On The Brink with Castle Island - Leo Zhang (Alkimiya) on creating a market for Bitcoin blockspace (EP.542)

Episode Date: July 8, 2024

Leo Zhang, founder of Alkimiya, joins the show to talk about their Bitcoin fee exposure product. In this episode:  The evolution of Alkimiya Alkimiya's current product approach Why solving Bitcoin transaction fee volatility matters How blockspace compares to conventional commodities What kind of market participants would want to long or short Bitcoin transaction fees? Avoiding manipulation in blockspace markets The decision to build on Base Reminiscing on the Ethereum gas token Building a fee product for Bitcoin as opposed to any other L1 Leo's long term views on Bitcoin fees Bitcoin season 2 and the cultural shift in Bitcoin Moderating views from maximalism to being a Bitcoin moderate The effect of Bitcoin L2s on fees Runes as a catalyst for Bitcoin fees The fee-transaction count feedback loop About Alkimiya: Alkimiya is a blockspace markets protocol that just released a novel mechanism for users to trade on Bitcoin transaction fees. Previously, users had no option but to accept fluctuating transaction fees. With Alkimiya, they can now profit from or hedge against these drastic swings. Further reading:  Infrastructure for Synthetic Blockspace

Hello, this is Nick. Welcome back to On the Brink. Today we're sitting down with Leo Zhang, the founder of Alchemia. Alchemia is a block space market infrastructure company allowing users to take a view on, for instance, Bitcoin transaction fees, Ethereum gas fees, things like that. Today we're talking about Alchemia's Bitcoin fee exposure product. I think there's a lot of reasons why consumers of Blockspace might want to take a view on Bitcoin fees. If there is a mint or runes or ordinals that they expect to drive up fees, or if they are structural buyers of Blockspace and want to lock in a consistent price for their fees. This is a market that I think needs to exist, and I'm glad that Alchemy is doing it.

Leo is one of the smartest thinkers in this domain and has written a huge amount on the topic. So I'm very glad we're finally able to get them on the show. we talk about the effect that Alchamia might have on Bitcoin fees, the effect of L2s and non-fundibles on the Bitcoin fee market, and the general long-term outlook for Bitcoin fees and how that affects the security budget. And as a disclaimer, Castle Island is an investor in Alchemia, and nothing said on this show should be construed as investment advice. Let's dive right into it. I'm sitting down here with Leo Zing, founder of Alchemia. Leo,

welcome to the show. Thanks for having me. We've known each other for a very long time since I want to say 2017, 2018. We haven't had you on the show yet, which is kind of surprising. Yeah. We first met you were doing

you doing Bitcoin mining and you know you're kind of still adjacent to that today. Still kind of the same theme. Yeah, it's pretty close. I mean, the, the, alchemia has gone through several iterations at this point, but there's always some relevance to it. Actually, when in 2020, when I was not sure if I wanted to start this project, I consulted quite a few people. And if you remember, you were one of them. And the

conversation, I think we had at least three rounds of conversations. And you gave me a lot the confidence you or sort of one of the reasons that I decide to like okay let's do this well it's my job to tell people to start companies so don't feel too special just kidding I'm glad you did yeah it's been an interesting journey with alchemia you know covering sort of the block space resource market I would say that's sort of the overriding trend is the block space itself is a valuable resource that wasn't always a popular idea, but I think it's getting very popular now as we see kind of sustained fee pressure in particular. So yeah, take us through kind of the history of the Alchemy and then sort of your flagship product

today. Certainly. So I think what was interested in the dynamics of block space, I think when we first started the project, the interest was much more on the supply side, right? This is the block production. This is mining. This is, well, staking badders at the time. we're still still mining.

And that was because in our early days, the miners have outsized impact on the block production. I mean, they still do, but they have a lot of power in how the direction of these public blockchains could go. We've seen quite a few block size wars before where miners have had outsized impact and led to some interesting outcomes in the Bitcoin space. As the, I think, application space evolves, especially with Excerium First, there are a lot more interesting patterns that emerged that gave other specialized players more power in the block building process.

And people realize, okay, there's some responsibilities that we should break down into different parts. And some part of the stack should be assigned to more specialized players rather than concentrate it in the hands of one. category of players. So we see that evolve quite a bit. And I think as a result, the demand side of block space economics is becoming much more interesting compared to when we started our first round of conversation. In 2020, when we talked about this concept,

it was still largely around, OK, how miners should hedge their economics because they have relatively predictable cost of production and that cost production is Essentially a one-way street, the global difficulty is on the longer trend is always increasing. The game is becoming more and more competitive with every four years, the having decreases the amount of block rewards that people can earn and place a greater emphasis on the ability to capture more fees. So I'd say that has changed a lot in the past four years, and that shifted our thinking and our focus as well from originally more.

on okay how do we secure the block producers economics how do we guarantee more steady production to okay how do we provide more stable more predictable experiences for consumer block space this include more frequent users of block space including you know exchanges trading firm wallet services bridges roll-ups in the future of bitcoin altuth to end users who are just trying to mint their favorite NFT collection or no collections. And they're getting snaked left and right. And they had to pay massive fees in order to get what they want. So tell me about the nature of the protocol as it exists today.

I suppose you're launching next month in terms of taking a directional view on Bitcoin fees. Yeah. So the essential idea of alchemia is that we're trying to build a block space resource market, We want to turn it into an infrastructure that can be plugged into service providers, such as bridges, exchanges, wallets, all these type of players that experience, that had to frequently settle on chain. And so for these guys, the volatility of transaction fee is really unpleasant. It's just, in traditional markets, there are a lot of parallel. There are a lot of examples of how these kind of patents have developed in commodities market, in energy markets.

There are long history of people, utility companies hedging against the fluctuation of energy costs. They will use futures market to lock in their monthly average cost. And for some of the more speculative event-driven users, they were able to use this kind of contract to speculate on the impact of Russian-Ukraine war on oil price. in short term, right? So we think that the public blockchain have evolved to a point where this kind of steady businesses, the kind of mature commerce are starting to emerge. And for these kind of businesses to have more sustainable expense management, they will want similar kind of experiences to similar kind of tools to manage their expense. So in short, Alchemia allows this type of users to

create financial instruments that allowed them to have long or short exposure on average transaction fee over a period of time. So walk me through the kind of typology of users that you feel would be interested in both the long and the short side of the trade? Yeah. So for the user on the long side. So someone who are looking at, let's say, you know, activities on Magic Eden, then they expect to see a large ruins collection to really, really move the interest for a lot of collectors or traders. And these kind of activities tend to move in cohorts, right?

And people who expect that there will be congestions as a result of these activities. And they will be able to take a long position on transaction fee before this kind of activity starts so that by the time that they finish their interactions with these collections, part of their higher expenses for minting costs or trading these things will be offset by their gains on longing the transaction fee itself.

So if you know that you're going to mint a big collection or you're going to create a mint event and third-party users are going to mint, it's going to be competitive. And you want to preemptively abate those costs, that's when you would go long. fees. Yeah, this would make sense if you are a large collector, large trader, or if you have the collection itself that wants to create a better user experience for your community. I think it was 2022 or 2021 at the time blanks. It was May when the board ape had a really, really popular drop. And I remember something like... Other side? Yeah, other... And the users collectively paid

150 million in gas and this is just the transactions that were rejected, right? They didn't successfully mint the collections. So you guys had to come out and apologize to its community and I think they said something like they're going to refund part of the gas cost to users who didn't successfully mint. So this kind of experience, they happen quite often. This started with CryptoKitty days, but at the time people didn't realize this is such a recurring pattern. this is something that's inherent to the supply and demand of block space. And I mean, if we really want to trace the history of this counterparty,

the kind of early signs already shown in 2013, 2014, and this is just a continuation of all these same kind of supply and demand split that happened multiple times in history of public blockchain. What is the nature of the contract, like the contract specification? Is it a perpetual? Does it have an expiry? How does it work specifically? It has an expert. The contract, the index tracks the average transaction fee across the period of time. The increment of the index is the median set per VB of the block. So this way we use median because we want to get rid of the outliers in a block,

which still happens a lot. You know, as you know, fat thing, people still fat finger transactions. I think not so long ago there was 80 Bitcoin transacted attached to a transaction or something like that. And whichever pool, that mine that was trying to return the feed to whoever did that. So these things happen, they still happen. And we want to make sure that this index tracks the sort of the most normal experience of interacting with Bitcoin. So outliers we want to get rid of the kind of transactions at the bottom, because they're all sorts of like operational transactions that, you know, mining pools, they handle,

or some of the transactions that has really, really low urgency. We want to get rid of them, we don't filter them out as well. So median is sufficiently resistant to this kind of outliers and manipulations. So we use that as the increment of the index and the payout of the contract, tracks the rolling average of the medium of every single block across that period of time. The reason we use average instead of something. The perps was the first thing that we explore when we designed this market. And we quickly realized, given the value, the nature of the volatility of this kind of index is very, very different from, you know, a pump and dump shit coin.

Where those things are also very, very volatile, right? But they tend to go up a lot and then drop off a cliff and then go up a lot and drop off a cliff. this kind of rinse pattern, which is still relatively easier to manage if you have a perk. But for something like transaction fee, where intraday have incredible amount of like spiky pattern, it's very, very difficult if you require the one side to maintain margin,

just constantly getting called. So given that our target users are these service providers, you know, wallets, they don't necessarily, that they want to become, they absolutely do not want to become traders themselves and when they interact with contracts like this. So I can't really be like, hey, you guys need to post margins for hedging your fees in the middle of the month. That creates a very undesirable experience for both the protocol as well as for the end users. So we opted for something that's more stable, something more straightforward, where the users, they interact with these contracts,

they don't have to think about it again until the expiration date. And given the expiration date, given the averaging nature of the payout, some kind of averaging date would make sense. Do you worry about banging the clothes? I mean, basically manipulation of the block space market to cause one of these contracts to settle in the money or out of the money? So given the averaging nature of it, it becomes harder and harder to manipulate towards, especially towards the end of the contract.

So in traditional, in energy futures market, this is how a lot of long-term contract works as well. The utility companies, they will hedge the average electricity price of the entire month or up to three months. Because it doesn't really make sense for them to do like a shorter interim. So for this market, a longer averaging period for some of the more service, the kind of services that are closer to utility companies, if we have any in crypto today, that that will be the type of experience that they desire. They really don't want to manage like margin positions. They would rather not have a high leverage to have something that takes less time to

manage and for intra-block manipulations it's really just for bitcoin specifically only the miners that have only the large solo miners are able to to manipulate transaction fee and this is because most of the mining pools today they're on f pps payout and if they want to if the mining pool operator wants to push up the transaction fee in that block they have to self-send and they attach a massive amount of fees to that self-send transactions, and they have to share that fee with everyone else on their mining pool. So that becomes a massive cost, unless they have, you know, like, I don't know, a $5 billion worth of long position on alchemia, then maybe that justifies the, then, you know, I don't complain about that. But it's really hard for them to do that and justify

that. In fact, the only pool that's probably capable of doing that state is marathon. because they're a solar pool they have sufficient amount hash rate they're sophisticated but i i doubt that they're going to do they're willing to do something like this given that they're a public traded company so the these uh this system is built on a base on a theorem it pertains to bitcoin where you're building it on a theorem how does that work yeah so it is it is uh it is it is written smart we do require smart contract uh it's you know there's just just no tools on Bitcoin for us to use at the moment. Well, there's, there's no tools.

What about the Bitcoin old twos? Well, they can, they can show us when they're ready. I mean, we've got a no shortage of interest from, you know, various Bitcoin L2s that try to get us to deploy there. For us, the consideration is really that, you know, we've loved to explore that when any of them are ready. But we also do require sufficient amount of liquidity in order for this market to work well. And of course, using RAT BTC is not ideal. It's not true to Bitcoin ethos. Let's be real.

A lot of these Bitcoin L2, a lot of these EVM-compatible Bitcoin L2s, their solution is no better. And dare I say worse than BigGo. Careful which Bitcoin L2 is you criticize. Some of them, some of them. So use wrap Bitcoin on base on Ethereum. Indeed. That's the main collateral. Yeah.

Who would, what kind of entities would take the short side? Who wants to short Bitcoin transaction fees? Miners. So with the most recent having, mine fee has become a larger portion of the block rewards. I mean, still it's not enough to, to become the, I mean, it's not 90%, but it's high enough. So there are two things that that makes it,

that makes it interesting for the miners. One is the increasing fee to report ratio that we just mentioned. And secondly, there's now greater, there's the expectation for greater volatility of transaction fees as a result of Ordinose, ruins, just a cultural shift in Bitcoin lands and how people want to use Bitcoin.

So these kind of vector as a result, there's less predictability on the revenue for minors. It becomes a very interesting financial instrument for miners to partially lock in the future revenue on the fee component. This is, of course, a little different from trading hash power itself, where the contracts have denominated in Pita hash over month or something like that. These contracts are still denominated in transaction fee. They're denominated in set per fee B. So for miners, of course, they need a little bit of conversion.

It's not really a hedge angle, but it is a pretty potent tool for them to increase their earnings or be able to capture some of the premium when the markets are excited about certain events. So there have been some analogous systems like Alchemia, I think, that have existed like the gas token in Ethereum. Do you remember that? I do. Back in the day. Yeah, so gas token, this is created by IC3, FieldDi Ann in 2018, I think. So gas token works very, very differently because, well, so gas token essentially take

advantage of it and exploit, which has subsequently being removed. That op-co has been subsequently removed in London, fork, if I remember correctly. So essentially it allows gas refund when you, for when you clean, when you essentially burn these gas tokens. So they sort of work as a gas battery of some sort of where they, okay, lock up the amount of gas units from during time of low gas and you're able to release them in the time of high gas. This is a very awesome experience for average users, but it is a very undesirable, experience for the producer of the big because they they the miners what they are still

they were still minors at the time they get strictly worse economics they get strictly worse economics for for for for having this kind of like majority of the gas fee paid through this type of interactions and also the staple was very very difficult to solve i remember phototic actually wrote uh uh whether a block post or e3 research host about this. He was adamantly against it. And the obco responsible for a gas token was subsequently removed and therefore killed gas token, the Chi token and the variance that represents this kind of gas battery. I think the moral of the story there is that it's

very difficult to, it's very difficult to create this kind of physical settle, physically set of physically settled blocks where you remove essentially computational cost from a low gas cost space to a high gas cost space. Because block space production, the supply demand is inherently a market function. There is someone that's getting paid to offer the compute and storage. And if this kind of movements were to take up a majority of the, I guess, interactions between the demand side and supply side of the blocks, it becomes one side is going to be worse off over the long term. So we see a lot of interest, a lot of philosophical discussions, or especially on the Ethereum side, to push for this kind of like physically settled inclusion list, pre-confirmation.

And there's a lot of very interesting ideas that are getting pushed Pepsi. However, I think they can, they're much more, those kind of solutions are much more interesting for MEPB searchers who are trying to really, really get granular on the sequence of their transactions and be able to lock in a specific sequence of events such that they maximize their profit. But it's less interesting for end users who are trying to have a stable and slash predictable fee experience over a pure time, nor is it interesting for proposers who are trying to have a more stable revenue source. So, you know, given all of that, I think it's just not as interesting to explain. It's technically, from an engineering perspective, it's much more interesting to explore physically settle solutions.

But from end users' point of view, I think they're creating problems for themselves. And I think synthetic approach is much more reasonable. It's much less impactful to how the actual block space dynamics, because it has no impact. Well, in theory, it should have no impact because it lives in a different dimension. And looking at how traditional energy market, commodities market, have developed, not say that this is going to be one to one, but these kind of paper market where information, updates information changes the price of these futures market. The paper oil, paper energy market, have much greater volume compared to the desire to interact

with the bears of oils, right? Yeah, that's how we got supercontango last year. Why did you start with Bitcoin? I mean, Ethereum has more fees in economic terms. since apparently Solana is catching up to Ethereum now. So why Bitcoin? Why Bitcoin on Ethereum? Yeah.

The Ethereum product is always in the work. Actually, we've been working on the Ethereum, the base-speed product for a longer time compared to the Bitcoin product. This is going to get into slightly more nuanced territory. But for the base-feed product, there's no natural producer of base-feed, because base fee is entirely burnt. Even on the cell side, anyone who show, so for the seller side, this would be anyone who's interesting just selling ETH in the format of base fee. It's very speculative. It's very, it requires tons of financial alchemy. It's possible, but it still, it requires tons of

coordination work. It requires the market to take a long time to form their consensus. I think for Bitcoin such problem doesn't really exist. Well, Bitcoin, Bitcoin instrument has other problems, such as there's no native smart contracts to support Bitcoin. But, uh, yeah, so it's, uh, we're trading, we're trading the market structuring challenge for a different set of challenge by, by focusing on Bitcoin first. With Bitcoin, they are a natural producer of transaction fees. So anyone who's taking on the short side, they, uh, as miners, they are not taking on an entirely, speculative risk to short transaction fee, which is a very unnatural behavior. There's very few people in the world wakes up and look at the chart and think,

hmm, I'm going to short transaction fee today. Because for whatever reason, I think it's going down, right? Unless you have a very solid quantitative model that tell you such, such is the case, which we do expect that to happen sooner or later. But right now, I think not that many people are just looking at the fee decay of transaction fee. the rate of decay of transaction fees. So for miners, this is really, okay, I natural producing fees, right? They're like farmers growing vegetables.

I'm naturally producing these crops. And now I'm selling the mass futures. And if I lose money on the futures, that I'm not losing, I'm not losing money on my like entire crop because because I'm not selling more than what I'm growing. and if they make money on these futures, that's great. That's the yield enhancement on their vegetables. Okay, what other products aside from fees are you thinking about

or are you just laser focus on fees at the moment? I think fees are the most interesting because this is an experience that affect everybody, every end users. And I think this hasn't been that big of a talking point before. Well, people talk about it when gas fee is high, but people cease to talk about it the moment it drops. This kind of volatility, it is still a very much a long-term challenge. It's not a long-term challenge for end users who would show up and do something and then they go back to their, you know, regular lives. But this is a problem for commerce.

This is a problem for businesses that are settling every single day, posting multiple transactions every single day. They're posting multiple transactions every single day. So that kind of volatility is very painful for them from cost management. perspective. The market for this type of the demand for this type of instrument is growing very, very fast as more mature businesses are starting to become entirely on-chain. We've seen this with sequencers, obviously, with some wallets, with bridges, with some of the more consistent on-chain traders. I think if we, if the If the belief is that crypto is going to attract a greater amount of economics to happen on chain,

it's safe to assume that there will be greater volatility introduced by these kind of comerses and also a great amount of volatility borne by these kind of commercees over time. And there's only so much high-quality block space that we can use. And the scaling, the scaling high-quality block space that we can use. block space is very slow and it's inelastic. And of course, the Pocodop folks, they have a pretty advanced view on this. Curious to see how that goes, but with more,

I guess, conventional, conventional public blockchings, such as the case, right? Scaling is very slow. Scaling is very, very, it takes like lots of VC money. It takes a lot of time. a lot of time and resources, but demand there is ephemeral. It comes and go very fast. So that's why people would often complain. So there would be a period of time where people complain about gasping too damn high and Ethereum is unusable. And when ruins started to first,

right after the having blocked, people are like, okay, Bitcoin's now unusable. We need a fucking censor these transactions. These people are spamming. These people are killing my sacred baby Bitcoin and the narrative switches to uh well sorry on regarding Ethereum scaling uh after a while the topic switch to the narrative switch to oh my god we have so so much so many infrastructures we have all these high FDB coins that because people are just funding fucking infrastructures we don't have any apps and we don't have users how about figure out where the users are before we do these scaling solutions which only benefit you know, the money that created this thing.

So we go through these cycles, right? And if I remember correctly, was Fred Wilson or someone from USB team wrote in 2018 or around that period of time? It's an application being for application cycle. Yeah, the myth of the infrastructure phase, right? Something like that. I think was the name of the blog post. Yeah.

Yeah, I remember it very well. And they said it was an interplay between applications and infrastructures rather than a single phase. I think the core points in that in that blockpost still rings true, right? And especially for something like crypto where there's a lot of mercenary interest for, you know, specific ecosystems. One particular ecosystem scales very fast. And now all of a sudden it has a lot of capacity, a lot of, a lot of, grants to throw around to attract this kind of mercenary and partly organic usage. And these applications comes and these kind of interest comes, they congested network,

make them unusable, and then there's renewed interest in scaling these systems. And such as the case that we see on Bitcoin now that we see with with Ornos in pushing the fees to a very high level since November of last year, start started November of last year, start of November of last year, the men pool became much more full. The blocks became much more full. And we see more these kind of out-of-band payments. We see more of these kind of solutions that are trying to structure non-standard blocks that are otherwise not appropriate for Bitcoin Corps relay policies.

And we see these kind of changes and that pushes renew interest in, okay, scaling Bitcoin, which we haven't heard these two words together in a very long time, scaling and Bitcoin. These two words haven't been together in the, I don't know, this is years. And now all these various solutions, they start to get funded, they start to, you know, for whatever reasons, for reasons that are somewhat obviously speculative, some are really trying to solve this problem. but I think the underlying theme is exactly what the Frat Wilson article talked about. Are you taking your kind of structurally bullish Bitcoin fees in the long term, albeit with lots of volatility. Myself?

Yeah. Yeah. Yeah, I think one topic, one very touchy, sensitive topic that would have had to talk about in a while is security budget. after rounds and rounds and rounds of having. We used to talk about it, yeah. I mean, every having it becomes more relevant. We still don't talk about it. I think the people who were really,

who talked about it were pushed out because they're marked as concerned crows or idiots or, you know, colorful words, MX. They didn't fire me. They tried. They couldn't fire me. You can't fire anyone from Bitcoin. That's the thing.

Yeah. But you can make someone disillusioned and stop talking about it. That's true. Happens so often, right? I think, especially back in the days when the, I guess, culture or diversity of Bitcoin was not nearly as strong as today. there's a much there's much more concentrated

I guess weight from the people who do not want to talk about it or just you know have triggered a reaction every time they see this kind of sincere technical conversations and at the time people who wanted to have this kind of serious technical discussions were

were like I said disillusioned, they went to do more interesting things. I was seeing quite a few of them, right? In a journey of a 10th set scaling Bitcoin. I think what changed now is that there's a much, much greater influx of new people with different opinions about how Bitcoin should be used. I mean, for better or worth, this is not going to be. back, right? This is, this has changed. And with this new culture of diversity, I think there are more forces from different directions that trying to shape the Bitcoin the way that they see as

appropriate. So it's not, it's not as, I think this has been talked about many, many times, but it's not, it's not so monotonic anymore. There's this, there's, yeah. Yeah. So I think, I think it's a very interesting. That's why we call a Bitcoin season too. That's why we say there's a Bitcoin Renaissance. There's a cultural shift as well as a technical one. And I think the technical shift in the capital allocation shift is a reaction of the cultural shift.

So, I mean, even al-Qamia, like the notion of a Bitcoin product built on Ethereum, that is heresy historically, at least for a portion of the Bitcoin ecosystem. But now I don't think people will bat an eye at it. I mean, there's no way to do it on Bitcoin currently. So you're a part of this as well. Oh, 100%. I mean, I was a Bitcoin maxi for a good amount of my, I guess, journey into crypto. And for me, it was a very, very practical thing.

Okay, I want to work with Bitcoin. I wanted to build stuff that allow people to make Bitcoin more interesting. I couldn't. I either build a fucking sense. centralized thing, which I have zero desire to, or I choose DFI. And I chose DFI. Yeah. Yeah. I mean, which one of us quit being a maxi first? Do you remember? Because I think I quit in 2021, if I remember correctly. That's when I definitively quit. I think privately we probably quit around the same time.

Publicly, I think you defected. Okay, public eye never really like had a had a had a. Yeah, this is it. This is your 95 Theses, nailing to the, nailing them to the church door. This is your Martin Luther moment right now. He's admitted it. He's admitted it. quietly walked away.

And I don't think anybody think of me as Maxi after, I don't know, 20 to 22 when I came out and said that we were building our alpha version on avalanche. I think at that point, I think there was no...

Yeah, that left no doubt. But it's true. Like, the Venn diagram of hardcore maxis, I don't know, I guess we're not allowed to call them that. Is that a slur to laser eyes? And the Venn diagram and people that are trying to actually build decentralized technologies has a very little overlap because there's so little you can do with Bitcoin in its present form.

That might change. We have all these new L2s. We'll see what happens there. Obviously, we have our exposures, Castle Island. We're very active investing there. But I don't think the laser eyes actually support the L2s. they only want to use kind of orthodox Bitcoin, you know, layer one existing Bitcoin with the very limited scripting language or lightning at most. So the builders tend to try and experiment and then move away from the very puritanical culture by virtue of the fact they're trying to build something.

Yeah, I think season two of Bitcoin is definitely marked by, it's definitely triggered by cultural shift first. right and and of course i think if we zoom out there's bitcoin etf that kind of fueled it but all these things are just perfect storm that led to where we are today i think with bitcoin l2s uh yes a lot of people shit on them uh while the good a good amount of them are definitely you know lazy solutions with their goal very very clear that that's you know there's no uh illusion regarding what they're trying to do But there are some groups that are really trying to bring this kind of solution to Bitcoin. I think whether they're successful or not, long term, this is a very valid effort.

This is something that people should try, and this is the best time to try it. I think if people are able to use Bitcoin's as a settlement layer for these kind of higher order primitives, I think that's awesome. There's no, there's absolutely, I can't think of a single reason to stop people from doing that. Last thing, we've had John for a while. What catalyst do you see for Bitcoin fees that are the most important in the near and medium term? What protocols do you think are going to drive fee pressure here? The most short term is definitely Rooms. I think the tooling for Rooms haven't been properly built up yet. So the UX for Roon is pretty terrible. I think we likely will see another wave of interest of playing with these kind of things.

I think it would be very interesting to see what happens after Rune Native infrastructure, like Rune Dexes, all these kind of pretty, pretty, I wouldn't call them the most, you know, technically events, but very interesting ideas that can change the dynamics. I think overall the fee as portion of the block rewards has become a much greater portion. The this actually this event itself introduces tons of tons of volatility to to miners first of all. And as for the usage of fees, I think it's still going to be very much event driven for a foreseeable amount of time. until, you know, whether it's Bitcoin L2s or bad ones of the world, they create more consistent usage patented.

They're able to bring more natural, organic usage to build on top of them so that we see more predictable or more consistent usage of Bitcoin Blockspace. So you're launching next month. Where should our listeners go to either learn more or even get started with Alchemia? It's Alchemia. I owe and I think everything else should be pretty self-explanatory. Yeah, you know, what's funny is I wrote this article, I don't know if you remember it. Public blockchain fee cyclicality back in 2020, I don't expect you to have committed my entire corpus to memory.

That's okay. And I wrote about negative feedback loops in fees, transaction count and fee, the interplay. And I noticed that basically peaks and transaction count tended to precede fee peaks, and then fee peaks would cause transaction intensity to decline. So basically, as users responded to the real-time condition of fees, it would cause blockchain utilization to go down. My case study was actually 2017. We have a lot more data now, but that was kind of the main burst of fee activity we saw in Bitcoin.

And I remember at the time thinking to myself, wow, I wish I had a way to speculate on fees. Because I figured out the pattern, basically. It didn't exist. So my dream has been realized four years later. So thank you. So that's why you asked me to leave my own job to do that. I mean, I've always been like very curious about the topic and I'll put the article in the show notes. But yeah, I mean, the interplay between blockchain utilization and fees and then that fee pressure causes users to migrate to other L2s or to competitive L1s.

Like that's a very interesting field that I don't think it's been like really studied yet. I mean, for instance, what's the effect of an L2? does it decrease fees on the L1? Does it increase fees because it creates a new transactional venue which creates more demand? You know, we don't know the answers to these questions. Yeah, I think we can see some of the trends

slash patterns on how Ethereum evolve. I definitely don't expect the Bitcoin L2 space to evolve in a similar way as Ethan roll-ups. I think they made a lot of mistakes there. which is a whole other can of war. But I think the pattern that you observed back in 2017, it still stands, right? So, okay, the transaction counts increases.

The blocks becomes more full. Some of the transactions that are trying to get through, they need to pay a higher price, right? And the smart fee estimate, that's the RPCN point that a lot of wallets used to do, fee estimations for a number of blocks that people want to include. That increases very quickly because they observe man-pull usage for the past X number of blocks. But anyways, so it has a very mechanical reaction. It has a very clear causal relations to fee spikes. And fee spikes, of course,

that decreases the desire to get transactions fast. And there's little reason at the time to send transactions, a E-SEP is the kind of arbitrage up to do high-value sniping that now is starting to infest the mental these kind of activities were they did not exist back that so there's like greater reactionary speed to these two factors now there are more factors that are in play time preference transaction size different transactions have different preference for fee tiers right some transactions that you need that absolute the top of the block some transactions are more chill. I think these are factors that changes the dynamics a lot. And so when we update this study, we'll include many more factors and I'm sure a lot of interesting things will come out of it.

Well, I'm looking forward to it and excited for the launch. Leo, thanks for joining us today. Thanks for having.