Episode 258: Ultrasound Money & VRFs with Justin Drake

Transcript

[Music] welcome to zero knowledge I'm your host Anna Rose in this podcast we will be exploring the latest in zero knowledge research and the decentralized web as well as new paradigms that promise to change the way we interact and transact online this week I catch up with Justin Drake from the ethereum foundation we catch up about what he's been working on since he last was on the show almost three years ago we chat about the progress that's been made on vrfs and how these can be used in ethereum's POS architecture the concept of ultrasound money where it

started what it means and where Justin sees it going as well as other interests he has in ZK generally before we kick off I want to share a quick announcement from one of our partners from last fall ZK Summit 8 event risk zero would like to announce the next version of their ZK VM is now available on GitHub the new version greatly improves performance adds GPU support and includes a pure rust verifier for easy inclusion in wasm projects check all of this out on their GitHub github.com risk zero that's risk the number zero We'll add the link in the show notes now Tanya will share a little bit about this week's sponsor today's episode is sponsored by Mina protocol the need for private trustless Solutions is clear a new era of ZK power

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minaprotocol.com forward slash ZK podcast so thanks again Mina protocol and now here's our episode [Music] today I'm here with Justin Drake welcome back to the show Justin yeah thanks for having me again I was just looking back through the archives to better understand when you were last on you've been on twice as far as I could find and once was like April 2019 and then you were talking about vdfs and then we did an interview in February 2020. like right before everything went down we're at the Stanford blockchain conference

and vitalik was on as well and it's just sort of wild to remember that recording because it was just weeks before everything got locked down with one of the last sort of in-person ones I got to do for a long time but um I think maybe a starting point would be to hear what's been up I mean a lot has happened since you know February 2020 so when tell me tell me a little bit about what you've been up to oh wow so much has happened I mean one of the big events of course is is the merge for sure but yeah I think my role has evolved during that time the research at least the Blue Sky research that I've been doing in the early days is is to large extents complete and so to the

theme of this discussion you know I've been transitioning a little bit more to the to the human layer to the economics layer you know in addition to to looking at ultrasound money I've also been looking at themes like Mev and censorship resistance which are not on the cryptography side of things but you know more on the economic side of things and really our field is is crypto economics and I feel like I'm exploring this the second chapter as it were the economic side after uh being fairly satisfied with the first chapter of cryptography so I kind of want to hear let's start on that sort of completion of the cryptography side the first episode that we did together was on vdfs verifiable

delay functions right did I remember it yeah that's correct yes okay good um and actually I'll add a link to that I want to hear what's happened with that research I mean at the time for me at least you were just presenting this idea I didn't actually know what this thing was how far has that gone right so vdfs like many things in ethereum is a very ambitious project and it's okay especially crazy because it involves Asics it involves hardware and A6 just uh you know they take a lot of time and they're fairly expensive now it turns out that in a few weeks uh in December of this year we're gonna have the first test samples of the the Asic so we've we went ahead we taped out the 12 nanometer

chip with global foundries and you know fingers crossed it should just work out of the box and we'll have these extremely fast vdf evaluators but that basically do sequential computation extremely fast you know we're talking 128 bit modular squaring at a one gigahertz frequency so one modular Square per nanosecond let's give a little bit of context to like where this lives though like is this purely research is this something where it's like you had an ambitious research project and now you're seen in Asic or are these things already in the ethereum that we know today do they exist and

this is actually going to optimize something or is it still sort of like oh well now we have this cool optimized thing we could use in the future right so the the research is very much done but it it's not in production yet so we have this this primitive which is interesting because it's it's a very unique and exotic vdf primitive because it kind of connects to the physics of our world so just like proof of work connects to the energy consumption vdf connects to time and you know most cryptographic Primitives like encryption and hashing and signatures and snocks they're kind of detached from the physics of things and this very unique cryptographic primitive unlocks various use cases which are very interesting one is

unbiasable Randomness um another very interesting one is what's called time lock puzzles or delay encryption which is this idea that you can encrypt a piece of information and it's kind of automatically decrypts at some future point in time and this is actually very interesting in the context of Mev and censorship totally and the reason is that you can have this thing called encrypted mempools so the idea of an encrypted mempool is that when you broadcast your transaction you actually broadcast it encrypted and then it gets included on chain encrypted and only after it's been included on chain does it get decrypted and executed and because your

transaction is encrypted people can't see the contents of of it and in particular they confront run you and they can't censor you at least not as as easily as it is possible to do today I mean one of the ways that I've always heard this described is threshold decryption does this replace that concept or is it also being executed by a vdf yeah so there's kind of there's kind of these two flavors of what I call Auto magical decryption okay okay so it's like when people are using that term they're talking about a different technique they're not talking about the one you just described exactly so there's kind of two flavors two very natural flavors of encrypted mentals one using threshold decryption and the other one using kind of time-based decryption

interesting and they have different assumptions so for the the threshold version you're basically trusting that a commit is majority honest meaning that some large fraction of it is is honest and if they're dishonest then they could do bad things one of the things they can do is they can not choose to not decrypt specific messages or maybe even worse is that they can decrypt things ahead of time and you kind of lose the encryption with vdfs one of the very nice things is you just have to trust physics you're no longer trusting a committee and so it's kind of a more conservative security assumption but it's fascinating it comes with with downsides you know one of them

is that you need you need hardware and kind of another one of them is that it's a little harder to work with because you know you have to wait these delays and so that can add maybe artificial latency in your system so it's a bit harder to work with potentially is there a way that you would have them both happening at the same time would they ever be combined or you'd always do an either or yeah you can combine them and one of the things that you can do for example is you can have an encryption mechanism which by default is threshold but if the committee goes offline for some reason then after a period of time kind of the delay kicks in and then it automatically decrypts

and so there's actually this form of encryption which kind of generalizes both threshold And Delay encryption which is called witness encryption now witness encryption is a little bit of moon math but the idea here is that you can use any arbitrary witness to decrypt your your payload and so the witness could be a proof that either the committee has signed off on the decryption of your message or enough time has passed and if you want you can have like these arbitrary complicated statements so one of the statements could be for example only decrypt once ethereum has finalized the block which includes the encrypted payload just one

thing do you keep saying Auto magical is that what you're saying that is what I was saying yes okay you say very subtly so I wasn't sure if I was like missing it but oh that's a good word Yeah so basically we want to have this guarantee that your encrypted payload will decrypt so there's kind of a very naive thing that you can try and do for encrypted mentors where it doesn't involve any encryption which is that you kind of commit to your transaction by including a hash of the transactional chain and then you make a promise that you're gonna reveal your transaction and then execute it but the problem here is that you can't force people to actually reveal those transactions and so instead what we need is encryption with a sort

of guaranteed decryption and the two main natural flavors are threshold decryption and time-based decryption I've done a few episodes where we mentioned only threshold decryption I actually didn't realize there was a second technique that we could use and the pushback from the Mev crew has always been oh you can try to get rid of the Mev there but the Mev will just move elsewhere what do you what do you make of that right so there's different forms of memory in my opinion there's kind of good and public Mev and those kind of bad and you know Mev that is triggered based on on user transactions so let me try and flesh out these two buckets so in the first bucket you have things like

like Arbitrage and things like liquidations or even things like back running and the idea here is that anyone can go ahead and grab this this Mev and it actually performs a service to the ecosystem and you know nav is extractable value it could be extractable value that is specifically put there by the designer of a decentralized application and so one of the classic examples here is liquidations we want people to trigger transactions that will liquidate you know very risky positions and in order to you know guarantee that we give them an incentive a reward so that's a form of Mev which is very good because it's constructive now the other form of Mev

which is is toxic and it tends to be kind of triggered by user transactions is essentially front running the idea here is that as a user I I make a transaction and this transaction specifically is going to get a front run and my belief is that front running can basically be removed eliminated with these encrypted mentors but of course the first type of public good Mev will will stay have you been following some of the I don't know if the word is controversy but like findings about the Mev operators of today I don't know if that's what you call them but I had the flashbots folks on some time ago and they talked about the PBS the proposer builders operation and then I learned

later that because of this model there were sort of these centralizing points in the actors actually getting Mev we had all these conversations about how validators could potentially be centralized or be censoring how they could be coerced and then we learned that actually there's these different places in that stack which could be and I'm just curious like it sounds like you're obviously digging more into Mev what are your thoughts on this and are you looking for ways to mitigate this kind of censorship at these different points yeah 100 I did a very deep dive into this whole topic and so the flashbots people talk about this Mev supply chain I like to think of it as a pipeline as a linear pipeline okay where

you have various actors um involved so it kind of starts with the user the user goes through an interface to to create a transaction to publish it to the mempool this transaction gets observed in the member full by so-called searches such as take these transactions and they create so-called bundles that extract value and then these bundles get sent to builders that produce blocks and then these blocks get sent to a relay yeah which acts as an intermediary between the Builder and the proposer and it's the relay part that can be centralized right I feel like that's what we talked about in the last time yeah so it turns out that at every single step of the

pipeline There's an opportunity for for censorship and for every single step of the pipeline we need different types of solutions oh okay and it turns out that for Relay specifically which is a a big contentious topic nowadays because of ofac compliance there is as you said something called enshrines PBS which is this idea that instead of doing proposal Builder separation outside of consensus which is a little clunky and a little hacky and it's basically something called math boost let's do it very clean only in consensus where you don't need the the relays and so right now the well the most popular relay is the flashbots relay and they're based in the US and they have to

do this this or at least they've chosen to do this filtering of transactions that involve addresses on the ofac list and the the net effect of that is because most of the validators are using the flashbot relay as their relay roughly 80 of blocks are so-called ofac compliant although I heard for some reason I heard it had gone down because the light was shown on it that number had fallen more to like 60 is that possible so there's a website called a methwatch dot info and I'm looking at it right now it's at 73 okay there's a graph with which is basically it's seemingly up only in terms of the red area Okay so so forget it I must be

thinking of something else okay so there's kind of several pieces of good news here like one is that relays will completely disappear in two to three years once we have ensure and PBS another piece of good news is that this form of censorship is called weak censorship is this idea that transactions actually make it Unchained the only bad thing is that they get delayed a little bit now we can do some quick math if 80 of the blocks are censoring or over compliant that means that only one in every block will contain these transactions and so the the time to the the average time of inclusion of these transactions will be multiplied by five and so the slot time

is 12 seconds 12 times 5 is 60 seconds so it takes one minute for a sensor transaction to go on chain okay now this is still 10 times faster than Bitcoin on average and I guess the other piece of good news is that there is this community effort you know this this desire to address the situation even in the short term before and trying PBS and there's various efforts to build you know incredibly neutral relays and this is something which I don't think has been announced publicly but I guess I could I could do it now is the ultrasound.money team is working on such a incredibly neutral relay so we're

building the ultrasound relay which hopefully people will use and help address this situation so this brings us to another topic which is kind of one of the reasons that I invited you on ultrasound money like that's a thing and this is something that I don't know anything about and you've just talked about a team you know it's not just a meme anymore it's a thing so tell me a little bit about like what is ultrasound money maybe even give me a little bit of background like where does this concept start from okay so let's try and give context and motivation so for a lot of technical people you know we we like to think that blockchains are secured by mathematics cryptography and this is you

know where I came in and you know maybe five years ago but it turns out that this is just not the case there's two pillars that are securing blockchains pillar number one is cryptography yeah and the other one is economics and that's why we call it crypto economics and it turns out that we can make the cryptography level extremely secure you know we can have like provably secure 128 bits you know in the quantum Oracle model whatever blah blah blah but the the economics pillar is you know much weaker and it turns out that the overall security is your weakest link it is important to focus on the economics and there's this concept called Economic Security which basically tries to quantify how much security is backing

your system and it basically puts a number on how many dollars an attacker needs to go attack a specific a blockchain and this is something that hasn't really be been done very much until recently now if you go through the exercise you realize that Bitcoin has on the order of five to ten billion dollars of Economic Security meaning that an attacker with that much money can just completely break the system they can for example only extend the chain with empty blocks they can start doing reorgs the whole thing just collapses and now think let's think to ourselves who has five billion

dollars many many nation states Russia China the US five billion dollars is peanuts I mean even someone like FTX perfect example sandbankment freed you know his evil strategy could have been to just 51 attack Bitcoin and destroy this whole industry yeah and so we want to be building settlement layers for the Intensive value we want infrastructure which is so-called world war three proof and in my opinion the only way to get there is to have a trillion dollars of security or ideally trillions of dollars of Economic Security and the reason is that no single attacker can go take down these these systems if we're talking

about trillions of dollars are becoming security but when you say Economic Security do you still mean needing that much value on the network right does it have to be actually like money invested tokens owned like is it is it that straight calculation or is there some other calculation that goes into that yeah that's a great point so this kind of there's two concepts here one is what is called TVs total value secured and if you go on on D5 Llama Or Layer Two beats or whatever there's these websites which will tell you how much value is being secured by these chains and if you take ethereum for example that's on the order of 300 billion dollars being secure there's ether

itself the asset which is about 150 billion and then the other 150 billion is erc20s and nfts and all sorts of other things like that now the other important concept is how much value is securing the chain and that is much much smaller so in the case of ethereum proof of stake it's the amount of Eve staking which is about 15 million if and that corresponds to 18 billion dollars at current prices and so we have this concept called the security ratio which is the ratio of the total value secured divided by the total value securing the chain and we want this security ratio to

be to be low and right now the security ratio of having a look on ultrasound money is 18.9 meaning that there's roughly 19 times more value being secured on ethereum than is actually securing a fear so the staking is the second one like the amount staked is the second value correct yes and you want the second value to be extremely high now if we're going to be securing the internet of value you know we need to appreciate how large the incentive value is and it turns out that it's on the order of hundreds of trillions of dollars right if you take all the wealth and on the whole world it's ballpark figure it's one quadrillion dollars and

you know if new category um and you know we can expect in a success scenario uh that hundreds of trillions of dollars will flow to the incentive value and in order to comfortably secure that you know we need to have at least let's say one one trillion dollars of Economic Security so that the security ratio doesn't go into the thousands um which would be a very precarious situation to be and the reason it would be so precarious is because the security ratio measures how much leverage an attacker has to cause damage if they were to invest one dollar they'd be able to break a hundred dollars or two hundred or a thousand dollars and one of the kind of scary things with

Bitcoin for example is that we should expect the security ratio to go to roughly a thousand and the reason is that with Bitcoin the issuance is going to zero and it's only going to be secured by transaction fees and transaction fees represent roughly 1 000 of where we need to be and so Bitcoin potentially could be attacked uh with a very small budget in the future relative to its size is this idea here that like there will just be fewer miners because it won't be worth it for there to be as many minors like will there actually be like a reduction in number of actors and that's why it becomes so much easier to attack that's what I'm sort of trying to figure out like what would an attack like that on bitcoin actually look like

right so in order to perform a 51 attack on bitcoin you need to have more hash rates more hash power than the rest of the network combined yeah um and basically what needs to be done is to buy these mining Rigs and connect them to the grid and by the Transformers and the cooling and and the data centers and whatnot now ballpark figure in the future my expectation is that the cost to attack Bitcoin will be roughly a thousand times less than its market cap so let's say that Bitcoin becomes like gold 10 trillion dollars market cap a thousand times less that would be 10 billion dollars so it would cost 10 billion dollars in the

future to go break Bitcoin so let's let's do the math let's say that Bitcoin becomes like gold it's a 10 trillion dollar asset um then the cost of attacking it would be roughly a thousand times less which is 10 billion dollars now one of the scary things here is that it actually becomes economically rational to go attack Bitcoin and the reason is that you can open a so-called short position and you only need to open a tiny tiny short position on the order of 0.1 percent of the total Bitcoin Supply so Bitcoin is meant to be this this really liquid asset which which is you know easy to short you know right now in order to attack Bitcoin and be

profitable you need to short maybe you know two percent or three percent of the total Supply is like very hard to pull off but shorting with 0.1 percent is much much easier in your calculation you still talk about it as though you'd have to buy all these rigs but wouldn't it be a lot cheaper if the fees are so low don't miners just drop off anyway like the hash power per Miner becomes higher anyways like you just have less of them there's less competition and maybe I misunderstand like the sort of end game of Bitcoin here but like that's how it seems like it would work no you're right I mean the most likely scenario that I see is that Bitcoin will never reach 10 trillion dollars it will never become the size of gold and the reason is that it doesn't have this

credibly you know sustainable security model and so what's most likely to happen in my opinion is that it will stay roughly in the current ballpark of let's say one trillion dollars and what that means is that the total amount of value that's going to go to the Bitcoin miners is actually going to dwindle over time with every single happening and there's going to be less and less and you're right like today you know the Bitcoin mining industry is roughly a 10 billion dollar per year industry in let's say 20 years it might be a one billion dollar industry and so with just one billion dollars you'll be able to take down Bitcoin which has a size of of one trillion dollars yeah so I'm very

bearish on bitcoin over 20 to 30 year time span because there'll be enough happenings to make the security of Bitcoin very precarious unless I'm going to give the one thing that could happen unless the community comes together and allows change to happen am I right that is correct yes um I mean it's kind of interesting how bitcoiners have been framing the fact that they don't have an evm as a security benefit and the reason is that they have this very simple utxo model which means that there's a lower probability of bugs and and things like that but one of the things we've seen empirically is that

ethereum has a hundred times the fees of Bitcoin and Bitcoin is secured by fees and so basically Bitcoin has reduced its security by roughly 100x by by being really really stubborn and saying no we will never uh support small contracts and we'll stay with this one megabyte block per 10 minutes let's move on to Ultrasound money what is the meme like a few years ago everyone was talking about this but like I thought it was kind of a joke or something and I don't think I followed it closely enough and I apologize to anyone listening who's deep in it I feel like I should know this better but tell me how this starts ultrasound money it started as a joke okay um it's actually vitalik came up with a joke he said

um if Cap Supply Bitcoin is sound money then decreasing Supply IFA must be supersonic money oh um and I kind of made a very small variation of that you know change supersonic to Ultrasound Ultra nice um but yeah you might ask yourself why would the supply of ether decrease how is that even possible well the reason is that there's two factors that come into determining the supply of ether one is issuance which is inflationary in the sense that it increases the supply of ether and then there's this other thing called the burn with eip1559 every time you make a transaction it destroys if and so if you can burn more if than

you're issuing then your supply goes down and this is something that has happened after the merge and the reason one of the big reasons is that the merge has dramatically reduced issuance on on efferent by roughly a factor of 10x so if you go to the ultrasound Dot Money website you will see the supply of ether having decreased since the merge and I'm looking at it right now it's gone down roughly 6 000 if since the merge 64 days ago cool the story of eip1559 I did years ago an episode on that that was controversial at the time right like people didn't want this to

happen What were the arguments against it right so I think controversial is a bit of a Nova statement I think what what really happened is that there was a very loud minority okay maybe one percent were against it but they were pretty loud about it and this is actually very healthy you know we want these contrarians that really question our our thinking and I think part of it was around the novelty of it and the fact that the community wanted to push it through quite quickly you know it had only gone through you know two or three years of a due diligence and maybe we needed to do more serious due diligence I think the other aspect around it was that it was a a change of user

experience for the for the users you know now there's kind of these two fees there's the so-called base fee there's the tip you know at face value it sounds like you know more complicated but it turns out that from a ux perspective it was a game changer in terms of dramatically improving the user experience of ethereum and the reason is that nowadays you just click Send and you don't even have to set your your fee it just it just works and you get included in the next block it used to be that you had to participate in this auction where you had to guess the kind of the optimal gas price for including transactions and so there was kind of two scenarios scenario number one is that you on the bid and then your

transaction is just pending forever or you over bid and you feel really bad because you've overpaid yeah and now we have kind of this fair pricing mechanism which is transparent and very easy to deal with when was that actually put through when did eip1559 actually get included right so it was included 469 days ago and the reason I know this is because if you go to also money and you click the since burn time frame there's a little fire Emoji it will tell you how many days so over a year basically exactly over a year and we've been burning at the at a rate of roughly 2 million ether every single year and in comparison we are

currently issuing on the order of 600 000 ether per year so we're burning three times faster than we are issuing and so that kind of leads to a very interesting uh shape of the supply so we basically been printing printing printing very fast from Genesis to the merge and then the merge is kind of this inflection point after which the supply kind of starts decreasing and then finds a new asymptote and so one of the reasons why the old sound money meme is kind of important is because it's a shelling point right the shape of this Supply is very unique and that creates

a selling point for the community to gather around this asset and recognize it as being special and recognize it as being worthy of so-called monetary premium monetary premium is this idea that an asset is somehow worth more than its intrinsic utilitarian value that maybe originates from cash flows and you can ask yourself why is monetary premium useful in our industry and the reason why it's useful is that the only way we can get a trillion dollars of Economic Security is if we accrue monetary premium and so monetary premium is actually necessary for ethereum to be successful in its mission of settling the internet of value interesting so

this is this going back to that what did you call the ratio like what the actual value of the staked assets are in this thinking because it has monetary premium is that actually more valuable than it looks like it's more valuable than what's actually locked yeah so as you said for the security ratio to be reasonably small we need the value of the if state to be reasonably large yeah now we can ask ourselves where does the value of eve even come from and the way that I think about it is that there's there's two components this kind of the the fundamentals the cash flows and this is how people have been valuing companies for example so you can think

of ethereum as being a business which sells secure block space that's the product that's being sold and people are willing to pay for it with base fees and the income is going to be the total amount of if that's burnt that kind of accrues to the eve holders and ethereum the the network now in terms of the expenses of this business it's basically the cost of securing the the blockchain the cost of providing the product and that's going to be the issuance and so one of the things that we want is first of all this project this company to be sustainable right we want it to be profitable we want to have more income than expenses and when that's the case

you can look at profit and you can look at so-called p ratio and so right now this is something on the you can see on your standard money websites we'll definitely add a link to that by the way in the show notes because it seems like there's some awesome dashboards that we can see there right so um right now ethereum has a PE ratio of roughly 30 which is you know a reasonable PE ratio of a Metro company it's like not too far away from Google for example but then once you have this kind of this fundamental evaluation you know in my opinion we have this idea of monetary premium which derives from the use of IFA the asset being used as collateral money and this is idea that

when you use ether as collateral you're reducing the velocity of money and only a fraction of the total Supply is basically privy to these cash flows of the burn and the issuance so only the portion of if which is actively moving in the economy is paying for transaction fees and that's the portion as well which is subject to the issuance now you can ask ourselves why would people use ifo as collateral money and that's kind of these two big use cases use case number one is using ether as collateral money for staking and use case number two is collateral for D5 and my expectation is that the vast majority

of ether let's say 80 percent will eventually be used as collateral money and you know people often think that money is only useful if it's being used for payment and it's moving around but actually money can be used when it's just sitting there and doing almost nothing other than backstopping some sort of liability and so the the liability that's backstopped in the case of staking is if you make some badass stations you'd make double votes and you know you you get slashed yeah you get slashed and then D5 might be backstopping a loan for example or backstopping a leverage position or whatever it is I want to go back to the monetary premium though yeah like so if you're using it as collateral

backstopping yes like is the price of the liquid token always the same as the price of these backstopping ones the collateralizing ones yes they are the same and they um one way to think about it is imagine that the coins that were used as collateral were completely lost then from an accounting perspective you know they're still included in the total market cap but really in practice they they're not just never sold and so if you want to do a cash flow analysis you're going to do a cash analysis on the liquid tokens maybe a more realistic you know example might be tokens that are currently vesting right they're kind of locked and so they're kind of

artificially low low velocity and you know it's it's a common trick that Founders do they have like these uh very large portion of the supply which is which is vesting and they kind of artificially inflates the the supply and you know I don't want to pick specific names but you know maybe you know Solana is a good example where you know there's been these massive unlocks and you know the the price has dramatically crashed and kind of and quote lost some of its of its monetary premium but in my opinion there's this uh kind of very natural strong demand for an organic demand for use of low velocity Eve um which in my opinion should it be accounted for when doing this cash flow analysis but it's still part of the

overall market cap and it plays a crucial role for 2 things one is economic security that we've talked about and the other one is this concept of economic bandwidth now if you want to be securing the incident of value you need decentralized applications that have access to economic bandwidth and one of the one of the best examples is decentralized stable coins right now we're in a very precarious situation with stable coins the major stable coins usdt and usdc are 100 centralized 100 trustless trusted and they're being censored and they're massive liabilities and systemic risks for the whole Space what we want is decentralized stable

coins now um in order to to build a a strong decentralized stable coin you need what's called over cholesterolization you need more collateral than the debt uh which is the stable coin so what you want is a design like die and maker and maker is one of the the largest consumers of economic bandwidth out there millions and millions of IFA being used but that's still a very small amount of stable coins in the grand scheme of thing dye has on the order of 10 billion dollars of stable coins where we want to be in a position where we have 10 trillion dollars of stable coins right if you take all the Fiat in the world you know we're talking on the

order of a hundred trillion dollars of Fiat that's the the order of magnitude and you know we're gonna want at least 10 trillion dollars in terms of value and so that means we need at least 10 trillion dollars of economic bandwidth and again the only way to get there is free monetary premium I want to go back bit of a step here so you had said that with eip1559 it started to burn things but emissions were still higher than burn I guess right like you're saying there was this inflection point at merge yes how much did that change yeah so from an economic standpoint the merge reduced the amount of issuance by a factor of 10 roughly okay so before the merge we had 15

000 if every single day in issuance to the miners at the time yes it was 13.5 to the miners and 1.5 to the proof of stake participants there was these two chains running in parallel before working proof of stake and then the 13.5 disappeared so we were left with only the 1.5 so we went from 15 000 years per day to 1.5 thousand years per day roughly a 10x decrease and the burn you know on a on a daily basis on average is something like 45 000 if burnt and so before the merge actually the issuance was overwhelming the burn but after the merge uh the burn is overwhelming the issuance okay so you have less and less

of the overall Supply yes going forward and you have some of these things locked and staking you have some of them locked in D5 you have some that are liquid yes I still don't really understand where the monetary premium comes in though like are you saying that like you take that number of tokens you multiply it by the price per one token that's the market cap the number of tokens are going down so you're thinking like the value of each individual token will go up if the market cap stays steady but what is the monetary premium on that that's what I didn't fully get from what you explained okay so there's there's kind of two ways to think of my typing this kind of the qualitative way and the quantitative way let's start with the qualitative way

which is that monetary premium is something very very special it's kind of the societal illusion okay that we've agreed that we're going to use one specific asset as as money and like how do societies coordinate on choosing one specific asset you know it used to be sold and then shells and then gold and silver and it kind of evolves over time you know maybe a bit maybe Bitcoin soon maybe IFA soon um and it turns out that the way we coordinate as humans to a large extent is through shelling points and memes right and this is this is part of the reason why this old style money meme is so important and one of the most important memes in in in money is around scarcity that's

why you know Bitcoin has such a huge emphasis on this 21 million limit right and so the original money meme is kind of the equivalent of the 21 million um Bitcoin limits is kind of the scarcity meme but there's there's other things which are you know important as shouting points like one very very important selling point in the context of of blockchains is security and today ethereum is the most secure blockchain in the world it has the most amount of Economic Security roughly 20 billion dollars at least twice more than than Bitcoin and so it has these two most important selling points going for it it's the most secure and the most scarce uh blockchain in the world where the supply will decrease for the next

hundred years and the supply of Bitcoin for example will inflate will increase for the next hundred years so the the scarcity is kind of very much black and white and so is the the the security and so as a society there is a possibility that we agree that e for the asset is worthy of monetary premium and not not only is it worthy but it's kind of necessary for it to be successful in its mission of securing the internet of value by providing economic security and provide the economic bandwidth now once as a society we've kind of agreed on on these selling points we can ask ourselves how much military premium can we expect from a quantitative standpoint and the way that it works here it is just a model right it's just a way of to

think about it it's kind of the best model that I've found so far is to look at the so-called velocity of money so there's two types of money in my opinion this kind of cold money and hot money hot money is what's known as currency the word currency comes from word current it means money that flows so you can think of money that's used for payments of of nfts for example or even payments of block space for transaction fees and that's one important part because it leads to cash flows around the burn and you can think of this hot money aspect of the economy as being like a company but then there's this other also very important aspect of the FM economy which is the cold money the

code even that's where the collateral comes in and if we have let's say 90 of all if which is in the cold money scenario then in my opinion like these 90 percent don't really play a part in the cash flows like ethereum the company is really only the hot money everything else is this other thing it's kind of this use as a collateral money and so if the 10 of the supply is worth let's say one trillion dollars because of cash flows it's a very successful company you know like like Apple or Google which has a lot of income and relatively a few expenses then the other

90 percent you know should give it kind of a a 10x monetary premium so there's this illiquidity multiplier that's another term that I use which is that because part of it is liquid it comes in as a multiplier in your overall valuation in in terms of like the fully diluted valuation and it's the same thing with with some blockchains out there where maybe 90 of the tokens are illiquid because they're vesting and so there's this 10x illiquidity multiplier that should be accounted for when you're looking at the whole market cap but unfortunately vesting is not sustainable and it's artificial on the other hand staking and use of ether in Defy is is

organic it's natural and the reason is that it's it's tied to this idea of the cost of money right so when you're staking you have various costs involved you need to pay for your hardware for your internet connection hsct and you need to pay what I call Capital costs which is the opportunity cost of money and it turns out that the vast majority of the costs are opportunity costs of money and so if the cost of money is let's say three percent what we should expect is that in the equilibrium the amount of each staked is going to be such that the issuance is going to be roughly three percent um so that you know profit margins kind of tend to

zero and validators are still profitable and it turns out that if with a three percent uh cost of money we should expect about 30 million if uh state so that's kind of a huge lump of of ether which organically will be locked up and with low velocity and then something I think similar will happen uh in the context of stable coins we need decentralized stable coins there's no other way we in my opinion we can't be successful without these decentralized stable coins someone I'm hoping will you know make a massive breakthrough in terms of improving the user experience or the tokenomics around it or something and that will lead to a huge demand for E for the asset that's

collateral now one of the things you can ask yourself is can we use other forms of collateral than ether and it turns out that for staking there's no choice you'll have to use ether and nothing else for D5 you do have choice but there is a there are strong reasons to use ether specifically and the term that we use here is we say that it's pristine collateral IFA is the only form of collateral that has no contract risk no governance risk no Oracle risk all sorts of tell risks that um you know custodial risk no counterparts your risk and that makes it a very attractive asset for for use in D5 why when you talk about stable coins backed by crypto why does die not work

why does maker Dow's product not satisfy what you want right the the main problem is that there isn't enough economic bandwidth so I can check the numbers but I think roughly speaking Dai is using three million if now and that corresponds to to some amount of decentralized stable coins are you just saying it's not popular enough yet I'm curious if there's like why isn't it then what kind of breakthrough would you need or would it just be like a marketing breakthrough like getting more people to participate in it or is it like you need a new concept yeah so let's say that we want to increase the

total amount of decentralized stable coins by a fact of a thousand which is what we need to fulfill a vision of of being the incentive value how can we do that well option number one is just for die to be more popular in the sense that more if is being used to to back die but the problem is that there's only so much if out there so if you're using three million then you know maybe you can increase that to 30 uh you know 10x but pushing it beyond that is going to be very very hard because there's a very limited supply of of ether and so really that shows you the importance of the if price itself so you you've got a 10x by having more e-fest collateral but you need another 100x that has to come from just the

price of increasing and that's to a large extent only possible through ether Gathering monetary premium and in order for for it to get to that point we need kind of memes we need selling points we need Society to kind of somehow believe that if the asset is worthy of monetary premium and basically education which is what the ocean under money meme is all about is about spreading this message and encouraging people to learn about ether the asset and appreciates its selling points may you know help if the assets accurate monetary premium I'm so not an economist but when you say monetary premium should

we be thinking price worth more like token worth more than it seems like every time you say it I'm still like oh what is it what is he trying to tell me yeah like what's the translation for what that actually is so there's the kind of there's two things that need to happen first of all is that a firm needs to be a super successful business it needs to sell a ton of secure block space and you know scalability is going to play a very important role here so that you know billions of people can be paying these transaction fees and that leads to income and profit for a firm and here we have this ultra high velocity economy which is very successful but we what we also need is kind of this ultra low velocity economy

to also be successful and the the reason is that it's going to lead to this illiquidity multiplier to kick in by a factor of roughly 10x is what we can expect in the best case and this market like where's this price even picked from though like you talk about the multiplier but is this like on coin gecko it'll show up higher for some reason like this is what I where I don't get like what's it compared to like that multiplier of value right versus what is your Baseline are you still basing it on USD the Baseline is the fundamental value as a company and I think the best example I can give here is gold so gold is a 10 trillion dollar asset and you can ask yourself where does the

value of gold come from now it turns out that gold is an industrial metal it's an extremely useful industrial metal in every single iPhone and computer or really strictly any piece of electronics there's gold that's being used and if you try to value gold based on its cash flows that is industrial metal it should be worth on the order of one trillion dollars now you can ask yourself where does the extra 9 trillion dollars come from well it comes from the fact that there's this crazy societal illusion that we we think of gold as money and people are keeping it in votes yeah and central banks are locking it up and people will use it as jewelry they love it because it's shiny yes so the

shininess kind of and jewelry might be the equivalent of this silly joke ultrasound money meme but okay okay it's still extremely important so it just turns out empirically that societal Illusions or myths are extremely valuable in society and like one example here might be the nation-state right if you look at boundaries and Frontiers like this this is just completely arbitrary you know people just get excited about the flag and you know the the football team or something yeah um think of the legal system and the police system why is it that people in suits you know in this stick and they somehow get Authority but if some other

random person in the street would perform the same exact actions as police but they didn't have the uniform then people would would start freaking out what about religion right religion is kind of like there's these crosses and like I don't want to insult anyone but there's like all these symbolism which rituals and and and yet you know religion is extremely powerful it has allowed the coordinations of of millions if not billions of people uh to do all sorts of things you know some good some bad maybe Crusades you know arguably you know a bad thing I don't know but yeah money is one of these precise Solutions which is just incredibly useful just as a coordination tool totally just like the legal system or

nation-states or religion yeah so okay now I want to understand like ultrasound money dot Eve so it was a meme it was like a joke it was a concept it kind of informed some economic planning or thought research the work that you've been doing but like what is it also it's a team is it a company like what is this ultrasound money right so originally it just started as a joke and then it became kind of this educational website and now it's a community a movement and so it turns out that David Hoffman who's one of the hosts of the the bankless show came up with emojis to describe the original money he had the

bat and the sound Emoji because bats produce ultrasounds so that you know is a good set of emojis this is making some of Twitter or make more sense to me I was so out of the loop Justin this is hilarious okay yes keep going so emojis are kind of one of the most condensed forms of communicating information and memes are nothing but that the kind of these small pieces of cultural information that kind of spread virally from mind to mind very similar to a virus a biological virus that spreads from body to body and it just so happens that we have on our hands a pretty viral meme where we now have over 6 000 accounts on Twitter that

have this this bad signal and the Twitter accounts is just a meme machine right it's it's a role is just to spread the meme further and further partly through you know building out the websites but also for trying to Foster this community so there's a po-up that's being issued there's also a Discord which is going to be open in a few weeks and there's all sorts of initiatives that are being put forward to trying and and spread them mean more and you know one of the latest initiatives that I mentioned earlier in the podcast is this ultrasound relay where you know we're trying to improve the PRD image of ethereum really the censorship problem has no fundamentals right because as I mentioned since the transaction take one

minute to come on chain which is you know totally fine it's not an issue but from a PR standpoint it just doesn't look good so it's kind of an anti-selling Point as it were which we're trying to address what's your relationship to the ultrasound money movement do you run the Twitter account like who runs the Twitter account right so I bought the ocean Dot Money domain okay and at the end of a two and a half hour long podcast on the back list I said I bought the domain let's try and do some sort something with it and like 10 people came to me and said I want to help out and right now we have about four four people that are kind of working full-time there's two devs and

there's one one person who spends her time responding to DMS and things like that and there's also me and you know we're trying to you know just grow organically we're we think of ourselves as a public good and you know very recently we uh we received you know published good funding initially it was me that has been funding this project out of you know my personal money so but it looks like we might be able to diversify the sources of funding and if the meme become successful then you know maybe we can be like a 10 or 20 or 100 people project cool and you want to you want to actually create a new relayers are you competing with flashbots

um I don't think flashbots is very happy with the current situation I think flashbots wants to focus on on the Builder side of things um you know they have this Suave and the decentralized Builder and I think them running a relay is is more of a necessary evil and I think you know that they're waiting for the Relay ecosystem to mature a bit more before you know maybe maybe moving out of the relay game so I think uh they're very very encouraging I've had you know discussions with them where they're really encouraging of this uh this effort to uh to put forward an ultrasound relay I want to just mention one other thing before we sign

off which is zero knowledge technology I sort of want to go back to the earlier topic of like vdfs is there any vdf ZK overlap is there any way for those to be used together absolutely yes um so it turns out that the vdf that we have built in Asic for needs to be paired with a zero knowledge proof system a snock and basically the the snock provides the the V and the vdf the verifiable it allows you to verify that time has elapsed without having to do the computation the sequential computation yourself amazing so there's a snark in the vdf construction actually yeah but when you talk about the Asic

like as I know there's also ZK A6 or like a ZK Hardware being developed would you have like a shared hardware piece doing both of these things then great question so right now the Asic does only the sequential computation and we're doing the snoc proving in gpus okay but the Firm Foundation and various other people in the ecosystem want to build a snoc Asic and so that is kind of what we're actively thinking about uh in terms of the the next Asic that we would go build neat I've heard there's like some Community efforts like things like zprize which are also created in order to like push that work now before we sign off I just have one

last thing I want to mention and that's the Nova whiteboard sessions we actually recorded this earlier this year it's just come out it's part of the Whiteboard sessions that we've been running Nova like do you do any work on that I was actually always curious like you know when I talk to you about doing the Whiteboard you were like let me present this really cool paper but are you still working sort of in the ZK direction are you exploring are you still doing research uh in our space yeah so Nova is a really exciting construction uh because you can think of it as essentially the fastest knocks you could ever hope for if you're working with elliptic curves and it's the one that we're using for the vdf project oh cool

and one of the really exciting properties of Nova is that not only is it optimal from a previous standpoint but it's extremely Hardware acceleration friendly partly because it doesn't have these ffts and so it's one of the Prime targets to be building a snock Asic for and one of the end games you know in the ethereum roadmap is this idea of a zkevm at layer one and in order to get there you know right now we're we're off from a performance standpoint by several orders of magnitude and having this Hardware acceleration is going to be a critical part to to getting to where we

want to be that is so cool bringing it back to ZK VM yes uh we've done a few episodes on that so I'll try to dig one up and add it here but yeah sure I mean maybe as a sign off what is that Vision share a little bit about like next stages what you're seeing coming up okay so I feel like we have a whole episode ahead of us we let ourselves but yeah go for it yeah so I have a very kind of crazy Vision which is that I'm hoping that the proving for the ZK VMS will happen not in data centers like it's currently happening for many of the ZK roll ups

um you know a lot of the ZK Road Labs because it's still very early days they have so-called centralized proving and what they do is that they rent out racks and racks and racks of hardware on AWS or some other hosting provider and this is not good for liveness in the sense that if this centralized prover goes down everything kind of collapses the ZK roll up stalls instead I think the position where we want to be in is we have these pieces of Hardware which allows people from home to be participating in in the proving and we have this idea of a distributed proven Network where collaboratively like a few of these machines can build

proofs for these for these roll ups now one of the interesting thing here is that it's possible that Asics are more about decentralization than they are about performance and one of the consequences here is that really what we need is people to have the hardware in their home and be able to turn it on if and when a primary prover goes down so I kind of see my vision is that there's a hybrid model it's the backup and so it's kind of an insane thing where we'd be investing tens of millions of dollars to build these pieces of Hardware to ship

them to people around the world and then they just never turned on they're just connected to the internet and powered on and ready to turn on at a moment's notice but that never actually turned on and so that means that there's no impact from a power consumption standpoint there's no impact from a heat standpoint or noise standpoints and because it's at Asic which is custom designed for this one specific operation it's a very small box with a low footprint and it's kind of this this crazy Vision wow that's like the fallback huh yes that's like that's the World War III kind of scenario too exactly cool well Justin thank you so much for coming on the show and sharing this

amazing update I loved this conversation I feel like I got a chance to ask you about like obviously like this big meme I clearly had missed but also um I love how it sort of circles back through the vdfs and things we talked about earlier it's really great catching up absolutely thank you so much for having me Anna I want to say a big thank you to the podcast team Henrik Tanya and Rachel and to our listeners thanks for listening