Betting the Fund on the Merge | Hal Press, North Rock Digital

Transcript

foreign bankless Nation wow what a week it has been uh I'm actually really refreshed to get into this show David because we're not talking about Tara we're not talking about UST today we're not talking elgo stable coins we're talking about one of our favorite subjects which is eth ethereum the merge I ran across a guy his name is Hal press who started to fund and he's betting his entire fund on the eth merge this man is bullish on ethereum okay yeah I think we do and I I wanted to bring him on David so that we could we

could hear a little bit of his uh thesis because it has some similarities with ours but he he extrapolates a few different dimensions like supply and demand and uh I mean he's betting his entire hedge fund on it so it's a pretty big deal so uh want to talk all about that um I'm excited to just get into this David do you have any thoughts as we uh dive in and talk to Hal yeah it's just always refreshing to hear the mer merge the alpha of the merge make its way out of the ethereum community and into the world around it right and this has always been the goal this is always the goal of ethereum but it's just nice to see and hear people articulate the case for the merge that aren't like deep inside the ethereum community uh how has

because ethereum has this culture of building out in the open building uh thinking out loud you know building transparently there's a bunch of information for people to like lean onto and you know some people have caught the bug and and Hal's one of those people and so he's been paying attention intimately not just to like the merge thesis but also the all core devs call meetings where people like Tim Baco and dankrad and Danny Ryan are all talking about the ethereum merge uh and there's a bunch of there's a bunch of alpha there and like it's just sitting out there for people to take it and Hal has taken it yeah it's super cool his strategy I thought this would happen I thought investors would start like you know how many investors all around the world hang on every single thing Jerome Powell says right and uh ethereum in the

whole core dev's call is not the FED they're they're not really setting rates but they are setting like timelines for the merge right uh they're talking about um ethereum issuance in the future it's a massive amount of Alpha and so people who are smart like Hal have clued into that and so I think he's got some insights into when the merge is coming so I hope we cover that as well there's some unique insights about that because he is a neutral third party that is responsible for his funds so he doesn't have any bias about when the merge happens he can like approach this with Sober Sober eyes it's like uh when taleb says skin in the game that when you have skin in the game is the ultimate bet uh and Hal's putting his skin in the game anyway guys also want to share that

there's still an opportunity to get in on this Oculus bankless deal okay David why don't you tell them what Oculus is and what the deal is opolis is a dowel that supports other dolls if you have you know risks or a family to take care of or health care that you don't want to lose from your Normie tradfi web 2 drop but you do want to join the world of web 3 opolis can help they are basically a dow that helps you onboard yourself into the world of this self-solving worker working for Dows working for web 3 protocols that don't really have Healthcare options but opolis does so it's a dow that Services other Dallas you can also get your your payroll service by opolis as well and you can also get paid in crypto as well as join their competitive Health Care rates

because it's a collective you join a collective which it was very very web 3 Centric and then of course Ryan if you sign up before May 25th you get a thousand Bank tokens that's the bank list out token and a thousand work tokens which is the opulus token so long as you sign up and get going by May 25th so there is a link in the show notes for you to get started uh yeah yeah that's the deal guys you're running out of excuses to quit your corporate job and bankers is making sure that yeah that's right this is now you can no longer say well what about my health insurance because it's right here opolis will provide that out of the box uh guys we are going to get into our conversation soon but David I want to ask you the question I ask before every single state

of the nation which is this what is the state of the nation today uh we are the state of the nation Ryan is giddy we are good I know yeah d d y d i d d y yeah the marriage really isn't anywhere close but you can still feel it right the drum roll is out there uh and so like I mean if we're if we're like we're gonna have to ask how as to how far he would uh how far away he thinks the merge is but if we're like I don't know six months away from the merge and I'm already getting now I think you can imagine how much more giddy I'll be in the future Ryan well look we need reasons to be optimistic right now uh because the uh it looks like the bear Market is in full effect crypto prices have been going

down lately so uh stay tuned for Hal's case on why he is bullish on eth going into the merge and why he is betting on it we will be right back in just a minute but before we do we want to thank the sponsors that made this episode possible Arboretum is an ethereum layer 2 scaling Solution that's going to completely change how we use DVI in nfts over 300 projects have already deployed to arbitrum and the D5 and nft ecosystems are growing rapidly some of the coolest and newest nft collections have chosen arbitrum as their home all the while D5 protocols continue to see increased usage and liquidity using arbitrum has never been easier especially with the ability to deposit directly into Arbitron through all the exchanges including binance FTX Hobie and crypto.com once inside you'll notice arbitrome increases ethereum speed by

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stablecoin using maker you don't need to sell your collateral if you need liquidity instead you can spin up a maker Vault and use your collateral to Mint die directly with maker the power to Mint new money is in your hands the maker protocol is extremely hardened and operated by one of the most experienced Dows in existence they've been here since the beginning they've seen it all and so you can mint die with the assurance that your collateral is safe soon maker will be present on all chains and l2s so minting dye can take place on oasis.app xerion zapper or any other D5 protocol that you use follow maker on Twitter at maker Dow and learn from the oldest and most resilient down existence bankless Nation want to introduce you to Hal press he's the founder of North Rock

digital how is doing something really unique he's betting his entire hedge fund on the merge okay he's been tuning into ethereum all core dev's calls paying a lot of attention to the progress that's been made on the merge uh we were talking about setting up this episode a few times previously but he said nope not ready yet not ready yet now he's ready so what does that tell you of course the great thing about ethereum is all of this information is out in the open and Hal is certainly taking advantage of all of that with this case that he's about to give us how welcome to bankless how you doing thank you nice to be on the show uh can you start with just the elevator pitch the high level why are you betting your entire fund on eth and the merge why

does that make sense yeah I mean so at a high level I think that there's a strong fundamental case um and we could talk about that the whole episode if we wanted to but really I think what differentiates it from other fundamental cases because quite frankly I think the the crypto space doesn't trade on fundamentals so directly I think what ends up happening is that the assets trade a lot more in line with supply and demand and just where where the price could finally equilibrium between buyers and sellers and as a result I think ultimately the most important factor is about structural supply and demand factors and you know we see that with the Bitcoin having event every four years and it is

understood well in advance but yet it seems to have an impact every time and so in my opinion the merge is the most powerful structural flow Catalyst to ever occur in the crypto space and the my in my view it's very very hard to price those in and so I expected to have a dramatic impact um so that's really the Crux of it and then there's a lot more detail to get into around that so a lot of people think that the crypto industry trades on narratives but you're saying that it's more about flows as in just so I have enough it's an interesting point that you raise and in my opinion it does trade on narratives but generally what happens is that actually I think about this in a lot of markets

in my opinion price leads narrative not the other way around so generally price will move for some reason usually it has to do with some technical factors and the narrative will form to try to explain why that's happening and if you can identify something where you have that structural Force that's going to move the price and you can see a narrative that's going to be strong and sticky and catch on to reinforce it that's when you get those moves but I find that the price actually is what leads the narrative and not the other way around and so you could have a narrative that makes a lot of sense but it doesn't catch on why because the price isn't moving and so in my opinion actually I think the flows and the price lead and the narrative follows this is a really important point in

exactly the reason we wanted to bring Hal on is because this this focus on supply and demand I think you'll hear that a lot throughout this episode is really the lens through which how views uh ethereum and uh and the merge event um so before we unpack that and I feel like we're going to spend the rest of this episode actually unpacking everything you just said in summary can you give us some context like how did you even find Ethan ethereum in the first place yeah sure why did it why did it capture your attention yeah so I think you know I think one useful thing to discuss before we get into sort of how I landed on eth and the ethereum ecosystem is kind of some context around how I think about crypto Assets in general and I think there's a lot of consternation and kind of

struggle to try to Value these assets and the main reason is because they're unlike any other asset they sort of fill this hybrid role in my opinion crypto assets really derive value from three different sources one as the name implies as a currency um they are currencies of their native economies they are units of Exchange in that economy and you need them to transact in the economy and I think that creates some demand for the assets as the economies grow but it's much easier to sort of gauge that on a qualitative level than a quantitative level it's very hard to say quantitatively what that implies for evaluation of an asset but I do think that is one one mean of value accrual but beyond that I think the term cryptocurrency is somewhat of a misnomer because they're not really

currencies purely in that sense of it I think they also have a lot of other aspects I think the second primary aspect is as a store of value a la gold so you know gold does not produce any cash flows it's not really used as a unit in exchange but it still has accrued historically a tremendous amount of value over time why because people have faith that it will be scarce and because it will retain value over time and I think certain crypto assets also tap into that um store a value value pool as well I think obviously Bitcoin is the first one that comes to mind and it is certainly been the most successful at accruing that value I think personally that Eve has a good chance of continuing I think I think if you had to rank them Bitcoin would be first and each would be second

in terms of store value and I think that ranking will Trend more in the each Direction post merge and we can get into a little bit about that specifically if you want later but then the third factor that I think is really underappreciated is I really do think of crypto assets as equities and I think especially when you talk about l1s the point that's really kind of underappreciated is that the the second that you move to proof of stake the actual cryptocurrency becomes very akin to an equity stake Because the actual revenue and profit generated by the network actually accrues to the holder of the token and likewise the expenses paid out by the network are used to dilute the holder in much the

same way that a traditional Equity has stock-based comp arencies also have issuance which is very similar to stock based comp and then in much the same way that traditional equities earn money and pay out dividends or buy back stock cryptocurrencies also pay out a staking rate or a burn which is effectively a stock buyback so they become extremely similar in that sense to equities and I think that's the part that's probably least understood and I think you know when the market is in a very frothy stage where people are just basically voting on whichever token they they want to think is the next cool Trend the value the actual value approval mechanisms are less significant but when you get into a more mature

Market which I think is where we're entering I think the True Value that that you can actually derive from the token starts to matter a lot more um and then the so and another point that I'd add on to that is that as an investor personally just to sort of move into the the why ethereum question um and and they'll really be focused on that Equity aspect as an investor I really do think it's important to separate investing in the utility of the network versus investing in the actual utility token of the network and so I kind of frame that as you invest in eth not ethereum or Saul not Solana you invest in avax not Avalanche so I think that distinction between the token and

the product um is is is is quite relevant um and so in that context to me you know it's not so much about how useful the network is I mean I do think that ethereum network is extremely useful but when I think about it from an investment standpoint I think less about that and I think about more about what is the actual value of the token and so in that context like the way that I frame the eth versus Alt L1 investment debate is kind of I I like to compare it to the smartphone industry and it's sort of like would you rather invest in a business that only Services the high end of the market has extremely high net income margins and generates extremely sticky Revenue so I'd compare that to something like apple or a business that only Services the low end of the market

has negative net income margins and no path to positive net income margins and is a very has proven to be a very disruptible Revenue base over time and compare that more to like one of the low end providers like Oppo or Vivo and in my opinion That's The Ether versus all Bell one debate each only Services the high end of block space demand and they charge opinion for it and as a result they have extremely high margins and that's proven to be very sticky over time altel ones by definition only service the low end of the market because their value proposition is low fees and as a result they have very low margins actually they all pretty much right now lose money um and over time you've seen that the the the alt L1 narrative has changed from one to the other to the other to

the other because they are that revenue is more interchangeable so for me it's pretty obvious in that context that you describe a higher multiple to the that the high margin sticky business and you see that in the Market Apple trades at 28 times and Oppo and Vivo trade in the teens and so that like in the equity Market which is in my opinion very efficient that's that's depicted and I think if you look at it in crypto though eth trades at the lowest multiple of all of those assets um and that's kind of where I think the opportunity exists and then the last so that that's one reason what brought me to ethereum as like an investment case and then the second thing I'd say is it really was about the community and the and specifically the developer Community

um I've found over the years just as an investor that if you find companies and teams that are doing things for the right reasons and the right way and not trying to maximize short-term Financial upside generally they will do the best in the long term even from a return of the asset perspective um and in my opinion the youth developer Community really epitomizes that and really puts forth a strong focus on sustainability and like actually doing things the right way for the right reasons I think to be frank in all the communities there's Moon boys that are toxic I think that's just a a a factor of the space um but what I'm talking about is and I think those exist for E2 just like every

other community but I think the actual developer Community itself is strongest in ethereum and I think personally that comes from the top um I think vitalik has set an extremely strong example historically and continues to do so and is very active in the space and I think it's kind of trickled down from vitalik to the rest of the developers and that's another thing that really brought me to the the ecosystem and then the last thing which obviously we'll talk about a lot in the um episode is that I think there's a truly generational opportunity with the merge just from a pure investment Catalyst perspective so kind of all of those things are what together drove me towards ethereum so uh so much John pack here and you know I think we will how

like one question I think we're going to come back to and I you know might continue to push on you toward the end is um what you were talking about is a lot of fundamentals right it's like something that we've said forever I remember we wrote a blog post in you know 2019 that said the asset is not the network and we said look the ethereum asset is different from either the the network Bitcoin the ass is big different than Bitcoin the network and if you're evaluating Solana you actually have to look at the kind of the revenue and the cost the issuance of Soul tokens because that's what you're actually investing in but here's the problem um we put that post out in 2019 we've been talking about it until now the market doesn't necessarily price it that

way from a fundamentals perspective okay and I want to hear your case for why you think the merge is going to be different I feel like it's a different lever here it's less about fundamentals and more about supply and demand which is actually super interesting but can we just go back and I think bankless listeners will heard us say some of the three things you had three kind of pillars to how uh a token like ether is valuable and why it's valuable right you said currency store value and equity and Equity being the least understood we've used the term Capital asset to describe equity revenue and cost can you describe what the revenue and the cost is for something like ether and how do you get to that like in equity it has to have net profit

has to have cash flows how do you get to cash flows for a chain like ethereum or a chain like Solana or a chain like Tara it's actually a fascinating question and one that I've spent a lot of time thinking about I think the revenue side of the equation is extremely straightforward it's just it's just the fees that's the revenue it's how many fees do they generate when you use any of the l1s you pay native tokens for the service they provide which is the blog space and that payment that you pay that Revenue accrues to all the holders of the asset in the form of staking rewards and so that part of the equation is very straightforward the revenue is the fees

and I mean you can look at it obviously you can pull up crypto fees dot info and you can show kind of the fees if you'd like but ethereum is obviously the only one that really generates any fees um but and obviously that's a big criticism by a lot of people um and you know I think that is valid in terms of the utility of the network but again we're talking about the value of the asset not necessarily the utility and of course they're linked in certain other ways but um just from a pure fee perspective yeah that that is that is the revenue um the the more interesting side of the equation is actually the expense um side of the equation which you

brought up I think you know for a long time I sort of thought of expenses as issuance and I think for proof of work assets the issuance is an expense because the issuance does not accrue to the Token holder it accrues to the minor um and so right now the expense of ethereum is the I think it's like four million each that they issue each year which is a tremendously large amount of expenses and same thing for Bitcoin but actually and so that's that's one expense um but then when you think about it for proof of stake I think what's really interesting is that that issuance I would no longer characterize as an

expense because it no longer goes to an external third party and in fact it actually goes to the Token holders um and so if you have an equity that decides to pay out a stock based dividend to its holders that payout is not treated as an expense because it's not an expense it doesn't leave the system it just goes to the holders um and so I actually doubled down on that uh is the proof of work cost the electricity cost is a literal expense of a proof of work Network as in that is something that yes costs money to people that operate the network and that same thing doesn't actually exist in proof of stake as well just wanted to add that on I mean for sure and there is some cost of Google state right you still have to run the node you still pay electricity

but it's just much much much more efficient so that cost is dramatically reduced and I would say that of course there's cost of proof of work like you said and and they're very correlated with the actual issuance cost um but the interesting thing is yeah when you go to proof of stake that issue is is actually no longer an expense and what's actually really interesting is that it actually becomes depending on how you want to think about it it becomes a form of Revenue because what happens is not everybody Stakes and so what happens effectively is that the people that don't stake are essentially forfeiting their share of those issuance rewards to those that do stake and so if

you can produce a network where there's a lot of demand for the asset outside of staking such that the staking rate is actually low the value that that accrues to those that decide to stake is really profound and that's kind of an interesting point that I think is really relevant for ethereum because ethereum only has about 10 staking participation rate and so like let's just extrapolate um that it goes to 15 after the merge because the the staking rate will come up those 15 of stakers are effectively eating the free lunch of the other 85 percent of people that aren't staking and so you can actually get a really outsized return for those stakers um in exchange and because ethereum is

such a useful asset in the web 3 ecosystem there's a lot of other demands for ether and therefore that keeps the staking rate low which actually allows a tremendous amount of value to accrue to those that do stake so that's kind of an interesting point but then to finish your on the last point of sort of what are the expenses then they're really everything else and for an L1 they're actually quite low like it's okay paying the developers in Native tokens that is an expense like that's effectively like r d expense and then also any sort of ecosystem fund or fund or L1 incentives like you know when these when a new L1 will launch and

they'll have an ecosystem fund that'll provide incentives that is a real expense but for the case of ethereum there basically there is no more ecosystem funds so the only expense is really what the EF pays out to the developers and salary and we actually did see the EF report go out not too long ago actually the first time that the EF has really put in a financial report uh and so again like the whole like working in public thing and and working transparently all this information is available to us and I can't remember the number specifically but like as far as total ether market cap goes the amount of funds that the EF is spitting out from its treasury is like actually not not that crazy it's completely insignificant right so like four or not one like like right now eth by my math

is um it's about 15 net income margins and then after the merge you'll probably be like 99 that income margins um the angle that you talked about with the the defy utility uh in impacting the stake rate is something that we have not talked on on Bank list about in a really really long time uh this was it was this component was in a very old old article but but that is a really uh awesome Dynamic that I want to drill down on where people use uh ether to like push push bids on open c for nfts they put their ether into maker Dow to borrow die and every single application that ever comes on top of ethereum that uses ether as collateral which is like most of them

it creates some sort of incentive for users to deposit ether into those into those applications uh and so this is another like roundabout byproduct in the way that the ethereum ecosystem actually does induce a value Into The Ether the asset right like the D5 apps have some amount of utility and those utility comes from depositing ether into those accounts but then what you're saying is like the more and more useful of every single D5 app that comes to ethereum becomes that you're actually increasing the stake rate for the stakers because you're incenting some of those stakers to stop staking and go use the apps instead leaving a larger share of the pie Left Behind for people who stake and so as the app layer of ethereum becomes more and more useful you're also

increasing the the value of the stake rate on ethereum as well at the same time I just wanted to drill down on that a little bit more foreign you're also muted Ryan uh okay it's just David he's alone in here well I can keep on going on the youth application stake right let's uh let's see if Hal uh returns do we have him in like uh one of our chats uh let's see uh if he does you know I guess I guess I think one of the one of the things I haven't talked about so I I think that was one of his points we haven't talked about enough on Bank

lists the other thing I really want to drill uh down on is he has a different definition of expenses than we do which I find uh somewhat interesting right so like I would just sort of take this this whole thing daily issuance as expenses for layer ones you know ethereum uh Solana polka dot but he said no that's not actually the expenses and I think because he's seeing this from a very Supply and uh demand Dimension so he's almost seeing it as cash flows and if the cash flows don't actually exit the system if they just go into validators Pockets he's not actually seeing that as like a an

external cash um you know cash flow you know push out he doesn't actually see that as I guess an expense in his terminology even though there is dilution to anyone who is not staking and holding the asset I wonder if he thinks that if it doesn't actually make it if his definition is that secondary market sales are the expenses and things that induce secondary market sales create expenses then just like that's what I think his definition is yeah so like the actual proof of stake uh here's how uh bringing them back the actual like proof of stake nature of this means that uh like because staking basically is free assuming the cost of computer and the internet and the Very

meager like electricity expenses what's up Hal sorry about our expenses sorry about that my internet cut out for a second there what's up no worries I was on my monologue anyways uh we we were I was talking about the tug of war between the utility of D5 versus the stake rate uh so just any any final thoughts on that before we move on yeah and another thing I think the the one application that you didn't mention is just the fact that eth is the base pair and every LP pool with every other erc20 um that's built on the network but yeah no I totally agree and then I think there's a lot of reasons I mean that that ethereum benefits from being a more mature chain like the token distribution is just much more Broad and I think for

a lot of these other proof-of-stake assets where you have more concentrated token distribution and a lot of it is still held by VCS you know those parties are basically like 100 staking participation rate so the more distributed you have it and the more mature the network is I think that staking rate trends lower anyway I think it's a combination of those few things but I think for like a new investor entering the space it's kind of counter-intuitive but you'd prefer the staking rate to be as low as possible if you are planning to stake because you get a outsized share of the of the earnings generated in that case you want you want the network stake rate to be as low as possible because that's yeah like if I could choose if I could choose if if it wouldn't mean that ethereum wasn't

secure I would prefer everybody except me not State and then I would basically crew the entirety of the fees generated by the whole network so that's obviously like an edge case but it's helpful just to think that would also for myself yes correct yeah so you guys don't stake just let me yeah yeah everyone listening to Stone steak you know it will be the sake this year but I heard actually on the latest all core devs that you're gonna get 100 penalty if you stake yeah right that's right some Alpha from here for the next year the slashing rate is 100 I wanna so I want to go back to this because this

is actually different than than um what we've our mental model for things so I want to hear how you think about it so on the expensive side totally agree block space sales are basically revenue for any layer one chain right okay but let's go to the expensive side of things right you don't think issuance this is money printer this is how much so that is right now because proof of work get it and proof of work but like this seven that is not an expansion okay no because your definition of an expense is actually an outflow from the system basically that's just going to the soul holders so those Soul holders are not being diluted by that they're just maintaining their con assuming they State the soul holders

aren't anyone who is not staking is being deluded but you still don't think of that as kind of an expense in your terminology if you want to if you want to be technical it is an expense for those who do not stake but it is actually in fact a revenue for those who do stake because they're taking that from them and the reason is that the distinction is like miners they have to sell the eve to pay for the electricity in A6 and operating costs right and in proof of it's actually not that it's the distinction is that your percent of the issuance is correlated with your port with your Holdings of the asset not with your secondary thing that you're doing in terms of how much work you're putting up that's what makes an expense

or not expense it makes it an expense is if it doesn't actually accrue to the Token holder if there's no correlation between how many tokens you hold and how much of the issuance you get the moment that those two are one and the same it's no longer an expense so you're taking a staker-centric perspective on these networks well for proof of stake asset it is not an expense it's just that's paid out to you so it's essentially it's essentially a stock based dividend if you want to think about it in equity terms would you would you consider something like this so a Staker lives in a country where there's like 50 taxes let's say on any staked income stake it receives staked

income has to pay 50 uh taxes has to therefore pay 50 of stake would you consider that an expense in the system I wouldn't consider an expense like okay do you pay um taxes on the dividends that Apple stock pays out yes do you consider Apple dividends an expense no um so it's the same thing but it is for selling right of Apple stock so those two there's there's two there's two things we can you could talk about does it show up in the supply demand Dynamics as an outflow potentially but is it actually an expense in theory as you think about like the income statement of the network no and what's the distinction then why does that matter

aren't we just measuring outflows I mean if we're supplying demand that's like yeah so if you want to get to this applied demand then yes it's important it's important Dynamic to think about but the reason why you wouldn't think of that um is because like for example if those issuance changed if they reduced it or increased it and instead of doing that they did something else with it that it wouldn't change um the the net income of the network but yeah I mean if you want to talk about the actual flow um potentially you could think of it as an expense but but the other interesting thing and we'll come to this when we start talking about the merge is that I don't think a lot of staking instruments get sold I think the majority of the time

the Staker is staking because they like the asset and by definition and when you go to state to prove the state you must hold the asset to state right and so then you are invested in the asset so those holders are much less likely to sell their issuance and they're much more likely to just want to accrue more of it and also they don't have any external expenses because proof of stake is so much more efficient um whereas the minor like a youth Miner or a Bitcoin miner doesn't have to like ether Bitcoin they're just like running a business right and so and they have a lot of expenses so I think a ton of the minor issuance gets sold but I don't think a lot of the staking issues get sold which is actually a reason why I'm one of the reasons why I'm so constructive on the

merge is because you have a gross reduction in issuance from proof of work to proof of stake but you have an even stronger net reduction because if you say like okay right now we're issuing 15 000 youth tokens a day and then post merge we're going to issue 3 000 tokens a day but of the 15 000 a much higher percentage gets sold than of the three thousand so if you actually think about the issuance that gets sold it's an even greater reduction and we'll get to that um when we go through the merch I want to drill down onto something because what you're saying is that with proof of stake assets because you don't have to sell them the issuance of these proof of stake assets assets don't count as a cost to the net work because people can

just keep on holding these things so it never makes it to the secondary market and if you're bullish on these things you get to stake it and you get more yeah and so there there's one aspect is that like proof of stake naturally rewards people that are bullish on the on the asset because if you are bullish then you don't sell you just stake but there that is discounting the role of total net issuance of new supply of tokens where you are actually incentivizing people to hold even more if the asset itself is more and more scarce and so there is a role of minimizing issuance allowing people to be more bullish on the asset because if you are just even if you just juice up total issuance and no one's selling uh and in your with a highly inflating proof of stake system sure like maybe

the stakers aren't aren't selling the tokens now but it could just be viewed as deferred selling later uh and it will ultimately come to a cost on the secondary Market because of very high issuance well the way that I'd think about it so like I can see I can see where you are coming from with that but I actually don't agree um and the way that I think it's probably useful to think about it is in sort of an edge case like if you assume there's a network that's worth a hundred dollars and it has a hundred tokens and like you have 10 of the tokens so you have 10 tokens and that Network always is going to be remained worth 100 whether they inflate or not right and let's just say they

inflate to the point where they double the the they double the number of tokens so now there's 200 tokens but the Network's still worth 100 so your token went from a dollar to 50 cents but your number of tokens doubled too because you received the issuance and so your Holdings actually did not change in value if it were an expense you would expect that your Holdings changed in value they would expect that that money left the system and so the reason that it's not an expense is because those rewards actually approved to the holders it's only an expense if if it leaves the network and so whether you if you choose to then sell your tokens um as issuance that actually doesn't

change the value of the tokens and it doesn't change the value of anyone else's tokens um that you could use that could put cell pressure on it but you also are approving more tokens anyway so that that should offset it and if we're talking in theory I feel pretty strongly that actually it is not an expense well with a highly inflating Network sure you can match the amount of issuance by staking so euroshare doesn't get dilute diluted but with a highly inflating Network you are disincentivizing the non-stakers to hold in the first place because they're getting diluted yes that is for sure Network stays the same but your real cost your real value does go down well actually I think your real value

would go up because you're basically just eating the people who's not staking piece of the pie so like you're basically just getting paid out a greater than than you deserve percent price is going to zero because everybody but I feel like so I feel like what you guys are doing is like you are like you're talking about which category it fits in what you're saying David is if you're doing too much dilution you're eroding from the store of value category right that you were talking about earlier how and what you're saying yeah I still think you should tread towards lower issuance but I think in theory if you want to actually like talk about it nuts and bolts it is not an expense in the in the pure form of an expense yeah you're just saying it doesn't really affect the the equity type use case or

the capital it doesn't it doesn't yes it doesn't but David's saying it does affect the store of value use case but in any case ethereum is pretty strong on both of those right because we're looking at like some pretty low issuance and we'll get to some of these numbers when we get to the merge uh and I do want to make the kit like hearing make the case for the merge but have we talked enough about like supply and demand mechanisms because that does seem to be this no the center so that's your case here what is that that isn't necessary okay what is that why is it necessary that is a very necessary piece of context um to frame the merge discussion and yeah today we've manually spoken or mainly spoken about fundamentals and actually my thesis has very little to do

with fundamentals so it's good that you segue into the more the more interesting part um yeah so supply and demand is is just what it sounds like it's just that's the basically the price that you see when you look at the price of any of these assets is just the price at which buyers and sellers are at equilibrium and that's the clearing price in the market and the only thing that actually impacts that price is supply and demand now fundamentals can impact price as well but only through the indirect link of the fact that the fundamentals actually impact the supply and demand which then impacts the price the fundamentals don't impact the price directly they only impact the price in their ability to change supply and demand so like if you think about it from a stock perspective if a stock is improving fundamentals and

that creates more buyers of the stock then that can impact the price but if everyone already knew about those fundamentals and it doesn't impact supply and demand the price doesn't move and that shows you is that the fundamentals only impact price through their ability to affect supply and demand and so ultimately all that actually matters if we're just talking about pure price of the assets is the supply and demand and so in that context like in the equity Market there's a fairly strong link between the fundamentals and their ability to impact supply and demand and so as a result the fundamentals end up driving the price because that link is quite strong however in crypto as you noted yourself Ryan that fundamental link is very weak um and so often what will happen is that

the fundamentals will change but because the space isn't dominated by fundamental investors it doesn't actually impact the supply and demand and so it doesn't actually impact the price um and so as a result the crypto assets end up trading much more as a product of the supply and demand forces and then what you'd find is that the narratives form to fit what's going on and now Supply demand structural forces and so in that context I think those structural Supply demand forces are extremely important like you look at any token that has like in the middle of a vesting period and it's essentially down only no matter what's going on with fundamentals why because scriptos trade on flows not fundamentals you look at Bitcoin every

having event the having event actually is a negative event for Bitcoin fundamentals it reduces the security but yet what happens bitcoin price goes up every having event because it's about to close um so as a result the it's pretty clear in this space that things trade on flows and not fundamentals and and these are not binary not none of this none of anything investing is binary it's just like weighted this way and weighted that way probabilistically but I do think that one example so from our original conversation where you really piqued my interest with this lens on this this way of um looking at things I asked you okay Hal if you're right then how do you explain the rise of all of these alternative layer ones and you said to me it's basically still supply and

demand I recall this yeah it is that I'm paraphrasing and you're saying basically someone who starts using an ecosystem like Seoul because of lower gas fees or or Matic or Avalanche or what have you because they're using that one they're they're glimming onto The Narrative of high youth gas fees and but Avalanche is useful but then two they just become more familiar with the the Avalanche ecosystem and so they're going to go and buy avax tokens right because I think what they're familiar with so it's basically free marketing essentially if you're using the network you're going to buy the native token of the network and that accounts for the additional demand force is that I think there's a few things at play I think first of all one thing I would just articulate is I am by

no means like an eth utility Maxi like I have used Avalanche and Solana and Matic and to be frank with you they often are a better user experience yeah right it's just the reality of it that is the truth okay you have to be honest um so I I'm not like I would never debate that but what we're talking about is the is the actual value of the asset so anyway just that that's like a disclaimer um second thing I would say is that there's a couple reasons for it first of all like to your point when you attract these new users because people don't understand well I think most people or a lot of people don't understand these Dynamics um they don't think of like the value of the asset they just think of like oh

this is really cool like this network's really easy to use like everyone's just going to come here this clearly is going to go up in value and like okay I just gonna buy it because I like it and I can see that and like I want to be part of the community so then they buy the asset but they don't actually think about like okay is this asset cheap or expensive am I getting good value for my money like they're just like okay it's useful I'm gonna buy it and then the second thing is because those assets are already proof of stake they have almost no structural cell pressure other than VC vesting and this is something that I'm going to get into like I'm going to do right now is that real estate assets just in general have much more favorable Supply demand

Dynamics because there is no minor issuance that must be markets sold every day and so as a result that lays the foundation for greater and more consistent price appreciation which allows those narratives to form and that's kind of what I mean by saying that the price leads the narrative not the other way around right the L the Alta one will do well because there's no structural selling and the VCS are all locked and as a result people would be like oh this thing's going up because it's the next like eth killer that it has to be like that that that's that's the reason and then the narrative will form because the price is going up but the price wasn't going up in the first place because the narrative was going up because the structural flows and then the narrative will follow that

um can you contrast that really quick how of like what's the difference between is there any investor unlocking with eth versus what's the difference between some of these layer ones yeah yeah so there is it and that's one of the best and and and most attractive things about eth is that like you know where many years since the since the the Inception and so all of the vesting has occurred and there's no more investing to occur well there was no vesting in the first place there was no vesting with Heath yeah I I don't know my history as well as you guys they're made everything was unlocked on day one okay so there so everything was unlocked they once there was disappointed that went to the Youth Foundation and that has basically gone

and whether you want to call it vesting or not vesting I'm sure a lot of those initial investors slowly sold out of their Holdings over time so regardless that was still structural cell pressure even if it wasn't technically vesting um but anyway yeah there is no more of that token distribution that needs to occur again nothing is absolute definitely like a cardinal sin of investing to think in absolutes so like I wouldn't say there's no more I'm sure there's some existing um token holders from the early days that are still slowly setting up but that is a very drastically reduced obviously whereas some of the volatile ones obviously there is actual vesting that still needs to occur um but to go back to the initial question of like going into the merge how do I think

about the space so if you break it down for a second and I think this is kind of an interesting sort of starting point the crypto Space is really dominated by two primary assets Bitcoin and their largest market by far and like the rest of the market tends to follow their behavior I mean 10 generally it's Bitcoin that leads obviously because it's larger but eth over time has started to have a bigger position and I think it also has an impact now but those are really um those are really the the two things the two assets that have an impact and both of those assets are proof of work and so I think what ends up happening is that the space at large and like the macro crypto Cycles um end up being governed by these proof

of work Supply demand Dynamics and so what are those proof of works of vitaminators I think they're very important to understand they are the fact that you're you so the structural seller of a proof of work asset is the minor and every day The Miner gets a fixed number of tokens for mining the network and I think what's really important that we can use it as an example because it's I know it better than Bitcoin um is that that issuance that they receive is denominated in tokens and not fiat currency and so what that means is that the miners get 15 I mean it's 14 and a half but we'll call it 15 for Math's sake 15

000 eth tokens every day and one other important kind of assumption here is that I think let's just assume miners sell two-thirds of their tokens I actually think the numbers probably higher over long periods of time it may be lower over short periods of time but I think two-thirds is a good just working assumption for math so let's so then what that means is that 10 000 tokens get sold every day and I think one one point that people will make is that maybe that fluctuates but really it doesn't actually fluctuate because well it fluctuates in short periods of time but not large periods of time because the market is efficient and so if the asset goes up a bunch or it becomes really profitable you have more miners come on and that's why you see

hash rate tend to follow price over long periods of time so let's just take the 10 000 token for sale as a given for the sake of this discussion what happens then is that as if is a hundred dollars then you have a million dollars of Market selling every day that needs to be absorbed and a million dollars of Supply is not very hard to absorb um you know that that's that's it just takes one million dollar buyer which is not that much however when eth goes to five thousand dollars a token then you have 50 million dollars every single day that needs to be absorbed and if you extrapolate that it becomes 1.5 billion dollars a month that needs to be

absorbed now that's a lot of money and then when you add on to it that the Bitcoin issuance is actually almost exact same then you're talking about at those prices like when ethos 5K and Bitcoin was 60k or whatever four and a half k um it was three billion dollars of proof of work issuance that needed to be absorbed every single month and that is just extremely hard to sustain um and what's what's what's relevant about that and what's so important is that that issuance linearly correlates with the actual price of the asset and so it creates a very reflexive price action where when the asset goes up in value it pushes naturally the price back

down because you create more cell pressure and the reason for that is that your supply is denominated in tokens but your demand is denominated in Fiat because you and I whether we like it or not we get paid in Fiat so we are buying power does not expand when the price of the asset expands so the the demand is relatively constant over longer periods of time but the supply increases with the price and so what happens is that when price goes up that will naturally push price back down and then when price comes back down that will naturally allow for a bottom to form as the as the supply is reduced and so on and so forth and so in my opinion this is the actual

most important fundamental driver as to why you see crypto Cycles the way that you do because what will happen is you'll have a period of parabolic Rise of interest and fomo and I think the industry is very gamified so you get a lot of this like fomo and and kind of excitement around these rallies and so you'll have this sort of parabolic rise and during that parabolic rise you know all the new money entering the space is enough to offset that increased minor cell pressure for a period but inevitably it can't offset it forever and so by the fact that you by the very nature of the fact that you reset the price higher you actually start to push it back down and so ultimately what happens is prices can

never sustain any parabolic rise in crypto history the reason is because you create so much cell pressure by actually producing The parabolic Rise um and so that kind of governing dynamic is in my opinion the force that drives the macro crypto cycles and is really important to understand and then you you throw on top of it the fact that the vesting is also token denominated and so it also adds into this um and and then also just the natural human behavior of like the people fomo in and then it can't sustain and then it starts going down and then all those people that film it in obviously get stopped out on the way back down and then you over exaggerate to the way down and then just to touch on a few smaller things

like the reason why I think you keep you see that very cyclical price action is because of what I said and then obviously as crypto gains adoption you end up with higher highs and higher lows within those Cycles because you have more money during those periods um but then the point that is so relevant for me then and what makes the merge so attractive is that finally an eighth merges it fixes this problem and this actually goes away forever um and in my opinion that creates the sort of lifting of the ceiling that has capped the price of the asset for so long because you no longer have this problem and you no longer have the minor

issue and see dictating the entire market and not only that and we'll get into this more with the merge but with eth because you pair that with the fact that it actually does generate Revenue and that revenue does flow into buy pressure which I can also articulate as to why I think that not only do you switch from having this not having this cap but you switch from what will be for the first time in the history of L1 assets a structural demand asset where instead of needing new money flowing into the network to sustain price every day you will instead need new money leaving the token every day to

keep the price from rising every day um and that the fact that you flip especially after you've formed like a seven year equilibrium in one set of Dynamics and you flip at one discreet moment in time like literally one block to the next you just flip the switch is what's so profound for me and then furthermore it's paired with a very dramatic fundamental increase in value that will also probably stimulate discretionary demand and then on top of that it's paired with a massive increase in the staking rate which will also fuel discretionary demand so like again just to put the high level and then we can

dive into each of the specifics on this when the merge occurs you're going to have the structural seller that has filled every ethereum buyer for the last seven years is going to disappear at One Moment In Time at the very same moment there's going to be multi-billion dollar that needs to buy eth for staking and then another set of multi-billion dollars that needs to buy 84 fundamentals so just from a pure Supply demand perspective you're gonna have all the daily buyers that buy youth every day because we've established this equilibrium where they need to buy it otherwise the price goes down because the miners sell they're still going to need to buy and you're going to have both of the discretionary forces that also need to buy and then you're gonna have the one force that was filling all those buyers gone and so that to me is what makes the

catalyst so profound and that's why like I titled the ethereum piece as a generational investment in my opinion that is what makes it generational I told you you'd like this guy David yeah yeah um so how you talked about how this is like it just happens that the the snap of the fingers as soon as we merge but um do you think that it manifests in the price that fast like how how much like lag time do do like there still be sellers around there'll still be buyers like how much lag time do you think is it going to be like yeah three days three weeks three months like how what what's the lag time that we're talking about here I would actually think about it in the opposite perspective and

actually like how much in advance I don't think there will be a lag yeah I think I think the market is not stupid I think frankly the crypto people might be offended by this the crypto Market is less intelligent than other markets um but it's not outright unintelligent and there are plenty of intelligent players that exist in the market um and so I definitely think it will be front ran um there's other it gets it's extremely complex because there's like so many components like people will worry about the actual technical execution risk of the merge and something bad happening but generally what I would think is that when the merge starts to actually be clearly visible on the horizon

and narrative will start to build and it'll be like I talked about it'll be the price will start moving and then the narrative will form to fit the price and actually it's funny because we actually already saw this like in June or not in June in it was like March whenever eath went on the run from whatever it was like 24 2400 to 3500 like that run and Arthur Hayes put out his like eth merge piece um like the merge narrative you could feel was at like a fever pitch and like why was The Narrative at a fever pitch well because eth was going up and why was he going up because do Quan was buying billions of dollars of Bitcoin and it was taking the whole market up with it it wasn't actually because the merge was coming it was just because the

price happened to be going up so what happened people scrambled to find a narrative to try to explain it and so they attributed it to the merch but actually in that period the merged fundamentals were trending down and then actually in the period where each price has been trending down the merged fundamentals have been trending up but no one talks about the merge why because the price isn't going up so again it's just another example of the narrative following the price and not the other way around cool I'm I'm bullish hell I think um what you're describing is pretty interesting and profound because I think this is bigger than just the eth merge I think what you're describing is a structural change in how major crypto assets are priced because we're totally

in the world that was like previously it was you know in the old old world it was Bitcoin happening Supply demand Dynamics and that was the thing and then we had kind of a newer World which was you know maybe the more recent world that most uh crypto investors legendary bankless have lived through which is like narrative driven sort of Demand right so whatever the hot narrative is and that drives that is the propeller that is the motor behind Supply demand Dynamics and now we're moving to a completely new post merge in one seamless transition from one block to the next where the merge is actually flipped from on to where the proof of work is actually from on to off is we we are completely changing the

structural nature of the entire supply and demand Dynamic for crypto and it actually starts to get for the very first time linked to fundamentals in a new way by fundamentals we mean block space Demand on ethereum and that is a first and that's going to have repercussions not just for each price which I think it sounds like you're very bullish on we'll talk more about that later but like that will have a profound change into the way all crypto assets are priced is is that what you're saying here yeah I I think it will certainly have a profound impact on the way Eve is priced and I think yeah to your point it could start to flow into other things but I

also think that I do it like okay I we don't need to predict whether eth will flip Bitcoin or not but I think eth will certainly like each dominance will increase post merge like I think eth will rise the bet that I'm comfortable making is that eth will rise relative to product crypto market cap and so naturally when that happens eth will become a larger factor in terms of driving the whole market and so because to your point then that eth will be trading more on these dynamics that may start to have an impact of affecting the rest of the market and the other point I'd make just like kind of while we're on this topic um I like so we talk about the fact that

fundamentals don't necessarily have a link with price however post merge that that link actually increases because especially with the ip1559 where fees are burned basically your Revenue and there's there's a lot of interesting places we could go with this too but your Revenue does actually flow into buy pressure so your fundamentals do actually directly then start to correlate with flows which means that they should start to matter more for price and how this is a little bit interesting to understand how they flow in so like if I spend one ether let's say gas prices are super high and it costs me either to do a transaction that ether does not actually get bought on the open market it's not by pressure

how and and whether it goes to a validator or whether it gets burned it doesn't matter it's still not bought so that kind of actually doesn't really matter but it does get it does flow into buy pressure why because I need to replace it like if I only have one Heath and I use the eve to do something and then I want to do something else guess what I need to buy another eat and so if you make the assumption that people want to keep their actual if investment Holdings constant which I think is a fair assumption that every dollar spent on fees must be replaced with new either purchased and therefore the revenue of the network actually becomes directly linear or directly correlated with by pressure like

um ish not necessarily like an equity because when you pay for something in equity space you don't pay with the actual share right right like when I go to an Apple Store I don't give them an Apple share for my iPhone I give them dollars and so then the only way that that dollar flows back into buy pressure is if Apple turns around and goes and buys back stock with it so in equity it only occurs if the company happens to do stock BuyBacks but if they don't it doesn't but if you actually make the payment itself in the native token then the link becomes that I guess it would be as if Apple only accepted

um you know currency in Apple shares for all those exactly exactly it's Apple demand if Apple instituted a rule that you had to pay for all Apple products with Apple shares then Apple's Revenue would be directly linked to buy pressure right but they didn't do that so now but or or if Apple implemented the policy where they said we're going to buy back a hundred percent of free cash flow which a lot of companies do then it also becomes directly linked yeah yes so a lot of the the crypto markets historically generally oscillate around Bitcoin or at least that's what the Bitcoin or narrative is like every every four years I think that's been correct and every four years there there's a

bull market now with the a coming proof of stake with with ethereum where like the second largest asset transitions from the the structural selling to the structural buying do you think we break free from that Bitcoin four-year happening cycle and ethereum starts to dictate its own bull markets I do I do um I'd also like to get into some of the specifics of the merge I don't know if you want to do that before or after but just on this point particularly I do like okay if you want my honest opinion I'll just go on record I do think eth will flip Bitcoin I do think it will happen around the merge and I do think it would be very healthy for the industry because I think then you will finally go to an asset that isn't is no longer capped by this proof

of work structural Supply Dynamic so all of a sudden the industry will not have that very cyclical pressure well it will not have that forced cyclical price action in the same way because the primary asset driving it will no longer be driven by it so I do think that will happen could I be wrong of course but that is uh that is my opinion but you are betting your fund on it so uh I am high conviction I'm high conviction on it but as I said certainty bias is a cardinal sin in investing so I will never say I'm certain of anything how can we run through some of the numbers then I think you've got some stuff to share with us just like taking a look at like what are the you know puts and takes on supply and demand from a from a

pre-merge perspective and then a post-merge perspective and the difference in issuance maybe any fee difference difference in staking demand um all of these things yeah what do you have to show us because I know you've been crunching numbers yeah so I think yeah I can share my screen here um there's a few things here to discuss but I think like the kind of important point to understand um from a from a current perspective is that right now there's about um

there's about so there's about 10 000 tokens for sale every day on eth which is call it 25 million dollars and then fees have been running at like a or burn has been running at like a 12 or 13 million run rate so when you take the net of those two it works out to about 13 million dollars a day of daily cell pressure so every day in ethereum if you don't find 13 million dollar dollars of new buyers and it's Sim it's actually greater in Bitcoin because they don't even have the buy pressures so for Bitcoin it's more like 30 million and for either it's called 13 million um so if you don't find enough buyers to offset that then the price of the assets go down and if you find just enough buyers who have said that the price of

the asset stays constant and so that's kind of like an uphill battle that you fight every day but after the merge um it flips and so all of a sudden then you need to find 12 million dollars at current prices and like I'm using somewhat um somewhat conservative assumptions on fees here that I think will probably prove to be too conservative because I think as we approach the merge activity we'll probably pick up as price picks up um but using the conservative assumptions you'll need to find 12 million dollars every single day to sell youth or else it will go out every day um so like that's kind of the high level of the supply demand Dynamic and it and

I think that flip from from negative to positive is very important um the network will need to find 12 million dollars a day of sellers in order to prevent the price from going up yes and and to make it a little bit more profound not only is that the case but also I think what's kind of more important and not really understood as well is that you tell me exactly how long has it been since the Ico how many years has it been 2014 was the Ico okay so eight years so um we have now spent the last eight years

forming an equilibrium where there is enough buyers to offset the current Dynamic of 13 million dollars selling every day so you have formed over a long time in equilibrium where you've built up this behavior of these people like the all the if diehards that every day or every week or every month they put their paycheck into eat and you've built up this Behavior over a long period of time because you've had to you the token has found the price where that exists because otherwise it will keep going down until it does find the price so one way or another we have now found that price and so those buyers are there every day because the token price is stable

um relatively obviously everything moves but it's found in equilibrium and you move from that equilibrium to the to the state which you just described where you then all of a sudden need the the 12 million dollars of sellers every day but those 12 million dollars of sellers don't exist and in fact 12 million dollars of buyers exist so you're actually going to need to find 25 million dollars of new sellers every single day or else the price will go up it's more profound than even the 12 because you've already reached an equilibrium at the previous negative 13.

um and so ultimately what will happen is that the price will naturally need to reset to a level where people are willing to sell 25 million dollars a day and it's not this price or else the price wouldn't be at this price right now so we will reset to whatever that price is and frankly I'd bet that that price is a lot higher but we'll see um and then the other thing is That's So profound about the structural forces you could you might you know for the first month you'll reset to a price where there's you know 500 million dollars willing to sell that price but then after a month you'll choose through that demand and you'll have to find a new price and that's the key is that there's a time element to it too where every day you will chew through a new Supply every

single day um and this actually just brings me back to one quick point that I wanted to make which is that the equity Market is already like this the equity Market is already a structural demand market like and the reason for that is because the s p is positive income and they do a lot of BuyBacks so the equity Market already have like the the the forced flow in the equity Market every single day is that companies buy back their shares and so there is a structural buyer of equities and in my opinion that's the primary reason that equities if you look at like a long-term chart of equities that grind higher crash lower for some small period of time and then start grinding higher again and it's that grind lower crash ground higher the crash lower type price action and if you look at crypto it's

actually very very different it's actually a grind lower Market you'll have like a six-year bear Market or a four-year bear Market followed by like a one or two year bull market and then a four-year bear Market followed by another one and it's the opposite of equities right equities will have like a six-year bull market followed by like a six-month bear market so crypto has actually been this grind lower crash higher market and I think both of those things can be explained by the structural flows equities are structural demand crypto is structural Supply so naturally when there's not some strange event going on that's creating the crash another Direction crypto will grind lower Equity will grind higher but then when you flip I would expect that crypto well specifically eth will

start to exhibit more of that grind higher crash lower price Behavior which will have all kinds of other unintended consequences which we can discuss if you're curious but that's just kind of a way that I'd contextualize it a little bit so that's the beneficial demand piece yeah where do you want to go to next the eth staking seems really relevant yeah yeah so I think this is an important point which is that like and there's a lot of assumptions involved in this so depending on how many fees you want to assume get burned um like your staking rate obviously changes but I think 80 is a fair assumption and then defending depending on what percent of tokens you want to say at Stakes are right now it's only it's only 10 um

but I think that will probably increase post merge so like if we say 15 then you can arrive at some reasonable assumption and then obviously it depends a lot on fee run rate so I'm assuming that you have a 5 000 eth feed run rate which is much lower than it's historically been but has been more in line with where we've been up late um but if you know we get to the merge and fees return to where they've been before then it's going to have a profound impact on the staking rate like we were averaging 15K for a while that'd be 11 staking rate right now we're at five that's a seven percent staking rate but the point is that there will then be a fundamental link where the actual revenue of the network will directly flow into your staking rate but

under all the assumptions if we try to be conservative we say that fees are going to stay low if we say that staking rate is going to go up and we say that 80 is going to be burned you still have a 7.1 staking return um which is obviously a big increase from today where it's like four or three and a half and so that on its own will produce a massive increase in demand because ultimately like if this if the percent of token's stake is going to go from 10 to 15. some portion of that let's say two-thirds will come from foreign that decides to stake but but there is going to be some portion of it which comes from new buyers that say okay now

I can get twice the yield I'm going to buy it because I want to now stake it at that new yield and that will be new demand so if you assume a third of that Delta is going to come from that it's about a percent and a half which is call it four billion dollars of eat that needs to be bought after the merge and like we can debate how much impact that has you've seen over the last few days the impact that a two and a half billion dollar Bitcoin buyer or seller can have um so I think that anything in that Billion Dollar Plus range has a very profound impact and especially if it's concentrated in one specific asset so that's one point I'd make then kind of the more interesting point I think is this which I've never really seen anyone

else articulate um and it touch it kind of brings together a lot of the things that we were talking about this is what I'd call like an adjusted equivalent PE ratio that's a really weird term um but this is if you think about what is a p e ratio trying to show in its purest form in my opinion it's basically how many years will it take for the earnings of this asset to pay off the price of the asset and so there's a couple ways to kind of think about that and you can think about it as like you just take the market cap of the acid and divide it by the earnings however with a proof of stake asset it's not that simple because you have a very different

PE multiple for those that stake and those that don't stay for those that don't stake their only form of income is the burn less the issuance so right now if you're not staking eat you're losing 3.3 percent every every year because that's how much issuance is being um put out and you're not getting anything back in yield but if you do steak Eve then you're actually getting 0.7 because you're getting a four percent yield and the issuance less burned is 3.3 percent now post merge so like but so so what that means right now is that like on the proof of work ethereum you're getting if if you're staking so this is really like what we're talking about is the p e

ratio of four stakers which I think is quite a relevant thing because anybody that buys eat can obviously decide to stake so this is like your incremental buyer has this option um if you if you do it right now if's basically trading at 134 times earnings which is like expensive but potentially Justified given how fast it grows but maybe not more interesting after the merge I'll you will then get a 7.1 staking rate which we calculated over here but much more profound than the 7.1 percent you received is that you get that in addition to the network actually deflating so that's 7.1 percent is not a fake

issue it's like this is where I'd go back to the other discussion about whether it's an expense or not like whether it's an expense or not if we take um like Solana and say or whatever don't pick on Slaughter any any other people think asset and say that they they issue a 10 um staking rate but that comes all from new token issuance which is all dilution then this number would be positive 10 and this number would be negative 10 and your actual net income would be zero so what's profound about the ethereum is that you can generate this yield and have negative issuance that's what's ultimately so important it's a real yield it's not a fake issue in Co

um and so as a result of that real yield the actual normalized p e ratio to the Staker is 13 times so post merge at all of the current numbers you'll be buying an asset at 13 times earnings which is like well below the s p multiple well below any sort of possible growth asset and doesn't even and that doesn't even factor into account any store of value any store value value accrual any currency value equal anything this is purely the equity component of value to the Staker you're buying it at 13 times earnings um and that to me is very powerful that that's incredible so how you're running

the numbers and you're saying that buying eth right now is way cheaper than buying the S P 500 not right now after the merge but but we're assuming the merge is gonna happen right assuming the market is going to happen where the opportunity to make that assumption yes I agree what's the probability that it doesn't happen you know what how we're gonna have to all right so yeah that's fair we can we yeah we can go to that next question now this kind of like summarizes the the number let's hold that question I think we have a few other questions for you it's like about how you can actually capture the trade that you're talking about yeah sure when the merge that sort of thing uh but guys um we've gone a little bit over just because this has been so interesting to us and uh you know but we we gotta we

gotta come for sponsors for a minute we'll be right back with Hal we're going to talk about what he thinks the trade angle is how you actually capture the upside of this and when the merch might happen so stay tuned if you're trying to grow and preserve your crypto wealth optimizing your taxes is just as lucrative is trying to find the next Hidden Gem also Ira can help you invest in crypto in tax advantage ways to help you preserve your hard-earned money also crypto Ira lets you invest in more than 150 coins and tokens with all the same tax advantages of an IRA they make it easy to fund your alternative Ira or crypto Ira via your 401k or by contributing directly from your bank account there is no setup or account fees and is all you need to do to invest in crypto tax-free let me repeat that

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the fund on the merge and he's got the numbers to back it up but in addition to the numbers you how you've also been tapping into the all core devs call which this is where the ethereum core devs the ethereum coordinators the ethereum client teams all get together and work towards the merge and this is out in the open anyone can watch these they're on YouTube every other Friday I believe uh and so and so but so many people just forget to tap into these things and so this is where like the merge is ultimately going to be decided and so since as you are an external third party who's got a fund on the line uh can you give us your best estimation as to win the fund when the merge is coming I can and I first of all I just say I

agree with what you said I think there's a ton of alpha to be gleaned it's actually not just all core Dev call there's a consensus layer call as well every other Friday so there's multiple calls if you go to the ethereum foundation YouTube page they post them there and also the the I I'm just gonna drop all that out for you if you go to the ethereum r d Discord use where you can really start to actually get a feel for things um try not to bother them too much just just watch because that's actually where they coordinate all the r d but certainly you can go and just observe the conversation there and they put all the links of all the calls there and everything there's a ton of alpha to be had from that like it's really funny because there's so much money on the line with

ethereum and I tune into these awkward Dev calls every two weeks and there's like 100 listeners and it's like you guys gotta be kidding me like this is like this is like the equivalent of the earnings call and nobody's here like like people are so busy running like technical analysis of like which moving average we're gonna break and they don't even like care about the actual Alpha but anyway that's enough of that um there is a lot of alpha to be gleaned and I spend a lot of time thinking about when merge and there's a lot of moving parts and a lot of interpretation because all people a lot of people have different incentives to push different timelines and different incentive

structures and so trying to kind of navigate it all to a realistic view of web merge I think can be challenging um so early on you know I was actually much more pessimistic than most like I think most people thought the merge was going to occur in June and I've been very public on my Twitter that like the merge is not happening in June like I've been saying that for six months there's no chance the marriage is happening in June because I just know the timeline and I know like there's enough things that need to happen that haven't even started yet that it's not happening um and everyone was like Oh no you're crazy like it's coming in June it's coming in June and then like obviously Tim Baker was like it's not coming in June and then they're like all right it's not coming issues

um and then but then like there's this uncertainty as like when is it actually going to come and for the first time my view has actually become more positive than everyone else's View and this is why I was like you know you can't you said it yourself like I didn't want to do the podcast that I was saying like the time's not right the time's not right the time is right now um in my opinion and like to be clear that will be confirmed in the next few weeks but I'm I'm very confident now that were close and I could put some intervals on it but just to give you a sense okay where we are in the process so we've been running these shadow forks for and when I say we I don't mean we

I've been doing okay the the Davis have been doing it I have not contributed um but um the dads have been running Shadow forks for multiple months now and they start and what a shadow Fork is is basically you you take the existing blockchain you Fork it and you run that fork through the merge but it's essentially a dress rehearsal it tests almost everything that a that an actual real merge would attest and so we've gotten to the point now and I think you know we did some like proof of concept test Nets and they worked and people were like oh so excited like okay it worked but then the thing that they kind of didn't understand is that there's a

lot of different ethereum clients like you heard all these names like Keith prism Aragon et cetera like all these different clients that actually run the ethereum network and they all need to implement the merge in their software and that is actually a hard thing to do and involves a lot of edge cases and a lot of software testing and hardening and that's the stage that they've gotten stuck on is the client implementation issues it's not actually anything to do with the core merge spec which is been finalized for a while so that's you know what I'd refer to as code complete we have been code complete for quite some time but the client implementation issues have been what's holding it up and for

the first time last couple weeks we've been doing mainnet Shadow Forks where clients have been having zero major issues and that is ultimately the main hurdle that remains and so we did the last shot off work was last Thursday and we've gotten to the point now where none of the clients are even having issues anymore in terms of like Aragon having an issue with every interface so what happens is that the clients will interface with other clients like Aragon will interface with with Keith and then prism of nethermind et cetera et cetera and at the beginning it was that like one of the clients was having issues just generally and now we've already debugged all of those issues so it's to

the point where the only thing that remains is certain clients are having issues with certain other clients but even those client payers now have basically gone almost to zero like I think on the last it's called mainnet Shadow 43 I think on may not Shadow Fight 3 there was only two client pair issues and the whole thing every client finalized after the merge and there was only two like minor issues um so like we are extremely close um give us some dates there's another Shadow Fork this Thursday if all goes well they will try to set a test net date for the actual public test Nets

at I'm going to try to be a little bit conservative the next all core Dev calls so not this Friday but the two Friday after that they will set a date potentially if things go well for the public test Nets when that happens that's the sign that okay the technical aspect of the merge are finished now and it's just a matter of then of practicing the coordination exercise so let's say that let's play that time frame forward let's say that that would be May 27th let's say we get to May 27th and they set a date that date will likely be call it five or six weeks into

the future because you need to give all the validators enough time to update their nodes so then what you're looking at is a a initial test net date and I forget which test that they're doing first if it's robsten or sepoya or Gourley but one of them they'll do one of those so what what will happen then is that one of those existing public test sets will actually like go through the merge and it'll happen probably in mid-june and then the next one will go after that which will be at the end of June and the next one after that which will be mid July after that you are finally ready for mainnet merge so I think by in in a everything goes well scenario you could be ready to start talking about mainnet merge

towards the end of July in which case you would schedule it for the middle of August so I think there is a realistic scenario that we are actually merging in August you sat through the calls you've really gotten in there so I think you've got a good feeling for it and I know I do not say that lightly like it it's take like it's been a long time coming that I've that I even feel comfortable saying that that doesn't mean we're going to merge in August there's always unknowns for sure for sure but I think it is realistic that it happens and I think this is not August September 75 you go ahead you're not going to get

dates from anyone in the development Community there so it's left to investors to actually do the due diligence to try to like figure out what the dates actually are and so that's what you're doing and of course you could be wrong you're not representing the ethereum foundation not representing any of the developers this is your best guess based on public forum observations so can I ask you we've got to close with this unfortunately how this has been so much fun but um can you can you tell us how you're actually going to trade This and like my question is why so I understand why you're betting the fun this seems like a very obvious bet the way that you've laid it out right but um and then you you do think you are betting that we are going to shift from you know

narrative-based pricing to actual kind of fundamentals flowing through then you supply and demand metrics to make uh each valuable so how are you actually playing this and are you playing this on a Time Horizon at all like why why get fancy why not just go long eth like many in the so the primary position the primary position is just long traditional staked eth and I actually stake my on stake wise um but yes the primary the primary position of the fund is essentially staked Ethan stake wise um but I think there are a couple ways that are actually really interesting to play the murder outside of that one is actually through the staking narratives so you can buy the Statewide

token it's called swise or you can buy the Lido token called Lido or you can buy the rocketpool token RPL those staking derivatives actually get exponential increase in their fundamentals on the merge because one if staking participation goes up two each staking rate goes up which they get their their revenue is is correlated with directly correlated with that and three the price of each goes up and all three of those compound each other to the point where if each doubles and staking participation rate doubles and the staking rate doubles then you have two cubed which is eight X multiplier on their revenue so like those staking

platforms Revenue could 8X when the merge occurs and then the kind of the more interesting part that's not so well understood is that their primary form of expense is issuing their token to incentivize a tight Peg between their liquidity token like the for Lido it's the SE token and eth and they have to pay out Lido to incentivize like a liquidity pool there but after the merge you'll be able to redeem SE directly for Eve and so they won't need to pay out any more incentives so you've got an 8X multiple in revenue and a very drastic reduction in expenses at the exact same time so that makes a staking the staking tokens an attractive way to play the merge and then the second thing if you want to just go more direct and I'm a

fan of this as well in my opinion the most underpriced asset in the history of liquid Financial assets that I've seen is eat upside calls so actually trading the options on Eve because historically you've been in this environment where price has been capped and so as a result those upside calls aren't priced like you could just blow through the cap but given that I think we are now lifting the cap I think that those options change structurally and they're not priced like they're going to change and furthermore youth options especially with the the experts that I'm talking about like the September options are pricing in almost zero event around the merge almost zero and obviously I think

this is the largest event in the history of crypto I'll accept probably the the Inception of Bitcoin so I think there should be a lot of event risk priced in and there's none so personally yeah the most attractive trade the most attractive trade that I've seen and I actually have this trade on so I was just like full disclosure the December 5000 strike eight thousand strike eth call spread can be purchased for around 70 and pays out 41 times return if closes above 8 000. and then on where do you buy this yeah so yeah the guys so I use an OTC counterparty but you can use there a bit

is the is the most liquid options exchange Unfortunately they don't offer for U.S um counterparties but yeah they're a bit I use an OTC County party called GSR um three arrows has another OTC desk like there's some OTC desks you can use but yeah that call spread it costs 70 and it pays out two thousand nine hundred and thirty dollars of profit if it closes anywhere above 8 000 so yeah it's a 41x return if e3x is how is the bear Market factor into your decision making equations at all absolutely but I would just say macro is very hard to predict uh I I have a view but I wouldn't overweight it

and I wouldn't overweight anyone's view on macro macro is extremely hard to predict macro is going to do what Mac is going to do if you want to play the merge from the purest standpoint by eth short everything else and the easiest thing I mean I I don't mean to like rag on bitcoin easiest thing to do is trade Etc buy each sell Bitcoin that's the purest way to play the merge and I do think a lot of the flows into it will come from BTC um how do you feel about the trade of putting uh ether into compound borrowing wbtc selling it for eth and and then trading literally the same thing you can you could you could you could yeah that's good yeah I I I think I think that's good and I actually might look at

that because when I try to do the trade it takes up too much Capital right and costs too much margin so I might look at that um yeah and I don't know if you want to discuss like anything else there's a couple other things that are interesting or we don't have time I think I think Ryan we tease that and bring Hal back as the merge approaches uh and yeah there's so much content that the community just absorbed in this video Hal I think you graduated to like you know one of our uh made major merge correspondence on this episode I'm happy to come on again as we get closer yeah um yeah you have anything else to close with because I know we've gone for an extra long episode but we one other just dropped yeah of course one other project

that I just want to discuss quickly because I think it's super interesting and um just want to raise sort of like the awareness of it um there's one project I've been looking at a lot and I'm not an investor in it so it's not like biased just like it's super interesting I'll probably write some more about it on my um Twitter in the future but it's called million um million is it's like million but with an n and I'll share the white paper and some FAQs but basically it's what's called a MPC platform it's a multi-party compute it's a cut what I think of what makes me really excited about it is that it is in my opinion a zero to one innovation in crypto which you don't see that often anymore but basically what it does and I think it will actually resonate a lot with the

ethereum community so I'd be happy to talk about it at some other time but it decentralizes the compute itself and so what that allows is it opens up a whole white space where let's say you have two banks that want to run a computation on their data sets but they don't ever want the other bank to see it they can plug their data sets into the million technology spit out the output no node will ever see the actual data but they can utilize it together in a way that they couldn't before and it all runs on cryptographic technology so that's one that I I would definitely keep an eye on and I'll share some more info on we could talk about it again later if you want but yeah happy to be on um for any other merge related discussion or anything

else how what's your Twitter handle if people want to follow you uh it's a good question I don't know you need anything on Twitter more sir I'm on Twitter but I know that my my name is nrd I think my Twitter is North Rock LP which is what it is North Rock limited partners I ran across Hal on Twitter after he wrote a just a killer post that I hadn't seen before on much of what we discussed today the supply and demand dynamics of ethereum going to the merge so we'll include a a link to that article as well um Hal that's all we have time for man but thanks for coming on really appreciate you exploring this with us yeah sounds good I really appreciate the time guys and I look forward to continuing the dialogue look forward to

merging man where's the disclaimers of course none of this ultimately I gotta tell you like I I am I am I am extremely excited for the next three months if we converge in August watch out it's gonna be a great summer uh but of course we don't know the true date of the merge none of this is financial advice eth is risky all of crypto is risky D5 is risky you could lose what you put in I'm guessing this episode made you a bit more bullish but you never know what could happen we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bankless journey thanks a lot hey we hope you enjoyed the video if you did head over to bankless HQ right now to develop your crypto investing

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