Unchained - The Chopping Block: Response to SAB-121, ETH ETF, & More - Ep. 650

Episode Date: May 23, 2024

Welcome to The Chopping Block – where crypto insiders Haseeb Qureshi, Tom Schmidt, Robert Leshner, and Tarun Chitra explore the latest trends in crypto. This episode covers the anticipated Ether ETF Approval and its market impact, Biden's evolving crypto policy, and the bipartisan repeal of SAB-121. We debate the controversy around High FDV Low Float Tokens and discuss the DOJ indictment for a $25 million MEV exploit. Tune in for insights on memecoin performance, the role of prediction markets in politics, and the increasing participation of retail investors in the crypto market. Show highlights 🔹 Crypto Regulation: In-depth discussion on SEC Crypto Guidance, focusing on SAB-121 and its implications for the crypto and banking sectors. 🔹 Ethereum ETF News: Examination of the anticipated Ether ETF Approval, the political motivations behind it, and potential market implications. 🔹 Biden Administration Crypto Stance: Analysis of Biden's evolving crypto policy, bipartisan repeal of SAB-121, and how these shifts might affect the upcoming elections. 🔹 High FDV Low Float Tokens: Debate on the controversy surrounding high FDV low float tokens, recent market downturns, and potential market structure issues. 🔹 MEV Exploit DOJ: Overview of the DOJ indictment of two brothers for a $25 million MEV exploit, exploring the legal and ethical implications. 🔹 Memecoin Performance: Insights into current market trends, including the performance of memecoins versus VC-backed tokens, and predictions on future regulatory impacts. 🔹 Prediction Markets in Politics: Exploration of how prediction markets are influencing political stances, particularly Trump's pro-crypto stance and its effects on voter behavior. 🔹 Impact of Regulation on Crypto: Discussion on the increased participation of retail investors in the crypto market and its broader implications. Hosts ⭐️Haseeb Qureshi, Managing Partner at Dragonfly  ⭐️Tom Schmidt, General Partner at Dragonfly ⭐️Robert Leshner, CEO & Co-founder of Superstate ⭐️Tarun Chitra, Managing Partner at Robot Ventures Disclosures Links Haseeb’s “Why are all these low float / high FDV coins down bad?” https://x.com/hosseeb/status/1792257063399403669  Two Brothers Arrested for Attacking Ethereum Blockchain and Stealing $25M in Cryptocurrency: https://www.justice.gov/opa/pr/two-brothers-arrested-attacking-ethereum-blockchain-and-stealing-25m-cryptocurrency  Tarun’s Towards a Theory of Maximal Extractable Value I: Constant Function Market Makers:  https://arxiv.org/pdf/2207.11835  Timestamps  (00:00) - Intro (2:20) - Congressional Response to SAB-121 (12:05) - Are memecoiners activists? (16:09) - Crypto is a new wedge issue (19:03) - ETH ETF & Regulation softening (22:23) - Prediction markets steering politics (30:22) - Being anti-crypto is stupid (35:38) - "High FDV, Low Float" tokens (40:16) - Market structure problems (49:14) - Market price is not sustainable (55:38) - DOJ vs. MEV Bot Exploit (1:01:45) - Crypto-on-crypto crime Learn more about your ad choices. Visit megaphone.fm/adchoices

The domino meme for all of this might actually be like prediction market traders, which... No, no, no, no, no. The domino, the beginning domino was Polygons BD team. No, that is the beginning domino. Polygons BD team is what created good crypto policy in the U.S. No, I just am saying this more because like, I think if you read the Democrat tweets and social media, it's like completely divorced set of numbers that they both are citing for why they're going to win.

and the right really loves citing prediction markets. And I think that that's a bigger difference in even last election. I don't think it was. So you're almost imagining it's like reverse causality, where it's like, okay, an incremental dollar pushing the odds of Trump up on holly market, make Trump more pro-crypto, which therefore sort of build support amongst the base. It's the future of lobbying. We started with the future of finance and we ended up with the future of lobbying.

Well, we can't prove or disprove this theory, but I will just. say, it's not a completely unsound theory. There's some grain of truth. You guys are a good team. Not a dividend. It's a tale of two pawn. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of

pointless anyways. I'm managed 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 insiders perspective on the crypto topics of the day. So quick intro, we got Tom, the defy maven and master of memes.

Hello, everyone. Next, you got Robert, the crypto connoisseur, and czar of Superstate. Good morning. We've got Tarun, the Gigabrein, and Grand Puba at Gauntlet. Yo. And finally, I'm Hesiv, the head-hyped man at Dragonfly. So we are early-stage investors in crypto, but I want to caveat that nothing we say here is an investment advice, legal advice, or even life advice. Please see Chopping Block. That x. Y, Z for more disclosures. So it's a good week for the good guys.

There's a lot of anticipation right now in the markets about an ether ETH, and that is sending markets skyward. But there's a lot to talk about this week because it seems like the regulatory and legal picture for crypto has gotten more complicated. And there's a couple crazy stories that I want to make sure that we cover. So we're going to jump right into it. So first up, before we get to Ether ETH, we have to talk about SAB 121. Okay, so I'm going to do a little bit of scaffolding just so people understand what we're even talking about. So what is SAB 121? An SAB is a staff accounting bulletin.

This is a bulletin, a piece of guidance that the SEC gives on various different things that they think people should do. It's not a rule. It's just kind of informal guidance. Okay. So in March of 2023, after FTX collapsed, the SEC gave this guidance, SAB 121, that basically said, if you are an entity that is safeguarding crypto assets, like a bank, like a custodian, you can have this on your balance sheet as a liability,

but you cannot have it as an asset. Okay? So this means if you're custodying a commodity, if you're custodying a painting, if you're custodying money on behalf of somebody else, it is both an asset on your balance sheet and a liability, but for some reason, crypto, according to the SEC, is special. Crypto is the only thing that if you're a bank,

it is only a liability asset on your balance sheet, it is never an asset. If it's not an asset, then that means if you want a custody crypto on somebody else's behalf and you're a bank, then you have to have offsetting additional cash or additional equity against that because of all the, you know, prudential requirements for banks. So this effectively was a backdoor way of preventing banks to act as custodians or to custody digital assets, which means implicitly that, you know, this is widely perceived as being the SEC taking a shot at crypto

and trying to, you know, coordinate it off from the regulated banking system, which also means that if you want to custody your assets with anybody in crypto, it has to be a coinbase. or somebody who's not a regulated financial player, which kind of benefits the coin bases and anchorages of the world. Okay, so this was SAB 121. Many people in the industry complained about this, as well as people in the banking sector

who were like, hey, I wanna get into crypto and I can't, okay. Then in February, so just a couple months ago, SAB 121 was brought into the House of Representatives, one branch of Congress, which basically said, hey, this rule kind of sucks, this seems not good for the financial markets. So we've already approved the Bitcoin UTF,

but still we have this weird rule that banks are not allowed to hold Bitcoin as an asset on the balance sheet. Let's overturn this, okay? This was somewhat contentious within Congress. It ultimately passed in the House, and people assumed that this was going to fail in the Senate. Because ultimately, repealing guidance given by the SEC

is a pretty extraordinary move. It happens sometimes, but it's a pretty strong censure of what's being done by a regulatory agency that's supposed to be under Congress's supervision. So Biden then said on May 8th, under an executive order that, hey, or sorry, a, what is it, guidance on the executive branch or something,

that if this resolution, which is, you know, basically repealing this security bulletin gets, or sorry, the security accounting bulletin, if this gets passed, he is going to veto it, basically saying, Democrats, get in line, president doesn't like this, do not approve this thing, okay? And that occurred prior to the House vote, actually. Yes, this occurred, oh, I'm sorry,

this occurred prior to the House vote. So it passes the House, which is Republican-controlled. So people are like, oh, okay, well, pass the House, probably nothing burger. You know, it's going to die in the Senate. Goes to Senate, and it passes the Senate 60 to 38, meaning that the Senate is Democrat-controlled. So this is a bipartisan repeal and censure of the SEC in front of both houses now of Congress. So this feels like, I mean, this kind of sounds like maybe inside politics, people are like, okay, why does this matter? This all sounds very obscure.

And, of course, the president has said he's going to veto that. so this is still going to be non-trivial to actually get this thing passed. But it feels like this is preceding something very important that has changed in the air about crypto, which is one, crypto seems to now be bipartisan, this idea that the SEC has overstepped its bounds. And the executive branch is playing too hard against crypto. Second, crypto is now getting political.

We talked about this a little bit on the last show, but it seems like the air is starting to change that this is an issue, that it's not going to be a defining issue of the presidency, but it's an issue that is in play. The way I put it last week, it's a pawn on the chessboard. It's not a rook.

It's not a queen. But in the last election, it didn't matter. Now it seems like it really does. And SAB seems to be the first inkling that this thing is going to play in politics now. So I don't know. It might be difficult for people

to grasp why this is a big deal, but this feels like to most people a big deal. Robert, do you have a perspective on kind of framing how this matters? Yeah, I have a few perspectives. The first to touch on is just that SAB 121, as you briefly touched on, is absolutely terrible, toxic guidance by a

regulator. You know, the SEC is not a banking regulator. They're not FASB, which sets like accounting guidelines. You know, they are a securities regulator. And through that position of securities regulator, they way overstep their mandate, like they've been doing with crypto, you know, in the aggregate. way outside of their mandate to use the tools they have to make an attack against crypto.

And, you know, this repeal of 121 was supported by banks and crypto and Republicans and Democrats because fundamentally it's just bad policy. It's malicious, you know, zero upside policy. And so I think that's one of the reasons why we saw such broad support. for repealing SAB 121. And what was most exciting about that is that, you know, this happened in spite of President Biden's threat and veto. You know, the administration in the executive branch has really been latching onto their

power when it comes to taking a standing as crypto. And in some ways, this is now a fight between Congress and the executive branch over, you know, crypto policy to the U.S. And the reason fundamentally why the executive branch has any role here at all is because there's been an absolute void of legislation since 2009 when it comes to crypto. The SAB-121 repeal is the first standalone crypto legislation that's ever been voted on. There has been clauses that have been inserted into other bills that clearly people are voting on it on like, you know, a major legislation focus, not on a crypto-specific focus. This was standalone crypto legislation.

It's the first time we've ever seen most House members or senators voting specifically on a crypto and a crypto-only bill. And it's the first bellwether we've had for like, where is crypto going in the U.S. And, you know, as you touched upon, the result is shockingly positive in that there's broad, beyond expectations bipartisan support for good crypto policy legislation. The response to that is what's even more inspiring. It's the response to that very quickly snowballed into Fit 21 and the central bank digital currency, repeal legislation and a number of pieces of legislation, you know, snowballing in the House

once the House observed this incredible bipartisan support for sound crypto-specific policy. And so it's been a monster of a week. Sometimes it feels like a year where multiple years happens in just a short amount of time. In a lot of ways, that feels like what's happening. And it dovetails and coincides with this rising crypto, you know, political grassroots movement. And I think everyone is just waking up to the fact that like now is the time to be smart about this. Yeah. I think the line that I drew, so I remember when SAP 121, I was literally watching the speeches

because I was just, it was kind of like you said, you know, we talk a lot about crypto's legal status in the U.S. And people forget that there's literally never been a single bill passed about crypto ever. Bitcoin has existed now for more than 10 years. And there's not been a single law passed singularly about crypto ever. So the first time that we see people, not grandstand, not like, you know, pandering to, you know, the cameras or whatever, but actually voting. We see actually that, like, hey, people are trying to be pretty reasonable within Congress. Like, when they know their electorate is watching what they're doing, they're not single-handedly saying, look, all this stuff is bad and crypto needs to go out the window.

Even on the Democrat side, when the president has very clearly signaled his allegiances. So I suspect very strongly that SAB 121 is what caused the reversal in the fortunes for the ETH. And like it's not not that it in and of itself caused it, but that it was it caused everyone to look around and to notice, oh shit, a lot of people care about this. And it's almost a kind of preference falsification where people look around and they realize like, oh, everybody else seems to also be uncomfortable with the status quo and also seems to think like, hey, we shouldn't kind of just like lemmings fall off this cliff of being anti-crypto just for the sake of showing our allegiance to to the executive branch because it's not. popular. It's not good politics. Like, our constituencies don't like us doing this and just banging on crypto incessantly.

Yeah, there's 40 million people that support crypto and there's like a thousand people that are in government and academia who don't like it. So, you know, up until this point, you know, the administration probably has only heard from those thousand people. Okay, I have a funny

thought experiment for you, given that I have the least regulatory context or interest. in a lot of ways, which is, suppose meme coins didn't happen, didn't take off last year between November and February.

How much would that have changed the number of Democrats who flipped? Because I feel like actually the average constituent who would have been annoyed was the meme coin trader, to be totally honest. And I think about this thought experiment

of the counterfactual of like they didn't exist. To be clear, if you are a meme coin trader, your bank is not going to custody your crypto. Yeah, exactly. You don't care about it.

Yeah. I think the thing is like, let's put this way, every single wallet or app I had on my phone today sent me a notification to call my Congressperson for this fit 21 thing. And all I have to say is I think the meme coin growth actually helps that cause. I see what you're saying. You're saying there's a lot more active participants over the last. couple months, then had meme coins not taken off again.

And they would be willing to, you know, call their senator or whatever and be more active because they have a lot more stake in some ways. Yeah. I mean, I don't, I, I hear you, but I think in absolute numbers, I don't think there are that many meme coin traders who are like making the calls. If you look at it's broadly speaking, you know, Coinbase users and people who have, you know, Bitcoin in their, you know, IRA or something like that. It's not like, you know, this is the bulk of the populace that's like, you know, engaging with crypto.

So right at the margin, it's nice. But the bulk of the populace is different than percent of populace that bothers calling their representative, which is a much lower number. Almost so much lower. I would assume that people who are like hardcore financial nihilists are probably not very politically engaged. Yes, they're probably political nihilists too. Yeah, exactly. Like, you know, you're probably like on your couch and your underwear. They do care about their wallet.

They care about the value of their wallet. Yeah. True. True. I don't, I, I, I tend to agree with Tom. I don't think it mattered that much on the margin. But particularly for SAB 121, like, this is very inside baseball. Like, if you're only big boys care about this, right?

Like, in and of itself, this is not sexy legislation. This is also not something that most people are going to care about. Fit21, which is this broader market infrastructure bill, which defines in large, strokes how crypto is going to be regulated, whether by the CFTC or SEC, pushes more of the jurisdiction to the CFTC and sets up a lot of different rules and whatever. It was something we can talk about later when it gets up for a vote. But that's a very different kind of bill that I do think affects almost everything.

Whereas SAB 121 was kind of, you know, without real political activation, right? There was no big campaign around SAB 121. It's really all just, you know, look at the bill and see what makes sense. Nobody's scoring political points yet. that's what makes this seem so notable. What do you think is causing this flip-dove? A, just the legislative breaking with the executive, but also it feels like this has really happened

in the past three weeks, two weeks even. Like, it feels just, I can't remember the time sentiment has turned 180 in such a quick amount of time. I don't really know what's driving. Not that there was one specific event or catalyst we can point to, kind of, you know, in a negative way, you can point to FTX as that it feels like, okay, we have the ETF, the Bitcoin ETF, great, we have this bad bill.

Like, why now of all times? That's why I want to give the populists a little bit of credit, all right? All right. Like, we have RFK come out today and talk about how he's not a bunch of GameStop, right? No, no, no. I think it's relatively, you know, obvious because it's being, at least from my circles, you know, the de facto explanation. And it's one I believe, and I'll just say it says a lifelong registered Democrat.

You know, Biden's poll numbers are terrible and crypto has emerged as a wedge issue that was looking like it was going to be an absolutely disastrous wedge issue for Democrats in that there's 40 million people that are pro-crypto and a thousand people that are vehemently against it. And that is a terrible issue to take up. And this is one of the first unclaimed true wedge issues of the last like 20 years. Everything else in American politics is so rote and routine. the battle lines have been drawn and everyone knows how they work and everyone knows the calculus of it and everyone knows this social issue and that's economic issue and everyone knows the talking

points. This is a gold mine of an untapped wedge issue that Trump came out for amidst really bad poll numbers for Biden and it looked like it was just going to be, you know, one more advantage to tip the scales. And as a Biden, voter. I mean, this is bad, right? Like, this is not what you want to see. You don't want to see the administration blow it on a wedge issue that could not only shape this election, but could also shape the battle lines of politics for the next couple elections. So I think this is just politics. I think it's people waking up to the fact that the calculus of this was looking really boneheaded. And it was looking like taking a principled stand that was going to cost them dearly.

And so, you know. I think also a lot of this was that, you know, I think you were mentioning, we were talking about this on the last show, the exact point you just made, that, you know, there have been a lot of polling numbers that have been released, but they're all from the industry, right? So like, you know, Coinbase has run polls, paradigm is run polls. And they all kind of say that, hey, crypto is a real substantial populace that's going to vote on this basis. And if you're the Biden administration, you probably.

don't trust these numbers because you already don't trust the crypto industry, right? So you know that this is all kind of, you know, people lobbying you in the first place. But even if you downplay it by an order of magnitude, they should be shocking numbers. I think, I think probably what moved the Biden administration was seeing Trump come out so strong in favor of crypto and saying, oh shit, Trump must have run the numbers and he must know that this matters. And so I can't lose this. however big it is, I maybe haven't done the polling yet, but however big it is, I can't afford to lose it outright. Yeah.

It doesn't matter that much to the base. Agreed. Most wedge issues are probably like 55, 4545 in terms of like four and against it or like 60, 40. Like I don't know if crypto like looks like most issues. Like there's a lot of people who are financially incentivized to see this work and a very small number of people that are incentivized to see it fail. Right. So, okay.

Let's go from that to the Ether ETF. So you all might remember the ETHR ETF, long history of people applying for ETHER ETHs, just like with Bitcoin, although obviously not as long since, you know, the first Bitcoin ETF was before Ether even existed. But Bitcoin ETH got approved last year. Many people also filed, including BlackRock for an ether ETF. And it was widely thought at the beginning of the year that the Ether ETH was going to get

approved under the same rubric as why the Bitcoin ETH got approved, right? So, I mean, if you approve one, how could you not approve the other for, for spot trading. Then the SEC kind of started stonewalling everybody. There was no movement on a lot of these applications and people assumed because of some of the noises that have been made in back rooms about them investigating the Ethereum Foundation that maybe Ether, they think ether is security or something. They're going to make some weird arguments to deny the Ethereum ETFs and none of the issuers were getting any feedback, which usually means that, okay, this thing is going to die on the Vine. There's been no engagement for the SEC. And so basically,

a few days ago on Polymarket, the prediction market, they were giving odds of roughly 10% that the Ether ETH was going to be approved. And then all of a sudden, yesterday, everything flips, SEC starts engaging, they start telling the exchanges, hey, we think these are going to get approved, get ready. They tell a bunch of the issuers, hey, please update your

filings, and they give them a bunch of feedback, and all of a sudden, the game is on, and it could be as soon as this week that we see Ethereum ETFs get approved. Basically, we have till the end of this, sorry, what is it, the 23rd? So in a couple days. 25th? The 25th, 23rd, whatever. Sometime this week. Sometimes this week. Sometimes this week, they have to give the response on the first tranche of ETFs. And we could have ETFs trading by the end of the month. Right now, polymarket is pricing it at 65%. Basically, under the belief that there's some chance that it drags or there's some kind of delay in the month of May. But more or less,

now the market consensus is that ether ETFs are going to get approved. Now, why does this this happened all of a sudden. And the speculation broadly is that this is political. When something changes this fast, it's because somebody in a high up place said, hey, shit, we got a we got a about face. There's a problem here. Figure out the details. And so this is probably not Gensler. This is maybe somebody above Gensler, such as perhaps the Biden administration, that thought, hey, we can't lose people on this. If we are broadly perceived as being antagonistic toward Ethereum and the Ethereum ETF, we're going to get even more

of this stuff that we're losing ground to Trump on in the general election. So market is exuberant. Ether was up, you know, almost 20% a single day. Almost all alts have rallied on this basis under the thought

that, okay, Ether ETF is coming, what happened to Bitcoin might also happen to Ether, and maybe there's even more lying in wait after the Ether ETF comes in. But also broadly that maybe this is presaging

a broader reversal in Biden's stance on crypto and that all crypto regulation might soften going into the rest of the year. All I have to say is in a week where we had the populist equities movement come back, it's kind of like...

Come back. It did kind of die. GME might and die. Yeah, but then today it was another crazy day, right? Like, I'll have to say, and they're also doing this crazy stock issuance. So it was only AMC that was doing issuance before. But anyway, the, The point I want to make is that all of the things you said are like, okay, somehow Trump is

leaning into this and Democrats are now like, oh, should, why did we do this? Trump is leaning into it if you read his truth social or Twitter because he's very focused on A, prediction markets predicting him winning. And ironically, guess who is the likely person who is punting on polymarket for this? It's ironically, you're a populist meme coin trader person, right? If we're being honest, it's a very overlapping demographic. And so I actually think Trump's numbers are coming from this sub-demographic, which already was kind of inclined to like him.

So I'm not saying it's like a conspiracy so much as like if there is some numerical evidence. And if you look at the only numerical evidence he seems to cite publicly, it seems to be prediction market data. I would don't underestimate the value of this, how much of that's influential. this. That's sort of like the kernel of truth of the bottom. Can you make more clear what is the insinuation you're making? Because I'm not totally following.

So, so, so, so, so, so, so, if you, if you, if you spend a little time looking at truth social and looking at Trump's posts. Which is his Twitter is, well, I mean, it's election era. You, Trump doesn't use Twitter anymore, basically, like, realistically, right? Okay. If you want to get any idea of what his base says versus Biden's and be objective-ish about it, you have to read both sides, right? And so.

sure you read to social the no he's constantly posting these polymarket numbers and that's how he and especially around the scripted once a week oh wow i do not realize that it's it's and and he loves citing this as like yeah i've seen him cite it i don't know it was that frequent i've seen it yeah i saw him to cite it once before i didn't realize it was no no no no he even cited it like today or yesterday so so my point is he he he's he's like leaning into this thing and my guess is somehow that is what got him more into like, I love crypto. And the irony is- Does he even know that Polly Market is crypto?

Well, he started taking donations of Zero-X and Shib today. I agree, but does he know that Polly Market? Tom tweeted about it, so I'll let Tom have a word. Yeah, I mean, to be, to be fair, Trump did the Trump NFT trading card thing, what, like two years ago. And it feels like really there's been this crescendo, you know, in the past two weeks where the video came out of him meeting with the NFT holders at the dinner and saying, you know, hey, Biden doesn't even know what crypto is. I think crypto is all right. And so it feels like there's been this sort of this sequence of events leading up to this. It's not like, oh, immediately

Trump was pro-crypto. Now Biden is somehow pro-crypto or something like that. It's been slow movement. But I think, I mean, he's been playing it super well. I think the crypto donation sort of being the cherry on top. But I think, again, the question is sort of like, why didn't this happen earlier? And if anything, again, with what's happening in Congress, what's happening with the Biden administration, potentially having this 180, it just feels so hollow and pathetic. It's like after four years of terrible policy, terrible enforcement, now all of a sudden we're reversing course for really no apparent reason. It's like, honestly, fuck these people. Tom, what?

No, let them do it. What the fuck? Why don't you criticize them for softening on crypto? Do you want to continue? I'm trying to claim that the domino meme, you know, the like the little domino that hits the bigger one and then it, you know, Yeah. Domino meme for all of this might actually be like prediction market traders, which... No, no, no, no, no. The domino, the beginning domino was Polygon's BD team. No, that is the

beginning domino. Polygon's BD team is what created good crypto policy in the U.S. No, I just am saying this more because like, I think if you read the Democrat tweets and social media, it's like completely divorced set of numbers that they both are citing for why they're going to win. And the right really love citing prediction markets. And I think that that's a bigger difference in even last election. I don't think it was something that showed up. Right. Remember that show we had on futarkey? Yes. This is basically, this is that. It's a mean point earnings. Yeah. So we had a futarchy show. Yeah. So we had a few tarkey show. Yeah. It's about how prediction markets all. But I love this version of the world if this is true.

You're almost imagining it's like reverse causality where it's like, okay, an incremental dollar pushing the odds of Trump up on polymarket, make Trump more pro-crypto, which therefore sort of build support amongst the base versus the future of lobbying. We started with the future of finance and we ended up with the future of lobbying. Well, we can't prove or disprove this theory, but I will just say it's not a completely unsound theory. There's some grain. Thank you, Robert. Thank you, Robert. Thank you, Robert. you guys are a good team

you guys are a good team despite your political differences of like Robert being pro-Biden and Turun spending all his time on truth social it's really wonderful how you guys back to each other for the record

like Robert I don't think I've ever voted non-democrat I've certainly voted independent or green or whatever but it's just that I don't believe in you know

only reading one side of the news I think you should read the other side as well fair and balanced he's a foxman no no no I just think I just think you don't understand You don't understand the other side if you don't read what they're writing. I feel like you have to go out of your way to do it.

Look, I hear you. I think when it was around the election, I started reading a lot of Fox News. But I think it is around the election. Yeah, but no, it's May. I mean, like, are you going to be reading truth social for the next month? First debates in June, Haseeb. First debate is coming up. Yeah, I mean, I think you can kind of fall asleep for about four months and not

worried that much about the election. Steve, a true patriot. doing his election diligence the night before. I'm just, I mean, I'm just saying like, you know,

the, all like, I mean, this stuff is all just rhetoric, right? I mean, come on. Like,

I don't really care how people campaign, but, but it's rhetoric that influences things as we're claiming, right, in that. Inference,

the battle of the United States, right? Yeah. Well, in front of the U.S. Electoral system is an absolute nightmare. It's completely fucked.

No, no, but influence of these bills, bills on the fringe, right? Like, that's kind of the claim politics does, right? Politics does. Yeah, yeah. So pay attention to the legislature. I think that's a good idea because that's where laws come from. But, you know, deciding what a president's – I mean, Biden ran on being a moderate. He's turned out to be, like, incredibly far left and has more or less fumbled most of his campaign promises. So, like, the reality is that looking at what people doing campaigns is just not informative about what's going to actually happen over the next four years.

I don't think he's far left. I mean, we don't have to make this a politics show. I don't think he's far left. I think on crypto, it's being shaped. by the absolutely worst members of, you know, advisory. And I think, like, in that sense, it's like... I would say his economic policy is pretty far left. His foreign policy is not far left. No, I agree. I agree. We're on the...

I agree this is the closest we've gotten to, like, the MMT, you know, government, you know, we've seen in history, you know, but, like, aside from that, I don't think he's a far left president. Sure. Socially and foreign policy is not far left. Yeah. Go ahead, Tom. Oh, I was going to say there's this interesting clip. that was making the rounds last week.

And it was former speaker, Paul Ryan, being interviewed, talking about U.S. debt, deficit spending, you know, whatever we're going to do. And the first answer who comes up with not even talking about crypto is stable coins. The table coins being the, what, 12, 16th largest holder of treasuries. And he's like, this is a way to, you know, offload our debt, create more, you know, treasury buyers, et cetera, sort of. So I thought it was very, frankly, impressive understanding of crypto. And like, it just feels like it was like one more sort of note in this, again, sequence

of events over the past two weeks. But as to why that is now sort of flipping policy, it just feels very bizarre to me. It's one of these things that's like everybody kind of thinks it's going to happen and then when it happens, everyone's surprised. So it's kind of like when it happens is surprising.

That it happens is not surprising to my mind. Right? Like we've been saying this for a while that going into the election being anti-crypto is stupid. And like, okay, it's, you know, after FTX and no one's in jail yet. And, you know, we've kind of done all

the stuff, right? Like, you put SBF in jail. You put CZ in jail. You, like, sued a bunch of these companies. You've shown that you're tough on crime. The FTX, uh, creditors are getting all their money back, plus some on top, you know, modulo, asset prices, whatever. We don't have to talk about that. So like, Biden can now say, look, I did it. I was tough on crime. I cleaned up crypto. Now it's all regulated. And we passed bipartisan legislation to like. Amazing. Yeah. What a win. What a win. So please vote for me. Yeah. And that's what, and that's what I think that's what you're going to see between now and the election, is that he is going to make sure that he doesn't lose votes on this basis.

He's not going to win the crypto crowd, but he's not going to lose the crypto crowd. I agree. It is a very down-the-fairway opportunity for good leadership and good government, which is actually extremely rare. Like, going back to the point, this is one of, like, the last remaining wedge issues, like taking it off the table as a wedge issue and actually doing some good bipartisan governing would be a win for Americans, it would be a win for the administration. So here's the question then.

Let's say that between now in the election, Biden chills out. He tells his attack dogs, chill out. Let's be nice. Let's not make anybody necessarily mad. Let's not get Coinbase to like send a push notification, to everybody to call their senator or whatever. Okay, let's say he does that between now and the election. And then Biden wins. Do you think he holds that line in second term?

or do you think he basically recants and says, ha, ha, great, I'm elected now. Let's get back to business and shut down this industry. I think it's hard to predict because I think a lot of it comes down to poor the economic advisors and the people implementing economic policy on behalf of the administration. And there's a likelihood that a lot of that changes. You know, seeing from this, we'll call it campaign, how unsuccessful, the current approach has been. And so I think if there's a turnover, then yeah, I think it'll be extremely,

you know, interesting. You know, if there's not, then there's likely to be sort of these elasticity back to, you know, bad policy. You know, I think it doesn't matter if there's good common sense legislation that gets passed. It just sets clear rules of the road. And then we don't have to worry about what Biden's views are or what, you know, the SEC's views are or what the CFTC's views are, or what the banking regulator's views are. You know, if we have bills on market structure and central bank digital currencies and like, you know, taxonomy and like all of these things, then what Biden's views are matter even less. And that's actually a good thing, because then you don't really care whether Biden's pro crypto or not. And you don't really care if Trump's

20-something percent chance that Dems sweep, like that they get control of the entire Senate as well as the presidency. So there's a real chance that basically, like, it might be tough to get bipartisan legislation before the election. But post-election, if the House flips, it might be Democrats writing all the legislation. But that being said, there were 12 Democratic senators who, it wasn't like, oh, there were two or three who crossed and it barely passed. I feel, and they were also, like, from pretty populous, high population states and stuff. So it's like, I don't think it's like that easy to write off the way that it's been written off.

And it's like, I don't know how many Hillary Allen's in the world there are to like yell at Biden and like that he'll listen to anymore. Right. Well, I don't think Hillary Allen yells at Biden. I think Hillary Allen yells at everyone who works and writes the executive orders because she cited so much in them. So that's what I mean indirectly. Yeah, I actually, I tend to think that consensus is pretty sticky.

I think if Biden sees that, you know, the Democrats are largely aligning on like, hey, we need to chill out on crypto. Because, you know, it's kind of up, you know, like you said, Robert, there are many, many different races and a lot of them are going to end up defining the policy for Democrats broadly. I think we're just going to see that like, hey, the consensus is more or less like calm down on crypto. And I think you'll probably just follow that consensus. I think these things are very sticky. And they kind of, when they turn, they sort of turn all at once. And that feels to me like what's maybe happening to crypto. We're seeing the first shoots of that.

obviously could be wrong, could reverse if we get something else really bad between now and the end of the year, it could fail to hold on to that consensus. But it kind of feels like assuming that things more or less play out as they are right now, that we're kind of on a straight march

to the consensus bipartisan is that we, crypto's here to stay and we've got to stop trying to stamp it out. So we'll see how that plays out. Hopefully by this time next week we have an Ethereum ETF. And if so,

we may see asset prices continue. need to rally. But there's another story that's been getting a lot of attention, a big debate among many people on crypto Twitter, about these things called high FTV, low float tokens. So let's describe what this means. So high FTV, FTV stands for fully diluted valuation, basically means if you include all the tokens, including not just the tokens that currently are circulating, but all the tokens that could ever exist for a given coin, the FTV is basically saying, okay, what's the market cap if you include all those tokens that will ever exist? So these low float, high, FTV tokens are basically these new tokens that have launched that supposedly have historically very

low floats. So, you know, let's say a few percent, five percent, maybe even 10 percent of the fully diluted supply circulating, but a very large fully diluted valuation. So like 20 billion, 10 billion, something like that. So supposedly many of the tokens that have launched within the last six months on Binance have had this low float high FTV characteristics in their launch. And that cohort of tokens has done quite poorly. So if you if you just look at like a chart of all those tokens launched in the last six months, they're mostly down into the right, you know, down anywhere from roughly flat to like down as much as 50, 60%. And if you look on the other hand at Bitcoin, Bitcoin's been up like 80 something percent in that same period of time. Ethereum has also been

up a pretty decent amount. A lot of the big old ones have done pretty well. And meme coins have done very, very well. But this particular cohort of these, quote-unquote, VC coins, generally VC-backed, you know, the VCs and the teams own a high percentage of the total supply, these have done fairly poorly. So there's a big debate on Twitter about what's causing this. Is this the VCs being greedy? Is this, you know, VCs dumping on retail? Is this retail rage quitting and just buying meme coins instead of continuing to buy these, you know, VC coins that keep getting dumped on retail? or is it a problem with perhaps too little supply for there to be meaningful.

Price discovery, is there some market structure problem that needs to get fixed? So there's been a big debate, many people arguing about it. I posted something on Twitter over the weekend that got a bunch of love. Kobe has posted some stuff about it. Every VC seems to have an opinion. So let's maybe just go around

and get some takes from, obviously, we're VC's, so we're going to have perhaps biased opinions on this conversation. Robert, what's your take? Hi, FDV, low-float. Well, let me point out the apps absolute granddaddy OG high FDV low float digital asset, Bitcoin. Bitcoin started off with an extremely small portion of the float growing over time

in a semi-linear fashion, a decreasing linear fashion. But Bitcoin is the OG low FTV high float. You can talk and justify for a lot of different reasons why that worked extremely successfully and how it's different from the current crop of low-float high FTV tokens. You know, the current crop of low-float high FDV tokens are things where, you know, teams release a speck of them to the community. Oh, 90-something percent or at least whatever. and it turns into a mess because the whole project, so to speak, is just owned by a couple people.

And the increase in the float really just comes from them, not from other mechanics. Bitcoin at least was constructed in a far superior fashion, and that 100% of the increase in the float came from mining and proof of work. But Bitcoin is the first model, and at least there's a justifiable construct for low-float-high FDV, which is you start off with 0% in circulation, and it goes up to 100% slowly over time. Okay, but that's not what any of these projects are doing. No, it's not. That's like OG Fair Launch stuff. Yeah.

I think nobody really does that anymore. Like last person who did that was like Grin, and that was ages ago. So what do you think about the current meta? Wait, Grin? No way. What are you talking about? All of DeFi Summer, realistically. Like the Wi-Fi type of stuff.

No, no, no. Wi-Fi was like all the supply gets loose immediately. In like a week. Yeah, yeah, but it's a fair launch. I just a fair launch for that. Yes, yes, yes. There were many fair launches in DeFi summer, but they were not these Bitcoin style, you know,

you start with 1%, and you linearly get to 100%. Yeah, yeah. Yeah. That was not done much in Defy Summer. Correct. So Robert, what's your take on this latest crop and this current meta? Is there a market structure problem? And if so, what should we do? Well, I'll preface by saying, I think every asset in every market deals with this market

structure problem. There's a reason why IPOs are structured in a way that are low, float, high FDV. Okay. When there's a IPO, only the IPO participants have their flow. And then six months later, everyone can dump, right? Like, it's similar in public equity markets in a lot of ways as well. And so I don't think we're like so far off base here as an industry. I think there's deep issues. Like there's deep issues where some project releases 5% of his tokens and that does this like high five, we did it. type situation, and that 5% trades for a ridiculous valuation because people think that that's the supply of the token. And then it's like, ha, ha, there's 95% to go and like, we're going to sell it into the market. That's where there's issues. But I don't think it's an overall construct of, oh, only some portion of this is tradable today,

is that bad? I think there's a lot of corollaries that haven't turned out to be disasters that do work quite well. I think the way it's happening in a couple different projects is just not working. I mean, the long-term dynamics of it are just bad. If it's like, okay, well, like, you know, there's going to be a high degree of inflation every single year, you know, like over four years. Those four years are going to look ugly potentially. Turin, what's your take? High FDV low float? I mean, okay, what's the point of having that ratio of like high FDV low float? Is that you have a substance. which is you're paying out as either a block reward or a liquidity reward or for some action,

like committing a resource, committing a node, committing hardware, committing liquidity, you are earning some usually pro rata, but sometimes not fraction of this emission. And it's a form of a subsidy. And it's a form of a unique subsidy that doesn't exist in normal securities markets because normal securities markets don't have continuous emission, right? There's a continuous emission of GameStop as a function of price. Instead, there's GameStop price goes up. GameStop management says we want to inflate the supply by X and tries to vote and push it through very quickly.

And causes the boom to crash. I think one very unique thing about programmable digital assets, which is pretty much only crypto, because most FinTech is lipstick on a pig and you can't do this type of stuff very easily, is that you can control these emissions and you can make them dynamic and respond to events, right? And so in Bitcoin's case, the emissions responded to, hey, we've produced too many blocks over a two-week period. We have a mechanism for reducing the amount

by changing difficulty so that we hit a sort of target usage rate while matching this inflation curve. In the case of Ethereum, it's like, hey, we have a target amount of stake we want to hit and we lower the emissions as there's too much stake as a percentage of the total float. Now, the subsidy, the reason I bring this up is, well, the subsidy has to do something, right? And I think there's a very natural tendency, especially for those who are maybe not trying to build a real technology, but maybe you want to copy pasta fork something, or they're just like, hey, I want to scam someone

to just basically say, like, look, this subsidy can make me rich quickly if I kind of, like can sell some fraction of it quickly, but I never find a use case for it. The problem is if there's no natural reason for people to lock assets that are worth something, whether it's electricity in the case of mining, whether it's Ethereum in the case of proof of stake, whether it's storage in the case of Filecoin or Are Weave, et cetera, then you have this problem that there's really no reason to hold it other than future inflation rewards. It doesn't have any baseline collateral. that it can be compared to.

And so then it's basically a meme coin at that point, right? And so if we look at this spectrum of things that are pure meme coins, there's no fundamental value that you earn from blocking a resource and potentially earning fees or a right to some future fees in the network. Then, you know, these high, FDV low-float things are, maybe they have a lot of marketing that is focused on their technology, but they're really meme coins and they're not actually. actually like they don't need this subsidy.

Like the network, the service that's being offered doesn't need a subsidy. Either people are willing to do it for free or almost free. Or there's just no valuable long-term service. And it's just that the token is the long-term service. So then at that point, then it feels like a meme coin. And so I think the reason people are upset is a lot of investors fund a lot of infrastructure, some of maybe the less technically bright investors, just copied other investors and invested in copy pasta competitors. As you go down the hierarchy of the copy pasta

ness, the lower down ones don't need, they just don't really have that much of a need for a subsidy because they don't even have a real network. So what do they do? They effectively turn into these kind of weird meme coins. And so that's sort of what my point is, is that if you have this subsidy that you're planning out over a long time via some type of inflation emissions, you need that subsidy to really attract real resources, real services, real usage. And if that doesn't happen, then it's, you know, you basically made a meme coin. And I think that's the movie pass a economy, but for networks. Yeah. Okay. So it sounds like what you're saying is that, okay, there's, there's good high FTV low float launches and there's bad high FTV low float launches.

The ones that are the kind of one of one high quality, you know, they're the original tech team who came up with the thing. Those are okay. But fast followers, those are basically meme coins, and they're the ones who are ruining it for everyone. I'm not saying it's the shape of your element. It's just that those are the easiest ones to point out when you look at their emission schedule versus usage. For you to point out or for like the people who are mad to point out? Because my sense is the people who are mad are mad at everything, right?

It's not just the eigenlayer clones. It's also eigenlayer. You know, it's not just. No, no. I don't disagree. And I do think part of the reason that there is, this gap is that, you know, I gave you kind of the Kipling-esque story of like, there's only two extremes. There's the high, FDV, low float that's real utility in the long run, real network effect.

You have to subsidize the network in order to get to grow, and then once it's sustainable, it survives. And then everything else in meme coin. But in reality, there's like gradations. And people have done a lot of things to play with this, right? where there's like, you have partial utility, but that utility almost doesn't need to be subsidized because your main net is almost a test net.

It doesn't really have real fees. It doesn't really have real usage. And people aren't really locking it. People are getting sort of like risk-free return for some period of time before they're actually taking risk operating your network, right? Because they're taking risk operating your network. You're subsidizing them.

That's sort of like the fair trade. And I think because of that, there's kind of this fine line where people are like, look, we're going to eventually launch and that eventual launch keeps getting delayed and delayed and delayed. And now it's like, well, is it ever going to happen? And I think

that's the thing people are most kind of, at least my read of what people are saying is that that's the thing they're most angry about. It's like, they effectively got this thing that doesn't work. Now, you could argue that. I don't think that's what people are mad about.

I feel like that's why people are mad about the larger names, like especially, I think a lot of the tweets this weekend were eigenlayer, Celestia, layer zero. What's the last one? The one, ZK Sync. And most of the failure there was like either A, the network doesn't really need the token. Like it's like pure subsidy token or, you know,

governance maybe token. Or the way the token is used is like to attract capital, but then, you know, there's no way of getting liquidity on that capital. So that's the one type of thing that people were unhappy at signing there. But my point is, if you're an operational network, there should not be these liquidity constraints, right? Like I should be able to join and leave. I should be able to find an equilibrium.

Let me hear Tom's perspective on this. And then we'll kind of complete the circle. Yeah. I don't think people are mad at Celestia. I can labor, like, overly subsidizing the network. I think that the problem is, unlike, you know, in ICOs where retail could buy in, by the time a lot of these projects launch, the, you know, FDV or the market have is so high that there, like, just isn't enough appetite to have the thing go any higher, right? So it's already priced to perfection. And in some ways, I agree. I think,

first of all, like, low float, there's a huge range there. You have the one percent. You know, Sam tokens classically from, from 2021, rest in peace. And then you have, you know, stuff like 10%, which is more in line with the IPO market. But to be fair, part of the difference with an IPO market is, you know, it is not price to perfection, right? It's not exactly, they're not trying to exactly hit market pricing. They are trying to leave like an IPO pop. And so, your people who are buying in feel like, oh, you know, this thing goes up, I got a good deal, whatever, I'm excited about it. And so it's this weird sort of market inefficiency where it's almost like you want.

want to leave money on the table so that people who are buying in feel like there's still upside to have. And right now, there just isn't that. That's the invisible staking yield. Yeah. You could say that. But I mean, overall, I don't know, it's hard to get mad. I mean, first of all, I agree there's this boogeyman around VCs dumping.

Most of these things are not liquid. VCs have multi-year vest. So no one is actually, none of the investors, none of the team are actually selling the tokens. I think the problem is straight up that just thought like traders were buying these tokens at these FDVs, it's just not sustainable. This is way over where the market should be pricing these things, and they're sort of coming back down to her with where they should be priced. And so I don't think anyone is really anyone to blame other than themselves,

or maybe something broadly speaking, broken with market structure as to like why there isn't, you know, earlier opportunity for retail to invest in these products. But that's sort of a whole other can of worms. Yeah, so I got into a lot of arguments with people about this because I heard, first I heard like a bunch of trader types complaining about this. And I'm like, okay, whatever. And then I heard a bunch of VCs also parroting this of like, oh, there's this big market structure problem.

And then I was like, this is stupid. This is just sensationalism. And I wrote this big piece over the weekend, more or less debunking what I see is the most popular theories of why these tokens went down. You know, to Tom, as you mentioned, it's not teams dumping or VCs dumping because none of these things are unlocked, right? None of these things are even a year old. So it's possible maybe some of them, you know, I've heard some stories about individual

ones where, you know, they have super short lockups like these Chinese kind of quick flip type investments or places where, you know, maybe the team is hedging on perps or something like that. But if you look at the charts, almost all these tokens went down in April around the same time, which basically tells you there's no way it's coordinated dumping from every VC and every single one of these tokens. Then there's also the story that retailers is buying meme coins now. And that's also not true. That's something that Tarun talks about a lot of like, oh, all the people who are buying meme coins, I pulled up the volumes on Binance, and Binance, about 14% of the trading volume on Binance is meme coins. And of course, Binance trades way more volume than anything

traded on chain. It's something like 50% of the total spot market is just finance. So it's true that there are a lot of people trading a lot of meme coins, and it's a brand new thing to be at the scale that it is now. It's way bigger than NFTs were on a trading volume basis, and way more people. But it's still a more people is a thing. The way more people. The way more More people than we're trading NFTs. Yeah, that's the thing. And there's no incentive to farm and sibble comparatively. So those addresses are more likely real.

Like you can use address count as a much better. Well, that, I mean, I don't know about that, right? Obviously, it's a very big business to be arbing these things. No, I think, yeah, but you can compare that to like normal thing, normal our volume, like, inflation versus like things where people are sibling it and like 80% of the other. But I'm just saying hundreds of thousands of people in the context of global crypto markets is not big. A hundred of thousand of people who are U.S. consumers is big.

No, who are on chain. I'm saying who are on chain. Yeah, yeah, yeah, yeah, yeah. But I think it's like a different demographic. That's like the... It is, it is. Clearly, clearly, clearly very different demographic than the people are trading on finance. My point is that meme coins don't explain why these high FTV low float things are

happening. And then the third point that I made was that these tokens are not actually high FTV low float. The FTVs are actually in a totally normal range. If you normalize for ether price, Solana, Avax, near, were all roughly in the same vicinity at the time that they launched as these new projects.

And the floats are actually totally normal. So the average float of that cohort is about 13%, which is very similar to what it was in previous cycles. It's also almost exactly the same as the average IPO in 2023, which is 12.8%.

So there's a lot of alarmism. There's a lot of desire to like pin the tail of the donkey and say, oh, it's marketmaker's fault. It's Binance's fault. It's VC's fault. It's VCs fault.

Because when markets go down, everyone wants someone to blame. And I think the realities that markets just went down for fancy, shiny new all coins. And there's no bigger, beautiful, magical explanation. There's no big reform

that used to happen. It just markets are perfect at this. They just figure it out by repricing everything and making the numbers go down. So my argument has been that I think everybody is freaking out for more or less for no real reason.

And if there was a market structure problem, everything that we're describing was also true in 2022. It was also true in 2020. It was also true in 2018. So if it was a market structure problem, then it's been six years of this market structure. And, you know,

it'd be weird for it all to suddenly start happening now. So, sorry, Tommy, you were going to say something? I was going to say, speaking of arbitrage. Do you want to talk about our next story? Well, I remember about address our being on chain. I don't know if we have time because I know we got a wrap soon. We have to.

We have to. We have to. By mandate of Tarun. Well, I have to hop. You guys can do this one. I literally have like a hard stop. I have to. Okay.

All good. All good. All right. Robert, we'll let you hop. We'll discuss this last story because Tarun really wanted to talk about it. Robert next week. Okay.

So very briefly, we're going to talk about this very weird, interesting story about the DOJ charging two brothers in a $25 million M.EV bot exploit. This is the first time MEP has ever shown up in a DOJ indictment. So here's the story, very high level. We're going to move to this pretty quick because we don't have a ton of time. So there's two brothers who went to, I think, MIT, both software engineers and they both worked, where do they work? I don't know, somewhere. Anyway, there is an exploit in MEV boost, which is the software that Ethereum invalidators run in order to extract MEP programmatically using basically an off-chain auction to extract MV.

If you don't know what that means, sorry, we probably don't have enough time to explain all of that on the show. But basically, they were able to kind of go in, exploit a bug in this software to allow them to take these transactions that were supposed to be sent as a complete bundle and unbundle them. basically strip them apart and arbitrage some of the individual transactions in order to make a bunch of money. So they more or less made this money extracting it from other bots that were trying to extract money from other retail users. So it's a little bit weird, right? So you've got these arbitrageurs who are more or less trying to fuck over retail users or, you know, according to the DOJ, protect the integrity of the Ethereum ecosystem by fucking over retail users. And these guys extracted their transactions, reordered them, and it,

basically attacked the attackers or, you know, sandwich to sandwiches or Robin Hood, or I don't know, I guess not that. That one doesn't make sense. But that's more or less what happened. Okay. So this was covered, I think, I don't know, like a year ago, $25 million that they made in this attack. Then they created multiple shell companies and private addresses and they tried to hire lawyers and they looked up, you know, extradition treaties.

And they basically knew immediately that what they did was probably legal and were Googling to that effect and all that showed up in the DOJ and diamond. So this indictment dropped just about a week ago, and everybody seemed to be very, very surprised that, hey, this kind of seems like, you know, sort of crypto and crypto violence, not the kind of thing that the DOJ generally conserves itself with. You know, this is not hacking a retail protocol. This is not North Korea.

This is not anything else. This is kind of like maybe in the neighborhood of sophisticated players attacking other sophisticated players. It's almost like hedge funds, you know, screwing over other hedge funds or something. So people were a little bit surprised to see this, Now, clearly, these people were exploiting a bug and maliciously using this and also trying to cover their tracks. So this doesn't really seem like they thought what they were doing was legal.

But it seems pretty surprising to have this kind of thing showing up in a DOJ indictment. And the amount of sophistication that the DOJ showed in explaining what exactly is going on in these very kind of minutia corners of the MEV market also seemed very surprising to people. So I was chatting with somebody who actually knows one of these two. brothers? They like went to math camp with them? I mean, I also know. I also know. Okay, yeah, you also know. So I know somebody else who also knows one of these two brothers, like went to math camp with them, knew them, kind of glancingly, didn't know them very well.

I was very surprised to see them show up here in a DOJ indictment. So, Tarun, you said that you also know both the brothers or one of the brothers? I know what's your take on the story. Yeah, I know one of the brothers. I also know the victim. So basically, the idea is the there's a thing called a sandwich attack. And a very dumb way of thinking about sandwich attack

is it's sort of your classic front running type of thing where someone sees your order and they see that your order, you're willing to fill your order until a price that's higher than the current market price. So they push up the price until the maximum that you're willing to pay in your order and then execute your order and then sell back,

which basically means they push the price up. They use your order to push the price up a little more, and then they sell back, and so they can get a profit. And so in automated market makers, like Uniswop and things like that, this is a very relatively straightforward calculation of how to do this. There's an argument that this is potentially good and bad,

and we will get to that in a second. But basically, a lot of people, the sandwich attack is sort of bad, for retail in the same way that people view Citadel filling Robin Hood orders as bad for retail. It's a very similar kind of thing. I think the difference. That's totally different. Well, I mean, a lot of the wallets are selling order flow as searchers, so it doesn't feel that.

But payment for order flow is more like just in time liquidity. Sandwich attacks, I think, are very obviously exactly. I don't know. So this is why I find this kind of entire case a little bit weird. You know, when I worked in high frequency trading, a lot of trading strategies. you do. The whole point is like you try to measure signals from book updates and also messages of like failed orders or guess what the failed order rate is. And based on that, try to find signals to do not so different things to sandwich attacks. So I would say market making has a lot of

very similar strategies. So I think it's just more, you know, those are not very public where sandwich attacks have papers written by many people, including myself. So there's sort of like, it's a very, it's a very well-studied thing, whereas these trading strategies that people are using aren't public. I don't know if you follow the Millennium versus Jane Street trial recently. That's a great example of this.

But anyway, so the idea is there's sandwich attacks. There's an auction that is run every block where people pay for the right to get their bundle of transactions in. In fact, actually, people pay for that to get a block and then people bid on whole blocks. And the person who is the right, the proposer, the valider,

person running a node who's chosen, picks a block. And so these searchers, these people who try to find sandwich attacks and then submit these orders, they submitted to these block builders and can't get their orders. So the interesting thing is this is sort of a second order thing where like the people who are these sandwich attackers got sort of sandwiched themselves. So someone was able to see all of their orders, break them apart and put them in the wrong order such that someone else made the money and they kind of lost the money. So last year at Ethereum community conference in Paris at this MEV event, where I was speaking, because I've written a lot of papers on sort of formalizing this stuff,

this guy comes up to me and sort of starts talking to me and is like, hey, like, you have this paper that says sandwich tax can be good sometimes because like they cause certain types of efficiency for liquidity providers. and, you know, I was a victim of this attack, and I was like, you're the unbundling victim, which is this thing that the DOJ went after. And he's like, yes, you know, also, first off, not a U.S. national, very much a EU national, which is why I thought this was a weird case for the DOJ to go after. And he comes to, and he's like, yes, so I want to sue the people who did it,

because I've had got enough analytics between kind of exchanges and other things, I was like, hey, this happened. And I sort of have a good idea who it is. And I want to sue them. But I need an expert witness to basically say, who basically can say sandwich attacks aren't bad, which is sort of my paper shows in some, it doesn't say the sandwich attacks aren't bad uniformly.

What? What? The shows, so there's this thing that says sandwich tax are sometimes good. They actually, sometimes, you, the individual user, might get a worst price. but the network at large, many orders might actually do better on average in some scenarios. And so he's like, yeah, I want to like make sure the civil case doesn't view sandwich attacks is bad, but if you're sandwiching the sandwich attackers as bad. And he explicitly said this to me.

And I was like, I have no desire to first off to be a part of this. Oh, you didn't do this. Oh, I thought you were going to tell us that you were one of the extra witnesses. No, no, no, no. But this is how I got a lot of information on this. And then James, who I'd actually then seen a couple times after that, at some research things because he would go to a lot of M.V research things. James being one of the two brothers? One of the two brothers. Okay.

Actually, a very funny thing is like, James is kind of a somewhat prominent and on an MV Twitter. And I was in so many group chats where people like, oh my God, I can't believe this is happening. And like, he's in the group chat. And I'm like, well, you know,

it's funny. No one could tell. But anyway, so, you know, he was just, he was talking a little bit about this with me. And I remember we were talking about like speculations of how the person found the bug. So in hindsight, I thought that was very funny because like obviously he knows how they found it. But yeah, the weird part to me, and this is one of those things where I feel like the law and what's actually happening are quite separate is like I agree all the stuff they did post hoc to try to hide the money probably is like really what got them in.

But the stuff that they exactly did reminds me a lot of things people do in high frequency trading and in like in like how they co-locate stuff in like how they like try to look at like which endpoints in the network are being used the most and then flooding them so that someone else can't send packets. Like there's all sorts of little microstructure stuff that the regulators definitely don't know about. Like I went to an Eric Buddhist talk at this conference I hosted last week and he was like, oh yeah, we just got the first ever cancel message data.

I'm like, all right, you guys are never finding anything for another 10 years. I remember what people are doing. But my point is, like, I kind of get this feeling that there's this like, this thing was like a weird thing. We're so technically sophisticated that people were like, it has to be fraud. Whereas like, I think there's a lot of other things that are much worse. But yeah, it's a very weird thing to be like,

this type of thing that you're doing to another user's transaction is not illegal. like the sandwich attack, like front running them. But if you violate the frontrunner's desire of where they wanted to be in a block, you're suddenly, it's suddenly like manipulating the sanctity of Ethereum. That part I still don't, I haven't been able to wrap my head around the argument. And I get all the other wire fraud stuff at the end. Totally makes sense. I get that.

But that's where I'm kind of lost. Yeah, I think this, that seems to be the general sentiment is like this feels like crypto and crypto crime. seems like there should be a civil issue, not a criminal issue. I think, you know, a few points, as you were saying, one, it's this conspiracy component of, you know, hey, don't, you know, Google, you know, wire fraud statute of limitations or, you know, how to avoid K.C. Like, clearly, you knew what you were doing was illegal or he thought it was illegal. And two, is, this feels very in the weeds. It's kind of like, like, order spoofing is also illegal. But it's, like, not in a criminal way. The DOJ doesn't go after. You get

fine. Yes, yes. Exactly. It's civil. I think really the issue here is like this, this exploit, this bug, right? Imagine if instead they had been operating a med boost relay and they were secretly malicious the whole time and they waited until, you know, someday in the future to take all the transactions that were being sent to them and unbuggle them and include them in a block that they were proposing. In my mind, that doesn't sort of sound the same right. Like you were giving these people information, they took it and they did something with it. There's no contract. There's no sort of, you know, explicit agreement that this is how it was going to work. It was just you were, you know, participating in this thing and that's it.

Having the bug and then exploiting that feels like actually the issue here and again, what the DOJ is going after versus, hey, you were sandwiching the sandwiches or, hey, you were, you know, had some sort of, you know, malicious PVP trade. Like, that is not the issue. It's more this hack. And, but again, it's like, why is it DOJ even going after this? One reason I think this is different and maybe this is like a nuanced thing. But in centralized systems, this type of hack can be very easily reverted and you kind of like roll back and pretend it didn't happen.

And this happens all the time. Like, you know, when the, the, if you remember during the pandemic, like oil futures had this technically net negative thing. Part of that got reversed. Right. Like that that wasn't like kept forever. But in this scenario, there's. It's actually sort of a weird probabilistic attack. In fact, the fix that was done doesn't fix it perfectly.

Like, it's just a, it's the nature of this thing that it's like a latency race. And what it boils down to is if I can get enough information about the block the proposer chose before the rest of the network is able to get that block and confirm it, like they vote that, hey, two thirds of people vote, two thirds of stake votes that this is the right block. And I can submit another block and I'm the same proposer and flood. the network with that and and yes, I'll get slashed because I propose two blocks, but the slashing penalty might be much lower than the MEV I took. It still works. And all they did is adding this delay. Someone will take advantage of it. Totally, totally. Someday we're going to see somebody get

prosecuted for doing a 51% attack. Just mark my word. That will have. I mean, that's a good, that's a good, that's a good question. If you can get prosecuted this, this is much harder than a 51% attack in some ways. Like, it's much nuanced. I mean, I would say like, you know, what is the difference between a trading strategy that's like kind of within the rules of the game and breaking the rules of the game

and like, you know, smashing the piggy bank and taking a bunch of money out? And the answer is that it is purely socially constructed that boundary. And what the DOJ is doing right now is constructing that difference.

I will say I feel like the victim based on what he told me last summer and reading what the DOJ has, this non-US national was clearly involved. in whatever the DOJ is. Oh, for sure. Like 100%.

There's no way. There's no way they got this on the road. Yeah, yeah, yeah, yeah. This was fed to them. This was, like, I read it and I was reading all these people on trivia. It was amazing technical nuance. The DOJ must have all these things. I was like, no way.

The victim guy told me this last summer, like last July or August. So I think almost all the facts were actually known, minus the Google searches. Yeah. So my guess, I mean, look, in order to get an indictment on somebody, you go to a grand jury, which is this kind of secret process where you present the evidence without the defendant being there. And grand juries love indicting people. Like it's very, very hard to not get a grand jury to indict something. So basically, once the DOJ decides, yeah, we want to go after you and we think this is going to be an easy case,

they'll just go do it. And if they've had a mandate of like, hey, go crack down on crypto crime, they get handed a case. of like some smart kids hacked something and made $25 million. Yeah, sounds criminal. Great. Go get it. And we got the case, you know, red, we got, you know, we got the on-chain receipts. We got the Google searches.

Like, no judge or jury is going to hear this and not be like, wow, those guys are guilty as fuck. So the kind of market structure. Yeah. Oh, isn't this just like Jane Street and Millennium arguing about blah, blah, blah. It's like, no, it's two kids and $25 million and like look at these Google searches. And they're like trying to figure out if they can get extradited from Dubai, you know, like open and shut. So the reality is that a lot of law gets decided in effect

by just like individual people doing stupid things where in the absence of a great case like this, probably it would still remain a gray area. And maybe if two hedge funds had gotten penalized for doing this, they'd have so much better legal representation that this would have ended up a civil case and the DOJ would never have gone after them. Yeah. I mean, like I said, the victim really made it sound like it was a civil case last year. Like, like, like, that they had enough information, they're going to sue these people, whatever. I actually feel like that makes total sense. Or even like a... Yeah, yeah. I was surprised that it went to this level of criminal case when you see, you know, if they're doing this, I would say that there's a lot of

other stuff that's going on in normal markets that probably should be considered the same. Sure. I mean, look, I actually think that this is pretty fair game. I think like, you know, blackheading MEV boost is just, yeah, you should, I think that's hacking as. much as anything is that. It's true, but it's a weird attack, right? It's like this timing attack, so it's not guaranteed to work every time. Like, there's a lot of nuance. That doesn't matter.

Why does that matter? That doesn't make a fucking difference, right? Like, I mean, this is clearly not how the system's supposed to work. But that's the same as me saying probabilistic finality. Oh, I accidentally forked and oops my forked suddenly. I think I, I mean, that's like, come on. This is like the trading strategy shit from Avi Eisenberg, right? Like, come on.

No. But this is much smarter than that. That was just pure. Like, come on. This is your IQ bias, making you feel that if the, if the attack was very clever and elegant, that he deserves the money more. I've met both sides. And I have, I have sympathy towards the ones who are martyr of the two of them, right? Fair enough.

Fair enough. All right. We got to wrap. That's it for this week. We'll be back next week. Hopefully they'll be an ETF and Marcus will be jubilant. But until then, I mean, they already are jubilant. They are.

But hopefully even more. Hopefully even more. Okay. That's it. Thanks, everybody.