7 - Ether's Value Mechanisms

Transcript

[Music] welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david we've got a super interesting topic today i think it's uh i think it's pretty ambitious as well what are we going to talk about we are talking all about scarcity mechanisms scarcity games and

value accrual for ether but i think we're going to put this into a larger context which in the context of the outside world where you know the fed is printing 2 trillion dollars it seems every other day this is really going to fit well in in contrast to what is going on uh with coronavirus with the world with our current financial system we're going to compare the different uh scarcity mechanisms that ether has and i think that's going to going to contrast well with the scarcity mechanisms that the dollar perhaps does not have yeah it and it certainly seems to um have the the quality of scarcity less and less these days so this is going to be a really fun topic you know a lot of

people talk about ether as a utility coin with an inability to accrue value over time i think in today's episode we're really going to take a wrecking ball to that notion because ether has some really interesting scarcity games and and properties built into the ethereum network and three in particular we're going to focus on so this is going to be an ambitious episode lots to cover but i think super useful for bankless listeners to understand the scarcity games in crypto relative to the traditional financial system and then specifically to the ethereum economy and and ether relative to other assets and other

networks like bitcoin but before we do that uh let's let's talk about some big picture stuff that's going on you know one place i want to start david is let's let's talk about what the the fed is doing these days i mean i i hear the sound of the the money printer more and more how about you yeah they just refuse to turn it off uh and it's just become more and more salient what exactly is going on uh the the big the big thing that everyone needs to understand at least the takeaway message that i have is that we are printing so much money that we have now begun to nationalize money uh and maybe in the crypto space the bitcoiners uh the bitcoin community has always been

talking about how like basically the fed has its hands around you know the the money spigot the money printer but now this is really really obvious and it's really a down to a political decision as to who lives and who dies who gets the bailout money and who doesn't because when you can print you know 10 trillion dollars over the course of two weeks to bail out certain companies like you start to really back yourself into a corner with regards to what who and what you bail out and who and what you don't like there's 1.5 trillion dollars of u.s student debt in in in the united states and we just printed 10 trillion dollars to give to corporations and companies and so like it's becoming harder and

harder to justify uh not bailing people out which means it's harder and harder to justify just not printing more money and and every time we print more money the world becomes a little bit less fair because money is supposed to be fair and printing money is not that yeah we've talked on previous episodes i think episode 2 where we talked about monetary policy about this this idea of the cantillian effect and you had a great definition of what the cantillian effect is but it basically means that those that are able to position themselves in front of and right underneath the money spigot are the ones that that benefit and the money [ __ ] is really coming from a very small group of individuals in the u.s government right

now they're they're the ones deciding you know folks like jerome powell for instance they're the ones deciding where the money goes in this economy and so if you can position yourself uh close to the money spigot you win and that's a much less fair notion of of what money is it starts to erode even the the game of of capitalism and it turns it more into a game of money and connections you know one example i think we we saw just last week so on thursday the fed actually um started buying uh more junk bonds so they had been purchasing bond etfs previously and now they're actually buying really low quality

corporate bonds actually efts j and k like junk bond efts uh directly and they're they're doing that to in their words you know try to stabilize the economy in in the coronavirus epidemic but of course what this inevitably occurs to happen and what this inevitably causes is the bailout of companies and balance sheets that don't necessarily deserve to be bailed out so we can contrast that with you know basically what big companies get if you're a big enough company to have bonds and even junk bonds for example listed on public exchanges then the government's going to buy your debt directly right if you have if you're big enough to have

a good banking relationship then you are first in line for some of the loans that are coming down the pike if you're a small business now the government is also in the u.s rolled out some programs for small business under sba loans um you have to you have to wait in line effectively so first you know you have to have a bank account with an sba lending bank and they're going to prioritize the businesses that already have loans with them but if you don't have a bank account with an sba loan designated bank then you're the low man on the totem pole you're effectively unable to get a loan in this sba program you're too far from the the money spigot

to really benefit you're kind of last in line in the whole process and that is unfair it rewards connections and money and the the size of the company uh over traditional credibly neutral capitalist market forces uh and that's a massive unintended consequence of all of this money printing as well massive unintended consequence and i i think that those three words are the things that really sum up what is what we're all really worried about here because it's it's a really enticing to press print on the money printer right it saves us from going into a very deep recession

it keeps us free it keeps us at bay yeah it feels good now people get to keep their jobs the airlines that we know get to keep keep on shipping people around even though they're not making any money a lot of things we get to continue our old way of life that's what the money printer does is it prevents change but economics and finance and money and business is constantly constantly evolving it's a darwinian process and the money printer go bur instantiation is is getting in the way of that it's really playing god with the economy and it's really something closer to central planning you know the reason why the united states won the cold war versus the soviet union was because our economy was not centrally planned but since since

there is no more cold war we've been able to move into a centrally planned system and that's what we see here that's what the money printer go bur is it's a centrally planned economy which you know in other contexts we as as americans we absolutely loathe yeah have you ever read that book red notice yeah yeah oh i've talked about that actually literally last night with my parents talking about how uh red noticed the the story of a bill browder and his capitalist endeavors in post-soviet russia it was it was not about good business it was about how how do you play the game of politics yes yes which which kleptocrats uh do you know and whom can you bribe and whom can you be in favor with that that's how to

that was how to win the 1990s uh stock market in in in russia had nothing it had very little to do with the fundamentals of companies or free market competition had a lot to do with who those in power and government power specifically chose to reward or to penalize um and you know i don't think we're saying david that the us is immediately going to like 1990s russia like that i mean that's not happening overnight but um is this a step in that direction is this an erosion of the credible neutrality of the u.s capitalist system um is this a reward for those who are closer to the money spigot

versus those who are farther away absolutely i think that's pretty undeniable and just as you said i mean that is an unintended consequence of these bailouts and the way that they're structured and it's why i think it's important for us to have an alternative universe an alternative game of of of scarcity and monetary system that we can fall back on one that is transparent and credibly neutral which i think is going to be the the focus for today's episode uh but before we get there david you had something interesting happened to you last week you were called a bitcoiner what was that about i had a nick carter on my other podcast pov crypto where if you

want to listen to a place where only the hosts disagree i would go recommend pov crypto we brought uh we brought nick carter on to talk about um kind of what his position is in the space and we talked a lot about what we were just talking about right now with uh bitcoin being an instantiation of values uh and a lot of what the values that we were talking about we were just talking about very recently with unfairness with regards to money uh and so we were talking about that and you know i wholly agree with the concept of crypto instantiating these these uh fair values inside of all of us and uh in the twitter comments as i was uh tweeting this video out this i i hadn't seen this twitter

account before so i don't know who this person is but he goes oh three bitcoiners talking about why bitcoin is so great get ryan sean adams on there and we'll have a real conversation and i'm like wow i've never been called bitcoin or so directly before yeah i mean so okay so that brings up an interesting question because look there's some vitriol between the communities bitcoin and ethereum um you know so my question is can you be both an etherean and a bitcoiner at the same time is this a bit like you know liking korean food and also sushi you know they're both great great foods um and there's no kind of tribalism between them or is it a bit more like being a

democrat and a republican at the same time like that's that's fairly difficult to do or being like a christian and a muslim at at the same time those are tribes that uh have had a history of not getting along what about being an etherean and a bitcoiner can you can you be both yeah it's actually i think a really interesting question um the obvious answer is obviously you can be both but at the same time even though that is the answer you can be both no one really seems to choose that answer like i think you and i definitely identify as ethereans however i definitely also have the same values as bitcoiners however calling me a bitcoiner is odd because of

how much time i spend in the ethereum world um also in this episode that we were recording with nick uh he was talking about how these cryptoeconomic systems are political systems they are the the code is a an instantiation of values uh and and values is is kind of where what you rally behind when you rally behind a political party so like to some degree these are political parties that we kind of adopt and you can't really be one or the other even though they aren't all that opposed to each other like the difference between bitcoin and ethereum in my opinion is not all that great they're actually pretty aligned politically speaking um but since there's only these two political parties

in the crypto universe like that what else do you have to fight and debate against and so like you you you were pushed to one end of the spectrum either way uh it's a really interesting concept that i keep on coming back to you over and over and over again yeah i totally i totally agree that there's a ton of overlap in that you can be both an etherean and a bitcoiner though it's true i think most people end up identifying themselves more as one over the other some folks of course will will say they're exclusively one or the other you know i think vitalik um said uh you know recently that ethereum effectively has moderate bitcoin values right so um there is a ton of overlap in the underlying value system of both communities it seems like in some ways

bitcoiners are a bit more extreme on one end of the spectrum uh whereas maybe ethereans take a more pragmatic approach and there's lots of different lenses you could you could compare these two social movements um you know under but uh one is one is certainly that we talked about monetary policy in the past that's uh that's certainly another one i think emphasis on security versus fixed scarcity of the asset itself is another um and i think in a lot of ways the bankless podcast is is about exploring um some of these underlying differences how both of these social movements contribute to the wider movement of

going bankless and this alternative money system that where that we're standing up so you can be both bankless listeners don't don't get stuck in the idea that you have to be in one camp or another i think both david and i would say look we're we're ethereans we're bitcoiners uh we're both we're here for the bankless social movement uh that's what this entire cryptic movement is uh is about in our minds and so it's um it's okay to be part of both communities certainly it's uh it's encouraged because at the end of the day we are all here for computer driven code uh code that is run on the internet that is credibly neutral with that is

completely fair and without uh human beings involved that's the values that we really overlap and that's really also the topic of today's episode which we're which we're totally going to get into right after these sponsors first we're going to talk about ave which is a d5 protocol that you have to check out if you already haven't it's growing phenomenally these days it is a lending and borrowing protocol on ethereum that means you can lend things to it so if you have an asset like dai or you have an asset like ether you can put it in ave it will magically transform that acid into an interest-bearing asset that actually yields you interest it yields you returns you can also borrow from the ave

protocol so you can borrow against your eth you can borrow against your diet rather than sell it in the u.s it has great tax benefits most d5 protocols that lend to you have a variable rate so that means one day the rate could be four percent the next day it could be 10 but ave has fixed rate loans they've embedded that into their protocol uh developers you've got to check out their flash loan products protocols uh they're being embedded in all sorts of new and interesting applications overall just go check out auve.com deposit crypto to start earning any ethereum while it will work try it out that's a a v e dot com all right so this ad read is about to be

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second is ether and the value mechanism scarcity mechanisms it employs and then thirdly how usd will fare against these crypto money scarcity mechanisms but let's start by talking about scarcity mechanisms and fair games in general i mean we talked in the intro and the big picture portion about the fed uh and its money printing and its ability to arbitrarily give to to anyone it wants to um that's not the case with crypto money systems and i think that comes from the value system we're talking about value systems with the value system

of austrianism austrian uh money that really enables these scarcity games can you talk about that a little bit david why is why is this austrian philosophy so important the austrian attitude towards money is an attitude of fairness about money you know a good austrian money is not something that is engineered by human hands but rather discovered or emergently used organically gold as austrian money gold is really nice because it was evenly distributed across the world and so as different civilizations came into maturity no one civilization had all the gold right it was it was fair uh and because it was this natural element in

the earth's crust like no one was able to play god with gold no one no one could mint gold and so when we talk about fairness and money you know he like like i said in a previous episode humans have a very strong fairness meter fairness radar if they see something that's not fair everyone picks up on it and it's really important with our money because what money is is a measurement tool of value money is like this meter stick that measures value of different things ryan if you want to sell me your house and i am an apple farmer how many apples will you take for your house like how do you even make that comparison that makes no sense uh

like you can't compare like okay well this house is worth 20 000 apples money is this tool that we use to to measure the value of different things and when you are able to distort that that measurement you are able to print new money what you are doing is you are changing that measurement that measurement stick like what if we all had meter sticks and then this this entity just kept on changing what a meter meant like how long a meter is it would mess up everything and that's that's what austrian money is all about it's it's saying that everyone has the same uh measurement tool equally across the world and we're all using the same measurement tool to to make value judgments and so fairness is really

important in that context yeah and i think one thing that that um you get when you have money systems and economies that aren't fair in the in the crypto world when that sort of thing happens when the community doesn't accept it socially um there's a network fork that means basically people take the underlying network and they create their own version of it so they might create an entirely new kind of side asset and they fork out unfairness uh to to me that's kind of akin to what happens when monetary systems of of nation states or of kingdoms go awry is the people have a tendency to fork we call we don't call those forks

necessarily we call them them revolutions though and that's what can happen to a society that pollutes and allows corruption and unfair decision making to its underlying monetary and economic system and if you look at you know just the world that that's going on and i know you know investors like ray dalio have compared um this sort of era that we're into the 1930s there is a level of of unrest uh going on there is this feeling that um things aren't fair uh and certain parties in power are bending the rules in in favor of the establishment and in favor of those people who will continue

to keep them in power and um to me those are early seeds for social unrest for a potential revolution whether that's an actual like physical revolution or if it's a social revolution and i think bankless and crypto money systems are all part of that revolution it is a way to opt out of the existing financial system where a few people can bend the scarcity rules of the underlying money system and certainly that's the perspective that austrians were coming from uh their perspective is hey you know a few folks shouldn't have the ability to bend the rules of the money system because if they do they will bend it in their favor and the system will become unfair and

not only unfair but also inefficient because the the top-down system cannot compete with a bottom-up system from a innovation perspective from an efficiency perspective from a you know price reliability perspective so decentralized systems and markets have worked really well throughout history and i think that's very much where the austrians are coming from so you know i think we would both say that big bitcoin is uh a type of scarcity game too it's almost a type of austrian scarcity game wouldn't you say absolutely uh bitcoin is one massive game uh and in in the context of what's going on today i

remember you bringing this up a couple times in the very first episodes where you talked about gresham's law where people will keep the good money and spend away the bad money and we've seen this uh with regards to previous community forks or aka revolutions in argentina in venezuela where people spend the bad money and keep the good money which is dollars and that puts us in this very unique position where the federal reserve is there's no other fiat money to run to right so the federal reserve is like well we're just going to print more because there's no other money out there like what are you going to do run to gold well bitcoin and its game is the alternative that they do not see coming and this game that bitcoin has is a pretty fun and fair game

and it's much more fun in my opinion than than the game of the federal reserve money printer gopur and why i'm referring to this as a game is because that's kind of how these austrian money systems work bitcoin is this large game of chicken where no one wants to be caught with their pants down there's this very large prisoner's dilemma going on between everyone in the world where if you are the last person to buy bitcoin you lose like everyone no one wants to be the last person to buy bitcoin and anytime money printer goes bur you increase that incentive to buy bitcoin early are you saying so are you saying bitcoin is a ponzi p bitcoin is a ponzi game yes and that is very very different than a

ponzi scheme a ponzi scheme has a one central operator who is ready to run away and disappear and fake a death with all of his new money uh there's a backdoor in ponzi ponzi schemes a ponzi game is entirely different where you know everyone benefits at the bottom uh if everyone else at the top buys after them you want to be first in this ponzi game it's this it's very much a pyramid structure but that's how that's how these monies bootstrap the the incentive to play the bitcoin scarcity game how many bitcoins can you own which is really just the if you if you look into the memes shared by bitcoiners it's really just a signal of playing

different games stacking sats is a very famous bitcoiner meme and it's really just about hey like you know increase your points get up the point scale like get up the value meter stick of bitcoin uh because if everyone else starts using bitcoin as a value system like well then you you are you got ahead when the when the points were cheap uh and and so that's the big bitcoin game it's really how many of the 21 million bitcoins can you get and uh can are you going to get them before everyone else yeah it it it strikes me that what you're saying is uh okay yeah uh bitcoin crypto money systems in general are a ponzi game right but but so it so is gold that's very much a ponzi game and that's different from a ponzi scheme which

might be more like the the fiat system where a few a few folks can essentially reward their friends and run away from the money but you know i'm writing this quote by peter thiel and uh he says you know money is the bubble that never pops it uh it's essentially it's its value is based on a bubble a social belief we've talked about this in our memes episode and and previously so check those out but ethereum is a little bit different so it has some of those uh scarcity ponzi game type characteristics that you're talking about um with respect to bitcoin but um it also has some in-game mechanics ether is almost like a point

system for these in-game in you know in-game money games that are played on top of uh ethereum and i think you've done a really good job talking about the three pillars of scarcity in ethereum and these are effectively because scarcity and value go hand in hand these are effectively value accrual mechanisms that are built into the ethereum protocol for ether the asset so maybe we should talk about the three pillars of scarcity why don't you just like you tell us what they are first david and then maybe we can hit them one by one absolutely and and these three pillars i i believe is where ethereum gets its

political differences from bitcoin where bitcoin has one large single pillar which is 21 million now and 21 million forever ethereum has three smaller pillars that each are represent their own scarcity mechanism their own little game of chicken of sorts each pillar represents its own additional scarcity force for ether and so the first one is the one we all know and love eath in defy the famous term eath locked in defy or you know one billion dollars locked in defy that is ether being used in this defy ecosystem as collateral as a store store-value asset and the more eath in defy the less east

there is everywhere else uh and so maker has 2.3 percent of all eth out there compound has like 0.5 percent of all eth the more defy applications there are that are good defy applications good being defined as how much ether is inside of them the less ether is there there is you know in the rest of the universe uh so this every time every d5 team every defy company d5 protocol that comes into existence represents some amount of incentive to deposit ether into that application to use that application for whatever that application is so the more the bigger defy is the more defy protocols there are the more incentive there is to take

ether from wherever it is in the world and deposit it into defy and so that's that's the first pillar uh we'll talk about the other two pillars in in just a minute but maybe we should we should camp on ethan d5 for just a second because what these protocols are on top of ethereum are almost forms of um ethereum banks where eth the asset is the reserve asset as the most trustless uh asset for economic bandwidth so these d5 protocols these crypto these these internal banks ethereum banks effectively are using uh ether to back loans as trading pairs in you know protocols

like uniswap and it really reminds me of the the fourth attribute of money that is much less talked about so when we talk about money and we've defined money before in the bankless podcast david as three things a store of value a unit of um account and a medium of exchange so those three things but it's also a fourth thing a guy by the name of william stanley evans talked about the fourth attribute of money which is money as a standard of deferred payment so money is a standard of deferred payment what that effectively means is the monetary denomination of a loan so if you have a mortgage for instance and if you're in the u.s it's it's generally going to

back be denominated your loan your mortgage that is is going to be denominating u.s dollars well um that aspect of debt denomination the standard of deferred payment is a fourth very important attribute of monetary systems and just to kind of like look at the big picture of what's going on in the market today there is an absolute rush to liquidity a rush to dollars around the world you can see this in various currencies fiat currencies losing their value relative to dollars the the value of dollars is is going up and everything else relative to dollars is going down and a primary reason for this is because so much debt around the world is

denominated in dollars so there's 60 trillion of debt around the world that is uh denominated in dollars and when there's economic uncertainty the folks that have borrowed um with and have a debt obligation denominated dollars they want dollars they're demanding dollars they're buying dollars in order so that they have the ability to pay back these debts and so they don't go bankrupt and they don't go broke so there's kind of this this sucking type effect of of dollars um when there's economic uncertainty because dollars are the standard of deferred payment now what's happening in the ethereum ecosystem is super interesting because all of these d5 protocols

are effectively making ether a standard of deferred payment so if you take an example of dye which is a stable coin what die actually is is like in global settlement it is a coupon for redemption in ether so it's effectively a debt note against ether so you know maker loans volts they used to be called collateral deposition cdps these are ether denominated debt devices so what's happening in d5 the reason ethe locked in d5 is important from a you know monetary accrual aspect is because it's producing all of this financial instrumentation that is backed by ether as debt it's

making ether a standard of deferred payment let's talk about the second pillar now david so that is uh staking so tell us a bit about that staking is where ethereum gets its security uh in previous episodes we illustrated the security of each blockchain as uh well with bitcoin an energy wall uh bitcoin security comes from this energy wall of electricity that every individual miner helps contribute to if you want to attack the bitcoin network you need to get over this energy wall and that energy wall is really really high it's it's the collective energy of all bitcoin miners everywhere in the world all inherently contributing to this energy wall that really exists on the internet ethereum

and proof of stake and specifically staking is the uh capital version of this wall you know and and money at the end of the day is just energy right so like if i have twenty dollars ryan i could ask you to do some number of push-ups and i bet you you would do it because you want this 20 dollars there's really it's really a battery it's there's energy stored in this in money right so you go out and you work in your field and you create and you toil and you create your wheat and then you put your wheat in the bank and then you get a deposit slip and that's deposit slip is money that represents your labor so inside of money is a battery and that's that's why ethereum is transitioning to uh staking and and proof of stake is because we like efficient systems and

staking is really really efficient because instead of just using energy directly you use a representation of energy and that's what staking does and so you take your ether and you stake it on the promise to not lie to the blockchain on the promise to do everything correctly and the more people are that are doing this the higher the wall of value that you have to get over in order to attack the ethereum network and so it's actually extremely inexpensive to take ether and stake it the only thing that is expensive is the value of ether itself and you are paid commensurately for your capital and when you stake and so you take your 32 ether or your multiple of 32 ether you take it

off of the secondary market you take it away from the floating supply of ether in the world and then you put it in the staking contract and then you lock it and then you get paid some amount of fees over time and that fee is the incentive the fees that you get that you earn from staking is the incentive to keep that ether off of the secondary market because what staking is doing is it's doing two things at once that's really really just a nice feature is that it creates this new wall that you have to give it get over this value wall you can you can measure the amounts of security that ethereum has with the amount of value that is is in the wall right and so with we've we're targeting between 10 and 30

million ether which is roughly 10 to 30 percent of the total supply of all ether as the amount of stake that we want which means you have to have an equal amount plus one to get over that wall and so if you are and so that represents 10 to 30 percent of the total market cap of ether which is a really high wall and if we're staking 10 to 30 percent of ether b because we want access to the block rewards we want access to the fees uh we have to pull 10 to 30 percent of ether off of the secondary market away from the hands of potential attackers so not only is this value wall you know 10 to 30 of the market cap of ether but

there's also 10 to 30 percent of the market cap of ether not available for attackers to use and so this scarcity game this scarcity mechanism is the game that protects ethereum and it also creates scarcity in ether at the same time it pulls ether away from the secondary market to protect ethereum and to pay fees to stakers to to get that value wall as high as possible so a scarcity mechanism that effectively secures the entire network that i mean that's pretty powerful and it's not something that is uh necessarily that new as you said right staking is effectively a cost and opportunity cost of doing something else with with your eath this is sort of

the same way that nation states bootstrap their security if you think about it like this so in a nation state like the u.s you can take your us dollars and you can park those dollars in treasuries so these are debt instruments effectively where you're lending to the state what does the state do with that money well you know lots of things but part of what they do is actually defend the legal system um you know defend the the nation against you know foes that would seek to attack it um establish the protocol and protect the protocol that the us protocol of course is embodied in the constitution

so staking in ethereum is very much like taking your dollars and parking them in t-bills um that's why i think we on bankless we we've called these effectively this is like uh eth bonds is is what you're doing you're lending to the protocol and this has a really nice attribute because just just as t-bills are effectively the risk-free rate of doing anything with your capital that's what staking on ethereum is going to become too so if you lend eath if you stake your eath to the protocol it becomes the risk-free rate of lending eth and folks are incented to do that when they get

some level of of return on their eath so the return might be five percent it might be ten percent it flexes up or down based on the total amount of eth that is locked so if a low amount of eth is locked then um the rates are going to be higher to incentivize more folks to stake but this rate is going to be the risk-free rate the the kind of bottom floor rate uh for all of d5 so all rates um should be higher because uh they are a bit more risky so you know if the eat staking rate is four percent for example it should cost greater than four percent to lend eth in a protocol like compound because compound adds a num another

level of risk on onto lending your eth so it has this really nice property of being the risk-free rate for the ethereum economy and as you said it's all part of the scarcity game in this game in particular the staking game in particular effectively is used to defend the network against foes and attackers all right so let's talk about the third pillar of scarcity and ethereum now this has kind of a clunky name to it it's called eip-1559 and just to talk about eip for a minute eip stands for ethereum improvement proposals so this is like david have you ever seen the um you know how a bill becomes a law video they teach you that in school i'm just a bill yeah that's

the one man it's like burned into uh if you went to school in the u.s it's like burned somewhere in your subconscious you cannot get away this is the story of how a bill becomes a law well eips are effectively bills on their way to becoming laws that is embedded in the protocol in ethereum so eip 1559 is a really interesting manifestation of an eth scarcity game in the ethereum economy do you want to tell us about it david yeah the story of eip1559 is is really interesting uh it's uh its beginnings come from just a ux and ui uh improvement to making a transaction on ethereum uh for those who that first got into crypto i think we

can all pro we all probably remember our first ethereum transaction because we all looked at the gas field and we were like what is gas and like what do i do with this you know gas is not a friendly mechanism that people have to play with in order to make a transaction on ethereum there's no real world correlate to what paying gas is to make a transaction on a blockchain you don't it's just something totally brand new and eip1559 is a way to remove this from having to make a transaction on ethereum what the what the improvement proto proposal does is that it creates a kind of like a difficulty adjustment like bitcoin's difficulty adjustment that changes every um two weeks depending on how much hash power there

is this kind of works similarly depending on congestion over time this number will go up or down based on how congested the congested jesus based on how congested the blockchain is and this number is the number that is the minimum fee number to make a transaction on ethereum so there's no guesswork involved so you can just make a transaction and the eip1559 called the number is called base fee the base fee amount will automatically be included and the difference why we're talking about this in the context of scarcity games and scarcity mechanisms is that base fee instead of being paid to the validator is burnt and instead you can if you want to get included and jump the line which

you can always do in blockchain systems you just pay a small tip on top of base fee but if you don't really care about timing you can just play pay base fee and base fee is burnt what do you mean by burnt for those that aren't familiar with like burnt what does that mean where does it go yeah so in the current system when you pay for your transaction fee you pay it to the validator in this new system this eip1559 system you burn it and basically what that means is you send it to no one you send it off into the ether if you will no one receives it it gets deleted gonzo goodbye uh there's no no one receives this this base fee amount all right so this is like if i had a briefcase full

of money and i'm giving that to you you know in in order to get my transaction through and you take that briefcase you throw it in the fire it's like it's like gone it's you know distributed into carbon can never be reassembled like never coming back issuance of us dollars has been reduced because money was actually physically burnt is it like that uh yeah yeah it's it's like that and maybe people are asking well why would we burn money and that's because first off base fee doesn't increase or decrease the amount of fee that is paid so we aren't paying more or paying less in order to get our transactions through and and why we are burning base fee is

because well the alternative is to pay it to the validators but the validators are already being paid because we have ether issuance encoded into the ethereum protocol we do not have a set monetary schedule of when we are going to reduce issuance because our ethereum's security goes ahead of its monetary policy that's part of the ethereum political party if you will we believe in security ahead of monetary policy and so we pay our validators block rewards ahead of time we pay them for we get security regardless of the fee market and so the fee doesn't necessarily need to be sent to validators for more security because

we already paid for security and so what we do is we burn it and this has a number of different economic implications for ether first off it increases scarcity right because you know instead that first the ether exists and then a transaction made it is made and then the ether stops existing and so every every individual transaction on ethereum removes some amount of ether from the supply of ether in the world and so it increases the scarcity of ether over time and so as the ethereum economy starts to you know heat up and get larger and larger and larger every transaction there's more transactions per day per minute larger transactions more and more ether

is getting burnt and remember when we were talking about staking if you want to attack the ethereum network you need to take the available supply of ether and you need to make a higher value wall than the current value wall of ether so you can get over that the staking wall if if eip1559 is constantly burning ether it's making less ether available for security in the future and so where staking is economic security for today burning ether in eip1559 is economic security tomorrow and so the more ether that we burn today the less available there is on the

secondary market tomorrow and so it's it to me it's paying for future security it's future security payments uh and not to mention how it simply acts like a kind of like a stock buyback of sorts where instead of paying the validators burning ether simply pays everyone equally it's an extremely fair way of issuing a stock buyback because any holder of ether wherever they have their ether in the ethereum ecosystem they benefit from burning ether because their ether is a little bit more scarce that this scarcity mechanism is creates scarcity for all other ether other than the ether being burnt yeah it's super cool and you

know i want to make the point too that this is pretty unique a unique design to that's only possible in the the world of of crypto so if we were to think about an analogy to nation state it'd be as if there was some sort of consumption tax and you know there's consumption tax um at the at the state level in the u.s you know some countries canada has a consumption tax you know generally uh in the form of a vat sort of tax um but it's as if that consumption tax so anytime you did something in the network was actually burnt you know fiat government systems don't have this they never burn fiat they're always issuing it and increasing it but in the ethereum system yeah quite

the opposite in the ethereum system every time you make a transaction every time you do something economically on the network a portion of issuance is getting burnt and this is not only unique relative to governments and how governments work in nation states work but it's also unique relative to how other commodity monies work so gold for instance you know no one burns gold as you use gold if i were to give you a gold bar david um that's not getting burnt uh you're just using that and recycling that and doing something else with it um unless you're a non-rational actor and you like you know just to burn your money which is uh generally not the case um bitcoin too uh when bitcoin transactions are um are used those transaction fees

go to miners proof of work miners in the bitcoin network they're recycled as well those fees are used to pay for um security budget for proof-of-work they're not burnt so this is really a new possibility in crypto-economic systems that ethereum is tapping into and you know in a lot of ways from a scarcity game perspective it's an improvement it's an improvement over government fiat it's improvement over gold it's an improvement over uh bitcoin it actually could make ether a more scarce store of value where you actually have negative issuance on the platform so rather than fixed issuance you know more

ether is potentially getting burnt every year then is being produced and it links it has a very nice link as you said to the consumption and the use of ethereum the the network so um pretty pretty unique from that perspective and pretty exciting so over time eip1559 burns ether and like you said it it creates the possibility of actual reduced issuance uh ethereum has constant issuance with block rewards to pay for security but if we have a lot of congestion if there's a lot of demand on the ethereum blockchain then we could actually have a eip1559 burn rate that's higher than the issuance rate and that would be that

would be a very interesting day if that if that if that does ever happen where we are burning more ether than we are issuing and that is in stark contrast to what we are seeing today with money printer go bur where we only see issuance there's no possibility for the dollar to have this value accrual this this scarcity mechanism this price appreciation because any time the dollar appreciates the fed just prints more and sometimes it prints more in when the dollar doesn't appreciate and so this kind of goes back to what we were talking about with ponzi games this this is a really fun game to play for ether holders right because you are incentivized to buy an asset that is becoming more

scarce over time as it gets used and so like we are saying with people wanting to spend their bad money and keep their good money well personally i'm seeing the federal reserve print a bunch of dollars and then i'm seeing eip1559 getting worked on and built in and audited it and into put into into the code of ethereum 2.0 and so i see my dollars being minted freely by this federal government who is bailing out these people that are politically close and then i see eip1559 being set up and ready to burn transaction fees and increase my percentage of the ethereum network and so i i'm really incentivized to spend my dollars and keep my ether

because that's how these ponzi games work is this is a very core component of ethereum's ponzi game absolutely and all those rules are are transparent too and which makes and embedded in the protocol which makes it really nice and really fair credibly neutral is the phrase that we would use for that sort of thing now we should point out to listeners that the last two pillars of ethereum scarcity i think you you mentioned this but those are coming with eth 2.0 so the next version of the ethereum network upgrade so staking the first uh edition that ethereum's initial bond offering will probably go to effect sometime this year eip-1559 may get incorporated in

ethereum one but is certainly going to get incorporated in ethereum two so these are sort of future games that the network is going to be adding and i think it's important to sort of zoom out and talk about you know bitcoin and ethereum as networks uh relative to how complete they are so the networks themselves i would you know i would consider bitcoin maybe 90 done uh they're working on tweaks um some minor changes and additions but they're not planning the bitcoin network is not planning a wholesale improvement in a 2.0 version ethereum on the other hand that project is maybe 20 complete maybe 30 complete and so these additional elements are

being added on top of it um as we go and i think it's important to to understand the state of uh completion of these projects even when you're comparing them because at the end of the day if if you've got a 10 year time horizon you're sort of comparing the end state of both of these networks but if you've got a one-year time horizon you know you you're comparing two projects that are in different phases of completion all right all right so well we just to recap the three pillars of of scarcity these are all in-game drivers of ether's scarcity in the ethereum network so the three of them when d5 goes up that's eth

locked in d5 eth gets more scarce when people want to hold and stake their eth then eth gets more scarce when there are transactions on the ethereum network eth gets more scarce those are all of the in-game drivers of the uh ethereum protocol and we're not even counting the out game drivers so ether has some of the same out game drivers that that bitcoin does when ethe is used in a crypto bank or as a store of value to hedge against inflation um you know it's being held and that's a outgame scarcity driver when it's being used as a you know a meme of a commodity store of value it's also being held so it has some of the same outgoing out

game drivers that bitcoin does as well now i think of ether as having both those in game and those out game drivers that effectively drive up its scarcity inside of the network and external to the network okay we're going to talk about games more in just a second but before we do let's talk about our sponsors rocket dollar is for our us listeners primarily this is the game of retirement which is uh also an important game to be playing saving for your retirement if you have an ira or a 401k the chances are it's it's jailed in a brokerage so it's in something like fidelity and schwab you can't get access to crypto

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rocketdollar.com use the code bankless and start your self-directed retirement account today if you want to look cool while you show all of your friends crypto you need to send them to xerion.io xerion is the front page portal to the defy universe with a complete set of financial services and activities available for you it is the place to view your portfolio you can add all of your wallets and you will get a report of all of your assets inside of them not only that but xerion also allows you to buy sell trade throughout the various d5 systems that are available on ethereum if you want to make an exchange xerion

now sources liquidity not just through uniswap but also through xerox kyber curve and all the other protocols that are relevant to whichever specific trade that you are making you can also invest through xerion as well you can lend out your assets to receive a return but you can also invest into uniswap or bank or pools if that is so suits you so if you want to look like somebody that is on the bleeding edge of finance while you show your friends what crypto is and why crypto is so cool send them to xeron dot io so ryan i want to circle back around to d5 we talked about dfi as one of the the perhaps the most important uh game although i won't pick favorites for

ether and its scarcity mechanisms but defy isn't really one thing now is it it's actually just a collection of different applications uh and so defy to me represents this uh this every this side quests of ethereum the mini games of ethereum to that offer you different activities to to leverage your ether in different ways oh for sure it's definitely a a universe of financial applications of these d5 protocols which are all eth money eaters inside of the ethereum network i think that's going to be a massive driving force of ether scarcity as these almost organisms if you will kind of grow these d5 protocols grow inside of

ethereum and consume and eat more and more eat but you know one of my favorite illustrations of this actually came from an article that that you put together and it's called uh ether's equity and you you showed you set up that article with uh this other kind of scarcity game but it's almost like more than a scarcity game it's it's almost like a uh like a biological type of of game that's embedded in programming it's called conway's game of life i'm actually looking at it on my screen right now um and it's like it's hard to explain without seeing it so we should definitely put some of these visualizations in the in the show notes but can you give it an attempt to

explain what conway's game of life is and what's going on here i highly recommend if you have 30 seconds a minute to just google conway's game of life and and check out some of the images because that will make this very easy but i'll do my best uh so conway's game of life is an open landscape uh it's a grid think of a grid and these cells these squares are either white or black so it's a binary grid and the grid goes is endless it's an endless uh it's an endless field and there are certain rules in conway's game of life about the state of the color of a cell and it versus its neighbors and so there are rules like if you are a white square and three of

your neighboring cells are black squares then in the next state you will turn black and there are a couple different more rules but but basically there are rules for if you are x and then there your neighbors are are y then in in the next state you change david these rules are embedded in code right these are rules are embedded in code and so what conway's game is is a state machine a state machine is this computer application that moves forward one state at a time it goes like like a metronome just moves forward next move next move next turn and ethereum is very much a state machine as well ethereum is a state machine where every block is every state right uh and and the uh account

balances of every single ethereum address are like individual cells uh inside of conway's game of life what you can do if you are really bored with conway's game of life is you can start creating things these you can create structures that that exist and live and move into perpetuity on conway's game of life and if if you want to keep on going down the youtube rabbit hole for conway's game of life you can see people that built you know started off with very small structures that some of them are called gliders they just move around some of them are replicators they they generate new little structures that also glide around there's this ecosystem of things that you can build and you can you can go look at these youtube videos of

people that have spent way too much time on this and and created this massive this like interconnected network of different structures uh sending uh you know different packets of cells around each other and it turns into this vibrant ecosystem of activity inside of conway's game of life now why are we talking about this well because both conway's game of life and ethereum are state machines with account balances of sorts and each application on ethereum i see as a structure inside of conway's game of life so for example uniswap is a great example it is this thing that is built into code that progresses forward in a state by state basis and it and it uh self perpetuates

and moves into infinity uh and and that's what it is on ethereum and all these applications are like conway game of life structures and they are all these independent organisms that when you put them into the same spot they start growing off of each other they start building off of each other and creating this ecosystem this economy this this world of living protocols living applications uh and and that's really what bitcoin and ethereum are from in an internet perspective bitcoin is this organism organism that is built into the internet and and so is ethereum the cool thing about ethereum and turing complete code is that you can build organisms inside of ethereum and i absolutely view uniswap as an organism

it is fed resources it's fed nutrients ether mainly and then it progresses forward in the state machine of ethereum and so the overlap between conway's game of life and ethereum applications i think are really strong it's crazy how biological these simple rules create things that look uh biological i guess that's why they call it conway's game of life but as you were talking it's like you talked about conway and ethereum as a state machine well is like dna the state machine for life yeah i would say so i mean it's it's crazy to think about but like um the resemblance is um is absolutely insane i mean dna at the end of the day is you know strings of of code i was

looking uh for example at the rna virus uh chronovirus covet 19 that they sequenced and um it's crazy i mean it's just a very long string of of code that attaches itself to other strings of code um humans you know and and kind of their their dna and extracts life out of them and uses that to self-perpetuate dude maybe we're just like inside a big block chain maybe that's what uh wha what reality is that the semi the blockchain simulation theory yes yeah or look maybe i've just been in the house too long think about granovirus stuff but okay so okay we've got conway's game of life and we've got all

of these essentially money applications that are are consuming ether as economic bandwidth and that creates a a very emergent ecosystem of money applications that are all kind of competing against one another in conway they compete for pixels in ethereum they're competing for ether and assets and money and capital pools right and so what do we get at the end of all of this if we have kind of this vibrant uh ecosystem of almost quasi biological robots um chewing on this this capital like what does this look like in two years and

five years in 10 years while writing that article i learned of this term called chaotic organization which means which means organization through chaos and that's kind of what i see with ethereum and and defy these applications are starting to organize around each other and these these different applications or organisms are are positioning themselves next to other ones that that share a lot of economic activity so maker and uniswap are very close because you know people go deposit ether mint die and then take that diet to uniswap to buy the asset that they want and so these these organisms just live around each other and they're they're starting to mesh and they create this one single structure

they uh because of the weight of ether everyone is consuming the same resource all these apps are converging into one single superstructure of sorts superstructures that the term i've landed on that makes sense to me and so this superstructure grows and grows and grows as every application is also getting larger and also new applications come to the structure and this superstructure is what we are calling defy this one single structure is the eth locked in d5 structure the the weight of the structure the size of the structure is is measured by how much eath there is in it how much value there is in it and so as these applications grow this structure grows and it can it

needs more ether and so going back to the organism metaphor i view ether as like blood flow right it delivers nutrients to these applications to these organisms and the larger the dephy structure is the more blood it needs you need to pump more blood through defy in order to keep that whole system uh nourished and so if we get another application like maker that sucks up you know 2.3 more ether we're just going to need to pump more blood flow into that and maybe that's the wrong way to to uh to approach it it's going to suck up more blood uh it's going to happen on its own it's going to create its own

native demand for ether and it's going to take away ether away from you know the rest of the world and because it's going to create the incentive to deposit ether into this new application on defy and so the growing weight of the structure is a measure of how much ether is in demand from this defy structure just to to operate on a daily basis how many new how much nutrients does it need to keep on going and growing and growing yeah it's it's it's crazy like when people ask um what do you think the next killer app on ethereum is going to be what do you think ethereum's going to look like in in 10 years i mean it's a little bit like trying to predict new york city in the pre-cambrian era of the earth right

like there's this like explosion of biological activity and it's it's almost impossible to predict where that biological activity is eventually going to lead i see ethereum a lot like that it's very hard to predict what it looks like 10 years out but we know as these systems build on each other they will consume the scarcity and the money energy of ether as their primary fuel so let's talk about maybe the the thing that is uh probably a bit easier to predict in all of this and that's um scarcity these systems like ethereum and bitcoin their

economic scarcity versus the us dollar price so you've described this as a little bit of a a tug of war against the us dollars um you know ether scarcity versus us dollars can you can you talk about that a little bit yeah so this this defy structure this superstructure that requires eth that sucks up eth needs ether right it needs to have access to ether but so does staking right so staking also needs ether and while these two things they compete they are both fighting for the same amount of ether for the same ether on the secondary markets meanwhile eip1559 just keeps chugging and keeps on

burning more of the ether that everyone is is looking for in order to get into their application or into their into the staking contract and so we have these three different demands for ether um that are that are competing for ether that all want ether and that's that's a side for all the humans that are just looking to buy ether and put it in their wallet and hold it that's that we haven't even touched on that uh and and maybe we will now so ether and defy staked eath plus the ether burn rate creates ether scarcity and this the amount of scarcity is always reflected by the us dollar price and so i've i view this as a three-way tug of war between eth locked in defy east that is staked and then the u.s

dollar price on a secondary market to whatever degree the incentive is to deposit ether in defy or ether into a staking contract the the measure of that incentive is the us dollar price on the secondary market these three things are all fighting against each other there's this three-way tug of war and uh and and then there's also eip1559 that is always pulling on the u.s dollar price as well so the us dollar price is almost like a bribe to sell your your ether early before all of these scarcity mechanisms come in you know like i asked you the question last episode at what price david hoffman would you sell your ether and your answer to me

was like you know when the system emerges and evolves i won't have to sell it man i'm not going to sell it at any price uh that that to me is the the long term horizon it's because you're looking for these in-game and out game scarcity mechanisms to kick into eth uh and to sell now would be to sell before all of that stuff kicks in and it would be to sell way too early i think that's the reason right absolutely that's totally true like the ether the staked ether incentive is not pulling on the us dollar price the eth locked in defy is we haven't started to see ether burn from one five five nine there's so much left in store that is going to in my opinion absolutely eviscerate the us

dollar price side of this uh tug of war fight bullish crypto money systems then i mean it's effectively the crypto money system with an inelastic issuance schedule uh versus an elastic you know basically we can print as much money to you know insiders or whoever we choose system and i think the population will realize which of those money systems is more credibly neutral and fair and choose the one that is over time you know that the last thing maybe to touch on is i i feel like in a lot of people aren't appreciating ethereum's in-game scarcity mechanisms to the extent they could because i see still see on crypto twitter uh people saying

things like well i like ethereum the network but if the asset will not accrue value and when you look at these in-game scarcity mechanisms it it shows how like null and void that argument actually is because there's no way the ethereum network can be successful in an open money financial system for the world there's no way defy can be successful there's no way that that staking can amount to economic security for a global permissionless network without ether accruing value so it like it drives me mad that um that people aren't seeing this because it's it's basically um it's written into the protocol and it's going to be deployed in the

protocol soon and you know to me that that kind of knows the argument that ether will not accrue value but ethereum will be successful it's just it's not an argument that makes any sense to me even the most bearish case where ether is just used for transaction fees like you say say defy doesn't happen and and there's just transaction fees that and staking well like all the activity on ethereum is still paying for uh ether scarcity right and so like realty my company tokenized real estate uh we don't we don't lock up ether we're not part of the defy ecosystem we we only use ether to send our assets around the network uh we don't really benefit

ether in an m0 sense but we're all of our economic activities still being paid to ether stakers who and then with eip1559 is still going to be burnt so there's literally no way that you can use ethereum without positively impacting the price of ether that is baked into the code any amount of use of ethereum positively impacts ether directly yeah absolutely and you know we talk every episode about front running the opportunity it seems like if you believe in and defy believe in what uh the ethereum economy is is building it's really front running the opportunity to uh to buy some heath you know like it's it's uh it's undervalued um potentially relative to

the narratives out there because most of the narratives don't i think recognize the power of these in-game protocol mechanisms embedded in ethereum and ultimately when you get to issuance in the ethereum network of you know say one percent under one percent potentially like negative issuance that's a pretty compelling value proposition for a a store of value asset at least comparable to bitcoin maybe in some ways better than bitcoin which is why i think the bankless communities is pretty bullish on ether all right let's just sum this up david and talk about the action so we talked about scarcity mechanisms and and fair games how crypto

money systems enforce those scarcity mechanisms both in game and out game particularly ether's scarcity in-game scarcity mechanisms are uh eath and defy staking eip 1559 we talked about all three of those we talked about conway's game of life and how d5 eth locked in d5 almost represents a a mini scarcity game inside the ethereum network and we talked about how difficult it will be for usd dollars to compete with these new digital economies with inelastic money supply net net usd must fall to die relative in price excuse me net net

usd must fall to eth relative to price all right so actions um here's what we want you to do so you might be new to this podcast we're on episode seven now so that means we have six previous episodes that have really set the stage for episode seven the first episode we define bankless second monetary policy we talk about concepts like economic bandwidth the power of crypto means the d5 trust spectrum if you haven't listened to previous episodes you got to do so that sets the foundation for everything we talk about in bankless going forward so make sure you catch up on previous episodes so you are up to speed you've also got to read an article that david published called

ether's missing puzzle piece this is all about eip 1559 that we talked which we talked about in today's episode it goes into the details of that the implementation of it's a fantastic article also read ether's equity which shows some of a conway's game of life and how that relates to if d5 protocols and the biology and the biological systems that are are being created here so a couple of um reading assignments and some listening assignments and for you visual people uh you can go to youtube and you can watch a video of me reading ether is equity right to you and so on the screen is the actual article itself so you can get

those visual images uh for those that don't like to read youtube is an alternative for all the articles on bank lists awesome get david hoffman directly into your ear holes people okay so how are we doing on five star reviews david uh we are doing acceptable on five star reviews ryan uh but it could be better uh we are still not yet above ico 101 podcast which hasn't released an episode in nine months so if you think that when you search generic crypto terms such as bitcoin into it and ethereum into the itunes podcast store we want bank list to to show up and i and i hope you do too and so if you think that bank lists should show up higher than ico 101 please give us those

five star reviews they are really really important for for spreading the bankless revolution making sure everyone knows that money printer gopher is unfair and that there are these credibly neutral scarcity games on ethereum that we want everyone to play that's it man all right let's talk risks and disclaimers guys eat is risky that's an asset we've talked about bitcoin is risky crypto is risky using d5 protocols are also risky you could lose what you put in we're headed out west this is the frontier it is not for everybody but thanks for being with us on the journey this has been episode 7.