Unchained - The Chopping Block: How Wintermute Avoids ‘Zombie’ Exchanges, Base’s Early Success, Bank Fraud in the AI Era - Ep. 532

Episode Date: August 17, 2023

Welcome to The Chopping Block – where crypto insiders Haseeb Qureshi, Tarun Chitra, and Robert Leshner chop it up about the latest news. This week, Wintermute CEO Evgeny Gaevoy joins the show to discuss market making when the crypto markets are quiet. Plus, an analysis of Base’s prospects following a surge of early interest. Also: Do you think bank fraud is going to run rampant in the AI era? Listen to the episode on Apple Podcasts, Spotify, Overcast, Podcast Addict, Pocket Casts, Stitcher, Castbox, Google Podcasts, TuneIn, Amazon Music, or on your favorite podcast platform. Show highlights:  how prop shops like Wintermute view the current state of the crypto market how an organization like WIntermute interacts with DeFi platforms Tarun and Evgeny attempt to squash some past beef why Evgeny believes that some exchanges are “zombies” whether this is a good time to build an exchange and how Evgeny would do it  how Base accomplished a big surge in its TVL and daily volumes whether it’s possible for Coinbase to balance the decentralized nature of building a blockchain with a desire to minimize scams how L2 sequencers have the power to censor transactions and the analogy to proof-of-authority chains how friend.tech, the social app built on Base, works and why it got so much attention why the crypto cognoscenti seemed to like friend.tech but hated BitClout, which is basically the same thing what is the role of biometrics in securing crypto wallets and assets whether bank fraud will increase or decrease because of advances in AI Hosts Haseeb Qureshi, managing partner at Dragonfly  Robert Leshner, founder of Compound Tarun Chitra, managing partner at Robot Ventures Guest: Evgeny Gaevoy, CEO of Wintermute Trading Previous appearance on Unchained: How Traders Are Thinking About the Merge — and a Potential ETHPoW Chain Disclosures Links Unchained: Coinbase Layer 2 Base Sees 80% Rise in Total Value Locked CoinDesk: Is Friend.tech a Friend or Foe? A Dive Into the New Social App Driving Millions in Trading Volume Halborn: Explained: The Wintermute Hack (September 2022) Forbes: Layer 2 Wars Heat Up As Coinbase Launches Base Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two-quan. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways. I'm named trading firms who are very involved. D5 protocols are the antidote to this problem. Hello everybody. Welcome to the chopping block.

Every couple weeks, the four of us get together and give the industry insider's perspective on the crypto topics of the day. So first up, we've got Robert, Cryptoonosur, and Tsar of Super State. Then we've got Turun, the Gigabrain, and Grand Puba at Contlet. And today we've got a repeat guest, Evgini,

the market's maven at Wintermute Trading. And then you've got myself, I've received the head hype man at Dragonfly. So we are early-stage investors in crypto, but I want to caveat that nothing we say here is investment advice, legal advice, or even life advice. Please see Chopping Block. That XYZ for more disclosures.

Ifgeny, it's good to have you back, sir. We were just chatting backstage about the fact that if you're in the market-making world, in the token trading world, as you guys are at Wintermute, what's notable right now is that it is one of the slowest times ever in the last, basically like the last three to four years of crypto? How is that on the side of a trading firm? Because we see it from the venture side.

What is it like on the trading side? Pretty similar. I guess it's like 2019, basically, more or less. We haven't seen those volumes since like early 2020 in general. It's very slow, especially in sport. It's a bit more busy in derivatives, but just primarily people are gambling a bit more. But yeah, it's ultimately pretty boring. And so I think that's what kind of drives all this like very short attention span for people involved in crypto, all this like new scams once a week that pop up.

Yeah, it's all like people are just bored and trying to come with stuff to do, which I actually cover. There were news articles this week about a token that is a meme coin called Harry Potter Sonic. Obama song. I forgot the 100. 10. 10. 10.

10. That's right. A lot of work there. Can't remember. Forget the 10. I was just reading about this. Apparently, it is a meme coin inspired

by a backpack that was found like a sort of bootlegged backpack that was using a lot of unlicensed images from different American icons. So like Obama and Harry Potter and all this other stuff together on a little backpack. And Sonic. The Sonic,

which is weirdly kind of, inverted colors, kind of trippy sonic. And this has just developed this cult following. And the, the ticker for the token is actually Bitcoin. So it is B-I-T-C-O-I-N is the ticker for this coin. And right now it's like a $150 million market cap. I guess the people, the people are bored. So, in Guinea, when you're at a trading firm and it's boring, do you guys just like start trading meme coins? Like, what do you do when there's not that much to do? it's mostly building stuff that we didn't have time to build during the bull market pretty much like it's very similar to how it works and try to it to be honest it's like you have slow days

and well slow periods pool markets bear markets like the same same kind of cycles they're just like longer usually and during the slow markets like in 2009 you just build stuff you work on better algos you work in better software better hardware better everything what's the most interesting thing that you've built during the slow patch? I would say our defy stack improved considerably. I think that's something. I think that's the coolest thing we've built so far. And yeah, I think that's probably the main thing.

And then more on the, like in general, like we've been much more active on OTC side of things as well. So we've built. But it's not really building in Algos. It's more like building stuff in the background, on the back office side, on legal side, compliance side, just being ready. So without leaking too much alpha, how do you interact with Defi as an organization like

yours? I mean, we've been trading on Defi since 2019. So it's all the usual stuff, like we've been supporting Dividex since the onset and all its incarnations and we're going to be there for the V4. We've been Arbin-MMs pretty much since Defi summer. We are very bullish on RFQ platforms in general, so we've been providing liquidity there as well. So it's, yeah, whatever we can be, we can apply ourselves. And especially the Ethereum stack, it's, it's really interesting, like post-merge results like, yeah, basically building the whole

vertical effectively, not just turbine, but also block building and like everything pretty much. It's, it became quite complex. Like, you have to do much more advanced things compared to like two, three years ago. Interesting. So actually, this, this reminds me. that back last year, you were talking about building your defy stack. Last year, there were a couple of very, very high-profile snafus that took place at Wintermute about your guys' defy infrastructure and key management. And I remember on the show, Turun talked a lot of shit toward Wintermeet. And I feel like that, yeah, I'm sure you remember that as well.

And I feel like now that we have you on the show, it feels like a good time to address the underlying tension that might be sitting there between you and Tarun. Anything that you want to say on Tarun now that you're here? On Tarun. Yeah. No, look, it's more like, let's put it like this. I don't know.

During its history, winter met raised, I know, 28, 29 million overall in external funding, ever. They're currently sitting at about 450 plus million of equity. So we've been having a pretty impressive growth overall over the last three years. We made a lot of mistakes. We generally like, well, we generally own those mistakes. We are much more public about those mistakes in general. We very much like to learn from them.

We build things better. So like a G5 stack and whatever, whatever not. And great thing about running a prop shop as opposite to fund is you basically, yeah, you own your mistakes in a very personal way, like nobody else suffers but you. go bankrupt, which we didn't. Ultimately, HACS Act, like all this, well, basically the DFI snuffus, whatever you call it, PSACC, but ultimately we owned it, we learned from it, we built from it, and ultimately, like, only people who paid from it were the intermit shareholders who are still doing quite

well, despite everything. So that's also kind of fine. And yeah, is regards to that particular episode. Some people chose to be nice about it. Some people chose to be dicks about it. And I made a notice about the letter pot. And let's leave it at that.

Very classy response. Turin, what's your response here? I think I was more angry last year. Also just like there were a lot of, I think especially around the time FTX we saw a lot more kind of like, let's say bad things that happen. So, you know, I, I get that it's hard to do these things. At the same time, I do still stand by my claim that culturally trading firms are usually very bad at OPSEC and security. And that's why on the

block building side, if you look at the top block builders and what I think he was talking about, a lot of them came from being formal verification people and actually not trading. Like, if you look at the top two block builders. So I would say that it's just... We are one of the top two block builders. I mean, it depends how you measure some. Yeah, I would say your main competitor, however, is much more...

comes from a different background, let's put that way. I still kind of think that ends up being true, and I think it's good that, hey, look, if the institution learns to fix their mistakes, especially if they're forced to, then that's always good thing. I don't know. I don't know what you want me to say, Haseed. You're just like looking at your particular.

I wanted you to say. You're giving me this like menacing look like I'm waiting. Menacing? I'm not, I'm not menacing. I just thought, hey, you know,

we had some bad blood. We should air it out before we got on with the show. This is the under the bridge episode. The water is flowing. Yeah. That's right. That's right. I just feel like you're also forgetting the time scale that that when that happened.

I feel like after that. It was like nine months ago. Of course, of course. Yeah. I mean, that was just like the beginning of the, you know,

parade of horribles that took place in crypto. So I feel like I took out maybe more anger because it was one of the earlier mishaps. Then now I'm where I'm kind of like, all right, well, it does what it is. No, that's fair. And look, in retrospect, the highest honor you can pay a trading firm is that they survived. Because, of course, a lot of trading firms did not, especially ones that were as far down the risk curve as a winter mute. You know, it's easy when you're on centralized exchanges, just doing like very safe stuff.

but when you're taking a lot of risk, yeah, you're going to mess up sometimes. And I think this is the exact point that I made when we were talking about the Wintermute hacks that took place last year is that I have the utmost respect for firms that are internalizing the cost of that risk, right? Like when Wintermute got hacked,

nobody else paid that price other than Wintermute. And that means that, you know, the markets are working and that there is no, there were a lot of situations last year where people lost other people's money. And FTCX being the big, gigantic principle example of that. But anytime that somebody loses their own money and they learn from it and they rebuild and build back better, I'm a fan. I think that's that's markets doing what they're

supposed to do. So anyway, I am sorry for causing said beef, I guess. It was a different era, you know. At that time, it was just like the security. Tarun is softened. Tarun is soft. He's gotten older. He's gotten gentler, you know. I mean, Gary was sending private keys for FTC. in Gmail. Like, all right. If we're comparing Google Sheets. Google Sheet, you know, like, it's like after all the other security stuff, at this point, I view this as a, it's not a.

There were just too many things after that. And now my head hurts just remembering how many of those things happened. So anyway, I will give a public apology for hopefully not being too much of a dick at that time. That's very, very hard-wereming. not warranted. Feels very hard. I'm so tickled by this. I feel like it's a product, both of you

kind of getting older and cuddlier over time, but also to the fact that everything else, everything else in the bear market was so much more embarrassing than what took place at Winterbute. So it's also partially lowering standards. Yeah, I think it's just like also being able to survive all the venues disappearing on you and like dealing with like very i got a lot of respect for that because like think about how many

times you got to move all your assets off in exchange in the last one year wait let me ask how many exchanges was winter mute on that went under with winter mute assets let's not presume let's ask not just one really i mean that's like no they're not that many exchanges that went under i mean okay like if you count liquid as part of ft x like we didn't really have any on liquid anyway, but okay, like, that's like more than one. But like my biggest challenge with current environment is like I think there are a lot of zombies still out there, like an exchanger site. And we don't trade on a lot of them because we actually think that a lot of them are zombies. Can you elaborate? Which exchanges, which exchanges do you suspect of being

zombies? I wish. Yeah. No, that's that's kind of the main challenge. Which exchanges do you not trade on? We don't need any. Yeah, which large exchanges, which, which exchanges are the top 10 do not trade on. No comment on whether or not there's zombies. Yeah, I mean, it's kind of like it's all over leapt in circles pretty much. Like, I suspect is then being zombies and not trained on Zamb. I mean, look, after what happened with FTX last year, I do feel like it's a bit of a public service to, you know, you can say, look, I don't know, I'm not confident, you know, caveat and tour, we don't have all the information, but here's where we're not trading. The hardest bit is you just like, I mean, I can say it, and then I just make a lot of enemies for

nootryism. And that's basically the unfortunate truth of it, that we cannot name things that like, they're just like too big to name things, unfortunately. When I can name things, like when I can name bad actors, I do it with much always. But sometimes it's, you just don't know, okay, there is an exchange and it belongs to a guy and he's a shady guy, but I know, maybe he'll still be around in five years time, you know? Who knows? Okay, I see. There's one exchange. in particular that belongs to a guy who may be around in five years. Okay, I see. I think I might know the exchange you're referring to.

I mean, I don't just mean like pulling off money around, say, FTX. I also mean like every time there's like a scare and then there's a rush of liquidity all off this exchange because of a rumor. And you as a market maker, you have to stop quoting. You have to like add all this extra logic for like pull from X when Y liquidity goes on. I feel like it actually makes all your exit trade logic a lot more annoying. I mean, yes, but you also kind of built for it. Like we had something like four, five, fire drills. Well, five drills with Binance, for example, it was the last six months.

And yeah, we just learned to do it, to clean it up in a matter of hours, basically. So, finance is one thing you do trade on. Okay. Yeah. I mean, you cannot, like, as a trading firm, you cannot not trade on Binance. And you might as well just close up. Like, it's pointless. That's why most of liquidity is currently.

Especially at a time when liquidity is so scarce in general. I believe, if I remember correctly, there was also an article about you making an exchange. Oh, yeah. I remember that. It's basically us mentioned that it would be an interesting idea to explore. So it's not like the same as making, which I still think would be. It was like the front cover. It was a front cover of a magazine.

This was not like, oh, like the block wrote a tiny article. So I don't, you know, I wish it was a front cover. No, no, it was just like online cover or something. It was a big, it was a big article. I don't know. No, that's what they chose to highlight out of all of it. I still think it's a really good time to build an exchange, to be honest. Are you done in an exchange?

Not at the moment, simply because it just takes a lot of focus. And I have a lot of other things to focus on primarily in the core business of Intermute. it's just I cannot afford to lose this focus at the moment maybe in two three months time maybe but like currently I just I just don't have mental capacity and frankly like the team like you need you need to do like building exchanges is such a massive undertaking that yeah I just cannot like take it lightly if you ever do it hypothetically if you were to build an exchange what would be different about it versus existing in common exchanges So I think like what would be, I think this exchange, if you were to build an exchange,

it would be much more similar to CME as to Bynes and to Bynet's Coinbase. Like I think it would be focused much more on the matching engine and basically like the central clearing part, basically stripping away all like Y, CML for retail people, stripping away, managing leverage, stripping away like all the horrible things about trying your own centralized exchange on crypto and just making it much more semi. like and basically focusing on one hand, and of like what has BF tried to do with FTX, like making this central clearing run a very efficient cross-margining kind of like engine. And on the other hand, kind of like improving on CME side, it would be basically running on

a stable coin instead of fiat so that you can do settlement cycles faster. And if you can do settlement cycles faster, you effectively can extend more leverage to the clearing members as a result. Have you considered hiring 20 kids feeding them a bunch of speed and sending them to an island? Letting them. They could probably build something with that. No, they probably built something with that. No, not in the cards.

Okay. No, that's like we, like one big change for us over the last year. So we started, we started like slowly incubating those products inside Ventremur. Like we did Bebop, which was just our play on RFQ. Like, well, you had Lawrence says. the other day who is building VALCAT. So we started like debbing into building products and like slowly moving into become a product company.

And basically what I learned is it's a very different gig, like building and trading companies, especially if you just train the centralized exchanges. It's kind of straightforward. Like all needs of former traders. And then like as it becomes more complex, you like gives them more support with back office operations and everything else and like kind of better developers and everything. that does great. But ultimately, yeah, product is very different because as a train company, you don't have customers. Like, it's very easy. You just need to build big algaurs or smart

algos. As a product company, actually, need to think about a lot more things, and that's what I'm kind of learning for myself. And exchanges like ultimate boss to conquer because there is just so much to be built. Well, so speaking of product companies, let's get into the news of the week. So Coinbase has launched, of course, this product that's getting all this attention now, which is Base, their L2. Now, base, I think last week we talked about how Base had a developer mode that was initially getting some traction, getting some meme coins and rugpoles and all sorts of crypto chicanery. But finally, this week, I believe as of August 9th, base finally launched their main net, basically meaning that now there's a nice little interface and you can jump across the bridge and start playing around on top of base. A bunch of protocols have been deployed there. So compound uniswap, AVE, you know, a lot of the big protocols are now living on base.

The base numbers actually look pretty strong. So the TVL on base is about 230 million as of right now, which makes it the number 5L2 by TVL behind DADX and then DYDX behind ZK Sync. Their daily active users seem to be, or daily active addresses, I should say, seem to be around 100K. They were growing quite a bit and now it seems like they've mostly stabilized, although, you know, Who knows there obviously could be a surge of activity, but as of right now, it doesn't seem like it's going vertical from there. The transactions per second is around seven.

Now, that's not like peak throughput. That's like the sustained throughput that it has over the course of the day, which is, again, it's pretty high. If there was a while, actually, I think yesterday it was actually higher than both Arbitrum One and optimism may net. But now it's kind of gotten back in line with the two of them. So it looks like the activity is pretty strong on base. It's not crazy. it's not quite by now smart chain levels, but it's doing quite well. It seems a lot of the activity on top of base is meme coins, lots of farming, lots of kind of degenerate excitement. That seems to be

the name of the day. I don't know what you guys have been seeing on your feeds or if you guys been playing around in some of the applications on top of base. But what's you guys take on what's happening in this new ecosystem? Well, I will preface by saying that I have not used base yet. I'm embarrassed to say I've created zero transactions on base. We're produced assets. We're done anything. So I can only look from the outside. But to me, I think it's like pretty bullish in that a couple hundred million dollars.

It takes a lot of L2s with long time to get any tractor at all. And I think people are sort of like preemptively, you know, migrating to base on the expectation that Coinbase will make it successful and attract developers and attract, you know, a lot of like new. applications and use cases and integration with Coinbase the exchange in like novel ways that I don't think have been thought through yet. And so like I think this is demonstrating that the brand that Coinbase has built alone is like selling the dream for a lot of users. And if this was like a product of, you know, a random developer team, I don't think you would see any similar activity or usage.

To ruin, what's your take? Yeah. I mean, I think it's sort of a similar type of thing. I think it has a lot more integrations. I only sent one or two transactions, so I can only say that that much. The wallet experience is a lot better, at least, you know, if you're using Coinbase Wallet, for instance.

I think the interesting thing has actually been the kind of cognizcente pushback against base in that, like, if you're trolling around Twitter, you'll see a lot of people complaining about the lack of fraud proofs. And you can see all the other L2s kind of like really collaborating on their dunking of this. That's true for every OP stack. None of the OPE stack. Yeah, yeah, yeah, yeah. But I think base took a lot of TVL from other L2s.

So there, this is a response to that. It's very interesting to watch the social layer in. crypto like flip like that because I feel like in normal trading there's not usually that much benefit to kind of like having these like very public collusive events but uh you know like everyone seemed to ever every other L2 seems to be on board of the like no fault proofs opi stack thing and you can you can kind of see some of the wars going on there so I think that's kind of interesting it's like it will be interesting if base actually really pushes everyone to finally finish their implementations. But I think, like, in general, probably pretty good

that people are going to get used to L2 experience. And, you know, a lot of people were tagging me on Twitter from something I said on the podcast a long time ago when Bass was first announced, which was me reading someone else's tweet. So some people think I said this, but which is that base is BSC for white people. I think it's, it is definitively seems to be. true now at this point. Well, so the question, Taruna, is we've kind of have an idea of what basis, obviously it could

continue to grow if something goes really viral. Has this overperformed or underperformed your expectations? One way I think it did overperform is that like most L2s right now have either focused on applications that are like games run as of their own L2

or new D5 protocols that are more expensive or deploy existing protocol, right? By and large, that's like the majority of applications. But the interesting thing with base is that because it kind of had this huge initial growth spurt, it was actually like a social app that kind of became very popular. And the social app, I think this is sort of the first time we've seen something like that in the bear market, right? Like in the bull market, you kind of saw things like this happen. So there is clearly a thing where developers feel much

more incentivized to build certain types of applications on base as far as I can tell, versus, say, other chains that maybe have different tradeoffs or different types of users, like the type of user who would go on base tends to have XO's characteristic. Now, it's obviously the early days of this type of stuff. But that's where it deviated from my expectation. I thought it would just be like another L2, maybe have more stable coins on it because people are able to, like, move from Coinbase. products to it more easily.

But the fact that developers seem to have like are trying weirder experiments than they are on other L2s. And this is not to say that people aren't on other L2s. I think it's just that those experiments just aren't live or haven't gotten as much attraction. Like that was sort of the most surprising thing to me. Evgeny, what struck you so far about the base rollout? I mean, in general, like, I think it's a good saying that we have more L2s in the mix.

I would be very cautious about the user numbers. Like, it's very clearly not 100,000 users. Like, I don't think it's 10% of that. Like, it's, I mean, it's like, to me, it's one of the most, like, infuriating saying about defies is that nobody actually bothers to try to estimate what the number of users we have. Like, everyone knows BSE has the most of it,

and then polygon is, like, second, but, like, how many it is actually nobody cares. Like, everyone counts, like, wallets or transactions, like all this like vanity stats, but nobody actually tries to estimate how many actual users do trade there. Benefit of Coinbase is they, like, I would be very curious to see the numbers, like, how many Coinbase wallet users trade on base, because that's actually a pretty good metric, and that's actually what can position it to success ultimately.

I'm also very curious how Coinbase is going to walk this line between, on one hand, maintaining this, well, either facade or like actual desire to keep it very decentralized. And at the same time to avoid stuff like bolt happening, basically, again and again, because we'll see more scams inevitably. And, like, whether they're going to be actively policing it and trying to prevent it or they're just going to, like, continue with Wild West. yeah, what's your risk, how's it going to take it? Yeah, I mean, this is a point that I made when we talked originally about the announcement of base before it was ever live, which is that in the early days of Binance Smart Chain, Binance basically had total control over the bridge that moved in and out of Binance Smart Chain. And as a result, Binance sort of played policemen for the chain, is that when there would be

hacks or there would be kind of other rug pulls on toward activity, Binance would basically step in and kind of feel like they were responsible for making sure. none of the kids bonk their heads against each other or got it got injured. Now, Coinbase hasn't shown yet the willingness to go in and start doing that, basically policing bad actors or making sure that like, okay, we're going to like freeze funds or prevent people from going over the bridge. But the thing is, you know, to Tarun's point that all these, you know, other L2s are complaining about, which is, which is strictly true.

If there are no fraud proofs, then it is strictly within the power of the sequencer. It's strictly within the control of the sequence. to be able to decide to censor transactions, to rewrite state, to basically do whatever they want, to write wrongs and to dry tears. And now I don't think Coinbase wants to do it, and I think they will fight tooth and nail, to prevent them from having the responsibility to do it. But you could evince an argument that basically, you know, this is like a money services business because they ultimately have control over what goes in and out.

And if they chose to, they could unilaterally change it. Well, I mean, a sequencer in this way is very similar to, and we haven't used as a society, this phrase in like five years, but like proof of authority change. This was like a concept like six years ago where it was like, oh no, like we don't have like, you know, a whole set of validators or minors or whatever. We have like, you know, one key or entity that approves or controls the transaction finalization process. And like a sequencer before it's fully decentralized is that. It is proof of authority. And it's like what I find just so amusing about, you know, most L2s is, you know, six years ago if you're like, oh, that change proof of authority. Like the crypto public would be like revolted, you know.

It would be like, you know, horrifying. And now it's like, oh, that's cool. Like it's an L2. Like, you know, of course like, you know, you just have like one company who runs the sequencer. Like, that's the way it works. And, like, now it's an accepted part of expectations. Maybe Binance is the one that, like, you know, sort of starting to do away with the, like, a chain has to be decentralized, you know.

Yeah, I think L2 has become less of a description of a security model than a vibe. And I feel like that's kind of what basis is, like, embracing L2 as a vibe, rather than as, like, any actually explicit way of keeping your funds safe. So, I mean, that being said, I think it's obviously very likely Coinbase is going to do any of those things. And they've shown the willingness to kind of be a lot more aggressive than they used to be in previous years about embracing crypto-native values. So I'm not accusing them of actually doing this. But, you know, I can, I mean, we've seen so many ridiculous lawsuits that I can imagine one taking the shape at some point in the near future, which may end up putting pressure on a Coinbase if there are no fraud proofs to basically say like, you know, hey, this was under your watch. you guys are making money from this. Apparently they've made, what was it something like $7 million so far from the sequencer? Something like that? Am I making that number up? I'm just making that number up. It might be totally. If true, that's a pretty good number so far. Can you know, fact check that? Yeah. I mean, one other thing about this that's interesting is, yeah, like these exchange POA chains seem fine. And one benefit that I think people get from these kind of exchange POA chains, let's put, you know, if we call them,

that is that they basically, people are always complaining about proofs of reserves, like how much in assets the centralized exchange actually have. And there's not really a good way for them to prove it to you, right? They could have an OTC loan that's not on their books, but it looks like they have a ton of collateral, but that collateral is actually really being, can be called via a legal agreement, for instance. So proof of reserves is already this kind of like a little bit of a smoke and mirrors type of thing. But the assets on the POA chain are the reserves you can see, right? And so like BNB being the BNB that's on the chain, you actually believe is like truly there's that much versus they're not being. And I think one way of viewing these POA chains from centralized exchanges,

so only from centralized exchanges, is as a programmable sort of proof of reserves. Like they have, there's some subset of reserves that you can really know. what's happening publicly and can validate yourself. You might not be able to change the state of, but you can validate the data is correct. And you have confidence in those reserves, relative to the exchanges balances themselves. This is a concept actually from a long time ago, Patrick McCory, who's, I think, at the Arbottram Foundation a long time ago, kind of in 2019 or 2020, I forget, had this description of POA chains by exchanges.

And I think in some ways, that's why people are fine putting their liquidity there. they're they're treating it as an extension of this thing they already kind of trust, which is different than say like another OP stack chain, right? Like another OP stack chain is not really an extension of like something you already have confidence fund wise. But to that point, there is, the question to me is actually more not the rug pulls because I don't think finance really gave a shit about most of the rug pulls, we're being honest. They cared a lot more about the bridge hacks, right?

The bridge hacks were the really big deals. And some of them were extremely sophisticated. Like the one that found the Merkel tree defect, that was an insanely sophisticated bug. But Binance sort of like worked with a bunch of the defy protocols to kind of patch it up. So the reason I'm bringing all this up is just to kind of point out that I think there's always there's going to be some crossing line. And it needs to be like the hack or lost funds have to either be big enough or actually. aggregated in a big enough pool or can bridged in some way for them to actually take action if they're going to be like Binance.

Now, of course, Coinbiss of public company, Binance is anything but. So who knows what the differences in treatment will be, where that line is. So just quick closing the loop on that fact check. So base right now, their annualized fees are about $58 million. Now, I don't actually know what the take rate is for Coinbase on those fees. So that's like the fees paid on the chain, I presume. but just for a sense of scale, right now they're making about half the fees of BSC,

which is roughly almost as much as Bitcoin. Bitcoin and BSC may have about the same in daily fees. So pretty significant volumes. Now, of course, a lot of this is because, you know, there's a bit of a frenzy going on right now, but it's very impressive numbers. Some of those fees go to the O.P. holders also. Is that already happening?

No, no, no, no. It's post-talk refinery. Okay, that's what I thought. But there is some. So I would say that, yeah, there's a bunch of portions of those fees you will probably have to discount. So what is that portion? Did I read at some point it was 10%. Is it not 10%?

Yeah, I forget exactly because initially they wrote a percentage and then they edited the article. That's right. They removed the percentage. They removed the percentage. So I haven't followed it. Yeah. Well, okay, we got to get Jesse from based on a subsequent show. It doesn't go to foundation or like how?

also distributed. If you're listening to this episode and you have the answer, please tweet at all of us. Well, I think we really need like a fact checker on the show. I think we're going to have Jeffrey from Bass on soon so we can ask him to give us the details. Great. And then he can neither confirm nor deny any of the things we ask him. It'll be great. Cool.

Okay. Well, so, Tarun, you were talking about the social activity that's happening on base. a lot of this has been concentrated into one particular application called friends. So friends.com. So friends. It's become kind of a social phenomenon. Here's basically how it works. So you go to the app friends.

com. It forces you to install it as a kind of on your mobile phone as an application directly, like a shortcut. And once you install it, then you can buy meme coins of your friends. So if you remember the app BitCloud, the BitCloud protocol ended up to rebranding. as D-So. But BitCloud was this old application that was kind of on its own blockchain that

did this. So it's kind of a recreation of it, but with some extra social mechanics, if you own someone's token, you can chat with them. Like with BitCloud, you know, the people who are your trading, they get a cut of the transactions. So basically, in this case, on friends.com, you get a cut of secondary market transaction fees, kind of like a royalty stream, more or less, if people are willing to trade your token. So this app has gotten a lot of social media engagement. So crypto-twitter seems to love Friends.com. It's getting a lot of love. I was looking at some of the stats. It was going pretty nuts over the weekend, but it started to trend down a little bit in engagement. So basically on August 12th, it hit the height of something like

10,000 transactions per day. Now it's down today, something like 600. Actually, this might not be daily. I might be reading this wrong. Sorry, this is an hour. This is hourly. So whatever, do the math. And if you look at the number of Uniques, they have been also leveling out. So the buyers and sellers are stabilizing quite a bit as well as the volumes. So it seems like the numbers are trending down, although there's still a decent amount of engagement in Friends.com. Did any of you guys play around with it or see what's happening there? I was one of my two transactions. That was zero of my zero.

Who did you buy? Who did you buy? Who did you buy? Teroon, who did you buy? Myself. Oh. That sounds like inside of print. Yeah, exactly.

Possibly also masturbation of some kind. No, no, no. It's like financial masturbation. I didn't buy anyone else. I just initialized my account. You were sort of self-pleasuring through your friendship with yourself. Yeah. I don't really like these social apps.

I just wanted to see what it was like more for the onboarding experience. Because, you know, right now, you know, probably in the venture world or the last five years plus, there's a ton of, you know, venture-front L's that are people making wallets for mobile wallets in crypto, right? Like a lot of them just never took off, never got users, dot, dot, dot, right? And the premise of a wallet is it's like you can use every application in one thing, right? Like you can do NFT trading, defy, bridging, whatever you want, right? But the idea of having this like app-specific mobile app, you know, like for this one application, which has a wallet in it,

but that's not the most important part. I think that's kind of an interesting modality. I know a bunch of people during the bull market were trying this, but I don't remember any that got as much sort of virality, at least whatever little virality this has had, by crypto standards virality, not by like normal world virality. And I'm kind of more curious if like the L2, the kind of clunkiness of like the modular kind of UX

of like I have to have athletes on the base chain, then I have to bridge assets to the L2, and I have to like manage those transactions. If these like app-specific chains that handle that, like kind of hide that from the user for a particular application and deal with that, if that will be a new UX modality we see people use. So to me, that was the most interesting thing about it.

It wasn't the actual application itself. It was like this UX change. But again, like, I mean, obviously the U.S. I think on Friends.com was very good, but it did really copy a lot of the ideas from Diso or from Big Cloud. Did the exact same thing. No, no, no, I agree. The interesting thing is like the Cognacente loved this app, but the Cognosenti hated DECA. They hated Bicla. And so it's it's kind of, it's kind of, but, but you know, that type of political stuff aside. I, I do think this app specific or, you know, wallet part like may actually

I'm kind of curious if we see a lot more experiments of this form, right? Like, I think for gaming, people have, like, sort of thought about doing this, but no one has actually gotten a ton of users using these app-specific wallets. And maybe that's actually, like, a way better onboarding experience for, like, non-trading use cases of crypto. Well, I personally think that all UX is going to trend in the direction of easier, even if it's worse from, like, a security perspective, or worse from a decentralization perspective or worse from like any other perspective.

Like the people in general, and I'm saying this very broadly, are lazy and like convenience. And this doesn't apply just to crypto. It applies to literally everything in every industry and like every product and every design space. And so I think the end state for wallets, you know, unless there's like intermediate solutions, is like just trending towards simpler and easier and like custom. And like, wallets integrated for specific applications or specific use cases or, you know, whatever. Like, and, you know, we talked about this, I think, at the last show a little bit with Unibot, you know, where it's like, that's a horrible architecture, you know. And it's winning, in a sense because it's like so, so broken.

I think this trend is going to continue. And I think we're going to have, like, more developers who are like, oh, I'll just, like, build a wallet experience. it's my product. Yeah, I think we're seeing more and more of this progressive security and progressive UX, which is, okay, when you first start, we're going to let you kind of be footgun mode and basically like we'll take your Google OAuth and then we'll just put your private key into like a file in your Google Drive and we kind of won't tell you about it. We won't tell you that's exactly what we're doing, but that's what we're doing.

And then it's like, okay, now we'll like add to it a pin code. if you have a little bit more money and it's like really worth securing that much money. And if it's worth more money than that, then we'll be like, hey, now you have to start doing social recovery. You have to, like, connect with friends and they have to help you recover.

And if you go on that, then we start getting to, okay, you know, get a fucking ledger or, you know, whatever, I don't know. You start getting more and more demanding of the amount of security you demand from your customer if the amount of capital they have at risk

increases. I suspect that's what these mobile UXs and these sort of casual crypto-UXs are going to start trending towards. And there will probably be, my guess would be one or two vendors who basically kind of manage this process for you. And you can sort of twiddle like, hey, when someone has less than 500 bucks, it's fine. You can just store it, you know, on the device or you can store it in their OAuth, you know, in their Google Drive if they don't have, you know, on device key management.

But as the numbers get bigger and bigger, you start demanding more and more from your users. That's what I would assume happens. But it's still pretty early for that. I think that's a very quotient approach. I mean, we are early-stage investors, so if you are working on something like that, holler, please. 100%. I just think it's going to be interesting, because, like, Defi is so about composability

as the first class primitive in some ways. It's such that the U.S. was always, like, for the average user, the non-sort-technical and in the weeds user. But it really does feel like maybe not NFTs, but like things that are a little more consumery than NFTs might just trend in this like they have their own app interface. Because it actually was, the app had a bunch of problems bugwise, like because I didn't think they expected that many users on Daywan or something. But honestly, it was a very interesting. Like I actually felt like I could tell someone who hates crypto that they could use this.

versus like, you know, I tell someone, you know, actually I kind of, there's this nice experiment you can do to see how, how annoying crypto is to your non-crypto friends, which is you give them two wallets on two different chains, maybe one in a Cosmos zone, one in an Eth, on Eth or an L2. And you say, hey, go buy an NFT in the other place. So you have to figure out how to route across whether you have enough gas tokens. It's caused by us. That's hard. This might be why you didn't have any friends to connect with on the app. That's what you're doing to people. I'm just saying this is like a way of like seeing how bad the UX is versus like this I could actually give to ostensibly anyone I know who's not crypto, which is like. I see.

Maybe we maybe it will be. I'm just making this speculation that like maybe we're going to see this like app specific like vertically integrated mobile thing. Right? Like in some ways, people thought uniswap wallet or things like that would look like something in that direction. But I think trading and defy just doesn't really need to be completely verticalized like that. But social and gaming things seem, it seems like way more important to their success. Totally great. Evgeny, what do you think? Yeah, I don't know.

I am very skeptical of like mass adoption using the existing wallet infrastructure and like being skeptical for for long long time. I think at this stage, probably Coinbase wallet has the best chance of actually capturing a lot of this GIFI activity. When it comes to games, yeah, it has to be something as much removed from the user, like even understanding there's blockchain inside of it as possible. Like not even, well, forget private keys. It has to be like email password kind of thing with something in the background. And then, like, obviously, users face in that always like a really. that somebody will hack into the company that stores all the stuff. And I don't think we'll be able to get anything better.

Like I really think it's a pipe dream that we'll get all people using crypto in 10, 20 years to be like self-costed and stuff. Like I don't think it's happening. Yeah, I mean, my favorite very out there form of how do you get people to not have to know they have a private key is, you know, WorldCoin, you know, ignore the token, but the actual orb is a tested sensor, right? Like, it takes some physical image, generates the low-dimensional representation, and then that thing has a ZKP of it. If the proof itself could be your, generate your public-private key pair, then you could basically do everything purely from a tested sensor.

I talk into a microphone and with enough samples and plus maybe take an eye scan, I generate. Biometrics, there's no way biometrics are secure enough to be using them as key material. Well, multiple, multiple, multi-form. It can be part, my point is like there's things where it's like it's not just, and, you know, you already see that with the centralized providers who do MPC who make you do some biometrics. But I actually think we'll get to a point where you can generate, you can deal with the key pair directly where you can do something such that, hey, with only my retina, I can move $100

at most. But with retina plus X, Y, Z, I can now do more, right? Like, like, I think you're going to have this, like, graded permissioning thing. Like, it seems like that's the best use case. And like I said, to World Coin's credit, ignore the token stuff. But the actual censor, that, that, there is a lot of value in figuring out. I don't know, Matt. generative AI is getting.

so good. It seems very difficult to be confident that I couldn't replicate your eyeballs or your irises, your voice, and your facial features for $10,000, $100,000, a million dollars. I agree. It's a terrible. With unlimited tries. With unlimited tries. Yeah, it's terrible. Did you see Westworld season three, I think it was, where there's not a spoiler. And if you're watching and you're really afraid of the spoiler, just stop watching. The evil robot steal. the billionaire's money by just taking his thumb and putting it on the iPad. And it's like, transaction completed, all your money has been transferred to the evil robots. And I was like, the whole time I watched that, I was like, what a crazy scenario in which like a thumbprint is

like the private key to like a billionaire's entire stack of future crypto money. For sure. I'm not, I'm not saying that that like it's biometrics alone by any means. I'm just more pointing out that the generating of the cryptographic material from the biometric. is actually different than what we have right now, right? Where it's biometrics run that centralized authority stores, say like fireblocks or Anchorage or something, or Coinbase for Coinbase custody. And then they just validate that.

And once that's valid, then they, you know, use keys that they have. This is actually generating like ephemeral public private key pairs for your app as a function of your. So it's like the end of the random number or whatever. Yeah, exactly, exactly, exactly. Like, there are ways of doing that such that the user won't even know there's a public credit key pair at all. Sure, sure. But then really,

it's coming down to a trusted third party that has the actual key that is verifying your biometrics. The idea is the proof, whether it might need FHEs, like more strong cryptography, so that part is not clear. But the idea is that the proof generated serves as your as your ephemeral key.

You don't need the third party. you do now, let's say, like a centralized custodian. Okay. I guess my thought on this, and we have, there's one more story I want to get to, but like my thought on this is fundamentally, I don't think biometrics in the long run alone will ever be secure because they're not secret. Like you don't go around hiding your irisists from people or never speaking in public or never showing people what you look like.

So face ID, even no matter how many things you combine it with, whether it's iris scans and face ID and voice checks and all these things, they work right now. because, you know, I don't even know why they work right now, to be honest, because all this tech is basically out there. Like, years ago, we had the tech to be able to basically do, you know, one of the common ways, I used to work in anti-fraud at Airbnb before I got into crypto. And one of the things that was, at that time, like 2015, just starting to be state of the art was being able to take like a photo of somebody from a passport and generate 3D video that would pass liveliness detection. Right. So oftentimes when you're doing KYC, they want to prove you the person in the passport. they'll say like hold your right arm up move it to the center then move it over here whatever this is called liveliness detection try to prove that you didn't just you know create a static image of this person in this in this

passport or this driver's license that is trivial now like children can can basically generate you know these real-time streaming videos that mask you as being somebody else and so all the stuff like the tech to defeat all of this is all already here so I I suspect that we are eventually going to have to fall back to just like old fashioned hardware security or some kind of you know sort of chain of trust type thing

I don't know or you just get a wallet with every single app and it's zero security and when you get paranoid you go to higher security yeah I think biometrics for small dollar like that's for small dollar it works you have to have some you're going to have some like

system that like automatically figures out what is a and permission based on the type of interaction. Right now that's so clunky. That's actually where I think these apps-specific, like the verticalized thing of like, my DAP has its own wallet just for this app, gets it right, right?

Because they like, they basically hide a lot of from you. They don't like, you don't have to like sign half the time, stuff like that, right? So the fictional company that we're all investing in that does this for all the apps of the future, which a founder who's listening right now is going to create. and let us know about biometrics can be level two. Level one is like, you know, it just is the wallet. Level, you don't even know what's there. Level two is like, you know, oh, it's a photo of your face.

It's like this, you know, security. Yeah. I can, I think as a, as part of that ladder of security, I think like biometrics do fit in there as like, okay, you know, your mom isn't going to be able to, you know, to take your, you know, replicate your face ID or some random person who steals your phone. you know, if you just get mugged in the street. But as you're talking about targeted attacks,

which more and more of what's happening in crypto is really defending against targeted attacks, not man on the street, not, oh, I lost my phone, you know, on the subway and then someone stole my money. Increasingly, I think this stuff is getting automated. It's at scale. It's entirely software-based and remote. And that increasingly has to be what your trust model is,

I think, when you're thinking about security. Okay. Here's a question for you, maybe more of a bet. In one year and five years, how much do you think bank fraud rates go up because of like say the last year of AI advances like what are you first wait well what are bank fraud rates right now I don't even know let's just say I'm just asking for relative to know relative relative okay relative like a percentage increase okay percent increase yeah I mean I know like my banking experience of the last year decreased so dramatically like it's just so horrible like

get, you can get like blacklisted, you get all kinds of questions, verifications all the time. And I don't know, probably it will be worse. But can it get even any more worse than it is now? I don't know. Like it seems like it's already pretty bad on the fraud side. I'll say 0.7. I think it gets a little better. I think it goes down.

Mm-hmm. You think bank fraud goes down. What is your thesis for why bank fraud goes down? I think bank fraud goes down because banks are just becoming IT companies. and it's becoming a larger part of their mission in general. And I think the tools that they have are improving. So I thought about this a lot. Back when I was at Airbnb and anti-fraud,

I was very, very bearish on the ability of tech companies to continue fighting fraud because the tools that we fundamentally have, like, okay, if you're a tech company, and you're not sure if somebody's account has been stolen or if they're being impersonated or whatever, basically the tools that you have are, one, you can email them and see, like, do you actually control your email? Right?

Which increasingly, if somebody's owning you, they also have your email. You might do a small charge of their credit card. You might get them to scan their driver's license or their passport. And then at best, you might get somebody to call them and like have them in video verify that, ah, I'm this person, here's the driver's license, whatever. That's what you got. Those are the options. Okay.

Now, which of those options do you think is going to survive, like the coming, increasingly, the increasing automation with which people are going to scrape all your data from all the data dumps that exist of basically everything about you that you've ever put online. Second, running this through some kind of AI agent that develops a game plan of how to impersonate you. Third, developing the video, developing the audio, synthesizing a fake passport or driver's license and doing all of the, like the only thing they really need is your email. Right, but this is why non-specialists will get crushed. Random tech companies are going to get crushed by this, right?

I think banks are best equipped to be the ones. I don't know how well banks are equipped to do. I think they just don't have the affordances. I think even India they do. I think there's certain places where they've installed the infrastructure. India is a different. India is like ironically, like in the way that people in the U.S. used to be like, wow, all the cell phones in Japan and Korea are like a hundred times

better. India's financial infrastructure is unreal. Like the government open sourcing all of the basically making their own blockchain and having key management standards and all of the stuff that's interoperable that every fintech uses. That is obviously like 10 years in the future for all the Western countries

because they're basically digital fiefdoms that don't have that much incentive to change. But I would argue that I think you'll see a significant increase, maybe like 20 to 50% relative to where it is now, because I basically think all the generative AI stuff just made the barrier to entry to fraud. lower, right?

So much lower. So much lower. So much lower that like I, how could it not? Like there's clearly going to be some bank and podunk middle of nowhere who's outsourced the K-YC to some company that like barely exists or got bought by a private equity firm and doesn't update any of their liveliness checks and can be now a 15-year-old can like, you know, kind of take advantage. There's a really good article in Bloomberg about a sim swap recently.

sophisticated sim swap. And I think the gender of AI stuff is only going to make that go up. I think the reason sim swapping is also getting easier is partially some of these types of voice transmutation stuff. Yeah. It's scary time. I hope that crypto at least plays some part in protecting us from. Well, I think this hopefully is the reason people will be like, oh, actually that

cryptocurrency stuff, they thought about this shit before we did. It's a good thing. It's a good thing we're here to save the world. Well, okay, we have to end the show because we're up on time. and we've got to run. But thanks so much of Guinea for coming on and sharing your insights with us. And for now, signing off.

Thanks for having me. Thanks for joining us.