Should Ethereum Burn Its Way to Zero Staking Yield?

Transcript

Over the past six months, in roughly zero meetings, has the tokconomics argument been raised to me by people when they were deciding what to build and where to deploy on the institutional side of things? And in at least 23 of those, the bybit hack was raised to me as a red flag for Ethereum. What do you think the implications of that are if we're actually trying to attract activity to ETH? Hey everyone, welcome to Bits and Bips where we explore how crypto and macro collide one basis point at a time. We're here to discuss the latest stories in the worlds of crypto and macro. But just remember, nothing we say here is investment advice. Check

unchainedcrypto.com bits and dips for more disclosures. So, starting out as a quick market snapshot, looking at these midday and as a reminder for everybody, it is Monday, August 10th. Bitcoin's hovering a little under 65K. ETH is a little bit above 1,900. Gold's at 4,300 and change [music] per ounce. Uh I think the highest close since late July there. Uh silver bouncing around at 63.5 and change. The S&P 500 was in the 7,760 range and notably the 10ear still hanging around 4.65.

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>> This episode is brought to you by 1-in Aqua, the shared liquidity layer from 1 in. Back multiple liquidity positions with one wallet balance and keep your tokens in your wallet until a swap fills. See how it works at 1in.com/aqua. Not listening to Bits and Bips yet? [music] It's our weekly crypto and macro market show with Rahm Alawalia, Austin Campbell, and [music] Chris Perkins. Search Bits and Bips and subscribe. All right, welcome back everybody. As always, I'm your host Austin Campbell, high scholar of Zero Knowledge Group. I am here with one of my usual co-hosts,

Chris Perkins, the golden hand of Franklin Crypto. and I'm being teamed up on today because Seth Gins is the chief investment officer of Franklin Crypto and is joining us as a guest. So, right now, um Seth is a disclosure thing. Your professional interest runs through staking and yield and treasury structures and we're going to be talking about that um in our second segment today. But before we go fully into that, Chris, I think you wanted to talk clarity for a little bit. Shall we start there? Yeah. Well, welcome to the Franklin Sandwich, my man. [laughter] >> Let's do it.

>> So, Clarity, you know, it looks like the vote has been pushed back to September 15th. >> Yes. >> Um, guys, a lot can happen between now and then. >> Uh, are you still bearish, Austin? >> I again, the single problem that I have continued to fixate on, which is the ethics thing, is the one that I remain stuck on. I think the other ones like look, what's the nice way to say this without making anybody angry? There are a lot of takes flying around about the BRCA and there are a lot of takes flying around about yield. I'm not sure all of them are of equal quality, but I think that is a potentially solvable set of problems. What I'm worried about is is

there motivation to solve them without ethics? >> Yeah, this is what I've been thinking about and I've seen some takes. I think I have a similar one. and would love to get cess as well. What happens if we don't get this law, right? The banks are probably in a worse place because we're back at status quo. National security, same thing. Not as not where we would like to be. I've been talking about some of the provisions in that bill that allow us to maybe enhance our defenses. So, we go back to where we're not.

Um, as you go down ethics, right, we're back to square one. No, no incremental uh progress on ethics. So, whoever you are, you're in a generally a worse spot if you don't get this bill. That's very important. And that's fine. Um let's just say we we we get to September doesn't go through. Maybe people are saying, "Well, we're going to revisit it with the new Congress, like whatever." But what happens? September 15th comes. We get people on the record. We know which senators are on the record. Yes. And which ones are on the record? No.

And then we go into midterm election season and guess what? Suddenly crypto comes back into um those local elections. I I tweeted about this, right? We're going to see people like Fairshake get very involved again. And I somebody tweeted out at me this weekend. They're like, "You know what? Crypto is not even a top 10 platform issue." Well, guess what? If this vote fails, crypto is gonna start reemerging, I think, at the local level at these local uh elections, it's going to hit the airwaves and people are going to start thinking about crypto again. And I some my big take is we get the bill, good for crypto. I think it's actually like

really good for incumbents and and banks and probably more so for them than uh cryptonatives. So, that's a good thing. We don't get the bill. you know, retail gets reminded of this industry. And by the way, I think the AI guy the AI guys are going to play an increasing role in midterms as well. I think they're going to start hitting the airwaves harder and harder and harder, advancing their agenda. But crypto is going to come back and it's going to come back, you know, on TV. It's going to come back on radio and I think that is going to be net beneficial for our market as we move into Thanksgiving where people will start talking about it again. And so I do think it could be a catalyst to get some retail activity back.

>> So I don't disagree that like publicity drives interest. Even negative publicity drives interest, right? Like you see the funny trends like bad headlines about Robin Hood driving people to investigate and open accounts and things like that. So like that one I agree with. What I think will be harder on the political front where somebody like Fairshake has a more difficult task here is if the vote happens on September 15th as we're all predicting now. And I've heard nothing to contradict that. So I I believe that's where it's going to land.

And you don't have 50 Republicans because you have several who are going to defect from this and you get zero Democrats and the major objection of the Democrats is on the ethics basis. I think fair shake is going to have to be very very careful running ads and how they would think about that to not make this a hyperartisan issue going forward because if you go after like Gillibrand >> because she had to vote for this on the basis of ethics >> then you have a problem but if you're not going to go after her and you start targeting the other moderate Dems who voted no what message are you sending to them like I I would say what I worry about from a political messaging

standpoint is that if you get literally zero Democrats voting for it and the hold up with ethics, it's a very fraught thing for fair shake to step into that. >> Yeah. And again, they don't go after just random senators. They go after elections that they can win, >> right? >> And and that's also part of the calculus either. And by the way, they're they're nonpartisan. >> Yeah, they're they're nonpartisan. I I hear you on going after moderate Dems as not being the the best look, but I think their mandate is very clear, right?

their their mandate is to make sure that the crypto industry has supporters in Congress. And thi this has been a a a piece of legislation that's passed the House that is that that has been sufficiently litigated uh sufficiently prosecuted is probably the right way of saying it within Congress and um it it is ready to to be passed and what we're seeing now is um some horse trading maybe some retrading um and and I I think that's exactly.

Now, let let's size fair shake, right? I I think it was roughly uh 140 150 million in the the last general election uh or in the presidential election. I think we have about 50 million more than that now. It's closer to to 200 million now. That that wasn't raised to sit idle. That was raised to look out for the industry. And and that's where I think getting people on the record is important, right? It it again, but in a a nonpartisan way that this is about and by the way, crypto is nonpartisan, right? Ju just to be very clear on that.

>> And this is kind of what I worry about for fair shake though. If you get a clarity vote, which doesn't have majority Republicans and zero Democrats, what should Fairshake take from that? Well, I I think it should take from that that that it needs to there there's positioning on the Democratic platform around crypto that needs to be that needs to be hashed out between the clarity vote and and the the midterm election. So, I I don't think it's a binary you set things in stone in September and then you you go into the midterm election. I I think it actually ends up leading to potentially more

discussion between the the clarity vote and the the broader midterm. >> So I agree on that. I think where fairshake so first of all the obvious thing for fair shake to do is which they're already doing was targeting non-crypto people in primaries and supporting crypto people in primaries because that's a nonpartisan way to get those elected. And then if you have a general election between somebody who's very pro- crypto and somebody who's very anti, you support the pro crypto person. This makes sense to me in all cases as a nonpartisan thing. Where I think clarity gets dangerous for them is you're going to have people who are crypto supporters voting no on clarity. That is a fight fundamentally between the Democrats and

Trump. And I don't know I like my advice to the fair shake folks would be stay the hell out of that one, right? Like that's probably waters you don't want to be sailing in because the danger you create is if you convince the Democrats we're going to attack you no matter what if you don't do what Trump wants. They're going to perceive this as highly partisan and then crypto is no longer nonpartisan. >> We've seen that mistake made before. >> I don't think their goal is to target Democrats. I think their goal is to ensure that crypto advocates get into Congress. Yeah, >> that's a big distinction.

>> I I agree. And so I think my point on that one is I'm not sure the clarity vote on the 15th says much to the Ironically, actually, it's probably worse for the Republicans who don't support the Clarity Act because that tells you that folks like Holly are just never getting on board. >> Yep. He wasn't on board for Genius either. >> Correct. Exactly. And and so that to me is a different set of problems. Certainly, you're already going after Elizabeth Warren and crew. I don't know. >> Not not necessarily. If again, if she's entrenched, they'll they'll save their arrows for elections that matter.

>> No, but I'm saying in the election that matters, they're going to use her as a boogeyman because like she will be the chair of the banking committee, therefore that's bad. Therefore, vote for the other candidate. >> Right. So, I just I think it's a very complicated thing because this one is breaking down more on political terms than partisan terms. Like to be blunt, I think if you revote it in the House right now, you don't get any Democrats. >> Yeah. And and there's there remains very few policy issues around it. Like real policy issues.

>> It I I will tell you this. I know there's been a lot of sound and theory around the BRCA thing. I think it is a solvable problem. I think we can get there with language that makes sense, that makes clear if you're purely developing code and you're not operating things, you're not liable. And if you're really an operator and money transmitter that like put a paint coat of decentralization in front, you're liable. And that the remaining like edge cases are going to be way more narrow and way more defined than where we currently exist, right? Like Chrome is not a money transmitter and somebody who's claiming to be decentralized because they launched a governance token but have control of transactions is a money transmitter and the middle line is

way narrower than right now which covers like the current middle is half of crypto as we know. >> How far apart do you think we really are on the ethics language? >> Very very far. Um, I think the minimum acceptable bid for Democrats is that Trump has to have his family divest all of their crypto projects and not reenter and that there's no sunset language on this and I don't think the Trump admin is willing to divest. So like I don't see any overlap in that ven diagram.

>> What about equities? Should they divest their equities as well? So, I am a long I am a long-term supporter of banning all federal employees from trading individual stocks. >> I think that's totally fair. Index funds are fine, >> but you should not be trading individual stocks because you have the equivalent of inside information. >> They should sell their real real estate, too. Let's just keep going. Let's just >> Again, I I mean, I'm going to be on the record as saying I think we pay our federal people way too little. way too little. Like you should make a million dollars at least to be a member of Congress. That's an important job. But on the other hand, they should not have investment discretion in

individual things because that's what >> I don't disagree. Like like we have but my point is we've got problems across many asset classes and it just you hate to see one asset class get singled out. >> That's that's what's so frustrating for me >> for the detriment of of like better policies. >> I think Dems would deal on equities restrictions, right? Like I do think there is a moment where if you really wanted ethics reform, we could do it. >> I said, "Let's go." >> Yeah. Pelosi has been sidelined. We can do this. That's right. I made that joke. >> All right.

>> All right. Let's go. >> I was going to say, let let's move on to what we brought Seth here for in the first place, which is the fight over Ethereum's yield. So, I'm going to try to set this up and then Seth, we're just going to wind you up and let you and then we'll argue. All right. So, here's what it is. There is a proposal. Um, correct me if I'm wrong. It's like BIP8361, I believe. Two, something right around there. >> Three. >> Three. Thank you. Um, which is basically this. It's bringing Ethereum staking rewards down significantly, possibly to zero, where what it does is burns a rising share of validator rewards as the

staking ratio climbs, hitting a 100% burn rate at 60 and a quarter million ETH or roughly half of the supply. Um, authors of this included Justin Drake of the Ethereum Foundation and ETHC co-founder Jerome Daichi. I'm pronouncing that wrong. um phases in over about 18 months and burns only newly issued ETH. This is not transaction fees or tips. Right now about 41.5 million ETH is staked, 34% of supply with 2.5 million more in the queue. So here's the case for under the current curve. Yield never

drops below 1.5% even with all ETH staked. The incentive to stake never switches off. Where does it stop? It doesn't. The entry queue is saturated at max churn, adding 1.75 mil per month. At the current rate, by Jan 1, 2028, over 55% of supply will be staked and past a point more stake makes Ethereum less secure. The social layer loses its fork back stop against a captured validator set. So that is the argument.

There's 48 hours to comment on the monetary policy change. Um Mike Siligod has been complaining about that one being this is a very rapid thing. Seven of the top 10 protocols could face an exodus. This is a dramatic loss of confidence and governance and stability to be done this way. Um there's also a statement that this is one of the most resisted Ethereum protocols or proposals ever. That was from Stanny at A. Um basically the EF's ivory tower academic approach will not solve these challenges. It's disconnected from the builders in the trenches.

Let's talk about the institutional side. So Joseph Shalom, Sharplink CEO, former guest. Sharplink opposes it. Um validators earn roughly 2 75% newly created ETH tips only account for 15% of staking yields. Validators would be asked to go on securing Ethereum to earn no issuance for it, living on transaction tips alone being proposed at a moment of tremendous momentum for Ethereum. So, I'm going to pause there because there's more that's happened over the next 12 hours. But Seth, I want to take a breath and ask you without getting into the details of the ongoing fight on an

initial proposal basis, how are you looking at this? How are you seeing at this? Is this solving a real problem or is this academic theorizing? >> I mean, look, I'll I'll be honest. I didn't see this problem as something that was front and center going into the the proposal. Um so so I kind of go to the the latter view which is that this is a little bit of um a a an academic push one that look there's some very big stakeholders around ETH now in a a postat world where um the the largest uh holder of of ETH is Bitmine.

um you you really need to um to to work in a very coordinated way. There should be um a a a broad leadup discussion to fundamental changes um like this. So um and th this came as a um a surprise broadly to the community. You know, I think the push back would be, well, this is the the proposal. Let let's talk about it now. But, um, it it seems a little bit like a um a solution looking for for a problem, at least right now.

Um, but but Chris, I know you have some uh some strong views around this as well. >> Yeah, I think this is great because I think the EF is about to eat its own cooking. you know, when people get all crazy about crops and this and that and you know, for people who don't know what crops is, Ethereum is really like leaning into what differentiates it, which is its decentralization. It's million validators, censorship resistance. And I do think that that is Ethereum's edge. But the EF is not a centralizing force and we're seeing other nonprofits coming along as well.

And I think what you're going to see here is this is going to fail. Why is it going to fail? Because the community the applications that are acrewing a lot of value and have the potential to probably acrew m more value because many of us believe the fat protocol thesis is not where that value crew is going to be cruel is going to be. So they're eating their own cooking in a sense because they don't control ethereum and that's a good thing and I don't think they want to. Now, as you start looking at it, probably the most concerning part of this is that if there's a perception that they have control of the network and they're controlling a direction, then the you don't want to recreate the Fed here. It's just not recreating the Fed where you have a bunch of people, you know, go into a spoke room and come

out and tell you what the rates are. Like, that's not how it's supposed to work, right? This should be a communitydriven environment. Now, the other thing that I'm glad is starting to bubble up, the light bulb has not gone out yet, but it's coming, and that's that interest rates can rule the world. Yield rates rule the world. Why do we care so much about the Fed? It drives everything in the economy. Ethereum's yield rate, you invented something called Caesar, like you know, disclaimer, disclosure. I, you know, this is I I was a big part of that, right? It's risk-f free rate, right? But that rate drives the economy and like these ecosystems, these blockchains, these layer ones,

they're economies. Those rates matter and you can't have people manipulating them or messing with them. Then you get liebore. So I'm all about I'm I'm I'm not saying that I'm not saying that that the EF is manipulating anything, by the way, but I'm just saying this is what we don't want. We don't want that. So, so any type of change needs to be open and transparent, gradual, brought about by the community because when you mess with the risk-free rate of any blockchain, it controls the economy. Let's listen one more second because I'm I I go off on this stuff.

You know what? If you have no yield, you become the yen carry trade potentially. You're that source that people are going to borrow and sell and they're going to go to another ecosystem that has that yield. Do you want Ethereum to become the the source of the end carry trade? Something to think about. I I realize it's not a perfect um it's not it's not exactly a perfect analogy, but it's close, right? Uh yield is too high. Everyone's going to stake. That's not good either, right? So, you you have to have a Goldilocks interest rate interest rate policy and it should be dynamic.

It's just super important. I'm glad that this is actually coming out. I think it's really healthy for the ecosystem and not just Ethereum, Hyperliquid, Salana, all these different yields. I think they're going to be much more in focus because as the big institutions come on board, they're wired through a fixed income lens. All right. Sorry for my long siloquy. Couldn't help it. >> I love the little tradey dig in there. [laughter] The manipulation is libar. >> Well, it did right like like we have to learn the lessons of the past. Like we're trying to make it better. that the one thing that I've always been obsessed with about about like just crypto is that you have fixed income markets are $145 trillion in size. They're based on interest rates. Interest rate swaps are

$500 trillion market notional and like this is one area of exploration that we just haven't seen yet in crypto. But fixed income is staring us in the face. And I think as we approach the institutionalization of crypto, that market's poised to finally do something. I think that's one of the biggest issues. But you're seeing like all the sensitivity. Who's opposing it? Institutions, the guys who understand fixed income, you know, the guys with the background in from Black Rockck, you know, our good our good friend Joseph, etc. So fascinate. I think the whole dialogue is very healthy actually for the entire community.

>> Yeah. If I'm looking at this and trying to figure out what do I think of it, what do I think of the proposal? One thing I would hit on is even if I was inclined to vote yes for it, 48 hours is way too short. So I would be a no right now purely from the basis of you don't make a change this big without making sure that everybody material is relatively on board because your nightmare scenario is it passes with yes at like 51% and then some very big holders just start unrelentingly dumping and pulling out like the last goddamn thing you want is like a day later after that vote Larry Frink comes out and goes

you know I like Avalanche better right you have a big problem if that happens because the whole thesis was institutional adoption. So Chris, to your point, if you alienate those people with the process, you have a really big issue. Two, I think there's sort of been a glossing over in crypto to your point, Chris, earlier because there haven't been fixed income people in there of how intricate all this stuff is and how much it matters. And I think there are some core fundamental assumptions that quite frankly have never been really challenged. Like one of the ones I occasionally ask people that I haven't truly gotten a good answer for is how does economic security and proof of stake work if we're really

putting all of the real world assets on Ethereum. Like the net value of those things is hundreds of trillions of dollars. Are you arguing to me ETH will be worth hundreds of trillions of because like then your transaction fees are insanity. And this is why a lot of Tradfi systems ultimately ground down to some form of proof of authority or proof of trust is the cost of economic security done economically is very very high if we're doing this. And so I think this is starting to become shades of that debate because if I can earn 3.5 sitting at a US government money market fund and you're going to cut ETH yields to zero, I've got to have a really

strong forward belief in the economic value of ETH to own that over the money market fund. And Chris, to your point, there's some subset of people who are going to borrow E or sorry, loan ETH, borrow dollars, and just put it in a money market fund. And that as we know does this. So one of the things I think the EFF is forcibly coming into contact with here that they may not have expected is global macro. >> Yeah, that's the beauty of what you just said. Like what what better a convergence theme? Now Ethereum's yield is competing with Treasury yield. It's competing with the yen, the yen yield.

Like it's it's this is the next step in the evolution of our markets. And and that's why I welcome this. I think it's a great time to have this debate >> and and also I think there's another interesting part of this proposal that I think was mistaken was lumping a number of concepts together that could have been disagregated because for instance something like hey we don't want more than x percentage staked because that does kill our ability to have like liquid trading and usage does not also imply and we need to just cut the base staking rate at the exact same time, right? Because like hypothetical proposal here, right, that I'll throw out for the Ethereum

community, our staking rate is going to be pegged to sofur, right? Just to match it to the US dollar rate. But if more than, I don't know, twothirds of ETH, whatever threshold you want, is staked, it just starts degrading by X% every day until we get back below 2/3. >> Uh, Austin, real or nominal? Uh, okay. I think you have to do all of these things in nominal terms, right? >> How how does one define real yield and ETH Chris?

>> Well, it's pretty obvious. You go to uh ultrasound money and and you can see the burn, right? And and there is an inflation rate associated with with the supply. So, I I do think that it's it's definitely um something you can calculate. >> Okay. But nobody is using ETH as a unit of account to buy real goods. So like >> they did for NFTTS, >> but that was that was a bygone error. >> This is a p this is a purely self-referential argument. You know it. I think we need to use nominal until it's a unit of account. >> All right, fair enough. >> So all right, second part of this topic that I wanted to raise. Um we've had 12 hours of like escalating

arguments. Um, DAP Lion, a co-author, said, "How to publicly admit that the network has been captured by a small group of interested parties? Is holding ETH still economically aligned with the upside of the network? So, tax ETH holders billions so these select parties can make hundreds of millions. You can't bribe me like this." Uh, it goes on, what if your ETH makes 1.7% APR and inflates by 1.7%. >> Right? There's your real yield, >> right? the real yield is zero. And so I wonder if you there's excuse me I wonder if users weighing on this EIP consider today's reality or a 5 to 10year horizon

and where I am going to throw the ball back as we're talking about this is if we're talking about a 5 to 10year horizon is any part of this proposal even in the top 10 most relevant things to make a projection on that basis right or are we having a really narrow academic fight because look, I'm a dumb trader and practitioner. But to me, the number one question of ETH's future value is are you getting people issuing assets on ETH and using them on ETH? I think you're like for alarm fire is the fact that DTCC went with Stellar.

>> I go ahead, Seth. I I I also think there's a question of like was it was it in the interest of ETH holders to have over 10 billion dollar come into ETH over the last year through the the broader set of DATs and and before that the the ETS the the institutional wave of flows has been unambiguously positive for the the network broadly. So to dismiss that cohort of owners as as being capture seems to me to be a little bit of a a narrow uh take on what's happened with the ETH network. But to to

your longer term question, I mean we need to have activity increasing. We need to have real world use cases. Let's talk about rather than constantly dealing with tokconomic tweaks and try we're we're doing tokconomic changes in an environment where there still isn't a lot of activity like let let's think about ways to drive that crossover activity. Let's think about ways of bringing the traditional financial infrastructure onto ETH to to your point about DTCC. Let let's think about ways to drive that top line rather than constantly tweaking the uh the the tokconomics to try to get the um the the

token moving higher. >> All right. >> Amen. Amen. He's totally right. You like we need activity. You want to increase the burn, >> drive more transaction fees, right? That's what you need. >> All right. I have a lot more to say on this, but first we need to go to our second ad break. So, we will be right back. $540 million. That's how much concentrated liquidity sat idle in a given week in the first half of this year. About 30% of the D5 TVL if you're wondering. That's according to Dune Research commissioned by 1 in. But there's a solution. 1-in Aqua is the new shared liquidity platform. It lets LPS back multiple positions with the same

token balance and keep their tokens in their wallet till a swap comes. Why does that help? Because the LPS don't have to split their tokens across positions, they can cover more market conditions and pairs with their full balance. That means more activity across deeper liquidity. See how it works at 1in.com/aqua. Remember that providing liquidity carries risk and fees aren't guaranteed. Heads up everyone, we've now fully transitioned Bits and Bips [music] to its new dedicated channels. So, if you're not yet subscribed to the new Bits andBs channels on X, [music] YouTube, Spotify, Apple Podcast, or wherever you get your podcast, go there and subscribe now. [music] For the next few weeks, we'll play segments of the full interviews on Unchained as a reminder. But for now, you'll only hear

those short segments of Bits and Bips on Unchained. No more full episodes. You can get links to all of the dedicated channels with the full episodes at unchainedcrypto.com/bitsandbips [music] spelled vips. Thanks again. >> All right, everybody. Welcome back. So, I have the advantage in this debate of running an advisory firm. I speak to most of the big banks, asset managers, and payments companies, and have a decent idea of what people are thinking about when they're looking at institutional adoption. So, here's a ball I'm going to throw to you guys

because this is something I have to say to the Ethereum community. I'm curious on your views. Over the past six months, in roughly zero meetings, has the tokconomics argument been raised to me by people when they were deciding what to build and where to deploy on the institutional side of things? And in at least twothirds of those, the bybit hack was raised to me as a red flag for Ethereum. What do you think the implications of that are if we're actually trying to attract activity to ETH?

>> Um, look, I I think when you look at institutions, it comes down to utility. They're not tribal like crypto people for good reason, right? They're looking for TPS. They're looking for or transactions per second. >> Yep. >> They're looking for security and they're looking for high like like low fees to the extent that that matters, right? Um many different depending on how who you talk to the use case, you'll have different um they want to overemphasize one of those elements versus another.

You talk to your friends at DTCC who mentioned yeah they love Stellar um but they love a lot of other uh blockchains as well uh and they love TPS like they they just love it. So I think it's more about utility and security absolutely front and center 100% probably in my mind the biggest issue to mainstream to true mainstream adoption. Uh but Seth I know you got a lot of feelings here too. No, look, I I think network effects and longevity are two other things that that weren't mentioned. So, ETH ETH definitely uh wins out on those and and that's why it's part of all of these conversations and we're also hearing so so we

obviously have a lot of these conversations as well and you you hear from a lot of different parts of the uh the the market stack and the payment stack that no one wants to be a kingmaker. >> Yeah. >> Right. Everyone wants to to be engaged with any blockchain that has activity. To Chris's point, they obviously they they want that throughput. That's super important. And the security is a non-negotiable, but they want to go anywhere that their customers are going and and that's going to involve Ethan one way or another. But what what you still need like th this isn't about um th this isn't just about putting out a

technically performant platform. This is about having people go out there and sell it. This is about business development and and that's where ETH has historically underpunched its weight. But we're starting to get a mobilization now. And by the way, that mobilization is is being fueled by some of these big pools of institutional capital, >> right? Like the very people capturing the network, right? So >> yeah, crypto folks love to like look down on the institutions. Um we've seen it for for years, but let me tell you something.

>> They are super sophisticated and they're not here to protect their bags and push for a certain tribe. They're here for utility. And maybe this is the first time that we've seen in years where utility is front and center, where applications are now starting to st take a much bigger role in in value acrruel. Again, I think it's healthy. >> So on the institution front, one thing you've got to think of is that there's also a coordination problem here. Like the reality is the institutions want to be where their customers are, but they also want everybody else's customers on there, too. so that they could trade, right? And I think that puts you in a world where Seth, you're right, nobody

wants to be a kingmaker, but you also need to be call it the least common denominator in terms of credible platform that everybody will accept. So if you've given people severe heartburn with say your staking model or security model that in the long run actually does start becoming a blocker because if you have say a large global regulator come out and say well we're really worried about that buy bit hack and long-term governance so not ETH and a bunch of activity moves to I don't know Salana you have a problem is the ETH community.

Now not saying Salana is the answer but just like hypothetical. The other thing is if you're going to fight the institutions to the death guys, that's where all the money is, right? And what I mean by that is if your vision for ETH is sort of call it the Ethereum Foundation like stateless money like sort of pirate ethos thing, I'm not telling you you can't do that. You definitely can. But your TAM is much lower and your token should probably be at onetenth of its current value because you're making a choice to permanently be a niche that rejects all of these interests. So if you truly view any institutional influence over the chain as verboten, okay, like you're totally allowed to

make that decision, but that does have implications for price and they're not this way, right? Because like if you're only going to transact with deep DGEN cipher punks, your market's pretty small. Yep. 100%. >> And that should not be the staking yield. All right, let's talk. >> We did it. >> All right, let's talk about another set of rates and let us talk about the Fed. So, a job shock hit the hawkish Fed is what we are titling this. Um, and basically here's the punchline. The economy appears to have lost jobs in the month the Fed spent worrying about hiking. So that's 23k jobs down against

a forecast gain of 80k. Um and the prior two months were also revised down by 103k. This has been a longun thing that has been going on since the Biden administration of we report revise down report revise down report revise down. So a reminder to everybody this is a continuation of a trend. The Fed held rates constant at 3.5 to 3.75 9-to-3 vote. Three officials dissented in favor of a hike and September hike odds are somewhere in the mid40s right now. They were 55 immediately after the print. Um unemployment rate also fell which is

where things are getting a little weird and need to be understood. That is 4.09% 09% the lowest level in two years which means employed people fell but job seekers also fell. The number to look at and Joe Weisenthal was tweeting about this is that the labor force participation rate fell to its lowest level since Feb 2021. And for those who don't know what that means that means take all of the people in the United States and look at how many of those people are working. So as an aggregate of the population, we have less of a percentage working than we did before.

So among foreignb born workers, Joe said the civilian labor force has dropped by about half a million in the last year. And Muhammad El Arian was saying participation at 61.4% quote points to underlying issues with the supply side of the labor market. So I'm going to pause there before we get further into CPI. Seth, I will I will set it up this way. There's a country I'm very familiar with that had low unemployment but declining labor rate participation for a long time and that's Japan. What do you think is going on here?

>> Look, I I think the when you look at the unemployment rate, when you look at the the broader dynamics there, I think the immigration crackdown is having a a big impact. That's part of what's driving the um the the lower participation. What what I what I think is a really interesting setup here though is on Thursday you had chairman Warf say we're going to be data dependent as we come into September and the market actually took that as a hawkish comment around September and the potential for a hike meaning there was a greater potential for a hike. Then you get the uh the jobs report on uh Friday and it's like well data dependency can mean two different

things, right? Um and what's interesting is the Fed actually gets that data a day in advance. So I I think we're looking at a a new chairman who is not that likely to to hike. Um that that's been my view for a while. I I know that view is shared by by at least some of the uh the other people on this uh stream as well. Um and look, I I think the the heart of that comes down to AI through its productivity gains is going to drive disinflationary pressure at some point in the medium term. And that's going to to mean we're going to be positioned way

more restrictively than we realize. And you don't want to have whiplash. You don't want to to be getting more restrictive than getting less restrictive. And and kind of going where the puck was rather than where the the puck is going. Let's see where CPI comes out. If you remember, last month's CPI came in lighter than expected. So, we had lighter CPI, lighter jobs, bigger negative revisions. Let let's see where we end up as we get the next CPI. Brent, >> you guys know the uh the old phrase, don't fight the Fed. I think in this administration, it's don't fight the Treasury. Like, don't fight Bessant.

This dude, you know, look what he's done. Look what the secretary's done. Uh when he decided to intervene in the yen, um why did he do that? Because he doesn't want rates going up. does not want them to sell their treasuries. Um so what did he do? He sold euro, right? And and I think as you step back and you look at this administration, um they want to keep low rates. Donald Trump has made that no surprise. And so yes, I think Wars has got a balance where he's got to, you know, continue to stay independent and I think he will. Bess's not independent. He's doing what he needs to do. Um and I just I just don't see a scenario then like look at commodities right now. Look at WTI. Look at uh Brent. We're not at $200 oil despite the fact that Hormos is closed,

right? The markets are rewiring. They're finding a new way. US is pumping away. Um I think WTI is in the 80s today. That's crazy. Hormus is closed. Who would have ever guessed? You know, this far into the What does it show? Markets are dynamic. We're not seeing that insane, you know, at least oil inflation that hits people at the pump. And um look, I think it will be an issue going into into midterms. Um but I just don't see them raising rates. I like I I just don't see it right here and now. >> I think part of what's important to think about is also the structure inside of the Fed and what the mandate is. A lot of these discussions occur kind of untethered from considering some of the

base level things going on here. So one reminder for all people looking at this the Federal Reserve has a dual mandate and that is price stability and employment right so right now if you look at what is going on their indicators are going like this right unemployment that was not a great print they're going to be concerned about that they would like more employment which would originally mean lowering rates but inflation remains above the 2% target which would mean raising rates. And so when you have both of those pulling in opposite direction, what the Fed has done historically, and you can look even back to the 1970s on this, is tread pretty lightly until one of those two

things breaks enough that they need to act decisively. So number one is to remember that if you look only at one of the two signals, you're not actually being data dependent and you're not remembering what the Fed's mission is. As Seth was alluding to earlier, if Walsh is meaning what he said about being data dependent, he's got data that now supports doing nothing in either direction. Two, Fed governors are genuinely independent human beings, right? These are not people who march in lock step. We have a 93 vote right now, which means you had three dissenters in favor of a hike.

Previously, we had a vote where you had denters both in favor of a hike and in favor of a cut, right? And if you go and meet these people, like if you go to Fed events, if you talk to the governors, like I've met Waller, Bowman, Goulsby, Barkin, all of them are their own people with their own decisionmaking frameworks, right? And they're not identical. Some of them are a little bit more forwardinking, like I'm not going to say vibesbased, but leaning in that direction. Some of them are very core economics datadriven. This is not a body speaking with one voice. So the other thing you've got to think about is how are these inputs going to be processed through a decision-making framework that

is not uniform. And so to me as I look at this, September seems pretty obviously an additional do nothing unless we get to a point where the data is truly breaking hard one direction or another because again you have to move four votes in favor of hiking basically to get a decisive majority to do that. I don't think they're going to do a like oneperson vote like barely hike here. That would be extremely disruptive for the market. So you're looking at probably needing a decent majority before all of the people are changing their votes to do that. And that means labor is much stronger and inflation remains above print or labor remains where it is but inflation's really got

to rip. Like Seth, how do you feel about that framing of thinking about how the Fed is going to think about itself? >> I think there are a lot of moving parts also. I mean, so I I'll give you some of those some of those dynamics. If you look at crude, look at Brent, I think we're up about 10 points on Brent just in the last few trading days, right? >> Yes. >> Then you look at the 10-year and it's interesting. We're we're at the high end of the range, but but we've been kind of in this tight range for um for for a little bit for a week or so. And um not not breaking out. And part of the reason why is toward the end of last week,

Treasury gave their expected supply issuance that that was coming and it was lighter on the long end than expected, which by the way is a really great tiein to crypto. >> Yes. >> Why? Because you're backing stable coins with bills. You're backing stable coins with short-term treasuries. So what we're seeing is keep supply low on the long end, which puts a little more stability into rates on the long end.

But where does your demand, your increased demand come from on the the short end as you're bringing more issuance there? It comes from Besson's desire to get stable coin issuance up to two to three trillion by the end of the administration. So, it it's really interesting how you kind of you pull everything full circle. Um, and and you can kind of see that there's a a little bit of a broader road map coming together here. >> I mean, another point on that front that Chris, you're probably familiar with this one. I think nondivatives people don't always follow is that's another big source of demand for short-term

treasuries nowadays because we have to clear everything. We have to post collateral on all these derivatives. You need initial margin. You need variation margin. It's a small $500 trillion dollar notional market, right? Like as we look at the demand coming, it's probably compared to call it 2004 weighted much more heavily in short-term bills than it is in long-term bills where you had way more insurance dominance at that time trying to buy the longdated stuff. And so I think you're in a world where there's large demand for short-term treasuries. It will grow if stable coins continue to move. This also sort of complicates the job of the Fed, but also makes it easier in the

sense you can just focus on short-term rates more. Right? If the 30-year rates at 8% but 30-year supply is 1% of total supply, it's kind of a who cares. I was looking at these numbers recently like the pools of collateral you're talking about on derivatives plus dotfrank I think between the uncleared margin which is the non-clear like you have to post collateral now and the cleared it's it's like it's like over a trillion dollars it's it's a big number it's a big number >> all right speaking of big numbers I want to hit the final topic because friend of the show Lorenzo Valente uh has been commenting on agents so he said crypto Twitter missed the most important

earnings call of the week. It wasn't a crypto company. It was Cloudflare. AI agent requests are up a light 1700% year-over-year. Agents crossed 50% of total network traffic. This quarter, first time in history, nonhuman traffic is the majority. Management admitted it happened faster than their own models predicted. And Cloudflare projects nonhuman traffic outnumbering direct human traffic by 1,000x within five years.

So Matthew Prince on the call, CEO of Cloudflare was saying Cloudflare handles about half a billion requests per second. Somewhere between 1 to 10% of those you could probably monetize through some sort of microtransaction like tiny fractions of a penny if you compute it properly for those office space fans out there. And that means 10 million financial transactions per second to be able to scale up to a 100 million. Visa currently peaks at about 20k per second. Prince is saying a lot of the world that's building these next generation payment networks thinks that they're competing with Visa as opposed to trying to figure out how you build a better internet. Uh the prince quotes by

the way are from the call audio and transcript coverage. That's not a company release. So all things approximate. Go listen to the audio. Valente's two conclusions being short L1 throughput is being short agentic workflows and at 10 million TPS and at onetenth of a cent per transaction you're looking at 315 billion a year in base fees alone stable coins in crypto are the endgame here. Uh also friend of the show Omid Malikon, this volume cannot be handled by any known blockchain currently. Even corpo DLTs with five validators can't scale that high. And even if it did, the

centralization eliminates the point. He said Cloudflare will instead probably play the role of trusted central counterparty performing multilateral netting and settling onchain periodically. If that model sounds familiar to you, it's the same trusted service card schemes performed between banks and merchants. As a counter counterpoint to that, I will also say I'm friends with Bob Bench, founder of Radius, did a small thing you may have heard of called Project Hamilton at the Fed, who is rapidly building performant blockchains for precisely this. So, it's not nobody is building it, it's that most people are not building it. But I found that to be sort of a fascinating

framing of what is happening with agents. Um Chris, I want to start with you looking at this through both the VC lens and the builder lens here. What is that like incredible turn of like traffic towards agents mean to you? >> Yeah. So as the world's changing so fast, uh it's it's going to it's resulting in a lot of problems and what you try to do is find those founders that solve those problems in this really dynamic and evolving um industry and ecosystem. We believe that there's going to be a tremendous value, a cruel layer at that intersection of crypto and AI.

Sandy call um from Franklin uh she recently published an a piece on it. It's really worth a read. It's it's really a solid piece, but like what are the problems that you have to solve for? Well, one of them is who's a human and who is not and how do you you know a lot of web traffic is predicated on marketing, >> right? How do you market to an agent versus how do you market to a human? >> Yes. >> All very important things. You know, you talked about other challenges that need to be sorted throughput, TPS, right? These are all areas as you look at the stack and and and dissect it. um humongous opportunity at a time especially and like look everybody knows that that crypto crypto rails that is where the agents will transact. It is

the most efficient way to do it. Micro payments we can we can chop value down to however small amount that we want. Um and that's and what are the agents good at? They're good at hyperoptimization. That's the one thing they love. And so it is the it's blockchain technology that will be the rails upon which these things operate. That's pretty obvious to a lot of us who operate at that intersection. Now the question is is where's the opportunity? Where's the value? And um look, we've been looking at this space for a long time. It is an exciting exciting space and it's starting to really show uh how important it is. I know Seth has strong views here too because we talk about it.

>> Well, I mean look, my my view would be and I will echo you know Sandy has a great way of framing this which is crypto complements AI. One of those two partners there has has seen a lot of price appreciation over the course of the last 6 to 12 months. The other has not. Um but but I'll step back and I'll say to to have cloud flare which is a a central component of how the internet operates talking about um both the the way that they see agent requests uh going vertical over the next few years and then also this intersection uh

with stable coins using X42. I mean, Cloudflare has has been in the background building out the tooling that they need to use crypto rails. Um, th this to me is part of that that broader thesis or or broader uh sentiment in uh in cryp crypto right now, which is the fundamentals are moving very quickly in the right direction. Price is not keeping up right now. So th this is part of what's driving th this to me is exhibit A on the fact that fundamentals and price in crypto are about as wide as they've ever been and and crypto is so

front and center as you get more agentic activity and remember like open claw really kicked off in December. So we're we're not talking about a a gigantic AI as as having been a high growth phenomenon for for years here. Th this is brand new and you're seeing the intersection with crypto come together very early in its life cycle. I would. So, as I was looking at this, one of the things I've been thinking about this price versus like fundamentals disparity is I also think it's a question of where the hell is the value capture, right? Because let's say that Cloudflare is correct in all of

their projections. Where does that money go is the second question you have to answer. I think that's one area where a lot of the disconnect is that nobody trusts these governance tokens to actually pay the users given some of the things that have happened there. It's unclear which L1 will win. Is it like should you just buy Cloudflare stock? Right. So I think part of it is also a value capture question. Seth, do you agree, disagree? Uh Austin, I'll tell you in in the last two months, we've had probably five projects come to us saying, "What do you guys want to see in our tokconomics?"

Right? So, people get it. They get that there's this trust deficit. They get that there's now a a protocol that is showing great performance, hyperlquid, on the basis of having real revenue, a fantastic growth trajectory and a buyback that drives that revenue right back to the token. And everyone is saying, "How do we do that with our token? What do you guys want to see?" It it's it's almost like traditional investor relations for uh for a regular company, but but almost like taking a few steps back and saying, "Hey, like we we realize we're we're not fully there yet. Help us get there. Help us think

through how we create a token with the right value capture such that investors will be attracted to that." So, we're we're seeing movement in real time on that front and that's super important. >> Chris, you want to add anything to close it out? >> Uh, it's been a great episode. Uh, I've I've enjoyed it. I think when you look at the AI crypto intersection, these are complimentary technologies. And I'll be honest, like, you know, people were freaking out about SAS apocalypse. Now they're re realizing, wait a second, this the this AI and SAS companies will the smart SAS companies are going to come together. the smart founders are going to figure it out and use AI. AI is going to be ubiquitous. Um, and then I

guess the last thing I'll say is that there's another technology that's looming out there in the future that people aren't talking enough about. That's quantum. And so like you have these three technologies coming together all at the same time. Uh, hi, ASI, Qday, it's all coming in the next couple of years. So what an exciting time to be alive. I'm I'm disappointed you said quantum instead of robotics, but we'll just leave that one there. >> We'll talk about it next time. >> For those who did not look, go look on Twitter at all the DARPA like lift challenge insane robotics stuff. It's incredible. Just trust me, it's very funny. All right, so that is it for today. One more time before we go. We have our own channels now. Subscribe to them if you want to keep watching.

Otherwise, you are going to miss us and that would be tragic. So, thank you for joining us for this episode of Bits and Bips. We'll be back in one week to discuss more about how the worlds of crypto and macro are colliding. Seth, hopefully you will join us again. Until then, take care everyone. Thank you for watching and hope you enjoyed this episode of Bits andBips. Just remember, nothing we say here is investment advice. And please check unchanged crypto.com/bitsandbips for more disclosures.