Unchained - The Chopping Block: 'Code Is Law' Is 'Obviously Not How Anything Works Ever' - Ep. 411

Episode Date: October 22, 2022

Welcome to The Chopping Block! Crypto insiders Haseeb Qureshi, Robert Leshner, Tom Schmidt, and Tarun Chitra chop it up about the latest news in the digital asset industry.  Show topics: Everyone��s impression of Laura’s interview with Do Kwon The importance to differentiate failure and fraud The Mango Markets hack and whether code is law What happened with the BNB hack and the concerns it raised about decentralization Magic Eden’s decision to enable optional royalties and the debate about NFT royalties How creators are going to find a way around the royalties, according to Robert Whether NFTs should be treated as securities Hosts Haseeb Qureshi, managing partner at Dragonfly Capital Tarun Chitra, managing partner at Robot Ventures Robert Leshner, founder of Compound  Tom Schmidt, general partner at Dragonfly Capital Episode Links Laura’s interview with Do Kwon:Do Kwon of Terra: ‘It Was Never Really About Money or Fame or Success’ Hacks Mango Markets Mango Markets $42M Reimbursement Proposal Passes Mango Markets Exploiter Returns $67M After Revealing His Identity Mango Markets Hacker Proposes Keeping $70M ‘Bad Debt’ As Bounty Solana’s Mango Markets Sees $100M Drained in DeFi Exploit BNB BNB Smart Chain Plans Hard Fork In Response to $100M Exploit Binance Chain Was Halted Amid Hack Rumors NFT Royalties Magic Eden Magic Eden Moves to Optional Royalties and Heats Up the Debate TCB Debate Tom’s tweet: “turns out people don’t want to pay royalties” Robert’s request for a startup Previous episodes of The Chopping Block debating NFT Royalties: The Chopping Block: Was This Gary Gensler’s Most Liked Tweet? The Chopping Block: Did OFAC Overstep by Sanctioning Tornado Cash? Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two Kwan. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways. Unnamed the trading firms who are very involved. D5 protocols are the antidote to this problem. All right. Hello, everybody, and welcome to the chopping block.

Every couple weeks, the four of us get together and give the industry insider's perspectives on the crypto topics of the day. So, quick intros. First of all, we got Tom, the D5 Maven and Master of Memes. Next up, we've got Robert, the Cryptocontasur, and Captain of Compound. Next, we've got Tarun, Gigabrain, and Grand Puba at Gondlet. And then finally, myself, I'm a sieb. I'm a head hype man at Dragonfly. The four of us are early-stage investors in crypto, but I want to caveat.

Nothing we say here is investment advice, legal advice, or even life advice. So, guys, it's been a bit of a crazy week. We've got a lot of, since the last time we met, a bunch of drama, especially with respect to hacks that have gone on in the last couple weeks. but I want to start. Laura just, I think yesterday, yeah, it was yesterday, right? Yesterday just released her Blockbuster interview with Do Kwan, which if you have not seen, highly recommend to go see it.

It's pretty crazy. What did you guys think of the Do Kwan interview? What were your takeaways? I think this is the first time other than that, what, coinage interview? This is like his first, like, really hard-hitting interview that he's done publicly. I'll be the first one to admit that I'm saving this to listen to this weekend that I have it. I'll be the second.

But on Twitter, it seems like it's a banger. It's definitely a banger. Wait, Turin, did you not see it either? I didn't see it either. I've been focusing on things. Unbelievable. Unbelievable. Sorry, sorry for doing my job.

Okay. Tom, did you watch it? Yeah, I guess I'm the only one. I was really impressed actually by Laura's research and how pointed her questions were. she went like really into detail on you know things like what would happen with this degen box thing or what happened with this i think um i saw someone that said a tweet that was like take a shot every time do says the thing people don't understand and i was like i think it's like a very apt description of the interview how many shots for you by the end i mean you're talking you know uh at least in the teens so it's just like i i in some ways empathize because i think what was actually happening or how terra actually worked and how it was presented publicly were like very, very different. But at the same time, I didn't get a lot of sense of remorse from Doe in the sense that

he's like, yeah, it is what it is and we acted certain ways. A lot of it feels very hearsayy, whereas like, oh, this wasn't, these weren't our, funds, it was just something else. So I don't have all the information on who was actually doing what as sort of the terra collapse went down. But yeah, it was, it was super, I guess, informative and just entertaining to watch, honestly, like Laura really kind of grilled dough. It was definitely great TV.

There are a lot of good accusatory moments on the main stage, which were, it was fun to watch. I did come away feeling very unsure because, you know, you'd expect there to be some point where Doe, I mean, one, you have to ask, like, why did Doe agree to do this, right? Like, he's got active court case against him. We've got criminal cases against him in addition to civil cases. So it does feel like, you know, what was his lawyer thinking in agreeing to let him do this? Or maybe he didn't consult his lawyer. it seemed like he sort of had an answer for everything. And some of them were very clear cut like, hey, for example, Laura was grilling him of like,

hey, it looked like your block explorer was censoring certain transactions where you guys were minting SDT for yourselves in order to do something or other. And he was like, no, that is not true. Our block explorers didn't censor anything. In fact, it's all open source. You can go check it out yourself. And so I'd love to see the fact finders go and kind of take all the explanations he gave for each individual element and see whether or not he was telling the truth. If in fact he was, and supposedly there's

an auditor who's going through the LFG books, who's going to go through all this stuff after the fact and actually verify some of the claims that have been made and some of the arguments between himself, the afl and some of the accusers, I mean, hopefully we'll get some clarity on was Doe telling the truth about these things? Personally, I can believe that he may be telling the truth and that at the end of the day, when somebody gets put on public trial, the way that Doh has, there's always going to be innuendos and kind of random things that kind of look weird that, you know, every single crypto project, if you like turn over enough stones and you like paint them in enough light, they look very suspicious, they look very strange, they look very like somebody trying to

profit off a protocol. When you just see transactions on chain, you have no context, so you don't know what they are. But I can also believe that maybe there was some genuine foul play. But I kind of feel like the fact that he's coming out publicly and really directly answering almost every single question that Laura answered to him means that he doesn't seem to be afraid. So it feels to me like our suspicion that we've mentioned earlier that like this might be mostly people trying to basically say like, look, we invested in the stable coin that blew up and we want to find somebody to like go, you know, kind of nail them to a cross and say this is this person's fault. and it kind of feels like that maybe is what's happening with Doe. We'll get a better answer to that once we have, you know, the full accounting of what happened with TFL. But honestly, my takeaway from that interview is that he seemed very confident in his answers.

He seemed to be pretty self-assured that, you know, there wasn't any foul play. Well, I'm excited for the forensics and the auditors and, like, the truth of open source analysis to sort of come through and, like, you know, shine a light on, like, all clear or, oh, man, like, no one knew this, you know? And the thing is, like, even an all clear is not going to be an all clear for most people, you know, so I imagine for the Korean government where he's currently, you know, it's got a criminal indictment, you know, for them, I doubt, well, maybe, I don't know, I don't want to speculate, but my guess is that there will be people who want to go after him, regardless of whether

all the accusations that have been thrown around around now feasance or unjust enrichment turned out to be false. Even then, I'm sure there are going to be people who try to find some way to pin the disaster as some kind of criminal affair. But I did take his point, and he made this point very clearly, which is something that I think I've stated on the podcast before, that I think it's very important differentiate between failure and fraud. They're not the same thing.

You know, he made an interesting defense of the basis cash, the basis cash revelation as well, which is the claim that, look, I was never really involved. Like, it was two other developers from TFL. I gave them my blessing to go and build this thing. I should posted on the telegram account for a little while. Clearly, I shouldn't have done that. That was a stupid thing to do. But, you know, it's like there were a lot of people who built stuff on Terra that I helped

support. I'm not responsible for every individual thing they do. And I didn't see Basis Cash as the failure of Terra. There are two different things. I wasn't even working on Basis Cash. And so I think you made a fair point in a reasonable defense of Now, if he was right about that, then yes, I think it's a reasonable defense of the terror, sorry, the basis catch story. Yeah, I also feel like there are no knives out for sort of the sub promoters of some of this stuff.

Like, you know, the people who are running those like anchor SPVs or, you know, the people who are actually running those front ends that were taking in, you know, ACH money and like putting in anchor. And like, I feel like we've heard really nothing about those people. Because I don't get the impression was actually Doe going out and, you know, promoting. people saying, hey, you should take all your money out of the bank and put it into anchor. There's all these other people. And Doe was just sort of building the saying, or mostly building, uh, Luna rather. Yeah. It's very clear, though, that the, the crux of what, the crux of what Robsy was the wrong way was

his arrogance about the whole thing. And that was one of the, I felt like that was one of the real highlights of the interview was her talking about like, do you regret the way that you spoke about the stuff, the way that you followed people, the way that you, you showed this kind of limitless confidence that gave people confidence that. that there was no way that terror was going to fail. It seemed like he, I don't know, it's hard to tell what's a real contrition and what's like, okay, you know, I've been counseled by my lawyer to express contrition.

So I don't know. It's clear that this is not the last word on Tara. As a non-watcher, did he actually reveal anything about his whereabouts? No, he was very intentional that it's like, look, it's very unsafe for me to mention my whereabouts because I've been targeted everywhere that I have mentioned my whereabouts, which I can also believe. It did look like he was in some sort of bunker slash club, though. So it looked pretty nice.

That's true. It looked interesting, for the least. He didn't mention that he's very, didn't you say he's very into building furniture? And I was like, did he build that thing behind him? That's like really, that's, did not peg him for somebody who's into building furniture. Usually you expect more stability from furniture than we got out of terror. So he might. All right.

I didn't know you ever had enough of a funny bone to make a joke like that. Every now and again, it comes out. When I'm talking about Tara, you never know what might happen. All right, all right. So speaking of disasters, we should talk about the hacks that took place for the last couple of weeks. So the first one, which is probably the most ridiculous hack that I have seen in a very long time, was the mango markets hack. So quick background. So mango markets, one of the biggest markets on.

Salana, one of the biggest DFI protocols. So this mango markets, I believe there was both like a purpose protocol but also lending. Mango markets, basically they had like 160 million-ish TVL. And there was an attack that took place against them by an initially anonymous address. That basically what they did is they bought a bunch of mango tokens and then manipulated mango on spot markets to massively increase the price of mango, which made the protocol think that they had a huge amount of collateral. And then using that huge amount of collateral, they borrowed all the real money in Mango, meaning like the USC and the soul and whatever. They borrowed all that out.

Mango, of course, then collapsed on the spot markets after they stopped buying. I think they used like $10 million to buy up this huge amount of spot mango to massively shoot up the price because it was very low liquidity. And then the mango markets, the mango price collapses. And by that time, they've already borrowed all the collateral out of the protocol and basically seized everything besides the mango tokens. So as a result, mango markets was totally drained. Then, so, okay, you're on Salana. Salonan doesn't have a huge amount of TVL anymore. You know, it's like between one and $1.5 billion, I believe.

And so trying to fence, like, all the money in Mango is pretty hard on Salana, right? There aren't a lot of places for you to hide. And so what happens is that the protocol hacker ends up giving a governance proposal to the protocol, where he proposes to return the majority of the money, but to keep $40 million for himself as a finder's fee, as well as a prime. not to prosecute him. And this proposal ends up passing governance, which is absolutely insane. Then shortly after, the proposer of the actual hacker ends up being doxed. And so we now know who the hacker is. The hacker is this guy. Avi. Avie, Abraham Eisenberg. He claimed in his

tweet, I was involved with a team that operated a highly profitable trading strategy last week. I believe all our actions were legal open market actions using the protocol as designed, even if the development team did not fully anticipate the consequences of setting parameters the way they are. So he's now become a little bit of a microcelebrity within Defi. It's like this kind of like Ken Bone kind of character, I almost feel like. Now he's like kind of playing it up in the character and he's kind of owning it. What did you guys think about good old Avi and his mango market's exploit?

Well, I'll start with the one side perspective. There's obviously a number of people on Twitter who, like, view this guy as a folk hero. I'm going to take the opposite side, which is, you know, what he did was market manipulation. Whether you believe that it's legal or illegal, you know, my view is that it is illegal as clear market manipulation. It's also deeply unethical. And even though Coda's law, he completely violated the expectations. of the protocol, the users, the community. And, you know, you can rebrand a hack or an exploit however you'd like.

You can rebrand a hacker or an exploit into a profitable trading strategy. I could try to rebrand bank robbery or, you know, some other horrible crimes as profitable trading strategies. It doesn't make them right and it doesn't make them legal. And, you know, at the end of the day, I think what. he has demonstrated is that, you know, as of right now, you know, he has basically robbed the protocol in broad daylight and is bragging about it. And it's really curious to see where it goes from here. You know, I think one part of him is correct in that, you know, every protocol has to address

the risk parameters, assuming that some black hat asshole is going to try to exploit it, right? And it's a great wake-up call for every defy project on every single blockchain to take this moment as a wake-up call. There was already a copycat attack for the world's tiniest borrowing protocol on cello where it was like the moo token or something like that. Mool-La markets. Yeah. Like, you know, imagine it was like, you know, a market way smaller than mango, but the same exact construct. That was already attacked in the exact same way, where Mew, which had even less liquidity, you know, was used to attack it.

It's a wake-up call for every defy protocol, every defy team, every defy community. And just assume that some black hat is going to be attacking you. What's going to slow them down? Well, you know, conservative risk management, both technical and market risk. But also, you know, this is one of those things where I think the community itself has to say, like, hey, it's not cool. Or, you know, exchanges have to say, like, hey, we don't want your money. like that you've robbed from a protocol, you know, like there need to be more of a community response

in general where it's going to continue and it's going to escalate. You know, this guy is shopping around, you know, similar trades to hedge funds being like, capitalize me and I'm going to go after bigger fish by robbing protocols again. Like at some point this has to stop and like either it stops from the government coming into the sector or it stops from like the entire community saying like, dude, like no. like this isn't like a good thing even if you call it a profitable trading strategy so i think he sucks i guess there are a couple things that are worth pointing out with regards to this attack and more like general oracle manipulation stuff the first thing is that you know the beginning of

this bull cycle started with an asset that is probably everyone on this podcast would agree is 100% of security and not even a question, which is FTT. And it started with FTT being this thing where in exchange, that's a new exchange, bootstrapped itself to basically allow people to get really cheap collateral early, by basically giving people this token that was really, really cheap. And you could use those collateral on the exchange. That way, you know, basically if the price of the collateral went up, you now could borrow more, you can take more margin, you can take more risk. And that was sort of a way of being like,

hey, you don't have to put your ether stable coins here. You can get this token that theoretically gets fees from this exchange, which is a centralized Hong Kong company, burning its fees into the token. The beginning of the bull market, it's always actually, if you time it correctly, and you're making a new exchange, allowing people to re-hypothecate off your own asset that is sort of implicitly or explicitly getting fees from the venue that you're using is a good way of bootstrapping these. Mango, certainly, and certainly did the same thing, right? Like, Mango's token, actually, if I remember correctly, the token launched before the protocol was running. I forget, it's very close, though. Like, I forget if it was like right before, right after,

but the token was there very early. And one of the easiest ways, especially in a bull market, to increase usage of your protocol, is to say, hey, we're going to have, like, crazy risk parameters. if you use the mango token as collateral, and if you're a number go up, land, well, liquidation probabilities quite well. Obviously a very degenerate form of risk management, but it is a good bootstrapping tactic, right? And so I think if you assume that it's a bootstrapping tactic,

you also have to understand that bootstrapping tactics have a lifetime, and you have to update your parameters as a function of market condition. Right? You can't, you can't just believe that this bootstrapping thing is going to work forever. You could argue the same thing happened to FTT. Why is SBF shilling FTT nowadays to try to get people to catch the fever? I mean, it's a very similar thing. There's a while you didn't need to do that. And now it actually is like kind of important to the stability of their exchange given how much collateral is denominated in FTT at FTF. Right. The difference is a centralized exchange. If something like this happens can just step in and be like kick out the user, right? In this case, you use the same type of bootstrapping growth hack that the centralized exchange uses, but you have none of the ability to do a reclamation in the same way. And so I think there was a lot of carelessness on that side, outside of what you would call the attacker or hacker, from the perspective that both Soland and Mango have been sort of pretty, as a irresponsible with like monitoring their protocols.

We've seen both of them have the same type of problem. And I think a lot of this has to do with, A, trying to make your own exchange security slash token used as collateral, which, again, works on the way up, but on the way down or like even mildly on the way down, you probably should be starting to tampon and not let people do that. And I think there's a lot to be said about the fact that you do need to dynamically manage these things. The other thing that's actually quite interesting is the insurance fund for Mango was also insolvent, not just actually the loans that were in. So the insurance fund is supposed to cover these insolvencies if they occur. But the problem is the insurance fund was also completely denominated 98% in Mango itself. Obviously, when Mango crashes because of this type of thing, the insurance fund can't. can't cover any insolvency because it's crashing exactly at the same time that everything is going

wrong. And so there's a lot of ballots here. I'm not going to show you know, I'm not. You not realize the insurance fund was in Mango. That's insane. I'm not going to show my own book about how you should avoid these pitfalls. But, you know, that's all. But if you want to know how to avoid these pitfalls, give Tarun a call. Yeah, let Tarun convert your mango into USD coin. There you go. There you go. Yeah, I, what really is struck me about this. So I agree with those points, obviously, to ruin in terms of, you know, yes, having your own native asset as collateral in the

beginning is kind of a nice bootchipping mechanism, but you've got to move beyond it, presumably you've got serious capital and you want to build a stable protocol. The thing against, the thing about this whole saga, I mean, the attack itself is pretty straightforward, right? It's not a genius attack. It's something that a lot of people have thought about before.

The thing that's so striking was just how brazen the whole thing is and like how gangster the proposal was of like okay I'm going to give you back enough money to make your users whole let me keep the rest also don't

don't at me if you like the idea that like you can also waive a criminal prosecution by a Dow vote is also like insane I'd love to see what happens when you know I don't know where did you know where this person lives

is he an American I believe he's in the Southern District of New York Oh, okay. That's a good place to be making these doubt proposals from. I mean, this seems so absurd. Part of the other news that we didn't mention earlier, so he actually made a bet, a side bet with somebody from Twitter who bet that he would not be charged.

And so, oh, according to Laura, he's actually in Israel. Okay, so maybe, I don't know. The Israeli police are pretty intense, too. But, yeah, I don't know what I expect to happen. I don't know enough about Israeli law here, but yeah, I think it's going to be, it's going to be rough. I don't think we've ever heard of globally accepted non-prosecution agreements in history. I'm a little dubious about it. Yeah, it's an interesting one.

And of course, like, there were Americans who had money in Mango, and so I'm sure the U.S. prosecutors will find some way to establish jurisdiction over this dude, especially given, like, one of the best things that you can do to get, you know, to get law enforcement after you is to brag about your take and to make headlines, which this guy has managed to do, you know, doubly so. So, yeah, this seems, this seems just like so brazen that this is not going to end well for this gentleman. Hopefully. Hopefully. I mean, I don't ever wish anybody, like, ill.

But, like, this is one of those, like, such brazen crimes that you don't want it to become a pattern. Yeah. And look, I mean, the idea that like, well, the code lets you do this, therefore it's legal, is like, I think this is just obviously not how anything works ever. Like, if that were true, then every hack on chain

would be legal, which obviously they're not. So, in which we know, because people have been prosecuted before for hacking people on chain. So I think this is just an obvious bunk. So we'll see what happens. But of course, the gears of justice turn much more slowly than the, the new cycle of Twitter.

But that was not the only hack that took place in the last couple of weeks. We had another massive hack, one of the largest hacks ever on B&B chain. So this one was also pretty insane. So what happened was that there was a, let me try to follow this because it's a pretty intense one. So what happened was that there was basically a vulnerability in BNB's relay or bridge, which allows you to move funds from Binance into BSC. And basically what the attacker did is they were. able to forge arbitrary messages, pretending that they were relaying sort of these cross-chain

transactions of minting BNB. And they were able to mint 2 million BNB, which is worth hundreds of millions of dollars, using this bug. I think it was like in some Cosmos S-DK, kind of IAVL-T module that wasn't verifying proofs correctly. And so using this bug, they're able to quickly mint 2 million B&B, take this 2 million B&B, deposit into Venus, borrow. just kind of like the same thing as having mango, borrow as many other assets as they could, bridge those assets into other chains, and then basically run

the assets that they had on other chains, they tried to make a run for it and try to go sell them, deposit a curve, whatever, onto other blockchains. So within, I think within like a couple hours of this hack, B&B chain shut down. So kind of the unilaterally decided, we are going to halt the chain.

I'm sorry, B&B chain is going down for maintenance, which is kind of insane. It's all the time. What's the big thing? It's a lot of constantly attacks. That's why it keeps going down. So the BNB chain was down until basically they could stop and freeze the actors. Of course, they were able to get away with about 100-something million tokens that they'd

already bridged out. But I think on B&B chain, I believe they're now doing governance votes to decide what to do with the hacker's frozen assets once they got B&B chain up and running again. So I don't know that we have any. information about the attacker or any speculation about who they might be, but this was clearly a very sophisticated attack. It was one that ended up resulting in a very large CVE for the entire cosmos ecosystem that caused a patch to get pushed out, I think, last week to pretty much every cosmos SDK chain.

So again, although the exploit itself was really, really large, it seems like the attacker made off with on the order of a hundred-something million. I don't know. It's clearly been a bad couple weeks for blockchain security. Did you guys have any reflections on the B&B chain hack? Well, the B&B chain one is interesting for two reasons. One, it's example number 712 of bridges are hard. Bridges are like right now the weak point in security for a lot of these things. But the thing that was technically interesting about it is that it required some pretty deep diligence and like cryptographic.

understanding. This was not a script kitty attack, right? This was far more in-depth and complex than like anything obvious doing on mango markets, right? You know, probably required a lot of planning and analysis and finance chain was probably the biggest opportunity to burn what amounts to be almost a zero day. The whole ecosystem that's vulnerable has figured out how to patch it. And in doing so, they've basically upgraded, you know, a lot of the cryptographic libraries for the entire ecosystems industry as a whole. And this amounts to in some ways like burning a zero-day, right? So hopefully this can't get replayed again or there's not the opportunity to. This is the one time we'll see it. And, you know, the deep cryptographers in the world can

learn from this and prevent this from ever happening again. And the rest of us users will just continue to use blockchain's a little bit safer. And net net, it might be a good thing for the ecosystem, you know, after everyone gets their money back. And at the end of the day, 100, million dollars is like a day's worth of trading profit for Binance. So like, you know, they'll cover it. Whereas something like mango, like, I don't know if anyone's going to be better off on this. I'm surprised they like almost let this happen in a way. Like I thought the whole idea with BSC is it's like Binance's sandbox and like nothing can go wrong other than maybe losing some money on like a bad trade. And like it seems like it would have been somewhat simple that there's like check some invariance.

And then like given that everything is co-located anyway and there's only like a few validators just like shut down the chain if something's going wrong. But in a scenario, like, you have all the downsides of a decentralized permissionless system. But, like, you know, it seems like the upsides are not as present. Yeah, there clearly wasn't a lot of defense in depth here. But I think it's also pretty hard to do in blockchains, especially when like these third-party bridges, because I believe they exited through third-party bridges, right? So if it's not like a B&B bridge, it's pretty hard for B&B to be like, oh, something weird

happened. We're going to freeze all our bridges. if they're using other bridges, then there's kind of no way out. Yeah, I guess I was thinking the fact that, you know, it's finance's own bridge and they run so many of the validators, like you would think it would be simple enough to have something detecting. Because this was not an atomic attack, which is like always so difficult. I mean, it's impossible to defend against. This was similar to Mango markets, a multi-step, multi-transaction process.

And so you would think it would be simpler to see that as it's happening and shut down the chain if they voted to do so. Yeah, I know that. I can see that. I mean, having an automated chain shutdown is pretty drastic, because I imagine you'd get a lot of false positives. So that's like a really scary thing to have running in the background. I do agree with you, like, I mean, my understanding of the attack was that like, you know,

B&B's actual bridge, and I don't understand the mechanics here, so I might be getting some stuff wrong. But it seemed like, you know, these are proofs being relayed on chain, which basically means that this is primarily an on-chain. bridge. It's not a multi-sig type bridge, right? Like, you're actually submitting proofs of blocks onto the blockchain. So if that's the case, then it's pretty hard for there to be, like, a secondary mechanism that goes in and, like, you know, automatically turns things off or freezes things. But again, I don't know the detail, so I'm very much speculating here.

I mean, this was actually, like, a problem in Tenderman. Tenderment had this particular sort of Merkle tree that was not, like, didn't correctly check all edge cases. And so basically what happened is, like, you know, for I guess the listeners who know a Merkle tree as a Merkel tree is like how is is one of the ways you represent sort of a compact proof of a block. You take the set of transactions and then you hash each transaction. Then you make a hash of the hashes and you kind of group them up until you got a tree. And I think effectively what happened was if you had a empty hash as your neighbor, there was some way you could get the proof to not actually check that. And usually, you know, that that would be like an error. So what you could do is you could insert a transaction

that would always return true when the Merkel proof was checked, even though it like never actually generated, you didn't have to generate a signature. it. And so I think this is actually just like a generic thing, Cosmos. I'm not sure if it was actually fixed outside of this incident or if this actually is like a CV, like a serious bug in like all tendermint implementation. That part I didn't check enough about. But the idea is you basically could insert this transaction that would always just everyone would, if they're running stock tendermint, would validate as true even though it had no signatures on it. I see, so it wasn't at a small contract level.

It was in the consensus layer. No, it wasn't. Yeah, exactly. The Merkel tree has this book, which is like, that's why it's actually quite a new. I see, I see. To Robert's point. It's definitely not like, yeah, it's not like, hey, I just like swept the order book of mango. I did think it was kind of funny that, you know, there's a governance debate about whether or not to freeze the seized funds.

In addition to the patch that's going to, you know, that has fixed the buck. So, you know, maybe we will. see a ACZ's vision coming out of this, which is, you know, leaves the hacked funds untouched. But I feel like every chain goes through at some point where there's some catastrophic failure that leaves a lot of funds isolated and they have to decide whether or not to, you know, freeze those or to reclaim them. I imagine part of the reason why they had to do that was just the veneer of decentralization, you know, because like everyone knows what the answer is.

The answer is like, yeah, you freeze the guy. But if you do it themselves and it kind of looks like, oh, be a nice. B controls it. They do. They shut down the street as soon as it happens. No, no, no, no. Come on, Robert, don't be like that. Don't be like that.

No, of course not. B&B is so decentralized. Stop. But actually, one funny thing, I think, is that, you know, the role that these governance votes are playing is like, you know, maybe we didn't fully democratize finance, but we definitely democratize company boards. Because we now have like five million people in the four,

I'm fighting about something that's usually like a board decision. Right? Like this freezing thing is very much like if this happened, it would be like HSBC deciding whether to freeze some account. And it would be like if it was so bad, it would go to the board. Or if it was credit sues, it would never reach the board. The same thing was true with the mango markets of, you know, a bunch of people in governance forest deciding whether to take the,

it's interesting that we've done like board votes. That's like the most boring thing that no one ever wants to do. It's true. It's true. the things people do for decentralization, man. So yeah, it's been, it's been a bad couple weeks and a couple ridiculous acts and some very ridiculous governance decisions that have been made. That was not the only drama, though. There was another piece of drama that actually we discussed on the chopping block on a special episode that we did over the weekend because Magic Eden

announced that they are no longer going to be enforcing royalties and that they're going to zero fees. So this caused a giantster. A bunch of people got really mad on Twitter saying that Magic Eden is anti-royalty. There's evil why you're doing this. And so we end up doing a debate over the weekend with Lee Jin, Laura, Joshun from Magic Eden and myself. Do you, do any of you guys see the debate? No, nobody saw it. So I'm waiting to watch this. Uh-huh. This weekend. This weekend. Okay, that's where you watch all your, watch all your unchained content. You like to save it up. Okay, good, good. I work during the week and I watch on Saturdays.

Look, look, some of us have jobs rather not being a VC. Okay, all right, all right. Our founders. You guys are VC's at the time. Okay, okay, sorry. I didn't mean to assume I didn't realize how busy you guys were. Sorry, I, what, how day for me? Tom, did you at least watch it?

You didn't watch it either. I feel like I'm living the debate, you know, every day at Dragonfly. So I don't need an additional. Oh my God. All right. Fine. Well, whatever. We can relive the debate in real time by talking about it.

So what did you guys think about Magic Eden and shutting down royalties? Okay. So, you know, I didn't see the debate, but I have some strong feelings on this. So one is, I think, the biggest misunderstanding in all of NFT and crypto. And like when you talk to people outside of crypto, they're like, oh, wow, like, the royalties can be baked into the NFT. It's like, no, they can't be baked into preempting. Like, like, and I think what people are realized. now is that there aren't royalties baked into the NFT.

Like you can't actually at an NFT level enforce royalties where someone gets a fraction of the fee every time it trades. It's been something like conceived of really at the marketplace level and socially enforced, not through the immutable laws of blockchain technology. That being said, you know, I think people are discovering that what they thought was true about the world is not true. and that royalties are not part of NFTs. Royalties are part of, you know,

artists request and desires, and marketplace is supporting that. But a marketplace wants to get volume and win, so the easiest way to do that is to make it the lowest cost place to trade. You know, if you can, you know, go from a 5% feed with 0% fee, that's a lot for a trade, right? Especially if you're an NFT person, you're going to flip it, you know, like a couple times.

You might sell it by it. Like, those fees really add up. So, you know, it makes a lot of sense for Magic Eden to attempt to get rid of fees. Now, there's really two things that are interesting here. One is, and I think this is actually like really productive for the whole space, and I hope everyone might agree with this, shifting the fee from the seller to the buyer. Now, I think when you're thinking about a royalty or an artist payment, it makes a lot more sense for the fee to be on the purchaser as opposed to the seller of an NFT.

And I actually think that this part of their action was really well thought out. I think, you know, if there is going to be a royalty fee, it should be paid by the buyer. Whether or not it's optional, right, it should add to the price and be a buyer premium. Why? Well, there's somebody entering a marketplace and a community. There's somebody like beginning their journey with the artist, not someone ending their journey with the artist. It should really be an entry fee as opposed to an exit fee. So I think this piece of Magic Eden's change was actually quite good.

quite sound, which is saying if there is a royalty, it goes to the buy side, not the sell side. Not somebody leaving the community, the person joining the community. Well, second, you know, making it voluntary, you know, I honestly expect that in the absence of other tools, most users are going to choose not to pay it. You know, most people are somewhat greedy, you know, most people are pennies. I assume they're going to see a lot of, and the data will tell the story, but I assume they're going to get a lot of traction. And a lot of people setting that to zero in their account setting because they're doing it at the account level and you can literally be like, oh, I default to zero. Like a lot of people are going to default to zero.

I want to hear the rest of it. But so we actually have the data now because it's been live for a few days. Okay. But by the way, one quick question. This sort of buyer versus seller fee thing, is that? Is there an analog in house purchases? Like, I guess it's like the homeowner association gets paid by the buyer or something. Because, like, I'm thinking of it, like, in normal illiquid assets.

There has to be some equivalent kind of thing, right? Yeah, the seller pays the fees of a house. Generally, I mean, there might be taxes on the buyer, but like the seller's paying the commissions and the brokers and all that. Isn't that fake, though, because, like, the seller is, like, going to pass on the fee to the buy, like, it's going to affect the price, right? Like, does it matter who's paying the fee? Good question.

I don't know. I don't know. I don't know. Because it's kind of like tax incidents, right? Like in economics, people study tax incidents, which is like you tax one side, but they raise their price, which means that, you know, like a lot of times it doesn't actually. Right. Anyway, sorry. Tom, do you marry what's happening here?

Yeah. So basically, pre-change, the vast majority of Magic Eden sales had a royalty involved. So this is looking at non-zero royalties versus total sales. So 80, 90% of sales had royalty. After the 14th was when the change went in, your debt. down to, like, let's say, 10, 15% of trades having a royalty. So I do want to get the dollar value for this, but it's pretty interesting that you can just check out the data, you know, immediately after the change and see what, you know, people's revealed preferences, which is

they usually don't want to pay royalties. So since the change, volume has gone up a lot, right? Because I heard that wash trading has gotten really intense on Magic Eden because it's zero fee. That's what people are saying. But, I mean, the number of trades are the same. So I don't know where that's coming from unless people are just, you know, trading some insane dollar amount on those trades and sort of marking up the trade. So what is the, what is the top line? That's just a number of trades. Oh, I see. Oh, oh, I see. It's gone up a little bit. Yeah. Ignored the final day. Yeah, the final line just because the day is not over. This is today. Yeah. Yeah. Yeah. I see. People are pinch and pennies. The data speaks for the reality. That was an excellent chart, Tom.

Thank you for sharing that. Thank you. I think the interesting thing is like, you know, people, people's narratives, I think, is that like, oh, there's a Magic Eden clone that has no royalties and therefore they're using that to undercut Magic Eden and they're losing market share and therefore they have to be competitive and do that. But in reality, if you look on like Solana, really the main competitor in terms of like a pure, you know, NFT is Hadeswap, which is like a pseudo swap competitor on Magic Eden, which of course does not have royalties, but I think even independent of the royalty and fee discovery. it's just like a totally different model. So I think they're up to like 25% of Solana and a T volume depending on the day. So I feel like there's like so many factors that are kind of difficult to disentangle here, which is like, okay, do these NFT AMMs out compete, you know, traditional order book exchanges? Is it the lower fees that they charge 50 Bips versus 2.5%? Is it like the,

you know, crater fees or the royalties that are like allowing them to outcompete them? And I feel like it's just difficult to sort of separate all those things because you're not really comparing, you know, like for like with one variable change. For sure. What I think we need to see, and, you know, I actually, this over the weekend, me and former CTO of OpenC put out a request for startup to explore this concept. You know, what I think has to change is people have to want to pay royalties. It has to be like a positive thing where you're like excited to pay a royalty to an artist and support an artist. There's a lot of, you know, examples of people like Patreon, etc. Like being super excited to support artists. And like, being willing to pay that royalty. But I think if that doesn't exist, they're going to pay zero, as Tom has shown. So I think there needs to be more tools for creators, more ways to track royalty payments, more ways to analyze wallets and figure out who is, like, supporting the artist or not.

And I think there's going to be actually a renaissance at some point, whether it's like 12 months from now or five years from now or two weeks from now. But at some point, I think what's going to happen is some NFT artists or creators are going to figure out a way to get people really excited about this and say, like, okay, all the people that are paying the royalty, you know, and not like opting out get to go to VCon or whatever, you know, where they get like, you know, the air drop and the ones who don't don't get the air drop. Like, I think people are going to figure this out. And I think like the end state of this whole magic Eden, you know, let's rip away the royalties to build market share thing. the end state of all this is going to be there are royalties going to artists and there is an on-chain economy and like artists will benefit from the existence of royalties and they might not be like programmatically enforced at the smart contract that created the NFT level but they're going to be

like enforced through other means that are like probably even more exciting and more like advanced and more customizable and allow artists to be even more creative and instead of just being this like oh, we get 5% of every trade, hooray, like that is our roadmap. It's going to be like really more creative outcomes where it'll be like, you know, experiences and like very different like interactions because of these royalty streets. And I think net net is going to be really cool. I can believe that. I think if you see creators innovating on more reasons why you want to stay within the sort

of lit economy of the pro royalty exchange. And this is one thing that we talked about near the end of the debate is that, you know, Kyle made a suggestion that having these no royalty exchanges kind of means that like, okay, now it's really in your interest as a creator to push people into your own platform, to trade and kind of build liquidity and have a marketplace specific to you and your NFTs or your content. Because there, we talk about royalties, right, like as though there's a separate concept. But really, royalties are just like an extra platform fee.

If there was only one platform, let's say OpenC, you just had 100% market share on every chain, then the royalty is just, just like an extra platform fee. And if you own the platform, then there is no royalty. There's just the platform fee. And so, you know, in reality, like royalties are, they are kind of a weird concept. Because if you think about it that way, imagine you just had one NFT marketplace that was OpenC, they owned everything.

And when you have a royalty, basically what you're saying is that, okay, open C, when you sell this product, please charge a margin. You know, let's say you're open C is 5%, and then you charge 10%. So you're saying, please charge a margin of 15% on every purchase and give me two thirds of it. Now, in normal business, it would be like, wait, what? Why are you telling me what percentage of, well, first of all, why are you telling me what margin to charge? Second, why are you telling me what percentage of it you get? Like, no, I tell you what percentage you get.

Or we negotiate, right? Like, that's how in normal business exchange of value takes place. But royalties are all dictated by the creator, right? Which is kind of, it's just not how any other business would work. In any other business, a creator would say, okay, if you want to list my assets, I get 2% otherwise you get it or don't get it. And they say, oh, well, what about 1%. It's like, oh, well, okay, one and a half or blah, whatever.

It's really important. I'll add this extra thing on top. I'll give you exclusivity. That's the kind of thing that happens is like a bargaining. But in NFTs, it's like, okay, if you say 12% royalty on this thing, the exchange just enforces it, even though, like, you know, they're charging a customer 17% net or, you know, whatever the net of the actual fees are on the exchange. And giving the artists almost, you know, the vast majority of what they're charging. the customer. It's kind of weird. And I think it's not a stable equilibrium, right? That's not the way

that like an actual functioning market would work. And so I do think that it's sensible to think that there is going to be a way that artists are going to be able to command more of a premium and capture a bigger share of secondary trading. But I don't think it's going to work the way it works now, which is the artist says 7% and then all the exchanges enforce it on their behalf. it is i mean speaking of people not realizing royalties not being enforced programmatically there's also this weird component of like you know at at least like open c doesn't even look at the royalty like metadata or like you know component of the nfts contract you just set it manually on open c so it's like it's all just sort of like you know this just huge sort of misnomer

and misconception around like what is actually going on with royalties it's literally just like a website you know has this feature and that's kind of where we're at i mean not that we can from like incredibly horrific world of music where like royalties are incredibly complicated and shitty and horrible but like you know they did sort of figure out at least the user experience of it which is like I go to a record store I buy a record like I'm not thinking about royalties it's $12 you know and like all the rest happens behind the scenes for the user experience I mean one of the things that um if this weekend you listen to the debate uh one thing that it came up in the debate was

Laura, I look forward to getting your comments. One of the things that Laura was bringing up is that, look, one of the reasons why royalties are so important is that, look, if you're an artist, so I was suggesting, like, look, there are other ways to align interests between artists and their collections, right? One of the ways, of course, is like what Yuga Labs did,

which is you meant a bunch of NFTs, you keep some back for yourself. It's like, you know, a company. You sell some to investors and you own equity. And by owning equity in yourself, like over time, you can sell it late. and capture some of your upside. And I do agree that's one of the core things about royalties.

That's great is it creates this alignment between creators and their products, even after they're already sold. Laura made the point that as a creator, as an artist, you don't necessarily have the privilege financially to be able to hold on to some of your own collection, not to sell it because you might need to make rent. You don't have the ability to sit on your own assets or like going to take this long day to bet on yourself. And so royalties are a way to allow yourself to get this fee stream over time that

that is very different than having to get this payment all up front. And this is an argument that I've heard now from a few other people talking to me after the debate. And I totally disagree with this framing for a couple of reasons. So one, I was chatting with somebody in Twitter DM, just telling me about this NFT marketplace on Solana that allows you not only to sell your NFT, but also to tokenize the royalties and sell the royalties. And of course, if you look at normal artists, right, like regular artists in the world,

when they sign a deal with a record label, they sell. both the IP and the royalty stream, right? They keep a small portion of the royalty stream, but very often they sell a huge portion of it upfront. So like 90% of the royalties and 90% of the IP or 100% of the IP goes to the record label. And, you know, artists willingly sign those kinds of deals. I mean, like, look, it sucks. Maybe they wish there were better options. Maybe we wish that artists have more bargaining power. But in reality, like, if somebody wants to get an upfront payment instead of taking a long dated thing, like basically saying that, like, look, an artist shouldn't be able to do that.

They shouldn't be able to sell their royalties. And they should be forced to keep the royalties and get paid over time. To me, that's basically like saying, okay, artists need to have, they need to engage in like a forced savings program. This is effectively what you're telling them is that you can't take the payment up front. You have to, you know, kind of divvy out the payment over time. If you had Yuga Labs do a drop, you know, some new NFT collection.

And they said, not only are we selling the collection, we're also selling off the royalties, right? And anybody can buy the royalty stream for this collection. A lot of people would buy it. It would be worth quite a lot of money. It might be worth a amount of money that's even comparable to the entire collection, right? Because if you just look at how much money Yuga Labs makes from each collection, versus how much they make from all the royalties.

But a lot of them, it's like 50-50. For Borde A Biakala itself, it's like 80-20. Most of the money was in the royalties, not in the initial mint. And so I think it's not as simple as just royalties are a way for artists to save money or to get fees over time. I think the core thing about royalties that makes them special is the alignment. between the artist and what they create after the fact. But I think, to your point, Robert,

there are other ways to do that. I think that's ultimately what people are going to have to innovate. And either one, you need to create a platform and own the platform and get people to want to pay royalties because they want to be part of your community. Two, create extra perks or extra reasons to stay within the late economy of your royalties. Or three, just create a culture of patronage.

That's kind of what a royalty is. It's like if a royalty is unenforced, then basically it's patronage. And not everybody is going to be a patron. Some people will. Some people will sign up for your Patreon just to support you. They don't even need anything, right? It might be easier to get them to do it if you offer perks.

But if you don't offer perks, people will do it. And I think right now that seems to be the three different directions you can take if you want the concept of royalties to persist. I would definitely buy the BordApe royalty IP right token, but not a security. I can't say whether, I mean, if the NFT itself, that's a good question. Is the NFT less of a security than the royalty stream? Because the royalties are a function of how often the NFTs are traded, right? Hey, the NFT is art, okay? Even if you don't like the thing.

That's right. It's like, okay, if the NFT goes up in value, if the artist does good work. Somehow we're trying to claim that this 1933 law, which was very under-specified, has the ability to have great-eating. of being continuously security and like you compare one thing being more of a security or less of security. It's not like that.

It's very binary. And the way you're talking about it basically suggests it rounds up to being a security regardless. Yeah, that's fair. I just don't know that practically speaking it's any less of a security than the NFTs themselves would be

given that in all these cases, you're kind of... Hey, is your house security? Is it? I'm not sure. Are houses securities? No. Okay. I guess not then. I don't know. I think the argument for the fee stream is it like it does sort of represent some like common endeavor that you're.

But like why would that be more so than an individual NFT? Because the NFT is actually your your expected future profit relies on the actual speculative market existing. Right. But like the has that not true for the fee stream is a fine. of the velocity. The fee stream is revenues. When the Howie test, it's like, that's the common enterprise with future expectation of profit matches the fee stream much more than like, oh, the speculative market could like not exist.

Hold on. That seems very arbitrary, right? Like, if you're buying NFTs because you're hoping that to get profit from the appreciation. No, I'm not, look, I'm not a lawyer, obviously, but I've, I buy the monkey, like the monkey. Like, it's not, what else is? All right, all right. I mean, look, nominally, I agree with you. On the face of it, it's like, okay, one is a picture of a monkey. One is a financial product, right?

So, like, I think in a court of law, a lawyer would be like, yeah, that looks like a security. That one looks like a monkey. But I think practically speaking, I'm going to die on the cell. Practically speaking, I think they seem very similar to me. Because both depend on the efforts of the creator in the community. Both of them, like one is a function of price. The other is a function of velocity. Both of those are things that are ultimately, you know, like, the creator either

can or cannot influence them depending on the approach the creator takes, right? Some creators don't do anything to try to create velocity or create price appreciation. Some try to create both, right? Some try to make both increase. But they're a function of each. Let's take an example. Let's say it's not an NFT on a blockchain. Let's say it's an actual piece of art on the wall.

And, you know, let's say who's your favorite artist doesn't matter. Let's just say super art. Okay, super artist makes a piece of art and says, hey, I'm going to sell the royalty stream on this. to Haseeb, and like every time it trades, the Sib gets 1%. And Robert's going to buy this really cool piece of art. How could the really cool piece of art that I'm buying be a security in the offline world?

Well, I agree with that. I agree with that. I don't think that that piece of art should be treated as a security. But the fee stream as well, at that point, it's no longer the efforts of the original artist that's going to get you to sell that thing to someone else. right because that fee stream comes from the mechanism for resale right

that's that's the hard part here common among whom right like well I'm not in a common enterprise if I buy the fee stream and like securitizing that that's probably an investment contract like for sure but the arts not

I mean look I whatever this is probably the wrong forum for us to adjudicate this question but I think this is a good argument that like you sell it to someone else. That person is now party to the contract, but like, I didn't know that person. I didn't enter into some arrangement with them, right? I think there's a reasonable argument. They're like, look, the original creator who set this thing in a motion, I'm no longer

in a contractual relationship with that person by owning the revenue, by owning the royalty stream. That's the argument I would make. That's the argument I would make. But anyway, I get your point. I get your point. Okay. We're at time. This was a, this was a interesting continuation. If you guys have thoughts, please hang us on Twitter and tell us which side of the argument you would take. But that's it for this week. Signing off. Yeah. Yeah. One last thing. One last thing. Some guy in the comments in YouTube was giving me shit for not giving the exact mango insurance number. I went and looked it up, which is 94% mango in March. It was 80% mango right for the hack, and now it's like 50 or 60, 59, 61, something.

it's been floating. So to the heckler, go fuck yourself. No, no, I like, I like YouTube guy. That's great. That's great. Thanks, YouTube guys. Stop blabering. Yeah. Sorry, just to read the comment, which is on the screen. I don't know, IDK, if you're unsure about the facts, maybe stop blabering.

Thank you, G.N. That was a very, very useful comment. Really appreciate you. I figured I tried to get it. No, that's good. You nailed it. still fucking dominantly. It's not like this is that much better,

but I'm happy. All right. Thanks, everybody. All right. Thank you, everyone. Signing off. See y'all.