3 - Economic Bandwidth

Transcript

[Music] welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless hey david how are you doing this morning doing pretty good doing pretty good really excited for this episode the first two episodes of this podcast i feel have really just led right into this topic that we're going to talk about today economic bandwidth a really

important topic uh another phrase that you coined which the community seems to have run with so i'm really excited to appeal back the layers with this one yeah so my this is a a fantastic topic so we are recording this on thursday morning and there are other events at hand what is going on in the market my friend what's happening with crypto what's happening just with corona what's happening in general well what's happening is that the economic bandwidth of these systems is going down uh big time which uh we will explain in the in this later part of the episode but uh it seems that coronavirus is a real thing and it's impacting all markets equally across the board yeah so so what's gonna happen like so uh part of

me wrote a post in bankless um earlier this week on not panicking but positioning how should we start positioning ourselves like um is this a risk-off market what what should we what should we do what should we expect is going to happen right well when people get fearful people de-risk and so people flee into safer and safer assets and so people that have leveraged positions or closing them people that have open vaults with maker are are lowering their liquidation price if not closing them entirely people who are moving to a less risky position which is going from from leveraged and from you know smaller cap coins into safer coins like ether or or

bitcoin and then at large people are also moving from these uh from the large crap cap cryptocurrencies to dollars away from you know what is a pretty volatile asset like uh bitcoin or ether and moving into the asset that they that they that causes them to feel security which is the us dollar so everyone is fleeing away from risk and making sure that they have the resources that they need to make it through this pandemic yeah i think that's exactly what's happening i think we are in the midst of shifting from a risk on environment for all assets to a risk off environment and people are fleeing to those classic safe haven assets i think there is an idea or there was an idea in

the crypto community that crypto specifically bitcoin and uh possibly ether would kind of catch a little bit of that be a safe haven asset i've never been of that belief personally i think that in certain conditions say monetary policy you know inflationary conditions conditions where the fed is pumping money into the economy then crypto assets like ether and bitcoin uh can and may exhibit some of some of the quality of gold where people flee the us dollar or treasuries and and go to those crypto assets um but we're not there yet we're in sort of the the

first inning uh and this is the time where everyone kind of gets out of what they perceive as as risky assets um what i think could happen uh and again like who knows but what i think could happen is we continue to see stocks drop central banks around the world they drop interest rates uh to zero many are already at zero maybe even into the negative territory and then we get into some really exotic money printing central bank stuff uh where you know where central banks around the world try to prop up their economies by injecting cash by injecting liquidity into them um i think with that backdrop crypto may be poised to do a bit better

um but we're probably a couple innings away from that and it could take some time so as i as as i posted earlier this week you position yourselves um for this uh hopefully you've done some of that already but um you know this could take some time for recovery and look look for those next signs when you know the fed starts printing uh funds starts injecting liquidity into the economy that might be a sign that um that crypto could could start some recovery um but i am looking at gas on the ethereum network and it is as high as i have ever seen to get a fast transaction out it's 101

gray and a low low transaction is 80. um for the folks that don't know what gas is can you maybe explain that a little bit gas is the fee that you pay to the miners to get included and if you want to get included faster than everyone else you need to be paying a higher fee than everyone else and so what is happening right now is that ether has gone from you know 170 down to 125 now back up to 140 and everyone who has a risk on position immediately needs to make some transactions on the blockchain to take that risk off the table and be create a safer portfolio so you know closing leveraged longs lowering the

liquidation number on people's faults and everyone needs to make these transactions all at once and so people are gonna have to pay a premium to get their transaction included um people people are fleeing away but everyone's doing it all at the same time so the network is congested and probably these fees are about you know 10x what we typically see i would say so um you could see sort of the strain happening in the network and um the panic as people are transacting and and try to close out positions and try to shore themselves up uh so we'll be monitoring that situation let's get to the topic at hand today which is economic bandwidth but before we do i want to give a shout out to our sponsors um the first is

rocket dollar i love absolutely love the rocket dollar product um i use it myself for my ira um i looked just this week and if you were to buy ether on a brokerage say your schwab or your fidelity account the cost of that there's an asset called e that you can type and you could buy it's trades at 400 percent more than what it trades on at coinbase so if you're to buy it in your brokerage you're paying 4x more than the market price on coinbase i think this is complete retail rip off the the only way that this e asset can charge those fees is because uh you're locked in your brokerage what

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2016 2017-ish called the fat protocol thesis all right so economic bandwidth is a little bit related to the fat protocol thesis which you may have heard of but but let's define that for everyone really quickly david what is the fat protocol thesis the fat protocol thesis is this idea that as more and more things get built upon the same protocol that base layer l1 protocol becomes fatter it's a way of illustrating how things grow when other things are built on top of it so the idea is that platforms like bitcoin that have many many different

companies building products and services on top of it and also ethereum with many different applications and projects being built on top of it as more things are built on top of these chains these layer one chains and these layer one assets the value of that l1 protocol grows and becomes fatter all the things built on top way down on the l1 protocol and and make it fat make it a fat protocol yeah absolutely and i i think one thing that joel was was trying to do with uh the fat critical thesis in this post was to explain the what was going on with bitcoin to people

in silicon valley to venture capitalists so venture capitalists uh they they they'd gone through the internet revolution they knew it very well that was kind of their frame of reference and what they saw in the internet revolution was that the protocols at the very base layer of the internet and remember from episode one guys what we mean when we say protocols that's just you know rules in a set of code that that software needs to abide by um so the the protocols of the internet are things like tcpip which is a protocol that moves data across networks or smtp which is a protocol for email these things are

you know standards maintained by by standards body there's no companies there's no stocks there's no assets that you can buy around the core internet protocols they're just free they're public they're available to the world everyone uses them but they don't accrue any value you can't buy them you know there's nothing investable about them well the vcs and silicon valley was kind of scratching their head and looking at bitcoin and um seeing that bitcoin is it's a protocol so it's it's like the internet protocol but somehow it's accruing all of this value and and why is that the case and how is that the case and so joel's thesis uh was basically that protocols like bitcoin uh and in the

future possibly other protocols that we could build in this in this crypto system would be the primary value accrual uh mechanisms for everything that's created in these crypto systems versus the applications so in the internet world the vcs were used to the applications accrued all of all of the values so applications like google which sat on top of those internet protocols or applications like facebook they were very investable you could buy them and you know they could 10 100 x you know 1000x they could ipo they were very investable the fat protocol thesis says maybe those applications are actually going to be

skinnier so they won't accrue as much value and and maybe the protocols themselves at the base layer in crypto um are going to accrue all of the value they're going to be fat that was the entire thesis uh and that was a complete paradigm shift i think for for many who had watched the internet revolution um so it sort of played out in in 2017 when all of these new protocols uh started coming about in in something called the the you know the ico craze as we sort of call it now so that clearly shows a difference between the internet and crypto uh but there on if you go to coinmarketcap.com there are thousands and thousands of

different coins uh so why how are these all going to be fat protocols yeah i mean so that's exactly what happened in in 2017 is people just started creating all of these coins all of these assets and they they sort of used the the fat protocol thesis to say well this asset is is clearly going to be massive in value and they they benchmarked the price of their asset to the price of other assets like like bitcoin and eth and you know eath was rising in value bitcoin had grown into billions by that point uh and they assumed that value would accrue to their protocol and it could have been a a cloud storage protocol or a vpn protocol or all of these decentralized

protocols that that were investible and they they basically put out the the idea and the narrative that uh these assets themselves would accrue value like the monetary assets of a bitcoin uh and ether but um i think they they got it wrong right because um the fat protocol requires some some more subtlety just because you put a an asset out there and a coin out there um doesn't mean it's necessarily going to accrue value it doesn't mean it's a protocol even that is going to accrue value there has to be something else there and so what was happening in 2017 is everyone was putting out these these

coins uh and expecting them to be used as a medium of exchange within their system and be expecting them to be used as a currency within their system but the problem is the these were sub-par currencies um they weren't good mediums of exchange they weren't good money protocols at all and there were better protocols out there people would prefer to use ether instead of you know a token money inside of some application people would prefer to use a stable coin like usdc or dye these assets inflated in value tremendously during 2017 and then kind of all came crashing down in 2018 when people realized the fat protocol thesis you know doesn't apply to everything and

i think some people took it a little bit too far and said the the fat protocol thesis is completely false you know protocols do not accrue value uh and maybe bitcoin is the only thing that will accrue value that's the only protocol that we've seen be successful so in 2018 i started noticing this notion that um ether even was just just a utility coin just a medium of exchange just gas within its own economy uh and completely disagree with that because that's not what we're actually observing you know what what are we actually observing david when we look at how ether is used

in in the economy because it's more than just gas it's more than just a utility coin how are people actually using ether i think the big takeaway from 2018 was should have been not that the fat protocol thesis is dead but just that the fat protocol thesis is much harder than people thought it would be to achieve when the for example the basic attention token is this erc20 token that is used for payment for attention on the brave browser that's a much that's a very niche ecosystem that's very hard to build a bunch of things on top of but at the end of the 2017-2018 mania people fled up the market cap up the up the risk just like

they're doing today with coronavirus they fled up the up the scale of risk into safer and safer assets and the reason why people landed on mostly bitcoin but then also started to to keep their eat is because of the ecosystem that is being built on top of these individual platforms and so that's what these open protocols have that all of these other you know niche assets don't have is they have an agnostic platform for anyone to build anything upon and that's where the fat protocol thesis really kind of stuck after 2018. and it's so it's a bit less fat protocol and it's a bit more like a fat money thesis it it's the money assets that are accruing the value not just any protocol

the protocol has to be a money protocol in order to uh accrue value and i think that's the that's the correction that the fat protocol really needs and what we observe in at least the ethereum economy is that ether is used as money in various ways um it's used sometimes as a medium of exchange to to buy icos in 2017 fundraising it's used as a store of value it is the most liquid most saleable asset inside of the ethereum economy it's used as a unit of um of account so things are priced in ether including the gas that we talked about the opening of this this this podcast

and it's also used as collateral and that's where we really get into this concept of economic bandwidth which we're going to spend the rest of the episode talking about because i think it is it's almost the successor to the fat protocol thesis the idea of economic bandwidth being the rate capacitor for the entire money system that's built on top of it particularly a rare form of economic bandwidth that we're going to talk about which is trustless economic bandwidth eth and bitcoin are both trustless economic bandwidth on their respective systems so but before we get into

like what economic bandwidth means and the ramifications of it i think we should probably define it for a minute so economic bandwidth is is actually pretty simple economic bandwidth is the liquid market cap of an asset so the way i define economic bandwidth is it is just the equal and alternative to uh you know data bandwidth the web 2.0 the internet revolution was all about how can we pass more and more data around the world and as the internet has developed you know the bandwidth has increased uh there was no no point in time where we could have

ever passed you know people's 4k streaming netflix in the 90s that was never ever going to happen but we innovated and we figured it out and so now we can send basically infinite data for our needs throughout the entire entire global ecosystem because the bandwidth for for data has increased now these internet protocols like bitcoin and ethereum these are similar protocols except their bandwidth isn't data it's value when it comes to sending and receiving value economic bandwidth is this new thing that maps on to the old internet the old revolution of the internet but now it's in this digital form which is

you know digital value how much digital value can we send across the world and so bitcoin has a market cap of 150 billion ethereum has a market cap of 20 billion and so these are the the limitations these are the bottlenecks the maximum possible amounts of value that we will ever be able to send and say actually even smaller than that what ryan said was right it's really the liquid market cap how much is available inside of these protocols to send and so the the total value bandwidth the total economic bandwidth that these systems have available to us is you know billions of dollars but the world is much much bigger than that the billions of dollars is minuscule compared to the rest of the world so we'll get this to

get to this subject and then later on in the episode where we talk about how we're going to get there but right now the the economic bandwidth is small just like at the very beginning of the internet we were never ever going to be able to stream 4k through through multiple devices under your home wi-fi uh but we're gonna get there absolutely yeah i love how you framed that that that's exactly the analogy to use the the value of assets like bitcoin and the value of assets like ethereum their total market cap that is the size of the pipe that is the capacity of of trustless value that we can build on top of these systems as that gets bigger it increases the bandwidth and the trustless applications money

applications that we can build on top of the system it's really a rate limiter and right now we're in the you know 56k modem days of bitcoin and ethereum there's only a few 100 million excuse me few hundred billion worth in economic bandwidth in these systems but that's that's a lot more than there used to be you know five years ago it was only it was only 10 billion so we're increasing in economic bandwidth and i expect as economic bandwidth increases we'll see more and more sophisticated money applications on top being used by more and more people now we keep using this term not just market cap which of course is is the total

value of an asset you take number of bitcoin outstanding and you multiply that by the the price of bitcoin that's market cap uh same with ether of course but we keep using this term liquid market cap and i i wanted to find that a little bit for folks so liquidity is basically um how much an asset will move if you sell it at a given uh price point so the folks at missouri put together a really interesting um screener on this so david i just sent you a link and this links you to a screen on masari.io it's on chain fx dashboard and it's like an economic bandwidth screen and what this

does is it sorts various assets by not only their liquid market cap but the percent the assets themselves the crypto assets themselves would move if you went and you sold one million worth of that asset you can look at this and we've got a column called percent to clear one million right uh and and folks can can see this screen we'll include it in the show notes but when you sort it in this way you can see bitcoin is clearly number one if you sold one million dollars worth of bitcoin you would only move the price of bitcoin by point one three percent just point one three percent uh that's a fairly liquid asset um

if you go down the second slot is actually tether so it's not ethereum uh tether is a stable coin of course and if you sold one million worth of tether it it doesn't move the price very much either it only the price would only slip by 0.15 percent um ethereum is in third place here and it has um you know it would slip farther than bitcoin so it would slip probably four times farther than bitcoin if you sold a million the screen here is showing if you sold one million worth of eth you're gonna slip by point four four percent now you keep going down and you could see the slippage increases so something like xrp

well if you sold a million worth you're going to slip an entire percent in terms of of the price and your sell rate and it gets a lot worse from there so if you sold something like chain link a million worth of chain link the price would slip almost four percent so that's what we mean by liquidity it's it's really the slippage of these various assets uh at a given sale price does that make sense 100 and i really think that illustrates what happened in 2017-2018 as as the mania concluded people wanted to move into the things that are acting as money the things that are acting on as economic bandwidth whether they understood economic bandwidth or not

it's not really something that you need to understand to really be incentivized to move there when it comes time to take risk off the table and so people don't want to when they when they want to hunker down and and hold for the long term you don't want to hold an asset that is going to shift six percent when you sell you know your your stack of it and so no one's going to hold cardano when you know a million dollars drops the price by six percent people are going to move up the stack into something that has guaranteed liquidity available to you when you need it and that's what a risk off position is and so that's what people are doing right now with coronavirus they're moving to risk off positions which means that they are going to be you know moving up the

stack of economic bandwidth exactly so you want to move to the most liquid asset as possible because liquidity gives you an option it gives you the option to sell exactly what you're saying is people moving to risk off assets those assets are things like cash dollars that's a risk-off asset or treasuries that's a risk-off asset and the liquidity for dollars and uh treasuries um i mean they're basically the most liquid assets in the world the most liquid assets available and that makes them the most money-like and so you can see this idea of liquidity is is very related to this idea of money uh in fact i think liquidity is if you were to ask me what's the the number one

attribute you look for in money right the economists say medium exchange you don't have account store value we've talked about that but i would also say it's liquidity liquidity makes a money a money and the moneyness of a money increases as you increase liquidity as you increase the assets economic bandwidth and so here's the thing that i think many of the the new ethereum killers and new crypto networks are are missing it's a a similar flaw that i think was in in like the popular investing ideas in in 2017 um it's this idea that that uh crypto networks are all chasing um scalability but but they're chasing scalability in

terms of transactions per second so a popular knock against bitcoin and a popular knock against ethereum is bitcoin can only you know um send bitcoin transactions at three to four transactions per second uh ethereum can only send it at 15 transactions per second but i've got this incredible new crypto eth killer that can do it at 100 transactions per second or a thousand transactions per second so you should buy my asset because this is going to kill bitcoin and kill ethereum and finally be the thing crypto needs to to scale up and beat visa but the fatal flaw of this is not only do many of these networks sacrifice

decentralization and trustlessness when they scale up in that way you know they they basically aren't increasing trustless transactions per second they're just increasing transactions per second in general but they're also not paying attention to the true limit capacity of scale and that limit capacity is economic bandwidth the value of the underlying asset the moneyness of the underlying asset that's what you need to scale in order for this crypto system to be a money platform for the world it's not enough to have high transactions per second you have to have high trustless economic bandwidth and you only get that

when the underlying asset in your network becomes the money increases in liquidity and increases in moneyness and this is just a fatal mistake that people have brought from the evolution of the internet and tried to apply it to the crypto revolution which is just the wrong thing to apply it to people understood that the internet needed to scale in bandwidth in data bandwidth and then they took that model and then they tried to apply it to crypto being like oh my crypto network literally has more bandwidth and the mistake they made is they chose the wrong bandwidth to optimize for the bandwidth you need in the crypto world is economic bandwidth it's moneyness you need to maximize for

being money not for being a scalable platform the scalable platform is the internet we already have that what's new and what's revolutionary is the money on the internet not the not the data throughput of the money protocol but the economic throughput of the money protocol absolutely and and and here's the thing i i think a lot of folks get get tripped up on um and i i like to say this all the time the asset is not the network the asset is not the network so there's bitcoin as an asset right we know that that is you can send and receive bitcoin it's an asset but then there's also bitcoin the network

now bitcoin the network is the blocks used to transmit bitcoin the asset around they're named the same thing but they're completely different things so bitcoin the asset that can have economic bandwidth that's the value of bitcoin and it should have trustless economic bandwidth because trustlessness is the entire point of this whole crypto thing this whole crypto experiment if you want trusted economic bandwidth go back to the traditional financial system we already have it so um bitcoin it's as an asset can have trusted uh trustless economic bandwidth now bitcoin the network um that needs trustless transactions per second right so

you're measuring these things differently uh and i think because they're named the same thing bitcoin the asset and bitcoin the network at least in bitcoin people get tripped up on that and they say things like well bitcoin is a digital gold and ethereum is a smart contract platform that statement is completely wrong because you're comparing two things that aren't alike it's it's like comparing you know gold and fed wire bank settlement network right these are different things one is an asset one is a settlement network but people get tripped up because bitcoin the asset and bitcoin the network their name the same thing in ethereum there's eth the asset or ether the asset right that's like bitcoin the asset and there's ethereum the network

um which is like bitcoin the network now on ethereum the network of course that's what you can use to transmit bitcoin around but you can also use that to transmit other assets around to interact with d5 protocols money protocols all of these other things and there's so much emphasis on ethereum the network that we often forget about ether the asset and the economic bandwidth scale that we need as well as the transactions per second scale that we need so economic bandwidth i think restores the balance in this conversation a little bit we put just as much focus on ether the asset as ethereum the network and realize that we

have to scale both in order for crypto and ethereum to become a global financial system for the world so ryan if economic bandwidth is so important how do we get more of it in the early days of the internet when we wanted more bandwidth we had to lay more wire we had to innovate on the protocols we had to do all these things that would increase bandwidth we had to use bandwidth more efficiently with with economic bandwidth how do we get more of that where does that come from you know this feels like a future article that that we need to write on bankless and i think um you did a pretty good job laying out some of the the scaffolding for this argument in in your article this week uh there was one line in it

that said um liquidity begets liquidity and uh liquidity is one of this these rare things i think in in the universe and in nature that actually um gets stronger the more you use it so the more liquid it becomes the more it entices more liquidity to come into it and it's this very powerful flywheel effect network effect that just keeps getting bigger and bigger and bigger it's it's it's almost like a you know a black hole sucking in other stars right um it you know as it as it as it takes in that liquidity it just gets even bigger and more massive and increases its ability

to take in more mass take in more matter and get bigger still so the way we increase economic bandwidth in a system like ethereum is to increase the value of eth and the way we increase the value of eth is demand for ether the asset and as that demand increases the economic bandwidth of the network increases too so again it's this nice flywheel effect and i think that economic bandwidth and value of eth and liquidity of eth in general are very much tied to the moneyness of the system and so as

people start to trust the system more and more people have a lot of trust in the us dollar that's why it is as valuable as it is and as liquid as it is as that trust transfers to these crypto economic systems like ethereum the value of ether will increase so the nice thing about it is we won't run out of economic uh bandwidth really at least not unless people stop using uh ethereum the system and start and stop demanding ether the asset the really elegant thing about these cryptosystems is exactly what you said

the more people use them the more bandwidth becomes available uh the more demand for ether the more ether is needed we don't run out of ether and even though that there is a inflexible supply of these assets especially with bitcoin with its 21 million hard cap but also ether with its algorithmically issued supply if the people want more and more ether there isn't more to be printed and that's not even where this economic bandwidth comes from if you print more ether you don't have more bandwidth and that's because you know when you print something the the value of it theoretically declines due to inflation so this is an interesting comparison to make where if the u.s the dollar needs

more economic bandwidth if demand for dollars is going up the federal reserve will print more of it to stabilize the value of the dollar and keep that value across time stable and so the the economic bandwidth of the us dollar is actually the total number of outstanding dollars out in existence and that's why no one invests in dollars people save in dollars you but you don't buy dollars because you think the price is going to go up that's a fatal flaw with these crypto systems it's the exact opposite no one's going to print more when there's more demand and so what happens instead when the demand for these things go up the price goes up and the liquid market cap goes up meaning

the economic bandwidth goes up if you need to do some things in defy if you need to buy some bitcoin to send it around the world or just to hold it what you do is you take that asset off of the table you take it off of the secondary market and you you've increased the demand while reducing the supply and as a result of that the price of these things goes up and so when maker dow has like two percent of all ether pulled off of the secondary market we call this eth loctin defy and so the two percent of eth that's in maker dow has reduced the supply by two percent on the secondary market which increases the the value of ether to some degree and that is what increases the economic

bandwidth because it makes more value more total value available for all other defy applications and all other users of ethereum it makes more total value available so while there's less ether available there is more value available and that extra value on the secondary market the us dollar denominated value or the euro denominated value whatever there's more of that available and that is how economic bandwidth grows and it grows automatically we actually don't need to innovate on this it happens in this emergent fashion it happens automatically as the fat protocol grows as there becomes more reasons to buy ether buy bitcoin pull it off the market

and increase the price that is how economic bandwidth grows and it grows organically so we've just defined economic bandwidth and we've talked about how it grows and i think all of this culminates into a reason to be really excited about assets like bitcoin and ether um i think it culminates in the trillion dollar case for ethereum for example um i i i talk to people um all the time and you sometimes in in 2018 people would say things like well i'm really bullish on maker uh which is a money protocol that that produces a stable coin called die i'm really

bullish on that but i'm not bullish on ether as nasa and that fundamentally does not make sense to me because of economic bandwidth so die is an asset it's a stable coin asset i think this is worth an entire bankless episode which we'll get to but die is a stablecoin asset that stablecoin means it's backed one to one with a dollar it is completely backed almost completely backed by uh ether in collateral so in order to create to mint one die uh one dollars worth of dye you need at least a dollar fifty worth of ether often two dollars you know sometimes

more that serves as the collateral and you can think of dye almost like us dollars back during the gold standard so at that time every u.s dollar was backed by some percentage of of gold that the federal reserve uh kept in its vaults right um now it's not we talked about that in episode two the evolution of money um but that's what dye is it's backed by a hard money it's backed by ether as its reserve and so if you just kind of think about what that means um if there's there's right now there's about a hundred million die minted in existence so that means there needs to

be over 150 million worth of teeth in economic bandwidth backing all of that dye there can't be less because again each die has to be backed by that ether as collateral well the interesting thing about dye is it it really fulfills the vision crypto has always had which is let's have a a trustless currency that's globally available to anyone with an internet connection for the entire world but let's remove the volatility from that currency so it's a better medium of exchange and unit of account and that's essentially what what dye is it's completely trustless so it's not like a stable coin you might get at a coin base

you know something called usdc which is uh stable with a dollar but but is not trustless you have to trust coinbase and the bank behind coinbase the traditional system bank called silvergate you have to trust those systems uh for usdc so so dye really is it's kind of the culmination of a vision crypto that we've had for a while it's a it's a particularly interesting uh crypto money uh if you will but um people who are bullish on die like how do you get die to a billion dollars from 100 million today uh how do you get die to a hundred billion dollars from what it is today how do you get it to a trillion dollars well the only way to do that in a trustless way is to have more

economic bandwidth to have more teeth the value of eth has to increase um we wrote an article on this uh on bankless um and the title is basically what's the trillion dollar case for ethereum and it sort of extrapolates this um the money supply in argentina is about 26 billion dollars right now well argentina is undergoing uh massive inflation they are getting rid of argentine pesos uh whenever possible and and going to to better money systems like like the dollar other citizens are anyway what if dye captured 51 of

argentina's base money it's it's economists call this m1 well in order to fulfill just that need eth the price of eth would have to reach anywhere between twenty five hundred dollars and ten thousand dollars in order to uh provide all of the economic bandwidth that dye would need in order to serve as argentinia's currency so a whole lot more economic bandwidth would be required to serve die as a global money that is essentially the trillion dollar case for ethereum what what if die scales to a trillion dollars for

instance well you're going to need at least 1.5 trillion worth of each to back it so you said eth needs to be between 2500 and ten thousand dollars ten thousand dollars to serve the needs of 51 of all uh value of the argentine economy of of its m1 so let's go through that math really really quick uh 26 billion dollars is needed by argentina to kind of serve their needs if we want half of that to be covered by die that's 13 billion die outstanding and and right now the total market cap of all die is roughly 120 ish million uh total die so we need that to

go 100x we need 100x more dai out there to be able to serve the needs of argentina now right now uh for every like ryan said for every one die there is in existence there's at least 1.5 dollars worth of ether backing it that is why die has the value in in the first place and so if we want you know 13 12 to 13 billion more die we're going to need to multiply 12 billion by 1.5 which means we need 18 billion dollars worth of eth locked up inside of maker dow just to back that amount of dye to serve argentina now the total market cap of ethereum today is a

little bit over 20 billion dollars which means maker dow would suck up basically all of the ether on in existence in order to supply this amount of dye but that's just at current prices if ether doubles in price well then maker dial only needs half that amount it only needs nine billion dollars and if ether goes uh 10x in price there's 10x more economic bandwidth available to make or dow and it only needs one-tenth of that amount and so the more that the price of ether goes up the less maker dow needs to be able to serve the needs of argentina to use a trustless internet based version of the dollar and again that's just make or doubt

there are many many other protocols that need economic bandwidth to execute their function maker dao is kind of just the biggest one but there are many others so ryan what happens when all of these other d5 protocols are you know what happens when they all need eth when they all need eth that increases the economic bandwidth of ethereum because it increases the value and market cap of eth through demand like we talked about earlier and yeah make no mistake all of these d5 protocols the ones that are uh you know most interesting and most used these protocols are eth eaters they're like their own kind of mini black holes uniswap for instance that is a trustless

d5 protocol for exchange and for trading it eats eath in order to provide trading pairs liquidity pairs for everything it trades against so it's it's like an exchange where you put eth into it uh ether into it and then it provides you a return as a liquidity provider and the more ether it has um the the better trading environment you get the lower slippage uh the better liquidity there is in that platform so it wants as much eath as possible and the protocol the mechanism incense people to feed to feed it eath too compound works in a similar way it is hungry for eath it uses eth as a reserve

collateral asset um to borrow and lend against uh similar in some respects to to make your in that way um synthetics that's another money critical that um is going to become a and eat eater in the future so i think synthetics is is maybe a a really interesting case here of how um protocols can start with their own money asset but then ultimately have to convert to and converge to the best money asset in in the economy which happens to be ether maybe david do you want to talk a little bit about synthetics and what they use is economic bandwidth

today and what they are transitioning to and going to be using more of in the future so infedex is a really interesting platform that uses their own token as their own money for their own ecosystem and it's a structure that has a lot of people very bullish and a lot of people very skeptical and scared that it is a self-referential system that may unwind and so in order to combat this fear synthetics is introducing ether as collateral uh in the very first and second episodes we've talked about how people always want to migrate towards using the best money and so that's what we see synthetics doing they are using ether as collateral for

their synthetic assets and their snx tokens being used just as the fee collection token so once again ether replacing other things to be money inside of other protocols the reason synthetics needs to incorporate ethan as economic bandwidth is so it can produce more synthetic assets synthetics deserves an entire episode in itself but it can produce assets in tokenized form uh that represent anything like stocks like apple or um gold or any asset but all of those assets they're they're ultimately backed by some sort of collateral and what david was talking about that collateral has been their own

token snx and its market cap its economic bandwidth is only about 150 million so several orders of magnitude less than ethers now as it incorporates eth as its economic bandwidth as its collateral to back the synthetics that it's minting and generate it's going to be able to 100x its economic bandwidth so it's inevitable that synthetics and protocols like it are going to adopt eth the most saleable most money asset on the network as economic bandwidth because it's in their best interest to do so and that is exactly

how an economy tends to converge on assets in the us economy like dollars and like treasuries and assets in the ethereum economy like ether and like staked ether which is sort of an ethereum equivalent or will be an ethereum equivalent to treasuries so it's this network effect that that always wins the money game and so when all of these defy applications combine we can get to a measurement of the total bandwidth used by d5 so maker dow has 2.3 percent of all uh bandwidth unit swap has roughly one percent compound has roughly one percent

uh these numbers are difficult to calculate and difficult to keep updated but the last time i checked there was about five to six percent of all ether locked in defy which is another measurement for total economic bandwidth locked in d5 and so we're actually pretty unsaturated and that's just kind of because of the early days of these crypto revolutions we are we are young and we are developing these protocols but the idea is that if we want the global monetary supply to be built on top of ethereum we are super short in economic bandwidth right now and the the price of ether will need to increase commensurately to be able to host all of that

transactional capacity all of that demand for for money and that's just money that's just a very small component of the overall economy if we want stocks and bonds on top of ethereum the price of ether needs to increase by like a 5 000 times in order to host that economic activity and and as we as the ethereum community as the ethereum economy grows it automatically increases its economic bandwidth from demand but so does the the need for more ether to host more economic activity and this is really the bowl case for ethereum it's just hosting more and more of the world's economic activity and growing its economic bandwidth in the same way that the

internet hosted more and more of the world's data and the bandwidth grew commensurately ethereum is going to hopefully host more and more of the world's economy and then increase its economic bandwidth as it's needed to speaking of ethereum and awesome protocols we should probably pause for a minute and talk about our sponsors um i want to tell you about a d5 protocol you absolutely have to check out it's called ave ave is a lending and borrowing protocol on ethereum so it uses some of that economic bandwidth we've been talking about you can put dye into it you can even put eth into it and when you do that die or that eath starts earning interest immediately you can

also borrow from it and i think this is a feature i haven't seen anywhere else when you borrow from ave you can actually create a fixed rate loan so it's not variable the rates aren't going to change uh on a day-to-day basis for you developers you got to check out their flash loan protocols they're incorporating that in um defy saver i believe this week so you could swap out the collateral of a cdp if that doesn't mean anything to you right now don't worry about it you'll level up you'll get it soon um if you want to get started with ave it's super easy you can deposit die there at ave dot com so that's aave dot com speaking of getting the world's

economic activity on to ethereum monolith is a great way to do that if you want to be able to spend your die in the real world while also earning interest on that die at the same time get the monolith visa card the monolith visa card connects to your die balance and allows you to spend that die at any merchant that accepts visa which is basically the whole world and so monolith is a great way to take some of the world's economy and put it on ethereum and so you can go to monolith.xyz to get your first ever defy card and it's pretty powerful to be able to hold your crypto assets on the crypto economy while also being able to spend your money in the real world so hats off to

monolith for really taking the challenge of bridging these two worlds and thank you for increasing the economic bandwidth of ethereum so i just put out an article in bank list called ethereum is an emergent structure and this to me is kind of a thesis it's a concept as to how all of these different ethereum applications are going to compose together and generate one single large structure and the core thesis of this is that every application on ethereum generates surface area so maker dow has huge surface area right because it produces a bunch of different things for other applications to use and leverage and build off of mainly dye but every application on ethereum

produces surface area for others to build so compound has a really big surface area a lot of applications put their assets inside of compound unit swap has a very big surface area a lot of applications go through uniswap to to swap assets you know every time you build something on ethereum you build it with just being one transaction away from all other things on ethereum so all of these things are very close in proximity the and that's why data data throughput for ethereum isn't that big of a deal because the data required to go from one application to another is very small it's just one transaction we're not going between blockchains we're not going between protocols it's all built in the same spot and that

allows all of these applications to coalesce into one single structure this is what we are referring to as composability and it's one of ethereum's key characteristics that make it so powerful all applications on ethereum are composable with all other applications and so when we talk about the eath locked in defy the metric of how much economic bandwidth is being used by this one single composed structure we are talking about the weight of the structure and how much ether it is sucking into it and so i have always viewed the price of ether as a three-way tug of war one between the eth locked and defy how much uh how much demand there is from d5 applications to

put ether inside of them and then there's also in proof-of-stake ethereum how much ether is being staked on the network to provide security and so these two things compete for ether and then the last thing that competes for ether is the market price of ether on the secondary market the price for how much people are willing to pay for one ether on the secondary market and these things are in a three-way tug-of-war and the more and more the stronger the gravitational pull of the d5 structure the more it pulls on the secondary market price of of ether people will have to pay more to get ether when the defy structure the

composed structure of applications on ethereum are sucking up all of the ether and so that's why i kind of view this structure as having a weight it has mass it has gravity it sucks in value into these applications because of the demand for economic bandwidth and so the more economic bandwidth is required the more it produces on the secondary market i view the secondary market price of ether as the weight of this total structure on top of the scale if you were to be able to just place this structure itself onto a scale the number that would show up would be the price of ether on the secondary market and that's how this

economic bandwidth is going to scale organically when you build something on top of this structure that sucks in ether that brings in ether to be deposited to execute the function of the app it adds to the weight of the structure which adds to the weight on the scale which reflects a higher number in the secondary market price absolutely you guys have to check out david's article that we published this week it's one of my favorite that we've published on bank list it's called ethereum as an emergent structure that's what he was just talking about goes through those concepts we'll put it in the show notes uh and everything that that you were talking about with ether is economic bandwidth um you know a question that i think some

people raise at this point is why does it have to be ether why can't it be some other token on ethereum like a tokenized gold or you know tokenized real estate or um you know token like rep or bnb from from binance and i think the answer to that question is because it has to be trustless um we should probably define what we mean by trustless a little bit you can also look at an article that we wrote last week called eth is irreplaceable and it goes through the quadrants of of trust that various assets fall into

there are four quadrants of trust and the most trustless asset has to have two attributes that's in the the top right corner quadrant the zero truss quadrant it has to have trustless issuance so the supply can't be changeable by a small group of of people you know the the fed chair for for example uh and uh his merry men um and it has to have trustless settlement so the settlement of the transaction can't occur in a centralized system it has to occur in a decentralized system you think of trustless settlement in the physical world if i give you a dollar in cash uh you know cash money

um then that is that is trustlessly settled because it's moved from my possession to your possession the settlement is over we've settled it on our network same thing with a bar of gold if i give you a bar of gold uh it's trustlessly settled everything else that we move through the banking system today if i were to send you some some money david on venmo that's not going to be trustlessly settled that's going to be settled in the banking system using fedwire that is ultimately all controlled by the us government they can impose sanctions on it they can they can stop us from transacting it requires their trust a zero trust asset is one that is settled on a network like

bitcoin or settled on a network like ethereum it can't be stopped can't be shut down it's a bit more like the transaction of cash or the transaction of gold in that when you send me ether or if you send me die david um i have it once that die is moved from your account to to my account as long as i have the private keys i own it it's mine um just like the settlement of cash or just like the settlement of gold so ether and bitcoin um have that trustless settlement and as we've talked about in previous episodes episode one and episode two they also have the element of trustless issuance it is not issued by a central government um

it is algorithmically issued and maintained through social consensus a bit more like the issuance of gold so a zero trust asset that we'd be used to in the traditional world would be again a bar of gold or a nugget of gold that is settled trustlessly and it is also issued trustlessly well bitcoin and ether those are also in this upper quadrant of zero trust assets if you look at the other assets even tokenized assets on ethereum and put them through that lens of which quadrant do they fall in how trustless is their issuance how trustless are is their settlement um

not many others if any fall in that zero trust uh quadrant that that upper right tokenized gold for example well if if i have an erc20 that's a token on ethereum and i send it to you well there's an element of that's kind of trustlessly settled but not really because once i send you that that token the token itself doesn't isn't the gold itself it just represents a voucher for the gold that can be redeemed in a bank vault in london somewhere or a bank vault in in singapore so ultimately it's settled in the legal system now maybe the issuance is somewhat trustless maybe as long as we can trust the issue of the

token so again not trustless settlement not trustless uh issuance real estate tokens the same way security tokens the same way almost all other tokens on the ethereum platform are not zero trust and ether is so if we want trustless economic bandwidth at the very base layer of these money protocols at the base layer of dye for instance then we need the asset that that's collateralized and that's backing these assets to be trustless as well or else everything we build on top becomes a trusted asset and if everything that we're building on top

of our trustless system is trusted well it starts to resemble more of the traditional financial system and then what's the point right so um the bet on ethereum i think in the bet on bitcoin as well is that people will value that the world will need trustless economic bandwidth and trustless money systems in the future and that demand for these systems and for these types of transactions and money systems will increase over time and that bitcoin and ether are not replaceable as assets on their respective networks

because those are the only assets that are zero trust i think a great way to illustrate why ether is the only native trustless asset on ethereum is is well illustrated but from the genesis block of ethereum the very first block block number zero has nothing inside of it except for one thing which is ether today there are you know thousands and thousands of different contracts you know thousands of addresses that you can go to and and do things and thousands of tokens on them but at day one of ethereum there was one thing and there was one thing only which was ether and there was nothing else to do and this kind of illustrates that all other

tokens or all other assets on the ethereum blockchain came after ether and they were placed there they were added there by other people and so this kind of illustrates why ether is the first class citizen of the ethereum blockchain and the same model is true for bitcoin as well there's tether on a bitcoin sidechain called omni but it wasn't there on day one and so the only real trustlessness that you can get from the assets on a network come from the ask the main asset itself because any other asset was placed there afterwards and is trusted to some degree and that's actually kind of why dye is so special dye is the only other asset on ethereum that

has a decent amount of trustlessness the maker protocol itself has done a great job removing trust but when it comes to comparing ether versus die ether will always be more trustless than die because ether is the single point to which the entire defy structure is built upon so we've talked about ether and we've talked about bitcoin being in this zero trust uh quadrant but what happens if we take bitcoin and we put that on ethereum we tokenize bitcoin there are a number of projects doing this today some fantastic projects out there tbdc is one of them they're they're looking to tokenize bitcoin and put it on ethereum to increase the economic bandwidth of

ethereum the trouble with these approaches is that they're not actually increasing the trustless economic bandwidth of ethereum um at least i haven't seen a design that does so if you take something like tbtc it actually requires that you post ether in collateral to secure it so every tbdc might every one dollar in tbtc or maybe i should say every one bitcoin in tbtc requires 1.25 bitcoins worth of ether to back it so when you do kind of the the math it's

actually a net consumer of trustless economic bandwidth on ethereum now tbdc is trying to get the the collateral of um the collateral backing tbdc down from 1.25 to lower maybe they get it to one maybe they get it a little bit lower than that but it is right now a net consumer of economic bandwidth and it will look to be an economic consumer of trustless economic bandwidth on ethereum into the future that's not to say i'm not excited and we aren't excited about tokenized uh bitcoin on ethereum i think we are i think ethereum is a platform that will will suck in all the assets of the world uh it will take in tokenized real estate

this just just last week there's 40 million in tokenized bonds that were issued on ethereum and accessible in bloomberg terminals i totally expected to take on all the assets from the traditional financial system but all of those assets including tokenized versions of bitcoin at least in the designs i've seen so far are not in that t-zero truss quadrant and that's really what you need in order to create an end-to-end trustless permissionless open financial system for the world all right so we've covered a ton today we've talked about what trustless economic bandwidth is why it's important and how it can actually create a

trillion dollar multi-trillion dollar use case for assets like ethereum and also bitcoin it's a super exciting concept we've put some more information in the show notes on this including some articles that you absolutely have to check out just a quick reminder risks assets like ether assets like bitcoin highly volatile all of the stuff we talk about on bankless this is a new frontier there are risks associated with it don't put more money into the systems then you're able and willing to use this is not financial advice um what we want you to do action items for this podcast obviously continue subscribing to the podcast also go to the newsletter and check out four articles that we mentioned

explicitly so there's three on economic bandwidth uh and there's one article that that david uh wrote this week these are fantastic for understanding what economic bandwidth is and why it's important we've included them all in the show notes guys really excited to have you on this journey this has been episode 3 of bankless see you next week [Music]