On The Brink with Castle Island - Vivek Raman (BitOoda) on Second Order Effects of the Merge (EP.357)

Episode Date: October 5, 2022

Vivek Raman, Head of Proof of Stake at BitOoda joins the show. In this episode we discuss: Vivek's career journey from traditional financial services to the world of public blockchains. Views on the impact of Ethereum's transition to proof of stake, including his perspective on the new financial products on the horizon. The path of CeFi as it relates to DeFi and where Vivek sees overlap. How BitOoda is working with bitcoin miners to manage risk. The smart contract platform category and how Vivek stays current on the latest developments in the industry. To learn more about BitOoda visit their website. Follow Vivek on Twitter.

Today on the podcast, I sat down with Vivek Ramon, the head of proof of stake at Biduda, which is a regulated financial services company focused on digital assets. This was a fun conversation, and we hit on the regulatory landscape, we hit on stable coins, the evolution of those products, hit on DFI, and then the evolution of yield products being built in the Ethereum ecosystem after the upgrade to proof of stake. So without further ado, here's my conversation with Vivek Ramon from Biduta. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures.

You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. 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 concentrated easy. And it's 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.

Vivek, thank you so much for joining us today on the podcast. Thanks for having me. Exciting times is always in the crypto space. Yeah, it's a lot to get into. That's for sure. You guys put out an awesome report. before we hop into the Ethereum stuff and just the broader macro context, we'd love to hear your background and what led you to Biduda. Sure things. So it's a winding road to crypto, but I feel like it has also like defined my mission statement of helping bring institutions into the crypto space. So I started off on Wall Street.

I started off in like as deep in traditional finance as you could. I traded high yield and distressed bonds and CDS. So like derivatives and bonds of stress companies and four different banks. So the More than Stanley UBS, Doche Bank and No Mirror. the whole time again, being basically a market maker in high yield and distress credit, which is now replaced by AMNs in the crypto space. So, like, there's an analog for everything in the crypto space that we do in Tradfy. After 10 years on Wall Street, sort of decided that I wanted to increase the convexity

and risk profile of my career. And so I left to go start my own businesses. And then found crypto, found Bitcoin, went deep in their Bitcoin rabbit hole, saw immediately why it was such an incredible technology. And also, as an aside, like, while I was on Wall Street, we sort of ignored the whole crypto movement because there was resistance against it. So immediately once leaving, I was like, oh, wait, this is actually an area that I wish I focused on a lot earlier.

Learned about Bitcoin, then started getting the Ethereum ecosystem and specifically because Defi was starting to take off. And this was like early 2020, summer 2020 when DeFi summer started and just systematically started to see everything that we built, that Wall Street built, start to get built via protocols in decentralized finance. So like trading via Uniswa, borrowing, lending via office. I'm just like, this is a really, really big movement. It's really complimentary to what we used to do. So I got into the D5 personally, started playing around with everything, self-studying because there

aren't really that many resources yet. And then after a while, after about a year of just like being deep in the Bitcoin Eith ecosystems, decided I wanted to sort of scale up and join an institution and try and go institutional. The institution I joined was called Celsius, which I never heard of. I never heard of it. I was part of the Celsius X team, which is their research and development, product engineering arm. I really wanted to shift from just finance and actually building stuff. I mean, it was actually a really incredible journey at Celsius. And it taught me a lot. It taught me a lot of good things of what the industry need as well as bad things that need to be fixed going forward. So incredible platform. It was a huge force in the space, unfortunately,

didn't make it. But after Celsius, I got introduced to the Biduta team and sort of immediately clicked that Biduta, while the whole space was, had been growing as quickly as, possible and sort of just like build first and break things and etc. Biduda had chosen the slow and steady path of let's get a bunch of licenses. Let's get our bit license. Let's get registered with SEC and CFTC. Let's build a regulatory framework so we can actually reach institutions. And I saw that and I was like, this is exactly what a lot of the firms that didn't make

it during the bear washout needed. And so I came on board Biduta. Biduta is basically a digital investment bank. So doing exactly what I used to do on Wall Street. But for the crypto space and with like a crypto name. focus. We really want to help the space grow, not centralize it or anything, but help it actually grow in onboard institutions. And so while it had its foundations in the Bitcoin space and Bitcoin mining, and we have an amazing presence there, the CEO, Tim Kali, wanted to also expand to the proof of stake

space since Ethereum is moving to proof of stake, and it's a very complementary network. So now I'm here. I'm trying to build Ethereum proof of state products, research, and then also just onboard the world onto crypto rails, whether they choose Bitcoin, whether she's Ethereum. It's sort of the duty to bring the next wave of responsible capital in the space. Very cool. Well, we've had Tim on the podcast in the past, and a lot of people probably know Biduda from the great research that you guys put out, but it's got to be an unbelievably busy time on the Bitcoin mining side of the business right now.

It's absolutely fascinating. It's really interesting. It's really cool how Bitcoin is such an infrastructure play now. And when energy becomes scarce and energy is on the forefront, plus when we're at bare market, yeah, there's a ton of deal flow happening. a lot of people wanting to, for various reasons, exit the mining space. And a lot of people coming in and saying, okay, now more than ever, Bitcoin has a real place and real need.

And so the industry is getting more and more enshrine. So we're seeing new people come in and build. Being in the middle of that and helping onboard clients, et cetera, and educate people about the space, it's awesome. Until very recently, we had never made an investment in a Bitcoin mining focused company. And one of the principal reasons was just a lack of risk management around the underlying and managing FX exposure to the underlying asset. Maybe talk a little bit about how you guys think about the services that you offer to the mining

community. So the purpose of an investment bank, just in the Tradfai world that we're trying to recreate in the crypto world, too, is to one, provide research and education to institutions, two, to facilitate capital markets. So to create structure products, derivatives, and just allow trading exposure to different assets. That's where we come on the Bitcoin mining side. And then three is raising capital, whether it's a, through and then TradFi, that's IPOs, that's debt offerings, et cetera, in the crypto world,

that's bringing capital on, like either on chain or to companies like doing Bitcoin mining. So, like, risk management and compliance regulatory is sort of our first and foremost values, which is, again, very refreshing for the space because that's what the space needs to really grow responsibly. So we've created a variety of different ways for miners to hedge their different exposures to the Bitcoin price, the difficulty, to hash rate, et cetera. So by creating those contracts, it allows predictable cash flows for people that want predictable cash flows. It allows people to come in and take the Bitcoin exposure they want to take. And basically by financializing the space, that's how we bring a lot more institutions into space and de-risk it. Just like in

traditional finance, derivatives allow like farmers to hedge their corn exposure, etc. So by being able to separate out exposures, I think it increases the surface area of who can come in. And just like you mentioned, now you're getting into potentially investing in miners because now you can actually isolate risks and take the risk you want to take and hedge out what you don't want to take. And if Bitcoin is going to be, like, if Bitcoin is going to be a global reserve asset and on time that we need a global reserve asset more than ever, we need the mining space to be very sophisticated, financialized, and we need everyone to be able to participate. Yeah, it can't be just every time you go through bear market, all of the Bitcoin miners

go out of business, which is, it feels like that's how this industry is operated up until the invention of these financial instruments. And we want to be an infrastructure layer. All of crypto, Bitcoin and Ethereum, we want to be infrastructure layer, not just the speculative tech layer, which we are right now. I mean, like the whole bear market of the last six months has really proven to us that we are a turbo risk on asset. And for us to graduate from that and become an actual sustainable asset, you're exactly right. We just need to become more immune to cycles and more just prevalent throughout. And we're creating the products and the ways

to do that. I mean, a lot of what we need to create has been built into the traditional world. We just think that crypto, blockchain, Bitcoin Ethereum will make it all more efficient and transparent and just like remove a lot of slippage from the system. So you're someone that came from a traditional financial services background. You obviously understand both sides of the table on TradFi and Defi. How do you think about just the macro landscape right now for the industry in terms of we're talking about pretty high risk assets? There doesn't seem to be much of a bit in the market today.

Obviously, there's a lot going on in the global geopolitical perspective. How do you think about just the institutional adoption of these technologies and the pace that we're on. To be completely frank, I think it got set back really, really badly. And a lot of that is our fault. And a lot of that is like now I think it's time for our industry to graduate on tribalism of like Bitcoin versus ETH versus proof of stake, proof of work, etc. Because now it's really an existential moment for our industry. We create a lot of narratives that governments now are attacking as they should with any new technology because it's a displacing technology. No, I mean, the knives are, I mean, on the Bitcoin and Eith proof of work side, you have

energy. Like, we're in an energy crisis. Energy is scarce now. That's a whole different conversation where energy really should not be scarce, and we have the solutions. Like, there are solutions to energy, like nuclear that are in plain sight that we choose not to use, but again, different condo. For now, energy is scarce. So there's an attack vector in energy. Also, let's take stable coins. Like, stable coins are, and this is a whole different discussion, that's a really interesting one, is stable coins are probably one of the most interesting adoption vectors for the crypto space, because out of sheer luck or whatever, the crypto ecosystem chose the U.S. dollar as the stable coin asset, that allows the U.S. to basically export the dollars now on digital rails, so on crypto rails,

as well as through physical rails, which it does already, like through the treasure market and FX and etc. So we've basically been given a way to sort of digitize the dollar already, but now it's become a real vector for regulation because we sort of foot faulted as an industry and tried to create a bunch different variants of the dollar, like UST was the most prominent, and then it blew up, and that sort of sets the industry behind. And then also, lastly, the industry had largely been self-regulated, not too regulated, and you saw a lot of blowups of people trying to recreate the financial system, like C-Fi lenders, et cetera. And that's just not good for the industry either. I think that ultimately all of this needs to exist, and the government will eventually learn

that this is actually really, really helpful to the economy globally. But for now, I mean, there's this going to be attack factors out, and that's why it's our job. to say, okay, let's have regulated platforms, let's have discussions. It's actually show the world why this is a better infrastructure in a time where, like, currency are collapsing everywhere. Bond markets are collapsing everywhere. We're just in a mean reversion from like the COVID boom we had. I actually think it's healthy that now we're going to have a more like functioning market where

you have assets that'll decouple with higher interest rates. Now you'll have good companies survive, bad companies not survive. Like it's almost like capitalism. Free markets are going to be back. But it's a pretty painful transition as we've seen. It was probably not over here. Yeah, I don't think it's over either. I totally agree with what you're saying on stable coins.

I mean, if someone were to make you the CEO of the United States government, I think one of the first things you would look at is just the monetary system. And you'd say, right, here's the technology and public blockchains that allow us to export these dollars at just massive scale that you never could do before the invention of this technology. And you have the ability for people in developing countries to hold their savings in U.S. dollars on a smartphone without needing to open a bank account. And so from geopolitical perspective, if your objective is to keep the dollar strong, this just seems like an obvious solution. And I guess with Powell coming out this week and saying that they're not going to do Fed coin, at least any time soon, maybe there is a path here for regulated stable coins to really, you know, take the torch there.

I absolutely hope so and think so. And I think we'll see it that way. I think one issue is just the uncertainty around having the world on a public ledger. Right now, a lot of stable coins are on Ethereum, and Ethereum is like trying to graduate to become a fredibly neutral, decentralized public ledger that's immutable and can't be attacked and can't be tampered by any single participant. Bitcoin already has that with Bitcoin the asset, but Bitcoin doesn't have stable coins yet. I hope it does in the future, but maybe that's not what it's solvent for. But regardless, like the fact that there is a public infrastructure that can support stable coins, I think it's both a blessing and that now exists, but it's also a curse in that government's so on. understand it yet. So we've already innovated without sort of asking for the explicit permission

of the government. And now we're playing catch up. Like that's what the most obvious stablecoin candidates like like circle or something where it's fully backed and you can, it's fully transparent. That's the first avenue of adoption. But I'm really hoping that the innovation space rises where they say, okay, over collateralized stable coins with real assets like Bitcoin or Eith. Like that should be sufficient too because it allows for the creation of more digital dollars. And like you said, if we want to keep the dollar strong, which I think we all want the dollar to succeed. We want the world to succeed. We don't want a doomsday scenario. This is really a good way of getting the dollar into like every other country out there. So I'm hopeful. Yeah, I'm hopeful as well. I mean,

switching gears a little bit to defy in the context of stable coins. How exciting is a DFI future where the USDA model is really the only model that flies in a world where there are no fractional reserve stable coins, where the over-clouded model may be is, is impaired in some capacity. Do you think Defi is as exciting in that model? I personally do. I think that will we have more experimental under collateralized stable coins? Again, UST and Terra set us back a lot from that. And would it be great to have that kind of model? Idealistically, yes. But also the point of crypto is increasing efficiency while keeping money sound and not recreating all of the old banking system. And the old bank system was based on

fractional reserve and a lot of leverage. And we've already seen C-Fi lenders that used like minimal fractional reserve blew up. So I think underclateral stable coins are a long ways away. And to be honest, I don't really think we need them because at least we don't need them at the moment because there's already a lot of dollars in the system. So if we can take those dollars and digitize them, I mean, the Fed can you print dollars whenever it wants. So that's basically that can increase the quantity of stable coins.

I think the more important part of defy is being able to bring a lot of the tools, just Wall Street had access to, like borrowing lending at institutional scale, repo, complex structure products, options, et cetera, bringing those on chain, giving everybody access to those. So someone in India could go have their own account and trade on uniswap and then borrow basically use their own stable coins to borrow lend. That's way, way more important, I think. I think once we build the basic pillars of defy and then make them universal, then we can start to experiment more and more with the more complex structure and leverage.

spaces. But I mean, I think UST has killed anything in the short term of having a really deep-pegged, globalized, under-collateralized stablecoin. Yeah, I don't think these under-collateralized stable coins. I'm kind of maybe I'll sound like a Luddite five years from now, but I actually don't think they're possible. I do wonder about the like the Maker model, though, and whether or not that is something that's enduring and whether or not Maker will continue to hold USC. Obviously, that's a huge conversation in the community right now. But I wonder if these over-collateralized stable coins, find a product market fit five years from now in defy if something like USDC just works and gains even more scale?

Well, on Maker specifically, I love Maker. I think Maker is the OG protocol. Maker decided to, like, overcollateralization is hard to scale, as we know, because just by definition of overcollateralization. But Maker is also has the mission statement of bringing real world assets on chain. And so they did a $100 million, I think. facility with Huntington Valley Bank and they're using Huntington Valley Banks like Loan Book to issue die. It's only a matter of time before they go after the real estate markets,

etc. So if those assets that are in the real world can ultimately be used, even over collateralized to create stablecoin dollars and use those dollars, that's massively, massively accretive because it creates liquidity. It creates ways for assets to be financialized. I absolutely love it. With Bitcoin and Eath as collateral, I would hope the Bitcoin Eath of the chasm where they're sort of institutional enough that they can be accepted as collateral. And also with algorithmic over collateralization, I mean, if the price falls enough, you'll just get auto-liquidated. So, like, unless these assets sharply fall to zero, which again, hopefully we're beyond that point, the model does work, you know, stress tested in Black Thursday and makers,

and it's gotten stress tests this year in crashes. Maker's model works, and I hope that over-collateralized stable coins are treated differently than undercut alized by the government. Yeah. Yeah, I agree. So you touched on the real-world asset front. That was something I wanted to get your perspective on. We're very bullish on that. I think there are some barriers there. But I'm looking forward to a future where you can have things like REITs tokenized on blockchains and taking out loans against real estate collateral and all sorts of things that are real world assets off chain. What do you see as the biggest structural barriers to that becoming ubiquitous? A lot of thoughts on that because I came from

a Wall Street background, but also real estate. I have a decent size real estate portfolio. I buy and sell land. The first thought is, let's take all this in tokenize and put it on chain. And the barrier there immediately, we've tried our experiment there. Immediately, it was just legal complexities and regulatory complexities of how fragmented the legal systems are around real world assets. So like a parcel of land, you actually have to record it with the county that you're in and then let the state know, and then let the state is federalist. Every state has different laws. And then you have to also record things nationally for tax purposes. That is hard to codify and automate on chain. I think it's a big enough problem statement that we should be tackling it. And that's why, I mean, that's why makers

going for it. Like, this is why I joined Beduda is because Beuda actually has the licenses and the framework to be able to tokenize real world assets. It's a heavy lift. And we're going to educate regulators. We're going to educate and not only federal regulators, but again, down to the local county level. We're going to educate all of them and try and standardize. But it's a big enough problem that everyone should have access to every asset in some sense. It's easier if we start with financial assets like pre-IPO equity. For example, that should be tokenizable. The bond market should be tokenized, et cetera, and people should have access to that. But ultimately, like, the real product market fit will be bringing real estate and these other assets on chain.

Just because it's difficult and I'll have regulatory like hurdles, doesn't mean we shouldn't do it. I actually think that's probably the biggest area that I would like to focus on for the next foreseeable future. Yeah, I think it will be an unbelievably big market, maybe even bigger than the monetary use case for blockchain. It's just taking some of these real-world assets and representing them on chain. I guess the frustrating part for a lot of entrepreneurs right now, at least, is if you have something that you know is a security, you want to play within the parameters of the SEC's securities regulation, you go to the SEC and you say, here's a security on a blockchain. And they say, fine, but there's no ATS venues that are approved to trade this thing. A lot of broker dealers can't get their licenses updated with FINRA.

And so there's just not a financial market infrastructure to trade this stuff and connect to the pools of capital that would want to buy it. So are you in any way optimistic that the SEC will give some clarity on things like the custody rule for a digital asset? That's a difficult question because so far, so far the answer has been no. But the optimist in me, because right now the world's on like a, it's on a wave of pessimism. It's actually remarkable to see last November. it was only bullish sentiment towards everything.

Now everyone's sort of overly bearish. It makes you think that, okay, like, it's not the end of the world in any sense for crypto or for macro. But coming back to crypto, I think that regulators want to understand what is going on. I think the SEC isn't making it easy, obviously. But that's because I think they identify how big of the market this is and how disruptive this is. And they sort of want to slow down progress so they can understand it. That being said, we're all very, very lucky to live in America. I mean, the cool part of America is we have checks and balances.

We have separation of power and we have, we basically have effective decentralization as much as the government can be decentralized. So while the SEC may be pushing back against a lot of innovation, you're seeing institutions and corporations actually adopt blockchain technology. And then the headlines that have happened through the bare market, companies like Stripe, Instagram, adopting NFTs, and USC is starting to become more and more universal. And the innovation from the corporate institutional

side is so promising that maybe the push will come from them as well. We have lobbies and Congress. We have such a messy governance system by design in the U.S. And I think that government system will actually help us push through for the real world cases. So long-winded way of saying, I mean, it's basically politically correct way of me saying that it hasn't been easy. And I'm not sure it'll get easier from the regulatory front, but we also have other avenues we can use to try and make this ubiquitous. And elections are the best sort of reset button. So if we get enough of the population and institutions sort of behind this technology and seeing the value has, then next election, maybe we'll have a lot more crypto representatives in government.

Yeah, supporting the pro-crypto candidates, a great place to start. I guess the other thing I'd add there is that there's a profit motive that is very beneficial to where we want to see this going, because when these banks see that they can make money in a rising rate environment by issuing a stable coin, or that they can make 35 basis points custodying a digital asset when a typical custody fee is the low single digits on a equity security, I think just pure profit motive will probably push the bank lobby and a number of broker dealers into just trying to influence regulators to give that clarity faster. That's super interesting to say that. It's such a good point because if we believe in pure

capitalism, I mean, I think we're all a hybrid. But if we belong pure capitalism, then profit motives drive everything. And I would say that before, I would say the banking lobby was fairly anti-crypto. I think we saw that from a lot of comments from banking executives or the last 10 years. but like you said, thinking one step ahead, I worked at banks. I mean, they're great places to learn. It's key infrastructure for the economy, but they haven't really innovated in the last decade. All the innovations happened in the 2000s and then the pendulum shifted to big tech from 2010 to 2020.

That was the Fang stocks. And now I think it's shifted into crypto. But if banks really want to innovate and stay at the forefront of creating new industries and finding new fee models and revenue models they need, crypto is literally sitting right there. I mean, the crypto makes everything so much more automated. Like settlement, for example, settlement of bond trades, et cetera. A, they take time. They're T plus 1 to T plus 3 settlement, not instant settlement.

You have a bunch of back office people and a lot of operational headaches. All this stuff can be memorialized in a blockchain. And clearly, a lot of efficiencies that can cut costs and increase profits. Same thing, like you said, stable coin costs like issuing stable coins at zero percent and then investing the underlying into treasuries and getting 4%. It's such a ridiculous no-brainer for them. It's ridiculous. And then custody, like you said, every bank is now starting to think about getting into custody,

because that's what banks do. And there's sometimes the crypto custody is, it's a necessary evil, I would say. Like, everyone should have their private keys, but it's really annoying managing private keys. This is why things like Celsius existed because it outsource private key management to NNT and also let you earn an interest. And I think that model has merit just has been managed correctly. It wasn't during last cycle, but I think it will be. I think the banks have a big say in this. So I think you're absolutely right.

I think we should educate the banks as well about how crypto can actually increase their revenue models. And that's how we'll speak their language. And so, okay, this is why you adopt crypto because it will actually help your business model. And again, that's part of what I wanted to do with Buduta. I mean, our clients, our institutions, it's banks. It's trying to convince sort of the old school, the traditional, the boomery places. This is actually technology that is going to be helpful for the next era of innovation.

Yeah, I totally agree. I mean, if you think about this from the perspective of just financial services being disrupted in some way, the very clear vector here is going to be the custody banks. And so I think it's really interesting that Bank of New York Mellon and State Street have been public with what they're working on with fireblocks and copper and the fact that they're leaning into MPC. It seems really risky if you're a JPM to just be not building digital asset custody right now. It just doesn't seem like a logical decision. And I think you'll maybe five years, 10 years from now, you'll have the Harvard Business School case study. on classic innovators dilemma, we missed the wave. And now a lot of assets are tokenized.

And Bank of New York Mellon is even more dominant in the custody space. It's pure game theory. It's like the same thing that kept the banks and institutions out of crypto because no one wanted to be first. Somehow that has shifted. I think Michael Saylor started some of it, but we didn't see as much corporate treasury adoption as we thought. But even so, like somehow we've gotten to the point where now it's almost too risky

for institutions not to have some sort of exposure. Not necessarily owning tokens, but building infrastructure around these tokens. Because that's the riskless model for banks. If they go invest in a bunch of Bitcoin or Ethereum, then they're going to have price risk. But if they set up custody for it and the whole world comes on board, it's almost a train that can't miss. So in that part of crossing the chasm, like you mentioned in an InterVis dilemma,

we might already be there. Like, unless we have really onerous regulation banning everything. But the problem with that, there's also game theory with onerous regulation, banning everything, because that can only happen in the U.S. And even in the U.S., like, you have federalism to counter, or yeah, your federal system to counter the national system. So some states will be like, okay, let's embrace crypto. Like Colorado is now accepting tax payments in crypto, which is really cool.

And then also, if the U.S. fully completely aband something, then you'll have other nations say, okay, this is our opportunity, and they'll embrace it. And the game theory is finally starting to work in the favor of crypto, and I'm hopeful that it keeps continuing. I totally agree. Yeah, it reminds me a lot of the internet. I mean, you can try to shut it down, but it's not going to be a very good place to live, ultimately.

Switching gears a little bit towards the by side, the thesis around holding some of these things. So I'd say Bitcoin has a pretty clear thesis, just non-sovereign venture bet on the emergence of a store of value. What would you say the dominant thesis for holding Ethereum is right now? And I'd be curious your perspective on how that has changed potentially with the move to proof of stake. So I think as people come into the space, people get myopic views by definition. Because that's how, I mean, the book Sapiens actually does a good job telling, saying that human narratives are based on tribalism. And you have all these stories built on tribalism.

That's what creates stories that endure. That's what happens with religion. That's happened with monies. It happens with nations. It's what happens with crypto, too. And we're at that beginning point. But like we were saying, we've crossed the chasm now for crypto into adoption. So I actually think all these technologies are fully complementary.

I think the Bitcoin case is very clear, like you said, and it gets clearer by the day when we see every currency. I mean, honestly, it's playing out. I mean, the currency is starting to topple at ridiculous rates, and we want non-sovereign stores of value. And more importantly, Bitcoin doesn't have, it's not trying to do everything. It's not trying to have a giant compute engine on top of it. And there's merit to that, too, because complexity, as we've seen with theorem, it does,

it does introduce attack vectors. Like, Ethereum is almost under attack from all different cases. It's stable coins that are under attack. Censorship at the base level is potentially in question because OFAC sanctioned tornado cash. There's a lot of knives out for it. But I would argue this is Ethereum's use case too. It's trying to be an open source app store. So basically an open source innovation platform where anyone can build anything.

I think it's very, very aligned with America's views, to be honest, that it creates a land of opportunity for anyone to build anything using code. And it's decentralized, et cetera. But what is ETH then? ETH is the reserve asset of that app store, of that. that economy. So I would say it's a compliment to Bitcoin. And by the shift from proof of work to proof of stake, it's even more complimentary now because ultimately we want institutions and sovereigns and large entities to allocate to the space, Bitcoin is one important vector. And it should be part of people's portfolios. But now you have a diversified alternate asset that's basically the reserve asset

of this Ethereum economy that they can also hold. And it's secured by proof of stake, not proof of work, has a different environmental profile. I actually think that Bitcoin's energy profile is actually super important. And by being able to use flare gas and be able to effectively create batteries for storing energy, I actually really, really buy into that. So I think some institutions will, but other institutions that have ESG mandates that just have to look at headlines and how much electricity we use, they can now buy ETH. And the last thing, too, is ETH has a staking yield now.

So that's staking yield. I think yield is the killer product of all financial, like all of finances basically built on yield effectively. So now there's a staking yield, which actually acts as a differentiated yield compared to government bond yields, etc. So it's its own sort of store of value in the Ethereum ecosystem and in the Ethereum economy. And it gives a complementary, it gives a complementary investable asset alongside Bitcoin, I think. It's been fascinating to see the TradFi lights go off, or lights come on, rather, in terms of that yield, right? If you're looking at things like

Bitcoin through the lens of, well, I don't invest in gold because it's not a productive asset, you're looking at Ethereum and saying, tell me a little bit more about this staking yield. And I think we're going to see a lot of interesting financial products actually pop up around this concept of staking yield. Maybe talk a little bit about that. What do you envision in terms of the world of derivative products that we're going to start to see around this move to proof of stake? I think the staking yield is one of the most alluring parts of Ethereum. And it's a differentiating part, too. And also, like we said, there's different risk profiles to Ethereum than there are to Bitcoin.

So I don't want to say that one's better than the other. Again, I think they're very, very complementary. country. But when it comes to financializing, there's a lot more products that can be financialized on the Ethereum ecosystem. The Ethereum stake yield has a few components. It has block rewards similar to Bitcoin, where validators are paid a certain yield to validate transactions. That's about 4%. There's also transaction fee yield. So the cool part, the thing I like about Ethereum a lot is it closes the economic loop really, really well. So it makes a lot of sense to me that the more the blockchain is used, the more fees are paid. And that those fees result in a burn of

Ethereum, it doesn't all get paid to validators. And that burn creates a potential deflationary force to counter the inflationary force of issuance. So it creates a pretty compelling case for a very low issuance asset, which again, we want low issuance to low inflation assets. Bitcoin already has that, ETH now has that too. And right now that fee yields is about 1.5%. But as usage goes up, right now fees are in a bare market. As usage goes up, that should actually increase even more potentially. So that brings us to about 5.5% yield. And the And then the last is MEV, and that's a whole sort of, it's a dark forest effectively. It's a whole slew.

I mean, we see MEV in traditional finance too. It's arbitrage opportunities and inefficiencies that can be sort of exploited by bots, by fast players. And that's going to exist in any complex system. And that MEV yield is at least a quarter percent, probably going to increase over time too. So we get to about a 5.75% yield right now for ETH with upside, with more usage. I think financializing that yield, isolating that yield, and then isolating the parts of it, isolating either the MEPB part or the transaction fee part or the base issuance part,

and be able to hedge out Ethereum price risk, that's going to just bring in so many players that just want pure yield exposure. Because this is now differentiated yield from government bond yield. So if you can isolate out ETH price risk and you can actually just get an uncorrelated source of yield, that's going to have a place in a differentiated portfolio. and then creating derivatives around that, creating, and traditional finance derivatives, not just crypto-native things because not everyone wants to custody. If we can create products around that, I think it's going to sort of create a Cambrian

explosion of exposure, and that's part of what we're working on too. You're already seeing that Cambrian explosion just in terms of the talented people that are coming in and starting to see this, I would say. And so maybe the products are, you know, will be at scale. It's basically like you guys and a couple others that are even experimenting with this at this point, but I feel like so many talented people are starting to get excited about it, that I'm really excited to see where the product direction goes on some of these yield and structure product instruments.

And just like stepping back on that exact point, I think the easiest way to make a bet on an industry or trend is just to see where smart people are going. Like it sounds really colloquial and heuristic, but I mean, it had like 2000s, everyone went to Wall Street. And it resulted in a ridiculous amount of really cool innovations happen. The credit derivatives market started. financialization of housing, etc.

started. It obviously got overheated, and we had our own like UST moment, which is a housing crash. So like there's a double-edged sword of that, but there was so much net innovation created and that's still prevalent today. So the smart people were on Wall Street.

Then in the 2010 to 2020, all the smart people went to big tech and tech startups and we saw the huge explosion there. Everyone's smart. At least to me, it seems like everyone's smart. Once they get hooked on crypto, it's a one-way train there. And no one leaves either.

Like, this is a bare market, usually to say during bare markets, people just leave. People are just doubling down and getting more and more into the industry and building new stuff, even from within the vantage points of TradFi. Like, TradFi is hiring crypto division. Every bank's hiring crypto division. So, yeah, just observing that, it's just the innovation has to happen. It's not like smart people are going to go to an industry and just do nothing. It's such a good point.

It's actually, I think we've used that example in our pitch decks over the years. It's just look at how many smart people are entering this industry. And it's impossible to imagine a world where the innovation doesn't continue when you just have this surplus of talent that's coming in. I guess the only time you leave is when you're kind of wheeled out on a stretcher after like Terra or Three Era. So some people leave, but by and large, people stay. Yeah, not by choice. I'm curious just from your perspective, how do you keep up on all the interesting new things that are happening? You can spend an entire career just looking at Ethereum.

But do you look at these new Alt-L-1s that are coming out? Do you pay attention to pre-launch chains? How do you know what to follow? That's both the blessing and curse of this industry. And it's such an industry of FOMO because there's so many cool things being created all the time. But I'm starting to shift. And I think the whole industry is starting to shift from trying to become jack of all trades and know a little bit about everything to realizing that, okay, we need to really, really hone in and focus on an ecosystem.

And doing that without becoming maximalist and while still saying intellectually curious is really really important. I honestly think the industry is growing too quickly. And there's too many complex things going on to pretend like we know everything about everything. Like you just make priorities. Like for me, the priority is understanding the Ethereum ecosystem and really focusing on it scaling and adoption, which that's the next step post-merge.

The merge was an enormous economic and environmental change for Ethereum. But now it's really focusing on adoption. That's on layer two scaling and that's on business development, onboarding institutions. That itself is of many, many full-time jobs. I watch other L-1s as they come up, but it would take too much focus to be able to become experts on those and help those as well. I like to say I understand Bitcoin, but I'm not as connected to the Bitcoin developer ecosystem.

And I'd love to say, like I hope that there's a lot of innovation on Lightning and hope ZK stuff comes on to Bitcoin Rails. But I just think like we're in a, especially on Twitter and et cetera, everyone seems like, they're an expert on everything, and that's just not how human nature capacity works. So I mean, now the superpower is knowing how to focus on one thing and becoming really good at that and helping that grow. But in terms of information, there just isn't that much info. Like a lot of this is still self-taughts.

I mean, it's literally just scouring through, it's like doing research all day long, scouring through Twitter, scouring through other sources, finding smart people on articles and just learning. And it's almost like that scene in the matrix where Neo gets plugged and they learns Kung Fu. But it's always like that constantly. You're just always plugged in the matrix trying to learn something new, and the important part is not to get overloaded. Yeah, I think that's exactly right. I mean, it kind of reminds me the early days of the internet where you had these funds, these venture funds that were quote-unquote internet funds.

And now that just seems ridiculous because you need to be somewhat specialized. And, you know, I think even now, it's hard to imagine being a professional investor and being an expert in things like blockchain-based gaming as well as like trade execution platforms for CFI. I mean, you're just going to have to specialize to some degree, I think. Yeah, but that also brings back the like what I think the value cases for Ethereum because, you know, Bitcoin, I think actually its strength is its simplicity and it's sort of its resilience in the face of all those nation state macro uncertainty going on. But Ethereum sort of has created an economy. And that's the part, that's why I think it's so interesting because now it's created, people need to be either be experts in NFTs. You can have artists creating their own songs or pieces of digital art. and then earning royalties on that and selling that. You can have an entire, like, you have entire businesses running on ethrails. Decentralized finance is another area that you can grow in.

Blockchain gaming, which is not my expertise, but it's really, really cool. The way that you can actually take digital scarcity, like characters and then use them in games, it's so massive. Like, I grew up playing Pokemon. Everything in Pokemon can be actually NFT and actually made scarce that way. And you can actually create an economic incentives around that. And Ethereum and blockchain lets you actually do that. So, yeah, it just creates so many areas to become an expert in and also brings in all different kinds of users, which that's the ultimate goal.

You want the ultimate, I think you want everyone using Ethereum rails without even realizing they're using Ethereum. I think Ethereum actually becomes universal when no one thinks about it. They're just doing whatever they want to do in applications. And it's just like a great security and settlement layer underneath all of it. Yeah, I think that's very well said. Well, Vivek, this has been great. Where can we send people to follow you online to learn more about what you guys are doing over a bit of Yeah, sure thing. Our beduda website is beduda.io. My Twitter is Vivek Ventures, and that's sort of where I sort of amalgate as many different things that I possibly can. But yeah, it's a hell of a journey.

Well, thanks a lot for coming on. You're a great follow on Twitter, too. So encourage everyone to go follow you. And we'll have to do this again sometime soon. Awesome. Thanks, thanks, Matt. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visitcastle Island. Visit castle island. To listen to all of our podcast episodes, please go to On the Brink-Podcast.com or just click on the tab in our website. Thanks for listening.