On The Brink with Castle Island - Weekly Roundup 08/19/22 (Treasury Activated Soft Fork, Coinbase vs Vitalik, do BTC miners censor?) (EP.341)

Episode Date: August 19, 2022

Matt and Nic return for another week of news and deals. In this episode:  NYMag writes a long piece on 3AC Is OTB a 'crypto fanboy podcast'? Are we up against the nation state 'final boss'? 3AC boat name reveal The Toyota Century rumors are true Revelations about 3ACs FX days Did 3AC actually owe the Mafia money? The 3AC Deribit deal A new 3AC supporter dials in to the show Machinsky was trading Celsius customer deposits The Galaxy BitGo acquisition falls through Dragonchain settles with the SEC Hodlnaut files for creditor protection Genesis reorganization Tornado cash developer arrested in Amsterdam Are Bitcoin miners filtering transactions for OFAC? Will Coinbase censor Ethereum at the protocol level? Vitalik suggests slashing Ethereum if they comply with OFAC at the protocol level Would Coinbase ever abandon their staking business? The effect of MEV on the centralization of PoS vs PoW End of the merge rally? Content mentioned in this episode:  NYMag, Inside the Crash of Three Arrows Capital Sponsor notes: Subscribe to the Coin Metrics State of the Network newsletter

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 concentrated 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. of Bitcoin. Bitcoin. Welcome to On the Brinkum, Matt Walsh. And I'm Nick Carter. In this episode, he's brought to you by Coin Metrics. And here is the Metrics Minute. Today in your Coin Metrics Metrics Minute, starting off, Ethereum share of total spot volume on Coinbase and FTX has actually recently eclipsed that of Bitcoin. That's not the case on all exchanges. Next up, in the last week, Ethereum Active Address has felled 19%, but they have been choppy as some exchanges have been taken advantage of low gas fees to consolidate funds. Lastly, the HUSD-Huobie stablecoin depagged today falling to as low as 84 cents on the dollar

before restoring its peg. Strange episode for the fully reserved stablecoin. That's your metrics minute. All right, so that was the metrics minute. always good metrics minute content met a lot of met a lot of new coin metrics people this week they had an offsite bunch of people in town the coin metrics staff is growing at a shocking pace it's good that's what happens when you're selling data so like we always say if you're in the market for a enterprise grade data product the coin metrics is your is your company wow we had quite a week of castle island

content didn't we've well ria sat down with Udav of Friction. And you were the star of this New York Magazine article about Three Arrows. I was definitely not the star, but Jen Vietchner for New York Magh wrote a great piece. Probably the best one, definitely the best one,

I've read about what happened with three arrows. And I think a lot of this story is still yet to be written once we start to find some of the actual details on the fun flows. But to date, this is definitely the best one I've read. And we'll cover it more in the in the dedicated section, which is back this week. The three arrows shenanigans of the week.

There's more shenanigans. So that happened this week. And then, yeah, Ria sat down with Udav from Friction Labs, which was a great episode. We have people asking us for more RIA content, more RIA interviews. Had a couple people say they're very intellectual interviews. Yeah, I mean, that's right. She actually put separate into the interviews. I'm not saying we're phoning it in these days, but Ria actually goes the extra mile.

She goes deep on the topics, which is good. Someone's got it. So very busy, very busy week. We're back with the twice a week podcasts. Yeah, no, we have content for you all. Don't worry. We're still here. We're not quitting.

Our numbers are at all-time highs, by the way, just in case you're one. Really? Wow. Pretty much, yeah. You know, when in doubt, you've got a jubes. the stats you bring Dan on you get a nice little bump and and it's a higher base I mean talking of stats that one that roundup you did where you went off on three arrows that's our number one episode and then the Zach Prince one right after that that's our number two episode so the people just

love scandal no you know what it was it was people that lost money in three arrows and there's about a zillion of them so they all downloaded the episode that's what it was and uh yeah now that's trickled over into the MSM even. I saw some references to On the Brink. There's an article that called an On the Brink a crypto fanboy podcast. I forgot about that. So that guy from Inc. Magazine was reaching out to me nonstop to participate in this. And I didn't get back to him.

And then he called it's a Crypto Fanboy podcast. It's like, come on, dude. Yeah, that's unbelievable. and I look to see if he had a Twitter presence so we could blow him up on Twitter for saying that. No active Twitter presence, so it's like he doesn't even exist. That was a very impartial and fully disclosed

that I love BlockFi interview. Don't call me a fan boy. Yeah, we're not fan boys. We disclose everything. And the guy's just going to come at us like that and won't even give us a chance to, I mean, how do you even like, get in touch with the dude to tell them that I mean look we work in the crypto space doesn't mean we're

fan boys I've been to be fair I've been called worse yeah I don't know that one really triggered me for some reason I did not appreciate it either but yeah that's uh there's the times we live in so I actually sat down with a couple friends that hadn't seen in a while over the weekend and one of them asked me how the crypto industry is going I was like oh great yeah yeah blah blah, blah, just small talk. And then the other one was like, is it though? Is it okay? It's like, people are really worried about us.

People like to think that, yeah, I don't know. I guess people think that we can't handle the vicissitudes. But, you know, we've been through it. Okay. Markets go up and markets go down. I got to tell you, the 2015 cycle when no one cared about this was a lot worse than this one. Yeah, the worst ones are when you think that the whole, ecosystem is going to evaporate.

I did think that in 2014. That was bad. That was a particularly bad one. I was very happy that I had some downside protection during that cycle and that I was not out on my own. 2018 was bad. I mean, you know, we just raised a fund and then everything collapsed, like 85%.

And more. I think I've told this story on a podcast. You remember we had raised that first fund and one of our LPs six months after we raised it when the price of Bitcoin was $3,400, said, oh, that's too bad. You know, it didn't work out. You know, the industry never materialized. Like, all right, we'll be back.

Yeah, we weren't short of conviction back then. That was obviously a lot of great companies were founded. Now, I mean, it's sort of like we're at the final boss stage, you know. I guess we can talk about it in a little bit. But it feels like, you know, in a certain sense, the industry got there and created useful products. And now it's the nation state final boss that we're up against. It definitely is. Yeah. And we'll we'll get into that. And that's important to discuss in the context of some of these coinbase and eth two, you know, discussions that were happening this week.

But why don't we hop into some deals of the week first? Dragonfly has acquired Metastable capital. So Metastable was, I believe them and Pollychain were the first two crypto hedge funds. Metastable was started by Naval Ravicon. So Dragonfly has acquired them. Yeah, it might have been predated by Pantera, but certainly a stalwart crypto fund from really back in the day. Congrats to Dragonfly on the acquisition.

Next up, we have Dot Bit, a cross-chain decentralized identity protocol. They raised 13 million from CMB International, Hashkey, GSR, and others. Next is Coin Fund. They have raised $300 million for an early-stage focused venture fund. Then we have Shima Capital.

They've raised $200 million for a Web3 focused fund. Fractional, which is a collective NFT ownership platform. They are rebranding as to Sara, and they have raised $20 million in a round that was led by Paradigm. Then we have Matchbox Dow, which is a Starknut-based game development platform. They raise $7.5 million at a $50 million valuation from Starkware, Delphi, Geometry, Research, and others. And the last one is Prime Block. this is a Bitcoin mining firm. They've canceled their plans to go public via SPAC. They had previously

announced a $1.25 billion valuation for the listing. So tough times for the mining firms right now. Light news of deals, light week of deals this week. Yeah, we're heading towards the end of the summer. So I think a lot of these deals will be announced in September. Folks are generally not announcing deals towards the end of August. But you know what is happening is three arrows. news. So why don't we cue the music and hop over to the three arrows Schneiding's of the week. Roll it. Boys, bad boys.

What you're going to do? What you're going to do when they come for you? Bad boys, bad boys. What you're going to do? What you're going to do when they come for you when you were. Never gets old with that music. All right. So the big article, let's talk about it.

There's a bunch of things in this New York magazine article by Jen Vietchner. A lot of just really great nuggets here. So first of all, the boat that they were going to buy, the yacht, the name of it was much wow, which I don't know. I think he can be more creative with the name. I mean, like, and like Dogecoin jokes aren't that funny, you know? Like, Dogecoin hasn't been funny since 2014. How is it funny?

No, do you think that Sam is going to keep the name or is he going to call the FTX Alameda. FDX colon, much wow. I think you actually have to keep the name. Once the boat is christened, that is its name forever. Can't rename it. Is that how it works? You can't rename a boat?

Well, it's like a child. I mean, even if it gets adopted or goes into a foster home or something, still keeps the same name, right? What about like, well, witness protection, you change your name? Like some... Then, yeah, that's very pertinent. But yeah, I guess you do. But the boat didn't do anything wrong.

The boat's innocent. The boat has not been fully paid for, apparently. So I don't know who's getting that boat, but it's for sale. So it's been put on sale. Yeah, it turns out the car rumors, this, what was the limousine called? Oh, that was corroborating. The Toyota Century. Yeah.

That was first, that news was first broken on this show. Increasingly a source of breaking Three Arrow's news, those rumors were confirmed. Kyle Davies did own a customized Toyota Century. Apparently, that's what Limber drivers in Japan drive, and now it's being sold. It's kind of a tasteless car. $800,000 for, I think. Yeah. If I had $800 grand to spend on a car, it would not be.

a stodgy looking limousine. I'll tell you that. No. It's just bad judgment. The other part of this that was really interesting was they had a bunch of, so these guys were former FX traders and there's a bunch of just slam dunking on them. Apparently they're not very well liked in the FX space, which unfortunately for a lot of crypto market participants, they did not get that memo. But there's a great quote. It says, we FX traders are partly to blame for this because we knew for a fact that these guys were not able to make money in FX, so as a former trader. But when they came to crypto, everybody thought they were geniuses. That's tough. I mean, that is a little bit tough on us, the crypto market participants, because it implies that we're a mature industry that's,

you know, easy to make money in. Yeah, not a good look. Not a good look for the industry. The other fascinating thing about the FX time. And so Sue worked at flow traders. And so, apparently the flow offices, quote, full of servers, ran hot, and he would come to work in short shorts and a t-shirt and then remove the shirt, leaving it on as he went through the building's lobby. Sue would be walking around topless in his mini shorts, said a former colleague. He was the only one who'd take off his shirt and trade. What a sight that is. So this guy's just walking around the trading floor is the shirt off and short shorts. Like, what are we talking about here? That's actually the sickest part of the article. I really, that part humanized him to me. me. I mean, also the part where he became like a fitness fanatic, that was pretty entertaining. And it said he got down to 11% body fat. I mean, good for him, but do you have to take your shirt off when you're trading? Do you not have air conditioning in the office? Well, I think there are a lot of servers. It was hot. But yeah, I mean, he did post, he was prone to posting shirtless selfies on Twitter, which was, I don't know, a sign of something.

He apparently had a drive to become, quote, massive. saying after COVID I got a personal trainer I got two kids so it's just like wake up play with the kids go to work go to the gym come back put them to sleep shipbo's in between not a bad life but where was the part where he just failed to leave out that falsified documents just represent your balance sheet incorrectly to lenders there was a lot of other things he was doing yeah he should have probably included a 30 minute slot for risk management somewhere in that routine. That's true. Yeah, I forgot about that. The line about the good class bungalow is also hysterical. That's an actual jargon, a good class bungalow. I had never heard that before, yeah.

It's referred to as a GCB in the article. I guess that's a known acronym, good class, $20 million bungalow. Not bad. How about this deribate piece? So it seems like this is going to be a bigger story here. So there was a part of the article that said that they were going around, and we know this to be true, that they were going around selling the deribate stake that they had. So they were raising an SPV into the entity. Apparently they were trying to raise it at a $700 million valuation and says some investors noticed the valuation seemed off and discovered that the actual valuation was $280 million. That's wild. So if this is all true, that's a pretty big. brazen act right there.

And there's a quote from David Fauci at Nickel Asset Management, who basically says, since then I've basically stayed away from them, helped them in very low regard, never wanted to do business with them. So marking up the ESPVs like that, can't be doing that. You're basically defrauding both the company and the co-investorists in the syndicate, which is impressive, is, you know, effectively defrauding both sides of the trade at the same time. I mean, we know that's true. That was pitched to us, right?

Correct. Correct. Yeah. So, I mean, I thought that was very sketchy, didn't realize it was just to the tip of the iceberg. The other thing in here that's interesting is that, so someone outright came out and said this mafia thing that everyone's been talking about. So a former trader and 3AC business partner says,

quote, they paid the mafia back. If you start borrowing from these guys, you must be really desperate. And the insinuation here is that that is why these guys are, one of the reasons why these guys are in hiding. So these mafia connections are now in print. Yeah, I thought that was the most interesting part of the article. Fascinating to see it actually printed. Would actually make sense, you know, so the liquidation process is ongoing. They're not involved.

Their assets appear to be moving on chain. So it seems like they're in hiding, trading around, getting, scrabbling together with funds to pay back. the super senior lenders, aka the mafia. Remarkable, if true, but I guess those are the ones that you pay back first. I would think so. So what are we seeing on chain here? So is Nansen sort of the canonical source here for some of this analysis? Yeah, I mean, while it's affiliated with Three Errors are transacting,

so someone's moving them, and I'm guessing it's not the liquidators. Well, the liquidators have been really quiet here. They have not updated the FAQ that says that they're not getting any cooperation. That FAQ was being updated every couple days for a while. Things have been pretty quiet. We also haven't seen the full rundown of creditors. And so I think a lot of this is not being publicly disclosed on the website anymore. So we know from an earnings call that Galaxy had exposure here, for instance, but they're not on the liquidator page.

And so there's other parties to this that presumably have made claims, but they're not public yet. So definitely, I think those are all the new pieces that we learned in this article. I mean, a good summary of the whole situation. Yeah, and to be fair, we're being pretty one-sided here. So, like, a lot of people have reached out and gotten in touch and said, I lost a lot of money in this Three Arrows thing. Or I'm being downsized at my company. I'm losing my job. Hey, these guys submitted false documents.

they lied all over the place. They made me look bad. And I guess we're not portraying the people that still support these guys. So we did hear from another listener of the show who is a supporter and who wanted to get a couple words. And so we're going to give equal airtime. And here's the supportive listener. Hi, Sue.

It's your Olympic hero, Kurt Angle. I want to wish you a very happy retirement. Congratulations on cashing in those chips and moving to the island. I heard you like to trade those stocks with your shirt off. Don't change, man. Oh, it's true. It's damn true. So there you go.

So they still have, you know, they still have support. And if you're a supporter of these guys, you know, we'll listen. So we're not out there trying to just say, hey, these guys stole a ton of money. They've resulted in a lot of carnage in the industry, set the industry back years and years. That's not the only thing we're trying to say on this podcast. I can't believe you keep doing this. I don't know what you're talking about. That was a natural, that's just a listener of the pod, getting in touch.

Completely organic. Yeah. Listener of pod. Impressive. I don't know where they keep coming from, but they feel compelled to send us these videos. We'll post that one on Twitter as well. There's also a video component. So that, yep, that was video component as well.

So that was the three arrows news of the week. A bunch of other news this week. So I guess the first one to jump into, so Galaxy has scratched their acquisition of BitGo. So they originally agreed to acquire Bitco for over a billion dollars. They're walking away. They're saying that it's because BitGo failed to get a full audit and disclose their audit by, I think it was July, end of July. So have walked away.

Who knows what's going on here, but Bitco did not like that. They've lawyered up. They're threatening to sue for $100 million, which apparently was the breakup fee. And not much else to say. I guess Galaxy didn't want to buy them and we'll see what happens now. I mean, yeah, it really depends who you believe on this one. They're both pointing fingers at each other. Tough situation.

You know, my sympathies are with longtime BitGo employees. I was starved of the opportunity for a liquidity event here. But yeah, this one will play out in the courts. Definitely. Did you see this Financial Times article this week? So speaking about big frauds, I guess we don't talk about this one. nearly as much, but Celsius, this store is getting uglier and uglier. So EFT reported that Celsius founder Alex Machinsky was actively trading customer deposits.

They said it was starting in January and taking some pretty big swings. And obviously that did not work out. Yeah, this is just a huge mess. I mean, apparently he requisitioned like over 100 million in customer assets and decided to launch into his own proprietary trading strategy surrounding on Fed announcements. I mean, you know, did he have the ability to trade size without slippage? I mean, it's not clear that the guy was actually a trader, but it seems like he was just at a certain point running the book single-handedly.

I mean, just incredibly irresponsible and contributed to the whole they have in their balance sheet now. I don't know how this one gets resolved because I don't see this entity emerging from bankruptcy. I don't see anyone wanting to buy this. Maybe there's value in some of the customer relationships, but it's hard to imagine this thing getting resurrected post-bankruptcy. Yeah, Chapter 11 seems very generous here. I think there should be more of a liquidation situation. A lot of regulatory news this week, the SEC, this is kind of an indication of how fast the SEC moves. They've settled with the Dragon Chain, which was 2017 era ICO. So a full five years,

you know, they took the full kind of statute of limitations. And they've settled up on allegations that Dragon Chain was an unregistered security, I guess. I had heard about this one, but it was not a big one on my radar. This one was apparently developed with IP from Disney, if I recall correctly. I think it was sort of claimed that there was a Disney relationship. I don't think there was really. I don't think Disney had any ownership over it. I think the claim was that it was originally developed there. There was another regulatory news. So the CFTC filed a civil enforcement action against a man in Ohio who ran a $12 million Ponzi scheme with cryptocurrency. So see more and more

regulatory enforcement actions here in the coming months, I'm sure. You know, the interesting thing is this Dragon Chain should have been a layup for the SEC, but it literally took them five years to get to it. Do you think that that's what, not necessarily, right? I mean, they could have just gotten around, you know, it doesn't mean that they were fighting it for five years. Right, right, right.

I mean, yeah, but it may not have been on the radar at all, but it's not really cause for optimism in terms of their ability to move on a timely manner for any, you know, potential unregistered securities that exist today. Well, you're seeing more, shatter that there's just going to have to be an act of Congress to determine who regulates the spot market here. And I think that's what it'll actually take in order to get a framework. It just doesn't seem like we're going to get there without a bill. And maybe we end up seeing that.

Folks at the CFTC have been increasingly public that we need to see some clarity here. So we just need to figure out who ultimately has oversight of the spot market. So elsewhere in crypto lenders, hoddle not, no relation to the character on crypto Twitter, this is the Singapore-based lender, has filed for creditor production. So maybe they're the last one of this little crypto banking panic that we've had. Yeah, they were impacted by three arrows as well. And I guess along those lines, I saw that there's a big restructuring at Genesis this week. Mike Morrow has stepped down as CEO.

Obviously, they had exposure to three arrows and sustained losses, but real bummer to see that. And Morrow is one of the stalwarts of the industry. So wish him success. I'm sure he's going to land on his feet. He's been a legend of the industry. So more and more, three AC-related fallout. So really interesting ongoing news with tornado cash. So this is really quite remarkable.

A 29-year-old developer for Tornado Cash has been arrested in Amsterdam on charges that he was involved in illicit activity involving Tornado Cash. Not really clear. The Dutch police haven't given us a lot of information. Not clear whether he was actually, you know, explicitly working with or facilitating money laundering or anything like that. However, the Tornado Cash developers, there was a token and the developers were profiting from the usage of tornado cash,

whether illicit or illicit. So that may just have been the sufficient threshold to consider this development criminal, the fact that there was profit there and a token. I'm really curious what the ultimate charge is here. Maybe that's what it is. It's not clear that that's what it is. And it's also not clear. the United States did not sanction certain developers of tornado.

They went after the smart contracts and they went after the protocol, but didn't go after the individual. So I don't know what information they have. I don't know what type of cooperation they're getting. I did find it interesting that CoinCenter released a legal argument that alleged that OFAC's sanctioning of tornado cash represented an overstep of their authority under U.S. constitutional rights. That will be interesting.

That looks like it could be a court case. I mean, I expect a lot of this stuff will be constitutional questions. Think about due process, right? Normally, you have the right to appeal a sanction against you. If you're an individual or an entity, which are the things that are traditionally sanctioned. In this case, it's blockchain. How can blockchain addresses appeal contracts, which aren't even strictly owned by anyone that are running autonomously? How can they appeal a sanction to the U.S. government?

They can't. So there's clearly a due process issue. It's an issue of overreach and privacy as well. I mean, everyone that had funds in the pool, which could have been an arbitrary number of individuals, is affected by this. It's very indiscriminate. So, yeah, I'm quite sympathetic to Coin Center on this matter. I think we're going to see a lot of these blockchain financial privacy issues. some of them end up in the Supreme Court.

The thing is, though, that the government can really stifle a lot of the industry before any of those cases are actually litigated. Yeah, they can certainly slow it down. This would take years to litigate, is my guess. But this is setting up to be, to your earlier point, maybe this is the big boss to beat here in terms of just the free speech side of this. So the fascinating discussion, and I was actually offline. for a few days, I came back and I couldn't believe what I was seeing.

The discussion lately has been around whether validators or miners would end up censoring transactions at the protocol layer in line with effectively OFAC. And it seems in the Ethereum community that there's even been a discussion of whether large validators like Coinbase would be compelled to, institute a rule whereby not only they didn't include transactions and blocks that they validated that were destined for SDN folks on the STN list, but that Coinbase would also be compelled by Treasury not to build on blocks that had these supposedly sanctioned transactions in them, which would effectively mean that the Treasury

would be compelling Coinbase or other large US regulated validators to institute a de facto soft fork on Ethereum or whatever blockchain it might be to exclude, to permanently

censor and filter these OFAC transactions. And so there are actual fears in the Ethereum space around this, including Vitalik, even weighed in on this. He said that he would be be supportive of slashing coinbase's deposits, coinbase's stake, if they were to engage in this

kind of activity, which is truly remarkable. I mean, to see the Ethereum community galvanize to a certain degree against the largest stakeholders, largest entities, economic entities in the network reminds me a little bit of the user-activated soft fork in 2x that took place in Bitcoin in 2017. The issue I have with all this debate is I just see no evidence that Treasury would institute that kind of soft fork rule where they say you can't build on blocks that have, you know, quote unquote, bad transactions in them. It's not even clear that they're insisting on OFAC filtering at the validator level yet. I think they probably will. That's a whole other question, what that would look like. But I don't see, I don't see, I don't believe. this interpretation whereby building on a block that or you know a block 10 or a hundred blocks deep that has some sanction transaction and that I don't see my building on that block as it endorsing

or processing that prior historical transaction I don't see that as my responsibility as the entity building on the chain tip you I feel that you're only responsible for the block you yourself are putting together. But yeah, I don't know. What do you think? I agree with that logic. I mean, you would think that if there was a big play to be had here around censoring, then they would have tried it at the Bitcoin level as well, because you can apply some of that logic, at least, to UTIX. The same logic, right? The same logic. So it doesn't strike me as something. I think it's a good thing to be discussing this. I am not that worried about it. I think they would have already done this on the Bitcoin blockchain into Bitcoin miners based in the United States

if this was something that was a big concern. I don't see this as something that is materially promoting like terrorist financing and things like that. It's just seems very overblown to me. I did see that there is a tweet that was directed towards Brian Armstrong yesterday. It said if regulators ask you to censor Ethereum protocol with your validators, will you A, comply and censor at the protocol level, or B, shut down the staking service to preserve network integrity? The response from Armstrong was, it's a hypothetical we hopefully won't actually face. But if we did, we'd go with B, I think, got to focus on the bigger picture.

There may be some better option C or a legal challenge, blah, blah, blah, blah, blah, blah. But that's kind of a crazy concept that they would shut down their staking service. I mean, that's a multi, the amount of revenue that Coinbase can generate off of staking services is enormous. Like, it's a huge bullcase for that business. You're talking about shutting down a multi-billion dollar pool of revenue potentially. So, I mean, we're talking about some crazy stuff right now. Yeah, it'd be like Amazon shutting down AWS. It's just, it's not going to happen.

Coinbase is not going to abandon their staking business. I mean, this whole discussion is odd because there's no evidence that Treasury is asking Coinbase to fork themselves off of the Ethereum network. If they, it's every validator's right to select the transactions they want in a block. And if they choose not to select defect transactions, so be it. That's just the truth of it. If the Ethereum community, you know, however you want to quantify that, decides to try and slash Coinbase, Coinbase would just sue the people that are spearheading that,

that attempt, like there's no actual rule in a theorem that says you can't, you have to include OFAC transactions in blocks. There would obviously be individuals and entities that would be spearheading that effort to slash Coinbase. Coinbase would not go down without a fight. There's no way they're abandoning their staking business and they're not going to be slashed. Frankly, if I'm on the board of Coinbase, I have a huge problem with CEO if he says, we're going to abandon our business because the Ethereum community is posturing. That's not going to happen. Yeah, I mean, you don't want to get rid of that business.

And obviously, he doesn't either. But that was an interesting take. I mean, there's been OFAC friendly mining pools in the Bitcoin space. And so how would you compare it to contrast what is possible in Bitcoin versus what is possible in Ethereum? Yeah, it's a fascinating discussion. I think it'll happen as we get more empirical evidence as to how stake operates. So there was one OFAC compliant pool, which was run by Marathon and DMG, I think.

That was abandoned. Actually didn't really catch on. We looked into it. I asked coin metrics today. They actually did some work to determine whether mining pools today in Bitcoin are, is there evidence of censorship? Is there evidence of systematic exclusion of transactions from blocks? and the way you evaluate that is you create a you look at the mempool, you create the most

profitable blocks and then you see what actually gets included in the mind blocks. And if there's a difference, now you have evidence of systematic censorship. And if the mempool clears out and you have a whole bunch of transactions that are lingering there that are not being included, that's more evidence. We're not seeing any of that evidence. Right now there's no evidence that there's systems. censorship of certain addresses in Bitcoin mining at the pool level. Can that change? Yeah. Do I expect that to change? Yeah, I actually do expect eventually Treasury to ask mining pools to comply with OFAC.

Then the question becomes how many mining pools are there XUS or U.S.-based miners, which is maybe 35% of the network, able to use those foreign pools? And then longer term, are miners able to create their own block templates so we don't have to rely on the pools for transaction selection. And the stratum v2 aims to address this, so we'll see what happens there. But long term, I'm pretty optimistic because switching between pools is trivial. Hash power is not, you know, 80% US. It's pretty distributed. And yeah, as I said, stratum will allow individual miners to select their block templates. So then I think it would be unregulatable.

Now on the staking side, it's more concentrated, in my opinion. If you look at it 65% or so of stake for post-merge, ETH proof of stake, is with these centralized, at least 65%, it's with these centralized accountable organizations. So I do expect them to engage in this filtering. It's also harder to switch between stake pools. There's more friction to doing that. Lastly, block template construction in Ethereum is more centralized because you have now distinguished template construction and template inclusion.

So there will be these specialized firms that assemble transactions in a competitive process. And due to the presence of minor M.EV, formerly known as minor extractable value, it's going to be a very specialized activity. So I expect there to be relatively few of these. So that's really the difference is, you know, Ethereum has this rich state where it really matters how you order the transactions and that's this highly specialized activity. So creating competitive block templates is actually not something that just anyone can do. Whereas in Bitcoin, I expect regular old miners will be able to create their own templates with limited difficulty. So that's basically the crux of the argument, in my opinion, is how distributed will block construction be? And in the case of

MEV, which doesn't really exist in Bitcoin, I expected to be pretty centralized. Add on the fact that de facto proof of stake and custodial eth is concentrated with a few small handful of large organizations, which have a regulatory barrier to entry, and you end up with a pretty centralized status quo. So yeah, I do think there's a meaningful difference between the two. However, all that said, I'm not that concerned about treasury, like soft forking Ethereum. But yeah, I think it's something, you know, to be concerned about. Wouldn't you think that they're just the private minor relay networks would become a lot more popular if this were to emerge and you just see a marketplace for direct minor relationships to get blocks added? Yeah, I mean, the question is, you know, to a

extent the miners have to use US pools, are miners able to propose their own templates outside of the large pools? So it really comes down to these intermediaries. You know, the miners are not the ones directly including transactions in the blockchain. It is the pools that do that. So if you can pull through that power, you can eliminate the pools as these thick interfaces and you can give the miners back that power, which there are projects underway, like I think block or formerly known as square is working on stratum stradum v2 if you can do that then i'm optimistic but currently it doesn't have adoption between this and the the fud around the fork this whole concept of buy eth and take the summer off is taking a big hit here a lot of eth fud yeah i mean it does add a lot more

uncertainty to the merge which is interesting because we definitely had this merge rally previously now it makes the merge a more probabilistic event. I mean, there's people calling for it to be delayed. It does mean that if the merger is successful, then I think you can expect to buy the news event, whereas I previously thought it would be a sell the news event. So there was an interesting speech delivered this week by the Federal Reserve's Michelle Bowman, who's a governor,

and explicitly came out and said that a number of banks have been seeing outflows towards crypto firms, towards some of these firms presumably talking about the coin bases of the world, the circles of the world, all of these financial services related firms that play with stable coins and cryptocurrencies. And there's a desire, it sounds like, to be able to compete with some of these folks. So maybe we'll see this become more of a hot button issue as these banks realize that in order to meet customer demand, they need to be able to offer Bitcoin, Ethereum, and stable coins.

I also saw our Canadian friends up north. I don't know if I have this exactly right, but I saw a headline about Canadian exchanges not allowing clients to buy crypto assets outside of the four select crypto assets, not able to buy more than $30,000 worth of them in a given year. I saw that. How is that possible that they can come out with a law like that? Is that actually true? Unclear, very unclear, but,

Canada is just they're up to something. They've always got these zany regulations. They consider your coins held on deposit with an exchange to be a security. Even if the coins themselves aren't a security, apparently that construct is effectively a securities contract. It does a mess up there. I also saw some news out of Canada

that that pension fund that invested in Celsius, they came out and publicly said, hey, we're just too early to crypto. It's like, no. Yeah, great excuse for a total lack of diligence. Yeah, I mean, if you could have invested in Coinbase. I mean, there were other things on the menu there. Massive multi-hundred million dollar check, a retirement pension.

I mean, that's tough. You expect a little bit of diligence there. It's not like Celsius didn't have orange or red flags surrounding that whole thing. Yeah, it happens. It happens. But I guess you've got to say something. So saying you're early, it's probably the least worst thing you can say. I mean, it's a huge pension fund so they can tolerate that hit.

But I don't know what you tell the retirees. You know, sorry, we put your, we were investing in the picks and shovels and we put your funds in the most mismanaged lender in the crypto space. Well, it happens, right? I mean, plenty of pensions had exposure to Enron. And there's always going to be nefarious actors. So you need to, that needs to factor into your portfolio underwriting decisions that you're going to have some bogeys. All right.

So I think that is it for the week. We do have a Monday episode. It's on the topic of crypto asset management and the fund of funds landscape. So really liked that episode. So we'll be back on Monday. And we'll see. We'll see if we have more shenanigans next week to cover. For your sake, I hope we do.

All right. Have a safe and healthy weekend. We'll see on Monday.