Bankless - SotN#27: Is ETH Money? w/ Ryan Selkis (2020 Recap & 2021 Horizon)

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Starting point is 00:03:05 So it's also being an on-ramp. So you don't have to go through your centralized exchange like Coinbase or Gemini or wherever. You can just go straight from your bank account right into your Monolith checking account smart contract wallet. So check them out at monolith. X, Y, Z. Hello, bankless nation. Welcome to another episode of State of the Nation. This is episode number 27. I've got David Hoffman here. As usual, we have a very special guest. We brought

Starting point is 00:03:38 in Ryan Selkis, who we will introduce in a little bit to talk a little bit about his ETH report and thesis and his thoughts on whether ETH is money or not might turn into a little bit of a debate. But before we do that, David, how are you doing today, man? Doing really good. December is my favorite month of the year for a whole bunch of reasons, particularly because crypto prices seem to do interesting things in December, which is what we are seeing. And, you know, the holidays are right around the corner. You know, feeling good. It's a good time to be in crypto. Absolutely. We will see if Bitcoin hits all-time high this month. It's been edging for the last few weeks. We'll see what happens there. But if this is your first state of the nation, what we do

Starting point is 00:04:17 here is talk about what's happening. Relate that to the big picture stuff we talk about on the newsletter and in the podcast. We hope to drop some insights and action items for you. This comes out on YouTube every Tuesday, 2 p.m. Eastern. We try to start it around that time and also on the podcast if you want to consume an audio form as well. Speaking of the podcast, David, we dropped a killer episode with Dimitri Kofinas, who has one of my favorite podcasts out there, Hidden Forces. And he took kind of a crypto outsider, crypto-scan, skeptical type view. At least he's not fully convinced of crypto. We had a conversation about that. What were some of your takeaways? Why should folks tune into that? Yeah, it was one of the few podcasts that I

Starting point is 00:05:02 edited and then when it was released, I actually tuned into it, tuned into my own podcast because it was so good. Yeah, Dimitri Kaffinus, really salient, really sober, really secular thinker about things. He understands our industry. He understands what crypto is. Yet he doesn't fall into like the religious thinking that a lot of us do, which I would totally say that I and you as well, Ryan, kind of, we definitely have that religious sort of thinking. It's really important to get out of that bubble sometimes, and that's what we did with Dimitri. He's one of those people that believes that, you know, at the end of the day, like these, these internet-based entities like Bitcoin and Ethereum still have to interact in meat space, and therefore things like

Starting point is 00:05:45 governments and community consensus and community and like human management overrides the power of these systems. And it's really going to be an interesting way for these blockchain crypto economic systems like Bitcoin and Ethereum to manifest in the world when they are going to be under the subject of the nation state. So that's the perspective that Dimitri brought. And it was a really, really valuable conversation for me. Speaking of the nation state, we're also having Rohan on who is maybe set crypto Twitter a buzz with some of his commentary. He's one of the primary authors of the recent Stable Act. And we're going to maybe spar a little bit with him, but also hear his perspective on why

Starting point is 00:06:29 the Stable Act exists. And the reason it is good for both the United States and the world, I bet there'll be some back and forth about that. But he was recently on Dimitri's podcast too. So there's some crossover there. And in ongoing conversation, I think, that's super useful. What are you hoping to get out of that conversation? We're doing that Thursday, right?

Starting point is 00:06:49 Yeah, we're recording on Thursday. We'll probably release it on Friday. I actually think the crypto space generally misunderstands Rohan. And I actually have a lot of respect for the guy. I do find like a lot of commonalities with what you and I are doing, Ryan, with what Rohan is doing. Like, Rohan understands money as a public institution that needs to be protected and cultivated and steward and have stewards.

Starting point is 00:07:15 And I think Rohan sees himself as a steward of public institution. mainly money. He just has a difference opinion of where money comes from. He thinks the money comes from the state and we on bankless think that money is like this kind of bottom up every money for themselves kind of environment. And so, you know, starting, I think we actually have a way to start with Rohan with common ground and attack the conversation from that angle. And I think that's going to be a very interesting conversation. I think it'll be super interesting. I may be a more pessimistic because I totally believe that both Rohan and the crypto community and us, we start from a set of common goals, but then we come to diametrically opposed conclusions,

Starting point is 00:08:00 right? And that's that conclusions, those conclusions where things get sticky. So we'll see if he's open to protocols existing outside of the nation state and humanity's ability to marshal those into a financial system. It'll be an interesting conversation. We are also doing an ETH Bull series. So if Ryan Selkis gets you down a little bit about his ETH is not money conversation today, don't worry, we will have some ETH bull conversations in the future on the podcast. I think that wraps up what's new. So I'm going to start with the question I ask you every state of the nation, David Hoffman. What is the state of the nation today, sir? The state of the nation is debating. We are debating. We're going to bring Ryan Selkis on, but ultimately to have an Eith is

Starting point is 00:08:47 money or not debate. We're going to ask about 2021 and the crypto industry at large over the last year, of course, but ultimately we're going to get into a debate. Then we're debating with Rohan on Thursday, too. So there is some debating going on. One thing I've noticed lately, especially in the latter half of 2020, is that the Bitcoin and Ethereum like ecosystems have kind of diverged recently. Like Bitcoin's kind of doing its own thing. Ethereum's doing its own thing. And all of a sudden, we kind of like had stopped to care about each other very much. But I still see that conversation coming to a head when it comes to like, you know, things like micro strategy, putting their treasury into Bitcoin.

Starting point is 00:09:25 And then also things like ether capital and three IQ putting treasuries into into ether, right? And so at the end of the day, while these ecosystems are doing different things, they meet in the real world in the same place. And so there shall be debates to be had. At some level, like crypto is just one long, debate all the way from inception, all the way from Satoshi's white paper up until now, both debating with the rest of the world and debating internally as to what the future of money should be. All right.

Starting point is 00:09:56 Well, let's get to it. Let's bring on Ryan Selkis. Ryan is probably, he's the original Ryan in crypto media. So I'm more the newcomer, but he's been around for a very long time. He is the founder of Masari, which is like a crypto Bloomberg. It's absolutely fantastic. They just released a facelift. And the tools that they're putting out weren't available in 2017.

Starting point is 00:10:21 It makes me bullish just seeing what Masari has produced and the rigor of analysis that is now present in crypto. He always puts out a yearly wrap-up report. And he didn't fail to deliver this year. He put like, I think, a 134 page report together. We're going to talk a bit about that report. We're also going to talk about a section that begins on page 43. about Ethereum specifically and whether ETH is money or not. Ryan, fantastic to have you on State of the Nation today.

Starting point is 00:10:50 How are you doing, sir? Thank you for being so brave to see you guys. Right back at you, my friend. Right back at you. I don't know if David is the neutral party or if he's going to lean more Ethereum here or what? What's your status, David? You've got to declare before you come in here. Yeah.

Starting point is 00:11:08 Oh, well, I mean, if you're making me pick sides, I'm obviously on the Eath side. But I think one of my big advantage is I can all, I tend to be able to see where Bitcoins are coming from, which is actually why I think I'm so good at debating this subject. But that will be up for Mr. Ryan Selkis to decide. Well, very good. Before we begin, before we talk about the eth is money conversation, that debate, let's talk a little bit about the thesis that you put forward and just the high levels. Because, Ryan, this is a 134 page report. Like, it's super meaty. we will include a link in the show notes guys just download this go look at it it's a fantastic

Starting point is 00:11:45 summary of the year and looks at the the next year moving forward but on january 1st like a year ago or so how do you think the crypto industry saw 2020 play out and how how did it actually play out like what were kind of the differences between what everyone expected and what actually happened well i think the things that didn't change were some of the projects from the 2017-2018 variety finally come to market and introducing their main nets. We saw that with Pocodot, with Filecoin, a number of other high-profile projects. We saw some maturity in the stable coin sector. We saw some maturity, obviously in the Defi sector. I'd argue that's the innovation. You could argue that was initiated

Starting point is 00:12:35 by synthetics in mid-2019, but but really kind of came into vogue with compounds, liquidity mining in mid this year, was maybe the most important development of the year outside of what was going on in the macro picture. Now, you can't talk about 2020 without talking about the coronavirus and just the incredible impact that COVID and subsequent lockdowns and monetary and fiscal responses had on Bitcoin and then by extension, and all other assets in crypto. And the fact that a lot of this happened right around the halving when Bitcoin's inflation rate finally dipped below 2%,

Starting point is 00:13:19 the target inflation rate for the Fed, I think it was incredibly fortuitous from a narrative perspective. And of course, the trillions upon trillions printed in the record setting negative yielding debt. that has certainly played a large role in that narrative taking off. With Ethereum, it's really all been about when's E.2.0 going to come online. And, you know, are we actually going to see this anytime soon? The developers actually got a credible path to bringing this upgrade to fruition

Starting point is 00:13:56 and how smoothly is that transition going to go? Because we are talking about essentially a brand-new blockchain in E2.0. So in some respects, I'd say the year is ending about where most optimists would have put us at the start of the year in terms of development, in terms of Bitcoin, Bitcoin, Bitcoin, Bitcoin, China, actually hitting its first milestone with Bitcoin chain launch. How about D5, Ryan? Was there a surprise there? You kind of alluded to it a little bit when you're talking about synthetics. I don't know that there was a surprise. The surprise was the velocity. at which it took off. And unlike ICOs, which were really kind of manufactured bubbles to a certain extent, there are some similarities, but I'd say unlike ICOs,

Starting point is 00:14:45 liquidity mining has a credible argument for pulling forward demand versus just creating a bunch of speculative fervor, right? The problem with compound, the problem with some of the other defy applications that were early to embrace liquidity mining, is that participating in those protocols as a user was kind of like picking up pennies in front of a steamroller because you're taking all sorts of idiosyncratic risk, you're taking principal risk with the underlying assets. And for what to turn a couple of points of marginal return, you're better off just waiting for the market to play itself out and for these speculative assets to hit their next cycle of growth. And it's kind of this chicken and the egg problem.

Starting point is 00:15:32 Defi, I think, exploded because you were able to give people a credible path towards these protocols and their native tokens actually capturing value in the form of fee markets. And so you kind of had your cake in A2 when you're actually participating in these protocols, both from a yield standpoint and then from a stock option standpoint almost, fear to kind of make the analog to the public companies. And I think that sweetener, that that returns juicer, was the difference between slow and steady growth and what we saw over the summer, which was a tremendous pop. Ryan, I'm curious because I know you pay attention to the coronavirus more than the average individual. And you already said that, like, you know,

Starting point is 00:16:20 one of the big legacies of 2020 is the coronavirus and specifically the relationship between the money printer and Bitcoin and just the cascaded. effects of the value of Bitcoin increasing as a result of the money printer and the net positive effects for the rest of the ecosystem. Taking that variable out of the equation, do you have any opinions as to how the coronavirus impacted the Ethereum ecosystem? Honestly, I don't think it had much impact at all. You know, there was three primary narratives of the year. There was coronavirus and Bitcoin's entrance in the macro scene. And it is almost 100% Bitcoin. at this point. We'll talk about why the limited institutional interest in Ethereum is kind of

Starting point is 00:17:06 manufactured. It's not organic. The second was just would Ethereum get to phase zero, which they did. So I think that's the biggest milestone for Ethereum. And then alongside that, which other blockchains came online that had credible pitches for cycling off some demand, some applications from the Ethereum blockchain, and then the third was defy. I would put everything else into like the very distant fourth, fifth, sixth place, like also ran category. So there's interesting things going on in non-fungible tokens and some of the early Web3 applications and the like, but far, far behind those three megatrends for the year.

Starting point is 00:17:52 Who or what would you say captured the moment of 2020 in our industry? either in the greater industry or maybe specifically inside of Ethereum. Well, I think if we're going to go off of those two or three megatrends, I'd say we put out a list of 10 people to watch. On the Ethereum side, it's Danny Ryan as much as it is Vitalik and for being the central coordinator and really kind of the figurehead that's led this massive upgrade so far and help to shepherd the right resources. and actually hit the milestone before your end. I'd say on the defy side, it's got to be Hayden and Rob Leshner, Hayden from Uniswap, from Rob from compound,

Starting point is 00:18:41 and then Andre from the Wi-Fi. I'd say those are probably the big three in terms of entrepreneurs that really hit the accelerator and got Defi where it is now and where it spiked over the summer. I think maybe the craziest thing is that the pace hasn't really let up. I think when we saw the dip in September and October, it kind of felt like this was the beginning of a bear market that would be protracted. And the vicious kind of rebound in terms of volume and in terms of how quickly things turned back around was pretty impressive and certainly took me off guard.

Starting point is 00:19:24 And then I think on the Bitcoin, in front, you know, there's a hodgepash of people that I think helped you risk it. You know, things like the Wyoming blockchain initiatives that came from the long as spearhead, spearhead started to pay dividends this year in the form of not only clear state regulations, but it got to building a special purpose depository institution, which is kind of like a Bitcoin bank. Banking was probably the biggest risk for a while to the industry, certainly was last year. wrote about. Brian Brooks, former Chief Legal Officer at Coinbase, not the OCC, opening the door for banks to not only bank stable coin issuers, but open the door for actual crypto custody, probably

Starting point is 00:20:13 through M&A, was big. And then I think what Michael Saylor did, and maybe more importantly, what Square did with their corporate treasury purchases of Bitcoin will resonate for quite a long time. Then there's probably a dozen or so macro money managers that had a pretty big impact on the Bitcoin side. But it was really just about the digital gold narrative on Bitcoin, hurting cats on Ethereum, and getting this defy ecosystem really bootstrapped for the rest. You know what's kind of interesting, I think, about the list that you guys put out, Ryan, is a lot of folks on the Bitcoin side are all kind of wearing suits, right?

Starting point is 00:20:55 These are almost like Bitcoin bankers, essentially, right? Even, you mentioned SBF, who came out of nowhere with an entire new custody exchange with derivatives on these things. On the Ethereum side, it's these D-5 protocol developers who, if they are successful, essentially remove themselves from the protocol entirely. Like Hayden Adams, whom you mentioned, right? The goal for Uniswap is that uniswap turns into a protocol and we don't need Hayden anymore.

Starting point is 00:21:30 It becomes completely decentralized. What are your thoughts on this kind of dichotomy? It seems like Bitcoin these days is kind of wearing a suit. And Ethereum is taking the flag of, no, let's build a intermediaryless financial system without banks in the middle. I'm sure we'll get to more of that when we talk about the, the, the, the, uh, ETHIS money debate. But are you seeing that as well, even with the choices of, you know, the standouts of the

Starting point is 00:21:56 year that you named? Well, who's the most important developer in Bitcoin? I mean, I, I, I, I, I, it's probably some member of Bitcoin core, I would say. But like at some level, the project is already finished, right? And, you know, it's, it's a different stage of completion. Exactly. So I'd say that the fact that it's, it's, it's, classified means that being very difficult change allows people to create their own image of Bitcoin,

Starting point is 00:22:26 right? For some people, it's going to be a Swiss bank account in your pocket. For others, it's going to be an uncorrelated asset that fits in a portfolio for others. It's going to be a hedge against inflationary pressures coming out of the most recent recession. And that's a positive because I think Bitcoin is at a different phase of the game than Ethereum or any other protocol or ecosystem right now, right? Bitcoin is on to the final boss. And with the final boss, you don't want a ton of attack vectors available to crack down upon, you know, different developers or development teams or mandate certain types of activity or non-activity in the Bitcoin blockchain. Once we see the taproot activation, that adds another layer of pseudonymate to the Bitcoin ecosystem. I think that's probably about as private as it gets, and it's probably the last major upgrade for a while that we'll see.

Starting point is 00:23:29 But Ethereum's just getting started, right? You know, there's no one day in mind for when the beacon chain becomes accessible. You're basically just relying on the availability of this synthetic eith, beacon eith on an ongoing basis as the new kind of reserve of record that people can lock in defy. The major players are very well known, right? If you asked anyone in the world who they think of when they think of Ethereum, it's our philosopher king, Vitalik. I'm not saying that's a bad thing, but again, it opens up some pressures in terms of his influence and ability to dictate how. this ecosystem matures and what the roadmap looks like going forward because his opinion carries so much of cloud. I don't think, I think it's like it's apples and oranges comparing

Starting point is 00:24:24 Bitcoin and Ethereum at this point and that's fine, but this is why I wrote in the thesis that, you know, it's plenty good to be powering the financial internet infrastructure that Ethereum is, that doesn't mean that it's at the same phase as as Bitcoin. They're almost two entirely different markets at this point. So what about Ryan brought up the fact that the Bitcoin cohort seemed to be represented by suits. Would you say that that's a symptom of Bitcoin's maturity and extended lifespan? Is that kind of just where Bitcoin is in its life cycle? And maybe if you're, I mean, I don't, I don't. Yeah. I mean, you're, uh, I think the fact that Bitcoin has

Starting point is 00:25:05 been successful means that it's available and it's liquid enough for larger investors. to actually access it. But every single retail investor, every single minnow has had 12 years to front run J.P. Morgan. They've had 12 years to front run Paul Tudor Jones and Stanley Drucken Miller. So it's like that to me is such a non-issue because obviously as something moves from a billion dollar, a million dollar asset, a billion dollar asset, a hundred billion dollar asset, a hundred billion dollar asset, there's going to be larger institutions that are interested in it. So, you know, the flip side of that is, you know, the bankers are buying. our bags right now. But so, you know, of course they're going to. But that doesn't mean that

Starting point is 00:25:46 Bitcoin has now beholden to the banks. It just, it just means that this is a phase where that's a new audience of users and a new ecosystem of buyers that materialized. Okay. I feel like we're bleeding into the next section where we want to talk about whether ETH is money or not, or even the definition of money. But let's kind of parameterize the discussion, Ryan. So we kind of led this with, we're going to have a debate on whether ETH is money or not. And you put on page 43 of your report, that basically ETH is not money. And that's fine. It doesn't need to be money. But you made that claim. But I think there's a question of what people mean when they say ETH is money. Like, what is money? So if we're to,

Starting point is 00:26:38 maybe open up the question or open up this conversation, right? I guess I would have the question to you. Do you think Bitcoin is money? And based on that, we can probably define what we mean by ETH being money or not. So is Bitcoin money in your mind? I don't think either of them are money in the traditional sense, right? They're commodity stores of value that are used for two different things right now. Bitcoin is primarily about the store of value use case, secure financial settlement.

Starting point is 00:27:08 of large savings accounts, basically, right? So I think the Swiss bank account in your pocket is true for better or for worse. For Ethereum, most of the usage is going to come in these experimental protocols and these experimental financial applications. And that's fine, right? The transition to proof of stake when it does happen, still not there, but when it does fully happen, will also make Ethereum a defensive asset. You're going to need some minimum price for Ethereum to back into a minimum market cap for Ethereum that will actually ensure that the

Starting point is 00:27:46 network is secure if it's going to be processing trillions of dollars of transactions and settlements. All that's fine. But by and large, this is not about whether, you know, every token can be money, every stock can be money, right? If you just loosen the definition enough. But ETH is money versus not. The question there is, let's be clear about what we're talking about, we're really talking about which is the ultimate and best form of digital money. Is it Bitcoin? Is it Ethereum?

Starting point is 00:28:17 Is there any chance that Ethereum is going to flip in Bitcoin for that use case? And the answer is definitively no. Not any time soon. And if it does, there's something very systemically wrong, I think, in the industry. So like, that's the headline, the catchphrase. but really what we're talking about with money and a narrative is this is a winner-take-most market with power law type distributions and returns, and is it they're going to come close to Bitcoin in that court? I think the answer is no. So I think that I agree with that definition

Starting point is 00:28:52 going into this conversation. So the way you defined money, we're really talking about monetary premium, essentially, when we say it is eth money. And what we're talking about in this in this conversation is whether ETH can accrue a monetary premium that exceeds Bitcoin's monetary premium. But of course, both of these assets are not money in the traditional sense, where they are used as a universal medium of exchange and unit of account and then also a store of value. They're more on the store of value side, and they're dipping into the unit of account, medium of exchange portions. So I think with that as the foundation of context, we could get into into the conversation in your like 10 points about whether ETH will actually flip in Bitcoin.

Starting point is 00:29:39 But before we do, we should get to some of our sponsors that have made this State of the Nation episode possible. If you want to live a bankless life, you need to get a hardware wallet. There is no alternative for storing your crypto in a self-sovereign fashion. That's why I have four ledgers that I use to manage my different crypto assets, using the Ledger Live account as well. Ledger Live is like your home base for managing your Ethereum, DeFi, and crypto accounts.

Starting point is 00:30:10 It does a really good job of aggregating all of your different Ethereum wallets if you are the type of person that uses more than one, but you can also add other cryptocurrencies like Bitcoin or Cosmos or whatever your preferred blockchain is, and then it will display an aggregate portfolio of all your accounts at the main page. One thing that Ledger is doing a really good job of is enabling all the money verbs that me and Ryan talk about with the bankless skill cube enabled in the ledger live app.

Starting point is 00:30:35 So right now in the ledger live app, you can buy, sell, lend, swap, and stake your crypto assets, which is doing a really good job of fulfilling all of the money verbs in the bankless skill cube. Something that's new to ledger live is ledger swap, where you can swap assets one for another directly inside the ledger live application, ensuring trustlessness in your financial activity on Ethereum and on Bitcoin. If you want to learn more about what you can do with a ledger, go to the blog post The Power of of Ledger Live on the Ledger website, where they share some of the more advanced things that you can

Starting point is 00:31:08 do with your ledger that you might not have known about. There's a link in the show notes that will take you to the Ledger Shop where you can get your preferred Ledger Hardware Wallets. I personally like the Ledger NanoX, but I also have both. They're both great options. When you own a ledger, you own your own assets in the way that they have been designed to be held by the user and the user alone. So go get your ledger today to make sure that you are as self-sovereign as possible. The bankless state in the nations are brought to by WIREN. WIREN is DFI's first self-building community-run project,

Starting point is 00:31:42 which I just get really, really excited about. Wynern is a system that seeks out yield in DFI, and it does that in a number of different ways. A very aggressive way is with the vaults, where you can deposit your preferred asset of choice and different defy experts will come in and generate a strategy for what to do with your deposited token, right? And so it'll go find ways to get yield in that deposited token in defy. For those who want to just earn yield on their stable coins, the earn system is for you,

Starting point is 00:32:12 where you can deposit your preferred stable coin, and Yiron will go and figure out which money market on DFI and DFI is producing the best interest rate, whether it's DYDX, it's compound or AVE, it looks around defy to see where the yield is coming from and it direct stable coins automatically so you don't have to check them out at yerne.finance to get started and also check out the stats page to see what other people are doing as well. All right guys, we are back with Ryan Selkis. We are going to get into the 10 points that Ryan brought up in his year-ending theses for 2020 and 2021. Ryan brought up 10 unique points and we're going to go through them one by one, starting with history.

Starting point is 00:32:57 And Ryan, I've summarized your point in this section as Bitcoin has killed all of its competitors, yet Ethereum has not. And there are still plenty of ETH competitors around. Meanwhile, Ether, Ethereum is kind of going through this like transitionary period from ETH1 to ETH2. And if we're using like a metaphor to talk about, you know, apex predators of money, then like ether is like in this vulnerable weakened. state while it's doing this transition while its competitors exist without having to worry about

Starting point is 00:33:30 that transition. Would you say that's a fair analogy of what's going on here? I'd say that's true. I wouldn't go so far as to say that it's in a weakened state, but it is certainly not in as strong a state as Bitcoin, particularly with with Pocodots and DFINITY and some of these other new protocols coming online that really have massive balance sheets and you build it as centrally coordinates different attacks, if you will, or just, you know, marketing schemes to siphon off demand and develop ecosystems from Ethereum. All right. Ryan, my co-host, Ryan, what do you have to say about that? Yeah, so I think it's an interesting point, right? So you'll find this in a lot of maybe

Starting point is 00:34:15 the counterpoints to what Ryan's saying, that I do definitely believe that ether, the asset, and let's separate ether of the asset versus Ethereum the network, because they're different things, ether the asset is probably a full market cycle behind Bitcoin, right? It is Bitcoin 2016. So like with that as a backdrop, I do think the point that Ryan's raising that Bitcoin has no like predators, no competition, but ether has many is much overstated. So there aren't actually competitors to Ether. There are a lot of Heath killers. who say their competitors to Ether, and their marketing says that they're competitors to Ether. But Ryan even raised the point of marketing in centralized Warchest.

Starting point is 00:35:02 It's that centralization that makes them weak competitors to Ethereum. Because the thing that Ether has, just like Bitcoin, is credible neutrality. It was not VC funded. It was not pushed out to only accredited investors. It's already crossed the gauntlet to become a decentralized network, even the CFTC said the two crypto assets that are commodities are Bitcoin and Ether. And they haven't weighed in on any of the other flock of Heath killers. So what's actually happening are these Heath killers, these smart contract platforms,

Starting point is 00:35:37 are competing with each other. And they're competing with Ethereum's layer two. And they're not competing with Ether as an asset for money. That's what I see is actually going on. Though, like, it could look, if you're looking at it from a high level, it could look like there's all of these competitors and Bitcoin has slayed its foes, but Ethereum has to slay its foes. I'm just like looking a couple years in the future where Ethereum has already won this contest. It is the only credibly neutral monetary system apart from Bitcoin. And really, it's just kind of the only smart contract platform standing.

Starting point is 00:36:13 That's my take. Well, no proof of state network has been proven at scale. yet. No protocol of this size has migrated to an entire new architecture at this time. No one has gone through a multi-year transition like Ethereum is proposing to do. And no one has tried to do that at the same time as billions of dollars worth of competitive spend is heading their way. At the same time, most of D5s killer apps are getting very expensive to run on Ethereum. And if you're going to need to set up infrastructure to support Ethereum roll-ups or Lair 2 applications, there's going to be a lot of teams that spend the same amount of time and energy on interoperable solutions to other

Starting point is 00:37:00 base layer chains. So the infrastructure is going to be built. You know, you said Ethereum is a market cycle behind Bitcoin. The truth is all of these other Ethereum-like platforms are not a full market cycle behind Ethereum because Ethereum is in some cases running in parallel as the established lead horse and as a brand new blockchain that's unproven. I think, well, maybe we'll get into the second point in a minute, but I just want to draw the attention of the distinction between ether, the asset and Ethereum, the network, because those are two different things, right? And so ether, the asset as a money system, right, as a sovereign, non-sovereign store of value is different than Ethereum, the network, right?

Starting point is 00:37:48 And so these other alternate blockchains don't just have to compete with Ethereum the network in terms of trustless transactions per second. They actually have to compete with the monetary properties of ether as an asset. But maybe we can address that in kind of the next point, Ryan, where you talk about ether the asset being sort of this reserve currency. And maybe David, you can kind of articulate the point here. So famously, ICOs largely in 2017 required Ether to participate in, right? Making Ether, like as it is, Ether the native currency of Ethereum, Ether was really heavily used during ICOs to make investments, right? And that was kind of the big thing about why Ethereum was so cool in 2017.

Starting point is 00:38:33 The claim here is that, you know, the reservation demand in 2017 for Ether was really, really strong. And that's why Ether was able to pump up to $14,000. hundred dollars in in yeah December of 2017 and and Ryan I believe what you're claiming here in number two reservation demand is that you know the eth leverage in defy doesn't have that same sort of like reservation demand coefficient where ICOs really needed ether to participate modern defy applications don't necessarily need ether to participate therefore the reservation demand is less was that a fair analysis of your take well I mean let's be clear Bitcoin was the reserve for crypto exchanges as well in 2017. Both lost their reserve status for applications that

Starting point is 00:39:22 would be better suited with stable coins. And in fact, stable coins were five times this year to close to $27 billion now in total supply. So whether you're talking about defy, whether you're talking about exchange settlements or any payment application, stable coins have really eaten into that reserve demand for both assets, to be fair. What's different is that Bitcoin has basically entered the institutional conversation as an uncorrelated asset and a speculative sort of value that should outperform gold in a gold investor's portfolio. So there's a new reserve demand for Bitcoin is from a new market. You might not like that it's bankers and institutional investors, but there is no such demand for Ethereum that replaces its previous reservation demand for ICOs.

Starting point is 00:40:14 Yeah, I think that's an interesting point. And I totally agree with your characterization of both of these assets competing at some level against stable coins. But I think that ether as an asset on Ethereum is still irreplaceable, even if you had, you know, stable coins and stable coins really took off and went mainstream. The reason is because ether the asset is the only trustless, trust minimized form of collateral on Ethereum. So Coinbase Circle, they can do a timeout, they can do a pause, they can stop USDC. They can't do that with a Ethereum native crypto asset like ether. So if you want to build something that is trustless, a protocol that is maximally credibly neutral. If you're trying to build a uniswap,

Starting point is 00:41:12 you can't have the reserve currency of uniswap be something like USDC. You could maybe have it be a stable coin that is ether backed, right, and have a pure kind of stable asset, you know, bearer instrument on Ethereum. This trustless collateral of ether, this like on Ethereum, like on Ethereum, is the part that I think a lot of folks miss, and it's why Ether is irreplaceable on Ethereum. And I do. I think we'll get back to that point about outside banker demand, right, where right now institutions are clearly demanding Bitcoin. Again, I think ether is just a cycle behind, right? This idea of ether as an internet bond is going to take off.

Starting point is 00:41:57 I think these same companies that are putting Bitcoin on their balance sheet will put ether on their balance sheet eventually. And in the meanwhile, I do think Ether's reserve status as 8% locked in defy right now, you know, 5 to 10% in the future are going to be locked in staking. It has a lot of sinks native to its own economy that will propel scarcity and price forward. Thoughts on that? Well, I mean, it seems that the market is speaking that the best collateral asset for defy is actually Bitcoin. If you look at the wrapped Bitcoin chart, I don't think that Ethereum has got the,

Starting point is 00:42:33 special position that you think it does as a reserve asset for these ecosystems. And the market is more or less spoken in the beginning of the year that was less than 10 million in rap Bitcoin on Ethereum. Now there's two and a quarter billion. And since yield farming started earlier this year, it was about 35 million. Again, two and a quarter billion today. So that's about 100x depending on what your starting point is. Ethereum's price certainly hasn't appreciated that quickly, and the Ethereum collateral locked in Defi hasn't been anywhere close. Hang on. I can tell David wants to jump in here.

Starting point is 00:43:10 The BTC on Ethereum and the BTC and Defi are different metrics. And I don't know the details or the nuances behind the metric that DefyPulse puts onto their front page. But according to Defy pulse, Bitcoin in Ethereum in Defi specifically capped out at $173,000, which is a very low number. So BTC tokenized on Ethereum, as maybe using Ethereum as a ledger of sorts is not the same thing as BTC pushing out ether as collateral and defy.

Starting point is 00:43:39 And those are telling, those numbers are telling very different stories. Yeah, I mean, well, we can put two together, right? If that's where all the value is coming, that value is coming from the Bitcoin blockchain in search of yield. And where's that yield going to come from? It's going to come from either making markets

Starting point is 00:43:53 on decentralized exchanges or in providing liquidity for lending and derivatives protocols. So look, you know, We're talking about months here where this is going to come to fruition. But, you know, the fact that there is that much of a collateral asset coming on to Ethereum, it's no different from the ERC 20 stable coins. So if you're going to say that, you know, Ethereum is the only, you know, credibly neutral, permissionless assets that is available for collateral,

Starting point is 00:44:21 that's simply not true. Or at least it's not going to be true in a matter of months going into the new year. Of course, like, you know, Bitcoin can press the, the stop pause button on anything that's WBT, right? But that aside, I actually think that what you just said, Ryan, is uber bullish for ether the asset. Because if Ethereum is maximally successful, if it becomes the gravity well for all assets all over the world, and they all end up on Ethereum, that is uber bullish for ether the asset. When we start talking about like Ethereum scarcity engine EIP 1559, where every single Bitcoin trend, like WBT

Starting point is 00:45:03 RAP Bitcoin transaction on Ethereum actually makes ether the asset more and more scarce. The, I guess the concern for Bitcoin is essentially what if it ends up with a chain that is kind of empty of its assets, right? Like low transaction fees. What's that going to do for security? So some of these, like, I guess, weaknesses that you're seeing, I actually think are our strengths on the Ethereum side. But I'd love to get to your third point because this is really interesting. I will not dismiss the fact that Bitcoin has had massive amounts of institutional demand this year.

Starting point is 00:45:44 It absolutely has with micro strategy, Paul Turner Jones, all of these things. It's being stacked on the balance sheet. but you called ether demand in institutions a mirage at this point. What makes you say that? Well, almost all demand from institutions right now for Ethereum is specifically related to the Ethereum Investment Trust at gray scale. And the reason there is staggering demand for that product right now is because there is a mismatch between where institutional investors can purchase shares of the trust at

Starting point is 00:46:22 the net asset value on a given day according to 4 p.m. timestamp, and where they can resell it in six months due to the illiquidity of the rest of that supply. So where the real demand is, it's in retail investors wanting to put their 401ks and IRAs into a publicly traded security that maps to ether the assets, maybe because they're too lazy or too scared to set up a coin-based accounts. But the institutional interest there, like, there's no, there's no missionary or real longevity status to those investors, because I haven't seen anything to suggest that they'll still be around once that premium declines.

Starting point is 00:47:10 That's interesting. So I think there is more institutional demand than meets the eye. So Dave and I just did a podcast with the publicly traded company. in Canada called Ether Capital. They have 30,000 Ether on their balance statement. They have since 2017-2018. Of course, they're called Ether Capital. Well, and they're buying $125 million more, right?

Starting point is 00:47:33 And that demand has got to... They're called Ether Capital. Exactly. They're a publicly traded company. Also, I3Q is another Canadian, it's a gray scale of Canada. I think that what is happening here is, again, back to that idea

Starting point is 00:47:49 that ether is just one cycle behind, we didn't see any of this institutional demand back in 2015, 2016. It was kind of where ether is today. And Bitcoin is being like a great big brother and introducing digital scarcity to the masses and to the institutions. Once they get their mind wrapped around like digital scarcity in this concept, they're going to come back for more. And they're going to come back for ether as a monetary asset, particularly when they, they start to grasp this idea of an internet bond, a productive yield-bearing instrument that is also digitally scarce. So I think what we're seeing is just a, I guess, a snapshot in time, and that this will play out that, you know, Bitcoin has already done all the hard work. And now Ether,

Starting point is 00:48:37 by the way, the only other asset that the CFTC has ruled as a commodity, we'll just ride those rails into institutional adoption. And that'll start this cycle. By the end of this cycle, there'll be a lot of institutions with Ether on their balance sheets. Right. Yeah. The thesis, the idea is that Ether is one cycle behind Bitcoin, but it's actually at an accelerated place in comparison to where Bitcoin was the cycle, because it's already having the balance sheet conversation.

Starting point is 00:49:03 Although it's being forced by Bitcoin, we're still having it. You know, Ethereum is a capital asset getting bonded to the proof of stake chain. It's not actually that interesting to investors that like bonds, nor is it that interesting to investors that lay cryptocurrency exposure because they can get the uncorrelated asset in Bitcoin. And if they're going to look for yield, they're not going to want to take principal risk in an asset that's as volatile as ether. So, you know, really, yes, is it important that this proof of state transition is happening and that there's some rewards and some seniorage for the investors that are going to take that

Starting point is 00:49:41 financial risk and do the work to actually process these transactions? Of course. but it's otherwise inferior on both other axes when it comes to institutional money managers in their interest in the asset. Said another way, once the premium comes down for the Ethereum Trust, I'll believe it when I see it when it comes to institutional demand. And maybe there will be some, but it's not going to be anywhere in St. Ballpark as Bitcoin anytime soon.

Starting point is 00:50:04 Fair enough, Ryan. Let's move on to probably the last point that we'll be able to get into. I know you have a hard stop at the top of the hour, which is in three minutes. But this one's important in my mind. narrative complexity, which I summarize as the Bitcoin thesis, the Bitcoin narrative is really easy to grunt out, doesn't take too many words, but the Ethereum thesis, the Ethereum narrative takes and explaining. Maybe you can elaborate on that. Well, Bitcoin is digital gold that is secured in a global censorship-resistant ledger, and it's much, much easier to self-custody

Starting point is 00:50:36 than physical gold. One sentence. If you're talking to a macro money manager, you can say, this is an uncorrelated asset that has outperformed every single other assets, and it belongs in every portfolio, at least a 1 to 2% allocation. Fine. With Ethereum, you're really talking about technical innovation. You're talking about all the experimentation that's happening on Ethereum, we're talking about all of the financial applications that can drive value and, you know, long-term growth in, you know, these money protocols. But, you know, it's much more abstract because you're talking about replacing banking and lending and, and, you know, all of the legacy market's infrastructure. And then you throw on things like new asset creation and digital assets and ownership over

Starting point is 00:51:23 data and all the other kind of emerging Web3 applications that are part of the same pitch. And yes, a settlement layer for value sounds interesting. But again, you can do that with the protocol. It's not asset specific. The asset is used to secure this protocol that's going to display. a bunch of traditional applications, whereas Bitcoin is really all about the asset and just the tech and the game theory behind it that makes the asset work. Do you put my response?

Starting point is 00:51:53 Go ahead, David. Oh, yeah. Oh, yeah. I was just going to go for it. My response to that is, like, to ask the question, what can you do with Bitcoin, right? What can you do with it? You can hold Bitcoin. That's what you can do on the Bitcoin blockchain.

Starting point is 00:52:10 And maybe you can transact it. but when all of the whales and the Bitcoin banks start using Bitcoin, you're not even going to be able to transact it for a fee that that makes sense, right? Those are the two verbs that you can do on Bitcoin. On Ethereum, it has like so much more surface area. So you can hold, you can transact, of course. You also have an economy of stable coins, an entire trading economy built up over the last year on uniswap. You have NFTs. There are all of these different, I guess, vectors for people to enter Ethereum that Bitcoin simply doesn't have. Bitcoin does have a better mean. Like I'll grant you that, right? Digital gold, okay? Like I buy Bitcoin to hold. I get that,

Starting point is 00:52:58 right? But you've got an entire digitally scarce economy that's building up over on Ethereum right now and all of these various ways to enter. We're just talking to the gods and chained CEO and founder. And like people are buying gods and chained cards that have no interest in crypto, but they're gaining exposure to these gods and change cards. And then ether. So once society and once mainstream starts to understand the idea of digital scarcity, thank you Bitcoin for that.

Starting point is 00:53:30 And once this decentralized economy gets unleashed, right, it's going to feed into demand for ether as an asset. So the surface area that you're talking about is, I think, a strength of Ethereum because it allowed all of these various places to enter. Sorry, David. I jumped in before you could. No, go for it. I know Ryan has to run to a meeting here, so I'll let him get the last one.

Starting point is 00:53:54 Well, most of the applications that you just mentioned actually aren't really that compelling to do on Ethereum right now because of the state of the fee market. And most of the scalability is going to come on later to chains, same as but. So it's really no different. I would say the diversity of applications that are tied to Bitcoin. Anytime period that you're talking about, I think it's going to be much lower than Ethereum. But in terms of scale applications, money is the biggest market that you could disrupt in the world. Bitcoin's got the lead there. Ethereum, plenty of other opportunities. It's just never going to be money. Well, Ryan, thank you for coming on the show and sharing your thesis with us.

Starting point is 00:54:36 If you guys are looking for a way to understand all of 2020 in just a short, 70 plus, or 130 plus page report, check that out at Mazar. We'll get that linked in this show notes. Ryan, thank you coming for coming on and giving us some of your time. Thanks, Ryan. Thanks, guys. It was fun. Cheers. Take care.

Starting point is 00:54:55 All right, bankless nation. That is the end of our episode. As always, risk and disclaimers, eat this risky. So is crypto. So is defy. You could lose what you put in. but we are headed west. This is the frontier.

Starting point is 00:55:08 It's not for everyone. Ethismani. See you later, guys. Are we adding that to our sign-off in the future?

Bankless - SotN#27: Is ETH Money? w/ Ryan Selkis (2020 Recap & 2021 Horizon)

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