 cylinder, which is now burning ether, right? It's vaporizing ether. And so that what is being liquid is being vaporized by EIP-1559. And we also have, and so the liquidity is being dried up that way. And then also we have on the flip side of things, we have this incentive to stake through ether. And so while this middle section of lukewarm ether, it's very quickly getting vaporized or getting staked. And while it's also not getting resupplied by a bunch of new proof of work issuance, it's only getting resupplied by a very small trickle of proof of stake issuance. And this reminds me, this turns my brain to some sort of like kind of stock to flow analysis where the center part is the new issuance and it's becoming very, very low. a lot of that, the total eath supply is either getting burnt or staked, right? Which is the stock.

Starting point is 01:03:15 And so there's very little ether supply that's accessible in liquid, which is actually a security mechanism to Ethereum because not having too much ether on the secondary markets is a way to protect Ethereum from would-be attackers because there's not that much ether available to them to purchase on the secondary markets and attack. Justin, did I say anything that tripped you up or did you like that? That was amazing. That was fantastic. And one thing I'll mention is that in the stock to flow, flow becomes negative, right?

Starting point is 01:03:46 Because we have more. And so that kind of something for the Bitcoin is to wrap around in the current model. Right. Massive amount of net cell pressure is reduced. This is crazy. So what are we talking about? A factor of 10 or so of efficiency at cell price reduction? what's going to happen?

Starting point is 01:04:10 Like when that happens, when EIP 15-5-9 comes around, when the merge happens, all of this net cell pressure is reduced by 80, 90%. Like, what happens? I wonder what could happen. I guess we'll find out. Justin, we've got one last model to go through, and then we're going to talk about a few other things. But before we do, Bankless Nation,

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Starting point is 01:07:23 guest scenario. Can you walk us through some of the variables here? Right. So we have three key variables here. Variable number one is how much if will they be staked when we merge? Because this 25% is at the point of merged. It will be, it will get obbed away as more if comes in. and stakes, but I'm expecting roughly 6 million EF staked when we merge.

Starting point is 01:07:46 And the reason is because we're at 4 million right now. Coinbase is going to add another million, and then we're going to have maybe another million trickle through. And what's happening is that the APY is gradually reducing, right? So right now we're at roughly 7.8% APR, but with 6 million if we're only at 6.8% APR. So the incentives are going down as more if stakes comes in. Okay, second assumption is what are the daily EVM fees at merge?

Starting point is 01:08:20 And I put 10K. You know, as I mentioned, we're above 10K on the seven-day moving average, on the 30-day moving average, on the 100-day moving average. We're roughly at, you know, 12-12K. So that seems, you know, relatively safe, but, you know, anything could happen, I guess. And then there's the fee burn percentage, which is one of the things that will be interesting to see when EIP, 1-559 comes in in a couple, in a few months. But yeah, I put it at 70%. And, you know, I guess, you know, one way to try and estimate it is to look at the slow gas price, right? So the base fee is meant to represent kind of the sustained demand for.

Starting point is 01:09:13 The basal level of demand, yeah. The basal level. Thank you. And so you can use that. And then you can just divide out. So yeah, you can just take that gas price, multiply it by 15 million gas, which is the current gas limit. And then divide it out by the, the,

Starting point is 01:09:34 the total if received in fees in the blocks. And that will be one way to estimate a lower bound on the fee burn. But of course, it could be slightly greater than that because the slow gas price might be too conservative. And so when people were previously discussing like the yields from from staking, they would, they would really point out just issuance. And they didn't really, people forgot to include the tip. and people forgot to include MEV, minor extract maximum extractable value, right? And so when people are seeing this 25% APY,

Starting point is 01:10:13 they're the, and maybe they're getting like sticker shock almost of like how high. Like no one thought that staking rewards would be this high because everyone forgot to integrate really high gas fees and really high congestion, right? And so that, that has been my takeaway is that like people, not only did we not really understand the large implications of reducing

Starting point is 01:10:32 issuance and burning fees, but we also didn't understand the net effect of MEV maximum extractable value rewards being paid to each stakers and eat stakers alone. But this isn't, this isn't MEV, is it, David? This is just fee. Doesn't include MEV. So, MEV is a very broad term and it includes various things. One of the things that it includes is the what I call the native fee, which is the fee that's paid by specifying a gas price in the transaction. But MEV is broader in the sense that there's different ways that you can get paid. For example, FlashBot, what they have is a bundle mechanism where it's basically

Starting point is 01:11:18 where they have a smart, they provide a gas price of zero way. And instead, you have a side channel. payment. And the side channel payment happens in the contract, which pays the block proposer, which right now is the minor. So I guess what I'm saying is like, I think what you're saying, David, is absolutely true. But what I'm saying is I think Justin's model only includes the protocol specific fee revenue as part of MEV. So if you wanted to include all MEV, it would be even more than this. Is that correct, Justin? That is correct. But FlashBots, have this dashboard, which is currently in beta, and I got the privilege to see it.

Starting point is 01:12:03 And from my understanding is that the incremental MEV, which is paid in these bundles, is only about 5% additional. So it's right now, at least, it's relatively small, but, you know, things could change. And, you know, this daily EVM fees, which is, you know, right now around 10K, that could go down, but you're right, you need to take into account the possible increase. in the fees that are paid through flashbots because those will go directly. This is pure tip that goes directly to the validators. There's nothing is burnt really in the flashbots fees.

Starting point is 01:12:41 Earlier in the episode, Justin, you talked about how like the staking ether is so cold that it freezes the ether proximate to it. And I think this is the time to revisit that metaphor. Can you walk us through that metaphor and how this has to do with this 25% APY? right so 25% is clearly you know insane and crazy and it's not going to last long it's going to be a temporary thing and so what's going to happen is that more if is going to come in and and stake and so the question the very natural question you might ask is how much if is going to come in and stick and get frozen exactly and one way to answer this is using a model

Starting point is 01:13:25 And what you could include as a parameter in your model is what is the fair cost of money of ether? You know, what is the opportunity cost of staking ether and as opposed to doing something else with your ether? And then the other thing you need to model is what is the cost of staking other than the opportunity cost. So there's various other costs. So for example, there's the compute and bandwidth cost. But there's also the risk that you might get slashed. There's some sort of bug. There's also the risk that you go offline and you accumulate these offline penalties.

Starting point is 01:14:01 My personal estimate for the cost of staking is roughly 1%. Okay. I might be overestimated. I might be underestimated. That's for you to put in whatever you think is appropriate. And for the cost of money, of the opportunity cost, I would put it roughly at 5%. So let's say a 6% fair staking APR, anything over 6% will get arbed away. Now, if you go back to the second spreadsheet, the road to 100 million EVE, you'll see that even when you have 30 million EVE staked in this best guess column number E, the staking APR is actually above 6%.

Starting point is 01:14:49 So if I'm correct, you know, that that 6% is kind of the fair APR towards which the market will converge, then we're going to see tens of millions, you know, on the order of 30 million if staked. So if this road to 100 million comes true, you know, we're going to have roughly 100 million if, 30 million of it is going to be in deep cryogenic cold storage. We're going to have some amount locked in DFI. I don't know. Right now it's 11 million if, but that's been growing extremely fast. Maybe it could be 20 million, 30 million, 50 million, we don't know.

Starting point is 01:15:33 And then the rest, which is going to be probably like a minority, is going to be this liquid if, which will be available to be sold on exchanges and used to fuel kind of this high velocity, if you and economy. And so returning again to the, this cylinder of ether, varying temperatures metaphor, we have very little new ether being added, the liquid new ether being added to the middle.

Starting point is 01:16:01 And where we've gone from where we are now with four million ether locked in the staking contract, that ether is so cold because it's receiving such a high APY from fees and issuance that that four million ether is so cold that it's going to freeze, perhaps up to 30 million more total, total ether, right? And then we already have 11 million ether locked in D5, perhaps that doubles over the next year to 20 million. All of a sudden, we have 50 million ether frozen, right, either in DFI or in the staking contract. And that's

Starting point is 01:16:36 all but half, like a decent, not half, but 40% of the total supply of ether is frozen, right? Meanwhile, we have on the flip side of things, EIP-1559, EIP-1-559 burning off a lot of that excess vaporware, or water vapor, and then we have only a small, modest garden hose of liquidity being trickled in via new proof-of-stake issuance. And so that is the complete final model of this, like, ether cylinder of varying temperatures. That is exactly right.

Starting point is 01:17:09 So you've summarized it perfectly. And that is how we model, ladies and gentlemen, ultra sound money. Wow. Wow, guys. All right. So that's how you got to those numbers, Justin. There may never be more than 120 million eth. We might, over the next 10 years, decrease that to 100 million eith. Cell pressure is going to get massively reduced, 80 to 90 percent with the efficiency of proof of stake.

Starting point is 01:17:39 And then staking APY at the start. of the merge could be as high as 25%. And then it will decrease from there as more ether is getting cryogenically frozen. That's what these models are showing us. Justin, let's maybe end with this. How soon could all of this happen? I think crypto is the crypto markets and just, you know, crypto natives in general are very used to living these like bull bus cycles

Starting point is 01:18:09 and like these almost like these four year kind of repeat. cycles. And a lot of this maybe stems from Bitcoin being the dominant asset. And there is a happening every four years where Bitcoin supply gets cut in half. So every four years, we sort of anticipate something new is going to happen at changing of the cycles. But I think that EIP 1559 and the merge are going to happen much more quickly at an accelerated rate. And maybe at a rate that you know, the crypto industry, uh, is not typically used to. So how soon could all of this happen? I know we talked about it, uh, a little bit, but there's this concept being floated around of the accelerated merge. Uh, what is this? How likely are we to hit the, the merge date and also the

Starting point is 01:18:59 EIP 1559 date of July? Right. So let me talk about the, the accelerated merge and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, basically, it, it, it, it, it, it means, it, it means, it, it, it, it means that we try to merge as soon as possible, but we have a proof of a MVP, minimal viable product. We remove all the bells and whistles that could slow down the merge. So we remove withdrawals from the beacon chain back to the EVM.

Starting point is 01:19:31 That can wait a few more months for what we call the post-merge cleanup. We don't enable transfers internally to the beacon chain. So if you wanna transfer some funds from one validator to another, well, you have to wait a little bit more until the post-merge clean-up, because we really want to focus on this minimal merge. And we don't do fancy stuff like statelessness. So statelessness is kind of a sustainability slash security feature. We have this massive state and with statelessness, the validators don't need to store the state, which is very nice.

Starting point is 01:20:05 But at merge, we're going to be asking the EF2 validators to run a full node, a full EF2. one node with all the state. And like in terms of timelines, we've really tried to accelerate things. And that's for several reasons. One reason, as you can see, is that the cash flows are so large, the amounts of money are so extreme that one, this is bad for the environment, right? Because we're just pumping so much carbon in the atmosphere to pay for the electricity bills. you know, on the order of $50 million per day.

Starting point is 01:20:43 The other thing is that it's bad for the holders, the ape holders, right? We're getting, we have this fire hose of issuance, which is just drowning us in liquidity, which is putting a huge amount of cell pressure. Also, we have miners that have, you know, issued some threats of violence, right? They've said, okay, let's try and show that we're strong and powerful, that we can control the network by amassing 50% of all the hash rate in a single pool. And, you know, honestly, I think the merge at this point is kind of overdue, right? Like we're six years in, right?

Starting point is 01:21:26 Like the concept of proof of stake has been there even before the genesis of Ethereum. That was part of the roadmap from day, you know, minus 100. it. And really it's it's overdue. I mean, I think this, this, the fact that it took us six years really shows how difficult it is to change Ethereum and how, you know, robust and decentralized and how how much due diligence we put in and how, how we want to do things properly as opposed to doing things fast. But, you know, the beacon chain is now running with over $10 billion. Like, There's a lot at stake. It's been running essentially fine since Genesis.

Starting point is 01:22:11 And I think if we were to merge, let's say, in December, the beacon chain would be a one year old. So, you know, we'd have a lot of value at stake for a long period of time. That's quite a bit of, you know, stress testing before we merge. So if you go to the eph peak supply spreadsheet, I actually have. the best case lean conservative and conservative scenarios. So my my best guess is that we're going to emerge the 1st of December 2021. And now the reason I picked this date is because it's the first anniversary of the beacon chain, which was launched on the 1st of December 2020. But of course, you know, I kind of lean optimistic in general. So maybe, you know, like people are like generally

Starting point is 01:23:02 in the team there's this, I'd say there's this rough consensus at this point that we want to emerge as soon as possible and that 2021 is a good development target. But it's not, you know, an ultimatum. It's not something that we must deliver. We really want to focus on security first and foremost because we don't want to put the whole Ethereum economy hundreds of billions of dollars on the beacon chain, which is not secure. And we don't want to risk all this value. So if we have to, we will delay. But because the merge is so minimal, it's so simple from a technical perspective, as far as I know, no one believes that the merge would come after Q1, 2022. And so that's why I put my conservative timeline at the 31st of March 2022 for the merge.

Starting point is 01:23:51 And Justin, this would be that accelerated merge, and then, of course, cleanup would need to occur afterwards, correct? Correct, yep. Okay. And then the EIP 1559 date, that feels like it's pretty strong, pretty set. July 14th is looking like the very likely date, but your conservative guess on that was August 2021. Right. So, you know, there's extremely high confidence from the person leading this effort that EEP 1559 will be part of London, like 99% plus confidence. It's happening. All the implementations are there. We have the test nets. It's already, you know, the EIP has been accepted. like the real question is timing.

Starting point is 01:24:38 But we're talking about weeks. That's the uncertainty period. And as I mentioned, we have this difficulty bomb, which is a forcing function. So we have to hard fork and we will hard fork with EIP-1559. The question is just, are we going to help fork in July, August, and potentially in the extreme case, early September, but no later than September 2021. So back to the acceleration that I was talking about when I asked this question, I don't think the crypto-mark is used to this amount of issuance supply chain change in such an accelerated period of time. First of all, the amounts are massive, right? Going from like 4% to negative 1%. And then also the

Starting point is 01:25:22 timeline is greatly accelerated. We're talking about nine months, maybe 12 months under the more conservative scenario. So I think that the crypto market, crypto investors, crypto people in general, are going to have to get their heads wrapped around this accelerated timeline and the ramifications and implications of what you just laid out. And thanks for putting the models together for us. I think David's got one last piece he wants to cover. And then we'll let you go, Justin. And Ryan, you can stop showing your screen just to finish things off. And Justin, I want to finish off with, again, another metaphor or kind of like vantage point for viewing Ethereum and moving forward. And you've talked about MOX when it comes to ultrasound money.

Starting point is 01:26:17 Like if we were at Mach 1, Ether is supersonic and we are actually burning more Ether than we are issuing. But MOX can go up. Like we can hit Mach 2, which is twice the speed of sound. or or what but what does that mean for ether the asset if if ether the asset hits Mach 2 what does that mean does that mean is that actually an explicit thing yeah so Mach 1 means that the fee burn exactly matches the the issuance so we've we it's like as if we had a cap right the the the supply would not increase it would be very similar economics to Bitcoin and we'd be like sound money if we reach Mac 1. But if we reach Mac 2, what that means is that the amount that we're burning is twice as much than the amount that we're issuing. Now, by the way, this is long term Mac 1, Mac 2, Max 3. If we were to look right now in the present day, it's more like Mac 10.

Starting point is 01:27:19 And the reason it's so high is because there's very few, there's relatively little if that's being staked, only 4 million if. million if. And so the proof of stake issuance is quite a bit lower. So this this little diagram is actually assuming 20 million if, which is a far cry from the current four million if. So, you know, I tried to be conservative. But you know, as you can see, you know, the 365 day moving average is at 6.5, 7.5,000 eph per day. And the 300 day and the 100 day moving average are at Mach 4, which is 12, thousand each per day. So these data points at the top there, they're acting like magnets, right, for the 365-day moving average. So we can expect that this moving average will keep on going up cross-max 3 and possibly even cross-mark 4.

Starting point is 01:28:12 I think this metaphor will do a really good job of kind of explaining the differences between the Bitcoin strategy versus the Ethereum strategy. Because with Bitcoin, we have the happenings, right? It's every four years, it's programmed into the protocol, it's a very ceremonious time for Bitcoiners. It's like it's just like the time of the happening. It's the time for all Bitcoiners get to come and celebrate the happening of the supply, making its way to the secondary market. But with Ethereum, I think we could have our own mocks.

Starting point is 01:28:41 And we get to have mock two, mock three, mock four. And the difference is that with Bitcoin, it's programmed into the protocol, regardless of whether Bitcoin is ready for it or not. It is getting cut in half no matter what, regardless of whether the economics stand up. And Bitcoin is very much hoping that because of the happening, it makes the economic stand up. But for better or for worse, the happening is happening.

Starting point is 01:29:06 With Moks, with Ethereum and going from Mock 1 to Mock 2, Mock 3, it's not programmed. It's not guaranteed. Ethereum has to earn it. Ethereum has to be viably leveraging the native economy that's built on top of Ethereum. If it gets from Mach 1 to Mach 2 and then Mach 2 to Mach 3, it's because it earned it. It's because it made the economics work out like that. And so rather than having it programmed and imposed upon the system, the mockinging or going

Starting point is 01:29:35 from Mach 1 to Mach 2, knock 3 gets to be a new ceremony as time for Ethereum people when we don't know it's coming or not. And when we finally hit like Mach 17 or whatever, and we finally get to rejoice in this new mocking, mocking, we need to figure out a better meme for this. but a new mock level where we get to pat ourselves on our back. We like, we earned this. Like we got this done. Like it came to us rather than it being imposed upon the protocol.

Starting point is 01:30:02 Ethereum was ready to reach this new speed of ultrasound money. And that's my takeaway that I think is a nice juxtaposition. Absolutely. And I think this kind of shows the potential of the ultrasound money meme. Like really the whole thing started as a joke. right it was supersonic money from from Vitalik and then it was upgraded from joke to meme with ultrasound ultrasound one word and I think you know we're moving towards ultra sound money with a space in between as becoming reality becoming

Starting point is 01:30:41 fundamentals and as you say these fundamentals are gonna age like fine wine right because if this this up only thesis is correct in terms of the the total transactions fees per day, this theme is just going to keep on maturing and maturing and maturing. And actually, if you want to facilitate the maturing process, not only can you participate, of course, on Ethereum and be part of the economy and pay these transaction fees, but this is a small plug. I'm looking for a website designer, backend and front end to help with the website ultrasound dot money. So I think there's a lot of potential there to show

Starting point is 01:31:24 like really nice graphics of the daily burn and what Mac level we're at and et cetera, et cetera. Wow, that is a very prestigious position. I think whoever ends up landing that job to help build out that website. That would be a pretty cool job to land. For sure. Justin, thank you so much for spending time with us.

Starting point is 01:31:45 This is number three. And, you know, wow. Like you've just given us so much in terms of understanding what's happening with the crypto economics of this system we call Ethereum. And we just really appreciate you spending the time to do this. Thank you so much for having me. It was great fun. Bankless listeners, in the show notes, there will be some action items for you. And one of those is to review these models, the models that we went through with Justin.

Starting point is 01:32:17 Super important. Play with them yourselves. If you want to adjust the assumptions, go do that. Give us your feedback. Also, listen to the ultrasound money episode again. I've had a lot of bankless listeners tell us that they've had to listen to it not once, but twice or sometimes three or four times to fully digest and understand that episode. I think that's a key precursor episode to this one. And I'll just say that I think this is the most important thing happening in crypto right. now. And it doesn't get enough... Since the beginning, in my opinion. Yeah, but like especially right now, because it's going to happen over the next nine to 12 months. It's going to happen so quickly. And Ethereum is the second largest crypto network, maybe moving into the first largest as a result of all of this. And people need to understand ETH's monetary policy, ETHs issuance schedule, what's happening with ETH2.O, the fee burn, the implications of that, the merge, the reduction of supply implications of that. And so we're trying to bring that information out to them.

Starting point is 01:33:19 This is alpha. This is understanding. This is where Ethereum is going. So thanks for tuning in. Thanks for tuning with us. As always, risk and disclaimers. Of course, ETH is risky. Crypto is risky.

Starting point is 01:33:33 So are these DFI systems. You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we are glad you are with us on the bankless journey. Thanks a lot.

Bankless - SotN #44: Modeling Ultra Sound Money | Justin Drake

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