Unchained - What's a Fair Value for Crypto Networks Like BTC, ETH and SOL? - Ep. 721

Episode Date: October 18, 2024

How do you determine the value of decentralized networks like Bitcoin, Ethereum, or Solana? It’s not as straightforward as traditional investments. Jon Charbonneau, general partner at crypto investment firm DBA, joins Unchained after writing a paper that dives deep into the complexities of valuing blockchain networks. He explains why applying traditional equity models to networks such as Bitcoin falls short, how tax inefficiencies in staking rewards impact valuations, and whether Layer 2 solutions like Optimism and Arbitrum are helping or hurting the long-term value of Layer 1 blockchains. Also, he looks at the big question—are these networks sustainable in the long run? Show highlights: What motivated Jon to write the paper What the main points of the paper are Why tax inefficiencies in staking rewards are a critical factor in valuing decentralized networks and how they differ from traditional corporate taxes What makes valuing networks tricky, as Jon explains how proof-of-work vs. proof-of-stake systems differ from traditional equity models How he thinks about valuing Layer 2s and whether they are parasitic to the L1 Whether blockchains are sustainable in the long term Visit our website for breaking news, analysis, op-eds, articles to learn about crypto, and much more: unchainedcrypto.com Thank you to our sponsors! Polkadot Mantle’s FBTC Guest Jon Charbonneau, co-founder and General Partner at DBA L1 & L2 Token Value Capture Links Previous coverage of Unchained on this topic: How to Figure Out Whether a Crypto Token Is Worth Its Trading Price ETH Is Down Bad, While Layer 2s Are Ripping. Are L2s Parasitic to Ethereum? Are Layer 2s Parasitic to Ethereum and ETH as an Asset? Are L2s ‘Parasitic’? Analysis Shows Ethereum Only Gets a Tiny Percentage of Fees Ether-Bitcoin Ratio Is at Multi-Year Lows, But It’s Just ‘Temporary’ and an ‘Opportunity’ Timestamps:  00:00 Intro 01:25 What sparked Jon's interest in this topic? 03:35 Key takeaways from the paper 08:30 How staking taxes could change the game 13:46 Why traditional models fail for blockchain 20:10 Are Layer 2s helping or hurting Layer 1s? 26:51 Can blockchains survive long term? 29:20 News Recap Learn more about your ad choices. Visit megaphone.fm/adchoices

And so in large part, that is what Ethereum is kind of making a bet with kind of all these L2s, at least from an economic perspective implicitly, is that it's worth this tradeoff. Like, we are giving up some amount of cash flows that's going to go to these L2s. But we're going to end up with, you know, a million chains that are all ETH denominated. And ETH looks like this more store value, commodity like currency, like asset that's kind of used everywhere. Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I'm your host, Laura Shin. author of the Cryptopians. I started covering crypto nine years ago and as the senior editor of Forbes was the first mainstream meter forwarder to stick over crypto currency full-time. This is the October 11th,

2024 episode of Unchained. Pocod is the original and leading layer zero blockchain with over 2,000 plus developers, and the Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem. Join the community at Pocodot.network slash ecosystem slash community. FBTC is the fastest-growing Omni-Chane BTC asset this summer. Join FBTC Points-inspired campaign where you can hold FBTC to earn sparks, lucrative yields, and token drops, all on your Bitcoin. Today's guest is John Charbonneau, co-founder of DBA. Welcome, John. Hey, how's it gone.

Thanks for having me on. You just came out with a paper about how to value tokens for both layer ones and layer twos. Why did you feel compelled to write this paper? Yeah. So it was somewhat of a successor to like a post that I had written probably about a year and a half ago at this point on just kind of talking through basic L1 economics. And I would say kind of the impetus for this post was I would have hoped at some point over the past couple of years or in the years before that we would have started to get more as an industry just kind of a better idea and common understanding of just terms that we use when we're like talking about these networks. Because it's been very clear when people are trying to think about the value that's moving through the network. and like what kind of value the tokens can capture, people try to use a lot of tradfied terms, and then people use them in six different ways. And then we end up talking about the same thing using like different terms of like some people will call, you know, issuance of cost and others won't.

And people, you know, what's like the profit for this network? And kind of the terminology just starts making no sense and then we just end up all talking past each other. So most of it was honestly just in that simple spirit of, okay, like, how do we get this terminology right such that we can actually just talk about these things, kind of in a reasonable manner back and forth. we all know what we're talking about. And so a lot of it was just out of, okay, like, what are some good statistics and terminology that we could use? And then I would say towards the end of it,

I also started to talk more about, okay, how do we fit this into our broader idea of, you know, based on that, you know, how much you go about valuing one of these things? And then how do you do that, you know, based on cash flows? Or you could think about, you know, is there also some other utility value for these currencies and kind of how do you try to bring those together when we're thinking about valuing these, um, and it's kind of assessing the health of these networks. Yeah. And it sort of feels like, the conversation is coming up in different ways because of, you know, things that are going on with Ethereum and layer twos. But also, you know, now, like people are calling into question of fat

protocols thesis and all kinds of things that were sort of like standard conventional wisdom for a long time. And in a way, it's like covering crypto over this long period of time, I almost feel like everybody in the industry are like little sculptors chipping away at this block. And like a sculpture is emerging, but we're still like in the early phases. And so sometimes, yeah, this question of like how to value these things is like, oh, now that we've chipped away at more of this sculpture, like here's what the new understanding is. But so go ahead and give us kind of like the broad strokes of your analysis. And then we can kind of go point by point. Yeah, sure. Happy too. So the main things I was trying to do to start were like, as I was saying, just set some,

you know, what are some basic terminology that we can kind of use across different networks? The really basic ones I ended up using were just TEV, total economic value, which is just very simply, what are all of the network fees, MEV tips for people who are capturing arbitrage and sending along that value to stakers, and then issuance, so token issuance, whether improved work or proof stake, what is just all of that total amount of value? And so that's what I just defined as TEV. And that's basically the pie that we're going to be divvying up over some period of time.

You know, there's X amount of issuance fees, all these things, you know, who's going to get those things? And then REV is very simply just real economic. value. So taking out inflation. We're just talking about, you know, network fees and MEP there. Because that and then that ends up effectively referring to, you know, what is the actual amount of money that users are willing to pay to use this network? So those are just kind of the basic terminology there. And then what I was doing also at the beginning was trying to set the stage of just getting the right, even a step back from that, just the right simple framing for people.

Because a lot of where I think a lot of analysis ends up going wrong is people try to look at these exactly like they do at companies. And that ends up falling apart on some spectrum because you can certainly imagine, you know, a company that puts everything on chain. And then, I mean, their financials still look like a company. You know, they have a treasury. They take money in. They take money out. They pick corporate taxes. They do all those things. And some of it gets lost in translation when people try to apply that to networks where those things like kind of fall apart. Ethereum being like a simple example of you don't actually have one sort of, you know, naturally unified income statement for this company that everyone is working together. There's no notion of, you know, corporate taxes coming

out of this thing when you are trying to assess, like, what are the expenses of this thing, what are the taxes that are people are paying? What you end up really having to do is try to look at subsets of different actors in the system. So you can look at like all token stakers or all token holders that aren't staking or the unison of like all token holders in the entire ecosystem. And then what you're basically doing is trying to like stitch together, you know, things like an income statement across all of those actors. So, you know, what is the total amount of money that all token holders made? And what is the total amount of money that they all spent on, like, operations?

So paying you the proof of work miners, validators, stuff like that. And that's why it gets a little bit messier is because you don't have this like naturally kind of unified idea where a company where you know it's just very simple. Like we're a centralized entity. Like here are our financials. So you kind of need to like stitch things together in that way. And then kind of going down kind of another step, I would say, the main distinction that you end up seeing in these networks is very simply proof of work versus proof of stake.

I would say is the general clean distinction, where in general, what you see in the vast majority of networks is proof of stake, you can assume that generally the token has some rights to receive all of the economic value that's going through the system. You know, you could stake your tokens and you could receive, you know, some version of all the issuance, all the fees that are being paid or fees could be burned and then it goes to all token holders either way. And generally, in proof of work, what you see is you have absolutely no rights to receive any value from the networks. You know, look at Bitcoin, very simply, like Bitcoin holders don't gain anything if people start to use a lot of fees, all of that because of miners.

Token holders are just purely losing money. They're just being inflated and they're paying it to miners. Minor caveat of like you can technically burn fees and proof of work, but we just don't generally see that in practice. So we just kind of put it aside. And then from there, you know, the basic thing that you want to start to think about if you're looking at, you know, what is kind of, if you're trying to look at like earnings and profitability metrics, how do you think about these things?

What it always ends up being as we try to like stitch those different actors together is when you're looking at the cash lows and the earnings. through the system is very simply of what do users pay to use this entire network as a whole? So that's the REV. So all the user network fees, all the MEV tips that are paid. And then literally what does it cost to run the network? So improve a stake is pretty cheap. It's usually, you know, you're paying on the order of like 5% commissions to stakers. You know, so, you know, there's some cost of all the different validators. You know, they need to literally run the boxes.

You know, I need to have an employee that's like managing this validator doing all of that. Improve a work, it's obviously much more expensive because you're burning a ton of energy. So everything ends up going to that. But for both of them, what you end up with at that bottom line is, you know, what is this idea of like a net income? If you look at all token holders as a whole, is that simple idea of what are the amount of fees, the RIV that people are paying to use this network? And then what does it cost to run the boxes? So in proof of work, you always end up with effectively a net loss of like proof of work token holders. They're just losing inflation like every single year.

Like as a Bitcoin holder, that's all you get every year is like you lose one percent inflation versus proof of stake. that generally that kind of profit margin that's left after, you know, paying to run the boxes, that can in some form go to all the different token holders. And so that's kind of the bottom line metric that we end up looking at and then we try to figure out that. And then you can go even further of like, does it go to stakers, does it go to non-stakers and then get into a whole different conversation there? Yeah, well, one of the things that interested me was when you started your analysis, you meet this point about staking tax laws or just taxes in general. So I just was wondering, like, why is it that you started with that? Because it's,

seems like that's sort of like a baseline assumption or premise that you think needs to be factored into all these values of valuing networks. Yeah. Yeah, that's a good topic we could tackle on its own. So the taxes were a good thing to start with. I particularly put it up front because I think it was one of the, it's a very concrete thing. It's also one of the better examples that demonstrates some of the differences when we look at these things as companies versus networks. So where a lot of people end up getting confused with issuance and thinking about taxes in these networks or like is issuance a cost to these networks or taxes across to these networks in, you know, traditional equity analysis, it's very simple to look at. It's like you have a company. It is in some jurisdiction, you know, the U.S. whatever.

Like there's a corporate tax rate that they're paying. So let's say it's, you know, 30%. That is money that is coming out of their bottom line. And then, you know, whatever those earnings are left over at the end of the day, those. are the earnings that the company has. And that is potentially distributable to shareholders. You know, you could do a dividend, you could do a buyback, whatever. And then from there, if you do a dividend payment, then it depends on where are the equity holders if they pay additional taxes on top of that dividend. And so where some of the comparison gets, I think,

confusing with people is in like these decentralized networks. There is no notion of corporate tax. There isn't that like, you know, calculating this post-tax bottom line. Like there isn't this clean number that makes sense to take out because any tax rate that has ever applied to any of these staking rewards is just fundamentally like it's not actually inherent to the value of the asset because the weird thing that ends up happening is it's very tricky to figure out because it depends on what jurisdiction you're even in and all of these crypto tax laws are super unclear but at least a lot of the major jurisdictions the general conservative tax treatment seems to be you know we treat all staking rewards so any issuance that you receive any priority fees and

stuff you receive as effectively income and that like probably gets taxes income. That ends up not making sense for a lot of reasons because issuance isn't actually real economic value and profit that you're returning. It actually looks more like a stock split. So like it doesn't actually make sense to tax it. But let's just take the assumption that it is taxed in these places. What it ends up looking like is effectively a dividend tax like like that is the comparison for it.

There is actually no notion of corporate tax. That's kind of coming out of the bottom line. So when people are trying to assess like the profitability of these networks, there's a rush to say like, oh, issuance is a cost because it makes. you pay taxes or people get like a little closer to the tree of where you say, oh, like, we should take the taxes out. But fundamentally in any of these networks, like those taxes aren't actually fundamental to the network. Like I could just buy all the tokens and then move to the Kamens. And then now like now there's no taxes on the staking awards. So it ends up

being very tricky in this idea of like we're trying to kind of stitch together the income statements with all the different holders. So what I think in practice you end up having to do is there's no idea that's like comparable to a corporate tax rate that you can just kind of take out of the bottom line. What we can do is say, okay, we have that net income number that I said before of like all the RAV minus what does it cost to like literally run the network. What you can do is after that we can try to estimate like what are the taxes that all of these different stakers are paying. And I think it is at least very important to keep that in mind even if it's not inherent to the asset because I think in practice what a lot of these networks end up with today is they

end up with this super tax inefficient structure where they're like issuing a bunch more rewards than they need to. And in practice, a lot of lot of people live in jurisdictions today where that is probably treated as income. So they're like returning a bunch of quote unquote value back to shareholders, but it's not actually real value. And so they're being taxed on this like not real value that you end up creating. So you could very easily end up with a situation where like all of these holders end up with a higher tax bill, then you actually return to them in like real fees that the users paid like ended up paying to use the network. So it's always this weird mix of like if you're a network and

you know, you're designing an economics for the network. Like do you take into account like the tax laws of the U.S. versus Europe or other countries, like, it's hard for me to say yes. But at the same time in practice, like, there are going to be different investors in different jurisdictions. Like, they're going to have to look at this. Like, if there's a high insurance rate and I live in a country where that's going to be taxes income, like, I'm going to have to pay attention to that if I'm considering buying the thing. So you ended with all these like weird differences versus companies is kind of where it ends up. And the tax thing helps kind of highlight nicely, I would say, where these are different from companies than where

they are similar. All right. So in a moment, we're going to talk about how to apply these different ways of valuing networks to some of the various networks that are out there. But first, a quick word from the sponsors who see make this show possible. FBTC is an OmniChane BTC asset, contributed by Mantle Network and Ant Alpha Global. Launched in early July, FBTC's TVL has already passed $125 million, making the fastest-going BTC asset this summer.

FBTC's points-inspired campaign, Sparkle, has officially started with lucrative and sustainable yields, plus points and token airdrop from Babylon, Mantle's new token cook, and more. FBTC is the BTC solution you've been waiting for. Visit FBTC.com slash ongoing hyphen campaign today. So you kind of ran through like a bunch of the different metrics, but why don't we just talk about like Bitcoin. It's the obvious one to start with because you do make a distinction between, you know, how this applies to proof of work versus proof of stake, which, you already alluded to. But just like talk a little bit about like let's say that I'm like one of

these people who has just heard about the Bitcoin ETF. And I'm wondering like, you know, is this something that's worth buying? Like how should they think about it, you know, using your analysis? Yeah, sure. So yeah, this is the proof of work versus proof of stake is nice because I think it highlights where although I start with like an equity like in cash flow analysis, this is an inherently incomplete model when you were looking a lot of these things, particularly something like Bitcoin, because if you just try to look at, you know, the simple, you know, income statement of something like Bitcoin, you will always end up with a negative valuation. Like your entire income statement will always be like, all right, like I'm losing every money every year. This is a terrible business.

Like, why would I be Bitcoin? I mean, the simple response to that is obviously like intuitive when we put it in the really simple case when we think about Bitcoin is like, oh, it's like gold. Like the purpose of gold isn't that, you know, I think it's this like super income generating asset. It's this more commodity like thing that's a, store value. And so it just has a completely different kind of analysis to it. And even in that, it is at least important to understand those kind of economic flows that I'm talking about, because you do still need to understand, you know, what is the amount that people are paying to use this network? Because you want to make sure that there's enough of this like RV available,

such that, you know, you're paying minors in a sustainable way long term, that there's going to be a good security budget and that, you know, I'm not getting inflated away too much. Like, I do care what my real expense is in inflation. But so you don't care about all those metrics, but you don't end up with this clean, you know, I have an earnings, you know, number at the bottom, and then I can put a multiple on this. Like Bitcoin is this more gold-like thing, which is difficult. And then there is this sort of like spectrum. And then I would say on the far end where you end up having a lot of these things,

particularly in the long term is they do look a lot more equity like is, you know, you have some very simple, you know, network protocol, whatever that's running. And, you know, there are some costs to run this thing. You got to run the boxes. And there's a token that gets the profits at the end of the day. That ends up looking like a lot like a company in a lot of different ways, where you can start to much more concretely reason about like, okay, what do I think is going to be the net profit due to the token holders at the end of the year?

You know, if users are going to pay a billion dollars to this network and it costs, you know, nine hundred, costs, let's say, $100 million to run all the boxes, pay all the validators, blah, blah, blah. You know, there's $900 million that's left over at the end of the year that's going all the token holders. Like that looks like a normal, you know, net income bottom line type number that, you know, I could put like a 20x multiple on that thing and you can come up with a reasonable number.

So that's on the far end of you have these things that look just completely equity-like to the point where I mean, some of them can literally just like they could literally be companies on chain. Like you, as from the example before, you know, you can literally just run a completely centralized company. You put it on chain. Like all the equity-like analysis starts to still completely works. The part where it gets trickier than I would say is like that sort of like middle ground area where, okay, we have this. And this is the more like Ethereum like, I would say is probably the perfect example there of it's got a weird mix of these two. different things of we very concretely do have an asset that gains profits from people who use the network to varying degrees. So, you know, if people are paying $10 billion a year for

REV into this network, that's great for each holders because that goes to them in some shape or form, whether that's burned and it goes to all token holders, which just looks like a share buyback. Right. And just as a reminder, yeah, that's like network fees, MEP tips. Exactly. Like those end up looking very equity like of, you know, we have this value going in and then we have and capital distribution mechanism back to shareholders. So we could burn it, which looks like a share buyback, or we could throw it back to Stakers as a payment, which ends up looking like a dividend payment.

So that is what is generally kind of like, I would say, the baseline intrinsic value for most of these networks like Ethereum. What you see in practice, though, is if you look at something like Ethereum or Solana, that number right now, give or take, is roughly a billion dollars annualized. Versus if you look at the valuation of those networks

is very ballpark, call it, 70, 80 billion for Solana and 300 billion ballpark for Ethereum, those 70 and 300 X on earnings would be like very aggressive multiples kind of in traditional valuation. And so you end up with this kind of question for these is, okay, are they, I mean, one, are they just like overvalued should the value go down, reasonable possibility? The other one is, are you expecting, maybe you just hit the market has very extreme expectations of growth of, you know, it's one billion today, but, you know, two years ago, Ethereum was doing 10 billion annual in this kind of RIV coming in.

So we just think it's going to go up way higher. And then like it's at a reasonable multiple. Again, now it's like a 20x on the forward kind of earns multiple. That's a reasonable possibility. And then the third possibility, which is in practice probably what it looks like for these bigger networks is you probably have this thing that is a weird mix of it has this baseline like equity like cash flows that are due to all the token holders. But they do also have a lot of those commodity like properties of something like Bitcoin.

And they do have like a, very tangible utility value to people who are using these things. There's a reason why a lot of Eath holders don't even stake their tokens. They are foregoing actual reward because they clearly derive some utility from the network and the same reason that anyone holds a Bitcoin. Like they're just losing money. Why would you hold it? They hold it because, you know, they derive some utility of it,

some future expectation of this thing being successful. No, it's the whole decentralized store value, all of that. And so these bigger proof of state networks, I would say, are probably the trickiest ones because you do get a weird mix of all the different things. And so you start trying to figure out like, okay, if I value it strictly as an equity, it looks like this. And then how do I try to layer on top of that, you know, oh, maybe only half the people are staking.

A lot of people are using it as a currency. And then you try to build up from there. End up being very difficult. But that is the way that you end up thinking about of trying to like build up evaluation to these things. So when you kind of apply this model that you came up with to this current debate about whether or not L2s are parasitic to Ethereum L1, because, you know, we should also say we haven't touched on this is the fact that you also talk in there about how to value L2s versus L1.

So, you know, if you want, you can go into that. But also I was just curious for how it touches on that debate that's been ongoing. Yeah, yeah. Yeah. So it's two interesting things with the L2. So one is the interesting conversation of people when people are trying to think about them, even if you just try to think about inequity like analysis of them, I think that most people think about these things incorrectly. because most people treat issuance, I would say incorrectly, as just this like straight up 100% expense, which in proof of stake networks doesn't actually make sense.

Because to that point of like, what did we say before for that net income calculation is your cost is what you're actually paying to the operators. And in proof of stake, that's only like, I mean, it's 5% of issuance, something like that. And in proof of work, it's a reasonable call issuance 100% cost to token holders because I mean, yeah, what does, what do Bitcoin holders lose every year? They lose 100% of their insurance. in the proof of stake world, really only the portion that you're paying out to operators is strictly the loss there. Most of it actually goes back to the token holders. So it's not actually value creation. You're just incentivizing people to stake rather than to keep the token on stake.

It's just trying to incentivize a certain behavior in the network. It's not actually a loss of value to the token holders because they get it back themselves. But the upshot of that is a lot of people who I would say kind of incorrectly just treat this as, you know, oh, issuance is like 100% of cost. It's bad for the token. That would lead you to believe if you look at that very naively that, oh, L2, are like super profitable because all these L1s have these high inflation rates. The L2s don't have these inflation rates. So like they're way better.

You can see from that what I described of like, no, that's a really simplistic. You need to just count for like what are you actually paying out. The proof stake issuance isn't like as bad as it looks. So L2's end up looking similar. The main difference is being they have sort of, I would say a more like ongoing variable cost structure as opposed to fixed cost because they don't have mostly their own operators. They're mostly like paying out to, you know, a layer one like Ethereum kind of just ongoing operator costs to them.

They don't have their own inflation. rate usually. They can do that, but most of them don't. The other big expense that a lot of them have is they tend to in practice print a lot of money from the treasuries and like handed out to a lot of application teams. That is a real non-cash expense like that looks like. And kind of in the Tradify world, the analogy is like stock-based compensation. That's exactly what that looks like effectively. And so getting back to the parasitic part of it is, you know, where do these L2 tokens get that like equity like value from is, you know, all the users are on the L2 now instead of the L1. So they're paying all the fees, all this RV. All of this is going

now to presumably either the L2, I mean, if the centralized L2, then going to their sequencer, but if it's a decentralized one with the token, you know, it's going to the token, it's going to their now. You know, that's more like arbitram optimism. Like, that's kind of their general model. Is the fees now all go to them? So the very fair argument is, is, you know, is this parasitic to the L1? Like, all the fees are going to the L2 now.

And so there's a mix of different arguments there that I would say. One is there is a very reasonable argument on the part of kind of the L1 of, you know, Not all of this is activity, obviously, that you are just like, this should have happened on the L1 and we're just putting it on the L2. Most of it is fundamentally stuff that, you know, we couldn't do this on the L1 before because the L1 is too fat. The L1 is too constrained, all these different things. The Solana argument to that is, you know, make the L1 faster and bigger and then you can do it all of the on the L1, which is a totally fair argument. And that's probably directly correct. But let's say that like it's symbiotic, like a lot of its net new activity.

What is it doing? it is, you know, concretely, though, still some portion of it is, you know, it's fees that should have gone to the L1, it's going to the L2. So if you think that these L1 assets are worth very strictly, you know, I am looking at the bottom line profitability of this thing. And then I'm just going to put, you know, some 20x, 30x, whatever, multiple on that thing. Yes, this is like reducing the earnings of that thing very clearly they are now going to the L2 instead. What you end up with, though, is this weird mix, though, of like, okay, but we said that they're not like entirely equity-like. they're probably also somewhat commodity-like. And what in practice, a lot of these L-2s do, the big ones like optimism, arbitrarum, base,

all these. Their native gas token is EF, usually most of the D-Fi and these ecosystems are all denominated in Ethereum. That is the, by far, like the largest token generally in a lot of their defy protocols. So you're really spreading the usage of this thing. And so you ended with this weird trade-off of L-2s, what you're implicitly doing is you're making this trade-off of, yes, we are sacrificing to some extent on some of like the equity-like properties of the L-1.

of a lot of that cash flow is now going to the L2s, but you are directionally increasing the commodity like attributes of it, which may also give it value. And so in large part, that is what Ethereum is kind of making a bet with kind of all these L2s, at least from an economic perspective implicitly, is that it's worth this tradeoff. Like we are giving up some amount of cash flows that's going to go to these L2s, but we're going to end up with a million chains that are all ETH denominated,

and ETH looks like this more store value commodity like currency like asset that's kind of used everywhere. So that's kind of the bet that you're taking. And then I would say the last small point, I would argue is most of the arguments that, oh, L2s are parasitic come from people who are trying to argue that, like, oh, all the app cash flows are going to go to a chain like Salana. the other very fair counter argument that like I would say gets left out a lot is even if all the apps stay on the L1, all the apps are still trying to figure out even if I am on a shared chain, how do I keep all the RV for myself? They're all increasingly doing this of, okay, even if I'm on Solana, even if I'm on Ethereum, how do I run some sort of off chain auction or enforce some different ordering rule where I make sure that none of this RV is leaking to the all one anymore because like I'm bringing all the users,

I should get all of it as the application. And so that means applications on a shared L1 or parasitic in the exact same way. as L2's order in L1. Everyone is incentivized to keep that kind of value for themselves, and who has the strongest position with the users and the pricing power, at the end of the day, is going to be the applications. We're bringing all of those users. And that is what we're seeing directionally as an industry over time is very clearly,

you know, if at the start we have these inefficient protocols and it really makes, you know, a big difference what chain you're on, most of the value has been leaking to the base layer with, I mean, Uniswap is the perfect example. Like they just announced today of, you know, historically so much of this value from being on Ethereum layer one, all this value is leaking to Ethereum. And what are they not today? We're going to make Unichain. And a big part of that is we're going to capture this for ourselves. And they're also implementing different kind of ordering rules on it so that change other applications to deploy on Unichain. They don't have this problem of, okay, we're trying to return

all the value back to you. So as an industry, you're very clearly seeing this trend over time and we'll continue to. Yeah, yeah, this is what I was alluding to earlier when I was saying like it feels like the FAT protocols thesis is being turned on its head. And, you know, that is a line in your PC row quote, it's obvious that, sorry, it seems obvious that applications, not general purpose networks will capture the majority of cash flows generated in these systems over the long run. And, you know, one of the points that you and some other people have been making is when you control the user interface, like it kind of gives you, yeah, more power in terms of that. All right. Well, this has been a great conversation. Is there any other point about your piece that you

didn't get to mention that you'd like to bring up? I think those are all the big ones for me. I guess the last other simple thing that we didn't talk about as much was just it kind of relates to summing all of it up together. There's this idea of people talk about are these networks sustainable or not. Generally, the two things that they're caring about concrete in these different scenarios when they talk about like, is salon sustainable because it has a high inflation rate? Is Bitcoin sustainable because it doesn't have enough fees?

Is generally the two properties you care about is, is this thing going to be secure enough long term? So, you know, is there enough money here that's going to pay all the money? miners or that's going to pay all the proof of stake operators and make us stake a lot? And then is there a bunch of profit left at the end of the day of these token holders? We paid for all our security and then we get a bunch of money left at the end of the day. And that latter part is much more what this kind of piece was focused on is, you know, what is the sustainability of the profits for kind of these tokens over the long term?

Not trying to address the questions of like what level of economic security is the right number because most of those conversations are overblown. That's really trying to look at these things long term, you know, what's the profitability of these and how do we address kind of the sustainability and like measure those things longer. Yeah, and I actually feel that part about, I think it was the real economic value. Like that was the one where it was, to me, it was like, oh, this is how you kind of suss out those zombie chains where like they have a big market cap, but they have no real activity. And which, you know, still to this day, I feel like everyday people that don't know anything about crypto will be to me like, I own and they'll name a shit coin. And I'm like, I would know that one if I were you.

but, you know, like, it's like hard to explain, but that concept, I feel, gets it across. Anyway, thank you so much for sharing your thoughts on Unchained. Yeah, like I. This is a ton of fun. Thanks for having it. Don't forget. Next up is the weekly news recap. Today, presented by Wintercraft AI. Stick around for this week in crypto after this short break. Pocodot is the original and largest layer zero blockchain with over 2000 plus developers. The anticipated Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem. upgrading the infrastructure with eight times higher transaction throughput and twice as fast block times,

tailored court time for the needs of every protocol, trustless bridges to multiple chains, and revise tokenomics with a token burn to reduce inflation. Perfect for GameFi and Defi to build, grow, and scale. Get your Web3 ideas to market fast. Think big, build bigger with Pocod. Join the community at Pocodot.network slash ecosystem slash community. Welcome to this week's Crypto Roundup. In today's recap, we'll dive into the surprising rise of the goat meme coin fueled by an AI agent,

explore the overwhelming start of Donald Trump-backed World Liberty Financial's token sale, and cover radiant capital's $50 million exploit that halted lending markets. We'll also discuss an FBI arrest. Gray scales push to convert its multi-crypto fund into an ETF, Kamala Harris's proposal to protect black men investing in crypto, and the major changes Vitalik Buterin has planned. for Ethereum. Plus, we'll touch on Tether's potential move into commodity lending and PRAXIS's massive $525 million raised to build a crypto-forward city. Thanks for tuning into the weekly news recap.

Let's begin. Goat meme coin rises sparked by AI agent. The goat meme coin created just days ago via the Salana-based platform pump dot fun surged to a market cap of over $350 million on Wednesday. What's interesting is that the sudden rise was fueled by an AI agent named Terminal of Truth whose online interactions sparked the creation of the coin. Goat, which started as a joke referencing an old internet meme, gained traction after the AI agent posted about a fictional Goatzy religion on October 10th. Shortly after, a wallet created the goat token on Pump. Fun, Terminal of Truth fully endorsed the meme coin,

encouraging followers to build a Goatze Metaverse. The AI's wallet has since received over 1.9 million goat tokens. valued at approximately $500,000. Goat's liquidity pools on Salana's radium have drawn significant interest, and the meme coin now has around 20,000 holders. Trump-backed DeFi Project raises $12 million in first 24 hours. World Liberty Financial, the decentralized finance project endorsed by GOP presidential candidate Donald Trump, raised only approximately $12 million in the first 24 hours of its

initial token sale. The sale, which began on October 15th, has significantly underperformed compared to the $300 million the project aims to raise. Despite the shortfall, the sale attracted over 10,000 unique wallets, though technical issues, including frequent website crashes, plagued the launch. The WLFI token, priced at $0.015, is non-transferable for a year, and serves as a governance token, allowing holders to participate in protocol decisions. Trump and his sons are heavily involved, with Trump himself holding the title of Chief Crypto Advocate.

FBI arrests Alabama man for SECX hack that spiked Bitcoin price. FBI agents have arrested Eric Counsel Jr., a 25-year-old Alabama man, in connection with the January 9th hack of the Securities and Exchange Commission's X account, which caused a temporary spike of more than $1,000 in the price of Bitcoin. According to the Department of Justice, counsel allegedly carried out a sim-swap attack to gain control of the SEC's social media account. He and his co-conspirators then posted a fake tweet. claiming the SEC had approved spot Bitcoin ETFs for listing on all U.S. securities exchanges.

The false announcement led to an immediate surge in Bitcoin's price, which then quickly dropped by over $2,000 once the SEC regained control of the account and confirmed the tweet was a hoax. Council faces charges of conspiracy to commit aggravated identity theft and access device fraud and is expected to appear in U.S. District Court in Alabama. Radiant Capital halts lending after $50 million exploit. Radiant Capital, a DFI protocol, paused its lending markets on Wednesday, following a major exploit that resulted in the loss of over $50 million. The attack targeted Radiance operations on both Binance smart chain and arbitram, with the attacker gaining control of the protocol's multi-signature wallet, allowing them to drain funds. The exploit, which involved the compromise of three out of 11 private keys required to manage Radiance contracts, resulted in the loss of assets such as USDC, WBNND,

B and ETH. Radiant Capital is collaborating with security firms to investigate the breach. This marks the second major exploit for the protocol this year, following a $4.5 million loss in January. Radiant's native token, RDNT, dropped 9% following the attack. Grayscale seeks SEC approval to convert fund into ETF. Grayscale investments has filed with the U.S. SEC to convert its $524 million digital large cap fund into a spot crypto exchange traded fund. The filing, submitted on October 14th by the New York Stock Exchange on Grayscale's behalf, marks an effort to offer investors access to a basket of top cryptocurrencies in a single,

more liquid investment vehicle. The fund is primarily weighted towards Bitcoin, which makes up 75% of its assets, followed by Ether at 19%, with smaller holdings in Sahl, XRP, and Avax. If approved, this would be Grayscale's first multi-crypto ETF, expanding beyond its existing single asset offerings. The SEC's stance on cryptocurrencies such as XRP, Saul, and AVACs remains uncertain due to ongoing legal battles. ETF industry expert Nate Gerasi commented that the filing could be preparing for a potential

shift in regulatory policy, especially if the U.S. sees a change in administration after the 2024 election. Kamala Harris proposes crypto framework to support black men. Vice President Kamala Harris, who has largely avoided taking a strong stance on cryptocurrency, is now advocating for a regulatory framework. focused on protecting black men who invest in digital assets. The proposal is part of her opportunity agenda for black men, released less than a month before the presidential election.

Harris's plan emphasizes the role of new technologies in expanding financial access, particularly for black men who have been early adopters of crypto, with over 20% having invested in it. While Harris has previously supported innovation in areas like AI and digital assets, her focus on crypto has remained limited, By contrast, her Republican opponent, Donald Trump, has openly backed the crypto industry and criticized regulatory crackdowns. Harris's proposal is aimed at addressing wealth inequality, framing crypto as a tool for financial inclusion, specifically for black men. Vitalik Butrin proposes major changes to Ethereum's network.

Ethereum co-founder Vitalik Buterin has outlined significant updates for Ethereum in two new blog posts. His first proposal would lower the financial barrier for solo validators from the current 32-Eath, about $84,000 to one-eath worth $2,600, making staking more accessible. Buterin also aims to accelerate transaction finalization times, reducing them from the current 15 minutes to just 12 seconds by implementing single-slot finality. These changes, he believes, would help improve Ethereum's speed and inclusivity without compromising decentralization. Meanwhile, according to research by the Defyreum's validators could face new challenges with the upcoming launch of Uniswop's Layer 2 network, Unicane.

Research indicates that Uniswap Labs and UNI token holders could capture millions in fees currently paid to Ethereum validators, significantly impacting Ethereum's validator income. As Unichane is set to handle its own validation and fee structures, many are concerned about the shifting dynamics in the Ethereum ecosystem, though some critics argue that liquidity migration is not guaranteed. Tether explores lending opportunities. Tether, the issuer of the world's largest stable coin, USDT, is reportedly exploring new moves into traditional finance, including lending money to commodity traders. According to a Bloomberg report, the company has been in early discussions with several commodity trading firms about potential U.S. dollar lending opportunities.

This move would leverage Tether's substantial cash reserves, allowing traders to use USDT for transactions involving commodities, particularly in regions facing U.S. sanctions. Tether CEO Paulo Ardoino confirmed that these talks are in the early stages and emphasized that any investments in commodity trading would be separate from the company's stable coin reserves. Tether, which reported $5.2 billion in profit for the first half of 2024, continues to diversify its investments, including holdings in U.S. treasuries, precious metals, and corporate bonds. Praxis Secures $525 million. Praxis, the self-proclaimed world's first network state, has raised five five. $525 million to build a futuristic city specifically designed to foster advancements in crypto, artificial intelligence, energy, and biotech. The project, led by 28-year-old co-founder Dryden Brown, has attracted investments from major firms such as Arch Lending, Gem Digital, and angel

investors such as Farcaster's CEO Dan Romero. The city's location is yet to be determined, but Praxis aims to create a hub for entrepreneurs and innovation, promoting the values of Western civilization. Time for fun bits, crypto debates, receipts, and salty rejections. Crypto-Twitter never disappoints when it comes to drama, and this week was no exception. Stephen Goldfetter of Arbitrum and Kyle Samani of Multi-Coyn Capital got into a spicy exchange over, well, tokens. Samani threw some shade, claiming Arbitrum issued a 100% superfluous token. Goldfetter didn't miss a beat and fired back with a cheeky, sorry we didn't let you into the Series A, bro. To prove his point, he even shared a screenshot of an old conversation.

in which Samani appeared very interested. Samani's response? I guess you got me, but he shrugged it off, insisting it was still for the best. And that's all. Thanks so much for joining us today. If you enjoyed this recap, go to unchained crypto.substack.com. That is unchained crypto.com and sign up for our free newsletter so that you can stay up to date with the latest in crypto. Unchained is produced by Laura Shin with help from Matt Pilchard, Juan Aronovich, Megan Gavis,

Pam Majumdar and Margaret Korea. The weekly recap was written by Juan Aronovich and edited by Nelson Wang. Thanks for listening. Unchained is now a part of the Coin Desk Podcast Network. For the latest in digital assets, check out markets daily five days a week with host Noel Atchison. Follow the Coin Desk Podcast Network for some of the best shows in crypto.