Silvergate Crashes, Cosmos Hub Ghosted & Jump Exploits | Roundup

Transcript

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-hosts 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. and welcome back to another roundup of Bell Curve. You got Michael's one and two, Vance, and we've dropped the dead weight, so it's just three of us this week. I'm just kidding.

Yeah, I know. I love you, buddy. That doesn't eat that. He's holding down the fort. Do you guys send people down there or do you do you feel tempted to go to these things yourself? We're usually at these things. We we sent a couple of our people there, but Eth's a a fan favorite. It's a classic. Um, in in the last one before the pandemic, I think it was literally held in like a parking garage that was like astroturfed. It's just like a great builder conference, but could make it this year. Hopefully next year. That's a vibe. I heard there were 30,000 people registered. Pretty nuts.

And and from what I hear just on Twitter, the vibe is very positive. There's a lot of people interested in ZK. There's a lot of people interested in L2s, DeFi games. You know, it's just great when you go to those conferences and you just get a re renewed sense of of vigor in the industry and and just like the sense that, you know, it's not just you and 15 people on crypto Twitter. It's it's it's actually a real industry like actual people doing this. Yeah, I'm with you. I think the biggest one for us, I don't know if you agree with this, Vance, but the biggest one, the one that we had the first experience of that feeling was Devcon. I think No, this is in 2019 before we knew you, Mike. uh Devcon, I think it was six in Osaka, uh where you literally had like

5,000 people all talking about Ethereum, all talking about DeFi, all the different announcements that were happening, and then you've got Vitalic and like 20 of the core devs with these massive Japanese dancers and drums on stage. And like it was it it was one of those where you're like, I don't know what I just saw, but it was definitely interesting and I feel like there's something happening here. Well, the big news of the week is that uh fellas, we're going bankless. We are going going bankless. Unillingly bankless. Not the way we thought it was going to go, but here we are. Um no, we're talking about let's talk about Silvergate because that's actually relatively big news. So, I mean, the the title of the story is that Silvergate

was due to file its 10K on Wednesday. So, we're recording this Thursday, the day after, and they said that they have failed to file. So shares are down I think at the time of recording it's down about 45%. Turns out Wall Street doesn't love it when you don't file your 10K. Um just to like give a history I think we've talked about Silvergate a little bit on this show but Silvergate you know they were a traditional bank right kind of like a local regional like a local regional bank. Um and then they started getting into crypto around circa I think like 2014 2015. They a couple things to know like first over time the their depositors I think as of end of 2022 it's like 90% crypto firms right so that obviously creates a little bit of a risk uh from a deposit standpoint the other

thing to know about Silvergate is that they've built out very impactful and highly used uh infrastructure especially on the exchange side of thing they have something called the send network and that's how all of these kind of market makers and exchanges all talk to each other in after hours trading and they uh send and deposit uh you know US dollars. So you know it's been kind of widely reported on that they struggled near the end of last year. They had an enormous kind of bank run which they processed by selling uh their debt securities which is they're basically holding all those deposits in treasuries in almost any year that would be totally fine. The problem was it was like the worst year for bonds in a couple hundred years in the US. So I think the Wall Street Journal they reported that they lost

about $718 million. Um, and apparently it's just getting worse this year. So, uh, and then I guess the last bit of news to note there is that there have been a couple tweets. Uh, you know, Coinbase, uh, basically tweeted that they were no longer doing business with with Silvergate and it's looking pretty bleak, at least as of today. I'm not sure. What do you guys think? It's kind of like the classic bankr run scenario where just the trust has broken down and people are now pulling deposits. They're cutting relationships. they're curtailing whatever activities they have ongoing with with with Silvergate. And Silvergate is primarily the main transaction bank for crypto.

What that means is that when you actually uh withdraw money um from Coinbase, they're actually sending it to your bank account from Silvergate. Um and now Signature is going to be that player. And you know, Silvergate's a a smaller bank. Um they're as of today a $300 million market cap g bank. Signature is about six and a half or seven billion right now. And so like the amount of concentration risk that they had within their crypto depositor section was gigantic. And you know this is the risk of of of that type of concentration risk. The other thing that we've we've looked at and you know this is not like the fixed income group of framework speaking. This is like Michael and I who don't have a ton of experience

and looking at banks just like reading the tea leaves on what we're seeing. you know, it looks like they took all of their crypto deposits, put it in, you know, pretty long duration credit, and then got worked on that once rates rised. And Arthur Hayes put out a tweet today that said really all you needed to do was take USD deposits from crypto firms, buy super short duration or at least like mixed duration credit, and then, you know, not get blown up or have to be a forceller when rates rise, uh, just because you have a little bit more duration diversity in your book. That does not appear to be what they did. It appears to be the exact opposite where they just took massive concentration risk in very longdated stuff and then got blown out. So, I don't know actually how mechanically an insolveny of a bank

like Silvergate would work. I don't even know if they're there yet. And they haven't issued a going concern warning yet. They issued a warning that they might issue a warning of being a going concern, but it's certainly not looking great. The thing that Vance just mentioned was the thing that I was going to double click into, which is they didn't file their 10K, uh, which is their annual report. They paused and they said that they would be filing it shortly, but it has something in it that they are concerned about the potential for going concern in the next 12 months, which means that they need to be able to work out some of the risk factors. They need to work out some of the disclosures. They need to basically spend time with lawyers and bankers to

say what is actually something that we can reasonably put forward and and sign our names on the dotted line to say these are the reasonable risks. These are the reasonable disclosures that we have to make to all potential shareholders and and so the the market is reacting to that as Van said it's down you know whatever percent today I haven't checked it in few hours but it was down 30% after hours yesterday. Um, broadly speaking though, you know, they it it will be interesting to see like do they actually have issues withdrawing? Do they actually have issues with, you know, liquidity? Um, there is a difference between something getting oversold and an actual insolveny. Uh, it's not like the bank is, you know, Luna and it's propping up its customer deposits with its equity. Like that that

doesn't necessarily that that's not how banks work. Uh, regulated banks that is. Um, so there is there is something to that. Uh, it's just a question of how much how much loss can they take before you know they they become truly underwater. Um, so that that's kind of like the big question mark I would say that needs to be resolved. I don't really know how this works either, but you know this is Silvergate has been I think actually going into Tuesday or Wednesday it was the most shorted stock uh in the US. It was like 81% of its shares were sold short. And there's something when there's some kind of rule where if if the auditor is sort of presented with I forget there's a very specific kind of legal term for what it is then they have to investigate. So Elizabeth Warren has kind of specifically singled out

Silvergate. Mark Cahotus you know I've seen him on on Twitter kind of giving interviews. He's a pretty well-known short seller. Um is a lot of concern. I mean, I I'm with you in the sense it's very far cry from Luna, but not filing a 10K is definitely there's probably cause for legitimate concern there. Elizabeth Warren put out a letter today about this. You know, like she's calling this out directly. Um, and you know, the at least the the thought is that there's a lot of people who have, as you said, 81% short interest, a financial interest in this thing going down. Um, so I I I don't know where the where the buck stops or like where this thing ends, but I do think that there are a lot of incentivized parties on both sides here.

Two other things I think are are important. So Micro Strategy is a large counterparty of Silvergate. And they put out a tweet today that says, "We have a loan from Silvergate not due until Q1 2025. There are market concerns regate. For anyone wondering, the loan wouldn't accelerate because of SI insolveny or bankruptcy. Our BTC collateral is in custody with Silvergate. So, it's not like they have a bunch of um they definitely have a lot of credit exposure to the industry, but the industry doesn't really have a ton of collateral exposure to Silvergate. It does have implications where it's going to be harder to withdraw money, maybe harder to do create redeem with with things like USDC, but this is not like a a death spiral scenario for really anyone other than Silvergate if they have

gotten blown out as bad as you know some people are saying. Um, so the that's one thing. I think the other one that I was watching a few weeks ago is you had this weird uh mly crew of characters getting on both sides of Silvergate. You had Brendan Bloomer as a I think like a 9% shareholder. You had Block One as a 9% shareholder. And then you had like Citadel and Black Rockck and Yeah. Yeah. And you had like you know a couple other of the big boys. Um, and there's certain rules about owning shares of a bank where if you cross seven and a half percent or something like that, like you like I don't know the exact regulations.

I'm paraphrasing here, but like you might also become a bank in terms of your reporting requirements and that's like not fun for anybody. So, it's not like you can have like Block One double or triple their ownership. Like you're kind of capped on on in terms of like the offensive side of Silvergate. On like the other side of Silvergate, you had George Soros and his fund shorting it. And so you had kind of like these two camps lining up against each other. And this was when Silvergate was at like 15. It's uh it was just weird to see that. You don't really ever see that. Um especially with Trifi people taking stances in crypto.

It was interesting, but it looks so far like the Soros side is is winning. you know, to address kind of the, you know, to maybe like stand up for Silvergate a little bit here. I, you know, I I also read that Arthur Hayes tweet. Generally, when I see people like kind of making those tweets from the cheap seats, it's like, okay, dude, you know, you you weren't actually in a position to run that bank. Like, there was probably a really good reason why that was the case, you know. Um, but thanks for the input. So, I that was kind of my reaction to that to be honest. Uh I I also think my my read on Silvergate I this is totally an anecdote so take that for what it's worth but I've interacted with that team pretty frequently. They always came off as pretty professional

and like they knew what they were doing. And like to your you know to your point Vance about these sort of people kind of lining up and and then taking individual sides. I mean, sometimes, you know, uh, companies are the casualty of these powerful shareholders who have these own weird battles, right? And definitely Silvergate, I think, is they probably made some mistakes, but I think they're getting caught up in something that's a little bit bigger than themselves. The the last point I want to make about this is Silvergate is one of those companies where, you guys probably heard this a lot in crypto. Uh, we invest in picks and shovels businesses, right? And those are supposed to be less risky than the underlying assets they're based off. Go take a look at where Silvergate has landed relative to its all-time high and then go look at how Bitcoin and ETH have

done from their all-time highs. It's just that's just not how it works. It's not how it plays out. It's like that that whole picks and shovels. Oh yeah, like the regulated businesses of crypto, those are like catnip to like growth investors and Silicon Valley people. And like just take a step back and think about the lived experience of those investors over the past 12 months where they were like, "Yeah, crypto's coming, but we're going to regulate it and we're going to be the good guys." And then like fast forward 12 months, it's like you invested in DCG, you invested in FTX, you invested in Silvergate, you invested in even frankly Coinbase. Like all of these things have just gotten completely worked versus ETH and Bitcoin which are honestly not doing that bad relative. So it it's unfortunate like and ETH and

Bitcoin aren't bad, but like all of the incentives now are for the traditional VCs not to allocate to these regulated plays and for everyone else to go go the exact opposite direction. offshore decentralized, you know, and decentralized is good and bad, but that's the way the winds are blowing at the moment. The the other like the we've kind of talked about like this broadly, it was being called like operation choke point, at least by people in crypto. There was also kind of rumblings from Signature. So, there was an announcement from Kraken that they were going to be limiting transactions of certain sizes from uh from Signature. And Signature and Silvergate are two very systemically important banks for crypto. They're kind of these smaller banks that really leaned in and offered banking services to like the exchanges and the funds and

kind of the cap the CFI infrastructure that powers a lot of crypto or regulated crypto based out of the US and that's coming under a significant duress which probably poses a lot of real challenges for for big companies in in crypto. I'd just be curious how much of a a worry is this overall for the industry and then I guess yeah I mean Vance you were just saying this kind of pushes people out that is the incentive for founders and companies right why why would you want a domicle in the United States right now given this given this environment I think there's two things there there's creating the on-ramps and off-ramps and having that be something that is a stable and reliable solution silvergate has been one I mean with their seen network that was uh or the

silvergate exchange network that that was something that you know was probably the most widely used rails to move money around in the crypto space. Um even though it wasn't even crypto rails. Um Signature has been probably the number two in terms of notoriety of which banks support crypto. And and there's only probably one or two maybe three others other than that that will take you on as a as a customer, as a client if you have anything related to to crypto and and what you're doing. Um, anecdotally, I've heard of a couple of friends, you know, one who was starting a new fund, one who, um, is working on a new project, and they're having a difficult time getting banking banking services, and it's not going to be impossible, but

it's just taking a really long time. It's unclear as to, you know, who they have to talk to, the the KYC partner, the you know, the the different hoops and ladders that they have to go through to get this bank account just so that they can put the money that has already been, you know, committed to them so they can pay people salaries like the the the operation chokepoint. I think I don't think that it's a concerted effort and and I think it's really, you know, coincidental that all of this is happening at the same time. Uh but I do think that, you know, it is it is serious. If we lose the rails, I don't think we're going to lose the rails in totality. We may lose access to certain rails, but I think there's just going to be others that are going to step in and

fill that gap. And I can't remember if it was the OC or if it was the Fed who put out a note um maybe a week or two ago as all of this was happening. There was sort of a rumor that Operation Chokepoint was happening. I I think it was the Fed who said it's not illegal to bank crypto companies. You know, like crypto companies are fine and it's up to the same standards of KYC, anti-moneyaunder anti-moneyaundering bank secrecy act violations. Like those are the things that they care about. You know, we we should not throw the baby out with the bathwater. Uh and you know, these are not two and the same. So I I think that there is a movement to not cut off an entire industry from the banking industry. And there's a desire to not let that happen. There just has

to be clarity. And frankly, I think this is, you know, one of those things that I think most more than likely will blow over eventually. Uh, but it will be something that, you know, drags for a bit, but it it's not going to kill anything. I I would I would agree with that, too. I think it's just, uh, and, you know, to to sort of take the perspective of an outsider. I can I can see the perspective of, well, what did you guys expect? You know, we definitely have some sins to atone for as an industry. It sucks. I mean SPF was definitely the this is probably blowback from from SPF. I can only speak anecdotal. I went down to DC two times and the first time I went down was right after SPF and everyone was kind of oh you know this happens and we know that

fraud happens and this doesn't necessarily reflect on the industry. Then I went down a second time and it was kind of like actually we're a little pissed was was sort of the vibe. So, you know, this is just this is sort of the natural way that things go and there's always going to be some blowback and this too shall pass. I think is the way I think about it. Ult ultimately I think it's for the better. Like this still is a huge prize to bank this industry to be the bank of stable coin creation redemption to be the bank that does the internet transfers. Um, I think this stuff is like, you know, getting exposed to like a cold every once in a while just like makes your immune system stronger. That's kind of what you need. You don't really want

to get hit with like something out of the blue and not be able to handle it at scale. Like, do I think Silvergate Bank was the banking partner of the future for crypto? Honestly, probably not. I'm hoping that like JP Morgan, Bank of America, you know, one of the large retail depository institutions steps up. Um, Signature Bank is frankly like a step in the right direction. It's 20 times the size. It doesn't have the same customer concentration risk. Frankly, it probably has better management. So, you know, I can see the silver lining. Um, this is like a year of a lot of silver linings. Like, yes, there there's a huge dark ominous [ __ ] cloud, but like look, like there's a rainbow behind that and you have to squid to see it. It might not actually be there, but like, you know, you have to take it for what

it's worth. One of the one of the things we keep on saying internally, but also with portfolio companies, is like this is a year of bend, don't break. You know, it's going to be a tough year. There's going to be a lot of [ __ ] that we have to deal with, but we're not going to break and we're just going to continue forward. I agree. Yeah, I agree. I think the toughest part about Soberg is that they had a bald CEO, so suddenly that just doesn't work as an indicator anymore. That whole thesis, what else can we trust? Yeah guys. It's the year of air. Year of air, my friends. Framework is poised. Look, look at what's going on there.

The lettuce. Good lord. Oh boy. Oh boy. All right, let's uh let's move past this. I I want to talk about this was kind of a cool story. Uh and I'm doing a little bit of a shilling our own book because Block Works broke it, but uh there was a counter exploit on uh the wormhole situation. So basically the background is is that uh I mean wormhole was was hacked um a while ago for for a pretty large number and Jump kind of stepped in and backs stopped it. Uh, one of our analysts, uh, Dan Smith, so credit to Dan was just as one does, just analyzing, uh, Raps Rap transfers. Uh, noticed a huge, as one does on a on Lego Friday night. He was doing this at like 3 a.m. uh, with a psycho. Uh, but he noticed a $220

million transfer, which is obviously a gigantic outlier. Um, and there's a there's a whole he kind of traced everything out how they actually did this. It was very clever. Um, and it's frankly beyond my uh my 5-year-old brain. So, we'll link the the free report of how it actually happened in in the show notes, but it was kind of a sophisticated counter-exloit that was that was leveraged on something called Oasis Dow. Um, and after this all came out, Oasis announced that they received quote an order from the High Court of England and Wales to take all necessary steps that would result in the retrieval of certain assets involved with the wallet address associated with the wormhole exploit. So part of this was some pretty sophisticated financial engineering and knowhow from the jump team, but there was definitely a legal

back channel that was involved as well. And Oasis basically said, "Hey, we had to comply essentially." So there were a couple takes from from the more idealistic uh corners of DeFi, which was, hey, this is a betrayal of the promise of DeFi. I'd be curious just what you guys thought about the whole exploit, and then if if that rings true at all. Oasis and Maker Dow are not the same thing. And not to get too into the details here, but like when you do a Maker vault, you are putting up ETH, you are drawing die. Um, it's totally permissionless. No one can take your position, alter it. Um, that's one thing. Oasis is entirely another. Oasis in the US actually used to have a broker

dealer license way back in the day. People I either forgot about this or didn't know about it, but like that's a centralized company. The UI that Oasis offers you if you're going to open a maker vault is, you know, you open it through them and it is through a different smart contract, but you have all these different bugs and bells and whistles that you can put on the contract itself. Do you want to multiply your leverage? Do you want to add a trailing stop-loss? Do you want to, you know, have a like an auto liquidation price that's arbitrary? Like, you can do all of that different stuff. And what's funny is that I think that the thing that caused the uh Oasis contract to be able to be exploited um on whoever stole the ETH's behalf was the fact that they used a trailing

stop-loss when they were trying to lever up a wrap ste position. And you know what's the moral of the story there? You know, pros don't use hedges, I think, is the first one. Um the second one is just like that's framework compliance approved. Yeah. No, that's not true. don't not financial advice being sarcastic but the fact that they used a centralized intermediary to put these additional things on their smart contract was eventually their undoing and I don't think anybody ever made the promise of crypto not you know extending to centralized institutions like that's not the thing that we're going after here and so I wasn't surprised I do hear the push back from everybody on crypto Twitter about how this was you know not a good thing generally but what else were they supposed to do like if your

thing is not permissionless there really isn't much you can do if a court orders you to do it right. And and just to be clear, I think the the hack wasn't I I don't know if it was necessarily a hack. I think it was more of a an open exploit that existed actually for a while where there was the ability to upgrade the contracts and in the process of upgrading you could change or retrieve assets um with the admin key in particular. So you were basically putting your trust in Oasis uh the centralized wrapper on top of the maker protocol and and just to like hammer this point home, there are a lot of instances where you've got centralized intermediaries that sit on

top of decentralized protocols and and I frankly think like that is the future of what DeFi ultimately looks like. But don't think that just because you're using something that happens to look and feel like web 3, it's completely decentralized to a point of not being upgradable, not being exploitable, not being redeemable, whatever it may be. Um, and so I think this is a good lesson for all users of DeFi. Obviously, the victory lapse of, you know, the the people on Twitter that are claiming, you know, this this is exactly why DeFi isn't DeFi. Um, whatever. Uh but but frankly I think um this is good because now we can actually have some retribution for a really large hack that happened and um I think we can close the

loop on whether or not these Oasis uh contracts are are upgradable or not. I think they they cut that capability. So, you know, it's it's a one-time situation for them. And, you know, nothing really is, you know, that much different other than the person who stole a bunch of money got the money stolen back. So, people rooting for North Korea are just idiots in my opinion. Like, oh, how could you? Like, DeFi is supposed to be uncensorable. It's like, yes, this was a one-time exploit and we took money away from North Korea.

I don't see it being bad necessarily. I don't know. Yeah. Was the wormhole hack officially Lazarus? I'm just assuming anything over like there's so few people that are sophisticated enough to do this. I like the the thing that was funny was like they started levering up. That's what they used the maker vault for. They started levering up and buying more ETH. At that point I was like, "Oh, may maybe they're not so bad." But it's like no, like we we can't let them do that. Like we should have some sort of checks and balances in the system even if it has to go to a court. Unless they bought like a ton of ETH then it would be then then we would have something to talk about. Of course.

No. Obviously leader. Yeah. Supreme leader. He doesn't have a butthole. I don't know what you're talking about. Adam's watching this like, "Oh god." Um yeah, I'm I'm kind of I'm kind of with you. I there has to be I mean this is I I do think I've heard Nick Carter say this and I kind of agree with it. We're we're we're in the span of time right now where all these systems are being battle tested and we're trying to get a sense of like where does decentralization really need to be and and what are just I get that it's really good from an ideological standpoint for it to have all of it be completely uncensorable and unseasonable but I don't know we live in a society you know so where's like the pragmatic like where

does this really where do those lines really fall so I think that's all going to get tested and we can opine on it but probably the market and governments and society is just going to come to a consensus on what they find is an acceptable compromise. I mean, think about how many how many implementations of ETH exist, how many client teams exist. Think about how many different apps are built on top of unis swap. Think about how many apps are built on top of maker or any of the D5 protocols. Like this stuff is going to get figured out. I think this is just a great example of where points of decentralization maybe need to exist or or maybe not. and and maybe this is the right outcome because now we have the ability to say, "Okay, let's put levels of security around this." I don't know.

I I ultimately think this is a really good thing. Small tangent. Have you heard about some of the these rules around renters's rights in cities? Oh, this is No, but I heard it's horrible in California. Oh, it's pretty funny. Like literally, a renter can take your your apartment that you may own and you're renting out hostage if they've been there for a certain amount of time, refuse to pay rent, and then and then declare that you need to pay them to leave. And there's nothing that anybody can do. San Francisco is built different, man. It's it's a whole other ball game out here.

Actually, this was this is an LA story uh of a friend who has a house and it has two condos in it and literally one of them is being seized by the tenant. What is the steelman case though for why it's a good idea that that tenant law exists? I'm sure there's some kind of rationale. Why does that exist like that? There's there's all these like I mean it it only got worse with COVID, but like there's all these um like owner move in and like um all of the like evict like safe eviction rules that exist. I I know in San Francisco there's those and I think in most cities in California there's some derivation of that where like if you are the owner of an apartment, you're only allowed to kick somebody out if you move in and stay

there for 5 years. And if you are found out to not be living there for less than 5 years, like the the previous tenant can sue you. like there's just like all these, you know, it's supposed to protect people who have been there for a long time and and you know, they they don't have any ability to move and maybe the prices have gone up and they're locked into these rates because there's, you know, there there's rent control um on certain buildings. Ultimately, for anybody who's taken a basic economics class, you realize that these are inefficiencies in the market and they ultimately have deterious effects on the entire housing market depending on which way they are built.

So, obviously not a fan. I I can maybe understand why someone put that in at one point for like human protection and like social value, but uh the free market is free market and it says otherwise. It's like these people don't believe in capitalism. What a shame. You know what? Honestly, I said that as a joke, but I think there is a growing portion of people out there, especially Gen Z that straight up does not uh subscribe to capitalism. They're just like, nope, opt out of that. But yeah, the the ones that uh have lived at home until they went to college and then just graduated, those ones. Cuba is really close. If you want to try the alternative, I can get you there fast.

I'm just saying scoreboard for capitalism looks pretty good compared to the alternatives is what I would float out there. But who knows? Let's just blame it on the boomers. That's that's much easier. Let's uh let's uh you know, at risk of going outside of the bounds of our podcast here, let's talk about Cosmos. Uh they're ditching uh ICS. Um so basically the this was reported a little while ago. So basically Cosmos needs a native stable coin. They had one in the form of US RIP. That is no longer the case. Um there are a couple other uh kind of alternatives that have been suggested, but basically Circle announced in September of last year that USDC would launch natively. Um and then we got a little bit more detail that

there was going to be a general asset issuance chain called Noble and that is was going to be distributed through the hub. So the hub has frankly it has a little bit of an identity crisis, but it does a couple things. uh it's kind of like a router for for messaging in between these these protocols, but also there's with the advent of Atom 2.0, there's this sort of shared security model where the hub can kind of rent out their validator set to commercial chains. And that's what this was going to be, but now that is that is no longer the case. They're going to launch as a standalone proof of authority chain uh instead of utilizing security from the hub. So, I'm curious what you guys what you guys think about this. I just honestly feel like Cosmos has missed its

window. ETH rollups are are scaling. They're getting user traction. They have stable coins. Um the fact that this is launching as a PA chain, Noble is versus using IC like a huge hit to the value cruel of the chain itself. But I don't know, like for for me at least, I don't know what Michael thinks, like Cosmos oftentimes feels like the purest form of of like the PVP meme where it's like, you know, instead of everyone having their own decks, now everyone has their own chain and there's like $5 of liquidity and it's like the same 10 people passing like $1 back and forth trying to make it into $2, it just doesn't feel like it has the activation energy required to really make it a thing. And maybe that changes with DYDX. Um, but

I don't know. Dydx is is even less of a like the whole DYDX value prop used to be it's on Starkware. It's super fast. It's the only place you can trade PERPS. And that was true. Just like the latency of the other chains was not low enough where you could have an oracle updating to run a Pers exchange on anywhere else. But now that isn't the case. The L2s are fast enough. They're cheap enough. Um, so I would be surprised if it had a resurgence. Frankly, I'm I'm just like not that big of a fan. Yeah, I mean uh I generally agree with all that. I I would say I don't know if they've missed their window or if they've just been like hamstrung by like Terra blowing up. Like they they had their stable coin, but you know the the thing that matters most for an

ecosystem, especially when you're developing anything that's going to have financial primitives or DeFi or even like value transfer, you got to have a native stable coin. And if you don't have that, there's really no form of application. I think that's super interesting. Um the second that you have to bridge, it's going to become too cumbersome for user adoption. Um the second that you like have to trust in um you know another entity to be able to have something that you can really feel you can get access to. I mean we're talking about the choke points of banks right now for USDC and and particularly USDC on on ETH. you know, what happens if there's there's choke points that break on getting your your stable coins from one network to the other. Um, so I

think that there's just a lot of trust that you have to put in that, especially for something that doesn't have the Lindy effect as everything else has and has been building for the last couple of years. Um, that being said, you know, if Noble can develop uh a sustainable, you know, I'm guessing that Circle would just put USC into Cosmos via Noble Chain. um if they can develop that trusted relationship, you know, maybe that's a good opportunity for Noble and and you can kind of speedrun the opportunity knowing that you're going to have the exact same playbook as USDC on any other network. Um it will, I think, be interesting to say, okay, let's say DYDX is going to use this USDC, like are are they going to use it? Are they going

to have to, you know, have a bunch of different others on there? like is it going to be another stable coin wars, you know, playing out in real time just in a new ecosystem? I feel like the the more harm and the more competition you have going into, you know, the the roll out of this this uh this new ecosystem is uh the noble ecosystem is that frankly you just have to have something win and win big quickly uh to catch up to everybody else. I will take the other side of this a little bit. Uh I because I like I like the the people in Cosmos ecosystem and I think they think about things in like a fundamentally different way. So the way that I would distinguish kind of what's going on in Ethereum land and the challenges and problems that they're really interested in solving versus

what's going on in Cosmos land is Cosmos has from day one been like extremely honed in on kind of like the application layer, right? like they solve a lot of problems from the perspective of like kind of app developers whereas Ethereum I think is very concerned with kind of like the modular kind of scaling infrastructure like uh data availability uh validity proofs all that kind of stuff right and like they got like the ZK kind of um came from from Ethereum land but I think the they're just very focused on solving a different set of problems I think if they could get you're right the the native stable coin the ability to take out leverage like there's a lot of really cool innovation going on over there. Um the hub just needs to figure out what they're doing.

They're lack they lack the value acrruel. That's the I think the challenge. I think it's something that can be overcome but yeah that's the challenge. So the value the value acrruel is a major component of it as well but the the thing that you know and Vance kind of mentioned this but I'll I'll just I'll say it again. uh the narrative of basically app chains that are built around IBC and the Cosmos ecosystem and and the tech stack that is Cosmos are being speedrun speedrun right now by supernets and subnets where you've got the same level of scale you have the same opportunity you've got very business developmentheavy ecosystems in polygon and avalanche and they're trying to create EVM compatible uh ecosystems

that also have the same scalability and native bridging that you would see if you were a a Cosmos app app chain. So I like there there is sort of an area there there is an opening and there's a window. I'm not saying it's closed. We definitely you know have investments in the Cosmos ecosystem. Not saying that it's over by any way, shape or or form but it is something where the competitors are catching up. I think that the la the last thing I just want to get your kind of take on before we move here is just because it was kind of a central idea to the the whole app chain thesis part of this season of bell curve is one uh I think advantage that you have if your if your validator set um understands the semantics of the application and that I think is just a

I'm not sure how you bridge that gap for something like Ethereum where there's validators for generalized block space and then even in this model there'll be first it's a single sequencer then it's a decentralized sequencer set but it's not going to understand the semantics of the different applications that that run on top of that. So it allows you a little bit more flexibility from a product standpoint or what do you think L3s? I mean, L3s, RO apps, whatever you want to call them. Like I I kind of that's kind of what I mean when I say like supernets and subnets. These are going to become application specific ecosystems or application specific networks. And I I bet you see, you know, like SMB game ecosystem and that's just going to be

like all the fast casual games, you know, with the same basic use cases and the same basic um interactions with the L2 or the L1, whatever it may be. I'm guessing it's L2. Um, that supernet, that subnet will be specific for that ecosystem. You also may see like a single game that has its own subnet or supernet and and so I think you're going to see the bifurcation there, but I I think these subnets and supernets just like the Cosmos app chains are going to be application or application ecosystem specific. Well, I guess well honestly like I'm kind of a you know, I'm a supporter of both both here rooting for everyone. I I mean I do think the the OP stack and and B Oh, one thing I um I had a couple conversations about uh Bass in general because I want to get a sense of if

developers are interested in that because it's kind of like there's a bunch of users that might use it, but there it's also could be like a corporate chain. Apparently the developers are super excited about it. They're like, "Yeah, there's 108 million potential users and they're excited to build stuff on base." I think it was such a win for Coinbase. I'm so happy for them. I think they nailed it. So, I'm very I'm stoked for them. Would you be as excited if they built a Cosmos chain? Yeah, I think I would. I would be. Yeah, I would be, dude. I would be. Don't I Come on. I I would I think I think it would be very I'm sure they probably thought about that and I actually think it's a it's a probably relevant question to ask why they didn't. Um, so, you know,

it's a fair question. I mean, I think the other thing just to tap into a little bit more of what you were saying, I think we're going to see a shift back to people realizing that they have to have sustainable businesses. So, they're going to know where the users are. They're not going to have this like, oh, like the users are coming, the developers are coming, like we're going to have this tool that serves five people. No, it's like we need something that serves an immediate population, an immediate market now, otherwise we're not going to be around in a year or 18 months when we need to do our next fund raise. And and so I think it's not really just like a oh, are people excited about it? It's like, oh, this is maybe the only way that I can continue forward. And I think that

that's that's a narrative that we've been talking about kind of here or there over the last 6 n 12 months, but it's definitely becoming more real now. I think a lot of the investing arguments in crypto are supply based, which is probably comes from like the Bitcoin 21 million hardcap narrative, but I think demand-based uh arguments for investment are always a little bit more compelling. probably speaking of our friends over in in Bitcoin land. Uh what do you guys think about did you see Yuga Labs announce something? Um they have their own native uh Bitcoin NFTTS. Um there's also there's like signs of life from uh Bitcoin. What do you guys think?

Waiting for you to bring up this general topic. Do you guys have a spicy take? No. What do you think? I think ordinals are cool. I think it's doing things other than just being like a culture of being against everything. Being for something is cool. Um it's a lot different. There's a difference between like being able to kind of crudely transcribe something into a a blockchain versus having like the apps, the DeFi, the user base, the culture of like trading and making these things cultural. So, I think that's the next step that it's going to be interesting to see them take. And it's cool to see Udy and like Nick be like

reinvigorated with purpose versus kind of like just like there's only going to be 21 million of these things. I don't I don't know how much people care about the 21 million side of things anymore. Honestly, listen, not to uh to toot own horns once again, but I I did predict that in 2023, we would start to have a discussion around what the future of Bitcoin looks like. And I think that this is in one form a discussion because you're putting something out. You're forcing people to make decisions. You're forcing miners to make decisions, which is going to be the biggest component. And to Vance's point, there's nothing really that's changed fundamentally about Bitcoin yet. You're you're sort of just using this in like a endaround way to like prove that there's something that could happen, but I think it'll force conversations around maybe this is

something that we should natively support. Like could we natively support this? Should we natively support this? like the the fact that there's going to be conversation around this could make it something that's viable and real. Right now it's it's truly just a toy. Uh but eventually it could it could be something real. I think I have a very hard time understanding how decisions are made within Bitcoin. I don't understand what the governance structures look like. And I I understand the stakeholders. I know who those I know who those are. I know there's the the devs and the miners and the validators, but I don't really get how decisions really get pushed forward and who's kind of in control.

It's really obvious. Satoshi comes back every 10 years and he writes all of his commandments down on, you know, Sanscript and and you know, we deliver them to the codebase. it I mean it like Ethereum is Ethereum is the EIP process which is like social consensus which is like clients integrating it which is obviously the developer community being behind it but like just to be transparent like there isn't really like a ABCD EFG process like you try to push it through all core dev's calls it usually fails you have to try again you have to rally people like there is no token governance of Ethereum either Bitcoin is more crude than that.

But it's not entirely entirely different just to be honest. Yeah. I used to when when it comes to Bitcoin, I used to really resist these comparisons to like the Catholic Church and some new form of religion, but it really does uh fit that that metaphor in a lot of ways or that analogy in a lot of ways. I mean, there's like the commandments that you were just joking about, Michael. They hate the apostates, right? The people that turned, right? Like just look at all the hate that Nick Carter gets on on Twitter now and they hate him more because he used to be one of them and it is this is this like religious fervor and there are these people that are like worshiped at the mount. It's a little frustrating because I I want to root for I mean I'm more bullish on Bitcoin than you guys. Like I

I want to root for it and the bull case for Bitcoin is like would you short the Catholic Church? Like look at what those guys did. They had an they had an amazing run. Like look at them. Uh, so but I I wish it was more than that because I feel like it could be more than that. But I I listen, you may be relatively more bullish on Bitcoin than we are, but that doesn't mean that we're not bullish on Bitcoin or that, you know, we don't think that there's future potential for it to really change and do something different. I I I'm just excited to see that there's at least an opening of the conversation. All right, guys. I think the last thing that I kind of wanted to get your take on was this immutable X uh times Unity SDK announcement. So, you spent a little

bit of time talking about uh kind of like what an app application uh SDK would look like and I think that's still kind of being built. Can you guys just again just give a little bit of a refresher like what is an SDK and like what is this announcement? How is it significant? Yeah. Um I mean an SDK is truly just a software development kit. So it can mean tons of different things. Um, usually when you're developing something that's consumerf facing or or like a game for instance, uh, you're going to have a bunch of software and a bunch of libraries and a bunch of integrations into other tools or services or infrastructure. And an SDK is just like an interface to be able to do that. So if you need to, you know, interface with AWS, like if you need to interface with

Unity, um, they've got an SDK if you need to. it like there there's just a a common way of communicating and that's what the SDK really represents. So what this in particular is uh is immutable and I I it's it's funny you put immutable as like the one that announced this. There's actually like 10 more that were part of this announcement. Immutable. Immutable, Flow, Salana, Avalanche. Uh there were a ton of them. It's just that I think Immutable loves to uh loves to ring the marketing bell more than more than most. Um, and really what this means is uh they were they were put into what's called the Unity App Store. And so what what it really means is anybody

who wants to build on Immutable, you're sort of like a verified vendor within the Unity store. Um, which means that you, if you're a game that's building on immutable for instance, or or flow or any of these other chains, you now have a direct plugin that's like a verified developer with Unity. Um, so I think it's a big move. I I think frankly like the biggest component of this is just Unity's recognition that Web3 gaming is something that they want to have plugins for and like feature in their app store. in Unity and and just as a backdrop here, Unity is one of the two um most dominant uh game engines. So all the rendering of the graphics, all of the

like physics, all of the motion or like all the different aspects of movement within games, all of that is usually controlled by a game engine. And and Unity is one of the two uh most dominant uh game engines that are underpinning, you know, all games, every single one. Um, or you can develop the graphics yourselves, but like most most developers, most game developers just don't do that these days. So, I think the big takeaway here isn't immutable. I think immutable is just louder than everybody else. Um, but what it is is that Unity is recognizing that web 3 gaming is definitely something that they want to be a part of. Um, and they want to have interface into the developers directly. And so, they're going where the developers are, which is all these

different chains. Um, so very interesting to see, but I'd say ultimately very positive. What What is your I know we've talked about this before, but in terms of I know you guys see a whole bunch of different gaming projects. Can you like I don't know when I when I think of like the games that I love, it's kind of like the like the Halo 3 was kind of like my game like the Call of Duties or stuff like that. That's not really what we're talking about here with crypto gaming. Like what are the what are the models that kind of like excite you guys or like what is some of the stuff that's on kind of like the cutting edge of gaming in crypto? like how do you think it looks different from uh traditional gaming?

The thesis is very simple. Um once gamers realize that they can actually get something out of playing these games and spending massive amounts of money on them, they will never go back to the old model. And right now we don't have a lot of proof points on our side. We have small scale examples of success, things like pixels. Um you know, obviously like Axi Infinity was not a good proof point. that was just like the the euthanasia roller coaster for largely Southeast Asian people. It didn't work out that well. But there is something powerful with being able to play something, being able to have ownership of your game assets and being able to create value and at the end of the day, not just having the game extract value from you, but building something that has value on

chain with the rest of the community and realizing some sort of collective success. And that's the thesis. Um, and you know, it's taking longer than we would have thought, but by the second half of this year, I think we're going to see a few games starting to prove this model out. And you know, we're not looking for a hundred games to work. We're looking for one. It only takes one. And once you have that success case, everyone is going to copy paste iterate towards it. And that's really kind of what grows the top of funnel with crypto. At the end of the day, it is the only consumer use case that has enough scale to put a billion people on chain.

And it's the clearest it's the clearest thesis that we have for that to happen. I would describe it as the bottom of the first inning where everybody has started to like build these things. They've started to test them. They've started to iterate with them. Um, frankly, like they have pretty wide distribution on the beta uh betas for these games. And what what happens is you you build a game, right? and you get the graphics right, you get the storyline right, you like have this entire world that you've developed and then you put a bunch of people into the ecosystem and you're like, "All right, now go run free and let's see what happens." And that's really when game development starts because that's when you start to balance out the game. You start to figure out what the economy needs to look like. You start to figure out like how many of

these different attributes, resources, capabilities should I put into the game at the start. How how should I be doing like my live ops which is essentially like the re-ups every week, every two weeks of like how many of these things am I going to be distributing? Like I need to be constantly managing this economy, you know, like some of the most simple games are some of the most successful games just because they have the best live ops operations on the back end and every two weeks there's new content and it just keeps people refreshed. It keeps people going. If you beat the game, people stop playing the game and so you have to keep it refreshed. So like we're in that rebalancing phase right now. So a lot of exciting data. Like anecdotally, you know, there's we've we've invested in a number of um former game executives,

game developers in pre-web 3 gaming. And some of the retention cohorts that they're seeing is like three, four, five times what they would expect to see. Uh just because you have imbued value into something that people own. And that fact alone and if you can communicate that effectively to the gamers, they stick around because they own part of the game. And so I I I think that's like step one. That's like web 2.5 for for gaming. What I think web 3, and this is a hypothesis at this point, what I think web 3 for gaming actually turns into is is a lot more user generated content.

And so it's not just like you get to own something, it's you get to create something in the game. And that just imbues further ownership, but it also imbues like your own creativity. You like you get to put your own your own swire into it. You get to do whatever you want within the confines of the game. And like that's the real value of game. Like Vance and I built a game prior to framework called hashlates. And that was an experiment in and of itself. But like back then in 2017 2018, everyone's like, "Oh, blockchain is going to enable games to be interoperable." And like I remember getting a question uh when we were going through the process. They were like, "Well, what if you put like, you know, a monster on top of Tom Brady's body and like you run around?" And it's like,

"No, no, no, no." Like that would ruin the game and you would lose your license immediately. So like that makes no sense. But like that's what people were talking about. Like this whole interop layer and and sure maybe like if you're a game publisher and you have three related games and the characters are all the same and you want to have interop between those specific games, like totally that makes total sense. But like the value of blockchain gaming isn't going to be anything that's interop. It's going to be ownership and and creation. So I think that's kind of like the thesis that we're refining our our previous thesis into.

Yeah. There was a guy who he spoke his name is Josh Rosenthal and he sort of gives this talk about this. He he spoke at permissionless but he's also been on uh bank list you know a number of times and he kind of has this analogy of like imagine you are living in like the dark ages. you know, you're a peasant in kind of medieval times. Imagine just trying to explain to that person how little ownership and how little freedom they have. They be like, "What do you mean? Like, I wake up like I go and I, you know, get my hay and I get my food or whatever." Uh, but there'd be no way of saying like, "Dude, you don't own any of that land. You know, you can't hire people." There's you, it's just very difficult to reframe that reference. And I think that's what that I kind of see

that in the gaming side of things as well. It's like, hey, we're trying to actually give you stuff here. We're trying to give you back some of this value that has traditionally just accred to game makers or or social media in general, but I think it's a compelling thesis, but I can see how it takes a little while to get there mentally. The thesis that we've had that have worked have always been very simple. Like we're going to allow you to own a part of the game. We are going to build financial services on chain. Like the stuff that's like further a field where it's like we're going to do a social network and like you're going to own your own post, maybe you can sell it to somebody else. It's like those things have like generally never worked.

It's going to take longer, but like I don't know. It it feels like it's starting to work at a very small scale and it gives us hope that this is going to really whipsaw in the right direction when it really works. Well, and and just another analogy, I mean, think about how much value there is in physical real estate obviously and you know, the the different slices of ownership, the different ways that you can manage it, the different you know, things that you can build on top of it or do with it. But think about how increasingly each successive generation is living their lives in a digital realm. And this may be I mean it may be social media but it may be you know in these game ecosystems it may be in like I mean and game ecosystems could be like threedimensional it could be like it

could be twodimensional and pixelated it doesn't really matter but like you're still spending hours of your life in that ecosystem. And instead of, you know, you being the peasant that's sitting outside the gates, you know, owning your own hay, you actually now get to be an owner in that instance of that game in that digital realm. And there's value in that. For younger generations, that's the only value that they know. I also the the simplicity point kind of resonates honestly, man. Sometimes if you like listen to business podcasts, you would think the way that things happen is you're sitting in a room and you come up with some brilliant strategy and you just do it. It is just so not how it happens in practice. Usually it's there was if there is something cool that you do, it's the result of someone

someone told us this. Um they were like, "Hey, it's really cool how you guys built a media company backwards because you started with the thing that makes money and then you reverse engineered the media." And I was like, "Yeah, we totally thought of that." When really it took us three years to realize that what we were building was a media company and we were just trying to make it work. And it sounds all cool to talk on pod, but I I generally think most strategy actually comes from just executing and tactics and, you know, needing to do something. Necessity is the mother of invention, but totally backwards from how I thought it was going to work.

The same thing with with pitches, too. Like if you hear a good pitch, you leave the call and you're like, "All right, let's invest." If you need to do like diligence or like we do diligent if you need to do like research and like studying trends and like you know what's the growth rate of this country what's the size of that market like it usually is is not a good investment like the best things are usually very simple what's the phrase it's a 10% strategy 100% execution yeah right I'm with you on that I can assure you it wasn't brains that got me here somebody just margin call hiring is kind of the same.

It's totally you know. Yeah. I have to usually on a hiring call in like a last stage or something like Jason and I kind of get looped in at at the end and we'll be on and after like two minutes I have to stop myself from being like this is a yes for me or this is a no for me. Like you just get that very very quickly. I I think you know what what we're all kind of saying is it comes down to clarity and like can you communicate clarity efficiently and if it's very clear it's very simple it's very obvious.

Yeah. And like% let's bring it back to gaming biggest market by far people who look and feel like crypton natives. Check games that are coming to market in the second half of the year. And like people are already fading blockchain games with no blockchain games out there. Well, there's one. It's called Axi, and it's still kicking. Here's a contrarian prediction. I think Axi comes back. You think Axi comes? Let me let me let me let me let me not to their not to their not to their old, you know, way of doing things, but let me break it down for you. Very simple.

They have a large studio. They have a lot of money. They have experience building games. a rebrand game ever. A rebrand might be necessary. Yeah, new new coat of paint, whatever you want to call it, different name, but like it's pretty simple in my mind. Like we don't have any axi. We're not we don't have any exposure, but like best things are very simple. I've got a I've got a way dumber like just stupid pattern matching observation that kind of aligns with that is I feel like in crypto there's this history of something like a makes a big splash like way earlier than it should in a cycle and then it comes back like full force

next cycle like I'll give you an example like uh CryptoKitties was like an NFT project that caused like a ton of hype and then there was nothing after that and everyone was like oh yeah NFTs were like kind of a thing but like look at CryptoKitties and now look at NFTs Even with like the Dow, right? There was like the Dow and it worked and it was like a phenomenal failure and then it just kind of laid there dormant and AXI has the potential to that just feels like that to me, you know, obviously there was something there and now there's not much. But but using that same analogy, if AXI is CryptoKitties, I'm not saying that CryptoKitties is back in any way, but maybe web 3 gaming will come back because it's NFTs that's back now. I mean, you can think of the analogy in

similar ways. I guess you could also say CryptoKitties is Dapper. Dapper has a lot of other things that they've built. Um but you know, I I actually think the biggest thing is um anything in crypto that hasn't truly died, like truly died, as long as you're alive and you can make it across market cycles, there is a chance that you come back bigger and and larger than you were before. I agree with that. I think Dydx actually did that pretty well. they initially launched there was a long period where it was just I kind of knew what they were but uh and then suddenly they were back one day. So I all the original primitives of DeFi summer defi DeFi summer time uh all of

those are are still the top DeFi protocols. Oh by the way I do want to give a a shout out to uh we we used their phrase at the top of this episode but bankless uh just got reported that they're raising a $35 million VC fund. Love those guys. Uh Ryan and David are we we have a kind of an informal no partnerships policy at Block Works. We've just over the years, but they're the one partnership where they like really do what they say they're going to do. They're phenomenal to work with and I think the world of them. So hope it works out for them. That's that's great.

Hats off to them. They're the best. All right, fellas. I think that's all the time we have, but this was a fun one. Jason, I miss you, buddy. I feel bad about that joke the beginning. Miss you, dude. Hope you're doing well, Denver. Peace. [Music]