On The Brink with Castle Island - Weekly Roundup 09/02/22 feat. Kyle Waters (Merge priced in, Roche and Ava Labs, Will Dai float freely?) (EP.345)

Episode Date: September 2, 2022

Matt and Nic return for another week of news and deals. In this episode:  What happens to the GPUs post merge? Will the gamers finally get cheap GPUs back? Is the merge like superbowl sunday or Y2K? Does the success of the merge undo a long-term Bitcoin talking point? Are NFTs going to cc0 screwing over their users? DC sues Michael Saylor and Microstrategy for allegedly skipping taxes in DC The SEC questions whether the certain assets in Grayscale trusts are securities What's going on with the Roche Freedman/ Ava Labs/ Cryptoleaks situation? Is Roche just David Boies 2.0? The Biden executive order reports are due next week Rune of Maker muses about turning Dai into a free floating unit of account Will Maker be able to survive real world assets as collateral? Did Moonbirds rugpull their buyers with IP issues? Kyle Waters from Coin Metrics joins to talk about the Merge Is the distribution of stakers on Ethereum something to be worried about? What's going to happen to ETH issuance post merge? How to forecast post-merge staking returns Is the merge priced in? Did Ethereum install a pro-cyclical monetary policy? Content mentioned:  Coin Metrics, Mapping out the Merge 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 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. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And this episode is brought to you by Coin Metrics. And here is the Metrix Minute. I guess it's a Metrix 15 minutes.

Yeah, we are welcoming Kyle onto the show later to talk about the merge. As an appetizer to that, we're going to do the Metrics Minute also. Oh, we got both. Two for the price of one. Yeah. Yeah, we're doing two. So as you all know, the merge is happening. I think it's scheduled for the 16th of this month.

So Ethereum will transition from proof of work to proof a stake. After the merge, the issuance will be dynamic increasing as the amount of staked eith increases and also decreasing with burns, which is a function of the usage of Ethereum. Coin Metrics figures that a typical validator will earn returns of around 4.5 percent per year. And that would increase with more transaction fees and MEV. We do talk to Kyle Waters later in the episode, so we'll deep dive in on that. That's your metrics minute. What time is the merge on the 16th? We don't know exactly because it's in block time as opposed to clock time.

What's the latest guess? We think it's in the evening. We think it's kind of like 10 p.m. Eastern time. 10 p.m. on a Friday, there's big parties. Yeah, I mean, you know, some people are going to be out and some people are going to be watching the blockchain. I know which can't buy them in. I'll be watching the blockchain. Yeah, that's what we do over here.

Coinmetrics told me they're going to do a live stream. So we're going to have kind of like a live merge watch party. Are they going to have like a meetup? I don't know, but, you know, we're going to be looking at analytics. We're going to watch the blocks roll in. I don't know if anything is, like, is there even anything to look at, like a block explorer? I don't. What are we going to watch?

Yeah, I think you watch a block explorer. I mean, historically, I would probably watch like the trade block block explore. You're really going to have to just imagine all the GPUs. powering down all at once. It's like, you know, in Star Wars where they blow up the planet and they're like, that was the sound of, I'm butchering this, you know, whatever, a million souls, you know, crying out at once and vanishing, whatever the line is. You all know the quote. Now it's the same. Like you're going to have to imagine a million GPUs coming to a screeching halt all at the same time. It's tragic. So what do you think is going to happen to Ethereum Classic? Do you think

Ethereum Classics going to see an uptick in hash rate? It has been. It has been. That's actually in the Coin Metrics report, which we're going to put in the show notes. But there's also no real reason anyone would use Ethereum Classic. There's no defy on there. There's no stable coins. So I don't think it's enough of a thesis just to be like, well, the GPUs have to go somewhere.

Like maybe GPU's prices are just going to fall. and the gamers will get the GPUs again. They'll finally get them back. Yeah, gamers. They don't like those Ethereum miners. They hated crypto for so long. We've really been troubling them for almost a decade now because Bitcoin and then Ethereum. And so the gamers have been totally colonized by crypto, you know, hiking GPU prices.

Now they're finally getting one back over. us. So congrats to the gamers. It's the biggest software upgrade I think I've ever been a part of here. This is exciting. We'll do a couple episodes on this heading into the merge. Are you getting Super Bowl Sunday vibes or are you getting Y2K vibes from the merge? Because I'm getting Super Bowl Sunday vibes. I'm feeling this is going to be successful. As the TikTokers say, it's giving Y2K. I'm feeling Y2K about it. I wasn't really aware at the time of Y2K, I feel like this is what it was like. I think something unexpected could break. I don't want to be spreading FUD, but that's how I really think something can break that we can't

predict. Well, when Y2K happened, I was ready for it, but pretty uneventful, I would say. Did anything actually, did like planes fall out of the sky or like nuclear reactors stop working? Was there anything? It was pretty uneventful, at least in my world. The clock stayed on. everything still worked. Okay, because I, yeah, I don't know. I feel like there's a lot of unwarranted fear. This time around, everybody thinks it's going to go great. And so it could be the opposite where there's unexpected bad stuff that happens, basically.

I will say this. If the Ethereum devs pull this off, which I have every reason to believe they will, you got to give them big kudos. The scope of this upgrade is unbelievable. Yeah, I mean, one thing I will say is, you know, the hardcore bitcoinsers have long doubted this would be possible. And it is definitely a blow to that narrative if Ethereum is able to do this. I mean... Oh, yeah.

I mean, Bitcoin would never be able to do this. Bitcoin, the Bitcoin engineering, like, Army, zero percent chance could pull something like this off. No, and, you know, that's not the Bitcoin design philosophy. It's, you know, there has been this claim that Ethereum would never achieve the move to proof of stake. I'm not saying proof of stake is even desirable. Frankly, I wrote a hit piece against proof of stake this week. You did.

So I'd piss off the theorems that, you know, I think that's a great position to be in where both sides hate you. That's, you know, I feel very comfy there. I don't know if that's always a great position. Just to be universally reviled. But yeah, I mean, this is undeniably. win for Ethereum, I mean, they will have done the transition. And then they'll be free to, you know, throw those ESG barbs over a Bitcoin. I don't know if they plan on doing that. I hope not.

But they're free to. I don't know how that whole narrative is going to work out with the German energy. I'm not sure that that's going to be as powerful narrative. I mean, I hope that Ethereum's are gracious and don't suddenly adopt ripple tactics. That would be disappointing. Or avalanche tactics. Yeah, we've a lot to get into. A lot of intrigue. I mean, it's really bear market blues these days.

You know, people are infighting is significant and aggressive. Oh, yeah. When the bear market comes out, you just get in a firing squad. You form a circle and then you start to fire. It's a circular firing squad right now. Yeah, we felt it. You know, the big corners are upset. Ethereum's also lots of drama in Ethereum space.

And then outside of that sort of major L1 land, significance amounts of drama, we'll get into it. And before we do, you had a good podcast this week, direct people to that, the founder of Fetty was on talking about Bitcoin custody. Yeah. So I know, you know, we get accused of defecting from Bitcoin. We're still here. We're still doing Bitcoin shows. So Obi, Noosu, great guy. He ran Coin Floor, which was the longest running proof of reserve attesting exchange.

So I think they did proof reserves monthly for like six years, seven years. And now he's founded a company devoted to Chalmian Mintz, federated Chomian Mints on Bitcoin. It's actually like a kind of a new idea. at least in Bitcoin. I've always been in favor of Chom Minx. I thought that was a great scaling strategy. So yeah, I think that's much better than scaling up through centralized exchanges. So excited for that to potentially be a thing.

What's going on with David Choms blockchain? Has that launched yet? So yeah, Elixir has indeed launched, I think, TestNet. I don't know if it's test net or main net, but it has launched. which is a kind of incredible, like, and no one's talking about it. And then it's David Chon. Is anyone using it? Are people using it?

I don't think so. I mean, I get DMs about it from elixir enthusiasts. But I mean, isn't that crazy to think about like David Chalman invented so much of the actual cryptography that's used in this industry and his blockchain is just totally overlooked. People don't have any respect for their elders. Yeah, that's crazy. I mean, hey, Zucco might have invented Bitcoin and not a lot of people are using Zcash either. And that one, we're going to be touching on that later in the episode.

But yeah, I do, I think that people in crypto just don't have a strong appreciation for the cypherpunks. I mean, they're not reading their history books here. Yeah, there's definitely a lot to brush up on. All right. Well, why don't we hop into some deals of the week here? First one up is proof. This is Kevin Rose's company. This is an NFT brand and collective.

They've raised $50 million from Andresen, Collab Fund, 776, True Ventures, and others. Prove, of course, behind the Moonbirds launch, which was one of the hottest NFT launches of the year. These guys are kind of getting crushed on the IP stuff. I don't know if you've picked up on that, but Alex Thorne and the Galaxy team have really been identifying some of the weaknesses and the intellectual property protections here. Yeah, actually, this is really interesting. think totally overlooked. Alex has been on the total war path here by pointing out that all these NFT projects basically are, I don't know, fraud is the right word. Frankly, it may be the right word, but basically they're not, they're sort of like claiming that they're giving far more in

terms of IPR protections to holders than they're actually giving. Moonbirds was pretty egregious, to be honest with you. Real talk right now. They said during the sale that holders would have specific assurances regarding the IP. They would have ownership rights. And then after that, they pivoted to a CC-Zero model where basically there's no ownership and anybody can do whatever they want with the intellectual property. So if you think about what that is, it's kind of like a rug pull. where you as the buyer thought you were getting a real entitlement to something, and then it was pulled from beneath your feet. So yeah, Alex has been on the mark here and very critical of moonbirds.

Frankly, I think it's a reasonable critique. Yeah, we'll see what happens on that front. Kevin Rose really has a feel for internet culture. Do you remember Dig? Yeah, I was part of the Dig migration to Reddit back. in the day. I think that was in maybe 2010. Yeah. Awesome, awesome site. So it'll be interesting to see what happens here on proof. Next one up is Solana FM. This is a blockchain explorer. They've raised 4.5 million from SBI, D1 Ventures, Spartan Group, and others.

Then we've got Anamoka brands, which is the big kind of NFT gaming Metaverse studio, kind of a behemoth at this point. I mean, I think they're going to be talked about in the same breath as Alameda FTX, DCG as one of the titans of the crypto industry. They are, they raise 100 million from Temasek and others. And Anamoka Brands Japan, a subsidiary, has raised 45 million from MUFG and others. Big raises there. Next one up is Redstone. This is a defy Oracle. They've raised 7 million from Lemnisk Cap, Coinbase, R-Weave, blockchain capital, and others. Then we've got Lightnet Group. They're a provider of blockchain-based payments of a structure.

There raise 50 million from LDA Capital. 776, which is Alexis O'Hanien's venture fund, have decided to raise a $177.6 million fund, and that fund will focus on liquid token investment. So buying the dip on some of these tokens, which seems like a pretty good idea, actually. That's a pretty good idea for a fund, I think. Next up we have token proof and NFT security startup. They raised $5 million from Penny Jar Capital and others. Great name for a fund, Penny Jar Capital.

Next is Clockwork. This is a Solana Automation Network, and they have raised $4 million from multi-coin and asymmetric. Then we've got Exterior, a blockchain gaming platform. They raised $40 million from Fund Plus, FtX, XPLA, and others. Next is Bitlevx, and that is all capitalized. That is a crypto options trading platform, and they've raised 50 million from Gem Digital. Pretty aggressive to just capitalize your name. The whole thing. Yeah. Just all caps. It's like it's screaming at you. Then we've got Kup with a K, that's an NFT fan engagement platform. They raise $5 million from one confirmation, variant

ball juice for Navasana and others. Next is Sai. I think. that's how you say it. SEI, a layer one blockchain. They've raised 5 million from multi-coin, GSR, flow traders, and Hudson River trading. 50 years from now, I think there's still going to be venture funds backing new layer one blockchains. Like, there will never be enough.

Yeah, it's L-1 season right now all over again. People don't realize it. It is. Also, just the, there's tons of L-1s getting funded, and there's also just tons of new D-5 primitives, emerging. So good stuff happening. I do wonder how many L1s the world needs. I know I've said this before. How many L1s does the world need? Three? I mean, how many do we really need? 200? I don't know. There's just so many things you can't do on blockchains yet. Like you still can't

really have a performance central limit order book on these things. There's going to be L1s that solve this. I don't know if you need that on the blockchain. But yeah. I don't know. It fits into this MEV conversation, right? You're going to have a ton of MEV if you just have the AMM model. So there's actually a lot of interesting pieces of news this week.

Should we start with the tax enforcement news from the District of Columbia? Yeah. Yeah. the District of Columbia is suing micro strategy and their founder, Michael Saylor, and the AG there, his name is Carl Racine, which came out aggressively with the Tweetstorm. I love for these people announcing these things on Twitter now, that they're going after Saylor for avoiding over $25 million in taxes. That apparently they're saying that he lived in District of Columbia.

And I think people thought he lived in Florida. I think he legally does live in Florida. they're saying you owe us some money that's what that looks like yeah so he according to them he represented that he lived in florida and virginia and uh apparently he was secretly living in dc i mean and obviously florida has no state income tax whereas dc has an egregiously high one and so now they think he basically didn't pay them 25 million in taxes over the years uh there's some whistleblower which came forward which basically enrolled in some, you know, formal snitching program and is entitled to abortion

of the reward here, apparently. That's kind of a convoluted. I mean, it's like the same thing with SEC whistleblowers, I guess. So they're, yeah, this is a Wyoming LLC blew the whistle here. And then you've got, I mean, you know, the question I have really is, why on earth would you choose to secretly live in D.C. If you had a very nice residence in North Beach, in Miami. And then I think he has another place.

I actually thought it was on the eastern shore of Maryland, but it might be in Virginia. But yeah, like, why on earth would you choose to live in a swap? I'm an authority on this. I don't get this. I mean, maybe he just live in Miami. Come on. It's better.

My guess is, yeah, he probably just had like an apartment in D.C. or something. Yeah. saying that he spent more than six months there, I guess? Yeah, I read the, I read the lawsuit. I mean, they're claiming, they're relying on Facebook posts. They're relying on records for his yacht, where his yacht was moored in Georgetown on the Georgetown waterfront. He did a remodel of an apartment there in D.C. So we'll see. I mean, I don't know. Like, I, the time, I've, I've encountered Michael a number of times in Florida, so I can definitely attest to the fact that he lives there at least part of the time.

I don't know what the exact accounting is of the days. But yeah, I mean, you have to imagine this is at least partially motivated by the fact that he's such a high profile Bitcoin. I mean, that's got to be part of it. 100%. Yeah. We're going to find out who that whistleblower is maybe. And maybe it's someone from like Ava Lacks or...

It's Roche. It's Roche Friedman. Yeah, it's one of these guys. Well, I don't think $25 million is going to turn Michael Saylor into a for-seller of Bitcoin if anyone's worried about that. Right. So I'm looking at Bitcoin Treasuries.net. They have a cost basis of $3.9 billion worth of Bitcoin and trading at about $2.5 billion right now. That's painful, by the way.

But even if they had to pay that $25 million fine, I think they'd be right. Twisting the knife. Yeah. It is interesting the micro strategy is named in this and accused of basically concealing this or having knowledge of this situation and, you know, I guess not doing anything about it. But yeah, people are kind of getting the scale. The numbers a little mixed up here. It is $25 million is the claim. He could sell his auxiliary yacht and satisfy that, not even the main yacht, sort of like yacht 2 or Yacht 3.

and satisfy the claim. I mean, he probably has some Bitcoin cash. He probably has, like, forked coins that he hasn't even separated yet. I think he'd be able to. Yeah, just identify some dust in some old wallets and use that. So that was a story this week, which shows you what type of a newsweek it is. The other one that it caught my eye was so Grayscale had a disclosure this week that they have received SEC inquiry into the status of three of their trusts.

It's the Zcash trust, the stellar trust, and the trust that holds horizon. It looks like the SEC is beginning to question whether or not those assets may be securities. So that'll be interesting. I mean, if these things are deemed to be securities by the SEC, Grayscale would presumably have to liquidate those things. Yeah, that would be a mess. Zcash in particular, you know, really structured itself so as to avoid potential securities allegations. with the founder reward or whatever you want to call it,

sort of being invested over time, I think it was over four years, as opposed to just being a quote-unquote pre-mine. So, yeah, that would really challenge a lot of the thinking in the industry around how to avoid Howie if it were shown to be a security. That discount, still a discount. Nothing new to report there. Yeah, no change. There was an insane story this week, which we have to talk about.

This is the Avalab story. Yeah, so there's a website called CryptoLeaks. The two prior leaks had to do with ICP, Internet Computer, DFINITY, previously known as DFINITY. I think it was kind of clear this was a pro-Definity website. and then I think earlier this week this bombshell article written in like a really tabloidy fashion featuring like secretly recorded videos of Kyle Roche emerged who's an attorney at a law firm a Roche Friedman and this is like Project Veritas style secret investment. investigation videos.

And basically, the interlocutor manages to get Calroche to admit to using basically legal intimidation tactics and pretty questionable stuff against opponents, particularly competing protocols of Ava Labs. And it appears to get him to admit that he was basically a hired. legal gun for Ava in exchange for some share of tokens, some equity in Ava Labs. And so that came out. It was pretty spectacular. It was basically completely denied by Goon, Cere, by Ava Labs. It does appear from a prior lawsuit that Roche Riedman actually does have some share of either equity or tokens.

I actually don't think, I wouldn't say it's that unusual for law firms to get share of tokens that they are providing outside counsel for. A lot of people say that never happens. That definitely does happen. It definitely happens. The scale was a little shocking, at least it was claimed by the CryptoLeaks crew, that Roche Friedman had 1% of the supply of A. AVA, Avax, at some point.

So that is kind of a little salacious that this law firm would be granted such a significant share. I think the tactics don't really surprise me. I mean, it's pretty underhanded stuff, but that is pretty common in this industry with scurrilous lawsuits being the norm. The Ava Labs team is basically denying that there was a secret deal here to, you know, harass other protocols or get the SEC to focus on these other competing protocols or anything. So they're kind of denying most of the connection there. So yeah, and the whole thing kind of appears to be potentially orchestrated by this pro

definity investigative like Project Veritas style outfit, which is pretty insane. So yeah, we're really in the thick of it here. I mean, everyone just looks really bad in the story. There's no there's no way to spin it. I mean, everyone just looks like a complete a hole. Cal Roche wrote in his denial that the videos were illegally obtained and highly edited, not presented with context, and they were part of a deliberate scheme to intoxicate and exploit him using leading questions.

Goon basically denied everything. Here's like an interesting, funny thing that I found out. This firm, Roche Friedman, was founded by, all of the partners were alumni of Boyes Schiller, which was the info of Theranos fame, where basically David Boyce was on the board of Theranos and did exactly this kind of thing for Elizabeth Holmes. I'm not saying it's the exact same situation.

All I'm saying is that amused the hell out of me. They learn from the best. It's interesting. I mean, David Boyce is just a phenomenal run as a lawyer, And it's kind of crazy that the thing that he's known for to most people now is that he was on the board of Theranos. Yeah, no, he definitely intimidated a lot of people that were questioning Elizabeth Holmes. I mean, he was involved in Bush Gore, right? That's right.

Yeah, that's right. So kind of like legendary lawyer, but then also in that book, Bad Blood, he came across extremely badly. Yeah, he's represented just a ton of very famous people. Michael Moore, the NFL, Larry Lessig, it looks like, he's Jerry Jones, Jeffrey Epstein victims, he's been all over. The victims of Jeffrey Epstein, to be clear, but on the flip side, Harvey Weinstein also.

I don't know how we got down this rabbit hole. He's willing to see the humanity in all of his clients. Anyway, he wasn't directly involved in this, but the Roche Friedman guys are alums of that. firm. So just thought that was funny. That's, yeah, just a messy story. Messy story. Hopefully we don't have to talk more about that one. So did you see that the EO, the Biden executive order, they're due, I think, next week.

Wonder how that's going to work out. I mean, I wonder how comprehensive all those reports will be. They didn't really have that long to write them. No, there wasn't much time. Yeah. There's a flurry. I don't know how many it was exactly. that we're requested in the EO, but it was a lot, like more than a dozen, I feel like.

Yeah. I would imagine that there's going to be some recommendations, but I mean, what we really need is just spot market clarity. Who's regulating that spot market? Yeah, I have a few items on my wish list. Modernized securities regulation would probably be my number one. Basically, the other one would be giving the CFTC control. basically give CFTC and marginalize the SEC if you're up to me.

Well, did you read, so former SEC chairman, Jay Clayton, he wrote this Wall Street journal op-ed this week on crypto assets, and he recommended a bunch of stuff. He recommended that the presidential working group codify stablecoin regulation, which I think they will. And then he recommended that the SEC give clarity on custody of tokenized assets. And I took that to mean a couple things. clarity on like real world securities and things like that. So the custody rule thing and the fact that there's 45, 50 broker dealers in line to get that clarity, but also probably clarity on the

Bitcoin and Ethereum front around qualified custody and whether or not these state trusts actually get treated like qualified custodians in the eyes of the SEC. So to be clear, I totally agree with everything he's saying that we need clarity on those issues. But the underlying current is, why didn't you just do it when you're in the seat? Like, what the heck? Yeah. Yeah, I don't like these, you know, come to Jesus moments after they have lost any regulatory sway. What's up with that?

Come to Jesus while you still have power. How about that? I know. It's just so easy to write up as when you're retired. But come on, man. Elsewhere in incomprehensible drama, There's some crazy stuff about maker. Have you been following this?

Maker leadership, Rune in particular, is looking to potentially float die, the stable coin, and turn it into a free floating new unit of account, not tracking the dollar, in order to boost the censorship resistance. So,

depeg it from the dollar and keep it sensor resistant. I think you have to. I don't, I mean, there's no way that they're going to be able to operate make or die at scale the way it is. There's centralization vectors there around USC. And the other, the concept of going out and buying treasuries, who's actually procuring the treasuries? There are very real points of failure there in that system that will fail. They will 100% fail. And so I think if they go down this path of depegging, let it free float, it's not going to be a dollar anymore, clearly.

I mean, that much I'm convinced of. But what other alternative do you have? I mean, this is a very circuitous way to arrive back at Bitcoin. You know, Satoshi talked about this in the year of Our Lord 2008. And, you know, the question was, why can't you make Bitcoin stable with respect to dollars or maybe make it worth a dollar? And Satoshi's like, well, you need someone to manage that. And you need the system to know what the price of a dollar is.

And, you know, then Satoshi opted for. the free flow. So it's like die came all the way back around and they're like, oh, this is why this is this way. It's like a real Chesterton's fence kind of thing. But the problem is Maker has already embraced the real world asset collateral. They were engaging with banks, like actual banks. They were completely embracing it. So it's a little late, I would say, to take this turn. And so this is by no means something that's guaranteed to happen. There's definitely other factions in the maker community. I find the maker debates to be some of the most complex in the whole crypto space, but very telling. Yeah, they're very complex. I mean,

I've been following the Hsu back and forth a little bit. I mean, it's really interesting. Some of the sharpest minds in the space in the Ethereum community are chiming in and going back and forth. So it's really fascinating stuff to read. But yeah, you can always go back. I mean, you can go back, sell the real world assets, get rid of the USDC, you can definitely roll back. But this was exactly the issue they faced years ago, and I was critical of them. They went from single collateral die. Remember, it's just ether back in the day. So it was very sensor resistant.

It was all kind of automated. And then you're issuing dollars based on those ether reserves. And then they went to multi-collateral die, which is now how it works. And then they end up with a ton of USDC and then some other junk, which is not even on the blockchain. So of course now it's very centralized and very exposed to like OFAC risk and stuff like that. So I guess they can go back. But the problem is you're going to have the exact same problem that they had back then,

which was it's hard to retain the peg at par when you have a difference in you have an asset liability mismatch. and you're using, let's say, ether as the base collateral for your dollar-denominated liability. And then, you know, the question is, well, do you have a negative interest rate if you need to alter the peg? And nobody really wants a stable coin with a negative interest rate.

So, you know, if it trades above the peg, so then they went for the dollar-based assets. Anyway, it's a pretty fascinating case study and sort of macroeconomics. I think. I don't know what's going to happen. Well, the whole stablecoin industry, the way it is right now is you sort of have tether on one end. You have USDC on one end, on the other end. And then you have Maker, kind of in between. And it's possible to me that within five years, tether is going to be significantly marginalized from a regulatory perspective.

I think the USDC model clearly works and will probably get codified into some sort of a bank charter. and then maybe die doesn't exist. Maybe, you know, you have this flurry of attempted Algo Stables on top of that. Maybe who knows. It might be that on some of these crypto exchanges, Bitcoin and Eath become the base pair. Yeah, I think we might go back to that. So it's kind of a push and pull. I've thought this would happen for a long time.

You get very centralized with the stable coins taking over. And then you realize belatedly, oh, actually. that was exposed us to way too much risk. Let's go back to the, you know, commodity cryptocurrencies as the main form of collateral and the main pairs. And I think that realization is happening. So I actually wouldn't be surprised to see the pendulum swing the other way. It does bring some pretty complicated things for the, for the derivatives platforms, though, because then you have the, if you can't margin in dollars, it just gets really ugly on the down swing.

And so you're going to end up with these vicious death spirals on the, you know, the COVID collapse day would be a good example. BitMex just trending towards zero on the Bitcoin price, just because the collateral kept on falling. Yeah, the dollar-based collateral is better for sure. I will say that Tether has shown an interest in distinguishing themselves dramatically from other stable coins and that they refused to blacklist the OFAC addresses they said they were waiting for law enforcement to give them a request and they hadn't heard from

them yet so they didn't preemptively do it same thing with Paxos right same with Paxos or BOSD yeah so there's different schools of thought in stable coin land over that about preemptive regulation versus waiting to hear from a judge so they're not all the exact same product Did you see this news out of Thailand that, so there was supposed to be a transaction. So SCB, the bank of Siam, they were supposed to buy Bitcup, which is an exchange. And they walked away from it a couple weeks ago. It turns out that it looks like one of the reasons they walked away was that there was some insider trading there. So the Thai version of the SEC find the CTO $235,000 for insider trading.

And it was, you know, it was like a small amount of money that he was inside of trading too. So $61,000 worth of fraud. It's like, way to mess up the transaction. What a dummy. It's crazy that we keep seeing this, like minuscule amounts, compromising huge reputations or deals. And, yeah, the proceeds from insider trading are often minuscule. So we do have a bunch of content on the merge coming out. we interviewed a certain David Hoffman from our sister podcast, Bankless.

You know, fun fact about Bankless, they got their idea for the weekly roll-up from this very show, the Weekly Roundup, No Hard Feelings. They've done a great job with it. They're a much bigger show than us, so all credit due to them. So that is going to be dropping a day or two before the merge. And then also in your merge-related content, we're going to welcome. Kyle Waters from Coin Metrics onto the show to talk about Coin Metrix's Merge Report. So here we go. Here's our little sit down with Kyle. Well, Kyle Waters, welcome to the show.

This is your first. We've had some Coin Metrics employees and adjacent folks on the show before, but this is your first time. So welcome. Thanks, Nick. Yeah, happy to be here. So you yourself and your colleagues have written a pretty mammoth report on what, else the merge. What motivated you to write about the merge? Yeah, thanks. Yeah. So a lot of teams at Coin Metrics are working really hard right now in preparation for the merge. Really significant upgrade to Ethereum and the research side of things. We are kind of hyper-focused on thinking about kind of the changes to how this impacts Ethereum, security economics, a lot of new analyses that have kind of derived from the merge. So yeah, just kind of in preparation for that

and being kind of top of funnel for new metric ideation going forward. So keep a look out for that. So what is coin metrics's role in the merge? I mean, what have they done so far and what potential influence could see them have here? Yeah, so we've been running nodes on the beacon chain. So kind of take a step back. So the beacon. is this parallel blockchain that's kind of orchestrating all of proof of stake on Ethereum post merge. It's been

running since it launched in December 2020 and we've been running nodes for it to collect data, to understand it. We've also been running test nets. So the Ethereum community has, and developers have been running these mock merges throughout

2022. They start with Robson, Sapolia. They went on Spoliah, this girly a couple weeks ago, we've been running nodes for these test nets to understand kind of what's going to happen and what to expect for how this impacts on chain data. And do you expect that it'll become materially harder to run the sort of like CM data collection infrastructure post-merge? Is that something that we're worried about?

Yeah, it's a good question. So it actually does require a good amount of kind of new analysis because now we're effectively running two clients instead of just one. So you have your people might have heard of the Geth or Go implementation of Ethereum or some of these other client software implementations of the Ethereum protocol. So now we're running two of these. So we have to collect data from this beacon chain or what we call the consensus layer. And then also the data on what the existing kind of infrastructure layer or execution layer of Ethereum where users are making transactions and account balances. And to be clear, like,

nothing, none of that really changes. The interesting thing is that designers of the merge have kind of created this to be very minimal impact to applications. And there's really no kind of need for users to touch anything or do anything. So there's very minimal impact. But from kind of under the hood, things are changing significantly. And the analytics provider. are going to have to reshuffle a lot of their metrics, presumably, and a bunch of new metrics are going to merge, right? Yeah, exactly. So a lot of minor metrics are going to be, you know, essentially deprecated or go to zero.

That's a very significant change. And then you kind of have this big changing of the guard with the main economic agent in the mix. And so now without minors, there's a whole new analysis around understanding validators. and what their returns are, how effective they are, you know, how performant they are. These are kind of all new metrics that are spinning out of, you know, a brand new set of economic agents who are in charge. So the report's great, really nice visualizations. Let's talk about the distribution of staking, of stakers at present.

So it's sort of highly inegalitarian, I would say, to put it euphemistically. You guys did some work to characterize who is staking and, you know, ascribe addresses to these various entities. I mean, what are your chief findings from this? Yeah, sure. So this is a really important question. So kind of the breakdown of validators. So there are a few different ways to stake. Heath right now.

When designing the system, kind of optimistically, Ethereum developers hoped that anyone could kind of be a solo staker, or run an note independently. Because it's a lot easier than procuring the infrastructure needed to run mining and proof of work.

However, that kind of takes the right tolerant risk tolerance kind of technical know-how you also need 32 eth which you know is not an insignificant amount of money like what $50,000 give or take today and so a lot of these like custodial staking services and staking pools have emerged to kind of accommodate these smaller beef holders and so what we found and this has been talked about frequently but you know like Lido which is a staking liquid staking pool has a significant share, about 31% of, and by far the largest, you know, kind of contributor to staked ETH today. That's kind of one of the big cohorts. The other, these are centralized exchanges. So, you know, a lot of people hold their funds already with custodian exchanges. And then they just kind of will spin up validators, spinning up the nodes on behalf of these people who are

depositing their funds with them. So Coinbase is the largest exchange there at what we've estimated about 13% of the total staked ETH today, which is about 13.3 million total. So you've been able to characterize about two-thirds of all the ETH deposits and the staking contract. Is that fair to say? Yeah, yeah, give or take. I'd say about two-thirds. And yeah, I would encourage everyone to kind of, it's, you know, look at, I look at this pie chart, it's easier to visualize this and to hear it. But yeah, it's kind of understand the difficulty of this problem. It requires tagging addresses on chain. So for some, it's very easy to know that for Lido, for example, it's just a smart contract on Ethereum. You can very easily kind of track the

provenance of flows from Lido. to the beacon chain. For others, you know, a lot of other exchanges kind of go through, these other entities go through kind of more steps to cover their footprints, kind of chiefly Coinbase. And so we needed to kind of understand patterns on chain to characterize funds that are coming from some of these exchanges. So that adds a degree of uncertainty. but we're very confident, confident in what we have tagged here.

And this is an area we're actively searching to kind of better characterize the total set of entities that are staking. Certainly kicked off a big debate in the Ethereum community, the concentration of power here among major validators. So, ETH issuance is currently stands at just over 4.5%. It's expected to drop precipitously. do we know exactly where it's going to stand post-merge? Yeah, that's a good question. So right now, every day, about 13.5,000, ETH is issued to miners via block rewards

and these other kind of uncle rewards, which are kind of this other given to stale blocks as a security measure, composed of a much smaller portion of rewards. But that's kind of the setup with total issuance. or inflation per day, as it stands now in proof of work. With proof of stake, that issuance is going to be dropping to about 1.7, or about 1,700, so roughly about 90% reduction in rewards, so to the validators. And so when we take into account the ether that is burned, so with the introduction of this EIP-1559, which is this big overhaul to Ethereum's

transaction fee market that took place last year. Already at times, Ethereum's issuance has been deflationary, but now kind of when this issuance is dropping so much, the burn will tilt in favor of deflation, very likely. And we're probably going to, so kind of on a non, on a total aggregate basis, we'll see inflation drop to about half of a percent at today's rate of stake and that's an important point. So the schedule is dynamic. It's dependent on the amount of stake deeth goes up as more ETH is staked, but at a decreasing rate. And the issuance will probably be negative depending on where fees or demand for block space, kind of how high that is from users. So that's varied a lot over time. We have one really interesting chart in the report. I think

that contextualizes this a bit more and shows what eith issuance, net eth issuance would have been under kind of the current issuance schedule with the burn rates that we saw over the last year. Granted, Ethereum demand was very high. We had this kind of massive explosion of interest in NFTs and Defi and just kind of overall user demand was very high. and some of that's kind of come down a bit now. So it's very cyclical, but it gives you a sense of where we're going. So basically, if you want to kind of forecast what returns from staking eth will be,

it's really multivariate because there's the generic reward to stakers. There is also the function of your return differing based on the proportion of ETH that is staked or not. So the more youth that's staked, the less you'd earn in terms of your share of that pool. There's the usage of Ethereum and the accompanying burn. And I guess the tips to stakers. And there's also the presence of MV or not. Yeah, yeah, exactly. There's a lot of moving parts and kind of in practice what you'll end up seeing

and what you have seen. So an important point, too, is that, you know, the beacon chain, like I mentioned, has been running since December 2020. So we already do have some data on issuance. There's about about 740,000. ETH has been issued on the beacon chain net since it launched. We already have some data on kind of what expected versus actual returns have been. So, you know, there's also the other factor of getting penalized on the beacon chain.

So you have to do your job right. Yeah, right, slashing. So we've seen some big staking services get slashed for being offline or making mistakes. And so that, and this is kind of all these estimates are in under the best case scenario performing your duties correctly. But in practice, you know, things can go wrong. You can go offline. So that kind of forces you to have redundancy and really kind of think deeply about some of

contingency plans if things don't go to according to plan. Yeah, so for a single staker, I know there's been a lot of emphasis on these sort of individual stakers as potentially part of the theorem's immune system here. If the large industrial stakers start to misbehave or filter their blocks to comply with various government dictates and so on, what is the share of kind of individual stakers that you were able to characterize that are doing the whole process themselves, kind of bare metal as opposed to going through a third party? Yeah. Yeah, that's, it's a good question. It's probably a pretty small portion based on what we've seen. We tried our best to categorize a what we called a hobbyist group. And what we did there

is we just looked for any address that had deposited just the kind of bare minimum 32Eath. and no more than that. And then just label that as a hobbyist. It's also possible that you have some of these, or maybe early, they've maybe participated in the Ethereum crowd sale, or they were just early adopters. They have maybe their whales,

I guess that is a better way to describe them, and they've spun up maybe 10 or 20 validators, and they're doing it as a solo entity. We're not really capturing that in that categorization, but it is kind of about, I'd say, less than 5%. of the share that we've captured. And I think part of the reason that is that, you know, like we were saying,

that there's a lot of variables when it comes to returns. And it's pretty difficult to kind of maintain hardware and software at 24-7, 365 with, you know, consumer. I mean, it can be done with consumer-grade hardware, performance consumer-grade hardware, but there are definitely a lot of considerations that go into it. And if there are options to kind of stake with an expert, some of those are, some of those incentives are pretty strong.

So we've had what some are describing as kind of a pre-merge rally sold off a little bit recently. I know this is the same debate we had in Bitcoin about the halvings being priced in. Just speaking for yourself, what do you make? I mean, do you think that this, you know, there's something of the market is. isn't realizing in terms of pricing in the merge. Is there still optimism or are all these dynamics pretty much priced in by the market?

Yeah. Yeah. So we actually had a really interesting piece on this and say the network last week where we looked at the options market. So we partnered with Data Always, who's a pseudo anonymous, really great pseudo-anonymous data, crypto data researcher. And the market is accurately pricing in some of the risk. and we can see from the options market. And kind of expected volatility is going to probably peak around the merge before coming back down.

At least that's the market's pricing. So in terms of kind of how that feeds into spot, I think, you know, kind of the same thing that you talked about that it's, it's kind of an efficient, it's an efficient market. If you understand the efficient market hypothesis, this should issuance is kind of known, like, where it's going. So that being said, we might see kind of, some of the narratives, especially around some of this like ESG narratives really start to bring new users, get more kind of attention in the Ethereum ecosystem that could push fees up,

base fees up on the network, start driving down issuance. So there could be a feedback loop there that maybe some people are not yet anticipating. One thing that always struck me was the fact that the Ethereum leadership or elites or community, whatever you want to call them, the key stakeholders that make decisions in Ethereum, they installed a pro-cyclical monetary policy, which is kind of the opposite, I would say, of what Orthodox monetary policy looks like, whereby, at least under the Keynesian model, whereby you sort of be meant to stimulate in a recession and a downturn to be countercyclical. In ETHLAND, well, it kind of puts like penalty on you as a holder, right,

if you're not doing, you get penalized with more inflation if there's low activity. Right. So it's in a time in like a bear market, there's more issuance. And in theory, sort of the eth price would sell off as a consequence, Cedorus Paribus. And then in bull markets, there's less issuance and there's more scarcity. In my view, that's pro cyclical. I mean, it's actually, I think the Bitcoin miners operate in much the similar way. But I do have to chuckle a little bit at the fact that Ethereum ended up with this pro-cyclical monetary policy. Yeah. Yeah, no, it's definitely an interesting dynamic that happens. And I think, you know, if you're thinking about where, like we were saying, like where issuance will go, a huge,

I'd say the biggest indicator, really, it's the demand side. And so just in predicting the demand side is really hard. The supply side's known pretty well. It's just where that new kind of bid will come from for for block space is hard to predict. L2s are starting to kind of L2 activity and roll up activity is starting to compose a bigger percentage of kind of base layer block space. But that's, you know, that's one thing to keep an eye out on. And we talk about a little bit in the report. Well, Kyle, keep it up. This is great. State of the Network. All is one of my favorite weekly reads. Yeah, yeah, thanks, Nick. And definitely keep a lookout too. We're going to be doing more reports and kind of as we approach the merge,

more coverage. So I'm excited to kind of get that out there to everyone. Awesome. Thanks for joining us. I look forward to reading it. All right. So I think that's it for the week. Football season is right around the corner.

It's not this weekend. One more weekend of no football, but we're almost there. So you went to do some scouting of the Patriots. What did you make of the team? I'm feeling pretty good about it. Everyone's negative on the Patriots this year. I didn't know if you know that. Everyone's kind of wondering what's going on because Matt Patricia is the de facto

offensive coordinator. He used to be the defensive coordinator. But I thought they looked pretty good. I'm thinking like 16 and 1, 15 and 2 type of season. So the biggest news in Washington football is we have a new name. We are no longer nameless. So we're the commanders. That's really it.

far as excitement goes. Yeah, I actually liked the Washington football team more. I thought it was really funny having the generic name. Now that we're named, it's just less exciting. Yeah, I don't know. I mean, I think the best you guys can hope for is like maybe have a Monday night game, but I don't really see it being that exciting over a year. We get total, the NFC East is always way overrepresented in primetime. And they're always terrible. So, but you notice, like they always put NFC East teams in the prime time slots. We've just been so spoiled with having Brady and all the championships in Boston that they were always on Sunday night, Monday night.

When I was growing up and Bledsoe as a quarterback, they were almost never on Monday night football. So we'll be talking a lot more football this fall, especially if the bear market continues. And we have an episode for you Monday, Tuesday, actually. Monday is a holiday on N-state, our favorite Web 3 merchandise footwear brand. excited for that one. All right, everyone. Have a safe and healthy weekend.