CBDCs: A Wolf In Sheep's Clothing | Roundup

Transcript

all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-hosts today are their personal views and they do not represent the views of any organization with which the co-hosts are associated with uh nothing in the episode is construed or relied upon as Financial technical tax legal or other advice you know the deal now let's jump into the episode all right everyone welcome back to another Roundup of bell curve you got Michael's one and two vancineno what's going on fellas yo you guys were roasting me last week you guys I listened in I was getting shredded you weren't supposed to

think that was expecting a nice little Roundup My bald head my God yeah I'm sorry it's awkward to have you back here well what what's awkward Michael is uh the the big hair reveal that you're about to do for us so uh I think I gotta get you back my friend you're looking baby Dana taught me a new word I'm supposed to know which is uh snatch um in what contest in what context friend no like I see I don't even know how to use it it's like Michael's looking snatch I don't know we need some some Jen's ears to tell me how to do this I'm not 100 sure on that one uh you might want

to want to wait on that until you get further Comfort I actually learned another gen Z one this week which is a brick you guys know what that means like like failing kind of like it's freezing basketball like it's cold as brick like I was gonna come visit you but it was Brave it was brick out it's cold okay I heard I heard a risen you ever heard of risen like I'm risen over something yeah yeah no I don't know that one you got Riz yeah yeah you're excited you're like feeling good I went to a bar trivia night here in New York and a whole category was Riz and the for the whole first two minutes we're like what did they say right what what is that word um spell that for us please yeah whole

English language getting reinvented right from under our feet um all right I actually want to make this a non-macro podcast for a change uh and get some thoughts on on crypto specific stuff so I would love to get your thoughts on kind of the two dominant stable coins usdc and tether so we've kind of seen some pretty significant outflows from from usdc um and tether uh is yeah ostensibly kind of looking at at tether dominance is going up it's looking like the the safe haven um at least that's what it looks like on the surface so I'd be very curious to sort of understand what what you guys think about this um

obviously since the you know Silicon Valley is situation issue whatever we want to call it had a number of conversations with portfolio Founders uh I would say uniform across the board and also in surprise to us the move was to put it in to tether basically like take all the cash that you had veins were not safe usdc was not safe put it into tether and that you know was kind of the safe hold of where you wanted to put value you know for for short duration um obviously everybody else has now moved to some sort of banking solution or banking infrastructure but it it was very surprising to me at least over the

last two weeks that you know uniformly Heather was the thing that everybody immediately went to and said this is the place we want to keep our value um I mean obviously we saw usdc depayed you saw all the true Falafel around that um also talked to a couple of people uh over the last week who were trading usdc uh as it was Steve Pagan and it seems like that was a pretty awesome trade but yeah just it feels like you know there is an opportunity to have something be the you know the reserve currency um and in a lot of ways it seems like tether has been that by default yeah I'm just looking at the the total market cap looks like it peaked at 56 and now it's

at 33 Peak to 56 billion in July of 2022 it's kind of the same thing you see with like the bank runs right and it's not just you know the speed of mobile funds it's literally just two ethereum transactions away 24 7 365. so it's you're seeing like Finance at the speed of the internet and it's not surprising that there's this much volatility I also think there's probably a lot of latent usdc that was just sitting there for one reason or the other and this was the event that woke people up to either getting to a new stable coin or or putting it into t-bills or things that are on chain like ondo but I kind of wonder where this stops like 30 billion seems like like you know you can't

really do Ta on this chart but seems like a decent place for it to stop if it were going to but yeah usdc kind of getting killed here and circle as a result yeah so just give people some numbers it's down from P or about 90 days ago it's about 43 billion in terms of market cap say it's 32. rough math says 11. 11 billion in outflows does it have well does it have something to do with where they embed where like what it's collateralized by like one of them is invested if you knew nothing about the backstory of tether and nothing about like oh usdc is more reputable it's like uh on paper one of them invests in U.S Bank deposits and the other invest in short-term treasuries yeah I think there's some additional hair on like the usdt thing

um you know like frankly like we have a lot of usdc I I wouldn't trust tether with our balances just because it's kind of indefensible for us to to go to our LPS if something were to happen to tether and say yeah this offshore you know banking operation that has like this checkered pass versus something that's holding t-bills in U.S you know systematically important Banks so like I continue to think the institutions are just going to be usdc but I think what you're seeing is just Asia does not have that same understanding and and frankly like probably just has a bit more history with usdt versus you know something that looks a little bit more regulated like usdc is there any chance that tether is like interacting with you I don't really

understand how like tether's mechanism or whatever like the burning and stuff like that it never really made sense to me is there any way that tether is interacting with usdc in some way doubtful doubtful I think they would need to keep pretty clean lines between each of them just in order I think if you own tether you need to have a very strong thesis about why it has been able to stay so steady despite all the turbulence out there in the market like you need to have a good explanation like are they that much better at risk management are there Bond Traders just dodging every bullet that exists out there I don't know I've never been able to construct a compelling thesis for why

it's been so solid it doesn't make much sense to me we had a conversation with Market maker and granted this was like probably April 2020 uh so tell you what the grain of salt as a lot of has changed since since then we had a conversation with the market maker a very very large reputable Market maker and they said listen you don't understand what southeast Asia is like when you go to Kowloon and actually see some of the FX prices in the the international currency exchange they're quoted in tether they're quoted in the base currency which is usdt so I think there is an infrastructure and it's probably not an infrastructure that we're used to seeing

that has tether as a core component where it's the base currency it's the base it's the base trading pair and and I think that you know is really kind of my to your point like where is this happening why is this happening I think that's a lot of the infrastructure that you know props up this currency so what one like little data point that I would that I would throw at you guys is um there was you know there's an another uh we block works also puts out a lot of macro content I'm actually not the host of a small macro podcast called on the margin and the what people were talking about a couple like probably 18 or so months ago I forget the exact timeline was do you guys remember when there was a big Chinese real estate firm called evergrand that was imploding yeah and

the concern at that period of time was because all of the the macro kind of Trader folks that what people always say about tether is I have never met any anyone who trades for tether like that's what all like the bond Traders would say right in like us-based Banks and stuff like that is like for some for an entity that supposedly has a gigantic you know multi-billion portfolio of bonds I've never met anyone that trades for tether so then the thought was all right well maybe what they're doing they have exposure to Chinese paper and then ever Grand happened and then that was actually dispelled and tether came out and said we were not uh we had no exposure to evergrant which basically meant that you couldn't have exposure to

to China at that point so then the question becomes if you're not trading in U.S treasuries and you don't have any exposure to Chinese debt where is that you know however big it is now you know 45 50 billion dollar Bond portfolio sitting they do have attestations it's like you know it's on paper somewhere I don't know what the exact locations of the of the money are but assuming those attestations are good I see a compelling reason for people to use this there's also different like the one of the different things about usdt versus usdc is there's a pretty robust culture of trading usdt OTC which sounds a bit strange but that's how people you

know first of all off-ramp from a lot of Chinese exchanges you will go into these like kind of like OTC markets and they used to be more active when you know China was really um running strong with crypto and I assume they're they're active again now that Hong Kong is back but you would really kind of use your account as a bartering chip to get you know stable coins which you would then convert into bank deposits and that's how ninety percent of people that trade in China that at least I know have actually used this so a little bit different of a use case as well um and there's a network of Brokers which will do this for you and who knows how active they are now but there's a pretty robust culture of like trading you know peer-to-peer like usdt as strange as that seems I have no

special information I just like it has never made an enormous amount of sense to me so that's why I kind of like I think you need a very strong thesis as to where that money is and and why they might have been might have been so impervious this but it's actually almost 80 billion in market cap which is larger than I thought and if you look at the charts of uh usdc versus tether market cap they're basically inverses of each other the name of this pretty incredible business model no matter what the uscc tether any of these stable coins if you're able to take deposits into the tune of 80 billion or you know 100 billion dollars earn three four five percent whatever it may be or or maybe less sure but like two three four percent and then you're not paying out any interest

pretty awesome it's pretty awesome but you know tether should have the same Pro or honestly I I kind of feel like all of them should have similar a similar problem that the banks had in that when they were originally generated all that market cap and had to put it in treasuries you know they were doing that at a time when yields were pretty low but I you I don't think usdc should be totally fine that's why I'm with you guys usdc is completely audited they're very transparent like a high degree of confidence that there's legitimate backing there it's not the same thing because usdc I think the average tenor of all the the fixed assets that they have backing up the usdc is like three months you know they

they cycle these very very rapidly so it really matters what like the short duration of the yield curve is in terms of what their yield is in terms of what the revenue will be but it's not like you know they're going to get stuck with these whole maturity Securities like they're not they're not the same issue as the banks ultimately ultimately the like I hope the T bills end up on chain and you know instead of stable coins as like the base foundational layer of D5 you have something that's yield generative just because you know if you have something that's yield generative your ecosystem is going to default grow by whatever that yield is year over year and so you at least like have like a little bit of a tailwind and people are a little bit more enfranchised and there's a cool product out there called

Ando which does ousg which is I think like two or ten or whatever your you know government uh fixed income the problem with those products is that you can't actually get wide distribution because everyone that buys them needs to be an accredited investor or a qualified purchaser which if you don't know what that means it usually means there's like a net worth threshold which is you know we don't agree with but like you know there is a threshold for people who can actually buy these things um and so as a result you're signing up with ondo to create you know a registration in a security which is a fund you own an LP stake um and so I don't know how you ever solve that but my hope is that we can um and I don't think you can do these

things synthetically either I feel like that would just be a lot of risk for the people who are on the other side of the trade but my hope is that this is where this goes and maybe we see it come out of a different country maybe Europe has you know different laws around who can own government fixed income and who can trade it and things like that maybe it's like Asian bonds but you know someone's going to start doing this just because the stablecoin business model to Michael's point is just extremely juicy and I'm happy they have the business right now I'm happy to have the revenue because they're going to need it to fight a lot of lawsuits and Lobby and do a lot of different things to make you know the Future Finance uh you know happen but it's uh it's my hope

that it Trends the other way over time more towards giving a yield to the ecosystem and consumers did you guys read coinbases kind of almost call to actions I guess I'd call them for Builders the four things that they wanted folks to build no what was it so so coinbase launch base Basics basically has like an ecosystem fund um and they just put out like the four things they want to see built one was like things that help enable safer D5 another was um reputation another was like on-chain limit order books and then the last one was um what they called Flat coins which are basically decentralized Stables uh stables and specifically they brought up like they're like we have a request for

like Builders to go build uh decentralized Stables that track that are like inflation hedged or like track the uh growth of inflation whatever you want to call it and yeah I'm curious what you guys think about that sounds like an amazing Concept in concept deceivingly difficult to ask you Don I mean to Vance's Point like ondo exists you know there are real world asset pools uh Maple is a great example of this you know a portfolio company a framework um there are they're also on-chain you know Insurance pools that you can put money into that are like literally insuring tow truck drivers and and crop insurance like there there are ways to get yields

that I think are are interesting the problem is that you literally need to sign documents or or do some sort of signature on chain such that you're effectively an LP in a fund that doesn't work if you're not someone who can pass kyc that doesn't work if you're not you know from the jurisdiction and and frankly just like doesn't work if you're an individual that doesn't want to sign you know LP documents um there there is a need for kyc and and all of the process around you know fun formation and and the light but you know the entire point is that there isn't really an opportunity to have someone access this product without effectively

like signing LP documents um which is and just to be clear like that that's way different from for instance like having a brokerage account where you can get access to these money market funds that's way different from anything that we have on chain if you're using ondo Finance you literally have to you know effectively sign to be a qualified purchaser which is a is a wealth threshold of five million dollars so you know there are high levels of access uh constraints that effectuate whether or not you can have access to this product even in D5 so I I agree it's it it's awesome to conceptualize but very very difficult to effectuate

I have I've heard a couple of VCS say they're not necessarily fans of early stage companies holding their treasury in even something as safe as t-bills just because you don't have like an enormous amount of financial competence at an early stage company and it doesn't happen super often but if you held treasuries depending on the duration in 2022 you might have lost you know 25 of your of your treasury so I'd be curious what you guys just kind of think about holding treasuries or like what is what is treasury management supposed to look like for early stage startups don't do that don't just hold your money in cash in a bank like just to replay this is my opinion just to replay FTX like

okay you're a startup you had your money in FTX what was the money doing in FTX well we were trying to you know buy euros and like because we yeah I had to pay people in Euros or like we thought we could get some yields like okay are you running a hedge fund like what are you doing you know that that's at least my perspective I don't think the risk can really or the reward can really ever outweigh the risk if mission one is getting your product to market and keeping your team alive if you're the CEO of the company you really have two jobs you know keeping the company funded and keeping everyone in line and like if you blow your company up because you put all your money in I don't really care where that's your fault

so one of the things I was going to add to this is uh a month ago I would have said absolutely 100 that makes total sense after the last month everything we've seen with Silicon Valley Bank imagine replace FTX with Silicon Valley Bank and replace the situation that happened versus what could have happened which is depositors don't get 100 of their money back or it goes into receivership and you have to fight for it for the over the next 24 months the the thing that I think is important to note is like there is a very huge difference between 250 000 of FDIC Insurance versus how much money your company probably needs to raise to be able to pay operations over the next

two years which is you know what you should have there are cash with accounts there are money market funds you don't have to do often buy t-bills but there are places where as interest rates ebb and flow you're not going to lose value on the the actual value that you have in your account and in fact you probably will gain value uh but I I think keeping it in a money market fund is probably you know the best opportunity here given everything that's going on as crazy as it sounds in the baking Center so then how do you grapple with the fact that a lot of the protocols that you guys invest in still hold a lot a decent chunk of their treasury in their own native token their own

native token or usdc their own native token from what I've seen yeah I mean you kind of think of it as like operating expense versus incentive fund you have usdc or you have cash stable coins as the way to pay people and that's the salaries that are coming out every you know two weeks or whatever it is and then you have tokens that are incentivizing the team incentivizing the community to go off and be aligned with the rest of the community with the rest of the protocol um and yeah sure a lot of treasuries are denominated or effectively denominated in the currency that they have but it's kind of like saying you know the the employee stock option pool is denominated in the in the company stock

that makes sense that makes sense um all right guys let's let's talk a little bit about I know um you guys flagged a report that was written this week on cbdc's um that was by city and kind of the combination of that in uh real world assets or the sort of real world asset you know real estate tokenization Trend that we've been seeing you guys um talk a little bit about that I personally have a pretty negative view on cbdc's uh I don't think like we all have digital money in our bank accounts every time we use Apple pay every time you use a credit card like you know we have digital money already the only reason why you'd have a cbdc on like the consumer payment side is to be able to have not only read permission

which the government already does into basically every financial transaction but also write access and be able to reverse things to be able to block things to be able to subtract money to be able to add money I personally just think that's a pretty slippery slope and I think it's pretty cool that Ron DeSantis banned cbdc's in Florida a big shout out to him for realizing that this is probably not a path that we want to go down I I think it becomes another veneer a layer of privacy control um frankly I in my mind we already have a cbdc and sure it traded off Peg but usdc is redeemable for a dollar as long as you have a bank account that you can receive it and in my mind that's really kind of the fastest the best

it's also really interesting that uh fednow is apparently launching in July we'll see you know what that is and what that does um but I I do generally think uh you know there is that there is definitely going to be competition from you know the public sector that's coming to the private sector which is circle and usdc the the the the expectation I don't know if you saw that if you guys dug into the paper but I think um I think the number they floated out was like five trillion Circ 5 trillion of cbdc circulating in the economy uh within seven years I like the the one thing that I would say is an interesting use case for Central Bank I don't know if it's like Central Bank digital currencies but I'm going to tie

it I'm gonna tie the macro to the crypto here like if you think about things like um uh like the TGA which is the treasury Journal account or the RRP which is the reverse repo repurchase facility like those things have trillions of dollars in them and the FED is trying to get this money you know through incentives to move into or out of these programs or into or out of the banks or into or out of the financial markets and it all kind of seems like it's pretty manual and stick to getting stuck together by like duct tape like if you had all of these assets sets you know say like the Central Bank issued all the t-bill auctions on chain and had all those assets on chain and maybe they had read and write permissions and maybe they could you know give people incentives to

move into these places or you know penalize them to move out like you know if if you assume that monetary policy is is one of the most important things that you know the US is doing today it kind of doesn't make a whole lot of sense that we're running on probably like 1960s technology so I think like Central Bank digital assets not Central Central Bank digital currencies are pretty interesting um like imagine if the rrb was on chain like that we were basically trading on yeah but then you're basically trading off efficiency it's like yeah they improved the Antiquated ACH system obviously like drastically right imagine there's another Global health health pandemic country shuts down you're out of work government announces a stimulus plan same day stemi checks could hit could hit your bank account like yeah

that's a big Improvement but what you're trading off is privacy control and surveillance because in that same world the government could then block your transactions if you attend a protest that they disagree with or even worse they can shut down your entire account if you post let's say you post on social media in favor of like some riots or something like that like then they can shut down your accountant I think it's not that's why I I'm like I think cbdc's are one of the are a huge have like a potential to be one of the most dangerous things um and this is already happening too people are already getting a financially de-platformed I'm like very anti-cbdc yeah yeah he's the truth is are we are we starting that narrative

this early event too early too early I know the caucuses start in January it's like seven months away and then and like once you know if DeSantis announces in the next couple months that's all people are going to be talking about for the next 18 months once if he announces you know I I think I was actually a little worried about you know we're moving our our Das event to Washington DC and we've been kind of doing our I mentioned you guys a couple times we've been doing some research and talking to people down there and it's been a little worrying to hear that what everyone wants to hear about and what people think are going to be

relevant is going to be relevant a year from today is cbdc's and I would say the majority of people there view it as inevitable that it's happening on a relatively shorter time frame than I think most would be in this uh this news kind of flew under the radar but I think it's one of the more interesting pieces of news over the last week did anyone see what happened with Matt Tybee the day that he went to go uh testify in front of the house arrest no no not house rat but like yeah some IRS agent rolled up to his house and left him like a note which was like call the IRS in the next four days yeah

not just that his existing tax returns were refuted basically the IRS said over the last three years the tax returns that you have we're rejecting them and we are reopening forensic audits into your tax returns the day that he was supposed to go and testify in front of Congress on the Twitter files imagine if they could automate that and just take all his money and just be like sorry there is a an executive control that I think you know cannot go understated here that we need to protect and this is the the entire conversation around cbtc's yes Ron DeSantis you know Pro anti-cbdcs but the the fact of the

matter is any sort of control left unchecked I mean who's going to be the one who regulates the cbdc who's gonna be the one who actually controls whether or not you know these things and these powers can happen did you see the Twitter uh sorry not the Twitter the the tick tock uh proposal and granted it's a you know it's a proposal that's not going to affection it's not going to go into effect 20 years imprisonment if you access the application from a VPN you know the the the Secretary of communications which is a new cabinet position that the president would uh you know appoint an unelected person would choose a council of people beneath them

to decide which which application should be banned which countries are or foreign adversaries you know how are we going to have any sort of checks and balances into that control and I there there is a there's a governmental overreach that I think you know is kind of the core to what cbdc's represent but it's happening not just on the financial side it's happening on the community communication side as well you know what I think is particularly dangerous about this is look at what's happening in you know with regional versus big Banks there's already a natural economic Trend that flows towards this anyway like our whole fractional Reserve banking system is basically

levered bond funds in a way and those are inherently risky and they kind of blow up from time to time and every once in a while when these bank failures start people are like well I should just be able to park my money in somewhere that I don't have to risk it getting uh you know losing my money that should just exist as a product and you know the the benevolent like imagine a very benevolent kind of technocrat in charge of this and it's like well how could I give people what they want and also make my life easier you know and that all roads lead to cbdc or even if it's not a cbdc I'd argue that there's not a gigantic difference in between a world where there's a cbdc by our definition versus the fed and like five or six big

Banks you know because that's just to use crypto terminology that's just a base layer with one node and then a layer two with like four four or five notes I mean there's no and those aren't real there's no I don't know what the difference really is I I kind of agree I think that we're not that far away from that cbdc and yeah I I find it extremely concerning I Echo all those concerns that you you made Jason um it's a massive overreach I think just to be clear we believe that there will be some sort of legislation that gets you know bipartisan support therefore approved in the next you know call it 18 months for stable coins

we we don't believe that there will be anything that happens in the next 18 months on cbdc's oh my God the cbdcs are going to move the pace of government like how long have we been waiting for fed now it's gonna be a while until this is reality yeah I remember we had a call with uh Jen uh Christopher Jen car Carlo I think was his name the cftc chair and like when was that Mike we were talking about dast I don't know if you're on that call it was like mid mid 2020 and um he was explaining to us how like a tokenized US dollar is is going to be built and how it's going to happen faster than we realize and that was three years ago yeah the same people that brought you the post office are gonna build this cbdc and it's literally gonna go zero

places I will say post office very important this is pretty good yeah about the DMV yeah DMV estate bro foreign yep it's kind of interesting this week like we've both seen like the cbdc's are like too powerful for for humans and also like the AIS two powerful humans Echo sentiment it feels like we're getting to this point we're like maybe we can't control all these like power tools maybe these aren't good for

us so here's what I think is going to happen with cbdc it's just a cast on this this point uh they're gonna happen elsewhere and the us is going to be probably one of the last places that would implement the cbdc we're going to see test cases in South America we're going to see them in Southeast Asia we're going to see them in you know Europe and those are going to be the examples that we you know use and leverage and and identify to test and see but it's not going to be something that happens in the U.S at least you know for the foreseeable future I hope you're right I don't know if I if I like really tried to put myself in the shoes of a technocrat in charge of this stuff it's very easy to say I'm solving people's problems I'm

giving people what they want and I get to make my life easier in the first place and the thing that I would just say that's a little bit different this time than Jason when you and I were talking to that person three years ago is Banks weren't blowing up in that period of time and backhand hasten these sorts of solutions it's a really elegant solution for solving the problem in a way do you know what I mean solve it gives people what they want and they get this thing that they really want I I well I I think what we'll speed it up is not the like collapse of svb and all that kind of stuff but um The Narrative that the US is losing its Global Reserve currency status is like not in the mainstream yet but it will be in like a year from now and um I

think if you if you go back and read that like the Gian Carlo paper that they wrote the like one of the main points was that a cbdc would help the digital dollar Remain the global Reserve currency and so Fareed Zakaria was on CNN screaming bloody murder about how the US dollar was you know going into the tubes if CNN is covering it Mike what is your uh content diet you must have such a good content diet Hood ratchet guys I like to send the Zeitgeist yeah did you know that CNN is not a top 20 news organization anymore based based on page based on based on

totally based on what Ron DeSantis told you or no no based on total viewership uh across all their platforms it's all about Newsmax now it's like you heard of this little gem called Breitbart I've never heard of this but it really I just found it on that it's a little gem on the web we tried so hard not to make this a macro podcast 540 million Pages a month on CNN good God so if if optimism and arbitrum are like the canonical 2l2s and like you're a successful application that builds on either of them and and has a lot of success

why would you stay on that L2 versus just building your own thing like coinbase like like is the model for l2s going into the future just like these two big kind of monoliths with a bunch of l3s or as a project would you prefer to be an L2 I think it's a really good question I don't really understand why yeah I think that's already kind of happening with like the even the op stack and coinbase's decision to not launch us a layer 3 but as their own competing Layer Two I think says a lot like I had a conversation with somebody today and they were like these l2s are gonna be worth hundreds of billions of dollars I was like okay how do we get there and and what are the assumptions that you need for that to be true

and like the Crux of it is do you eventually just want to own everything as an application like the few games that we're very excited about like in terms of you know they're launching soon that are you know high quality that you know have a chance to bring on ten tens of millions of users they want the whole stack they want the defy they want the med from the transactions they want the fees from payments to go back and forth like I'm increasingly convinced that it's an a gonna be a different model than we think and B you know just the the pressures of people wanting their own l2s and the ability to just cross layer message and be wherever you want and access whatever you want any other L2 is going to change the entire landscape of investing in this type of

stuff that's kind of what I was thinking about this morning it sounds um reductive to say this but I think it comes down to two variables number one it's cost and number two it's essentially like feasibility like what is what is the layer two versus the app Chain versus the layer three versus whatever infrastructure stack you're proposing what does that enable versus the other options um when I was at Dropbox one of the biggest like things that we went through and Dropbox from you know 2007 2005 when it started uh until about 2014 um was 100 based around AWS think of it as like cloud storage

brought to you by Amazon web services and one of the big you know things that the the team went through in 2013 2014 was do we go off and build our own infrastructure to be able to like you know when Dropbox is down pick up the phone and call a Dropbox employee versus an Amazon employee like there were so many different like npv like net net present value calculations done there were so many strategic analyzes ultimately we moved in the direction of building our own infrastructure also fun fact you know the fastest way to move that much data you literally rip out the hard drives put them on trucks and drive

them to a new data center that's the fastest way to move that much data the the fact of the matter is ultimately the npv positive analysis that was done was MPV negative when all was said and done because Amazon just get kept on getting faster kept on getting better it kept on getting cheaper there is an element where I think it really comes down to like what is the infrastructure stack and what does it cost to to build the application that it's hard to project out like which L2 L3 app chain is going to work which one of those models is going to be the best but but it really comes down to like what do you need as an application and

how much is it going to cost you I think you're right about that I think one thing I mean we've talked a little about Ethan Cosmos on this on this uh podcast and this whole app chain thesis that got born kind of in Cosmos and has now migrated its way to eth and that the game is all about execution so I can totally see the the kind of bull argument for what's playing out on Arboretum and optimism I do think though that the different like one thing that crypto hasn't really had to contend with yet is users frankly to just be totally honest and one different starting point like just having gotten in the weeds with a lot of people that are like

there's there's no you know I'm not meaning to throw it's just very different perspectives like people from the ethereum foundation tend to approach things from when you're designing an economic system like Mev a lot of times from the perspective of ethereum uh like what is ethereum the network need to be in order to be this decentralized neutral base layer but people in Cosmos approach things very differently and they say like what is the best user experience and I actually think that eth should be approaching it exactly the way that it is now but that's not to say that there isn't another perspective and after the job of building that neutral censorship resistant base layer is done there's an enormous amount of work like

wood that needs to get chopped on just building for users and I think a lot of teams will will figure out to your point Mike maybe Vance these these layer twos won't be worth hundreds of billions they'll be worth a lot of money and they'll be able to raise a lot of capital and they'll probably say to themselves like I'll recruit my own network of sequencers or whatever it is I need to have 100 control over my my product and my user experience so I think there probably will be a lot of teams that that go out and say that it just feels a little bit weird right now that it's like you know the l2s that arbitrum and optimism have built are ostensibly what everyone will build in the future and so like that is probably not their real

product it's like these l3s where you use uh arbitrum or optimism to settle on and I think that's the question you really have to ask these developers is it like do you want that or or do you want to build on ease assume all the costs are equal uh and I think that is going to be probably just a war of like BD and like bringing people on or The Branding of the chain itself but it's unclear to me how it all resolves because like congratulations optimism Arboretum you've created amazing copy paste networks that we can just deploy for things like bass and for things like consumer app chains and stuff like that so kind of hard to hard to understand right now I think I think Mikey he hit the

nail in the head in that uh we've never had to build infrastructure for a mass of users we've also never had to build applications for massive users the whole model of everything that everyone has ever built in crypto gets thrown out the window the second that you have you know you go from thousands of users to millions of users it's gonna be really fascinating to see that transition single day Mike what are your updated thoughts on on like now that Arboretum and stuff have an optimism have like pushed forward this kind of like L3 narrative and like app chains on eth is becoming a thing then you I know you're pretty bullish on Cosmos after that season um people in crypto tend to make a lot of very like technical arguments about stuff and I understand there's like good

reason to do that there's a lot of like soft stuff that I think it's totally glossed over things like brand things like culture that kind of thing ethereum built the culture that it needs to build they are very very focused on solving this problem that's I think actually not to be I think it's important for future of humanity I think it is a good but they have a very specific mindset for how they approach designing systems Cosmos just starts from a totally different Vantage Point um they're then they just have a different set of problems like ethereum now probably has built the winning chain that has the most momentum and consensus behind it the question is can you change the way the like the influential people and ethereum think

from okay we've built what we need to build here in terms of like an economically neutral credible system and start like change to how we need to change to attract a whole bunch of users and then Cosmos needs to they they got to figure out the thing that ethereum has perfected they got to figure out Economic Security they've got their own cold start problem to solve so I I they're they're they're converging on the same thing they just have different starting points ethereum's in the lead that's for sure but I yeah let me ask you this if you have a million new new blockchain users someone who has never touched a chain before doesn't even know what metamask is ETC where do you think they aggregate

like like what it what is the thought process what's the like mechanics of them I think they aggregate to whatever I I don't think they aggregate to like an ethereum or something like that I think they go to whatever applications the best application yeah exactly that was give me my perspective as well which is it doesn't matter which chain they're on it matters which applications they're getting driven towards blockchain I heard the most like left bell curve like Occam's razor take of why someone chooses Cosmos versus um versus like building an L3 on ethereum when I was in San Francisco and met some of these Founders is um it's kind of like starting your website with um like when we launch block works we started on uh we started on Squarespace and then we went to webflow

and then eventually we built a full stack like web app but only after like year in like year four when we needed like to service millions of users and so like these what the founders were telling me like their thought process they're like oh we're all just going to build on like up like the op stack or or coinbase base or arbitrum because they give us a full Suite of developer kits but they're like that doesn't mean that in like three or four years like if we're successful like if the L3 earth like the if the East people like the bass and arbitrary and stuff can't support us being able to build more and more of the stack then we'll be forced to go to Cosmos just like block Works was forced to like webflow and Squarespace weren't

able to give us what we wanted so we were forced to go build our own thing even though it's much harder to do that this exact effect is happening with games right now and and I'd say games is the canary in the coal mine for maybe not millions of users but like tens to hundreds of thousands of concurrent users they're trying to build on top of main Nets or l2s and it's sort of like mainnet okay that didn't work L2 uh like polygon maybe but now they're like okay we need our own we need our own option there's just no questions tell them why Michael why do they need their own app chain the costs are prohibitive uh but also the blockchain itself is not capable of running that many concerned transactions you know if you have hundreds of thousands or millions of of

users concurrently you either need to have almost zero interactions with the blockchain for that interaction like you know you're playing the game you win something great this thing gets dropped into your wallet blah blah blah whatever that blockchain interaction is is a transaction that exists on chain well if you have millions of concurrent users that's gonna be hundreds of you know transactions that's just not going to work on a blockchain so you either need to design the chain or design the game in a way that interacts with the chain in like kind of a weird way or you need to run your own infrastructure yeah I guess I mean there could be a sweet spot here we're talking

about it like it's black and white there's um like a sweet spot between app specific like an app chain and and roll like a roll-up Centric uh future could just be like Sovereign Roll-Ups um which I don't know you might have missed something that exact Spectrum was the whole point of last season it's like l3s on ethereum on one on one over here full Sovereign Cosmos app chains over here and then in the middle is like what Sovereign Labs is kind of doing and there's uh or Celestia or Celestia like that yeah that's that's probably this and there's and there's honestly like oh that's probably why I was in my head then yeah because you I remember you talked to Celestia guys a bunch and it's um I find compelling reasons for each one of these

things I I I just it's hard to know yet it's hard to know yet let me give you the the biggest left curve left of the bell curve take on on just why ethyl one will continue to be dominant all of these l2s which I generally think we have a consensus that you know even though the long-term future is potentially uncertain they're gonna be massive you know fully diluted valuation outcomes for these l2s they're all launching their tokens on ethyl one ethyl one is like the NASDAQ of of crypto you know if you launch your token on some other chain like not to on polygons so you launch your token on polygon like you don't have nearly the same access to whales to institutions to individuals that you

would as as on ethyl one and so all the biggest assets are going to continue to be there and I think over time you build a real Financial mode as a result like do you want a IPO on the NASDAQ or do you want a IPO on like the Belgium you know Southern divisions of course [Laughter] exchange it's known for basically like back in the day people would Wildcat oil wells and like kind of dig their own oil pits and they would like IPO these pink sheets on the TSX it was like wild and crazy and you know and it is pretty buttoned up now but the TSX is still

kind of like a degenerate Stock Exchange so thank you totally I didn't mean to I didn't mean to disparage the TSX they're about 15 companies that are super happy to be listed there Galaxy's listed there so just uh you know I know I know uh I think it's like these are interesting uh these are interesting debates to watch to watch play out I think there's a natural I don't know it's a natural um you know what actually you guys got me thinking by the way about now that we're just talking about some of these things with with brand and so we had a a podcast a couple maybe like a month or two ago talking about uh is eth money is there a monetary premium there or like is Bitcoin gonna win that monetary premium and I I still think that my opinion back

then was Bitcoin has this brand that's like very easy to understand and it will do it's it's much simpler I think but I think it's a little bit more complicated than that because I think in an Ideal World the problem with Bitcoin as a as the base money is that there's no elasticity to it at all I actually think eth's monetary design is much better like it makes more sense um but I also think putting it in the context of where we are in the world right now in the macro I think things basically move in intense overreactions and then intense corrections to fix those overreactions and the big problem with like how everything works in on the Fiat L1 is that there are no checks and balances and it's groaned as like crazy

growth and way oversupply of credit and I think it over corrects to bitcoin even though I actually you guys kind of did make me think about it and I I kind of do think that the monetary policy of eth is may be better but I still do think um Bitcoin ends up and you can you can like Bitcoin they're talking about exporting Bitcoin or properties of Bitcoin within Roll-Ups it's a way to export Bitcoin time stamps to Cosmos chains to prevent reorg attacks that's pretty interesting like one of the problems for a tendermint consensus is it's sort of vulnerable there's instant finality but you're sort of vulnerable to these long range uh reorg attacks which is why there's an

unbonding period of I'm pretty sure it's 21 days in Cosmos and that's a problem for like liquid staking in Cosmos where the way you're supposed to balance that out is through an Arbitrage if you have a 21 day withdrawal period it just makes it very difficult to run that sort of trade so if you could pay a little bit extra to ensure against a long-range reorg you could you could reduce the unbonding period and make it much easier like add a whole bunch of liquidity to that protocol that's stride protocol in Cosmos which is super cool shout out Mike you're going deep man you're getting deep in the weeds of stuff dude I've been yeah I've been deep blankets yeah yeah it's um

Mike Thomas tell us how much Mev content you've consumed over the last like months man uh sister Pawn that is uh it's been good I just got a shout out haasu he's been um he's been great he's a he's a really he's a good dude smart guy um I mean he is one of those things where it's like there's like rabbit holes and then there's like Alice in Wonderland rabbit holes and then there's Mev and it's just you can go so so deep and it's pretty complicated stuff but it's good it's been good um I need to take away from that from the Meb learning so far yeah I actually think that like that I think that wallet right now there's a lot a lot of the

discussion in Mev is based around like block space auctions and people have been worried forever about centralization on the validator level whereas really what you're where you're gonna have to worry about centralization is around the the wallet the wallet level um and everyone's gonna move to like PR I think private order flow is probably inevitable um and then the way that mbb is going to get allocated is through order order flow auctions instead of their blog space auctions will still exist they'll just be smaller and a less significant portion of Mev and I think that the the worrisome layer for centralization is going to be wallets probably but you might actually get rebates for trading on these platforms because that's how there will be Mev that's

redistributed back to users to the point where it could actually you could sort of be getting paid to trade which would be a cool user experience can we get a can we get a check on where you guys think we're at in terms of uh markets and whatnot uh we got a handy chart here shout out Garrett who who put this together um but it's been it's been a very good start to the year for for crypto in general um but you know because this is a macro pod it looks it looks a little dicey out there still for for macro so I know I know we kind of ask you guys this this each week but you know what are your sort of latest thoughts on where we're at

we uh we had a conversation yesterday with one of our core LPS for one of our first funds um and I I think the the Salient quote from that conversation was and he's you know a reputable hedge fund manager um you know from the 90s and had just like seen markets over the last three four decades so just like very well attuned to what's going on and it's always great to talk with them and just like get a sniff test of what's what's happening kind of broadly um he said that amongst the conversations that he's having there are absolutely zero people that are bullish except for him he loves to get in the mix when things are looking dicey and

he's just seen this so many times that appreciate his perspective but he's like basically the last and he's like in the New York circle of those types of people but he's kind of the last bullish person and I think that's kind of what you need for these things to continue like I think we've largely seen the Snapback rally just because we were so beaten down last year um but the real question is where do we go from here and not a whole lot of people believe the bullish case the bearish case is very easy to make but I don't know the bank stuff is kind of slowed down it seems doesn't doesn't seem like we're going to be talking about that in a month you know I think the bank stuff has slowed down so I think of it in terms of

categories um if we take Venture Capital you know you can separate that into growth equity in sort of early stage early stage I think is pretty much like limited from the exposure of what's happened over the last 18 months just given that you're investing in an earlier stage like investment Pace has slowed down you know entrepreneurship a lot of people aren't jumping in to you know figure out what company they want to build they're trying to fight for their jobs uh growth Equity I think is in a very troubled state but we've known that literally since like middle of 2021 when everything started to to hit the hit the fan um the things that I think are are relatively new are commercial real estate where you have 1.5 trillion

dollars of commercial real estate debt that needs to be refinanced by the end of 2023. the fact of the matter there is you've got hard assets you also have sort of like this this need to refinance versus you know not not financing like there are elements where that can really blow up that could really get bad the the thing that I am tracking now which has kind of been over the last couple of months just thinking about this the one thing about commercial real estate is its fixed rate lending so all of the terms of those loans are generally fixed at whatever the whatever the interest rate was when they

made those you know 7 10 15-year loans the thing that is not fixed that has gone skyrocketed private equity and you think about taking the exact same concept which is a company you lever it up you know five seven ten times where you're putting 10 Equity down that company then has to pay Libor plus 500 basis points Libor plus 400 basis points like those are usually the leverage Finance terms for how you're how you're Levering these companies so you've got a simultaneous effect of number one growth and revenue prospects subdued and declining number two you've got interest rate

increases that are making it such that The Debt Service alone is the entire cash flow for the company and so you kind of have this like effective Blackstone Apollo you know the the major and and not specific to them or their portfolios but like the major private Equity firms and the in the portfolios that they put together these companies are levered to the hilt and you've got increasing interest rates and decreasing growth something is is bound to break at some point and we're starting to see that you know obviously with the the Blackstone real estate portfolio that that I think is a little bit more fickle than what I'm talking about but you ultimately do have you know these companies that are just not going to be able to make their Debt

Service and and what do you do when high yield debt at a corporate level it gets blown out you know keep in mind high-yield debt is superior to to equity like what happens to the companies and the equity beneath it there there's a lot that's going on yeah the commercial real estate thing is interesting because first of all it's so it's so large and there I actually heard there was a good amount of variable rate financing that happened for for commercial real estate and they have fixed yield on the asset right like the cap rate um and the other thing about Commercial Real at least like offices is that I think the jury's kind of out now that work from home hybrid work is going to

be a thing forever so these assets need to get re-rated so not only are you going to be underwater on the financing but the assets themselves need to get re-rated and I think that's the problem my good friends of the commercial real estate developer uh in a major city and I was like how does this work like this whole process um and he's like well I've never repaid a loan I've always just refinanced it like there's never been a time where he's had to like you know I've borrowed X and like here you go and like you know there it is and it's paid off just like always revolving and it's the Michael Howell thing exactly you get the role exactly and I was like well which banks are like doing these loans he's like you know pretty big

Banks like Bank of the Ozarks you know like Deutsche Bank is in there like you know these random things that I've never heard of like I don't know anything about commercial real estate I was like this is going to be a disaster I'll call you until yeah so you know Bank of the Ozarks yeah apparently they're deep in it but I I also went to a school because I came out undergrad I went to USC where the cool thing to do coming out of school was become a real estate developer because like people think Los Angeles is the city of entertainment it's really like the city of just like never ending sprawl and never-ending developments it's gonna be a rough one for for that crowd we also we also graduated into a decade of zero interest rates

dude when I graduated I was like you guys are just printing money how is it this easy they're just like yeah you just build physical stuff and then people like come in and they'll pay for it and like you levered it up nine to one man that sounds great here's the cat here's the counter argument to this being like a huge catastrophe is that um it's really not in the interest of cities to see like a whole Street of like Office Buildings basically just completely wiped out have you been to San Francisco recently what's on Market I went on Market Street and was gonna like walk to your guys's office and I was like I'm getting an Uber this is yeah if you go to Market Street and you're like something sinister has happened here like what did you do next to Market Street and I was

like uh you guys want to get the guess guess what percentage of commercial real estate loans are held by small Bank 70. yeah at 70 percent guess what so okay I will say like commercial real estate there are five different categories that you could broadly put into commercial real estate one of them is offices a lot of them a lot of the value is offices so it's not like commercial real estate as a whole is getting screwed over like no if you own warehouses right now you're you're doing really well if you own offices it's a tough time but within offices do you know what the over uh in the entire

United States vacancy rate is and this isn't like we have a lease and we're paying it but like people aren't coming into the office this is like zero least office space do you know what that is get the highest Mark in history 18.7 percent one in five square feet in in the United States of office space is Unleashed commercial real estate feels a little bit like crypto where it was just like anything goes for a full decade and now it's like okay half of you are in trouble we just don't know which okay so you guys want to hear so there's going to be a weird like second order impact of all

of these vacancies which is that there are all these green rules that got put in place a couple years ago in Europe that said if you're under a vacancy if you don't have like a let's call it like 80 vacancy in in your place for like two years at a time you're not allowed to operate that building and I think they just like didn't think about this and didn't think about like covet obviously happening and I have to look up those rules but I remember those rules were put in place I think in like uh in London for example so I I wonder if you could see those going into into effect just like the EU demolition Squad you you start to offer this is what I was

getting at before you start to offer extreme the government starts or the city starts to offer extreme incentives to renovate the building or convert the building that will work yeah I'd come in for some cold brew it's also very European solution to that problem I mean you guys are you guys are out here serving coconut water so you got you guys get the incentive game and yeah from Japan Flex on them men of culture the line the line from our investor who uh we're referencing earlier was that he

has never seen this in decades but people are literally walking away from buildings that means like you own the building the bank forecloses on you and they're just like right that's it I'm done I'm out that means that every single person who works in the building they don't have an owner every every lease terminated every single person who's janitorial you know operations or or has like a retail establishment in the building potentially gone I answered I answered my quest I uh I was wrong about the about the green rules basically but I was right in a sense it has nothing to do with the vacancy it's that every like three or to five years you have to upgrade the building and

it's always just been like oh yeah we'll upgrade the building but now there's no incentive to upgrade the building because no one's actually staying in these buildings so London it it is London London is already starting to do this I guess they started to do this six months ago they're shutting down buildings because they don't meet the green standards but there's no incentive to improve to the gr to hit the green standard anymore so fire them into the sun imagine you're like you're like trying to make your office work and it's like not going according to plan and someone's like in your ear talking about how you're not green enough because you didn't upgrade the building can you give me five minutes you are not green enough

[Laughter] oh my God um while we're on just you know random subjects here do you guys see the announcement from Dune that they're integrating some form of llm or whatever so now you won't need to know SQL that you can just type in plain English what you want to see and you'll be able to to pull that information learning sequel is like learning cursive now like you really do not need it and it's like I had token terminal up on one uh computer yesterday and I had chat gbt up on the other and I was like man I'm supercharged right now and if I can just

get you know like do an analytics to work with just natural human language prompts there's going to be a lot of Junior analysts that are looking for something to do we all thought that white collar jobs were uh we're gonna remain in the blue collar jobs where we're gonna get crushed in boy yeah it is the opposite yeah it's I mean the creatives went first we killed all the Arts first yeah new orders creatives go first White Collar second and the third people are like the guys who like weld your pipes and they're they're gonna be living like kings I was having a conversation last week uh with uh uh the head of some game company um here at GDC and he goes yeah we used to have a creative team of eight people

now we use mid-journey like boom gone did you see that uh Elon Musk called for a moratorium on AI research for six months you never you never know with that it got reported on the Wall Street Journal and pulled the article but no it wasn't just yeah like it was like 10 000 or like a thousand like AI big brains I'm worried about this stuff like I've definitely set up a couple nights and been like thinking about Ai and like where it could go there is a non-zero chance that something bad happens I also think Elon might be talking his own book a little bit because I do believe he has a startup in in this race somehow now no he didn't get funded or what happened

to it he did it's called no no no no no no no he it's called based AI or something it's like something stupid some dumb name but like what is this proposal we we stop we all just put our hands up and like go home oh what are you at vacation what do you uh like when you're when you're playing through some of these scenarios uh in your head like what are what are some of the things you find yourself because I've also done that so and I think so one that I was thinking about is like okay cool you know the education system which is like totally broken you know now if you can get the best tutor on the planet you know it really is somewhat of an equalizer you know in that regard but

then I was thinking about if this machine knows everything and knows it to a more insightful extent that you could ever and it's better at everything it's faster at math and it's better at writing what's the point of you even learning it like are you just like is the new education like be the best prompt engineer possible that feels literally like a wage cage you know style scenario where you're just paid to like press a button every five hours I don't know that was kind of the stuff that I was thinking about I have a more optimistic okay what's the more optimistic take my I I'll tell you the optimistic take you guys have probably heard these criticisms right America is falling behind in in math like these liberal

arts colleges they teach you nothing and instead really what we should be doing is teaching math and Engineering because those are where all the jobs are yeah again the irony of this might be that those programming languages like you don't need to learn because a computer will will learn that for you and like maybe at the end of the day what this stuff still can't really do is reason particularly well like higher level reason critical analysis frankly I think life would be a whole lot better if everyone was forced to take human history as a as a major I think it would improve should you still learn math in in a you know in a world where chat gbt exists yes because how do you know that it's

accurate how do you know how to apply Advanced it's not just chat gbt like why would like we don't need to do math you're not doing math every day you can just Google like you can just type in on a calculator but you still but it's still important to learn math yeah I guess it's important to like learn things in order to be able to reason through them and be able to prompt this thing but I don't know it just feels like the human input is less and less valuable over time and that's but here let me let's go back 20 years or let's go back 30 years or something and and someone's like you're one day going to be able to search the internet for literally anything and it'll just answer it immediately for you you'd be like well what like why would we ever learn

history if you could just search this stuff and that's Google and like I visually remember I I'm just trying to justify my history major here guys I'm uh trying to justify it to himself yeah how much time do we have on the Pod yeah the the this will remember like I grew up in Palo Alto in the 90s I visually remember Google happening and being like oh great now all our kids are just gonna like Google their homework it's like no okay you can use Google as a tool to do your homework just as everybody does and everybody did but it's not like it's gonna do your homework for you you still

have to be able to reason like the my personal perspective is like the reason why you go to college the reason why you study something is not to learn that subject it's to learn how to learn it's just like you're using that subject matter as a as a placeholder to be able to understand how to reason through things so that when you know if some technology comes along and it's just like okay great this this now gets 20 50 100 easier you can actually use it but you know how to reason like the history major or you know personally the economics major Classics major you know it's it's not like I'm using that every day well maybe more so uh than history or classic Jesus um I

remember walking downstairs into the basement it's like 4am and Mike's just like reading The Iliad like locked in Tapped in you guys are doing things yeah like what are you doing buddies like translating The Iliad let's go that was like a huge portion of my college experience like translating yeah like like Aristophanes and these like ancient greet texts that's like my College college experience so I put that to use every day where are the rest of your Classics major colleagues today I couldn't tell you there were nine of us the history department at Emory got defunded [Laughter] yeah exactly

yeah but um I think it's I think it'll be abolition first too like the crypto people are going to get super powered by this first and foremost because everybody's gonna get super powered by this and and also like once you put something once you put a new technology out into the world you can't pull it back and that's why this like open letter is a stupid thing it's like when we invented the printing press it's like everyone was scared about like commoners getting access to books and like being able to like read the Bible for themselves whoa whoa whoa they don't know how to read that look at where I got us I mean like the church had a pretty thing they had a good thing going for a long time

yeah they honestly did General ability to read really kind of did not do them a good service but did not I don't people started asking questions I don't think people are gonna stop building AI I I kind of think this is going to fall on deaf ears so we've like gone down the rabbit hole uh in a couple of different ways on just like AI Concepts from a from a venture investing perspective the thing that is undeniable is that there are hundreds of thousands of people individuals who are on these betas or on these wait lists like there is such a thirst for being

able to like test out these different tools to be able to try these different you know systems I think sure crypto will be an early adopter just because it's crypto and we're the earliest adopters of everything but there's so many people that just want to play with this stuff that are going to like experiment with it it's the fastest growing user base in the history of any product in the world it's the best launch in the history of any consumer product it's the fastest growing everyone wants to use this stuff crazy this is why we need World coin I'm sorry how did you tie that together you don't know the thesis no no one man should have all that power you know all right this is a fun one cheers

yeah foreign