Unchained - The Chopping Block: Why Hacking The DAO Is ‘Something to Be Proud Of’? - Ep.323

Episode Date: February 24, 2022

Welcome to The Chopping Block! Crypto insiders Haseeb Qureshi, Tom Schmidt, and Tarun Chitra chop it up about the latest news in the digital asset industry. Show topics: their thoughts on The DAO hacker reveal the importance of The DAO and why it made Robert fall in love with crypto how the alleged attacker was found (feat. a deep dive into the Morden testnet and Wasabi) dumb DAOs: why the guys are unimpressed with DAOs seeking to purchase, among other things, the Denver Broncos and fast-food restaurants how to fix price discovery for DAO mergers and acquisitions whether Anchor’s 20% yield on UST is sustainable in light of Luna Foundation Guard’s decision to backstop its reserves with $1 billion in BTC why deploying funds from a large treasury is difficult why the BlockFi fine was not a surprise what lessons the BlockFi settlement taught crypto companies why Tarun still loves Olympus DAO and OHM how EthDenver has changed since the NFT boom   Hosts Haseeb Qureshi, managing partner at Dragonfly Capital https://twitter.com/hosseeb Tom Schmidt, general partner at Dragonfly Capital https://twitter.com/tomhschmidt Tarun Chitra, managing partner at Robot Ventures https://twitter.com/tarunchitra  Robert Leshner, founder of Compound  https://twitter.com/rleshner  Show Topics: The DAO attacker revealed https://www.forbes.com/sites/laurashin/2022/02/22/exclusive-austrian-programmer-and-ex-crypto-ceo-likely-stole-11-billion-of-ether/ DAO trying to buy the Denver Broncos https://www.buythebroncos.com/ Fries DAO https://fries.fund/ BlockFi Agrees to Pay $100 Million in Penalties and Pursue Registration of its Crypto Lending Product https://www.sec.gov/news/press-release/2022-26 Terra and UST receiving backstopped funds https://www.theblockcrypto.com/post/134871/luna-founation-guard-token-sale  OHM bonds as Vol-reduction strategy https://twitter.com/tarunchitra/status/1495807277978341385 Eth Denver https://thedefiant.io/ethdenver-scene-cryptopunks-community/    Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, everybody. Welcome back to the chopping block. Every four weeks, the four of us get together and give an industry insider's perspective on the crypto topics of the day. So quick intros. First, we got Tom, the Defy Maven and Master of Memes. Next up, there's Robert, Crypto Connoisseur, and Captain of Compound. Third, we've got Turun, the Gigabrein, and Grand Puba at Gauntlet. And finally, myself, I'm a Seab, head hype man at Dragonfly. All four of us are early stage investors in crypto, but I want to caveat that nothing we say here is investment advice or legal advice or even life advice. So, Robert, we were just commenting how incredibly young you look with your beard shaving off. I got the feeling that Bitcoin's back at 20 bucks with how young you look. How does it feel to be unburdened by the beard? You know, I shaved clean for the first time in two years. I think it's going to be the catalyst to bring us out of this temporary bear market. So time will tell, but ask me in like three weeks if it worked. Is this part of like being a new father you're trying to reinvent yourself?

Yeah, exactly. You know, you got to start from a clean foundation. So, you know, reboot, you know, start eating a little bit healthier, you know, this week, too. So, you know, maybe you'll have a younger fitter me. Baby only sees baby face. What's the, it looks like you're back to the internet compound. You know, it's like, for showing up, it's your first day. I just really love decentralized money markets, you know.

Yeah, me too. You know, it's like, I can't wait to see if they exist. Wow. Is the, is anything weird? the new diet, anything particularly crypto-relevant? Is it like meat only? No seed oils. No seed oils.

Nothing that comes wrapped in plastic. Nothing processed. Yeah, I feel like since COVID, my diet has gotten a lot worse than what it used to be pre-cutting. Yeah, mine too. I gain like 30 pounds. Yeah. I got to work on that.

Okay. Well, we've got an interesting piece of news this week. So our namesake, Laura Shin, so first of all, we're all. We're all here to congratulate Laura Shen because, one, she just released her book, The Cryptopians. It just came out this morning. Actually, it was just announced that my place, which I'm not at right now, just received the pre-order book who just arrived this morning. But I don't actually have it with me. Otherwise, I'd be flashing it on screen.

But in the book, it was announced that there was a huge reveal. And the reveal is that we now actually know, according to Laura Shen, allegedly, we know who was the infamous Dowhacker. Okay, so I think at this point, given how many people have entered crypto in the last couple of years, I'm going to guess that for a lot of folks, this is ancient history. So we need to crack open the history book. So the Dow hack was a hack that took place, I think this was 2016. Yes, 2016. So in 2016, one of the very first major projects on ICOs on Ethereum was this thing called the Dow. And the Dow was basically a decentralized, essentially decentralized venture capital group.

And the Dow was, at one point, it held something like 5% of all the ether in existence. It was a huge project on Ethereum, back when Ethereum didn't have a whole lot else going on. And it got hacked. And as a result of trying to ameliorate the side effects of this hack, which would have had the Dow hacker controlling a huge amount of the ether in existence, Ethereum very famously pulled the switch to hard fork into two versions of Ethereum, one which today is called Ethereum Classic, which is a sort of parallel universe in which the hacker got away with it and owns all the ether that he stole.

And then the current version of Ethereum, which we know today is just Ethereum, which is actually a sort of forked and rewritten version of Ethereum that made a temporary exception in the otherwise automatic rules of the blockchain that this hack got undone and the contract got fixed in such a way

that it is no longer hacked. So for a long time, it was unknown who this hacker was and we just discovered that it is a, let me see, it's a 36-year-old Austrian programmer who is the co-founder of 10x,

which is some weird ICO project that I don't know very much about. Do any of you guys know anything about this person or know anything about 10x or have any connections to the story? So my only connection to the story is that the Dow hack is actually what got me excited about Ethereum

and actually got me to notice that Ethereum existed and was working. So the Dow Hack is actually what brought me into the ecosystem originally. I was not like an ICO participant. I didn't think it would work, you know, to be honest. But the Dow hack was like the moment in time that got me paying extreme attention

had made me want to build things in the space. I did at some point, like invest like $12 in the 10X ICO. So I do know the project that way. But I will, you know, caveat and say that anything is allegedly, we actually don't have any conclusive evidence that this person is the Dow hacker, you know, there's always the 1% chance that he's not, so we don't want to have this person skinned alive. But aside from that, I have never heard of this person.

And if he is, it's almost something to be proud of at this point, year down. Because it's one of the most monumental events in the history of both crypto and blockchains and Ethereum, period, full stop. You know, it's one of the most controversial things ever occur. you know, a huge amount of people think it was ethical and deserved and positive. And it started to prove out most of the really important questions about, you know, is code is law or is code not law? Led to the fork of Ethereum into Ethereum classic and Ethereum. And I kind of think it's something to be proud of to be at the, you know, that cataclysmic event.

But we'll see if at some point it's proven that he's actually the one who did it or if he admits to it. speaking of proof and speaking of allegations, I actually found the details of this article to be super interesting. Basically, once the ETH was stolen, it was swapped via ShapeShift, which is a basically a ring exchange for doing cross-chain swaps, and basically swapped into Bitcoin, and then it was dormant for a while. And then a later date, they swapped it into Grin, or then they mixed it, and then they swapped it into Grin, which is another privacy coin. And basically along this path, it was revealed that chain analysis, which is a blockchain analysis group, was able to unmix the transaction from Wasabi Wallet, which is how he tried

to gain some privacy for these, for these bitcoins, which normally would have other ones been, you're very obvious, but who the holder was. And so there's an unknown capability that chain analysis has. I presume it was pretty somewhat easier this time because the transaction was so large. in size. So there's a very small anonymity set. You can't really hide a such a large Bitcoin transaction. And then basically this swap from Bitcoin to grin was sent to this person's grin node, which was his nickname.io, so not very stealthy there. But pretty interesting, you know, details. I also remember using, you know, shape shift in the very early days when you kind of do,

you know, other types of swaps. And just the fact that she analysis can also unmix, mix Bitcoin in in certain scenarios is also pretty interesting. So I was slightly skeptical of the story of that. It's as simple as chain analysis has some magic way to unmix wasabi transactions. Like maybe it's true, but it seems more plausible that they just had not that big of an anonymity set and they just kind of chased down all the things in the anonymity set. And they're like, oh, this one is connected to this guy who like also has these other things. Or, you know, they're basically able to plausibly rule out some of the other outputs.

And as such, you know, they're going to go and say, like, oh, we were able to figure out that it's exactly this one. I don't know if that's true, but that's my gut feeling here is that this is not like a large scale. Because this is the first time we've heard about this, right? And this is not a live attack. This is something that's like purely intellectual curiosity who hacked the Dow at this point, given that obviously they didn't get any ether. They have Heath Classic and I mean, who's going to cash out the Heath Classic that the Dow hacker stole? So it does seem like, I don't know, I don't know, I don't know to ruin if you have a perspective here, but I feel like, like this may be overrepresented what chain analysis did here.

I will say one thing that I remember was that, you know, there's this very, if you were in Ethereum at that time, there's a very early test net that 90% I'm sure of people have not heard of called the Morden test net. It doesn't really exist anymore. And if you were paying attention on Twitter in maybe like five or six months ago, Laura and a few other people were like, hey, does anyone have an archive copy of the Morden TestNet? And nothing rang a alarm bell in my head more that someone is trying to do some type of like deep analysis.

Because the people who were actually asking for the copy were like Hudson from the EF or at that time, I guess he just left him in flashbubbeds. Like Laura, one of the two Alexes who worked at the EF, I forget which one it was. either the one who went to balance or in DNS or the other one, Van Dissend or the other. It was like very like particular people, very close to Ethereum Foundation plus Laura and that like clustering was very odd to me. And so it did actually seem like there was some much more weird digging going on. The more detestment thing was like the big big thing.

So I think I suspect that so the more intestine was like what, you know, like one of the modern East Testaments, but it was deprecated in the hard fork. It was kind of basically killed by the Dowhack. So I suspect there might be some truth to this because it was really hard to find anyone who had like that Tescent archived and the fact they were able to go back to that.

And they asked on Twitter, like that part, I guess wasn't said in the article, but like, I mean, you can go find the tweets. Like if you search Morton and Tesla, I don't think they're deleted. So I'm a little, I have a little more hope in that regards. With regards of the grin thing, I didn't,

I'm a little less, I'm sort of in your boat that maybe there's something else going on. Like, it's just like, the volume didn't make sense. Although one hilarious thing to think about is that Eve Classic has had so many hard forks, soft forks and itself, forget about hard forks. I mean, like, actually just forks from like miners not mining it

and like big trades getting front run. That it does make you wonder if, uh, if it is really this person. and whether like they were making like large transactions and like some of the exchange softworks that we saw on ETC. I don't know if you guys remember like ETC basically got 51% attacked it at one point, right? I was wondering if some of those are actually related to this person trying to like do this grin thing. Because the timing was around the time grin was like sort of coming online. So there's a couple of things to corroborate these other other aspects that I don't think were mentioned.

But the Mordintestanet plus this sort of like ETC. forking being around weird transactions. Like there's something there. I don't think perhaps, perhaps there's more to it. But like, yeah, there's a lot in the story that does check out. It feels like behaviorally, the story of, okay, we found all this evidence that it's you. We present you with all the evidence. You're like, no, no, no, it's not me.

And you delete all your social media records and kind of run away. I mean, to me, I'm like, okay, that's kind of all the proof that I would need to know that this person is probably the hacker? Is at a certain point, like, you know, we're processing a little bit too much and then running away a little too fast? I give it 99%. They could be scapegoated.

You know, there's a lot of different factors which make it, like, not definitive in my mind. You know, just because you delete your social media presence doesn't mean. Robert, how big are your 10x bags that you're... Oh, I own the whole project now. I think 10X, clearly. Your 10X is now 1X, Robert.

I'm sorry to tell you. I don't think he was actually able to cash out that much, though, which is the funny part. Like, most of it is still sitting there in the classic. So I think it was only like a few mill or something like that from the article. So maybe this gets to a slightly related but kind of crazier thing to think about. Like, it's been raining cats and dogs of like attackers being found in less short period of time. And it kind of feels like a lot of the reason that this has. happened is like whoever did the attack, whether it was this person directly or like this person

was just an accessory, they were unable to get out of more than a certain percentage. So like the Bifflin X hacker, right, the actual hacker, as far as we know, could only get out of $900 million out of that like four, four point five. Well, that's what's missing. So in the best case scenario, the person who isn't caught got away with that. That's a pretty low take rate given how much they were able to get out of, right? So I think like the moral of the story is eventually whoever actually does this stuff realize that it's actually really hard to get out in like serious size. And then they start trying to like get accomplices and the accomplices get caught.

That's my that's my sort of rough theory as to like how how we kind of have some of the bumbling mistakes we've seen. Is this even illegal though? Was this even a hack? Like basically they, he stole the money and then they just changed it so that the money was not stolen. So it's not like a normal defy hack where the money is actually permanently gone. In this scenario, like, everything was kind of reverted. So like, really, who lost here?

Well, it's reverted on one chain, right? Every ether holder, right? Every ether holder lost. The blockchain fractured into two. Every user, every developer lost in some way. I think there's kind of a stretch, though. Like, ETH Classic is nothing. You know, it's not like, oh, I'm missing out on some huge chunk of value.

ETH Classic is basically worthless. So it's like in reality, you know, you didn't actually lose that. Tom, I'm excited for your Twitter DMs shortly. Yeah, who lost? I mean, this is also like the number one event that like Bitcoin maxis point to in terms of the like flexibility of Ethereum monetary policy. Okay. For sure. It was a narrative loss for sure.

I mean, it's a big loss of credibility, I feel like. Yeah. Like the community decided that the hack was so bad that they made a new version of the blockchain without the hack. Right. And like, yeah, that was an unbelievably contentious decision at the time and probably still is, right? So who lost in some ways? It's, it's Ethereum in general lost in all of the users and developers. Now, it's years later, you could say that like maybe you made everyone a lot stronger and I think in other ways it did. But like everybody lost, right? Sure. I guess the point is there isn't like a group of depositors that is short, you know, tens of millions or hundreds of millions of dollars.

it's sort of more of a, I agree, a branding and sort of narrative loss more than anything else. But it hasn't been repeated, right? People wanted this with the parody multi-sig as well and it didn't happen. We don't know, we know that people wanted to do it in large mass. I would say that parody was much more contentious than the Tao. In the sense that like parity was like, we're going to exit Ethereum and then they did, right? And like, Rugg pulled the client. It was a very different, it was even more crazy that they,

It's also possible Ethereum would be worth more today if the Dow hack had never happened. So we can't measure the counterfactual loss of value, right? It could have been that it would have taken much longer for a turn of their ones. Maybe never have made compound if the Dowhack didn't happen. That's what we've learned on this episode. That's true. I probably, I never would have looked at smart contracts if it hadn't happened. I don't know.

You would have just gotten rich off 10x. Never had to bill anything. No, I wouldn't have. I wouldn't have because I wouldn't have gone to the Ethereum ecosystem at all. Yeah, like I hated crypto before that. Like I way long ago like dabbled in Bitcoin and was like, uh, Bitcoin,

you know, whatever. It's not going to take over the world. And then the Dow hack is what got me excited about crypto. Why did it get you excited about crypto? Why? Well, what was exciting about it?

The fact that you could build using a computer program, like a, you can start to program financial assets on a blockchain. Like, like the fact that like, the Dow was even deployed. It was like such a monumental achievement, I think, for society at large that, like, the Dow as a smart contract getting deployed with the ability to, like, gather funds and deploy

those funds. And like, like, it was incredible. Like, it was so inspiring. Like, it made me, like, immediately look at Ethereum as, like, something usable, you know? It's definitely one of the more sci-fi things that I read when I was learning about crypto. I was like, holy shit. That's so cool.

Yeah, it's like the dream of you like of like crypto itself. And like, you know, some people like need certain like events in the world to like get it and like have a click. And like right now with like the truckers in Canada, like people are getting like why you want like censorship resistance money. Like even though people like got that like 10 years ago, like people are like learning the lesson. Like the Dow was like to someone who's like a builder, it's like you can build extremely complex financial infrastructure on a blockchain. It was like, wow, like ball mode, you know. I feel like the other thing about this story is that it's another vindication of this narrative increasingly arising that crypto is actually not good for laundering money.

And it's like all these big hacks, they keep getting unwound or they keep getting found or they keep getting frozen. And I think we're just going to keep seeing more of it. So the ammunition on the side of, no, crypto is actually not great for stealing funds or laundering money. It seems to be getting stronger every time that we uncover one of these. One thing I just want to point out of a 10x, I didn't really know much about them. Although clearly there was, I mean, just go look at their chart, 100% insider trading on this.

And like, you know, you can just like see the volume like 100x in the like like last two and a half weeks. Oh really? Yeah, it's like this is a chart of like, hey, someone's going to take some views. Can you throw it up on the screen. Yeah, throw it up on the screen. Just go to the 10x one month chart. It's like. Let's go up or down.

It goes up and then down But it's like You can see the down there's like perfectly linear line Like it's like hilarious Maybe it's like the bet that the attention is going to go up And then the price is going to go down And people realize that he's a bad guy It's a beautiful chart

The one month, the 30 day Oh 30 day Oh wow 30 days It's just like look at this linear thing coming down And look at the volume Look at the volume Look at the volume

Wow Oh, it hasn't had that volume in forever. Yeah, yeah, true. That was actually the other interesting piece of evidence. I think it's less damning. It's kind of more circumstantial, which is like, I forget the name of the Dow hacker, but he was basically suggesting to people that they should short Ethereum right before he drained the Dow, which is like, you know, I don't know why you would do that.

It seems pretty leaky, but programmers are very rarely good traders, a lesson I learned firsthand in trading. One other thing is the 10x co-founder guy definitely started a bunch of scammie. Yeah, he started a ton of scammie like D5 Forks in the last year and a half. So I don't know if that, I don't know what that, what you want to make of that. But like he was tweeting, he was tweeting today. And like, then I was, I looked at what he made. I was like, wow, okay.

You were, you made a lot of these like pangolin wash trade, or sorry, pancake swap like, like, wash trading. liking things. Robert, you've come a long way as an investor. I still invest in shit coins like 10x though. All right. From humble beginnings to more shit. No, no, no, no. They're now shit NFTs. That's true.

Yeah, I still get suckered by all the new things and shiny things on the crypto menu. That's fair. That's fair. What is crypto for if not losing money to dumb things? Speaking of crypto and dumb things, so I think we should start doing like a weekly segment on dumb DAOs. So there's a new DAO that is trying to buy the Denver Broncos, which is a sports team,

it's American football team, estimated sales price of $4 billion that I guess is going to go on auction. And buy the broncos.com is out there trying to, it doesn't even have, it looks at, so Dirge United, let's own the Broncos together. It doesn't look like they even have, any place to actually put money yet. They are recruiting people who can maybe help them figure out how to set something up on

juicebox, I suppose. I don't know. Like right now, so far, I think historically the biggest Dow is the one we talked about last time at Sange Dow, which was about $50 million. So this thing is about 1% of what it would need to be in order to buy the Denver Broncos. I don't know. What do you guys think the likelihood that we see bigger and bigger Dow's start going after more sensational things like this?

here's my prediction and I can be proven completely wrong and I hope to be proven completely wrong. I think what will happen is over time, instead of capital being formed to do something cool like this, because they're never going to hit their goal, right? You're going to see like more permanent pools of capital available, like either from Dow's or like protocols or whatever that are able to like respond to these events. So like we're already at the point where there's like protocols and Dow's with like a billion dollars. right. It sounds crazy, but like, it's true. They do. They have like a billion dollars. And like, yeah, the Denver Broncos are like completely out of reach even for like the biggest protocols and the biggest Dow's. But like a minor league team is not. Right. Or like, you know,

like things that don't cost four billion dollars are like that that is available. Right. So like, I don't think we're going to see these like quick let's fundraise as much money as humanly possible to like do this thing. Like that's a really hard coordination problem. I think what we'll see is Dow's and protocol treasuries and like these players like emerge that like have hundreds of millions of dollars available to like like seize opportunities that like eventually like oh we should call you know M&A Dow you know you want to do like a SPAC for DAWS a DAX yeah exactly I was going to say like a DAG so which football player is Chaman I don't watch football so I don't know anything which football player which football player is like who's your back promoter The cheerleader, the one is like, yeah. Oh, I see. Okay. The promoter.

It's got to be some celebrity who's going to, like, make the SEC angry. But there's always going to be one, right? At least one. Yeah, I feel like you probably need Daniel Sesta to go in and be the guy who tries to buy the sports team. Cifu? Cifu. Or Cifu's either. Or the 10x guy.

Apparently, he's quite charismatic out here. Yeah, I mean, I'm just saying there has to be some, like, cheerleader. Maybe Tom Brady is the, like, is like, the foot. ball spack, a Dow spec driver. Because like, he's already done all these crypto commercials. He's like, he's just like prying. And, you know, you know, I, I just like think that that that will be the catalyst. Although one thing to remember is probably the longest running Dow like structure in the U.S. that's like largely capitalized is the Green Bay Packers where like people in the town like own shares in the team and they get some dividend. They can vote on some things, right? Like,

they do actually have these kind of like cooperative ownership structures and sports. I just tend to think most of the people who want to do it right now are unequipped to actually do any of it, led in part by a fact that like all the news articles for this thing, tended to quote PhD students who are advising the Dow instead of anyone working on the Dow, which I found hilarious. Speaking of dumb Dow's, maybe this should just be a recurring segment. This is my current, like my current favorite DAO or SPAC Dow.

This is Fry's Dow. They're buying fast food restaurants. And that's pretty much it. I feel like generally like that the Dow formations that we see are- Do I get anything for donating? Well, you get a token. You get fries token. And in theory, you get some repayment from the cash flow from the fast food restaurant.

You know, normally they're doing something very epic. You know, they're buying a copy of the Constitution. They're donating to Julian Assange. They're buying the never-euvre. Broncos, but this is just buying some fast food restaurants. So respect. You know, start, start small, starts practical. What voting rights of the token have? Like, voting on which chain to be a franchise of? Or like, how does this, like, what's the token purpose here other than just like people? Yeah. I think it's just like a governance token. You know, we put a bunch of money in a

pot and then we can, we can vote on which, you know, or maybe they want to open a franchise. You know, they have a lot of, they have a lot of options. This is unisonable. back. This is just private equity. Like, I feel like crypto's is getting more mundane. Yeah. Yeah. I mean, it's private equity except people are trading like the mezzanine tranche of the

fund or something, right? It's like... Yeah, that one's going to end badly. Well, clearly the franchises are going to lock them out at some point, right? And just be like, fuck you. Like, it just seems like unlikely that won't happen. I think that one's going to have a principal agent problem. And the people organizing the Dow are going to figure out a way to get

all the money and the people who are investing in the fries are not going to get any money. Imagine if your dividends were paid in fry NFTs, though. Then you've given all your money to people who go out and buy real world businesses, make the real world money and you get JPEGs. Like that's probably that. I think a lot of NFT projects aren't so different, especially these ones that are funding movies that haven't been made. It's not so different.

There will be some weird thing that goes off. The difference of the franchises, I think, or franchisers. We'll just, you know, put a foot down on this. Here's a chopping block experiment. We should profile a bunch of bad dows and then the audience should tell us which of these bad dows the four of us should take our real money

and put into one of these bad dows. So a year later we can come back and be like, oh man, we lost all of our money in fries now. But let me tell you about the experience along the way in a way that would make us really like credible. We could do a dating game for dows where we bring three bad dows and then like one person who's like, I want to join a Dow.

And we ask questions on their behalf and then they have to pick and then we, yeah. That sounds like an amazing game show actually. It would be kind of funny. I'm imagining now Dow dating. And I feel like, I mean, we've talked some about protocol M&A. It'd be interesting to see if we end up doing Dow Eminet. And, you know, so one of these kind of failed takeover bid Dow's is kind of like, okay, well, we didn't buy. the blockbuster or whatever. But, you know, like the NFL Dow or the Broncos Dow like rolls up

a bunch of a smaller ones, like buys up fries down. It's like, look, you guys don't need fries. Like, let's just go buy the Broncos together. All I will say is I've been spending a long time thinking about how you would do an M&A protocol. I've noticed that. I've noticed that. Turun, give us the rundown of M&A protocols. The TLDR is like if you were watching the Faye Rari merger and disclosure, Robert and I are Faye investors. Faye Rari merger was a very contentious thing, and most of the contention was price discovery. We're like, someone said a price, someone said I want one-tenth of price, and then people were like, okay, we're going to like pull all of the conversation offline and come up with the price and come back.

So it was like, it was like a contentious thing. I think if you can make a protocol that separates price discovery for two DAOs in such a way that each DAO votes on like putting a portion of their treasury to be the to sort of be the backstop price. And then you have this kind of like continuous auction where people who own both sides of the token can basically lock their tokens. And then at some point in the future decided by governance, basically the trade gets executed at the final price. Now, now you have to make this like resistant to whales.

You have to have some rage quit things. Some of the fay argument was that there wasn't good enough rage quit. So there's a lot of details to make it work as a protocol. But if you can make the price discovery some type of like thing that you see where people can like basically vote on the final price or like stake for the final price. I think you can alleviate some of these problems and make it relatively generic for like certain types of governance contracts. And eventually Denver Bronco Dow will use this to acquire Frydown.

And we will have called here. You will have called it here first, Robert. Yeah. Your point around price discovery I think is well received, but it's maybe think why people who are not auctioning things or selling things that might be interesting data targets and not trying to solicit DAO's actively. This is a pool of capital that is not super price discerning and is actually looking to actively looking to deploy.

You would think actually trying to get these people to bid on your thing is probably a good use of time and money versus like, you're just leaving it to this sort of standard, you know, high-netware or PE firms or whatever. I mean, the whales still have more power in this thing. But I think at the end of the day, you want to incentivize the whales to just, like, show their cards before the thing happens. And, like, somehow that's more how you want to design this. Because, like, right now you have this weird thing where, like, some of the whales want to just, like, only discuss things off chain. And then the price discovery is extremely slow.

Well, this is kind of a more general topic, I feel like. I mean, you saw the same thing with sushi when there's this interplay between the deal-making that tends to happen, you know, in the context of a Dow. Oftentimes there's dealmaking that needs to happen behind closed doors for people to feel like the negotiation can kind of happen in a way that is suitable to both parties. But the nature of a Dow culturally kind of demands that all the negotiating happen out in the open, right? And it kind of reminds me a little bit of, you know, democratic countries that kind of feel like, look, we should be beholden to our, you know, electors in the way that we make decisions diplomatically. But it's also necessary for diplomats or legislators to be able to go behind closed doors and kind of hash it out. and then come out with a proposal that they present to the broader constituents. How do you guys think about this dynamic in the world of Dow's?

Because it feels like this keeps happening, right? You have this feeling that, look, the founder or, you know, a group of people who are kind of responsible for BD at the protocol level, they want to have the flexibility to be able to, you know, go behind closed doors and negotiate bespoke deals and maybe present them to the Dow. And communities, by and large, really resent this. They don't like this phenomenon. But it seems pretty universal. I think it's effectively always going to happen.

There's no doubt that, like, I mean, that's just the nature. Until we actually have private smart contracts actually work and like can do a lot to facilitate a lot of discovery without publicly showing your, you know, imagine you could sign a commit reveal to a blockchain that only like some subset of parties you want to see can reveal. And then you can reveal your bid. And then people coordinate that. Until we are at that point, which we're not from a program.

We can do that if you. Not from a technical standpoint, but from like a programmatic standpoint. It's just like the programming that right now is in the house. Like no one's going to do it. Like it's not like it's just like really not at this at stage that that's ready to do. Like it's not theoretically. It's obviously theoretically and proof of concept practically possible. It's just not in like, hey, you're going to put this in like rainbow wallet possible.

And obviously that, you know, five years more of engineering that might be good. not be true. But right now, that's still going to happen. I think that's why you want something where it's like people vote on this auction, then they get a certain amount of time and then they have to reveal their preferences, right? Like right now, the problem is the preference revelation process is like extremely asymmetric and like one side will reveal one thing in a way that like forces the other side to take longer to reveal instead of like shorten how fast they reply, right? And if you can make it something where they have to like kind of have a back and forth, that will actually, at least, you know, in a lot of cases, I think, reduce the complexity of

these deals. Well, one interesting case of Dow governance, quote-unquote, coming into play was in the last week we saw a huge drama play out in Terra. So Tara, for those who are not familiar, it's a layer one blockchain. It's been around for a few years now. It used to be a stable coin. It still issues a stable coin called UST. And it's a little bit complex to explain all the moving parts.

but basically one of the most popular protocols on Terra is a protocol called Anchor, Anchor, a DeFi protocol in which we are actually Dragonfly as an investor. And Anchor, essentially what they do is they offer very high yields to people who stake some of their assets, including stable coins, into Anchor. And Anchor, because it offers very high yields, so on the order of about 20% yields, those yields in this environment are not really sustainable. It's very difficult to get 20% yield doing anything right now, given the way that yields have come down in defy.

So anchors' reserves were draining over time. And if anchor were to lose a lot of the supply that were locked in anchor, it would have very negative effects for the overall terror ecosystem, as well as for Anchor itself. And so there was a proposal in anchor governance and in terror governance broadly to inject a bunch of capital to backstop and kind of help strengthen the reserve to allow Anchor to be able to continue offering these high yields for a longer period of time. And so apparently what happened was LFG, which I think is the something something guard.

They injected $450 million into Anchor in order to protect the reserves. And we also saw very recently announce a $1 billion fundraise to create a billion dollars of BTC that is going to be backstopping the terror ecosystem further. So a huge amount of capital that is going in to protect the anchor ecosystem in a way that obviously, you know, I was reading through some of the forum comments in the governance forum for Anchor. It was very interesting seeing this phenomenon

of a lot of folks who obviously don't directly have access to that capital. It's kind of maybe even slightly unclear where the capital is coming from, but they're just like, yeah, yeah, yeah, we should shove a bunch of money back into Anchor to keep it all going. Curious what you guys think of

this whole Terra Anchor saga and where you believe it might be going. I mean, Tara is a little bit between a rock and a hard place. Like, people, clearly there is a large percentage of the, you know, UST in Anchor that is exclusively there to get this yield. And if that yield goes down or disappears, that kind of unwinds and obviously that greatly impacts the Luna price just by virtue of the fact how Terra is designed. I feel like this is, the 450 mill seems like maybe a stopgap, right? Like, you kind of need that money to maybe make sure that this thing doesn't bleed out immediately.

but it feels like maybe the rest of the money could have better spent designing new sources of demand for UST, which was, I think, you know, part of the thesis of some of the products they've been developing so far. And I don't, it doesn't feel super sustainable to me. Like, I feel like a billion dollars could go a long way towards developing new apps or partnerships or use cases that are going to generate, you know, new organic sources of demand for UST. So they don't have to keep, you know, sort of burning the cash, so to speak. It's an interesting point. I agree, Tom. I mean, if you squint, it's like an extremely simple ecosystem.

system, which is Luna makes UST and the demands, pretty much all of the demand for UST comes from, you can earn 20% on it. There's a little bit of demand outside of that, right? But like it's you can earn 20% on it. And that 20% comes from Luna. And this works. You know, eventually it gets so big that there's sustainability issues. If it works forever and it's small, there's.

It's a perpetual motion machine and everyone high fives. I think long term something has to change fundamentally in the economics of the system. You know, this can keep working for a while, right? Like, just put this in a spreadsheet, you know. If you're paying people 20%, you know, let's say on their UST, which you created from Luna anyway, like this keeps working for a while. You know. But eventually it becomes unsustainable. and I think one of the primary foundational pieces of the economics of the ecosystem will change.

It's going to have to. It might be the yields go down. It might be you meant U.S.T. not with Luna. Maybe it's, you know, something totally left field. Who knows? But, like, I expect something is going to have to give. You know, Tommy raised this point of like, look, you could take that billion dollars and do a lot more things with it. You know, you could build more use cases, build more partnerships.

And to a certain extent, I kind of disagree in the sense that, um, we can't. We have run out of ways to use money to buy adoption. We're like so far down the utilization curve of money that you just think of all the captive capital right now in crypto, especially among the layer ones. We're just thinking about the current generation of like, you know, all the folks who are like Polygon and Avalanche and Terra and, you know, NIR protocol and all of them have raised crap loads of money. And it's very unclear how they can use it to do anything. And that's ignoring even the previous generation, right? Like think of how much money Falcoyne has, how much money takes.

Bezos Foundation has, how much money, you know, these EOS, for that matter, has, or Tron has. All of these folks have huge balance sheets, and they have absolutely nothing to spend it on. And so I think we're in the situation now where the uses for capital to produce adoption or to produce partnerships even has become incredibly inefficient. And what you see now mostly is that there are tons of bidding wars between all these protocols in their balance sheets for partnerships. If you're Tom Brady or you're Melania Trump and you want to launch an FD project, you just go to all these foundations. You say, hey, I'm going to launch an FFT project. Give me your best price. And it's like, okay, $5 million, $10 million, $15 million,

to launch a project on top of them. That's where these treasuries are mostly going. So I don't know that Tara had a lot of other ways. Melania clearly didn't talk to the Salana Foundation based on all of the logistical met fuckups and also then all of everyone working like Anatoly and Salauna Twitter being like, we're not associated with this whatsoever. That's true. That's true. I bring it up in Jess, but you know, most projects do look like that. I don't know. I think some of those products are just like fundamentally crap or like unneeded. And so it's like, yeah, four billion dollars is not going to save EOS. Like it's just impossible. But it's like, you know, stable coins are like the killer app of crypto. I mean, there's like,

what, 13 billion and like, tether sitting on Tron? Like, like, what is that doing? Is you being used for gambling, you being used for payments? I, like, staple coins are fundamentally like the killer app of crypto so far. And so I'm not super convinced that they've tapped out. But point well taken, this is why I think the 450 makes sense because it takes a while to sort of build these things out and deploy. You can't just like, you know, put this money to work overnight and expect dividends in the form of new applications. But it's like, you need to do something. You can't just sort of like keep holding on and hope that people are going to stick around. I mean, one thing I would add is that unlike some of the other stable coins that are sort of similar in structure like Selo, the Terra design never had an explicit reserve.

And this is basically bolting on what you've seen in some of the other stable coins of like a basket of other crypto assets as a reserve. So it's not like it's unheard. And the size of, given how large Luna is relative to Zello, I think actually there's still under capital. capitalized on a dollar per dollar bait redemption basis like if we compare it to other sort of undercladlers so so it's not so crazy size wise you know i i i do agree that's kind of like hard to buy like there's customer acquisition cost in crypto feels like zero 10 or infinity right there's like there's no in-between cac it's like it's either it's really it's either nothing people are using it for free because they're earning fees or something or it's like a little bit and you can get them

or it's just like you're paying infinite to keep them. So I think it is a little hard because it's not as kind of discreet in a lot of other industries, I guess. Also, the Terra ecosystem is a little weird, right? There's like there's been a bunch of new protocols like Mars protocol has like a three-month UST lockup. For the record, I don't really own any UST or use it. I. I don't really own any UST or use it. I've used it a few times, but not seriously. And part of the problem I had with it was like the only application you could really, if you're not in Korea with disclaimer, in Korea, there's tons of stuff you can do with it.

But like there wasn't really that much, right? There's like anchor, astroport, Mars. And I do feel like until they have more protocols that are just like the base core blocks, it's really hard to just like pay for new users, right? For like Polygon or Avalanche, everyone just redeployed unisop compound dave right like and that that was enough to like but like terror doesn't quite have that like the only thing that's there is anchor right so it i don't think they they could spend their way out of this in any scenario unless they make the backstop make

people have confidence in it well if doe is listening in the interest of replicating the successful defy protocols for ramethered chain i might suggest to you make a ribbon clone which seems to be the thing that is missing from the Terra ecosystem so far. So you know, you got to have every Lego piece together. And don't go wrong. Doe is also an incredible hustler and finding random teams, building all this stuff. So I just think it's like there's a cart for the worst thing. And to Haseeb's point, I don't think throwing money at the horses is going to work. It's might as you might as well load up and get as many carts as possible. I mean, ultimately is buying them time. And it's, it's a real question of whether Terra can use that time profitably to change the calculus.

Because what may end up happening is that, you know, six, eight, nine months later down the road, we're in the exact same spot. And it's time for another billion dollars of backstop. So hopefully that doesn't happen. Obviously, we're, you know, a dragonfly were long anchor. So we hope that things work out. But it's clearly not in a, you know, very promising position right now, given the, given the state of the yield situation.

But speaking of yields, one of the big piece of news this week was, BlockFi. So BlockFi entered into a settlement with the SEC. It agreed to pay $100 million in penalties and to pursue registration of its crypto lending product. So for those who are not following the saga, BlockFi, it allows you to get yield on your crypto. It's a kind of centralized company that has become increasingly popular in the last few years. And the SEC, well, actually, many different state regulators, state securities regulators started going after BlockFi in their states, basically saying that BlockFi was offering securities, unregistered securities, and that's not cool.

And so this culminated in the SEC, finally extracting a massive penalty, or relatively massive penalty from BlockFi, 100 million, and BlockFi agreed to stop offering their yield products to any of their customers until they register. So this is interesting on a few dimensions. I mean, one is that, okay, $100 million is a big penalty,

but it's also not a big penalty relative to the market capital, BlockFi, which is, you know, they sort of built a business by doing this and then we're able to get really huge and then essentially, you know, take a, I don't know, like a few percent tax on their business to go and fix it after the fact. But of course, it also reverberates across the industry. In that one, it creates a path for other regulated institutions to start offering the same thing in terms of crypto lending products. And it ultimately maybe produces even a little bit of a moat for BlockFi, given that they are going to be the first to be registered, presumably, with the SEC, for the offering of this crypto lending product.

So curious, Robert in particular, I'm wondering what your reaction was to this news. Well, I think in some ways it's good, because, you know, if you're a business that accepts money from retail customers and does whatever you want with that money to generate a return and then passes that return to customers, that's clearly a security, right? And, you know, I think that's been relatively obviously a security or a securities-related business for a really long time. They weren't just gone after for offering a security, but also being an investment company as well as fraud. You know, it should be clear that, like, if you are a very traditional organization that is doing that, you will have to comply. It doesn't matter that it's a new digital asset.

It doesn't matter that it's a new type of asset. that if you're in the business of taking money using your discretion and skill and excellent prowess to make a return and handing it to customers, that's old school Wall Street, right? And so I see this as no surprise. I imagine that there's a lot of folks in the regulatory space that are not surprised by this outcome either. You know, at compound labs, we offer a product called compound treasury, which operates on the assumption that, you know, giving money to a business to generate an interest rate for you is a, And so it's only offered to accredited investors, you know, as an exemption from registration. But knowing that businesses will be able to just register this with the SEC is extremely positive. I think not just for businesses that look like BlockFi, but for other types of businesses that don't look like BlockFi.

I assume next up are securities exchanges that are trading crypto, right? And eventually you'll see all of these businesses and things like them, not just lenders, but trading platforms, brokers, you know, all of these, you know, types of entities, you know, being registered businesses. You know, yeah, they're not trading equities or they're not supporting the equities financial markets, but they're doing crypto and the crypto financial markets. And I think long term, it's going to be really positive for the space. In the short term, obviously, it's chaotic. But giving them an opportunity, you know, to become, you know, regulated and registered businesses is extremely positive long term. Makes sense.

Spoken like a true elder statesman of lending. I agree. I think it seems like a good thing for the industry that we finally have some regulatory clarity, even if it only comes through enforcement. Some clarity is better than no clarity, even if it'd be nice to have that clarity ex ante before people end up running a foul of the lines. I actually really liked Matt Levine's take on this, which was like, you know, normally, if you want regulatory clarity,

you can hire a bunch of lawyers and spend a lot of time. And maybe after several years, you'll finally get approval or yes, no, or a path forward for whatever the product is you're trying to build. Or you can do what BlockFi did, which is build it and then take a small haircut after the fact, but having already built a great business. And it doesn't seem like in crypto,

that is often the best path forward, given that there doesn't really seem to be a lot of responsiveness or quickness to actually get clarity on the little products people are building. So was EOS the most successful regulatory clarity entity in history based on this? It's got to be. Yeah. Unfortunately, we didn't really get a lot of clarity from EOS, right? Because if you look at the history of the SEC going after token issuances as securities, so like EOS slap on the wrist, like, you know, didn't have to register.

Kin slap on the wrist, didn't have to register. Telegram, nope, you can't do telegram. Telegram token was like too security-like. You can't do the defy money market car lending thing. It was just 100% fraud. Was that just fraud? It was all fraud all day all night. Yeah, it was all fraud.

Oh, I see. Okay, never mind it. Never mind on that one then. And then XRP is still up in the air, unclear where XRP is going to land. And of course, you know, Ethereum, whatever, statute of limitations, I suppose. Dow was the security according to the SEC.

So it feels like we've kind of got a big range and there's not a lot of clarity even from what the SEC has gone after. I mean, I think it's going to get more interesting if the SEC goes after NFT stuff. Or like, someone goes to start going after NFT stuff. I feel like these things are all things, you know, the BlockFi settlement to me just read like, I read some tweets from lawyers from 2018 and then we zoomed forward and picked a number. You know, like it wasn't like people weren't already saying a lot of this stuff, right? It's just that the government decided to pick a random stopping time in a random

number and then we got an answer. Yeah, no, I think that's fair. That's a fair critique. All right, so we're winding down on time, but one thing I want to make sure that we get to is there's been an amazing discovery in the world of defy. So we were talking earlier about stable coins with Terra. And it turns out the renowned stable coin known as OM, otherwise called Olympus Dow, it turns out that it was recently discovered by some leading scientists and researchers

that own bonds actually serve as a volatility reduction strategy. Tarun, do you want to cover this? Yeah, yeah, yeah. So, you know, I've showed Ome as not being all like pure Ponzi in this show many times. I spent, you know, my theory for whenever you should try to figure out if a crypto project is just a pure Ponzi or whether there's some actual like sort of mathematical reason that it should work is if you see it, last a really long time and then there's a huge crash and somehow still is not dead. And you see that like a certain number of times, right? Because like something that's like a

pure Ponzi fake Algo stable coin, you know, you'll see that you'll see the death spiral really fast, right? We've seen enough of these. It dies once. It dies once. ESD maybe had a little like fake second bump. But yeah, yeah, yeah, yeah. Okay, it's the there I mean. It's not the suicide roller coaster. It's like one instant, you know. Yeah. Yeah. And Ome had this interesting thing where it like somehow didn't die, even though like theoretically, right, like everyone was like, oh, a lot of Algo Stable coins. They're just these like kind of overly simplistic controllers, you know, like somehow you can't really get them to work without putting huge backstops to be speaking of, for instance, backstops. Like the Stello and Terra models effectively end up needing some backstop.

and you hope your staking coin is a good enough backstop, but eventually you have to diversify and offer kind of different types of yield, different types of duration risk to people on the other side. And so, you know, I think it certainly fairly has gotten a lot of criticism because they created the greatest meme in crypto of 2021. And, you know, there's a lot of stuff that probably was Ponzi-like, like the staking mechanism was really not really doing anything for the protocol. But this bond mechanism that they invented and now is the reason that it became like the third most forked contract on EVM chains.

And that the third most involves like Hero 6, like throwing out safe math and throwing out libraries, but whatever. Like assume that like third most did with the hero six I used for this. One of the reasons it's so stable is that this bond thing actually does work in some way. There's there's some sort of meaning to like why having having bonds as a way. for a Dow to rebalance his treasury, like, works really well. And, like, people have said this forever. Like, Tom has probably said this since 2020, that, like, Dow should be, like, issuing bonds. And, like, you know, there was all these versions of it, like, um, options and stuff

like that. None of them caught on. But the own bond is, like, is this cone of truth. And, uh, yeah, you know, this paper kind of formalizes that and argues that, look, you can actually lower the volatility of the asset that way by adding more bonds. And as you add more bonds, you can make the Dow's treasury management strategy stable. So it was more like, you know, I'm not sure, you know, I talked to, I actually met the own folks in Denver. I don't think they like invented this figure, like real with that assumption that this is, it was just that they were like fly by the seat of their pants and they kept adding all these features.

And somehow the Frankenstein worked and like, you know, under the cover, you're going to be like, okay, there's actually like life underneath. It's not just, you know, the dead robot. Well, that's the magic of Darwinian evolution, right? There's no, there's no single hand controlling all this, but what rises to the top is the adaptations that lead to survival. It's just like, you know, think about a year ago from right now. That was like peak algosable con. That was when Mark Cuban got rugged on Titan. Do you remember that? Like that was a year ago? That felt like. That was like a year ago. Time has lost meaning in this industry. But, but my point is like there were so many things that died and owned and not. So like there's some. tone of truth, and that was hopefully what we tried to illustrate. So the last thing is that I think a few of us were in Heath Denver over the weekend, which was absolutely incredible event. Huge numbers of people there.

I heard that there were 15,000 people at East Denver. And from what I heard, the last East Denver, which I think is 2020, there were 1,500 people. And there were thousands of people on the wait list. The last, in Denver, I remember you could get a free ticket for it because they, like, had that capacity. Yeah, it was pretty nuts. Totally crazy. Just like people spilling out under the street.

They're like, you know, lines, like two blocks long to get into the venue. All the hotels are booked out and everything. So it's great to see, obviously, people excited and great to see a lot of energy around Ethereum and crypto. I will say, though, that, like, I was a judge for the hackathon. And I don't, I feel like the projects were not substantially better or they're not, like, 10 times more projects. So I feel like a lot of people were in town just to party or, you know, talk about their project or whatever, but who knows, maybe it was just my, my bias.

So are you saying that it was the modern equivalent of what Bitcoin Miami was, but for Ethereum? That sounds right to me. Yeah, except for the weaker form of COVID spreading. That is true. That is true. There was some poll I just saw on Twitter that was like, did you get COVID at Denver?

And I think it was like 60% yes, 40%? Wait, 60% yes? Yeah, it had like 150 responses. Holy crap. Okay. Well, the other thing was that, so when I was in line at East Denver, because you have to take a COVID test, actually get in, clearly it wasn't very effective because obviously there's a lot of COVID spreading there. When I was in line at East Denver, everybody in my group who was in line with me, they had all joined crypto in the last year. And none of them were devs.

So I think it is, it does vindicate a little bit that this is the kind of Bitcoin Miami for Ethereum in that there were. there were, you know, almost everybody there was into NFTs. And that was their, that was their relationship with Ethereum and what was happening in this community. But just kind of shows how big the tent has gotten. And, you know, crypto, I don't know, I feel like, more and more, I feel like an old man in the space, given that I'm like, wait, you guys don't know about defy, you guys don't know about.

Look, you're getting old, Robert's getting young. I know, I know. We're going opposite ways. We're passing each other in age. Terrible. In a year, I'm going to ask you to invest in my new idea. Wait, time is a circle. Is that what you're saying?

Time is a circle? Yeah, time's a circle. I'm going to go back to the outset. Yeah, yeah, yeah. Robert, we'd be like, look, we got to, he's so young. We have to invest in him. Yeah. That's going to be our memo.

You know how right now there's high schoolers who are doing defy? Eventually there's going to be like middle schoolers, you know? They're already middle schoolers buying NFTs, man. That's the thing that's kids. I mean, like half that conference was kids. I mean, maybe this is a funnier observation. I've never been so many places that checked your ID. Like, and like, we're very, like, it was very clear that they were like the Rari kids were not, they weren't even at the bottom of the.

They were too old. They were too old for that. Yeah. They're kind of the median. They're the medium now. That's nuts. That's nuts. Anyway, all right, guys.

Well, this was an interesting couple weeks. Hopefully, we'll be back soon with another episode of the chopping block. Can I ask our favor? Yeah. Can we get Laura as our guest next week? Oh, yeah. Let's do the deep dive. We should have a deep dive with the...

I totally agree. Okay, next time, homework assignment, all of you out there and all of us in the show, we've got to read the Cryptopians. And the next time we're going to have Laura on for a history lesson. And pitch us which shitty Dow to put our savings into. Oh, yeah, yeah, yeah. The shitty Dow, I think that the shitty Dow thing is got to be a sticking point. Yeah, we need to do that for real.

We got our marching orders. All right. All right. Thanks, everybody.