Unchained - The Chopping Block: Is Ether the Only ‘Organic Yield’ in Crypto? - Ep. 477

Episode Date: April 6, 2023

Welcome to The Chopping Block – where crypto insiders Haseeb Qureshi, Tom Schmidt, and Tarun Chitra chop it up about the latest news. In this episode, they are joined by Laura Shin, author, journalist, and host of Unchained, to discuss the drama around the Arbitrum governance’s proposal, the MEV attack on Ethereum, the Shanghai upgrade… and much more! Show highlights:  what the intentions behind Arbitrum Foundation's ratification poll were why Tarun says that it was suggested by a crypto lawyer what will happen to Ethereum staking after the Shanghai upgrade how ETH provides 'organic yield,' according to Tarun whether staking makes ETH a security  how a validator on Ethereum got slashed after a $25 million MEV attack the drawbacks of how Proof of Stake requires a locked stake, while Proof of Work allows joining and leaving freely whether Tarun should cut his hair (yes, this was actually discussed) Hosts Haseeb Qureshi, managing partner at Dragonfly  Tarun Chitra, managing partner at Robot Ventures Tom Schmidt, general partner at Dragonfly  Guest Laura Shin, author, and host of Unchained Disclosures Links Arbitrum DAO Unchained: Arbitrum Backtracks on AIP-1 After Community Backlash  MEV attack Unchained: Rogue Ethereum Validator Slashed After $25 Million MEV Bot Attack Euler hack  Unchained: Euler Hacker Returns All $200 Million Stolen in Exploit Shanghai:  Unchained: A Guide to Ethereum’s Shanghai Upgrade Single Secret Leader Election Gauntlet’s View on the Shanghai Upgrade Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two Kwan. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways. Unnamed trading firms who are very involved. gdot.8 is the ultimate pump. DFI protocols are the antidote to this problem. Hello, everybody. Welcome to the chopping block.

Every couple weeks, the four of us get together and give the industry insider's perspective on the crypto topics of the day. So quick intros. First, we've got Tom, the DeFi Maven and Master of Memes. Next, we've got Tarun, the Gigabrein, and Grand Puba at Gauntlet. then we've got Laura, the CEO of the show, and then you've got myself, I'm a Seab, the Head-Hipe Man at Dragonfly.

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 ChoppingBlock.X, Z for more disclosures. It's been for once a relatively calm week in crypto. I actually, for the first time, I learned that my mom watches the show, and apparently when she misses me,

she turns on this show because she wants to see me and, like, she likes my camera. and she told me the feedback that she gave me on the show is that like, yeah, I see this, who's the crazy guy with the crazy hair? And I'm like, oh, you mean Tarun? She's like, yeah, yeah, tell Tarun to cut his hair. So my mom wants you to cut your hair, Taran, just to relay that to you. You know, don't worry, my mother tells me that all the time, too.

Okay. I don't think she watches. I don't think she watches this, but yeah. Okay. It does make me very nervous now to imagine my mom watching the show. But I'm going to try to push it out of my mind. I mean, it's short on the one side. So you could just record from, you know, one angle of your face.

Hello. Yes, yes. And then the mothers are now abused. You suddenly look much more backable. Yeah. I love it that they didn't object to the color. It's only the length. She did mention something about the color, but I thought I wouldn't bring that up because

I feel like that with a little... She has other preconceived notions about people with colored hair. So I thought, okay, I'm not going to mention that one. But the long hair, she pressed on that a couple of times. But she otherwise said that you talk a lot. That was the other thing that she mentioned. To be clear, she doesn't know anything about crypto. It doesn't follow any of the space.

She's just here to like listen. Just feel the vibes. I like the tone we're sending for the show. It's going to be the pick on. Tarun episode, which I'm, which I'm good at. And I set the tone already in our little pregame conversation. But anyway, well, okay. So let's, let's, let's, let's break it down with some of the news that's taking place this last week. So one of the interesting pieces of news this week was around Arbitrum. So Arbitrum, of course, launched their token, the Arb token, a lot of fanfare around

the AirDrop, which took place, you know, a couple weeks ago. And then came the very first governance proposal on the Arbitritorium Forum, which is known as AIP1. And AIP1, the way it was proposed is that it was supposed to be spending 750 million ARB tokens, about a billion dollars worth of ARB tokens, roughly 10% of the total supply. It's going to be sent to the Arbitrum Foundation

to give them capital to invest into initiatives with the Arbitrum that are going to be built on top of Arbitrum. And Arpholders wouldn't really get a say. It would give the Arbitrum Foundation total ability to do what they want with the $1 billion, because they've got to compete,

they got to compete with Polygon, they got to compete with Solana, whatever, right? That's kind of the general idea. So now the Arbitram holders looked at this proposal and they were like, wow, that's a lot of ARB without any oversight. I don't really like that. And so they started voting against it. And then the Arbitram Foundation was like, oh shit, hold on, guys. This is actually not meant to be a proposal in the traditional sense.

This is meant to be a ratification because we kind of already did it. And so this caused the governance holders to free. freak out and everyone on Twitter to get mad and say, oh my God, governance is a sham, Arb token doesn't do anything because it turned out that a lot of these tokens, 50 million of the 750 million ARB tokens, was already allocated to a market maker, supposedly winter mute, and then 10 million was already sold into Fiat to cover operating costs for the foundation. And so the foundation issued this kind of flat-footed response saying like, well, no, you know, look at just as a matter of practicality, we have to have tokens in order to set up a foundation and to engage

contractors and to do this stuff, like, you know, Dow's don't show up for free and foundations are money. And so like, look, this is, I'm sorry, we kind of messed this up. We should have communicated this as we already did it as opposed to here's what we would like to do. But a lot of people got bad because obviously this was not communicated

well. So Arbiturum has since then backed up and said, okay, guys, we hear you. The entire internet is now mad at us. We are going to redo this whole operation. We're going to break this AIP into pieces and we're going to try to repass individual pieces and get more

feedback from the from the Dow. But this is, this is a big conversation about how much is governance really governance and how much of this is kind of a show, especially in the early days of a Dow when obviously there's, you know, a lot of insiders who are basically controlling the outcome of these votes. So what were you guys taking the drama unfolding over the weekend? I mean, I just didn't even know why they had tried to do the ratification. I was like, if you already did it, then like, why even go through this ceremonial thing? It doesn't even make any sense. You should just be like, by the way, here's how it was all set up, you know, and not like do this ratification post, you know, after the fact.

Like, it doesn't even make any sense. It's just like they stirred up the pot for no reason. They'd already done it. There was nothing anybody could do about it. So why go through the motions of making it seem like people are proving something? I was just like, you guys caused yourself this problem over like nothing. And maybe you guys know more about doubt governance. And I do, but I was a little bit like, why?

You could have just been like, here's what's been done. Yeah, I kind of agree. I mean, there always is like a little bit of this LARP in the beginning. I think people think of it a little bit kind of like, you know, the comps always get drawn to like WordPress and automatic or like, you know, Redhaf and Fedora where it's like, okay, there is the open source thing that people are contributing to. And then there's a separate entity that like the Dow pays to do the thing. And in reality, it's kind of a larp.

because they're kind of very tightly, you know, connected, at least in the early days. And so it's like, yeah, sure, it wasn't the best show, but, like, you know, was the alternative, like, no one's going to develop arbitrum. And, like, you know, some, so they're going to wait for some third party to show up and generate, like, a consulting proposal. And so, you know, obviously everyone kind of wants the outcome. I said something to a founder recently, which apparently really resonated, which was, like, early-stage startups, they're a little bit like China, where it's like, yeah,

you have the power and the control, but like you need to let the people believe that they have some of the power and some of the control sort of keep this process going. And apparently that resonated with them, but I think of that a little bit like this. Like, we kind of know the outcome, but people kind of need to be brought into the process anyway. I'm guessing also they thought that this thing would just pass uncontroversially, right? My guess is that they were like, you know what, it'll look better for us if the community just like rubber stamps this thing as opposed to if we, like when we come out with our token economics, we're like, yeah, there's 50% of the community,

but 10% of that 50% of the community is also ours, and we're going to, like, figure out what to do with it, and we're not going to have any oversight over it. That kind of looks bad, and they were like, I bet we could just get the early people to say yes to whatever we asked for in the first proposal. That's my first guess looking at this,

is that they did not think this would be controversial. And then you saw them, like, trying to justify it. They were like, well, if you compare this to, like, AVAX and compare this to Polygon, like, actually, we have less of the percentage of the tokens that just goes to the foundation that just goes and makes grants and stuff. So, like, why are you arguing with us?

Like, stop arguing with us. It was kind of the vibe from the responses and the governance forum. So I think this was not, I think they like kind of backpedal, my guess, total speculation. My guess is that they backpedal at the end when they realized that there was just a revolt

from the token holders. And they were like, oh, no, no, no, this was meant to be a ratification. Like, that was the intention from the beginning, where I guess in the beginning, they probably assumed it would just get rubber stamped and nobody would care and the thing would just pass very easily. Yeah, I mean, I think that there's, yeah, the comparisons to other networks is pretty fair. I also just think that the one question I have is like what lawyer kind of like said that this was like a good thing to do? Because like it does feel like a little bit like there's some law firm.

I'm clear if it's a U.S. one or Kaman one or something who is like, hey, guys, you know, because there's a lot of regulatory pressure, you know it would be great. Because it looked like a Dow voted on the foundation because of the like cases that exist right now, like the Uki-Dao case and stuff like that. So like, why don't you just like toss in a vote, but like make sure it gets, make sure it passes? And like there's somehow some of that, the way the initial response read like it was drafted by a lawyer and the later response read by as draughted by like a crypto person sort of suggested. that somehow there was like a lawyer running this and it was not like and and and you know

you know i got to say like i i really love the arbitram team because they're like really good engineers there's like a ton of people who are really focused on engineering i'm not sure if i i know much about anyone who does sort of community stuff there so it can it i i don't actually know who who runs this but like the the response just felt like it was written by a lawyer to me like and it it felt like some legal counsel was like, hey, you should just just do this. And it, you know, of course, sort of ended up not working out as well. And yeah,

I just, one of the most uncomfortable conversations has to be the arbitram team talking to whatever legal counsels suggested this. That would be what I, like, I would not want to be in that room. Well, I mean, I'm still reeling a little bit from this analogy to China because, like,

if blockchains are supposed to create these little mini democracies, but really it's all like these sham to democracies where instead it's like actually top down control. Like that's really problematic. Like the fact that that is what resonated with that person and that that was the analogy you came up with. I'm a little bit like, what are you guys all building here? Like that that's not what people. To be fair, this was a this was a centralized company that happens to operate in crypto. It's not it's not a Dow or not a protocol or something like that. But I mean, I think it's it's kind of like,

yeah. I mean, in the early days, things start out kind of. You need someone to start pushing the boulder and then things kind of slowly decentralized over time. I mean, I think Maker is actually kind of a pretty good example in terms of like, you know, there's you see political infighting, which is a testament to like the fact that no one is actually, you know, pulling the strings. And also frankly, there's this other component here, which is just like these big lump sum payments and sort of the lack of oversight around budgeting. Maker actually does an incredible job with budgeting. You can basically see all the different light items broken out for all the different core units. And like most DAOs don't do that. They operate like this where it's like, you know, pay us $100 million and we'll like develop the protocol and, you know, trust us is going to be spent well.

I just want to give like sort of a little bit of the benefit of the doubt to the arbitram team in some ways because like I do feel like they did actually add in some other safeguards. Like the fact that you can vote off the off chain directors like the Dow basically effectively controls a multi-sacist. That was pretty interesting. Like a lot of other L2 foundations didn't do this. I think the difference is in a bull market when a lot of these other L2s launched, the knives weren't handily readily available, let's say. And people just didn't notice that people

were doing much more egregious things. And I think that the kind of like timing plus the really bad PR stuff, which looked like it was written by a lawyer, just like those two things, compounded into something that looked horrible. But, you know, yeah, I agree that, like, I think, like, they actually made some very interesting steps

towards decentralization and their proposal that are all going to get overlooked because of, like, sort of some of the other improprietious stuff. Yeah. I mean, I would describe it a little bit differently, which is that, you know, Arbitrum is a layer two. And that means, you know, of course, they have a centralized coordinator that basically runs all the blocks.

Like, you know, they run the server that, runs the layer two. So, you know, the sense in which, like, this thing can be decentralized is actually a, it'll take a while before this thing is actually governing anything that's plausibly decentralized from the architecture of the thing. And that's true for all the layer twos at the moment. That said, like, they've basically been completely centralized up until the point where they launched a token. And now all of a sudden there's, like, this changeover very suddenly, where they have to move from being totally centralized to now being plausibly decentralized, or at least like, you know, deferring to Dow governance.

And that's a very sudden change in the way an organization runs, in a way decisions are made, in a way that people think about their own roles and who they're responsive to. Like, it is a very sudden and weird thing that normal organizations never do. This is purely like a weird blockchain land, you know, you know, bizarre a world thing that we're doing, this idea that like, hey guys, why didn't you set up all these decisions to be responsive to the Dow, which just exists? existed 10 minutes ago, and all these random forum posters are now your boss. Like, that's weird.

It's a weird thing to, like, change your mindset into. And Arbiturham very clearly, like, although they've built a great community, they were never subservient to their community in a way that they now have to be now that they have a token. So they've never had to deal with, like, the mob. And now they're learning, they're getting a crash course in, like, what happens when the mob shows up, and the mob is mad. And the mob, like, they have your tokens now, and they control you, and they're very upset.

And, you know, you could see that, like, even the way the original post was written, as you were saying to Root, it was written, it was written by this group. I can't remember what it was called. It was, like, some consulting firm that they later admitted. They were like, who is this person who wrote the initial proposal? Because it's not like somebody of the Arbitrum core team. And they were like, yeah, it's this, like, consulting firm that we hired to, like, handle governance matters for us. And it was like, bad look. You have to understand there's, like, you know, one of the ways I would delineate the difference between arbitram and optimism.

and this is not like a purely like a very tight dividing line. But like the Arbitram team is like a bunch of engineers and academics. And they're really built around like focusing on the engineering side. And I think they kind of like left all the other stuff kind of like untouched, especially community wise for a long time, right? Like relative to say optimism, which arguably has like less of the engineering. and like kind of technical adroitness in some ways. But they did start with much more of a focus on the community

and like community management from the beginning. And they weren't kind of like, hey, we'll bolt it on at the end. And this kind of illustrates that philosophical difference between the two of them in a lot of ways. Totally agreed. Totally agreed. And you can see that in that optimism has always been talking about the community

and public goods and how to make all this stuff beneficial for everybody, even when like optimism wasn't even working. They were spending an enormous amount of energy explaining how all this was good for everyone and the mob should be very happy. And Arbitrum is kind of the opposite. It was like, look, we built you a great layer too. What more do you want?

Like, why are you yelling at us? Like, give us tokens so we can go make it more valuable. So I think it does, I mean, look, after this, like, I guarantee you everybody at Arbitrum is shell-shocked, and they are now never going to make this mistake again and everyone is going to get, like, some form of, like, training in, like, never, ever say anything. never ever dismiss token holders ever because like we can't let this ever happen again.

But it's a, it's an expensive and painful lesson. Are there any Dow Coms consultants yet? You know, it's like when there's PR crises, you can hire like a PR consultant. Is anyone doing specializing in Dow's? I feel like there would be a good market. You know, I think the meme I would make about this is 2020 was the year that everyone could be an investor. 2023 is the year everyone can work in investor relations, which is like basically what the like, you're liable to the token holders.

Yeah, I feel like this has actually come up on the show before where we talked about the importance of community managers. And like I also have personal experience running like a big group and online. And yeah, when things get out of control, it is bad. So like learning how to communicate, learning what to do when things go down, having like kind of like shifts basically for people to manage, you know, when things are starting to bubble up in the forum and what. not. I feel like that's all going to be super important. But yeah, I feel like in this case where it's already been done and then you give them this facade of like having control over something, like people who are not going to react well to that. You know, so they should have just been upfront and been like, sorry, this has been done already. And we're announcing it.

I mean, you can see also that like it wasn't a facade, it turns out because the token holders really did have control. They didn't have control over the 50 million that they'd already cashed out. But the rest of it, the other 700 million, yeah, they have control. The token holders have control because they took it back and now they're going to resubmit things to governance and get people to sign off. So I think in the end, it's like it was messy, but it is a validation that like, hey, yeah, ultimately when you have a token, the token holders are in control.

Yeah, and actually in a way maybe it's good because it like probably galvanized the token holders. And so there's probably like certain people that are naturally filling certain roles of like, oh, you know, now we're going to be watching blah, blah, blah. I haven't been following this, so I might be just making stuff up, but I could imagine people being like, oh, we need somebody to do, you know, X, Y, Z to watch for this or that and, you know, to come up with ideas for this or that. So you tell me, I don't know if any of you have been following it more closely, but it seems like that would naturally happen now.

I think starting governance on such a sour note is going to make everybody super vigilant for the next proposal and the one after that and like the level of argumentation and every proposal is going to go way up. So these things do have a way of like, affecting governance and making it feel more adversarial with the foundation or with like the, you know, the team that's actually building the software. Whereas I think in places where there's just not as much pushback and like almost every proposal gets passed, there's just a sense. It's kind of like a board in management, right?

There are times when the board is just like very pro the CEO and they just kind of let them do whatever they want because like, look, we trust you. But if that doesn't happen, it's like, why are you doing this? Why are you doing that? And like every single question, every single decision from the, from the CEO is being fought by the board, it's just a precedent that like tends not to go away. Like it just tends to persist. So my guess is that that's going to happen to arbitral governance at this point, which may be good or it may be bad. It's hard to tell. I mean, I think a lot of this also just has to do with like,

if you know, if you look at sort of the governance practices of say startups from 2015 through 2021, it was like strict like loosening, right? Like people had like less and less board control. people had less and less, like, governance rights over their investments. Like, you saw sort of this loosening in standards. And I think a lot of projects that launched tokens in, you know, that era, so that that would include kind of the other L2s, they sort of inherited that. And so Arbitrum is sort of in the same way that right now, every, you know, fundraising round has very strict terms, way stricter terms than, say, 2021, token holders expect sort of the

same kind of reckoning. And it's sort of interesting that the stuff that happens in the like pure private market, pure equity market is like has bled into into Dow's in some way, right? That's like, it's like sort of an unexpected thing. But I think the arbitram scenario kind of illustrates that. Yeah, I think that's possible. That's possibly true. Okay. Let's, change topics. So the other big thing that's coming up next week is the Chapella upgrade. So Chapella is a combination of two big upgrades in Ethereum, one of which is Shanghai, which you've been talking about forever. The Shanghai upgrade is the upgrade that ultimately allows stakers to unstake and withdraw their ether and potentially sell staked ether,

which has been kind of dormant, just stuck on the on the staked side since basically when staking went live with the advent of the beacon chain. So today we have about 15 percent of the total ether supply staked. And so that means that within short order, all of that stake will potentially be eligible to be sold. Now, different people have different expectations about what this is going to do in terms of how much ether is going to get unstaked.

It's not straightforward to be able to model exactly who's going to unstake when, and even if they do unstake, who's going to sell or not. Most people are anticipating a lot of unstaking, although this unstaking is kind of, there's multiple steps you have to go through, and not everyone can't unstake at once. there's a couple of cues that you have to go through in order to fully unstake.

Gondlet, Tarun, you guys wrote a piece about the Shanghai upgrade, talking about what you think the effects are going to be on staking derivatives, Ethereum security. Can you summarize for us? What are your guys' expectations of what's going to happen with the Shanghai upgrade? Yeah, I mean, I think, you know, the stuff that people are fighting about on Twitter regarding it is sort of the polemics of what we were talking, what we wrote about, the polemics being like,

everyone's going to withdraw. It's going to have no security. It's over. They're going to withdraw and sell because they've been locked up for X number of months. That's one side of the argument. The other side is everyone is hodling forever. And if this doesn't remind you of like Bitcoin happening events, it's sort of like Bitcoin happening events had the same level of polemicism, right?

Of like, oh, like at the happening, everyone's going to sell right before or after. And like they'd have some weird theory, right? Like rainbow curve type theory. Yeah, so I think the main thing we are more focused on is the fact that there's, you know, staking derivatives have a ton of concentration. So staking derivatives allow you to basically give your 32Eath, which is sort of the minimum amount to make a validator to a validator. And then you receive a sort of IOU. And the IOU is sort of like the pooled stake that a bunch of validators are running the network with. And the IOU lets you sort of have some liquidity on your asset.

And so these IOUs are very popular. In fact, they're larger in some sense than the rest of defy right now. They're one of the most popular assets in decentralized finance. And the reason for that is that people, when they are contributing their ETH to validate the beacon chain, they're locked up until this upgrade. And they've been locked up since the beacon chain started. And so it's been quite a while. And so the idea what Staking Gros is that allows people some form of partial liquidity.

we've had some liquidity crises around staking derivatives in the past. So right after about a month after Luna crashed, Three R.O. Capital had their insolvency event. And in that process, they market sold an extremely large amount of distaking derivatives, causing sort of some unexpected behavior. In this upgrade, we sort of don't expect the same level of that type of stuff happening, partially because A, there's a bunch of staking derivatives,

and people have started partitioning their risks somewhat into different staking derivatives. And B, the net leverage ratio is much lower. So people were using these staking derivatives and sort of treating them like ETH and then taking, you know, like 5 to 10x leverage on them. And I think the net leverage ratio, you know, prior to Luna crashing was actually quite a bit higher than that,

almost like 20x on chain. And so that net leverage ratio has gone down. and so there's going to be sort of some orderly events. Like I'm sure there's going to be people unwinding positions in getting ready for this. But I don't think it's going to be either of those two polemic ends where everyone sells at the same time and ETH POS is dead or, you know, like everyone's hodling forever. And like, how can you not expect the rainbow curve for the price for Ethereum? So, true, if I had to ask you, what do you think? is going, do you think the net level of ETH staked is going to be higher or lower two weeks

after the Schengh upgrade? What would you guess? My guess is that it will be slightly lower. So I don't think it will be higher, but I don't think it's going to be dramatically lower. I just think there's a lot of people who have liquidity needs. But I do think that the overall staking derivatives ecosystem is expanding quite dramatically. Like there's a lot of different derives. There's also things like eigenlayer, which will allow you to sort of restake your assets and provide them to certain networks for services on chain like oracles or or or other things like that. And so there's sort of a sense in which that there's a bunch of opportunities, yield opportunities tied to staking that are sort of growing over the next few years. And I expect

the recovery time from maybe a slight dip to not be, not very long. In some sense, to me, the only single origin organic yield on chain right now is eat staking. And for the foreseeable future, it is really the only thing. Like other staking products just don't have the same level of liquidity, interest and actual usage of generating fees, MEV, et cetera. I like the idea of calling eat staking organic yield. I feel like there's some branding exercise around there that we can do. Well, well, like the, the, The thing is in the last bear market, the now infamous GBTC trade and sort of Bitcoin basis trade were the pure organic yield.

What makes yield organic? Hold on. How are you defining organic now? That doesn't sound very organic to me. GBT is not organic. But the Bitcoin basis trade where like the futures and spot were all like historically always trading at some deviation. That was like something that was a huge.

That was like the organic yield. and part of that just had to do with like the nature of Bitcoin futures versus the nature of spot and like delivery. But that was sort of, Bitmex was sort of built off of that in a lot of ways. I was going to say this reminds me so much of Grayscale, ETH, right? And it's like Hotel California. You can check in, but you can never check out. If you stake right now, which obviously makes it in some respects unattractive for a lot of

investors, right? Like, each staking as a percentage of total ETH is very low, much lower than like pretty much every other POS chain. In part because you don't know when you're going to get liquidity. It's the same reason why ETHI, the Grayscale ETH trust is trading at such a massive discount is because you're basically hoping and betting that at some point it turns to par, but you have no real read on when you'd be able to redeem it. Adding this sort of redemption loop and, you know, completing this sort of Rb makes it underwritable

for a lot of investors or just ETH holders who are sitting on the sidelines right now. So I think anything it makes it kind of more attracted to get the organic eel. So I guess we're going to use that term now. It's as plausible in the long run that there's going to be more ETH stakes because, like you said, a lot of ETH is just sitting around doing nothing. And you might as well get something for it and, you know, normally secure the network. But I do agree in the short term, you know, it's likely that there's going to be people who want to get out as opposed to people who immediately want to get in. So I think two-week prediction I'd probably agree with Therun that more ETH will be unstaked. But I would guess like two years there will be more ETH staked than there is today.

Yeah, and a lot of this is like a natural basis effect. So like, think about the ETH price at the time the person staked. Think about the ETH price now. And imagine you're a fund that's dollar denominated. You have to return to your investors in dollars. Well, your net return might have, might actually be negative because of the fact that ETH price has gone down from when you were staked when you first started taking, like when you made that position. So your your basis will affect that. And like there's obviously people who have. negative bases, right? Like the beacon chain started at a much higher ether price. So, you know, you can't imagine that all of them are just going to stay forever, you know? That's never, that's never been true. They got to do some tax loss harvesting basis. What you're saying. It's like stuff like that, like that type of stuff that's kind of like systematic stuff. I think there's a ton of that that exists. One thing I find so interesting about this conversation is that nobody has raised this issue about how now the New York Attorney General and Gary Gensler keeps saying every crypto aside from Bitcoin is a security. But, you know, Letitia James also said that ether's

a security. And I think like back when staking started, Gary Gansler said that staking products look, or not product, I shouldn't say products because that sounds like from an exchange, but I just mean that's coins, you know, that are secured by staking our securities. He was implying all this. And I just find it fascinating that like nobody seems to be thinking about that. Like you guys were all like, yeah, there's probably going to be more staked ether in the future now that this has been implemented, which, yeah, I don't know, it just sort of feels like the industry is sort of like, we don't care. Yeah, I mean, if you're going through an exchange or something like that, I think, as we sort of saw with the crack-in settlement, you know, maybe there's some legal dubious around it,

but obviously there's solo stakers and people who aren't in the U.S. and whatnot. And so there is some some attractiveness there. I don't know. I think overall, though, like, with each staking, you know, obviously yield goes down as more people join. And so, like, I do wonder kind of where that, that point on the margin is where, like, it actually is, you know, attractive to people to stake versus not. Yeah. The reality is like right now your opportunity cost is just, like, your opportunity cost is relatively high right now to stake until Shanghai. And then your opportunity costs is super low. And once the opportunity costs sufficiently low, I think, I think, I think, Taron is right. ETH staking just looks like the quote-unquote risk-free rate, even though it's obviously not

actually risk-free because your validator can mess up. But like that lowest risk thing you can do is just going to become the de facto thing that people do. And then if you want to take on more risk, you can decide to do something more fancy or do leverage staking or do leverage something or other. But, you know, the default thing, like all the ether in EFE is just going to, you know, okay, stake that because, you know, might as well make some more money from it or something. I was going to say, there have also been some lot of, efforts to basically change the tax classification for staking rewards because right now they're taxable as income as you receive them but obviously they're locked and it's very annoying to do that kind of

accounting and so I realize we're talking about you know crypto taxes on we're talking a lot about crypto taxes right now I don't know what's going to it's been a quiet week in crypto yeah yeah last week everything blew up and this week we're talking about taxing but anyway it is almost tax day more to be unveiled it is true very topical yeah but the other the other thing I remember So back in the day, I remember there was this big argument on the cosmos forums, talking about whether they should make staking in cosmos, whether they should make it so that the entire cosmos asset is, what's the term when rebasing?

Like make all of cosmos assets rebasing, except for if you're staked, if you're staked, you don't rebase. That way it's economically equivalent to staking, in that like you're getting a fixed percentage of the network, but you don't have to pay taxes. Yes, exactly, exactly. This is called Demeridge. It's a kind of like old school French thing that like French shipping magnates used to do.

I think like the hard part that I find with all of this is that staking doesn't really feel that much like a security itself alone. Like if I'm a solo staker in some sense and I get slashed for like not being online or not or invalid processing of a transaction, well that. is only inured to me. There's not like this common effort of others to take that loss. Now, when you're pooling staked products, like staking derivatives or like these pooled vehicles, the pooled vehicles are a lot closer, right? Because I am sort of subsidizing, like, the loss is shared. The profit and loss are really shared amongst everyone. But the individual stakers just seem so far removed from orange groves in Florida. And so I just like find it really hard to imagine that. And that's why they're single origin and organic.

That's why. I need a t-shirt of like buy organic yield. That's, that's, that's really charming. Okay. Well, so, okay, speaking of getting slashed, getting slashed. So there was a very interesting attack that took place this week, a $25 million dollar MEV attack. Now, we don't see these very often. The last time that we saw, like, an MEV attack was quite a while ago. I remember something somewhat distant last year that took place. It was directionally similar, where basically what happened was that there was somebody who set up their own validator.

And when their validator was up to produce the next block, they put these bait transactions into the mempool to try to get these MVB bots that are constantly scanning the mempool trying to find transactions to front run or to sandwich attack. they put these bait transactions in. The MEV bots tried to submit Flashbot bundles to front-run these transactions. And then the person who was running the validator basically unbundled the blocks

and reorganize all the transactions so that the MEV bots, instead of front-running or sandwiching their own bait transactions, instead were getting front-run themselves and sandwiched themselves by the attacker. And so the attacker was able to yield $25 million in a single block by doing this across a bunch of MEV bots.

So there was a bunch of rigamarole about how flashbots could have mediated this by something about checking for signatures on the proposed block or something like that. I didn't quite follow the details. Tom, true, do either you guys follow exactly how this attack played out? Yeah, I think the one thing to note is that, so if we take a step back, when Ethereum had the merge, there was the software called MEV boost that Flash. match bots made that anyone who is validated or can run. And what that means is what MEV boost does mechanically is every block producer who's selected, so like, you know, there's some

verifiable randomness, we select the next person who chooses a block, they become an auctioneer. They say, I'm willing to sell the block space that I'm deemed to produce in the next block, and you can bid in my auction. MEV Boost lets people bid. And these people who are bidders are called block builders. And they send you blocks of transactions. And the idea is that if they found some MEV, they might like, you know, reorder some transactions or add some sandwich attacks. And then they send it to you the proposer because you, you have to produce that block. And there's sort of some interesting rules of how this works. So the way that the people who are bidding send you the bids is they actually send you some form of metadata proving that the transactions they're sending

you are valid plus their bid. The interesting thing that happens, though, is you don't reveal your transactions. So the proposer, the person who is selected, if you revealed all your transactions, they could just copy your transactions, right? They could just, like, censor you and elide your transaction. So for censorship resistance reasons, you don't include your transactions. However, there was a sort of bug, depending on whether you want to call a bug or intended feature, where if someone basically sent you a certain set of metadata,

and then, you know, when the proposer validated it before sending it to the rest of the network, if it was invalid, you could still sort of see the transactions that they sent. So what that means is that someone wins the block and they don't, but they bid without sending you their transactions. Then subsequently they send you all their transactions, but then you send an invalid block to the rest of the network that doesn't get accepted. And then you immediately make a block where you add in all the copies and then send it and try to, you'd cause this kind of race to get your block to be first. And the software had this unintended effect that like these invalid, like these invalid blocks still sort of leak their

transactions. So there's a little bit of information that the sort of malicious valetor could use. Now, I know this probably sounds scary to a lot of listeners, but this type of stuff for the record happens in normal trading all the time. In normal high frequency trading, you see all these kind of weird sequence or issues between multiple venues. So I would say that these types of like auction, hocus, pocus stuff happens everywhere. Equity auctions are notorious for this. I'm curious too, because I know like obviously part of it is at least on Ethereum, if you're a validator, like you know you're going to be proposing a block with like two epochs

ahead of time. And that allows you to do, you know, multi-block MEP or do something like this. And there's kind of been some research into like, like, like randomizing or obfuscating that a little bit more. So this kind of stuff isn't possible. You are, I guess, are a resident expert. Like, what is the state of the art on stuff like this? Yeah, I'm glad you asked.

I think the proof of stake versus proof of work has this one particular problem. So in proof of stake, in order for the stake distribution to be sampled, like in order to say, like, you know, Laura puts in 100-eath, Tom puts in 10th, his seed puts in 90th, the fact that, like Laura should be sampled the most, that rule requires you to sort of lock your ETH into a contract that can then be sampled at those ratios, right, of 50% to Laura, 45% to SAC, et cetera. And you can't just join and leave the network whenever you want, you know, in particular, because the network, everyone needs to agree for some amount of time that the stake distribution hasn't changed, that we're sampling the same distribution and such that the probabilities are all correct. In proof of work, that's not true.

actually ever has to know how many people are running machines or running hash where there's hash power, the difficulty adjustment just sort of infrequently adjusts based on how many things you've seen. But it actually means that people can join and leave whenever they want. And so there's this whole line of research of like, how do you, can you use advanced cryptographic tools to get proof of stake to have that property? And there's sort of some negative results on this. But the positive results are, this paper by Dan Bonnet and I think Nicola Greco from 2020 called a single secret leader election. So it's sort of a way of selecting a leader in a fully private manner and on the next block,

they provide some sort of ZK proof-like things or knowledge proof that like, hey, the correct person was selected. And so the state of the art is people know things that can be done. people have implemented them. They are not very good for production because they rely on some cryptography that I think people are not 100% comfortable with, which is threshold fully homeorphic encryption. Okay, well, that went totally over my head. That sounds all good. I remember back in the day there were, I thought Ethereum was also relatively unique in that you have a very far look head to know who the next leader is going to be and other algorithms don't have that property. So I believe it was like Algorand or Tezos or I can't remember which one it was that like

you can know two in advance. Then one of them was like one in advance or something like that. I forget all these details now because it's been so many years since anybody was talking about consensus mechanisms. I remember back in 2017 and 2018, this is like all everybody was talking about was the different properties of consensus mechanisms. And here we are so many years later and nobody cares about any of those. things anymore. And this is the one place where it matters.

I'll give I'll give Ethereum a lot of credit in one place, which is that a lot of other proof of stake networks have very long epoch times for like how long the stake distribution has kept constant. And you're known for like many, many blocks in advance. And I think Ethereum did do a lot of work to try to like reduce that. So it's like realistically like six to 12 blocks that you know in advance versus like hundreds or thousands in some other networks. Yeah, fair enough. Well, there was one more hack that ended up getting a resolution this week, and that was the Euler Finance hack. So we talked about this a little bit a couple weeks ago. Oiler finance was hacked for, I think almost $200 million, like almost all the assets in the in the

protocol were stolen. So Twitter went on this wild goose chase, trying to find the ether that was stolen from the attacker. And a small amount of it was already returned. But it turned out that through cooperation with law enforcement, particularly supposedly with help from Haan Ventures, they were able to get in touch with law enforcement that was able to track down who the attacker was. And ultimately, they got into conversation with the attacker and were able to negotiate a return of all the funds or the vast majority of the funds. So we don't have a lot of details. Things are pretty vague as to what happened and how it happened. But supposedly a bunch of people were involved, including Samsung and Hudson and a bunch of folks who were, you know,

just part of the security apparatus of Ethereum who helped everything run. So, all that ends well, looks like Oilers got all the money back, and the attacker was tracked down. I think one of the lessons here from Oiler Finance is that it's getting harder and harder to get away with big hacks. And we saw this before last year. I remember there was a number of hacks last year that got fully returned, or like returned minus some small finder's fee, quote unquote, of like a couple million dollars.

And so this does seem like, especially in a post-tornado world, it's just like we've increased the friction of being able to cash out and the non-KYC exchanges are getting less and less, that it's just more and more difficult to hide your tracks on chain. What do you guys' thoughts about this oil return? I mean, like, this was something that came up when I was doing the Dow hacker thing for my book. you know, when I interviewed people about who I thought it was and stuff, they were saying stuff to me like, oh my gosh, he could have saved all that money. And then he would have been a hero in the Ethereum community. And now because he did the opposite, you know, he'll be shunned.

And people were saying things like reputation is everything. And he could have like had it made for life. Like he would have been considered this like amazing solidity, you know, dev and I mean maybe some people might think of him that way now but you know I think a lot of people probably don't. So yeah, I mean it sort of just shifts the incentives in a way where I hopefully would think that a lot of people who find these ex-plates would start realizing like oh what I can do is I can you know make a little whatever like bounty fee or whatever they call that. And then I will be made for however long because I've now set my

reputation as being this amazing person who can find these exploits like basically they could be like the other like the next Samson but when they do the opposite then like you know people don't want to deal with them and you know and then they could get in trouble with law enforcement and like look at Avi Eisenberg

he like he not only did he tweet that he had this highly profitable trading strategy he came on my show you know like talking about it and I you know would imagine right now he's maybe having some regrets about those decisions. Yeah, I'm very curious what methods they're using to get these people identity. Sometimes it's very obvious. They do something stupid.

Like they are funding these through an exchange account. And it's like, okay, well, obviously, that's not going to work. But I believe the Euler hack was actually funded by a previous hacker that was funded via a tornado cash deposit. And so, like, I don't know what they're using if they're looking at, like, IP addresses that are submitting like transactions to an RPC node or if like there's some extra, I don't know, metadata. Like I'm actually very curious to kind of hear more.

And obviously, Han used to work at the DOJ. So they probably have some, I don't know, interesting sort of fingerprinting tools as well. I also have people on, so I think Euler was saying on Twitter that like, hey, all the funds have been recovered. And obviously the denominations are different because some of them were sold. So there is a bunch of WBT. You're not getting all the WPTC back. so we'll figure out how to net it out.

But there was, I think, like, 1,100 that went into tornado from the hack that does not seem to be accounted for. So maybe they just negotiated like a sort of, you know, settlement fee or, you know, like a finder's fee for the, for the bounty or for the, for the bug. But, yeah, I think it's more details kind of to come. Yeah, I would guess also that part of what makes it a little bit weird is that if you remember a couple weeks ago, they were communicating with. the oiler hacker through ether scan message, not ether scan messages, but like on-chain messages. And somebody, what was it, like a previous hacker? It was like North Korea or something was communicating with the attacker. And so supposedly like the attacker had gotten in touch with somebody.

And there was some, like, it sounds like this was a more complicated thing than just they looked at on-chain records and then they figured out who it was. It has to be that they established communication and were bargaining and then like somehow, My guess would be like in that process they found something. Some of the on-chain notes were crazy. Like the one that was like, I fucked up. I'm Jacob. Like in fact that they said their name there or purported name was kind of awesome.

One of the notes from the hacker said, I'm sorry to everyone who was hurt by this. And they signed it Jacob. Yeah. And they said things like, oh, you know, I didn't mean to like take people's life savings. and I didn't mean to like hurt these families and blah, blah, blah. And it's a little bit like, okay, when you're going to take that amount of money,

how do you not realize like it's going to affect people? Are you like two years old or like, I don't know. It's just, but one thing I wanted to say about the North Korea thing was like, apparently people thought that maybe what had happened was they were trying to obfuscate who they were. And so they like decided like, oh, I'm going to do this weird transaction to make it look like North Korea's involved. So that was kind of one of the hypotheses around that.

Whole thing is very odd. And I have to imagine also a lot of these attackers are probably, you know, basically the equivalent of script kitties who are like living in Russia or something and they're like 14 years old and they just live on ether scan and they found some vulnerability. And then once you do the hack, like you can follow all the steps like, okay, first fund it from Tornado and then make sure use the VPN and blah, blah, blah. Then you have the money. And now once you have the money, like there's no guide for like how to get the money.

out. There's no guide for how to deal with like, wow, everyone on the internet is trying to get in contact with me. What should I say to them? What should I not say to them? How do I avoid getting unmasked? And, you know, I have to imagine that that's where a lot of these hackers fall apart is not before the hack, but after the hack. Like, after the hack is done, you know, more money, more problems. Like now you have to suddenly deal with the fact that you have 170 million dollars on your hands and, like, the entire world is coming after you. We've never covered this hack on the show. I'm not totally sure why. Maybe we did it a little bit, but the James Zong, the Silk Road 50,000 Bitcoin person, because that person was caught

after like 10 years or not 10 years, eight years, something like that. And it was, the interesting thing was like all the, that there was a recent DOJ filing like last week or two weeks ago in that case about like his like lifestyle and the things he said. And I thought it was really interesting that like that's being used very much against him in this case. or at least like part of the case to claim he has no remorse. And so, yeah, I feel like a lot of this, you know, it's like the post-exploit actions are actually very important, almost 100 times more important than the getting into the exploit actions. It's like you got into the museum and you stole the diamond. Now you have to get out and not get caught ever for the rest of your life.

And otherwise you'll be hunted by any anything you say. you got to like not suddenly increase your life expenditures to the point where like your neighbors start noticing something's off like it's a lot harder actually to get away with crime than to do crime a lot of the time yeah and this is what I was saying before because like like you're right once you have that money that is stolen you can't actually use it like if you're going to use it you're definitely going to get caught like look at the razzlecon people you know I mean it's like they got tracked down to their like Walmart gift certificates and stuff like that like Uber rides. I mean, it's like super specific. So if you do the good thing,

then like you'll get a reward. And then on top of that, you, you know, can probably work for whoever you want afterwards. So, but you're right. I think it's like little kids who are, who are doing this and they haven't thought these things through. One other thing I wanted to mention though about the James song is that Taylor Monaghan did this like amazing thread where she talked about it all. And like she has her funny, you know, the way Taylor writes her tweet threads was amazing and hilarious. So you should check it out. And she has like screenshots. and images of his time parting on the yachts with like hot women and whatever. Right, right, right.

This was all used against him in the case. And I think it's like kind of interesting like that. Maybe karma doesn't exist instantaneously, but it does over long enough time. Yeah. And like another part of the tweet, right, granted, I didn't read the court thing. So maybe the court thing is even funnier. But it goes into how, you know, he was trying to hide $2 billion or some number that was in billions in his home, like physically. And it was like in random places, like in a popcorn tin and

whatnot. Like it's like hilarious. Yeah, the Jamesong thing should be a movie. Like I actually feel like it's like one of the cases that that like is unsung here, unsung like villain. I don't know. Like you talk about unsung heroes, but these people are like unsung villains. Well, let that be a lesson to all young people watching the chopping block. Crime does not pay. if you're going to make money, do it organically, like Turun says. Single origin, organic, on chain yield. That's right. That's going to be our meme now, I think, for the chopping blog.

That is our approved way to make money in crypto. I'm surprised like no one made that meme before because, like, it is just kind of true, right? Like, each steak and yields is like unique. We got to do it ourselves. All right. There was another T-shirt that we were thinking of making for the chopping blog. This clearly needs to be the second one. I forget what the first one was, though.

I think it was Robert in the GM cup. Either that or it was Tarun looking at the camera out of the corner of his eyes. Didn't people make the GM cup? Like people on the internet seem to have gone and like, you know, made made the same version. We have a shop at Unchained. We should whip those up in there, stick them on there. But I feel like the other one was about what I'm not going to say, because I don't remember off the top of my head. But we'll try to find it for the next show.

We definitely need to get started on some unchained merch. I will wear a chopping block merch on every show if we have something. Okay. I will not wear chopping block birch. That's true. Tarun himself is chopping block merch. Like all chopping block merch is basically different versions of Tarun saying things. Well, wait, Tarun, what if it was like super colorful?

What if we could make super colorful shirts? Okay. You're starting to work on it. Yeah, he's starting to get. And I just realized you have different classes now. you don't have your like asymmetrical glasses. You know, sometimes I wear them. Yeah, I switch them out.

Okay, Turud, give us, what is your algorithm for when you decide to wear the yellow asymmetrical glasses versus this one? So actually one of the funniest things, I actually went to this conference of like not very crypto-native people, but they, the people there, apparently there were people who listen to chopping block, but they only listened via audio and didn't know what I looked like. and they were very surprised. And I thought that was very funny. So, like, to audio listeners, I may look slightly different than what I sound like.

Okay, so for the audio listener, actually, you just made me realize this. For the audio listeners, Tarun looks fucking crazy. Okay? I want everyone to understand. Tarun has very colorful, multicolored hair,

constantly wears, like, glasses that are not quite symmetrical, and are also multicolored, His outfit is usually very tie-dye. Just so that everyone understands that, because I feel like this whole episode, we made a lot of references to Turun's outfits that may not make sense if you don't picture that.

Yeah, and he often wears very colorful printed pants, like pants with prints on them. Which is another. Lots of different textures. And colorful shoes. And also his hair changes color frequently. So it's definitely not been the same color or colors throughout the whole recordings of TCB.

But anyway. Do we have a poll at one point where people could vote for Turun's next hair color? I think we should bring that back. Yeah. We can. We can. We can. Tarun, I have to admit, you die.

You're so often. I'm a little bit worried about, like, whether it's breaking and, like, how healthy it is. You know, my, my philosophy on this is my, my father lost all his hair and was bald at, like, 31. And I'm like, you know what? I'm older than that. And I still have my hair and I'm coloring it. So whatever, you know? Okay.

Good philosophy. I like it. While you have it, you got to do something with it. And then, you know, if it goes, it goes. That's it. Say love you. Say love you. Okay. All right. Well, on that note, I think we're going to wrap for today. So when this episode goes out, we're going to do another poll for Tarun's hair color for the next show. Thuron, you're in?

I'm in. But the one thing is I'm getting that haircut on Friday, so maybe the poll needs to go. The show should be out before that. So we'll be good. We'll be good. Awesome. Then yes. Can be executed. Sounds good. That's it for now.

All right. Ta-t-ta, everybody. Bye, everyone. See it.