Quantifying Maker Protocol: Revenue Analysis, Risk Frameworks and Stability Levers | Roundup

Transcript

already I think back in early September I was trying to tell people that hey look at this this is going to create a lot of Revenue and profits and people are like yeah I don't know not really interested does it have a hat yeah yeah maybe that's what's missing all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-host today are their personal views and they do not represent the views of any organization with which the co-host are associated with uh nothing in the episode is construed or relied upon as Financial technical tax legal or other advice you know the deal now let's jump into the episode all right everyone welcome back

to another Roundup of on the margin today I'm joined by two of uh blockworks star analyst class we got wesy and brick on the Pod fellas welcome than for having us um so we're gonna we're gonna spend most of this podcast actually talking about maker we've got a new dashboard coming out and I feel like people have been pretty inundated with Bitcoin ETF content for the majority of the week um but just before we jump in you know we're recording this on Thursday morning so we're a couple of hours into trading I think we've got over two billion clocked in volume for the combined spot ETFs which is an impressive start I'm looking at the latest tweet from Eric balunis who is essentially the guru on

this topic along with James safeer and you safe to say we're going to be breaking some records today so uh let me let me hold your guys feet to the fire and and get a get a little prediction for the for the listeners here where do you guys think we we end trading today any any predictions around that or um is this going to end up being a seld the news event or you guys have any sort of thoughts um early on on the ETF based on today's info I mean I just take check the price and apparently people are really selling so I don't know what's gonna happen there but I don't know long term my opinion is that it doesn't matter what happens today like just buy the coins on hold them that's the strategy to like win at this

game yeah I'm expecting a pretty volatile day overall um but yeah no no numbers on specific inflows because that's really out of my range in particular not to try and guess that but yeah a lot of volatility and like brick said this is obviously huge Catalyst overall and whether it's a sell the news buy the news doesn't matter I think six months from now we'll see a lot better prices yeah I'm in that boat too fools fools Aaron to guess um all right guys let's start talking about maker and I I know wesy you're going to share your screen and walk us through uh some of this dashboard that we created at blockworks research but for folks who might not be following and just to give

you guys credit I feel like I would have no idea what the maker endgame is if it wasn't for you guys uh um it's definitely been difficult to follow but it's been a big year for maker and I think there's a lot of reasons to be bullish on the protocol and I think we're going to walk through some of those those facts but for folks that haven't been following maker as closely you guys just give us a sort of an overview of the current state of the protocol as well as some of the proposed changes like the redenomination of uh maker and uh maybe just summarize the the end game for us yeah sure so um yeah last year definitely was pretty eventful for maker um what basically happened was Ru so the founder of the protocol um introduced

this five phased um Plan called end game to change the protocol in pretty um like significant ways and the main point of the whole um plan is to kind of diversify or decentralize the governance structure so one of the main points is the introduction of subd um and then kind of moving the protocol forward to what is being called the end State um where it can kind of take care of itself I guess would be the best explanation and um yeah being totally decentralized when you look at

governance um and there was a lot of friction within like the large players um in governance when this end game proposal came out um because there were basically two camps um those who were in favor of this end game plan and then another camp that basically wanted to implement more of a like corporate structure um where you'd have kind of a board and um not the CEO but you you get what I was saying and when the end game plan was pushed through a lot of um like core contributors and governance people

left which kind of left the protocol scrambling um which is probably one of the reasons why end game still hasn't started um and to explain what it is it's a five phased plan um and I'll go through the like main points for each plan or each phase um so the first phase um is basically like a rebranding of maker um which is trying to unify the whole brand um and the new native uh governance token as well as a stable coin will be introduced um the old tokens will still be functional um but the idea is that

you can kind of switch between these two or the old version and the new versions and one thing that has recently caught a lot of people's eyes is the fact that maker or the mkr token will be uh red dominated uh one to one token to 24,000 tokens of the new um governance token um if the um proposed change goes through which should happen at the end of jary if it happens anyway so then people are talking about oh the token price is going to go down even though like nothing happens to the market cap or fdv

but there's just like units by there in play um but yeah that's basic phase one then for phase two um we will see like the proper introduction of subd dows which are basically kind of um DS that work um on some specific tasks uh while maker cord out takes care of kind of like internal governance things and uh while this Som focus more on a product or some specific like trying to facilitate governance in a better way um and phase two will also introduce subow token mining or like

farming um so each subel will have their own native token and through that make a strength to create these sub communities basically who are more specialized in certain things that the subow will be doing and a good example of sub subd that already um live is spark Dow um which is basically the Dow for spark protocol which is a money market and on ethereum and nosis chain um and yeah spark now will be responsible for um yeah basically uh developing products uh that are complimentary to spark protocol as well as then of course taking care of spark protocol then phase

three uh is a bit of a I don't know an interesting one which is supposed to introduce AI um into the protocol so like help uh or because governance is at the moment pretty um not convoluted but it's super hard to follow what's happening in the for because there's so many proposals going on and protocol is so large so um maker is trying to like introduce AI tools to uh help with the process there's also the the maker chain as well uh creating your own chain which obviously caused a

lot of uh backlash when they talked about using salana potentially as uh maker chain and that'll be sort of like the the central governance Hub of maker going forward I'm not sure if that's phase four or phase five but that'll be included as well that would be phase five when um basically that uh protocol is moving into like its endgame State and the um idea of the new chain would be to have like some of the backend stuff um live on the Chain so the idea is that um if something super bad happens to the protocol um you could Fork the chain and to that like keep the protocol alive

because at the moment um if something kind of terrible happens um put it shortly like the protocol with will kind of shut down or there will be an emergency shutdown which um in yeah in short like gives out all of the collateral within the protocol and then the protocol kind of is just destroyed after that um and yeah for phase four it was um like governance parti participation incentive so there are like several several different ways in which maker is trying to um then get people to participate more in

this um like subow governance and that's going to be happening to different like token farming incentives and that's basically yeah the end game that that was phase four by the way it's just governance incentives incentivizing people to participate in governance and then phase five was new chain and for folks who might have been following that's when run stirred the pot a little bit by proposing an svm Fork as kind of the basis for for new chain so let me ask you guys this before we get into some of the some of the details of maker and how it's performing today and I want to talk to you guys about the rwa narrative as well uh one of the things if you listen to run talk about this it

feels like there's a driving underlying philosophy that's informing this and I would say you know maker or run is one of the the ogs in crypto and you know a lot of the people that got in especially you know like pre to 2013 time frame had sort of a strong ideological take on the space and like to to summarize I feel the way he talks about or like human organization is that it should be very very um I guess robust in the sense that people are basically going to do the most self-interested kind of net negative thing and we should be designing our organizations to withstand Humanity basically whereas if

you look at a guy like there's a famous sort of organizational theorist uh coast and his theory of the firm the whole point of a firm is to actually reduce transaction costs through trust right um and I guess if I had to do a highle summary of what Run's endgame is is to basically go in the exact opposite direction um not have trust really in between any of these disparate parts of of the maker protocol and actually segment and compartmentalize all of the different functions the one of the things that I've never really understood about the subow model and maybe you guys know more than I do is how are you supposed to underwrite if each one of

these subd has its own token how do you underwrite that because if I were to just look at blockworks and carve it up into different parts like you could kind of start to create a p&l for some of our like maybe research you could do that for or conferences but then you have huge um uh parts of our business with high head counts that aren't reput generating but are extremely crucial to the business and how do you underwrite a marketing function or or a finance function I I'm just a little bit confused about how organiz like parts of the protocol like that are going to have tokens associated with it do you guys have a

sense yeah I mean I guess this comes back to the question is a token valuable if it doesn't acrew cash flow like in my opinion it can be because for example it gives you access to something that you otherwise wouldn't have and you could AR that okay this some of these Subs have could have like great wibes or whatever I I guess that's kind of what um another subd Dow called Sakura da is going for which is more of like for newer crypto people to come in and learn about the space and do things like that um but I get what you're saying because

on the one hand some of the sub are supposed to be Revenue generating and like function as businesses where meanwhile other ones are more governance focused and um supposed to be I guess more friendly towards I don't know less less businesslike and more of just like welcome to the sub now you can do whatever you want then like find some friends or whatever I don't know if that's a great way to put it but um I definitely get that um it's a weird structure in that sense and there has been a lot of talk about like how could this ever work because like

will you ever ever have enough um like professionalization between this subd does it spread out too much and will people care enough for some of the subow versus some of the other subow and then if one subow is doing really well does that mean that everybody just flug into that one and then everything else gets forgotten about I also think this comes from like you said the philosophy of creating the endgame where he's trying to create almost like a more robust maker as a whole but allowing each individual subow to experiment and find their own like voice or vision and within that like each token is also going to have its own Vision where you know maybe it's Revenue

generating maybe it's just a community token to represent um your like access to a certain Community maybe it's just governance and with that you know governance does have some value being able to vote on the protocol so it's going to allow for a lot of experimentation and it's going to be cool to see you know different things play out like brick said if once sub Dow starts doing extremely well versus others do we start to see consolidation I think it's going to allow for experimentation which is good thing overall for the robustness of maker but it's going to cause a lot of turmoil in the mean in the mean term like one thing that I sort of found myself thinking is what if you took existing conglomerates and you

superimposed this structure and you assumed different business lines had a different another stock a separate stock like if you looked at Amazon as a business and you had the Legacy business that had the Amazon token so their sort of shipping and online retail business but then you also had AWS and AWS had its own token proon at I actually not 100% sure you you could make and people have made the argument that if AWS were to go you know where to get carved out and go public as a separate company it would be worth more than Amazon so I don't know how this is all going to work I it is an interesting experiment and you know the other thing that it

remind me of is do you guys see Oppenheimer the movie yeah yeah I I don't know I always whenever I see a movie like that I go just nerd out on Wikipedia and read about like I read I went pretty deep on the Manhattan Project and that challenge that they were alluding to of compartmentalization you know the Groves figure in the film who wanted all the scientists not to talk to one another um the Oppenheimer and his group of scientists at the time was opposed to that but that's become Doctrine uh like as as an organizational philosophy inside the US to segment out different groups and they're just pros and cons to that and I feel like actually ruin is pretty deep on these different

organizational schools of thought and is designing has this funny mix of government design like public policy government sort of or structure and traditional company thinking which is I guess we'll have to see how that one plays out yeah but I mean that's pretty cool though because I guess only crypto could you do something like this and it's great to have some experimentation so can't really complain about that with you brick all right wesy uh let me let me can I pick on you here to to walk us through so this is sort of where Maker's headed but uh you can also learn a lot by digging into the data that exists today so can you walk us through some of the highlights of the

dashboard that we've just created in Block Works research yeah absolutely I just gonna try and share my screen here so I guess in terms of highlights there are a few different highlights I definitely saw and first would be this first chart here which is annualized revenue um so to be clear uh the last I'd say month and a half of data is uh currently estimations when it comes to rwas given that there's a lot of delay in the reporting of data uh which can be you know over a month and so if you you hover over this data looking at November of 2023 which was actual historical reported data we saw over 300 million uh

dollars in annualized Revenue which for a crypto protocol is really incredible it's numbers you really don't see uh this is largely driven by you know rwa stability fees which is majority uh t- builds or t- Bild ETFs as well as uh individual loans as well and then a large chunky is coming from uh crypto interest Revenue which has been rising over the past few months as well and then if you look at the price to sales and price to earnings ratio because of the these super high revenues and high net income you see prices sales ratio of 5.3x which you know in crypto is easily one of the lowest you'll see uh showing

a lot of value I mean there's a lot of question marks as to you know why is it price this low or value this low and I think there is something to say of you know rwas and their potential growth opportunity because there's an expectation that rates might lower in 2024 or likely to lower as well as um if you look at uh I think there's another chart within the DI metrics tab that looks at the the PSM value or sorry it's I think it's financials no it's right there right there yeah the PSM value you can see over time as they've been investing in uh more

rwas uh the value of the PSM has dropped but if you look at specifically within November December there have been large drops where the PSM has been as low low as a couple hundred million um and as a result they have asked uh coinbase custody to return some usdc that was uh originally given to them as part of a marketing strategy it is it was instead given back to the PSM because they're worried about the collateralization and because of the low PSM you're going to see uh less investment into RW in the future and if this number drops further you're going to see some winding down of

rwa vaults and so I think there's concerns around um the future growth of rwas as well as the fact that it's entirely offchain and you're trusting third parties uh to to keep track and to generate these returns there are a couple specific loans uh two of the rwa vaults have a certain percentage of their loans in default and are currently trying to uh get recourse on those and so there's a lot of question marks and so I think the Market's sort of pricing in lower growth in these RWS as well as the fact that they're offchain and less reliable so I think that's definitely Point number

one so let me return oh sorry go bre yeah maybe to give some background there for those that aren't that familiar with maker um basically how maker deploys Capital into these rwa since that um they take some usdc from the peg stability module um give it to the kind of vault manager who then redeems the usdc and invests um into these offchain assets and that's why wesy was saying that when the PSM or the usdc in the PSM drops it kind of limits makers ability

to invest um in for example te bills so it makes sense um that uh usdc in the PSM has historically been dropping because like maker has invested a lot of capital into that space But now we're coming to a point where basically I guess there's not enough demand for D such that um usdc in the PSM gets filled which then limits Maker's ability to to um invest into these offchain assets um but then a lot of people as counterargument to that are saying that okay now because the bull market is kind

of starting to present itself um if these revenues start dropping from T Bill and RWS for example because um the interest rates are expected to go down this year um yeah a lot of people are saying that that will be compensated uh through crypto loans because basically what you're doing when you're uh taking out die from um the protocol is like you're taking on Leverage and the theory is that and what is usually seen in a bull market is that people want more leverage so then that would bring like some non cyclicality to the protocols Revenue because um usually in a bull market rates go down but then

leverage um goes up and then it works down other way around in a bare Market where then these two um components are pretty like complimentary and then over the time it's also assumed that like the protocol can grow which means that then the usdc and the PSM grows and then again um makeer simple to invest more into the Ste wheels and other RWS yeah one of that you know you sort of anticipated one of my observation questions I guess which is you know if you're look if you're following along via video here either on Spotify or YouTube you can see where Maker's Revenue has spiked in the past so that was around um there was a spike in May of 2021 and then again in uh January of

2022 and uh the revenue mix was extremely different back then so the primary driver during those periods of time were crypto interest revenue and uh liquidations on you know to your point brick liquidations Revenue apply kicks in when there's extreme volatility in the market so it it looks it looks uh just at first glance here as if maker might have built itself something that looks like uh there are a couple of different complimentary and actually sort of um balancing revenue streams that that could uh maybe what's what's his face protect um maker against some of the cyclicality that all crypto

businesses face is that uh a fair assessment or or what would you guys think about that yeah i' definitely say it's a fair assessment so if you click on the monthly time frame and scroll down a little bit um I have it split out by by Vault basically so if you scroll down below yeah right there um you can see that since July you know as prices since we heard about the Black Rock ETF application prices have obviously bottomed and started Rising and as a result we saw the demand for Leverage come back and so a lot of revenue generated by Crypt back vaults have started to increase and I think that's

going to continue as we see prices rise throughout 2024 and so I think it's a pretty fair assessment to say that uh it's pretty counter cyal to the revenues generated by rwas but also one thing that should be noted is that um maybe it helps to think about maker as a bank um and nothing comes free in that world where what maker is basically doing when they're buying RWS is changing their collateral type for uh that's backing D so what's happening is you're taking something super liquid that being usdc and then swapping that

for um for example short-term T bills which still are liquid in a sense about but um if there ever ever will be a like huge Black Swan event or whatever it would take some time for like the Vault managers to sell the t- bills and basically push back usdc on chain and um if you remember at the beginning of uh last year we had this uh usdc D pegging event umh which also led to die kind of uh or kind of by yeah D pegging um and back then people were talking about like completely getting rid of the USD cpsn

and maybe it's worth mentioning that like for those that don't know the usdc PSM basically lets you swap die and usdc one: one uh no matter what the prices are wherever um so yeah um maker decided to maintain the usdc PSM although some people were saying it's liability to be kind of attached to that uh token um and the reason is that in events of like high volatility you want people to have a liquid Market to change between these two tokens such that like you can keep or keep arbitraging um between the two rates and that stabilizes die a lot so some ASMR

um maker is kind of taking on more uh liquidity risk when they're investing into these T bills and RW and yeah that's a important point to make and I think a lot of people forego that when they think about the protocol yeah there's I I really like that analogy of maker as a bank we've actually talked about that on the show uh a couple of times and they shown the similarity from a balance sheet standpoint of even something like a central bank to a bank like JP Morgan to makeer uh even to you know down to the level of uh liquid staking protocols or stable coins themselves there is managing assets and liabilities and banks at their heart are net interest margin businesses um and just like a

bank might have a portfolio of extremely liquid Securities like treasuries you might have slightly um higher interest earning but uh you know you can't yeah higher liquidity risk uh sort of portfolio of loans for instance to larger small businesses um and so maybe the analogy is very similar here but also what banks typically have are um other lines of Revenue which counterbalance the cyclicality of their lending business so we saw during covid uh trading profits from Banks largely propped up you know falling lending rates and like the IPO Market that went dead for a little bit so I really like the analogy here what do you think you talk I mean brick you were just talking about a little bit

with the the PSM but this was a this was a pretty interesting chart for um for me to look at you guys live in this data much more so than than me but just the amount of liquidity that exists in the PSM is down is down an enormous amount from the highs which was you know back in early 2022 at 5.6 billion you know it's down 90% today so um I mean is there ever a point you think from the from a risk management perspective where the liquidity risk that maker is taking on with their rwa portfolio is something to be concerned about um is it is it not I mean h how would you as as an investor

um sort of sort of assess that yeah I mean at least right now um I think it's quite important that there is a an Avenue on chain where it's easy to um like Arbitrage die back uh to its Peg um and especially because like it requires quite a lot of um liquidity if a black swap one event ever happens like it might feel weird for somebody to see this large pools with a lot of liquidity and like nobody is trading ass that much but then if something really really bad happens it's it's important that the price can't of this stable coins like

can't have this large or huge wings during uh these kinds of events but um yeah I'd say right now maker is kind of pushing uh the PSM liquidity to its minimum or for the USD C VA and uh it's also clear that like the main kind of decision makers have or are taking this into account and if the amount of usdc in this BSM Vault and then in two other Unis swap pools drops below 300 million in total then maker withdraws usdc from the coinbase custody are R wa

to like prop up the liquidity and that strengthens the peg but as I think Wy was alluding to earlier was that and this comes back to the liquidity risk point that um once the coinbase custody vault is completely drawn out of and it makes sense that they start there because that's their most liquid kind of yield earning collateral then you have to go to the next most liquid assets which are T bills so if that were to happen then kind of starts spiraling where the revenue starts dropping you need to sell more and more and maybe the market becomes more worried and that might um or that would be like kind of the worst case scenario where maker has to begin uh defending liquidity of diet

that makes sense um and yeah I think right now is a moment where um we're kind of seeing the minimum amount of usdc in the PSM such that it works because in recent months uh there has been a lot of volatility in the PSM like some have speculated that it's kind of being attacked by somebody who's trying to uh like Force Major into liquidating their yield earning collateral um and that's why there's been a lot of withdrawals from the coinbase custody [Music] Bol all right so maybe something to keep an eye on um walk me through guys one one of the I mean a so we talked a

little bit about the potential for die Supply picking up and just the the main driver for that being uh like Leverage right like primarily when I think of maker Dow I I I know they have a large rwa portfolio but really the way that I think about it is people depositing uh crypto collateral primarily eth and then leveraging up and and that's what they're using die for so you can kind of look at the amount of outstanding die as demand for that leverage um but tell me if I'm wrong about that now a huge part of a huge part of that as well um and the and the incentive complex that that underlies that is this thing called the the DSR the die savings rate so you guys walk us through because there's been

there's a pretty big change in the in the DSR that happened um within the last three months or so and then can you just walk us through the role that the die savings rate plays in the amount of circulating die yeah definitely so um as those who are watching this video can see uh the amount of circulating die had been uh decreasing for a while um in 2023 and at one point it was decided that so basically what um affects Maker's ability to pay out interest on this DSR which I'll explain soon is um

how much profits it's making or it's um like completely attached to that and then because um maker started investing more of the die collateral into this yield generating assets of course Revenue goes up and profits go up which allows the protocol to increase the DSR which is the die savings rate so maker allows die holders to deposit die into this DSR vault which based out a governance decided or a yield decided by the governance and because revenues were higher and profits were higher it was decided that um the

DSR would be increased and um it was first increased from it had been close to zero for a long time then it would increased 1% that kind of didn't help either um then it was increased to around 3% I think and that didn't really like induce demand um and at that point it was decided that this enhanced DSR would be introduced which in short like pumped up the um interest rate to 8% which then you can see in this chart that uh the amount of D um deposited into the DSR like kind of explodes

and uh that's a good example of like showing how the DSR can be used to induce demand um for die but I think it should be noted that this mechanism mostly only works or works better in a bare Market when there are that many opportunities to deploy Capital um which is when people uh as I said earlier like minimize leverage and just look for like safe um returns um and that's why this has been pretty effective now and that and I think um going forward what will like affect the market or the amount of

d d uh Supply is like um basically how much demand there is for leverage and then of course how the market sees uh di so how safe does it see uh the asset and like um how liquid uh does it see the asset yeah brick definitely gave a good overview if you want to scroll down just a little bit on that dashboard we actually have what the die savings rate has been over time um so you can see the slight increases up to 8% at its peak and now it's at a terminal 5% and you can see the deposits went absolutely nuts when they did increase to 8% I

think it increased by a billion in under a month in deposits and since then as the market started to to rise again like bricks said people are sort of chasing faing what they think is higher potential returns in the market and withdrawing their die so but they're still over $ 1.4 billion doar of die in the die savings rate uh contracts yeah um all right guys anything that we might not have covered so far are there critical points for investors to understand about um maker moving forward I don't even know what we're going to end up calling it The The Branding branding change is going to throw everyone for a loop I think myself included uh or parts of the dashboards that we that we haven't covered

yet yeah I think the only other thing to click on would be spark protocol which brick mentioned in the the subd section earlier but if you were to scroll up we have a whole tab looking at spark protocol um and it's seen immense growth uh since it launched in I think it was May of last year um so they have over now $3 billion supplied in assets and over $1 billion borrowed and that's insane growth they're actually number 12 in terms of tvl of all protocols and they just launched last year and so this is incredible growth and I think is one to keep an eye on right now they're

doing uh pre- farming so anyone who is supplying volatile collateral and borrowing against it within spark is going to be given a portion of I believe it's 30 million spark tokens which is rough 2% after four years of subd farming in terms of like the percentage of total Supply um so uh a small portion of Supply is being given now and then eventually they're going to start the subow farming so you're able to use the new stable coin and new uh governance token to farm it nice yeah shout out to um Sam mcferson and and Co for just doing an amazing job on spark protocol it's been

I think one of of the best year ones for a new protocol that that I've certainly seen so huge shout out and something to take advantage of um yeah guys I mean um you know we you you've for those of you who've been following Along on video you've seen it but you know there super uh we we'll Link in the bottom of the show notes where you can go check this out if you're not a blockworks research uh subscriber I think we can uh do what we can to hook you up with a a trial but you know we got very comprehensive financials uh dashboard built out and then deep Dives on Di real world assets and then spark protocol so um shout out to uh brick and Westy and uh Dan as well for for putting this putting this together really cool and I guess I guess

just in in conclusion out zooming outside of the metrics how are we feeling about maker us a protocol going forward into 2024 I mean for me I've been looking at this um or the protocol for quite a while and um already I think back in early September I was trying to tell people that hey look at this this is going to create a lot of Revenue and profits and people are like N I don't know not really interested does it have a hat yeah yeah maybe that's what's missing but like and then maybe a week ago or something a little narrative on at least crypto Twitter started where like people started to talk about the r domination

of um of maker and like the revenue potential and all of this stuff which was pretty cool to see but I guess it dur really to stay for that long but I have a feeling that um some of the subow uh tokens could do really well in the coming like year um and maybe especially when it comes to spark because like if it continues growing like this it's definitely b or it's definitely something to keep an eye on yeah I mean the bet on fundamentals is clear but I also think a lot of the intangibles like the subow farming the fact that maker is going to be 24,000 per cheaper uh in the future like uni is

definitely a real thing so a lot of the intangibles as well in 2024 I think you set it up to have a good year yeah but also maybe to mention that governance is still kind of a mess like not a lot of people know what's going on um it's kind of concentrated uh between those that are like super knowledgeable out the about the protocol um and also yeah end game is a big um question mark still so maybe keep that in mind if you're trying to look at this it's a good flag it's a good flag hard to underwrite the complexity but um but we'll see I I think I think you guys said it well it's you know in only in

crypto can you run these types of extremely bold experiments and you know I uh part the Boomer part of my brain looks at this and it's like this seems like there's a lot of moving Parts but I also you know I want to root for uh people that are taking big swings that's definitely what Maker's doing so Props the entire team over there all right I want to move away from maker for a second here and talk about something that became a a big debate on Twitter again this week because falik talked about uh potentially increasing the target gas limit on ethereum main chain and this has been I guess gas fees and transaction fees in general has been a topic that's polarized people since time IM Memorial in crypto when people were

talking about this in Bitcoin and then people started talking about it within the context of ethereum and fees being extremely high on main chain and there's sort of one camp that says actually uh that makes the protocol unusable multi-coin calls this anti- network effects and then there's another group of people that says look honestly uh history has has proven out that people are willing to pay the higher fees and generally High fees or a source of high demand uh I think this has come under increasing pressure as salana uh has had an extremely successful year in comeback and it's just reignited this this debate about fees and my per to editorialize a little bit and put my personal takech I think put some healthy pressure on

ethereum I would say and you know even within the ethereum camp there's kind of two different perspectives which is that you know e it doesn't really matter the entire end game for ethereum is to move users onto layer twos so it doesn't matter the gas fees on Layer Two or on eth main chain and we're going to get upgrades so dankun in the near future I believe that's later for April and then full dang sharting after that at some point that's going to make it trivially inexpensive for users to transact um and basically execution on the network uh but then there's another group of people that say okay but you know Pro 4844 is not necessarily going to increase bandwidth to the to the degree there's not enough bandwidth there for all all

of these different rollups and fees are still going to be expensive and you know aside from that why wouldn't we there's a lot of slack actually on eth main chain to raise gas fees and so vitalik uh posted posted something this week and I'll turn it over to you guys to get your your perspectives here but that you know the quote that he posted was honestly I think doing a modest gas limit increase even today is reasonable the gas limit has not been increased for nearly three years which is the longest time ever in protocols history that 2x bump in the chart in late 2021 is a fake in reflects the EIP 1559 transition which increased the limit um by 2x but actually only increased average usage by 9% so basically splitting the post 2021 games from mois law 5050 increas between

increased capacity and increased ease of syncing and verification would imply an increase to 40 million or so so what do you guys think in general about you know aside from balic comment about the idea of making it more inexpensive for users to transact on E main chain is that use that useful or worthwhile thing to do or is that just going to be kind of the ultrasound money base layer and then people are going to move to L2 so it doesn't really matter yeah when I first saw this I was super confused because uh to me like a lot of the the talking points in the ethereum road map which has been talked about for the past few years is really focused on okay the role of scaling road map everyone's

going to all users going to move to l2s the L1 is just going to host basically rollup data and another one would be you know client diversity you want to make the the L1 as robust as possible and to me this is pretty antithetical to both of those things and John Charo had a had a good tweet where he said the's kind of in this Middle Ground of yeah we want all users to to end up on rollups and that's where they transact but we also want the L1 to be performant and people to use that too and kind of have to pick one of the other and to me raising the gas limit doesn't make much sense because it's going to lower client diversity at the execution layer right now I think like over 85% of clients are

using gu and the the second client uh Basu has had a lot of issues in the recent past and someone actually commented on that thread under metallic and uh put the specs uh basically the potential block times of performance for the different execution clients and basally was way less performant than G and so when you increase the gas limit like you're going to see a lot of people just switch from the minority client to the majority and so you're pushing uh client diversity uh to be weaker with this move and so as a result I I just think it's kind of a weird move given that we want to push users to the L2 um so if it were me i' i' I'd be against

the gas limit I'd say as an L1 you want to create create it to be as robust as possible um you don't care necessarily about the fees to transact because all users are going on the L2 anyway so yeah that's my overall view yeah to me this kind of feels like um um that like now with salana having taken a lot of Mind share and maybe some people are starting to wonder that oh are we going to like and lose liquidity or are we going to use lose users and now we like quickly have to come up with some like Quick Fix solution to I don't know maybe turn the narrative around or get back to

um yeah at the front of people's minds and I think Wy summarized it really well that um you want to like kind of focus on your strengths instead of like trying to hit every box here and I think it's Ian strengths going forward will be on the like L2 level and um it just feels weird that they're going to or that you would make changes like this on the L1 level yeah I I don't know I I think I'm I generally agree with the two of you but I would I think one thing that on the other hand ethereum has

always been extremely conservative around the their gas policy because they're very worried about State growth and there's there's a lot more capacity um on the network than they actually they're actually basically allowing for in the current state so if you could get kind of a lwh hanging fruit easy win here why wouldn't you uh I guess would be I guess would be my question like the thing that I feel like salana has really nailed and I never really I don't hear As Much from the ethereum camp but the toic just alluded to it here is you know Mo's law is a thing it does exist and actually things like bandwidth are

improving as well slowly over time like people have better access to Internet and the assumptions that you know ethereum the protocol has are like very very conservative so I don't know it's kind of like I get it you have to be you don't want to be stuck in this messy Middle Ground where you're trying to you know ride two horses with one ass but at the same time you know if you can make Blow hanging improvements kind of why would you see that market share but it's also a tradeoff as well right because salana like their focuses on performance and as a result they're going to have less client diversity because even with fire dancer if they

agree that performance is their main focus all of the clients will switch to fire fire dancer no one's going to use use the old Salon Labs client because the network is only as good as your worst client and every individual validator is going to want to have the highest performance and as a result you have no client diversity um whereas ethereum in theory is focused on more decentralization robustness and as a result focuses on client diversity and maybe you know takes away a little bit from performance but as a result makes themselves more robust in general so I think it's a trade-off overall all right well this is going to get into the second topic that we're going to discuss here anyway but do you think

that more clients like a higher amount of client diversity is more robust um and if so do you think you max out a certain amount and the the argument here being like the so client diversity is something that's been argued about again we're probably talking about the two oldest longest standing arguments within within like all of crypto protocol design but you know if you look at Bitcoin Bitcoin has one major client which is and the argument there actually and what maybe Adam back would say if he were on this program is that actually more clients does not make a protocol more robust because what you're essentially doing is dividing attention and sets of eyeballs between two different uh clients and you might actually miss like

bugs or something like that it's kind of the stand druck and Miller I like to keep all of my eggs in one basket and then watch that basket extremely closely so and if you look at Bess so I I think I'm understanding correctly that so coinbase has come so people have pointed out that a bunch of the validators Run by coinbase have missed slots recently and uh essu which is I guess I guess the way that they originally positioned themselves is kind of an Enterprise friendly Java client but it's much less performant than the other clients that exist and so you know the flip side of having multiple clients is you're only as strong as your your weakest link so to so to speak and actually by having you know by trying to allow you know creating the the spec for the protocol

around essentially the lowest common denominator of what a client is is capable of you're actually needlessly holding the network back so that's the flip side what do you guys think about the counter argument yeah I know uh effort capital on our team agrees with Adam Beck on this point that you're actually more robust with one client because like you said all eyes are focused on making sure this client is robust as possible as well as over time if things converge to one client that is the most performant the most secure Etc then it's sort of found liness it's sort of one right so I understand that argument this is

definitely out of my realm of expertise um but I know that within the ethereum camp that they believe strongly in client diversity and that being the path to more robustness but I could definitely see both both Visions here yeah what comes to my mind at first I don't know if this completely applies but if you think about like free markets and competition in a market it usually it's much more beneficial to have robust competition because then that pushes like everybody else to kind of innovate and coming up with the best product so I kind of flip the argument of only one client being good because everybody's looking at it because if you have a lot

of clients that are getting build there will be like different approaches to this things and then you might find something good at this client and then something that works better at this other client and maybe that's going to then kind of move forward uh like the I don't know whole industry or clients as as a whole the a middle ground in between what we're talking about here just to even maybe get a little bit more granular is there three basic Market structures that exist win or take all fragmented and then an oligopoly Market structure that sits in the middle and maybe the best uh you know maybe the best the optimal end state for clients is not I pure win or take all one client

or many different clients but like two like could it be two I mean does that create enough competition uh maybe I I have no idea but it seems like that actually might be and that's like roughly where it's sort of shaking out for ethereum as well there are a ton of different clients why why I was saying that I'm not sure this Market Theory kind of applies here because I didn't I'm not sure if you can say that clients are like straight up competing against each other maybe it's not the same structure here and that's why I'm kind of being careful with what I'm saying here but maybe have some thoughts there you might be right I'm almost venturing out of my zone of competence here but one one other question that I had for you guys on

the on the ethereum gas conversation is how much do you think the performance of ethereum main chain actually impacts long run the performance of rollups so like what I'm what I'm kind of saying is there's rollups are going to have to pay some amount of tax down to ethereum be that today it's data availability and settlement um now I I expect validium to get much more popular in this coming Market cycle and okay they're Outsourcing da and you can make a pretty solid argument I think right off the bat if cost was a little bit more reasonable then maybe more rollup teams would opt

to be Pure Play rollups as donr has reminded us instead of validium right so that's like an example of how if again gas costs and compute was priced a little bit more reasonably in eath than then maybe we' we'd have that but I but either way there's always going to be some amount that gets paid down to ethereum and in a let's just be really bullish here and say there are going to be thousands of rollups in the future or a couple rollups are enormous right um or uh I guess how much does the performance and cost of ethereum ultimately end up impacting the end user on rollups like one of the things that is starting to be in Vogue again is Bitcoin right rollups on um pups on bitcoin but the thing that they're

constrained by outside of a community which doesn't really doesn't really want them is uh the performance of Bitcoin the the Bas layer right there's a totally different architecture and like 10minute block times and extremely small blocks that just makes it wildly difficult so right now ethereum looks kind of performant but you've got new age competitors like Celestia coming up um and you know if you don't try to keep the the base layer perform it at all then who's to say some of these new l1s because they're clearly going to be new l1s you know what's to stop them from eating ethereum's lunch so to speak yeah yeah I actually do think

that's a really good point and probably a point towards raising the gas limit in that like you said there are a lot of Da layers that are a lot cheaper than that the AR's going to be under Proto sharting and even under D sharting and as a result um you're probably going to see a lot of like you said validium or celestium as they're calling them pop up where they're using some sort of external da layer but still settle to ethereum and with that ethereum probably needs to focus a little bit on creating the best settlement layer and with that means more liquidity and at least enough performance um to ex basically

facilitate better liquidity and trading Etc um because if they they don't focus on that then suddenly you could have a more performant L1 gain a bunch of liquidity and people just use that as a settlement layer or create a trust minimized Bridge to that L1 so I definitely think it's a great point and is one F the reason why increasing the gas limit may be a good idea yeah and this kind of um comes down to one thing I've been thinking about a lot lately is that okay if ethereum at the end of the day just becomes settlement layer like what's the value capture at that point of the layer like

yes it's super important for the layers that are below it but for the token itself like how do you then justify where it's valued and um like how how close to money it is or whatever you want to call it I yeah I this this was originally one of my problems when Bitcoin people started saying it was that uh this is going to be the ultimate settlement layer for every asset on the planet and yada yada like so I just don't really believe that but I what I also don't believe is that I just don't really understand why that would acrew an enormous amount of value to you and there's plenty of examples where um like

if you look at stable coins where do they mostly settle down to not to bitcoin to freaking Tron because it's cost efficient and uh one of the things that it's been kind of frustrating to me you know if you talk to people about why fees are what they are it's like well we have to price compute resources I get that you have to price compute resources but why don't we approach the problem from how can we improve like how can we optimize those costs uh instead of just like accepting those as some sort of static thing and uh maybe that's a really stupid perspective but I feel like we should be focusing more on how to drive that down while maintaining security and you can actually I'll link it in the show notes but there's a

really great Exchange in between um Peter I'm going to blank I'm going to blank on his last name Sil I I just can't pronounce it Sil silagi and Martin copelan um and you know Marton is an OG ethereum guy but also you know one of the sort of most respected kind of builders in the space I would say and there's a really interesting back and forth between the perspectives where Peter's clearly arguing from the standpoint I think a lot of people at the ethereum foundation optimize for safety like they see raising the gas limit as taking on new risks whereas Martin is like dude need to build businesses on this like even at 50 cents per transaction that still prices out an enormous amount of businesses so just

interesting you can read the read the back and forth though I think it was good um all right I've got one more one more update for you guys and maybe we can use it as a as a jumping off point to uh because I've also had this um a long discussion about this this week about whether or not rups were going to try to use their native token as Gap or whether they're going to use eth for that so this is a proposal that went live on Stark net um on uh back in December but the proposal is um to support for ad support for fee payments and strk um and reduced transaction fees and

basically the idea is you know this was a I think it's been a long-standing question about what what um what is the primary currency I suppose or however you want to frame it uh for these that these rollups are going to use and you have examples of rollups using eth so Bas is a is a good example of that but um there's also I think a lot of these rollups are going to want to use their own native tokens and Stark this proposal uh for Str strk is particularly interesting because it looks like what they're going to do is enable um new features for payments in strk that would only apply to if you're paying in strk so that includes

basically they're going to build their own native fee Market uh which allows users to compete for blocks space during congestion um so basically creating some sort of feature equivalent to 1559 there's going to be a pay Master uh type solution where you know you as an entity can sponsor um user transactions and again if I'm reading this correctly it looks like that is only going to be a feature for payments and trk and then something called volition mode which permits users and devs to opt out of expensive L1 da in favor of much cheaper alternatives um so I guess like Celestia so that's actually super interesting um and so yeah I mean if I think if you just read the what those things are It's

a combination of like there's an obvious incentive for starkware for Value to accruit a Stark in some way and something like a fee Market is really Central to the idea of sovereignty for these chains so what do you guys think about the idea of l2s using their own native token as um sort of the primary currency for uh transactions I mean the reason why you would use something like eth or maybe Tia is because it simplifies the accounting because the rollup has to pay the L1 or the da layer in order to post their data or settle there right so it just helps with the accounting if you're to use

a native token it means that you either need to create a system of swapping the native token for the underlying or you require someone to take on some duration risk where now they're long the token in short eth or short Tia Etc and and you have constant sell pressure of the token over time so let's say uh Stark is posting $10 million worth of data to ethereum per year well that's $10 million in sell pressure if they're looking to pit if people are paying in Stark and they need to convert that to eth and so as a result you basically need to think about the tradeoff of okay I'm I'm definitely increasing the value of my token and its

utility potentially demands but I'm also creating a constant stream of sell pressure um and I have to deal with sort of the accounting and the potential things that could go wrong with that such as there not being enough liquidity between the native token and eth uh so ET so yeah I think it's just a tradeoff teams are definitely going to start thinking about it and I also think that uh it depends entirely as well on how cheap the data that they're posting to the L1 is right so if they're paying Celestia let say $100,000 a year well yeah they're definitely okay with having $100,000 in cell pressure for over a whole year it's definitely worth it to

increase you know the utility of your native token but but with something like ethereum's current costs um it's definitely not something you'd want to do so yeah it's just something teams have to think about yeah I guess in these com I'm this is me just injecting my own opinion but outside of arbitrum and optimism and even long-term optimism and arbitrum I just can't see any of these rollups paying ethereum for da so I my like base assumption is going to be that this all gets outsourced to Celestia or aan da I just I just can't construct a a rational framework for why why they would want to do that um it's just far way too much revenue so yeah because that that that is the that's the

primary reason why you wouldn't do this is just the accounting difficulty and sell pressure but I think like settlement to ethereum for these rollups is pretty minimal cost like I think probably on the order of50 to $100,000 a year and then it's going to be roughly the same for Tia or igen da so I don't know I feel like that's sort of minimum minimal yeah but one thing I've been thinking about is why not kind of flip it around and um have L2 users pay in the kind of the underlying tokens so for example in this case e and then the L2 decides on a certain profit margin for

itself and from that profit margin it accounts or like sets aside a certain amount of which it then uses to buy the native token so you're kind of foregoing the FX risk or the duration risk of the two assets but still you acove value to the underlying token of the L2 that's an interesting idea I guess the other reason that you might want to do it is just because it sucks from a ux um like not to call out but there's a a cosmos platform form that I tried to use recently and it like kind of makes you the default is to pay in the native token it's like this sucks this is so

annoying um I was annoyed by that so yeah I there's probably ux reason brick I think that's a good observation too so there're probably arguments in both camps it might it might end up being a dual sort of system where eth one is default and then there's a native token too it's an option yeah I think the best user experience would be like give the user the ability to choose what token they want to use as gas I know osmosis says something along these lines where you can use atom to pay for gas and I'm guessing they're going to add more assets once they become more liquid on osmosis but yeah the more Choice the user has the better agreed yeah but yeah at the end of the

day what's important uh to remember is also that like the underlying token kind of has to have this money this component or this kind of value acral component so I also get why like even though it sucks from for example from a ux perspective like at some point you just have to come with some kind of or come up with some kind of an idea how to kind of effectively use your own native token right these tokens have to be useful for something at the end of the day um I don't know but I I still don't have a really vividly clear mental model for L2 tokens in general I I just don't really I don't think these

are like moneyness token things like I don't think L2 staking makes an enormous amount of sense so I don't really know what they are to be honest um but if a bunch of the activity ends up migrating to l2s one way to easily do that is to basically you know Jam your token in and say y it's not an ideal user experience but still got leverage baby um all right guys that feels like as good of a place to end it uh as any Westy brick appreciate the the two of you hopping on and um yeah guys as you can see both these guys know more about um maker than most people will uh ever ever know and definitely go check out

the the dashboard yourself and and yeah guys appreciate you coming on yeah thanks for having us thank you thank [Music] you