SotN#25 - Road to Ethereum 2.0 w/ Ryan Watkins & Wilson Withiam of Messari

Transcript

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have to go through your centralized exchange like coinbase or gemini or wherever you can just go straight from your bank account right into your monolith checking account smart contract wallet so check them out at monolith.xyz bankless nation welcome to another state of the nation this is number 25. david and i have already had a very full day but it is an exciting day this is the day that eth2 launched we are going to talk about that we're also going to talk about probably the best report we've ever read on ether in this space and we're bringing on the analysts who actually wrote it brian watkins and wilson within from sorry

crypto first i want to ask you before we get to the guests before we get to the agenda david how are you doing today man are you a little tired you had to wake up pretty darn early to see the lunch yeah i woke up at three in the morning because the uh these two launched at four in the morning but i went to i was smart and i went to bed at literally 8 pm last night and somehow i managed to make that work so i'm actually just like a bundle of energy right now like today's the day like today's the day that eth2 is here and and you know thank god i got out the door with all systems all systems go was like all the blocks were green everything went out without a hiccup and so you know today's just a good day

that was awesome it was a lot of fun to live stream that guys if this is your first state of the nation we do these every tuesday we stream them live on youtube at uh 2 p.m eastern time we drop that in youtube as well but we also put it on the podcast so you can listen to it and our goal here is to talk about what's happening right now right now the story is all about eth2 so today we're going to be talking about this analyst report it's called eth 2.0 the next evolution of the crypto economy written by the folks at missouri crypto we'll introduce them in just a moment but i think for me david this was like the first analyst report that i've read where i'm like thumbs up on the whole

thing i mean most analyst reports about ethereum that have come out over the years have been like garbage like really wrong miss wrong like bad take dope doesn't make sense uh this one nailed it for me i don't know what's your take yeah and this one nailed it not just on like the technical details because like even that is to generating a report on the technical details is a monumentous task in of itself not only because like understanding ethereum 2.0 and the different phases to how to get there is like that's a hard ask but also it always changes at the same time and so uh so the missouri has done a really good job of making producing a report that actually keeps up with all the

changes and then in addition to that there's also just conversations of like the social contract and the political philosophy and and kind of got pretty meta with about the philosophy of ethereum and and this the ethos of ethereum which i really really enjoyed and it's integral to understand what that is to understand ethereum and they did a really good job with that yeah we are going to dig into it also a few things that are new of course our eth2 live stream that we're just talking about david that happened at 3 30 your time this morning that is now archived on our youtube but um a lot of like a lot of folks tuned in for these live streams so we had a live stream on bankless ether had a live stream as well there's some the reddit eat staking

community and it felt like between all of those live streams there were like 6 000 yeah yes attendees participants who witnessed the launch of eth2 genesis live yeah that is the largest single event at least ethereum event based on viewership that i've ever seen like i've never seen like five or six thousand people all like watching the same thing and that was just the people that were watching on youtube right like other people were watching it from like just watching their own nodes at home right and so like as far as events go with ethereum biggest event ever dude it was super cool as well so that is archive if you guys want to check it out we'll put in the show notes also our bellagi podcast came out on monday man that that was hot dude i remember uh recording that and i was doing it like

it's like after it was like between 12 and 1 o'clock in the morning my time and we just kept going because the conversation was so inspiring and so interesting what was uh your big takeaway from that yeah the recording that was was a ton of fun we actually had to record with balaji uh twice because like we recorded about an hour and a half except we still had so much left to go and he had a meeting to get to and so he went to the meeting and then he came back and we recorded to finish it off uh so and i think i got this line from you ryan uh so i'll steal it um uh back in 2010 it was crazy to like consider bitcoin as like a new money right and so like even if you believed it like speaking about it to your

friends was like hair brained it's a hair brained idea and so like but now bitcoin's money back now bitcoin is just like understood by the world so what's the crazy hair brain thing in 2020 and bellagi has an answer to that question it is let's make a country let's make a nation first let's make a nation in the cloud and then let's figure out how to make it real in real life and so we had a two and a half hour like epic conversation with balaji about like how are we going to go from just like a group of people who are interested in this project to like actual real land somewhere building a real country so that's i think that's like the new crazy topic of the decade that i think maybe in one decade from now this will be a normal conversation that's the teaser and blashy brings a

lot of credibility to it because he tends to see these things about 10 years in advance it's like he's from the future also david speaking about the future tomorrow you've got a missouri event are you guys going to be talking about this report uh as well or what's that event about yeah i think i i think we'll we'll talk about this when uh when the boys come on in a sec but i think the gist is like uh there's just so many different things that are new with ethereum 2.0 and so missouri's throwing this event tomorrow which i'm speaking at with uh cami russo uh and um uh um i'm forgetting her name oh no the uh who wrote who wrote the with colin the um absolutely she's fantastic she wrote the

ether bonds paper yes right yeah so that's just going to be a really fantastic conversation like kind of trying to get a grasp on like how does how does new economics work in ethereum 2.0 really important conversation awesome man okay going to introduce the guests in just a moment but first i've got to ask you the question we always start with david what is the state of the nation right now the state of the nation is launched past tense past tense uh because it already happened it happened this morning we are launched right so ethereum two it's it's launched like we don't there's no double meaning here this isn't that creative uh the state of the nation is launched and that is pretty exciting in and of itself right a lot of these sorts of things fail on launch we've actually

seen a number of like one of the major test nets uh just kind of the rocket died on the launch pad and tipped over and exploded right um but this time for maynet the rocket took off it cleared the atmosphere when it mattered we're on our way to the moon i guess somewhere destination unknown we'll call it the moon all right awesome state of the nation has launched now we want to bring on our guests to talk about this epic report how many pages is this we're gonna have to ask the guys when they come on 70 page report all of it is gold we'll dive right into it we want to introduce our guests ryan watkins because there's two ryan on the podcast we're gonna call him just watkins he's okay with that and also uh wilson with him these are the

brains the analysts behind this epic ethereum report gentlemen are you with us how are you doing today hey what's going on guys uh doing well hey welcome hey guys welcome welcome uh yeah yeah yeah excited to be here it is great to have you awesome well we're gonna dig into it so first we just want to say like nice job on the report if you if you didn't hear our intro we're big fans like you did a fantastic job i'm just curious how long did this take you to put together was this something that was like like months in in progress or you know did you did you finish it on a on you know the weekend before

yeah well we definitely finished it the weekend before again but yeah we've worked on this for for probably about two months now uh i guess originally we were working towards the kind of like november 16th ish launch date for the beacon chain uh but then you know once i got pushed back actually you know lucky enough gave us some time to get put in a little bit with onto the report and you know end up taking about two months so uh you know by far the most research i've done on anything within crypto just it's kind of fun so when you guys are sorry uh wilson go ahead it was perfect timing for the for the blst audit to come in last minute to just give us that little extra time so we could bump it up from like a 30-page report too all right so what wilson's

referring to here is he got an extension on his paper basically because eth2 was delayed a little bit in november some people thought it would come thanksgiving weekend and there was um a kind of uh an audit that was sort of pending for some bls crypto signatures so you guys got a reprieve in a few more weeks to finish it up right yeah exactly so when you guys first started chewing on like producing this report what were what were some of the initial like motivations like why apart from just like providing making information available part of missouri's business model like what what really specifically about an eth2 report was really attractive for for you guys in missouri yeah

uh so i guess i'll start first um i think what was what we really wanted to do with this report was you know we looked out on what has been written on e2.0 so far we've seen really great technical deep dives we've seen really great economic deep dives uh but we really wanted to create a report that combined all these different elements as well as touched on some of the more like philosophical and historical elements of theorem 2.0 that we think are like critical to understanding what is actually being built why it's being built and where ethereum is is going and to put that all in in one report uh is really what we were looking to do

yeah that it was exactly what watkins was saying um trying to put something together that really kind of took away there were a lot of misconceptions going into what eat 2.0 can be it's this major upgrade really trying to break it down into a very simple but in a descriptive uh report as far as what's going on so people have a good idea of what is happening now and what's to come and what are the implications for it um so really covering all of our bases in a very easy to read and digest manner so we're going to open up the report and talk about some graphics and and components of it that we thought were particularly interesting but um before

we do that i want to ask about the decisions to include like political philosophy and it's like social consensus and a social contract in in in a report right because this is this is not something that you will ever find in a in a legacy report about a legacy equity market a company or whatever like there's no political philosophy of like tesla or amazon right and so this is something that i think you know legacy people or institutions quote unquote people that are trying to like peer in from the space from the outside in they might open up this report and be like why is there political philosophy here uh so maybe like you guys could add some perspective as to why you thought it was important to add in like some of the social aspects and or social narratives around these blockchains

yeah no it's funny because wilson and i were like literally just talking about this yesterday about the the differences between writing a report let's say at an investment bank and it's pretty much just very descriptive very dry to the point you know what are the numbers etc and you know you don't really need to dive that deep into what is the political philosophy of just bezos to understand amazon but with blockchains uh it really is a different story because blockchains aren't just technology they also are institutions and they're institutions that are you know encoded with different values uh and were it for you know different purposes and we thought that like it was really important with this report like if you really wanted to appreciate what ethereum

is and kind of like the underlying design principles for ethereum 2.0 it's really important to understand these you know philosophical components right to understand and i think another thing uh that was also pretty interesting is that with bitcoin there's been a ton of content written on what is bitcoin's social contract uh what are bitcoin's values and these ideas have actually seeped into mainstream consciousness as well like when you hear about you know michael saylor or any of the major bitcoin bulls including some institutional investors like they will touch on some of the you know

core elements of bitcoin social contract with the 21 million it being immutable censorship resistant uh decentralized like all these different things but for whatever reason with ethereum there's this perception because it keeps changing its narrative and because it's always evolving that it's social contract is kind of like nebulous or it's just weak and that's not necessarily true like there are like very consistent values that ethereum has had and it continues to have that the community agrees upon and that kind of keep the ethereum uh ecosystem together so if that was like really important to start you know upfront really write up their

introduction with what is like what what is the theory actually and and why like what are we all doing here wilson you want to add anything i i mean that it broke it down perfectly i think really trying to get to understand what ethereum is you have to understand you know where where it kind of comes from and what are its key principles and so that's why we kind of lined it up right there not only the philosophy going into why it was built but then the principles of what ethereum 2.0 uh is supposed to bring and and it goes into its design why it took so long to come why it took seven years of research to get to where it is uh because they didn't want to sacrifice the centralization for all these

different upgrades that they're looking to make and that was core to its to its design to its uh to its social contract going forward um so really kind of understanding that concept was key to diving into the rest of the report fantastic yeah and i think like one thing i'll also add is that like these concepts like of ethereum social contract it's not just like some kind of ideological appeal to people like these ideas actually underpin many of the desirable properties about blockchains like making it so that they are globally accessible making it so that they are unable to be censored like

pretty much everything that makes like a blockchain interesting is enabled by the fact that you have these like core ideas that actually become real uh when they're manifested in like the design of a blockchain so uh yeah it's not necessarily just you know trying to tell everyone like why you know what what we believe in this industry but to actually uh get them understand like why this stuff is important in the first place so i would imagine that like the the research process because of this difference the research process for producing this report was probably also like different i don't know what your guys's backgrounds are with reproducing reports of this nature but i would imagine if you did have

experience that this particular report was perhaps different than reports you've produced in the past specifically based off of this like attempt to talk about the political philosophy and and the ethos of a blockchain uh so so maybe talk about just the research process at large and also maybe any of the differences as a result of this unique nature of what ethereum is and how that uh impacted the way you guys came to coalesce the report yeah so i think a lot of the research i mean it's been like years in the making especially on the more like philosophical and historical aspects of ethereum and ethereum 2.0 i mean and that's you know years of you know reading some of the content

that you guys put out like reading all of the talents blog posts reading or watching all the interviews that metallica and you know various members of the ethereum foundation have have given to to really get a sense of like how are they thinking about ethereum 2.0 so in that respect like it was it wasn't unique i mean it is similar because you're just finding information and synthesizing and putting it to report but uh again i guess like another thing is that you know you also have to understand some of these ideas like what is a social contract in the first place for example so we actually had to do some research on okay well what is a

social contract and how do we actually express this idea and report that may actually be like palatable to people who come to the space and just think this is just a technology like i've never heard of this concept of the social contracts and especially applied to ethereum it seems crazy so yeah those are kind of the differences yeah it was um it's kind of interesting because i was drawing a little bit more like experience because when i first i i mean i i guess i'm relatively new i really got into crypto back in 2017 so typical bull run bandwagon fan i'm right there with you brother september 2017.

yes exactly so yeah same time um so i uh when i first came in i i was particularly drawn to ethereum and so that's kind of where i went i started helping teach classes about people how to develop smart contracts and um so it was kind of like this uh this ecosystem of like acceptance and uh what and it was kind of like a pragmatic approach to everything which is what i found very very interesting going in so kind of drawing on that and that kind of culture around what a theorem was and then the other part was really diving into not only the a lot of the historical pieces that uh vitaliy put together six seven years ago but listening to a lot of the podcasts

to try and get a deep understanding of um what it was kind of like going through this process and so i i in some cases i was diving deep into reddit threads of stuff that was happening like back in like 2014 2015 it seemed kind of like what how were they saying how were they acting what was the community like at that time and how it evolved um over time which i've just it was fascinating to kind of dive into the history of how everything has evolved over time both ethereum as we know it now and you know eth2 and uh where it's going to go from there i think what you're saying wilson is super interesting because this is not how a traditional institutional investor would go collect data right they they are not going to go to the reddit

threads or the old vitalik posts or the discord channels or twitter you know heck you know we we have some uh probably institutional investor exposure at bank list on like sub stack and youtube but it's not necessarily their channel either like we don't package it in a way that um institutional investors uh like dave and i don't wear suits generally right like so um but the way this is packaged is it's very um appealing to the institutional investor i suppose or the traditional investor who is um used to reading like analytic heavy data-driven sorts of

reports like these on other traditional assets i want to ask a question about who this report is for is that kind of who it's for it's obviously for the crypto community and anyone who is investing in crypto right they're going to read this report everyone who is reading bankless should go read this report obviously um but also outside of that are you guys trying to reach a new audience an audience that maybe like paul tudor jones of the world they have they understand the bitcoin narrative and now they understand digital scarcity but they don't yet understand ethereum that was my guess on who you're trying to reach uh after reading this but why do why don't you tell us who's the target market for this kind of a

report yeah so i think what we wanted to create this so that it was accessible to have as many people as possible so whether they be a user of ethereum or an investor or someone who's building or a service providing space we wanted to have insights that would be helpful for all these different groups to navigate the space but yeah i mean definitely something that we definitely considered uh probably like one of the first things we considered was actually how do we like really communicate what's special about ethereum to this

more like institutional like more professional audience that now is comfortable with bitcoin now understands the value proposition of bitcoin but has not yet been able to grasp ethereum because of how kind of like expansive the idea of ethereum is and you know i think when like we're thinking about like how to how to like craft this report you know one of the things like when people think about the smart contract market and i'm sure like a wilson could elaborate on this you know a lot more is that you know when people think about smart contract platforms they think one they are like utility platforms like they just you know and it's all about how much transaction throughput it has

it's all about how scalable it is like all this stuff that like yes does matter but is probably about like less than half of the picture of what actually matters with these these blockchains uh and to understand you know why those things are everything uh it really was important to really like touch on you know kind of that first section on philosophy and history uh to really like talk through the different design decisions that the theory of team made for ethereum 2.0 to highlight like why that's important so you know hopefully it was written in a way that uh you know someone with that more like professional background uh will be able to appreciate um

you know without written yeah and and exactly we're saying on the institutional side people from outside of ethereum trying to get familiar with it but i think i had a little bit of something for everyone in a sense so you can kind of get a sense of the history of the philosophy behind it but i had a lot of talk on the monetary policy of eat that uh that walkers did a lot of phenomenal work on so if you're looking as from an investment standpoint those are some key critical parts that you definitely want to check out to understand what's coming forward with ethereum um so yeah that was definitely one of the key things we talked about going in is who is this going to be for how are we going to um really structure this and write it obviously we want to make

it very approachable but at the same time have something where people have some key takeaways uh that they can make decisions on going forward very good all right well with all of that i guess set up we want to get into some of the meat of the report and um i like what you were saying wilson about sort of you know not just talking about kind of the the network side of things but also talking about issuance and ether as an asset because i think a lot of people get they have trouble separating the difference between ethereum as a smart contract network and ether as a reserve asset for that network because in bitcoin it's a little bit one in the same i mean the purpose of bitcoin is to you know transact bitcoin and move

bitcoin around so monetary policy is very tied into that anyway we're going to get into all of that in the report um a few sections to cover can we start here though which is the scalability trilemma maybe watkins you could kind of describe what that is and why why what like what eth2 does about that yeah and also let uh wilson hop in as well but uh basically the high level idea with the scalability trilemma is that there exists this trade-off between these three properties of a public blockchain being it can be decentralized secure and scalable but can't be or it can only

be one like two of the three and you know different blockchains have made different trade-offs to get those desired properties and it's been this you know really tough problem to try and solve especially for ethereum where it wants to become scalable but doesn't want to sacrifice its security or decentralization so one of the ways that ethereum approaches problem is through charging which is you know one of the the major components of ethereum 2.0 design and the high level idea of sharding is that it involves partitioning the ethereum blockchain into subsets of nodes which can process transactions and store data kind of in parallel

and the reason why this is done is kind of like tying back to some of these you know underlying uh philosophy philosophical aspects of you know why this was built because ethereum wants to ensure that yes while it gets scalability that it is still accessible for people to run infrastructure for ethereum so that you know someone with a laptop or some other kind of consumer hardware can participate in the consensus process and run a an ethereum validator is something that's very important to maintain the property that this thing is decentralized and accessible and then probably another aspect about

this kind of sharding component is that it it also makes ethereum accessible for users when it's more scalable so and i think it's actually a really important point because if it's a case where transaction fees become extremely high in the future uh because block space is very limited then practically speaking the way that the majority of people would interact with the ethereum blockchain would be through intermediaries that subsidize the transaction costs for them and if that's the case then all of these special properties of a blockchain don't actually flow up to end users

and that's kind of like a compromise on the on the vision so scaling is important not just from perspective of you know kind of the supply side of people who run the infrastructure for ethereum but also the demand side so that people can directly interact with the ethereum blockchain and really take advantage of you know the special properties as we've said so often the the alternative to scaling the the base layer in some way or having a trustless scalability solution is basically you have to scale by trusted intermediaries as you're saying so often crypto banks right we see bitcoin doing a lot of this today right transactions through coinbase more institutionalization hopefully that is not the path that ethereum takes but i notice you you kind

of plotted these things in uh i guess different different sides of the triangle here right and it looks like things that have uh strong decentralization with high security are sort of on the left and they're more conducive to money type use cases so bitcoin and ethereum would be those those that kind of make some trade-offs with decentralization uh in favor of getting more scalability like eos or a tron or a ripple um it seems like what you're saying in this graphic is they're not as conducive to non-sovereign money type use cases with bearer assets is that one of the ramifications of the scalability

trilemma that you're drawing out here yeah i i think that has to be a part of it um the uh the main purpose is that they're making the accessibility to the base layer whether the node operator is as a user uh or mainly as a node operator very very difficult they're limiting that um so when you have a limited number of node operators obviously that's just a high amount of centralization that you have in network and as we've seen with some of the uh cartel issues with eos and obviously tron uh you know there are some issues that can that can seriously bubble up there so making that maximally democratic uh is gonna be far more beneficial in the long term for any

uh any network but it's it's tough to kind of meet that high level of security that something that bitcoin and ether have reached and um the one the one of the main reasons behind why they're valued at where they're at is because they do have this high monetary premium right now and they are kind of seen as these store value assets uh at least it's you know some some people that most do uh but uh um so yeah i think that's kind of why bitcoin either fell to one side and and the others haven't because they really haven't um reached that that point of uh of how people kind of look at them as a store value asset wilson that sounds a little uh ethan's money of you sir is

that what you're saying a little bit we see a bunch of blockchains around the perimeters of this triangle and then we see eth2 at the center right and i feel like the reason why we wanted to start with this particular graphic is because this kind of illustrates the difficulty of like moving into the center like this is called a trilemma for a reason um jeff coleman recently had a fantastic tweet thread that talked about like why did east 2 take so long and the answer was well because it's hard and like getting into that center point where you have a nice balance of security decentralization and scalability where you are working all the angles to maximize all three of these rather than having to make compromises is why ethereum 2.0 has taken so long to get out the gate right

and so it's at this point excuse me uh with with ethereum 2.0 in in well probably speaking of ethereum 2.0 past phase 1.5 when uh the eth 1 and 2 chains merge there is nothing like ethereum like that right and ethereum 2.0 is what it's it's not just trying to like have an evolution of ethereum to me uh it's it's more like trying to in the most pure and most essence way possible solve the scalability trilemma right and as a result of that effort is what ethereum 2.0 is right ethereum 2.0 is the thing that solves the scalability trilemma not some just inherent it's it's it's technologically neutral right

like whatever needs whatever technology needs to solve this scalability trilemma needs to be discovered and that's what ethereum 2.0 has morphed itself into right out of a very long like six year long research and development process so i'm super happy to see this graphic like really early in the article because it really sets the foundation of the whole purpose of the whole point of this whole ethereum thing uh and also sets the groundwork for the rest of the article right rest of the report yeah i i i think you nailed it um when you're talking about the uh it was uh jeff coleman um yeah that's we thought that was an excellent tweet thread that was fantastic uh diving into why it took so long um and in the background on bls signatures so the idea that

and this is kind of why we put ethereum 2.0 in the middle here is that there are other networks that have introduced uh proof of stake and charting um but no one's done it at the level that ethereum 2.0 is looking to do it at no one's going to have the level of validators that are on the network and so um that level it kind of takes it to another level of like well hey we're introducing the scalability um feature and then at the same time you're gonna be uh significantly significantly more decentralized than any other competitor at the moment um who knows where they end up at but just based on design that's that's where it's leading to um and just kind of one of the reasons why going back to that thread was the idea

behind the bls um cryptographic uh signature aggregation um so basically if you have a ton of validators on the network and you're pummeling the network with a bunch of signatures on each block it can lead to a network overload and so what bls does is it basically aggregates the signatures it makes it very very small so you can maintain the uh the speed of block finality with uh without making node operator costs go through the roof awesome and ready to move on yeah let's let's talk about this graph david yeah so this this is the one with the subject we want to bring up next because again this actually sets up really important groundwork for why all this

effort needs to be undertaken in the first place right and when i when i first look at the of at this chart and this is a chart of the percentage of ethereum block space that's used right like how full are the blocks on percentage terms and we see like in the relatively in the center we have like the 2017 like mania right we had this is where we experienced like icos that sold out in in 10 seconds because everyone was racing to get in the blocks this is when we had cryptokitties this was like the first real test of ethereum's capacity right and like we see to me when i look at this shaded area in the center i see three big spikes one in like q1 uh 2017 one and q2 and then maybe one in like late q4 2017

and it's that in each spike it's progressively higher and higher and higher right like the first spike spikes up to roughly 70 percent full then like the second spike is 85-ish 90 full and then the third spike in 2017 uh actually got to to comparable levels that we see in in d5 summer 2020 like nine plus 95 full which if you're above 90 95 of a block you're basically full that's basically a full block uh and what's interesting to me is like okay that's great uh we reached capacity but that was in like peak mania times but we actually didn't really fall off in block usage between 2017 and 2020 it stayed relatively high and then the first instance of like d5 coming back to life after the bear

market of 2018 it looks like we have just this incredibly high sustained block percentage used in 20 in in 2020 like it starts at the very start of defy summer 2020 it's like 95 and at the end it looks like it's something like 98 full uh and so to me this is just like extremely validating of the whole um incentive or or need to scale ethereum right like they're we're trying to scale ethereum and and this is why we're doing it like the first instance of ethereum becoming like adopted again we max it out it's like it's our is already maxed out and like this is before like new wakes of people come into this space um that's my analysis what's your guys take when

you see this uh chart yeah so i'll just give a couple of thoughts and then i'll add myself to wilson but yeah i think you know that like the the reason why ethereum is like ethereum is not doing this upgrade because they just want to make things complicated that's not what they're doing like the reason why there's this transition to ethereum 2.0 is because like ethereum doesn't currently scale today and it's cool that we can run all these very interesting experiments on here and everything that's happened even during the ico boom but you know especially now with with g5 uh it's incredible uh what's been built on here but what we're doing now is still very small

scale and nowhere near what you know the level of scalability we need if we actually want ethereum to actually serve as a you know public infrastructure for the world where you can actually run you know significant amounts of the world economy on ethereum and actually start you know have have like real people actually use this thing so uh yeah that's i mean that this is why ethereum 2.0 was built yeah i i i won't add too much i'll say on top of that i i kind of wrote it in the piece but i thought this was um clear affirmation of you know some of the concerns that a lot of the developers and researchers when they

first built ethereum they had they had those concerns around you know at the end print scale should have reached this level of utility um but it also from a lot of the research that they had already been doing and researches that they put towards building ethereum 2.0 um so that that was a clear reason and this whole event starting in 2017 and you can see it hasn't gone down since um is is the clear showing that there is a is a need for uh for scalability and that it's a top priority i i have two uh thoughts on this when i when i see this which is super interesting um but it's a little bit of a side quest you know one thought when i see this is oh my god like in 2017

we wasted block space on all sorts of stupid things there's this concept we talked about on bank list like economic density of blocks transactions like the more economic value and throughput being pushed in each block and this is something by the way that happens in bitcoin right as well but also when i look at this uh and i contrast it from three years ago it also seems to be happening in ethereum like in d5 casino summer um we were spending blocks on more productive things like these are collateralized loans you know a lot of still speculative behavior but it wasn't cryptokitties right and i wonder like

three years from now or five years from now if the things we did in d5 summer are going to seem awfully silly too and awfully wasteful because it seems to be the case that at least on the main chain these transactions are getting more and more economically dense you guys talked about roll-ups a little bit later on and kind of that way of thinking about ethereum and that is the that is a maximally economic economically dense transaction because you're doing all of this economic activity in a roll-up chain and then essentially you're just like settling that on the main chain so that that's that's one thing i think of um any reaction to that is was that an observation that you made as well um i mean yeah absolutely i mean you're

it's uh you know just kind of even thinking about it a little bit more right now and you'll see a lot of these and i i this is just how i'm thinking of is each cycle that we go through in 2017 and what we went through in d5 uh casino summer is we're gonna go through these cycles of where things start to get somewhat popular and then and then they'll catch on um and you almost you almost need to run through that yeah you need to get to the other side and uh and then the ones that actually have some utility some good teams behind them as we're seeing right now with like urine is basically eating up all of d5 um they're the ones that are gonna come out and be uh a potential front runner or

all i mean is that they'll they'll still be there come the next cycle of uh of whatever comes next and you know i think it's going to be related to d5 but uh what that's going to be maybe it's not liquidity mining um food coins but it's something even more um even more interesting related to it's very it's very survival of the fittest isn't it in a healthy evolutionary way and only the most valuable transactions survive because those are the only ones that can compete for block space which is super interesting um we want to move on to this maybe because this is sort of related i guess to block space but the median ethereum daily fees have certainly shot up as well and that

means like i was i was looking the other day at token terminal uh and basically e fees annualized are about 700 million right now right so if you look at kind of all of the fees that are going to pay for block space um ethereum is generating 700 million in revenue which is pretty surprising because that was not the case in 2017. what's the story between behind the ethereum daily fees are blocks just becoming more more valuable or like what does this tell us is this also uh part of the story of oh my god we need scalability on the base layer too yeah definitely part of this the same story

except i guess maybe this chart highlights the perspective of the the user of ethereum and what they experience if they're trying to submit a transaction so throughout this year like you kind of see like the median daily uh fees like paid on ethereum is mpe terms is about 2 000 each and then since kind of like the d5 summer which i'll say started in in june it was around like 5 000 which eth a ton i mean and we'll talk about this kind of in this section we get to uh ethereum entrepreneurs monetary policy and uh you know what happens when you start burning some of those transaction fees and you know why that

matters but uh yeah this just really highlights just just how how much more competition there was to get your transactions included into blocks because there's just so much opportunity on the theory of the summer for people i mean to be frank just for people to make money yeah yeah and the criticism is real right at sort of the peak in in october um lots of folks in d5 were saying i'm like this is just a whale chain right like we can't afford a basic transaction uh only if you only have a certain amount of capital maybe you can but it's not worth it for my 500 you know transaction to actually pay a hundred dollars in gas fees to do this thing

um well let's switch to issuance because i think that is another key part of the story so we were talking about all the same story all the same story so we're talking about blocks and that being kind of the the chief commodity that um ethereum sells i guess right is get get your get your blocks in an ethereum transaction we're selling that to you and you have to pay an eth by the way um but this is a story around ether as an asset and it's net annual issuance right we'll get into why that matters maybe kind of the the three points on the triangle we call it triple point asset thesis but um can you talk about this because i'm not sure that many people frankly

know this guys right like uh i don't know how many times a week i get asked on twitter uh what is eats issuance into the future right i'm like well like uh we kind of know it right like i can't tell you there's a fixed amount of ether but we kind of know it can you tell us what we know and how we know and what this graph is showing us yeah so some helpful background for this is just to describe ethereum's monetary policy kind of what it is and you know if you guys have discussed this plenty of times so i'd be prepared for you guys but the the high level idea with ethereum's monetary policy uh it can be defined as like minimum necessary issuance and

basically what that means is that ethereum always aims to issue enough eth to ensure that it remains secure now and into the future now the trade-off with that is that and this is probably many people's criticisms is that who defines what minimum necessary issuance is is something that sounds very technocratic uh subjective sounds and yeah and it's like it's like really hard to really like quantify like what that actually is um but but practically speaking i mean this has always been a theory of monetary policy and what's happened in practice is that

ethereum monetary policy has only changed twice in its history and both adjustments were to reduce its monetary policy uh so this is not something that like while yes it may be a little bit kind of you know uh like it's not like clearly defined practically speaking you if there was going to be a change to the theory of monetary policy there would need to be ecosystem-wide agreement to do so so this is not something that can just change at the flick of you know if italic just says one day like hey guys like let's jack up the inflation to ten percent like that this is it like that that's not how it's going to work now

i think that that is kind of important to highlight the differences here so ethereum has designed this monetary policy to prioritize security and this is an opposition to bitcoin which has designed its monetary policy uh for for kind of like monetary idealism at least what the austrian things is would be like ideal money and that they trade off with that you know because we kind of discuss the tradeoffs with the minimizer issuance to trade off with optimizing for you know this perfect money is that as a consequence you also set your security budget arbitrarily it's unclear if having havings every four year and then ultimately a fixed

supply where the bitcoin blockchain will be supported by fees is actually viable in the long run uh so that's that's the tradeoff that bitcoin makes um so now that we have that kind of you know framework for how to think about the monetary policy well this is how like it actually translates into you know ethereum 2.0 so when first phase zero launches well i'm saying this to say pass and launch but now that phase zero has launched all of the issuance on ethereum to the e2 beacon chain will actually be incremental to what's on the e1 chain so for the next maybe call it you know one to two years before the eth1 chain merges into e2

ethereum's annual issuance will actually increase slightly and it'll increase maybe about yeah so like here it is so increase you know probably somewhere between you know point 10 and under the most aggressive assumptions maybe 0.8 uh this is a temporary thing right because once that ethereum one merges into ethereum two well all of that issuance that's coming from ethereum 2.0 that right now is incremental will now become the only issuance for ethereum 2.0 so if we go back to the last chart uh that's kind of what it's showing is that once this merger happens ethereum's annual issuance weight will drop uh you know well below one percent potentially even below zero

and kind of like that range you see on the screen that's depending on how many trends how much transaction fees are are burned so one of the things i touched on before is how when eip 1559 which is kind of like a proposal to restructure how users bid for block space that results in majority transaction fees being burned uh depending on how much transaction fees are being burned in e2 it can actually cause ethereum's net issuance to actually be negative despite the fact that the theory 2.0 is perpetually uh inflationary oh it should be super interesting because at that point i mean you're talking about ethereum's

issuance for faculty being zero while bitcoin's issuance rate is 1.8 percent and i don't think this is something that you know many people have have appreciated yet just just how uh i mean potentially deflationary ethereum could be uh at this point one thing just read i just want to read this last line here because it's it's kind of encapsulates what you're saying is very likely that once each one 1.0 merges with eth2 ethereum will not only be the most secure blockchain but also the one with the most credibly no low monetary policy that's the summary of what you just said yeah and i guess when i say credible i

really just mean incredible in the sense that it is very likely that this is sustainable so it's not going to be a question of down the line like right is this issuance enough to so that ethereum remains secure uh so that's kind of where that credible part comes from ryan you you talked about how like uh you gave the theoretical hypothetical example of like if so if somebody asks you like well what what's ethereum's like monetary policy like you know tell me how much ether there's gonna be in 10 years uh if if somebody can answer that question with a like a specific number the ability to do that comes as a sacrifice to the uh understanding the knowing of the security at that point in time it's it's kind of like uh uh that i i don't know i don't know what

law there is it's something to do with quantum physics but you you can either know the velocity of a of a particle and not the place or you can know the place of a particle but not the velocity right like there's some like quantum physics rule about that and so that's the same thing with blockchain security and monetary issuance it's like either you get to supremely decide what the monetary issuance policy of a blockchain is or you get to decide what the security of a blockchain is but not both right you only get to maximize for one of those two things and the thing is like with ethereum it decided to innovate and be pragmatic in its approach to generating security and one of the big incentives to um generating a very efficient and

efficient insecurity blockchain is that that allows you optionality with your monetary policy and so like the the innovation behind proof-of-stake means that we get to tinker with our monetary policy in ways that are long-term net positive for the ecosystem so at the same time we've been able to generate a secure environment for the ethereum economy while also we've been able to figure out a path forward for something that is actively deflationary versus something that is just passively in uh passively deflationary and that's that's what i see in like this this uh chart here where like the thing that the line is variable but it's trending in the direction that you want it to no matter what and i want to go back to the the line that ryan just uh just read out

ryan if you want to scroll down a little bit um to me when i when i read that line that that felt like a mic drop moment and because if if you gave out this line two years ago back when back in peak bear markets when the the bitcoiner like maxine narrative had was like dominating and if if you got like ryan selkis to like ryan selkis like what what what do you think about this line i'm sure people would be like like no that's just completely ridiculous but the fact that this sentence is being like reported out in a report nowadays to me just indicates like how many people are starting to wake up to like this new alternative security model and the the positive benefits of the monetary policy over the long term and so i see this as just like a and

a shifting of the tides if you will about like the the perception of ether from like the outside in and and i'm just really thankful that you guys are putting this and put actually putting these words into a report because they mean so much when you guys typed whoever typed this into this page did you think about the implications of of typing those words in when you type that uh yeah i know that definitely you know we definitely did um and you know i'm sure that there will be people that are triggered and rightfully so because this is something that uh could have like will happen or i should say it's it's this is something that is planned to happen

in you know once two years and in theory it's not guaranteed so i can get why people be skeptical if they read something like that and they are you know have a predisposition to be an ethereum skeptic but this this is the plan and if ethereum two works out the way that it's been designed this this will happen and at that point uh people need to deal with the the consequences and you know granted even at that point you know maybe maybe you know people still might not get it maybe they'll be like you know what ethereum is still perpetually inflationary and

it will be hard to get people to buy the narrative uh we still don't know but all right this this is something that that will happen if the 2.2.0 works out and it's it's important it's integral to understanding uh how eth will evolve as asset in ethereum 2.0 when it does uh you know trying to kind of fully roll out i i want to i want to answer that question in another way too right because when someone asks you uh what is the monetary policy of ether how much supply will there be right the the answer of course is what we've said minimum necessary issuance right it's balance this trade-off between we're going to maximize for security but we also like it's not like we don't know like we know

the bounds of what this is going to be like it's not that hard right so maximum is 4.82 like that's probably going to be the maximum because we're not going to have likely more than 30 million staked eath and it'll probably fall somewhere in the 10 to you know 16k range so we're probably talking about before the merger a 4.4 to 4.6 issuance rate right so like that's the max and we know it won't be more than that and if this merger happens which again as you say is not concrete nothing in the future is who knows right um but if the plan is carried forward and by the way we have evidence that the plan seems

to be working because these two just launched okay but if that happens yeah you haven't heard in two years or so which is what the timeline um with the timeline kind of predicts look maybe you're bearish on that maybe it happens in three years maybe but but there's a tremendous amount of momentum and force from the community to deliver on this plan and we just completed the hardest part if that happens then we get a drop of issuance down below the one percent range and do we know whether that's going to be one percent or negative half a percent no but to me both of those scenarios are pretty damn deflationary like that's a pretty good store of value asset it's a pretty good story so i am fired up

because i'm also tired of people saying like acting like metallic could trigger a masternode and suddenly inflate like 15 annual issuance into his personal account and steal it like a fed chairman or something because that's just not true but i want to ask you a question here because i'm getting to a question this is not just a rant why is this so taboo what like so david and i have been talking about this you guys know right for like the last year and a half to two years right it's why we started bankless like literally to talk about this stuff because no one else was and here's the first report i've seen that is actually like spreading the truth about what is about

to happen uh for ethereum right and you guys are doing it and fantastic thank you like sincerely thank you but why has it been so taboo to to do this is it is it the fact that it's taboo or maybe it's something else maybe it's just the data is hard to compile what's your sense as analysts as to why no one else has written a report like this yeah i mean there's probably a ton of different things going on for for why people uh always discount this scenario that could happen i think among them is that uh many of the early people who got involved in bitcoin were

playing for a very specific thing when they wan when they thought about what a cryptocurrency would be and they're playing for a fixed supply uh currency with a deterministic monetary policy and when that's what you're playing for and when that's what you don't want to compromise on when someone offers an alternative uh oftentimes i feel like people can think in binaries that it's either fixed or it's hyperinflationary and ethereum's going to be you know zimbabwe on the on the blockchain and that's just and that's just not uh this is not true um so i think that was probably one of the and one of the biggest things is just

that uh you know some people just just don't want to you know and also i think another thing is that for whatever reason there's this idea that there will only be one uh crypto asset that will succeed and that there's not a future where these different blockchains ethereum and bitcoin can actually be symbiotic and they can both be successful that it's not a zero-sun game and i think that that like thinking is is probably one of the reasons why you know so many people haven't been able to you know appreciate this and you know hopefully that will change you know especially when you know this ethon merger finally happens and uh this thing is real and it's no longer

a point of you know contention or a what if it's just this this this exists you know yeah i i think yeah you you on that last point i couldn't agree more it was the uh the idea that um that there will only be one winner a winner take all situation and especially when you have a lot of bitcoin holders or people that have been in crypto for a while uh as soon as you tie any sort of you know financial uh holdings to this uh this narrative uh that's gonna just kind of bring out this ideology that's not gonna allow someone to kind of think of uh

something else as as money and i think that was the the other thing that kind of maybe attributed to uh why it was potentially taboo is the idea that using eth as as money uh that narrative was i guess kind of brought up more within that kind of got legs within the last like two years um so kind of looking at it when you're you're thinking about issuance uh schedules you really kind of do that for assets that you're looking at it from a monetary standpoint and less so for something that might be just used as a utility or gas um so actually starting to look at a theorem from a different perspective i think that's exactly something as as it starts to gain more

acceptance then you'll start to uh maybe see more people look at it so i think that that was kind of one of the reasons why we definitely wanted to take that perspective like as we were saying uh get everything into this report so everyone understands what's what's really going on all right ready to move forward let's move forward i do have one solution if you're if you're a bitcoiner you know is you could just buy some eth right you can diversify a little bit right so like i think having some investment in the space does color is on the space and it's okay to be hedged um i guess if we're moving on maybe could we talk about this concept of uh the staking implications on eth because that is the thing that launched

today right and we've used this term um like ether as an internet bond and looks like you guys agree with that as well can you comment on this this kind of sovereign bond analogy and what that means for ether as an asset what that like turns ether into yeah and i'm sure this will probably end up leading into uh the either a triple point asset yeah but yeah i think so uh yeah i got such in touch on this uh earlier uh that mara and colin did this very report called like ethereum the

and it was really interesting report because you know when you think about like what staking is uh it's not entirely clear that there is a very uh easy analogy to what what is happening here so there are aspects of it that are similar to like a sovereign bond in the sense that you know if you think this is like a very simplistic model but if you think you know why do why is the united states raise uh capital uh via selling treasuries well in large part i mean its largest expense is to pay for its defense and there's kind of a similar concept here with ethereum it's like why why is like what is theorem doing it's

raising capital from people who will eat and it's using that capital to then go and uh secure itself and another common thread between you know a nation state issuing a a big sovereign bond and ethereum paying people staking is that the currency that it's paying uh kind of like these bond holders is one actually issue issues itself so ethereum is issuing users eth for you know staking on the ethereum protocol and that's interesting because of you know what it means for the risk you take when you're staking so the risk you take when you're thinking are really

too risky it's one systemic risk and that's just the idea of like ethereum failing um and then two would be a validator risk so the the risk that your validator underperforms and you get penalized or let's say you blame maliciously you need a flash now boundary risk can actually be diversified away if you were to stake through like a decentralized statement protocol like say like rocket pool in which case you're just holding this kind of like eth bond that is paying you uh eth for providing the service to theory of blockchain now uh it's not quite just like a sovereign bond because there's also these other interesting components of it right like there's no maturity on it

users can demand their money back whenever they want obviously subject to like withdrawal period uh it's perpetual um and there's also you also get paid transaction fees as well so yes like when eip1559 is implemented the majority of transaction fees will be burned but there will be a portion of it that is actually not burned and that portion of it that's not burned will be based on uh you know ethereum's ability to kind of serve serve users well in their use cases and this is almost like an equity component to it as well because it's kind of like this like variable component of how much return that a staker can get that's

based off the utility of the ethereum blockchain so it kind of is this like really kind of new like financial opportunity for for investors to be able to you know basically like lend your eth to the ethereum blockchain and receive this return from this non-sovereign but in a sense sovereign because ethereum is like the sovereign over theory of users uh no source of yield for buying the service so yeah i think it's like a super interesting like opportunity for for people by the way watkins i'm not sure that people know about that last part right so we've

talked a lot about eip1559 and the burn right so if there's a transaction some portion is burnt and that benefits all eath holders because it reduces supply of course but if you're staking if you're a validator you also receive some proceeds from denominating eth from that transaction too in addition to the block rewards that you receive that's a really interesting point exactly wilson do you want to add anything on to that um and i i think i i couldn't have covered it better um uh but uh i i think it's uh important to kind of fit these kind of narratives around what's uh what's actually happening here uh because it just makes it that much more acceptable what's going what's uh what's going on because

uh even there are there's still some people who are skeptical uh skeptical of what proof of stake can actually provide and being able to kind of bring a story around it and make it relatable um just makes it that much easier to understand what's actually going on do you guys think that this is a narrative that the legacy markets the legacy institutions the institutions this headless thing that everyone keeps on pointing to do you think this this is a narrative that people can grasp on to these days this is to be determined i feel like part of that would be predicated on acceptance of eth as a monetary store of value and then i think once you get over that hurdle uh this

becomes an incremental benefit to being able to hold it and that you can be productive with it by you know staking cool all right totally agree should we get to it david here i know you're itching to get to right here we're here are we here is this the moment okay this is the moment so asset super class triangle and when i see this i see ether the triple point asset right and so uh i kind of want to ask you guys like your thought process as to why you thought that the ether the triple point asset thesis was worthy of getting included into this report yeah so i think this is actually a recent tweet that the talent had where he was like when describing

uh like assets now i might be like botching what he was saying but the general idea is that like when describing things in the blockchain world like assets it's better to describe their properties than to just kind of box them into like what they are and with ethereum you know there's always been this i know there's something i struggle with as well is like what what actually is this thing like is it just a commodity because it's used as you know fuel for transactions i mean there's also the analogy back in 2017 that ethereum was just kind of digital oil and that's like that's not really the entire story it's not quite just oil and then you know is it a store of value uh well i mean that's something that you

know you guys always talk about uh but that's also the full story because it's not just something that people use for collateral d5 to pay for transactions et cetera um and the mistaking well now you can actually get like a a yields for on your on your ether so now you have these like three like properties of ask and maybe i should also zoom out and just describe what these properties uh mean and kind of where they come from so i think like back in 2017 uh crisp chris berniske and adam white wrote this paper called ring the the bell on a new asset class where they looked at bitcoin and then they kind of introduced research from i guess a guy named robert greer

about classes of different assets and you know the student basically said that there's three super classes of assets stores of value which are assets that retain their personal power to the future there are commodities which are you know assets consumers are transformed and there are capital assets which can you know be um their capital assets that can like generate an income right now uh with ethereum it is i mean as far and granted i have not looked through every asset in history to determine if this statement is true but it could be like the first asset that actually has all three of these properties so if you look on this uh this kind of

visualization uh we've had asset 72 so we've had gold and bitcoin which are both commodities and stores of value we've had us treasury securities which are both uh capital assets and stores of value right like people will gladly i mean there's what like 17 trillion dollars of negative yielding debt that people are holding they're not holding it because of yield they're holding it close to store value right but ethereum is actually probably one of the only assets that actually has all three of these properties and you know i think it's just good to highlight these properties because they you know not to try and like box ethereum to like this like

it's like this is one thing like all like ethereum is money or at the end of this commodity or the resist just saying like it just has some properties and these properties are could be different sources of demand for uh eath on the ethereum blockchain like eath will be demanded to as historic value ethel be demanded to pay for block space either be demanded to stake and this i think is actually what's important for people to understand from an investment standpoint about ethereum it's not some abstract concept of like oh like it's money or oh it's a commodity or what's a capital asset it's like no but there are these there's three kind of different use cases that are all pulling upon it uh

for uh to be used and that's an important driver of value do you guys think that when somebody from the outside world maybe a money manager family office quote unquote institution when they cut stumble on this page of of this report do you think they're ready for some sort of uh uh interpretation like this because this is like not something that is within the legacy topics like this is a very inherently crypto based uh narrative or topic so when the outsider perspectives uh comes in and sees this what do you guys think their gut take is gonna be uh well hopefully i'd wanna fix the title

but yeah i mean hopefully this can this can help people understand uh just help them to begin to understand what drives ether's value uh because it really is difficult like people would love to have these assets just fit into predefined boxes uh but that's just not the case like you really can't just box in what ether is and i think that's fine because part of what makes this industry interesting is that in many cases we are reinventing what like money is and we're like creating these like new

uh assets that haven't before it existed so i think it's fine that you can't box it in and that it has these various properties that we may not be able to make sense of now but uh certainly are important in driving value for it for either so hopefully that you know that idea can get across in this page of you know sure you might not be able to it doesn't neatly fit into some some box that you you have in your head but here's what makes it valuable so what david and i have found through our travels is this is the simplest way to explain ether as an asset this idea of an asset super class triangle this idea of

the triple point asset thesis um we need to take this to the world guys like we're like what's the next step here how do we get people to understand it there's an element of i feel like we're bitcoin like ether is bitcoin in 2015. where some niche group understands it but like institutions didn't understand digital gold back then they thought it was like you know hacker money or drug money or something like that right so i feel like we need to to take this out to more people and spread the message i you know i know that's what you're doing with your your report here but uh man we're aligned let's do this guys this is the collateral we need to get

that done so that's why we're so excited to see this you know i do have one um i guess thought on this so as i've thought about the triple point asset thesis in these in these three ways one like next level thing so first of all this is the way to explain it exactly as you had in my opinion watkins you did a great job um one subtlety i've i've often wondered is well actually like the commodity here is not actually ether the asset the commodity is actually ethereum block space which is different we were talking about that that block space earlier but ether the asset is almost like the petrodollar because that's what like as as you know

barrels of oil are all denominated in us dollars in kind of the real world that is the unit of account for barrels of oil worldwide us dollars as the reserve currency as the petrodollar if you will ether is kind of the reserve currency for the commodity which is ethereum block space right so like the next level of thinking about this i think is understanding that subtlety we don't have to get investors there yet but that's what i've come to to think of it is it's like ether is actually just the unit of account for that commodity which is ethereum block space i don't know if you guys agree with that i brought that up with chris berninski when we had him on the podcast he was

like ah i have to think about that some more yeah i never thought i remember when you tweeted that out and yeah the kind idea that ethereum was ether was gas money um yeah yeah it's just kind of like an easy way to think about it you know you go fill up your tank and you're just playing with your credit card whatever cash um and that's essentially the ether in that transaction so um it's a very interesting way to think about it because i i think kind of wrapping ahead around the the acid superclass thesis um it makes it sound really nice when ether acts as that commodity as well it does plug your ears institutional investors let's go with the asset super class don't worry we'll address the rest in

2025 when you're ready it is important to know that like when you purchase block space with ether you're actually there there's an intermediary currency that is gas and so it actually goes ether gas block space and when you are like calculating the way for the gas price or whatever like you are actually doing a very quick instantaneous creation and then just destruction of this gas currency which then purchases you the the block space right and so like this conversation actually gets really really nuanced yeah no i honestly i totally agree with that uh and honestly i think that the commodity analogy will be even stronger when eip1559 is implemented yeah and there's actually this direct relationship

between lock space being used in the theory of either the currency being like consumed gasoline wouldn't be as expensive if it was renewable that is for sure [Laughter] absolutely i think we have maybe one last area we wanted to cover really quickly and this is um in the report to do with um decentralized staking right so staking is now upon us and you guys have characterized i thought this is pretty unique decentralized taking protocols almost as investment banks can you talk about what these decentralized staking pools could actually become in the future and how you think about them yeah so there's a really good uh article

and then paper that uh alex and alex evans from placeholder and to roon from gauntlet wrote about this topic of you know what proof of stake and d5 can learn from mortgage-backed securities and they kind of introduce this concept that uh staking derivatives are similar to mortgage-backed securities and what this kind of diagram is showing is what that process looks like under the hood when you stake through the centralized sticking protocol and the process is you as someone who wants to stake deposits or eat into this protocol say it's like rocket bull and then rocket pool will then go and allocate that eth

to different uh validators in this kind of network right so it's almost like a two-sided marketplace investors on one side of mistake validators on the other side who want eth to stake with and if you think about it the validators are in a sense receiving loans on eth because they they don't actually have to put up the entire 32 heath that they need to stake they're actually borrowing you know part of that uh 32 we need to to stake and they need to pay it back um now that's interesting because you know you when you hold this kind of derivative that you get from depositing your ether into one of these

decentralized statement protocols well what does that beat actually represent it is a claim on the underlying eth that is being loaned out to all these from validators so one analogy to think about this is that imagine like each validator loan is kind of like a mortgage and then you're packaging those valder loans into a security like a march back security and that's essentially what this uh derivative is it's kind of just like this package of all these different you know mostly different validators and i think it's also interesting massachusetts where i think these decentralized taking protocols

uh will actually be preferable as a form of derivative is that it actually diversifies the underlying i mean just like mortgage-backed securities diversified underlying risk of uh you know a single mortgage failing similarly like uh a derivative that station from one of these staking protocols diversifies the risk that individual validator fails so that's a lot better than if you were to go and stick with a centralized service provider like say in exchange and you know if their value fails then that e derivative is it's like in you know it's toast um so and i think that that will probably

be why people will prefer this uh come out the fact that and this is you know protocol specific but uh in the case with like rocket pool well validators are actually in a position of first loss if they get penalized or slashed for behaving maliciously so you know validators have to put up 16 eth they get the other 16 from stakers in the protocol if it was the case where you know they got slashed for 5e then that validator would lose that 5v as well so from the receptor someone holds this derivative heat not only do you get to diversify the validator risk but you also get kind of like insurance against

being penalized or losing because the validations behaves so that that was kind of the idea of these you know staking pools and you know how big they could be when a theory yeah i keep saying one theory 2.0 now that 2.0 says launch get used to it brother so uh before i hop in wilson we want to add anything i i just think this is kind of one of the most interesting aspects of phase zero this idea of uh the illiquidity dilemma for validators or perspective stakers and um how this is going to play out between the centralized protocols versus centralized protocols and i know decentralized

staking protocols are going to um in a sense um mitigate that that risk that validated risk a little bit more um but i will say like if you're sticking with coinbase most likely they're probably going to ensure any any losses off of that um but i i think there's a a lot more that could go on the the one of the clear benefits of utilizing these decentralized services is obviously um you're not using uh a custodial service um so you still kind of have that uh that ownership over and exactly what ryan was saying um uh you there's a built-in insurance protocol as well all right so here's when i was reading through the report this was one of my favorite uh sections and the reason why i this especially

this little graphic right here uh and the reason why i got so excited about it is because like it opened up my eyes to what like could be a very very competitive world in the world of staking pools probably both on the centralized and decentralized uh uh ends of the spectrum they're all pro all probably competing on the same few things and it's basically all competing for like east deposits into my staking pool but where like where we are eliminating uh mining pools we are creating the possibility of staking pools right and that can be decentralized or centralized but there but no matter what like no matter what characteristics or the parameters of how these uh staking pools come to be they're going to be competing on a state on the same few things one of them is

uptime how how does a pool incentivize maximum uptime from its validators because that's going to create the strongest amount of roi in the derivative token that each staking pool is going to inevitably issue right like you deposit your 32 eth you get 32 like staked eath uh derivative tokens uh that's either one of the articles that you guys have cited here from from dan elizer um and so like i'm really bullish on like this competition to be the best staking pool system to really add overall to ethereum's security because it's really amping up the incentives to have strong uptimes to be staking as much eath as possible and

they're going to be fighting for generating liquidity on their staked east derivative token so like like you hear you heard it here first yield farming on state east derivative tokens is totally going to be a thing like you are going to become people are going to be compensated for providing liquidity for like whether it's like r eth for the rocket pool token or or coin us or ethc for the coinbase token i don't know you're going to get rewards for providing liquidity between staking pools and and ether and that that was kind of like my big takeaway from from this part of the section and so uh i thought that this this part was was really ingenious and this graphic especially was a nice add to the piece as a whole yeah that you know what this made me

think of too just to add to what david was saying it's basically like you know the stable coin wars that we have yeah like we're gonna have the eat staking wars in a big way right so ether is already the most liquid asset on ethereum staked ether is going to be the second most liquid asset right but steak ether will have all of these different flavors right so there's not like just one us dollar on ethereum there's usdc and there's you know tether and there's dye and all of these things and that range will be from centralized to decentralized and then because of like dan elizer who you sourced your

superfluid collateral right we get to mix and match all these things too so we could create some basket of you know centralized um steak teeth if we want and it's a blend of binance and coinbase and kraken right yeah and then we could have a like because one one dimension david that um you know you mentioned uptime but another dimension that's probably going to be important is the degree of of trustlessness of the asset itself right so we talk a lot about economic bandwidth and in particular trustless economic bandwidth well like and you guys cited the protocol sync thesis thank you by the way we're propagating that um like the protocol sync thesis would

predict that d5 is going to want to build on the most trustless form of of staked eth in the ethereum ecosystem too so rather than build on finance's version of eth right that is completely custodial stick teeth maybe you want rocket pool because that is more decentralized or maybe you want this blend of decentralized anyway we could go down the rabbit hole here but you guys have unlocked something i think in both of our minds with respect to how the future could could pan out with all of these ether bonds that are floating around and it's super exciting to think about yeah honestly i think both of you guys nailed it i think when we were researching this this was probably one

of the most surprising things when i was like when we were looking through it because of how little it has been has been discussed so obviously like dan had that great article on the death of ethereum but outside of that i it just didn't seem like there was an equal amount of coverage for how big an opportunity this uh derivative space space is and yeah i think there's going to be kind of like you said there's going to be like incentivized pools between like eath and derivative to build liquidity between those those two there's going to be new farming opportunities with derivative v there's going to be the opportunity to like lend it to blend and borrow through like use it as collateral

to meant die like all these different things there's also going to be like structured products that will probably be built packaging these different derivatives together uh it's really like i think the possibilities are really endless i mean they're probably like you know opportunities for you to like swap your variable yields in uh your safety from like a fixed one uh that's interesting so there's like a whole ton of you know products that i you know imagine will be built using this derivative as a as a primitive and i think they'll be very popular because no one wants i mean everyone would prefer liquidity over illiquidity and this is probably going to be the way it happens when there's no uh withdrawals for your

safety well ryan wilson i really appreciate you guys coming on and talking about the missouri report ryan i'm looking forward to talking to you tomorrow at the missouri missouri conference online as well yeah look looking forward to it so you guys have done a fantastic job with this report bankless nation this is the report that you send to your financially minded friends who have not yet gotten to crypto this is the report that you send to your friends and family if they're trying to learn about ethereum uh ryan and wilson here have done a bang-up job really just going into every single nook and cranny of ethereum subject matter and getting it

relayed into this report so tip of the hat for really pushing the narrative forward pushing why we're doing this and pushing why ethereum really really appreciate your guys's work yeah seriously guys thanks for getting it right thank you it's not easy yeah no yeah thanks thanks for having us on thank you guys yeah really really appreciate it absolutely guys take care thanks a lot all right bank list nation we're going to turn to sponsors really quick uh just to talk uh and then afterwards me and ryan are gonna talk about just you know eth2's launch so we're gonna reflect on that a little bit so stay tuned as we get through some of our fantastic sponsors that make this show possible

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that i use to manage my different crypto assets using the ledger live account as well ledger live is like your home base for managing your ethereum defy and crypto accounts it does a really good job of aggregating all of your different ethereum wallets if you are the type of person that uses more than one but you can also add other cryptocurrencies like bitcoin or cosmos or whatever your preferred blockchain is and then it will display an aggregate portfolio of all your accounts at the main page one thing that ledger is doing a really good job of is enabling all the money verbs that me and ryan talk about with the bankless skill cube enabled in the ledger live app so right now in the ledger live app you can buy sell lend swap and stake your crypto assets which is doing a

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well one of them is literally ryan yeah well okay literally i mean i think that um it was the first time to be honest i talked to analysts crypto analysts specifically who actually like got it right like they totally understood and they um i don't know there's i just nothing nothing i disagreed with in that it you know so like what was your take on on that report is this the one that gets in into institutions did we just did we just uh advance a step on the ethereum education and ethereum narrative side yeah you know i i think we did and a lot of what was included in that report was like stuff that you and me have been chewing on like since 2018

i think like ryan even before we knew each other like i think the first time we actually like talked uh we just hopped into a zoom just to share ideas about stuff right and i don't think we you and me at the time didn't really have the words to that we use now to communicate things of that nature but like we talked about like other teams that were trying to get to ethereum 2.0 before the actual ethereum team could and things of this nature but like i think the beginning of that talk that we had in 2018 was like talking about things like credible neutrality talking about things about the importance of ether as an asset ether as a money uh defining ether and like narratives and it that that conversation that we had like like over two and a

half years ago i think has turned into some of these like some of just the the canon truth about what ether the asset is and what ethereum the platform is and so it's taken like two three long long years for that to finally like bubble up to the surface and get into something that's uh that's like a like a legitimate institutional report coming out of missouri so it's not like rome was built in a day like we've been hammering some of these points for years now uh and it's finally kind of starting to like rise up to the top and be put into like an actual fantastic pdf by the missouri team yeah it's it's super cool to see that happen and a lot of like so uh sometimes with with the bankless thesis and backless ideas like the ideas are uh are

novel and new but a lot of times like what we're doing is is basically what they did which is we're we're synthesizing things that we see in in the community and ideas and posts that the people like vitalik write or like that um you know like synthesizing the social sentiment and trying to put that into metaphors and words and easy to understand models and this just felt like the next extension of that is basically like um you know we have a reach with bankless but that reach is also also limited i mean people who aren't on youtube people who don't do podcasts people who don't like newsletters right um we struggle to reach everybody so the

more people that we have talking about this narrative right like the better so we're just seeing it spread and i think part of this is like the bankless community quite frankly because um like the bankless community helps get guests on our shows the bankless community helps spread like the narratives and the memes and helps really really support us so what this is is it's the next iteration of the social layer that we talk about so much which of us like it rests on very simple models or like as we call them memes and those memes like propagate up the stack and pretty soon the next level after i'm sorry right this is now mainstream crypto it's like where this where this

like niche right and then we got mainstream crypto and the next level is wall street journal in cnbc right and i don't know if that happens next year or if that happens maybe 2022 but i'm not going to be surprised david if in a few years everybody that the common way to think about ether as an asset is oh it's like an internet bond it's like a digital bond it's like bitcoin is it's just digital gold right right like bitcoin propagated its narrative in the exact same way so absolutely super exciting to start seeing that yeah one thing that i think really excites me about the future is is like to me and to you and to to the ethereum culture and community like ethereum is

inherently good it's a good thing right it's a maybe it's a neutral good lawful good i don't know but it is good right and one of the reasons why it is good is the protocol sync thesis like things that are good incredibly neutral like balanced fall down to the bottom of the protocol sink and this is something that they cited in their report they talked about how like uh the the credible neutrality of a protocol makes it more socially scalable to the whole world that's something that they cited in their report and if this missouri report lands on the desk of some wall street individual there's a link between wall street and the protocol sync thesis and the protocol what inherently the protocol sync thesis is is the promotion of global public

goods public financial internet based infrastructure that are credibly neutral that reach out to the whole entire world and all of a sud so to me what ethereum does is all of a sudden there's generating alignment between somebody as far away from from alignment as wall street to the creation of global financial public good infrastructure on the internet and that's the power of ethereum it's linking people on wall street to to open permissionless protocols that just are going to better everyone's lives and so to me it's just very validating of like why why we are here in this space because like it's to do good and and we have the path to do that yeah absolutely

um i only have the path to do that too right so the second piece maybe we talked about this morning and the launch of e2.0 right so i think partially for for a while it's felt like we've been profits in the wilderness and no one's listening because everyone's like yeah like sure tell us when eat staking ships like tell us when you know proof of work and staking merge into one chain and ether issuance drops down to less than one percent right then maybe we'll believe you right and our our take on that i think david is like if you wait for all of these things to happen like let's say let's take it to the extreme let's say you wait until

ethereum is the globally adopted financial permissionless financial infrastructure for the world it's the internet of money right maybe that happens the next decade maybe takes longer maybe it doesn't happen but if you wait until that happens for the evidence you're going to be buying eth at 50k and eve yeah right like [Laughter] i don't know man i might not sell i might be just staking like uh so if par part of this i think is where i was getting to full circle is the message starts to have more credibility when some of these things are actively shipping and now that we have eth2 shipping as we witnessed this morning it was basically like the launch

could not have gone any better right stuff can still happen in the future we're talking to lucas uh lucas campbell on the bankless team and he was like guys something bad's gonna happen at some point in time over the next year right um like probably this is this is still a uh an early uh kind of network there could be some bumps along the road but the launch went super smoothly and the the sentiment the narrative over the past two years has been e2 will never launch and none of these things will happen or come to fruition and i think when reality starts to to kick in and things are shipping it just shakes it shakes that that narrative right um

maybe it's no accident that i feel like it does is it just me or it feels like on encrypted twitter at least there's a lot of angry bitcoin maximalists maximalist i don't know it just seems like that they're throwing these like red herrings about um if you do something with ether it's going to be like a taxable event right the irs is going to bring ethereum down right so raspberry it's straws man it just feels it just feels like maybe it's a reaction to wow ethereum is actually shipping that thing that we said would never happen is actually happening right by the way i'm looking at myself does it look like i'm wearing lipstick like my lips are super red dude yeah you literally got a weird filter you got the pretty filter on

i'm not wearing lipstick but whatever yeah so like the funny thing about like bitcoin or narratives is like the the bitcoiner narratives have kind of painted themselves to themselves into a corner where they're actually out of control of some particular things that could like pull out all the jenga blocks from the tower like a decent amount of bitcoin or narrative is that proof of stake can't work a decent amount of bitcoin or narrative is that ethereum can't ship if they're a decent amount of bitcoin or narrative is that you don't scale a blockchain if all of those things and others like turn out to be not true and instead like actually plausible then like one by one you're taking ammo out of the tool belt of you know of a community that is just

frankly obsessed with making sure that bitcoin is the only blockchain that the crypto economic blockchain world ever produces to be clear when you talk about bitcoin like thinking you're talking about max bliss right there there's so many bitcoins there are so many bitcoiners not and at some level maybe this is the more silent majority who like they hold ether too they they want any bankless system to to succeed but there are definitely many maximalists who who think of things in just binary like either bitcoin wins uh or bitcoin has to win and everything else has to has to lose um so yeah i i anyway successful launch this morning hi

so how are you feeling about things at this at this moment you're like we are december 2020 we're getting ready to get go into 2021 how are you feeling on this day december in december in 2020 about just i guess your crypto journey in the future of ethereum future bitcoin yeah it is i feel pretty split because one part of me is like and especially at the same time the rise from ether price going from like 300 to 600 and also the launch of ethereum uh phase zero stakings like yeah like duh like it does here like we've we've told you it's been coming like yes i've i've seen it coming and now it's here like now today's the day

it's like my birthday doesn't surprise me every single year when it comes around either like some of these things are just like expected and so like yeah maybe to the outside world like this it's like oh like ethereum 2 is actually shipped but but to me it's like well some of these things are just obvious like yeah ethereum 2 ship today like you know cool but also ethereum's becoming ready for the world and the world is becoming more and more ready to accept ethereum and so like this is why ethereum scaling is so important is because we've been changing the beating this drum on bankless pod ethereum is a platform for trustless institutions and the institutions of the legacy world are breaking down right and so we need to find different ways to produce new

institutions on ethereum and i think and as ethereum is becoming more ready for the world the world is becoming more ready for ethereum and so at the same time while i see like you know oh phase zero launch like yay like cool we did it like today's the day and maybe maybe i'm not as excited as other people just because like i kind of saw it coming at the same time i'm so incredibly like optimistic as to like this arc that is seemingly like getting really really close to being complete that is going to save a lot of people from a lot of suffering in the world does it feel like things are starting to happen faster now things are happening velocity has increased time it's accelerating really quickly right now like never mind 24 hours it's 24 hours

or units of time of units of time more progress is happening per unit of time and therefore it feels like we're moving forward through time at a faster tick rate absolutely at some level it just feels like the decade could be over in it you know snap the fingers right and just i don't mean to get existential on you but like i just feel like um velocity is increasing in this space um over the past i don't know year and a half two years it's really it's really picked up and i i have been frankly blown away with even the velocity of some projects on uh ethereum d5 projects that start out so

small and suddenly like you wake up a few months later and they're doing billions of dollars in transactions and value right and like i'm wondering what the next phase of this looks like because if uh if it continues to grow right um it's going to start consuming parts of the mainstream world right right now we are still in this this niche where the crypto is weird and like you can't talk to anyone about d5 no one really knows what uniswap is right there's maybe a million people using this um but like last year at this time there was less than 100 000 people using this yeah so if you think about like just

the bill gates quote people don't really think in like log scale basically um and you think about log scale i mean where are we gonna be in five years from now right um it could be pretty pretty incredible the the bill gates quote that i know is that you overestimate what you can do in two years and you underestimate what you can do in 10 years yeah so like i always anchor my perception on to 2017 because that's when i got into crypto right and it's like all right 2017 i thought like all of the world was going to be crypto enabled by like the next year like it was going to be 2018 and like oh the world just runs on crypto and that was just like my hair brains like mania mind that that i had at the time and so like

moving moving forward moving into bill gates quote like we overestimate what we can do in two years okay well that was 2019 and then and then we underestimate what we can do in 10 years right and so now we're at like three and a half years past uh 2017 when i got into it got into the world of crypto and so now it feels like we're actually at the meeting point where like what gets developed in the next year actually starts to exceed my expectations of what i could envisioned back in 2017 and it doesn't stop there it just like keeps on going it just keeps on going and again there's just an inherent demand for a platform like ether right but like ethereum like think of all the jobs that ethereum is going to create in a world where jobs are extremely hard to

find like just any sort of d5 protocol or platform or company is going to be hiring in the next like in the next two to three to four years and there's also going to be more of them like a lot of economic activity is going to be put onto the ethereum but also generative outside of ethereum as well like it's just going to be it's just going to be the savior of the world it's going to save the whole world well david chances are your kids may work for a dow or for a protocol rather than a company i think that's kind of the trajectory we're on yeah speaking of kids not my kids but my sister is due in february and i just bought a b is for a buffet corn book from john pauler who runs denver uh and so just fyi for any

any other families that are having coveted babies like my sister get the b is for buffacorn book because it's a great children's book to indoctrinate your kids with all right well we should include that in the channels all right david we should uh maybe wrap it up this has been this has been fantastic okay uh bankless bankless nation thanks for hanging with us on the state of the nation extra long but today is an extra special day with the eth2 launch and this fantastic report from missouri it's been a pleasure to be with you of course none of this was financial advice ethan's risky so is bitcoin so is d5 everything we talk about is relatively risky but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bankless

journey thanks a lot