On The Brink with Castle Island - Dan Matuszewski (CMS Holdings) – What explains the growth of Tether? (EP.83)

Episode Date: May 25, 2020

Dan Matuszewski, Principal and Co-Founder of CMS Holdings joins the show once again. Since he last appeared, the market has been through some gut-wrenching turmoil, and Tether (one of the subjects of the first episode) has tacked on a casual $5B in market cap. Dan, alongside his colleagues at CMS, has also joined the Crypto Twitter fray. In this episode: Why Dan relented and started a twitter account Dan's explanation for the massive growth of Tether since March Whether there is non-crypto business occuring in Tether What we can expect for the Tether-denominated futures markets if it trades below par How Dan thinks about using Tether on Omni versus Ethereum versus Tron What Dan makes of the rise in CME open interest

What's up, everyone? This is On the Rink with Castle Island Ventures, and I'm Nick Carter. This is a very special episode. It's our first episode with a repeat guest. In fact, the first episode of this guest was the number one most popular episode of our show ever. I'm speaking, of course, of Dan Manashevsky, co-founder of CMS Holdings, and the former head of Circle trade. So Dan previously ran that OTC desk for Circle, and he's been intimately involved in these markets for a really long time. Probably the most knowledgeable trader that I know. So last time we had Dan on the show, we spent a lot of time talking about the growth of Tether and what that meant and how in 2017 mechanically Tether was created and why. Since we had him on in December, as the dude from the Big Lobowski says, some new shit has come to light.

So since March, Tether has grown explosively from 4 billion market cap to over 9 billion today. So it's really preposterous rate of growth. So I wanted to hear from Dan who understands these markets really well, where this tether is going, what people are using it for, and whether there's actually non-crypto usage of tether out there. I also wanted to talk about the tetherification of these markets and the implications of a lot of these derivatives products which are quoted in tether terms and what that means. Lastly, I wanted to cover some of the most exciting news of the day, which is, of course, Dan's highly anticipated entrance into crypto Twitter and what the backstory is there.

So let's jump right into it. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing.

They've printed a couple trillion dollars, and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Dan Matashevsky, welcome back to the show, man. You have the honor of being our number one most listened to episode ever. And we took that as a sign that we absolutely had to get you back on. So welcome back. Nice.

I actually looked to see if I can confirm that and see if there was like a ranking. But there's like no, there's nowhere you can like go and view it at an outside party, I don't think, to like see the viewers. Yeah, it's fine. Only I possess the analytics, which I keep very close to my chest. It's good that you're going on the record now, so I know you're not just lying to me.

Yeah, no, no, no, I'll send you a screenshot. I'll send you proof. Don't trust verify, right? That's true. Yeah, I wouldn't just butter you up like that. Something has happened since that episode. A lot of people were like, man, why would Dan do a podcast episode?

He's like a pretty secretive guy. And then, you know, you become more progressively involved in, like, the crypto-twitter sphere and the social media dance. So now you actually are on Twitter, which is new. Yeah, which is good. I mean, the big reason behind the secretiveness is, like, there's some that I just didn't care about sort of being out there. But then a lot more just had to fact that, like, we were running a bilateral OTC trading desk. And, like, in general, if you're servicing sort of customer order flow and, like, you're trading with a large number of counter parties, having opinions is, like, a pretty bad thing, right? Like, you're not going to net win business because you are polarizing

or have opinion strongly about certain things one way or another. This actually caused a lot of headaches with us at times when other people in Circle would publicly mention things and then we would get flack for it. And it would like just cause headaches generally with certain people who, not that you're going to control on us, but like if you have an exchange and somebody in management is saying bad things about them or saying that they're potentially sketchy. That's only going to create headaches with you because stuff's going to go wrong with any one of your counterparties at some point and you're going to need to work with them. So in general, it's just better to really toe the line and like do your job, like don't get

involved with like politics or anything like in the ecosystem. So that really drove the majority of like why I didn't have any public presence in any capacity. And I think that's true for like, I think exchanges should be the same way, right? I don't think exchanges like coin floor in particular, right? They made that really large announcement where they're like everything else but Bitcoin is a scam and like we're only going to do Bitcoin and win a deal list, everything else. And like that's fine if you think that. But like you're in the business of providing matching services for like your customers.

And if your customers want to be trading these things and matching them, I don't know if it's a great business decision for you to sort of be making statements about what you think your customer should be thinking. I think that that's a bad business decision, but again, like, everybody, pretty do wherever they want it. I just think it's a better long-term deal for your business to sort of not be very opinionate. Anyway, that changes now, right? Like, so I can speak a little more freely, which has been fun.

You work for yourself now. You're free. It's good. It's terrifying, but it's also, like, liberating in a sense. So, like, we've been a little more public about sort of things and opinions that we have. Like on Twitter, we've obviously started a lot. little bit. I don't think we've said anything too crazy, but then you never know, right? Like certain people take things different ways. But I mean, really we're just like

sort of giving color on what we see in the market and then sort of things that we know shape different risk profiles in the industry, which I think people find useful hopefully. I mean, that's why we're doing it. I really like the CMS Holdings aesthetic. You know, it's your, I recommend everybody to navigate to CMSholdings.io. Oh, yeah, our website is about 35 minutes. Your motto is number go up. I mean, what else could it possibly be number? That's like, that's the ethos of the space.

It's the goal, right? Like, that's how you know you're doing well in life. But, no, I think you've got like a clip art guy holding out two bags of money. Unfortunately, it's Fiat, but I'll let it slide. Yeah, maybe we can. another five minutes in, like, Photoshop that out. So, actually, the other partner, Julian, who, like, runs all of our, like, infrastructure stuff made that logo.

And I think he used, like, a hedge fund generator, like, website. And then we just, like, took it. And then, like, I had to spend another five minutes fighting WordPress to, like, put in the set out of a screen and, like, that. We actually had to make a website. So we had to make a website because the exchanges kept asking for it as part of the KYC. And I was like, why do they need this? but like they would keep saying like, hey,

your, like your email that you're sending from doesn't like have a website. We need to know what your website is. So we just made it. I was going to ask like why on earth you need a website given that you're like a prop trading desk. You got to have it. So there's a, there's an ongoing theme that I've noticed. And people can go and like take this out themselves.

But the larger the AUM of a fund, the more shitty their website is. So go and look at like someone like the. really large, like, funds that are out there, like, Rent Tech or, like, Susquehanna, or there's, like, a couple of other ones that are, like, large family offices. And it's, you kind of have, like, Google doesn't even climb them, right? So, like, sometimes you got to, like, dig a little bit to climb them. And then you put them in and, like, it, I tell you, the largest ones and, like, the ones with, like, the most assets and, like, some of the sharper ones will just,

like, like, have their address in the top left corner and, like, that's, and just, like, plain text, and that's it. And I'm, I assume they have to do that for some regulatory reason, somewhere or they've just come up like we had to just like put a website out there. But it's always so funny. Like the really flashy big ones are like it's always just such a like negative signaling. It's like way too much time is going in on the marketing of this versus the actual sort of alpha generation. The best example is Berkshire Hathaway.

They have a website that looks like it's from 1994, which you very well may be. It's just plain text. It's amazing. It's great and it tells you everything you need to know. like there's probably like a contact like an address that you can send mail that won't ever get picked up like that's all you sort of need for it they have a little ad for geico on there which is kind of funny so they just gave guyco the ad space on their on their very very plain website um yeah i guess that makes sense it's funny how like having a website in some way legitimizes you in the

eyes of an exchange even if it's like a completely janky website it's so weird um yeah and it was the crypto exchanges that wanted it. And then like we even got it on certain like other sort of like like we've done some deals where like they wanted to know that as like part of like an accredation thing. And I was like this is like the weirdest question that's like getting asked. But like right, like after the first time I was like right just like I'll grab a WordPress like thing and just like shove it up there. It like takes 30 seconds. But that apparently is enough of a hurdle to figure out if you know what you're doing or not to invest money. I don't know. It's silly. But so. So. So. Dan, the first time we had you on, and I want to do the odd lots thing.

I don't know. Like, this is all contingent on you being willing to do this. But you know how, I don't know if you listen to odd lots, but they basically have like a few guests that they bring on like every month. And, you know, like the world expert on like whatever the hell the repo market is, they have this guy's Zoltan on. So maybe you can be my Zoltan, basically. Nice. Yeah, I'll check out the practice. I obviously have more sort of time in the sense that I'm like sitting around on the desk with like

I don't have to commute anywhere. I don't I can't go anywhere. So I'm always interested in another podcast right now too. So the you're the Zoltan of not to like associate you with anything, but you did shed a lot of light on tether when we first had you on, which was great. It was interesting to hear someone who's actually like touches tether because most people just read about it and never use it. they don't necessarily have a reason for using it.

And you shut a lot of light on it the first time around. And then since then, Tether, like the monetary base of Tether is gone from, I don't know what it was when we talked last time, but it was about $4.5 billion to start the year. And now it's over $9 billion, which is a rocket ship. Which is just preposterous. It has slowed in the last week. So maybe it's kind of topped out. It's chained under a buck, too.

So it's cheaper to buy it than it to create. it. Yeah, and I interpreted the premium as meaning like there's demand to create Tether, like, there's people want Tether for more reason. I mean, if Tether's trading over a dollar, and like, I mean, this within like a, like, not just like a dollar and a BIP, like if it's like 10, 15 basis points over, like, there's going to be creation. Like, people are going to sell that by, like, they're going to make them. It can't just be one bit because there's that creation fee, which is 10 Bips, right? Yeah, though that's changed a little bit and there's like certain sort of, it's come in a little bit, but there's still like a non-zero cause to create it.

So like once you get over that hurdle, like it comes in. So we know that like a lot of the explosion into Stable Coins started in March, but like there's this, a lot of growing speculation that they're being used for as like a non-bank dollar alternative just for regular, you know, like balance sheets. for normal non-crypto businesses that want to transact. But then we can also observe that there's a whole bunch of tethers sitting around on exchanges. So like what do you make of this? What do you think that these roughly four or five billion new tethers are actually being used for? Yeah. So the like the case that there's like business going on in tether and that like corporates are paying each other.

I like I don't think that's zero. like I think that's there's some there. I don't think that drives the needle at all on all this issuance. So I think all this issuance is really people who are two things, right? Like they have their domestic currency that they're worried about. Right. So they like are in some geo that holds some currency that they just think is going to like die even more than has died.

Right. Like there was like a big risk off in every non dollar currency going into the year. Totally. And like still may continue going on. Right. So there's some of that where people are like, I need to get into dollars, but I don't have a way of holding dollars. And the other like dual thing is like, or there are people that can hold dollars and they absolutely do not trust the entities that they can potentially hold it in. Right.

Like I think we take a little bit for granted that like in the States, like I can just park my money at JCP Morgan or at Bank of America or Wells Fargo. And like, I don't know. I'm not like super. There's not like a seizure concern that I have at any time. But like, yes, like the government could come. in and like freeze funds for certain people. But like I mean, we have due process. And like also, we generally just have like a financial system that like operates not completely independently, but a little more so than you have in other GEOs. Right. So if you're very worried that your

domestic banking is potentially just like funds that can be seized or haircut, I mean, like the biggest case we've ever seen of this was that whole like Cypress bail-in thing that went on a long time ago, but there's concerns that, like, other geos will have the same problem, right? Like, if things get way, way, way worse and the currency gets demolished even more, like, you have problems that can arise where there's, like, capital controls that come in place. There's, like, potential, like, freezing of funds inside that are, like, held in non-local currency, like, account. So, basically, if you're really worried, like, tether's a great option, right? So, like, yeah, tether's got some, like, risk attached to it, but it's probably outweighed by the risk you're concerned

about locally. So then you end up just like holding tether as like an alternative. Or like any of the stable coins, but like tether's been like big flavor. Now I think a lot of, there's a lot of questions that go into why does this all sit on exchanges? Well, so there's a couple reasons why I think that happens. One is like there's certain exchanges that will offer you some yield on it too, right? So if you're going to hold it somewhere, you don't want to hold these dollars in your bank count, but maybe you'll keep it on an exchange and you like you'll earn a little bit on it, right? It's better than not earning a little bit on it. And secondly, I think a lot of people just don't trust holding coins on their own.

I mean, this is the same reason you see a lot of like just people's regular holdings of Bitcoin that sit on exchanges, right? People just don't natively trust themselves to be like handling these assets. So I think a lot of them end up on the exchanges because the exchanges function is like pretty good wallets for a lot of people. So you see a lot of the assets sort of like stick around on there, which is bad. But like I get why that sort of happens. So I think that's why you're seeing it.

They love intermediated access to their coins. It's the great paradox of the industry. I kind of find it funny that if you're worried about like domestic seizure of your assets, that you're like fine with keeping them on this like other exchange. Right. But I guess it's one of these problems where like it's the devil you know kind of thing in the sense that like you can quantify the risk of one of them. But the other one is a little more opaque.

In a sense, like, leaving funds on a crypto exchange to someone who doesn't natively deal in crypto a ton, probably is hard for you to, like, quantify that risk. Like, you're probably discounting it too much. So effectively, these are basically offshore, you know, lightly regulated to Euphemus exchanges are being treated as banks by people who don't trust the actual local banking system. And in a sense, people actually have more faith in them. than the banking system itself. Yeah, and one dollars. But yeah, that's like, I think the primary thing is they want dollars and then they want dollars like in the way.

I mean, like there's definitely like a desire for, I mean, look, like Euro Tether isn't exploding in volume and it tells you something. Yeah, what are the interest rates like on Tether? I mean, are they meaningful or like, I feel like they can't be that high, right? I mean, they're a couple percent. They should be like, I mean, we like,

If we go to borrow it, we're paying that much. So, like, I have to think that there's, like, a pretty good... So the best way to get an idea of what, like, the tether-implied, like, rate is, is to look at the curvature of the tether-based futures, right? So if you look at, like, what that curve looks like, you can back out the implied rate to lend tether. And so was that rate fairly high when there was a shortage of tether? and then it declined as tether was produced over the last few months?

To be honest, like tether has just been like a one-way rocket ship and the curvature has like traded around a lot. So like I would say the signal to noise ratio there is probably none. But like that being said, like over year long or like multi-year periods, like there's like a 4 to 5% implied lending rate that you get for your tether. But like if you look back in the last three months, like I mean the same. except contract now, which only trade, call it 4% annualized, was like 50% negative annualized at like the lows of the March crash. So like we had like a big washout of leverage, which is

going to like really make it noisy to look sort of on like the short time horizon. But like I would say in general, you don't see like cash lending rates get really high and then like tether issuance get like jacked up. I think that's just why you're seeing it like get to exchanges a lot. Would you say that the interest rate reflects just the inherent uncertainty around the backing of the product or the potential regulatory concerns or the fact that one day those banks might get seized so people would want that compensation for holding the asset? No, no, the lending rates tend to mirror cash.

So like it's really just that the lending rates are dictated by demand for leverage. That's like purely what does it. And it just happens to be that like people will use tether instead of dollars, right? Like, I don't ever see, like, a huge difference between, like, tether lending rates and cash lending rates. They stay pretty close. You'd think that there was a risk premium there. Well, I mean, like, tether sticks around a dollar, right?

Yeah, yeah. I mean, it has, yeah, it has traded close to par for a long time now. Right. And those curves tend to look pretty similar to each other. I think something that, like, people forget, which is, like, 100% going to be a risk event that happens at one point, is that you've got a ton of these like tethered denominated futures exchanges now like finance okay x will be that the base currency on those things is tether now there at some point in the future there'll be

another risk event on tether it just like it happens right like we get one every couple years and tether's going to trade down in 90 or 80 cents on the dollar and that's going to just totally f with those curves right like and what happens is the price of crypto jacks up right in and tether term. So like being long Bitcoin or ether or any crypto against tether is sort of an implied

bet that tether might crash. You get what I'm saying? Because if tether would have like take a digger at the price of that future is going to like rocket ship up. You sort of get like a built in put on tether when you're long those futures. Oh, that's interesting. So if tether ever trades a discount again,

those exchanges are going to be printing some really wacky prices, I guess. They don't have to look at it. They're not going to be wacky. It's just going to be people are so used to looking at the tether future as like being like the cash future, but they're not. Right. So what you're going to see is like the Bitcoin price on finance is going to be on the moon because it's actually against the tether cross and not against the dollar cross.

But it's going to it's going to really wonk with those futures. Like I'm, I'm sort of shocked that everyone has gotten so complacent about. tether-based futures but I mean I don't know it's a problem until it's not yeah I mean what one interesting thing about the last 12 months is the tetherification of the crypto exchange industry in that tether basically replaced for the most part I would say BTC as the base currency which is like not really being talked about very much it's been going on for a bit yeah I mean people are just like really comfortable with tether now you see it I mean it's pretty ubiquitous amongst like all the

exchanges. I think I had a tweet in there about like cracking not taking USDT ERC 20 just because like I mean we move a lot of tether around like everybody moves out of tether around and like you like want that pipe built in an exchange like it's starting to become something that like customers just demand. Did they just use the Omni USDT? Yeah they only use Omni which is like kind of annoying especially because the menpool is going to little jack right now and like it just takes a while like I'm not going to like whatever your feelings are about.

Bitcoin versus Eath, like the USDC and USTC on ERC20 is just by far a better product. Yeah. I mean, this is something that I've been thinking about for a while now, basically the dollarization of public blockchains. Teller has totally outstripped ether in terms of like being the transactional unit on Ethereum, which is pretty weird to think about. But it's like, you know, Ethereum, the system doesn't have the ability to, you know, prohibit any, you know, non-native token. So it's not surprising that the dollar denominated token is the one that kind of takes over. Yeah. Yeah. I mean, like, I think a lot of, so I've seen both arguments on this where people have said, like, it's bad for ETH value profit because you, like, don't need to pay fees in ETH or something

or like because like the no one actually cares about ETH, they care about the dollars. And then like the counter to that is, well, like, if you got, like, $50 billion, like, a tether, scape them for the thing, it's got to be worth something of value. Otherwise, the whole thing falls apart. And then, like, there's, I don't know, like, people love to, like, theorize around, like, why this, like, may or may not give, like, the token, like, underlying value. I think that gets a little overdone at times. Like, I think it's a net good for a chain if they're able to, like, make it useful in an incremental way. And, like, in general, these stable coins are, like, very useful things.

Like all the chains fight to get tether on it, right? Like it's on five different chains now. They're not doing that for no reason. Right. Yeah, it's interesting. Like we're returning to these like fundamental theories of like value cruel for native units. And for like a few years there, we just kind of took it as a given that they're valuable. And now we're like re-content.

We're going back to the basics. Like, wait, why is this stuff worth anything? Yeah, right. It's just like such a classic human thing. it's like this thing has to be like valuable so like we just like bit it to the moon and then you you sit back and like hey maybe it doesn't have any value at all and like all right like clearly like it's somewhere in the middle here but that's like a really hard thing to figure out yeah I mean you definitely like one interesting maybe counter to your point there is like tether it kind

of like maybe just is indifferent as to where it circulates like which blockchain it's on um I mean I don't know actually so like you have a strong preference for like ERC 20 tether as opposed to like tron tether or omni tether or or EOS tether? I, so truth be told, like, I just want whatever is the most seamless and fast enough. Like, I think, like, there's, like, people have made this argument like, oh, if you use it on this chain, you can have it in like sub millisecond, like, like, that's, that's fine and good. And like, yes, that's, like, marginally better. But, like, it's one of these things where it's like, it's good enough, right?

Like, I just wanted to be there in, like, the next couple minutes. Like I don't need to like I don't want it to be there in there a couple hours like I got to sit around and like what I judge but like it being there in like half a second like I don't know like maybe there's like a not a huge difference there. Yeah it's just not like maybe some like high frequency does care. Like I just, but I doubt it though because like also you got it then you're waiting on the exchange to still credit it like it's not immediately sort of seamless as they make that to be. Well that's the thing. It's like there's still that settlement risk like you still have to deal with an escrow period and that's like in my opinion a function of security. spend, although exchanges don't always see it that way. Yeah. No, but I was going to say to the other point is like, either is just good because like everyone's got it. Like it's on every exchange, you know? So like it's pretty ubiquitous in that sense.

But you run into more issues with like TRC 20 in that like it's just not supported a lot of places. So it's not as useful. For the Trondether, is that something that you think is just marketing? Like Justin has somehow convinced people to, create $2 billion worth of tether or is there actually revealed demand there? I think it's like marketing. Like I don't.

I don't think people are like genuinely asking for it over like EOC 20. But like also you got to remember it's like you can seamlessly swap it on a lot of these now. So like like people. Right. And it's like yeah. So it's like you could just be like marketing being like, oh like I'm doing Justin's son of solid like I'm making them some tier C20 and then like I can immediately swap it for whatever I want.

Like you're a little more agnostic. as like an issuer. Because if you're custodying tether with an exchange, you can just have it in basically whatever format you want. Yeah. And then like once in a while, they have to like, you'll see it with like the prints, right? Like they'll destroy a couple hundred million of one chain for the other and like they just swap it. But like the tether folks are like very like helpful and they're pretty easy about that. So I think the exchanges are pretty comfy holding on all of them. So all right. So that's good on tether. I think that's definitely shed some. light on what's going on there. I'm looking for anecdotes for people using Tether for kind of non-crypto,

regular old transactional purposes. So if anybody finds evidence of that, definitely get in touch. I'm trying to see if it's actually happening. Let's move on to some of your recent hot take. So you put out some contradictory tweets this morning saying the memple being jacked is bullish and bearish. So which one is it? So I think the whole point was like, I don't think there's anything to it. But I will say that like, I mean, this is like, a data point and like don't take this like in any sort of like this has to happen. But like, I mean, the Mempool has always gotten really jacked during like really big runs. Like I mean, in 2017 like it became somewhat unusable.

And I think I think that was actually it was bad for Bitcoin. It was good for all. It in the sense. I think you actually saw a real spillover of people being like, F this. I can't even like move this damn thing. And then they were like hopping over to like other chains, even in particular. I mean like there was there was there was we paid.

I got a $500 transaction fee once because of like a bunch of like really badly formatted unspent inputs and like in a transact in a wallet that circle had. And I was like this is ridiculous. And like I think if it's like I think we made like a thousand dollars on the trade. And I was like I just ate half of the edge on this thing just like sending the coin to the guy. I mean like it was it was our fault for the way it was like structured. like but you get into these issues we we ran into this issue if you issue a lot with like the infrastructure circle is like you're doing a lot of spends for like a retail wallet you end up with like

a really large UTXO set and like you get to a point where like some of those outputs are like unspendable at like certain fees because like they just like eat through more than like or a significant percentage of like whatever like the value is so like that that it's it's bullish in the sense that like it means people are using it right like there's a lot of stuff flying around. I mean, we've got some, like, backup of, like, the blocks because of, like, the having and, like, the readjustment. But, like, to be fair, we just had, like, a huge diff readjustment during the crash. And I don't remember the Mempool being this, like, jammed up then. So, like, and they seem to be similar to order of a magnitude of, like, the reset.

So I don't know. Like, I would say that it's good that people are out there, like, moving stuff around. It's odd that there's really old inputs moving around. I don't know what that's about, but, um, and even, I think the Biffinix hack coins had a small move last night, too, which was weird. Though they've moved before in the past, so it's not, like, as alarming. But anyway, I think, I think that is, like, the underlying theme on it.

It's, like, this is probably pretty good that, like, people are using it. They're paying for it. Like, it's also healthy for the miners to have, like, additional sort of income to offset the, like, camping. But, like, by then my next question is, like, right, well, what's the reason it's all moving around?

Like, is this just, like, a sort of blip on the radar? But, I don't know. Trends your friend, right? Like, that's happening. I'm of the opinion that fee pressure is a good thing, generally. Of course, you can get really bad. But, like, to me, healthy fee pressure, it probably has to be more efficient than what we saw in 2017.

But the good news is that we have more block space. Like, we have on Bitcoin up to four megabytes of block space, although you can't realistically get to four. But we have at least double. And then, you know, like exchanges finally started batching. and started using native Segwit outputs. So you can probably pack, I don't know, two to three times more transactions in the same block space now,

which is pretty good. Yeah, definitely. I would be really depressed if we didn't have fee pressure because that would basically signal that the capped model didn't work. Yeah, right. You can take it to the other extreme. Like if there was none, that's like a pretty telling sign that this isn't like a good thing.

Yeah, I don't know. I'm like really curious to see how that all evolves over like the coming years like the sort of fee market. I find that we run into the issue and this was like definitely more of an issue when we were at circling. We were moving a lot around constantly is that the biggest headache wasn't so much that you had to pay a certain amount. Like that was always fine for us. It was just really hard to model how much you had to pay to get in. And like that was like annoying. I never had like a really good solution and maybe there is one and I just don't know about it now or like it's been meant to like I just like want to pay up to a hundred dollars like get me in the next block it's like get it done you know and like where you end up seeing like I always looked at like the bitcoin fees thing on the urn.com right and there was like you could tell where the exchanges were setting their fees per bite because there'd be like big chunks of like then you're like all right I just got to get one in front of that thing or whatever right like but it was annoying because it was constantly had to be like reshaping

Well, that's the problem. It becomes a feedback loop because people look at the fee prediction engines and then they try and beat that and then you're trying to beat them. And so you get this positive feedback loop of fee estimates, which is super, super bad. And that's part of the reason fees were so high because it's just bad fee estimation. I got to think at some point in the future of miners just start pre-selling like loaded space in the blocks. Yeah, I'd be shocked if that wasn't happening. Like, yeah, just selling tranches. We already have out-of-band payments that happen to miners. I don't know if you ever use these fee accelerators. Yeah, the accelerators, yeah. Every time you want to use it, everyone wants to use it.

And then it's like, if you think about it, that's a form of fee abstraction because you're paying fees in dollars. True, true. You know, so that's the fee abstraction everyone's worried about. Yeah, I just think like if you're like a big exchange, like you, you, at some point start cutting deals with like miners to like smooth that out for you at least a little bit so that you're like in times of like high usage you're right like because you're just you're paying a flat rate now for like an unknown like I think it's good for both like I think it's like a win

win for both parties in that case but there's only a handful of people that make sense for it yeah but you know the problem with exchanges contracting with miners for guaranteed allocations to block space and like privileged positions is that it like kind of breaks the assumption that miners don't really know what the transactions are all about. And then it like leads down the road of, well, effectively the exchanges now have a certain amount of control over the contents of the blocks,

you know? And so by being a large holder of coins, you then have influence over what happens to block space, which is like effectively prove a stake. So it's like a really roundabout way of potentially getting to a proof of stake world, which is a little scary. Yeah, it's weird.

I mean, like, I think it's going to happen. I guess I haven't really thought too much about like what that means is like a larger sort of ethos of it. I think both exchanges and miners will eventually cartilize. And people probably won't like me for saying that. But that's like certainly one way this goes is that large exchanges and large miners have these like agreements for guaranteed block space. And then you see more stuff like the Benance API hack where, exchange just operationalize these um these like automatic counter attacks to um to like to like pull the points back yeah yeah yeah yeah i think that's going to formalized i wouldn't be surprised

i mean it all kind of makes sense it does but it like it uh it kind of institutionalizes bitcoin and like not in the good way necessarily i mean the fact i don't know i mean i guess i just take the tax of like the fact that the miners have been so big for so long and it is like sort of that way like it kind of already happened right like you're just you're like finally acknowledging the fact that they like operated like single entities first like this idea right now where you just like pretend like it's not happening because like it isn't you know like you think it's in my mind if like there's two people could collude right now that's just as bad as if like they are like potentially doing something that's not nefarious yeah Hossi had a good take on it he said we we have no way of

proving that minors aren't colluding right now um so we just have to assume that they are but even if they are, they have Bitcoin's best interests in mind because they own A6, which depreciate a lot if the price of Bitcoin goes down. So they still want to maximize the long-term value of the coin. Yeah, I mean, I think everybody's on the same team. And it's really hard for somebody who's not on the team now to, like, jump in. The spoiler is if miners become like perfectly hedged or whatever. I don't know if they ever would, but they'll have the tools too.

Oh, yeah, then they don't care. I don't know. I just any minor or anybody that I've ever seen to put that much work into this thing, like they're still trying to get as long as possible. I think we talked about this last time I was on too. Yeah. And this is the thing too. Like I said this the first time,

like the guys who have been willing to take the most risk, like to the exposure of the coin, have done the best. Like maybe not over the last two years, but like over the long term, absolutely. So like if you were the guy who was like, I'm not going to take any risk, I'm going to head to everything.

You're probably dead. You lost. Yeah. Yeah. You guys just out, like, hustled by the guys who want to take more risk, and now they have all the balance sheet. So that matters a lot, I think. Yeah, and all the miners I've ever met have been super big fans of the corn and, like, wanted to be long. And viewed mining is a way to get long.

Oh, yeah, totally. Yeah, I mean, that gets pitched up. I mean, we see a lot of decks like that where there's, you're not, it's not about like, oh, if you invest this much dollars, you'll make this much money. It's like, if you invest me this much, you'll get this much corn. like coin out of like this close basis. Like that's like how a lot of them get pitched. So on that topic, so FTCX now has hash rate futures, I think. Is that right?

They have a problem. Yeah, they do. They do. So you're a noted fan of FtX. I love FtX. What is it about FtX that you like so much? Well, I mean, the biggest thing they did I get is that they like collateralize everything in cash, which like I think was just like a needed sort of reset from the Bitnex model,

which we saw go absolutely like parriced. shaped in March. And like that's always been like a big concern for us. And like you I'm not some genius. I didn't like look, you're like, oh, I knew this was going to happen. Like this has happened multiple times before. Like it wasn't bit max always. It was okay X back in the day. And like the curve would implode and like everybody was collateralized in the asset and it would just like fall apart. So like there's a long history of this really negative terrible tail risk on the exchange is happening. Which is why like we've always wanted an option to like collateralize it in cash. And like finally we sort of got that option.

And like you'd like you collateralized it in coin too if you want, which is like good. But it's a little. The problem is like in simple terms is that if you, your collateral is based in Bitcoin and then you're, you have a liquidation risk based on that collateral. And if Bitcoin starts dropping, then there's like some convexity that emerges. Right. Right.

And I think like in general that that could be like that risk profile is lost on a lot of traders is like this. They're like, oh, like, if it goes down, 25%, like, exactly. And very much though. And I think the smart guys are, but I think a lot of people aren't on there. And I think that leads to like unnecessary like liquidation, specifically to the downside. I think it's why you get like very exor submitted moves down versus up. Anyway, so like obviously CME has the same model, right?

Like that being cash on there. But like, FJX is nice because it's got a whole suite of crypto that we can trade. And like it's really liquid, but I mean, we've said this since the gate. Like the biggest risk we know is that like Alameda backstops a lot of that liquidity. So like you're taking some kind of party exposure there. But we were obviously willing to like deal with that risk and like have it on. So yeah, like being big fans of them sort of since the gate. Ryan who ran Asia for me when I was at Circle went there actually too.

So we've always like kept up with him on that side. And like I don't know, in general being like a big fan of the platform. But yeah, they just launched like the. cash rate futures contracts. I think they go out four quarters. So it's pretty long tenured stuff. On the topic of CME, by the way, so what do you make of this massive ramp in open interest on CME, which has been talked about a lot? Yeah. So there's a couple things going on here. And they all tie into the same concept that, like, I'm a big seller in general historically of like this institutionalization like of crypto. But I think you're actually seeing some real like institutional flow

into the asset claims. Like, I mean, the Pulitzer John thing is obviously, like, institutional flow. Like that you can't deny. He said it. He's doing it. But, like, the other big thing that I think is happening that, like, people are, may or may not be paying attention to, like, GBT is getting a ton of issues. And if you're a fund, like, that's kind of the best way for you to get in the door still.

And it's great because you get premium on it, right? You get a little juice at nav. You're not going to buy it on anything. You're going to buy it at nav. And I think you want to look at the nav issuance. because that's going to give you like a good idea of like where that's all coming through. A lot of that is going to be guys that are just really are. But I think some of it now you're trying to get people that are looking to hold it outright.

I mean, like the numbers on GPDC are pretty staggering. They're at the point where like I don't believe that it's just all the arbitrate. No, no, it's definitely not. Because like you'd think that ARB would come in. Like some of that's getting like warehouse. But that being said, like even if you're warehousing it, you should still sell it in six months, collect the premium and like redo it. but so any like I guess the point is like I think you're really seeing like actual like

sort of high ticket institutional interest in the asset class and it's going through there and it's going through CME so like if you do trade futures in like whatever your entity is like your family office your like macro fund like seeing these like those futures are like a good option for you to like trade it so I think the interest they're growing is like definitely showing you some more interest from that side of the table but those two things in particular, like their growth is like, I think it's a pretty big deal. I think it's being discounted in general by a lot of people. Yeah.

And like, what would you say to the people that say, well, this is just a cash solded product. It has no effect on spot Bitcoin whatsoever. Because it's getting hedged out anyway, right? Like, I mean, like most likely that future flow is being hedged out by a market maker. Like potentially in the cash market, a lot of times it's just going to end up on like one of the other futures markets. But like the cash in the futures markets can't be disjointed for. It doesn't work like that, right? Like, I mean, they could stay there for a while and you can like make a lot of money doing the

art between the two. But at the end of the day, it's still people that want net exposure to the asset class. I don't know. I guess there's always going to be a contingent of people that like, we see this in the gold bug community as well that, uh, that are just convinced that the, the, the, like, financial versions of these commodities are like totally divorced from, from the underlying. Yeah. I mean, I don't think the point of shake it either, right?

That people just like, blame the future. sellers for like the price being kept low. I mean, I don't think you can like it's one of these things where like no matter what you say, I don't think you actually ever win that argument. In my opinion though, like in general, like that those two can't remain disconnected for an indefinite period of time. Like they'll like that doesn't work. So like in short term, yes, that's probably true. Like there's probably portions where like the paper market is like moving the price like out of whack from its natural sort of steady state in cash. But those will those will come home at some point. That's not like something that exists for like 40 years and like it's the

holy reason gold never traded above a certain level. I just don't find that. Yeah. So Dan, this has been great, man. Thanks for coming back on. Hope to have you on in the future as well. And now you actually you have someone to chill like follow, follow Dan. You're at least partly, partly behind the new account CMS holdings on Twitter. I have done at least one tweet. That's all I will admit to. Okay, all right, so it's probabilistic. But, you know, your tone sort of comes through a little bit. That's true, but maybe Bobby's tone just like mine. You guys just don't know.

You never know. It could be anyone. Do you have anything else to shill? We're all about letting people shill. I don't have anything to shill. I mean, like, the big thing I think people need to take notice of is that there's, there's an actual very large cash demand in the market. And I think as long as that outstrips, like the new supply, I think is like immediately

beginning at shit, right? So like any new issuance I think is like already like sort of spoken for but like beyond that, like I don't, I do think there's a temporary imbalance in the sense that I think there's like a lot of sort of levered interest against the sort of current trajectory of the cash market. And I think that is like a temporary imbalance that will correct itself. If that makes sense for all your readers. Like basically I think those are things that people need to be paying more attention to is like what those two markets is going to. And I think basically ever since we like ran back up from when the market got like wow. in March, like that has been a persistent imbalance that has, like, caught a lot of pain

for Leverett traders on the future side. Well, I will link to the thread you had about that, but yeah, Schilling Ideas is very welcome, of course. Thanks for coming on, man. Really appreciate it. Thanks, day time.