Unchained - The Chopping Block: A Rough Week 3 for SBF, DCG Troubles, Fees at Uniswap - Ep. 559

Episode Date: October 21, 2023

Welcome to The Chopping Block – where crypto insiders Haseeb Qureshi, Tom Schmidt, Tarun Chitra, and Robert Leshner chop it up about the latest news. This week, the four discuss – and disagree about – Uniswap’s new fees, SBF trial week 3, and DCG potentially being taken out by the NY Attorney General.  Listen to the episode on Apple Podcasts, Spotify, Overcast, Podcast Addict, Pocket Casts, Stitcher, Castbox, Google Podcasts, TuneIn, Amazon Music, or on your favorite podcast platform. Show highlights:  What happened recently on the criminal trial against Sam Bankman-Fried, including testimonies from Caroline Ellison, Nishad Singh why Robert doesn't like the cartoonist and how Tarun is friends with a stenographer  how Nishad Singh confirmed what everyone suspected about the cross-collateral risk engine at FTX why Haseeb believes that the NYAG's lawsuit against DCG, Genesis, and Gemini is "brutal" how DCG resembles the Roman Empire, according to Haseeb what Robert thinks about the introduction of the Uniswap Labs new fees, considering he was in a similar situation with Compound Labs' how can companies that build open-source protocols monetize their efforts whether the implementation of the fees will reduce the total volume for Uniswap Hosts Haseeb Qureshi, managing partner at Dragonfly  Robert Leshner, founder of Compound Tom Schmidt, general partner at Dragonfly  Tarun Chitra, managing partner at Robot Ventures Disclosures Links Previous coverage by Unchained on the trial of Sam Bankman-Fried: How Heated Sidebars During the SBF Trial Could Impact the Jury’s Decision SBF Trial, Day 1: Possible Witnesses Include FTX Insiders, Big Names in Crypto, and SBF’s Family SBF Trial, Day 2: DOJ Says Sam Bankman-Fried ‘Lied’ While Defense Claims His Actions Were ‘Reasonable’ SBF Trial, Day 3: Why a True Believer in FTX Flipped Once He Learned One Fact SBF Trial, Day 4: SBF’s Lawyers Annoy Judge Kaplan, While Wang Reveals Alameda’s Special Privileges Sam Bankman-Fried Trial: Here's Everything That Happened So Far SBF Trial, Day 5: SBF's Defense Finally Found Its Legs, But Can It Counter Caroline Ellison? SBF Trial, Day 6: Caroline Ellison Recalls 'The Worst Week of My Life' SBF Trial, Day 7: In SBF Trial, Did the Defense Lose Its Opportunity With the Star Witness? SBF Trial, Day 8: Former BlockFi CEO Adds Credibility to Fraud Charges  SBF Trial, Day 9: Nishad Singh Describes Former FTX CEO as a Bully and Big Spender SBF Trial, Day 10: Defense Struggles to Discredit Nishad Singh's Testimony SBF Trial, Day 11: How Alameda Got FTX Into a $9 Billion Hole Uniswap: Unchained: Uniswap Labs to Charge 0.15% Fee on Certain Tokens NYAG lawsuit:  Unchained: NY Attorney General Sues Crypto Firms Gemini, Genesis, and DCG for Over $1 Billion Fraud Reddit: Unchained: Reddit to Discontinue Community Points Citing Scalability and Regulatory Issues, Sparking Community Backlash Learn more about your ad choices. Visit megaphone.fm/adchoices

I think we have a couple of takes. My favorite take this week was the fact that Nishad finally admitted to the thing that I think everyone kind of thought was true, but wasn't totally 100% true, which is, you know, one of their main selling points in 2020 was that FTX has this great cross collateral risk model. And you could like give them any shit coin you want and you could post it as margin to take 100x leverage on Eath. And somehow they would liquidate it correctly and like reallocate the collateral. Not a dividend. It's a tale of two clans. Now, your losses are on someone else's balance. Generally speaking, aircrafts are kind of pointless anyways. Unnamed trading firms who are very involved.

I like that eight is the ultimate puns. Defi protocols are the antidote to this problem. Hello, everybody. Welcome to the chopping block. Every couple weeks, the four of us get together and give the industry insider's perspective on the crypto topics of the day. So quick intro is first you got Tom, the DeFi Maven and Master of Memes. Next, we've got Robert, the Cryptoconisour, and Tsar of Super State. Then we've got Tarun, the Gigabrain, and Grand Puba at Conlet. And finally, I'm a sieve, the head hype man at Dragonfly.

So we are early stage investors in crypto, but I want to caveat that nothing we say here is investment advice, legal advice, or even life advice. Please see Chopin Block. That XYZ for more disclosures. All right. So we're on to week, what is this week three now of the SBF trial? And I'm honestly losing steam. Like it's gotten, I think like the bombshells are mostly over.

I've heard so many people described as the star witness, but the prosecution, I guess they've had like five star witnesses so far. Basically, anybody who worked at FTX is a star witness. So just to give you the quick rundown, I don't think we're going to talk about it as much on the show because Tom was very exhausted by all the SPF talk, but we're just going to run through it real quick for those of you've been asleep at the wheel.

Caroline Ellison, the scorned lover and the CEO of Alameda Research, was on the stand. She was one of the many star witnesses for the prosecution. She basically agreed that everything was bad and they defrauded people and she was complicit. the whole thing. They played one of the recordings of Caroline getting in front of the Alameda staff and explaining to them, yes, we kind of stole the money slash, you know, lent it from this entity to that entity without an intention to pay it back. She also testified to making up seven different

fake balance sheets that she presented to Sam to select from to decide which one to show to defraud their lenders. She also cried on the stand, which apparently was a big hit. And supposedly this was a big moment for the prosecution. Then Nasad Singh, who was director of engineering, He testified about the financial chaos at FTCS. He was described as the moral heart of this story in that he was somebody who was always had tortured feelings. He was used for political donations and some real estate purchases, but he always felt half-hearted about it.

He confronted Sam several times to try to get him to come clean, but that never happened. He also did engage in some lavish purchases that he eventually unwound after the whole ship capsized. And that's basically it's so far And there have been some accountants and some other stuff But so far honestly if you've been following the story before now I don't think there's anything new that we've really learned

In the last week it's just all kind of been on display Anything you guys would add to what you've been observing so far in the trial I'll just give a quick shout out To how I consume the information about the trial So there's a Twitter account by a journalist who's like in the courtroom Inner City Press that I just read their tweet summaries of like the days events in like, you know, two minutes. And it's a great way to consume all the information.

Hold on. There is one more journalist who's in the courtroom every day. You don't watch Laura's recap videos? Come on, Robert. I actually have not watched the videos yet. I've heard they're incredible. I'm just saying, you know, that was how I was consuming information. Same.

Matt Russell, a guy who runs, Intercity Press is a machine. You're like basically reading the transcript from the courtroom. I briefly considered going myself because it is open to the public and it's just down here in Lower Manhattan. And I was like, why not? You know, curious. You got to go at least one day. You got to go at least one day.

I talked to a friend who tried to go and greatly dissuited me because he said, got there. And first of all, if you want to wait in line, if you want to go to the main courtroom, you have to get there at like 6 a.m. There's a big line. Everyone else is going to like the overflow room. And then they take your electronics and then you're waiting in line for hours for the courtroom to open without electronics. And so it's just like this kind of silly setup.

You're probably not even going to make another main room anyway. but if anyone's interested, you can go. Wait, how is he live tweeting if they take his electronics? I'm guessing he's in the overflow room. I don't actually know how he was doing that. Maybe press gets their own exemptions. I think press is allowed to report directly. Because people are also like different journalists have been live tweeting pictures of the sketches.

Yeah, not shout out to the cartoonist. I don't think they're that good. Do we get an overlay of some of the cartoons? I feel like we need to insert that into the Robert is trying to tell you he wants Dolly to replace all of the court sketch artists. That would be amazing. Put a camera in the room

and let the camera use a generative AI to basically create its scene. I mean, I don't know what the rules are and why they have to actually have, like, to this day, like, you know, an illustrator instead of like a photo of the actual situation. But it does feel like one of these types of government jobs where even if the technology was worked, the government couldn't do it without it being political

suicide because they lose all these jobs. All these jobs. There's like five people like that. Court sketch artists is not all these jobs. I don't think that's like a. I wouldn't be surprised if there's just like some collective action for people who work in the court system where they like would be very not into this. I mean, the fact that the kind of romantic about it.

fucking stenographer is still there, like typing on a fucking, you know, typewriter. Give me a break. I had a friend who was a quartz stenographer. And all I got to tell you is that job can be done with... Wait, how did you make friends with a quartz stenographer? But let's... I don't know. I don't know.

What do you want me to tell you? Okay. I don't know. Interesting. Okay. Was it was a quartz stenographer in crypto? No, no, no. This is...

Okay. This is just, okay. He's just a guy I know in New York who is a stenographer, and I lived with him and 10 other people in Mexico City like 10 years ago for like a month. So ignoring this person, which I don't know why you guys are so interested in who the stographer, but the guy like, he's a nice guy. I'll tell you true, the reason why I would not peg you as somebody who'd make friends with a stenographer. I'd make friends with anyone. That's the difference between the people. I believe you.

I believe you. But like in the sort of the vector space of people, like that is the inverse of you as a quartz stenographer. Nah. Quartz stenographers like to go see Eastern European minimal techno just as much as I do. I would basically say like I talked with him a lot about like, aren't you ever worried that your job will be replaced? So it's so fucking easy to replace it. Like I could just put a microphone at the courtroom. Right.

We have amazing transcription services now. And he was like, no, no, no, no, they can't do it. The government just, like, can't get rid of these jobs. It's like, it would like, everyone who works in the court system would revolt. And he has a strong feeling that it's like an almost union like collective action thing that they would be against it. So I think those jobs are safe for not because they can't be replaced, but simply because it would cause a riot. So do you think that in like 2050, it's like the early years of like the singularity we're still going to have people manually typing all the things that happen. I think the singularity doesn't hit America first, right? It's going to go to

some country that adopts things earlier, like Singapore or something. It's going to be in Mexican techno clubs. That's where the singularity is going to happen first. It will start there, yes. For sure, for sure. It might already have happened 10 years ago, actually. And it'll come back later. Okay, so, all right, SBF, whatever. We're done talking about SBF. I guess you'll. No, no, wait, wait, wait. I think we have a couple of takes. My first, favorite take this week was the fact that Nishad finally admitted to the thing that I think everyone kind of thought was true, but wasn't totally 100% true, which is, you know, one of their main selling points in 2020 was that FTX has this great cross collateral risk model. And you could

like give them any shit coin you want and you could post it as margin to take 100x leverage on Eath. And somehow they would liquidate it correctly and like reallocate the collateral. And it turned out they actually did zero of that. And Alameda just ate the losses on a lot of these things just directly. Like they just straight up took the, they were kind of like a Ponzi scheme for trading funds. Because like if I'm a trading firm, I actually heavily incentivized to go max leverage at FTCS because they didn't liquidate me correctly or on time. And that's sort of what he admitted.

Hold on. Are you talking about the two bugs that he was that he was talking about of like the hackers, quote unquote? But then he also talked about the liquidation. engine and like that they didn't actually like they didn't correctly like oh like think about this way suppose I put in right now I have a thousand pepe and the pepe are worth say $1,000 right and now I put that as collateral and now I take a 10x leverage thing on ETH and I put up a thousand dollars of collateral I'm getting $10,000 of exposure now the problem is pepe's price could crash 50%

faster than eats price goes down the, you know, 10% that would need for me to be liquidated. So now my collateral might only be worth $500. So in theory, they should have liquidated me already. But apparently he was saying he gave a lot of evidence that they didn't do that correctly. Like they didn't rebalance as efficiently as they had been claiming or at all. Alameda just kind of sat on the losses and tried to trade out of them manually. I see. I mean, we kind of knew that already that like Alameda was eating a lot of bad liquidations.

We knew that about the mobile coin thing, right? But apparently this is like systematic. That was like their justification for this backdoor stuff. And I was like, I just think that that's like that's even worse. It's like furtals all the way down. It's like, I'll FTX isn't liquidate anyone. Blockbite is like Alameda. Yeah, yeah, yeah.

You know, it's like everyone. You know what does? You know what does? Defy protocols do. Exactly. That was that was the natural zinger here, obviously. Yes, but the interesting thing is that that might have. actually be positive for the defense, right? If like the defense is like, well, look, this is how it

always worked. And like, Alameda was an intrinsic part of this thing. And it was there from the very beginning. And it was there to actually make FTCS liquidations work correctly. It's still fraud because they advertise that they were doing this. Right, right, right. Okay. But the really bad charges, I think are going to be harder to stick. If you can convince the jury that, well, you know, a lot of liquidations went bad. But we were like, this is how it always worked. We were doing our best. It was it was not fraudulent intent beyond misrepresenting that, you know, we just suck liquidating things and we pretended not to be bad at liquidating things. That's a story at least. But isn't the, you have to admit this human centipede of bad liquidations, right?

Of like Alameda not, like FTX not liquidating, Alameda, Alameda not liquidating, gang liquidated by BlockFi, dot, dot, dot, right? Like, what's the, speaking, all right, speaking of the human centipede of liquidations, perhaps the head of that human centipede came into the forefront today. So the New York Attorney General just sued Gemini, Genesis, and DCG, all of whom for defrauding investors and allegedly defrauding retail customers for over a billion dollars. So if you recall, way back in the day, there was this big spat, I mean, it's obviously still continuing, but in the past there was a big spat between Gemini with their Gemini earned product and Genesis, which was a lending company under the banner of DCG, which is this big holding company that has a big pile of money, that Gemini had this earned product, earned product. to use Genesis on the back end to actually generate their yield. And Genesis lied to Gemini about the status of their balance sheet, and that caused them all to get mad and do the Spider-Man pointing at each other thing.

And unfortunately, it turns out that everyone defrauded everyone. That's, I think, the moral of the story. So the New York Attorney General, so they were in bankruptcy proceedings, and they were kind of getting closer to some kind of settlement, but creditors were pissed at everything, and nothing seemed to get done, and everyone was starting suing each other. And the New York Attorney General comes in and says, guess what, you're all sued, and you're all now criminally liable under New York law.

So more or less the story is that Gemini claimed that Genesis loans were over collateralized, but they actually were not over collateralized. Internally, they knew the loans were under collateralized, and they knew that the risk factors, especially months before everything blew up, they knew that the riskiness of Genesis was extremely bad. But they claimed to customers that Genesis loans are over collateralized, everything's great, Genesis is a super strong partner, and they continue taking customer deposits, even after they knew that things were in a very bad state at Genesis, or at least not a bad state, but a risky state at Genesis.

And then, of course, DCG, we've covered this in previous shows. DCG's claim to have absorbed the losses from their three arrows right down for Genesis. So DCG claimed, hey, I'm coming in, I'm going to make sure that everyone's okay. But instead of actually filling the hole, they just gave a promissory note and claimed the promissory note was worth a billion dollars. So you're saying, at the end of the human centipede, you put dollars in and you get promissory notes out? You shit out promissory notes from DCJ. Promissory notes are better than what Alameda got.

So, or I guess what FDX holders got. FTT is still worth more than those promissory notes, I bet. FTT is a lot. There's still some liquidity for it. How much is FTC worth today? Oh, I would love to know the answer. I bet it's 20 cents. Okay.

No, guess the market. And by the way, this is also delicious in the human centipede theme. Apparently, Genesis's loaned 60% of all of their loan book was Alameda. Which was all collateralized by FTT. Okay. FTT. FTT, take a guess. I want each of the three of you.

700 million. 300 million. Tom? I'm looking at it right now, so I'm going to get it. 3.41. Oh, good. Good. Good.

Look at that. Very good. Very good. Okay. That's worth more than the promissory note. Yeah, I don't think that fully diluted is a meaningful metric anymore, though, because I don't think there's going to be more dilution. But my point is people are still trading it.

You're getting some. liquidity, right? Yeah, but you couldn't sell $350 million of FTT. You probably saw like $3 million before bringing the price to zero. That's still more than the promissory note. That's still more than the promissory note. That is true. Yeah.

And so this lawsuit demands disgorgement of profits. And so that what is the profits for DCG from all of this? Hard to say, but I mean, this is brutal. I mean, I really feel for DCG. I mean, obviously they were assholes and whatever misrepresentations they made. but they are just getting picked apart. I mean, I don't feel bad for DCJ. And I've mentioned this on previous shows and a disclosure that I am a creditor to Genesis.

I feel like there was significant fraud and misrepresentation there. And as a creditor who provided capital to them, I was not aware of the hole in their balance sheet. They were representing to everybody that they were a solvent and healthy business. And so I don't feel bad for them at all. Yeah, I take it back. I don't feel bad for them with regards to that. I think clearly what they did was super illegitimate. We were also Genesis customers, and we just stopped working with them when all this shit came down.

And we're very lucky that we didn't have a residual balance with them at that time. Well, I will say Robert is just, you know, angry that he was an involuntary participant in the human centipine. Nobody wants to be in the centipede. He's getting a taste of what's coming out. Yeah, yeah, yeah. Oh, wait, so, Robert, how do you feel about Gemini, though? I mean, my read of the situation is, you know, Gemini was also clearly defrauded. Did they do everything they could to protect their customers?

It seems like they tried to in cases. They tried to use the information they had about the unhealthy position that Genesis was in to start with drawing funds from Genesis and unwinding before its collapse. It seemed like they were taking actions, but they, you know, they've still representing on their website and marketing collateral that everything was going great. That's what I've read from the lawsuit. I mean, I feel more for them. Like I, you know, the status quo is to like, you know, not change what's on the website every time you find something new about a counterparty. It's not like they're going to go from like, you know, oh, we only make loans to Genesis and it's all over collateralized and it's a great program to being like, change the website to like, we hate that.

They're untrustworthy. They're committing fraud. Like, apparently the loans were never over collateralized, though. I hear you. And you know what? That was also a problem at BlockFi and Celsius and every other one of these entities, right? You know, this huge, the centipede is turning into a hydrant. Speaking of centipede, they also talk about, I think at some point, like 50% of the loans were also collateralized with like GPTC shares.

So it's like there's another sort of like loop, I guess, at the end of the centip. Oh, my God. Yeah. It's all kind of fucked. It was snake eating the tail. Yeah. Yeah. I don't know if it's the tail, but it's eating something.

Or a borough. Right. Yeah. Yeah. Well, I mean, like the heart of the trade, the trade in air quotes for years was DCG had gray scale. Genesis borrowed money, loaned it to 3AC, loaned Bitcoin to 3AC, who took that Bitcoin, subscribed to GBT, put the Bitcoin into the trust, which is locked forever, and tried

to sell it at a profit. And it was really like, in essence, taking customer money from Genesis lenders and putting it back into DCG. It was always just like DCG in multiple ways, taking money from Genesis, whether it was directly, which is DCG literally was borrowing money directly from Genesis in inappropriate ways, were indirectly, which was Genesis lending to 3AC who put the money into gray scale, which went to DCG. The whole thing was like DCG, robbing this like piggy bank for years. Like yeah. It feels like to, I mean, it feels very conniving to try to like protect the the cash cow

at DCG, which is, which is Grayscale versus, you know, effectively like Griscoll makes hundreds of millions of dollars a year on fees on the trust products. And so, you know, effectively what you should have done here is have those equity holders eat the losses from Genesis. And instead they're like, actually no, fuck anyone who used Genesis. we're going to sort of protect this, this gem and have it be untouched with this sort of, you know, bullshit pseudo bond related party transaction. And so I feel like that was the part that, I mean, it's all actually bad.

But if there was a clear solution there, they could have taken and yet they chose not to. I guess the reason why the DCG story is like, I guess the reason why it seems so sad is that it really is like this Roman Empire crumbling in front of us. Like DCG, for those of you don't know, DCG is a very storied firm. They were super early into crypto. You know, CoinDesk, Grayscale, Genesis, were three of the titans of the industry. And they still are in their own ways.

Like, Grayscale is still the largest exchange trade of product in crypto. It owns a huge amount of the outstanding Bitcoin. It's bigger than any other product in this industry. CoinDesk, obviously, a very OG and very well-known publication. And they built all this from the ground up, you know? And now they are, like, they're just, like, you can see the collapse. And it's also said, too, that, you know, Grayscale, we just talked about Grayscale being a cash cow. And there were some stories this week about the Bitcoin ETF.

There was a false story that the Bitcoin ETF had already been approved. And markets kind of went crazy over that. Turned out to be bullshit. But you can see that the SEC is signaling that most likely, at this point, almost everyone believes that an ETF is coming soon. And the, it was news as well that the SEC did not appeal the Grayscale, outcome from the panel of judges who basically said, look, the the gray scale denial was

capricious and unfair. That said, if gray scale does convert, then if it converts to an ETF, then the fees are going to drop massively. And the idea that this is like this amazing cash cow, you're probably going to get, you know, 15, 20% of the fees that it was originally getting.

And so it's kind of like this massive decapitation of everything in the DCG empire. And maybe, look, they had it coming. Obviously, what they did, in the case of Genesis was extremely unethical and fucked over a lot of people. But it's just sad to see so much carnage in somebody who at one time was one of the pillars of the industry.

That's the thing that I reflect on. I don't know. It's like that meme of like how often do you think about the Roman Empire? I like that that's kind of my feeling when I look at DCG. I hadn't thought about it in like at least two weeks until you just brought it up. And crypto, how often do you think about DCG? I think that's the analogy in this industry. Nowadays, never.

Well, I think for creditors, probably think about it more often. Yeah, for creditors, like, I'm in a chat group where people are just all day complaining about how all their money was stolen every single day. It's just ugly. You guys need to launch a social token for your group chat on Frontec. Oh, for the unsecured creditors, yeah, humidity participants of Genesis. Yeah. Yeah, fair enough. Fair enough.

Okay. Well, moving on from sad things to other maybe sad things. So Uniswap is in the news this week. And some people are mad. Some people are defending Uniswap. But here's basically the story. So set up. Uniswap, of course, is an on-chain protocol.

They have a token called Unitoken, which was launched in 2020, 2021, 2020, I think. So that's a token. It's worth like $5 billion or something. And the Uniswap protocol, which is on-chain, is governing. by the Uni token. Now, the Uni token has never actually voted to instantiate fees in the protocol itself. So if you use Uniswap on-chain,

there are no fees that are currently enforced because of the token. The token has not decided to do that. However, Uniswap also has a company. The company is called Uniswap Labs. They were originally the company that was set up to build this thing. And that company separately raised a fundraising round,

I believe last year. And so they have a separate set of investors. It was a round led by Polychain. And those investors have a stake in Uniswop the company, but they did not purely invest into the token. So Uniswap, the company is building different things. So they built like a wallet. They obviously own the front end.

They own the domain. But other things are owned by the Uni token holders. Now Uniswop token does not enforce any protocol-based fee, but Uniswap Labs, which owns the website, uniswap.exchange or uniswop.org, that website now has decided to charge a 15 basis point fee. on certain token pairs. So this caused the internet to kind of freak out. Some people were very pro this and said,

okay, this is great. Now you have open source. You basically have companies that can build independent business models on top of protocols and build sustainably. That's great. Allows the developers to continue getting paid and build something that can work in perpetuity without having to rely on token emissions.

You have other people saying like, hey, this is bullshit. The token itself, like why did you sell this token if the token holders don't get any fees but this front end is getting the fee, and the front end is like the canonical front end, which everyone knows is the one that Uniswap is used with. And so you have a lot of people going back and forth on GitHub, or on Twitter, or on X.

Maybe on GitHub too. Yeah, GitHub keep overquest, you know. At this point, pretty much everywhere. Set fee to zero, you know. That's right. The fees right now for Uniswap, so it hasn't been running very long as a time of us recording, but basically the approximate run rate of revenue

that they're getting per year, the annualized revenue is around 30 million. So it looks like a pretty good, decent business, you know, but obviously there's probably some overhead in running the business, but in terms of revenue, that seems pretty strong. That said, there's a lot of disagreement about this. So I'd love to just kind of go around the room and get reactions about how you feel about the Uniswap Labs front end monetization.

I'll go first as somebody that was in a similar position with compound labs, which had built a protocol. So at Compound Labs years ago, we thought that the correct business model for the company that had originally built the protocol and then handed it off was not to monetize the protocol for itself, but to try to build an application on top of the protocol that would be profitable as a new business line. So at Compound, we built a product called Compound Treasury and it was, you know, an application or business built on top of the protocol just like anyone could build. Right. Anyone out there could go and like on equal terms, build whatever they wanted that made use of this system. And, you know, we thought it was a really great plan. And like for years it started to grow and then the whole crypto market blew up and the product was shuttered and it eventually in some sense led to what I'm doing today, which is super state. But the idea was build a private for-profit thing on top of a defy protocol and do it as a way of generating profit for the developers.

And anyone could go out and do this. There's no reason why Tarun can't start a thing called best uniswap interface.com and charge a fee to use best uniswap interface.com. And there's no reason why Tarun couldn't go out and start, you know, compound treasury or whatever. But, you know, if you're super deep and close to something, you're obviously the best equipped to try to create a product that's monetized on top of it. So I get where they're coming from. The pros of it are, it's a way of driving revenue.

I think the subtle pro of this is it actually is going to create more competition at the interface layer to the uniswap protocol itself. I actually think what they're going to inspire is a lot more alternate interfaces and forks and things that are literally trying to cannibalize their own interface. I think it's going to push more volume over time to trading aggregators and things that like bundle uniswap transactions alongside others. I think what it's going to do is going to be a good revenue stream for them, but it's over time going to obsolete, you know, the app.uniswap interface. And I think that's a good thing in a lot of ways, but, you know, I don't expect that it's going to be an incredibly long-term sustainable thing. I think in a lot of ways it's good for them. Like, it creates a lot of competition at the protocol level for better interfaces and more innovation and more people trying different things

that don't have a 15 basis point fee. And so I think there's a lot of interesting upsides to this. get the sort of community pushback on this. It's like, oh, well, you know, you guys are taking a fee, but the protocol's not. But like the protocol can take a fee if it wasn't. It just hasn't yet. And so I think it brings that conversation to the forefront and it makes it even more interesting and more timely, which is like, how do you allocate fees between the protocol itself and the interface built on top of it and what's right and what's fair and what's good and

what's viable and what's competitive? And like, I think that that conversation is even happening is also. extremely positive for Uniswap. I think the only thing I would have changed is I think they should have given, you know, a longer lead time to let people know about it, simply because it changes the user experience so significantly for a lot of core activities that like, you know,

just like turning it on is very different than being like, oh, here's our, you know, vision. We're going to like turn this on at some point, you know, get ready for this. Yeah, I mean, I hear that. in concept. I think maybe it's more about how this kind of gets represented publicly. Like the Uniswop Dow gave, you know, like 40, 50 million dollars to like New South Foundation. You know, ostensibly sure, that's for protocol development. It's not for sort of application development. But like, for most people, I don't think that delineation is particularly clear.

And I, on the fee element, like, you know, fees cannot escalate forever, right? Like, there is competition within fees. And so fees that go to a front end inherently come from LPs. They come from traders. Like there's not sort of this infinite pie. And so, you know, if anything, this is, yeah, I think there's a stat now that's like 40% of volume is going through the front end based on the fees that are being taken and sort of approximations from uniswap. And so this is the primary way that people actually access uniswap liquidity. It feels maybe a bit confusing to try to tie in funding to the foundation to separate from this from from from labs which is kind of the experience that most people have when they use uniswap. So I think it's fine if there's like a clear

delineation. And I think you know, maybe even naming it something other than uniswop labs and have a totally new third party. That's fine. But in practice, I don't notice and know if that delineation is clear. Yeah, I kind of more or less agree with what Robert pointed out. I also think there's a sense in which there's still a lot of expense that has to be paid to keep the market share of a front end. And a real question to me is like, is this sufficient to motivate you to keep like spending money on, you know, try and have your front end be the best or is it actually like going to get eaten? I kind of think because we're kind of in this like low volume environment, it's sort of like hard to see. but I think like if we see any kind of like green shoots of like prices moving quickly

and liquidity sort of dries up to some extent because there's some losses for LPs, you could imagine that like people actually end up going through different aggregators. And I'm just not sure how that that plays out. But yeah, I mean, I think also the introduction of Unoswap X as like, you know, segments to LPs from purely passive to kind of these just in time piece LPs, there already was this kind of like tronching of fees going on anyway. And this is just kind of adding to that stack. I do think the UNOSOP front end order flow is generally viewed as sort of the dumbest order flow, right?

It's like the ones that's easiest to sandwich attack. It's the one that's easiest to front run. It's people who are like, clearly they don't care enough that they're just, you know, going to the main website. And, you know, it's a convenience fee. It's a convenient, the most valuable flow for sophisticated actors, for sure. And I think there's sort of this weird thing that this extra fee might make users actually pay attention to getting sandwiched, for instance, a lot more. So they'll notice the compounding of the 15 basis points plus the sandwich attack fee, right?

So I think, like, users may respond to that combo in a way of moving to other front ends. I think it actually might not be this fee itself. It might be that this fee makes the sandwich attacks and front running look much worse. So, okay, I clearly am the most negative on this relative to anybody else. It sounds like I fucking hate this. I think that this is awful. I think it was communicated terribly. I think clearly you can tell from the responses of people in the community that they feel blindsided and betrayed,

which I think to your point, Robert, of like, signposting that this is coming shows a big, big, big failure on part of the Uniswap team. I remember when Uniswap was raising that round, and I was talking to other investors in that round, and I talked about this on a previous show when we were interviewing ZeroX, Will from ZeroX, that this idea of people raising equity and raising tokens separately and having this divergent cap table, I think, is terrible precedent, and I think it should generally be avoided wherever possible. And this is exactly why, because now there's two set of constituents who care about Unoswap.

There's the people who own the equity and the people who own the token. Here are the reasons why I hate it. So one is just kind of spiritually, you know, more or less the team is double dipping. They all got big piles of tokens, which are worth billions of dollars. The token itself is worth billions of dollars. And then they got paid again by raising money for what otherwise, in almost every other protocol is just a public service to the protocol they already built, right? If the front end for every single product you use in crypto takes an extra fee,

because I'm like, well, but I developed the front end and I'm supporting it and I'm paying for like, you know, DNS protection and this and that. and like, I need to keep this sustainable. What that would imply is that every single protocol should have a front end that takes a fee. And I think that's a crazy equilibrium to end up at. You know, why would we not end up at that? You know, well, if you use Geth,

well, Geth requires active development and we want to keep it sustainable. So if you send a transactors through Geph, you have to pay us a fee. Now you can use a fork. You could use some other client, but our client, you know, obviously that's a bit of a reductio ad absurdum.

But it's emblematic of like, isn't this, the point of crypto was that we didn't do shit like that? this that we didn't have these like thousand little paper cuts of minimum. No, but you have you have the option to not take the paper cut. That's that's the difference, right? Yes, okay, fine. Okay, fine.

So you have the option to not take the paper cut. Now, here's why I think this argument is bullshit for uniswap, right? Everybody knows that most of the volume going through uniswap comes to the front end or a big portion of it, right? 40% or whatever. That portion is the most valuable portion because it's retail, right? It's the retail uninformed flow that everyone else is going to follow. If that flow goes somewhere else, people will follow that flow.

Now you could say, well, this is going to incentivize competition. Right now, there's going to be more front ends for uniswap. Like, I, first of all, I don't believe that's true. I think 15 bibs is so low. Retail is going to bear it. Obviously, if you look at what retail pays on other platforms, they are not fee sensitive to 15 bips, right? Like, Metamask charges, what, 80 bibs?

Coinbase charges like 1.5%. I mean, that's just robbery. I mean, that's just... Sure, sure. But 15 bibs, like, that's like the lowest tier on Binance, right? People are not going to revolt against 15 bibs. So I think they know, and they probably chose that intentionally, because they know that it's not going to cause a lot of volume to go away. But at the end of the day, and I completely agree with Tom here, that is zero sum with the protocol.

It just is. There's no fucking way it's not. You could argue like, well, but it's going to incentivize people to go somewhere else, but they won't. And it's not a theoretical question. They're not going to go away from the front end. The retail will continue using it because they don't know. They probably can't even tell what the fees are. They can't tell they're being sandwich. They can't tell any of these things.

It's zero sum, but it's taking away from users. It's not taking away from like the liquidity providers, in my opinion, not directly. I mean, maybe indirectly. It's really just increasing the total fee load of using Uniswap, right? There's going to be some reduction in volume, right? Like there's some point where the fee will reduce volume, which is going to be bad for LPs. I think it's this like related party issue. Like I don't take any issue with Venomask adding a fee.

It's like, hey, you go build a wallet. You want to slap a fee on some aggregators. Like go for it. I think it's sort of the mixing of there's the labs and the foundation. And the labs is for profit. but the information's not. And it's like, who's developing what? Like, who is aligned with what?

And right now, they're not aligned with each other. But I remember having a conversation with an investor in the Uniswop Labs round. And I was like, here's why I hate this. Here's why I hate that divergence of goals because it's going to end up in something like this. It's going to end with the company wanting to take a fee for the front end and the protocol wanting to take a separate fee for the protocol. And they were like, no, no, no, we're not going to do that.

And I was like, really? How are you going to make this valuation make sense if you don't do that? It's like, no, we're going to charge for other stuff. We're going to do a wallet. we're going to do Fiat on ramp, we're going to do this other stuff. We're never going to do that because that would put us in opposition with the token holders. Well, here we are. It's a fucking bare market and the front end's taking a fee.

And yes, it's true that, okay, look, Robert, I mostly agree with you that I think it's going to have a very small effect on front end volume. Some people who are smarter are going to go use aggregators or whatever to go around the fee, but most of the really valuable flow is not going to do that because they're just not fee sensitive, right? I think the whole point of why you can extract so much from retail is that it's very inelastic, right? the demand from retail. The problem is that when the protocol does introduce its fee,

that fee will have to be lower because it knows that 40% of the volume goes to the front end, goes to the uniswop.com exchange front end. And if retail is able to bear, let's say 60 basis points, is like that the inelasticity of demand is such that they will bear up to 60, and then after 60, they really start falling off, right? Let's assume, let's just model it of something. So they'll pay up to 60 bibs. Okay, well, 15 just went to the company. So that means now uni holders only get 45 bips before it starts making no sense. anymore. Like, there is just only so much that the demand side is willing to bear. And if the front end takes this much, only that much is left for the token holders. Like, there's no, it's no possible

way that that logic does not hold. That's why I hate this. I think it is zero sum with token holders. There's no fucking way it's not. And if you wanted to incentivize other front ends, delete your front end. That will really incentivize other front ends if your front end goes away. But obviously, that's not what they're doing. Make your front end a panel of other front ends that you can route to. There's so many ways to create competition. for front ends. This is not it. And I don't think that competition for front ends is going to happen because of this. It would be a side effect because they're like, oh, maybe we could also take a fee. But I guarantee you those other front ends are going to get almost no volume. It will probably incentivize

more volume to aggregators. But beyond that, I really don't think so. So what do you think the solution is? What do most startups do that are in this situation? I mean, it's a very unique situation. No, it's not that unique. I don't think most startups are in a uniscom position. The only other company, and I know those who are more ethelined listening to this will be angry when this is. The only other company is very similar is Ripple, where Ripple equity was sold a bunch of times. Oh, oh, yeah. Okay.

So the first thing. Ripple, the token had the, Stellar and Ripple had very similar, like, weird dynamics between the tokens and the. Okay, yes. Once you create that divergence between equity and tokens, that's what, that was the original sin, right? That is the first thing that I generally encourage companies not to do. do not go sell equity separately from your tokens.

Once you do that, I agree with you. You're in a really sticky spot because you do have a fiduciary obligation to your equity holders to maximize shareholder value. That's how fucking capitalism works. So once you're there, I think you do need to draw some kind of bright line. Or you need to divest yourself of the front end, right? There's a bunch of stuff that the uni holders technically govern. They own, what do they govern?

They govern like the uni ticker. They govern the V3, like BSL. The BSL. Yeah, there's a bunch of stuff like the license. there's a bunch of stuff that they gave to the uni holders. They could also, in principle, give them the front end and the domain. They did not do that. They did not do that.

And so they own the front end and the domain. And there's this fantasy that, well, the really valuable thing is uni, the protocol, not the front end. Of course the front end is valuable. Of course the front end is valuable. And the front end is valuable because it was the de facto way to access uniswap for, you know, three years. I'll bring up a counterpoint, which is, you know, when you look at, well, how did

ripple get into that situation or Stella or Uniswop or anyone. I think the root of this is that in the year 2023, there's still not great legal structures or understanding for protocol-esque non-entity-esque things. And every one of them start off as a company or an LLC or something that there's like an established legal structure for, which is when they go out and they raise money and they hire employees and they do all of that. Like no one. is going and doing all that, typically, without that first step of, like, oh, forming a company and hiring people and raising money and, like, doing all the things. Almost every one of them starts off as a traditional legal structure. And so there's this huge chasm between traditional

legal structures and, like, this fully decentralized, it's only a token, it's only a foundation, you know, it's only a protocol and it's, you know, it runs everything. There's like this gap. most things aren't crossing that gap well, if at all, right? Because it's crazy hard to go from like, oh, we had this thing to like, now it doesn't exist anymore. And so I think the root of it is this lack of legal structures. I bet in like 2030 we might be in a place where you can start off with a thing where like there is no for-profit company at any point. There's no.

There's just a Dowel with the multi-sig, but there's some notion of limited liability. Exactly. You might seem more. Exactly. Yeah. Look, I agree with your point. And I also don't, I don't think it's fair to say, like, well, the, you know, Hayden is a bad guy and he, like, planned this all along or something. Clearly, they were in a tough spot. And I don't think they intended originally to do this because I was told by people that this was not the original intention when they, when they raised that round.

And I agree with you, look, if the regulatory structures were clearer and it was easier to, like, do all this stuff, fine. Yes. I don't think the uniswap team are the bad guys here. I think the incentives that kind of conspired to make this the only option they really had available to make this a viable business is the problem. I guess my thing is like I think it, even in some ways, it really comes down to investors, is investors need to start demanding that these kinds of things do not happen, that they are not on the table as a possibility,

that there's a divergence between the equity holders and the token holders, such that if you do an equity race, into another company, and that's fine. That equity, like, why does the devco have the domain? Why doesn't the foundation have the domain? Why does the devco have the front end? The foundation should have the front end, right? That is the problem here.

If the devco just had, like, oh, we're going to build a wallet and we're going to build this. We're going to build a fiat on ramp. Great. That's awesome. I love that. You know, maybe that's worth a lot. But a large part of the reason why they got such a large valuation is because they own the front end. And that, I think, is the misalignment, like the core of the misalignment here.

Yeah, I think of a comp actually as Oasis, which was a originally, it was built by Maker. It was, I mean, the primary way Dye traded and MKR traded in the early days is what they used for liquidations. It's sort of morphed into this savings tool, lending tool, like sort of this interface on top of Maker. And eventually it spun out, they raised money separately for OASIS as, you know, an equity. But no one was under the impression that, oh yeah, MKR holders get fees from the OASIS front end because it's so clearly a different thing with a different name with a different team that's separate from MKR. KR and people who work on sub-dows for Maker. And so I agree. I think it's actually fine to have, you know, a separate team that is for profit, that is

building something on top of a protocol and taking a fee for it. But it is about that sort of separation and delineation. Yeah. What I don't like about it is that now that we're here, the Uniswop team kind of has to gaslight people in that, no, no, no, this is not Uniswap. Uniswap is just the protocol. This front end is just like a separate thing we made. And because we did all the amazing work of building this front end, we deserve to get paid

for it. At the same time, the same team is developing V4, and they're developing these protocol upgrades that are going to go directly to the Dow. And so it's just like, look, just at least admit to us that this is what's happening. You know, anyway, I don't know. I get really worked up over this

because this is a fight I've had with several companies that are trying to do similar things. Another aspect of this that I don't quite understand is like liability for the front ends. Because like, doesn't it seem like the legal system is trying to put even more of an onus on the front ends than the protocol over time. It feels like that. So I would argue that in some way, this fee is actually paying for those future legal bills.

Because I actually do think there will be a ton of liability from owning the front end. That maybe you're right, the foundation should harbor, but I'm not sure that it shields them from anything. I do think there's some very weird thing going on with, like, how governments are treating front ends and all the over you know you we saw with all the misinformation of the last few days right where like elizabeth warren and 28 senders wrote a note saying like crypto was used by hamas with very inflated numbers and then a bunch of people came out and were like are you kidding me these were wrong numbers and i kind of think this is one of those things where the owning the front end is like the thing that like will be like the misinformation more thing and like governments will go

after that. And so I don't know. I think there is some risk premium to running the front end that maybe is, is worth having a fee for. But this is just more a tangential thing. Like I am not, I get your, I get all of the sort of more like rational philosophical points you're making. But, and the related party thing being the one that stands out the most is like strong to me at least. But I do think there is also this weird legal risk with the front end that you're not kind of, you do need to include as something that needs to be compensated for. Yeah, look, I agree with you, but this is also not unique to Uniswap. Every single DeFi protocol, every single app has a front end, you know, and Uniswap is kind of the only one we see doing this.

Obviously, they're the most profitable, so maybe that's a good explanation why. But it's also, I think it really boils down to this fundraise they did that kind of set them down this path that became eventually unavoidable. Yeah, look, I agree with you. And also, I can't imagine there are not going to be a lot of regulatory thorns. with them basically now taking a portion of every single swap on uniswap without asking any KYC information, without knowing, you know, source of funds, all that stuff. That also seems like very dicey to me. And so it may end up eventually being a kind of self-owned that if they're taking fees

from the front end without checking sanctions lists and without doing all this, or not the sanctions list, probably they're doing that, but without being able to verify, you know, source of funds and the backgrounds of the addresses they're taking money from, like, it means. may end up being a KYC front end, at which point it really does drive the volume somewhere else. But that might be the path that they're going down. I mean, I can see why they don't want to host a, you know, front end is the majority of volume that they're not getting revenue from, right? Like, if the end state is they do do all of those things, right?

And they say, like, oh, the nature of, you know, the legal clarity around this stuff is evolving. And, like, you know, a law gets passed that says, you know, there's multiple. draft bills out there, you know, that all theoretically could pass in the next cycle that would change the requirements on them substantially. In some ways, they might just be front-running that with the expectation, you know, that they are going to implement KYC or they are going to implement, you know, different regimes that they don't today. And so I think it's hard to predict, like, the motivations behind it, but like it's possible they're just getting in front of proposed legislation. Sure.

that is plausible. I'd still, though, take issue with the way you started that answer, Robert, which is that, you know, why would they host a front end that they don't get paid for? Everybody at Uniswap Labs owns UniToken.

The Uniswap Labs itself has a bunch of Uni on the balance sheet, right? They are ostensibly already aligned with the protocol itself. And again, this is not a problem anybody else has. Avey doesn't have this problem. All these different layer ones

don't have this problem of like, why would I keep building for this when I'm not getting paid on every transaction? Yeah, anyway, whatever. I'm going to stop beating this horse because I'm running in circles now. Well, it just seems like of the four of us, you have the strongest affinity to your argument. I'm just kind of, I don't know.

This is like the Wild West. I don't really know everything. I could imagine like there's so much stuff in the background that we have incomplete information on. So it's like, I don't know. I mean, if that's true, like, no, that I don't believe. If we have incomplete information, then nobody has complete information. I don't, you know, I don't like to assume that I have that much complete information. No, it's more than like, look, it's not that complicated, man.

Like, it really isn't. It's very transparent to see what the incentives. I think people who are people who are the most in regulators crosshairs would do to things that, for reasons that none of the four of us can perfectly divine. And I think that they as one of the largest targets of every single regulator, just read every bill. It mentions them. every proposed bill. You know, there's so much stuff going on in that side of the world that I don't understand

that. I don't pretend to understand that. It's very hard for me to have like a strong, like, opinion where it's like, you know, last week, if calling, saying SBF is a psychopath, that's a very easy opinion for me to rant about for an hour. Okay. Maybe there's some convoluted regulatory backroom dealing thing that's explaining all of this. I guess that's possible. If that's true, you know, give us a wink, uniswap team and then we'll, you know, we'll forgive you. But, I think usually the simplest explanation tends to be correct in these cases.

And I think it's also the case that even if that's true, the way they went about this was absolutely horrendous and did not inspire any confidence that there was a good reason beyond the obvious one for doing this. Anyway, at the end of the day, Uniswap has a fee now. So if you, for those of you who use Uniswap, you may want to look into your neighborhood aggregator if you want to avoid paying 15 bibs.

I'm curious to track the fee and its actual buildup over time. You can extrapolate from like one or two days. But like seeing like where it actually goes in a year, I think is actually really fascinating and like valuable as information for the entire ecosystem. Watching the trend does it go up? What is it as percent of volume? How does it evolve? It's annualizing to like 12 million right now.

So just as a lot. It is much lower. I mean, it's very spiky volume. Yeah, yeah, yeah. I'm just, I'm just taking the three days multiplying by 365 over three. So okay. So yeah, so obviously the other thing too is that it much much much, much more volume in times of high volatility. So until we actually see, I mean, right now we're kind of in a low volatility period, not a lot of volume. So even over this month, I would not necessarily take that as representative for what you should. For sure. No, no, I'm definitely not. I'm definitely not. But the point is, you know, look, it's a decent, it's a decent business. I don't know if it's worth what they, you know, raised in terms of valuation. But it's obviously, you know, it's better than running a wallet. It's a good, you know, it's a good chunk of change. Anyway, cool.

Well, I can't wait for the hate mail after this one. I'm sure I'm going to get a lot of people yelling at me. But whatever. That's what, that's what we're about in the show. Well, I think that's, that's it. Shall we wrap it up? Yeah, we can circle the wagons. Circle, circle the wagons.

What, why? We're circling, we're circling the centipede. Okay, that's the right analogy. Okay, okay, yeah. The cent of the penit. detaching the centipede and it's going to go back on its, go back on its merry way. Individual components. That's right.

That's right. The human centipede of the chopping block has detached. We're logging off everybody. We'll be back next week for more disgusting filth. Thanks, everyone. There you all.