On The Brink with Castle Island - Weekly News Roundup 5/8/20 (Paul Tudor Jones, the stablecoin invasion, Cash App's Q1) (EP.77)

Episode Date: May 8, 2020

Matt and Nic review the top stories of the week in the cryptoasset industry. This week's topics include: Renowned commodities investor Paul Tudor Jones announces his intent to trade Bitcoin and releases a Bitcoin thesis NEAR protocol gets funded Are fair launches dead? The under-appreciated merit of PoW issuance Libra's new CEO hire Wyoming's Special-Purpose Depository Institution legislation The privacy-auditability tradeoff in blockchains Whether the growth of stablecoins threatens the security model of public blockchains Thoughts on the imminent halving Our guess of who the next high profile hedge fund investor will be to flip bullish on Bitcoin

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 into Britain's ailing economy with a new round of Concentive Easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called a Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And the number went up again this week. Man, it's a happy Friday. It keeps going up. We're up for eight weekly green candles now, eight consecutive weekly greens. Let's go.

It's great. I mean, the world is kind of crumbling, but the price of Bitcoin is going up. And we got smiles on our face. And this ad is brought to you by CASA, very timely. You got to secure your Bitcoin. How confident do you feel about the security of your coins? Every quarter we hear a new story about an exchange hack, a new exit scam, someone losing their pin. The best way to keep your Bitcoin safe is to hold it for yourself.

And CASA is definitely the easiest way to do that. They have one of the most well-respected teams in the industry. They have amazing design, 24-7 support. They have a bunch of cool features that we're going to be. we've been testing out that are coming down the pipeline. And a bunch of these things previously were only available to ultra high net worth customers. Now they're available to everyone. So if you're ready for security upgrade, you can get started with a membership for as little as $10 a month.

And as a special offer, use the code Castle and you'll get 10% off. Head over to keys.casa. Get that piece of mind that your Bitcoin is safe. A lot of people are going to be thinking about the security of their Bitcoin over the next couple weeks, I'd imagine. Yeah, we might see some newly, uh, you know, minted Bitcoin billionaires here. Bitcoin has done a nice, almost 3X in 2020 so far. Yeah, we clipped, uh, $10,000 last night. Yeah, we, we brush 10K. We're not there right now, but, you know, it's looking good. Bitcoin is a Swiss bank in your pocket. Obviously, take advantage of those nice properties.

Self-custody it. Don't hold it with an exchange. If you're going to self-custody it, use Something like CASA that makes multi-sick easy for regular folks. It's a total no-brainer. So busy week this week. We had a couple of really good interviews on the podcast. You had a really interesting one about Tether. Yeah. So we had Ganesh Viswanath Netraj.

She's a professor of finance at Warwick University in the UK. He did this whole investigation on Tether. Tethers in the news a lot. It's about over $7 billion of Tether. exists. You know, and the big question in 2017-18 was, is tether driving up the price of Bitcoin? There were a few papers saying it was. Ganesh took another look at it. Turns out, based on more sample data, more evidence, it doesn't look like there actually is a causal relationship there. And then he went along and explained exactly how tether price formation occurs, why tether issuance

occurs. Really great paper, really readable, you know, unlike a lot of economics papers. Definitely recommend that episode and the paper. And then I did an episode with Marcos Verimus, which turns out we recorded it a few weeks ago, but turns out to be really kind of a good timing with the Paul Tudor Jones news, which we'll talk about. But Marcos is an MD at Evanston Capital Management, which is large hedge fund of funds. And previously he was a managing director at Cambridge Associates and was leading their whole crypto asset push and co-authored their white paper last year, crypto assets venture into the unknown.

So we talked about just how institutional allocators are thinking about Bitcoin, thinking about crypto assets, what the major themes are in terms of why they get excited about this space. And I guess, you know, out of all the weeks, this was a great week to have that conversation. There was just a lot of discussion

from institutional allocators this week. Yeah, talk about high-profile, you know, money managers publicly taking, Bitcoin positions or talking of Bitcoin. That was the big news yesterday. Paul Tudor Jones and Hayes Hedgefund saying, you know, we believe Bitcoin is a really important play here. We're opening up the possibility to hold a position in the CME futures product. Just a monumental announcement. Yeah, so let's actually just dive right into that. And we'll talk about some deals that happened a little bit later.

But so yesterday, Paul Tudor Jones, you know, it broke with this Bloomberg article that his fund now is long Bitcoin via the, the CME futures. And, you know, I don't think people realize how big of a deal this is. Paul Tudor Jones, Tudor Investment Corporation, one of the top hedge fund managers in the world, one of the best performing allocators, you know, of all time, really. And when he says something, folks listen. So he put out this letter, which was circulating on the Internet and in telegram groups, which was just an awesome letter.

I mean, he just very clearly articulated the thesis around Bitcoin as a censorship-resistant, non-sovereign inflation hedge and referred to the great monetary inflation, the GMI that is kind of driving some of this. What did you think of the letter? It was so good. And like, I've read a lot of cases for Bitcoin over the years. I've written a few. But this is easily one of the best ones.

It's short. It's concise. It gets right to the point. You know, people talk, what honestly impresses me more is like Paul Tudor Jones is considered one of the great commodities investors of all time. And, you know, and he started trading cotton back in the day. And, you know, now they, you know, he does a lot more asset classes. But to the extent Bitcoin is a commodity, having these revered commodities investors,

publicly state the case for it is huge validation. And the letter is really, really interesting. I mean, he talks about how we're in a kind of a regime change here with M2 growth hitting absolutely record levels, not seen since World War II. And we're not in a war right now. So the justification for immense growth in the money supply might be a little less. You know, comparing M2 growth to GDP growth and it's just a really great great letter. So he considers a bunch of different monetary assets, you know, inflation hedges and concludes the Bitcoin is a perfectly valid one. So it and he quotes Satoshi. I mean, really, there's a lot of appreciation for sort of Bitcoin's history and Bitcoin's intellectual heritage in this

letter. So it's really outstanding. I mean, in order, you used to have to go on the Bitcoin subreddit back in like 2013-14 to get a really, like, well-thought-out piece like this. But now it's coming from some of the most revered people in all of asset management. It's just amazing to see. I mean, there's so many parts of this letter that stuck out to me. So there's one section where he's talking about comparisons and the tradeoffs of all these store of value assets, which he lists gold, obviously, being one of them. And he talks about Bitcoin. He says it scores 66% of gold as a store of value, you know, by his metric.

But it has a market cap that is one 60th of gold's outstanding value. Something appears wrong here. And my guess is that it's the price of Bitcoin. Like, how awesome is that? Yeah. And where he goes through the traits of monetary goods, just reminds me of these like posts I used to read on Bitcoin talk and on like the Bitcoin subreddit where you would have like,

you'd list out the different like qualities of a. monetary good, fungibility, portability, liquidity. And in this letter, they do exactly that. They just go through it and say, well, Bitcoin's incredibly portable, you know, relative to some of these other assets like gold. It's quite liquid. It trades 24-7. In terms of trustworthiness, maybe it's not there yet. It's only 11 years old. But, you know, that's an interesting thing to consider. People say that Bitcoin moves too slow, that it doesn't have enough innovation. You know, consider that according to to allocators like this,

Bitcoin has a lot of work to do in terms of trustworthiness. So if anyone ever admonishes Bitcoiners and says the culture is too conservative, just look at notes like this, which emphasize, you know, how the trustworthiness really matters and how you need a lot of time to accumulate before these assets have that credibility.

Yeah, that's exactly right. So another thing he says, at the end of the day, the best profit maximizing strategy is to own the fastest horse. just to own the best performer and not get wed to an intellectual side that might leave you weeping in the performance dust because you thought you were smarter than the market. If I am forced to forecast, my bet is that will be Bitcoin.

I mean, just awesome. So I think that, you know, this is great. It's just one fund getting long exposure to Bitcoin. But I think in the grand scheme of things, it's a huge deal. As I said, he's a tremendously well-respected allocator. I think that this is a bigger type of thing than even if, like, Warren Buffett came out and said that he is long Bitcoin because you're just going to have a lot of macro funds that start to put on positions. And the thing to remember about this is that the

asset class is just so nascent and small, to your point. So at about $150 billion to $180 billion, which is where we're around today, you know, we've only been around for 10 years. Apple has more current assets on their balance sheet than the total market cap of Bitcoin. So, you know, we got a long ways to go. This is really an exciting development. I'd expect that we're going to see Dahlio hop on this train sooner rather than later. He had a nice piece this week, too, that kind of got overshadowed that talks about some of the same ideas and some of the money printing that's going on. It doesn't mention Bitcoin at all, but you could very easily see his thesis lending him to start to put on a position here. Yeah, and I think he's stated in the past that he's not a fan of Bitcoin. But, you know,

regardless, his latest piece, the changing value of money, is really, really powerful. I mean, what we're seeing from a lot of these allocators is just zooming out, looking back into history, seeing what these monetary regime changes look like. And that's what Dahlio does here. You know, he looks at cash and short-term government debt as a means to store value and potentially a really risky way to store value, which people don't really have an appreciation for these days. But there's plenty of cases where sovereign currencies got wiped out in the past entirely wiped, which usually coincided with some sort of geopolitical shift. So basically,

he's arguing that even if it seems like cash is the best bet, it's not always the most stable. It's just not always the best. And he spends a lot of that piece focusing on gold. Gold is a kind of index, a measure of value that's sort of invariant. over time, which lots of Bitcoiners like to do. I mean, I've taken to looking at the price of Bitcoin in gold terms, which to me reflects its real performance, real with a capital R, you know, because if the dollar is depreciating, even if it's hard to perceive, even if it doesn't show up in CPI, that means that BTCUSD looks overly sunny.

Really, it should be BTCXAU is the way that we should be looking at performance. performance. Yeah, that's an interesting point. You know, maybe the last thing from me, at least on this, is two things that I think deserve to be thought about here with this Paul Tudor Jones announcement is that number one is that it passed his due diligence threshold. And so Bitwise put out some commentary about this. I thought was really interesting. So he obviously would not have put his client's money into Bitcoin if he thought it was illegal, like manipulated Ponzi scheme, could be hacked. You know, he put on a personal position a couple of years ago, he mentions, but this is now in the fund. So he's a fiduciary. He's sticking his reputation to this. This is a big deal.

The other thing that I think is interesting and worth thinking about is that he's really, he's really putting the career risk conversation to the side for a lot of managers. So, you know, prior to this, you're thinking about, you know, very early in your career fund managers who were doing this. There's a ton of career risk here. So you're not going to see, it's just like why at large asset managers, you don't see people really staking their reputation on this. A lot of the people that are driving crypto initiatives are younger in their career. They're willing to take the career risk. You don't see people that are making a million dollars a year, you know, go out and start leading crypto incubators necessarily. So this takes that career risk off the table because managers can just say,

look, if it's good enough for Paul Tudor Jones, I mean, he clearly articulates in his thesis. this is our thesis too. So it's a big deal. I think that there's a little bit of a herd mentality here in asset management and now it's safer to hold these views. Yeah, that's absolutely right. It just, you know, a couple of these high profile well-respected money managers coming out and saying nice things about Bitcoin that will turn heads. I think the other thing to remember is that Bitcoin doesn't scale with individuals, with individual users per se. It scales with capital. You know, it's a monetary good. So what really matters is the question. liquidity. This is one way that it scales when people move in in size. It's true. So maybe more on

that later, but let's talk about some of the deals this week. So there's a bunch of them, some token deals. So Andresen Horowitz, which we said raised that big fund that they announced last week, they led a $21.6 million token sale round into NIR protocol, which is smart contract platform, one of these Ethereum competitors. This was a big round. So there's 40 other investor groups that participated, Pantara, Electric, DG, notation, and many others. So, you know, still a lot of capital for these Ethereum competitors. Have you been keeping up on the smart contract platform wars? Yeah, there's at least a dozen, honestly.

I don't know if I can name them all off the top of my head, but it's interesting to see this trade is still so popular. Although I guess if you, if any of these alternatives to Ethereum reach Ethereum size, the payoffs are still extreme, one wonders how they're all going to differentiate if there's a dozen well-funded smart contract protocols that are all competing for the same pool of devs and users. Yeah, my view on this is that the ones that are, you know, if there are to be ones that gain meaningful scale, they're going to have to have to. to adopt money-like properties like Ethereum is developing. You know, these not, certainly inferior to Bitcoin money-like properties, but Ethereum is developing some money-like properties. People are hoarding it, saving it.

Without that developing, it's hard to imagine any of these things reaching critical mass in terms of storing wealth and storing value. I guess not to say that they couldn't be useful as technology platforms. So it could very well be that, you know, 20 of these things exist. and actually deliver great services and slash margins of centralized competitors and they work. But I guess at that point,

the play would be to be investing in companies that are building user interfaces on top of them. Yeah, I think something that is often not appreciated is actually the distributive effect of mining. You know, Ethereum has had GPU mining, even though it had a big crowd sale, of course. A decent chunk of Ethereum

was distributed by mining. In particular, home mining on GPUs, which stayed economical for a long time. In fact, GPs are still economical on Ethereum. And that has this, like, distributive effect. It gets the asset in the hands of lots of people who worked for it, so they're kind of more likely to be, you know, emotionally indexed to it in a certain way. It also means that there's more churn kind of in the set of people. people to own the thing because miners, you know, professional miners have to sell off their

coins to pay their bills. And, you know, virtually none of these new smart contract platforms, these competitors have mining. In fact, I don't believe any of them do. And, you know, they all have to resort either to air drops or just to big token sales and then gradually selling off the coins to try and distribute them to as many people as possible. I think even Ethereum's don't appreciate how useful it was to distribute, you know, however many it was, 40 million ether via mining specifically. If you look on chain, you see, you know, the number of addresses with the balance. Ethereum is really far ahead, you know, just behind Bitcoin, partly because of this proof of work distribution element. And I think a lot of these chains are going to find out that, you know,

the coins will be held just by the VCs that back these things and no regular folks. And that's a big challenge, just distributing the coins. If you look at Stellar, they tried to do tons and tons of airdrops. Mostly the airdrops completely failed. If you look at what people did with the coins, they ignored them or just sold them off right away. So there is kind of a lack of appreciation for how to effectively distribute these coins to a global audience. I think it's such an important point. And it's, you know, can you imagine 10 years from now a Paul Tudor Jones type of person doing an analysis on a monetary asset that is a smart contract platform that's done all these token sales, right?

Like analyzing it and saying, well, you know, 40% of the network was sold to like eight funds in Silicon Valley. It's really difficult to imagine a store of value money property emerging from that. Like it would almost be a non-starter. It just strains the bounds of credulity. How can the world's future monetary asset be owned by a handful of venture funds? It just doesn't make sense, unfortunately. No one's going to go to bat for this thing. No one's going to go to war for this thing.

No one's going to lobby the government, you know, to give a special, you know, tax allowance. You know, no one is going to be religious about this thing. That's just, unfortunately, the truth of it. That's only the case with Bitcoin and to a smaller degree with Ethereum. I don't see it anywhere else. I think the most exciting projects to me are less so the projects that are doing these token sales, although maybe from a technical perspective, these are the most bleeding edge for sure. But the fair launch projects, you know, like something like a grin is a really interesting attempt.

I don't know if you can ever recreate Bitcoin's launch mechanisms. I think people would people would know about it too early. they would start mining it in scale and you wouldn't have that kind of grace period for people to accumulate and CPU mine and FPGA mine before you get to A6. But Grinn is an interesting one. And maybe there are going to be innovations just on how you distribute tokens in a proof of work type of manner at scale. Who knows? Yeah, that's why people talk about the historical uniqueness of Bitcoin's launch and it genuinely cannot be replicated. If you tried to launch Bitcoin today, knowing what we know, people would try and front run that launch. You know, there would be

SBVs set up to mine Bitcoin. You know, venture funds would be trying to scoop up as much Bitcoin as possible. You wouldn't have that two-year period effectively where Bitcoin wasn't monetized, didn't even have a market price. It was 18 months before, you know, the first, you know, Bitcoin trade occurred on an exchange of any sort. The coins just circulated. People mine them on CPUs. That cannot happen again. You know, that's one of the most organic, you know, phenomenon in terms of distributing a monetary good. That's amazing. And yeah, there's been kind of a lot of intellectual morbidity, I'd say, in terms of thinking about how to distribute these coins to a global audience. It really hasn't developed much in the last 10 years, I would say.

And fair launches are totally out of favor right now, which is a shame because they're the only to launch a coin without kind of inbuilt seniorage in a way that all the coins are auctioned for market price. Yeah, we're going to see another wave of these stories about some of the early days of Bitcoin and people who had the faucets like Gavin and Garzik. And every time the price runs up, you see these. And these guys did great things for the protocol, right? They were handing away free bitcoins to people and to developers trying to get people to use it. So I don't think you can ever recreate that to your point. No, the stakes are way too high now.

Right. A couple other deals. So Stellar Development Foundation invested $5 million in ABRA. So Stellar, you know, it's interesting. Stellar buys chain a couple of years ago. They're using developer foundation money to invest in startups. It's interesting. Yeah.

It's funny to see how this is kind of a viable strategy, just printing up and, you know, non-dilutive capital instrument like a token and then using that to acquire actual real equity and real companies. We've seen Tron do it. We've seen Binance do it. It's rumored that part of that coin market cap acquisition was with B&B, the token that they kind of magiced out of thin air. And same for Stellar. Stellar has used their Lumens hoard to great effect. And then two small ones here. So Vbit DC, which is a crypto asset mining company, they raised $1.1 million in seed funding led by Golden Age. And then Ember Fund, which is a non-custodial app for crypto investing, they raised $700K through a SEC registered crowdfunding sale.

So deals continue to keep on happening. I'm sure next week they'll be more announced. You want to move on to some news. Did you see this Square announcement about the monster quarter that they had on Cash App? It just keeps growing. Yeah, they're absolutely killing it on that product. So they generated $306 million in revenue on the product. I think it's like a 7% profit margin, something like that.

It's up from $178 million a quarter before. To me, the big story here is like, if you're a retail brokerage, like, what are you doing? Like, Square is just racking up cash app revenue here. attributable to cryptocurrency. You have Robin Hood making big plays. The liquidity options here are abundant. You can connect to wholesale liquidity providers. You can connect to Central Limit Order books. There's plenty of, you know, execution platforms like a talus that are institutional caliber. And the market is just exploding here with customers who want to own this stuff. And they're going and they're finding alternatives. So blockfi and river and Coinbase are all presumably just

growing exponentially throughout this time period. And meanwhile, the retail, brokerages are just kind of sitting on their hands. It's crazy. Yeah, I mean, I think it's worth noting on these square figures. They kind of report it in a strange way. So this 306 million in Q1, that's probably more comparable to something like gross merchandise volume, in that it kind of represents the total amount of Bitcoin sold through the product. And then what you might consider revenue in the conventional sense would be the spread that they're making on top of that. So it's definitely a flashy figure, but it sort of has to be understood in like accounting context, I'd say. Yeah, it's a good point. It is GMV, I believe. But I think the point still stands that you have these customers that are flocking to these platforms.

The features are getting better and better. And oh, by the way, they're the type of customers that are going to be controlling a lot of capital in the coming decades as intergenerational wealth transfer starts to happen at just massive scale. So if you're at retail brokerage and you're just sort of hoping this goes away, not really an okay career decision, I'd say. Although the brokers seem to be doing pretty well these days. Robin Hood just raised another round. Seems like this stage in the in the cycle day trading has become much more popular among retail. Well, so what I'm referring to is the retail brokerage is like the e-trades and the TD Ameritrates. It's like, what are you doing? You're just get Bitcoin on the platform. People can't get this thing fast enough. And, you know, Paul Tudor

Jones is out there saying it's something he's holding. There's tremendous appetite here. And the new account growth at the Blackfives and the rivers of the world is going off the charts. But anyways, it's all to our benefit to not have them making those moves. So I guess I should stop talking about it. All right, Libra. Libra Association, so the nonprofit group standing up behind the Facebook-led consortium efforts, they hired Stuart Levy as their new CEO. So he joins from HSBC, where he was the chief legal officer. Big time hire right here. So this is a no-joke CEO hire that shows that these guys are very, very serious about pushing this forward. And I wouldn't be betting against

Lieber right now. Yeah, you know, a lot of Bitcoiners give Libra a lot of stick. I think, you know, maybe deservedly so to some degree, but I'm pretty confident they're going to launch here. And more than that, I'm fairly confident that I can launch something which isn't fully custodial. It's not just a PayPal clone. I think they do have the ability to internationalize a system like this. they already have that distribution rails and they've a strong incentive to do it too if they clearly want to capture you know every facet facebook wants to capture every facet of their user bases kind of online footprint whether that's social um you know video chatting um or even like marketplaces or e commerce and so libra is clearly a pretty important part of all that um you know libra could

potentially be a really significant remittance tool. You know, you layered into Instagram, WhatsApp, you know, those are really significant distribution rails. You know, you look at their updated white paper. There's still language in there about third party wallets, about non-custodial wallets. So I'm still cautiously optimistic here. Yeah, I'm optimistic about this too. I think it's competing for a different use case, but I wouldn't be betting against it right now. Along the lines of big hires, so the center consortium, which is the organization behind the USDC stablecoin, which is the Circle and Coinbase joint venture, and I guess others are joining that consortium as well. They're looking to hire a CEO according to the block. That's going to be a big hire too. Yeah, and people haven't really focused much on USC, but it's actually doing pretty well these days.

supplies over 700 million. Tether clearly has the line share in terms of the stable coin market. But USDC is number two. And it's a much more, you know, onshore and banked stable coin, more regulated in some respects. So especially if anything adverse happens to Tether, USDC, you know, stands a benefit. Agreed. And then another piece of news this week, ErisX, which is the spot and derivatives exchange for crypto assets, they received their bit license. So these are very difficult to get. The process is extraordinarily time consuming and not straightforward, to say the least, to be very generous. So congratulations to ErisX on navigating that atrocious maze of a regulatory regime.

Yeah, it seems like we're not going to be rid of it anytime soon, although the banking regulations in Wyoming are pretty interesting. They're trying to cast themselves as an alternative to New York, which is pretty cool to see. Yeah, this will be interesting because we should try to do a whole podcast on this at some point, but Wyoming is trying to come out with this banking framework that would essentially allow crypto companies to operate in Wyoming and get reciprocity on a state-by-state basis, theoretically taking away the need to go state-by-state for money transmission licensing. there's in my mind there's just a very slim chance that new york is going to offer reciprocity to these type of companies they're not just going to say come on you know you're fine in wyoming you can operate here

in new york and so if they don't um i think we're what's kind of going to happen here is we're going probably have a court case and this thing could go pretty high right like you you could theoretically you could see a supreme court case around this Wyoming banking framework and whether or not it deserves reciprocity. Yeah, we'll have a battle on our hands for sure. New York wants to be the first name in banking. They want to be the center. They already are the center of the correspondent banking universe, and they want to keep that crown. Yeah, yeah, they do. So let's move on to some stuff that we read this week, things we've found interesting. I guess let's start. You wrote a guest piece in Ryan Sean Adams's newsletter, Crypto Fiat, Mutualistic or Parasitic.

And you dug into Ethereum and how all of these stable coins are being issued on top of the Ethereum network as ERC20 tokens. And what the implications are for the Ethereum protocol as it gets, I guess, top heavier would be the word. So what's the story here? Yeah. So I don't know if the founders of Ethereum anticipated this. Maybe they did. I know Stablecoins was mentioned as a potential use case. I believe in a lot of the early materials around Ethereum.

but I don't know if they expected it to get this big. So, you know, Ethereum's worth, give or take, it's about $20, $22 billion, like the native unit ether. And then on top of Ethereum, even another about $15 to $20 billion in tokens. And the bulk of that, about $9.5 billion as of today, is stable coins, so dollar-denominated tokens. And these stable coins kind of punch above their weight

in terms of actually being used on the platform. So stable coins at this point way outstrip Ether in terms of transactional value. And like to me, the value being throughputed on the platform is kind of like the most important metric you can look at. So Ether went from having, you know, 95% of market share on its own platform to having 15% to 20% of market share with stablecoins taking up about 80%. So it's pretty dramatic what's happened just in the last year. Stable coins have come to account for a huge amount of Ethereum's transaction value. And the question is, if this continues and these blockchains effectively dollarize with the transactional medium being dollar denominated tokens and not the native units,

and by the way, this critique applies to other blockchains, not just Ethereum, does that kind of impair the security model, which sort of relies on people, actually holding and using the native unit, you know, as a settlement medium, which kind of gets back to our long-running critique of smart contract chains. They could be super vibrant and they could work. But the native unit, people just may choose not to hold it. So in this article, I basically examined this debate. You know, I don't really commit to a certain side, but I certainly lay out the critique.

Have you, this is a tangent, have you seen the representative Hank Johnson, he was a Democrat from Georgia, his video around Guam capsizing? It's just an all-time. Oh, yeah, yeah. His concern was that if you put too many military installations on Guam, the island would capsize. This is sort of, you know, are we going to see Ethereum capsize here as a result of stable coins? Could it capsize if we put too many dollars on it? Yeah, so top heaviness. So top heaviness is this worry that like let's say the ratio of tokens on top of a blockchain to the value of the native tokens is five to one or 10 to one. Is there then, because, you know, remember that the security

spend is a function of the value of the native unit. But if that relatively small native unit is securing a large amount of kind of collateral circulating on the platform, does that delta become exploitable? And you can think of it in terms of like a bank vault, which is full of stacks of gold, but the walls are really thin, right? So the walls of that vault are a function of the value of the native unit. And if people are just using the system to move around non-native units and not holding the native unit. In theory, the native units, you know, not really appreciating very much. And so the security spend isn't growing. So it's a really interesting question. Actually, I found out yesterday that Tron has this top heaviness ratio over one. So there's more tether

on Tron than Tron is worth. People don't know this. Yeah, this is a new phenomenon. So Ethereum isn't there yet. I'm sure it'll get there. But yeah, you know, I think what these smart contract platforms are going to look like in the future is a lot more non-native assets circulating on them than the native asset. The question is, does that introduce new sort of security risks that people haven't even considered? Is that even within the scope of the risks that the designers of these systems were forecasting in the first place?

I think the answer is no. So it's a pretty interesting time. You also talked about just fee abstraction. So what's the, maybe explain what that is and then what's the latest conversation in the Ethereum community around fee abstraction and how they're protecting against that. Yeah. So if you compare blockchains to like sovereign states, you know, one reason that the dollar has values because taxes have to be paid in dollars. And the government also creates those tax liabilities by effectively forcing you to pay taxes. So that's $3 trillion worth of buying pressure for.

dollars every year. You know, you have to have dollars to pay taxes, so you might as well hang on to some dollars, right? So it's kind of the same thing for Ethereum. You have to pay fees in ether, even if you're moving around something else, like a stable coin. And so in theory, that is the driver of part of ether's value is, well, you have to buy ether to pay fees, so you might as well hold some ether. There's a risk, though, since you can pretty much, you know, do whatever you want with these Turing complete blockchains, someone could probably devise a way to pay fees directly in tokens, in stable coins, which seems like it makes a lot of sense. Like, imagine going to the bank and trying to send a wire and they say, all right, so this wire is denominated in dollars,

but the fee for the wire transfer, you have to pay it in the bank equity. You might be like, no, I just want to pay the fee in dollars. It doesn't make sense to have to juggle two currencies all the time. So if fee abstraction happens, then it kind of erodes that part of the value proposition. However, the Ethereum community is pretty awake to this threat, actually. So they're really keen to make sure fee abstraction is basically not possible within the protocol rules. And then the question is then, does that open the space up?

competitor which has abstraction built in and says, look, it's just more convenient to use our chain. Are there any competitors that fit that bill yet? Honestly, I haven't looked, but I'm sure there are some that thought about this design constraint. I mean, a stable coin, for instance, which, you know, basically a protocol, which is a stable coin by design, those certainly exist. That would have abstraction built in, of course. I guess that it would be difficult. I mean, ideally what you'd want is a smart contract platform that is just built with a non-sovereign stable coin, but those don't really exist, right? Like something like a base coin theoretically could fit this.

That's what basis was. Yeah. C-Lo is an example. Terra. Yeah, I mean, there's a few, right? But, yeah, obviously there's challenges in targeting the return profile of the dollar. That tends to require pretty active, you know, monetary intervention. Yeah. Another article that I thought was really good this week was by Nick Prince, who's at Coinbase. He wrote a piece,

Where are the institutional investors in crypto, demystifying the ever-elusive wall of capital. So this was a good read. And I think pairs really well, actually, with the podcast that we did with Marcos this week. So it just kind of lays out the considerations of institutional investors, how they work, what their process looks like, fund structure. So I'd recommend checking that out. You like this one, right? Yeah, it's really good. Nick's a really nice guy. and it's a very useful piece. I mean, people talk about institutional investors, you know, sometimes without really having a firm understanding of what they are. Nick really goes deep in explaining what they are, how the investment process occurs, who are these institutional investors? What do they look like?

And what are their considerations? So it's a really great piece. Another piece that I enjoyed this week was from Bitwise. So they published the case for Bitcoin in an institute, portfolio. Good timing on this one, too. So there's a couple of highlights. So the paper shows that Bitcoin would have contributed positively to a diversified portfolio's risk-adjusted returns in 74% of one-year periods, 97% of two-year periods, and 100% of three-year periods, dating back to 2014, assuming you quarterly rebalanced. And it was also interesting that they said, you know, the size of

that positive impact has been significant. So on average, if you do the quarterly, rebalancing, a 2.5% allocation to Bitcoin would have boosted three-year cumulative returns by about 15.9 percentage points. And even if you bought at the highs, so for instance, an investor who first allocated to Bitcoin at an all-time high in December of 2017 and held throughout would have had a modestly higher cumulative in risk-adjusted return than someone who didn't, despite the fact that Bitcoin went down 67%. So that's driven actually. by the fact that Bitcoin has low correlations to other asset classes. So a really thorough read here.

A lot of work went into this. And it kind of reminded me of the Berniske-Adam-White collaboration a few years ago just around how Bitcoin acts within an institutional portfolio. Yeah, and keep in mind, the big assumption here is rebalancing. And what rebalancing actually means in practice is dip-buying behavior, right? you know, continually deploying into these strategies. Because if you think about like a traditional portfolio with Bitcoin in it, you buy Bitcoin and it declines and you have some target allocation of Bitcoin, rebalancing implies that you would need to keep deploying into Bitcoin, right?

So that is inherently kind of like a dip buying behavior pattern. So it kind of stands to reason that you would have outperformed doing that. you know, assuming that you have a long-term positive view on Bitcoin. Yeah. Yeah, exactly. And then the other thing I wanted to get your perspective on this week is this Forbes article. So Zcash, man, what the hell is going on here? So Forbes had a piece on Zcash and in a profile of Zucco. You know, Zucco's great. He's one of the original cyphor punks. He's a real pioneer here. Zcash obviously is, you know, the whole thing they're going out. after is we have a network that has enhanced privacy features. It's theoretically better than Bitcoin

on some of those features. Bitcoin is much more traceable. But it looks like Zcash commissioned the RAND Corporation to do a study of how Zcash is used, really with the idea that they wanted to prove that Zcash is not being used for illicit activities like buying guns and drugs and things like that. And not surprisingly, this commissioned report that they paid for came back and said, you know, Zcash is not really used on drug marketplaces that much, and Bitcoin is far more used. And so there's sort of this victory lap being taken right now from the Zcash folks. But to me, this is like totally puzzling because basically they just commissioned a full report to say people don't really use Zcash here. I mean, the reality of it is if Zcash was all that useful, if people wanted to store wealth in it, then it would be used for both legal and illegal activities.

And basically what this shows is just not a lot of people are using it. Yeah, a little bit strange for sure. I think, you know, if you look at what's used on dark marketplaces, the report is totally right. Basically, Bitcoin is still the dominant asset there. And Minero is also used. The thing about privacy is you kind of also need meta privacy, which is the ability to have plausible deniability. So to the extent you can, you know, you have strength in numbers, the largest, you know, the largest. Assets with more users generally offer more privacy because there's just a bigger crowd to hide in. And so if there's relatively few transactions, relatively low activity, you don't have a lot of privacy. So it stands to reason that Bitcoin would be the most popular asset for dark marketplaces, even if it's more transparent. You know, however, I would say one point Zcatch's favor is the shielded pool, which is the fraction of supply, which is truly

transparent or truly kind of encrypted and you know in like the traditional meaning of the sense is up to about 440,000 Zcash. So that's basically an all-time high. You know, that said, they still have relatively

few shielded transactions per day. And you know, that's the issue I think is that the tooling and the wallet's software to use Zcash in a shielded way still relatively underdeveloped. So it makes sense that they're not as popular yet

in terms of actual privacy usage of the platform. One thing that I don't hear a lot of people talking about with Zcash is just that bug that happened a little bit over a year ago where we don't have a good sense of what the total supply could be. There's a theoretical possibility, and correct me if I'm wrong on any of this, that the shielded pool is actually a lot larger and that there'd been some inflation bug. And there's really no way to audit the supply without having a turnstile mechanism where

everyone in the shielded pool kind of comes back in and then goes back out. So in terms of the confidence for Zcash to emerge as a non-sovereign store of value, I think that really compromises it, at least in my opinion. I just don't know how aware people are of this bug. and, you know, if people care or not. But to me, it's like a non-starter that this thing could even reach, you know, half of Bitcoin's level, call it, just based on the fact that we don't know how many Z-cash there are. Yeah, I mean, I think the actual possibility that the bug was exploited was pretty low because it was a, you know, a typo in a, you know,

really intense cryptography paper, which was the cause. And there's probably only a couple dozen people in the world that actually have the ability to understand that stuff. So I'd say just on the balance of things, it's unlikely that was actually exploited. But yeah, the points well made. If you look at virtually all the privacy implementations and all the privacy coins that exist, they virtually all had an inflation bug of some sort, whether it's been exploited or not. So bytecoin had an inflation bug exploited, you know, crypto note. which is the protocol that Manero uses has had inflation bugs, although I don't know if they're

exploited. Even Bitcoin's had inflation bugs. But just the problem is that with a privacy coin, it's kind of much more dangerous because you quite possibly don't know that the bug, the inflation bug has occurred. You don't have the ability to audit supply. And that's something I never want to trade off against for Bitcoin. I always want to be able to audit supply down to the last Satoshi, you know, find out if inflation has happened so we can remediate it right away. If covert inflation happens, then it's like inflation with the dollar, everybody gets devalued at the same time and the people that are conducting the inflation benefit. So, you know, unfortunately, strong privacy kind of trades off against that ability to audit

supply, which is, you know, not the most desirable property. Yeah, so I guess I'll take privacy at the wallet level. It seems like a better trade-off to have, you know, coin joins and things like that and to be able to fully audit that supply. To me, that's where I come out now. I mean, several years ago, I would have maybe thought differently, but this is a critical issue, really, around auditing the supply. And, you know, there's all sorts of approaches to privacy, right?

You know, through sidechains, you could do something like a Chami bank, right? You're zero knowledge mixers live on Ethereum right now. So, and obviously, you know, Bitcoin has a few fairly sophisticated coin join tools that exist. So there are ways to build privacy enhancing technologies on, you know, these larger, more developed assets already. There's no like silver bullet for.

privacy, but there's certainly ways to enhance privacy in certain cases. All right. So I think that's, uh, that's it. Um, it's Friday, which means, um, you know, cooking up some meats. What do you have, uh, on tap for the weekend? So today I'm going to experiment with smoking some ribs in my, I actually don't have like a dedicated smoker. Uh, I do have one of those Weber grills.

Apparently you can do it in a Weber grill. Um, so I'm going to, I'm going to experiment there. Oh, that's good. Yeah, it's intertwined with Bitcoin culture. And this is last Friday before the having. So you have to celebrate it is. What are we going to do for the having? So the having is going to take place on Monday, it looks like.

Yeah, it's kind of anticlimactic because everybody's stuck in their homes. But there's a lot of events happening in like live streams and so on. But yeah, I mean, in the grand scheme of things, it's not really that exciting. Well, enjoy the last weekend of 12.5 bitcoins coming out every 10 minutes. It will never happen again. Yeah, we're going to be in a 6.25 Bitcoin world from now on. It's a good day. We do need that fee market. Yeah, I mean, I'm like, I'm kind of nervous about the having, you know, A, I think it's potentially news selling event, you know, no two ways about it.

B, the fee market or the block space market is going to need to kick into gear at some point. That's just the truth of it. Hey, don't bring me down. We got a lot of moon juice this week. We got Paul Tudor Jones. Ray Dalio is just about there. There's a lot of good things happening this week. We should create a pool based on who's the next high profile hedge fund investor to flip bullish.

I want to say like maybe like Drucken Miller would be. one. Yeah. I think it's either Drunken Miller or Soros or maybe, maybe Dahlio. Yeah, Soros likes currencies. He, like, he should be pro-Bitcoin. I mean, these macro guys, they just get it, right? Like, they see it.

Novigrots, you know, Dan Moorhead, Raoul Paul. These guys get it. And then some of them become the biggest and loudest advocates for Bitcoin. It's amazing. By the way, you know who got it even earlier than those guys is Bill Miller. He was all over this pretty early. Well, it's becoming much more defensible to be a Bitcoin Bull. It's not just the purview of nerds and libertarians anymore.

It sure is. We've come a long way. All right. Well, everyone, have a great weekend. Enjoy the last weekend before the having, and we will see you next week.