How blockchains earn revenue and why they hold value

Transcript

what's up friends welcome to web3 academy a place for entrepreneurs creators and marketers to explore and learn how to use web 3 to transform business models and create thriving communities enjoy this next episode [Music] gmgm welcome to web3 academy it is the weekly spotlight uh i'm jay hamilton and as always my co-host kyle rehead is with me here what's up kai what's up friends how's it going today we have one of my old friends on the podcast who is a reformed hedge fund investor termed crypto investor uh we've got mr sam andrew sam welcome to the podcast hey guys uh thanks for having me

what's up and hey to everyone listening so excited to have you here man uh give us a little bit of a bio on sam so sam spent nearly a decade at blue mountain capital a 22 billion dollar nyc based hedge fund uh he was responsible for sourcing underwriting and overseeing investments and now he focuses all of his time on crypto taking a seasoned investors approach to researching and understanding and valuing crypto assets something that kyle and i were both really impressed with when we started to read sam's writing which he's been doing on his sub stack we'll definitely be putting the link in the show notes you guys are going to want to check it out

but really today we're going to dive into the business case for blockchains understanding more what is the value that blockchains create are they profitable how are they profitable what are their costs what are their revenues uh and are they sustainable and where where are they going we're going to talk a lot about ethereum as well not because we're trying to be ethereum maxis uh but because ethereum is a great example uh to use for a lot of blockchains um so buckle up this is gonna be an incredible episode uh that really i think is gonna set a lot of foundation for a lot of people out there that are trying to get a better

understanding of blockchains which i know i am trying to figure out every day so yeah really really excited to get into it um one thing i got to mention is sam being an old friend of mine uh sam you got one of the best laughs there is so i really i really hope you you treat us with your laugh well um i like to think i'm like every comedian's best friend or biggest fan uh because it doesn't take a whole lot for me to laugh so if you don't hear it that may be more reflection of your poor joke making [Laughter]

totally fair i'll i'll accept that i'm going to start uh i'll start working on my jokes now for the end uh okay let's let's start as we always do when we bring someone on the show uh just give us a a background sam of um how you sort of went down the crypto rabbit hole when did it start why did it catch your interest um why have you decided to spend your time researching focused on crypto yes so as you mentioned in the bio like i i fit the mold of like someone in traditional finance right or tradify as it's kind of commonly referred to now i did the like investment banking thing for a couple years i spent eight

almost nine about nine years at a hedge fund and it was in 2017 that i like discovered crypto and at the time like crypto was bitcoin right you remember it's a bit ironic uh but you may remember the like ico boom which was actually all based because of ethereum but like none of us knew any better so like we we thought about bitcoin right and i remember being on the you know the office and like msnbc was usually tuned up tuned in and like you'd have prices and like market news whatever and all of a sudden they're like quoting bitcoin prices like all of a sudden everyone on wall street was aware of bitcoin and i'd probably clued into it maybe a little bit before that foray not a while

before um but like reading the bitcoin white paper and then trying to understand like what this was one of my work colleagues at the time was also quite into it so we'd kind of go back and forth on it try and understand what it was um and like largely the rest of the firm like wasn't that into it um and then by like 28 you know mid-2018 it was like wait but what like what was that thing that just like totally flared out like you said it was gonna be a big deal and now it's totally collapsed and i'm just like oh yeah okay i guess i got that one wrong um but i think that was just you know one of the early at least for me one of the early chapters um and it kind

of piqued my interest and subsequent to that like you know in the years subsequent to that it remained kind of a hobby of interest i would follow bitcoin then like i got more into ethereum and it was just like oh this is like you're into bitcoin this is like bitcoin but better it's programmable and like you can do more stuff it's like okay i could look into that start buying some ethereum that was mostly in kind of like you know 2020 the depths of covid asset prices had just totally collapsed i got time on my hands i'm researching things and then you know so bought some like ethereum and then all of a sudden back into the year certainly into 2021 and it's like oh my god this is worth a lot of money i actually figure out what this thing is and

um at the time i was pursuing like a few different entrepreneurial ventures and so crypto remains like um like a hobby like something just of interest that i kept going back to and then you know finally several you know towards the end of last year i was just like man like i've been following this thing for like four five years like all of a sudden it dawned on me that like this is where i need to be spending all my time um and i think that was kind of one of the questions you got to is like what what kind of got that that was the kind of arc of how i got to crypto um but why i'm kind of committing all my time to it now and there's a number of

reasons i'll just kind of flow through them because i think it's interesting hearing from the different folks in the community how they got to it and why and certainly why they're sticking with it um so for me it starts to just like i think this is potentially like a revolutionary technology and it's like really feeding my curiosity of like learning a ton about this stuff and it's like super fun and like the community you meet in it is a real driver and i know community gets kind of thrown around a lot and for me what that really is it's just like this band of like misfit trailblazers like there's a bunch of like really smart but like also eclectic people that like some came out of

you know traditional finance in my capacity but a lot of like really smart engineers and software developers out of like really noteworthy either companies institutions but then there's also like i mean guys on discord that are just like so well known or know so much about the space and they're like yeah man like i hang drywall like nine of five and i do this in the evening or like another dude i met he's like a retired uh like an entire retired navy pilot in like his 70s and he's got like some weird funky handle and he's just like it's just like so strange the people you meet in the space and like i can't help but like laugh and uh or like laugh with them and like it's just like so

fascinating um so that's what like really do me in there's also quite frankly like a bit of a regret minimization of like if i you know if i think for like five or ten years and it ends up kind of crypto web three however you want to call it ends up being you know as big or nearly as big as the internet like i will regret not being part of it right and i think through like already the arc of my career in the when there was like one massive you know structural like mega tsunami ship right and that was the internet in the kind of 90s and early 2000s which i was like in school during that time and i like aware

but like i wasn't i wasn't part of it in a professional sense and then the second kind of like big shift was you know into mobile and mobile i was very much you know in the professional world during that period and watching it and kind of participating it but participating kind of as at a distance as an investor and there's this realization of like man i started like two big waves in my life so far like i don't want to miss the third big wave um and so it's just like i gotta be part of this and to be part of something that i think can have like a pretty like meaningful

impact on the world for me it's just like personally really fulfilling um and i also think i can be like a pretty valuable contributor and you put those two things together that like you know it gets me up in the morning i love it i love the i love that so many people talk about when they came in and the what would have been the third crypto winter 2018 was when it started i think was when a lot of people came in right before then and then fell off and so we lost a lot of people and now here we are again entering or in the fourth crypto winter but there's a different energy this time right there's a building energy you talked about

community i have numerous stories of the same of meeting completely eclectic different background people all with this uh um thirst for for learning i think is really the the common thread throughout uh this desire to be on the forefront of innovation uh and to be part of as you said uh i really like that term used regret minimization i haven't heard that one before uh yeah to be part of something early on that is a really potentially you know going to change the world at least that's the way we believe uh it'll lead to uh so yes i really really agree with a lot of the threads let's jump into

go ahead you know what let me just pause on that regret minimization i found that to be a really good framework to think through big decisions certainly big personal decisions i can't totally like clean this like clayton as my own there's this fascinating jeff bezos 60 minutes interview from i don't know probably sometime in the early 2000s like early days of amazon and he talks about you know he was also former hedge fund guy d shaw and like a really big well-known hedge fund and he made the case to you know the founder of the firm now like i'm going to leave to go do this and

the founder was like you're nuts like do this either internally or like but you're working on this hedge fund you're gonna make all this money here and it's gonna work and like he's like yeah but i know if i forecast myself in five to ten years time and i don't do this even if it fails i will regret not even having at least tried and that's i find a very good lens to think through longer term decisions that's great i love that look at great tips great life lessons covered from sam oh this is awesome uh i thought you were going to talk about the time we went to tony robbins maybe but that's uh that's a difference lots of life lessons came out of that okay let's let's start uh

with a a quick summary of why blockchains are valuable so you wrote a post on this we highlighted this post uh on monday in our newsletter and we actually kyle did a full reading of this post on monday uh so if you haven't listened to that podcast recommend you go back and listen to that if you want to understand um a little bit about why blockchains are valuable but give us just sort of the the summary of that sam uh to start off sure so how let me tell you about how it kind of came to this thinking like why watch things are valuable um i got like [Music]

really drawn as i think the number of people kind of drawn into the hype the innovation and like things are just moving so rapidly that you're kind of always like jumping onto the next thing and i realized that that was a bit kind of miscalculated almost like taking a step back and like very much kind of first principles approach to like what this thing actually is and why is it valuable because i think a lot of people talk about blockchain as being valuable in anticipation of what may come right like oh blockchains can disintermediate the payment system they're going to revolutionize the art world they're going to you know obliterate traditional finance like all these things of like when

blockchains achieve x then they will be valuable and although that may be the case that they may do one or many of those things um that is like proof down the road right and that's going to be confirmation but it's confirmation that of things that exist today and so what are those like features that exist today that are inherent in the blockchain that make it valuable and that's what's most interesting about why blockchain is valuable and to me there's like four key features one is to centralize two it's functional three it's composable and four there are native economics right in the form of tokens um in the blockchain and those

four things together produce what i've called like the innovation super cycle and the innovation super cycle is effectively this uh this breeding ground of innovation that has this feature set unlike a feature set that existed in any other prior era or development medium that makes it especially attractive for developers to develop in for community builders to be a part of for artists to be a part of for financiers to be a part of for users of all different types to be a part of sam i i love the the innovation cycle or the super innovative super innovation cycle is that what you call it the innovation super cycle yeah

innovation super cycle sorry i love that i think we see that is that's exactly what's coming here with crypto with web3 um and i mean the reason this all happens is is because of blockchain right um i want to flip the switch a little bit here now and um and just to start talking about like blockchains and how these things actually function or work in terms of just like um it's revenues and like it's just sort of like business models around it because ultimately um you know these things are great and everyone like i think everyone agrees that blockchains are valid but i don't think people really understand the underlying like metrics of this all and i think you just wrote a really good article on sort of the i think you call it the business case uh of ethereum in this instance but we'll sort of talk

blockchains in general um so let's just think of this like this blockchains are a business right they sell block space right just like um apple sells phones and you know uh facebook sells ads etc blockchain sell block space so can you just sort of walk us through like why some blockchains uh are more expensive than others and we can think of maybe you know that as like revenues for the blockchains but like why are some expensive why do some charge more why are some super cheap like how do we differentiate between that sure um so why start like let's first start like what is revenue for a blockchain right and just like a regular business

revenue is based on the product it sells and that revenue is a product i guess no pun intended but like a product of price and volume and in this case for blockchain your price is your gas price gas price is just a kind of crypto term for the fee it costs to process a transaction um and then the number of transactions right gatsby your gas fee times the number of transaction that yields your revenue simple as that right and then say okay what's cost base well cost base is you think about like proof of work networks um

your cost base is the cost for the miners to process that transaction um and so if we take ethereum as an example and most kind of work a similar way certainly proof of work networks um then pretty much all the call all the revenue you generate in transaction fee 100 of that gets paid out to miners um to validate those transactions right to ensure the integrity of the transaction not only do all the all the revenue gets generated gets paid out to those minors in addition to that you're constantly issuing them new tokens right so think of it even just from like

a business standpoint all the revenue you're taking in you're paying out in cost and call like cost of goods sold right to process those transactions and in addition to that you're continually issuing new tokens right or in the case of a business continuing issuing more equity so that's diluted to the existing owners to run the network so you're like this thing is not profitable not only is it not profitable like how is it ever going to be profitable if the revenue matches the cost they're the same and i keep issuing more tokens like there's massive dilution happening right like why is this thing economically valuable

so hold on when you're talking about profitable let's try to let's try to break this down we have the revenue which comes in as a result of gas fees so people paying to use it and to use that block space right so that's the revenue but what you're saying is i guess there's two expenses maybe is or all that revenue one goes to the miners right um to pay for them to actually like validate and you're saying there's a second expense um which is basically uh the the inflation i don't know if you want to call it inflation but um is the amount that the the blockchain i guess is paying to the miners for them to issue new tokens can you explain that yes so let me explain that second one for more detail if i'm a miner i get two revenue streams

right i get you know my gas fees yeah right and that's the cost you know my cost of processing transaction but it's almost as if that in and of itself is not enough to offset my own cost of running my mining operation so in addition to that i get given in the case of ethereum two new eth per block and a block is simply just a whole bunch of transactions so those are the two costs right both involve the you know including ensuring that the security of the blockchain but those are the costs um of operating a blockchain and right just to be just to be clear here

why why these costs are being spent and really the value of a blockchain is the security that that it's offering and we're going to talk later and we're talking currently about the miners and proof of work and i'm just going to tease that at some point we're going to talk about the merge and proof of stake i don't want to jump into that right now but really what we are talking about is there's a lot of value and security right people want to pay coming back to this wire blockchain's valuable that you talked about earlier people are willing to pay to have secure digital property online and secure transactions so there's value in

that outside of the the profit and loss yeah jay that's a great place is a great point you made one we probably should have started with of like what just yeah you know what are the costs that we're incurring right why are we incurring these costs it's as you pointed out security i would also posit that like it's also just like processing the inputs right processing the transactions but ultimately like watching it's all about security so right you maybe see maybe selling block space but you're really you know like a brand sells more than its product you can sell a lifestyle a blockchain sells more than sells more than just block space it sells security right right and okay so it sounds like

proof of work anyway it's not neces and i think as we dive into proof of stake too we're gonna see the same thing but like none of these blockchains seem to be very profitable right they're issuing lots um and we're not making or they're not making enough revenue to pay for these expenses now does this really matter i mean a blockchain doesn't necessarily have employees i guess maybe you could say the miners are its employees but not really it doesn't really have any other expenses not like it needs an office and it needs to pay for you know pens and paper and whatever else i don't know what offices pay for these days but like do blockchains need to be profitable and if so why can you kind of dive into that yeah blockchains absolutely need to be profitable right that's at least there needs to be a path to profitability

right and kyle you're right no blockchain is profitable now they're all burning millions of dollars a day um that's a like that's a problem right it's because their costs are way bigger than their revenues um and yes a blockchain needs to be profitable right and it absolutely needs to be profitable in my mind because otherwise why do you want to mine eat right or why do you want to mine or validate you know if we're talking we're kind of starting to use proof of work and proof of stake interchangeably which we'll we'll probably get to that at some point but why you know if i'm a minor or a validator that is critical to ensuring the integrity and the security of the

blockchain if i'm not making money doing that why am i doing it right i've got costs to mine this blockchain right and if i'm not and if the chain is not profitable then it loses security and it once it loses security it loses kind of the confidence of the people that are operating that network and then fewer developers come and develop and then fewer pro you know apps get built on it so the whole thing unravels pretty quickly so that's why having profitable blockchains right or certainly a path to profitability is tantamount in ensuring the security of the blockchain now can't can't

the price of a token just go up anyway even if it's not necessarily profitable from the underlying like uh fundamentals price i mean if you look at solana for example i'm just looking at daily issuance their their their daily issuance to their expenses is basically close to five million dollars a day um just to pay their this is proof of stakes this is to pay their stakers not their miners but they make basically zero in revenues because they have almost no gas but i mean they're they're token i mean i guess not recently but had continued to go up for a while and so like that pays the stakers and makes them happy so like is is what i'm saying is like is the token price then related to the profitability of a blockchain or is it just something completely different

you may not like this answer but it depends maybe let me because there's two things that will drive that um one is um like proof of stake versus proof of work um and uh and then also the like the scaling ability particular of the cost structure of whatever blockchain we're looking at those will drive the kind of profitability and ultimately kind of where the where the price is going um i think maybe if we use ethereum as an example that will maybe help kind of

tease things out a little bit okay so we talked about you know kind of ethereum not being profitable right now and why it needs to be profitable and so you know in this case like what do you actually own if you own like an ethereum coin you know right now it's like you own currency right currency in the native economy in the native ethereum economy because to do anything if you're in you it requires me and in my opinion you also own like a speculative token right there's no fundamental value the fundamental the value that is created on the ethereum blockchain does not accrue to the eth holders

right because as we went through like all the revenue gets eaten up in cost and then some in the former dilution of additional tokens and so people own eth on the belief that like something is going to change right and they have actually pretty good reason to believe something is going to change because it's actually been like telemarked for like the last couple years that like we're implementing eip1559 which was implemented last summer right and that had been forecasted and then we're going through what's called the merge right and that had been talked about it's even like prior to 2020 like it's been a couple years in the works right and so markets are generally forward-looking and so they're anticipating like kind of big

changes and this merge in my opinion is a huge deal and it's a huge deal because all of a sudden ethereum becomes profitable and the value that gets created on the ethereum blockchain starts accruing to each token holders that's a huge deal right um so when i refer to the merge what that means is ethereum is currently proof of work proof of work is um as a consensus mechanism that allows minors which are the people who people that effectively run like big-time computers um to ensure that each transaction is like

properly inputted on watching um whereas proof of and they get paid per you know they get paid to eat per block and a block is a whole bunch of transactions proof of stake is a different consensus mechanism right um whereby now we call them validators they validate instead of miners they validate transactions and they get paid for based on the amount of total eth that is staked and state e think of it as like a security posit i will put up a whole bunch of eth and i will go and ensure that these various transactions are correct

and if i falsely say that a transaction is correct when in fact it is not then my if my stake eath will get burned or sorry get slashed and what that slash means is effectively like you lose it you were a bad actor and so the east that you state as the quote-unquote security deposit gets taken away from you um and so this murders a huge deal right i talked a little bit about how it changes structure but it's huge deal one because it's more secure too because it's environmentally more friendly and three because it's economically viable and we can touch on all three but probably we want to focus a little bit more on the economic uh viability of it um and going back to kyle to your question

of like well does how does this affect the eth you know these price is for just you know token prices in general a lot of them are driven off the speculation that something is going to change in the case of ethereum like something is changing and something you know has been in the works to change for a while and that is this conversion from proof-of-work to proof-of-stake which all of a sudden makes the blockchain profitable and the value that accrues on the blockchain or ethereum in this case will accrue to the token holders so it means the more revenue the more the adoption the more the gas fees the more the revenues much lower cost base that value will it becomes profitable

and that value and then accrue to each token holders can we sort of i don't know if you have the numbers handy i know you had them in your article um but i'd love to sort of dive into the difference here of like the revenue and expenses uh from proof-of-work to proof-of-stake because i think like what you said one of the biggest changes here with the merge is the tokenomic structure it's not gonna lower gas fees or anything like a lot of people think it is to go green like you said um it so we don't have all that energy anymore but it's the really big unlock here is this this changed tokenomics right it really significantly reduces expenses and thus makes ethereum profitable which thus is then good for the eth token price which thus is good

too for this people securing the network right which is all the things we want we need that in blockchain we've already kind of established that can you walk us because the changes are actually like massive can you sort of walk us through those numbers or just like what you're seeing with the change from proof of work to proof of stake sure so there's just kind of two steps that are happening here one of which has already happened which is the eip1559 um so let's just think like simple proof of work you get a certain amount of revenue when all in the form of gas feeds all that goes back out to pay the the miners and

then in addition to that you issue them um new tokens so simple numbers right now and i think putting numbers to this will help just illustrate how big of a change this is right now there's about give or take it could be pretty balled out let's say like three thousand in daily eat revenues right so that 3 000 is revenues of each coming in and then that's 3 000 getting paid out um to miners let's assume for the simplicity sake eip1559 does not exist in addition to that if you

like issue about 13 000 tokens right to produce that 3 000 of ethan revenue right now let's talk about eip1559 for a second what that means what how eip159 changes things is instead of the entire amount of gas fees being paid to the miners the gas fee is split in half there's what's called the base fee which gets which is kept by the network right i think it kept by the network and then it's used to burn each so what does that mean is that now some part of the revenue is kept by the network and i'm using that kind of kept in quotation

marks it's not technically kept but for the sake of this explanation it makes a bit easier um and then it effectively retires that e it means it's retiring it takes it out of if the number of ethereum or e tokens outstanding so what's your result like there's fewer each tokens outstanding at the end of that burn mechanism um and then the the miners get paid the remaining portion of the gas fee which is called the tip right and the tip is like you know you can pay them you can pay more if you want your transaction to be processed faster um so now when we get to proof we've get implementation of eft 1559 this burn

mechanism right and then proof of stake at the same revenue of about 3 000 feet per day now the sudden you know you're keeping about 85 of that revenue that's coming in right think of that as like your gross profit right and that so the other 15 is what gets paid to the in this case the validators right that's the tip so now you've got a business that's running at an 85 gross profit margin right and then in addition to that you still need to issue tokens right but you're going to issue tokens to the validators

based on the amount of eth that's staked right and now we can make different assumptions as to how much each has staked and so forth and we can get into that but we've got a sense of that right now because there's on this kind of test chain there are a number of validators and we know the kind of yield that they're generating so we have like a pretty comfortable uh assumption as to what that could be because there's this test case and so from in the proof of work when you're issuing 13 000 new eth tokens per day right which is why i was so lost making now under or soon to be under proof of stake ethereum will issue about 1700 um

new eth tokens per day right so wow that's i mean that's uh that's that's huge it's like a 90 reduction yeah right and that's that's enormous and so all of a sudden now um ethereum is profitable and then so those profits how that accrues to the token holders is heath gets burned think of it like as a share buyback all of a sudden you know he gets retired from the network there's outstanding so if the network value remains the same same value you know the value per each increases because there's fewer eth outstanding right um

so that's a huge deal basically what you're saying i'm trying to figure out ways to put this into easier terms for people to understand is like imagine a business where it's going to have the same revenue as it had last year but this year it has a 90 reduction in expenses and it's buying back i don't know what the percentage was but whatever amount of its own shares as well right so it's like it's an insane i guess when you think about price of tokens and this could be true of anything whether this is the us dollar or you know equity or whatever it's all about supply and demand right um and so any unprofitable blockchain is just inflating kind of like the us dollar right our us dollar inflates and it's worth less that's because it's just

inflating there's more supply and so every blockchain is just creating more and more supply of its token and eventually that means price is going to have to go down but eth with the merge and with the ip1559 um is about to go into a world where it's no longer creating still creating new eth but net it's actually decreasing every single probably day i guess because it's burning so much and it's issuing way less does that sort of make sense that is that is correct right all of a sudden you've got your same revenue costs are down by about 90 and you're gonna have fewer e to outstanding which also kind of begs the question like how is cost just going down 90 like what just happened there

and i can kind of explain that as well because that's like you're like oh my god this is so profitable and like the use case for is still there we were talking about like why you know kind of blockchains are valuable and you get into theory in particular but maybe that's a separate discussion so revenue's still the same cost structures drop dramatically and so like why uh why is that and the reason is because simplistically in proof of work is it's the race to do the work to um ensure the transaction was properly inputted right the first one that gets there and the way you can increase your odds of

being the first one to get there is get a ton of computing power right and so it's capitally very intensive these are not just like our laptops that we're having this conversation with these are like specialized very expensive computers that are used to do this to process things incredibly quickly not only is there a capital cost to doing this but there's also high operating costs right to run these computers you need a lot of electricity right and so you generally want like electricity but that's also why you know the term mining is actually somewhat similar to traditional like resource mining right like blockchain

mining is similar to traditional resource mining in the sense that it is incredibly capital capital intensive right it is also incredibly energy intensive and as a result of those two things it's terrible for the environment so you're like that's the existing cost structure under proof of work right for miners now pivot to the cost structure under proof of stake right well proof of stake is not a race right validators and proof of stake get chosen at random so having all this high expensive computing power doesn't actually help you when the whole thing is random to begin with

right and it's done in such a way that you can you know the computers were using to have this conversation on that's a computing power that's enough to generate um block validation i think one of the there's a great explanation by the way to explain why it's i actually didn't even like that was really really good um hopefully that helped the listeners understand as well the other big difference between proof of work and proof of stake that i've seen um is okay so for for any price of any asset it's all about again supply and demand how many buyers are there versus how many sellers there's more sellers right and price goes down there's more buyers price goes up in proof of work because of what you said that's resource

intensive they have to pay for this equipment they have to pay for this electricity all that bitcoin that's getting bitcoin or eth sorry we're talking ethereum here but ethan proof of work that's going to these miners they actually have to sell that e because they need to pay for electricity they need to pay for their equipment et cetera right so that's a lot of cell pressure on the asset whereas when you switch to proof of stake like you said it's not energy intensive at all they can just run it on on a laptop it doesn't take a lot of electricity and so now you have i mean one a massive reduction in the amount of eat that you're giving to these people but also they're probably not selling it or like why do they they don't need to sell it they don't have to pay for much

electricity they don't have to pay for much equipment so you also just have so much a massive reduction in cell pressure on each token itself from this which in my opinion and i don't know you're the investing experts you tell me also is very bullish for the price of of the token which again is good for the security of the of the entire network right yeah kyle you hit the nail on the head there like this you know from an investment standpoint we can talk about whether or not this is priced in and how to think about that that's maybe a separate discussion but like this is a you know there's so many facets as to why this merger is a big deal this is another one where all of a sudden you go from ethereum in this case being a structural

sell market right miners need to sell every day the e they get issued in order to pay for their dollar denominated cost of running their mining operation right right now i estimate that about 75 of the eth that is issued to the eth tokens that are issued to miners gets sold right to fund their operating costs so that means there's about 7 000 eth on a daily basis that are sold to cover costs that equates to about 13 million dollars a day of cell pressure right which you know you accumulate that that's about 4.6 billion dollars a year

in cell pressure every like if you think about it another way there's 4.6 billion dollars worth of demand that needs to be created to keep the east price constant right now when we move to proof of stake because it becomes profitable right it becomes profitable mainly because of the cost structure we just walked through of how it's being totally inverted and because of this burn mechanism through eip1559 where all of a sudden it's buying back eath right so one you don't have the validators don't really need to sell much ease i assume you know they sell ten percent of the ease that is being issued to them you know so that means

and the improved profit you know with the improved profitability and the the buyback or the burn mechanism now all of a sudden there's about two thousand of each a day or about four million dollars is all kind of assuming a two thousand dollar each price by pressure a day so on a net basis right you go from that cell pressure you know called minus you know 13 million dollars of cell pressure now there's a 14 million dollar buy pressure that's a 17 million dollar swing right in by by demand on a day per day right that's 6.3 billion annually that's a big deal

right and you think about just both the terms like absolute numbers but then also you know you want to like contextualize this um because the east market is still pretty big right it still has a 200 billion dollar market cap and on daily volume it does you know about two-ish two billion a day something like that so you're talking about like one percent uh you know this 17 million dollar by pressure that we just got to that's about one percent of the daily um eat tradable eat volume um that's like that's that's that's pretty big uh but it's not like you know i want to put this in context like it's not it's

it's something to pay attention to um but in and it's big but it's not like gigantic um but it's certainly something to be aware of and there's other listen there's other by pressures as well as a result of how we think about staking and so forth um that are actually probably an even bigger deal than this um but maybe it kind of separate conversation because then we start getting down down the rabbit hole and and the merge same i wonder if you can add to this a little bit more so i just want people to understand like one okay this sounds super bullish for eth which is great yes we all want our bags to go up that's not really why ethereum the network is doing this is merging one it's because you already

said it it is more secure uh proof of stake is just a better way to have decentralization et cetera and security versus proof of work um i think this whole tokenomics discussion is important to get right because if you can flip it like you said where now there's all this buy pressure instead of cell pressure and the eath price goes up this means the market cap of ethereum goes up which is also a big important vector for security because if you have a very like let's say your market cap is 20 million it's fairly or 20 billion let's say whatever it's someone can like a nation state could buy up half of that and take over the system right they could take over and hack into uh the blockchain

essentially because they own their own control of it whereas the more um the more value or the more expensive that market cap or the higher that number is it's harder for nation states or whoever bad actors to be able to accumulate enough to make an impact and do something bad to that network and so i think another reason why i think the ethereum community cares so much about price is not because of their bags although i'm sure that's a thing but it's actually to increase the market cap because it means that it's more secure i don't know if you have anything else to add to that or what your thoughts on are in that as well i just want to make sure listeners are like we're not just trying to shill bags here we're actually just talking like it's better for the entire ecosystem if numbers go up

yeah so higher there's a couple things on security you're you're right the higher the east market cap the more expensive 51 um attack becomes right it's more expensive it costs more money right to go buy the amount of eth you need you need to own to launch a 51 attack than buying all the computing power that's that's required to launch a 51 attack in the world like proof of work and mining there's a second facet that improves security as well and that is because mining no longer requires is heavy computing power and is that

capital and operationally intensive and it's designed for anyone can to do it you're going to have a lot more validation right a theorem right now on the beacon chain the beacon chain is this like test chain that's been operating for like a couple of years that they've been testing all sorts of proof-of-stake stuff on um there's about 400-ish thousand validators right now right and i expect like that will go up because like literally all the computers we're using now we'll be able to validate e right and so that means you can have what what can happen in can or like has been happening in proof-of-work mining operations is they become more consolidated because it's it's no different than it's no different

than any commodity business like scale is really important and you get to scale through consolidation right and so that consolidates the number of miners you have but like in the proof of stake you know there's not really a scale benefit so you're going to have a whole lot more validators and so it's like it makes it safer and more secure as a result so this brings up the question um every other smart contract platform is already proof of stake uh why are they not profitable and are are they on track to becoming profitable do they have this like like you said ethereum is not profit but it's like you can see it it's coming they have a roadmap for it so that's cool and it's roadmap really is going proof

of stake and then also it's eip-1559 um why do none of the other blockchains why are none of them profitable a short answer i don't know i've got like hypotheses as to why that is the case um one like burn mechanism for ethereum is particularly important because that's a way of distributing value back to ethereum token holders um and so that's that's pretty critical um so that's like in my mind a pretty big differentiator

um and then also you know you got to pay attention to like the economics of how tokens are issued based on the amount of tokens staked um because that is also can that's also different across different chains right um and so how ethereum is structured they have like a very clever um kind of sliding scale mechanism as to how much uh eath gets issued to validators that ensures the integrity like the security uh of

the blockchain without kind of without overpaying for it um so those are usually like two factors that i would you know i would highlight um that's all on the cost base right and then to think of it from like a revenue standpoint it becomes a you know product of like the price and volume right like some of these other rival chains you know they have much lower cost per transaction and that's they're like selling if they're selling feature right which is actually can be quite very useful but you need massive volumes to drive that right um i actually have the numbers up for revenues here on crypto fees from david mihal we had in the podcast once

and uh so we look at revenues ethereum is earning 60 yeah six million a day basically on average for the last seven days uh and then in comparison bitcoin is 446 000 on average and then you have like avalanche at 42 000 polygon at 27 000 solana at like it's maybe on this list i don't even know where it is like under 15 000 so like i mean they just basically have revenue right which i mean like you said that's a good thing for the users but it's terrible for the overall business case of the of the network right yeah i wouldn't necessarily describe it it's terrible but like it's not sustainable right right right right and so

i was doing some like benchmarking on this like a little while ago as well and yeah on i reckon you know bitcoins are losing 30 million dollars a day avalanche about two million solana four and a half million right look at their revenues and their like their cost base um like it's yeah it's it's big numbers i just want to take a step back and celebrate the fact that you said i don't know on this podcast because we really celebrate those three words a lot you know you talked about in the beginning the uh

the cooperation that happens in this space and i think cooperation happens because people say things like i don't know and we all learn together and yeah it's it's an important an important mindset to have you know i think there's when we're when we're innovating in a super cycle as you mentioned the way we are there's going to be a lot of a lot of blind spots a lot of learning to be to go through uh and yeah just uh i've got to give you a shout out for for the i don't know i i hope more people and our listeners embrace that attitude and are aren't afraid to to say what they don't know because that's that's okay and that's that's a good thing yeah well thanks jay um

you just double tap on that the there's a lot more than that i don't know that i do know and i think my experience as an investor as you know it can be quite humbling um because it's the things you often think know or take for granted that end up not being so like that's where you really get screwed um and so you've got to be able to just be like yeah i don't really like i don't i don't know how this works and that's that that's kind of impetus to go figure it out yeah that's also an empty there's a realization like hey that's a blind spot yeah that's a great point so i want to start to wrap it up here uh for the sake

of time but i think one thing that was important just to kind of note of this is like um so we say ethereum's about to become profitable none of the others are yet one thing to keep in mind is like ethereum has been around since when is this genesis like 2016 2015 kind of things like yeah yeah it's had a lot of time to also you know ethereum didn't know how it was going to come profitable at the beginning either right and it's had a lot of time to research and learn and change things and figure this out and so what i was trying to get across was not like okay everything else is not profitable don't think about anything else like it's only ethereum because it's only profit one um it's just that the rest are new and it takes a lot of time and you got to get a lot of things

right it sounds like to make this work but like to come full circle one of the things you said was like you know we want these trust guarantees that's what makes this so valuable and thus we need sustainable networks that are going to be like what's the point in building on a blockchain that's going to be non-existent in two years from now you know what i mean like we need to make sure that as developers as builders as entrepreneurs we are going to put our efforts on something that is going to be around for a long time and it looks like ethereum is one of the ones that has been able to or hopefully is able to figure that out and the rest i mean a lot of these other ones all the names we said avalanche solana but they're only like a couple years in existence so like i'm sure over

time they will find what the things that they need to do to become profitable and sustainable as well at least we hope that's kind of the the the hope of this whole this whole space yeah and i suspect they'll get there faster right because all these learnings kind of compound on one another exactly exactly right just like solano was so solano was able to launch much faster than ethereum was because they already had kind of like the road map from ethereum right theory was able to launch actually pretty quickly relative to bitcoin because it's like well we're gonna do bitcoin but it's gonna be like slightly different it's gonna be programmable but we're still gonna use like proof of work because like that's how things work and like you know it's tested it works and then they later just you know later said like maybe we should change this proof

of work thing this proof of stake thing it's actually probably going to be better but it's taken like several years to to go from proof of work to proof of stake and we're not quite there yet right okay so the elephant in the room is what about bitcoin this one's been around longer than everything else and it's still proof of work and still not profitable does it ever get there uh in terms of profitability um no but the use case for bitcoin is in my mind very different than the use case for like any other programmable blockchain right um and that's why i was like from the top it was very good that we delineate

between programmable blockchains which is kind of everything else but bitcoin in my mind over the last few years all the use cases for bitcoin with the exception of it being a store value have been refuted debunked like it just like doesn't really you can't do a whole lot with bitcoin um and even you know i put like store value in air quotes because in my opinion it's not really a good stereo store value um or i would bifurcate that for most people in the world i should say people in the developed world is not a good store value and it's not a good store value because there's other

competitive store values gold painting real estate like whatever and if you're worried about inflation then you can go buy commodities and equities and various other things um whereas you know if you're not living in the developed world if you're like in a more despotic regime then all of a sudden you know you are really worried about the government taking your money or hyperinflation right in most of the western world like we're not worried about those things like yeah we're worried about inflation now it's like eight percent but like in some emerging market you have like six percent monthly inflation right that turns into like a hundred percent in a

year like that's hype for inflation right and so all of a sudden a thirty percent drop in the price of your store value assets like dude it doesn't matter because the diet you know the alternative is so dire i'm not willing to go there um and so that's in my mind the use case for bitcoin or the store value for a lot of people in emerging markets that where you know hyperinflation and the government seizing your assets is a very real threat and that's still like a really big market right there's about 480 trillion dollars um uh worth right um um in the world and i estimate about like 60 trillion of that is in like clinical despotic markets

that's like a really big market for bitcoin to go after so that's kind of how that's my view on bitcoin that was the greatest simplest summary of bitcoin as a store of value i've ever heard we're gonna have to we're gonna take that one out that was awesome uh one thing i want to mention that we we talked about is like so we've talked about how eth becomes profitable we've talked about how we're moving from a sell market into a structural buy and the buy pressure um but we haven't talked about the the burn and the eat outstanding tokens uh and how that economically affects i

just want to touch on that before we wrap up and i know we also want to get a price prediction from a theory for ethereum from you at some point here which i'm sure our listeners want to hear too not that we're trying to be about it but um okay so we you want to just elaborate a little bit more on the burn mechanism was that yeah just total size predictions yeah and the total supply uh how that will flip when when the merge happens assuming the merge happens in august is the current prediction am i feel free to correct me on that that's my knowledge okay so

we touched on a bit how like the burn mechanism works what it does how it's funded um and so like out the outcome of that is i anticipate to hit the kind of maximum number of eth tokens outstanding probably later this year around 120 million based on you know the latest estimate of like an august merge and once you move to like this proof of stake um consensus mechanism then i suspect and it's i suspect between kind of half a percent to two percent of each will be removed from circulation

every year okay right so think of it as kind of like deflation of like half a percent two percent and what really drives that there are two main inputs that drive that um it's the percent of beef that is staked and what the daily fees are right what the sorry when i say daily fees i mean like the daily revenue of that ethereum is um is generating so we have an asset that's decreasing at two and a half percent per year you're saying that's uh that's pretty incredible yeah do we see that anywhere in the traditional markets sorry i would say half it's going to decrease by like half a percent to two percent something like that

um and again it's like there's assumptions that go into all these models and we can link in the shows to my latest piece and in that piece i have like links to these different models if you want to go in and kind of like nerd out on how i'm deriving some of these numbers like all those um google sheets are available have we ever had an asset that's deflationary like i like you know i mean the bitcoin thing was like okay there's only 21 million there'll only ever be 21 million and that's cool do do we have any example of something that's deflationary in an asset i have no idea no no no there isn't um you know the like main thing that people would generally quote as like

you know why gold is a store of value is because it's not an inflationary ass they tend to think of it as not an inflationary asset it's not really true like you can go and mine more gold there's only so much gold in the world oil would be similar there's only so much oil in the world like a lot of commodities tend to be thought of that way um but the reality is like you know you can't flood more into into the system and so maybe i should just kept the short answer the answer is no and you may people may have come across this like moniker of like ethereum is becoming like ultrasound money and where that was derived from is bitcoin being sound bonnie in the sense

that like it's only every 21 million uh bitcoin tokens outstanding and whereas everything else is inflationary and with the burn mechanism and with proof of stake ethereum all of a sudden becomes deflationary and so if you know bitcoin is sound money then the better version of that must be ultrasound money that's where that's where it came from come on merge all right well can you give us a price prediction i'm actually very very interested to hear what your thoughts are here this will be the first price prediction ever on webster academy by the way that's right okay [Music] and and also can you give us

a merge prediction like in terms of timing in terms of time okay and merge prediction is easier because um that's lately has been getting better telegraphed and all the stuff there's like you know the ethereum like all four devs calls like anyone can kind of tune into and they talk about the stuff that's going on but the second thing is that like uh metallic i don't know probably like two weeks ago something like that like tweeted like we're on schedule for you know an obvious merge um so yeah so that i'm like you're gonna assess the probability to

it i'd say like 70 percent certain emerge will happen in august um i'll put it to you this way i of what i think are like reasonable estimates in the reason or like assumptions and the assumptions the main assumptions that i'm driving at are like the percent of each that is going to be staked and where the daily revenues are going to be um i'd build towards i think of ethereum this way that like you're effectively

getting like a four percent staking yield right but think of that as like a dividend yield on an equity you're then getting like a one percent um earnings yield right and then you're getting called like a one percent share and buyback so all those things combined you're effectively buying an asset at like a six percent like a six percent yield um another way to think about that you're buying an asset by like 17 times earnings that strikes me as really low for something that's growing as rapidly as uh the ethereum ecosystem is

um and has as large of an addressable market as ethereum has if you want some context around that 17 times multiple um google historically traded at like a 20 to 30 times multiple the stock market overall usually trades at like a high teens multiple that's how i think about it and a price [Laughter] i was going to let the listeners infer what they wanted don't worry this isn't financial advice

that's a good move yeah yeah there's a disclaimer at the end of this podcast all right i was hoping that the i was hoping the build-up was going to be you know more interesting of like how to think about this from a valuation standpoint um yeah i'm like pretty confident we you know you could you could you could see a doubling in price between assuming an august merge um and no other like massive macro dislocations part of the problem right now is this macro dislocation that's happening um and so this is kind of being swept you know the merge is not really being seen um or forgotten about um

yeah i could see like a doubling in price by the end of the year but it just means that ethereum's on sale right now well we didn't want to turn this into like a youthful case but i mean everything's on sale right now by by the current market effects when we're in a bear market yeah i listen i i would push against that like i don't view price as like an indication of value both on the up and on the down uh and i think that's one of the things that like the crypto market this is like partly why i'm so interested in where i focus a lot of my attention in crypto is unlike traditional markets like there's no like real valuation heuristic

in crypto right people are just like oh it's going to go to the moon like this it's incredible it's gonna do all these things and then more and it's like it's amazing and you're like yeah but like you gotta somehow ground that in reality um and the other thing's like oh it's cheap it's like down sixty percent from its highs and you're like well if your price was not necessarily an indication of value then like just because it's down doesn't actually mean anything that's a good point more kai any more questions before we it's it for me let's wrap it up yeah uh all right well we've gone so long i'm not going to do the speed round uh i

just want to jump right into where people can find you sam uh i know you've written some great articles so i just want to give you a chance to do your show and to tell people uh where they can find you and how they can reach you sure um best reach me on twitter uh my handle is samuel m andrew um you'll find you know links to my website which is samuel andrew.com uh and then from there you'll find all sorts of articles tweets about you know a lot of the stuff we're talking about um and yeah reach out um if you've got a different view or you think something i've said was off even more so doing

something i've said was off the mark uh please come and like you know prove me wrong and and correct me because i make mistakes and things but i'm pretty confident in these numbers i've outlined amazing and we'll put all the links we'll put all the links in the show notes and starting next monday in our discord community for those listeners that are in there we are doing a a weekly podcast discussion uh so in the discord on mondays we will have a open conversation where we break down uh the podcast from the previous week so we'll be talking about

this podcast today as well as uh the podcast that was released on monday uh which dove into some of the similar concepts that we talked about today so if you are a listener and you have questions uh or you're not sure how to um digest some of the content or if you have another viewpoint uh your we'd love to have you uh in the discord for that discussion uh to dive deeper into these topics uh what time that's at jay that is at seven p.m eastern uh on monday uh i don't know the rest of the time zones of the world so i hope uh i hope everyone can time zones trip me up so well sam thank you so much for joining us today this was incredible it's great

to get someone from the the financial world on because we don't we've never done that before um so it's good to uh to hear your take and to see that you know you're you're kind of coming up with these numbers and um and we can actually see if these blockchains are actually profitable or not and um to bring some good merit to it so thank you for joining us and thank you for sharing everything you're sharing in your in your newsletter yeah it was a pleasure guys uh a lot of fun and um i hope you know all the listeners find this interesting and um yeah hit me up if you got any questions take care everyone thank you for listening to web3 academy we hope this helps you along your web3 journey if it does please share this

episode and subscribe so you don't miss the next one by the way if you have yet to join the discord community you are missing out this is where all the magic happens this is where we learn where we ask questions where we network uh you want to be in there the link to join is in the description below and finally a quick disclaimer nothing in this podcast was financial advice crypto and web3 can be risky you can literally lose it all in fact if you invest on account of what we say you probably will lose it all so don't do that in all honesty the point of this podcast is to remove the noise of markets and price and focus on utility implementation anyway so you should not take any of this as financial advice thank you friends and see you in the next one