Unchained - The Chopping Block: Did OFAC Overstep by Sanctioning Tornado Cash? - Ep. 386

Episode Date: August 18, 2022

Welcome to The Chopping Block! Crypto insiders Haseeb Qureshi, Tom Schmidt, and Tarun Chitra chop it up about the latest news in the digital asset industry. In this episode, Laura Shin, host of Unchained and author of The Cryptopians, also joined the conversation.    Show topics: What Tornado Cash is and why it got sanctioned by the OFAC The difference between Tornado Cash and blender.io  Whether privacy is dead as a category and whether regulators are going after it How these sanctions have a negative impact on the funding of privacy projects How people within the industry can have different points of view, even when they understand the technology Whether the ban of Tornado Cash only means that malicious groups will just go and use other protocols Why regulation by enforcement sucks The asymmetry between the government’s sanction and the effort needed to push it back. What changes after the Merge for ETH in terms of centralization Whether some MEV solutions make Ethereum more centralized Why MEV is intrinsic to blockchains and whether it is impossible to get rid of it Why Proposer-Builder Separation is helpful for the network Whether MEV is illegal and the plausibility of major exchanges not extracting MEV Why Facebook has an MEV extraction business model, according to Tarun How some NFT exchanges are not enforcing royalties What Sudoswap is and how it works How the royalties were there to bootstrap the supply side of NFTs Why Tarun thinks music NFTs will never happen The economic reasoning around royalties The differences between NFT marketplaces like OpenSea and Magic Eden Whether NFTs have a real-world use How Dragonfly’s acquisition of Metastable brought Laura some old memories Hosts Haseeb Qureshi, managing partner at Dragonfly Capital https://twitter.com/hosseeb Tom Schmidt, general partner at Dragonfly Capital https://twitter.com/tomhschmidt Tarun Chitra, managing partner at Robot Ventures https://twitter.com/tarunchitra    Laura Twitter: https://twitter.com/laurashin Episode Links   Tornado Cash Treasury Press release:  https://home.treasury.gov/news/press-releases/jy0916#:~:text=WASHINGTON%20%E2%80%93%20Today%2C%20the%20U.S.%20Department,since%20its%20creation%20in%202019 Developer arrested: https://www.fiod.nl/arrest-of-suspected-developer-of-tornado-cash/ Coin Center’s article authored by Jerry Brito and Peter Van Valkenburgh: https://www.coincenter.org/u-s-treasury-sanction-of-privacy-tools-places-sweeping-restrictions-on-all-americans/ Second Coin Center’s article authored by Jerry Brito and Peter Van Valkenburgh: https://www.coincenter.org/analysis-what-is-and-what-is-not-a-sanctionable-entity-in-the-tornado-cash-case/ Coin Center may challenge the US Treasury's decision to sanction Tornado Cash: https://decrypt.co/107475/coin-center-tornado-cash-ban-court Circle freezes USDC in sanctioned wallets: https://www.theblock.co/post/162172/circle-freezes-usdc-funds-in-tornado-cashs-us-treasury-sanctioned-wallets  Crypto exchange dYdX blocked accounts that received funds from Tornado Cash: https://www.coindesk.com/business/2022/08/11/crypto-exchange-dydx-blocked-accounts-that-received-even-small-amounts-from-tornado-cash/ The possibility of forking Tornado Cash: https://www.coindesk.com/tech/2022/08/10/cloning-tornado-cash-would-be-easy-but-risky/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two pawn. Now, your losses are on someone else's malagery. Generally speaking, air drops are kind of pointless anyways. Unnamed trading firms who are very involved. D5 protocols are the antidote to this problem. All right. Hello, everybody. Welcome to the chopping block. Every couple weeks, the four of us get together and give the industry insider perspectives on the topics of the day.

So, first I want you to apologize. We're starting a little bit late because Turun is very late. He was very late. He wanted to say something to everybody for being late. Tarun, please. Take the floor. All I have to say is, I do apologize for the late start, but you know, sometimes thinking about time too much can make you

go crazy. Oh my gosh. The most Tarun apology ever. Okay, very. Thanks, Tarun. All right. Those are quick intros. First we got Tom, the Defy Maven, and Master of Memes. Next time, we have Tarun, the Gigabrain, and Grand Pubodod, Garmlet, who is perpetually late. Next, we have Laura Shin, the self-proclaimed journalist, and the CEO of the show. And then we have myself,

I've received head-hike man at Dragonfly. There was no alliteration there. Come on. There was no, well, last time we had this big drama about whether she was actually a journalist or not. And she claimed that she was. What do you mean? Of course I'm a journalist. Okay. All right. Moving on. I said that you said that you said that you're a journalist. We can say journalist and author. Lo. Yes. Published author. Published author. Very, very impressive. Anyway, the three of us are early stage investors in crypto, but I want to caveat.

Nothing we say here is investment advice, legal advice, or even like that. Okay, so we're starting a little bit late, so let's go ahead and jump into the meat of it. The big story of the week has been the sanctions on tornado cash. So quick backstory, tornado cash, it's a privacy protocol slash mixer on Ethereum. At the time, it's been basically the largest privacy solution on Ethereum. It's also the thing that most hacked funds end up getting washed through tornado or mixed through tornado. So last week we saw Treasury and the Office for Foreign Asset Control, also called OFAC, they issued the first ever sanctions against a smart contract.

So it was not Tornado Cash the company. It was not the people who are involved in Tornado Cash, but rather the sanction entities include Tornado Cash, quote unquote, which is not a legal entity, it's just the name of a project. And then specifically the list of a certain number of contracts in Tornado Cash, which are mostly on Ethereum, Trinator Cash actually has other contracts on other chains. So Trinidad Cash exists on BSC, it exists on Arbitrum.

They were apparently not sanctioned. But the Ethereum contracts itself were sanctioned. So this is the first time we've ever seen this. We have seen another mixer get sanctioned. So there's another mixer called Blender, which got sanctioned a while back. But it was a legal entity and the people who were involved with the legal entity. This is the first time we've ever seen this. This is not a person.

This is not a company. This is a set of smart contracts. a general project that has been sanctioned by OFAC. And so in response to these sanctions, we saw an enormous amount of responses from the crypto community. Huge pushback. Lots of people, one, declaring their solidarity with tornado cash. Torino Cash immediately started getting blocked from a bunch of their vendors. So Alchemy shut off their API access. Same thing with, what was the other one that I think? Inferra.

InFira. InFira also shut them off. Their governance forum was taken down. The Discord was deleted. So the GitHub was completely erased. The GitHub's of the founders. The GitHub's of the founders. It's anyone who contributed to the Trinator Cash GitHub in their account deleted. So their accounts were completely erased from GitHub, even for non-Trader cash contributions. They are just wiped off the face of the earth.

And we've also seen one of the co-founders, Alexei Pricev, who is based in, he's a Russian citizen, but he was in Amsterdam at the time. He was arrested in Amsterdam. We still don't know what the charges are. and FOID, which is the enforcement authority in the Netherlands, has not said clearly what the charges are, but he's still currently under arrest. We've had a bunch of commentary from CoinCenter, who's preparing to challenge the sanctions as well as the EFF.

It's been really crazy to see this stuff playing out in real time. Nobody really knows what's going on. Soon after that, there was what's called a dusting attack where some person, I think there's somebody on Twitter proclaimed that they were going to do this, they sent 0.1Eth from tornado cash to a bunch of well-known docks addresses. So including people like Shaq and Justin Sun, they all received 0.1 Eath. And as a result, a lot of compliance solutions that are supposed to pick up on people who are engaging in interactions with tornado cash, which of course is now sanctioned and so very not

okay. They were now suddenly getting blocked from a lot of things that use chain analysis or TRM. So for example, AVE is now blocking people who have interacted with tornado cache. The front end. The front end, sorry, the front end. The front end of Avey, as well as the front end of some other protocols, started blocking people who have addresses that have interacted with tornado cache. And so we're starting to see this broad ripple effect of what happens when the biggest player, which is, or the biggest tool, which is sanctions, starts to hit and come up

against the concepts of decentralization and defy. So what are you guys' thoughts on what we've seen with the tornadoes? Well, you guys should start because you invested in tornado cash. So I feel like we should maybe start with you know their story more closely than probably Laura RID. Well, we know the team

fairly well and we do own some TORN tokens. The team broadly, I mean, the surprising thing, and this is public at this point, Roman and Alexa have shared this already, is that nobody from OFAC really interacted with the tornado

team. There was no prior notice from Treasury that, hey, you guys are in the investigation. And if you remember actually Tornado Cash, one, they have a compliance tool on the front end that allows you, basically like the equivalent of a VE key for Manero where basically you can, you can basically show somebody, look, here is my Tury Cash address. You can generate a report that basically shows you, look, here's the source of funds, here's where I got it from.

But you can selectively disclose this. What you want to disclose it to, rather than disclose it to everybody. And second, they also, I think it was like in April, they started themselves enforcing on their front end because obviously the protocol is decentralized they have no control over the protocol which is one of the core points about tornado cache

when they burned access to every function except deposit and withdraw yes so like the owners of all functions were like gone so you can't you really can't change anything exactly and so this may be an important point that I didn't touch on deeply enough so the big difference between tornado cache is something like Blender the blender was run by a company

like if the company gets deleted blender was gone there was no more blended. Tornado Cash is an entirely decentralized system of smart contract that are completely autonomous. No more human intervention is needed for Tornado Cash to run. The Tornado Cash really just is a bunch of code that lives on the blockchain.

And when they so for the founders, now they, you know, they did own the domain and the website and the domain got seized as well. The website, they were blocking on their website any sanction addresses from

interacting with Tornado Cash. So ironically, kind of did what they could for trying to mitigate the degree to which bad actors could use Tornado Cash. But ultimately, once you create decentralized code that anybody can use, well, one can use it. The blockchain doesn't have the ability unless it's voted in by governance to be able to discriminate which actors can and cannot use the blockchain. And so in some way, the question in my mind that this raises is, does this mean that basically privacy is kind of doomed as a category?

because the reason why tornado cash got hit is that that was what the biggest and high profile hack ended up using. They ended up using tornado cash. And so North Korea and the Lazarus group when they're hacking the Ronein Bridge and some of these other players, they went through tornado cash

in order to try to bring up the funds. And now that tornado cash is no longer viable for that, there will be the next thing to me. Which was some lightning service. Is that right? Yeah, there was some like random lightning service that got the proceeds of the curve finance So the current finance hack took place after the tornado cash hack, and I guess the attacker sent it to this, like, there's this lightning service where you can send ETH-to-N-Eth contract and then relay it to Bitcoin via lightning. It's much more expensive than using like Wren. But Ren theoretically was centralized, like Alameda owned most of the nodes running it. I think they actually announced their decentralizing today, probably mainly because Alameda is a kind of easy target, let's say, for OFAC, given that a lot of people.

are U.S. citizens who work there. But I think there's sort of an interesting thing of what the alternatives are showing up. I'm not sure privacy is dead as a category in the sense that, in fact, it just motivates certain people more. I think there's this weird problem where certainly the funding for privacy projects may initially go down,

but there might ironically be kind of like a second wind where people are like, oh, we feel more motivated. Now, the real question is, like, are the developers who are actually good at writing privacy software, which, you know, as we've learned from the ZK world is really like five people and maybe four of them are civils. You know, I think, like, there's really not that many people who are extremely, extremely good at and careful at writing some of this type of code because it's, you know, if you make any mistakes, you have things like the Zcash inflation bug. And so, like, you know, you really have to be, you know, if normal crypto smart contracts or measure 100 times cut once, you know, writing like privacy code does measure a million times cut once. And so, like, yeah, I think it's actually, it's hard to find those people who care about it or are good enough actually to implement this stuff. But usually those people are motivated by non-financial incentive. And this is actually kind of an increase in that.

So I would actually not be surprised if we see way more things happen from Anons who are actually just people who... Maybe. I think the problem is that privacy requires a lot of R&D work. For sure. I'm sorry? Yeah, yeah. For sure. It's not something that you can really easily spend together on nights and weekends. You know, like you really need a lot of dedicated energy and time and a strong team.

And for a lot of the people who can do it, like they have really high opportunity to come. So I think without consistent funding, I think it is actually really hard. Now, that being said, like, you know, if you look at the privacy coins after the tornado cash sanctions, they actually didn't go down. When narrow and Z cash were basically unperturbed, even railgun, which is like a kind of tornado nova poppy thing, like it dipped a little bit and then it came back. And so I think the market seems to be seen this is like, okay, this is just tornado cash. Yeah. I actually asked Jerry Brito about this on my show. That was my last question.

Like, does you think privacy is going to leave the next thing regulators go after in general? He was like, no. Yeah, I think the reality is that the regulators are not thinking that deeply. They're just like, look, tornado cash bad, North Korea bad. So, yeah, put the two together. I was just stuck by, like, how sloppy everything has been so far. Like, I feel like the Treasury really fucked up here. Like, specifically listing the Ethereum deployments of it in tornado cash, not the other instances,

listing every single pool that was used, not just a hundred-eat-pool that North Korea used, like, you know, is North Korea going to use the 0.1-Eth pool? Probably not, and yet it was banned anyway. The fact that Turner Cash did have this compliance tool, even though, like, well, why do we care about privacy? Why is this the problem? Because somebody can get basically fresh eth and use it to cash out. Well, if I can go to an exchange and show them the compliance tool and say, hey, here's my original address, here's a new address, you can sort of stop that sort of cash out process. And so everything about it just didn't really make any sense. I don't think they really understood what they were doing. Jerry also brought up the point that how is a smart

contract supposed to defend itself? Other sanctioned entities can defend themselves. They can start a lawsuit. What is a smart contract supposed to do? And so the whole thing just feels like they didn't really know what they're doing. And I feel like there's going to be a big legal challenge. And even, you know, we're still find out about what's happening with Alexi. But, you know, the fact that there have not been charges brought yet. The Dutch police claim that they're launching their own investigation unrelated to the U.S. seems kind of suss. Like the entire thing just feels very kind of amateur hour and really disappointing. Yeah, I don't know if I agree with that.

Like I feel like watching this whole thing, what I'm seeing is the same issues that I see with security regulation in the U.S. where I feel like the crypto community has its views about, you know, what decentralization mean, what open source code means. And they kind of have these certain distinctions that they're making, right? But that's like the industry. I mean, when Gary Gensler came in as, you know, that CC chair, people thought like, oh, he gets blockchain. He's going to kind of view the way we do.

And yet he understands the technology and he has a totally different view, right? Like to the point where the SEC seemed to imply that ether was no longer a security. And then he seems to be kind of back. Or no longer commodity. Or no longer. No longer security. Yeah. Oh, yeah.

Sorry. Before Gary Gensler. Yeah. Yeah. And then now he's kind of implying that it is a security. So I feel like what I see time. And again is like, oh, like even when I read, like, for instance, you know, the New York Times or like the Wall Street Journal or whatever, they'll say things like, oh, there was this new crypto legislation introduced. And it's very friendly to the industry, meaning like the industry, you know, had a lot of input and they shape the bill. And like you guys all, because you're part of the industry, you're like, well, that's how it is. Like, you know, these are commodities and but but, but like, as we've seen, as easy regulators will look at something that you guys consider to centralize and be like, actually, it's really, you know, identify all people. It's really centralized. And so I feel like

it's the same thing again. I just want to add on about the Dutch authorities. So you're right, we don't know what the charges are and stuff. But I interviewed somebody who used to work at O'Fack and FinCEN, and he was saying that essentially we just don't know all the facts about what happened, right? And so it could be that there really are things that are illegal in the Netherlands or whatever jurisdiction this person falls under that, you know, give the authorities a legitimate reason to arrest him. You know, in the U.S. where we have, like, stuff about free speech and everything. You know, we have a bunch of, like, U.S. lawyers opining on what this all means.

But really, like, none of that really applies to this person as far as I understand. So. Well, yeah, you're absolutely right about Alexi. We don't know what the charges are. And once we learn the charges, we might be like, oh, shit, those are serious charges that maybe are incidental to his relationship with twin-ins. cash, right? And you're absolutely right. Dutch system, I don't know. I don't know anything like the Dutch system. But we, I think we are in very good position to be able to criticize OFAC.

Because... Yeah, I mean, I'm not necessarily disagreeing with you so much as just pointing out that, you know, like Tom had this very strong opinion. Oh, they definitely fucked up. It may be that they very well understood what the implications would be, but were, you know, confident that they could make the argument that this was the right step. That's all I'm saying. I'm just saying, like, you guys definitely view it all as being one way, but they might have a completely different interpretation of everything. This whole thing in my mind is also very bizarre because it just parallels so much, like the crypto wars of the 90s and the case law that was presented there and the establishment of code is free speech. And so the whole open source privacy movement, I feel like we're just replaying this again, even though we've sort of already seen this happen 30 years in the past. Right.

I mean, yeah, maybe. I mean, these were the same arguments that were made of why encryption should be illegal. Why are you encrypting stuff? Don't you have something to hide? Doesn't North Korea encrypt stuff? At least in the U.S., as far as I understand, you know, regulations around financial things are way stricter than around other things. So that's, like, I know people all...

Incription was financial regulation, right? Like, what were people... What was the pro argument for encryption? Was it credit cards? That's the thing when you do encrypt sending over the Internet, right? And it's like, okay, this bad stuff that people do about sending illegal secrets and, you know, whatever, I don't know, whatever nonsense they were obsessed with at that time. That's the collateral damage that we're willing to accept in order to allow for good economic

activity to go on and perturbed with encryption. And it was also very serious because they were munitions. And so it was an arms control export. And so obviously, you know, smuggling, you know, munitions out of the country is also extremely illegal. And yet, you know, that was sort of changed. Yeah. And it took people who were, one, obsessed with privacy for anything to change because most normal

people don't care or don't even understand what's going on. And second, it took people who were willing to do so at personal risk. Because at that time, the developers behind PGP took personal risk in creating technology that they knew was illegal in the U.S. Right. And actually, you know, Adam back for whatever misgivings that might have about him. Right. He was a true cyphepunk.

And a rebel, I think it wasn't him who like had RSA in his signature. On his t-shirt or something. Yeah. I think it was his email signature was the RSA algorithm, which was technically illegal. It was illegal to, as a munition, as, you know, something that's supposed to, only the military is supposed to have these mathematical formulas, which is a ridiculous concept on its face. And now the idea is that this set of code is illegal. Now, do they say that?

No, they didn't say it. They said some vague thing about tornado cash and these Ethereum addresses, which are not even all the addresses of tornado cash, which is my point is that what they're infringing on is a really important, very difficult conversation that as a, like, we're, you know, We need to grapple with these conversations, not have answers handed from on high. Yeah. And I'm not saying that I don't agree with you guys. Like, I'm somebody who does consider privacy super important.

I find it weird when people don't. But I'm just saying that I feel like, you know, very swiftly, the community kind of had a very certain take on everything. And I was like, well, we don't know their reasoning. Like, they might come out with a lot of reasons why this was the right move. That's all I'm just trying to. say, you may think they definitely bungled it and they'd be like, no, this is exactly what we intended. Yeah, knowing the, you know, average level of competence and intelligence of like, you know, most of these, you know, government officials, I would be very surprised if they had, you have

a really good argument as to like, why was this the move? I think it's just like, you have a hammer and this is where you're going to use instead of, you know, from their perspective, it's like, what are they really losing, right? Like, it's like a classic, and that's, you know, you got all these protocols and these companies that have sort of abandoned tornado cash and it's like, Yeah, is our Microsoft lawyer is going to stand up for tornado? No, it's extremely high risk, very low reward, so he was going to get rid of it. And the Treasury probably did a very similar calculation. Yeah, then you saw who's the legislator who was like, finally we stamped out, you know,

tornado cash, which is owned by North Korea. Oh, it was the Secretary of State. It was Blankin. Yeah, Blankin, yeah, Blankin, who claimed that the tornado cash was created by North Korea, which is just like, this whole thing is just like this boogeyman, you know, even the title, the title of the post is, U.S. Treasury sanctions notorious virtual currency mixer tornado cash. It's just like, oh my God.

Like, it's just all designed to create this like fear. It was like, what is tornado cash? You know, it's a privacy protocol that some bad people use. When you sanction this thing, they will find the next thing to use. And are we going to sanction that thing next? Right. Like the next hack is going to go somewhere. It might be some lightning thing.

It might be they wrap through Monaro and they go into their Minero bridge and they use Monaro or they use Zcash next or they use Ren. and there will always be something that bad people use. And is the theory that we're going to operate with is that we'll whack them all one at a time until one that's not sympathetic shows up and actually fights us. Yeah, but I have a question.

Like, one of the government comes out and is like, okay, here are the ways that tornado cash was actually centralized. And it's like some kind of nuanced argument about, I don't know, I'm going to, you know. She was extremely careful to avoid components of centralization. I mean, they burn the admin keys. they didn't run like a relayer.

It was really just, you know, you build the code. They didn't even deploy it. There was a deployment ceremony. So I just, I'm open to the idea that maybe there's more to it. But that's the thing. They didn't sanction the people. If you sanction the people, then it's like, okay, there's some argument about some people are responsible.

They didn't sanction the people. If they sanction the people, then I agree. Well, they didn't know. Clearly, if the Secretary of State thought it was North Korea, they didn't even know the right people were on. No, they relied on GitHub. They're very hard not to know who the people are. They relied on GitHub.

They're the three biggest contributors on GitHub. Yeah, yeah, I know. I'm just saying, like, I don't think they did that much. They clearly did not bubble up all their due diligence. I would say the one thing, though, that's important. Yeah, so with regard to a ceremony, ceremonies are when basically you have a group of people who each contribute part of the randomness

to the initial creation of, like, the initial genus block that is used to be the initial point of random number generation for, like, a privacy protocol. So you can think of it as, like, No one person contributed the initial genesis, kind of like in the Satoshi has a famous quote. It's actually many people contributed part of it and got aggregated. So they did that, but there was also a deployment ceremony. So they basically used Create 2 and said, hey, you can do this transaction and it's going to deploy a component of tornado cache.

So they didn't even do that. There's like 30 contracts that were deployed by random people. Right, right, right. And there was no incentive to do it, be able to do it. Right. So, yeah. This whole thing, like, I mean, clearly this. is going to be a fight.

And the thing that's frustrating about this is that, and this is part of the imbalance of power between the government individuals, is that, you know, when OFAC takes a step, even if that step is miscalculated, it's a breach of their abilities, right, or what their constitutionally not to do, the amount of work it takes to undo that step, right?

The amount of legal expenses, the amount of time, the amount of energy, the amount of economic destruction that happens, It's hugely asymmetric, right? It's going to take years before anything happens on any of this. Obviously, we'll eventually learn the charges. We'll get more details about what happened and why. But the amount of work that it takes to push the government back one step

is enormous relative to what it took for them to take the step. And that's part of the frustration of something like this. And that's part of why regulation by enforcement sucks. That's why it's so much better to regulate through conversations so that people can actually make decisions as a collective about what is the right way to treat privacy? How do we think about financial privacy? Is the idea that, look, you don't have the right to financial privacy

if bad actors are also sharing that financial privacy with you? Is that the idea? What's the theory here? I mean, the problem, and maybe this is to Laura's point, is like, you know, most of the time, I think if the government sees a sanctioned country that, you know, we've had sort of mal-religious. relationships with for decades anywhere near anything.

It just becomes a like stop everything type of decision now. There's collateral damage in that, of course. But that is the cost they're willing to pay for enforcing kind of this type of thing. And like I agree that there's a nuanced argument against it. But I do not think the government needs, has been kind of told to have a care about a nuanced argument. Their regulators effectively lay down the law of like anything North Korea has to be kind of

bludgeoned. And that's it. But this is clearly like a very different categorical difference, right? With like what they usually do. They usually sanction a foreign person or a foreign company. Which makes sense, right? Like, okay. All they're doing is taking that framework and just hoping that it works.

Well, it's like, imagine that they sanctioned like literally a code base. They didn't literally sanction the code base because they just said tornado cash, which people assumed meant the code and so GitHub deleted their code. Imagine that they sanctioned this code North Korea uses

for their hacking efforts, right? And it's like some, you know, I don't know, some disassembler or something like that. They say North Korea uses this. And if we take this offline, North Korea is going to be screwed. I mean, we do do that, by the way, with hardware export restrictions and IP. So I would argue that you're not totally

like code is free speech, but hardware gates are not free speech, which is like a funny distinction. Okay, okay. Export restrictions on hardware is actually quite different. Even though it's the same code. It can be the same code burned into an FPGA, and it will be illegal as hardware, but not as code. I think that is a reasonable distinction made, though.

But maybe I don't have a good argument why. I see a point. I'm just saying, like, they draw the line arbitrarily already to me, so it's just like they just, it's turtles all the way down once you cut the line. Well, I think, you know, people are talking, like, you know, what is sort of the next shoe to drop, right? like, are validators supposed to process transactions from sanctioned entities?

You know, is Ethereum supposed to exist and process transactions from sanctioned entities? Like, you know, it is, you know, turtles all the way down when you sort of look at the stack and wonder, like, where does it sort of stop? Yeah, it gets interesting when you look at the questions of after the switch to proof of stake, then, like, is Coinbase going to, you know, process a blog that has interactions with tornado cash in it? I mean, like, it just gets really, really weird quickly. I don't know. So this may be a segue to our next topic. But I just feel like I keep on learning so many different things about, you know, what things will be like post-merge that really call in a question certain fundamental elements of Ethereum

and make me wonder like, oh, is this really going to be a good thing? Or is this going to end up in creating a lot of, you know, potential threats to Ethereum? I don't know. There's just... What are you thinking of? So this obviously is like the most recent one, just those questions around validators and stuff. But, you know, this centralization vector around like liquidity, staking derivatives and Lido and stuff.

Like I did a big show on this and I kind of was surprised that like there wasn't a little bit more alarm about it. Because just as a journalist listening, I'm like, whoa, this seems potentially quite bad. And then now, you know, I'm like, you know, I'm like, I'm learning a little bit more about MEP. I don't know a ton about it yet, enough to really give an opinion. But I can definitely say that given the range of things that I've heard, there's like really good points being made against institutionalizing MEP

and like just making it something that is an accepted part of Ethereum. And so I don't know. There's just like a number of ways where I'm like, whoa, shit might go down. Maybe I will talk about this. Yes. I have a feeling to room. would have an opinion. Yeah, so I think the first thing is,

the theorem already accepts, I mean, there's just no, there's no, there's no if stands or butts about. They've in fact centralized it off chain. And there's, you know, in spite of the fact that that's been tried to be decentralized by multiple attacking auctions, we've centralized to like 70 to 80% of hash power in one.

So the first thing is it's already there. The question is whether it gets shared, the revenue gets shared amongst all validators or not. But actually, but some other people would say, that another question would be, should we do more to minimize it, rather than just accept it?

So there's a couple things. I think the first thing is that every mitigation mechanism has a cost. So anything that's doing something like, say, fair ordering, either is more centralized. So like the chain link arbitram version of the world

has a centralized sequencer effectively, or like at least a centralized off-chain relay. Or it adds a huge amount of latency or kind of like changes to the U.S. that would be unacceptable to most users or developers. Like you just have to wait a long time. You have no clue what other transactions are being included, like a batch auction.

The second thing is there's sort of what I would call my folk Janon theorem, which is like anytime you actually have any uncertainty in a transaction processing mechanism, there's always some amount of minimum extractable value from people who are processing the transaction. And when you force people to go from the environment of like, hey, I submit a transaction to someone who then afterwards is like very low latency with like all the other parties have to interact with,

then it's like, okay, well, the fact that's very low latency means the net extractable amount is a lot lower. But now that we're like, hey, we want to actually just send packets or I want to send transactions over the internet, which has tons of reliability issues. you can't guarantee that the latency is low, you're obviously going to, the higher the uncertainty, the higher the extractable value. So there's no real way around that.

That's just like the laws of physics. I guess the second thing is that there are ways of mitigating. And most of the ways of mitigating actually involve in making the auction better, making the economic process better, not like these fair ordering things that change the security assumptions, use new cryptography,

like that maybe is not ready for prime time yet. there's trusted hardware. Which gets broken in every other month. I'm just waiting for all these SGX things to break at some point. And protocols are also redesigning themselves over time to reduce any of the opportunities. So yeah.

I think there's going to end up being like, we're just converging to whatever the information theoretical minimum. Let me paint the intuition that you're trying to convey here because I think it might not be intuitive to most people. Why MEV is intrinsic to blockchains. So MEV is basically the idea is like, Imagine you're running an exchange, okay, but you're the exchange operator.

And as an exchange operator, you can ultimately decide what happens when, as long as nobody is obviously cheated. And when you're a totally centralized exchange, obviously nobody can really tell who's getting cheated. And so people are just sending you stuff and you're like, oh, you know what, this one goes here and this one's going to go here and then boom, I'm going to go in between and I'm going to make some money. Now the tighter that the bounds are, let's say that everybody is coordinating. Everybody can actually see who's doing what trades when.

And now it's harder for you to cheat. But as long as it's not instant, the moment two people send you a trade, right? If two people send you a trade and you can decide which one goes first and you can decide when your trade goes in, there's always some MEV. MEV is just the ability to control how the order book plays out. And to ruin's point is that it's impossible to get rid of. You can make it better. You can make it faster.

You can do whatever. But as long as somebody runs the exchange, they can always do something to make even a little bit of profit. Right now, in theory, you can make a ton of profit because there's a lot of profit because there There's seven second blocks, or 12 second blocks, basically, which means that there's a lot of time for you to go in and reorder stuff and do a lot of nothing. I also think people give flashbots for saying, oh, FlashBoss is like causing MEV or something like that.

I think the mental model for FlashBoss is sort of, you ever seen like the Hamster Damb episode of The Wire, you know, where it's like they sort of sanction a portion of the city to like basically sell drugs. And I feel like FlashBots is sort of like that in my mind. Like, this is going to happen anyway. So we may as well have an orderly market for it. as opposed to what people previously did, which was like,

you know, bribe Myers, do co-location, like crazy gas spikes, stuff like that. Yeah, and so actually the history of this was that these probabilistic gas auctions led to people spam, instead of saying, like, I want to be after this transaction, that I'm front running or background. You instead would just spam the validator

with a million copies of the same transaction, with the gas just a little bit below the transaction you want to be after. And if there's many competitors, everyone was spamming and you had this like huge spam war against the network. And it just like basically was non-productive usage because most of the block could be filled with these failed transactions that were people trying to spam. By moving that separate from the production of a block via the flashbot's auction, you actually at least made it much more orderly for the average user, the non-strategic user, the dumb user, the user who just like opens MetaMask hits Send. not the user who's like sitting and actually like monitoring the mempool and interact with using directly.

So the proposal in Ethereum that is the controversial one that you're talking about is this notion of what's called proposer builder separation. So the idea is that builders, for block builders, people who are taking sequences of transactions that they see, ordering them, executing them, and giving a proof that like they executed those transactions correctly, they then bid, they say, here's how much I'm willing to pay. for this block, or here's how much I want to get paid for this block. And a proposer basically takes those bids and aggregates them and then submits to a network. Now, one of the reasons this is supposed to be better, at least in some sort of more economic sense, is that if there actually

is a competitive market for block builders, people who are like trying to like rearrange sequences and like find the optimal block to build, then censorship becomes very expensive because you have to pay significantly more than the maximum price that a block builder is willing to offer for many blocks to effectively do the censorship. And so the idea of like doing this splitting actually does sort of help, but it doesn't mitigate the fact that you still have these like supply chain attacks on the actual code base, right? Whereas someone puts in like the the meme was like OFAC guess, like the Ethereum client has like an OFAC check. So I guess the main thing is these things Things are just still a little half-baked to put in the protocol fully, and they're not going to go in immediately.

But at the end of the day, there's no way of, the best you can do is just add in mitigating mechanisms and then actually share the revenue. The one problem in proof of work is that you actually cannot share the rep. So imagine there's revenue that's earned from MEP. You can actually distribute it to all miners. So like let's say on each block when you enter a proof of work, MEV auction, whoever mine that block gets all the MEPV rewards. There's no way of splitting it. And the reason for that is with HASH power, you actually don't know.

And this is a feature and a bug depending on how you view it. You don't actually know the distribution of all miners. You don't know how much resource each miner is getting. You only approximately know it, and you're measuring that based on the difficulty adjustment of the blockchain. And in proof of sake, you could actually take a portion of the MEV and redistribute it. to all validators as sort of a bonus for staying honest. And in some ways, that's sort of the direction that's being moved in to kind of eliminate the centralization effect of a flashback function.

So I would say that the OFAC get thing got confounded with this thing that wants to be added. And then there's lots of thud and people didn't bother reading like carefully any of the documentation. And so hence we got the storm on the internet. Yeah. The weird thing, so all this MEP stuff, FlashBots started, what, earlier last year? I mean, I guess they were informal for longer. Yeah, yeah, yeah.

Like, before that, the really interesting thing is that before that, there was, initially when FlashBots was first conceived, I was very strongly against FlashBots. We were actually investors in FlashBts now, but I was very strongly against FlashB. All three of us. All three of us are investors, yeah.

And basically my view was that I thought they were playing with FlashBats. and that the idea, like institutionalizing the idea of MEV extraction is going to make basically Wall Street and traditional enterprises be like, what the hell is going on to make? Like, you guys are just agreeing

to all front run each other and steal from each other and that like anybody who's not smart enough or connected enough is just going to get destroyed. And I thought, one of two things. So one, there was this trend actually of a lot of projects that were what we call accelerationists. Basically mean to be like, this thing will eventually happen.

Let's make it happen right now. and then try to create the perfect version of the eventual state. Before that point, obviously there were MEP auctions and there were, there was MEP, but it was kind of a gentleman's agreement not to extract it. And so I remember back that wasn't true on chain though. There are people definitely. I mean, on chain, but in terms of the minors themselves, like they remember in 2017, there was this famous instance,

one of the first instances of MEP that was very widely known of, which was that F2Pool, during the status I scale, the status very old school ICO back in the ICO era in the status ICO it was discovered that F2Pool had put in one of their own transactions to basically mint a bunch of tokens in the ICO before anybody else could and there was a huge storm about this

but if people pull their hash rate from F2Pool you were like oh my god how could you do this you're destroying the integrity of Ethereum and after that the miners learned don't mess with loss it's just part of the Ethereum like immune system There was this paper out, I think, this week.

I think it was like some, basically actually talking about F2 Pool. It was selfish money. Yeah, yeah, yeah. Single block's selfish money. Yeah. So F2 Pool has gotten with a hand of some of the time. But they've always been the kind of, like they're famous. They're a bad boy.

Yeah, they always are cut. They were the first ones to move from FlashButs to whatever that competitor was. Eden. So like I feel like they're always. Yeah. They're always living on the bleeding edge. They are, but I think it's interesting because, like, that single event, every single mining pool that I'd ever met with you, they remembered that. They all knew about that event because they knew that, look, there are certain things you don't mess with.

And one of the things you don't mess with is you don't reorder within a block. And it was always understood that, okay, a mining pool is allowed to have their own transactions at the end of a block that are non-fee paying. They're just like, you know, do payouts and stuff and just kind of administrative stuff. But you don't mess with the internals of a block. And it was really flashbots that started to move the Overton window of what is acceptable within Ethereum, which is that no, MEPV is a thing. These MEPV auctions are happening on chain through PGAs. We should institutionalize them and remove the noise from the MEP pool and put it in a separate section for pros over here and everyone.

Arguably, though, I would say that I think that we would not be at the point where Ethereum actually was able to support so many different types of applications with. increasingly less sophisticated users without flashbacks. And it's not like it's inaccessible. In theory, like anyone could just change their RPC and use it. So I would just say that, you know, the main thing I always take kind of, I'm always surprised at it.

There's just always people like, oh, it's like so extractive and like nothing, you know, like, I don't really understand how you expect this thing to be an economic system and not have some type of like, non-strategy-proofness. First of all, there's no incentive compatibility in any of this stuff as designed.

Only at the consensus layer does anyone even care about measuring whether incentives are sort of compatible. Once you get to application layer, literally no one actually even bothers checking if their mechanism works. They just try to deploy and mint the token and get out. And if people are like that,

then obviously they're going to create all these horrible, horribly inefficient things. I remember when ArtBox came out, which is like this big NFT launch pad thing. They had this like horribly implemented Dutch auction where it would always start at a valuation that's lower than what all the bidders wanted. And so they basically created,

they took this auction that was supposed to actually be like an orderly thing and then they turned into like the worst type of first price auction because everyone is like, oh, this is 50% cheaper than what I really think the value is. So I'm going to spam for this. And stuff like that, the average person who participated in an art box auction would have gotten zero if not for FlashBot.

So you have to give them a lot of credit for... I look, to be clear, I totally give FlashBots credit. I mean, at this point, it's clear that we're not going back. Look at Solana. I mean, a lot of the problems on Solana happened because they didn't have an orderly mechanism and the fees were zero. Right.

They didn't have a fee market. Wait, before this turns into yet another Salon Fadtsin show, I want to ask because, again, I am still doing my research on MAPE, but as far as I understand, like, people are pointing out that there are certain regulations against this type of thing. And so some people are saying, like, oh, this literally is kind of like illegal. So I was wondering. I think it's plausible that we move to proof of stake that some exchanges don't extract any of V.

100%. Yeah, it's optional now, right? Like if you're running an Ethereum client, you can use MEV Boost, which is a software, which is the basically that you take these blocks. And I suspect these big, you know, like Coinbase, right? They're not going to run MV Boost. It's too, too sketchy. So, yeah, I find that weird that, like, one group is going to be like, okay, we'll do the thing.

That's illegal. And then another group is like, okay, we have to abide by the law, right? But that's always been true in this. Yeah, when does it not been true? When is that not been true? Like, we were just talking about tornado. That's the perfect example of this. Well, wait, but tornado, so obviously now it's sanctioned.

But, I mean, unless you're a North Korean hacker, like a lot of people were just using it for privacy. He's being for privacy. Yeah, yeah, yeah. Tornado is obviously not. Sanctions are not backwards looking. Sanctions are four. Okay. Okay, but so you agree that MEV boost then would be illegal?

Like, I think it's not really not really not really. It's that, I mean, if anything were to happen, it would probably be civil. And it's like you're opening yourself up to lawsuits and like you're opening up to your, like, you're just like, if your point base, why would you want to bother? Yeah, the real question is, does uniswop get regulated as like a swaps dealer or like a broker dealer? Or at least if you care about US regulation. If that ever was true and like kind of like the sanctions forward looking, any future un swap transaction gets qualified, then I agree. It's true. But right now, it's like, the government doesn't even seem to be able to distinguish the difference between like an LP share and a ERC 20 for taxes.

Forget about for like understanding how to redeem an LP share. Yeah. No, I think the reality is that a lot of Ethereum exists in a global environment, right? A lot of, most people use Ethereum don't live in America. They're not Americans. The weird part those most developers do. Unfortunately, a large proportion. developers are unfortunately subject to American laws,

but Ethereum itself is not. And you have to build Ethereum in such a way that it works no matter where you are. And the MEPV is something that just comes out of the incentives, comes out of the game theory, right? And it kind of doesn't matter if you make MEP illegal in one country. Someone in a different country

will extract MEP. I'll give you another example. Arguably, if the U.S. government ever said that an online ad impression, which is sort of like when you go buy a Facebook ad, you're buying a future rights, to a certain set of demographics that get a certain ad, right? It's basically a security.

You could argue that it actually is a fucking common enterprise, and it is a security. If the government really wanted to go after Facebook back when they cared more, they would probably have just been like ad impressions or securities, and you know, you're a broker dealer, so like you can't front run everyone. But instead it's not, right? And like, oh, if you look at Google on Facebook, they do their own, their entire business model is do M.

for yourself. You run the auction. You sequence when particular bidders are bidding. And 90% of bidders use automated bidding strategies that you made as the company. Their business model is literally only MEV. At least here, it's like competitive. I like this idea of extending MEV each other. But that is what it is. Like let's not let's let's let's let's, you know, let's call a donkey and ask when it is an ass. It is in this case. All right. All right, you heard of your first. Facebook, the biggest MV extractor of all time. Wow.

I mean, it's the same concept. I understand, I understand the point. I just, I always enjoy. It's the fact that it's like a second price auction, though. I mean, you do get more. It's not second price anymore. They literally got rid of all that. Google sort of didn't.

Like, yeah, some, some auctions are, some are in. Yeah. Anyway, all right. Let's move away from Google and Facebook auctions. So actually one of the things that I want to chat about that we brought up before the show started when Tarun was still not here Is see aren't you happy a lot? Well, well no you got more bonding You've had a great discussion and it the listeners would have benefited it been anyway This is really all your fault there's really all your fault to run.

Silver line so so there's been a lot of hubbub this week in the NFT community about these exchanges that are no longer enforcing royalties. So royalties for those who are not aware generally when you affect a sale of an FFT on a platform like OpenC, there's a certain percentage of each sale that goes back to the original creator. And that creator, the creator specifies what they want the royalty to be for that collection. So it turns out, and a lot of people did not know this. And I actually didn't know this until I learned it very recently, is that these royalties are not enforced at the smart contract layer.

The way a lot of people talk about NFTs is like, oh, NFTs are this way that creators can get paid and blah, blah, blah. But actually these royalties are kind of like a suggestion. It's kind of like, you know, you just sort of tape something on like your, the little bucket that you're busking with. And it's just like, please, suggested donation is 5%. But it's up to the actual exchange to actually enforce that. And it turns out there are a couple of exchanges.

One of them is element and the other one is pseudoswap that are not enforcing royalties. And as a result, they're actually growing quite a bit in trading volume because they're cheaper than the places that enforce it. Since Tom is the real NFT-DGen here, I would like love a little TLDR of what pseudo-slop actually does because I actually have not really understood. I mean, I feel like that's...

We can talk about it. I mean, I feel like the reason that they've become popular is also their new mechanism on like OpenC or... Yeah, yeah. It's just a lot of royalties. Oh, really? Well, no, I think that's a portion of it.

But it's also... You can think of it as... I know you're a big NFTX fan. You can think of it as basically a sort of UniV3 version of NFTX where basically any individual can set their own sort of curve

for the NFTs that they have, and then they use a routing contract that aggregates over all the curves. Do you get better execution? Per collection? Per collection. Okay. And lower fees.

You're not doing the whole fractionalized, two-see swap thing. So, yeah, it's just like a better, cheaper place to trade, you know, NFTs. And the NFTs,

and the NFT meta is trending towards floor trading, and so it sort of all kind of lines up. Oh, so you don't even care which one you get. Do you don't care when you... You can actually specify. It's sort of like NFTX in that way. But it's like,

hey, if you're trying to move, you know, a lot of months. through an NFT collection, maybe you're less, you know, picky about that, and it's more optimized for that sort of meta within NFTs. But yes, no royalties. Yeah, I mean, it's this very weird dynamic where I feel like we wouldn't even happy having this conversation had OpenC not opted in to have royalties in the first place. But they did, which sort of said the standard,

which created this impression among everybody, including very sophisticated people, that royalties are somehow enforced on a smart contract level as opposed to just being this suggestion that exchanges choose to enforce. And I think as a result, you know, it's like, well, you know, are exchanges incentivized to use royalties? Well, it's like, no, because it increases the price for, you know, their, the assets and sort of reduces trading. Do users want royalties?

Some do that I think want to, you know, respect creators and give them attribution. But most don't. They just want a cheaper NFT. And so it's like, why are we even in this meta in the first place of people paying... Well, remember there was a supply-side problem in 2019 and 2020. where forget about the demand side. There were just like no one you could convince who was like a relatively prominent artist

to even make one of these things. And so the royalties were actually like a way of like bootstrapping the supply side before kind of, you know, the demand side came after Defy Summer. So like I do think the supply side piece of it was... That's an interesting argument. The royalties were there to bring people in the beginning.

But now the demand was there. Who were like more prominent... The creators. Yeah. I mean, but this is exactly my argument. of like why creators were interested in NFTs, you know, Mark Cuban on my show was like, oh, I got interested when I realized I could sell tickets to Dallas Mavs games and, you know, and force a royalty and all the resales. So, you know, creators are very interested in this. And, you know, as a creator myself, I have to say that I personally would totally want to give,

you know, some of my resale value over to other creators. Yeah, I don't want to go into the economics necessarily being writer. I would love to go into the economics. I mean. Oh, okay. So if you're, like for you, for a unit of work, you make like this amount of money. For me, for a unit of work, I make like this amount of money, you know, especially with writing in particular. Sure. So, and you, it's like super offensive.

Like you don't even know how many people have like tweeted things at me. Like, why don't you give things our way for free? And I'm like, oh, because it took me like X amount of time to make that and like that's what I do for a living. I mean, like, yes, people like you like VCs, you can write for free because you make your money doing something else. But this is actually what I do to make money, right? And this goes to my point. I was, we were discussing this while, too, and was late. I was kind of annoyed when I opened my Twitter application.

And I see Spencer No offense to Spencer. I've never met him in person. But, you know, he's a variant fund. And he tweeted something like, oh, you know, when artists' songs are streamed, they shouldn't make any money because the song is effectively an advertisement for their work. And I was like, you know, I was like, do you know, do you know anything? musicians because like musicians they are much more likely to say like I should earn so much more for my streams they're more likely to complain about the fact that like they kind of have to tour to make

enough money you know it's like the actual work they do doesn't make enough so they have to do this additional thing on top to actually make the money and so he you know i just was like and i was surprised because you know jesse walden is part of very infund and i was a little bit like i feel like Jesse definitely knows musicians, so you guys should have talked to something to, like, understand what their world is like from a business perspective. And then I was surprised, like, Kyle Simani backed Spencer Nune up. And I was like, I just tweeted back at them. I was like, you guys must not know any musician. I think Jesse's married to a musician. Yeah. Yeah. So that's why it surprises me. Spencer did not seem to understand the economics of being a

musician. And, you know, it's like they want musicians to be like entrepreneurs and like, you know, have this like, oh, I'm going to like like, like, because Kyle, point was, there's a ton of businesses where you give away the core business for free, and then you charge her stuff on top. And I'm like, for you, but a musician wants to make music and be paid for it, not like at this whole business model that's super complicated where like they do the work, but they do that for free. And then they do this other thing, they make the money. And it's like not what they want to do. They want to make money. They want to make money. And they want to be paid. I'm getting a second hand. Yeah. I was a little bit like, and

you know, I don't normally get kind of emotional when I'm looking at. Twitter, I'm fascinated you by the crypto discussion, but I don't normally, like, have a sense of personal involvement, but I have musician friends. So, like, I just was like, you do not understand this world at all. But anyway. Okay, so let me give the supervillain argument for why I think actually, I'm fine with the idea of destroying royalties. So here's the, because you asked about the economic argument. You asked about the economic argument. So if, if when I, let's say, let's, let's ignore music and all this NFT stuff, right? The classic thing is, selling tickets. When you, when you, when you're selling tickets to like, you know, some

basketball game, right? Very often what will happen is scalpers will come in and they'll buy the tickets so they can go and resell them later to people who actually want to sit down and watch a show. So if a scalper bought the tickets from you, right? And they, there was a tax that was automatically enforced when they resold the tickets to somebody else. The scalper would pay you less, right? Because they have to, because they have to, let's say, let's say I have to pay 25% of what I make from you, you automatically enforce it. Let's not say how.

Let's just say you have a software system that does all this, right? When I reassign the ticket to somebody else, I have to pay 25% or whatever I charge them back to you, then I'm going to be willing to pay you less the first time that I scalped the tickets because I know I'm going to get less at the end because I have to pay 25% to hand it off to somebody.

Right. The tax that you pay when you resell the asset, it flows through to the original value that the scalper is willing to pay. if the scalper knows they're going to make less money because they have to resell it, then they're not going to be willing to pay as much. You are making some assumption

about the velocity of resale here, which I think the point is, musicians are not, they're not, like, constantly trying to churn their revenue. They're not like, they are, this is the reason music NFTs will never happen. Here's the basic shape of the argument I'm making, right?

Is that like, if you remove royalties, then people will be willing to pay more for the initial mint, because the initial mint is going to be worth more, right? I can now sell this thing for higher than I could originally sell it for. But you're assuming resale is happening fast enough that people care. Like there's some trade off between like royalty and resale frequency, right? And like that's sort of like I don't think for musicians, it's like that for even for artists, fine artists, it's not like that. But for this like these like collectibles, it's clearly like people want to just constantly like Beanie Baby trade, Pokemon card trade.

I don't see. If you're structuring it purely as like a donation and you're not actually. Yeah. Yeah. user result. Or if it's like, if it's like fine art where it's like a tax harbor

for someone else, then like, yeah, the royalty is the only way that the artist ever gets paid. Yeah, I think that's kind of the part that seems ridiculous to me, which is the velocity of trading

of NFTs, which is like, should board apes be making $50 million a year from people trading board apes? Like, that seems pretty high. Maybe it should be a per transaction fee or should be, you know,

kind of, you know, something nominal versus like, you know, the 10% that you see. But when you buy merch at a, I don't know if, you know, at like a music festival or a concert or something, you're not going and trying to resell the merch immediately. That's the problem with all these music entities. They're assuming that people, like, want to resell the rights to. It's like, why would I even own intellectual property or fake intellectual property and, like, immediately sell it?

It only makes sense for these, like, weird collectible things. I just don't think it, like, for people who are making these things where they're, like, not trying to be businesses and they're just like, hey, we're in our own creator. I just don't think they care about the velocity. Well, I just don't think it makes a difference, right? I think at the end of the day, if you get two and a half percent of every future sale of this asset, right, then in economic expectation,

in economic expectation, if you don't have those royalties, you'll make that two and a half percent more up front. And you can decide that you want to spread out that two and a half percent over time by taking two and a half percent of whatever you sell for. But you're assuming a user, no, no, no, no, no, no. This is the difference between, like, something that's like strategy-proof and sort of obviously strategy-proof.

Strategy-proof means like I can bid my true valuation and I actually get it. But the problem with strategy-proofness is these are just for like, you know, Nobel Prize winner, Paul Milgram's terminology for this. Strategy proof has this problem where I still have to reason about if there's many rounds of this, which is the frequency argument, but that's to reason about the future rounds people's valuations when coming up with my valuation. Obviously, strategy proof is I don't care. I just do it once and it works.

And the problem is the NFT market has stratified itself into games that are like me really spending time thinking about the set of future about. That's different than like what say like a fine art person creator cares about. Right. And so like I view the people who make board apes is like the same as someone who like works at Supreme. They don't really give a shit about the quality of the product they're making. It's not the quality of the product. It's literally just like can I convince enough? of this core group of speculators that there's high enough velocity of churn that it's worth investing

it now versus something where it's like I spent like my lifetime making this magnum opus and I just want to sell it one right and like understanding that those are two extremely different notions of how people on both sides have valuations for these things sort of means that

like you can't expect this is why the music NFT thing is a scam like it's like never going to work well in the case of someone with a magnum opus like you the royalty doesn't doesn't matter because no one's going to resell it. No, but they resell once you're dead. Wait, when you're dead.

Right. Well, but wait, actually going to what you were saying about the Dallas Mavs tickets, I have a similar argument to what Chirouin was saying, where when they're selling the initial ticket for something like, yeah, a concert or like a game or whatever, they set what the price is, right? And then the scalper finds what the actual, like, real prices. Yeah. So, like, this is why, you know, and.

This is why creators like NFTs because they can have that direct relationship with people and they can capture that value rather than a lot of it going to the scalper. So just in your initial example, there's this kind of middle person that hopefully wouldn't exist at least as much in NFTs, right? Well, the middle person's open. Right. Arguably. Yeah, but I don't think NFT or OpenC is like buying, you know, the collection that you're going to drop and then be such. Speculators are the middle person. Right.

Unless they pull a Zillow. Right. So then when you make this whole argument about like, oh, the initial person will want to pay, like, no, it doesn't because in this new world that we're talking about, we don't have these scalpers or ideally we wouldn't. We do. We have the speculators, right? I mean, that's where you're making all the money from is the speculators.

That's what the royalty, who's going to pay the royalties. It's speculators who keep braiding the NFTs with each other because they're all speculating. No, but I think a lot of people that buy in the initial, I mean, it's going to be a mix. It's going to be a mix of speculators and actual real family. that just want that thing. I mean, but the initial mints are like overwhelmingly. I mean, that's what I'm like, we're talking about Salana going down because it's not normal people who are like running bots trying to get into the initial mint.

Yeah, yeah, yeah, but that's why I compare most NFTs are successful with like shitty shoe drops, which are equally boughted. Yeah. Or like shitty watch drops. It's like the same group of like hype beast like 20 to 30 year old people who love like gambling. Because those are this, this is the, the, the, the, the, the, the, the, the, the, the, the, the, the, sort of more introverted version of the people

waiting in line to buy. True, can you define hypebees for us? You know, basically anyone who somehow finds a fad for particular materialistic items, they pick a subset of goods that exist that are definitely bought and sold at a high enough

velocity that they don't have to hold inventory for more than one day. And they try to buy the thing right when it drops and then immediately resell it. That's a hype beast? Yeah. I mean, in some ways, I kind of feel like they are the ultimate speculations. Sure, sure. And in some ways, okay, yeah, sure, those people like board apes.

I don't think they have any taste for fine art or, like, for music IP or like any of these things that are like assets that like the rest of the 99% of the world gives a shit about. Yeah. I mean, look, it's clear once there's an equilibrium, it's kind of like flashbots, right? It's actually very nowadays flashbots. We're like, before anyone's extracting MVP, we can all kind of gentleman's agreement, okay, we're going to enforce royalties, royalties are good, there's great story about it. And then suddenly somebody crosses the Rubicon and it's okay. Now one person is over the line but

like that person's bad. I'm excited for this. Not because of like the like crypto Twitter version of this world. I don't think that's, that's like... Opency will absolutely capitulate. If they start losing market share because other people are unfortunately... I just think you just stratify the market into the like shri-bag like

we want, it's purely speculative NFTs or so the ones that have like long-term that's where all the money is. Right now. creators will want to be on OpenCard. Yeah, I agree. I agree. I don't think like everyone wants to be like catering to the shabag Supreme Kid. Like, that's just not.

Really? You know what OpenCy wants to do? I think they grew off that. But I do think that like now they kind of like, they're catering to a different number. Look at their website. Look at Suiswop's website. Come on. I don't know.

I think that. Look at Magic Eden's website even. Compare the two of them. Clearly one is going after like the ultimate speculative bubble people. And the other is trying to be like, we have fine art on our... I think what you're pointing out... I understand the argument you're making, but I don't think that looking at the front page of the website,

like the hypebees you're talking about, don't look at the front page. It's the random person off the street who looks at the front page. And the random person off the street is very different than the average user. But there are wannabe hype beast. And Magic Eden is clearly more attractive to them. Sure. Right? Just like even aesthetically, like I'm like,

how does one become a hype piece? you just like watch too many skate videos you gotta start your own course of like how to be a couple of high piece you watch some of skate videos and you're like okay like yeah I really want to like buy all these skate shoes

and resell them because like that skateboard's really expensive and like I think I can make money because like these people are idiots and like that's like the beginning of the cycle of doom and so those people need when they go to your website

need to be like oh like wait you're like trying to get sold to Sotheby's nah this shit sucks like those people are not going to like look at that site and say that. Whereas like Magic Eden's clearly catering for that. And I think like we're seeing the stratification of the NFT market with high

quality assets versus low quality assets. Low quality has high frequency churn. High quality is like maybe it's more like fine art. Yeah. Yeah, exactly. And like, you know, unfortunately they maybe got rugged by Mr. Zoo. But I think

and the fact that three arrows owns such a large portion of the art block collection. Oh, yikes. But, or owns, I don't know who owns those keys technically right now. Someone owns those keys. But, you know, I think that that, we're going to see the market stratify. And like the bear market is the perfect time for that. Because like there's all the speculative stuff has to concentrate in the highest velocity exchange.

And it will probably be bad for open sea short term. But I do think long term, their brand recognition probably means they can go high up market. Yeah. Yeah. I mean, unfortunately, I think, like, upmarket is board apes. That's up market. Yeah, you should talk about Sotheby's. I'm like, guess what's getting sold to South of the B's?

It's Cryptopunks. I know, I know, I know. Look, look, look. I'm not disagreeing with that. But my point is the new, these people, most of the volume you see right now is like not even, if you ignore Bord Ape and crypto volume and Cryptopunk volume, it's like all these, like, all these, like, random shit salon NFTs, which is why you can see Magic Eden beating OpenC some days. And so I think the reason that's true is because it's like, oh, like,

the newcomer who like is like I saw all these people get rich last year where can I go but I only have 10 bucks oh it's the one NFTs yeah what's the rate on open C's 2.5% oh yeah actually going back to a much earlier point that Tom made where he was like oh maybe it should be a fee or whatever like to my mind and get in a creator's perspective I'm like oh well if I create something and it becomes so huge then like yeah percentage makes sense because then I should benefit and this thing that's gotten so huge. So the idea that, like, you would, that, you know, no matter what the value is, you would always get the same amount.

Like, that to me just doesn't make sense. Like, it does make sense to me that it would be percentage-based. Maybe it's also just a byproduct of the fact that, well, A, I think if you did it per transaction, way more enforceable versus, you know, trying to do it per exchange, which is like we can't do that right now. But I think it's also just the norm where we see royalties getting set around like 10%, just feels super high. And that's why you see these anti-few products that have insane treasuries because they're

making money on all this, this volume. Another thing we talked about was, like, you know, basically making them opt-in, and you can sort of see on chain who's paid, you know, royalties on their, you know, and who isn't. And, like, you know, maybe those kinds of assets or those people get something special, get higher quality. Those are the kinds of things

that can get sold at Sotheby's. And, like, you know, the hype these people who are flipping on OpenC, it's like, oh, you didn't pay, you know, your royalty on this crypto punk, we can't sell out at Sotheby's anymore. Oh. Yeah. Yeah, I actually, I do agree. that the moment these things move to royalty free, you've tainted. It's gentlemen's agreement. No, no, no. I think

the upshot is these newcomer exchanges have a really good shot of like actually cannibalizing Opency. Probably not Magic Eden. Magic Eden seems like ruthlessly fine about cutting fees. Like I don't think they give a shit on creators at all based on like the fact that they went to the ape point community and we're like

hey, we'll let you pay an ape to subsidize any user and like they don't have to pay a royalty just to get the ape usage up. So like they're willing to do anything versus like OpenC is like much more like trying to go a high brow like in it.

OpenC is definitely yeah. I agree with that OpenC is trying to hold on to their highbrow status but I think they're they're benefiting a lot from the fact that yes, all the crypto, not the point of the board apes are traded on open C. And I think I personally believe that if that changes

and they need to get aggressive on cutting They will. I think they will. You bring up a good point, though, about this idea that these collections actually are weirdly decentralized in some sense and that they don't control their revenue stream. Because yes, during like the speculative bubble, they can like put up this like X percent royalty. But when like the market crashes and people are just like, I'm not going to pay it, then the treasury of this thing, like suppose all the nouns were traded like on pseudo swap with no fee. Like the nouns treasury.

has just hit its peak then. It's never, it's never earning any money. They're still selling nouns. Yeah, yeah. Nouns is weird. I meant not, someone who has like a fix size. There's kind of this interesting thing of like what happens to these projects if like they become abandoned after the royalty goes away and, and you know. I think board ape like shows you the model, which is that like it's, well, you got to keep launching new shit and air dropping. That's exactly right. It's like, I mean, if you consider these things to basically be like luxury goods companies, right? It's like, okay, you created one. line of watches. Okay, it's important that those watches trade for a high value, but you've got to

keep launching more watches. There's more people in the world. Also, there's this weird thing of like, if you make it to a certain point, you just get other brands basically using your address list as a customer list, like Tiffany's. Like the Tiffany AirDrop Day for Popang people is crazy. Yeah, which is, you know. I mean, look, both people are equally tacky, so I get why that's like the good customer list. Yikes. Yikes. And you know, I have to admit, I thought that they were cool. It was like, you know, I'm not even one of these PF, well, no. I think Laura's trying to get Tiffany's as a sponsor for the show. It's so funny.

I was about to say, I'm not even one of those PFP people, but I have a PFP, which I totally forgot. It's CryptoCovin, of course. My favorite. But, yeah, that was actually something that I thought was kind of interesting and cool. But I don't know. Do you feel like real world, like, yeah, assets or whatever you want to call them based off of these digital things, these digital NFTs? you think they're going to become a thing?

Or is that just like... Because it just feels like it creates a whole host of... Yeah, I find it kind of tacky. Yeah, it's just real cringe. But it maps to Miami. So it's like, okay, great. Yeah, there's a quarter of people. You've literally figured out the sales tactic in Miami,

which is like, oh, you just go to the like some hotel and you're like, hey, put my product in your hotel. And that's how you do all your marketing. Because like, it's like the people who care about that aesthetic will buy your product. Yeah. because they see it at XYV place. This is the same thing. It's like, oh, now as a Cryptopunk owner,

you get to, like, get free stays at somebody... I don't know. It's just, like, you have to have, like, taste that's only dictated strictly by dollar values of things for you to, like, care about this. Yeah, it's a very, like, TikTok house approach to, like, thinking about what NFT status is.

I don't know. Yeah. No, no, I got it. But I do think that there are some brands that, yeah, they're, like, Definitely, I think the benefit is more for the traditional brand. Like, there were a few that did Super Bowl ads where they had, like, NFT stuff in their ads. And, you know, I feel like that was for the traditional brand to get more credit.

I mean, it's crazy that Tiffany's got $12 million of revenue for, like, ostensibly what costs them a little bit of PR and, like, free customer list of, like, people who are guaranteed to buy it. That's, like, insane. There's a great move by that. Yeah, kind of genius. And I bet you were going to see a lot of cop, like, other, like. luxury brands. I've seen the Tog Hoyer NFT watch. They had this watch with a screen on it that

I'm impressed by the tech that they were able to get this out so quickly, but basically it will sync with your Ethereum wallet and verify the own NFT and put your NFT on your watch face. Oh my God. Wow. I love people wearing signs that say mug me right now.

That's literally what. Yeah. I mean, look, that's what wearing a Rolex is too, right? It's not in principle different, but it just it's a, it does feel like you're, you're going on the wrong side of the aesthetic.

You know, it's like... Yeah, how did we go from cypherpunks to shit back? Like, you know, somehow that's like, if I ever write a book about, about this industry, that's the title of it. Yeah, it is, yeah, it is a bit dushy. Like, you know, anyway, whatever. Now, all this stuff is

arbitrary, who the hell knows? Maybe, maybe five years from now, we're... This is why I'm pulling for the fine art stuff. Because at least there, it's like, you know, people put thought and you know you really really like had to like make some social commentary about the world when they created something versus

some social commentary about like people there's a lot of people better social commentary than apes. Apes are literally like we've been talking about apes a lot you know that's just because the marketing doesn't mean it's a good social commentary well I mean a lot of empty art is cool most of it is not

social commentary yeah you know like I mean look like fuck render or something like It's really cool. It's not really social commentary. I guess I'm just not like personally that. I mean that's what that's where we get. I did have to like real artists on my show that made NFT collections. And their art was so interesting because it really engaged with blockchain technology in fascinating ways.

Like one of them took her 23 and me genetic or DNA whatever and turn it into a hash or something. And then put it. I think it was like this was so early. It was like back in 20. 13 or 2014. She put it on a fork of it's like doge party or it's like some counter party doge mix up. I don't even know mashup. It doesn't exist anymore. And the title was

my soul. I thought it was funny. Or like yeah, Mitchell Chan who is an NFT artist he did some of the first NFTs before the ERC's 721 standard. His was he found an artist like a traditional artist Eve Klein, who he believes actually made the first NFTs, but they were with paper. And what it was, was he had this, like, big exhibit and they were, like, lines around the block in Paris. And people walked into the gallery. And there would, it was just, like, empty. But there would be, like, numbers, like, number one, number two. And, like, you could buy one of the,

it was called, like, immaterial zones of pictorial sensibility or something like that. And you could buy one of these. And what you would get is a certain. of your authentic ownership of this. So when Mitchell found this, it's like from the 1950s or whatever, he was like, oh my God, this is the first art NFT. So he made the actual digital NFT version of this in like August 2017. And this was like, you know, before cryptoconies, whatever. And the funny thing is, so Eve Klein said that you could just buy the certificate. But if you wanted to experience the true apotheosis of the artistic experience, then he would take you to the River Sen. And sorry, you had to pay for your digital zone of whatever it was called, immaterial zone.

Anyway, you'd pay for it in gold. And so if you wanted the true apotheosis of the artistic experience, then Eve Klein would go with you to the river Sen. And you would have to throw your certificate into the river. And he would throw half of the gold you gave him into the river. And then that would be like the true artistic experience. So when Mitchell created. This is like Marina Bramovich, but like, you know, 50 years ago. So when Mitchell created his, his NFT version of it in the smart contract, you know, you had to pay him Eath or whatever, right?

But if you ever burned your NFT, which, you know, somehow the contract would see that or whatever, and it would trigger the burning of half of the ETH that you gave him. So he, like, created that aspect of it into his. Anyway, and the point is all I'm saying is, like, these kinds of art entities interest me so much and they're like so different from yeah the PFP's or whatever which again I have a crypto coven so I'm sort of a fan of those as well but um but like that kind of true nfti art where it's like in conversation with art history and there is like it doesn't have to be social commentary but it's like engaging with the technology in a way that's like super creative and like makes you think like I really like those well so speaking of true art we got the last piece

of news for the week which is that biggest news of the week that drug is that you're which is that dragonfly just rebranded. So we are we're now we used to be called Dragonfly capital we're now

that's the biggest news of the week obviously I mean I think you guys just reduced yourself to three Aski symbols right

now you have a logo that's a asking emoji it's true which is that was pretty cool we got a lot of we got a lot of it because it looks

very similar to Tracer Dow which recently got acquired by mycelium exactly no TracerDoh Bracetka does great

but they They used to have a logo that looked a lot like ours, but it's one weird Greek symbol, whereas ours is like, you know, carrot and then bringing carrot. Anyway, we also announced that we acquired a fund called MetaSable Capital, which is a fund I used to be at when I started investing.

And so we now... I just wanted to say that to everybody at a show. Yeah, I have to say... Do you guys have, like, a gang symbol? Not yet. We may have to invest in something... I'm trying to, like, get it. Pretty good.

It's because it's almost hand representable. It is. It is. That's the idea. It's very versatile. You would be a good shadow puppeteer. Yeah, no, this brought up for me, like so many memories of kind of when I, you know, was covering this, like, earlier on. Because, you know, there was a time when it was, like, Medistamil was this sort of secretive thing.

Yes. Yeah. And I don't think I even knew you at that time. And, like, later on, I found out that you used to work there. But, yeah, there were, like, I, shoot. is this, I'm trying to think, yeah, this is what eventually became my first Forbes cover story, where really? I don't know if you guys remember the one where I put Olaf Olaf, Carlson via Folli Chain.

Yeah, because, you know, you could see the ICO thing happening and like all these crypto hedge funds were popping up and whatever. And Metastable was like the oldest, you know, crypto hedge fund. But then for various reasons, I went with Folli Chain as like the... Well, Olaf was always all the public. Yeah. He had better hair than always. Well, Naval is pretty good hair.

Olaf still is better. Oh, yeah. Sorry, Naval. He does play better on a cover, I think. Naval plays better on Twitter. Yes. Naval was in the co-founders of Medistabel, and so when we acquired Medistible,

you know, it's a super OG fund. It was founded in 2014. They were, like, in the Ethereum pre-sale, they did Z-Cash and Azos and Algoran and Cosmos, Affinity. Like, you know, a huge, number of the layer ones that have been very successful. And then when I was there, I did avalanche to near,

you know, file coins, darkware, bunch of stuff. So it's a very storied fund. And so, you know, it's, for us, it's been pretty special. So take it over. But yeah, it used to be a very shadowy fund back in the very early days of crypto. And so we're now taking it into the 99th of family. Anyway, we're super over time. So we need to wrap up.

But once again, thank you everybody for listening. And Turun, you are. very big trouble and I hope the audience finds it in. Yeah, I like to think of it as everyone got a blessing. They got extra time to like talk about me. Exactly. Well, we did, but the audience was just stuck with that. Well, thank you, everybody, for listening to us another episode of Shopping Block.

We'll be back to you in a couple weeks. Thanks, everybody.