Unchained - The Chopping Block: Was This Gary Gensler's Most Liked Tweet? - Ep. 405

Episode Date: October 8, 2022

Welcome to The Chopping Block! Crypto insiders Haseeb Qureshi, Tom Schmidt, and Tarun Chitra were joined by Laura Shin to chop it up about the latest news in the digital asset industry.    Show topics: Whether crypto optimism is different in Asia than in the United States How Sam Bankman-Fried has been doing some work with US regulators How the CFTC lawsuit against Ooki DAO changed people’s perspectives about the regulator Whether the lawsuit could make all DeFi illegal and the role of DAOs to coordinate governance The SEC settlement with Kim Kardashian for $1.26 million, Gensler’s video explaining the case and whether it was a publicity stunt Why Tarun would fire almost everyone at the CFTC and the SEC to hire more technical people How the NFT QQL collection censored a marketplace in its code What the whole purpose of NFTs is, according to Haseeb The debate around NFT royalties and their enforcement How a huge portion of the blocks in Ethereum are generated by Flashbots and whether it represents a centralizing force  Whether MEV should be stopped or accelerated    Hosts Haseeb Qureshi, managing partner at Dragonfly Capital Tarun Chitra, managing partner at Robot Ventures Tom Schmidt, general partner at Dragonfly Capital   Guest Laura Shin, author, and host of Unchained   Episode Links   The lawsuit against Ooki DAO Previous Coverage of Unchained on Ooki DAO: Why the Ooki DAO Case Could Hurt Participation in DAOs Kristin Smith on Why Crypto Legislation Could Be Passed by Year’s End CFTC Filing $250,000 fine Nik’s article CFTC Commissioner Summer Mersinger’s dissenting statement CFTC serving the members of the Ooki DAO via their forum Tim Copeland’s article on what’s next for DAOs A federal court ruled that the CFTC legally served Ooki DAO through a website help bot. The LeXpunK Army filed a motion for amicus status in the SEC case against bZx/Ooki DAO. Crypto group DeFi Education Fund argued that the CFTC should properly serve Ooki DAO’s actual members, not just the DAO at large.   NFT Royalties Tyler Hobbs’ QQL $17 million collection QQL blacklist explanation NFT platform hits back Previous episode of The Chopping Block debating NFT Royalties Article: Why NFT Creators and Collectors Can’t Stop Talking About Artist Royalties Article: NFT Royalties: Why artists love them, and traders don’t  SEC charges against Kim Kardashian The SEC fined reality TV star Kim Kardashian $1.26 million for promoting a crypto security without proper disclosure. Fortune article on the Kim Kardashian settlement as publicity stunt eMax price spiked Gary Gensler’s video  Flashbots and MEV Post-merge relay drama What is MEV Proposer-Builder separation:  MEV Boost Flashbots auctions Previous Coverage of Unchained on MEV: Why Is Ethereum Trying to Maximize Value From Users? Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two Kwan. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways. Unnamed the trading firms who are very involved. D5 protocols are the antidote to this problem. Excellent. All right. 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 up, we got Tom, the Defy Maven and Master of Memes. Next up, we have Turun, the Gigabrein, and Grand Puba at Gauntlet. Today, unfortunately, Robert couldn't join us. So Laura is filling in. Laura, CEO of the show. Thanks for being with us, Laura. And then you got myself, I'm a deceived, the head-hight man at Dragonfly.

So the three of us, excluding Laura, we're early-stage investors in crypto, but I want to caveat. Nothing we say here is investment advice, legal advice, or even life advice. So I just got back from Token 2049, which is the big marquee event in Asia in Singapore. I am extremely jet lagged, but it was a really fantastic event. I had an amazing time. I tweeted about this a little bit earlier, but I feel like the energy in Asia feels really different than the energy in the U.S. right now.

Laura, I was listening to the last few shows you've been running, and it's kind of all very doom and gloomy. A lot of people kind of feeling sullen about regulation and about the SEC, and we're going to talk about some of that stuff with all the stuff going on to the U.S. Macro feels terrible. everyone's kind of sad. Renasia, people feel great.

Did you miss the episode that came out yesterday with SBF? Because he actually was, he felt optimistic about what was going to happen with regulation in the U.S. And I was like, what? So. I have a cute up. I have a cute up. I want to listen to it.

I've heard that, I've heard that SPF has been doing lots and lots of behind the scenes action with respect to regulators in the U.S. So it's basically him and Katie Hahn kind of have the whole U.S. industry on their back is what I hear. I don't know how true that is. Pretty much. That makes sense. I'm going to say I'm spending like half a time in DC these days, which is, I guess, a testament to that.

Yeah. Yeah, I wouldn't be surprised. Yeah, you should listen. But, you know, one thing that I was curious about was like, what is he talking to them about? And I think there are certain things that like the crypto community is super, super kind of just really into or like thinking about a lot. And I think like his priorities are slightly different.

Not, you know, 100%, but. But I think, like, everybody has been talking about, like, the tornado cash sanctions and privacy and stuff like that. And, like, I don't think that's top of his list, you know. So even though he's spending a lot of time there, I think, like, there are certain things where, you know, that's really what his priority is, is like, you know, having FTCS infrastructure being used to clear derivatives. You know, I'm sure that's probably actually number one. Because he talked about, like, exchange kind of stuff was one of his priorities. But I feel like some of the more hot-button topics in terms of regulation are maybe not his priority. I mean, that makes sense, right? You can't. I don't think one should expect for Sam necessarily to carry every pet issue of the crypto-native

community on their back. I think I have a lot. I have a ton of respect for Sam and for anybody who's kind of in their day and day out, especially at a time like this when there's so much, there's so many headwinds. for crypto, especially in the U.S. where people have been, by and large, there are more negative news stories than positive news stories over the last six months. And this week was no exception to that. So maybe we should just jump straight into it. One of the big news this week, so historically, the crypto industry has been really pushing for the CFTC, which has become the dominant regulator

of cryptocurrencies. And the party line within crypto has been CFTC way nicer to us than the SEC, way more reasonable. We really want them as a regulator of choice. And there was something that dropped, a lawsuit that dropped within the last couple weeks that I think caused a lot of people to change their tune. And this was the CFTC lawsuit against Uki-Dow. So quick backdrop on, you know, what the hell is Uki-Dow? So Uki-Dow, you may remember in its previous form, which was BZX. BZX was an early D-FI lending protocol back in the very early days of DFI that got hacked repeatedly. It was kind of a mess in the very early here. days. They were one of the first flash.

Definitely a mess. Definitely a mess. Definitely a mess. So they rebranded to Ukidau, and whatever. They continued doing stuff iterating on product. They obviously didn't have a ton of success. But the CFTC filed the lawsuit against them. And the lawsuit, so you might be unsurprised that the lawsuit is like, you know, doing kind of derivatives-y things as, you know, offering these things to U.S. customers, which is illegal. They're supposed to register with the CFTC, which they did not do. But the other part of the lawsuit,

which is what freaked out a bunch of people, is that the lawsuit basically declared that Uki-Dao, which was the DAO that was voting on chain to do certain things or whatever, that this was an unincorporated partnership. And as an unincorporated partnership, that meant that every person who had ever participated in Uki-Dao governments,

in governance, was jointly and severally liable for the violations that BZX-UK Uki committed, meaning that running an unregistered, I can't remember what the actual. Was it a commodity pool operator? Commodity pool operator. That sounds right. Yeah.

So you're not supposed to do that without registering with this EFTC. Obviously, Uki Dow on the whole did not do this. And therefore, every individual member of Uki Dow is liable. And this is maybe unsurprising, but it's unprecedented. Now, Uki Dow, unlike a lot of other DAO's, is not incorporated. So a lot of DAOs, what they do these days is they actually have some kind of corporate entity somewhere, some kind of LLC that limits the liability for the individual members of the DAO. UkiDa did not have any such thing. So it's known as an unwrapped DAO. There's no corporate shell or anything that would prevent people individually from the DAO from all being liable for anything the DAO does that's illegal. So nowadays, most DAOs are not like this. But UkiDAO being a relatively early Dow, BZX being a relatively early protocol, they had a totally kind of naked. a Dow. And as a result, basically this is kind of what people were afraid of. And exactly the worst that's come to light, which is this idea that anybody who participate in governance is therefore

also liable for anything that Uki-Dao did wrong. This caused a lot of people in crypto to get very upset and say, oh my God, CFTC, how can you do this to us? I thought you're a friend. You know, top 10 anime betrayal type energy. So what are your guys thoughts on this whole Uki-Dao drama? One thing was like Gabe Shapiro came on my premium offering. And I was really shocked when he said that. So, you know, he's he's a lawyer, a crypto lawyer for Delphi Labs. And so I'm sure like his understanding of this is just well beyond even mine. But like I was super shocked when he was like, oh, this means all of defy could be illegal. And I was like, what? So there's two things, right? There's like what they were doing was illegal. I think like nobody will question that. Right. But then like he was kind of saying that. any sort of thing where you're like trying to have decentralized governance that could be illegal. But the other thing that I wanted to say was like that commissioner who dissented, I read her dissent. I thought it was actually really interesting. You know, this is not an area. I'm super familiar with. But her main thing was she was like, first of all, look, this now creates

this like weird separation in terms of the class of individuals, right? There's like the token holders that participated in governance and then the token holders that didn't. And she was like, look, the CFTC is sort of setting this precedent in this enforcement action without having gone through like a normal process of, you know, putting forward a proposal and then soliciting comments and then, you know, kind of like coming up with whatever the best solution is to deal with these kinds of situations where DOWs are engaging in some kind of activity that is against some sort of law. So, you know, obviously that she just was like, look, this is sort of just creating this thing off the fly without like really thinking about it. And then second, she was like, you know, the side effect of this is that a lot of these DAOs will, their token holders will feel less inclined to participate in governance, which she, you know, was pointing out was like seemingly a bad effect, which I would agree with.

So, yeah, I think there were just a number of things where, you know, it either wasn't clearly thought. through or, you know, the effect that they wanted was to sort of like chill Dow activity. So, you know, I don't know. By the way, I looked it up and FCM is futures commission merchant. So that was, yeah, but anyway. Yeah. It definitely is going to cause a huge chilling effect on people participating in Dao's, right? The idea that you are liable for what the Tao does, like anything that the Dow does,

if you ever participate in governance once, right? you participating once in governance like three years ago, and then you kind of forget about the tokens, you still hold them, and then three years later, the Dow votes to like, you know, go rob a bank or whatever. Okay, well, now you're liable for robbing a bank. That seems like a pretty crazy legal theory about liability, right? Like, normally that's not how anything we think of works.

Like if you're not actually, if you have no mens rea, meaning you have no actual intention to commit anything illegal, then the idea that someday the Dow does something illegal, you are now liable for it seems, pretty ridiculous. So, you know, the dissent from the one commissioner was notable because I think it pointed out a lot of the weaknesses of this legal theory. But of course, like, you know, again, filing a lawsuit is not law.

So there's a very good chance that this thing is going to get challenged. I think the legal theory behind the challenge seems pretty plausible. But like everything with basically the government slash regulators going after something, it's very, it's much easier for them to start a process. than for it to get stopped by civil society or by a particular set of defendants, right? So it's going to take years in this case for there to be anything that is like settled law on the question of how does Dow liability work. But this theory by the CFTC is going to scare the shit out of people because it's like,

okay, well, if it maybe works like this, then that's terrifying. And it's going to be a huge disincentive for any institutions or any large corporations or even people who are wealthy enough to consider themselves targets with the CFTC to ever participate in Dow governance. Yeah, I think the specifics of the lawsuit are particularly interesting. I mean, I think on the one hand, I agree, like a Dow doesn't have limited liability the same way like a corporation does. And so, yeah, it's, I don't think anyone was operating or something who not was operating

an assumption that, like, you know, if you're part of a Dow and then the Dow commits fraud, like it's all cool because it's a DAO and so it's like you know it's fine but i think the thinking was more well like the DAO is unstoppable like if you like how would you go about stopping the DAO from doing something like that like you know maker right like makers not have an entity per se that is operating maker but like you know it's like how would you can go about stopping maker which and so i feel like those are kind of two different it's a distinction that i think maybe people didn't really appreciate and i also agree with laura like the uh setting the bar as participated in governance is pretty bizarre to me as well. I would be curious to see how that

holds up in court. But my favorite bit for this was actually how they were served. Basically, they hosted the notice in both the forum as well as the intercom chat bot on the Uki-Dao website. Because they said there was no email address and there's no mailing address. So they're like, this is how we're going to do it. And apparently this was upheld by a judge recently. So now you can get served on your forum or through your intercom chat bot. So you got to watch out for that. Yeah. So I actually have like, yeah, my reaction to this was like, so I just think about how like for me as a journalist, you know, like when I was writing my book and there were people that definitely, you know, you could definitely say their portrayal in the book wasn't like positive and they hadn't spoken to me. like I went through so many hoops to try to make sure that they knew what was going to be said about them in the book and to give them a chance to respond. And there were certain people where I just did not have their contact information.

So I literally like saw out all these different random contacts of theirs and was like, can you please pass this on to them? You know, and like even if they said, oh, they don't want to talk to you, whatever, I would say, look, just please send this document, you know, with these statements and like just make sure that they have a chance. to read this and then they can decide if they want to respond to me. And I would just, I wouldn't do it just with one person. I would do it like with multiple people to make sure I just had tried everything to make sure that they could have a chance to respond, right? And so like when I think about kind of that standard and it's just for a book, it's not even for like a legal thing, which is, you know, that has like real consequences. I just, I'm surprised that the judge said, like that was a sufficient way to serve people about something so important.

To me, it's like, whoa, like, what am I doing, like, jumping through all these hoops for what I'm doing? I think I'm like, you know, so I know that was my reaction. Yeah, it's like, how do you verify receipt, right? Or someone got served via an NFT last year as well. And it was like, the NFT had like a link to the actual documents in it, but it's also like, you know, how is that legit, right? Like, how do you know that someone actually viewed it and received it, I guess? Yeah, I thought the theory was that like checking the search. overlog to see that somebody actually visited the link was supposed to be the proof that the serving happened,

which obviously doesn't work with NFT because anybody could look at the NFT. It doesn't have to be the person who actually owns it, especially after it made news. There are thousands and thousands of people looking at the NFT. It's like, oh, okay, well, maybe the real person is somewhere in there. So, yeah, the whole concept is a little absurd. I mean, to be clear, if you are a member of Uki-Dow, probably you saw this when it got posted on the forum, because I'm sure everyone in Uki-Dao was like, guys, did you see this? we just got served.

I'm sure it worked, right? That actually seems like a great way to get it done. But it also does seem like maybe an excellent way to defraud another, or like to scare another Tao is to, you know, serve them through their chatbot and to see if you can scare them without being real. There is this other question, too, of like, how do you actually identify the Dow members, right? Like, even if you voted on chain, you don't necessarily have, you know, identifying, you know, characteristics of the address mean I've interacted with a, you know,

KYC, you know, exchange account or something like that. So it's like who's going to step up and, you know, raise their hand and say, yes, I, you know, was part of Uki Dow and I want to be, you know, sued by the CFC. So it's a bit tornado catch like in that way where it's like, you know, who's going to be the defendant here really or, you're hardly going to find these people? Yeah, let me docks my wallets. Yeah. I think, again, this is. is a large part of the game theory behind Daos in the first place, right? It was not that Daos are impossible to identify, but that the connection between the person and the Tao and the real

person is difficult to identify. So in some way, like the real measure of this Uki-Dao lawsuit is, okay, let's say that nobody raises their hand and says, you know, hey, I'm part of Uki-Dao, I'm ready to get sued. What are they going to do? Are they going to try to like chain analysis people and cross-reference with Coinbase and try to figure out who these people really are, how aggressively is CFTC going to go after the people in the Dow? And of course, a lot of people in the Dow are probably not Americans anyway. It does feel like part of the test, part of why this is such an interesting test case is not just, okay, the legal theory behind going after Dow's, but also what happens

to what are the defendants going to do? If the answer is that like no defendant shows up and basically there's just like empty seat when they're like, great, here's the case against Duky Dau and nobody shows up, that might be in some way, like the strongest defense of Dows is that you try to sue a Dow and nothing happens. And then you just, you know, you just have to go wasting a bunch of cycles trying to figure out who's in the Dow. It becomes, in many ways, like the whole theory of why Dow's are supposed to be legally robust, or not legally robust, but legally difficult to attack, is because it's kind of like the early P2P platforms, right, like BitTorren. You know, when

In the early days when the music labels were going after users of Napster and other peer-to-peer services, the idea was that, look, you can only kind of go after like one person at a time, at great effort to yourself to try to nail them with something. But the, like if you actually want to stop this thing en masse, it's just not realistic, right? The only way, ultimately that the record labels were able to get people to stop doing peer-to-peer file sharing was to basically inculcate people. into things like iTunes and Spotify, such that they didn't want to do that anymore. And, you know, the belief is that that's what Dow's are about. It's about lowering the barriers to coordination among people who want to coordinate. And if you don't let them do it, they'll find other ways to do it.

We'll see whether that works in practice. Yeah, but I don't know if you recall, I forget the name of it, the Recording Association of America or whatever, they did kill after individuals. And it did have a chilling effect. So, you know, maybe that would be the same theory with Uki Dow. It's like, okay, so no one shows up. So then the CFTC will try to match identities with the token holders and then go after certain people to make an example of them.

I don't know. To be clear, I don't think the lawsuits were that much of a chilling effect, right? The main chilling effect was shutting down Napster. That was the big chilling effect. But the lawsuits against individuals, like, I mean, pure to pure file sharing was still huge, even while all that stuff was going on. It was still growing. And I also had, you know, massive backlash for the RIA, right?

Like, that basically totally killed the reputation. that's pretty much everyone, all anything associates with them now is just like, yeah, they went after a bunch of, you know, random people who downloaded a song and, you know, tried to ruin their lives. Yeah, there's a lot of the backlash to it too. Yeah, but I don't know if the CFTC is like trying to get on people's good side. I mean, they're like a regular. It's like different from a recording.

I don't know. I mean, I think to some of our previous conversations, I think they, look, the CFTC doesn't want to be a villain. You know, they do want to be liked. because these are people too and they have reputations outside of, you know, the period of time that they're actually serving for the CFTC. I think people want to be perceived as being reasonable and coming up with good laws and protecting consumers where they can. Yeah, actually, I think one thing that interests me is like I sort of feel like in a way this enforcement action almost came out of this turf war between the CFTC and the SEC, where it's sort of like, oh, oh, so you're tough with the enforcement actions. Okay, we'll, you know, like match you on that regard.

I don't know. Maybe. It's just speculation, but it is out of character for the CFTC. Or maybe it's not. Maybe this is just what the CFTC is going to be like once they're the cop on the beat. Is that they're like, look, somebody's got to crack down to this down nonsense and I guess it's us now. So we're just going to go do it. Anyway, we'll see.

We'll see. Well, speaking of the SEC, the SEC was also in the news in the last couple weeks because of a large settlement that they reached with Kim Kardashian. So we might remember Kim Kardashian very famously and prominently shield this project called Ethereum Max, which was, what is Ethereum Max? Is this like an Ethereum fork kind of shit coin? Let's just say it's not associated with Ethereum. I don't know what it is, but it's not, you know, let's just make that part clear. Okay, Vitalik was not involved in Ethereum Max. This is outside parties that were innovating on Ethereum to make it more max.

Anyway, so she was charged 1.25 million for her promotion of Ethereum Max. And pretty much immediately after this, Ethereum Max is just like dead as a doorknail pretty much since, you know, they originally filled it. But after the announcement of this Kim Kardashian settlement, Ethereum Max pumped like 130%, which is awesome because that's just how crypto works. I don't know that there's much to talk about here other than like, look, if you are a celebrity that is, you know, not just. disclosing your conflicts of interest. The SEC will eventually get you a year and a half later. Well, did you guys watch the SEC's video that they released with this? That was embarrassing for it.

Yeah, it's pretty cringy to make that. Oh, okay. Can you give us the exposition? Like, give us the play-by-play of the video. Yeah, it was just like warning people basically that, you know, if a celebrity is promoting something that doesn't necessarily mean that it's a good investment for you because they're getting paid for this and they're going to make money either way. And, you know, your financial priorities might be something different. But yeah,

like, so, okay, so just keep watching because I was watching this and I was a little bit like, wait, because there's something about the style of it where office hours with Gary Gensler. Yeah, like you could imagine that they would make it in a way where, you know, you, like, you, as the viewer, would really take away the lesson that, like, you need to be careful of, of these people. there's something like so parody like about it where it's almost like they're making fun of themselves rather than like making the bad actors seem like bad actors do you know what I'm getting at? So I was watching this as I was like, wait, if the intended effect is to educate people around, you know, not like fall like like they're, you know, these are such caricatures. It just sort of like.

Top knot stock footage. Yeah, more ridiculous rather than like, you know, giving people the message like don't trust these people. I don't know. That was my take. It was like super, I don't know, there was just something about it. I was like, I wouldn't, I wouldn't, you know, feel. I don't feel like the style of this video kind of fit with the message. I guess we can put it that way. Yeah, they're trying to be more relatable, you know, trying to get those zoomers excited about, you know, disclosures and whatnot. No, it's fine. Because they know that this is the one thing that everybody's going to pay attention to because you announce Kim Kardashian and so you pay some, you know, some like very low quality. video company. I think we should maybe also point out that the SEC and CFTC seem to be going for very different types of people to go after. The SEC seems to go for the high value shock therapy. They're like a reality TV show. They're just going for like the clicks and the likes. And the CFTC just goes for the easiest one because BZX was always sort of like dead on arrival

in many ways in terms of like a bunch of things that have happened in that ecosystem. So the difference in tactics, the question is which one will sway Joe Congressman or Sally Congresswoman to, like, vote on the thing that chooses the dividing line and funding? I don't know. I don't know anything about politics, but I'm assuming that crypto people would prefer the CFTC based on that. Well, in many ways, like, actually, the SEC going after headlines is kind of easier to manage because it's like, okay, you know, like they're going to go after the frauds. are going to go after the celebrities that are getting into the space. And the really complex stuff, they're just going to kind of leave alone. Gensler might make a lot of noise and a lot of sound and fury about how, oh, everything in DFI is bad.

But actually going after a uniswap is just like kind of too hard or complex or it's not a clear, cut enough case. So he's going to veer away from it. Whereas the CFTC, they might be like, oh, no, that sounds like an interesting legal theory for us to try to challenge uniswap. Let's go for it. If anything, it seems like CFTC actually is skiswis, actually is a skiswis. carrier if that's the way they're operating.

It is, we were talking about this yesterday. There's this outstanding case was it Wrenzley versus Uniswap, where this Uniswap user is suing Uniswap for allowing like shit coins to be traded on Uniswap. Not just Uniswap. Also, it's largest investors. Yes, yes, that's right. But one of the tokens, Rensley traded was Ethereum Max. So I'm sure she feels, you know, very righted now that Kim Kord actually had to pay a million

dollars in fines. That's, you know, feeling very protected there. I had one sort of semi-sauce take on this Kim Kardashian thing, which is, you know how she just started this private equity fund like a month ago. Yeah, that's right. Usually when you get these SEC citations and you admit wrongdoing, you're like banned from trading or purchasing securities or being a registered securities broker of any form for like a year or whatever. I'm curious how the two things coincide. There's like something. No, no, no, no.

Like, pumping something without disclosing your investment in it is very, very different from like securities fraud. Yeah, yeah, but she's a investment advisor technically. Sure, sure. But like... Usually investment advisors have some type of slap on it. Even if it's like a two-month suspension. Like there's usually some, it's interesting to see that this got negotiated out. Well, she is banned.

And she is prohibited from promoting or I forget what the activity is. But there's some prohibition on her activities with crypto, crypto asset securities. So it's like limited to just any crypto securities, but not like securities broadly. I do think that's like a kind of funny thing from the private equity side that, you know, I think that's very reasonable. I don't know. I think you're looking for a bonapank.

I think that's very reasonable. No, no, no. I'm just pointing out that this. I'm not looking for a bone to pick. You know, when I pick, when I pick fights, it's with people who fuck up for a reason. Like, sure. Well, I thought you were going for more conspiracy theory.

No, no, no, no. It wasn't really conspiracy theory as much as like, I bet you're part of the negotiation of her settlement. Involved this like, like, like, exclude, like, exclude, like, exclude the fire, but exclude certain. Yeah, yeah. I mean, but also look, like, it was disgorgement of profits, right? It's not like, hey, we're going to hit you with 1.25 because it's a nice round

number, it was, okay, we're going to take your profits from you shilling Ethereum Max and don't do it again. Yeah, no, but $1 million. So that was a fine. $250,000 was disgorgement. And then the rest was like interest or something. But yeah, like this is not an egregious for somebody, Kim Kardashian's stature and how much money she makes just like, you know, tweeting stuff.

There's a very good chance that Kim Kardashian never even heard of Ethereum Max, right? Like they're, she just has like a team that manages their social media and they're just like taking orders and somebody filled it with this thing. I would personally be surprised if Kim Kardashian has any idea what Ethereumax is. I guess I'm just pointing out that the negotiations for these things are quite interesting, and you can kind of see the side effects of them in these observations. I'm just trying to, that's all I'm saying. That's fair. That's fair.

It's definitely, there was definitely some finesseing in the shape of this settlement in order to get everybody what they wanted. So, SEC comes out with like, you know, a nice scalp that they're. can show off on social media and then Kim Kay gets to keep running her private equity empire. Yeah, no, definitely it was a great PR move for the SEC. No question. They got so many headlines. Gary Gensler have, like, I feel like that must be his most liked post. I'm sure Gary, he was probably every night going to sleep so excited of how Twitter was going to embrace him with open arms after he brought this settlement to them.

there was actually a dissenting op-ed in like Forbes, I think, basically actually saying, no, this was just like a total, you know, publicity stunt on behalf of the SEC. Fortune. Like, fortune, rather. It's like, who was actually being protected here? You know, it's as if like someone was, you know, planning a nice diversified portfolio and was misled by Kim Kardashian to thinking that Ethereum Max was, you know, a nice, safe investment. It's like, it's just kind of absurd.

So, I don't know. I just like, you know, we were talking about this. Hold on, hold on, hold on. They're like, what there are really obvious rules around this, right? Like, for anything. Like, even for, isn't that even true for, like, sponsor posts on social media? Think about this way.

In terms of actual dollars of harm cause, there's like the bit boys of the world who are like the immediate, like, U.S. citizens to go, I'm not sure if he was. But if he was, like, those people who are promoting should on YouTube who are, like, much more involved in, like, the constant creation, they probably promoted much more. dollars of harm cause.

For sure. Kim Kardashian, right? But it's clear that the SEC does not give a shit about dollars of harm cause because Gary Gensler is like looking for this PR room. Yeah. And actually what, so Jeff Roberts was the writer of the fortune column and he pointed out that the SEC completely missed Celsius and Voyager and things like that, which, you know, that caused like real pain for everyday investors.

And, you know, it was instead kind of going after. this big win with like the, sorry, big PR win. And then on top of that, like, won't approve a Bitcoin ETF, which arguably is also hurtful to everyday investors, at least in the U.S. So, yeah, we should link to that in the show notes because I thought it was a really well-argued piece. Yeah. In terms of like actual damage, like it would have been better if the SEC had gotten after Celsius as opposed to Kim Kardashian. Yeah. And there already are rules around, you know, disclosure, right? That's like an issue with the FCC. That's not like an SEC issue. So I don't know. It does feel a bit silly. I like kind of subscribe to the Matt Levine theory,

which is like, you know, you should be able to, it's generally refers more to a credit investors, but it's like you should be able to buy anything you want as long as you, you know, sign a document that says, I'm an idiot and then someone slaps you and then, you know, you're good to go. And I generally kind of subscribe to that, you know, theory of markets as opposed to kind of what we have right now. this model the, the, the, the, uh, the, uh, the, uh, the influencer is the person. So there's a very funny meme a couple weeks ago of this Japanese like fighter of some form who, who passed away. And like, a few months before he passed away, he was at a stadium and people lined up to get slapped by him.

And I just think of the, the, the, the, is the guy who's like slapping it right before. I see. Well, look, it's, it's kind of always. true of regulators that regulators are like the drunk looking under the street light. Like they're going to find the thing that's easy to find rather than, you know, it's like, it's hard to find Celsius because nobody really knew how bad things were at Celsius until it was out there. And so you could say, well, you didn't find the most terrible thing. Wait a minute.

What are you talking about? Everyone, first of all, XeroxB1 being the Celsius funds was like one of the most obvious things that you could see on chain and track the losses of. Yes, I understand. If you're following crypto drama, yes, it's very easy to, to, to, to know that something was up. Isn't that the job of the regulator? Isn't that their job if they're going to be prosecuting these things?

I mean, let me finish my statement, right? When I say it's easier to look under the streetlight, like you see Kim Kardashian posting, you guys should buy Ethereum Max. It's like, okay, well, clearly this is illegal, right? Like, everybody is pinging you all of a sudden saying that Kim Kardashian is posting stuff about some random shit coin and she didn't disclose anything. You already know what's up, right? Same thing with like a lot of these influencers in the, in the 2021 cycle,

there are really easy, obvious cases to prosecute that are right in front of you and that you know we're going to make headlines and you know we're going to look like you're doing your job to retail. Doing a Celsius is hard. It requires basically investigation and insight and hard thinking

and like kind of prying facts where they're not staring you in the face. Now, to ruin your point about like, okay, BitBoy versus Kim Kardashian, I think is a great point that there's probably much more harm done by a BitBoy than by Kim Kardashian just by sheer volume of dollars moved.

But look, I don't expect the SEC to do, like, brilliant investigative journalism about, or not investigative, just investigations about figuring out, you know, which platforms, especially non-US platforms, are engaged in malfeasance and which ones are. Like, that's hard. And the SEC, like, doesn't have that much sophistication about crypto as we've seen many, many times. Yeah, no, I agree with you about just the time that investigations take because, like,

oftentimes people send me these messages, like, you need to look in it, blah, blah. And I'm like, okay, yeah, that would take me a really, really long time. And meanwhile, I have, like, a new book deal and I have, like, this other narrative podcast I'm working on. And I do two shows a week and blah, blah, blah. And but still, it does feel a little crazy that that was kind of their big enforcement. Like I saw that Nansen intern tweeted something like, oh, what a bummer. Because, you know, I was really using Kim Kardashian for my financial advice. Yeah.

I mean, it is ridiculous looking at it. There is also this thing that regulators in the U.S. Because they are unable to invest in ever building out technology themselves due to it being much more profitable to spend money on PR videos than analyzing the on-chain data yourself, rely on the vendors that they get. And whatever vendor they're buying their on-chain analytics from dictates what they see. So if it's an older vendor who doesn't understand how defy contracts work,

or like doesn't track a lot of like on-chain activity for certain people of like a certain form, then they're not going to see that. And the only thing they're going to see is like Kim Kardashian. dot Eath got five million Eath in it. The other thing too, yeah, like to the Lord's point, like it takes work, you know, Kim Kardashian. I mean, it takes work, but like, so did that PR video. I don't know that that took any work actually. I watched it. It seemed pretty low effort. That's all outsourced.

I'm just like bad. I don't know how to make it. I don't know how to make it. content. So to me, anyone who makes videos already is like, you're just very impressed by stock footage, I feel like, we got to, we got to, Tom, can we get some more stock footage in this? Like, just like little clips in between. Yeah, yeah. Yeah, just like when we talk about the SEC, you just get like people like working on, you know, just filling out clipboards. Okay. Okay. Actually, let's let's maybe take a hypothetical question. Let's suppose you were dictator for, for one week and you're, you were tasked how well your dictatorship would be viewed after a week was how well you reformed the SEC or CFTC.

What would you do with your one week of dictatorial powers? All right. You have to go first. You pose the question. Yeah. I mean, I think the main thing I would do is like basically fire everyone who's not technical and like hire a technical staff for them.

Okay. So in your two weeks, basically, you would kill, you would, you fire everybody so there's no one left working at the SEC. Not everyone. And then you would like start doing tech interviews and then you would be kicked out. I think what I mean,

by that is I would instill this mandate that would basically have to be followed that like the the company would have like the end organization has to like basically prioritize certain technical milestones and if they don't that like Congress is basically going to decrease their funding every year for the next five years and if they make a milestone basis of like how good their ability to actually like measure on-chain information is and if it's still dog shit they it just, you know, they should keep having their budget. Well, I think, I think their budgets are already super low. That's probably why also we see this sort of like triage with like the easy wins that

to the rest of us seem kind of dumb. And then like little work being done on kind of the more important things. So they do have some sort of performance measurements. So there are, they're like the government accounting organization geo or whatever, has this like these performance metrics. that they use. And the performance metrics are not necessarily based purely on actions taken. They're also based on like, how much amount extracted per unit enforcement. And I feel like they just have chosen really bad KPIs and you have this good hard slot thing where like it's actually much easier to optimize those KPIs by not actually improving your technical capability and instead making videos. And so I generally think, like, that's the problem. Like, the metrics are just fucked up for these.

I think that's probably right. It feels to me like the way, if you have two weeks, the way to try to reform the SEC is basically you get like a CTO for the SEC. And that CTO is now heading the organization. And you basically say, like, look, we're going to take a quarter. It's kind of like a tech company, right? And a quarter, you might say, like, look, we're so deep in tech debt. We need to, like, freeze the feature roadmap and just go pay down technical debt.

And that feels like probably what the SEC needs to do is like create a more systematic way to do what they do. Now, of course, crypto is a small part of what they do, right? Obviously, financial markets are freaking massive, especially in the U.S. And they need to regulate an enormous surface area beyond just crypto. But this feels like not just a crypto thing, right? This is like a kind of broader thing of how can you systematize what you're doing in a way that's not just basically headline chasing, which is easy to do but not great at actually creating the right kind of norms around how markets function. So an interesting thing about reg NMS, which is regulation neutral market service, which is the main U.S. regulation that ensures that prices you get on U.S. equities across multiple different venues.

So like Nizzi, NASAC, BATs, Philadelphia Exchange, whatever, are guaranteed to give you the national best bid in offer. So this kind of forces this notion of like synchronization of prices across the U.S. And part of the reason this law actually even ended up being enabled was that there was this trading firm that kind of like didn't do that well as a trading firm. But then basically sold a lot of their analysis tools they were using for trading to the SEC. It was called Tradeworks, I think, WRX. And after that, they got a lot better of finding spoofing. I mean, you can see like the spoofing is working dumb. So it was, it's very clear that like the Genslers of the world are not particularly good.

at like figuring out how to make that jump, right? Like, SEC got lucky in 2006, where the failed trading firm, they were able to acquire basically the assets for pretty cheap. I think it was like $8 million, which is like less than they spend on like anything, you know, technology wise. I mean, you can see the contracts, right? So I'm just trying to point out that like that would be my dictatorial bend. Especially as crypto continues to evolve,

becomes more complex, becomes more, difficult to wrap your head around. It requires more technology in order to really engage with it seriously. Well, let's move on a bit from the SEC because I feel like we've, I don't want this to be the regulatory show, although obviously there was some regulatory news this week. So there are a couple of the stories that I want to get to that I thought were very interesting. First, I want to start with Tyler Hobbs's new $17 million QL collection. There was a really interesting story that got a lot of Twitter up in arms. So we've talked before about royalties and about some of the new NFT exchanges that are no longer respecting royalties. And I think, Laura and I, you and I have scrapped a little bit

about this concept of NF2 royalties. So one of the most notable exchanges that don't respect royalties is X2, which is this kind of Chinese team that is building a very similar to looks rare exchange for NFTs. And this is one of the first times we've seen this. So QQL basically decided in their own codebase to blacklist X2Y2 from being able to list QQL NFTs. And so this is kind of the first instance of like reverse censorship where the NFT collection is censoring the exchange. And it's saying no exchange, you cannot, you cannot trade our NFT collection. Now you could like wrap QL and then take like a wrapped QL NFT and then go put it on X2

Y2, I guess. Like, do you remember this happened with penguins? Of course. Yeah, yeah. The penguins were wrapped. So it's possible to do it, but it's an interesting development where now, like, you have to be nice to the issuer if you want them to not delist you basically as an exchange. You can imagine the way this evolves is like basically the NFT collection is like, hey, OpenC, if you want to trade my NFT, you better like pay me up front. Otherwise, I'm going to blacklist you from being able to list my assets.

So it's almost like a new backdoor for NFT collections to be able to basically negotiate some of the rent that NFT marketplaces are capturing. I don't know. What do you guys think about that? I mean, I think this is make sure that royalty is on Code Zero for the highest end promoters. And it's a little bit like the art market, right? Like if you're like Larry Goghian, you're probably paying like a huge markup to like the hot artists today. But then for new artists, you're like, you're getting. getting, you know, you're not getting anything. This is like exactly the same behavior of the

market of like, the fee structure is like bespoke and like not transparent as to why it is that. But at least here, I guess you see the royalty. You can see the fees in the art market. You can't. So, but this, this, this, this, this, this, this, this, this, this, this type of price discrimination does exist. It is, um, weird too that. So the, the blacklist is also updatedable by like the owner of the contract. And so, you know, I think there's always this tension with NFTs of, it's, just like, you know, how sort of permanent is this, is the, or the metadata, you know, store an IPFS, is the image stored IPFS? We're just like a link to S3 somewhere.

And this feels like a big step towards, no, this is just like, you know, a JPEG on someone's servers and that, like, the owner could be busy step in forever and like, you know, blacklist, you know, transfers or transferees, which, which feels a bit, I don't know, kind of strange and sort of antithetical to what empty steps are supposed to be about. It's the USC of NFTs. It ties into that the Magic Eden thing. I can't remember what it's called a ghost or something,

where basically if you traded an NFT in a way that did not respect the royalties, that they would basically like tombstone your NFTs which that showed up as like a, hey, you didn't pay your royalty thing. If you think this has been, if you've arrived at this page and error, please email support or something.

It's like, wow, holy shit. we're really are moving pretty far away from the original concept of, okay, this is like a permissionless artifact on the blockchain. Now it's like, okay, the NFT issuer is policing every single instance of a transfer of this NFT to figure out whether or not you paid your toll as you're crossing the toll road. Like it seems like we're moving in a very weird direction as the NFT issuers are really trying to hold on to their grasp over royalties in particular.

which, like, I mean, Laura, you and I have argued about this before. This feels to me like a super unstable equilibrium, right? In the long run, the whole point of NFTs is that they're permissionless, is that they are open, is that anybody can do whatever they want, which means that you cannot force people to do something if they don't want to do it. And so you can try, it feels very much like the record labels being like, you can't share music because I want to do, you know, like, no, it's just not allowed. Even though I gave you an MP3, you can't give it to anyone.

In the long run, your business model just has to adapt to the fact that people, are going to do what people are going to do. And you can try, like, this, like, policing stuff and say, okay, well, I'm going to look through to your transactions and try to figure out if that was just a transfer to a multi-sag or an OTC sale behind the, you know, sort of behind the veil. At the end of the day, the point of crypto is you can make infinite derivatives. And, like, the fact that you can make derivatives basically means that this type of thing is, like, going to be like, yes, there's going to be a couple people like Tyler Hobbs who are like, you know, fine, the Van Gog of the last year artists.

gets to get away with it, right? But like everyone else is just going to, there's going to be someone who just makes a wrapping service. And ironically, the wrapping service might get more usage than every single NFT derivative that it exists on chain because it's just a way to get around all this stuff. If I were someone who was doing

NFT derivatives, I would actually just go stop and go build a wrapping thing. Look, I'm a man that people. Fuck these fucking artists. That's a problem. You can't have just one wrapping service because that one wrapping service is going to get blocked. just like the way the extra white took up blocked. There's going to be many of them.

They're just going to basically work like here. You need like this like constitute. Yeah. Totally. Yeah. But you guys, I mean like so you guys are all crypto investors. You're like VC people and VCs tend to be the people who at the beginning of some kind of new crypto concept.

They're like out there being the salesman and like saying like, oh, like this is what makes this, you know, new development so great. And like one of the selling points of NFTs that you guys were like, you know, shilling to the world was like, oh, hey, creators, they can get royalties on resales of their creations. And like now that this has become a thing, now you're like, no, we're going to pull that back. To be clear, to be clear. I never said any of that about royalties. I think royalties were cool while they were being enforced.

But again, royalties were totally opt-in. Royalties were not designed in the blockchain to be enforced. They were a suggestion. I do also think you're painting all capital markets participants with a single brush stroke, which is a bit like saying like everyone. Well, how could you treat us like we're all the same just because we're VCs? How incredibly. Not all VCs.

Is that it? Exactly. Starting that hashtag right now. But no, no, no. I mean, I'm just pointing out. First of all, I think most NFTs are dog shit and I hate NFTs for this reason. Because it's like me, it's just like it's been this kind of like scam narrative. for certain venture capitalists who raise these weird funds built around creator economy,

like bubble stuff. Defi is really the only thing I think is actually like a real innovation in the space. NFTs are just... I don't agree with that. I don't agree with that. But here's what I will say. Here's what I will say. Here's what I will say.

Is that there's always these two forces in crypto between like what, you know, crypto, the term crypto, traditionally, like, it's kind of a right-wing term, right? It's sort of skews like, okay, hyper-capitalist, hyper-anarchist, you know, this sort of, or anarcho-capulist, really, libertarian kind of feeling, right? And the term Web3, it points to the same stuff, but it's kind of the liberal version, it's more socialist, it's more like, oh, we're reinventing the web, we're giving power back to the people, that kind of thing, right? Crypto always has both elements, and those two elements are always in tension. And in NFTs, right, you see those two concepts. Like one concept is, okay, these are, you know, just pure financializing anything in the

world and allowing it to be traded instantly and in a totally unregulatable, unstoppable, unstoppable way that's like the crypto element. And the Web3 element is like, oh, well, but, you know, you have these royalties and the creators are getting paid and it's like all very kumbaya and, you know, everyone is helping everyone and it's wonderful. And these two things are always fighting each other, right? They don't just kind of sit here and nothing changes. There's always a tension and that tension is fought over in every part of crypto, whether in DeFi, whether it's in layer ones or layer two's, about like, oh, public goods funding, but like, oh, no, it's a bare market, so never mind, we're not going to do public goods funding.

We're just going to, like, try to pump the token. In the long run, you cannot fight the evolution of markets, right? Markets evolve over time. Like, they don't stay the same. They don't stand still. And in a time when everyone's getting paid, everyone's making tons of money, NFTs are all going up. It's all one big party. It's very easy to be very kumbaya and say, okay, great.

You know, NFTs are both this, like, capitalist hyper innovation where everyone, and makes a ton of money, but it's also this, like, socialist wonderland. When you get into a bear market and all of a sudden, people are feeling poor and everyone's losing money and all these exchanges are in this massive mad dash for market share. Like, yeah, there are going to be some people who are going to say, look, I don't want to do royalties. Like, they're not enforced at the smart contract layer. I don't think they're required.

And competition forces that to happen. Yeah, but where I would disagree with you is like you keep saying that when creators get royalties, then it's like a kumbaya socialist thing. But I would say, no, that's a capitalist thing. That's them being entrepreneurial. And like, you know, this is, you know, what this person is doing. They're saying like, hey, like, you can't trade this without giving me my royalty because I'm a business person and I created this.

And the more that it gets traded, that shows that there's value in it. And I should get like a piece of that because it's my creation and the value comes from like what I created. And like this actually goes back when we discussed this before. I afterward wanted to ask Tom because Tom was like, oh, I feel like, you know, I don't a certain point, like, let's say, you know, board APR club becomes like super successful. And he was just like, oh, it just seems ridiculous that they should make money on every single trade after a certain point. So I would ask, you know, are you a question? Like, so for,

you know, some of these things that you've invested in, would you say like, oh, they should only make a certain amount of money. And then after that, they shouldn't make anymore. Like, the more successful they are. No, no, no, no. Then at a certain point, they shouldn't. Right. That's not what I'm saying. Which is why, like, why is it that you're saying for creators if they get to a certain point of success, that then they shouldn't make any more off of the trades after that. It doesn't make any sense. Yes, it does. Because what I am saying is that right now, the enforcement of royalties is a norm. It is not enforced in any way. Creators can't enforce it. That's the whole problem. Yeah, I'm not talking about norms. I'm talking about.

I see what Laura's saying. Like, let's say we could snap our fingers and make it enforced. My point is, like, companies require additional labor and capital to keep running, right? So it's like naturally they should be able to pay for themselves because they're performing additional laborers additional costs. I think it's a little bit actually more like copyright. Right. Like copyright laws in the U.S. are like what? The artist's death plus 70 years, that seems a little bit more insane to me.

The fact that like you can have a legal monopoly on like a concept, you know, even well past when the artist is dead. It's like that to my mind doesn't seem seem right. And I think that's kind of more how I think about royalties where it's like this work has, you know, existed and yet you get to keep basically taking. fees and perpetuity. But it's also, obviously, something that has come up with defy projects as well, right? Which is like, why does this exchange, you know, get to just keep taking, you know, five dips? Why do tokenals get to keep taking, you know, five bits forever? It feels more like

rent-speaking versus- I understand the point you're making, Tom, but it feels very distinct from the point that Laura's making, which is that why is it, isn't it unfair to say, okay, most companies get to keep the perpetual revenues of what they create, except creators, creators have to get jipped by all these exchanges. The reason why I don't think that is a legitimate counterpoint is because why was it in the first place that these royalties were being paid to the artist, right? It's not because the artist asked for it. It's because OpenCC decided to respect it. OpenC just decided, hey, this is kind of cool.

It's part of the ethos of crypto. So we're going to do it. When other exchanges decide not to do it, like from the beginning of how these NFTs were designed, it was not enforced, which means that at a software you could create. NFTs that enforce this at a contract level, right? That's what Terra is doing. People are talking about how ridiculous Terra is because of the fact that Terra is forcing a tax on every single transfer of Terra, right?

That is obviously absurd and ridiculous, but that is the equivalent of how you do it by enforcing it at the business level or the contract level, right? Binance does not make a suggestion that, hey, could you please pay me fees every time you transact on Binance and don't withdraw your full balance, right? No, they take the fee because that's their fucking business. That's how it works.

there's no suggestion within Binance of like, hey, please pay me fees. With NFTs, it was always a suggestion. It's not enforced. And so if it's not enforced, when somebody builds a business that doesn't take that into consideration and you say, oh, my God, you're ruining the value proposition of NFTs. It's like, well, you guys were, you guys just decided to do this, right? If you want to enforce something, you need to create a mechanism that enforces it, as opposed to just, we're going to be mad at you on Twitter if you don't do it.

So I have a question for you. If we were to imagine a world where there, there were no royalties for resales, then you think that it would make total sense if the creator only made how much they made in the initial sale. And then if the project became much more popular later, that they wouldn't reap any rewards from that. You think that that would be totally.

Maybe we would do that. Okay, so two things, Laura. We talked about this on a few years ago, right? If you don't allow resales, that means that you are going to capture, or sorry, not if you don't run resales. If you don't capture rent in the resales, right? You don't capture it. You don't tax the resales.

Then the NFT will sell for more up front because the person who's buying it keeps more of the value as it grows, right? This is just like, there's just basic kind of economics. The other thing that you can do, if you want to capture some of the upside is don't sell everything. That's what Yuga Labs did, right? Yuga Labs held back some of their cryptopunks. Cryptopunks went up a lot and they were able to profit by selling more crypto puns later. There's a very easy solution to the idea of like, hey, I want to capture some of the eventual upside. Just don't sell it up. Just keep some on your on your balance sheet until you actually want to sell it into where the market's at.

I feel like you guys are talking over each other a little bit. I mean, I think, A, that doesn't work for like one of one collections. I think Laura's saying like philosophically, let's say we could snap our fingers and design a system where your royalties are mandatory like on Terra, right, for transfers. Like do you agree with the idea that art should be entitled to this versus Steve saying like technically it's not possible. So like where is the market going to net out? And I think those are like two different, two different questions. That's a fair point, right? Like, practically speaking, it's very difficult to imagine how you could enforce this at a smart contract level without doing something ridiculous like what Terra is doing. If you were to do that, let's say you were to do what Tara was doing, then I would say, okay, fair game. You design this to enforce this tax and people who buy it get to decide what they, you know, they're opting. The thing there, the thing there that's different, though, is that the validators are the ones basically getting paid to enforce the contract that the fees are taken, right? It's quite a bit different than just like the like I'm an application. And this gets back to this problem of like in crypto, unlike normal computing,

we don't have a very clean separation between sort of like the base thing running things and the application. And the end user might think the application is the same as the base thing. Like I bet you 90% of open to users don't know the difference between Ethereum and Opency. They kind of think they're the same thing, which is fair, right? Like they watch some fucking TikTok video that was like how to how to get rich off NFTs and then they like downloaded Metamask and that's all they know. Right. So I guess my, the reason I guess I feel like this, this royalty thing is like so contentious to some extent is A, the application layer cannot actually enforce a lot of things on its own. And B, the base layer is

not meant to enforce these kinds of like specialty rights. And so I think I think it's great when you're an artist. If you're Tyler Hobbes, kudos and good for you. Like this is, Go ahead. Do whatever the fuck you want. You're basically like, people are still buying your shit, even in like the worst part of the market for you. I just think that this is like the 1% problem of like NFTs. Like it's only going to be the highest value ones who are ever going to even be able to do this.

The average shit's on NFT, like they're never going to be able to have enough pricing power to do this. I actually just had a great idea when you're talking about stack separation. I think really something that would make everybody happy is we introduce a new MED boost relay that blocks transactions that don't pay artist royalties. And then, imagine everyone mad at that.

I mean, you know, I think everyone working at FlashBots had a very stressful a couple months. And that would have made them have a way more stressful

a couple months because like they would have the NFT DGens mad at them on top of just the like layer one politic goes. And the NFTDGens seem much worse to get angry. That's hilarious.

Well, okay. Let's, let's wrap up. up the last story. After the merge, there's been a lot of drama around flashbots in particular because of how much market share flashbots has when it comes to block building. So right now, Tom, do you have actually the stats of what the current numbers are for flashbots? I just did. I think it is around 40%. Yeah, that's what I saw most recently on Twitter. Basically, a huge portion of the blocks generated on proof of stake are now being generated by

flashbots. And this is causing a lot of hand-wringing within the Ethereum community. It's also causing a lot of hand-wringing at flashbots. They're kind of, in many ways, a victim of their own success. So it feels like a very much analogous to what was happening when, you know, a lot of these Bitcoin mining pools were getting really huge and people were starting to get very nervous about decentralization. Flashbots, of course, is a little bit different than actually controlling, quote, quote, hash rate or controlling stake per se. But it does mean that a lot of the software that is being run is being, is busy depending on one particular third party for a lot of the blocks that are

being built on Ethereum. And of course, the MEPV that's being extracted on Ethereum. Any perspectives on what's going on with the flashbots? A couple of things. So I know, Tarun, you're close to that team. But, you know, so I'm not going to pretend to be like some MV expert or anything.

But, like, I did a show about this, this summer. And I did some, like, preliminary interviews beforehand. in. And when I was learning about it, I just was like, it seems like flashbots is a centralizing force in Ethereum. That was kind of one of my takeaways. And then it sort of felt like almost like a taboo thing to say out loud or something. And then, of course, when the tornado sanctions thing happened, and then they were like, oh, shit, shit, we're going to, you know, open source our relay code because we realize that we should have more relays. and there should be other options. Like, you know, it sort of just feels like, I don't know, it just feels like if you'd been kind of investigating it,

it would have been kind of obvious that that was a risk. And then suddenly when this, you know, outside event happens, it like highlights that. But it just was surprising to me that they didn't realize it before or that people didn't call it up before because that was kind of one of the things that I noticed when I was researching it. I don't think that people didn't call it before.

So, by the way, quick disclosure. So actually all of us are investors into Flashpots, both Dragonfly and Robot. So we know the team reasonably well. I think people who are kind of close to the MEV world are always aware that Flashbots had a huge amount of influence and a large effect on what was going on with respect to Ethereum blocks. It's just more obvious now post-merge with the growing dominance of MEV boost and the fact that Ethereum issuance is a lot lower.

So a larger portion of block awards are MV. Yeah, but I feel like if anybody had just thought through all the steps, like what this is going to look like post-march, you could have figured that up before. Like you didn't actually need the merch to happen. There were definitely people who are angry about it. Let's put that way. I would say that there's a large discourse on it.

But of course, it was only amongst the people reading the technical docs. So of course, that was 10% of the addressable market of people. But yeah, like all the other block builders were like, If you follow the Rook Twitter, like every day Keeper Dow was taking like a shot at FlashBots and giving an argument for it. Or BlockTrout or whatever. Like every single one of the other builders

has been saying this for months. It's just that you have to remember the historical context that led to FlashBots. Ethereum was definitely getting destroyed in parts of 2019 because people were just spamming the public mempool to do all these like, back-running attacks and front-running attacks, it became unusable for a lot of average users

because 90% of the block could be someone sending the same transaction 100 times, and then no one else could get into a block. And so this was meant to be a way of moving that sort of bid sniping off-chain so that it's not clogging the entire block for the rest of the users. Now, naturally, such a thing will have some centralization effect, but also naturally, you know, in the same way that a mining pool operator or staking pool operator controls the pending transactions that they send to all the stake or miners that are subscribed to that, you will also have a similar sort of centralizing force.

So the question here was like, do we go for some notion of like welfare optimization? Like we want the welfare of all the users who want to get into a block to go up or do we want sort of, you know, a pure decentralization argument? And so that was the original reasons the FlashBots 2.0 Flash Boyce 2.0 paper was sort of pointed this out in 2019. Right. But like at this point, I sort of feel like the incentives are, it's like a tragedy of the commons kind of situation. Huh? What's the alternative right now? Yeah. Because like people, the reason why the percentage keeps going up and up is because it's more profitable for them to use that. And so like I feel like people will have to be. sacrificial, they'll be like, oh, I'm not going to do something that's like financially

in my own interest to like keep Ethereum decentralized. But then you're always going to get the people that are going to be freeloaders and be like, oh, well, I'm just going to make more money. I don't care if it's centralized. And to be clear, there was also true of the mining pools, right? Back in the day when the mining pool, like when there was, I can't remember which money pool was that like had 50% mining pool market share. The reason why was because they were the most profitable. Most miners don't actually care. They're just pointing their lasers at whatever is giving them the most Satoshi's per per hash. So they're, most people are just going to be like, yeah, whatever. And when the, when the, when the crisis basically gets bad enough, that's when the market

starts to self-regulate by like, you know, the, the staker at the margin basically says, you know what, I'm going to stop running flashbots. Now, it's not every single person is going to do that, but a few people are going to say, you know what, I'm going to stop relying on flashbots because it feels like they're, you know, the block preparation ratio is too high. They're going to start relying on some of the other block builders. And slowly it's going to self-regulate, but it requires this political activity actually take place, right? Like the conversation that's happening on Twitter of people being mad and people saying like,

hey, this is bad for Ethereum. The exact same thing that happened in Bitcoin, right? It took a while, but eventually people start caring more politically about what's going on and that causes people to change their behavior. So I think from my perspective, in a way, what FlashBots is is trading off centralization for efficiency.

And there are times when you have to do that in the development of a protocol. And, you know, FlashBots, is always looking, if you talk to the team, right, they're always looking forward to like, okay, eventually, you know, PBS is going to be enshrined in the protocol. It's not going to be like them running our crap in a sidecar to geth as it is today. But we're not there yet, right?

We're not at that point where the flashbots architecture is basically in protocol. And until then, FlashBots is like kind of emulating that final state of what Ethereum is going to look like. And that incurs some degree of centralization. The thing is like FlashBots is good at their, they're good at what they do. They're good at what they do. and if you're good at what you do,

you're going to get more market share the same way that these mining pools that were better than anybody else, we're just gaining tons and tons of market share. So this will regulate, but it requires us to have this debate in public. Yeah, and for the record, right, there's no known technical solution

to any of this that exists right now. So PBS is sort of a, PBS stands for Proposer, Builder separation. The proposer is the person who, the stake distribution, you assume there's some sort of Oracle that's able to sample, like, which person's stake gets used for the next block. The proposer has to pick blocks that are built by other people.

So you can think of the proposer as sort of an auctioneer. You can think of the block builders as people bidding for, like, here are the transactions you should get in the block. And whoever is able to pack the block the best and get sort of like the highest revenue split between the proposer and builder usually wins. Right. But that was the other thing is like when I realized that Ethereum was going to move to PBS, I was like, how is that also not centralizing?

Because the builders, there's probably going to be some builder that becomes more dominant that is just better at packing the blocks. That's capitalism, though. Like, I don't see how you get around that. Like, that's an understanding of the actual execution of these contracts correctly and being like, oh, this particular type of transaction flow has this type of transaction stream. I'm willing to subsidize it this much to get it in. This other type of transaction stream has a spiky flow, and I can't subsidize it as much.

and whoever's the best of constructing that portfolio is going to be the best block builder. And the fact that's open is different than the rest of the normal finance, right? In normal finance, you actually can't even participate in that. But the idea that someone is better ends up being hyper-specialized. I mean, that wire jump in Alameda so large in other firms didn't grow as much last year. It sort of has the same concentration effect because it has to do with the economic value in the transactions, not the actual cryptographic content of the proofs of these transactions. And that's what I think people don't get.

But is that a risk to have that? Like, is that also a risky centralizing factor or force, or is it not? At end of the day, it's hard to get around there. What's the vector you're worried about, right? I think the most likely thing that you can imagine, let's say that the most dominant block builder basically prepares every freaking block. That's sort of the degenerate case where literally no other block builder is ever competitive. other than, you know, let's say, you know, SuperBuilder.

And SuperBuilder, let's say they are OFAC compliant, and so they will never include a transaction from an OFAC restricted country, right? That can get you into a world where basically you have de facto censorship. If this one Superbuilder is just so good that nobody else can ever prepare a block that has anywhere near the profitability of the Superbilder block. Now, practically speaking, how likely is that? Not super likely, but it is, I think, a possible degenerate case in a world of PBS. To Turun's point, like in a world with MEV, I don't think there's any real way around that,

as long as there is an open market for MV, the people who are best at extracting it are going to ultimately be able to win the block space. I think the best state equilibrium is that there are many applications, not just uniswap sandwich attacks and not just like front running mints. There are many applications competing for this. So many that it's actually impossible to specialize in being good at all of them. And you will have builders who are really good at certain applications and building blocks when there's certain transaction volume for certain applications. And the transaction volume is kind of like distributed across all of them because then it will be very hard to centralize the economic value.

But otherwise, this is the part of cryptocurrency that I think people don't understand. They somehow think, oh, yes, we use some fancy cryptography and we've like avoided all these economic concentration problems. And then that's just not true. This is still a capitalist system. Like, if you're better at understanding the information flow before a block is built, and you're able to collate that into figure out an expected profit and loss for you faster than everyone else, then so be it. That is literally on every blockchain what keeps, you know, just decentralized exchanges humming.

Yeah, no, clearly a crypto isn't a capitalist system. I mean, these, like, crypto networks, they're all built around incentives. So, like, clearly that's, you know, part of what. is going on here. It's just, like I said, like when I was learning about it, I was like, wait, wait, wait. And, you know, it's interesting to hear your perspective since you guys have invested in all this. And we'll see what happens. There is a line of people who, you know, I guess I would say like there's like the MEV accelerationists versus the MEV can be stopped by cryptographic's mean camp and there are two very separate camps. The can be stopped by cryptographic mean camp is kind of

what are so-called fair ordering protocols. None of them have ever really been built in practice and work, and all of them make kind of quite large security assumptions that are very different than a public blockchain, in fact. They either make the latency significantly worse. They rely on some fallback oracle. So, like, the chain link arbitrum version of the world is that everyone will have these, like, fair or sequencing things

and, like, whatever transaction gets in first, most of the time will, like, be first. Now, of course, errors impossibility theory means, like you can't do that perfectly. So there's obviously theoretical limits of that. But I guess the main point is the M of the acceleration in this camp is like, hey, look, if we actually understand how much value is being generated, how much people's incentives are, we can design a better auction.

We can design a better auction that actually is able to redistribute things. It's able to like do other things with this excess value, such that it goes back to the users. Whereas the fair ordering side is like, we want to just not care about what transactions are going in and what values created, there still could be value extracted. We just want these like theoretical guarantees of first in, first out. And it's that's sort of like a philosophical debate that has no technical solution at this juncture today in plain. Yeah, yeah. No, I agree that, like, first of all,

I definitely agree that the two sides are a little bit like oil and water. And in some sense, they like actually really, really dislike each other, which I randomly stumbled into and did not expect when I discovered that. And I was like, whoa, whoa, whoa. Like, yeah, that was kind of interesting. But I agree that a part of it is like a values thing. And, you know, other people have talked to me about this potential for MEP to result in rebates for users, which I actually think is super interesting. And frankly, you know, in terms of the sort of fair ordering thing, like as far as I understand, arbitram is like super centralized. So even when you kind of like try to minimize MEP, it's centralized anyway. So, you know, I, yeah, I, I'm not a technical person.

I'm not a technical person. This is the reason I kind of like, you know, why do I write the researcher? A lot of it has to do with like proving these things formally because like everyone who's working on this shit doesn't seem to care about there are, there exists some bounds to how well you can do either side. And everyone is just like kumbaya to my side. The other side sucks. But in reality, it's a very subtle tradeoff between these two things. And unfortunately, like, you know, people's economic incentives don't let them research it. So I unfortunately am blessed with that bag. Well, we're very blessed to have you doing God's work to ruin it and proving to people

what they might know. The point is just that the people working on these things otherwise are incentivized to choose their camp, right? Instead of like being neutral about it. Fair enough. Well, look, to close out this thread, the one thing I will say is like, look, we've got a lot love for the flashbots team, but we also, like, you also need some tough love for them. Like, they're in many ways a victim of their own success. And so to the extent that you want to yell at them for being like, yo, why are you guys

like centralizing Ethereum? Like, do it. Give them shit. Tell them like, hey, you guys need to figure out a way to not make Ethereum what Bitcoin was in 2017 when a huge amount of concentration was taking place in the mining layer. I think this stuff will get figured out, but it won't be perfect because there is no perfect, right? There is no. no pristine, you know, kind of final state that this stuff is going to end up in, there's always going to be a tension in blockchain between centralization, decentralization. Same way, as I was saying earlier, between capitalism and socialism. There's always some tension. And that tension gets resolved in part through economics and in part through politics. And we're seeing that

playing out right now. And I think that's important. So I'm glad that people are pointing this out, that people are pushing flashbots to have answers. And, you know, they're doing a lot more open sourcing stuff. They're talking about how their roadmap is that they're going to make it easier for other block builders to become competitive with themselves, which is the kind of thing that a normal company would not do. But when you're so tightly, when you're tied so tightly to the fate of Ethereum, in some sense, like flashbots only succeeds if Ethereum succeeds. In the same way that like, you know, the Bitcoin mining pools, back in the day, like, they also got the same calculus is that they only survive if Bitcoin survives. And if Bitcoin is going

through like the civil war because the miners are too centralized. And people now think, oh, we should throw all these, we should throw all this out and start over. It's like, okay, never mind, no, mind. We're not that centralized work. We're not going to try to be monopolist. And so I think that that push and pull is essential to how blockchers work. And there's also this interesting thing of like off Ethereum, MEP,

exists quite. In fact, I would argue it's much because it's less efficient. It's more extractive from users in some ways. But I think between Solana and Cosmos, there's sort of different models of how MEDs, auctions, how they'll get extracted, how the technical details of the chain influence, how well these things work. And these experiments are going to influence, like, how people design around what sort of the limits of, like, what fair means. Because fairness can have many different

definitions, unfortunately. Yeah. And actually, I know we're over time, but like last point on this is just like interesting listening to see you talk about how there's kind of like capitalist tendencies in crypto and also socialist, which I had never, like, thought of that. Like, it's weird to me that it had never occurred to me that that is true. But it is, which is like really interesting and fascinating about crypto that it's like this thing that's, yes, capitalist because of incentives and what we talked about. But then it's also this thing that's like trying to get everybody, you know, involved and kind of distribute value to like everybody. And it was just like a fascinating thing. But anyway.

Anyway, well, this has been super fun. We got a little bit heated between you and I, Laura, but it was a lot of fun, and I'm glad you were able to jam with us today. So that's it. Until next time, thanks, everybody. And signing off. Yes. Hi, everyone.