Bankless - The Element Airdrop & DAO Launch | Will Villanueva & Jonny Rhea

Episode Date: April 6, 2022

Element Finance is an open-source protocol for fixed and variable yield markets. Yield markets you say? Like the incoming Trillion-dollar ETH Staking yield market?  Come learn about how Element is putting a financial layer on top of Ethereum staking, and the other cool new inventions that the Element team has for the DAO space.  ------  CONSENSYS | M·A·C: NFT Collection for a Good Cause https://bankless.cc/MAC  ------  SUBSCRIBE TO NEWSLETTER:          https://newsletter.banklesshq.com/   ️ SUBSCRIBE TO PODCAST:                 http://podcast.banklesshq.com/   ------ BANKLESS SPONSOR TOOLS:  ️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum   ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across   ALTO IRA | TAX-FREE CRYPTO https://bankless.cc/AltoIRA   AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave  ️ MAKER DAO | THE DAI STABLECOIN  https://bankless.cc/MakerDAO    BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  ------ Guests:  Will Villanueva  - CEO of Element, previous worked at Consensys doing research on Ethereum  Sharding Jonny Rhea  - CTO of Element, previously worked at Consensys working on an Ethereum client.  ----- Topics Covered: 0:00 Intro 8:30 What is Element? 13:37 The ELFI Airdrop 19:05 The zk Claim Process 25:48 Non-Transferable 29:20 NFTs & DAO Governance 35:57 Council Governance 41:14 Voting Vaults 49:58 Maximally Expressive Governance 53:55 ETH Staking Yield 1:01:06 Protocol Security 1:07:50 Bullish PoS Merge 1:15:10 What's Next for Element? 1:18:22 Closing & Disclaimers ------ Resources: DAO Launch Announcement:  https://mirror.xyz/0x3fcAf7DDf64E6e109B1e2A5CC17875D4a5993F39/bctuLRkf7oBL4mMJ9lPf0y0blFjBDslTUfUL0CEk1gc  Guide to Element:  https://newsletter.banklesshq.com/p/a-guide-to-fixed-income-on-element?s=w  Yield Token Compounding: https://ytc.component.fi/ytc?base_token=0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48  Previous Bankless show with Element https://www.youtube.com/watch?v=iF5O1rPbsm4  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

Hey, Bankless Nation, welcome to another episode of State of the Nation. We're super excited to talk to you guys a little bit about the Element AirDrop. Element. This is a Defy Protocol, DefiPrimmative. We've talked about them before on bankless, basically fixed interest rates, a new sort of Defi primitive. And there's actually a lot to unpack with this element story. So, David, I know you've got three things that you think are going to be super valuable

alpha in this conversation that we're going to cover. Can you talk about those and the guests that we have? have on today. Yeah, yeah, this is not your typical Dow launch. While that is where the conversation begins, it is certainly not where the conversation ends. Element with the launch of Element Dow is bringing a lot to the table. First, they have a brand new, money, Lego, governance primitive that all Dow's are freely able to use and plug into. They explained it to me yesterday, and I'm already pretty well convinced that this is going to become the new standard when it comes to Dow governance tokens. It's called a voting vault and allows you, Ryan, to have your cake and eat it too, at least when it comes to,

yeah, cake's great. So we're going to take, we're going to unpack what a voting vault is and why we think, at least why I've been convinced that basically every single Dow is going to adopt a voting vault structure. Second, they are also pioneering a Dow governance model, a new governance structure, which they think is faster and more effective and more efficient at governance, which is something that all Dow's need to improve and iterate on. But lastly, Ryan, and And most importantly, and most excitedly, they're going to show us how we can get exposure to the merge. Like you said, it's a fixed interest yield.

Upside exposure, right? Upside exposure, yeah. Or maybe the inverse. If you so. I don't want the inverse. Why would anyone do the inverse? Yeah, right. But, okay, as you said, like, Element is a fixed yield interest rate protocol.

But with that tool, with this money, Lego, you can express bullishness as to the APY, the yield rate of Ethereum. And so if you think that yield rate is going to go up, I don't know why someone would, Ryan. Maybe they're expecting the merge to happen. I do think this. I do think maybe it's someone who's listening to a few bankless podcasts might think this. Yeah. So Element as a tool allows you to get exposure to the merge. So that is what we are talking about today.

The new governance primitive, the new governance structure, but then also how Element is going to be useful going into the merge. We are bringing on the CEO and CTO of Element. Will Villanueva and Johnny Ray. they have been in the Ethereum ecosystem for a long time now. They are both X consensus before they went off and built off their own thing with Element. So they have been around for a long time. And they are fantastic community members and now builders, building out a defy app that is actually a little bit closer to the actual protocol of Ethereum

rather than just in the application layer, which is another topic that we will get into. Yeah, that's super cool. And by the way, we'll start this whole conversation talking about the eligibility criteria for the AirDrop. And of course, element, I think, was an airdrop that we had predicted would happen. That probably would happen when we put out our big, beefy air drop guide, like all the way back in November of last year. So if you were listening, if you were checking those boxes, you might want to see if you were eligible for this air drop as well. So we're going to talk about that.

David, before we do, man, we got an announcement. Super important. So it is National Youth HIV AIDS Awareness Day on April 10th. And a new NFT collection has just been launched. This is powered by Consensus NFT. And I think this is a fantastic opportunity for first-time NFT buyers because it's an opportunity to support a really great cause with the NFT. Could you tell them a bit about this NFT and how the proceeds from this?

Where the proceeds from this go, David? Yeah, this is from MAC cosmetics. Maybe the men in the channel, don't know what that is, but the women in the channel certainly probably do. Make up a company making a bunch of cosmetic products. They are working on an NFT project with consensus, where 100% of the revenue of the incoming money is being donated to AIDS Awareness. Youth HIV AIDS Awareness Day, which is on April 10th.

There are three tiers of rarity. We've got red tier, blue tier, and yellow tier. So if you have never participated in an NFT drop, maybe you just don't know which one is for you. This one might be a nice one to start with. $25 for the minimum tier for the red tier. $250 blue tiers for at $150 each, and then only $25 yellow tiers at $1,000 each.

And again, 100% of the money goes to youth, HIV, and A's awareness. Yeah, I'm going to be participating definitely because this is a good cause. The art is by Keith Herring, by the way. So to get more details on that, click the link to the show notes. It's bankless.com slash MAC. David, let me ask you the question before these episodes. episodes I start with. What is the state of the nation today? Brian, the state of the nation is yielding. We are yielding. Our crops are yielding. Not only. Like I said, Element is bringing to the

table some brand new technology for all Dow's to be able to use, regardless of plugging into element or not. Brand new governance primitive that's going to allow us to have our cake and eat it too. We're going to talk all about that. Some new tooling in the Discord space, allowing Discord users to discreetly and privately claim tokens without doxing themselves. That's that's also coming. So all these technologies that element is bringing is being yielded by the rest of the Dow ecosystem because of the nature of open source protocol. When somebody builds something, we all benefit.

But of course, Ryan, is also we are yielding from the merge, which element is also going to help us with. Look, man, three words, cake, yield, and merge, all right? And they all go really well together. We'll all unpack all of those things in this episode. Really excited to get to it. Before we do, we want to thank the sponsors that made this episode pop. possible. Arbitrum is an Ethereum layer two scaling solution that's going to completely change how we use

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at MakerDAO and learn from the oldest and most resilient Dow in existence. Hey guys, we are back on the podcast with Will Villanueva and Johnny Ray, super excited, the CEO and CTO of Element respectively. I think they both did some time. I make it sound like a jail sentence. They both worked at consensus previously. Will on Ethereum sharding was pretty cool. And Johnny on the Ethereum clients, so both like protocol layer devs that moved up the stack into D5. That's a conversation in and of itself. But Will and Johnny, we are here to talk about Element. How are you guys doing today? Welcome to Bankless and welcome back, Will. Yeah. Thanks for, thanks for having us. Really excited to be here. Really excited to jam out

and talk about everything. And yeah, it's fun to be here. Well, let's jam out. Let's talk about everything, guys. Thanks for having us. I'm hungry with all this talk of cake. We're going to get to the cake, all right? But first, we've got to eat our veggies as we do on Bankless. Give us the quick speed run, the 101 of element for people who haven't caught up on what element actually is. We talked about yield. We talked about cake, of course. But tell us about yield.

What is the 101 on element? What does the protocol do? Yeah. So element's pretty simple at the most fundamental layer. So what we do is our set of contracts basically allow you to put, go for any yield position in the market. currently we're wrapping the positions on yearn. And it lets you split that position, that yield position, into two basic components. So there's the principle and there's interest.

So to give you like a really, really simple example, if I put down a million dollars on the USDC vault in urine, and let's say it's going for 10% API, the principal is $1 million at the end of a year. The interest that I can redeem for is $100,000, that 10%. And so what we do is we create a market around both those components, the principal side and the yield side, and allows for some really interesting things. And particularly the one that's really interesting is the markets around principal tokens. So we use something called yield space, shout out to Allen over yield protocol. It's the constant power product invariant.

And essentially what we do in this case is it's sort of, of this concept of I give you 90 cents for a dollar. So Ryan, I'm going to give you a dollar. How much is it worth it to you? But you can't use it for a year. So you might say, okay, I'll give you 90 cents for that because I sort of, you know, miss out on the opportunity costs of money, right? I'm not able to stake it on different positions in the space. And this is sort of what creates that market, which sort of tracks the going variable yield rates in the space. And so when you make that deal. It's safe. It's conservative. You know exactly what you're going to get up front. And it's sort of fueled by people who are going long and variable interests and using our platform

to do that and sort of degen a little bit as well. And Will, this is this is super common, right? In the traditional finance world, what is this subset of assets called? And like, what happens in traditional finance? Yeah. So there's this, there's this pretty like, you know, basic concept, you know, of the opportunity cost of money. If you give someone, know a certain amount of funds and it's locked for a certain period of time that sort of accrues that differential in interest. One way you can see it is the person who's buying these principal tokens are getting that fixed rate. You can almost see it as a really, really high interest rate CD that they're locking in. But those rates are, you know, significantly higher than what you

see in traditional finance. Also, yeah, the splitting of variable interest from the principal is also a pretty common thing in that space as well. So this allows somebody who is particularly bullish on an asset to be able, and that asset has a yield associated with it, it allows people to buy that asset at a discount. So like if Ether is like $3,500 and it's got a certain amount of yield, I could buy it for like $3,200 at a discount, but the only thing is I just am locked up for a certain amount of time.

But if you're already bullish, and you're already going to hold it anyways, you could buy it today at a discount. And that's probably like the most basic way to leverage element. But then things can get really a lot more creative. The splitting of a yield-bearing asset into a principle and its interest into two different tokens, the principal token and the interest token, allows for a lot more of expressivity,

a lot of more creativity. And that's where we're going to get into the section later on in the show about how one can gain exposure to the merge. Anything to add on that, or should we get into some of the Dow launch subjects as well? Yeah, let's get to the Dow launch. Okay, cool. Because, of course, like we said, got to eat the veggies before we eat the cake.

And so veggies first. Congratulations, guys, on the launch of Element Dow and the Element token AirDrop. Let's go a little bit into the details about the dynamics behind the AirDrop and the Dow launch. The snapshot was taken March 1st. So anyone that has interacted with the Element Protocol since then, sorry, you're out of luck. But if you're before then, you probably got some of the airdrop. How did you guys determine how much of the airdrop to give out and who of the Element Protocol users actually got the airdrop?

Yeah, so I'll actually let Johnny, I think Johnny can describe a lot of this in more depth as well. But basically, we've sort of broken out into a few components. So one, we wanted to reward the users of the protocol. These are people who traded principal tokens. These are locked in a fixed rate. These are people who LP'd in the protocol. We also wanted to reward active community.

So these are people who are active and actually had engaging discussions in our Discord. And then also we were pretty passionate about rewarding both ecosystem developers. So these are core Ethereum developers. There's a number of reasons why I think Johnny can articulate that really well. We're both really passionate about that. But also other systems, protocols. So we also rewarded people, basically protocols we built on and then other protocols

that we felt were like good for the space, good for the defy ecosystem that we really appreciated. And the way we did that right is we actually had scripts that analyzed GitHub contributions and based on your GitHub contributions that, you know, allow us for your eligibility on, you know, some of those repos. But I'll go ahead and pass like this one off to Johnny. I know he has a lot to say. Yeah, Johnny, help us understand this a little bit more. What are the unique elements of the element airdrop that isn't really found in other air drops or other Dow launches? Yeah, I would say just like high level, like the main takeaways.

So, you know, on the user side, like we provide like, you know, like three and a half percent to liquidity providers, you know, three and a half percent to traders and then like half a percent to mentors. And really what we did is we decided early on to do it in a proportional manner, which is like, you know, it's good and bad. proportional is nice because it's basically like, you know, the amount that an individual has, like, interacted with the protocol is going to, like, directly be proportional to, like, how many votes they're awarded. That was probably the most complicated, you know, part of the process.

But really, our goal was to keep it simple. You know, like, I think when we were looking at the data initially, you could see that, like, there was a lot of people that were, like, trying to take it. of like hopefully the fact that we would have some sort of like blanket distribution for anyone, you know, like sort of you saw with like the uniswap, you know, air drop that they did. Like anyone who'd made a trade gotten a certain amount of beauty right away. Well, since then, that ship has sailed. People have kind of got savvy to that.

And so rather than try to come up with some really complicated logic, we figured, hey, let's just do it proportional. You know, if people are sprinkling, you know, little like two cent buys or cells here there or just LPing a very small amount, well, you know, they'll, that's the slice of cake they get, right? And if they did more, well, it essentially takes all the, all of the subjective kind of like decisions like out of our hands. So, so that was one thing. It was also interesting sort of looking at the data and noticing like how many people had figured out some of the interesting art opportunities there are on element with minting and swapping and, and, and, and, and, and, and, and,

token compounding, which I think will explain a little bit more. But yeah, that's basically the TLDR with the distribution and how it worked from the user point of view. And Will brought this up, and I want to dive into it. You guys have also allocated, I believe, one and a quarter percent of tokens to a cohort of people that typically are not included in AirDrops, being the ecosystem contributors and developers. Can you, Johnny, can you just unpack that decision? And who are these people that are receiving this share of the tokens. Yeah. Yeah. So this was like when, when Will and I first started Element, this was like the one thing. We couldn't wait, you know, to incorporate. We didn't know how we were going to do it. We didn't know exactly what form or how it

manifests, but it was something that we were really passionate about was basically kind of like bridging the gap between, you know, the core protocol layer and the application layer. And so like, you know, one thing to, one thing to mention is that, like, the people who get this, yeah, like Will mentioned are people we built on. So that's core protocol devs, even, you know, even core like defy Legos, like Maker or like Yield Space. Like we love and respect Dan Robinson and Allen and all the work they did on Yield Space. You know, we adopted that. So people like that all took advantage of it. They all got included in the AirDrop. There's, going to be people we missed out on. But one thing that's kind of interesting about the way it was

implemented, you know, was this was this ZK claim, you know, air drop process that we kind of like pioneered here. Yeah, the ZK, oh, sorry, go for it. No, no, no, keep going. If you're going to keep on going, that's where I was going to go. Yeah, so the ZK claim process is pretty dope. So we, you know, worked with Sam on this. And he sort of, you know, worked on the contracts. We gave a call out and the write-up that we did, the distribution write-up. But essentially, what it lets people do is if you're going to reward people by their GitHub ID or by their Discord ID, you want to do it in a way where they can still keep their privacy, right?

You don't want to be able to connect their Ethereum address to their identity. And so the ZK claim was sort of a cool innovation because it basically enables what we're doing, that you can claim by your GitHub ID, and then you don't need to be doxed. And so this is sort of why we have this one week period if you go, if you qualified on the Discord side or the GitHub side, you go through this really cool dashboard. You generate a public ID, a key, a private key. You know, generate randomness by moving your mouse around. It's a really fun process. And then essentially a week and a half later, once everyone's posted their public IDs on the GitHub issue thread or in the Discord, you know, channel that we have, we use that to be able to build a miracle tree where then they can claim. And when they claim, you can't, you can't track it to the identity to GitHub ID that's being claimed. So it's, it's sort of a necessary part in doing it this way. And it's, it's pretty cool. I'm, like, excited to see others sort of follow suite. So I want to just recap and make sure I

understand. You guys, in, when you guys started Element, and again, you guys came from consensus. One of you guys worked on charting. One of you guys worked on an Ethereum client. So app developers that are really close to the Ethereum protocol and also just, you know, open source values and something that really a lot of the core people around Ethereum really embody. And so you guys came and you guys started Element with the intention of when it came time to have a token or however you guys intended on generating liquidity when you first started Element. You're like, okay, we're going to give back. The protocols, the element is built on. top of and the shoulders upon which element lies on,

the shoulders of giants, you guys are gonna give a share of the tokens back towards, you know, the Maker Dow Protocol I think is one you listed, but also the other people that have contributed provably via GitHub. And so you guys have embodied this ethos of giving back to the platforms that you guys have been building upon, giving back to open source,

which is very honor, and very true to the nature of Ethereum. The issue with that is that if you want to give away tokens, you would also inherently be doxing the contributors. And so you guys have made the ZK claim technology that allows the elements of the element it's built upon to be able to have their share of the tokens, but not also doxing themselves on Ethereum at the same time.

Is that the full story here? Yeah, you nailed it. Yeah, 100%. and Will mentioned it, but shout out to Sam Ragsdale, who we were just, like, riffing. Will and I were just riffing with him about it, and he brought up this idea for his ZK claim process. And we were like, dude, I think that would be a sweet way to do, to do what we're kind of like looking, you know, looking to do for our distribution. Well, I know I just, we just talked about how we can remove the ability to be doxed with the ZK claim tech. but who is who is receiving all these tokens like how is that part of the distribution been

allocated is that public knowledge yeah yeah we have a we have a gist that basically lists it's a it's a bunch of Ethereum like so basically like all the client all the client repos so Geph you know Teku Lighthouse you know Beesu nethermind you know all of the all of the client teams, all of the, you know, even the, even protocol labs in live P to P. Right. So like, you know, the Ethereum, you know, Ethereum and protocol labs like work together to kind of be like the first big protocol to like really integrate like live P2P into their networking stack. So we included them. You know, also like, you know, additionally like like we mentioned like the MakerDAOs, you know, the compounds, the Aves.

We missed a big one, like in uniswap. Like uniswap, like, I mean, we knew this was going to be a miss. Like, we knew we would like kind of like that would be a, you know, sort of a risk, you know, like trying to remember every single repo or every single thing. And honestly, like, you know, really the takeaway is here is like we hope people like take our approach, build on it, give us feedback. And then the next team that comes around and does it, maybe they can, they can make improvements on it. Johnny, did you guys give any to that Vitalik guy?

I've heard he did something. He does have a distribution, yes, yes. Because of his contributions to GitHub? Yeah, because of his contributions. So pretty much all the core ETH2 researchers have a claim amount that they can go for. And this wasn't you guys just manually saying like, oh, they deserve this amount or they deserve this amount. This is just an algorithm of sorts programmatically going through the GitHub. pose saying, oh, these guys contributed, these people contributed, this system contributed.

And so you guys are leaving, like, it's like a retroactive air drop, but for protocols that came before your element's time. And so it's literally like, again, building on the shoulders of giants, but doing a retroactive air drop to the open source, like all the open source contributions that has been contributed to Ethereum at large. Yeah, that's correct. Yeah, that's right. And we tried to keep it simple.

It's like we could have, again, like we could have gone into like, you know, judging quality of commits and stuff like that. But instead, what we tried to do is like basically said if you have a commit that's merged into Maine, whether it's a comment or whatever, like everyone gets, you know, the same amount for that, you know, for that, for that particular repo. So just to work any kind of questions there, keep it simple. Yeah. Yeah, we wanted to keep an objective. So we just basically picked a list of the organization. And then from there, the script looked at all the merged, merged commits. I love that.

That's a really cool precedent to set, I think. One other thing over on the subject of the token, my understanding is the token is non-transferable right now. Is that correct? Yeah. So the current setup, and we can go into this in a bit, so we have the council governance protocol. This is a new governance primitive, new protocol overall.

It's not a fork of Governor Bravo. but essentially it introduces these things called voting vaults, and I think we'll talk about this in a bit as well. And the way that we have it set up is when you claim your drop, you're put into a locking vault. And this is to encourage people, you know, from the start to actually play a part in governance, to delegate in governance. So in the current setup, the locking vault keeps you into the governance system.

So what are kind of the reasons for the lockup? Like why did you guys, or the non-transferability, why did you guys want to start with that? Yeah, I think it's good to sort of bring everyone who's contributed to the protocol and who's excited and start everything off with everyone being involved in governance and having a say in that. And then from there, right, like the governance system, voting vaults, everything is upgradable by the community. so they can sort of situate changes if they want it to they want to but the idea here is we wanted everyone to be like playing a role being a part in governance from the start will the community have to vote their vote in transferability into the token or is a token unlocked to be transferable at a certain point in time so if they wanted to make changes you know you can always upgrade the governance system or upgrade you know the set of voting vaults but that's sort of up to governance and you know i think where we're folks

focused on, you know, trying to keep keep people using this to vote and being a part of that dynamic. I think that's interesting, I guess, like, not being distracted by like price and all of that, too. I mean, with many air drops, the minute starts trading, everyone's like, when moon, you know, what's the price going to be? And you guys don't have that dynamic here. It's just like, okay, there's an allocation of supply. And now the next step is not go look at it on coin gecko. the next step is like go go vote go plug into governance in some way but honestly it's it's really

like the way we wanted to approach it is like I mean this is an experiment in radical decentralization and I don't mean that like you know it's it's total chaos but it's like we wanted to do this in a way like everything is up to the community it's out of our hands like every decision is going to be completely up to the community um you know these are valueless um you know, like we didn't want to make any decision, you know, without the community being involved. And so, you know, some of that is, you know, the very first step was basically just launching, you know, the governance protocol, launching a way to distribute some initial votes. You know, kind of getting the governance system, getting the, you know, like the, basically like the, you know, the community, you know, the culture, you know, like the vibe kind of in place. It just like you said, like, you know, price and all that stuff, like, I don't care what it does.

Like, we're here to like just try weird shit. We just want to experiment, you know, let the community take it where it wants to, you know, and, you know, we'll see what happens. So, so that's really what we're looking to do. It's out of our hands. I love the theme of experimentation and trying things. And I think we'll talk about this later, but we even launched like an NFT project. They're these like really cool kind of badass pixelated elves.

And this is part of this is part of the whole thing where basically we're incentivizing people to delegate right away. The first, you know, and number of delegates got whitelisted to mint these. And this sort of like, it's really cool. I did a whole tweet threat on this. I believe that NFTs are now going to be a core part of Dow governance because NFTs is, NFTs sort of build community better than any primitive we've seen in the space. So you combine the community of the NFT world with the community around Dow's and this, you know, sense of belonging. And then you sort of integrate them and you find ways that these these NFTs can play a part in

governance. You sort of supercharge things. And so this is, you know, Johnny put it really well. We like to do weird things. We like to experiment. We like to throw things out there and see what happens. This is just like one of one of those examples. So. Yeah. So. We'll get into it here since we're already on the subject. We just came out of a podcast with Olaf Carson. We, that podcast will come out on Monday. And he talked about how there's just this natural fit between defy applications and DAOs. Like, defy applications are awesome.

Dow's are awesome. But defy applications need governance and DAOs can offer governance. So it makes sense just to smash these things together. So you guys are doing that with the launch of Element Dow, but you guys are also doing the NFT thing as well. So you have a Dow that's not only about a DeFi. app, but now it's also about like an NFT ecosystem. Can you just go into the, the angle on that? Like, why split your attention? Like, now you guys are doing two things. Or do you think that

this is actually going to be a worthwhile endeavor to help just the DeFi app side of element? How does the NFT project actually end up helping the defy app? Yeah. So, again, I did like a really long thread on this. And I sort of come with a hypothesis. that NFTs are now going to be an integral part of DAWS from the future, from this point on. I think people are going to start experimenting with it more. I think it's just going to be, it's a natural fit. DOWs represent, you know, community, right? Like the voting share you have in the Dow you feel connected to that Dow, its mission, what it's doing, the research it's doing, the things it's launching, it's treasury that it owns. So you combine that with, you know, an NFT project, which also, you know,

know, it sort of builds a natural and organic community in general. And you can sort of see, like, what it can do. And, you know, there's a number of things that we can play with, right? So not just using NFTs as like a community aspect or like gating certain, you know, channels or discussions or events with it. But you could also have like the NFT world be a part of governance. So you do certain things in the application. You, you know, try certain behaviors. You put a proposal for. you vote on something, you're active, maybe you can level up that NFT with, you know, external set of potions that you can show in your profile. You know, there's a lot of experimentation here. There's a lot of, a lot of cool things. And so this is sort of what we're playing with.

John, you have anything to add to that? Yeah, I was going to say that, like, you know, in addition to all of the, you know, all the things Will said, like, I mean, honestly, like, if nothing else, like the project was like a great design exercise. You know, it was like, we have, we have awesome, like incredible designers and artists. And we wanted to also give them a chance to spread their wings and experiment. We like to experiment too. And so, like, this seemed like a great way for them to express their creativity, kind of really, really find the soul of the project, you know, which is like it's more, you know,

defy, like Ethereum, all this stuff is, you know, it's more than just like, you know, you know, magic internet money, right? Like we really, really think it's important to like, kind of, you know, figure out like what is the soul of this project. And in art, you know, is like a really good way, you know, to express that and to reach people. And so, you know, from like a more philosophical point of view, that's why I think it was like a powerful thing to do as well. Johnny, just for people, what's the alpha here? Like, how do I get an elf? These things look amazing.

How do I get an elf? Yeah, so it's basically the first, so what we did, the first 2000 to whitelist, sorry, to delegate on the governance app, would get whitelisted. But, but, but we're going to open that up again very soon in the next few days, because there's a total 5,000 in supply. So 2,000 have been whitelisted. we're going to white list another two put up another 2000 for white listing here very shortly particularly geared towards the discord and the gethub contributors community as well so they have a

shot at getting things so that's that's coming soon we'll make an official announcement i may have released too much alpha you can't release too much alpha bank there will be more soon I do want to say that there's no minting fee. You just pay gas too. So that's also important to recognize. What magic is this? Free NFTs? I thought you have to pay them.

Okay, but it's not free because you have to participate, David. Okay, so like, delegate. We're just a bunch of hippies, really, you know. All right. Delegate Discord. We give free NFT, love. I love it. Oh, also, check out the mean version of our lore, you know.

If you don't have to do it now. Yes. That's definitely. some. I saw this. I saw this. All right. So read this text carefully is what I'm hearing. I don't know. Yeah. Read this text carefully. Oh, there we go. Be inverted. Yeah.

And see if you can't. I don't know. It might be important later. I don't know. There you go. And more we camp on this, though, David, the more alpha they're going to share. Please change the topic. Asap. Of course, they're elves, of course, because the token is called. called ELFI. So just for those that don't know why they're elves, they're elves, because that's what the token name is.

Also because elves are awesome. Yeah. Oh, yeah. They're cutting. They're cool. They're like, yeah, I love elves. Yeah. Okay.

So I want to get into the last two bits of alpha before we get into the actual yield markets and Ethereum merge subjects. There's two governance innovations that you guys are bringing to the table. One is an alternative form of how the element Dow governance structure works. And also one is the voting vault, and that's the have your cake and eat it too. So we'll talk about that one. Second, first one is council governance. Can you guys explain this new Dow governance model that you guys are pioneering?

What is council governance and why is it better? Yeah, so we launched a new protocol called the council protocol. It's a new governance protocol. Most teams in the space and they're launching a Dow are sort of forking off of Governor Bravo. And is that that's the compound, the original? Correct. That's the compound governance system. Yeah, yeah. So there's a number of different, you know, directions. Those forks have gone in and that people are, you know, playing off of. And so what we decided, you know, from the start, Charles St. Louis, he came from Maker. He helped ruin build, you know, the original setup over at Maker. One of the things we talked about from the start is let's innovate. Let's move the space forward on governance. It's super important. Setting a Dow framework is like the right thing to do for the space. That element, we want to innovate and experiment in everything. And so that's sort of, that's sort of, of the result of that conversation, the council protocol. And so council protocol has a couple, a couple major, you know, innovations. One, it's from the ground up so that sort of, you know,

brings the learnings that we've seen from DAO's and governance systems before. A couple of things that it comes with is a governance steering council. So this is built-in delegation where the governance steering council can have certain privileges within the system to push, essentially, proposals forward in an expedited manner to be able to spend, you know, a certain allocation of treasury for events and other things. And they're sort of voted in real time and they can be removed in real time based on a minimum quorum of votes. Then we have the, and we actually already have like seven GSC members that have been

elected, which is cool. So the government steering council, it's working and that's, you know, been happening in real time. The second thing, this is what I'm like most excited and passionate about. I did like an awesome, you know, fun thread on this at one point is voting vaults. And voting vaults will go into this. I won't, you know, go too deep yet. But voting vaults are essentially, um, uh, what I call governance Lego pieces. They're a new primitive. Um, and they let you redefine what constitutes a vote. So I'll just leave it at that so far. Well, I actually think we want to go into that. We'll leave that one because that's the have your cake and eat it too.

Is the council governance, is this just like another form of like representative democracy where just like, you know, if every single person in America all had to like come to consensus about every single issue, we would just be bogged down in snapshot votes, basically. Is this basically just we are electing council members who will steer the element Dow on our behalf? And then we can choose to remove or add our voting weight to different council members as we see fit. Is that basically the story? Yeah, that's essentially what it is. It's pretty cool. And it's done in the liquid way, right? They can be removed and added based on, you know, how people delegate and if they remove or change their delegation. We even saw people like sort of do campaigns on Twitter.

It was fun. And we saw a lot of people in the Discord sort of campaign. We sort of left it, left it open for people to make it make it their own. But yeah, we sort of make that code and everything really simple and build that into the protocol. I think this is funny. This is kind of what happens when you move protocol devs into the app layers is they end up going to the protocol layer of the app layer. So now we have a new governance framework. And I'm curious if you guys see that this might take, well, will DAOs that are on the Bravo governance framework, for example, will they be able to, like, port over to this? Do you see this being used by a lot more Dow's moving forward? Like, do you think this is a improvement, a big improvement from

previous Dow governance structures that have been in place previously? Yeah. So I think, so the council part is really cool, the governance steering council. I think the Lego pieces, this is the huge one, voting vaults. So basically, you know, if someone wants to launch a new Dow, right, if they want to do one with compound voting integration, a vesting vault, a locking vault, let's say uniswap integration, they can just pick all the components they want, boom, launch, new Dow, they have all these things that the situate, that have been situated and that the open source world has already built, you know, in these voting vaults. And so I sort of see as a huge, huge innovation, a huge evolution.

It's going to be cool what everyone does with these voting vaults. They're, you know, in my opinion, they're like life-changing, world-changing. Dow's are on basically can, you know, exponential, you know, increase at this point with this. Yeah. Well, can we talk about that then, the voting vaults? Johnny and you were talking about the cake, man. So this is your moment to talk about the cake here because this is the cake. Why is this, why are voting vaults?

Can you explain what they are? why they're so important and why they're, as well, well said, potentially world changing. Yeah, I can I can give a quick explanation. So one nice thing about it is like, it basically allows you to, you know, if you, you know, if you're, let's say like, you know, some new protocol, like wants to use the council government system.

Like by all means, come in steal the code, you know, or contribute to it, whatever, fork the code, like absolutely. encourage that want people to do that. Say they come in and say it's food out, right? And they have a food token. And they want to, you know, one of the nice things about the voting bolts is, is that like a lot of people want to, just things you can do with a food token.

Maybe you want to provide liquidity on uniswap pools. Maybe you want to, you know, add it as, you know, so people can, you know, add as a, you know, collateral on compound. Whatever, what we can do is, is create these voting vaults that that will mention that basically allows you to, you know, deposit those, you know, those whatever the LP shares or, you know, the collateral on compound. And what they'll do is they'll inspect and figure out like how many votes they, you know, that that corresponds to.

So like the actual council protocol will query these voting bolts and figure out what the associating voting power is. You know, with that. So you can you can participate in governance and you can still like participate in defy. You don't have to choose one or the other. So so that's sort of the. This is super important because that's been missing so far. Right. It's like and I would argue that the people who are actually doing something with the governance token inside of a Dow are actually like Dow super users.

because they're doing things like providing liquidity for the underlying token or like lending it out. But the problem right now in the current state of Dow's is once you do that, once you take that token and start to use it in defy, say you're providing liquidity or something, then generally you lose the ability to participate in governance. And that's not what we want in these structures. So you're saying, if I'm understanding you correctly, Johnny, it's like I don't lose that ability. as I'm providing liquidity, as I'm lending out my downate of tokens, I still have the full ability to participate in a vote, a snapshot vote, for instance. And so I get to maintain my voting rights while doing all of those things. Is that correct? Yeah. Yeah. So we actually, one of my favorite

podcasts that we've ever done was with Joel Mnegro from Placeholder, and we titled it Capital and governance. And it was an exploration as to what capital actually is. And his definition was, capital is the ability to influence the world. So governance and capital are actually two sides of the same coin. But in defy, in the current state of defy, they're not. Because you can't vote and also like yield farm with your token at the same time, you actually have to choose between using your token as capital or choosing it to use it as governance. And you can't really have both.

And most people end up just using the capital route because that is what ends up getting them more money at the end of the day. But with voting vaults, again, you get to have your cake and eat it too. You get to have the capital. You get to use your token in defy. You get to lend it out. You get to yield farm with it. You get to do your D-Gent stuff.

But with a voting vault, you also get to vote on stuff at the same time. And, Will, Johnny, we were talking yesterday, and you guys were walking me through some of these use cases. This is going to become really, really important for so many Dow's that exist on the Ethereum layer one. But when the tokens exist on layer two, because not only can you yield farm and defy with it, it, you can also send tokens onto layer two and also still have your governance powers. And so when you guys told me about this, I was like, oh, well, this was obviously the way that every single defy application is going to do this going forward. Obviously, it's a disservice to their users to force them to not yield farm in

defy while also being governors. It's basically going to become table stakes in my mind. Would you guys agree? Yeah, definitely. And I mean, you nailed it right, other users. cases. So people can now hold the, you know, the token on L2. They can vote so you could have an L1, L2 bridge voting vault where you pass the Merkel route in and the vote is counted on basically the L2 that they're on or the other chain that they're on as well. So yeah, it sort of opens up this whole world. And this is what I was talking about earlier now that we have context. If you're launching a new Dow, you can now say, you know, I want the L2L1 bridge. I want the compound integration. I want the uniswap integration. I want the locking, you know, system, you know, deploy. And this sort of

creates this new, new, like, amazing ecosystem. Right, right. And the cool thing about this, for listeners who like mental models, which I hope you do, because we're really good at making them here on bankless, it's like yearn strategies where, like, somebody will write up a urine strategy and then urine governance will accept it into the new strategy. It's a little bit like that in the sense that anyone can write a pathway. So, like, here, you got, you got the element governance token, and then it's going to be LPing between ETH and Element Governance token inside of Uniswap LP tokens.

But then that LP token can go inside of MakerDAO. And so you can write a strategy that is like a Uniswap LP token as collateral in MakerDAO, write that for code for the voting vault. But then as soon as somebody writes that one piece of that recipe, that recipe becomes known to the whole rest of the open source community. So anyone can like go into the voting vault you know, candy store, pull it off the shelves and plug it into their voting vault for their doubt. And anytime anyone writes a strategy, we can get even crazier, right? Like uniswap governance

token, ETH LP, deployed onto the optimism layer two, and then also being lent out in AVE. So it's an optimism A-LP Uniswop token, but it's also functioning as governance on the Ethereum layer one. And as soon as one person writes that, it becomes usable for every other single Dow that uses a voting vault structure. So it's only progress. You can't lose progress. You can only add more and more optionality as to how these DAOs can leverage their capital while also enabling their users to have governance. No questions. Any comments?

That's exactly it. Yeah. I'll leave with like a really funny, funny one that we talked about. It's the vampire vault. So you give people voting powers by getting, you know, the token of, let's say, a competitor protocol. And then they burn it. They send it to, you know, the zero address. And then they gain votes in your protocol based on that behavior.

Wait, so you don't even need your own governance token. You can determine governance voting power based off of interactions with your non-native tokens. You could do that. Yeah. So you could do even Dow mergers. There's some cool things that could happen here. And it's sort of up to governance to, you know, discreetly. Wait, what's that vampire vote thing?

So you're saying like I would have to show a proof that I should have opened this kind of work. No, no, please continue. Please continue. So you're saying that I would have to show proof that I burnt another protocols token in order to be eligible for voting rights? Yeah, you could get basically additional voting rights. for burning the other protocols token as an example.

So the government system would query that voting vault. The voting vault would respond and say, okay, these people burn this amount. They get this certain allocation in the next vote that's going to happen. But if we were being super malicious, you wouldn't want to burn their token because people associate burning with number go up. I think maybe you could like, maybe you could have like a short position on DYDX.

We're like, if you haven't a competitor, you can like provably short there. And then you have governance powers based on how significant your short is. Proof of short. Yeah, proof of short. That's pretty evil. That's pretty evil. I didn't know my co-host is so evil. Gosh, I'm sorry.

Stop the broadcast. We can stop this. I think that the point lands, though. It is maximally expressive governance. And so it's really allowing, like, perhaps touring completeness to be coming to go to the governance layer, which I think is. a huge unlock to Dow governance. Guys, that is a really cool feature.

Again, thank you for building that for all of DFI, because all of DFI is going to use this. This is not something that you have to tap into the Element protocol to use. This is open source software, which Element is innovating on it and now has given to the rest of the world. Thank you for your contributions. We want to get into details around the Element Protocol, especially as we get into the merge.

We want to learn about how Element is kind of integrating itself into the Ethereum Protocol more than the typical app. There are a certain cohort of apps out there that are more related to the Ethereum Protocol itself than other applications like Rocket Pool and Lido come to mind and Element finds itself shoulder to shoulder amongst some of these apps. And then all, of course, where we get to the candy

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at governance.ave.com. All right, guys, we are back, and here is where we get into the Ethereum yield markets, the coming merge, and how Element is embedding itself straight into the actual protocol level of Ethereum, not formally with code, but more informally with economics. And so with the launch of Element Dow, Element is now becoming more and more embedded

into what Ryan and I call the protocol sink, getting deeper and deeper into the structure of Defi. And because Element is a yield, an interest yield money market, it is very, very relevant to the native ETH stake rate on Ethereum. As ETH turns into a capital asset that has a native yield to it, all of a sudden, Element turns into a financialization layer around the next generation of the bond market. If you guys read the Monday opening note that we wrote yesterday on bankless, it's all about how Ethereum will be the next bond market for the digital age,

at least that's the plan, which makes Element and what Element does extremely relevant as a financialization layer on top of the native E-Stake rate. And so this is where, and I'm stealing these words from Will, who I was talking to yesterday, defy-i is now responsible for Ethereum security. And so, Johnny, I want to throw this one to you. Can you just elaborate on this aspect of element as it relates to Ethereum

and how it's impacted some of the design choices that you guys have at Element? Yeah, just like, I mean, like a high level, really, like, you know, like our, you know, from a mechanism point of view, like we, we put a lot of effort ensuring that the core protocols just solved through like analysis, simulation, audits, all of that stuff. We definitely want to be like embedded in the stack, like you mentioned. Like this is another primitive for people to build on. You're already seeing it. You know, there's a, there's a tool that Component 5 released for yield token compounding, which allows you to basically go along on. Or I started to basically lever up on a variable rate. And so they make it really easy to yield token compound essentially.

And so since we actually wrap assets like Stake D, you know, this is another, you know, this is another example of, you know, how we're getting more embedded. And really all of DFI is getting more embedded into the security of the network. That's one of the great things about proof of stake, right? is the internet bond. It's also something that we have to use responsibly as well. That's another reason why we actually wanted to give voting power to core devs, is to enable that two-way communication.

So can I ask, basically, you're doing the same trick that Will outlined at the very beginning of the episode when he was talking about what element actually is, which is separating principle and interest? So is there the ability to basically lock in my eth staking rate? Because with Element, that's the core functionality. So of course, you know, eth staking right now might be 5% post-merge. Maybe one day it's 8%, maybe another day it's 12%, maybe another day it's 15%. Hard to know.

It all depends on kind of the market, supply demand, dynamics, all sorts of things go into that. But what element allows you to do is basically turn this into a fixed staking rate for yourself. Like a fixed bond, essentially, where it's, eith staking would be variable. Every single day, it could be something different. Yeah, it's market driven. Yeah. So basically, like, we'll mention before, it's like you want to sell for 90 cents a dollar. So it's basically to think about like, I want to sell you a stake eth for, you know, 0.9.

Right. So whatever the market rate is at that moment, that's what you lock it in at. And through the magic of, you know, yield space, you know that whatever you buy it at, it's going to mature to one to one with the base asset, you know, at the end of the term. So whatever you buy it at the market rate, that locks in your fixed rate. And that's the magic of how the fixed rate side works. Where it becomes more interesting is when you actually. can yield token compound and sort of speculate on what's going to happen with variable rates. Yeah, and I want to get into that, but even just the ability to kind of lock in a fixed rate,

we are starting, we've talked about this the last few weeks on bankless, we're starting to actually see, tradify understanding the eth narrative ether as an internet bond, right, turning into this capital asset, productive asset. And what you're doing is you're unlocking a whole new group of institutional buyers who are just like, yeah, and I also want a fixed rate on that staking yield. Do you think that this unlocks a whole new cohort of institutional buyers? Yeah. And the beautiful thing is, so you're going to get like from the institutional side, yeah,

they'll see like a, they'll see a juicy rate, you know, on like staking, for example, on like state teeth and they'll want to lock it in. Well, what happens when you when you, because like I said, you're buying, right? So they see a juicy rate. They want to lock in. Well, the more they buy, the higher the actual price goes up. So the lower the yield, you know, actually becomes. Right. So, so there's a, you know, the, so, so that you have that side. And then you have the more the gin side, the side that's going to come into the protocol. And they want to mint principal and yield tokens, right? And then they meant that principle and yield token and they go take a look at the fixed rate market side. They're like, oh, I can sell my principal token right now,

you know, like for a 1% discount or 1.5% discount. And they can exit out of their position quickly while keeping their exposure to the variable side. And so this really comes into play when you start doing that recursively. The more, if you do that recursively is you sell into the fixed rate side, the actual price is going to go down, right? So the rates go up. So as you sell into that, you actually go, you basically, you basically end up, as you sell into it, you basically end up kind of balancing the two sides of the market out that way. This is cool.

So what we're basically doing is we're financializing ether, the internet bond here and making it accessible to more people. And like one other point to know, of course, Elmint is not doing the staking itself for something. like Heath, would you work with other liquid staking protocols, like a Lido or a rocket pool? Yeah, that's right. We don't have any of the infrastructure. It's literally just wrapped yield positions. That's what the protocol is. It's completely agnostic to what the yield source is. And in fact, it's permissionless in that fact as well. Anyone can go and wrap a yield source, write an adapter for it. We don't, you know, anyone can use the protocol that way. There's, there's nothing preventing them from doing that. And we are at the,

very beginning stages of the conversation is how to get exposure to the merge, but not yet. Not yet. Still got to wait. That's coming again towards the end, which we're almost there. But Will, I want to unpack a line that you said yesterday that stuck with me. I mean, you said defy is now responsible for the security of Ethereum. How is element now related to the Ethereum, to the security of Ethereum? Yeah.

So essentially, once we have, you know, these staking derivatives, things like Lido, Rocket Pool, what they end up doing is they end up bringing, you know, tokenizing those actual stake position onto the core defy layer. So now, right, these Lido, you know, Lido tokens that Staked ETH, you know, can trade on, you know, curve, it can be used as collateral. People can leverage long on it. They can, you know, short, they can do all these different things and all these behaviors within DFI, which then extends to the actual behavior and security on, you know, that core layers. So you have sort of this two-way road of how they're affecting each other now. And this is sort of what's what's happened with this with this inclusion of the staking

derivative. So with the unlocking of fixed yield interest rates, which is where institutions are going to feel more comfy, do you think that we'll just add to the total security of Ethereum because it'll add more demand towards staked eth through element as an element will be bridging the wants and desires of institutions to more ether being staked at the L1. Do you think that's going to happen? Yeah, I think so. So it locks up more of those positions. I think it brings a strong sort of calculable, accountable, accountable, you know, asset that you have.

And so I do think it does bring, you know, additional security and liquidity into that aspect as well. You're ready to throw it in a pension fund now. It's a fixed yield. Exactly. All right, one last question before we get into how to get exposure to the merge. Johnny, your ex-consensus, you worked at the Pegasus client back in 2018 to 2020. Will, you're also ex-consensus. You worked on sharding research in 2019 to 2020.

Application devs don't usually have this much exposure to the protocol level. This has been a theme so far in this podcast, even talking with the actual distribution of the element token towards people that aren't working on element, but we're working on the things that made element possible, you know, the protocol devs, other defy apps. How has this shaped what you're building at element? And also, we can just zoom out and reframe this conversation into the world of open source and the world of development. Like, why is this link between the Ethereum L1 protocol and the defy application layer important? Yeah. Yeah. So I have an answer that actually kind of goes back to my, you know, my working with Will back in, you know, on Ethereum research back in the day.

It was interesting, like being a developer, CORE dev researcher, like in consensus. Like, you know, like, on a personal level, like we all have a good relationship, you know. And so, but the struggle was always like alignment, right? So like, you know, initially, like I had to rely heavily on personal relationships, you know, with individuals just to ensure, you know, like there's constant communication, you know, that we're working on,

you know, whatever we're working on remains relevant to the, the roadmap. And this was informal. It was efficient as long as I was, you know, as long as I was diligent about it. Well, what struck me immediately about Will, like, is he came in, you know, to the, to the East research scene, starts Quilt, immediately sets up the steering committee, you know, that was basically comprised with a bunch of people, you know, from the EF, key researchers from the EF that were contributing to the roadmap, of E2. So he formalized it had immediate impact, you know, to make sure that quilts resources, you know, like were directed on whatever is the most relevant thing. Like it's basically like,

I mean, the whole point of it is like, how can we help the EF, right? And so I saw firsthand, because I would go on side bus with Will. I would like join their standups, not any excuse to collab with them. And so like I saw this and I saw how effective it was. And so I I took and applied the same model back to, you know, TXRX, the research team that I was on. And it was really effective. And so I say this is really a long way of saying that like that lesson right there really resonated with me. One, it speaks to just like the leadership ability and just kind of like the dynamic

personality that Will is. But also just like it spoke to me in the way that like that's a way to kind of like get core developers and the application side working. You know, we build on the application side on these key technologies. And so we need a way to formalize this feedback loop. So giving them votes and governance systems that are like directly, you know, tied in. Just really only makes sense. It just strengthens that feedback route.

Yeah. And another thing I'm actually really excited about. So I loved when I was, you know, researcher on Ether, too. I loved logging into youth research, the forums. And really just like the community that had been built there, the community of research, experimentation,

discussion, having really deep, sophisticated conversations. And that was so much fun. And so one of the things that I want to experiment with and play with, and I'm super passionate about is how do we recreate some of that atmosphere into our own

Commonwealth forums? The forums and governance discussions that we're having at element. And then how do we take that and, you know, connect that to the core, the core layer as well, and the things that we talked about, the security on the core layer and make sure that that's an open part of the conversation. And so part of that is one, including, you know, the right people. This is another reason we gave voting power and drops to people that have contributed something towards this space. They're more likely to be involved in sophisticated and research-based conversations. And then the second is basically fostering and cultivating.

that ecosystem. So, you know, getting key people as part of Element and others to contribute in that and making the place where, like, people are excited to log into like the element Commonwealth forums and governance discussions because that's where a lot of the innovation in the DFI space is happening, right? So that's like that is my vision. That's my goal. I want to create that as part of Element and the Dow and everything that's happening there. and I want to foster that, you know, that juice and recreate what we had. That's really cool, guys. All right.

So let's talk about the last thing on our agenda that we've been talking about. We're promising this entire episode. So that is upside exposure to the staking rate post-merge. So it's hard to know what ETH price is going to do, going to the merge, up, down, like, who knows, right? We all have our sort of ideas on what will happen, what's likely to happen. But one thing that seems super obvious, if anyone runs the numbers, is that staking yield is going to increase. Right? It's going to increase maybe right now it's like 4.8%. Some people are forecasting as high as 10, 12, 15% even higher.

Is there a way to speculate on that and get upside exposure to that bet going into the merge with element? And if so, how do we do it? Tell us how to do it. Will, do you want to take that? Yeah, yeah, I'll take this. Cool. So I actually did a talk at Yves, Denver. You should watch it. I went into like the background of X-Zero-X-C-Few, the Wonderland ecosystem, that whole scandal and like connected all these things. If you're, you know, into like a fun, really interesting deep conversation,

look at it. And it connects to a lot of these things as well. So one of the things I'll give like a quick background story. When we first launched Element, we were in sort of a market low. The yield rates had gone down. And we were actually pleasantly surprised because all the fixed rates were actually higher on our launch than the variable rates. And this actually caused a lot of confusion to people at first. But what ended up happening is people were actually predicting that yield rates in the market were going to increase.

And so they were leveraging into the variable rate, bringing the fixed rate up. And so let's say USDC, right, was at, you know, 5%, but it ended up averaging to 20%. they're okay to bringing it up to 10% because it's, you know, the market's going to go up and it's going to reach that higher API. And so what we saw is a ton of people actually profited in the beginning by bringing the fixed rate higher and leveraging into that yield rate. So how does this work? So like if, and by the way, I want to, you know, mention and give a disclaimer, you know, I can't predict anything in the market or where it's going to go. But if you do believe that yield rates are going to go up on state ETH, then this is. could be a really cool strategy for you.

And so how does this work? So currently you'll see that on our platform, there's like three and five percent, fix rate API on stake deeth. So if you assume that that's going to, on the variable side, reach 15 percent, what you do is you mint principal and yield tokens into that state deat position. And then you sell your principal tokens, right? So if I put $100,000 in, I get $100,000 yield tokens. I get 100,000 principal tokens.

I sell my 100,000 principal tokens at 5%, right? And then I get $950,000 in liquidity immediately. Then I use that $950,000 to mint again. And now I have a hundred, now I have basically $200,000 of yield tokens. I sell the principal tokens. Again, I do this multiple times. And so what happens is if the fixed rate is at 5%,

and I believe the variable rate is going to hit 15%. That's a 10% spread. So each time I do this minting selling cycle, I basically multiply my 10% increase that I have. So if I do this 10 times, I leverage in 10 times, I can get 10x leverage into the staked eith exposure, the variable exposure, and I could on that 10% spread,

essentially achieve around 100% APY. And there's a tool that does this, for you, does all the calculations, does it all in one step, component build it, built it, I believe it's YTC.comonent.comfi.5.5. And that sort of lets you do that. And so another thing that this requires is like a deeply liquid market so you can push more and more capital into it. And we in about 10 days, our staked ETH term is going to come to expiration. I think there's about $60 million, $70 million of ETH in there. It's deeply liquid.

And I would expect that that will roll over into this next term, which expires six months from now. And so we're going to have like a pretty deeply liquid playground that you can do this speculation. And, you know, you can take 15 percent variable yield. And you can change that into 100% if you believe that it's going to hit 15%. And so you also have to speculate on the actual timing of the merge in order to get the strategy done, correct? This is correct. So you'd have to take a speculation on when the merge would actually happen and all these aspects, which is why there's some risk involved.

And this is just a suggestion on how you could play. But we've seen a lot of people do very well through these strategies. Okay. Okay. That is super cool. We will, guys, we'll include links to these things in the show notes as well. I'm wondering if the market is going to tell us when the merge is going to happen through, through tools and mechanisms like this. David, you looked like you're going to say something.

Yeah, is this YTC component? Is that just an application that's on top of Element? As in like, this is a UI for doing, is this just a UI layer? Or is this also its own kind of defy app that's hooked into Element? It's just a UI layer. So it just basically recursively strings. this process together. And actually, like a really cool way to make this even more efficient.

So let's say I do 10x leverage. And let's say after the 10 iterations that leaves me with about $500,000, you know, dollars, and I put a million dollars in just to make for an easy example, you could actually just flash low on that initial 500. So that's, I believe, a iteration they're going to do as well, which makes it even more capital efficient. And actually, once you have that. in place and it's 20x exposure versus, you know, 10x.

I think the other cool thing they do is they also simulate what's going to happen as well. So, so it provides a lot of useful information when you actually use the tool. Yeah, I would imagine. I have a hard time wrapping my head around like the holding in my brain how Element really works in the background just because, you know, psych major here, not a finance major. And so having these UI layers on top of things like Element really is really, really helpful. and I think listeners can start to get a gist as to how big the Ethereum bond market is going to become, especially when it's aided by financialization layers like Element.

And that's not even to mention just the actual innovations going on in the other aspects of the Ethereum bond market, like the Shared Secret Validator innovations and the Staking Network innovations. The Ethereum bond market is going to be absolutely huge. And Element is one of those tools to harness into that power of the bond market. Guys, thank you for building Element. And also thank you for handing over power to the community with the launch of the Dow and the launch of the token. And congratulations for making it thus far. What's next?

What's next in the Element story? What do you guys have on the three, six months timeframe? And then also what is like the 10 year time frame for Element too? Yeah. So major things. So we have an amazing team. Really, really solid, really, really smart people. We're really proud of them.

So a lot of it is research towards. a V2 on the AMM that we're doing, making that more efficient. Auto rollovers so people basically can get perpetual exposure to the fixed rates and to these LP positions. This sort of also locks in liquidity for years and makes the markets a lot better to be built on. So we're sort of finishing some of the work there. Also a revamp of the current UI and current system,

making it easier to come in through other assets instead of having to get obscure like curb-based assets, things like that. So a lot of things like that were even like we have some research on a new liquidity like mining primitive as well. And it would be interesting to see if you know, later down the road the community, you know, takes that into account. I believe it's a lot better than the curve model. I believe it's a huge iteration on that. So stay tuned. So just a lot of innovation, also continuing to build out the council protocol, things like that. I would say additionally, like also like, you know, Will and I came, you know, we were protocol does. So, so also, you know, continuing to kind of keep an eye and help out at the core level,

you know, where we can. And also, like efforts like the, you know, like protocol guild that's kind of being proposed by Stateful Works and Trent Van Apps. That's kind of an interesting way to kind of iterate or really more formalized, sort of like the idea of kind of sharing, you know, the stake in some of these application layer protocols with the core devs. That's a whole interesting conversation as well, and something that I think probably even deserves a whole episode on bankless. But it's really cool.

you all should reach out to Trent and check that out. It really removes a lot of the legwork from what we had to do. This is awesome. I'm so glad there has been in the past in Ethereum. I know you guys will test this. It's felt like at times there's some division between like what the protocol devs are doing and what the DeFi builders and the users are doing. So it's really cool to see builders like you started on the protocol side,

then moving to the app player so you have a way to bridge both. of these communities and find some shared alignment between them. I think that's really good for the overall ecosystem. So I would still love to see some app layer devs move to the protocol side. I think that would be pretty fun to see too. But then again, I'd love to see more protocol devs up the app stack. I wonder what Vitalik, what kind of app Vitalik would build if he was a defy developer. You'd keep it weird, you know. Yeah, he would. I bet I would would involve public goods. Will and Johnny, thank you so much for joining us on Bankless. This has been a

blast. Awesome. Thanks for having us. Yeah, this is really awesome and really appreciate the time. For all the listeners out there who are looking to the resources, there are a number of links in the show notes. The first episode that we had, Will, on the state of the nation, that is in there as well, as well as Bankless's guide to Element, how to actually use Element for Yield. Those are in your show notes as well. And of course, please like and subscribe, because that's how we bring you the alpha all the time. And so if you're on YouTube, please subscribe. And then also if you are listening on a podcast, give us to those five-star reviews wherever you are listening to that podcast. So bank lists can start to take over the world.

Risk and disclaimers, guys, as always, none of this has been financial advice. Of course, ETH is risky. So is D-Fi. You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bank journey. Thanks a lot.