ETH L2s Have The Same Flaws As Alt L1s | Roundup

Transcript

[Music] let's jump in all right everyone welcome back to another uh Roundup we've got a little Crossover with uh Empire and velker but we have uh dropped the dead weight so Santiago's gone Vance is gone we've gotta I don't think it's not too much [Laughter] Michael's one and two uh and for the Empire listeners uh that is Michael ippolito from block works and uh Michael Anderson from framework and then we have Vance plus plus uh otherwise known as miles O'Neill from reverie so uh welcome guys Santiago return to our respective roundups after that intro but I was gonna say a little less than that

but you know real questions and uh I mean I feel like I delivered on a picture of ball diano when uh when Jana was gone like do we have a bald Vance or and the lights I know I know I dropped the ball I'm gonna have to share it after the fact and put it in the chat um I I uh this morning it was kind of busy look all I'm saying is a little unsolicited advice if you want people to take framework seriously like someone's got to go bald you guys are just too strong on the hair game right now um but you know he did get it he he is currently I think on a plane to Tokyo and uh he got probably the shortest haircut I've ever seen him get yesterday so you know we're getting close

how do you get in the race closer yeah there's nothing quite like a especially like a very short or like kind of trying something with a haircut to make you feel like you're about 12 years old in terms of insecurity so we'll have to uh instant regret yeah governance so the tldr of uh what happened this week is so arbitrim launched their token um and then uh aip1 which was the arbitrary Improvement proposal framework um proposal went live the first proposal for Arboretum and the tldr of it is that they were uh they wanted to move 750

million arbitrum tokens which was roughly a billion dollars from the treasury into the foundation to be able to do like at a high level like BD deals grants um like hiring and things like that um blockworks research actually came out pretty pretty strong in this one and and voted no against it and and I think uh helped to tilt the vote in the no Direction uh the the overview on I think why we voted no was that there it makes sense to probably move money from the treasury into the foundation but there really was like very little transparency into what was actually going to happen with that billion dollars and I think there's a bunch of second order impact questions from that uh from that that proposal like the big thing that was on

my mind is like well the when a new token goes live one of the first things that people look at is like what allocation is going towards like the team what's going to the investors what's going to the foundation and uh my first thought was like if the first thing that you do is move money from the treasury to the foundation why don't you just start with more money more of the tokens in the foundation to begin with uh which so if it feels like a little bit of governance uh kind of theater there in a way but I want to get your guys's take so what do you guys think about what what happened this uh the past couple days with arbitrum here I think one more minor bit of detail uh Michael sorry before you jump in is like I think the other reason why this was

not very well received is after the no after the vote started to shift to no there was some on-chain sleuthing that was done that revealed that actually the funds had already been distributed to the foundation and come to realize with hindsight you know arbitrim says actually this wasn't really a vote this was a ratification of something that that has already happened so even though the vote was actually turned down the end result was no uh the foundation still has those funds so just like a little bit of additional color for and kind of why they were getting so much heat hey everyone exciting announcement from blockworks we are hiring two podcast hosts to come build a brand new show with us the show is called Lightspeed

tldr of Lightspeed is that it is a show for Builders tinkerers and lovers of Technology Lightspeed is a call back to the Heyday of Silicon Valley where great technology was built in garages non-corporate fortresses Lightspeed is an exploration of crypto from the perspective of a builder and an engineer who's really designing for scale and is interested in onboarding the next billion users into crypto so if this sounds exciting to you and you have a background in creating content or hosting podcasts head over to the careers page of blockworks it's just blockworks.co forward slash careers or even easier slide through my DMs on Twitter hit me up let us know we would love to hear from you we are super

excited about the show and we're looking for two podcast hosts who are as excited as us talk to you soon so yeah exactly I mean that was essentially what I was going to talk about um but more to the point of the point of doing it after the token had launched is so that you can use the the mechanism of decentralized governance to be able to promote the community and and tokens being part of the governance mechanism um it just you know doesn't look that great when it when it gets found out to be more decentralization theater then actual true decentralization and frankly like the the moment when a token launches

it's like the most you know wild and crazy period of time you've got like tokens flying everywhere you had this massive airdrop you know there isn't a consistent token originated Community because the tokens literally didn't exist and suddenly they do and and so in retrospect I mean it's just it's the worst time to be trying to Corral everybody to get behind a vote um and I I think it definitely kind of ran in their face a bit and and I hopefully think that you know the arbitrum team will will be stronger because of this going forward and definitely have that perspective but they're gonna have to learn how to engage the community in in a different way um this is just a testament to that yeah I think my initial reaction is that I guess two things one is that I think

it does provide some insights into the regulatory challenges that these teams face because you know it would have been a lot easier just to take that seven or eight percent and add that to the team's allocations but then you know going out and then deploying that to you know do BD or other things that that presents some some regulatory challenges it looks like you know you're more like a security essentially um and then the second option you know would have been I guess carving out like a entirely different category beyond the community treasury from the very from Day Zero for this Foundation but then of course you know that's not either in the hands of the of the

community it's probably a decision that the community should make um so you can't do that and you know so you get to this third option which is basically you know presented as if it was part of the treasury but then the students governance launches move it into this own you know foundation and hope that you don't get any pushback um and so I think you know this would be a lot easier if you didn't have those challenges in the first place but the second takeaway for me is just you know I think it's a lesson in terms of that that others should look to for for learning best practices on proposal submissions um and if there's one thing we've seen is that you know first of all when you bundle a lot of pretty major decisions into one Omnibus proposal

um say like the atom 2.0 you know Saga right that was a there was a that was a loaded proposal um you were just setting yourself up for for more I would say you know pushback right and so it's much better to isolate these proposals separately um and then really when it comes to anything around you know treasury spend uh there is a huge onus on you to to for for transparency um and there was just some some table Stakes details that I uh that you guys called out that were that were missing from that especially of a treasury of that you know notional size um at least in US dollar value and you know like we run grants programs and we

have to be extremely explicit about our processes right who's in control of the actual funds who's doing the day-to-day work why are we you know you know capable of doing this why should you trust us and why should you trust the folks on the multi-sync like all of these things I would say are standard for you know a 10 or 20 million dollar grants fund much less a you know billion dollars for both so yeah I thought I thought early lessons you know uh and we're launching it now anytime soon I would you know just take some notes um I think to avoid going forward give your little yellow notepad out and just drop some I'm in total agreement with you miles and I I do think it's it's worth just highlighting again like

it's a very different regulatory environment and frankly there's an organizational challenge around Dows that haven't necessarily been solved yet so I think it's always fair to like give the benefit of the doubt to these teams that are trying to navigate really difficult problems in real time and highly competitive environment that said I think there was some some pretty obvious mistakes that were made here and to your point just to re-highlight this was 750 million our our ARB tokens which is over a billion dollars worth of notional value in US dollar terms and the explanation that the foundation gave or this this comes from Patrick McCory uh he said that the foundation needs a sustainable amount of funding not necessarily governed by tokens to deal

with Partners who won't do on-chain transactions to make IRL Partnerships right like uh like like kind of some of the ones that polygon has gained a lot of attention for to avoid voter fatigue Etc and there definitely is some concept of this even Within um you know sort of companies today right it doesn't make sense to have every single person weighing in on every decision no matter how small or no matter what the expertise is but I would say there's a fine line and a spectrum but I think that begs the question then Mike of like so so Patrick's saying that they need to use those funds to do these BD deals with like off-chain entities so like big Brands and I'm assuming what they're saying is like they need to compete with like the polygons of the world or

um you know when polygons doing a deal with like a Starbucks or a Nike or uh whoever there are there are other big like web three or like a meta or something like that though the way those deals work is like there's oftentimes almost like not like a bidding process but they are incentivizing those companies to work with them with money so polygon might pay five million bucks or 10 million bucks or I've even heard upwards of like 20 or 30 million bucks to go to go convince one of those web uh those web 2 Brands to work with them um so what arbitrim's actually saying here is like they need you know 20 million dollars to be able to go like compete with polygon and win the Starbucks BD deal but in that case shouldn't the community and they're saying they don't they shouldn't have to

like ask the basically Community if that's a good use of funds isn't that a perfect point in time of where you should actually ask the community of like hey I want to go spend 20 million dollars to go try to do this like beta deal with Starbucks like that that feels like a lot of money for that kind of a deal so all the pine here and say um I I think there is a difficulty and especially the the type of transaction that you're talking about you know where a lot of those deals are competitive and a lot of those deals need to stay private until the deal is done uh and if you're in a Bake Off process of um you know against any other

participant you know they now have information against you that they can use in their process which is going to be private so I do think that there is an element of I mean the question that I was going to post to the group is what do we think is you know and I don't think there's a clear answer but like what are the different types of governance models that that work and which ones don't um I think a pure you know token one vote one token model for every single initiative is probably not the best model and you shouldn't be opinion you know you shouldn't be asking the the entire audience of what we should do in every single decision the one that I do actually kind of like is the multi-council model where your tokens are voted to elect people to have different controls over some of this

stuff and um synthetics actually has a really good example of this where they've got a Spartan Council who does the upgrades for the protocol they've got a treasury time who manages the treasury you know and and the point of the treasury council is they know the information like how many how much people are getting paid uh via the treasury when they're contributing to the protocol um any of the business development deals and and you know what the what the details of those are um but that that isn't shared with the entire Community their budget is determined by the community and the token holders but their process and they're evaluated with outcomes that that's something that goes to the community but the the internals is not yeah yeah I guess one interesting maybe Nuance that I'm personally curious about

is you know I've always gotten the sense that polygon um and you know even optimism we're doing these deals off of their own balance sheet of the the operating company and um using their own cash that they've raised um you know I think polygon raise like 400 million dollars at some point in the last cycle um and why you know arbitrim is opting to you know do this out of you know what is I guess the community's uh allocation of tokens in the first place um but I guess that aside yeah I mean Michael to your point I think at the very least you need to you know if it's a foundation or a grants program they need to have a Like An approved mandate like here's what we're going give up

like trust us we're going to go do these private deals that need to be done you know behind closed doors until they're announced but here's what you're giving us money to go do and I think that that even that was missing here um right especially and I think like you know the proper amount of transparency and the proper you know the governance structure kind of depends by the function um like upgrades to the smart contract bridge that is something that should absolutely be you know a large Council of you know multi-stakeholders from all different sorts of backgrounds right um whereas I don't think like having a council to do BD is actually very effective I think that's one thing where

you kind of you you approve you know a team that you trust and is capable to go do it for you and then you know have them basically report back every quarter every six months or something like that and then decide if you want to keep funding them do you want to claw back the funding if they've done a terrible job um so yeah I guess that's my initial reaction I don't think there's you know I I do like the different and like the two the two house you know governance models um I don't think you know something that's like a council for every single function works well but um you know I think you can you can mix and match these things yeah just confirming that by the way I was sharing screen for for folks who are

following along via video but it was a 450 million dollar raise which was led by Sequoia for polygon date of that was February of 2022. so honestly a lot of a lot of the difference that gets made and for cryptos like if you raise money at the right time that's exactly the right that was a good move from from polygon cash and then they can go do they don't have to go through governance right well literally can I actually push back on that Mike like um it was a good move from polygon because they were able to raise 450 million and then go win all these BD deals but like do we think that's a good use of money in the first place like they probably spend 100 bucks on on winning these web free or web 2 deals 100 so two two separate parts of that

question actually like one is just you know I think the the strategy of staying stay existing in crypto throughout multiple Cycles is just sell your Equity when it's like the most expensive at the top of the cycle and use that to like get you through the the bear Market um so that that's more what I was talking about in coinbase I don't know if remember you know we talked about this when we saw they did that 1.5 billion dollar debt issuance I remember the two of us were having a conversation like maybe this is a sign that like coinbase deciding to finance themselves here probably means we're like approaching some sort of top um but then the the meat of your question there was are these BD deals good from the perspective of polygon and this is where like I'm not an expert in this I have my

own sort of opinion and I don't have the knowledge of like all of these deals and the results that they've had um I think I was saying my diplomatic opinion I was trying to give you another answer I want the non-diplomatic opinion it's kind of like it look it really depends if it's kind of like being in the business of honestly like venture or content you're trying to take a portfolio of different bets and hoping that one like really ends up paying off and if one ends up paying off it's gonna pay for all the losers and at the end of the day if polygon lands one of these things and they pay 20 million bucks to Starbucks and that actually ends up onboarding

10 million people onto their blockchain then boom it you know it doesn't matter what you did with the rest of the 450 million because that's going to be such gigantic win if they miss and probably most of these are going to miss and look like expensive waste of money with the benefit of hindsight then everyone's going to say it was a really stupid way to spend that money I think the the product strategy for polygon right now is to not have a product strategy and try everything casting a wide net both in terms of yeah but yeah that's generally my take like this might be an obvious thing to you guys I uh I originally thought that

these ecosystem funds were like a crypto thing I was kind of skeptical of these ecosystem funds as well which is kind of related to what we're talking about um but I met with someone who was on the who's like first five employees at um Amazon Alexa and uh he was explaining that they did the exact same thing they had like a hundred million dollar ecosystem fund to convince people to come build on Amazon Alexa and he said that it's very common practice which this that might just be my naivete but I never knew that was a thing there was uh I mean there is a model in like I think it was mostly in like the late 90s early 2000s where you wouldn't necessarily have like the company itself be fund a specific Venture fund to go

off for these ecosystems but I very viscerally remember Kleiner Perkins famously had the Java fund which was anyone who's building applications in Java yeah they would fund that they also had the I fund if you were building an application on iPhones they would give you some some funding I mean you can kind of think of it in the same way which is I'm sure a lot of that Capital came came from the respective invested interests uh in those ecosystems but it is interesting to think okay well how are we going to build this platform oh we need to invest in things we're going to build on this platform oh we need to go fund those okay let's go like that that model is definitely tried and true the one thing I will say about polygon is

uh and I don't know this for sure but my guess is that you know they have two buckets uh of assets to pull from when they're making these deals they have the cash on the balance sheet and they have the polygon you know the matter token itself my guess and and once again don't know this for sure is that a lot of those deals were actually struck with Matic itself not with the cash on the balance sheet cash on the balance sheet is funding the hundreds of people that were hit polygon not not the uh not the business development deals um so so that that's kind of how I think they do it and I know that this is a Playbook that Ripple ran way back in the day this is a Playbook that a bunch of these ecosystems have run where it's like hey we need to find massive

ecosystem Partners let's just give them 10 million dollars worth of our currency then they're bought in they have the asset that they're going to need to use the ecosystem run a validator you know run a node whatever it may be but they're also going to be able to be participatory in the network with governance and potentially see the upside um with with growth of the network itself so I I think that's probably what was going on and what has been going on with a lot of this BD stuff um less than cash itself just kind of cracking up matching Starbucks not knowing what to do with this 20 million dollars of matter so I I um yeah I I have a friend who is one of the

VPS of Finance at a large social media company that is trying to go public um who's been involved in web3 um so you can piece the tea leaves together if you want but they randomly have like all these tokens on their balance sheet and they're like like where do we just do them apparently they were stored in like some some like metamask wallet on one engineer's device and like it's always like we have to recognize I can set up the metamask for us well you know it's like okay we got to put them onto a hardware wallet like we need to safeguard this stuff and like how do we account for these things like do we have to disclose these in the S1 like comes painful oh yeah maybe we can pivot this conversation into uh Mike you had a pretty interesting tweet uh this week

about eth l2s um having every feature that uh all l1s are criticized for and I think the things that you specifically mentioned were um centralized single sequencers Network downtime opaque uh opaque resource allocation which is what we're talking about right now wildly expense evaluations also what we're talking about right now and you said time to call Spade of spade right ethyl 2's of every feature that all l1s are criticized for you got some pretty interesting engagement and and uh pushback on that I'd say I'm curious like now that you've had a couple days to digest that like what are your thoughts around it or maybe do you want to share a little more into what you meant by that tweet yeah I I think the um the thing that I'm kind of trying to ask myself and one I

do just think there's a look the some of the other ecosystems outside of especially Bitcoin and eat take like an enormous amount of flack a lot of it is very well deserved a lot of it is just because some of these blockchain ecosystems are just not at the same point of maturity and haven't been allowed to achieve the same uh like sort of deflationary schedule or inflation or emission schedule or level of decentralizations that uh decentralization that more mature blockchain ecosystems have so that was kind of the point that I was that I was trying to make with that um but I think I would I actually kind of want to ask this this question to you guys which I think there's kind of an interesting comparison to be made here between this is hypothetical to all of you guys

um the fdv of Solana and arbitrum are about the same they're about between 11 and 12 billion dollars each I'd be curious if you guys had to invest in in one of those or buy them at the current price which one would seem more attractive to you and why disclosure not Financial advice not Financial advice not Financial it's spinion put on put on a little Speculator caps here and uh and yeah I'd just love to know like how you guys would construct the argument I think it's a really interesting question and

um we're not investors and either of them uh don't intend to not Financial advice um the the way that I would see it and this is going to be no surprise um to uh to you guys um let's just say that everything else is equal the token economics are the same so the value tool model is generally the same I think there is still a kind of a question as to what the value pro model will be for arbitrum but that's that's a question that exists relative to where you would uh see the valued cruel potential with Solana um so let's just say that those are the same the total economics of in terms of distribution so uh one of the reasons why you know you look at how much has been vested how much is liquid is

because you want to know what those unlocks are and who who potentially bought at a much lower price who would potentially want to sell at the current price that will drive price action and a lot of these ecosystems um and then what you really want to look at is what's the growth what's the potential go to market strategy who's building on top of it and you know where is that trending so all else being equal that's kind of how I would think about it where what is who is on the up and who is on the down um I would say arbitrum is is definitely on the up relative to Solana um just because they're an ecosystem um they have historically been the most used ecosystem out of the top l2s on top

of ethereum um and with 4844 there's a potential that their cost drops uh to something below what you would see on Solana even um so that I think is is a huge variable unfortunately I'd say like Solana um did get caught up in the FTX debacle you know unfortunately and and not to their own um uh not not something that they did specifically themselves um and anecdotally we've just heard a number of uh either games or application developer that are moving away from the salon ecosystem um so that that is the lifeblood of growth for these platforms and if you start to see negative growth that's a really bad sign

yeah I think that's fair um it also kind of depends on what what arbitrim wants to be uh which I think is it's not totally clear to me right now but um you know do they want I think a fair compare or a more apples to apples comparison is you know arbitrum the general purpose roll-up and the prospects of that versus Solana the general purpose L1 um and two different economic models around you know and growth prospects honestly of that but I think where it becomes apples to oranges a little bit is if you know arbitrim starts and I think they're heading this direction it's more like a uh you know a roll-up framework um that there's going to be the arbitrum general purpose roll-up but arbitrim's

obviously launching lots of other types of you know I would say roll up Frameworks and tooling for you know whether it be app specific Roll-Ups um you know I think it's arbitrum Nova um right and so orbit I think right yeah orbit I can't I can't remember the names unlock the top of my head but you know I think if you're just comparing the the roll up to Solana L1 which I guess they're both general purpose you know you're looking at like you know whatever they can get on gas fees plus potentially you know Mev Revenue in the future um if they decide to do some sort of like sequence or you know uh like PBS uh you know auction or something like that

um but yeah I think I think Solana and then if you think about like the verticals I think Solana is kind of soul-searching at the moment um given that you know D5 has taken such a hit over there uh and you know kind of retail like web3 activity is down but still seems like that's more kind of the niche they're going for which which I think is much more promising than competing on the defy side um but yeah I think it also depends on you know is is like arbitrary multiganot put out a shared sequencer service that that all of its apps can tap into right that's another form of Revenue um is there going to be some sort of like you know any sort of I don't know economic share from the other tools that they're

putting out um or is it just going to be completely free open source like SDK tooling um yeah I think there's probably more more angles for Value equal with with arbitrim or maybe it's just a more complicated kind of unclear future whereas Solana you kind of you you know what it's going for right you don't know exactly what type of activity it really wants or is going to it's kind of out of their control since it's you know permissionless in general purpose but um yeah I just want to call out the nuance yeah I mean another answer to this is neither [Laughter] I I don't know I had a I was just kind of thinking about this myself and like I've

I've you know I'm not really 100 sure but uh I I do disagree with you I actually think I'm you know not Financial advice they're times a charm but I have I think Solana is going to end up doing much better than basically the the consensus majority would expect and I don't have like my non I've got some technical arguments and some non-technical arguments which is purely based on kind of pattern matching but I sort of Remember at the um at the Nader of the last bear cycle during around like 2019 you know the consensus bet then was not ethereum the consensus bet was Bitcoin and like if you look at how coin did during the last bull cycle it did like well but it underperformed you know most other tokens that that did better and I I

think the one thing that the bitcoiners kind of didn't take into account was that there's so much more the liquidity kind of cuts both ways right so the the the larger market cap means that you need more marginal dollars to come in to move the price either up or down right so that's like that's it uh outperformed on the way down but it also didn't go up as much as people expected because I just didn't think they don't think they took that into account I think one Dynamic of like the layer twos on eth that people I haven't really heard anyone say this but it would make sense they would a lot it would logically work like this I think people allocate to different ecosystems like they'd be like I'm you know there's kind

of like different layer ones which are seen as like an index of everything that's going on on the ecosystem and I think eth went from being like hey I really like Ethan what's getting done it's on the east so I'm gonna Chuck a thousand dollars into eth to I really like the ecosystem so I'm gonna put 500 into eth and 250 into arbitrum and 250 into optimism and then I think that combined with the larger you know you know the larger market cap of Ethan these l2s is just I think it will be they'll they'll do well this this next cycle but I think you know it will underperform what people generally think is going to happen in terms of price whereas Solana is they've got a lot of they've got to get their BD chops kind

of figured out they've got to attract projects back to the space they've got to rebuild default they've got to like capitalize on the momentum they have around any any nfts and they've got a solidified brand but what they've got going for them is that it's non consensus and they still have the ability for that [ __ ] to pop because the volume is just generally lower and like that's where you get the big moves um yeah so you're so you're like your take is that when we go back into a bull market investing becomes left bell curve and like where we're at the market right now we like try to go right bell curve and like think come technically but back in the bull market we go left bell curve and if you're investing in eth it's kind

of confusing you're like does value accrue to eat does value accrue to like optimism is it arbitrum so if you have a thousand bucks you might put 500 into e 250 to R 250 into optimism but for other folks it's like the alt L1 thesis is easy and you're just like let me throw a thousand bucks into Solana is that the is that your thesis I think regardless bullet bear Market you need to be able to quickly quickly articulate whatever the left bell curve version is of your investment thesis like Bitcoins like internet money internet Money Bang Boom uh you know ethereum is like like you know Bitcoin but you can do other stuff too you need more stuff than you can on bitcoin super easy and then Salon is like ethereum but faster and like it's just very easy

stuff to understand because what what moves money removes the price of assets marginally is like you know be uh retail inflows and so you have to have like a very simple easy to understand thing the l2s are a layer of complexity and it's going to divide flows do you think that that narrative changes ethereum but faster once 4844 goes in and uh ethereum l2s Roll-Ups are cheaper than Solana you know assuming that Solana also puts in the the free the fee Market um 4844 goes in in a reasonable amount of time and the the expectations are reality in terms of the cost compression like kind of but you because you're like okay this is like ethereum but fast but it's also but then immediately you ask

the next question like okay but it's also ethereum so wait a second do I invest in ethereum the base layer or this thing on top and it's just again I think they'll all be successful and and find over time I'm just trying to take like the most left bell curve sort of explanation there um yeah it is called bell curve of the podcast it's called belt yeah I uh miles could I actually call on you and uh Michael I'm assuming you probably have some opinion on this as well as an investor in the optimism not Financial advice but um do you want to break down because Mouse we were kind of talking about this a little bit you have a tweet about like how you would categorize the revenue and expenses for uh Layer Two And if you want I can actually pull up I've got it

somewhere here but if you want to start to walk us through and then I can find this tweet sure I think it was in response just like someone was saying that you know Roll-Ups don't have operating costs and you know I think we were we were kind of pushing back on that and saying that their p l actually doesn't look that much different than than like a layer one um in the future once they have you know actually decentralized these sequencers um maybe not as much as like you know actually bootstrapping a validator set like you know a layer one or an out chain would but there will be some some sort of you know cost there so you know just running through it I guess I had for on the revenue side you have obviously the margin on gas fees that that's what they're making today right

so there's a you know call data cost to post it to L1 they take a margin on top um and that's that's the basic Bare Bones Revenue model um then in the future though you're going to basically have to have you know for for defy you know oriented Roll-Ups I would imagine there will be a decentralized sequencer set um you're either going to be bootstrapping your own decentralized sequencer set and paying them somehow or you're going to be renting you know access to a shared uh sequencer Set uh from like an espresso or an Austria and you know that they will be secured by saying you know I will layer restaking eth or maybe some other token um and you're gonna have to incentivize

them to take on that additional slashing risk right and so you know I think at the end it looks like you know on the cost side you still have that you know call data side you can call that either like a REV share with ethereum or costly goods sold you know you're gonna have some sort of rev share likely with the sequencer set so you know if you're making a 10 margin on gas fees then maybe that goes down to a five percent margin and that's how you're incentivizing people to take on that risk of restaking right um and then if you go click deeper you know what we're seeing like skip protocol is doing for for osmosis right now I think we'll see that expand into

um into the roll-up side which is basically you know incorporating some sort of uh way to internalize the Mev that's generated on your roll up through an auction um and so I think longer term on the revenue side it's the gas margins it's the Mev auction proceeds um you know if it's a lot of app chain then it could have app Revenue um and then on the cost side you know like today you've got the call date like cost of posting data um there's going to be some sort of wanting to share with the sequencer set or some sort of token incentives where the sequencer set um and then you've got you know normal like you know token liquidity incentives so I call that like CAC and you've got you know what we're seeing now with

arbitrim you're gonna have to pay for Grants and Dev costs out of a foundation at some point so yeah I was just saying I think that the P L's will like you can kind of flush them out right now and to say that like it's zero operating costs um you know I think that's probably uh unrealistic miles I followed all of that except for I have one question there what are um where would you Buck it on a piano like incentives for other for other protocols where do you look at that um I would bucket that into a cost of acquisition um not not cogs no no I think I think there's very I would say token incentives are for the

most part uh an acquisition cost um I've had some back and forth like the Lido team on whether they're token incentives to say like the curve pool is really yeah like to me that seems like you're trying to maintain liquidity and that sounds like more like you're not trying to acquire those curve users or those curve LPS anymore right you're just trying to get them to keep their liquidity there to keep your product functional um but apart from that like if liquidity if liquidity is core to your value prop um you could like like lie now uh you could argue that it's cogs but for for most other circumstances I think it's you're really incentivizing you know the supply side to come in and and make you

know user experience better or you're just trying to get new users into the platform somehow I I've always thought that uh liquidity incentives would also fall in into effectively tack not maybe in the traditional sense of attack but it is essentially rewards for customers you know discounts rewards incentives which is all part of you know broadly like marketing spend in a way which isn't really historically cogs yeah totally agree yeah it'll be interesting a big a big question on there that that like I still have and exploring right now with hosu is basically what uh decent like what's the roadmap for decentralizing your sequencer and like what is the model

going to be for that and like Austria and espresso are kind of two that have put forth different models there and it's kind of unclear um they're I think they're both they're both promising but we'll just have to see how it ends up ends up shaking out regardless you're gonna have to pay for it right and that's that was kind of my point right now is like sure there's the sequencer is pure profit or like you know minus like the call posting data but like those margins will get you know eat Away by like actually having somebody else do the work for you instead of you know being a company running this yeah absolutely let some what's up what's up you know I

was gonna pivot us into Mev I want to get your uh I'd love for you to even overview on MAV stuff if you're up for it yeah um so there was a pretty large exploit this week in Mev land somewhere to the tune of uh 25 million dollars which was kind of a very complicated sandwich tack so this has to do with a bug in the um the Meb boost relay but basically there are kind of two parts to the to the exploit and Miles you can kind of correct me here um on on some of this stuff but basically there was sort of a malicious validator the attacker whoever this this person or entity was you know deposited the amount of eth that was required 32e

to set up a validator they waited like the eight days or whatever it was and um a bunch of uh you know core to like PBS right which uh the relay system that we have now which was pioneered by flat flashbots is like a trial fix for eventually PBS is going to be enshrined in in ethereum but right now we use relays and the core function of that is so that the proposers which are the validators are not able to see the contents of the block and then these Builders are separate entities which there's frankly like a lot of concentration in and they're pretty much like large large kind of hedge funds that build these block and then Searchers will submit bundles which are smaller you know kind of sets of

transactions to the builders the builders build them and they get passed along via relay to to the proposer so in this case they and again the the key thing there is that they what goes along the relay is the the block header so there's an understanding of how much profit is in that block but you don't actually get to see the contents of that block um so what ended up happening here was there was there was some sort of bug or this validator is able to exploit um this design see the contents of the block and actually reorder the transactions and steal the Mev this is the part where to be honest is kind of a live exploit so I'm not 100 sure what the connection was but but allowed them to do is to understand some details about some strategies that

Searchers had way further down in the Meb sort of value chain and like one very common form of Mev which I would categorize as a harmful form of Med is sandwiching so if you have a transaction that takes place you like reorder the transfections that you buy before the transaction you sell after the transaction the user you kind of get screwed but for Mev Searchers it's a trauma Atomic Arbitrage um so risk riskless profit what ended up the this attacker the sophisticated attacker essentially set traps for some of these sandwich bot Searchers um in some very kind of like low liquidity pools and they baited these Searchers into sandwiching and taking

these transactions and the end result of that was that they ended up draining I think it was uh four Searchers four or five Searchers the tune of uh five million dollars each so miles like correct me if I left out some of the the technicalities there no I think that's basically it I think he had to he had to set two traps um he had to first of all like basically set set up a trap for these Searchers so that they thought they were seeing a really profitable Mev opportunity that that's what they were going to bid enough basically to win the block based off of what they were seeing um and so you know that I think he he

basically like he basically let them have a small win like a couple days before this so that they knew that the strategy was profitable and then set them up basically when you know he was ready to be the proposer uh for this big one um so that's the first first you have to like trick the Searchers into going after these you know basically booby trapped pools um then the second piece is that he had to basically fold the relayer into thinking that you know he had returned a signed valid block header um and the real air you know this is the whole thing where privacy the reason all this happens off chain is because privacy is so hard hard to do on chain basically have to bring this auction you

would have to encrypt all the transactions uh in the entire blockchain but the relayer you know thought that it was getting a valid block uh and so it revealed the contents um and then it tried to post that to the network and couldn't call it so the proposer says okay great now I know all the contents of the uh of the block I can see the Searcher strategies go in I can do whatever I want with the block basic and so if that ever happens you know none of this would ever work because the proposers would see the contents of the Searcher strategies replace it with their own every single time and there would be you know no market for there

would be you know no incentive to be a Searcher at that point if you're a Searcher at that point you just go and become a validator right so you can do that for yourself um but it seems like that's where things are trending is that Mev eventually like it seems like the cert there's the incentive to be a Searcher is going away but you guys understand Mev way better than I do um there is a strong incentive to vertically integrate but it's not between like Builders and proposers it's between Builders and Searchers and that and that is already happening a lot of the big Builders are essentially but it seems like their own yeah but it seems like Searchers are just going to be out competed by validators no because they don't hold up they can't censor or reorder transactions and validators can if flashblocks is broken then then yes

but I don't think that's the case now uh yeah right so like the whole the whole point of like separating it is to make the proposer as dumb as possible and get paid you know as much as possible for for just saying Yep looks good to me it's all valid um but you know that's that's like the uh the fear here is that I guess if Mev boost is actually working as it should work then then the Searchers are fine yeah okay yeah up to a point of History just to illustrate like why relayers are really needed is if you what what they're trying to do the point of this design is to avoid centralization and collusion at the validator level so if you rewind the clock to the way it used to work before

the merge there were it was mining and there were these big mining operators there were like five or six mining operators and when you only have like five or six entities then you don't really need infrastructure like relays or things like that because those five or six entities kind of could just trust each other they don't need some kind of enshrined you know mechanism designed to make them trust each other they have an economic incentive to do that what what changed when you had uh when when we had the merge we had a bunch of different validators out there and the design of ethereum wants to make sure that one tiny little validator out in Arkansas or Ethiopia or wherever you know has the same that they're that

they're not disadvantaged by not being in one of these large like sleeping pools for instance so really the point of these relays is to make it very easy right the only thing that a proposers allowed to see is the actual reward right for for doing that and like the whole point of this design is so that like the 10 you know like the smaller groups of validators aren't can communicate in the same way with like the large actors in the space in the same way that the large actors would intercommunicate with one another it's like that's the that's kind of like the whole point of relay and then eventually just to repeat what I said like these off-chain sort of solutions which are these relays are going to be replaced by PBS which is enshrined within ethereum

that's like a year away I think though it's a challenger than shrining it is because it's really hard to bring it into the protocol and still keep the contents of those blocks private until the moment that they're basically you know submitted on chain yeah yeah it seemed like there were kind of two camps here one one Camp was like I have very little sympathy towards the Mev Bots and like good like yeah they should have got they should get wrecked because they were they were saying how much doing these sandwich attacks and then there's like another bucket um of folks who call the flashbot strainer like a malicious actor um and thinks that they should like get punished or return the funds or whatever like what what bucket do you guys fall into there

okay um I mean yeah I think I think uh no one really feels bad for sandwiches getting sandwiched and I think that's fine um I think it's they're a very valid insurance you know basically a lot of problems we thought we had solved could could not be as buttoned up as we thought they were um at least on the you know revealing content side um and yeah I'd say it's it's it's malicious enough that they think they slash the validator but that's kind of the problem with the 32 eth it's you know you're slash like four eth or something like that and you just Yeah so basically you're not posting

enough collateral I'm I'm in agreement with you miles I think look nobody's gonna you know it's like playing the world's smallest violin for frankly like kind of a a pretty predatory you know support strategy that's supposedly run by very sophisticated actors so optically yeah like no one is shedding any tears but I do think there's a question of Integrity in the systems like people want to be able to trust that when you submit your bundles and blocks to relays that you're not going to get exploited there and that is foundational to how blocks our mind or you know created in ethereum today and you don't want to undermine trust in those those systems yeah sorry go ahead Michael

I was just gonna say that that was like my one question coming out of this it's like okay you know it feels like Mev you it's kind of this ever expansive um you know set of learnings and lessons and strategies do we feel like this is now going to be something that's tested and tried more often or do we do you feel like this is going to be something that you know is more regularly occurring yeah I think I think one thing yeah my short answer is probably yes um but my second order effect I think is it could you know I think Justin predict was on bell curve uh the Mev version uh the other day and he was talking about Meb burn um and I think that that does make actually a lot of sense and you know this could accelerate sort of

the push of of burning the Mev portion of the of the block rewards um you know again I always say no one's looking out for the common Heath holder but uh I do think that you know obviously that would accrue a lot of value to any sort of etholder but it would also kind of get rid of this this almost Lottery system where you know if you're in the lottery then on like you know the most valuable block of the week then you know it skews all these you know sort of oprs and averages um way up but it also provides like a lot of incentive that you know if you are the proposer and you can figure something out then you can run off with the funds um burning the Mev would would actually

probably you know have solved this right um report right you never have to worry about proposer Shenanigans again yeah to just like just um sort of round out that explanation that that you because it's a little bit of a technical explanation is there's there's an incentive to pool in ethereum because the way that validators are chosen uh which who who gets to mind weight block is totally random I think there are like 550 000 validators so it's like a relatively low percentage that you end up winning so you kind of have this you know if love large numbers and averages if you sort of pull your power together then there's like more of a steady stream of of sort of income so you have this incentive to pool but then the collateral that you post to your pool is relatively small compared to like a

gigantic payout right in this case 20 million dollars is nothing on the you know 32 eth or whatever that you're required to actually stake so they're just some some kind of weird incentives there uh at the consensus level but the flashbots team is super smart um I know they're hard at work trying to make sure that this doesn't happen again and actually there was a I want to maybe tease a little bit without giving everything away there was a really Matt Cutler um also he's the CEO at blockdative who's like very deep in the weeds uh in of Meb himself and he runs a a relay and a block Builder and there's a very interesting there's a very long discussion to be had and it was it was

had and it will be out on this week's bell curve about um kind of the merits of you know flashbots runs their relay for free and you know Matt's sort of argument is that infrastructure at the ethereum level especially off-chain infrastructure that the protocol depends on should not be guaranteed like taken for granted like there should be strong economics to ensure that they keep doing that it's a they're a very good arguments on both sides of that debate but that's a little teaser yeah I gotta stick around [Laughter] um all right I uh you know what this is kind of a feel-good story actually uh this was the Euler D5 recovery so this was I think is

the largest crypto recovery of all time about 200 million dollars the hacker appears to have been doxed as well um which you can find if you want to look it up but I'm you know I'm not gonna repeat that stuff here um but yeah it ended up being I guess I guess it was kind of a happy ending in that the Euler team sort of got their their funds back but so definitely props to them I'd be curious like what your guys kind of thoughts or takeaways were from this whole exploit and then the return of the funds what do you think I totally agree I mean it's a great outcome for the for the situation um frankly I think this is a testament to

why we need better systems for security monitoring um for bug bounties um for basically the entire system that protects these systems uh and you know the it's unfortunate that we have to the point of like doxing the person holding their personal identity over their head to be able to get them to give the money back um if we had and and I know that there's a ton of teams building you know out this stuff and I they're working really hard to make it more and more robust every single day but um I think that this is just more a testament to how we can prevent this from happening in the first place and the need for that um being ever present with you know any sort of smart contract that has value in it

I like the way you put it like that it's a feel-good story I'm not sure if this happens in other Industries but I feel like this happens time and time again in crypto where you have a lot of people who like band together to help out and you you saw that with this it was like yeah you shout out Tay like from what I heard Tay jumped in like Hudson Jameson uh Sam CZ Sun like I I heard there were like just a number of different people who committed a lot of time to basically doing like tracking this person down in in like like both on chain but also off chain and um yeah getting the salt so definitely a big win boss if you're talking you're on you're on mute buddy on meet here thank you yeah I think everybody is you know

Euler has a great I would say you know very positive sentiment among the communities everybody's rooting for them um I think we see this a lot where hackers are are good at getting the funds but very bad at laundering them and it's getting increasingly do that that's positive um but yeah I I would agree with Michael's take that um you know I think we're seeing more and more the limitations of audits uh and more and more of a need for you know ongoing monitoring tools um you know I think I think circuit breakers are really really interesting uh they break composability which is what has kind of stopped their adoption so far

um but something like that if we can get over that hump you know the the amount of pressure on audits you know would come down quite a lot right um and so yeah that's stuff that we think about a lot with like osmosis too um we have like you know IBC rate limiting now so that you know on any given day only 20 of you know the tvl of a of an IBC channel can move in or out um um you can instantiate rules like that so that you know on one day sure maybe you don't double your tvl like if that was like going to happen without sort of the sort of requirement you know maybe there people are told that they have to wait a few days to deposit more but it's

way more you know you'd much rather have like a slow slow you know onboarding of liquidity rather than you know allowing all the liquidity to exit on one day um so yeah definitely definitely some service providers out there working towards working towards that Vision um shout out shout out range and Cosmos uh ecosystem you guys wonder what why these exploiters end up doing this they can't do much with that money they can't move that money out of crypto why don't they just do this for why don't they just get handsomely paid for some some Bounty instead now you've got this like legal trouble and all this stuff I mean it's not been a good story

for this exploiter [ __ ] shout out one of our portfolio companies in munify um you know they build a bug bounding program uh I know code arena is another one that you know has the similar types of challenges uh challenges is in you get to compete to find bugs um and that's where you can turn from you know black or gray hat to white hat and also get paid for finding these things um I I think that has become the industry norm and the incendo module is pretty strong which is like 10 of the value is usually what the bug bombing is that's a payment that's legal and agreed to and boom uh because so I I think there's a yeah no I think that we just have to

make that more the industry Norm um like every single technology Trend you you have different security standards different security models that you gravitate towards when it's a centralized system everybody's down firewalls you know miles to your point firewalls are great but you know what are you gonna do if something gets passed it do you have to chop the circuit breaker and and kill composability like we just have to find the new Norms that work for this industry audits are a great start and necessary component but only one that I think we need to find others to come to accompany it yeah the killing com I think we're at the stage of crypto where to like use an way overly used example but if you take the analogy of the internet in the early

days there was this overriding Narrative of democratizing information and giving everyone access it was going to level the playing field and there were a whole bunch of other narratives that came uh you know started around that time too and like in some some of those narratives kind of got validated in some cases they kind of did and so others just didn't there are a lot of like supposed advantages of crypto right composability is one of those uh transparency is one immutability are others and maybe some of those narratives end up coming totally true maybe others are like slightly less true like Cosmos is definitely doing a lot of experimentation with async composability and maybe for like it's actually same with East layer twos right so maybe like we discover like hey composability is

really cool but maybe it's actually like ACN composability is kind of like 80 20 rule really good async is just gonna enough so I think it's yeah all this stuff is basically being the trade-offs are being figured out in real time we'll probably knock some of those narratives off but then we'll figure out the ones that end up existing and really matter long run yeah trying to think guys if we have any oh uh maybe we could just end um I'm gonna ask everyone to put their their Speculator hats uh back on but we've got uh we've got framework lawyers are gonna love this one yeah Adams Adam's like uh Michael there's a lot of financial advice in there this last song No there isn't there is none yeah

there's none none at all um okay but I do want to get your guys perspective because we've got the you know the major Shanghai upgrade um or I guess chappella as it's been as is being labeled which is coming up relatively soon sorry I should know the exact date off the top of my head but it's it was April 12th well it's next month yeah okay so maybe it makes sense to to do this now because next Friday we're going to be talking about the aftermath and what it ended up looking like but the big the big question that has caused an enormous amount of debate is what is the impact going to be on people taking their funds out of if they're unstaking their ethereum and again like there's kind of a bearable case for this and the

bear case is hey there's an enormous amount of ethereum that's been locked in this contract for a long time uh people are going to want liquidity and there's going to be significant cell pressure on ethereum the bull case is and I don't think these are majorly exclusive but you are now going to de-risk what has henceforce been hence previously been a major risk right and now people know that when you stake in ethereum you can withdraw that stake and that that actually could lead to more more ethereum being Stakes actually over time um so I guess like my question to all of you if you had to put your like guessing caps on is what do you think the immediate um yeah thanks I don't have any tinfoil caps today just uh just just your

Speculator caps um but uh if you had if you had to guess like what do you think the short-term impact of this is going to be and then like longer term longer run I mean uh my perspective is um and this doesn't have anything to do with the value of it I I this is more just a comment around the entire ecosystem um I think there will be a lot that happens uh over the first couple of days so keep in mind the the upgrade is happening uh next week but still much of the eth is being staged not directly on validator nodes it's being staked in ecosystems like Lido where you get an actual uh liquid staking token out of it the the lsts have been liquid for years

now um so you've actually had liquidity on and you know to the three nines or two nines worth of liquidity um via curve if you wanted to to sell those assets um so that is kind of like not part of the ego system that uh could be removing and selling or removing withdrawing and doing whatever with it um I do think that there's an element uh frankly of taxes where if you've been earning stating rewards and those are now liquid there's going to be a tax income hit granted that doesn't mean you have to sell the assets to cover the tax bill immediately it just means that there will be taxes factored in I think that's probably one of the biggest structural things that needs to be recognized um and it'll probably be a little bit

wonky right around uh right around the upgrade it doesn't seem like Lido or any of the other liquid staking providers are going to be ready to go they need to go through their own upgrade path and last we read Lido is targeting May for their upgrade to be able to withdraw from from State teeth so I think a lot of this is also going to happen over the course of the next couple of months not necessarily the next couple of days following an upgrade um but yeah it'll probably be a little bit wonky like I said over the short term medium term I think it'll kind of dissipate and this will be just generally a catalyst as you were saying Mike to more staking activity coming on board um you know I know of a lot of um so

here's another example we as a fund can put our assets into um something like a state eth but then we get Steve back for instance there's a lot of tax complexity when it comes to moving that eth into Steve not to mention Steve is a rebalancing token where you're earning more tokens every single day sure you can wrap it and and that is another complexity because each one of these in the most conservative view of of tax guidance is a taxable event so unless you're underwater with your eth purchases or you know at par with your eth purchases you're gonna enter a tax income when you swap those assets from eighth of Steve when you stay through a centralized provider like

coinbase and not you know it could be any provider but you know a centralized stating provider um like a custodian like coinbase you don't get a token back and when you don't get a token back uh that doesn't incur a tax hit now probably most of the institutions that are staking are not going to want to or that own eighth that want to state are not going to want to incur a tax hit as well when you receive the liquid rewards every single month from the centralized custodial stating you do have a tax income element but those those rewards are uh liquid um so there's just this whole kind of perspective of do we think if staking percentage will go up or down following

this upgrade our belief is it's going to go up over over the medium to long term probably by a large margin because of the effect of de-risking mostly from an Institutional perspective um and a lot of that I think will aggregate into the custodial staging environment yeah I don't I don't have a lot to add I think that the tax considerations are a great Point um you know I'll be just very curious to see what the withdrawal queue looks like and how it evolves in the over the first couple weeks um and then you know I think one thing that's that's exciting is that we actually might have some some rational price Discovery with the LST tokens now that you actually understand your

liquidity risk like you understand exactly how much you know time to maturity it takes to redeem these tokens and make them liquid um so yeah I think I think that will be interesting and then but overall you know couldn't agree more it just de-risks the concept of staking so much and you know it'll be interesting to see just how many players come off the sidelines um you know maybe not as like maybe a little bit muted because of the market environment um but you know this over a year or two or whenever you know activity speculation starts to come back from sort of the most conservative participants

um you know this kind of opens the door to to staking for them so yeah expecting it to be a little weird in the beginning but overall very very very bullish one other just kind of or secondary effect of this change you know let's assume that staking rate goes up as we're describing over the next 12 uh ish months um what also happens unless there is a commensurate increase in activity or um fees flowing through the network is that staking rate the percentage of rate returned goes down so there's an inverse relationship to that um and a Hal press uh has talked about this a bit on Twitter of just like it's kind of it's going to be interesting

where you know you get more state which is probably good for Network Health uh you know more participation in the ecosystem but at the same time staking rate as a percentage return goes down um it I think that's gonna be one of the most interesting things to follow like over the next 12 months as we see these changes play out um that's just something that we're tracking soon as it goes down you'll be able to restake it with eigenlayer and then you know get those numbers back up exactly man that's going to be interesting because you know I do remember I was listening to tarun in one of his um I can't remember one of his talks but he was excited about one of the things that

restaking allows you to do is basically kind of tranche out different risks um you know different portions of risk that you'd like to take around East stake and I think Miles it was you who was telling me that was um like in one of those protocols maybe it was element element five that allowed you to strip out the yield between kind of principle versus variable you'll never thought you were going to take the safe like uh you know principal yield but it was you know crypto's a bunch of d-gen so it was like people just uh you know fold into the the higher the higher rate the variable stuff and it will be interesting I think it's gonna attract an enormous amount of demand as soon as you kind of tranche out the I I don't really know

how you would how you would do that assigned riskier or slightly less risky parts of that yield but yeah I think a lot of innovation and I think a lot of innovation and definitely maybe a little little cause for just something to keep an eye on is um some of the financial engineering that goes on with uh yeah he's making yields exciting and terrifying you know [Laughter] restaking Index right that you know it's got a tranche that's just regular steak to eat then you've got your safe restaking options like arbitrum optimism and then it gets really wonky towards the junior tiers and you know miles you were talking about it earlier when talking about operating costs but uh I do think that one of the things

that's going to be really sub uh substantially mispriced from a user perspective is the additional slashing risk that you take on by participating in one of those ecosystems uh you know the the slashing risk of being in a Lido pool is is fairly small like you may see a lower return uh but you're not going to lose your state whereas when it comes to actually restating there is a principal Asset Risk yeah exactly exactly and I think that needs to be a lot of thoughtful work being done both on you know the validators who are going to be opting in on behalf of their depositors to understand what they need to see in terms of return to justify the risk and

there's going to be a lot of work and negotiation on middleware side to say okay you know here's what we have to pay here's living bare minimum we have to pay to get incentivized people to take on you know this risk right yeah I I personally can't wait until next Bull cycle there are yields of only 500 percent and it's going to be well much uh much less than it was last cycle these ones are sustainable maybe a thousand percent fqi let's go a thousand percent yeah absolutely all right guys this has been a uh a really fun one I think it's a good place to leave it here um miles thanks for for somebody in here and and joining the the Roundup crew um nice little season three depending on

how uh Santiago and Advance are my early comments [Laughter] see ya [Music] foreign