Bankless - The Trillion Dollar L2 Opportunity | Part One

Episode Date: May 4, 2022

This is part one of a two part Ryan and David masterclass on the trillion dollar L2 opportunity. L2 summer is right around the corner. Start preparing now. Part two will be airing tomorrow! ------ �� OPOLIS | Sign Up to Get 1000 $WORK and 1000 $BANK https://bankless.cc/Opolis  ------ 🚀 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  ------ Topics Covered: 0:00 Intro 5:30 Why to be Excited About L2s 8:38 Do L2s Cannibalize ETH? 16:33 L2 Fees 20:55 Difference in Rollups Fees 22:55 L1 Fees 29:29 The L2 Paradigm 32:05 Burning Explained 40:32 ETH Stake Rate 42:55 The Demand for ETH 51:55 L2’s Narrative Opportunity 56:45 The Security Budget 1:01:30 L2 Summer is Coming 1:06:10 Liquid Mining & Tokens 1:08:10 Summarizing Part One 1:12:30 Disclaimers ------ Resources: L2 GDP Map https://twitter.com/RyanSAdams/status/1521503349773946882  Burn Leaderboard https://ultrasound.money/  ETH Isn’t Expensive  https://twitter.com/RyanSAdams/status/1521471900836372481  Money Printer https://moneyprinter.info/  Crypto Fees https://cryptofees.info/  ----- 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 

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, there is a massive opportunity. We've called it a trillion dollar opportunity in the layer two world. We want to unpack it. We're going to do that in two parts, in two episodes. The first episode is the one you are about to hear. We're going to talk about ether economics in this episode. What? Do L2s, the coming of L2s, do for the price of Eath? Is it beneficial? Is it parasitic? Will we actually

get in a layer two season with layer two tokens? We unpack all of that. In tomorrow's episode, there's going to be a part two where we talk about public goods, how they're the killer app of these layer twos, how you can work for these layer two's and work to receive public goods funding, and how layer two's will ultimately win the battle for hearts and minds using public goods funding and economics. David, that episode is coming out tomorrow. The one we are about to listen to is today. I'm really excited about these episodes. And by the way, there's no guest.

It's just you and I. What can listeners expect to hear? Oh, it's classroom time with Ryan and David, man. It's going to be great. There's so much information to get out there. And each one of these episodes represents its own opportunity. And people who generally think that public goods, those are the things. things that you donate to or those are the people that work towards just, you know, public

goods and there's no upside there because they're public goods. You're wrong. This is where things change. And this is the beautiful mechanism of retroactive public goods funding where we are injecting Silicon Valley type upside potentials into people that build public goods products. And this is something that has never before seen on the face of this earth or in crypto economics at large. And so if you think that that is just like, oh, Ryan and David talking about public goods, no,

we're talking about alpha, and we're going to tell you about how you can get potentially the billions of dollars that are going to be generated from MEV and block space sales on layer twos, and how that can go into your pocket when you build something useful for these layer twos. But that is all in episode number two, which is coming out tomorrow. Layer episode number one, which you're listening to right now, is all about how the ether economics change in a layer two paradigm, as Ryan said. And of course, as we ended this podcast, we talked. about perhaps the liquidity mining incentive programs that may or may not be coming for these

layer twos and of course as we hit stop on the recording we just launched or we just heard that optimism launched its layer two liquidity mining program so you know these things are coming they are here today and we can start building towards getting some of that money into our pockets right now and that is all about all of these opportunities that layer two offers for for you for me and for the world Guys, fantastic episodes coming up for you. If you like these episodes, make sure you like and subscribe. Of course, if you're watching on YouTube, make sure you subscribe with the channel. If you're on the podcast, make sure you're subscribing to this feed.

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That's A-A-A-B-E-D-E-D-com. And also check out the AVEP Protocol governance forums to see what more than 100,000 Dow members are all robbing about. dot ave.com. Hey guys, welcome to a classic David and Ryan episode. This is just the two of us. So I think maybe the format is, David, I'm going to be kind of interviewing you and then adding color commentary because this is something that you wanted to talk about a while. We're talking all about layer two and the possibilities in layer two at the eth level, the Ethereum level, at the layer two level, and then working on public goods. So I don't have to introduce you. Guys, this is my

co-host David. How's it going, man? Good. This is my co-host, Ryan. How are you doing? I do it great. Why are you so excited about layer twos, David? Oh, because there's just so much surface area for opportunities, Ryan. Like, you listed them off. Like, the opportunity for ether, the asset to become even more money are huge. And so there's, there's things to talk about with that, like how layer twos will impact the ETH burn rate, how layer twos will impact reservation demand for ETH, how layer twos impact the staking rate of ETH, the APY you can get from staking ETH on the layer one. And that's just with ETH. There's also bridge opportunities

and yield opportunities. There's also the layer two token themselves. Each one represents an opportunity of themselves. There's also the opportunity, Ryan, to spin up many, many layer twos. And so these things are infinitely forcable and infinitely copy and pasteable. And

there's all of these economic things to discuss. And that's even before we get to the secret opportunity that if so few people are talking about, which I think is going to put billions of dollars into entrepreneurs' hands over the next 12 months and ultimately become to a trillion dollar industry, which is fighting for what we call retroactive public goods funding, where public goods turns into upside. Same level as like a Web 2 Silicon Valley startup exposure, but for building public goods products.

I think, Ryan, this is a coming trillion dollar opportunity over the next decade, and we are on the cusp of seeing this ball really get starting to roll. So I want to make sure the bankless nation knows what's coming because there is a lot of opportunity just over the horizon. If you're playing a bankless drinking game this episode, please do not use opportunity as your word because I think I counted like eight times or something that David just said opportunity. And I think, look, that's the theme of the show is there's this new white space that has opened up in front of us, this new horizon, which is layer two. And it has so many opportunities for expansion. It's like crypto is new again, right? Like, you missed out on

original Bitcoin in 2013. You missed out on Ethereum in 2015, 2016. Well, now layer twos are open for you. And there's so much that needs to be built out in this ecosystem. So we're going to talk a lot about it. Okay, let's start here with the bull case for ETH because you and I believe layer twos are actually bullish for Eith the asset. Not everyone believes that. In fact, I've been seeing a lot of things on Twitter, a lot of pushback about this saying layer two tokens in particular and layer twos themselves are actually parasitic to ether the asset and to Ethereum, the network. So let's spend some time talking about the opportunity that is ETH in a layer two world. But let's start with that question, David.

Do you think layer twos cannibalize Ethereum? Do they cannibalize the layer one, especially with them launching their own tokens? Are these tokens going to be competitive with ether as an asset? I think if we saw layer twos having their own tokens and those tokens become instantiated as money in those layer twos, then the argument for do layer twos cannibalize Ethereum would be a lot stronger, but I do not see that actually shaping up to be the way that layer twos work. The way that the trajectory seems to be is that layer twos are probably going to all issue their own tokens.

Optimism just announced their token. if you're paying attention to Arbitrum, you kind of know that they're probably headed in that same direction as well. And there are other layer twos that also have their own tokens, but they all accept Ether as money inside of each one of those ecosystems. And so Ether is the currency inside of optimism inside of Arbitrum. And even on Arbitrum, you call it Aeth. And on optimism, you call it Optimism ETH. And this is the native currency of these layer two chains. Now, part of the argument for these layer twos being parasitic for the Ethereum layer one is that they

sap away transaction demand from the layer one, and they put it on the layer two. And so, well, clearly it's parasitic, because if we're taking away transactions from the base chain, which is the chain that pays for security, and we put it on the layer two's, then, like, well, that revenue is going to a different spot, and now it's going to revenue for the optimism token or the Arbitrub token or the ZK Sync token instead of actually being paid for Ethereum validators. And, like, yeah, this is true to some degree, but you have to remember that layer twos are blockchains that also settle on Ethereum itself. So all of the revenue that all of these layer twos create from selling their blocks, that turns into block space demand for

the Ethereum layer one. So the way that I explain this to a lot of people is that they are like solar panels for economic activity that hook in, that plug right into the Ethereum layer one. So optimism, arbitrum, big solar panels, big solar arrays. They get the, how big these solar panel fields are a function of how cheap their fees are because the cheaper the fees, the more economic activity they can support. And so by reducing fees on the layer two's, they actually are inducing more total economic activity that otherwise wouldn't have been available on the Ethereum L1. I mean, optimism and arbitram in layer two's, they're not pulling away economic activity that requires less than $5 per transaction because that economic activity simply doesn't.

exists on the layer one. They are actually creating that on the layer two and acting as an aggregator of economic activity and injecting it into the layer one. So in some ways, they do borrow from economic activity on the layer one, but it's stuff that should have been on the layer two to begin with, and it always aggregates and puts it back onto the layer one at the end of the day. Yeah, you know what this argument reminds me of is basically, have you seen this, have you ever seen this map, David? This is a map of the U.S. and the U.S. States in this map, looking at this on YouTube if you can see the visual, but we'll try to include a link in the show notes. This is U.S. states renamed for countries with a similar GDP.

And if you look at the state of California, it is a similar GDP as the United Kingdom. Texas is similar in size to Canada, the nation state. So one state in the United States is the size of a major G7 country, Canada. Florida is the size of Indonesia. New York State is the size of South Korea. And I think like L2s, the argument that L2s are parasitic to Ethereum would be kind of like saying New York, California, Texas, and Florida are parasitic to the U.S. economy. It's like, no, these are part of the U.S. economy, right? It's like not everything has to happen.

Not all of the GDP has to be produced at the federal level. In fact, the GDP of the U.S. is the sum of all of the GDP, the economic activity of its states, of its vassal states. And, you know, these states, they have different tax codes and they have lots of autonomy, but they still adopt the coinage of the U.S. government, for example. They still receive the defense and security protection of the U.S. military as well. And they are states in a union. And so to me, this is a very useful analog, right? It's like they're all part of the same Ethereum nation, if you will. And Ethereum is kind of a united uh set of chains after a fashion you can also see this david in if you go to like uh the burn

leaderboard here right these are actual applications paying their taxes they're consuming ethereum block space and right now you see things like ens and open c at the top we expect that a lot of these things will move to layer twos over time a lot of this economic activity even when you scroll down a little bit farther you start to see arbitram how much over the last day did arbitram pay in tax of 33 Eth. I expect someday this entire burn leaderboard will be full of layer twos, essentially. Other blockchains, yeah. Yeah, the demand is going to, we said this in the past. The demand is moving on Ethereum Mainnet from block space demand, that is, from users to applications. We already seen

kind of that transition. And ultimately it's going to land, it's just other chains that are going to be the primary block space consumers. And so all this is additive to the economic, you impact, the economic throughput of Ethereum. It's like a union of chains, not completely separate chains. That's a useful analog to me when I think about this. And I really like that the states model because there is huge benefits from all of these different countries turning into something more interoperable than separate sovereign nations and being more like states where you can just freely walk across borders from

California to Oregon to Washington or eventually from California and Washington. or eventually from California and walk all the way to New York. Like trade can happen across all of these things because they all settle on the same protocol. And we even have a highway system, interstate highway system. Exactly. And like there's no tolls between California and New York. There's probably some. But the point is, it's like you can drive from California to New York without ever having to prove your citizenship

or have to, you don't have to pay like tariffs or like, you know, trade taxes because we're all on the same protocol. And so the growth of the Californian GDP has spillover effects to every other state. And so it's pretty crazy when you see the city or the state of Texas being as large as all of Canada, the whole entire mass of land that's above America, but it's as efficient as the smaller mass of land, which is Texas. And like United Kingdom, the former like empire of the world is equal to just California, just one of 50 states. And so like this collaboration of layer two. is a very much a growing the pie ecosystem that all ultimately comes and settles down to the main

Ethereum layer one. And so it's giving optionality and it's giving autonomy to every single layer to do what's best for themselves. And layer twos will therefore have to do what's best for their users because that's their job. Their job is to aggregate users' economic activity to make it cheap and then ultimately come and secure that with the main Ethereum layer one. Let's talk a little bit more about the economics in this layer two world. So what about layer two fees? What happens to layer two fees? So I can pull up a chart in a second layer two fees, like optimism.

It's hanging out at about, you know, 50 cents, call it to like 90 cents, some of the 90 cents, some of the ZK rollups are around 10 to 20 cents. I believe, you know, some of this is from memory. And you compare that to main net, and the main net transaction might be like $8, $10. or something. So on the order of a 90% to 95% reduction in fees. But will it always be like that? Or will L2 fees increase over time? Yeah, there are reasons why layer 2 fees will go up and also reasons why layer 2 fees will go down. The near-term impacts of layer 2 fees is definitely down because we are just at the beginning of layer 2 optimizations. There are things that all of these

layer two teams can do to make their fees go down that they're responsible for. But then there's also EIPs, like EIP 4484, I think is the right number, some combination of fours and eights, where like it reduces the cost of call data on the Ethereum layer one, which it's going to drop layer one, layer two fees by an order of magnitude. And then there's also sharding. As soon as sharding comes into play, we have layer two fees going down by another order of magnitude. And so like each one of these different subsets like a development on the layer two's themselves by the layer two teams, EIP 4484 for reducing call data costs, and then also adding in sharding, each one of those represents an order of magnitude fee reduction and can finally get us down to what

Vitalik calls the internet of money with sub five cent transaction fees and probably much lower than that. Now we can also increase transaction fees by just the normal way that you would do that, which is increasing the demand for block space. So as block space gets consumed, and it has more and more demand, as we've seen the Ethereum layer one, you can see fees go up.

And this is why things like Arbitruma and Optimism have somewhere between like 25 cent to $1 transaction fees. Because there's actually a decent amount of demand for these things, as evidenced by how much revenue they're making. We'll get to that later. But there is eventually an equilibrium point. There were so many layer twos that have been able to scale out to their

maximum degree, it attract a lot of economic activity and that induces a lot of economic activity. So it's not like fees are going to be permanently down only. There will be upwards price pressure for block space demand for the layer two's. And it will hit some sort of equilibrium. But the beautiful thing about this, Ryan, is that when a layer two gets too saturated for particular use cases, we can just make more. We can just have another layer two. And so if we need a layer two with hyper cheap fees, there are different design constructions and different optionalities that layer twos have to make sure that fees can stay as basically as low as the layer two teams want. And so the long-term equilibrium of these things is a little bit

unknown, but with the amount of ammo that we have in the tool belt to keep pushing down fees on the layer two is pretty significant. And so I would be very optimistic to seeing less than five-cent transaction fees, sometimes in 2023, and then also scaling that out to more and more users being able to access more and cheaper and cheaper fees. All right. So what we're seeing right now is layer two transaction fees that are about 90 to 95% cheaper than layer one. And we're getting some EIP improvements that will massively reduce those transaction fees yet again, right? You mentioned two that are coming. And once these two are implemented, we'll probably see like sub five cent transaction fees, maybe sub one cent transaction

fees. But we also anticipate the same time, because when you create more block space, there's more cheap block space. There's more block space demand. So demand will eventually like catch up, and then fees will increase from there, you know, above, above one cent into the future. So I guess right now we've got fees hovering around where they are for the next few months. In six months to 18 months, a massive fee reduction that will carry us over for a very long time until block space demand then catches up with it. So when we talk about the fee differences, is there a difference between, I know those two classes of roll-up, is there a difference between optimistic roll-ups and ZK roll-ups with respect to fees? Yeah, so for the user fees,

ZK roll-ups are always going to be cheaper, just by definition of what they are. Those are the faster, cheaper transactions. They're just also harder to build and harder to develop on than optimistic roll-ups. But the cool thing about this, both roll-ups, both roll-up design constructions, they amortize fees across users. And so actually, the more users that are using roll-ups, the more the fees are shared. Because the fees are ultimately the cost of making a layer one transaction. And so when a layer one transaction from optimism or arbitram is shared amongst 10 people

versus 10,000 people, the more these roll-ups are used, the cheaper the fees get. So this is actually a really, like, awesome mechanism and just really good mechanism design where the more and more these things are used, the cheaper and cheaper the fees get because the cost is split amongst a wider and wider set of participants. This is more true for ZK roll-ups than it is for optimistic roll-ups because ZK roll-ups have very high fixed costs, as in the transaction for ZK roll-ups to put a transaction on the layer one is about the same size of data every single time, whereas as economic activity on these layer two's optimistic roll-ups like arbitrament and optimism as they grow, the actual cost of that layer one transaction also does increase,

but it increases linearly as usage can grow exponentially. So layer two usage of optimistic roll-ups can grow exponentially while the L-1 transaction cost grows linearly. And so they still can, this is like directionally right, they can still amortize higher and higher transaction quantities across more and more users. And so this is a beautiful thing about layer two is that you just can't do at the layer one level,

which is as adoption grows, the fees actually go down rather than up. So we've got layer two fees going down over time, at least until such a time that massive block space demand catches up with it. But what about layer one fees? What about Ethereum main net layer fees? Are we ever going down there? Probably not, I would say, just because the opportunity to spin up a new blockchain

and then have that be the aggregator of fees down to the layer one, there's so much potential of defy of crypto left to make newer and newer use cases for what we can do in the crypto world that is going to be unlocked with layer two's that it's ultimately going to aggregate a bunch of new economic activity and then put that down onto the layer one and that is going to increase block space on the layer one and so even if like users stopped or even if like layer two stopped using l1 block space like even users would start going back to the layer one but that's just never going to happen. And there's always going to be some sort of just like basal level of demand for Ethereum layer one block space. And that that basal level of demand is only going to increase as more and more layer twos come online. And as they, they themselves create higher and higher block space demand on the layer one. Yeah. We've talked about this concept, David, of, you know, even Bitcoin in the early days, economic density, right? So what we've done is we've compressed far more value, far more economic.

activity into onto each dollar spent on Ethereum main net fees. Because now it's not just me buying something on Uniswap as an individual user. That block space fee is the sum of maybe thousands of transactions on a set of layer twos

that then collapsed down to spend on Ethereum. And that's been the trajectory of all successful fees. Like more and more economic density of the transaction You remember in the early days when Eric Voorhees was telling us about his Satoshi dice, where he's actually using Bitcoin block space for like, what was it? Almost like an early app. It's a fun gambling app that use on-chain like gambling metrics. And it used in an incredibly like a lot of Bitcoin blocks based in an incredibly inefficient way. And very soon it became impractical. This is like the early days of Bitcoin 2012, 2013 timings. It became impractical to actually run Satoshi dice. on Bitcoin. Why? Because other more valuable transactions crowded Satoshi dice out. And that's exactly what's going to happen with Ethereum Mainnet. This is why I agree with you, David. I don't think

mainnet transaction fees, like they'll ebb and flow a little bit, but they're never really going to go down in the future. And so that's actually a good thing, though, overall, because we want high transaction fees on Ethereum Mainet in order to prop up the defense budget, the security budget for the Ethereum network and all of the United States, the United Chains of Ethereum. So that's actually a very important feature and function. Now, where people get stuck, though, is they still think that the Ethereum Mainnet is going to be home for users in the future, like individuals paying $30, $40, $100 transaction fees on Ethereum mainnet. What would you say about that?

Right. So if you're a user trying to use the Ethereum Layer 1, think about who you are competing against. Like, right now you're competing against other. Ethereum whales who have like a ton of ether and are insensitive to gas prices. And you're also competing against other blockchains, right? And that is the long-term competition for Ethereum layer one block space. Do you think that you have enough ammo to compete with other blockchains to consume Ethereum block space? Like the answer is no.

Yeah, I'm gonna say no on that. You're competing with an entire like state level economy. It's like competing with the state of California to get your transaction through. Right. It doesn't matter how big of a whale you are. eventually you will get pushed out to the layer two's. Like the tide will always go up and up and up. Just because layer twos are instantly cash flow positive

because any block space demand for the layer two turns into block space demand for the layer one. So all layer twos have to do is have any ounce of utility around them and they start being pretty competitive with consuming layer one block space. And so like it doesn't matter how big your bags are. Like you're going on to layer twos eventually no matter what because that tide will catch up to you. Yeah, so just don't go there kicking and screaming. I mean, I think some of the message we're talking about in this episode is start to look, start to seriously investigate building a home in one of these later two. So like go drive your car through the neighborhood,

see if it has nice schools, nice houses, see if it's kind of a vibe that you like. Because sooner or later, and I think it should probably be sooner, you should think about migrating all of your activity to these layer twos. And we've got a lot of contenders to pick from, right? You know, optimisms you can. And the nice thing is it's not like, just like a neighborhood, because you can have, you can live in multiple locations at once. But the location you're probably not going to want to live in, you're going to be priced out of is the Manhattan, which is essentially Ethereum main net. It's too crowded, too busy, too expensive, block space prices going up. So some of the message of this episode is start to

investigate some of these layer two because you're going to have to migrate. So it may as well start right now. One thing that has really been a big advantage for the early Ethereum users is having a big footprint on the Ethereum layer one. Like if you use Uniswap in 2019, you got the air drop. If you use DYDX, you got the air drop. And so like now is the time to start growing your footprint on layer twos. Like just grow, cast your net. Do the things because crypto pays you to learn it. You don't know how or when or how it's coming, but the sooner you establish your settlement on a layer two and start just going and doing normal layer two things, living your layer two life, the larger your footprint will be, and the more surface era you'll have for air drops

or just other generalized opportunities. Totally. And given what we just said, right now, some of these layer two is like even a dollar on optimism or opportunity, that's a little expensive for transactions. But realize it's going to get significantly cheaper. in the future. Like we're talking six months, 12 months, 18 months from now, once some of these Ethereum Improvement proposals go through. So you have that to look forward to as well. But let's talk a little bit about the layer two paradigm that we're entering and the impact to

ether the asset. Of course, we talk a lot about ether, the asset as an ultrasound money, for instance, as a reserve currency for this thing we're calling the Ethereum economy. But how do layer twos directly impact the value of ether, the asset? Again, some have called it parasitic. I think we've made the case for why it's not, but walk us through. Why is it not parasitic for ether the asset? Right. And let's begin by recapping the three pillars of ETH value capture,

the three points on the triple point asset. You have ether consumption via ETH burning via L1 block fees. Then you also have the stake rate as in how much yield in ETH terms, how much APY you can get from staking your ether. And then how much ether has the reservation demand for ether. Like how much collateral can it be on these layer twos? How much money can it be on these layer twos? So these are the three things that really define ether as an asset.

Locked in defy or slash locked in layer twos, the burn rate, how much ether is getting burned, and then the stake rate. And so the layer two paradigm impacts all of these things. And it really always boils down towards how layer twos are, solar panels for economic activity. And so let's start with the ETH burn rate. When layer twos have a bunch of economic activity on them, maybe it's like gaming on immutable or defy on optimism or arbitram

or any other possible design considerations for any other layer twos, of which there are many of. All of these scale out the possible economic use cases of Ethereum from where it is today at like a $5 to $50 transaction fee average, and it also goes up from there. but then it lowers that threshold down to five cents or below. So this sheer amount of economic activity that can come to ultimately be settled on Ethereum always turns into block space demand for the layer twos.

And so all these layer twos, which are collecting all of this economic energy from the world around it, come and start burning ether. And they start burning ether a lot. Ryan, you earlier showed the ethep burn rate on the ultrasound.m.money website. I'm going to show that again. Yeah. So right now, Arbitram is doing 23 ether per day. And optimism is slowly, it's somewhere just below that as well.

Like, we are just in the early days of layer two's and burning ether. And this is before Arbitrum even has a token and before optimism's token even goes live and before liquidity mining incentives. And so we'll get to all of those things because those are all relevant. Just camp on burning for a minute. So for people who maybe they're not quite sure what the linkage between burning ether is and actually the value of ether as an asset. So when you say burning, what do you mean? Can you talk about ethas a deflationary asset and what this, what this, who ultimately gets the, the benefit from this burnt ether? Certainly, yeah.

So EIP-1559, it's the famous EIP that changed how block transactions work on Ethereum. About 70% of all blockchain L1 fees on Ethereum gets burnt. And the reason why it gets burnt is, it's multifaceted. But it's basically when we have, when Ethereum. generates transaction fees, high transaction fees, we don't actually have to give it to the miners, or we don't actually have to give it to the stakers because of how secure Ethereum is anyways, especially under a proof-of-stake paradigm. And so we're taking in all of this extra revenue, and previously we were just spitting it out to miners, and they were just selling it on the open market.

And with EIP-159, it takes in about 70% of all transaction revenue, and that number varies, but 70 seems to be the equilibrium, and it burns it. And so this is the excess. of the Ethereum economy. This is the people are spending more than what is needed for Ethereum to secure itself. And so it takes that excess revenue and it just burns it because it's extra. We don't actually need to send it back into the economy. And because sending it back into the economy implies some point at which it goes back into the economy, we don't really want to bestow some privilege position in the Ethereum economy as

and either the stakers or the miners or anyone, it needs to be credibly neutral. And so what's the most credibly neutral thing to do? We just burn it. And what that does is it's basically a buyback on ETH. So if you own ETH, you are basically being paid this revenue because just by owning the thing. And so instead of injecting it into one specific part of the Ethereum economy,

saying like, hey, the miners should get this, or the validators should get this, or Vitalik should get this. Instead, the Ethereum economy says, well, if we burn it, we can give it to everyone. It's like basic income for everybody. Everybody if you hold ETH. Right. You get your dividend.

You get your dividend. You freedom dividend. Except the best part is you don't actually like, it doesn't actually go into your wallet. It doesn't actually have to make a transaction on Ethereum. Your ether is just more valuable implicitly because the other ether has been burnt. There's less out there. So this is why we call ether like ultrasound money. Because as we go into the merge, you can see like if you hit that Simulage merge button,

which I think maybe you already did, Ryan. Yeah, I did. Yeah, negative 4% per year, as in Ether is deflating at 4% per year. Do you know, Ryan, how much gold is inflating? I know, like, base numbers. I don't know the exact numbers, but I'm going to say, like, it depends, right? Because the more valuable of the gold, the more inducement there is to inject more supply into mine more. But I'm going to say like 1 to 3% per year.

Is that about right? Yeah, it does vary over time, but the 1.5% is the average. metric. So gold, the non-sovereign, dollar value asset, inflationary at 1.5%. Ether, with today's numbers in the merge, is negative 4%. Bitcoin inflates at 0% over the long term. Ether, currently with today's standards, inflating at negative 4%. So when you say Bitcoin is 0% over the long term, like I kind of understand that, but that's also like a little bit of Bitcoin or speak. Like, practically, what we're getting in the market is about a 1.1. 5 issuance rate for Bitcoin, something to that effect until the next happening.

And then that gets cut in half again. But yeah, so this 4% per year, that's based on the seven-day burn rate. And you tweak the numbers because any seven-day period of time, there'll be a different burn rate. So if you pull that back to 30 days, it's a little less. It's a negative 1.7% burn rate. But we're talking about some pretty big numbers. If you, we haven't even been any year.

It's been about like nine months. I guess, August since EIP, August 2021, since EIP 1559 went live, we roughly burnt 2% of all ETH supply. This is about 2%. Okay, 2.2 million in ETH supply has been burnt in this in this nine month period of time. So we're talking about some pretty massive numbers and what you're saying here is the link between layer two and this burn rate is layer twos are going to burn by far the most amount of block space because they are going to expect them to be the the largest consumers of block space they don't even show on the charts today guys that's how early they're not the top 10

they're not in the top 15 you have to look to the top 20 to start to see arbitrum but uh that's all going to change is what we're predicting and they're going to be some of the top burners and all of that burn goes back as a dividend to anyone who holds eth you don't have to stake you don't have to validate you just have to own some ETH in the Ethereum economy, and you get the proceeds of all of the layer twos. So what you're saying is just in that first pillar, layer twos are good for ETH, the asset. Yes, right. Ryan, do you remember when I say defy summer, what gas fee numbers come to mind? What was the sustained gas fee? I'm going to, like, I just feel like I saw a lot in the 300s.

I felt it was a lot in the 300s. Maybe that was just whenever I looked, it was at least there. What number did you have in mind? Yeah, two to 300. It was over two to 300 for at least a couple months in a row. And that was like the on-chain bull market for Ethereum. The average gas fee over the last seven days right now is 45. And it's been that way for the last two months or so.

And this is because, like, Defy Summer, like a lot of on-chain activity is a huge bull market, huge mania. But like, it sustained two to 300 Guay for months. And so like that would put us at like a negative 7, 8, 9% percent. percent deflationary rate. And so when I use the metaphor that layer two's are solar panels, then they are collecting energy to burn ether. That is going into burning ether at the layer one. These are solar panels for economic energy. And that ultimately comes to the just the throwing ether into the furnace over time. And why is that a good thing? We'll just make one link and then we'll go to the next to the next pillar that you're talking about. The reason that's a good thing is because

burning ether is a public good. Why? Because the more valuable ether is, the greater security the Ethereum network has, and the greater security for all of the united chains of Ethereum, all of the other layer 2s. So an L2, burning

eth on Ethereum, makes ether more valuable and increases the security budget for the entire Ethereum network. So it's like California, Texas, Florida, they're all paying their taxes to the federal government, and the federal government can then spend more on national security.

And of course, these states can secede at any time, of course, that, you know, their chains. It's a completely opt-in network. So it's not as if Ethereum is like forcing these chains to become roll-ups and become layer twos. They are doing that of their own accord. But that's how you get a self-reinforcing economy. And the beauty of this, Ryan, is that when there is a lot of ether burn, again, burning the excess revenue for the Ethereum protocol, it also means that Ethereum doesn't have to issue as much new ether, because if ether increases in price, that means we are getting more bang for our buck when we

issue and mint one new ether to pay for security. If that ether is more highly priced, we get more value per unit. And so as the Ethereum protocol collects all the revenue from burning ether, it means we don't have to issue as much. And so this turns into a positive feedback loop of value accrual, because we are burning so much, the price is going up, the value of it is going up. And so therefore, issuing more ether, it requires less issuance. And so which furthers how scarce it is. So it's this great positive feedback loop of security. And then the higher security you get, the more layer two's you attract,

because more people want to be associated with Ethereum, because they want that security to underlie their chain as well. The ETH stake rate, does that actually, you know, have any impact in layer two? That was the second pillar you said, of. the three pillars of ether, you know, value proposition, does the stake rate change at all? The ETH stake rate is a complicated beast, especially in a layer two world. Right now, like I said earlier, 70% of ether block space transaction fees go into burning ether, implying that 30% goes to the ETH stake rate. That probably changes over time in a layer two environment, and it's one of those things we're just going to need more data for. What we do know is that if you believe that

layer that ether will go up in price because more and more ether gets burnt and it's also becoming more and more money and all these layer twos, that the dollar denominated APY is also going up bigly. The ether denominated APY is a harder thing to reason about. There's a lot of a debate out there as to where MEV gets captured. Is MEV? And that means minor extractable value. As in, if you are an ether validator, when you are the, it's your turn to propose a block, you get to order transactions as you see fit and there is a specific ordering of transactions that you can make that puts more money in your pocket and so validators compete on how much MEV that they can extract from the blocks in a world where a lot of economic activity is going to layer twos and layer two's just bundle up a lot of transactions and put them down on the layer ones there is that implies that a lot of MEV ultimately goes on to the layer twos and this is actually a conversation that we'll be having later in the show as to what layer two's due with all this MEV.

Some, naturally some MEV will work its way down to the layer one. How much that happens is to be determined. There's definitely going to be arbitrage opportunities as, like, optimism settles all of its uniswap trades onto the layer one. And then there's an arbitrage opportunity there with optimism's version of uniswap, with the layer one version of uniswap versus Arbitrown's layer of uniswap. That is all arbitrage opportunity, and that creates MEV at the base layer. The proportion of this is to be determined.

There's a lot of data that we need to really look at. But I think the main thing to take away is that perhaps in ether terms, ether denominated terms, staking APY is about the same. But in dollar terms, because of how bullish layer twos are for ether, the asset, in dollar terms, goes up bigly. So we got the burn rate, which positively impacts, like, the value of ether, very likely. The stake rate that is probably neutral, you know, maybe some good, maybe bad, we'll call that even, call it neutral.

And then the last piece is the demand for ETH. So what is the impact of layer two's on the demand for ether, the asset? Well, very simplistically, layer twos need ether to make layer one transaction. So the protocols themselves have to have a supply of ether in order to run the actual layer two. And so each protocol generates its own renovation demand, but that's probably orders of magnitude smaller than the total reservation demand. Reservation demand is just the term that people use when there's these things, entities that demand to hold some currency.

And so layer twos have their own native demand for ether. Maker Dow, for example, has reservation demand for ether with how much ether are in Maker Dow vaults. And you can imagine as we unlock new use cases for crypto on these layer twos that have super cheap fees, we can create new protocols that induce their, own reservation demand for ether, the most trustless asset on Ethereum. And so as we come up with new use cases, as we come up with new defy apps, and as people take their ether off of the layer one and put it on the layer two, just the reasons why people can want to hold ether just goes

up. And so there's always this frustration about like, I can't do anything on the Ethereum layer one because of the fees. Well, as soon as we solve that problem on the layer two's, we unlock a lot of reasons to deposit ether into the layer two for this reason or that reason. And so it just creates more surface area for ether demand for different use cases that we haven't been able to unlock for. Yeah. So layer two is the first thing you said is layer twos have to have some ether in order to pay their taxes because their taxes are due in denominator in Eth because they're basically,

they need to buy block space from Ethereum and they have to pay for that block space and eth. So that's one source. The other source that you're saying is all of these like applications. on the layer twos themselves inside of these layer two economies. And I think you could start to see that. These are some stats from bridges. A bridge to arbitram, a bridge to optimism.

There's already, David, on arbitram alone, at this early stage in the game, like pre-arbitrum token, there's $1.3 billion worth of ETH on Arbitrum. It's been bridge to Arbitrum. That's a lot. That's about like, it's almost getting close to half, it's a quarter of a percent. of all ETH supply, okay? Again, getting close to half locked up in the Arbitrum economy. Optimism, 148 million. I bet that will swell in value two. These are only two of the layer two networks. We could look at all of the others, right? And even it's funny, you know, alternative layer

ones and side chains also have a lot of ETH demand. You can you could see that in the bridge stats as well. So ether as an asset in these layer two economies as like a primary monetary asset is That's going to be a source of demand, a very inductive source of demand as well. And it'll form a lot of the basic total locked value inside of these ecosystems too. So that's a demand case right there. Anything else you want to say? I mean, overall, like, pretty bullish. We're going to burn more eath.

Staking rates are going to be about the same, maybe positively impacted, maybe a little negatively, but we'll call it awash the same. But the demand for ether as an asset is going to be massive in all of these layers to economies. And if they are successful, which we think they will be in these economies in layer two grow, that will just massively increase the amount of demand for a monetary asset like ether inside of their economies. Just to add on to the bridge aspect of things, bridges demand ether because you have to hop from arbitram to optimism to the L1, and so they need to hold ether. But then they also need to hold stable coins. And so there's also going to be

stable coin demand by these bridges and these layer two's. And one of our friends, Jim Bianco, he's always expressed bullishness as to if we want the next leg up in crypto prices, it needs to come from on-chain stable-coin liquidity. So stable-coin supply needs to go up in order for Defi to really have its next moment. And when we have yields coming from all these bridge mechanisms where, you know, people, you can get onto optimism or arbitram instantaneously, but getting off take seven days. And so there are these bridges like Kinext, like hop, like Li-Fi, that have all of these deposits into their bridges that allow people to hop in and out of these layer twos instantaneously. And so they also create a lot of stable coin demand and stable coin liquidity, some in the form of USC, of course, but also some in the form of dye and other decentralized stable coins. And those stable coins ultimately have ether as reservation demand somewhere else. And so as stable coin supply goes up because of the liquidity needed for bridges and also other generalized defy use cases, the demand for ether goes up because these decentralized stable coins like fracks and dye use ether as collateral behind them.

And so this is just one example of like the immense amount of surface area that comes with layer twos that will ultimately settle back down to needing ether in people's pockets. So guys, if you're playing your drinking game, you're looking for opportunity number one. All right. We just said it. Opportunity number one is ether the asset, okay? The fundamentals. It always is. It always is. Like the economics for ether the asset in an L2 world could not be stronger. I have no, I just don't even understand why people think that L2s are going to be negative for the price of ETH. It makes absolutely no sense to me, at least on any long term scale. There might be some attention premium that L2 tokens get in like the short run, right? really excited about optimism token, arbitram token, whatever other layer two token, and we're going to sell our ether for these things. That might happen in the short term, but you can see the gravitational pull and force

of ether as an asset. The fundamentals are only going to get stronger. All right, guys, that was all about ether in a layer two world and the economics of layer two's as a result with fees. In the second half of the show, there's also the narrative trade. We know that crypto runs on narratives. We know that crypto runs on attention. What happens when we start doing liquidity mining and token and token?

incentives with these layer two tokens. What happens when the same growth that happened with the liquidity mining for all layer ones starts to happen to layer two's? Is that going to create just the layer two season? Is that the layer two narrative game that is coming up? There's plenty of evidence to suggest that layer two season is around the corner. It's easier to spin up layer twos and it's to layer ones. And so that will create just a Cambrian explosion of layer two's. That's the thesis. So we're going to get to that part of the show right after we get to some of these fantastic sponsors that make this show possible. trying to grow and preserve your crypto wealth, optimizing your taxes is just as lucrative

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if you need liquidity. Instead, you can spin up a Maker vault and use your collateral to mint dye directly. With Maker, the power to mint new money is in your hands. The Maker Protocol is extremely hardened and operated by one of the most experienced Dow's in existence. They've been here since the beginning, they've seen it all, and so you can mint dye with the assurance that your collateral is safe. Soon, Maker will be present on all chains and L2s, so minting dye can take place on Oasis.app, Zerion, or any other Dify protocol that you use. Follow Maker on Twitter at Maker Dow and learn from the oldest and most resilient Dow in existence. Let's talk a little bit about maybe the second opportunity, right? If those are the fundamentals for this now, network. There's also, I feel like a narrative opportunity, right? And so we talk about so much on

bankless, like decide which type of investor you are. Are you a fundamentals investor? Are you a narrative investor? Are you a trader? And bankless always skews more towards the fundamentals. Definitely not on the trading side. But there's also some narrative plays that are kind of fun. And I think layer two season is going to be a narrative. David, can you make the case for layer two season. Is this going to be like the the alt one layer like the alt one explosion that we saw previous summer in summer 2021? Ryan, I can certainly make the case for layers of season. I knew you'd come through. So the first thing that I'd say is that it is trivially easy to spin up a new layer two in contrast with a brand new entire blockchain. And that's because of how layer two's

already have a very difficult problem already solved for them out of the box, which is, blockchain security. You do not need to secure your layer two if you just settle down into the Ethereum layer one. Ethereum, the security components of Ethereum, which is highly optimized for, and it's the most secure blockchain in the world, you can just borrow from Ethereum security while you create your layer two. That's the whole point of a layer two is that you can have scale without sacrificing security. And so by reducing the barriers to spinning up a layer two, you're naturally going to induce more and more layer twos to work to be spun up. And we saw how many layer ones got spun up in 2021.

Avalanche, Solana, Phantom, Definity, all of these layer ones. And some of them got started in 2020, but they really hit their moment in 2021. And all of this came from the demand for block space that the Ethereum layer one couldn't satisfy. And so all these layer ones got spun up. But that's hard mode. Like spinning up a whole entire new blockchain is hard mode. Where in contrast, spinning up a layer two, you can actually just fork optimism. You can just fork arbitram.

Their code is available to you. And so spinning up a layer two is trivially easy. And the best part about this is that as soon as your layer two has any ounce of demand for the block space, it becomes cash flow positive, which is something that all the alternative layer ones are so far away from. Okay. So why? Why is it cash flow positive? I think this is a really important point.

The economics of layer twos are just too too good. Why? Because they don't have to pay for security, Ryan. Oh, okay. Right. Right. So, like, does Oregon have its own military? Like, it has its police force.

It's got that. But, like, no, it just outsources all of its military to the United States, which is a way better military. Like, the budget for the U.S. military is a point. Oregon, David. I'm sure they could muster something. Yeah, they got something, right? But like the United States military has like stealth bombers that we don't even know about. And this is the same metaphor for layer twos where no, you don't need to fund your own security mechanisms. You don't need to pay for security. There is no issuance of the optimism token every time a new optimism block is produced. The reason for this is because they just settled their blocks onto

Ethereum and all of a sudden the defense of ether in proof of stake Ethereum becomes a defense force for optimism. So there is no new, there's no security budget for optimism because it hooks into the Ethereum layer one. The Ethereum layer one pays security on optimism's behalf, on arbitram's behalf. And so that creates, like there's no net new issuance. There's no inflation in the actual token as a result of security. That is a problem that every single other layer one blockchain has to contend with. Solana is inflating at 9%. Avalanche is inflating at 5.5%. Other layer ones are inflating above 10%.

Ethereum layer 2s, they inflate at a rate that is chosen by them just for basic incentives. I think optimism is inflating at 2%. But they opted into that. They actually can turn that off at any moment. Yeah, and that 2% goes to what we'll talk about later. Public goods. It goes to the actual improvement of the optimism ecosystem and all of the Ethereum layer 2s. Just to put some numbers on this, I know we've talked about this before

on various podcasts, but just, you know, it's worth repeating, okay? This is the security budget that chains are actually paying. It's a number that, like, I don't know why more people don't talk about. Bitcoin pays $36 million per day in security in the form of block rewards, issuance. New Bitcoin being issued to its defense force, which is Bitcoin miners. Ethereum pays $37 million in security issued an ETH. By the way, post-merge, that's going to drop all the way down, right? 0.4%. It's a point to...

Yeah, and so that's going to drop from 4.13% to probably around 1% and then when you subtract the burn, that's where you get into deflationary ultrasound money territory where we got negative 2% issuance or something like this. Solana pays $8.5 million per day. almost as much as Ethereum, like a quarter of Ethereum's defense budget, okay? Avalanche pays $3.7 million, okay? So they're all paying a lot for security. And this is the amount of revenue that they're generating for that security.

Ethereum is almost generating all. So it paid, it pays $37 million, at least in these figures, and then it made $46 million in block space sales. So it's actually net positive, which is one of the few times in history. I've actually seen Ethereum or any chain I think this is net positive. Yeah. And so net positive.

But look at, if you scroll down to, I've got to find it, Salana, $46,000 per day. So it's spending $8 million. Listen to this guys. It's spending $8 million per day. And it's selling, it's making in terms of tax revenue. Tax cost, $8.6 million, tax revenue, $46,000. Okay? There's a deficit there.

That's a bearish company, Ryan. There's a deficit there, right? Barish government, would you buy those bonds? Because that's what you're buying with the sole token. You're effectively buying bonds that secure that. So, and now, you know, supporters of all of these, when ecosystems will say, well, these transaction fees, this block space demand, will increase over time. I'm like, yes, okay, maybe.

And if they do, they'll no longer be cheap. All right? So where's your competitive advantage? Avalanche paying $600,000 per day, right? So also, or actually making $600,000 per day. So also at a deficit, although I have seen, to be fair to Avalanche, I have seen them start to produce more and more blocks-based sales. So that is a good sign for the Avalanche network.

It's still nowhere where it needs to be in order to be positive. But, okay, all that aside, what you actually said, what David actually said here, guys, is layer twos don't have to pay any issuance. All right? It's free. It comes free. They're Oregon. okay they're not like they're not paying for their own military it's like a small percentage based on

what they use it's like a excise it's like a usage tax excess tax is paid to the ethereum network in terms of blocks based sales no issuance fee so none of these layer two tokens actually have to issue create more supply of their token to the market so like they have ultrasound money assets, if you will, like deflationary assets, if you will, if they want to, from day one effectively. And what we're saying is that is a killer economic advantage. Right. And this is what you get when you align with the Ethereum protocol. When your protocol decides to use Ethereum for security, you don't have any costs because Ethereum just protects you on its behalf. And all you have to do is pay the small taxes to the Ethereum L1, that

that enables it to secure your transactions in the first place. So 100% pure revenue, as soon as you can create any sort of demand for your block space on the layer two, you're in the green. You're in the green. And so, Ryan, like, we saw a lot of these Alt Layer 1 ecosystems really get bootstrapped by VC funding. What do you think happens when the optimism token starts trading in a few weeks

and then the Arbitrum token comes out? And, like, you're seeing, like, $5 billion market cap plus. that's going to generate a ton of incentive for the same sort of thing to be created around layer two's. Except, again, it's just the economics are going to be much more sustainable. And so what I think is happening

is on the horizon. There is just this insane layer two mania when so many people wrap their heads around how easy it is to create a layer two, how instantly cash flow positive it is, and how much surface area there is to spin up new ones. I think we're on the cusp of what we're always been calling layer two summer. We just don't know which summer.

Let me show you guys a graph. So the thing we've been missing, I think, is layer two's that have been able to actually sustain this, this traffic and volume. And like the layer two is like optimism and arbitrum up to this point. And even now still, they've still had their governors on. They've been in this very slow rollout phase, right? But the big thing we've been missing is once those governors are removed is tokens. And this is Avalanche, if you recall last summer, what they did is they launched an incentive program for defy to essentially, like giving people Avax tokens in order to use DFI on Avalanche.

I want to show you this graph. You can't see the date, but the date is August 18th. August 18th. August 18th. There you go. August 18th, 2021. I see if you could spot on this chart, David. Where is August 18th on this chart? Avalanche total locked value.

Oh, let's see. It's right there where the line is, Ryan, where it just starts going up into the right. The TVL on Avalanche just is nothing. And then August 18th, it starts going up into the right. And so Avalanche went from 13 million in TVL on August 18th to just a few months later. It was $13 billion before the end of the year. And TVL, of course, stands for like total locked value. So this amount of assets on the Avalanche Network, right?

Totally. And so you saw multiple orders of magnitude going from 300 million to 13 billion in like four or five months as soon as there was any sort of like avalanche liquidity mining in program. Granted, again, there was a lot of pent up demand for this block space. And so avalanche was at the right time at the right place. And so there was a lot of demand for avalanche block space in of itself. They just needed something to get them kick started. During that same timeframe without any growth, Arbitstrom went from 300, excuse, me, Arbitrum went from 30 million to 2.5 billion in the same time frame. So, like, well done, Arbitrum in that same time frame without any liquidity incentives. It went from $30 million to $2.5 billion in that same time frame, and now it's at $3.4 billion before any liquidity mining incentives. Optimism went from $70 million to $400 million in that same time frame, again, without any liquidity incentives. So what happens when these liquidity incentives turn on and there is a direct secure economic cryptographic bridge to the Ethereum layer one.

So porting your money over to optimism or arbitram is so trivially easy versus having to spend up a whole entire new blockchain. So there's this massive economy just waiting for these incentives. And now with optimism's token getting launched, they haven't launched any liquidity mining details, but maybe they will. Arbitrum perhaps the same. As soon as this kicks into gear, like you're going to see just an absolute migration onto layer twos, which is why we are saying,

go check out the houses, go check out the roads, check out the schools, go see what you like. But get ahead of the crowd, because as soon as the crowd moves, like you want to have that real estate before the crowd moves there. Yeah, and I think what's crazy, David, is if you look at all of the united chains of Ethereum, we get to a figure that's about $6 billion, and that's pre-token incentive.

And so what we're saying here is there's not only a fundamentals play, but there's also a narrative play as soon as these layer two start to issue tokens. They're already competitive with alternative layer ones when you compare, you know, total value locked and you compare like the amount of revenue that they're actually generating. Like the amount of revenue that Arbitrum is generating, it's generating like double the amount of Solana. So is optimism in terms of block space sales revenue. Okay.

It's already generating double. What's the thing it's missing? tokens, token incentive, narrative, like these things that for some reason haven't quite caught up to the fundamentals yet. But that's the case. That's what we think is coming. And I don't know, David, if you want to put any timeline predictions on this of like when it's going to happen. Like, it's really hard to say whether this is going to happen in June, in July, like what other factors are at play. But what we're seeing here is just all of this raw kindling, this Tinder that all it takes is some ignition, maybe some influencer, maybe three hours capital,

like apes into a token or something like that and sets off this frenzy. And then you have the narrative in full effect. And you have L2 season has begun, basically. I will say there is going to be one big difference between the liquidity mining incentives of other chains versus what operatrum and optimism is doing. Liquidity mining is a short-term game. You are basically paying for people's attention. You're paying for their TVL. And so eventually that runs out.

It's a great way to get attention. It's a great way to get mine share on your application. Because when you pay, like, I don't know, $5, $10, $50 million a day in liquidity mining incentives, like you're going to get attention and people are going to fight for that. Famously, optimism is a very long-term thinking organization. And same with Arbitrum as well. And so they are very cognizant of how liquidity mining is a short-term game.

So they might not be as aggressive with their liquidity mining incentives as other Alt-Layer-1s were because they are thinking for the longest term possible. So there is a cultural difference, I think, between these layer two teams versus these layer-one teams that are a difference with, that is going to create a difference in my mind with Alt-Layer-1 summer of 2021 versus the coming layer-two summer. But we do know that they have tokens that they need to distribute in a fair and equitable and decentralized manner. And as users, you can compete and fight for those tokens if you want them and you can get your hands on them if you do the things that the protocols want you to do to be determined.

So optimism and arbitram maybe they are longer term thinking, but here's what's going to happen, right? We're going to have a whole bunch of alt layer twos. And these will be forks of optimism and Arbitrum and any of the ZK roll-up chains that can be forked will be forked. Certainly. And more short-term thinking project founders will spin these things up. And, you know, some would argue already have to some extent are already creeping down that lane. And then we'll still see a frenzy. It's like as soon as the narrative takes hold, I expect a whole lot of frenzy. Maybe not from the OGs, but certainly from the new crowd who

wants to capitalize this on this narrative. That's what we've seen with everything in crypto in the past. All right, guys. So that was the bull case. Those are two opportunities. for you in the L2 world, the L2 paradigm. David, I think we should just summarize this. And then we should get to a part two episode because we're going a little bit long here. And I think this is going to require two parts to get everything we want said. So give us the summary of what we talked about. And let's give a precursor to what we're going to cover in the next episode in part two and when that's coming out.

Yeah, yeah, just running through it again. Layer two's, they will borrow some economic activity from the, layer ones and they will put it on the layer two's but they will in aggregate create way newer brand new use cases brand new economic activity on the layer twos which will ultimately come down to settle on the Ethereum layer ones. Layer one's block space will be consumed primarily by these blockchains and Ethereum will over time become a blockchain that settles the blocks of other blockchains and so layer one fees are up only. Meanwhile we have so many paths forward for layer two's to reduce their layer two fees. There's optimizations at the layer two level, innovations at the layer two

protocols themselves. There's Ethereum EIPs like 4488 and also dank sharding as well. And so layer two fees are down only while layer one fees are up only. This increases the eth burn rate. This increases how ultrasound the ultrasound money actually is. Bridges, the cross-chain bridges will create reservation demand. They will create yield opportunities both in ether terms and in dollar terms and the growth potential for both the growth of the layer twos themselves and the quantity of layer twos is just off the actual charts. And then soon as liquidity mining incentives get kicked in, man, it's layer two season, baby. And it's just right around the corner. Yeah, absolutely. What we're saying, the big opportunity for Eath here, I think, with layer

two, the advent of layer twos and the fundamentals look strong. And then there's a narrative opportunity with layer two season coming up as well. So that was only half of the, layer two bulkeys. I think there's even more to cover. David, we're talking about a massive public goods opportunity, a secret trillion dollar opportunity. What are we going to cover in the next episode? When's that coming out? Oh, yeah. Well, first off, it's coming out tomorrow. So stay tuned. But, Ryan, there is this opportunity with layer twos that no one is talking about. We just covered all of the basics, the ether economics, the tokens, the bridges. People know about those things. There is a massive opportunity that no one knows about that is unlocking this new domain of crypto that has never been seen before.

Like green pastures, untouched snow, and it's massive, Ryan. And it's about the combination of like Silicon Valley Web 2 startup incentives, but with public goods as the product. Crypto and Ethereum is here to do one thing, which is to solve human coordination. And what we are doing on the layer 2 ecosystem with block space reward, and what we are calling retroactive public goods funding is putting the startup potential, the upside equity of something like Facebook or Twitter or something massive,

but we are putting at where the product is public goods. And there, Ryan, with all of these layer two block space sales, that turns into billions and billions of dollars of monthly revenue that can go into the hands of entrepreneurs building products that have never been seen before on the face of this earth. It's something that I am extremely bullish on, and I'm making a call to action to the bankless,

nation to get ahead of the curve because the amount of opportunity that awaits in the layer two innovation field with this mechanism, which we are going to describe in part two, is absolutely massive. Never before we've seen products coming from never before seen funding mechanisms. And I want the bankless nation ahead of the curve here. So guys, you will have to wait until tomorrow. We're recording this episode in two parts. That'll be in part two. It's coming out tomorrow. For now, we'll leave you with a main action item at the end of this episode. Go get some of those opportunities. Opportunities in ETH, there's opportunities in layer two. And the big action item is go explore. Go cruise through the neighborhoods, see which layer two you like, that you vibe with,

that you want to start calling home and go start settling there. You'll have to pick just one. That's the great thing. Maybe pick a few and experiment with them, but start to figure out where you want to live in this new layer two paradigm. Of course, risks and disclaimers, guys, none of this has been financial advice. ETH is risky. So is crucial. So is. So our layer two is all of defy is you could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.