Unchained - Could the Crypto Markets Revive in 2023? Two Researchers Discuss - Ep. 439

Starting point is 00:00:00 Hi everyone. Welcome to Unchained. You're a no-hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. We started carving crypto seven years ago, and as a senior editor, Forbes, was the first Mainstream meter porter to cover cryptocurrency full-time. This is the January 3rd, 2023 episode of Unchained. Are you getting more questions than ever from your crypto-curious, or skeptical, family and friends? Send them my Crypto-Explanter on on TED at go.com slash laura shin. Minima is a new layer one blockchain designed to run in full on a smartphone. Join over 300,000 Minima node runners on the incentive program today to start earning every

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Starting point is 00:01:45 Today's topic is the outlook for 2023. Here to discuss are Lucas Nutsi, head of R&D at Coin Metrics, and Larry Sirmack, VP of Research at the Block. Welcome, Lucas and Larry. Thank you, Laura. Hi, Laura. happy to be here. 2022 was a doozy for the crypto industry, certainly one for the history books. What developments do you think we'll see in 2023 that will be a direct result of the events of last year?

Starting point is 00:02:13 Lucas, do you want to start? Yeah, I think with the collapse of FDX, we've seen a bit of a reckoning, especially in DFI projects that were supported by FDX. I think in 23, we're going to see a lot more search for product market fits. I think FDX was really centered around the speculative use case of crypto assets, where it predominantly served as a speculation platform, right? They did fund a lot of really interesting projects in the space, but at the same time, the majority of their focus was really the speculative use case. I think given the scale of the collapse of FDX, we're going to see really a reshift in priorities and potentially a focus on. use cases that really add value and potentially abstractly even the notion that there's a blockchain in the background. I think the product market fits of projects is going to get tested,

Starting point is 00:03:11 especially if markets continue to contract. And we might finally see projects that have product market fit to survive because they're providing services that are valuable. Larry, what do you think? Yeah, so I agree with Lucas, a couple of things I would add on top of that. So with the collapse of FTX and three arrows and a bunch of other projects, we've also seen a pretty large collapse in terms of credit in the market, which generally just translates to less liquidity because market makers have less available cash to market make with. On top of that, we also see significantly less retail in the market, which kind of removes the other side of a lot of the trade.

Starting point is 00:03:53 so that also translates into slightly less liquidly. So I think that will continue in 2023. And just overall, exactly like Lucas said, there's going to be flights to actual quality and there's not going to be as much speculation. I think the macro markets will continue kind of dictating how crypto markets overall recover and how they turn out in 2023.

Starting point is 00:04:19 Just overall, it's going to be slightly slower and quieter than we saw in 2020. That would be kind of my guess. And there's going to be a lot of impact from 2022, mainly because people are going to be scared. They're going to be constantly looking for, you know, as skeptical as you can be. We already see that now. Everyone's second guessing everything. And I think that's going to continue being a trend. Yeah. Yeah. And I would say that part of that also is simply because the public perception of crypto has really taken a beating. So when you talk about how there's not that much retail, I don't know how soon they're going to come back. But one thing,

Starting point is 00:04:53 I wanted to ask just to draw on your comments a little bit more is I saw that coin metrics published this chart of the crypto prices in 2022. I'm sure everybody saw this because this was a very sobering chart with, you know, fire engine red colors for how the prices have gone. Something that was fascinating to me was that some of the coins that fared better were ones that aren't even thought of as very good, like Tron, Ripple, BSV, and Ethereum Classic, which is kind of funny. But anyway, so I was just curious, like, do you feel that the prices are going to draw down even further in 2023? Or are we going to see some uptick somewhere? Or what's your take?

Starting point is 00:05:36 Yeah, this was a year or 2022 was a year of pain, right? There was a lot of projects that just collapsed, effectively became zombie projects with no one really backing them. And what you saw with projects that were able to retain. some momentum or the communities behind these projects that at times are not the healthiest, but the fact that there are communities behind these projects certainly helps on the market side. If you have a market that's predominantly retail for some of these assets that are deemed, you know, not of particularly high quality, but you have a strong retail community. That can also be incredibly powerful. There's only so much that will get you, though. There's

Starting point is 00:06:23 you know, at some point that project needs to deliver or it needs to continue to pump in order for this cohort of retail investors to continue to support it. And we saw this in the aftermath of the 2017 bull market as well, right? A lot of projects that had huge communities, Iota, XRP, they weren't immune to the continuation of the bear market. And the same might be happening here where you have a little bit of a lag, but retail users are quite price responsive. So if we continue to see a decrease, those projects will follow suit as well.

Starting point is 00:06:59 I think the ones that we're able to survive, I think they're still hanging on to that belief that the prices will continue to pump, which we're seeing in the little macro situation, you know, it's probably not going to be the case. One more thing I'll add to that, and I totally agree with Lucas, is that there's also the effect of just projects that have unlocks where investors bought a lot of coins for cheap. And with a lot of the projects that you named, you know, XRP, BSV, even Bitcoin and Ethereum, you know, it just doesn't exist. But then you look at something like Solana or some of these other coins and, you know, VCs bought ads still,

Starting point is 00:07:38 at this point it has gone down 95%, but they still bought at prices that are still like 80% lower. These dynamics do a lot in a bear market. In the bull market, it almost became a meme where there's an unlock, you know, the price will actually go up. In this market, long term, it actually isn't that way because some investors are very much in the red. And if they bought tokens for cheap, those tokens will be sold. And, you know, when you look at on-chain stuff, which I'm sure Lucas is tracking as well, you see a ton of selling, even at these really low prices by investors. And some of it is forced selling because they're just down a lot and they don't want to disappoint anymore. So these unlocks actually are quite bearish in a market like this.

Starting point is 00:08:20 And I think that will continue being the case. We've seen a ton of ton of VC investment in 2022. And some of these prices are still much higher than some of these investors bought them. So I think that will continue being a trend as well. It will become much more popular for diligent investors to track Unlocks much closer in 2023 for sure. Yeah. And not to pile on with the negative news. But in addition to that, we still have.

Starting point is 00:08:46 kind of continuing fallout and contagion, obviously, you know, we had, you know, the first sort of collapses, but then now because of FTX, there's this like cloud on the horizon with the Genesis DCG-G-G-G-Gem-Eerned situation by extension even gray scale potentially could be a problem here. So what do you guys think might happen there? And how do you think that will also affect both the industry and the market? Yeah, contagion is not something that happens immediately, right? It certainly did for a lot of projects in the aftermath of the collapse of FDX, projects that didn't really have that much runway or that, even from a public perception, because they're a part of what's now considered a massive scam, they were unable to survive. But a lot of these larger institutions, they're able to move capital around and obtain short-term liquidity at times at very unfavorable terms. So there's always that danger that in the short term, they can remain afloat and suppress any sort of

Starting point is 00:09:51 concerns around their solvency. But people are skirmish and afraid because if those conditions are not favorable to the point where they're just pushing the problem further down the line, you have these cascading failures, right? And I think it's highly likely that we haven't seen the full extent of contagion. It's been only a couple of months now. Not even a couple of months, I should say that the collapse of FDX. Feels like the years.

Starting point is 00:10:19 It feels like four years. It's been, you know, only a few days. So it's something that will likely haunt us a little bit still in 2023. I think we're going to have a couple of additional companies that were able to obtain short-term liquidity and survive, push the issue further down the line. But if those conditions are also market dependent and the markets continue to contract, the contagion will also lead to their demise as well. One quarter is really nothing when it comes to this level of the scale of fraud. So it will likely be a recurring topic in 2023. Yeah.

Starting point is 00:11:06 What I'll add is that contingent really works in funny ways. like we saw with Terra, Terra then translated into three arrows having issues and then going down completely, obviously combined with GBTC but regardless. And then after it took another five months for FTCs to go down whilst

Starting point is 00:11:23 having issues with both of these. And when you look at Genesis, I mean, Genesis is quite similar. I mean, obviously, I don't think it turns fraud there, but they have been exposed to effectively every single collapse that we saw in 2022. I mean, it was Terra exposed.

Starting point is 00:11:40 it was exposure to three arrows. There was some blockfire deals as well. And then I think finally, the FTX as well. So there has been just so much beating that Genesis has taken. And obviously there isn't much concrete information. But I mean, it's pretty much understood that there are at least, you know, one, maybe even two billion in a hole right now. And it kind of remains to be seen how that will be solved.

Starting point is 00:12:06 And what effect that will have on its parent organization and other companies in that an organization. Do you want to make a prediction about one or the other? If DCG goes down, this is going to be big news for the industry. Yeah. I mean, it's just a really difficult time to be struggling because everyone else is struggling and it's really difficult to raise capital. Like that's the entire story of the end of 2022 is that the projects that are having issues, regardless of how well they're structured and how well their business looks, it's really, really hard to actually get any capital. And I think that's exactly what DCG and Genesis are running into right now. So I don't, it's difficult to make predictions. They could find capital somewhere,

Starting point is 00:12:44 but I think if they don't, it could definitely be a pretty significant issue because Genesis and Grayscale are massively important. And grayscale, as we know, two products, GBT and EFE. They're both trading at roughly 50% discounts right now. And it's because everyone is scared of what could happen and if this actually ends up materializing. And it is somewhat of a possibility that those funds would have to be liquidated if someone else, for example, bought these assets and they wanted to go in that direction. Whereas if it's just grayscale and you know, the Barry isn't really interested in liquidating any of the funds because they're just generating a lot of money, there's less certainty there. So I think we'll end up seeing, but it's definitely scary and it's definitely worse like

Starting point is 00:13:28 keeping really, really close eye on. I was just going to say that I think valuations will have to come down too if it is in fact a very tough environment to raise capital and even perpetuate their their business model right a lot of their their business models rely on folks trading demand for lending and with markets contracting so does the revenues so if they have to basically raise funds on the on the basis of equity it's very likely that valuations will have to come down quite considerably in 2020 as a result of their short-term liquidity crunch.

Starting point is 00:14:09 Yeah, and I would just say, I think that's already happening. And one good example of that is when you look at Coinvest stock, I mean, it's trading at less than $8 billion market cap. And it's in the bear market 2018, which in my opinion was actually worse in a lot of ways because people thought crypto would die. They raised it a billion.

Starting point is 00:14:26 So it's currently less than the investors paid in 2018 bare market. And that's on the second, you know, after the direct listing when it's trading on the market. So I think valuations have already contracted insanely. It's just not as visible yet, but I think this year it will become visible quite a lot more. So it's interesting that you said that you felt that the 2018 bear market was actually worse because people have been noticing that in previous bear cycles,

Starting point is 00:14:54 the prices would draw down, but they wouldn't ever really go below the high of the previous cycle, the previous bubble. And in this cycle, they have gone, at least for Bitcoin. It's gone below the high of the 2017-2018 cycle. So I was curious why you thought that was and kind of what you thought that meant for this bear market. Yeah, I think, just to clarify, I think in some ways it's better, in some ways it's worse. I think where it's actually better is that there are now, it's kind of common thinking that crypto will be back, that it will continue coming back and that prices will eventually rebound.

Starting point is 00:15:31 In 2018, I remember, like, you know, I basically, I started working at the Black Play 2018. I was thinking in two years I might not have a job because like this thing just might not turn out. And this year, I'm just not seeing that as much. But it's also worse in a lot of ways. Like we didn't see as many collapses as we did in 2022. Like 2018, it was just kind of like slow bleeding into nothing and projects dying because they ran out of money. Whereas in 2022, we just saw absolute, you know, these projects could absolutely destroy like drop to actual zero, which previously was kind of a meme. It can't go to zero. But a lot of these projects

Starting point is 00:16:07 actually did go to zero. So I think those are kind of the two aspects that I would compare to. But in a lot of ways, you know, the industry is much larger. And to answer your question, why did the prices actually go lower? I think a reasonable response would be that the macro environment is actually significantly worse than it was 2018. 2018 was kind of isolated, in my opinion, into the crypto bull and bare cycles. Whereas now, you know, you have Tesla going down 80% as well. You have other stocks that are very speculative going down as well. And that's because there's just significantly less capital and because of what central banks

Starting point is 00:16:42 are doing with the interest rates. You know, that's really challenging when you combine the bear market of the normal cycles in crypto plus also the macro bear market. And I think prices could actually go a lot lower despite what people think. But they might also not. It's just really difficult to read in a market like this. Yeah, I would add that crypto very much trades like an industry, if you think about it as an industry, as a highly speculative tech stock, right? So we haven't seen a recession coinciding with crypto existing.

Starting point is 00:17:15 We also haven't seen a period of monetary tightening when crypto existed. So it is very difficult to make predictions and look retrospectively, right, in terms of understanding what will be the market dynamics because a lot of the investments that came into this space were really coming from traditional funds. There's certainly a retail mania as well. In credit tightening, capital is not as fluid and it becomes a lot harder for this scale of investments really take place. That's why I think there's going to be this reckoning of what is this technology actually doing and what problems is it solving? Because these investors are going to have to be very careful deploying into projects that are even pre-launch. As in 2017, I saw in 2017 were really just based on an idea, a white paper, not a whole lot of actually organic users and actual software written. In a lot of ways, though, this is a lot more of an optimistic time for this.

Starting point is 00:18:22 industry relative to 2018. I think in terms of use cases, there are clearly a lot more use cases for this technology now that coincide with more of a thirst for better services, you know, less surveillance perhaps in some of these apps. Freedom of speech is as a huge topic in today's discourse and, you know, ownership of data. So I think there are a lot of interesting use cases that have been somewhat validated, maybe not to their full extent, but there are various areas now that really just didn't exist in 2018. Maybe we're created because of this influx of capital, but if one of them goes well, which there's high likelihood that one of these areas that this industry recall crypto is pursuing will actually provide value, I think the industry

Starting point is 00:19:17 itself will be uplifted. We just haven't really seen that yet. And because it's coinciding with a pretty damning collapse in terms of traditional finance and credit tightening, it is something that is concerning, but there are reasons to be optimistic as well. Yeah. So we've touched on crypto venture investing at a few different points in this discussion. And I would say the industry is probably having its own sort of reckoning right now. And yet it's, It's also just kind of at this interesting place because VCs have raised 70% of all the funding they've ever raised in the last two years alone. Portfolio performance maybe hasn't been so great.

Starting point is 00:19:59 But given how much cash they have at the moment, I was curious where you thought crypto VC would go in 2023. I can opine here quickly. I think you're totally right. There's still a lot of cash on the sidelines from these investors. What we've seen and we track all these deals as well internally is that, oh, capital hasn't been allocated over the last, you know, three to six months as much as it was before, despite there being a lot of capital on the sidelines.

Starting point is 00:20:26 But also a lot of these funds, as you guys know, like they have a mandate to invest. Some of them are long only funds. And some of them, you know, cannot just justify having a few billions of dollars on the sidelines not doing anything. So I do think that they will eventually have to be allocated, but there is significantly higher standards. Kind of as Lucas mentioned, the valuations have tanked massively. I mean, from what I've seen privately, as well as kind of just from the publicly announced deals, really most companies are raising right now are raising because they're in distress situations because they're running out of money and because they're in some way like have to raise or they're just going to have to close the project. And the valuations of like seed investments as well as Series A have tanked in my kind of experience at least 60%. like six months ago we saw valuations for seed investments going from anywhere like

Starting point is 00:21:18 $6,200 million. And now they're lucky if they're getting 15 to 20, just like before. So I think, you know, that's playing a large effect as well. But on the other hand, these funds eventually will have to allocate the capital. And I think there's just going to be more focused for quality and for projects that are more long-term oriented and maybe not as focus on speculation. That would be kind of my quick opinion. Yeah, I completely agree.

Starting point is 00:21:42 I think there is, for some VCs, this is the perfect environment, right? Because especially for the companies that need short-term liquidity, those that raised in 2020, 2021, and even some that have raised earlier this year before the market saw the second kind of wave of failures and contractions, it is the perfect environment because they have the dry powder. There are companies that need capital and that are taking these valuation hits. So it's something that to them could be very positive. I think the nature of what they're doing, though, has probably changed quite a bit, especially when it comes to due diligence. I think what folks have realized post-FDX collapses the level of due diligence that some of these VCs were doing in their companies that they were investing in the individuals that they were backing was really lackluster.

Starting point is 00:22:35 So our analysis at point metrics has shown some pretty good. crazy smoking guns around FDX and their activities that were just not really understood or acknowledged by a lot of these VCs, right? I don't think they were scrutinizing a lot of these projects to their full extent. So in a lot of ways, this is a positive for the industry as well because there's pressure for them, not only to take these deals for companies that are in the stress that need short-time liquidity, but it also enables them to or pushes them. to do more due diligence on their investments and potentially prevent scams of this magnitude

Starting point is 00:23:16 from growing because now we probably learn a pretty painful lesson in the need for due diligence. So in a lot of ways, this is a very favorable environment for VC investing, but it has changed in terms of the nature of the work that entails making investment into a crypto company. At the moment, another part of the industry that is just kind of a source of mostly bad news is Bitcoin mining. Bitcoin miners as an industry are about $4 billion in debt, and a number of them, including large ones like Core Scientific, have filed for Chapter 11 bankruptcy. And also, obviously, with the price of Bitcoin and the doldrums, mining is actually unprofitable for many or most of them. So what do you guys expect to happen amongst Bitcoin miners in 2023?

Starting point is 00:24:08 I think there's going to be a massive collapse in hash rates that's just waiting to take place. A lot of the A6s that are alive right now mining Bitcoin, they were financed through debt. And because of the contraction, the price of Bitcoin, a lot of these operations are just not profitable. right, but they're forced to continue to mine because they need to get something out of their existing hardware. They cannot afford not to mine. So there's a lot of speculation as to why hash rate was continuing to go up when the price of Bitcoin had collapsed quite drastically. And that's essentially the reason, right? They do not own the machines that they're using to mine Bitcoin.

Starting point is 00:24:54 A lot of them finance these machines and those machines sometimes are even used as collateral. So as the market conditions worsen, their profitability goes down. Electricity prices have also been fluctuating quite a lot. It's not as bad as it once was, but they had to take a hit from increases in electricity prices, coinciding with a very negative environment for Bitcoin. So ultimately, I think we're going to see a continuation and a decrease in hash rates. and we'll see a lot of markets for ASICs, like secondary markets for ASICs, but likely to extend this, the pain, really.

Starting point is 00:25:41 I don't think that this decrease in hash rate will be a cause of concern from a security perspective. All of the evidence that we've seen is that Bitcoin drastically overpays for its security in terms of potential attack vectors. But it is not. something that is positive news, really. There's no twist around why this is potentially good. I think it is going to be a painful environment for miners heading into next year as a result of this collapse,

Starting point is 00:26:10 not only in the price of Bitcoin, hash rate going down, and also the value of these ASICs that were at times paid over MSRP also collapsing as a result of this contraction in the market. The only thing I'll add to that is, and I totally agree, is that this will really be a cleansing of the overall kind of quality of miners out there, the companies overall, those that are prepared to properly use, hedges properly actually sell and not overuse the credit that they can get. Those are the ones that kind of deserve to survive, in my opinion, and those that haven't done a good job that have just been kind of greedy and overextended because they thought that, you know, Bitcoin price would keep going up or for whatever reason, those maybe don't deserve it as much

Starting point is 00:27:00 because then they end up causing issues like we've seen. And then there's a ton of companies with exposure to these firms, like 100%, including Genesis, I think. So these, while they're much smaller than something like FTX blowing up or any other company filing for bankruptcy, these also have effects on the space overall. And I think overall, exactly like Lucas said, hash rate will go down, but it will actually improve the quality of these operations for the next cycle. And the people who actually know what they're doing are going to be very valuable.

Starting point is 00:27:34 When price goes up, it's easy to make money. When price goes down, it's actually very difficult. And those that run the most efficiently, those are the ones that survive. So hopefully that translates into the next cycle. Hopefully it becomes. Yeah, it's almost like we're seeing evolution and action in the industry. In a moment, we're going to talk about Ethereum, but first a quick word from the sponsors who make this show possible.

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Starting point is 00:29:31 so that anyone can participate in building Minima's decentralized network as an equal. Join over 300,000 Minima node runners on the incentive program today to start earning every day until Mainnet launch. Get started at minima.global. Join over 50 million people using crypto.com, one of the easiest places to buy, earn, and spend over 250 cryptocurrencies. New users enjoy zero credit card fees on crypto purchases in their first seven days. With crypto.com earn, get industry leading interest rates of up to 14.5% on over 30 coins, including Bitcoin.

Starting point is 00:30:08 Earn up to 8.5% on stable coins. With the crypto.com visa card, you can spend your crypto anywhere. Enjoy up to 5% cash back instantly, plus 100% rebates for your Netflix and Spotify subscriptions, and zero annual fees. Download the crypto.com app. and get $25 with the code Laura. Link in the description. Back to my conversation with Lucas and Larry. Ethereum had actually probably a pretty good 2022,

Starting point is 00:30:38 except for one sort of big black eye, which is the fact that kind of before the merge, people didn't seem to pay too much attention to how centralizing the flashbots' Mav boost relay could be. And then obviously when the sanctions happened right before the merge, suddenly that became a concern. And then obviously after the merge, now we're seeing 70% of blocks being censored. MEV boost itself accounts for about 60% of all blocks in Ethereum.

Starting point is 00:31:08 So I was curious what you thought would happen to Ethereum in terms of this question of centralization. Yeah, it's probably one of the most concerning trends in terms of censorship. I think the whole structure of MV infrastructure is concerned not only from the censorship perspective, but there are also single points of failure that were introduced as a result of this, right? So if you look at how to attack a crypto network, you know, 101, the biggest power that an attacker could get is the composition of a block, the transactions that are inside of that block. It is like this notion of adding transactions to a block and aggregating transactions.

Starting point is 00:31:51 to the block is basically what MUV is, right? You want to organize the transactions in the block the most profit maximizing way at times by receiving transactions directly from traders that are extracting arbitrage profits from various different markets. This in the context of proof of work is done mostly by mining pools. So mining pools would aggregate the work from all their constituents that were using that mining pool, and they themselves would select the composition of the transactions in a block. It's still the case that the majority of blocks and Bitcoin are selected by less than 20 entities.

Starting point is 00:32:33 And it is probably one of the biggest sources of concern, at least in my view, when it comes to security. The hypothesis with the theorem was that that structure would be improved because now you have a much broader set of validators that are acting like miners and appending the blockchain, add any blocks to the blockchain. But in reality, there's another centralizing force behind us, right, where you basically replace the structure with mining pools with their MEV counterparts and MEV infrastructure providers. So it is, in a sense, you know, pretty negative because it is something that the trend for MEP and the profitability of MV is a lot more tempting than, say, what a mining pool operator would do to maximize their profits.

Starting point is 00:33:26 With MV, you have a lot more entities involved and that are relying on these open source at times endpoints, but a lot of them are not open source and that also has its own set of challenges. But decentralization forces are very powerful, especially in the MVV because centralization, the more centralized that you get, the more opportunities you have to make more money, let alone all of the potential security concerns that emerge as a result of this. There are some good news there. I think there's a lot of work in what's called Proposer, Block Separation, PBS, that's being discussed right now.

Starting point is 00:34:05 I do think it's something that needs to take place at the base layer. and we've had strong cohorts of users that support this idea that any of you needs to be more modular and there need to be more safeguards so that you're basically not replacing a structure that was less than ideal with a structure that is more predatory and potentially dangerous to the entirety of the network. So bear markets tend to be positive in the sense of it's when things get built and I'm hopeful that PBS will be something pretty high on the priorities list within the Ethereum researchers that are working exclusively on an AV. That was a really good explanation, so I don't have much to add.

Starting point is 00:34:50 I will say, Laura, exactly like you said, that it was kind of unexpected for a lot of people that censoring blocks in this case or complying with sanctions would happen this fast. I think that was definitely quite unexpected for a lot of people given the tornado situation. Exactly as Lucas said, there are now initiatives. And FlashBots is developing one of them as well to kind of like decentralize building of the blocks itself and kind of like create a MMP pool, kind of a plugin MMP pool that would solve some decentralization issues. But I think it was not expected that this would come up as fast as it did.

Starting point is 00:35:22 And therefore, it is one of the largest concerns for me as well when it comes to Ethereum. And it's also slightly concerning that a lot of like really prominent Ethereum community members are, not talking about it and they're kind of like ignoring it and saying, oh, this is going to be fine because a year from now or two years from now, this will be fixed. I would expect, just like in Bitcoin, when there's some threat, even if it's just perceived a short term to decentralization, people would speak up a lot and people would really, you know, talk about this

Starting point is 00:35:52 as much as they possibly can. And that's one thing that I found quite concerning myself is that a lot of the prominent people have just not talked about it enough and are just kind of like closing their eye to those concerns, whereas if it's a concern with Solano or a concern with anything else that is related to centralization, they bring it up immediately. That kind of approach by the community itself is a bit concerning for making the blockchain long-term as decentralized as possible. There'll just be some thoughts. I would add to what Lucas said because that's great. Yeah, but are you, so it seems like you both are kind of optimistic that the community will resolve that? Is that how I could characterize that?

Starting point is 00:36:32 I am. I think this is not going to be an issue, but it's kind of unclear how long that will take long term. It could be a year, it could be two years. And in that time, you know, there are attack vectors in Ethereum that are not good for the project itself. Sarah, I was just going to say that, you know, I really resonate with this notion that a lot of voices in the Ethereum community, I think, need to be louder about this being, in fact, a problem. I think this is how these issues get resolved. I'm optimistic that this is, in essence, a technical problem to be solved. It's not something possible. There are various solutions that have been proposed to improve the decentralization of MIV. It's interesting, if you talk to MV engineers that are working on this directly,

Starting point is 00:37:21 it's almost like a nuclear scientist mentality. They understand they're working with plutonium, and they don't want it to lead to contagion. and a nuclear disaster, I think there's awareness of their responsibility. A lot of these folks might not talk as publicly as others, but it is something that I've seen a lot of really interesting, even papers that are published openly about fair transaction sequencing, block composability in terms of MIV. It is something that needs to be discussed because in a period where you see

Starting point is 00:37:54 decreases in interest, especially from retail in DFI and DFI protocols, MEV opportunities also decrease. And what that might ultimately lead to is MEV searchers and firms that specialize in new MV engaging in riskier and potentially more dangerous behavior. There are various types of MV attacks that are detrimental to the health of the network where you're actually perpetuating these so-called reorgs, where you're rolling the chainbacks or transactions that you thought were final are no longer final.

Starting point is 00:38:28 they not even exist in the blockchain. And there are new novel attack vectors that exist because of this ability. So I think shrugging this problem as something that is not a problem, I think it's dangerous because as things get more bearish, what we've seen is that the strategies get more creative. And that creativity, mindtail and impact to real users of these networks through things like time-banded attacks, which is really the worst-case scenario for an MEV attack,

Starting point is 00:39:05 which actually entails sending transactions, back to the M-POOL and disrupting several users. So it does seem like there are some promising solutions to do this, but I definitely echo Leris' comments on, you know, we need to take this issue seriously and elevates the folks that are actually working on this. Yeah, so as I mentioned before, despite this one major issue, Ethereum otherwise had, by all accounts, is a really pretty good year.

Starting point is 00:39:33 In addition to the successful merge, which obviously was an amazing technical feat, Ethereum used to face a lot of competition from other layer ones, the kind of Luna Vax world, which obviously Slana and Luna are either non-existent or struggling. So I was curious kind of where you thought that was going to go, we're going to be credible competitors in 2023, because related is sort of this scaling dilemma. Because in 2022, we did see some of these layer twos take off. So I kind of wondered how you thought the scaling competition would play out in 2023. I think similar, like you said, generally there's just going to be less appetite for projects

Starting point is 00:40:15 that are just alternative layer ones because there's just less, there's going to be less speculation and less cash in the system overall. So I think those narratives will slowly kind of be less powerful as they were in 2022. On the other hand, exactly like you mentioned, I think layer twos are all kind of coming to the point where they're maturing as technology. And especially in the bear market, there's slightly more time to build. You can take your time a little bit more prior to shipping and actually properly built product. I think that's going to be the largest focus. obviously we already saw optimism, Arbitrume,

Starting point is 00:40:52 gained some traction and some activity. I think the first half of 2020 will be ZK Relops actually launching for the first time. I was kind of optimistic that this would happen in 2022, unfortunately, I am now, again, optimistic that this will happen in the first half of 2023. I think, you know, even the solutions that Polygon is building to kind of transfer the proof-of-stake chain into ZKVM chain

Starting point is 00:41:19 is really interesting. You have Startnet launching relatively soon, Zcasing as well, net scroll. Those projects are actually really advanced when it comes to technologically, almost solving the scaling Trilama in my opinion, while inheriting

Starting point is 00:41:34 really good security for the system overall. And I think that's where most of the focus will be. What I think the dynamic that will be interesting is that a lot of these projects will have their own tokens. We already have optimism token, arbitrable, no doubt do a token relatively soon. You have Starknet. They already said that they will have a token. All of these

Starting point is 00:41:53 projects will have tokens. And then how does the value accrual look like for these projects if they get a lot of traction? If it actually becomes a layer where a lot of the smart contract applications happen, how does that battle with the main chain with Ethereum when it comes to investability? I think that's going to be really interesting to see and to kind of witness as we go into to the next bull market, hopefully, within a few years. It's not completely clear to me which chain actually kind of accrues the most value. Like if StarPnet becomes the most valuable or the most activity happens on Starpnet, then the Ethereum is kind of just for validating those actions that happen there.

Starting point is 00:42:36 Then where does the value actually accrue? And I'm not totally clear on that. I don't think many people are actually. Yeah, I completely agree. I think there's been a reckoning of L1s as well, right, in terms of what is truly their value proposition. And I think with Solana specifically, are the tradeoffs that come with

Starting point is 00:42:53 that level of skillability actually worth it. I can tell you, you know, trying to do on Chin Chin analysis on Solana was incredibly difficult in the aftermath of DFDX collapse. You know, Solana in one day produces more data than Bitcoin produces in an entire year. That's roughly around 100

Starting point is 00:43:11 gigabytes of new data per day, which is quite drastic. and it entails some quite unique challenges when it comes to looking historical information because you need to go back in time and store that data historically to be able to answer some basic questions of like, what was the balance of Alameda back in early 2022? A lot of nodes just discard that information by default. So transparency is not something that a lot of these L-1s truly embraced, which I think now because of the severity of the FTC's collapse will be top of mind.

Starting point is 00:43:49 And at times, it might be structurally incompatible with how these L-1s were even designed from the get-go. So there will be a gigantic, I think, push to improve the transparency of these networks. To give you one example of this, we found some really interesting mints of the serum, decentralized exchange happening in Ethereum and going straight. straight to Solana via bridge. Non-disclosed mints comprising about 60% of the circulating supply of serum. Just supply those just minted off in air and sent to salon. Wait, when?

Starting point is 00:44:25 That was, that took place, I believe, in early 2022 and then mid-2020. So when we think about, you know, how did Sam make bail and was able to get bail money? Just a percentage of it, right? That was, that was. No, no. No, there was no. Yeah, it's like literally. Yeah.

Starting point is 00:44:47 It's pretty complex, right? They just put up the house and then like the 250 mil is just like kind of, you know, celebratory thing, I guess. It's like, yeah, just a number they put on there. It's like if you don't show up, you know, your parents and, and these other signers will have to pay this money. Yeah. Yeah. But there was no money actually exchanged.

Starting point is 00:45:07 Yeah. I was making this point because there's a lot that you can't really assess about, you know, Sam's true net worth. as of today because you can't really look at the data from those mints going into Salana, right? There's a lot of transparency issues with a lot of these ones that prevent you from being able to do due diligence at their full extent. And if it's true that, you know, VCs have also been through this reckoning of having to be more due diligent when it comes to investing new layer ones, I do think transparency will be

Starting point is 00:45:44 at the top of kind of the priorities, even more so than something like scalability is now that we have roll-up solutions that are fully scalable live. So I think it's something that layer ones will have to rethink. A lot of the layer ones that really made strides in the previous run will have to be redesigned so that they're more friendly towards, you know, on-chain analysts and optional transparency as a really a requirement for an investment. I just wanted to add really quickly two things that I learned since the FTX collapse, really.

Starting point is 00:46:19 One is that very few people are actually checking the chain. Like you can say, well, everyone's watching the blockchain all the time. It's actually not true. Like sometimes I find things randomly by manually scrolling three to scan and no one found before. And it's like a really important thing. So I would say that needs to change us as well into the next market. Like there need to be better monitoring tools. People need to pay more attention just in general because exactly like Lucas said,

Starting point is 00:46:44 There were a lot of things that we could have picked up on if we actually looked for the right things. Hopefully, that will change. Second thing that I've learned as well is how important distribution of coins and just in general, how these layer ones are actually distributed. You know, people would say even if Solana is like relatively decentralized, actually ultimately doesn't matter as much if so much ownership is concentrated in someone's pocket that ends up being a bad actor. We just see how much bad will and just bad attention.

Starting point is 00:47:14 And just in general, the effect that something like this can have on a project itself, just because one person had a lot of the supply and was publicly associated with it. So those two things I would just point out to people that I think were kind of, I learned that they're more important than I initially thought based on some of these actions that happened in the last month. Yeah, oh my gosh, I completely agree with you on that first point. Like in the days leading up to the collapse, when people couldn't find any wallets that looked like, cold storage for FTX. Like that just effing blew my mind.

Starting point is 00:47:49 I was like, how did nobody ever notice that before? Like, that is like with the whole point of having an exchange is that you're supposed to store these things for people and protect them from being hacked. And the notion that they didn't even have anything like that was just like, what? Like, you know, how did this never get noticed before? I kind of couldn't believe it. I was just, yeah, my jaw was on the floor. All right, let's talk about stable coins, which, you know, most people probably thought that this was sort of a sleepy part of the industry.

Starting point is 00:48:21 And then lo and behold, when the macro environment completely changes, suddenly competition heats up. And this year we saw this battle in stable coins. Finance leveraged BUSD to try to take market share from circles USC, or at least, you know, who knows what they were actually trying to do, which is sort of seen that way. huge collapse in the world of algorithmic stable coins, plus just the general fact that they've never really worked. And Tether somehow taking more criticism and yet surviving, what do you guys think will happen in the world of stable coins in 2023? Look, it's an insanely good business model in an environment like this.

Starting point is 00:49:01 You look at crypto companies and the outlook for the next year, you know, Circle and Tether as well as Paxos, they're insanely good position when it comes to their business health currently and how they will perform in 2023. Because as long as the interest rate keep relatively high and as long as they don't pay out any of that interest rate to users, they're literally printing cash. And we're talking about like large magnitudes. I don't think people realize. Like we're talking about like 100 billion total supply. You multiply it by like roughly 5% what you can get on that.

Starting point is 00:49:34 It's a lot of money. And those companies will continue growing and continue. continue doing well. And exactly like you said, there will be battle for those interest rates for their revenue because it's actually a lot. And I think Biden has understood that relatively early on. And obviously they're working with Paxos. And my understanding is that they have a 50-50 split when it comes to revenue. So, you know, actually this year it might be a decent chunk of the total revenue that they make, even compared to trading fees and lending fees and all that. Because it's just the environment is really favorable to stable coins. And I think just like

Starting point is 00:50:08 the last bear market in 2018, 2019, they've continued doing well. Of course, there are some redemptions, but actually people continue using them. They're used for investments. They're used for trading. They're used for some commerce already as well. And they definitely have one of the largest product market fit in an environment where there's not as much speculation as before. So I think this is going to be actually, like, unearadically, this is going to be one of the more exciting things to look up for in 2023 because it's just these kind of. companies will go at it. And you will see Circle talk smack about Paxos.

Starting point is 00:50:42 You'll see I'm talking smack about Tether. They'll just be going at it. And I think that could get interesting, uh, 20, 23. Yeah, as an instrument to, you know, attain stability, right? I think the reserve back stable coins have certainly achieved a product market fit. I think the collapse of, of algorithmic stable coins like Luna, I think really shed light on the dangers of some of these structures. We also saw a lot of, you know, drama for lack of a better word, within Maker,

Starting point is 00:51:15 with the assets that support die as a stable coin. I think, you know, a lot of those concerns have been remedied at this point, but the reserve-backed stable coins, I think, are here to stay and have certainly attained substantial liquidity. You know, we did one of our most popular Stittenden Network newsletters this year was in an analysis of USTC and USTT, it's very clear if you look at when these assets are used, the time zones where these assets are used the most. Tether has achieved a pretty strong product market fit in APEC. So a lot of very large liquidity providers in the Asia Pacific zone using Tether as the instrument to attain.

Starting point is 00:51:58 Portability between exchanges, access services in DFI, hold USD equivalents that attain a level of stability. Whereas USDC has achieved the same exact thing in the West. So if you look at Europe and US, USC is the stable coin that's most predominantly used in specifically in US business hours. So the momentum with these stable coins is really difficult to break because they are a core component of how a lot of these funds operate. I also think while this is true and they've certainly achieved product market fits, there's definitely large liquidity providers that are surviving through this bear market that leverage these products. I think there will also be scrutinized by regulators that are now taking a closer look into

Starting point is 00:52:49 crypto assets, specifically now from this risk perspective. Because stable coins, even the reserve back stable coins, they're not risk-free, right? And when I'm talking about risk, it's really the potential for them to be exploited and that leading to chaos and destruction, which is a big part of my job at coin metrics is thinking about these attack vectors. For a lot of these table coins, one key can mince any arbitrary large units of these table coins. One admin key enables you to mint potentially one trillion USDC, which for defy is a gigantic problem, right? because if I can print a trillion dollars worth of USDC, I can just trade any market that has a pair with USC and deplete all the liquidity in those markets

Starting point is 00:53:36 because they're automated market makers, AMMs, right? They're structurally conceived to make markets regardless of who I am. So I do think there's going to be some scrutiny on the governance of stable coins that will likely come in the form of regulation. I don't think it will kill these stable coins. I think these are problems like the presence of admin keys and nearly all reserve-backed stable coins that are somewhat irresponsibly implemented. I think will be scrutinized, but not an impossible issue to solve. I just think it's going to become top of mind because now we have this massive focus on security and really investor protection, which stable coins play a gigantic.

Starting point is 00:54:24 roll in. All right. Let's quickly talk about defy. What's interesting to me is, you know, it definitely had certain wins, which were, you know, how during the great financial crisis of crypto in 2022, a lot of defy functioned very well. But trading is down and total value locked is down, although, you know, it's obviously because the value of the coins themselves have gone down. The thing is the sector is also seen, obviously, a ton of hacks. So I wondered what you thought, would happen in defy in 2023. I think exactly like Lucas mentioned previously, I think we need to focus more on the user experience

Starting point is 00:55:02 and on just abstracting away as much of the blockchain as possible. Like ideally you get to a point where you have to, you know, the FTX level of experience in terms of trading, I don't mean in terms of anything else. Or, you know, finance is a better example. But just something that works as well that actually uses blockchains and allows people, you know, let's say, in China or people where maybe there's more restrictive activity to actually use these tools

Starting point is 00:55:28 properly, you know, I think the UIDX probably gets the closest, but it's still not quite there yet. It's not there yet for multiple reasons. And a lot of them go back to scalability. But regardless, I mean, there's still a long way to go there. And I think with the collapse of FTX and with some these like liquidity concerns that you now have with exchanges, like their concerns that genesis goes down, what impact they'll have on GM.

Starting point is 00:55:53 and I, you know, those sort of concerns, I feel like we've seen every single exchange being illiquid on Twitter over the last three weeks. Those concerns that can actually be addressed properly in DFI. But I think the main roadblock is still the usability of these protocols. And I think hopefully that will be the focus of 2023 is to try to make something that people actually want to use, not just actually farm to make money out of. but something that I actually want to use, just like I wanted to use finance or I want to use other products in the market. Yeah, I completely agree.

Starting point is 00:56:31 I think product market fit is definitely going to be the biggest topic for Defi. I do think there are things that excite folks that go beyond, you know, the use cases that people are usually interested in in terms of trading. Unisop is an amazing product, but the AMM model might not be the best. best for users, right? The fact that you don't know exactly what price you're going to get, the fact that your transaction will likely get sandwiched through MIV. I think there's a lot there that can be improved. But there are also things in defy that you can't really do anywhere else, right? The notion of a flash loan, which is a loan that you don't need to post collateral to attain pretty massive amounts of liquidity, as long as you're sending it back to the lender in the same

Starting point is 00:57:20 transaction is not something that you could do in finance. You could potentially do in finance, but it would be a contract thousands and thousands of pages long so that all the edge conditions are addressed. So there are some very unique use cases that I think will be tested. I think you have to have a strong kind of foundation of services that you're providing, things like flash loans for market efficiency, better lending protocols that manage risk more active. And you also have to have, you know, products that are built on top of those foundations that potentially abstract away, even the notion of that there's a blockchain in the background. There's going to be some tradeoffs in terms of centralization, of course.

Starting point is 00:58:05 But I do think there's going to be this path where we need to focus more on what is unique about this technology that you really cannot do. And it's not just, oh, I'm going to buy and hold this token because it's going to go 20x. You can't really blame people from doing this because historically, you know, that's what's happened. People want to be better off financially. So they're naturally gravitating towards these use cases. I think DFI projects, they need to really distill what is unique that they're doing, provide, focus more even on the front end side of things. Once you've determined, you know, from a foundational perspective, what services you're providing and try to replicate in a non-custodial fashion, the level of experience that you're.

Starting point is 00:58:50 sell with things like FDX and even Binance when it comes to trading and lending. I think that will be critical to the success of Defi. And I think there's even from an investment perspective, VCs, I think, are now better aware of this dynamic given what would happen to FDX and some trauma of that happening again. I think those solutions will also see funding. All right. Let's definitely discuss NFTs. Trading in them is way down in April, trading in April, trading in

Starting point is 00:59:20 Ethereum NFTs was at over a billion dollars. Now the trading volume is at around $200 million. So where do you expect NFT interest in trading to go? Really good question. I think we've already seen some like slightly higher activities towards the end of 2022. Again, I think NFTs have actually shown to be relatively resilient when it comes to kind of keep coming back when, you know, there have been almost like multiple mini cycles for NFTs that I've seen over the last two years where the activity goes super high, people

Starting point is 00:59:55 are speculating, and then all of a sudden goes down again. And it recovers again. And I think the reason for that is that it's just a very easy concept for non-crypto people to grasp, which is like, let's collect things that have rarity, to have value. Like I'll provide an anecdotal example. I do these lectures two or three times a year for university classes, and I do them just basically intro class to crypto as a whole. And the part that people always care about the most,

Starting point is 01:00:26 and these are like 21, 22 year olds, always the NFTs. Like they just ask so many questions. Like, how can this be so valuable? Like, why should I be holding these things? Why apes?

Starting point is 01:00:35 Why not punks? And I think it's because it's just a really relatable topic to younger people. And because of that, I think this will continue coming back up in terms of interest. I don't know about the prices and I don't know about specific NFTs. But I think there's also. also really large product market fit that maybe hasn't been as realized as it could be. Like there's no reason why some of the trading cards should not live on a blockchain,

Starting point is 01:00:59 why a lot of why people shouldn't be trading these things online instead of actually in person. So I think I think there will continue being a ton of development there. I don't know if this will happen in 2023, but it is something where I've personally seen enough evidence that this is a really really sticky concept and will continue coming back and it will be more and more and more used in some games and in some things overall, even though there is also this hate, like almost irrational hate, by some normal people, there's also an insane amount of interest. And one follow-on question, do you also think that the creator royalties will continue

Starting point is 01:01:36 to be kind of jettisoned by marketplaces? Or do you think, because obviously we've also seen certain ones sort of embrace them? So what do you think will happen on that score? Yeah, I personally think it's something that's very difficult to enforce on a smart contract level. And I think in the nature of just in general how crypto is conducted and how blockchains work, I think long term royalties will not exist just by the notion of it's really difficult to make them mandatory. Even though OpenC has a 80, 90% of market share and they can kind of like decide what will happen there. They need to compete with other marketplaces.

Starting point is 01:02:14 And like you mentioned, some have followed, but some actually haven't. And I think the most pragmatic view that I have on this is that long term, this is not going to be a way to monetize NFTC that it's going to have to be in a different way purely because of the technical complexity of implementing something like this. And for example, the OpenC solution that we've seen, I think personally I think it's a joke. I think it leads to like there's no point in the NFTs if this is how we will go about enforcing royalties in my opinion because it leads to effectively kind of like unfair competent. And it's almost like a really large play of bullying all the other wants. And I don't think that's going to be long-term sustainable. So in my opinion, it would be it's just not going to work. Yeah.

Starting point is 01:02:57 And just for listeners, what he's talking about is that their solution is that if you're a creator and you say that you want to enforce royalties, then your NFTs will be blocked from being sold on the marketplaces that don't. Yeah, have royalties. So Lucas, what do you think will happen to NFT trading and also NFT royalties? Yeah, I think the royalties model is something that's really interesting because it is enhancing the utility of NFTs to an extent that, in my opinion, make them a lot more exciting. I think right now, if you think about their utility, it is really as a mechanism to demonstrate wealth in a lot of ways, which I think is what in a lot of circumstances drives people into them. like how can this, you know, NFT be worth so much money?

Starting point is 01:03:47 And I think for a lot of folks, it's a more tangible thing, right? Oh, I own this. This is mine. So they're naturally gravitating towards it. I do think with the NFT sector, if you will, of this industry, the marketplaces have taken a much more substantial role in, you know, making markets for NFTs, determining really how these NFTs will be issued in a lot of ways imposing upon like creators on, as we just were talking about, how these NFTs should operate.

Starting point is 01:04:26 I think there are a lot of technical issues that are circumvented by a centralized marketplace, but in some ways not in a positive way. I think marketplaces are going to be deep, scrutinized in 2020. I think for two reasons. I think the first reason is there's an argument that they do hurt the utility capabilities of what creators can do and the policies that creators can implement on who owns their NFTs and what that represents. I think what excites me the most in terms of use cases goes beyond just, oh, I hold this, I own this. It's really, what can you do with it? If it's a song for, example, I'm particularly excited about music NFTs. Can you create a system whereby you're

Starting point is 01:05:16 receiving payouts from the song being used in a commercial fashion, be a commercial or a movie? Things like this, I think, can be incredibly empowering to artists. But marketplaces, because they're trying to do so many things at the same time, I think they're unable to focus and explore. The other thing that I think will drive a lot of scrutiny to these marketplaces, is that, you know, in 2021, we saw a pretty severe market manipulation taking place in a lot of these NFT marketplaces. There was a paper that has just come out in December of 2022 that focused on market manipulation, specifically wash trading in NFT marketplaces. And wash trading is when a buyer and a seller are the same entity or controlled by the same entity. And they're just making markets to

Starting point is 01:06:07 stimulate volume and potentially increase the prices of a specific asset. And this paper, I think, is really interesting because they found that $3.4 billion was used last year to pump NFT markets via wash trades. That happens predominantly on looks rare, the looks rare marketplace. And attackers were highly sophisticated, not only in terms of manipulating, specific NFT markets, but also manipulating the token disbursement mechanism that these markets use to reward their participants. So looks rare, for example, they have their own, looks token, and it is issued on the basis of the volume that are making the platform. So not only were these

Starting point is 01:06:57 attackers manipulating these markets to increase the prices of NFTs that they had no interest in holding a long term, but they're also getting, uh, getting, a disproportionate amount of the token in that platform for making so much market. And this analysis shows that there are some pretty large entities involved in doing this. So I do think as we continue to uncover instances of potential unhealthy behavior in these marketplaces, I think they're going to be scrutinized more aggressively by regulators. There are both good and bad things about this. I think the good thing about this is that it will really focus on adding more utility to NFTs via more technical methods.

Starting point is 01:07:47 I think there are services that might emerge as a result of this that might focus on specific parts of issuing NFTs music, for example, I think is at this point under explored. But I think it will hurt some user experience, right? because NFTs have served this role as the stepping stone for a lot of new users into this industry. The marketplaces, they play a massive role when it comes to usability and interfacing with crypto. So it's kind of tough to make predictions, but it is something that I see being scrutinized in 2023. All right. So last question that I want to ask is after the fall of FTX, finance is now incredibly dominant. And amongst crypto-only exchanges, accounts for nearly 90% of trading. Yet, it's also reportedly the target of an investigation by the Department of Justice.

Starting point is 01:08:44 So what do you guys think it means for the industry to have this one player in particular, finance, which, you know, as I mentioned, likely has some regulatory baggage to be so dominant. And how do you think that could affect the industry in 2023? Yeah, I mean, it's not ideal. Like we saw with FTX, you know, FTCS was probably 10 times smaller in terms of the size. And it really, really affected the industry in a bad way. And the ripple effects have still, maybe not some of them have still not been seen yet. And it's been like a month and a half or something.

Starting point is 01:09:22 So, I mean, to answer your question very bluntly and pragmatically, it would be insanely bad if anything happened to Binance in my opinion. It's where most liquidity is for most spot pairs, for most futures pairs as well. And it's just, you know, yeah, I don't think it's even comparable to anything in traditional finance. It just has a near perfect monopoly currently. And if something were to happen to it, including some regulatory issues or including anything else, it would have a really bad impact on the overall market. And on top of that, just like the faith in the industry alone, like I think FTCS alone. alone in itself will have impact on regulation for years to come and also on the faith of

Starting point is 01:10:06 new entrants that maybe just started using FTX. They weren't familiar with any of these risks and end up losing all their life savings. You know, if you if that happened to Binance, you have 10 times more capital on the platform and it's 10 times more important for volume for overall trading, it would be a complete disaster in my opinion. I think it would be actually Signaf Clayworth and Mount Gox back in the day, if something were to happen to Binance. That being said, to be slightly more optimistic, I think, of course, finance will have regulatory issues in the US, right? Like, just like BitMex did, of course, initially in the first two years, they had very lax

Starting point is 01:10:46 K. Everyone knows that. Like, they had almost, if you wanted to use it without KYC, you could. You could just split your account between multiple and then do the daily withdrawals. It was very simple. They've ramped that, ramped it up really a lot. over the last two years. Like I just saw last few days how they're still kind of harping on people to update their

Starting point is 01:11:05 KYC. There's a lot of KYC now on Binance and they're quite diligent. They have large compliance teams as well. But there is a lot of baggage from the early days, just like there was a lot of baggage with Bitmex. And now the question is like what could actually happen? Like is it just going to be kind of a slap on the wrist fine that's easy can pay off, you know, 0.5% of his net worth or is actually going to be something slightly more

Starting point is 01:11:28 significant. I personally think the risk of, you know, Biden is being affected so badly by regulations that it dies completely is quite low myself. But on the other hand, there could be an effect and it scares, you know, me a lot that something could happen to Binance and it would affect the entire industry for, you know, years and years and years. And I don't know if that would be recoverable. Probably would be, but it would be a really, really bad shock. And a lot of the questions we get from our customers these days is exactly like what will happen to Binance. Like, people are actually really freaked out. They're freaked out about stable

Starting point is 01:12:01 coins, Binance, freaked about Tether. Everyone's freaked out about everything. But Binance would be by far the worst, in my opinion. I completely agree. It's terrifying the extent to which, you know, Binance is now predominant in terms of liquidity in this ecosystem. I think, you know, to a very concerning degree, not only because, you know, there might be regulatory scrutiny that gets potentially overreaching and impacts their ability to continue to provision liquidity or something more concerning, you know, total regulatory scrutiny, right? And really a massive decrease in liquidity in the market. So it is terrifying.

Starting point is 01:12:40 I think it is something that will hopefully be addressed with more competition, both on the decentralized side with better products that are built on decentralized platforms, as well as better competition, potentially by entities that were responsible, the coin basis of the world, which probably there are two or three of those at this point. It is, to me, a good thing for Binance right now to see what lessons could be learned from the FDX collapse,

Starting point is 01:13:11 I think especially related to BNB. To me, that's one of the areas that is the most unclear. I think we have a good sense of their reserves, even though their proof of reserves was lackluster in a lot of ways, could be completely manipulated if they wanted to. Their custody scheme is not super sophisticated or it's very simplistic. So we can see that they have a lot of reserves in the tokens that they support in their platform and have liquidity for.

Starting point is 01:13:42 My concern at this point is mostly around the transparency around BNB. BNB exists in three different blockchings. at least right, in a native format. It exists in Ethereum as a NERC20 token. It was how they initially raised funds. It exists in the Binus smart chain, which is the Ethereum fork. It exists in the B&B chain, which is a Cosmos SDK implementation. There isn't a ton of transparency around historical supply for B&B.

Starting point is 01:14:15 And at the same time, there are some very concerning transactions where they likely minted quite a lot of BNB. to sell to, you know, private entities, like any other token, debase other users. I think the time or the circumstances surrounding Bynes at this point will not be aligned with this type of activity. I do think they will have to bring a lot more transparency, given their role as a central liquidity provided to the industry, not only on their reserves, but also their B&B holdings, the distribution of B&B across all of these blockchains, and potentially being a lot more, frankly, careful when it comes to new products that they launch, because now they are being further scrutinized.

Starting point is 01:15:06 I would say that Bynes in 2017 is very different than Bynes today from everything I can see, both on-chain and off-chain. It's a much more mature exchange, and I think CZ has done a really good job maturing it. it is at the same time terrifying because there are these ghosts from the past that might haunt them, either because they might have not abided by all the regulations at that point in terms of AMLKYC, but also because they were operating on a much more experimental, you know, care-free way, especially with the issuance and dynamics of the BNB token. We'll likely learn a lot more about BINS's operation, either because of this investigation or because of

Starting point is 01:15:47 voluntary disclosures, hopefully the latter. But it is something that I think will get scrutinized in 23 as well because of their role now as the predominant liquidity provider in the industry. All right. So we're going to wrap with a one sentence prediction from each of you for 2023. One sentence. Zika Robes will finally launch and actually be usable by normal people. I like that.

Starting point is 01:16:16 I think that's pretty good. mine will probably be, auction analysis is here to stay and we're just scratching the surface of what is possible when it comes to diligence. Love it. All right.

Starting point is 01:16:30 Where can people learn more about each of you and your work? For me, you can find me on Twitter at Lawmaster. You can also email me at L-Sermak at thebloc.co. And of course, we write a lot of research on the blackresearch.com. And for me, I'm Lucas Nutsi on Twitter.

Starting point is 01:16:50 You can read more about my research by subscribing to State of the Network, which is the Quimetrics newsletter. You go at Quimetrics.io and go on publications. There's going to be a link to subscribe to State of the Network. It's where the team at Quimmetrics releases new research. Perfect. It's been a pleasure having you both on Unchained. Thanks a lot.

Starting point is 01:17:11 Thank you for having us, Laura. Thanks so much for joining us today to learn more about Lucas, Larry, and all these topics we discussed for 2023. Check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Mark Murdoch, Matt Pilchard, Wanner Vanovich, Sam Shrebram, Hamajim Dar, Shishonk, and CLK transcription.

Starting point is 01:17:31 Thanks for listening.

Unchained - Could the Crypto Markets Revive in 2023? Two Researchers Discuss - Ep. 439

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