The Next Generation of ETH

Transcript

All right, we've got a wonderful panel here today on the Bit Digital stage. Um, I'm Amanda Casset, aka Amanda. Um, I am the founder and CEO of Serotonin. We bring the world's breakthrough technologies and financial products to market. Um [clears throat] we have incredible um guests on our panel today and I'll start um with Sam on the end. Um what does the next generation of ETH actually mean? Who or what is the next big user of the Ethereum network?

>> Okay, question is uh what's the next generation of ETH users? What I think in the last era we uh put a lot of calories in getting humans onto the ETH network. I think the next era is really bringing software, bringing machines into into Ethereum. And what's happening today uh and where that's going is that we have an agentic economy. We have agents now operating. They're having they're engaging activities that involve buying tickets, buying compute, buying data, and all these transactions require payments. And so the banking system was really made for human beings. They weren't made for agents and agents never sleep. They

operate 24/7. So my thesis is that Ethereum and artificial intelligence people really under underappreciate the connection between the two. In fact, Ethereum is perfect for the agentic economy and that's the stuff I'd like to talk about a little bit later today. >> Awesome. Kevin, um, what does next generation of ETH mean to you? Who or what are the next users? what are the next big uh challenges, milestones that we're going to uncover? >> Yeah, I I think to echo some of what Sam's saying here, there's a there's this world where we're slowly tokenizing assets from the traditional world and putting them on chain. And these assets will invariably trade along alongside their trify counterpart. As you get

agents coming on chain, they will basically go through the path of least resistance. And agents don't like friction. And so we will see that invariably volumes and liquidity will pick up. Um having said that there's still pockets of users out there uh physical real world world users that we uh have yet to bring on chain which I think Matthew will talk a little bit about. But uh before we get into that I'm particularly interested in still building the financial infrastructure. As much as most of us see and feel crypto is like trading stocks or equity-like instruments. I think the world of fixed income is completely untapped where again the everyday person has hundreds of thousands of mortgage

debt or credit debt and yet how much equities does your average everyday person trade >> next generation of ETH? What does it mean to you? >> I I agree with all of that. We should probably also look at like the Ethereum of today looks nothing like or very different to the Ethereum of 2015 2016 and Ethereum in the next few years is going to look just as different yet again. I mean the the scaling that's happening um the privacy enhancement and all of these additional features that allow for the the scale without compromising on security and decentralization to enable the [clears throat] scale of both value flows and particularly with agentic use cases. Um allowing that to operate

easily on Ethereum going forward is the the big upgrade as well. Very cool. And I agree so much has changed since 20145 when this was a research project. Um Sam, if if software is going to be the one transacting at scale, why would they choose to settle on a blockchain as opposed to going through a bank? >> Well, an agent isn't going to walk into a bank and open up an account. An agent is not going to wait a day for settlement to happen. Uh the banking system was made for human beings and uh agents operate at scale. There's trillions of transactions that would potentially occur when agents are

operating at scale. And also if you think about it, blockchain is machine native intelligence and AI is machine native sorry blockchain is machine native money and AI is machine native intelligence and there's a very similar tren language that occurs between artificial intelligence and blockchain. You have in AI all language is represented into tokens and in blockchain you have money fund interests all represented in tokens and that's a very similar language and that language is what I think will really unleash the agentic economy.

>> Yeah Kevin I mean if machines become Ethereum's largest users what happens to blockspace and what happens to ETH? Yeah. So, we well, first of all, I guess can machines become Ethereum's most active users? And one of the issues we have right now is, well, there's still 12 second block times. And if I'm a machine, I don't want to wait 12 seconds to, you know, do this transaction. >> Better than a day. >> Yes, >> it's better than waiting a day. Better than a day. [laughter] Absolutely. Totally with you on that front. Um yeah, as much as Ethereum was uh much faster than Bitcoin in the early days, but um but but to that effect, you know, we're undergoing this transition where much of Ethereum will start to become more real

time um and transactions will be processed, you know, within hundreds of milliseconds type of latency. In that environment, basically you have like this incredible uh demand for block space on Ethereum. And so when you make Ethereum effectively like a HFT or highfrequency like platform, you're going to start to see a lot more trades. That's going to drive the price of gas up because block space is limited. However, with uh Glamsterdam, the update we're going through right now, and some of the research in zero knowledge proofs, we're going to increase the size of the tunnel, the size of the pipe by 15, 20 times in the next few years. And so, you know, that's going to enable us

to, you know, bring in 15 20 times the number of transactions. We'll be getting through much faster. So, uh, it's the right time for lower latency. >> I I would like to challenge that. I do agree that more transactions mean a higher demand for block space, but does that necessarily mean that it goes to Ethereum? I think that's still a question. I think that's an important conversation to have >> as into the L2 or L1 or how are you >> Oh, that's a good point. I didn't think of it that way. Yeah. Uh well, so the way I see it is that um you know how much gas is burned and right now you're we're at like uh 70 million a month for example and so you have 70 million a month of gas burned or ETH burned but you have this issuance where we have

like 200 million a month. So there's a net net um uh issuance basically of like 150 million. So if this is the gas burn and that's the issuance. If we have 10 or 20 times the demand for block space, then basically the demand side of the equation, it outpaces the supply side and then you basically get a net burn of ETH every month. And so I think >> that's that's where the ETH gas would go up. >> Exactly. So So I see in the next couple years us going from this uh negative carry type of environment where we're just issuing 150 million of ETH every month >> to us burning maybe 5600 million of ETH every month. And so >> just as you know maybe you >> challenge met you get you got you got >> just as you or

>> you know D or anyone might be buying ETH out there well if they stop buying ETH like where does the demand come from >> and that'll come from just transaction throughput and people just wanting to land trades on chain. >> It's a fair point. >> I think like a lot of it's probably largely consensus now that agents will be a transformative user in blockchain. Every other blockchain will sit up here and say they're going to use my chain. Well, that's what that that was my question. It doesn't automatically come to Ethereum. Still a question. >> Yeah. Why would they choose Ethereum? >> Well, reliability, security, liquidity.

>> Exactly. Because if an a an agent, we're going to use it to ultimately add value. Uh whether that's through efficiency, through financial literacy, whatever it may be, the agent has to be present where the value is. And Ethereum absolutely dominates when it comes to most metrics of TVL, of value, of use cases. And so naturally the agent to unlock the most value will go there. Agents also uh certainly don't like friction but also they have like a lot of intelligence and discernment to understand the risk or risk adjusted activities that they're taking. The reason most value is on Ethereum is because of the lindiness the security resilience and the liquidity. And so I

think agents will compound that. For specific use cases, they might go to the L2, but with the scale at L1, that's certainly very compelling. And so I think the same reasons that humans went to Ethereum and continue to agents will do that as well. >> Agreed. >> Yeah, Matthew, I I'm also curious. I mean, I think a lot of the institutions you speak to are thinking about how to make money on their ETH. um about a third of all ETH is staked today and the base yield is around 2.5%. I'm curious what are the real ways to make ETH productive right now and what does each one cost you in risk? Yeah, I think most of my conversations with institutions is around Ethereum as infrastructure because we whether it's

agents, financial institutions or typical users, uh they they need assets and use cases on chain and so institutions see this as a huge opportunity to upgrade their financial technology stack and to unlock these kinds of efficiencies. So a lot of the conversation is around stable coins and deposit tokens, tokenized securities and we see a huge kind of uptake in uh money market funds that are collateral for those stable coins. So this is just the beginning of institutional adoption of Ethereum and the Ethereum ecosystem as infrastructure and Ether the asset fundamentally underpins that both from a security perspective through throughout decentralized finance as liquidity and

pair assets and of course from a staking perspective as well. So it naturally benefits from all activity on the chain and is increasingly used both at layer 1 or if you just take something like a Robin Hood which is a fantastic success story recently as an additional gas token and token that's used throughout the ecosystem there as well. So it continues to proliferate too. >> Yeah. Kevin, I'm curious if you have a perspective on this since you've kind of split the atom with Ethereum block space and found new ways to make markets um within the Ethereum infrastructure. What do you think are the most attractive ways for institutions to actually earn with their ETH? Why institutions should be involved in the ecosystem?

>> So, there's a number of perspectives there. The first one is uh I'd say just like the pools of liquidity and the opportunity. And so we're in this environment where again we're tokenizing many things and it's coming on chain and we have this pool of users and bots and agents just trading this in real time as fast as possible. So in this uh I guess in this market we will invariably just see like far more demand for the block space. And if I'm a traditional bank or uh like I have to be involved I have to get involved in the in these businesses.

I can't I can't not not be on chain. And so, you know, that's how they would come on chain. But if I'm holding ETH, what do I do and how do I get involved? I'd say just invest it broadly in infrastructure. Anything that increases, you know, the throughput, the capacity, the demand side of the network, be it financial primitives, all that just drives so much more demand for ETH. And so that's why we work closely with, you know, DATs and other people with large pools of ETH. >> Yes, Sam, let's talk about how it's actually going. um as one of the largest holders of ETH um on the the Bit Digital balance sheet um a lot of the largest ETH holders that are publicly listed are trading below the value of the ETH on

their books. So I'm curious what separates a model that works from one that doesn't. >> Yeah, that's a that's a challenging question. So just taking a step back, Bit Digital owns uh one of we're one of the top five holders of ETH in the world. We have that on a balance sheet. We stake it. We also own about 60% a controlling shareholding interest of some a company called White Fiber, which is an artificial intelligence uh data center developer and uh that company is also listed on NASDAQ. the market cap of that company is actually larger than than Bit Digitals. So depending on how you measure our net

asset value, without White Fiber, we're trading at a premium. With White Fiber, we're we're trading under net asset value. The only way that that really works is very simple. You issue shares if you're trading above a premium on your NAV. And if you're not, you can't really issue shares to buy the underlying equity, buying the underlying asset rather. So these days a lot of DATs are trading below their net asset value for us. It depends on how you calculate it without white fiber or with white fiber. But the model the business model just unfortunately is a bit shitty. It's not working. And we've saw that a while ago. We positioned ourselves to be not quite a DAT but rather a strategic asset company. So

what does that mean? We allocate rather than accumulate. We allocate to certain infrastructure place. We believe Ethereum is a certain type of infrastructure. It's a digital asset infrastructure. We allocated money by owning this white fiber AI company. And so with those two things on the balance sheet, Bit Digital is very simple, just two line items, the ETH and the white and the Wi-Fi. Wi-Fi is the ticker. And the reason why we did that is because we wanted to be in the intersection. We're talking a lot today about agents. We're talking about Ethereum. We're the only company in the world, as far as I know, that's actually a capital markets proxy for both of those things. We have ETH on our balance sheet. We have White Fiber

on our balance sheet, which represents artificial intelligence, and that's doing very well. And so, we are the only ones that are an economic representation of these two things that intersect at Bit Digital. So, that's how we positioned ourselves as a strategic asset company. And again, we're the only ones in the world doing that right now. I I have a quick thought on that. Like when I was um when I learned about you guys, I guess earlier last year, it this was just kind of like a no-brainer for me. You know, you're at the intersection of these two forces. And when you basically combine them, there's this leveraging effect, right?

>> So it's not like on the ETH side, ETH goes up a dollar, you guys go up a dollar, right? But as ETH evolves as an ecosystem, as agents come on chain, you basically have this leveraged exposure >> to the entire ecosystem. And it's a no-brainer to me. I think there's going to be a supernova in many ways once these agents are coming on mass. Once these machines come on mass and they use Ethereum token 249 is going to have like a million people attending because well I don't think machines can attend but people are going to see the activity that happens and you know there's still a question mark are they going to choose Avalanche or going to choose Ethereum for the you know I totally agree based on reliability and liquidity and security. Ethereum has already won the race and that's our position. Ethereum

has already won this race and everything else is a long tail. I realize that's obnoxious, but that's the position we've taken. >> So, there's ETH tokens and there's AI tokens um all under one roof. Um and those things getting increasingly proximal and integrating. Um super interesting. Um, Matthew, just with the um the DAT question, the question around um institutions that are um publicly traded that hold ETH on the balance sheet, it's been interesting to watch the proxies in the Bitcoin world actually go ahead and sell some of their Bitcoin. I mean, you you see all these different institutional structures. What do you think the good structures are for institutions that want to hold ETH?

Yeah, I think I think what sets Ethereum DATs apart from Bitcoin DATs is the fact that Ethereum has a yield. And so without having to take debt, you can actually have revenue that can be utilized. And we see that putting that revenue to use within the ecosystem. So it's much more likely that you can have a positive feedback where that staking yield is utilized to help benefit the ecosystem and the ecosystem growth reflects in the Ethereum price. So I think that's what sets Ethereum as a productive asset aside in terms of the the DAT choice.

>> That makes sense. And then my other question for you is um when you do talk to these institutions, do you ever get the push back that it's going to be Ethereum adoption being that base settlement layer, but that ETH itself, the asset, might not be able to absorb all of that um demand and turn it into price action that how do you respond to that critique? It's yeah it's not something that is is a concern from institutions. ETH the infrastructure is the most resilient and secure and that's what institutions are interested in first and foremost.

Ether the asset plays a big part in that in the sense that through staking it helps to secure the network. I don't think that there's a scenario in the future where we continue to see the Ethereum infrastructure adoption, TBL growth and um and increasingly transaction growth and that doesn't pass pass on to either the asset. >> What do you think of that Kevin? I so when I talk to institutions or my exposure to them there's there's a few points right like who is throwing money at the bank to run a P and there are some chains that are very focused now they'll just throw money at you to try the chain but you know again no one loses their job for trying Ethereum and

so at the end of the day the I think there's a couple considerations for the institutions one is you know can I I have a set of compliance and controls can I can I adhere to those by coming on chain onto Ethereum. And so is there front running? Is there sandwich attacking? No, I don't like that. Um, who am I paying transaction fees to? Is it to this unknown validator in some sanctioned country or some sanctioned entity? And so these are some of the questions that come up. uh privacy is another one but for the most part the institutions would then choose like an L2 for example or they start at their own L1 but you know that might solve all those compliance controls but there's no liquidity so if you are like a a stripe

and you have your own network like that makes sense but if you don't have you know millions of users you need to tap into the liquidity pools themselves and so for that reason we had this initiative where basically any institution can now come on chain on Ethereum with no front running and paying like known validator so you can effectively >> they have their own lane like they have maybe this is a very US thing but like an easy pass >> exactly right so we've created this what we call like an institutional access lane on Ethereum so no front running uh of controls and basically you can get your stuff on chain and it's just like you know if I'm in the US or Singapore I trade with my u qualified counterparties they might trade with maybe less

qualified counterparties but But eventually that capital is part of the global market or you know eventually it'll it'll be on Ethereum. >> Yeah. Ju just directing this to Sam I mean I think the Ethereum ETH the thesis is working like JP Morgan launched the tokenized money market fund on public Ethereum that was 100 million this year. Um Black Rockck started putting um institutional share classes on chain. I guess for for the institutions that haven't moved what do you think is holding them back? is a question about whether like why banks haven't adopted certain banks haven't adopted Ethereum.

Is that is that the question? >> Adoption's happening, but it's not everybody yet. What do you think is holding back the folks that haven't? >> Uh well, I don't have a very politically correct answer. I think it's generational. I think it's just boomers. Boomers are in the way. [laughter] Um I think that if you young people really trade crypto, they don't really trade stocks as much as boomers do. You'll see when Gen X and especially millennials and Gen Z when they become into you know the seeds of position and they control portfolio construction they've this generation this younger generation the people here they've normalized digital assets I use the word digital assets

because crypto is sometimes a dirty word with c with certain boomers and as soon as I use digital assets they're fine but the point is it's true the point is um I think it's a generational thing. I think boomers are just um not uh they're just scared of stuff they don't understand and they're afraid of change and eventually they'll die and you'll have you know a younger generation take taking over and they would have normalized digital assets or crypto and and finally we'll see a lot of things move but I think it's a generational issue. >> I I speak to these teams regularly and it's an interesting >> Do you say digital assets or crypto?

>> It depends. It depends. Um the the interesting thing about digital asset blockchain adoption is we all understand that in the medium term it's going to increase efficiency considerably and for institutions that means big cost savings but before you get to that point you have a lot of upfront investment. So what we see in this industry is rather than the challenges racing ahead with innovation, JP Morgan and Black Rockck is the biggest bank in the world and the biggest um asset manager. And we see similarly across Gibbs and large financial institutions. They are the teams that have the internal capacity, resources and capability to invest in

this upfront and lead the way. So, it's kind of flipped on its head. And so, it's a positive thing that Black Rockck, JP Morgan, and many others are, if you look at the data, clearly choosing Ethereum almost often exclusively for their institutional asset deployments. And so, they're leading the way. And not only do they set an example for what to do, they now, if you look at Bank of New York's capability to tokenize custody and do digital transfer agency or JP Morgan Kexus' capabilities, they are all partners in the traditional fund service, fund admin, TA world. And so now if you want to tokenize a fund, you can call up Bank of New York and they can help you with that or you can call

up your existing partners. So the professionalization and capability is there for subsequent teams to adopt. So it's not surprising and we're going to see that u not longtail but the the subsequent adopters come quite quickly. I think [clears throat] >> I was going to say there's a huge information gap coming back to boomers and stuff like there's a hu like so I did banking for a number of years. I was at Morgan Stanley led financial engineering 40 PhDs in my team. I talked to a whole bunch of my old peers and they're just like, "Hey, tell me about the Ethereum thing and like they still just don't get it." So there's a a large information gap. Um secondly we need to kind of distinguish like who is it in tradpi that we kind of want to bring on

chain because at the same rate banks like for much of what you do in the banking system you can replace it with a spreadsheet and everyone knows that and and so you take uh fixed income or lending and borrowing there's like 12 intermediaries between lending and borrowing and and again ethereum you can do that with just like maybe one or two intermediaries. So what is the impetus or the reason for maybe the banking part of the traditional world to come on chain and it's very little. It's I I think of it what's the uh uh frog in the boiling pot of water type of thing. Um and so for the bank's part I can't see them really coming on chain because this will completely disintermediate them.

The other parts are where I call like real money accounts. People who don't make monies primarily off of fees uh for those guys then you're going through the path of lease resistance. And this comes back to the earlier discussion around tokenization. Once we do tokenize everything, bring it on chain. They will be transacting where they pay the least amount of fees and eventually that will that'll be on Ethereum. >> Yeah. Super interesting that there's kind of a people um a people crisis uh which is the blocker. I mean we we see that a lot too. I think the old way that people got their assets was through their broker. Um, and now there are digital ways to market to retail and to

institutional, which we think about all the time at Serotonin. Um, as opposed to relying on these internal kind of broker-driven systems. So, I think, you know, a lot is going to change there just as as Sam said, as people as people swap out. Um, I'm curious though, what do you think, maybe we'll start with, uh, Matthew. What do you think the people in this room should be building or investing in that doesn't exist yet? >> I think one of the big we have kind of two worlds colliding. So we have all of the existing DeFi use cases and capability which were initially designed for permissionless assets so they could move freely and we have all of the

composability and interoperability that we love all of the buzzwords. uh and now we have increasingly going to have a huge number of permissioned assets institutional assets require KYC um and some form of identity be that offchain or onchain. I think there's a big opportunity in onchain identity um to help enable a more efficient usage um and composability of permissioned assets. And then of course the other side is on privacy. Ethereum is public by default but increasingly has very capable privacy solutions across the stack which is important not just for institutions but also for for all users.

So I think those are the two big opportunities that are are being worked on. >> Sam I'm curious what you think people here should be building or investing in. If if I was a young person again, I would certainly I mean there's so many ideas now because of this whole agentic economy, but I mean two easy ones to do and if there anybody's looking for a startup idea and they work on this, talk to me. I'm probably going to invest in it, which is really just anything involving for example building wallets for agents. You have to build permissions, spending limits. You have to build these parameters around these wallets so that people can trust software with money. agents with money is a scary thing, but you have to build the rules around it. So, if you can

build that, that's very interesting. And I think I think um I think you I think Matthew mentioned maybe you I'm not sure if you mentioned this. I think you did or you touched on it, which is basically there's a lot of KYC software for humans, but we need that for agents. So, I don't know if you call call it KYA. I'm not sure. I think I invented that just now, but you have to know your agent. people counterparties need to know which agents and what they're dealing with and who they're interacting with. So if you have agents in the wild with wallets that have guardrails and you have KYA for agents, I think those are really two great neat products to be working on today.

>> And it's also great to have assembled these pools of strategic capital that benefit from making sure that these technologies get built. Um, maybe Kevin, if you want to bring us home, what do you think needs to be built in order to realize this future vision? >> I I'd say there's uh probably a couple parts to it, but depends on the time horizon, I'd say, for one, but uh I would short the banking system and just long ETH as as as the most simplest play. >> Do you agree with that, Sam? Short the banks long ETH.

>> You know, on that note, a lot of people actually think that Ethereum competes with Bitcoin. It doesn't. Bitcoin competes with the gold markets as a store of value. And to your point, Ethereum competes with the financial system because Ethereum can rewrite the entire financial system and it can disintermediate all the middlemen. I used to be a lawyer and a banker. And when I found out about Ethereum, I jumped out of that profession because I knew eventually Ethereum was going to put all of us out of a job, us lawyers and us bankers. You were talking about how banks take 12 steps and Ethereum is now just one step. So that's one and that's another reason why banks don't want to deal with Ethereum is going to put them out of a job. So um so yeah that's my point. I'll get off my soap

box. I think the banks and the like you said where it's not uh like rent seeking where true value is added those institutions will benefit tremendously from the adoption of Ethereum and so I think that they can do incredibly uh well as well as Ethereum as we grow. So, so I think coming back to time horizon, there's a very long term time horizon for this to happen. I think in the in the near term, there's an entire generation of people who are just non banking. They're like they're they're part of they're cryptonative and so, you know, the banks are going to lose them.

So, I think they have to come on chain just to target these users for everyday services as well. >> Rewarding true utility and uh and uh disintermediating rent seeeking. I think that's a very positive note about Ethereum to end on. Thank you so much to all of our panelists. This was super fascinating and a great window into the future of ETH. Thanks so much everybody. >> Thank you.