Managing Leverage in Crypto, Risk of Restaking, and ETF Updates | Roundup

Transcript

all right everyone so on Empire you obviously know that we talk a lot about the institutions coming into crypto and that is why we are super excited to share that we are hosting the digital assets Summit we've hosted this since 2019 it's coming up in London March 18th to 20th don't miss your chance to get ahead of the curve you can get 20% off with code Empire 20 we'll see you in London all right everyone welcome back to another episode of Empire first Roundup of the year what are we talking about today Santi how we doing uh doing great you know we had our first uh reminder that crypto is not uh up only so um good little reminder yeah you know I'd rather start

the year that way you know letting people say like Yes sounds starting to look like good year but you know you know it will uh it will keep the dean Spirits in check I think so how's the new year's uneventful I went to bed at like 11 or so I was wiped I run so much because I'm training for Tokyo so when's When's Tokyo uh first week of March nice yes so just running a lot these days and you it was good you know I had to cancel my uh I was supposed to go on this twoe trip to Patagonia but had some some health stuff uh so had to had to cancel that so went Upstate fresh I'm not I've got bar barely into sleep but uh you're looking fresh got a got a

meeting with a with a big trap this is about as nice as I will allow myself to dress up you know they're all going to be in suit and tie today like walk into this room I'm sure it's G to be like 10 guys suit and tie like oh yeah this is about as nice as I as I will dress you walk around berlyn Sho and Tha people look at you like you know my first crypto conference i w I was I was coming like straight from work and I was a JP Morgan at the time of course I took off the tie but I still had the suit you know and people looked at me in the Bitcoin Center in New York and so oh yeah and they're like you must have gone the wrong door like the yeah I had the same thing 2017 going to these Bitcoin

meetups straight from work like yeah uh you know rocking the tie rocking the suit um all right you're gonna have to wear that in D so I'm just saying I don't think this setup is Gonna Fly no I look I look nice at D get a Dapper for D Dapper for das exactly um so you buying some Nikes the new Nike drop oh yeah the new alphafly uh running shoes came out literally today in Europe they came with 2 in the morning so I I stay up late this why I didn't sleep 2011 comes sold out then they came out right before we started this pot in the US so I'm be you know I'm trying to get it in the US too sold out as well you know you think an

nft mint is hard buying hot Nike sneakers is much harder folks I've been dealing with this problem for a while so I become better at for me you know minting NFD is is not hard what is hard is trying to find these shoot so I didn't get him you didn't get them so now you what now you'll just 5x them on uh on stockx probably I'll be the idiot I was the first listed plus my size is also like the one that they know they rip you off so yeah yeah oh all right man so let's uh couple things I want to talk about today ETF week uh we got the ETF ahead of us uh Jan 8 n 10 I think Jan 10 is the official deadline for um both Arc

and 21 shares so let's talk ETF um maybe we can kick it off with Market nuking just get your take on that um and then we can talk about this tax thing that went into effect January 1 um and then maybe we can cover Visa had a cool little crypto announcement that I think went under the radar but was was pretty cool to see them follow up on something that they shared that they would would do two years ago so first things first um market nuking so uh basically a matrix Port uh report claiming that the US uh that the SEC would reject a spot Bitcoin ETF um causation correlation whatever it is but it kind of proceeded in an 8 to 10 I think it was 8% maybe 10% drop in in Bitcoin so Bitcoin fell

from I think it was sitting around 45 fell down to what it was sitting at 453 and fell all the way down to 40 what is that 40 40 and a half so you know what do that drop 8% 10% um uh B if you haven't been following it Bloomberg analysts and a lot of different folks put the chance of approval in the coming week around 90% And that is one of the reasons this you know bitcoin's kind of run up in the past few months um but this guy Marcus steelin the head of research for Matrix Port said that he believes all applications are going to fall short of a critical requirement and he added that uh SEC chairman Gary Gensler still sees

the industry in need of more stringent compliance uh he also doubled down he said from a political perspective there's no reason to proove a Bitcoin spot ETF that would legitimize Bitcoin as an alternative store of value um and uh this guy Eric balunis over over Bloomberg said without any sourcing this report does not line up with the Bloomberg intelligence uh reporting that we've done he said I'm not saying it's impossible but it would overturn a lot um however if Marcus has done a lot a lot of sourcing to back up the report that's a whole different ball game so uh Market's already rebounded bitcoin's up to four almost 44 eth is climbing today eth fell from 20 from 2380 380 down to what

2195 yeah 2100 rebounding already to 2270 the time of recording so things came back up but a a good amount of wiped out salana dropped from salana was the most dramatic one I think it dropped from like 107 109 to 85 that was a 27% drop it's now up to 102 so here's an interesting one let me read the biggest s-day losers it's Bitcoin cash eth classic pancake swap Tera classic ftt the FTX token right so no surprises there then there's madic madic is uh this group like it's flow token Litecoin

ECC all these things that like don't really matter and then there's madic in there um so anyways we can we can I thought that was an little side interesting point but uh yeah there's ones that actually didn't really fall much like arbitrum hit alltime High yeah the l2s are having a nice little run yeah we can talk about things that are performing well but um not really surprised well I guess we can talk about why a seemingly irrelevant analyst intern report had this cascading effect in the market uh speculation but I think a lot of it is bot driven there's a lot of I would I would gather that and I saw some

commentary around this so I think that over the last couple years like the market like traditional markets has become more kind of Bot driven I wouldn't say it's to the certainly not to the extent like as you know equities but there is a certain amount of like bought activity in crypto and so um that could have led to the like the start of you know some selling component and then in of itself it shouldn't have this dramatic effect of course when you pair that with everyone's lever to the tits then yes like you're gonna have you're gonna have a cascading effect of liquidations and then you clean and all

that leverage off you know funding rates are getting pretty out of hand and so there's uh I always like to monitor funding rates just understand in open interest to understand how much a Leverage is in the system and kind of systematically even if you go back to Prior Cycles like every time funding rates get really hot it's sort of a ticking Time Bomb it's at some point in days you're gonna have uh a cleanse um and can you explain that Santi why why funding rates are so important and like what is what is the funding rate basically well everyone calculates it differently which is a bit hard right when you're looking at funding rates across centralized Exchange is and decentralized

perss uh they all kind of have their own methodology but basically and we we had an episode about this but the funding rate means how much Longs are how much like if you're going long a particular coin on a per it's how much you're you're you're paying um you know the other side right um and so when think about in a mark in a very balanced Market where there's you know every like there's a 50% sure 50% long this funding rates are very you know are neutral but when there's a a skew towards like a disproportionate chair of the market is either long or short that's when funding rates start getting getting out of whack

and so on an annualized basis yeah you're looking at the chart here now which is a good visual kind of heat map representation um so for instance when you saw the runup of Soul all the way to one like 23 on Christmas you know there's a fair amount of um you know yeah exactly or Bon for instance or you know I'm picking on two but you could look at injective like some of these hot like I guess narratives and coins um basically means like you know you're you're you're paying an enorm amount of money to to express that view and so at some point that is that corrects itself it's like it's no different than you're

farming at a 10,000% apy you know that ultimately corrects itself right um I don't know if that makes sense yeah yeah it's the price you're you're paying to it's the from an exchange perspective it is the mechanism that they use to keep these books balanced right and the more people want to in in a scenario where 99 people like are going long and only one 1% is going short the funding rate gets so out of hand to compensate that imbalance and they and to bring it back to kind of normaly and so that that's the mechanism by which you know you keep it in check yeah yeah it's the difference between

the I think I have this right it's the difference between the pers the Futures the the pers Futures price and the index price right yeah exactly which equates to how much you are willing to go to basically not not borrow in a sense but uh pay to to Bel long yeah exactly exactly have like contango which factors in like storage cost and whatnot but because these are digital assets like it's really just the cost of holding the contract yeah um and the you know it's that spread between the contract and the underlying price let me ask you about leverage Santi so do you it's always crazy to me that people are so levered up and get completely wiped on these moves like

when I when a day like this happens I click the buy button a little harder than I do in the past right like it's a it's always a good buying opportunity uh but you see on Twitter so many folks get wiped out they're like ah man I lost my stack or whatever it may be so it's always shocking to me that people are still so levered up to the nines in uh in crypto what what is your take on Leverage and how when do you use leverage when do you not do you use leverage in the traditional way of just like you know being 5x levered or 10 10x levered or do you lever long and maybe buying nfts instead of the spot or whatever it is like how how do you think about leverage I've used it in the past past um I don't have any leverage today

I haven't used it in the last basically since 2021 I have not put on Leverage um I'm just very comfortable sitting on spot and it's just more of a lifestyle more less lifestyle it's just more of when you're sleeping at night and unless you have someone or you have an algo that is going to be monitoring the things it is very stressful like you just should be prepared for any asset including Bitcoin to go down 10% on moments notice and it these are violent moves uh and so you're sleeping at you know during that time you can't adjust your

position so like funny story in um March what is it during covid um I was still a Pary and you know it was percolating the code was a thing and it was that Thursday where uh it was an actor I think it was Mel Gibson that got Co that night and like a few athletes had gotten it I called Ben I said Ben I think this is going to be real I think it's gonna be a pandemic and I think it's gonna get ugly I wake up at 4 in the morning because I was I was giving class at NYU and I was in San Francisco so it was like super early I go walk to to to buy coffee or you know I think there's a Starbucks open at 5 in the morning or something I look at the prices and like everything's down and

and I'm like I I my caffeine situation hand like I can't even read a screen and it took me a while to process it but like I had some leverage on dydx and had some positions on like levered eth you know like just going long all wiped and the issue there was you know a lot of times during these violent movements you stress test the system so like the oracles start maybe failing and you know the liquidation engines start failing in the case of you know March 2020 Mak and have a good keeper Liquidator system and so you know that added more fuel to the fire and I think this is why you see these violent

movements I the the You could argue we're going to continue to see even in every cycle in a bull market you're going to see 10 20% draw Downs of these assets so why why play with fire and why like yeah you know can't even you can't even be lucky if you're dead so yeah look the the difference between like Ci and defi traditional Capital markets is when there's a uh you know the best thing about defi is it's all automatic right it all it's all automated and you know you can see everything on chain the downside is um you know if you get a margin call in traditional Capital markets your Banker your broker will call you up and be like Santi look you're you're below the limit like and you can say look I got you know this is happening but I Gotta Give me

give me 24 hours I'll add it back all 12 24 hours to refill yeah on on in defi like you wake up and it's been liquidated there's no call happening there's no email even right it's funny you say that because I I've been talking like after that incident I talked to a lot of def5 Founders and I said why don't you build that type of system where imagine imagine you have a open position in maker OB it you have the option to pay a slight premium an ongoing premium as an insurance policy whereby if there's a liquidation event happening this is especially important for n s where you don't want to lose the nft you have you know more of an

attachment where you have like if it put it gets put in escrow and there's a time lock to that liquidation and you have that ability like six hours 12 hours but you can pay how much right and I think that type of system would be very useful because in my conversations with funds A lot of times they don't want to use D5 because of this because they don't get call um and so so I think you can build something on chain that would mimic this type of mechanism yeah and the keepers would be happy and the protocol would be happy because that increases the fees to the protocol right because in a normal situation you're just occuring more fees uh and in volatile moments um you know

someone's getting paid to um you know you're paying to have that optionality and so I don't know I don't know why someone has I like that idea I think the other thing that will happen this year I think it's uh infinex is doing this and some other places are going to start doing it is tying if if you want if you opt into it tying emails into your into your wallet so that um like you you know you sign up with your wallet obviously but then you can put in like your email and then what that does is it gives you the ability to you know if if there's a margin call or something like maybe they'll email you and say hey look you're you're at 50% at 40% we're going to start calling some assets so you know 50% maybe you'll get like a notice email

or something like that right now there's no way to get notified let me ask you a question do you use leverage I I don't because I first off I mean you're what we're talking about here is like just zoom out for a second like traditional investors are excited about you know in in the market right now in treasuries you can get what five or six or seven percent um maybe if you're pushing out into into some like you know corporate credit or something uh equities you're excited about what eight% a year 9% 10% you're doing awesome maybe yeah 15 uh if you're in some good funds or something what we're talking about is like I my belief is that Bitcoin eath go up two to 3x this year and my belief is that things like Soul go up you know five 5x or or even more than that so I think when

you're when you zoom out and you're like okay I'm talking about something going up 400% vers traditional markets they get excited about going up eight% like I don't need to get greedy I don't I don't need to get greedy about that I also had I levered up I I was a really early user of what uh of coin bases um you could borrow on your assets on coinbase and uh played with that and like it was it was very I mean it was very addicting like you it's it's kind of like having a bad credit card habit or something it was like I was like oh I'm like and this was 2021 so like all the numbers were going up um and I would just like continue borrowing and then when and to go long and like it worked very well then in 2022 numbers start

going down um yeah uh it quickly I was like and thankfully I paid it all off and it was fine but like I was like oh man like this could quickly get out of hand so it's a great point I did that too as well on the bottom like I I borrowed from like American Express took like a 20K loan to buy eth and then um I borrowed in trafi from uh actually from my parents and I said look it was was I was like I want to go long and and I paid them like 10% interest like loan docks like everything yeah yeah and I gave them way like interest were at zero and I said look I'll pay 10% collateralized by a bunch of other assets that I had and um but

but again onchain is is quite tricky you're absolutely right I mean it's a matter of preference I don't think a lot of people should be using leverage you can use leverage to hedge but the reason why most people are using Leverage is because they were caught off sides they didn't catch the first uptrend and they want to do a 10x yeah oh that's not true actually do do you want to know when I got really off sides with Leverage I just it was 2017 do you remember you could use credit cards to buy crypto on coinbase I remember I got inor amount of points I mean I would get new cards oh my God I forgot about this I blocked this memory my mind I would get new cards and basically max out the card and buy crypto and Bitcoin was running up from a 1,000 to 20,000 and I was it was

you know it was like the most money I'd ever I was right out of college I had never really had any money in my life and like to then have money was insane and I just kept doing it and then the market turned and I got really off sides and it took me a little bit of time to pay that off um I W I completely blinked that out of my memory but thank I actually think it's a good thing that you can't buy crypto on coin base or gemini or any of these remember blockfi and Cel you could buy you could buy crypto with credit cards on on all of those I think yeah yeah thank the other the only other time that I ran some leverage was when I um I bought some uh FTS and I borrowed against the base asset thinking that is a lever bet and

so I borrowed like say you have 100 eth you borrow 50 eth and and or 100 eth or you borrow some fraction like 60 e or 50 eth or whatever and then you you know the the tricky there is that a lot of times when when the base acid runs up so if e goes from 2,000 to 4,000 the floor might not actually move in the same manner so you can get caught off sides uh but generally at the time I thought n were levered bet are you still thinking about doing that so no I didn't I I thought it was already pretty priced in so I I was thinking of doing this trade where I would borrow against my soul uh and buy a bunch of torans um to kind of as a proxy of getting the as a proxy of

getting exposure to Growing nft activity in the uh salana ecosystem in the absence of not having Equity exposure to tensor um I said okay well maybe I can just borrow you know with healthy margin So 20% of my stack or whatever go buy like thousands of torans or whatever and then just play that but the math was such that I I didn't feel that I was getting it was a I think the the price of torian is kind of already really reflected that trade so I was a bit late to that so it did not you didn't do that no what do you think about punks right now uh generally about the price or just punks I was looking at the punks floor last night and they what is it I think

they were at they peaked a US dollar value of 400,000 I think it was and now they're sitting around let's call they're 55.6 9 so that's 125k yeah yeah um what yeah I mean I don't know it's a lot of money you know um all right they peaked at 440 no 420 uh in US Dollars now they're at 123 I believe it was on eth terms if you priced that in eth I think it was 125 is was the uh the top yeah there we go I remember I literally bought one at

12 I bought like a base 15 yeah I bought a a low trade Punk 125 at the time eth was you know it was like 100 it was like 500k USD uh and I'm still holding that so no again I I didn't and and I have these punks like hanging in my wall and so every time I wake up and walk I'm like okay God I remind myself of so far been a pretty bad trade but again it wasn't a trade for me so I I collect without the intent of selling how many punks do you have can is that a undisclosed undis publicly twoo publicly too I'm dis um actually the other one the one with a bandanna I

bought for 125 and uh that was the top that was like the top so I have it maybe it's a good point to remind myself of like yeah you buy the top yeah yeah no matter how smart you are you will Top tick I think you always will top tip you'll round trip you'll do all these things welcome to crypto Mike Mike's gonna get mad at me for sharing this but I think Mike bought coinbase stock it like it's it's not even on the chart because it's like it was like the high of it was like the absolute High not even of the day but but like of that minute yeah it was a satellite candle or whatever exactly that's great Leverage is something that um is for very sophisticated people and even even

sophisticated people blow up so yeah they blow up in traditional markets and crypto are less efficient uh less robust kind of from an infrastructure perspective and so even though it's more battle tested you have to just be aware that these mechanisms fun rates may not work properly during stressful times and so yeah don't don't play cute you know play long game yeah there's this book Market I think it's Market Wizards where this guy Jack schagger interviews like top 10 to 20 best hedge fund managers I think it's Mar I think it's Market Wizards it might be a different one I'm thinking of but anyways if you go if you read that book they all sound super smart brilliant investors if you look at

who's still around of these hedge fund managers I think only one of 10 or one of 15 or something is still around because every single one of their funds has blown up by getting off sides and getting too confident and too cocky so here's my you know that's such a good observation I'll just say one last thing and I what first I want to ask you one thing do you get more stress anxiety maybe you don't at all during a bull market or a bare Market bull market for sure 100% right I mean bare markets are very low stress the only reason a bull uh the only reason a bare Market is stressful is a if you don't believe in the long-term

price of crypto so you're worried about the dollar value going down which I which I like I have zero stress about what was stressful was like I mean blockworks got 10 times harder like for blockworks is going to be very hard in a bull market it's going to be really hard to hire people it's uh compensation's going to get completely out of whack like it's going to be we're going to there's money everywhere so we're going to start trying to CH like chasing money even if you say that you you you won't like there's going to be a lot of money all over the place and like that's going to be tough but like blockworks got a lot harder in the in the bear just because like you know the ad Market dried up and stuff like that but um no the the bull market is more like anxiety

inducing and stressful because um yeah for for many different reasons yeah same for you I'm assuming yeah same the the other thing I want to say is on this point around Market was is um like the some of the advice that these people are giving if you read the book it's like and uh it's like don't lose money um rule number one and it's like you really if you die and so I think it's just it's funny that at some point like greed gets into the equation and uh you know these people just it's easy to put on Leverage um but uh and at the time you think that you're going to

structur it better than most but you know it's not yeah I I feel similarly about uh leverages I do a trading by the way too like you want to know like there's all these people that were trying to trade through the bare Market you want to know who made more money people who just like held Bitcoin Ethan salana yeah right probably yeah that's why I think it's foolish to try to trade in and out of all this stuff like yeah you're gonna like trade this arbitrum runup like I just sit on ARB for the whole bull market like you'll probably do better if you're than if you're trying to like flip from ARB into Celestia back into you know goo like just sit at some point uh people have asked for it but I'm happy to do an episode of all the mistakes I've done

documenting because I've documented most um of all the mistakes I've done in crypto it's yeah let's do it all right everyone so we talk a lot about the institutions coming into crypto on Empire Santi and I are both headed out to London March 18th to 20th for blockworks his 8th ever digital asset Summit Das this is an Institutional buttoned up conference that we've hosted since 2019 I like to joke that it is probably the last remaining kind of suit and tie event in crypto people are still wearing suit and tie it's pretty funny you'll actually hear from a lot of the largest institutions in the world coming from Standard Charter FIS JP Morgan framework folks coming out winner mute vanc

Goldman Sachs there are a couple big themes of this conference one Bitcoin catalyst the having and the spot ETF two A View From the buy side three rw's tokenization and stable coins four Global regulatory Frameworks five institutional infrastructure including Banking and payments and six the macro case for crypto if you have anything to do with the institutional side of crypto you have to be there Santi and I got you back we hooked you up with a 20% off code it is Empire 20 there is a little competition running internally at blockworks to see who can drive the most number of tickets so help Santi and I out register with our code and you get 20% off that is Empire 20 all right let's give a little update

on the ETF so here here's what's going on so basically um uh January 10th is the arc deadline and I think the 21 shares deadline um last week this guy Eric balunis um at Bloomberg said that the SEC is ready to approve spot Bitcoin ETFs but only if they have clear language around cash only creations and have a signed agreement with an authorized participant um they is this scenario where if Arc were to withdraw at the sec's request and Arc is the first one in this kind of like long list of folks who have filed um Arc if Arc were to withdraw the sec's request then the next deadline is March however balconis who's uh speaking at D and has been on some of some of the other blockworks pods recently uh he thinks

that this delay situation is a is a long shot and I think the idea here is that if you AK the SEC if the SEC intends to deny they would have just denied at this point instead of just kind of like floating around so there are two um there two things that I thought were interesting with with the at with the ETF one is authorized participants and the other is fees so the first was um a lot of people are talking about who is the issuer of the SE uh of the ETF right is it a black rock ETF is it a Fidelity ETF is it a bit wise ETF I think the authorized participants are also really interesting to look at so AP are the entities that create and redeem shares of an ETF and you know typically

shares can be exchanged for a similar basket of Securities that reflect the Holdings of the ETF uh or obviously for cash so uh Goldman is the big Goldman just got into the game Goldman's in talks become an authorized participant for uh both the grayscale and the Black Rock ETFs so what that means is they would be responsible for the creation uh and the Redemption of ETF shares some other ones are Fidelity named Jame Jane Street and JP Morgan as its APS Black Rock named also Jan Street and uh uh Jan Street and JP Morgan as APS Valkyrie tapped Jan Street and caner Fitzgerald uh Wisdom Tree also named Jane Street um who else Invesco is using JP Morgan in

vertu grayscale hasn't been announced but I think the aps are gonna be Jane Street and vertu so there's kind of this like there's the issuers of the ETF and the creators of the ETF then there's this group of like five to six folks right Goldman Jane Street JP Morgan caner verto who are emerging as like the go-to aps for these ETFs I thought it's an interesting list to look at I mean it's like everyone right um Andrew Kang had a good post about this actually and and I certainly believe it which is when you think of it like this is uh every so many years Wall Street gets an opportunity to sell an entirely novel new new new thing and to assume that like like it's just

I I'm not sure people realize that the the way kind of the Wall Street machine works right and go watch like you know boiler room or you know there is a very big incentive for I mean these people get paid on commission like I'm not saying there this is not a product that they should you know sell I mean obviously we're we believe in it and whatnot but it is uh you know the fees are likely higher right for these ETFs it's like a new product and so probably relative to your traditional vanilla ETF um so the you know it Wall Street is a very commoditized business especially selling securities and so um at the end of the day this another fee stream for

them and it will be an important one so it almost becomes uh I I think if you understand that then you you kind of see how you believe in a world where one everyone every bank is going to be a participant everyone that is has a ETF type of line of business whether as an AP or or just like wealth management kind of division um because probably the commissions are going to be higher and you know the the you're going off of his base of zero and so it's a new product you're selling and so I think that Andrew has a good post we should link to it but understanding kind of that mechanism is is is no pun intended I guess as fund as mechanism Capital but it's uh it's interesting yeah we should have Andrew on the Pod um that'd be a

fun one yeah I agree with that I mean you know the the I the few products that exist today have a pretty high fee right uh like higher than your typical yeah they they have high fees but um if you look at what the fees are going to be uh it's actually lower than I thought it was going to be so if you look at the Invesco one which I think that's a Galaxy partnership so Invesco Galaxy that's no fees until five billion AUM and then Fidelity who oftentimes sets the sets the price of ETFs um they they'll tend to come in lower they're coming in at 39 bips so like too high it's it's high for an ETF like not as high as I thought it was going to be um

yeah because for context your traditional like SNP ETF like Tech ET like just your plain vanilla ETFs are relative to 39 bips it's what like like yeah you know 20 20 25 bips and then if you have just like yeah if you have like the you know just the Vanguard or the Fidelity like uh whatever the M like you know tracking QQQ or something like that's 10 bips I want to say or 11 or something like that so you know who's missing from this list that I think is going to be a colossal regret for them is Vanguard Vanguard has just said we're not playing in the in the Bitcoin ETF market and man what a swing and a miss because they have I mean vanguard's the

largest ETF business in the world like what a colossal Miss for them in my opinion I would love to see a prediction Market uh of uh when when Vanguard gets into the game whether it's uh you know within less than a year or 2025 or just never yeah it's I don't think it's ever I think it's just at some point they get in the game yeah you know what I've been thinking about this idea around prediction markets that we talked about on our predictions pod I really want to we should have an Empire like little account on poly market and then when these things come up we just create the predictions and I I don't know we could get something going there all right chain you're listening with an idea uh to to is basically what you're saying is

to help keep us accountable just just to show us how really wrong that we are oh we're terribly wrong um all right so there's a uh there's a new crypto tax reporting obligation that took effect on New Year's Day so I want to fill you guys in on this basically uh the infrastructure investment and jobs act if you guys remember that Congress passed it in November 2021 it included a provision that amended the tax code to require anyone who receives $110,000 or more in crypto in the course of their trade or business to make a report to the IRS about that transaction and that report has to include among other things the name the address and the social security number of the person whom the funds were were received the amount received and

the date and the nature of the transaction and if you don't this is the kicker if you don't file a report within 15 days of receiving the transaction you could be found guilty of a felony offense so that uh provision tax code amendment that was passed November 2021 this law just became effective on January 1 a couple days ago and all Americans are now subject to it it is a self-executing law meaning there's no requirement for any additional regulatory action or implementation by a government uh by a government agency for it to be enforced once it is passed and signed into law AKA January 1st it was immediately operational and enforceable on its effective date and uh shout out

to coin Center who I basically just read their post on this um but they they actually filed a suit against the treasury Department uh Challen in June of 2022 that challenged the constitutionality of the new law but that case is still in the courts so as of today if you receive more than $10,000 in crypto uh via either trading or your business you have to file a report within 15 days under penalty of law and uh yeah well uh so that's the update you us tax persons only right what did you say that's for us people for us people yeah so not relevant for you no but I

mean I sympathize it's it's it's a it's a huge pain I mean 15 days is like reporting anything in 15 days is a pain in the ass like I it's that's a that's a quick turnaround I mean I I still file in the US because I have Nexus there and like you like the amount of the amount of fees that I've paid CPAs I've like at some point hired four five when like like D5 summer was crazy and so you had to like that that first year was just preparing taxes was just but like I just don't get it shows that they don't I mean it's it's not straightforward right like it's

first off it's coin Center makes the argument it's not constitutional but at the very least it's not straightforward like if you're a if you're a minor or validator and you receive block rewards of let's say 10,000 plus dollars whose name and address and social security number are you reporting there or if you trade on a DEX um and it's a crypto let's say you know an eth for avac or crypto for crypto swap you receive $10,000 in let's say you swap eth for AAC or something who are you reporting there on the other side of that and what standard should you measure whether an amount of a particular crypto is equivalent to more than $10,000 like if you buy I don't know what Pudgies are at right now let's when Pudgies were at 10

like is a pudgy worth 10,000 is it not because it's a liquid like what do so it's it's very it's uh I mean I get it look it's an information game and they wanna understand who the participants are in this whole economy I think there are better ways to do that uh less taxing from time perspective like there's a great blog marginal um what is it marginal Revolution marginal Revolution yeah and there is a great piece over the years that he talks about like the GP the GD like the the economic impact of the filing taxes in the US which is relative to other countries is is like the amount of time that people have to dedicate to filing their taxes is very unproductive for the economy and

like if we were to simplify that like countries like in Scandinavia and Singapore like it is a very much more streamlined process um like versus you having to extend in every quarter or like you know it's just crazy right uh it is not like trivial like it would have a massive economic impact if we were streamlined but again it's a the fact that the tax code is very complex is a feature not a bug you know it's uh anyway so why is it a feature not a bug because the more complex the people that can pay for the complexity of the tax who would understand it cannot find certain oh it's a feature it's a feature for the rich exactly yes yeah yeah yeah look I mean like this is the whole criticism of like folks like Trump and

whatnot like not have paying like their effective tax rate is like not your typical 30 50% for normal people um you know there strategies that and and the more the anyways Iran but yes exactly yeah I mean it applies to businesses too like blockworks gets paid in crypto a lot of our deals are not like is usdc crypto right and right we get we get more than $10,000 in usdc like every day or every other day or something like are we reporting just every day sending a new transaction to the r like maybe I guess we will it's like a a normal form it's it's like I mean I don't even get if you send do you send it to finsen or do you send it to uh or or the IRS or or

both of them right certain things like they're still mailing out this stuff with in incredible amount of people like sensitive information to outdated addresses updating your information with the IRS is like a super complicated process it's not like their website is very streamline and modernize it is the most among the most Antiquated them in the DMV are the most I'm staring to pay my New York taxes for like four days the site was down and I was like I'm trying to pay you guys I'm still waiting on taxes that I paid as an intern at JP Morgan in 20 200 N oh you're not getting those back and my is like they may mail it to you within the next one or five years the address that I put on that file I don't

live there anymore I can't update that address so it's like yeah good luck with that good luck with that yeah I uh I didn't cash a tax refund in time and uh so I called that I called them first off it took like eight hours to wait on the phone and then they're like yeah we'll send you a new check within the next 12 months I was like what yeah um the very last thing I want to call out is actually uh Visa announced um that they are piloting a crypto Customer Loyalty platform um like a basically an nft loyalty platform I just thought this was cool like they in 2021 if you remember they launched a crypto advisory unit to help their clients and their Partners

kind of navigate crypto and at the time they cited a crypto Rewards program as a possible offering for which they could build and uh yeah you know two two and a half years later it's cool to see them them follow up on this so the basically the platform it's a customer engagement platform called the Visa web3 loyalty engagement solution and what it does it helps Brands create wallets where they can store reward points and experiences on behalf of uh consumers um and it's a it's cool it's an nft Le uh Le platform that's uh you know I think they'll basically sell this or help their clients build it or something like that and then it's kind of B2B to see and then their clients will figure out what

kind of Wards they want to have for for their customers so that's right it's great to see continue on this like you know adoption and I think they appreciate the opportunity better than most um I wanted to we don't have to go deep into this because I think there are people that are better at talking about it but you had it as a prediction I did two reaking as a risk the rehypothecation of security um I think we should be on top of this there was a most recent thread that I saw you commenting on David from a bank list he was like Ian layer onquotes will cause 2008 like like Global financial crisis on ethereum he says it's is some of the biggest cope

I've ever seen on this app I've seen worse but anyways we'll take that and you say well and you respond that is big cope and fud but also reaking is about to get insane probably starts yield farming 2.0 that Rivals defi summer reaker reaker layers several layers of tokens on top of each other that's a lot of chains on the same underlying asset feels scary question mark and David responds I think it's pattern I think pattern match I think it pattern matches with a lot of scary things we've seen before and he says like euthanasia roller coaster TM but slashing prevention and risk mitigation strategies are also numerous and this is where I think we should double click on

and this is the side and this is aside from how Ian layer contagion risk is overblown loan um look I think there are numerous reaking providers out there not to pick just an i layer but if I were to just I want to end the episode with maybe something that we should follow up in a future pot and it's this reaking component because we had the IG layer guys I think it was about a year ago it was like January of last year and I was going back and listening to that episode because look a lot I think they've done they contined to develop there were certain things in that episode where I I didn't come fully satisfied with certain responses of how

they were like collecting this trusted group of people to like act as like the security Council if you will there's certain mechanisms that I think are worth updating maybe we should have the IG layers again and maybe a panel of other people that are like doing deep research on this because it's certainly feels like you're stacking more risk it's certainly not making the chain more secure um but the question is how much more risk and what are these quote quote slashing prevention risk mitigation strategies well are they sound and how do you really know if you haven't battle tested them so anyways I would love to to really do I mean let me just finish like just to respond to that last David thing

that I said I said I so I think what I said to him is I think Ian lir fud is dumb but I what I think is going to happen is that 50 maybe 100 liquid reaking token platforms launch this year it's going to be insane um and I think most will be launched by good well-intentioned Builders but some are going to take these crazy risks pulling a lot of capital um and they inevitably blow up and that's where my concern lies and I think actually Mike uh also you know partner in crime over here at blockworks he had a good take he said I think there's a middle ground between these views I bet we have a big blowup in reaking feels inevitable actually but that doesn't mean we shouldn't do it or won't be successful blowups have been happening at bank since since time and we still have those

so I mean just like it's we're not just taking risks though like I I do think reaking is good like reaking provides a service that the market needs right so like Igan lay is a protocol as a reminder to folks like igen lay is a protocol if you guys missed that episode that we did with Shri Ram um you you should just search for it and listen to it or we can have them on again but igen layer is a protocol that facilitates reaking of liquid tokens that's lsts such as Ste to and they do that to securely to secure uh these things called avss actively validated Services um and people call it like if you see this word like programmable trust that's what they're talking about so avss use igen layer to bootstrap their security model

with restake eth and avss can be chains it can be networks middleware applications and the problem that they're solving in the market is that prior to igen layer uh securing and properly Distributing a decentralized system like an L1 was a really big undertaking um it took a lot of money and a lot of time so if you take for instance like Bitcoin and E like those took years to reach critical mass the concern that I have is it's just a lot of layers um there's now like four layers of risk that you have you have first you have the risk of staking your eth then you have the risk of liquid staking eth then you have the risk of raking eth then you have the risk of liquid raking eth you're exposed to both slashing and smart contract bug risk at

each layer so the more layers you stack on top of these things like uh the riskier and riskier it gets in my mind and the more claims on a single underlying piece of eth and then what's going to happen is more claims on underlying pieces of random tokens like uh the riskier kits I think um so is it h typical summation or exponential risk because when you stack these type of things sometimes the risk is not one plus one it's actually one you know whatever probability like you know the RIS just blows out of proportion um I don't really know I think and then and then what's about to happen I don't know if you've seen some of these deal like these companies getting built is you're

going to be there's going to be re liquid raking defi that launches okay so like here's the four four layers of risk it's staking eth then liquid staking eth then reaking eth then liquid reaking eth but then there's there's even more layers there's like you're going to be able to deposit your liquid reaking token let's say into an amm deck you'll get an LP token back in return then you can deposit that LP token into a let's say a money market as collateral so then you can borrow even more eth to liquid restake now you've got like seven layers of of of risk in the process I actually think uh chain link God has laid out some of these risks better than most um so maybe we could do an up with him or something but yeah have him fishy and maybe other people um does it feel like

when I want to maybe challenge one thing you said there is what is the end game like what when you say it is a providing a useful service at what point Continuum what is the actual use other than like artificially like creating yield opportunities like what is the it it's like I see this in a way of um every okay I have two responses here one is every time you make it cheaper to go build something new things come to Market so if you take like uh AWS or something like AWS these Cloud providers it makes it much easier and and cheaper to launch go launch a

company uh to go launch a SAS company if you take like Squarespace and web flow like it makes it easier to build a website IG layer is making it easier to build distributed systems um now the problem with this is every time you launch go launch a new thing like let's say launch double click on that before you go further it's this idea of shared security uh using when you have a validation of a distributed system somehow their mind their thesis is that is a very kind of that process can be utilized in a more efficient manner and and in a way like because the way e theorum is architected you apply the same sort of validation

for everything and maybe there are different security assumptions or SEC or the the amount of energy that you apply to a certain validation can be different like you're creating like more more like consumer preference if you will like the ability to like distribute and redistribute security by reh hypothecating it or or like okay okay so this really your yeah you're qu you're I think what you're getting at is like how useful really is economic security to ethereum um and I I mean right now it's deemed in the market to be useful like I think say or some you know some some other folks are like

renting or Bor I don't know what the right word is like renting security from ethereum using igen layer folks like that like it is a product that the market is is using right now like as a like a SAS if you were if it was a SAS product they would have customers long term I could make the argument that Economic Security is a bit of a meme like let's let's play this out consider your uh new protocol like you Santi the founder and you want to bootstrap security so um you know we we you could go get validators and all that kind of stuff but uh but it's you know it's it's kind of expensive and stuff like that so you so you what you do is you borrow Economic Security from from igen layer the problem with that argument though is is

like if you want to attack the network there are so many other ways to do it that are more efficient than a 51% attack right like if you had a a chain that was worth $10 and uh you needed to attack like you want what you're I think preventing against here is someone buying five five dollar worth of stuff because then they can corrupt the chain right a 51% attack in reality I don't really think any chains get attacked by 51% attacks they get attacked by like human problems and people problems and multi- sigs and smart contract bugs and like that's really what you need to prevent against so I what ends up happening like if you take preig layer world is you go

create some hype you get some validators you hope the number goes up enough so that the 51% attack is too expensive to do you're not they you you weren't really raising money to then go buy Economic Security um yeah I mean look that's the counter argument I think to Economic Security I just feel like that this is a a way up a mechanism right now it's a way to attract users it would be I see the benefits outweighing the risks of introducing way more fragility to security because you you should never compromise on that but I understand why they are doing it in the way the ethereum is architected that I don't necessarily think you have that

problem in a chain like Cosmos or salana out for instance and that's what I want to focus on because at what point do you really put in at risk the core kind of tenants of a decentralized distributed system to focus on what is I think a like for scalability reasons like it's a fine I think it's a fine line we're treading here is all I'm saying I'm not smart enough and I need to do more work to have a more informed opinion but my intuition when I was talking with a lers publicly in this pod and I just doesn't feel like it's gonna

end well I don't want to be that like caner and the coal mine that just says it's not going to end well and just stop there I want to have a more nuanced and informed View and so I want to have smarter people come in and comment on that because I think it's a right time to focus on it as these things G it's going to be a top hot think it doesn't and if you had to predict something now do you think it doesn't end well because um everyone ends up building on top of Igan lir and there's risk of like centralized risk of Ian lay do you think it's because um one of these like liquid reaking token platforms blows up do you think it's a mass reaking uh related slashing event that that occurs again my understanding back then was I think

you're transitioning now to more human judgment as it relates to the allocation of certain resources meaning security because my when we interviewed sham and Calvin right or what's his it was it was this Council initially that was like when you I think when you determine like how security get it's like different use cases require different sets of security and so it becomes a bit more efficient that that was like my impression of it and it may be wrong there is a human element in judgment there and I just think humans are never good at this stuff yeah they're never good like you're they will make mistakes and this is why we build in crypto because we don't rely on humans we rely on a set of smart contracts that okay are built by

humans but you can have formal verification and other things to you know battle test and get more Lindy and unfortunately crypto when things break they really can break and so building Lindy you know ethereum has built a lot of Lindy in security as as a base layer there's been parts of the stack built on top of ethereum like defi that have broken at times smart contracts that have had bugs um and even ethereum has had certain things that needed to be patched but yeah uh that's that's my only yeah not my only it's that's what I worry where we are somehow of the mind that we can take a lot of this very important resource uh that through validation or

mining we get security and then we somehow are now of the mind that we can further optimize that that resource by like allocating it to different use cases and renting it out and I think in that process I want to question that assumption I want to I want to have smarter people come in here and talk about the merits of that but the risks of that and look I don't to your point I sort of agree I don't think all reaking providers are going to be created equal um and as we know people chase high yield and so you know as there can be blowups you know there could be blowups in any smart contract not just a reaking provider the

implications of one are vastly different than the other I think um you know defi you also have these like the money Lego concept is is very sexy and it composability is a beautiful thing the fragility of that is you know it's sort of like you're you're only as strong as as your weakest link so if there's a it's like a Jenga Tower there's particular Lego in that tower that falls apart well it's very you know like if a were to have a a terrible situation then it has cascading effects across this financial system that is very interconnected um so yeah it's sort of more of a I want to talk more about the guard rail I want to talk more about the like the the the slashing mechanisms the

contagion mechanisms I feel like a lot of people are just saying borrowing these type of Concepts that we understand in normal validation in a normal proof of stake system oh you know you have a slashing and you have like this is the mechanism by which you know if if a validator like goes offline or you know is acting C maliciously then there is a roundabout around that to for the chain to continue to operate or whatever I just don't think it's that saying logic applies to reaking one we haven't seen it too I think there's a lot of people that don't really truly understand how these mechanisms work I want to bring on people that actually understand how that works to then make that distinction because I think the IG layer guys in the Pod were saying look

there are some things that were still need to build and we don't know all the answers to these things but then you see people commenting on Twitter that they know everything and it's like no no like it's just important to call this out and say we don't know and before you ape into Igan lay or whatever other reaking provider just understand that these are have very little lendy to them yeah I'm not saying they're not going to work I'm also accepting the fact that they're gonna get bicked because you can't stop this train we will why don't we do this let's wrap this part about liquid reaking and the risks of it why don't I will we will invite a couple Founders building these liquid reaking platforms they're going to be pretty early some of them might even be pre-launch or something but they are

some of the smartest people I think anyone building this is thinking about this 247 I think people understand that it's risky so we will um uh I invested in one called called Rio because of this reason they're kind of like the adults in the room of liquid reaking I thought um so we can invite them on or some other folks as well so yeah let's do it I that let's make that a priority all right all right you're getting nervous I see I see The Sweat Beads dripping I have a I have a Content recommendation for you nice um uh um it is I was going to make a book recommendation but I'll make a podcast episode recommendation it's the fee Market episode that Mike did on bell

curve with Sam Hart from skip protocol from from Cosmos and uh uh oh my God I'm I'm sorry to the a16z guy really smart guy who's great from uh andrees he's a researcher over there um but they did a whole episode on fee markets they basically started with Bitcoin fees the Bitcoin fee market then moved over to eth fee market then talked about um 1559 then talked about salana fee markets um and like maybe what the salon of folks are going to run into with the problems with their fee markets in you know maybe six to 12 months um and then talked about like potential ideas for different fee markets like maybe unbundling gas or different things that you know maybe

it's a credit markets where you know you get actually paid to transact on chain or it's zero zero fees to transact on chain because of some different credits so or maybe it's a says to Unis swap like hey your users can trade here for free I'll pay for your you know and vice versa so really interesting episode on fee markets on the bell curve feed so that's my I would recommend folks listen to that nice uh it feels like the fee Market is another area where I've been doing more research I think it's one of the areas where salana can be further optimized yeah yeah no that's we have well we have Anatoli and uh Ben coming on the Pod so we'll we'll dig into fees with them year anniversary of a pod that we did um when everything was kind of the worst moment so that should be

really good who else do we have on just to give people we have some we have some good apps we have um there's some good apps I can't have a deep in have a deep in discussion we have a deep in debate with uh Kyle and and Dimitri we have uh Logan jky from uh from friction list coming on we got the the guys at Kinto coming on got yeah we've got IA from near coming on talk about n's new DA stuff uh we've got H and aichel coming back to the table so yeah a lot of good apps lined up that's awesome yeah good stuff all right my friend we're just above the hour mark so uh sleep Sir places I need

to ended uh go have your Trad Vibe meetings and uh you know I will that's great all right folks well thanks so much for listening and stay safe don't play with leverage we'll see you next next week hey everyone thank you so much for watching today's episode really hope you enjoyed it we wanted to take a second to just remind you about our upcoming digital asset Summit in London March 18th to 20th Santi and I got your back seats are limited and we hooked you up with a 20% off discount code it is Empire 20 if you heard it earlier in the podcast there's a little competition running at blockworks to see who can drive the most number of tickets so when you register for the digital asset Summit make sure you use our code Empire

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