Exchange War Erupts: Hyperliquid vs. Binance & OKX - The Chopping Block

Transcript

closing it out in such a way that the HLP pool profited after being in a horrific position is the part that's a little bit confusing because when anybody profits in a per market somebody else has lost And I think this is a very clear example of the hyperlquid team/validators choosing an incorrect winner and an incorrect loser in this situation Not a dividend It's a tale of two fun Now your losses are on someone else's balance sheet Generally speaking airdrops are kind of pointless anyways Unnamed trading firms who are very involved Eat is the ultimate DeFi protocols are the antidote to this problem Hello everyone Welcome to the

chopping block Every couple weeks the four of us get together and give the industry insiders perspective on the crypto topics of the day So quick intros First we got Tom the DeFi maven and master of memes Hello everyone Next we got Robert the cryptoconoisseur and Zar of Superstate Good afternoon everybody Next we've got Terrun the Gigabrain and Grand Puba at Gauntlet Yo And finally I'm Hive the head hype man at Dragonfly So we're early stage investors in crypto but I want to caveat that nothing we say here is investment advice legal advice or even life advice Please see chopping blocks XYZ for more disclosures So uh we finally had a relatively quiet week um markets are not gyrating horrendously in one one

direction or another but there have been some individual markets or marketplaces that have been seeing a lot of activity So the one of the biggest stories of the week has been this drama playing out on Hyperlid So for those of you not familiar Hyperlid is the new hot DEX They are now the number one DEX by overall volume They are a huge per exchange Um they had a massive airdrop They've been kind of a darling of crypto retail because of the size of their airdrop and because of the fact that it was fair launched Now uh there was a a massive attack that took place over the last couple days against Hyperlid And I'm going to try to describe the attack although it may be difficult to follow some of the details but it it centers around a memecoin that uh we we mentioned previously on the show called

Jelly Jelly So you don't need to know the backstory of Jelly Jelly but you do need to know that it's a very low liquidity memecoin that's very much past its prime Um so Jelly Jelly was listed as a per on uh on Hyperlquid So what happened was that there was a trader who opened an $8 million short on Jelly Jelly Now this was uh I believe something like 50% of the circulating market cap at the time of Jelly Jelly meaning that this was a massive short position that they opened against this asset Now what the trader did is they went off of hyperlquid and pumped the spot price of Jelly Jelly causing themselves to get liquidated Now why would the trader do this why would they force their own liquidation well what

happens is that on Hyperlquid when a position cannot get liquidated um in an orderly way HLP which is Hyperlid's basically crowdfunded market maker that's kind of the easiest way to think about what HLP is Um it has a bunch of retail deposits is very fundamental to hyperlquids liquidity always being a very liquid market is because HLP is always there providing liquidity to traders Um so so HLP when a liquidation happens in a very presumably disorderly way HLP takes on the position and tries to liquidate that position in an orderly way Now this position was so big that HLP was now in a position to be short jelly jelly with no way to really get out of the short There weren't people

willing to take that that short position uh to go long and and offload that that short And what happened was that then there was a short squeeze Now the short squeeze was not just retail deciding oh huh looks like Hyperlid is stuck in the short Let's like let's screw them over Um there were two other parties that entered into the short implicitly And those two other parties were OKX and Binance because what happened was that the moment that people realized oh [ __ ] Hyperlquid as a protocol or HLP you know which is which is kind of implicitly backed by Hyperlid uh is now massively short Jelly Jelly OKX and Binance announced that they were listing Jelly Jelly Ps basically within 24 hours Uh now this almost everybody assumed like oh my god

this is now exchange warfare CZ and Star and OKX are have basically pointed their guns at Hyperlquid and have decided this is our opportunity to take them down Now what happened next was instead of Hyperlid eating the loss or retail investors on Hyperlquid eating the loss through their positions in HLP instead Hyperliquid validators voted to delist Jelly Jelly and manually close out the position at an oracle price that was not the real price at the time that the position got closed The oracle price was below even like the starting of this fiasco price Exactly So Hyperlid decided you know what these guys who shorted us and all the people doing this are bad

actors and instead of eating the loss or having the HLP holders eat the loss instead we are going to artificially close out the price at a fake price and not the correct price to make sure that HLP users are made whole So that was more or less the end to the drama but it has caused an enormous amount of conversation Uh so one it dropped the price of Hyperlid by quite a bit I think it's down to something like $15 It started the day at something like $21 Um so it dropped uh something like 25% in a single day as a result of all this um all this this whole debacle Uh but it's it's caused a lot of people to debate first of all what should Hyperlid have done in this situation what was the core mistake that they got wrong and second

uh does this mean that well you know how could they have do done this without showing their hand that maybe Hyperlid isn't as decentralized as it was once claimed to be or maybe isn't as fair as it was once claimed to be so you've got a lot of people on different sides kind of throwing mud at each other You've got some people at centralized exchanges like BitGet calling out what's going on Hyperlquid See I think OKX call out Hyperlid as what they were doing was somehow unfair So it now feels suddenly very PvP feels like the centralized exchanges versus decentralized exchange um and kind of a watershed moment in the exchange wars now extending to uh to DeFi So curious to get your guys' reactions Trun why don't you start uh what's your take on this whole HLP drama help contextualize it for us Um yeah I

mean I think there is sort of like a sense in which um these types of protocols have some certain types of deficiencies um in the sense that like a little bit like an AMM like being an AMM LP you know you can't reject orders like like the naive Unisoft V2 even V3 to some extent there's no real like notion of like I can reject an order without me going and pulling my liquidity There's not like a a way of saying like I want to pick one one order to trade against and not other orders And I think you inherently have the same thing um in these pools The difference I would say between sort of like HLP and sort of its

predecessors in GLP from GMX and JLP from Jupiter is that the Hyperlid uh balances So it's like you deposit say ETH into the pool Hyperlid will take your ETH and market make on many different assets So maybe it'll take some you know 1% of the ETH and market make on jelly jelly It'll take 90% market make on ETH We'll take the remaining and market make on BTC That algorithm for choosing that is completely offchain and you're trusting like the single whitelisted manager for that So there's a sense in which the pool is not really trustless already you're kind of trusting the effectively the hyperlquid team who is doing the

allocation rule So I think clearly there is you know and and they've written tweets about this so I'm not going to belabor this but there clearly were a lot of mistakes they made on their side in terms of like how their strategy was working and how they didn't have position limits and cap sizes and OI limits and all sorts of stuff like that that could have ameliated us without the emergency price So let's just say I think they learned a lesson about sort of the mechanism design aspect that that's like the first I mean that's the only concrete thing that has been said that they will fix after this incident So let's start with that So the thing they will fix is like uh open interest limits per open interest limit

and then like concentration limits and you know for HLP or for the actual uh underlying for the types of positions HLP will liquidate Oh I see So now in the future HLP won't even touch something as so this this is why when I started describing this I described liquidity pools that don't discriminate right anyone they you can't say I don't want this order and I want this other type of order and basically if they had a way of having HLP discriminate versus like third party open liquidation then like the market could have priced what the value of that position is and HLP didn't have to eat the loss but the way it's constructed right now is like it does just automatically trade against it like a unis swap pool in that sense for the for the HLP liquidator pool

So there's a sense in which they didn't put much many restraints on the strategy Strategy was just kind of like and you don't you know it's like that strategy is run by the hyperlquid team offchain somewhere So like it's not like I know what the code looks like I mean most of their code is not open source right like I can run a node but I only get the the binary and like there's a lot of stuff that like is not clear about how the setup works And so I think this was a very clear thing where like they made mistakes on their strategy limits And I think that's the first thing they agre they said they're rectifying to clear up But to the rest of the market I think it sort of does exemplify the value of like having that strategy at least somewhat

more open than the way it is right now because like clearly you have no transparency into like the fact that you know like you as a hyper HLP depositor you don't actually know if there is some risk limit that HLP will automatically take an entire uh pool uh position or not You also don't know if they'll like devalue the oracle the way they did And there is one note in the docs that tells you this but the code's not open source So you can't really ver you don't have any even if it's not open source You you there's no like verifiable proof that it's doing this So I would say yeah the guarantees they gave you were sort of different than what people I think may have thought they were getting in other protocols where you do actually see what the strategy is doing Um you know

there's trade-offs right the when you don't have a public strategy you can be more capital efficient So like you know there it's not like there's a I'm not trying to to to vilify I'm just saying there's a kind of like a decision spa trade-off space and they clearly made some wrong decisions that they're rectifying Uh but I think the one one of the big questions that I saw Kevin Joe wrote a great tweet thread about this um from Galwa you he was the guy who famously shorted Terara at the top Um one one big question I have is like do do you think it made sense to bail out the HLP depositors right So obviously the HLP would have would have pretty significant losses You don't you think it was a mistake no I think I think this

was the Cardinal mistake frankly I think resolving a market after messing up we'll call it the risk parameters of the platform That's one thing I think closing it out in such a way that the HLP pool profited after being in a horrific position is the part that's a little bit confusing because when anybody profits in a per market somebody else has lost And I think this is a very clear example of the hyperlquid team/v validators choosing an incorrect winner and an incorrect loser

in this situation And frankly the HLP liquidity providers who are backing this you know platform market maker that takes on positions are entering into a risky proposition You know if the liquidations are successful they will make money If they are unsuccessful they will lose money On the other side of them in this example when closing out the market are all of the people that were participants in the per market normally the people that were happen to be long for instance the people that happen to be short and the HLP product combined with the price that it was closed out at somehow HLP was up which means that somebody

else was down and in this situation I think that's inverted I think that you know the the whole system would have been better off had they not done it in a way in which they profited so to speak and the user base as a whole lost so to speak If you're going to if you're going to pick a price and rig it don't pick one that's favoring yourself Like honestly they picked a crazy price And not only that it was extra crazy because it was lower than where the fiasco even started It's like they chose to just give themselves a winner you know yeah I agree with that I mean I think it kind of goes back to this weird uh I think tension between like HLP as a as a

product versus Hyperlid as a product Um because HLP is not the only vault right there are other vaults people deposit into that run other offchain strategies Um and I think the perception presentation of HLP is like hey this is our you know first party um vault product but anyone can run a vault And I don't think anyone assumed there was any sort of um privileged access um that you know HLP would have Um I mean people online compared kind of with the saga to um loss socializing or auto deleveraging that has happened in other perp exchanges in the past um where hey this this market overall um you know is uh you know below margin and so we're going to freeze positions and sort of socialize um you know losses are tapped to the insurance fund This is not that

this just happened to be HLP was in loss Um but hyperlquid itself was not at at risk of default Um and so it's like I I I think it creates this weird um perception where it's like why is HLP a favored liquidity provider on this exchange where if they have a bad trade they get they get bailed out Like what do other market makers think what do other vault owners think bailed out at a profit Yeah It's crazy It's it's insane Um so sold out by a profit at a profit by hype not HLP holder denominated oracle manipulation that's the other weird thing right is like the hype holders voted to give the HLP holders this profit well can you can you be

specific I mean what's the exact mechanism by which the hype holders are participating the validation of hyperl because I'm actually I don't know the details of all the validation you can delegate to a validator and like but some of them have to KYC sometimes so it's kind of still a little opaque but Patun's right You could get a binary They control they control the oracle So that that they chose the governance vote chose the oracle price So the hype token holders effectively voted on indirectly voted through validation Well they voted by governance to to reduce the market and then choose an oracle price right yeah There's a lot of criticism because the fact that the foundation itself runs mo like basically they have they're delegated a supermaajority of the total hype tokens So uh you know the the the

hype holders are voting through delegation but of course this whole thing happened in about 2 minutes So uh like the the the beginning of the vote to the end of the vote uh was not enough time for voters quote unquote to actually be able to have a say Okay So one one more question taking this back to like ground floor you know education Let's go back to the original like you know this is an attack type situation where two exchanges that were not hyperlquid listed per at the same time I don't necessarily agree with the hypothesis that other exchanges listing per markets would have an impact on hyperlquid necessarily and I'm still a little bit confused by this narrative as to what

the sort of like sequence of impact is because you know the per markets themselves are just another trading venue that is detached from the spot market right and even if there's excess demand on a new Binance jelly jelly per like on the long side It's not necessarily going to change the price on hyperlquid or in the actual underlying spot market which is the index to control the funding rate on hyperlquid like they seem detached to me like what's the sort of mechanism of transference i mean so the the first thing of course is that if you're

Binance you need actual spot inventory and it just takes longer to go source that right like they open They didn't open a spot market They have No that's what I'm saying That's what I'm saying It's faster to launch a per market than to launch a spot market because for the per market you don't have to actually get the inventory onto your platform So somebody has to be figuring out how to get that inventory to where it needs to go to get the you know to basically move the spot price and get it in line with the index right but you don't have to worry about that if you're just listing per So if you're just listing per all you need is enough demand for people to go and trade the per Um so structurally for every long there's a short For every long there's a short That's right That's

right But structurally it's simpler to rate to like if you if you're like hey I want to kill shot these guys as fast as possible and there's a limited time to do that What's the fastest way to get there the answer very clearly is pers not spot So no but but this how how is it a kill shot that's the part I'm still grasping at and don't fully because it gives more people access to to participate in the short squeeze right if like Hyperl is getting short squeezed and the and the goal is like look the No but for everyone everyone who's longing it on Binance there's someone shorting it on Binance too and they are short It's not like you know well that's not true right it depends on the funding rate dynamics and the funding rate If the funding rate goes to zero then yes

but the funding rate blew out The funding rate blew out It went up 300% in one hour right so like there's the funding rate was like very out of whack from that super But that's fine That's that's like less than a percent a day right and like this thing hundreds of% it's a crazy short squeeze right exactly So this is something that markets are expecting will be over I'm I'm sure they will delist Jelly jelly ps within a week or two you know because obviously there's not real demand for jelly jelly There's only no matter what Sam Lesson says no one wants jelly jelly Um but I I I the the interesting thing about this thing okay so again it might be difficult to follow the mechanics here if you're not familiar with PERS and you're not familiar with you know liquidity providers and HLPS and all

this stuff So so let's abstract all that away right fundamentally what happened was that Hyperlid was stuck with a toxic position and two other exchanges Binance and OKX jumped onto this to try to further bleed out Hyperlid right basically to try to try to force it force HLP not hyperlquid itself but force HLP um to become insolvent Now this is kind of a crazy move right we you know some people were saying like "Oh this is kind of like CZ what CZ did with FTX," which I don't think is true I don't think CZ had good reason to believe that FTX was going to become insolvent by dumping FTT Um I I and if you look for example what happened with the Binance hack or sorry the Bybit hack with the Bybit hack actually Binance and

Bit came to Bybit's defense and they actually lent bybit ether in order to help them fulfill the shortfall and to like maintain uh exchange operations right so what you see is actually the total opposite behavior that they were doing just a few weeks ago with the BBIT hack compared to what they're doing now with uh with what's happening with Hyperlid So it it's I I I don't know if there's a good theory that explains why they chose to go this way but it seems like and this is what Kevin Joe was saying Hyperlid has implicitly said now through this through this behavior that there's a put on HLP There's a hyperlquid put If HLP loses too much money Hyperlid is going to come in and

defend it And you can see that the hyperlquid price moved really dramatically in response to what's going on with HLP which to me was kind of confusing because I'm like why what's the connection here between HLP and the value of Hyperlquid and maybe there's something I'm missing with respect to the tokconomics of HLP Um HLP doesn't really have any tokconomics It's like an LP pool It's not Okay Yeah So it's not tied to to No no no That's true I I think I think the weird thing here and this is maybe a better way of viewing this is like I view the HLP pool as like a company having debt right because it's like I raised money from depositors to go lend It's not debt It's equity No no no Hype is equity That's what that's the weird part about

this No no but I'm saying it's equity in the market maker right because the the pool investors take all the profit It's not debt Sort of Yes The market maker is taking the users USDC and using it to trade all of the different markets on Hype That's right And but the users get all the profits right so it's not dead Yeah I think I think the reason why hype dumped is um I I think it uh sour the you know future of the exchange like like why would you want to trade an exchange where you know there is a privileged um LP that that that can't lose like why would you want to provide liquidity there i mean this is sort of again the same things that come up when exchanges have you know in-house market makers is like okay well how far does this privilege kind of go I think for

there there is there is one very cynical take that I think a lot of people have had which is like the majority of the HLP liquidity is from the hyperlquid team themselves so like they didn't want to take that loss no $500 million in there no it was like 200 at the time yeah I could easily like when they bootstrapped the pool it had over7 75 So it's like it could be a large majority of that 200 was theirs Um but still wouldn't their balance of hype be so much larger than For sure For sure But here's another reason you should be thinking of the HLP pool as a a debt in more debt-like instrument is that it takes money from depositors who are

supplying and you can think of it as like lending to each market that it's um uh kind of market making in So it's doing kind of this like local loan Uh and in in the case like Jupiter and GLP they are explicitly lending protocols They like charge fees in that way In the hype case they charge a fee plus the spread effectively Um and the idea is like if it defaults like in this case then it like you know the the the depositors have first right rules It's almost that's why I say it's like debt holders and equity They they actually can claim the collateral It's not like equity and they get zeroed out And so I I I feel like it's not it's like some weird in the middle but like I think it's closer to debt and hype is the real equity because hype is the thing that's

like able to really control I mean the thing that can control the oracle is the equity instrument in my opinion Well so I I the way that I would frame it more is that um like Hyperlid is almost like an exchange that's booking but the BBbook stuff is happening through HLP HLP is the equity in the Bbook and Hype is the equity in the exchange itself Can I make just a very controversial statement real quick go for it I feel like we should have learned after FTX that an exchange and a hedge fund like thing or a proprietary market maker trading on the exchange should be separated right one of the separated I mean to the to the to the credit of this though I can see every single trade I

can see every single trade hype HLP is doing I can withdraw whenever I want Like I it is very different I agree with that I agree I think actually in principle what they're doing is still if they are not attached to the hip No no no That's not what I mean What I mean is that if the exchange is putting a put on this market maker and saying this market maker cannot lose money now they're exchange now they're they're joined at the hip right just the team running the market maker itself it's like well if you don't want to if you don't believe in this team being good at running a market maker don't buy equity in the market maker you know fine That's not a problem Um and that's how it's presented You know it's like you hey come spin up your vaults and here's

another market maker that you can deposit into And it's like we are one of many And actually no it's this is a one of one I mean I will I will say though if you look at their other market makers my favorite one to look at is Sefue who just constantly loses money Like I don't understand why people keep giving that guy money He's he already he's historically lost money you know forever today right his vault is very funny to watch But my point is yeah there's a lot of adverse selection already in those vaults that I I I I think like yeah his intuitively the these two things were separated until this event and now they're not viewed as separate right and that I don't think they were separated even prior to that prior to the event the team was running a market maker that was

the primary market maker on the platform yes the economics were owned by users and not them but it was the same owners of the trading venue running the primary market maker trading on the trading trading venue and being the liquidation mechanism Yeah I mean obviously them being tied into the liquidation mechanism does make them somewhat privileged Uh although in some ways it makes them unprivileged right because they're forced to take on these positions that a another a market maker might not want to be taking on all these Totally Alamita Alamita whether they wanted to or not took on all the bad positions on FTX with the mobile coin and all these horrible things that

blew up their exchange as well right they were forced into it It was both a blessing and but the whole idea of why this is potentially okay is that even if HLP goes to zero takes on a bad liquidation gets completely [ __ ] The retail users are taking the risk like in not retail users let's say investors investors in HLP are taking the risk and hyperlquid can continue on even if HLP gets zeroed out right that should be how it works If if it's not how it works and it's all comingled then I think this whole structure no longer really makes sense Right By the way from a vi from a vibe standpoint just like aesthetically I think getting sukued by mobile coin is a better aesthetic than getting sapukued by Jelly Jelly Like Jelly Jelly is just

like an embarrassing excuse of a VC memecoin And mobilecoin there are lots of negative things you can say but at least it has a network like there was something that was built versus like this dog [ __ ] piece of [ __ ] coin that was like some VC who was too bored decided to try to dump on retail like I agree they were mobile was trying to be a real project versus just an out sorry just aesthetically if you got killed by mobile coin there's like a little bit it feels a little like okay that's like an honorable it's sort of like it could have been anyone you know they just like found you I get that I'm just saying aesthetically aesthetically not that they sharpened into a knife and then stabbed Hyperlid with I'm just saying aesthetically aesthetically not Sure

Sure Aesthetically Yes Yes Yeah Okay So so one of one of the points that uh Kevin Joe made as well is that you know in the wake of this what you should expect to see now is that okay let's assume that HLP and Hyperliquid are now tied to the hip whether they acknowledge it or not Um what that's likely to mean is that one third party market makers or liquidity providers are likely to do less on hyperlquid because they know now that they're not fighting on an even playing field with HLP Um second HLP to be fair to be fair most market makers I talked to already said that So I think it's not like they didn't know that but now they get to use it more as a real excuse Sure Sure Um second is that you should see more capital going into DLP

because people now realize that like hey the protocol is going to protect you Disagree less No no you've you see the flaws in Wait can we can we can we bet some Red Bull this one this is like a Red Bull case bet I I feel like uh but well I think because the problem is that we we don't know in absolute terms will it go up because it depends on itself Let's go right now on DeFi Lama It's it's uh we'll just use DeFi Lama just as a vault Has it gone up or gone down it's gone down Okay it's at 185 million It was uh 3 days ago 296 million 299 Let's say it was 300 million on March 24th I think that's a good benchmark time Okay

it's it's down to 185 Um I I think like I could see both of both points I actually wouldn't be able to pick one because it's possible that it goes up like the way Hib is saying because it's like oh it's viewed as a FDIC insured hype insured product or something you know like um but there's also the fact that like the fees on the exchange might go down because of this cuz like there's a loss of confidence and so then like the fees it could make go down so then you know what I mean like those are two counterveailing things and I don't know which one will dominate I I actually think the risks have gone up and yes if the incident is bad enough then the platform steps in and and closes the market and uses a resolution

price such that HLP doesn't lose We just saw that with Jelly Jelly right there is a put Fine There might be a put when things are really bad But the jelly jelly incident has exposed the fact that small cap assets on hyperlquid are easily exploited under the current mechanisms And the probability of a repeat incident has gone up like at least an order of magnitude And if I were looking at h I I totally disagree with that Now nobody's going to try this again You got you guys are like you guys are like the this is like trying to fight over whether like an airline that just had a plane crash is more safe or not Well they are also materially changing obviously HLP strategy in the

exchange right to like limit So it's it's not like yeah it's you know these are not totally independent events Yeah I know But again this is also not a plane crash There was a plane crash like two weeks ago the exact same thing where there was a intentional liquidation in the Bitcoin market which is not a small cap asset which is a very large cap asset And the exact same we'll call it attack parameters took place like two weeks ago I think you guys should bet Just saying Wait you're not betting i told I already told you I'm kind of like I I'm in Martingale I don't think I have a decision on which one is 30 days a year Uh no let's say end of the year End of

the year End of the end of the year Yeah End of the year More deposits or fewer deposits in HLP I think I think you should do HLP as a percentage of OI cuz cuz you know the exchange OI might go down Deposits might go down Yeah that that's that's a better metric That's a better metric I don't know what it is right now though Okay I say I say down definitely goes up Definitely definitely goes up Okay So what are we what are we betting one case of sugar-free Red Bull hyperlquid Okay All right Well we we'll we'll figure this out We'll publish it alongside the um the the episode of what the current number is and we'll see at the end of the year Total total open interest as of yesterday was 3 billion Um and yesterday it was at 236 million So

but we went today 7% ratio the ratio of HLP to OI is uh 7.6% Right the OI dropped a lot since yesterday The OI dropped sorry not the OI the not the OI the uh the HLP dropped HLP OI dropped about 10% also Okay It's not it's not like that So So it's at like 7.6% now like the the So we'll find we'll we'll uh lock in those numbers and we'll see at the end of the year uh if I'm right or or if Robert's right So I like this Okay Wait So So did you guys pick who who just just so we have Yeah I'm lower See higher Okay Yeah Yeah That's on the ratio of oi Sounds good I'm going to pin this in our our

group chat so that we have a a memory of the number Okay Good Good Yeah We'll send a send a reminder Okay Um let's talk about um some more positive news Let's talk about what's happening in our good friend Terrun's favorite field DI So big news in DI land Uh SE protocol which is a high performance uh layer 1 EVM chain has announced that it is placing its boldest DI bet yet The SE foundation is exploring the acquisition of 23 andme the genetics company that has uh famously filed for bankruptcy recently Um and what they said was that they are going to defend the genetic privacy of 15 million Americans and

ensure their data is protected for generations to come They are going to deploy 23 and me on say and return data ownership to users through encrypted confidential transfers allowing users to choose how their data is monetized and to share in the revenue This isn't just about saving a company It's about building a future where your most personal data remains yours to control Wow Tarun how can you how can you argue against the magic of DI saving all of our genetic data please prove to me that there's any bare modicum of understanding of any privacy preserving technology known by anyone who works at say Oh I'm waiting There isn't Uh if you told me like someone who's doing a real privacy thing bought it I would it make way more sense If you're telling me

someone who's buying it and it's like we're going to somehow spend a lot of blockchain money and then maybe make it open in some weird way that is almost worse than the people who are just buying it So what you're saying is that you support this if they do it right Yeah Sounds like maybe you should do some consulting with I think you should be an adviser I think you should be an adviser to this I just think I think if you're going to do it and you're going cuz like all the other biders in the current stuff right now are like all these comp bio Okay So I know a little bit about the bidding that's going on for for 23 and me is a lot of people who are lining up are like computational biology companies like AI drug discovery companies who basically want to buy the

data as like training set Um the reason people there's this uproar is that people are like I bought 23 and me 8 years ago and like their privacy policy then said they were not going to share it with anyone and they went bankrupt and now they're sharing it with like people who are getting who who maybe will make like some blockbuster drug out of my data and I didn't consent to that which is fine So like there's two aspects there One aspect is the privacy aspect right like the the terms of service that you initially signed which are now null because the company went bankrupt uh on privacy are not there Uh but secondly the kind of terms of service on monetization aren't there And I think if you're someone like wait is

that is that right like the terms of of through which you bought a thing get terminated because the company went bankrupt cuz there what entity what entity of enforces those afterwards right Isn't I thought there's like a if they come out they're doing a restructuring They're not they're not like liquidating the company Yeah I I Okay this is a good question I kind of assume that that that's what people are are yelling about If only we had a guest who was like a bankruptcy lawyer or something Yeah exactly I That's fair All right Well that's not okay Yeah screw that Okay The the main things people care about in the terms of service are the privacy aspect and monetization aspect right they kind of like those were the two things and all of the people trying to buy the company there's like one set

of people whose entire goal is pure monetization right like the people who are these comp bio drug discovery companies and then there's some people like nonprofits and stuff who are like trying to to bid and then of course there's uh the DI world then they're say they're say and I would say no pun intended that if the blockchain is supposed to help monetization fine That's like a 2017 ICO pitch I'm I'm excited to to to see that fail once more again But if you said something about the privacy aspect I'd be like okay that maybe you could actually be useful and like find a way of like doing this in a privacy preserving way but still making it

somewhat monetizable But I think if you're just like oh we're gonna like let you own your own data and moni I I just don't I don't think I've seen anyone who's successfully been able to do that It's a little bit like this thing Tom was complaining about earlier right before the show about like people complaining about the studio Gibli stuff cuz like people didn't monetize it in on the blockchain or something It's like that is like completely not the the thing going on here That is very true I also don't know how they would buy it because I think there's still like $200 million in debt So unless they have some crazy structuring or you know hey maybe the uh you know the 23 me creditors want some want some say tokens sweeten the deal a little bit tokens for uh I mean the thing is all the other people

bidding so there's like some big companies bidding but I actually feel like I have no clue their chance of winning but I kind of get the feeling that sentiment wise it's like oh people want it to go somewhere else um given given the initial turmoil with the company Um but yeah I I don't know like g make sure if you if you have a plan for like some like preservation of the the the the sense that the original terms of service had then I think like sure fine go buy it go default your validators because you're basically borrowing against their future earnings if you think about it at a high level here's my take on this right now all the data is in a database that's owned by a company

that's bankrupt right in general general putting all the data on a blockchain can be no more private than it currently is right I think there's risks that putting all the data on chain you know has more exposure for the information obviously it comes down to what security measures are being taken what encryption there is what zero knowledge whatever there is blah blah blah blah blah but I don't think it's going to improve privacy and security versus the status quo which is there's a bankrupt company with a database full of info Well it seemingly right now if what turn is saying is correct uh it is true that you know base case some company

acquires that database full of info and just does whatever the hell they want with it Um so that that that's clearly not the there could be worse outcomes A there could be worse outcome worse buyer who takes it super complicated and they publish it on the internet without any security standards right probably less likely but yes that's in principle possible It's in principle Yeah I I I I don't know Like I've I've never bought this idea that like okay you know sort of data ownership means that you take some data you encrypt it you put on the blockchain and then you sell people uh you know if you want to use my data here's the key to decrypt it Like I I've never seen how that solves anything It's also just like I think especially if you

are blockchain people who don't understand the privacy side for doing that type of stuff correctly there's so many ways you'll [ __ ] it up and release everything And I I I feel like that's more the thing I think is more likely to happen is that they spend all this money they accidentally release it in some weird way and then like I don't know North Korea makes a super bug from training their their their bioweapon LLM Um yeah Yeah Okay So what you're saying is that you're not bullish Jordan I think if someone else was doing it I'd be more bullish But I Someone else were doing it Who has to do it for you to be bullish open AAI XRP

XRP Microsoft I think someone who's doing more like T stuff actually actually like like I actually sort of have this weird thing where actually like Nvidia doing using this to prove their privacy preserving H800 stuff that it works is like kind of a good way It's a way for them to have a a data set that's unique to their chips that uh you can't see the whole data set but you can do queries against it in in their GPU And like I I I feel like this is someone like that probably has more incentive to not just like completely [ __ ] things up So okay But nobody in crypto You you wouldn't trust anybody in

crypto to do this and be a good What about the Ethereum Foundation i think like I think like people doing like low-level cryptography advanced credit card stuff like ZKT FHE I think all those people are are would be good but like I don't think that they're going to like figure out how to productionize it because they're they're already Sure Fine All right Let me let me let me ask you this Putting this story aside um it's been I think three months now since you've declared war on DI How how is it going uh since my war on dies I mean I don't know what's where where's bio protocol nowadays I I just kind of I kind of gave up because I was like I'm kicking a dead cat you know it's like I think everyone kind of realized it's like mainly a scam I don't

know 23 and me could bring it back Mixing metaphors a little bit there It's mainly a scam Um there are some well-meaning people who uh just just you know Bio Protocol has 321 million FTV That's pretty serious That's worth more than 23 and me Don't give them any ideas as you now that I mean the thing is they they'd have to admit more than they have currently unissued to get My point is like you know I just I think people have realized like most of the hype at that time was like it was just a memecoin that happened to have a different type of branding It like attracted people who

were like memecoins are gross Those are hype beasts But DI DI is like donating to a nonprofit I feel like a great memecoin holder and like it attracts that's like what I I thought it was It's kind of an affinity scam to to kind of target people who are like memecoins give me the ick But like a memecoin that does social good Oh but I don't check how it does the social good I can't even verify that it did Oh I'm trusting these random five DO token holders Okay great Whatever Bye You know like that's kind of how how 90% of DI is So you're just saying it was memecoins with better branding or more or more different branding like you know it's like targeted a different demographic right like than the the the Salana Den stuff What was that fork from last cycle that

was like we're going to use the treasury to like plant trees the carbon credit one right yeah the carbon credit clim That's right That's right Clim reincarnated Wait wait wait wait Can we look at the price of clim i like I had forgot that thing exist Yeah All right 5 million market cap No just kidding FTV FTV is 5.5 Uh I mean it's really this year it's down like 80% this year Huh I mean this chart I just checked Yeah M uh like Olympus like the OG M is at 430 million market cap It's up 100% this

year Yeah it's been up They've been they've been monetizing their treasury and like distributing yield I I I feel like Omen actually has some secret comeback story You think so future episode will have OM on they ra because basically think about this in the process they raised a huge treasury and then they started monetizing that treasury in DeFi as things went up and like then they're distributing some of the yield back So like it's like a it's like kind of a weird business that's like robber barons or something where like the underlying business has disappeared but they just have this foundation that continues on I I I think they're still building new products So I have I'm not sure but I know that there's there's now real yield coming in So they're like the new Nosis

Nosis Filecoin like I I can think of all the ICO people who did similar things right where they like raised a huge ICO then monetized ICO very well Um EOS or sorry EOS but it changed their name What is their name now vulta block one No no no EOS the chain changed its name to Vault Really yes Yeah Yeah I saw that They did a whole rebrand Well Block One who made EOS and made all the Why were there There were a bunch of rebrands today right like people were complaining on Twitter like Winter Me rebranded Someone else rebrand No I thought the joke was winter rebrand Yeah exact logo like short small green text It's the same Okay Okay Okay cuz I I just saw like Afghani like fighting

haters in in the replies somewhere like you don't know the difference between a brand update and a rebrand or something and I was like what the [ __ ] is happening here like it it hey spring it's spring it's time for uh fresh coat of paint I I I respect that All right Well speaking of a fresh coat of paint there is a new stablecoin bill now working its way through Congress So before we mentioned the previous version of the stablecoin bill called the genius genius act uh that was sponsored by Kirsten Gillibrand Uh we now have another one in the house instead of in the senate called the stable act Now the stable act was introduced by French hill Yeah go ahead petition for prediction markets to bet

on the names of these bills Well I I think it's somewhere between stable and genius It's sort of stable genius you know Oh I did not that did not occur to me Wow You guys didn't realize that the whole point is it's a play on Trump's quote about being you know a stable genius No No Really yes Again wait but which one which one came first no Originally yeah Yeah Genius came first But I thought it was like the stable genius act It was the very first iteration of the you know backy No Wait Are you making this up or do you do you actually hear this no I'm serious So they were making fun of Trump in No it's not making fun No it's a celebration Oh I do not believe you Where are you

getting this i I don't know The internet I thought this does not sound real There's no way What no I mean well Robert was allegedly in DC so uh you know he's uh maybe trust him on this but this sounds like DC hearsay There's just no way cuz they all cuz they cuz like first the G the Genius Act came first and it was um uh the the previous version of this was not called the stable act So I think it's a coincidence I think it's I think it's totally a coincidence There's no way that you would call it stable genius because now that's like an insult People use it to make fun of Trump Do they i thought it was I think they're things that Trump himself that other people think are insults He doesn't

think they're insults He's like teflon the teflon dawn thing is this this Okay Well regardless of whether or not stable genius is meant to be a joke um so anyway this new bill is called the stable act So uh just to just to give a sense of the differences between the stable act and the Genius Act because these we now have two versions of this bill These two versions are going to be competing in the House and the Senate to get reconciled into one final bill that's going to eventually pass And we don't know which pieces of which are going to end up making it into the final bill So relative to the Genius Act here are the big differences between the Genius Act and the Stable Act So first and foremost the Genius Act is probably more industry friendly Uh it's more flexible It allows bank and non-bank

stable coin issuers alike So you don't have to be a bank in order to issue a stable coin Uh it allows for state regulators to oversee a stable coin issuer rather than just federal regulators And it has a big focus on interoperability Um it allows you to pay yield potentially in some situations Um and uh it's it's it's basically just more encouraging the the growth and creation of stable coins The stable act is more restrictive Stable act only allows the Fed to oversee stable coin issuers So you need direct Fed oversight Only banks or approved bank subsidiaries are going to be allowed to issue stable coins under the stable act Uh there's a much heavier compliance regime under the stable act And uh the the the overall sense you're going to get is that you

know no yield coming out of these stable coins A lot less um uh creativity you can have around the types of assets that you have in reserves Um and there's also going to be a two-year moratorium on algorithmic stable coins although currently existing stable coins are going to be grandfathered in So that's the stable act Robert you said that you were on DC making the rounds talking about stable coin legislation What's your sense of how this bill is being received and how do you think about it yeah So I happened coincidentally I mean timing unrelated to you know stable coin legislation being top of everyone's mind you know had a trip to DC on Tuesday and Wednesday had you know about 15 meetings with members of the house Um and obviously number one conversation the

whole time was on stable coin legislation just because it's so close I think there's obviously a tremendous amount of excitement from both parties for creating legislation that's pro- crypto and non-controversial Um and I think in a lot of ways stable coin legislation everybody both sides of the aisle you know protek a little bit tech scared realizes that we need to enshrine law around how stable coins work It's too important not to And so I think there was a widespread consensus that stable coin legislation would obviously be the first major crypto legislation that gets passed because it's also relatively

simple I mean we're talking about a couple differences between the House and Senate side that will get resolved you know in the near future Um you know there was obviously a lot of conversation about what comes after stable coin legislation I think there's a widespread consensus that it's market structure in some variety and you know I think it feels a little bit farther out So most of the conversation and focus was really on stable coin legislation and you know to reiterate widespread support you know and granted I was talking to members that were in general you know more aligned with crypto than skeptical of crypto So there is some like perspective bias in there but you know full support for stablecoin legislation and a widespread expectation

that you know any differences between the house and senate would be easily reconciled I think the first time I ever heard the phrase narrow bank was 2009 I'm like everyone and their mom has been talking about narrow bank legislation for like okay this makes me just sound like an old Kromagin but I'm like everyone's talked about how like oh you should have these kind of narrow banks that kind of very restrictive on like the types of yield they can offer but like So can you explain what a narrow bank is so I guess the original definition narrow bank and the current definition deviate So I'll give you sort of like some intersection um narrow banks like I think especially after the financial crisis there was

kind of this view of like can you make banks you know like at that time there was like hey do you put a ton of regulations on banks to say like okay you can't trade or do these types of activities or whatever or do you try to also just make a completely separate bank for consumers that can only do very simple loans and deposits and does not really do much else So it's like a little ironically a lot of the early fintech apps and you know currently like Squareash Venmo stuff like that they sort of function as like pseudo narrow banks where like or N10 or in Europe and stuff like that where you can deposit but there's not many products you can off earn like you can maybe buy

treasuries indirectly or in the case of Square I guess Bitcoin Um but there's not like the principal who's holding the funds is allowed to really go and earn yield in very exotic ways Like they can't have a prop trading desk They can't they can't have like you know they can't buy weird bond portfolios Like they're very restrictive And in some sense a lot of the stable coin bill really reminds me of neurobs It's like the no yield on stable coins the kind of how the bank charter is used And it sort of feels to me like it's kind of interesting It's like took all nearly 20 years from the first time this like concept existed and then it took this like new technology to

actually make it kind of eventually adopted So I just sort of feel like we're there's this weird feeling of like history repeating itself or taking forever to repeat itself because you know there was this like 10-year period where there were like no new banks in the US no new bank charters right i I was going to say my understanding of you know narrow banking from when it was originally proposed is a little bit different So the interpretation I always had was that you know a narrow bank is one that would park pretty much not pretty much 100% of its deposits at the Federal Reserve at like the discount window and maintain full 100% liquidity period Just say we're we don't need any investment analysts or loan officers 100% of it just goes to the Fed and

takes whatever they're going to give us turn around take 10 25 basis points or whatever off the top and pay that rate variably to all the depositors and there are no other services It would basically be a wrapper around the Fed in a lot of ways Yeah it's a full reserve bank It's a full reserve bank with zero with 100% liquidity zero liquidity risk And like you could do this hypothetically with like 12 employees and scale to any amount of size And people hated the idea of a narrow bank because a it would compete with the existing you know you say people didn't like it The Fed didn't like it People like the Fed Yes PE people loved it but the Fed didn't like it for a lot of reasons but

it would compete with the existing you know fractional reserve and commercial banking sector right that increases the money supply through loans as opposed to just parking it at the Fed right and you know they thought that the radical simplification would also dry up liquidity for mortgages and for things that are good and that narrow banks well here's here's the way that I would describe why the Fed rejected the concept of a narrow bank is that it restricts the Fed's ability to directly intervene on the money supply Right because it's not as though nobody would give mortgages anymore It's that it would move to private lenders Right private lenders would start offering uh rates on mortgages because ultimately

yeah people want you can you can borrow money for [ __ ] anything in principle right and house is obviously good collateral in America So uh but once the market moves into private lenders the Fed loses a lot of the mechanism to be able to directly intervene on the the basically expansion of the money supply So well no if anything they'd have more ability to intervene because the lever of what is the overnight rate changes everything for everybody everywhere If there's more also have the reserve ratio right the reserve ratio is the second lever That's a very powerful lever that can instantly like the changes Yeah Increasing rates or decreasing rates obviously you've got the zero lower bound um which you know I guess you know technically you can cross but the US has not um to go like go into negative

interest rates but second it's just a much slower mechanism to go into the market then okay now as banks you can lo loan out everything that you have in reserves and just like go hog wild that can change much faster Which brings us back to the Genius Act and Terrun was saying that stable coins are like narrow banks Although I would say with this legislation are not like narrow banks But well no I think what he's saying is that the stable act in particular because it doesn't allow yield right why why aren't they allowing yield in the stable act presumably because they don't want it to to compete with commercial central bank commercial okay I I thought Tan was saying that makes it more like a narrow bank but the whole point of a narrow bank is you pay people incredible rates and it's fully liquid Well so I I

think what he's implying is that you could create a narrow bank using a stable coin if you don't disallow paying yield Correct Right So under the stable act you cannot really create a narrow bank that would compete with commercial banks But under the Genius Act you could um you could basically have a stable coin that just holds a bunch of treasuries and pays back all the you know treasury yield minus 20 bips or whatever Um and that ends up becoming a really easy business And you could argue that's kind of what Tether is you know like I mean obviously they don't pay yield but if they did it's an incredible business model It's very labor efficient They have like what 90 people or something um over the you know hundred billion dollar plus that they hold in assets So that's a pretty damn good business Uh I I I think there is there

is something there that this is kind of a backdoor way to reintroduce the concept of a narrow bank but in a way that uh we're a little bit more comfortable with and has broader geopolitical advantages whereas a narrow bank would really only harm commercial banks without having any offsetting benefit to the US dollar or to you know the internationalization of the dollar as as it's often called right the advantage of stable coins is that okay even if you do have something that competes with commercial commercial banks It it also increases the overall TAM for the dollar by exporting it internationally Um narrow banks don't really do that It's purely zero sum between commercial banks and and narrow banks So I think from a policy perspective that's like the reason why

you might look at it differently for stable coins But I I do agree with you Terrone that it's very likely that when uh you get central bankers andor um even even banking executives looking at this thing they're kind of like "Yeah actually we should only have people with banking licenses being allowed to to uh to issue stable coins because at the end of the day this is kind of regulatory capture 101 is you really want to make it so that a smaller and smaller number of players can capture this market if you're a bank." So Robert given your time in DC what's your read on how the final bill is going to go do you think it's going to look more like Genius Act or look more like the Stable Act more restrictive or less restrictive i think it's going to

be less restrictive with the exception of yield I think the commercial banking sector as it currently exists doesn't want to see yield on stable coins and I think with that exception it'll be a looser bill but with the one caveat being no yield on stable coins That's my guess if I had to just put a line in the sand Right And honestly it is one of the weird rackets in banking that like you know I have I you know I have a Chase bank account and I'm like why doesn't my cash automatically get swept into money markets and then like get drawn the moment I want to spend it right Exactly

Why is it like purely a function of my laziness that my money like this is so trivial to do if they would just do it for me but if you don't do if you don't do it yourself and a lot of people don't do it themselves your cash is just sitting there I think this also true for like brokerage accounts that a lot of people just have their money sitting there doing nothing and like there's like one button to move it into the money market Uh and a lot of people just like don't and so the brokers just make shitloads of money on people just kind of being lazy with their cash that they haven't swept yet Yeah I mean brokers make money primarily off of interest nowadays There there was a FTC um I guess lawsuit or investigation to City I don't know if you read about this where

they had two different savings products that were basically the same name but one was this like one BIP and one was right Yeah And then I think actually uh the new Trump admin dropped that So um we'll never find out what happened but um you know City gets investigated and the stables get away with it Yeah Yeah You can't lower the rate for new customers very easily but you can roll out a second product that goes up and all of the old customers were left at the interest rate that didn't go up Well but but ironically you know if you think of this as like a cash account right um stable coins even if you're not getting sharing yield like if you're not getting yield on your Tether or your USDC um just lending it in the market gives you reasonably high yield Not you know it's

not necessarily treasury rates but it's pretty good Um I don't know what it is right now Is it is it above or below treasuries i think it's above for five six% But I mean you can also Okay I I think the idea with the bank is you can choose instead of bundling all this together you can unbundle it and choose your your risk profile You could put it into private credit You can put it into you tokenized treasuries You can do whatever you want Um versus having you know a single entity kind of do it for you So um you know you can go and and do that if if people so desire Yeah that makes sense But if there's a reason why stable coins do win and drain deposits out of the out of the banking system my guess is that would be the reason why is

that your cash is always earning a yield regardless of how lazy you are So anyway all right we're up on time We got a wrap but we will be back next week Thank you everybody Thanks everybody See you [Music]