On The Brink with Castle Island - Weekly News Roundup feat. Lucas Nuzzi 08/14/20 (Asteroid gold mining, Microstrategy, Ethereum's "supplygate") (EP.112)

Episode Date: August 14, 2020

Coin Metrics network data product lead Lucas Nuzzi joins the show to help explain how to audit the supply of Ethereum – and other, even more challenging blockchains. Also covered in this episode:  Does the Winklevoss gold asteroid mining talking point have any merit? Are the Winklevii being ironic or sincere The Boston Fed is hiring crypto engineers Why DeFi tokens remind us of PoW launches from 2014 Why we need a new taxonomy for autonomous fair launched DeFi tokens Why DeFi might not herald a resurgence of the ICO phenomenon Microstrategy surprises to the upside Facebook focuses on payments ETH supplygate explained

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 I notice that you're drinking out of an unsanctioned Washington R-Words coffee mug right now. Yeah, this mug is contraband now at any moment. The NFL commissioner is going to confiscate it from me because it has what is now, you know, an illegal logo on it. So the Washington football team, that's it. They're without a name.

No identity. Well, I hope we have some football. It looks like college football is just not going to happen. Maybe we'll have NFL on Saturdays. I think they have to do that bubble thing if it's going to happen. It's hard to see that working. Yeah, because there's like 60 players on an NFL team and staff. Yeah.

But it doesn't matter, actually, because my team basically doesn't exist anymore. Well, you can feel free to join the fandom of the Patriots if you'd like. No, thank you. All right. Well, talk about a busy week. I mean, a lot of stuff happened this week, huh? Some of the stuff that happened this week just defies comprehension, too. If you took a nap for 48 hours, you would have woken up and just been like, what on Earth just happened here? So many things this week are just like, what this project yams? Winklevoss twins are talking about asteroids on golden asteroids. Yeah, yesterday in particular was a very strange day.

All right, so there's a lot to talk about, but before we do, let's talk about BlockFi. BlockFi is the sponsor of this episode. They're also one of our portfolio companies. BlockFi has a suite of services. They started off with crypto loans where you can get a collateralized loan, park your Bitcoin, park your Ethereum, get a U.S. dollar loan. They also have interest-bearing accounts, which is just an awesome feature to get a monthly interest. statement to say you have more Bitcoin or more Eith, that's just a good feeling. Yeah.

And you know, some of our listeners might be listening right now and they might be thinking themselves, man, Matt and Nick are such clowns. How could they possibly support credit creation on top of Bitcoin? But honestly, I think credit is the driver of civilization. So I am not a Rothbardian. I totally support lending and credit creation as long as it's accountable. And Bitcoin happens to be the best collateral ever, super auditable. So I actually don't have a problem with it at all.

It is. It is the best collateral ever. BlockFi is also rolled out trading. So retail trading is now something you can do, move easily in and out from US dollars. And they have a wealth of products and services for institutions as well. So it's really a full service brokerage and market leading position in the lending space. So check out BlockFi. Head over to BlockFi.com to get started. You can get $50 worth of Bitcoin when you refer a friend and check it out.

All right. So what went down this week? What's the first crazy thing that happened? Well, why don't we talk about the Winklevoss twins with Portnoy? So founder of Barstall Sports, Dave Portnoy, Davey day trader, sitting at home, you know, just trading stocks. It's become a huge phenomenon, you know, the Robin Hood effect. And of course everyone has just been chirping him, you know, get Bitcoin, start buying Bitcoin, talk about Heath. And so he had this thing a couple weeks ago where he said if the Winklevoss twins came to his house and showed him how to do it, he would get involved.

And they did. He specified the condition that they roll up in their rowing outfits. and they did not. They're not in their wrong outfits. I mean, they're wearing some pretty interesting matching outfits with some like neck scarves. But to their credit, they did show up to his place and explained, I don't know if explained Bitcoin is the right way to put it. Yeah. So they sort of walked him through Gemini, you know, told him that it was basically a brokerage account.

then they sort of got into this asteroid. Do you want to talk about the asteroids? I feel like that was the biggest part of it. Yeah, and like a lot of people are really mad about this. Like a lot of Bitcoiners was super mad about it because they felt that Winklewey weren't the best emissaries of the crypto industry. Honestly, I think they're fine. Like, it could be a lot worse.

But they spent a lot of the time talking about why gold is, you know, potentially on the precipice of being worthless because of the possibility of asking. asteroid mining gold, which, you know, because there's trillions of gold out there on various distant asteroids. And if we somehow managed to drag those asteroids back to Earth that could potentially dilute the Earth supply, which for the record, something like that actually did happen when we discovered the new world, well, we, you know, the Europeans.

And they basically made all of the locals mine gold for them. I mean, it wasn't great. Like, there was a lot of slavery involved, but they extracted a huge amount of gold and silver from the new world, brought it back to Europe. That caused rampant inflation. So there's actually historical precedent for this. So basically, the Winklewey posited that this could happen on a grander scale if Elon Musk started mining the asteroid belt for gold, which honestly isn't totally outside the realm of possibility.

and Davy Daytrader was just completely perplexed by this. But to his credit, he bought a whole bunch of Bitcoin, so clearly something that they said resonated with him. Yeah, so this is something that, so these guys had written a, one of the Winklevoss twins had written a post on Reddit back in like 2014 about how there's plentiful amounts of gold on asteroids and that's a big risk.

and people kind of thought that they were crazy. I think people, including Portnoy, thought that they were crazy for this. But I think there's kind of like degrees of crazy. And this probably wouldn't have been the way that I introduced Bitcoin by just talking about Elon Musk hopping on an asteroid with a Bruce Willis and Ben Affleck and just mining up a bunch of gold. But they do have a point here, right? Like there's plenty of gold out there that I'm sure at some point people are going to figure

out how to harvest. Well, I mean, honestly, if you really dig down into the economics of the question, I don't think it's the best point. You know, like I think the problem, as Larry White pointed out, the probability of gold a gold bonanza based on asteroid mining should be incorporated into the price of gold today. So, you know, let's be clear. Like the market knows how to price these things, maybe. But I mean, I was kind of perplexed by this too because I thought they were being ironic just to like get a rise out of him. But what you're saying is they're totally sincere about this. Oh, no.

Like they are dead serious. So I'll have to go find this. But I distinctly remember 2014, 15 time frame. One of them wrote this very long Reddit post just talking about the likelihood that there would actually be gold mined off of asteroids. And then they deleted it because people are like, you're freaking crazy. Oh, so these guys actually, they totally believe this. This is earnestly part of their pitch for Bitcoin. Yeah, no, this is like real. This is real. Oh, man, I thought it was a bit. I thought it was a bit to like mess with him. No, this is not a bit. This is not a bit. Wow, that makes it much, much better, actually.

Yeah, no, they believe it. They're very genuine about this. I think they've got me somewhat convinced on it, too. Wow, that's great. Anyway, honestly, I watched the whole clip because it's one of the funniest things I've ever seen, in my opinion. It was really good. But then they're talking about like chain link and a bunch of other stuff with him. So he might be going pretty hard down the shit coin trail. I don't think anybody's like that shocked that he, you know, immediately bought chain link. he doesn't have a reputation of this most discerning trader, you know.

Yeah, that's true. But he is a profitable trader. Do you want to talk about the podcast we did this week with James Lovejoy? Yeah, this was definitely one of the more wonkish podcasts we've done. So, you know, James, good friend of mine, he actually used to run the MIT Bitcoin Club. he's the founder of vert coin not the founder sorry lead maintain it for vert coin and uh verk coin's claim to fame is asaic resistance the other claim to fame is it gets 51% attacked a lot those two things are related and maybe because of that experience james became very interested

in detecting 51% attacks which to his credit he then did detect a bunch of 51% attacks including on Verkoyne on his own coin. So he did this great project with the MIT DCI to assess the finality of proof of work on a bunch of different blockchains, which is like a really big open question that we don't have a lot of data on. And so I brought him on the show to talk about the issues with proof of work, whether he still thinks ASIC resistance is a good idea, even after it caused a lot of chaos on his own project. and if you're into proof of work, there's an amazing amount of scholarship in that field,

both from academics who miss things a lot and then practitioners who kind of point out the holes in their logic and James straddles the two. So I thought it was a great podcast. The other thing I'll note is that the Bank of Canada, kind of very timely, they also wrote a Bank of Canada, they love crypto. I don't know what's going on. with their they write some great pieces there's so much crypto coverage there so they wrote this paper saying why fixed costs matter for proof of work based cryptocurrencies which was something we 100% knew like

that's the whole point of asex uh is that a6 you know they align long-term incentives and but the academia had kind of ignored this for some reason and even though there have been lots of um kind of blog posts in papers emerging from the industry pointing this out, the economists that write about proof work had never really figured it out. So now it seems like that information is percolated through to the academic side. So this paper makes a point that we in the industry have known for a long time, but I guess it took a while for the big brains to kind of grasp it. So after this podcast came out, I don't know if it was related or not, we can hope. James is hired by the Boston Fed. Yeah, so the Fed is now hiring crypto people. So maybe we've come full circle or something,

but it turns out that crypto developers are in super high demand from the legacy financial system. But, you know, everybody's focused on a central bank digital currency these days, so it makes sense. Yeah, so the Boston Fed actually announced a partnership with the MIT digital currency initiative to explore central bank digital currency. So Bob Bench over there, and his team are doing a lot of work in this space. Yeah, there's a bunch of ex-crypto industry folks over there with the Boston Fed. So maybe they will displace the Bank of Canada as the most progressive central bank when it comes to crypto.

All right, let's do a couple quick deals. So a lot of stuff happening in the decentralized finance space. So one inch, which is a decentralized exchange aggregator, they raised $2.8 million from Binance, Galaxy, Libyris and Dragonfly. And then we had a Dersify, which is an Ethereum exchange that is spun out of Bitfinex. They raised $450,000 from D1 and Parify. So you want to talk about some defy stuff?

Yeah. It seems like the only deals that we ever announce these days are defy related. I don't know what's going on there. Maybe because the defy sector is exploding at a completely incomprehensible, right? That could be it. Yeah. So let's talk about. I want to talk about yams, but I want to talk about that in a context that people will actually

understand. So is that even possible? Well, to understand yams, you have to understand ample fourth, I guess. So yeah, I guess the answer to your question is like, no, like you need a huge amount of context and sort of introductory reading material to really understand this stuff. But, you know, the long and short of it is in 2014 to kind of 2016, we had these proof of work fare launches where, you know, someone would fork Bitcoin. And instead of pre-mining a bunch of the token, they would just say, here's the code, have at it. And fast forward today, the same thing is happening, except instead of burning electricity or using GPUs, you allocate some liquidity to a pool and you get a claim on some new tokens that way. So you're not sacrificing electricity, you're sacrificing opportunity cost or the cost of capital. And so that's the new way to do a fair launch.

And so Yams was one of these fair launches, but it attracted a staggering amount of capital within a couple of days, something like 400 million value locked in this contract. And maybe you could say that these launches today are more valid because in some cases there's already products that are functioning. And so then the token is a claim on certain cash flows potentially, or it's a claim on the governance ability, whereas the prior proof of work fair launches and 2014 era were just mostly, you know, here's a new coin, maybe it'll catch on. So potentially the ones today are slightly more valid, but it's kind of the same incentive. Like there's nothing new under the sun. It's basically, well, fair launches are exciting because nobody has a huge structural advantage. and, you know, anybody can participate, basically. It's just that the method of participation is different.

But in the case of Yams, it actually failed catastrophically due to kind of unaudited code. So, you know, it didn't end great. But, yeah, there's a lot of others that are kind of similar. Yeah, so basically it looks like the code was a mix between a fork of ample fourth, which, as you mentioned, another project. trying to create a base money.

And then it looks like they took some of the code from compounds, governance, a function, and maybe a few other projects. They deployed it. It got up to about $450 million, if I'm not correct, and collateral. And then kind of collapsed to zero when this bug was found, and everyone needed to rush to get their collateral kind of moved. So did we just start with, like, what's the point of yams? Like, why, what was the idea here?

There's no point. There's no point. I mean, like, it was like a proof of concept. Actually, I was on Clubhouse last night, which is a great app, by the way. You know, feels great to be in the Cool Kids Club, got to say. If anyone wants to throw me a Clubhouse invite, you know, it's just shoot it over. So there's a big crypto presence in Clubhouse land. I don't know why exactly.

But so we were trying to devise a name for these things because they're not like Ponzi's exactly. because they're like they're they're sort of autonomous in a certain way and so we're trying to figure out where they fit in the taxonomy of like ponzi's and pyramid schemes and MLM schemes but you know there's definitely some like less salubris elements to all this because generally speaking the earliest participants are rewarded at the expense of the latest the later participants but in some cases they really are just code. So it's questionable how much responsibility you would say the people who deploy that code actually have. They sort of take on lives of their own.

So I think we need a new term for whatever they are. It's hard to look at this and not just get the feeling that this looks a lot like the early days of the ICO phenomenon, right? Yeah. It has that look and feel to it. Yeah. I would say I would be skeptical that this would grow to the same. size and stature as ICOs did. Like, it would be hard for me to imagine any one of these taking in $4 billion over a year-long

period the same way EOS did. I could be totally wrong. But there's a couple of gaining factors here, I think. So one is it's quite complex to actually get involved in, for instance, using uniswap or using curve, engaging in any of these. liquidity mining events or people call it yield farming, which is not a great term. It's difficult and it's challenging and it's like it's fraught with risk as well because half the time, you know, these things fail catastrophically, right? So that's one getting factor. It doesn't seem to me that

there's a lot of new capital being pulled into defy because it's a very complex value proposition to explain to people. And also a lot of people who would potentially be the buyers of this stuff got burned investing in ICOs the first time around. And with ICOs, all you did was just send Ethereum to an address, basically. So that was much simpler. And also, you know, with ICOs, like, oftentimes you could just buy them on exchanges. In this case, the exchanges are, you know, it's a constellation of dexes and automated market makers, which is, again, much more complex to get involved in. So I do think there's kind of a fundamental gating factor, which means most likely this defy token phenomenon actually does not grow to the same scale as ICOs.

Yeah, that's a good point. It'll be interesting, though, to see it, you know, there's a lot of people that are starting to use uniswap for the first time and start to get interested in this stuff. So it'll be interesting. What do you think the impact is on the other sort of Ethereum competitors? It's clear that all of this is happening on Ethereum. Do you think that there's a play for any of this to be built on any of the other

smart contract platform? Well, it's challenging because liquidity is such a strong network effect, and it's not just liquidity, but it's like the interlocking contracts, which all reference each other. And that's extremely strong network-wise. But there's the one thing that these other competitors have going in their favor is fees on Ethereum are pretty monstrous right now. And I'm not like a fee-concern-trol. I actually think high fees are generally really good for public blockchains. But, um, I'm, I'm not like a fee-concern-trol. I actually think high fees are generally really good for public blockchains. But, um, Yeah, I mean, the fees have been pretty outlandish recently. So as we saw with Bitcoin in 2017, at a certain threshold for fees, people start to use alternative chains as spillways. So you can track light coin transaction count and model it versus Bitcoin fees. You could see that a certain threshold, people spilled over to light coin or Bitcoin cash. And they just started using alternative block space. And block space is a substitute good.

So it's not perfectly fungible, but yeah, there's plenty of other projects which are close enough to Ethereum that you might think that investors would start to use them as an alternative. But again, they don't have this rich patchwork of contracts. So there's like high fixed cost to getting started, I guess. Well, the story that I thought was going to be leading the news round up was micro strategy again. Yeah. This is just breathtaking. So last week we talked about it. And last week what we were reporting on the roundup was that they had a Q2 earnings call.

And Michael Saylor, the founder and CEO of the company had said they would be diversifying their balance sheet assets to include things like gold and Bitcoin. And really with the idea that the dollar, they were worried about inflation concerns. And to be honest with you, I thought that maybe this would mean they would go and buy like a million dollars worth of bank. or something like that in a budget gold. I had no idea that this was going to be announced. They have purchased 21,454 Bitcoins for $250 million. So their total kind of cash in short term equivalence was $350 million. They just went out and they just bought all Bitcoin.

Like what was your reaction when you saw this? Yeah, this is probably the most bonkers thing that happened last week. You should give yourself a patent back. You were the one that were, you first pointed out that they were musing about doing this before we knew the scope of it. Yeah. So I, yeah, I'd read their Q2 earnings call, which again, it's just like so funny because, you know, they're going through the reading the can statement. And Michael Saylor goes in, he starts talking about we're going to diversify out of cash. We think that all this money printing is a big problem.

and we think that long-term treasury management, we should hold things other than U.S. dollars. And just like a really alert, kind of comprehensive view of why Bitcoin matters. And then he says, we're going to buy some Bitcoin. And so it's like, hey, this is a publicly traded company, you know, it's $1.2 billion market cap saying they're going to buy some Bitcoin. And then they open it up to questions and not one question from any of the analysts about Bitcoin. It's like they weren't even listening to this guy. And then a week later, they go off and they buy $250 million.

worth of Bitcoin have basically turned this stock into like a Bitcoin stock. It's the stock went up 15% the next day. And it's like kind of funny because if you really want to hedge against inflation, you can just buy inflation protected securities. So like I don't think that's the whole story here. I think the CEO became incredibly orange-pilled at some point, just had an awakening. And he realized that his role, you know, in this. in this world was to be an ambassador for Bitcoin.

And he wanted to use all the considerable resources at his disposal to do something with immediate impact. It's kind of crazy. So I think I actually misspoke when I said the total cash in short term equivalents. It was $530 million, not $350 million. And that was the end of Q2. There's a couple of other things just to note here. So one question that I want to get your.

kind of perspective on is just if you're a shareholder in this company, are you happy about this? You know, do you really want to have a Bitcoin play or are you investing in this operating company? But before we do that, you know, it doesn't really matter because Michael Saylor, he owns 23.7% of the company, but he controls 72% of the voting rights. So he really can unilaterally make this move. I mean, if he wanted to put all of this into chain link, he could very well do it. so happens that he's really knowledgeable about Bitcoin and, you know, appears to get it. But I guess is this a good idea? Well, if I'm an investor, I did my diligence based on their software business. And now all of all of a sudden, the company's fate is much more indexed to Bitcoin than it is

their core product line, which is pretty bonkers. I mean, from what I understand, it wasn't like the most dynamic business in the world. But so what this is done, it means that the stock is going to get a lot more volatile because now it's partially indexed to Bitcoin. And it took this kind of sleepy business and it made it heaped on a bunch of risk, to be honest with you. And if Bitcoin goes up enough, it becomes a de facto closed-down Bitcoin fund, you know, as the balance sheet. the Bitcoin held on the balance sheet kind of eclipses everything else in significance. So maybe that's the plan.

I mean, maybe the plan is to, you know, gradually taper off the core business and then become a de facto publicly traded Bitcoin investment product. Maybe that's kind of the master plan. Well, I'll say this about micro strategy. I had never heard of the company before. I've been talking about it nonstop for the past two weeks. So their like awareness level has probably gone up pretty. I will point out that I did know about them because I used to live in Tyson's, Virginia, where

they are headquartered. So, Tyson's, for the record, not a nice place. It's like a glorified office park. But it is the number one tourist attraction in Virginia because it has an enormous mall. So, yeah, that's a fun fact about Virginia. The number one tourist attraction in Virginia is a big mall. So maybe just to close out on this. So I agree with everything that Michael Saylor said in all of these comments and this press

release around his thesis for why Bitcoin matters and why people should have some exposure to it. I think the question of whether or not that should happen on a corporate wrapper is a totally different issue. But we've seen this a lot in the private market. So there's plenty of companies in this industry that have Bitcoin on their balance sheet, that are venture-backed companies. Some of them have been really successful.

And they've bought that Bitcoin at insanely low prices, and now they're sitting on enough cash runway to last a lifetime. Like Blockstream comes to mind there. But there have been some other just complete disaster scenarios. There are companies that bought Bitcoin at kind of a local top and went through a two-year hellscape when the price collapsed, and they basically were laying off 90% of their workforce, right? So I'm not going to name any names, but this is a double-edged sword.

Totally. It'll be interesting to see what happens with a publicly traded company. Yeah, and we don't typically recommend that, in fact, we absolutely do not recommend that the startups in our portfolio hold crypto assets on their balance sheet because the entrepreneur's job is to manage and deploy capital. It's not to become a de facto hedge fund. So, you know, those are totally disparate skill sets. Certainly a curious move. But, you know, Michael, if you're listening, feel free to come on the show. explain your reasoning.

You know, I'm sure he's got a lot of podcast requests already, but open invitation coming on the brink, explain your thinking on this. We'd love to have them. We'd love to have them. All right. So another story that I wanted to call out this week was Facebook has launched a new group called Facebook Financial to oversee, quote,

all things payments at the company. And it's led by David Marcus, and it includes the Libra group, which is now called Novi. So my take on this cynically is that moves like this to further integrate WhatsApp, Instagram, and Facebook, the original Blue app, just makes it a lot harder for a regulator to go to Facebook and say, you know, break up WhatsApp, break up Instagram, separate these things. So cynically, I look at stuff like this and say, this is just sort of a regulatory move to kind of keep the business compiled as one. Honestly, if you look at the antitrust wins in the U.S., what we've seen from policymakers on the antitrust front is incredibly weak. So, I mean, you know, I wouldn't be sleeping soundly if I were faced, but from the antitrust perspective. But their opposition is so completely disorganized that I don't think we're going to see any big antitrust for a while now, unfortunately.

Well, so speaking of that, did you see this Fortnite thing that happened yesterday? So Fortnite has been de-platformed by the Apple App Store and the Google App Store for basically violation of their terms of service around the fees. And so I think we're going to start to see some real murmuring about why don't we have third-party app stores on the iPhone. Yeah, it comes down to platform property rights. And this was a big argument for Web 3, but I think what Apple does to cultivate their App Store environment is much more complex than anything that exists on Web 3.

But are you just a client of some entity that owns all of the real estate? Or do you have a genuine claim to that platform? And clearly with Apple, you're just, you're a vassal of their system. The Fortnite is the biggest company to run into this fight, I think. I think they're going to push back pretty heavily. They're already putting out commercials to take shots. at Apple. All right, so I want to kind of go back, actually, to talk a little bit about Ethereum. This is not Defi specifically, but last weekend, it feels like it was months ago, but last

weekend there was a big brouhaha online around just the total supply of Ethereum of Eith. So why don't you kind of give us a recap of what this was all about? And then we're going to bring on Lucas Nuzzi from Coin Metrics to talk a little bit more about it. Yeah, so this was kind of a silly debate, but basically. Basically, a few Bitcoiners started asking very pointedly, do Ethereums know what the supply is? And more to the point, can they verify the supply on their own individual Ethereum full nodes? Because Ethereum clients, for the most part, don't actually have a dedicated command to output the current supply the way that Bitcoin nodes do.

And this degenerated into a pretty ugly debate. And, you know, I think we have an interesting position here. Like, obviously, my experience with coin metrics is very indicative about which, how difficult it is to run certain nodes. And honestly, there's a lot of underappreciated difficulty in running full nodes for certain blockchains. I would say theorem is actually in the middle of the pack in terms of difficulty. It could be worse. But it comes down to fundamentally conflict divisions between Bitcoin. and Ethereum's, most Ethereum's are generally okay with end users not running full nodes

and not verifying everything, whereas Bitcoiners are pretty laser focused on making it possible to run a node on commodity hardware. And so then the auditability thing is a tradeoff that develops from that. But certainly kind of an interesting debate once you get into it, once you get past kind of the trolling on Twitter. So we're bringing on Lucas Nutsi, who is one of the best and most qualified people to discuss this. He's the head of network data at Coin Metrics. And a huge part of what Coin Metrics does is audit supply for a bunch of blockchains. They found inflation bugs before.

They've discovered novel inflation bugs that no one knew about because they were applying rigor to the calculation of supply. So Lucas is basically going to break it down, compare the auditability of Bitcoin and Ethereum, and explain to us what this actually means. And he's also going to tell us what the Ethereum supply is. So let's get them on the show. So today to untangle the supply debacle in the crypto industry, we have one of the most qualified people on Earth to answer the question, in my humble opinion. It's the esteemed Lucas Nutsi, who is the network data product manager at Coin Metrics. Lucas, thanks so much for joining us today.

Thanks for having me, Nick. Thank you for the kind words. So, Lucas, explain to us what's going on. What is Supplygate? What happened here? Well, it seems like people were thinking about how to verify supply on Ethereum. After this massive run-up of interest on defy and Ethereum-based projects, there's been, you know, the intent to highlight one of the value propositions of Bitcoin,

and that's that you can see the supply in a very succinct way. Whereas on Ethereum, that's a little bit more difficult. And that difficulty in attaining the free float on Ethereum at all times has created some conspiracy theories that no one knows what that figure actually is. And the fact that no one knows what that figure is upsets Bitcoiners that celebrate the money printer Gober meme and for whom, you know, verifiability of supplies of the, most importance. So Lucas, I get the distinct feeling that these Bitcoinists were perhaps not asking the question in the best of faith. Is that true?

Most likely not, because this is not a new issue, right? It was from the beginning of the specification of Ethereum as a protocol and all of the implementations of Ethereum, you were never really able to do that in a straightforward way. to get the full supply of Ethereum, the full free float supply of Ethereum at all times, which is complex in a context of assets that don't have a cap on their supply, right? On Bitcoin, you have a free float,

which is all of the coins that have been issued to miners as a reward for mining blocks, and you know that there's a cap there that's enacted in actual protocol. Whereas on Ethereum, that supply is uncapped, which begs the question what that supply is, if it is uncapped. And there's no easy way for you to answer that,

even if you're running an Ethereum node. That you have the guarantee that you've tested and, excuse me, that you've verified all the transactions because your node will be doing that by default, we'll be connecting to all these different peers in the network, downloading blocks from the very first block on Ethereum, and verifying all those transactions in its history.

But there's no easy way for you to actually sum up all of the supply that was issued after the Genesis block and land on a figure. On Bitcoin, you have something called RPC calls. And you have that on Ethereum as well, but on Bitcoin specifically, you have an RPC called Get TXO Outset info. And that,

RPC call gives you some really useful data on the current state of the chain, which includes the free float, includes the circulating supply. And you don't have the equivalent of that on Ethereum, which leaves some subjectivity as to what is the total supply of Ethereum. So why don't we settle this once and for all, Lucas? Do you know what the supply of Ethereum is? I do. Oh, great. Okay. All right. So argument over. At least one person knows, do you have the figure on hand? What is it? So we went through the effort of independently trying to verify what that supply is, which wasn't as straightforward as we would like to. And that's because you need to assign some heuristics into how to account for things like burn addresses. to account burn addresses as part of the supply.

So you need to make some decisions into what your policies on lending on that figure will be. And we've landed on a figure that's slightly different than others. We have 72,049,306 ether in circulation. That is as of block 6,912. Okay. Isn't the current figure something like $112 million or something? Yeah, excuse me. I mentioned that because that's when the discrepancies starts taking place. So $72 million was up until block $7,9,912. And from that point onwards, you see some discrepancies between our figures and

third-party data providers. And that's when the subjectivity starts. So this figure is different than, say, ether scan by a couple of units just because of those heuristics. How do we account for burner addresses? For certain circumstances where you have smart contracts that are generating smart contracts and transacting with smart contracts, the the question on who owns the supply, which address is the supply sitting on, can be subjective and you need to have some sort of heuristic to determine this is the rules that we're following.

But generally speaking, all of the data providers agree on the bull park, right? And then it depends on the individual heuristics to determine what are this, what's the specific free float on Ethereum? Because free float, again, it's circling the supply is what's available today for you to sign with a public key and transfer from party A to party B. And you wouldn't be able to do that on Ethereum's burn address, for example,

which is, you know, it's a predetermined address where contracts can send funds that can never be redeemed. So you need to account for the burn address. You need to account for all these idiosyncrasies that are subject to, they're subjective in nature. So I guess to kind of summarize what our finding so far, so the nodes all agree on how many ethers have been issued and how many are being issued on an ongoing basis. If they started to disagree, then we would have a fork.

We would have enormous consensus issues. And just by running a node, you're effectively verifying that supply. But, you know, there's no easy single command you can do to query the state. and generate an up-to-date version of supply, as with Bitcoin. And then there's kind of a separate issue, I would say, which is data providers have different approaches to determining what they consider to be supply,

which has some kind of small-edge cases. So there will be discrepancies between different data providers, but that doesn't necessarily mean the supply is indeterminate. It just means we haven't well-defined what we believe supply is. as kind of a concept, right? Exactly. And so one of the features of a blockchain is that you're chaining these blocks,

these groups of transactions together, and you're landing on a single version of events. So the fact that every Ethereum client, as of right now, is on the same sequence of events with the same block caches, proves that the consistency of those transactions is the same, right? But to determine how much,

how many ether has been issued from Genesis? That is a matter of a methodology. So you're introducing a methodology to determine that, which for Ethereum because of its complexity as a protocol, because you have things like uncle blocks, which are a requirement, which are basically blocks that were found in conjunction. So if you're a minor, you found a block.

Another minor found a block as well. That other minor, depending on the composition of transactions, within those two blocks can get up to, I think, 87% of the block reward. So the reward to the miners of that specific height. And because you have these constructs on Ethereum, it is a much more complex methodology than, say, Bitcoin, where you're just counting the unspent transaction outputs, meaning the transactions that have been received by an address, but have yet to be spent, summing all of them up and landing on a figure.

Right. And on Bitcoin, the protocol itself, when you're doing that RPC call, that methodology is baked in. It's basically just summing all those out. It's very simple. On Ethereum, you don't have the equivalent of an RPC-determined methodology to assess what has been issued, dating. back to Genesis. You could have, it's something that could be developed for it. It just doesn't

exist at this point. Yeah. So there is no agreed upon methodology on how to do it. Do the irregular state changes, so to speak, emerging from the time of the Dow fork, make the calculation, do they complicate it at all for Ethereum? Not, not really, because the Dow's state was essentially it's essentially not considered at all as part of the canonical chain. So you wouldn't even be able to to you know see it on on Ethereum itself. So it's something that doesn't complicate the the calculation. It's more so the indiscences of specific contract, quarrying contracts, and answering the question of who owns what, which, is a seemingly simple question at first glance, but it is subject interpretation on Ethereum

and something that we are working on at Poim metrics to determine in a more succinct way. And to do that, we're creating a universal data model for several different blockchains, that you can essentially treat these contracts and treat these users as, as accounts simply and all of the state transitions all of the you know transactions that are taking place in a network can be represented as debits and credits so the way that we verified supply for example on Ethereum and to kind of take into account all of these idiosyncrasies that you have on Ethereum is to apply this model to Ethereum data dating back to the

Genesis block and essentially coming up with a set of, you know, network states over time, they're represented as debits and credits. And at the end of that, you know, data conversion process, we can see that the books balance and you can have some certainty that the chain is, the supply figures that you have have some methodological backing to them. So Lucas, and I guess Nick, too, just to maybe bring this up a level on, you know, like why supply matters. I think you have the, you know, it matters a great deal if you're looking for a sound money, obviously, right?

You'd want to know how much of it exists and you'd want to easily verify that it does exist, which, you know, to be fair, I guess you can't really easily verify with gold. So that's why Bitcoin in some ways is superior to gold, someone to argue. I know both of you would probably agree with that. So that's one thing is, you know, why this kind of fight kind of broke out. That's one thing that matters. But I'm curious, Lucas, just on more of the tactical level, like reasons why supply really matters, what type of things are people trying to do that make it matter? Is it like index construction would suffer as a result of not knowing the supply?

Like what other things, just tactically speaking, does this impact? Yeah, of course. I think the biggest impact is on determining what's the value of a network, right? Because if you have a very small floats and you're advertising a supply figure that's, you know, a thousand times that floats, you can inflate your protocol and make it seem like you have a multi-billion dollar network when in reality you don't. So I think at, you know, at a first stance, it is an important metric to be a very metric to determine any sort of valuation. And I think for philosophically, for, you know, people that think

Bitcoin is valuable because it is scarce and has that predictable monetary policy, it's an important element to see whether or not your expectations on a monetary policy match with reality, right? It is a portion of security. It is a portion of, it's just a matter of, the value proposition of Bitcoin as it's being presented as of right now. And it should be something that it's also related to the values of Bitcoin as a movement, right? Because it's very easy to explain why this is important to a Bitcoiner. But I think, you know, if you look at Vitalik's answer to this as an example, saying that you don't verify the code on your,

on your Bitcoin core node, you don't know the assumptions that are baked into your cryptography that's being used in Bitcoin. That's also true, but at the very basis of the system, the value proposition, the reason why people celebrate the money printer go burr meme is the auditability of supply and how easy it is on Bitcoin relative to other assets like gold. Because gold, you have the certainty that it is scarce, but you don't have the certainty of how much of it is available out there. On Bitcoin, you have both, right? You have the certainty that inflation is determined by the protocol, and you have the option to verify yourself the number of assets outstanding. And so on that point, on verifying the number itself, talk a little bit about how difficult it is to do.

that on some of these blockchains. I mean, do you envision a world where there's only a couple of amenities that are able to run full nodes and verify? Yeah, it can be incredibly difficult for some of these networks to determine what is the free float supply. And you guys had Ben and Tim from at some point here. The difficulty is a function of how easy it is to run a node, as a starting point. So if your protocol is closed source, for example, and we have assets like Binance chain, which are top 20, if you go by market cap, that are closed source, it is very difficult for you to do that verification and make sure that you understand and can validate the full supply of B&B. For other assets like EOS, it's also difficult because inflation is determined

by a contract. So you actually have to look into this pool of capital that they've allocated to inflation, to incentivize block producers to continue to produce blocks. So you need to run an archival node, which is pretty hefty on ESS, is over 10 terabytes of data. And it can be really difficult as you go down that list. And, you know, we have assets that are basically, It does require an institutional industrial-grade data center to be able to verify that supply.

And as you move down for assets like Stellar and Ripple, it continues to be very difficult to come up with a reasonable figure that you can verify yourself. In terms of actually assessing the relative ease of auditing some of these crypto assets, assets, where would you sit, clearly Bitcoin optimizes for auditability. So it's one of the better ones. Where would you situate Ethereum in this kind of relative taxonomy of auditability? I think Ethereum is actually, as a data, the underlying account-based data model is really good. I think it's closer to a double-entry bookkeeping than Bitcoin than UTXOs. I think Bitcoin is really good for assessing value via UTXOs because UTXOs are basically notes that have a value and that you can sum all them up and see what the float is. For Ethereum, you have balanced updates that are reflected in the actual accounts of smart contracts or addresses.

And for those, you only have those state transitions that are analogous to debits and credits. And it is convenient to, you know, derive metrics from this model and audit specific contracts. So Lucas, just to maybe bring this up a level and to close out, from a business perspective, what is coin metrics doing to bring some of these insights to life for people that are deploying capital in this space? Sure, yeah. There's clearly a need for better auditability tools and third parties that can actually make those decisions on what appropriate heuristics are

for each one of these protocols. And I think a good representation of that is the clients that we've been interacting with, large auditors, large financial institutions that care about these issues, especially when it comes to auditability and transparency very deeply. So we've been trying to work with these clients and service this clients and provide them the full set of network metrics,

but also provide them with raw data on all of these different networks so that if, for example, they want to check supply for themselves, They have a way of doing that and not necessarily running their own nodes or not necessarily trusting a, you know, a blind third party that you're just found on the internet. But having a level of data and support that enable access to these networks that are seemingly difficult for you to run. So it's not an issue that's siloed to crypto-Twitter. I think it's an issue that institutions are looking for answers on as well. And if transparency is a value proposition of this industry, and if that's something that will continue to drain attention to this industry,

I think our work on this area is very important to enabling these institutions and the public at large to have more clarity on networks. that it's highly unlikely they will be running nodes themselves. Lucas, thanks so much for coming on. Keep up the great work. And please let us know if you catch some hidden inflation on Ethereum or any other chain. That would be great. Yeah, you guys can follow me on Twitter at Lucas Nutsi and get the earliest inflation alerts.

Thanks, Lucas. All right. So Lucas is a very smart guy. Yeah, I'm very glad he. He works for CM. He's a great, great acquisition. So anytime we have a brewhaha online, it's always good to get a very good, comprehensive answer. And I feel like that's what we got there from Lucas.

Yeah, that's about as complete an answer as you're going to get. All right. So any more news this week? Yeah, so it looks like the SEC has continued the slow drip of enforcement actions. And they've settled a case against a company called. called Boone Technologies that did a $5 million ICO in late 2017. So they're still, they've still got three years of latency built into this system. Yeah, so I had never heard of Boone Technologies, but my first question is, you know,

if you're doing an ICO in late 2017, how are you only raising $5 million? Like, how is that not a $35 million ICU? That's true. This is a disappointing one. My takeaway from this is that the frauds out there today are going to be prosecuted in 2023. Yeah, I mean, I remember when this whole ICO thing started and regulators had no idea what was going on. There was just not a lot of people that worked for the regulators that could explain ERC20. And I feel like defy is probably in that same space right now.

It's like good luck trying to explain this stuff. Yeah, but, you know, like ultimately, I don't think that complexity is going to save people. that are trying to extract money from retail or conduct fraudulent activity, eventually the complexity gets untangled. It just takes a really long time. That's what we're seeing with these ICOs. Like, sure, yeah, plenty of them are pretty complex. But ultimately, it's a simple issue, which is you're selling unregistered securities to retail. This complexity theater is definitely part of the intrigue for raising capital for these projects, because they just deliberately make things as complicated as humanly possible and use these new words. And at the end of the day,

that's just feeding part of the FOMO. So some people really are attracted to that complexity. It feeds the FOMO and it's also a way to disclaim responsibility from the project. If you hide the power and you veil it in multiple interlocking contracts and you claim that nobody's in control, you know, all of this is a way of saying, trying to take the spotlight off the developers and the people that are actually behind these projects. Yeah. If it seems too good to be true, it usually is. So on that sobering note, I guess we'll wrap it up. All right, everyone, have a great weekend and we will see you next week.