Could AI-Accelerated Math Break Crypto's Keys Before Quantum Does?

Transcript

Yeah, it's creating this framework where you need to have bet not just on something on the frontier but the right thing on the frontier because I see a totally plausible future where five years forward open AI is bankrupt, Anthropic is bankrupt and AI is taking over the world. Hey everyone, welcome to Bits and Bips, where we explore how crypto and macro collide one basis point at a time. We're here today to discuss the latest stories in the worlds of crypto and macro. But before we begin, a quick commercial break.

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Thanks. >> All right, welcome back. I am your host Austin Campbell, high scholar of Zero Knowledge Group, here with my co-host Chris Perkins, the golden hand of Franklin Crypto. We'll see if Rahm is joining us today or not. And before we begin, as a reminder, we have our own channels now. Sign up for those. So Chris, let's start with token 2049. You were there. Here's what I saw from the outside. 25,000 attendees. Day one was very cryptonative.

Day two, much more tokenization. News that came out of it. Tom Lee said he won't hold more than 5% of ETH supply. Currently, he holds about 4.9%. That could have some implications. Poly Market floated an onchain asset tied to its economy with quote real programmable utility. No ticker launch date though. Token 2049 is coming to the US next year, June 16 to 17. Coinbase fully integrating Darabit. It is now Coinbase Global Exchange. A 30 billion BTC options market eligible to US institutions via Prime. There was a

tokenization panel with Fidelity, Black Rockck, Morgan Stanley, ICE, Bitwise, Franklin Templeton's own Jenny Johnson opened the day with Binance's Richard Tang. OKX and ICE were talking about their SEC filing. So, this is a lot going on. I want to just throw it over to you to have a discussion about what were you seeing there, what was important there, what was going on, what was most interesting.

>> Yeah, Austin, for those of you who've never been to Token 2049 before, it's like like no other conference, 25,000 people all in Singapore. And remember, there was also Milkin going on at the same time. You had the F1 going on. So it was just like I think Block Works had a side event. There were I think a thousand side events. So it was just like massive and overwhelming in many cases. As you go into the conference, it's like literally like this humongous conference center in Singapore. Five floors, the main events on the fifth floor. You got to fight your way up to the top. There booths everywhere. And so crypto is alive and well. There's

incredible energy. You know, I think during the Gendler era, that event really took on a lot of product market fit because everyone realized that a lot of the activity was offshore. So, it just started like building and building and so it really attracts the who's who of crypto. You mentioned Tom Lee, I did a panel with him and Jenny Johnson, guys like Arthur Hayes, like the who's who of the crypto industry shows up. So, the first thing about it is the energy is as high as ever. A lot of excitement, a lot of just just just mass focus, right? I was walking through Jenny Johnson and she with her and she's like, you know, this reminds me of like mutual funds when they first came on the scenes like way back decades ago. That's how it feels. It feels like innovation, right?

Key takeaways. You mentioned tokenization. There's an absolute convergence happening like everyone's talking about tokenization. I was talking about tokenization like Bloomberg was there. So you have this convergence theme that's continuing to go very very strong. Tom Lee was there. He said it was pretty funny. Like he's just like, "Yeah, I'm almost there to my 5%." You're like, "Why aren't you going to go higher, Joe?" He's like, "Well, the EF doesn't want me to go higher." But then you talk to some very serious people in the Ethereum Foundation and they're like, "You know what? We don't mind if he goes a little higher. So, we'll see what happens there." He had a pretty big bullish call, too. Like, you know, he remains bullish as ever. So, he was in good form. But there were just so many other people Arthur Hayes out there talking about flop, his new his new

thing. But, you know, the who's who of folks were there. Key takeaways. We're in 24 47 markets. Like every single major institutional investor was there. Like institutions showed up in force this year and there was this like interesting mix of FOMO where they needed to see where everybody else was to make sure they're they're not being left behind. Excitement because they're all building now. Regulatory pressures are behind them and and moving forward. The other thing I'll tell you is like the the prominence of people like there are some really senior people there. I was able to meet with literally heads of state public company CEOs the who's who of founders and so it's like really in a way look it's massive but the who's who

showed up and came away with a lot of energy. Of course right in the middle of it Tom said I'm not going to go above 5%. And then of course Justin Drake puts out this massive red five alarm fire alarm saying cryptography is in big trouble. everyone need to migrate. I think some of that was overblown, but it's an important theme. So, despite all this energy, it's like crypto, man. You're around long enough, you think you got this great setup, and all a sudden it's like, you get kicked in the stomach again. So, all that said, feel very good about the long-term direction that we're heading. >> Let me throw a couple of questions at you. I've been to token before. I know you've partaken in the conference. And by the way, good work to Singapore for keeping this things on the rails at all

while you've got Milkin and F1 going on at the same time. It's like, oh my. Oh, and by the way, everything's on fire right nearby. So, it's like apocalyptic weather. So, like, >> great. And yet, it's Singapore. The trains still run on time. Question for you about Tener. >> If you've been looking at the Ark of Token, as somebody who's been there a couple of times, how was this year's event different? What does it say about where crypto is now versus where we were living say in the Gensler era or the focus years ago? >> 100%. The biggest change with the cycle in my mind is that memes and momentum are being replaced by fundamentals and utility. That's what everyone's looking

for. And it's like in a way the crypto industry is finally growing up. There's a realization that it's not the fact that it's a token. It's about what's underneath. What's the value of whatever that's wrapping? And the regulators have made that possible. And so I think for many years we were always like, you know, the institutions are coming. Oh, we think they're here. Institutions are there, man. Like they were having their own side events. I went to a side event at Center Chartered who's very, very aggressive like leaning totally in probably the most aggressive bank that I've seen when it comes to building in our space. So the difference here is just the fact that again it's about real utility for the first time, not not less hype and memes. Look, you can still go find those hypes and memes if you go

through those you fight through the crowds and you see all the crazy stands and everything that's going on in the kiosks, but fundamentally at the end of the day it feels like the industry is really growing up. And yeah, you've heard reports, oh it's more packed than this year, that year, whatever. It's pretty damn packed. like it was hard to get through the event. The main stage was pretty much packed. We did an institutional stage on the side, also packed. I think it was plenty attended. >> I've been seeing the same thing. When I looked at my list of who's attending, the people going are getting increasingly more institutional over time. And one of the fascinating parts of the conversation for me is exactly what you said. Like to be honest, it

seems like the old days of launch a token and it's mainly marketing are somewhat gone. That's not working anymore. You now need to actually do something as you were saying. And if you look at things that have been performing well or garnering attention in this space, it's stuff where there is either utility or at least a theory of having some sort of utility behind it as time goes. >> Yeah, it's a great point around theory because it used to always be the theory. Hey, you know this token, it's a utility token. Theoretically, it's going to have value in the future. But let's be honest, you know, you know the reason it didn't have utility till now is because if it did, it was a death sentence. We only had regulatory clarity last cycle for two tokens, Bitcoin and memecoins.

That was it. Even Ethereum was under stress, you know, throughout. Like look at some of the cases against consensus and otherwise. And as a result, all crypto was nothing more than a front tier risk asset and that's the only way it could behave. And if you popped up and you had those fundamentals, you get smacked. Um, now the SEC and you know generally what happens is the SEC moves, major jurisdictions move and then those smaller jurisdictions like they fill in the gaps. It's like it's always consistent, never identical. That's just how it works. It worked that way for derivatives. It works that way today.

But the difference now is that not everything is a frontier mean they're all frontier risk assets in a way but like they don't all behave in tandem. We're seeing more dispersion now where if you acrue value to the token over the long term maybe it's going to go up for a change because it has that fundamentals and I think it's opened up a new ability for investors to start really underwriting based on fundamentals and utility because in the past that could be a death sentence. you know, up your security, you get smacked, off you go. So, this is like to me this is the biggest theme. That's the biggest theme and institutions are underwriting based on those fundamentals and regulatory clarity is allowing that. And my god, like chairman Atkins, chairman Celig, they are not slowing down, man.

Like they're blazing a path forward. It's like the only time in my career where like the regulators are now out in front of industry saying, "Hey guys, let's catch up." The other thing I had an opportunity to do was the prior week I was at a conference in Amsterdam and I was able to host Patrick Wit on a panel and interview him on a couple fire sides. This administration is not slowing down when it comes to crypto. Yeah, Clarity Act is behind us. One of the things he mentioned that really jumped out at me was the strategic Bitcoin reserve or the SPR. Think about it. If the US does start pivoting to refocus on that in the absence of clarity and if they can figure it out and my understanding it's with the department of treasury right now they're

kind of moving it between commerce and treasury but if they're able to figure it out we're going to have a really interesting situation on our hand where sovereigns now are going to have to follow them and you don't want to be caught if the US is moving forward with an SPR and you don't have some of that asset. I'm telling you from my seat I've been in discussions with multiple sovereign wealth funds asking me for the first time hey you know how do you think about this asset class so that dialogue is happening so the other theme is like yeah we're focusing on fundamentals we're focusing on utility why because regulators are now clearing the path oh and those regulators are as aggressive as ever in getting it right and I think the final thing I'll say is that clarity

would have been wonderful it would have enshrined these laws and given us enhanced predictability ility. But to be honest with you, we've got two years of precedent setting. And based on all of my conversations and everything that I'm seeing, we're going to end up actually with a framework and conditions that are far more bullish for the crypto industry than if clarity had been passed. Is that sustainable? I don't know. It's going to be sustainable for the next two years. And then once you have that precedent, it's very hard to put that genie back in the bottle. So, it's hard for me to be critical right now of the conditions when it comes to the regulatory landscape and the direction of travel there.

>> I think that's what's driving a lot of the institutional adoption here, if we're being honest, is that many of these firms have large other businesses that are subject to these regulators. Remember, if you're at a Franklin Templeton, a JP Morgan, right, even a standard chartered, you have large mainstream businesses that these regulators can attach to. So if they really don't like something you're doing over here, they could punish you in many ways, which meant in this era of regulatory animosity, it was very hard for them to act. I feel like now we're starting to see the revealed preference of many of these institutions because they're allowed to do things. And once you see that, you see the more innovative ones are jumping into this space trying to do things. And the ones

who are less innovative are, shall we say, standing back. So I guess the thing I'll end with on this topic for people is if you're looking at adoption cycles of technology, it always starts with sort of the tinkers, the people in basement, the people in garages, the power users building janky stuff that's really only useful to them. And if you don't believe me, go back and look at the first Apple computer and what that actually was compared to what something like a MacBook is today. But as you move through that cycle, the sign that tells you something is going to take off is when mainstream adopters come in and start smoothing out that user experience for normal people. And I think that's

what we're seeing now. >> Yeah. I'm going to push back on one part of it because and I'm going to talk my own book because I was there and I saw it firsthand. I sat down with Jenny Johnson, CEO of Franklin Templeton, the new boss if you will. Like people like that. Imagine the courage. And you know, talk about exception rather than the rule. She went all in in 2018 and here she's got like a $2 trillion asset manager. Very few people to your point, they don't do it because they want to really protect they want to protect the legacy franchise. So for her it took a lot of courage, but you know hopefully now wow what a foundation to set to be that first mover and now like the fast followers are coming in now that those regulatory risks are alive. So, you

know, for the early adopters, hopefully that risk pays off. We will see what happens. But there were many other folks like Franklin Templeton that moved in despite having a legacy business model, like Don Wilson, people like that. They made the jump. So, not everyone waited and tinkered. >> No, I agree with that. So, on that note, before we continue, we need to take our other commercial break and Chris and I will be right back. >> What if your crypto could do more than just sit in your wallet? Nexo is a digital assets wealth platform where you can generate daily interest on your crypto or borrow funds against your assets. Today, Nexo serves more than 10 million clients. Find out more at nexo.com.

One more thing, we've got a listener survey open. It takes just a few minutes. It's [music] anonymous and it changes what we make next. Use the QR code on screen or go to unchainedcrypto.com/servey. The link is in the show notes. All right. But speaking of security, Ledger also things that are crazy. So Ledger uses who brought devices through Malaysia. So selling specifically from Cryptobillis were drained of an estimated 100ish million across six chains on October 9th. Ledger has confirmed they have found hardware implants in at least one device. And

because it is an authorized reseller, we're looking straight at what is going on with self- custody here. So what happened? Early estimates put losses above 86 million. Bitquery now thinks over a 100 million, 324 wallets, six chains hit within 47 minutes. Ledger said while the volume of impacted devices is limited, Ledger can confirm that one of the impacted users devices contained an unauthorized hardware implant. The former co-founders of CryptoBillis say the company was sold and handed over in March 2026 and that they have zero access to credentials, visibility, or administrative controls.

and CZ quoting Pete Rizzo said the hackers apparently bought the reseller and made them sign a nondisclosure agreement is this contained Mark Carpellis who if I recall Mount Gox said this means the issue is far from being limited to one reseller and Ledger's own buying guide says genuine check cannot verify the devices physical supply chain history tether froze 10 million of USDT over 6,600 ETH went through Tornado Cash, Ninja Zcash, and it looks like I was reading on Twitter today, there may be at least one other reseller who's had devices compromise. So, Chris, what are you

making of this whole situation from an infosac perspective? Because this is a new vector of attacks. >> Like, sadly, we talk about this every week, man. It's getting worse. And like this one was not even AI driven, which we have plenty of issues with the bad guys using AI. We'll get to that. But like this is just some dark nefarious criminal stuff. And I should probably use more of an exploive there. Look, we have to fix security before we're able to move forward. And I there's two things happening right now. Number one, hopefully we get a policy response. I think the administration gave us one. I think people are getting organized right now to go help fight the bad guys and more leveraging private sector assets.

We've beaten that one to death. I think it's just going to take time for people to start companies and get after it. Sadly, the other thing is that you're there's no choice. You got to use an intermediary. And that that's another lesson of this cycle. DeFi is beautiful. It's great. It's an incredible vision, but it's really hard to have a huge amount of assets like your personal wealth in DeFi if you're vulnerable. I wish it I like I earnestly wish it wasn't like that. And I'm hopeful that in the medium term, we'll have AI tools that help defend us. Like many of us, Austin, I think you as well, we got into this space for the promise of decentralized finance after spending years and years on Wall Street. We want that ideal. I've always ascertained that

intermediaries should not be necessary, but they may be wanted. And unfortunately, now's the time you may want an intermediary, someone to safeguard your assets in an institutional and enterprise way. It just feels like we're at max security vulnerability right now. And I think between the policy side and the tech side, I honestly believe it's going to get cleaned up. Early days of the internet were no different. I remember you wouldn't like in a million years put your credit card into the internet. Back in the 90s when I was in college, um I mean it would be gone in two seconds.

It's not as bad today, but I do think tech will solve for it. But damn, it does seem like we're in a period of like max vulnerability. So intermediaries are stepping in to close those gaps. And then again, I hope that we can get my private tears off the ground soon, get after it. Yeah, it to me raises a couple of points about how the ecosystem is working. One, you're right. There needs to be more of a coordinated response here because right now the incentives for hacking are all one way. If you succeed, you get the money and if you don't, you get to try again. And so until there's some concept of like punishment or deterrence, I don't think it's going to go away. I think you're right about that.

Privateeers are definitely one path that I think is valuable and there could be more. But the point is without the ability to inflict consequences back, people are incentivized to just keep trying. Especially >> also at the same time like there are laws and I think people forget this. If you break the law and you use crypto, you still broke the law. And I do think in many cases this is going to catch up to people because all the assets are on chain and at some point you're going to have to offramp if that's what you want to do or not. But I do think it's going to catch up to folks as well. A lot of times law enforcement won't happen immediately, but they know where you are and they're going to find you eventually and the numbers are getting pretty high.

And so I don't think that these types of things are ignored, but for some reason people think that just because it's new tech that the law doesn't apply. It does and these folks will be found out. I think the problem is in many jurisdictions, they're in sanctioned countries for a reason and they are untouchable. But I think for normal criminal activity, they will, you know, the laws still apply. No, I agree with that. If you're doing this in the United States, it's a matter of time. The harder places are like the North Koreas, the Iran, or even the Cambodia of the world. But I also think there's been a big misunderstanding of information security in this space, which is to say people have looked at tools that allow them to self-custody or things that they sort of have a mental model of keeping the private seed safe

that ironically rely upon a bunch of things like vendors. you cannot really do diligence or devices that you can't easily take apart and understand. And this is where people have got themselves into trouble because hypothetically if you had created a MetaMask hot wallet, which everybody will tell you is not safe, and just written the private key down somewhere secure, put it in a fully encrypted password manager, and then never transacted with that thing, nothing's been stolen. Right? That is the answer. If you just stuck it in a proton pass, you're good.

>> I think Joe Lubman is going to push back on that that MetaMask isn't safe for sure. >> No, no, I'm saying that's the perception that Hop's not safe. I'm not agreeing with that, but I'm saying the meme was it's not safe unless you're using like a cold storage wallet. >> This to me is a misunderstanding of the security surface. When you're an individual, you have limited time and limited ability to verify. You should actually be oversolving for simplicity if you want to do these things. And that is not what people have been doing. >> The other thing is that we live in a quote trustless permissionless world, but it's very hard to operate if there's you got to start with trust somewhere.

It's almost impossible to eliminate a need for trust. Like look at coin cover. People trusted them. They're like, "Oh, you know, I'm going to self custody my Bitcoin. It's going to be awesome. No one's going to be able to mess with it." But they trusted Coin Cover and Coin Cover had vulnerabilities and they got hacked. So it's almost impossible to live in an environment where you're truly trustless and permissionless because you generally end up trusting someone somewhere somehow and therein lies the vulnerabilities in the gaps whether it's the provider of the software or whomever. It's just super hard to be truly trustless and that's why I hate to say it there seems to be more of a need for intermediaries you know and again intermediaries come in different shapes and sizes. What are the

value added services they're providing? Do they have control over the assets? do they not are they providing you know what layers and it can be very modular but you can't eliminate trust sadly you can't perfectly eliminate it that's what we've seen I think the other problem is when you get into an environment that's truly permissionless especially as you've said when we're having trouble enforcing traditional laws you end up in a world where the bad actors have maximum power >> also let me just I say quicker I meant cold card I apologize that was my bad please uh forgive me after that one >> like I wrote an article about this a while back for my newsletter that's still up on my blog titled technobarbborism where the problem is when you don't have rules it sort of

incentivizes the people who are willing to use the most force and the worst actors because they can just continually try to expropriate people. The North Koreans are probably the best example here. So I do think at some point we're going to need an ecosystem level response if we're going to solve this problem. I agree with you on the privateeers thing. I'm just saying there will be considerable existential questions for this space if you created a technology to protect people from being expropriated by central intermediaries and the main outcome is people getting expropriated by different central intermediaries.

>> Yeah, it's a tough one. >> It is. All right, speaking of tough ones, let's talk about that Justin Drake thing. Open AAI releasing hundreds of AI generated math results. Ethereum Foundation researcher Justin Drake said ECDSA could break in the worst case in months, not years, and urged a controlled migration of funds in what he calls bunker modes. Researchers are kind of split on whether the AI accelerated math is a real new threat to crypto keys or FUD that could cause, let's say, more losses than it presents. But let's look at both sides here. So Drake said, "Io it is now reasonable to brace for the

possibility that crypto breaks before Qday in the worst case in months, not years." He said, "Move funds, large holders first, to fresh addresses whose public keys have never been exposed, eg, they've never set transactions." He said, "Don't rush, but this is worth doing." The trigger was OpenAI's October 16th release of 722 math manuscripts. None yet touched the elliptic curve problem behind crypto keys, but this is what people are starting to look at.

Vitalic Bdderin said to take this seriously. Quote, I don't recommend anyone scramble to move their funds to new wallets today, but we should take seriously the risk to cryptography from AI accelerated math. It's very easy to lose funds from a misconfigured rushed upgrade, so don't rush anything. Eli Ben Sassassin said, "This calls for bunker mode. Chains need to become futurep proofed and fast." HB said hiding your coins in a bunker won't save your blockchain. He proposes a chain recovery mode. There are some skeptics like the CEO of Ledger on the AI multiplication result. Hardly a practical breakthrough.

It doesn't change our understanding of how to break cryptography. and Dankrad Feist was saying if exposed keys break your coins are going to zero having them in bunker mode is not going to help you. So Chris first of all what do you make of the whole call from Justin and its timing here and then how are you thinking about this risk? Yeah, tons of respect for Justin Drake. Know him. He's an EF researcher. He also spent a lot of time working with Google on some of their latest quantum findings. So, he's a one of the worldclass cryptographers out there. Very thoughtful guy. Now the big difference here is that we've always known that Qday or when quantum

computers have the capability to break public key encryption. We knew that that was a theoretical challenge that really undermines not only cryptography but the 500 trillion dollars in assets remember like crypto is like three of those that underpin you know our global economy. So quantum has always been a threat. I think there's been a lot of debate amongst top researchers. We also know that AI is accelerating quantum pretty robustly. And so people will say, hey, it could be 2030, it could be a little earlier, maybe it could be longer, but no one really knows the day of Qday.

Like personally, I think my head is fixated on 2030, maybe sooner because AI is getting so good, guys. It's accelerating hardware optimization, software optimization. So it feels like we're marching toward that date. The US government has stated, "Hey guys, migrate your critical systems now, no later than 2030." So they've put their foot in the ground. Usually when you make that kind of announcement, you think it's going to be slightly later. So you want to give a buffer, but I'd argue now that AI again is accelerating everything. So I'm not so sure. If they were to put it out today, they'd probably say migrate ASAP. And look, NIST has also published standards. The thing is is like we've always known that quantum was this risk. And remember it

goes back to what we keep talking about security. Security needs to be solved. Justin's point was a little bit different. He's saying guys, it's not just quantum you have to be worried about. AI is getting so good at math. We may have this issue where AI is breaking cryptography before we even get to to quantum. And that was the red alarm bell that he discussed. I think some of the things he was criticized about are valid. Look, if the whole chain's undermined, like dude, your coins are nothing anyway. So, why are you migrating this stuff? Like, I get that.

But what I do respect is that we're bringing attention to this very important theme. I'm in the venture space. I see companies all the time. And one of the verticals that excites me most are companies that are filling the gaps. What they're able to do is look at attack vectors, look at surfaces, identify vulnerabilities using AI agents. Our thesis has always been that AI is disruptive now for sure, but ultimately AI and crypto are friends and ultimately AI is going to be the path forward to deliver on the security.

We're going through this interim disruption period. So, long story short, I think the message was the right one. Guys, focus on security. We need more eyeballs on this. We can't put our heads in the sand and imagine that this problem's going away. Nick Carter's highlighted this in the Bitcoin community as being problematic where it's just so decentralized it's hard to get people to agree on a fork or whatever. What do we do with Satoshi's coins? Oh my god, I don't know. But what we're seeing is that there's hyperfocus now because the threat is real. So look, short term, I don't think the markets like that. They didn't like what Tom Lee had to say. They puked out a little bit.

They always do. But when you really step back and you know what's going on here, the world is at risk. World cryptography. We have bad guys already that are, it's called harvest now, decrypt later. So they're literally taking data now and they're just waiting till they have the AI capabilities or the quantum capabilities to unwrap it to decrypt it. So like the threat is real, the threat is now. My overarching thesis, I published an article in Fortune about this a couple weeks ago, is that if only there was an industry that had a concentration of world-class cryptographers. If only there was, they would lead us out of here. And we're seeing guys like Ellie over at Starkware, you know, even Justin, like these guys are some of the best in the world at cryptography. They understand what crypto agility means. And for those

of you who don't, like you can't just like update your crypto and and like go home and go out to lunch and be done with it. You need to constantly fix your attack surface so that you stay encrypted. That's the future. I think crypto is going to lead us out of this. By the way, it took seven years to update Swift. Now, I'm not digging on Swift. I know they have a very focused encryption agenda, PQC, postquantum cryptography agenda. I'm really hopeful that they make it out of there, but again, I think crypto is going to play a very much a leadership role in delivering us from these threats, whether it's AI or whether it's quantum.

So long-term bullish, near-term with crypto always volatility, but I do think we're going to muscle through it. And I do think it's will be positioned much much better than traditional finance. They have a lot more challenge and work to do. >> I think it's part of the complexity of this problem like what you're raising, which is to say not all potential encryption breakthroughs are equivalent. something big enough that it's going to break almost all forms of currently usable cryptography like public private key cryptography has far bigger implications than crypto. Like yeah, your coins are going to zero, but do you realize private internet

communications are now impossible. So we're back to like the 1990s where you can't put your credit card on the internet at all. Right? This becomes a totally different level of problem than the problem of hey we have some blockchain specific issues to deal with because in that case great ecommerce is dead and like email is no longer private. Those are call it step function levels of problems far above the Bitcoin blockchain. Right? I know crypto people like to look at and think about the crypto system but look outside into the world at the implications of some of the predictions you're making and you'll realize this is a little bit like hey if stable coins break because the US Treasury defaults it's like hold on if

the US Treasury defaults nobody cares about the stable coins. >> Oh we got bigger problems. There should be tanks in the street. Right. >> Exactly. So like if you break all the cryptography fine if you break a few kinds of public private key cryptography where keys have been exposed because of message sending on a blockchain that is a specific solvable problem for crypto. You know there are these like layers of problems that you deal with. The last one I think gets into like the efficiency of these types of communications in general. You can harden a lot of these cryptographic systems, but it makes them significantly slower and more computationally intense to run. At the exact same time, the AI wants all the compute in the world. And so I think all of this is just pointing

to compute, compute, compute, compute becoming the binding constraint for running a lot of these things. I do think it's relatively complex. So, I get where Justin's coming from, but I think the problem is maybe an order of magnitude bigger and more complex. >> You know, in my venture circles, people are talking about comput as the new stable coin, the new currency, the new dollar because it's just a commodity that's so much in demand. I don't think we're there, you know, for a very, very long time because I think it's going to be very volatile and it's very hard to have a currency that's very volatile.

But you're right, compute, compute, compute. You know what else was interesting about the OpenAI case was they released these 700 and whatever mathematical proofs that were very challenging. They didn't really talk about cryptography and that has a lot of people concerned because they're saying hey did they suppress it because of you know people going to freak out and it will cause you know incredible economic destruction if people realize that certain encryption can be now broken. That's something to watch and something to be concerned about. But again to me bigger problem than crypto. Crypto has a lot of the resourcing to fix it. And what if this is actually a forcing function or tailwind to see more tokenization because if we can get our act together faster than the surface

area across legacy system that could be very good for our space. It's kind of a contrarian view but the whole world has a problem. I know we have solutions. It just going to take a little time. >> All right. So, if compute is the new dollar, let's take a minute to talk about the old dollar. So, I've been keeping an eye on yields. The 10-year Treasury touched 5.36 last week. It's currently sitting at about 5.24 as we have this conversation. This remains like a multi-deade high. You've got to go back more than 20 years to find this.

>> Brent above 105 on Iranian attacks. The Fed has signaled more hikes. the howies just attacked like Riad's airport, right? We're seeing a lot of chaos in that region right now. Waller, let me lay a few of these out, said, quote, "I anticipate additional hikes to support a timelier return of inflation to the 2% goal. FOMC minutes see another hike by year end. Futures don't price it for October, but they're pricing 75 to 85% for December. The 10-year remains elevated. 30-year mortgages are at about 7.5%.

France's bond yields are going this way. Italy, Japan, Korea, Indonesia, all up 100 basis points. Ed Yardi was saying if we get to 6% quickly, we're going to see some real cracks in the financial system. So CPI still remains elevated here. 3.7% year-over-year or 6% month overmonth, up from 3.4% 4% in August. And Chris, like you've been in FX for a long time. I was in rates for a long time. What are you making of all of this economic data coming our way as inflation remains sticky, but rates are headed that way?

>> Yeah, look, it's pretty tough. War is very inflationary. It feels like we're very much in the depths of a war that seems to be expanding. I think if you talk to policy makers, the thesis is that AI is deflationary. The problem is that we're still in my mind in the inflationary phase of AI where we're building out all the infrastructure before we can really avail ourselves of all the deflationary aspects that it will tend to bring to the table. So we're in this like double inflationary environment right now. Look, everything happens in cycles. [snorts] I know that the government is very very focused on the tenure and making sure that what did I see that like the department of war budget is now less than what it takes to service our debt. So that remains an issue. Things

happen in cycles. We've got midterms coming up as well and we will see what happens. It sounds it feels like we're in a bit between a rock and a hard place. I know Trump would feels like he would like to get out of Iran, but at what cost? And what's the cost of getting out there elegantly? Who knows what's going to happen after midterms? It felt like he was going to hold off on escalation until after midterms. Now I'm not so sure. So it feels like we're kind of at max uncertainty and things are starting to fray a little bit. Look what's going on in France. You have pretty epic riots. Students are saying, "Ah, it's not fair, not for me." The debt as a function of GDP and that country is kind of off the rails at this point as well. So, could you see more geopolitical

issues across the developed world perhaps? Yeah. What do you think, Austin? >> So, I think there's a few different threads here that are important, some of which you're hitting on. One is it's hard to hike your way out of a supply shock, right? Like oil is a physical good. We need a certain amount of it. You can raise rates to destroy demand, but that's not going to create more supply. As you said, that creates first inflation and then if you deal with the inflation, it simply creates less demand, which means a recession. And people have had low tolerance for recessions recently. So, I don't see positive ways out of this for

governments that they're going to like. They're going to have a choice of killing the inflation by causing demand destruction and recessions or they're going to have to tolerate the inflation. I think the second part that is a real problem as you've noted is this is opening up for a lot of western nations in particular fault lines politically that have not been active for a while which is to say between young and old. Right? As we've looked at political realignment we've thought a lot about right left. What we haven't thought a lot about is young people versus old people. Because the argument is basically boomers are like, "We've been promised all these benefits. We need to get paid

these benefits. Yes, the budget is large, but just raise taxes, right? Because we need to get these things." And the counterpoint, you know, I hear this from my students is I wasn't even born when you guys voted these things for yourself. And then you ran up a negative$40 trillion tab on this thing by running a huge deficit. Why the hell do you expect me to pay for that? Sounds like your problem. And I think the political parties are going to start having a reckoning of if you really start moving aggressively to defend benefits for the elderly, you were going to lose all of your young voters because young people rightly are pointing out, hey, we weren't a party to this agreement. Like the 65 year olds don't

get to vote amongst themselves to steal all of our stuff to pay for their things. Like we're not cool with that. And this is leading to the rise of people like Trump on the right, but also M Donnie on the left, right? Is it's a similar set of issues that's pushing all of them to the forefront. France, I think, is where we're really going to see this break. Because if you look at what retirees get paid in France, the average retiree in France has a higher net income than a working 30-year-old in France. That's not sustainable for a society. Well, we've seen this in crypto since day one, right? Where the younger generation is grasp onto this asset class in hopes, you know, that their

speculation in the early days would result in wealth at a time when they didn't think they could realize it through normal traditional means. We've seen this in our Congress where the young and the old diverge independent of party. The younger folks tend to be supportive of technology and crypto. The older folks not so much. Example after example. But it's interesting because you're right, it doesn't really perfectly align with traditional parties. Like I know youngsters that are super conservative and I know ones that are not. And so how do you think this plays out? We're seeing it unwind in France, but how do you think it plays out in the States?

>> I mean, I think this poses an existential problem for call it current political alignment in the United States. That is to say, there's probably not like an internal view the Republican party can have on benefits allocation, tax increases, and like the current economic structure that's going to hold their coalition together. And the same is true of the Democrats because both parties, right and left, are aligned primarily on ideology, not age. But now age is becoming ideology. So when your party is a mix of young people and old people and because of inflation and the budget finally starting to break, interest on

the debt is now above defense. And by the way, on the current trend, 10 years from now, it will be half the budget. So above Social Security and Medicare, you can't have a policy that will appeal to both the young people and the old people. Just doesn't exist. And so I think you're going to start seeing a realignment, like it or not, the healthier one for the long term is probably unfortunately for them telling the boomers, you voted yourself a bunch of benefits, but you voted for people who weren't born yet to pay for those benefits for you. The answer to that is nah, dog. And just starting to cut them, that will produce a significant electoral response. But the problem is if you don't and you start strangling

your economy, the most productive people are going to be the first ones to leave for places that are not doing that. Because if you go to one of my students who again was not even born when many of these bills were being passed that the boomers now want them to pay for and say you're going to pay a 70% tax if you start a company, they're going to be like, I'll see you in Singapore or El Salvador. >> Yeah. But I think the problem's going to get worse before it gets better. I'll tell you why. AI is accelerating drug development and we're only touching the surface. Like you know, you talk to some of these people in NSF, like they think that I don't want to say immortality is on the horizon, but people are going to start living a lot longer. And I don't

think we've come to grips with the societal impacts of that. You know, are you going to work into your 110s? Maybe you will be going forward because of the way that we'll be able to customize drugs and treatment and reverse aging. That stuff's happening in real time. There are so many breakthroughs happening on the health sciences side. That's going to translate to people living much longer. So it feels like this is probably going to get worse before it gets better. Austin, what do you think? >> Maybe it's definitely going to get worse because that's just a math problem. >> Yeah.

>> Right. Like if we slow down and think about what's really going on. We've run up a large deficit and we continue to run deficits while interest rates are going up. that curve is exponential upward which means something is going to break. Part of I think what's misattributed to bond vigilantes is instead just people who can do some basic math because it's somebody looking at the budget and being like well on the current trajectory this is completely unsustainable. So they're going to do financial repression. So I really do not want to own long bonds because I'm just going to get crushed for a decade. And by the way, the United States did that in the 40s and 50s and did it again in the 70s. So I have seen this game played

before. It's not vigilantism. That's just people not being stupid about making investment decisions. But my point is if that's the part of the cycle we're into and everybody thought these decisions are coming 15 years from now, they're coming five years from now. >> Yeah. I hear you on treasuries and Rah said he was he was going long treasuries last week or two weeks ago I was out last week but where do you go because from a relative perspective the US isn't looking so bad particularly when the world is falling apart >> I don't disagree with that but the answer is you do not go to US bonds you would go to gold you would go to Bitcoin you would go to US stocks and you would go to stocks in other places that still

have high growth potential and decent demographics so like Latin America America, like South America, those look good. What you would avoid is places that are way down the aging curve and not recovering with factor productivity, like Europe is the obvious one, where like over a multi-deade frame, they probably have significant issues. And so to me, as I'm looking at that, like this is why the bond problem is significant is would you rather own bonds or just like the S&P 500? What do you think? Like which one are you doing?

Oh man, it's tough. We have this really interesting part of the AI cycle. Are we in the beginning, the middle, or the end? It depends on how you're looking at it. There's still a long way to go. There's still this insatiable demand for chips. You can't even get your hands on chips. There's certain industries that wish they had their hands on chips. They can't even get them. So, there's such a backlog of people who want to get into the game. It probably is going to run for quite some time. That said, a lot of these companies are not very profitable, are they Austin? and the frontier AI companies. We've talked about the liabilities that are stacking up. So, you know, is this dance party going to end or is it going to continue?

Therein lies the question. Lot to lot to unpack there. >> I mean, I kind of look at this actually. Let's talk about this through the lens of open AAI then. So there was reporting that OpenAI quote unquote has a 20 billion revenue gap and it mainly arose from an attempt to produce a direct comparison with Anthropic which is booking revenue from AWS and Google Cloud sales according to Reuters because Anthropic's quarterly revenue topped OpenAI's for the first time in Q2. Open AAI is now saying it will reach 70 billion by year end and is raising 30 billion ahead of an IPO in 2027.

Axios is saying in public markets investors will prefer actual revenue rather than financial constructs that are far more appropriate for early stage startups. Obviously the market didn't like this. Oracle down, Nvidia down, Coreweave down, chipmakers overall down. AI pivoting, miners were sliding. And the question is, is it accounting or is it demand? But I want to use this as a vector to look at a bigger problem, Chris, that you're raising here, which is where are the economic gains from AI going to show up? Period. Full stop. And I think this is similar if you've studied history of financial markets to some of the problems that we had with

attribution in the tech bubble, right? Because you've really got to take three different questions apart. people like to compact them into a single ball and you should not. And those questions are is AI net valuable to the economy. If so, to whom is it valuable and then on what timeline? And I don't think your answer has to be open AI is the winner to believe that it's net valuable and on some timeline it will win because as you said it's driving significant demand for chips. And if you want an alternative model for AI Meta just continues to ship ship ship ship ship with Muse. And by the way to anybody not looking at the

news Gemini Zargon 4 allegedly is doing very well on benchmarks. I haven't seen it publicly yet, but Muse Wonder just hit today and is basically touching the capabilities or even exceeding them of OpenAI's latest models and like Claude. And so if that's true, I have a lot of questions about where the economic winners are. Is frontier modeling essentially a game where you're just constantly burning money and never have a moat and so it's actually other stuff that will acrue the value. So Chris, I want to throw the ball back to you.

You've thought about this a lot as a venture investor. You're now at Franklin Templeton. If we're seeing a world in which chips demand is insatiable, the frontier model companies continue to incinerate money and while revenue is growing, the money incineration is not slowing down. And you've got competitors in the water doing call it orthogonal things like the Chinese openweight labs or Meta. How do you make sense of this whole picture? You wait for regulation. And what regulation does is it forces you into a duopoly or duopoly plus.

That's the natural state of mature markets. If you get that regulation which you're hoping for, maybe it can take care of some of your liability issues, maybe not. What it will do is it will create a material moat which will allow you to when you have regulation, it forces everyone to have the same fixed costs. And what it does is it squeezes margin and forces scale and usually not that many folks can compete. So that's why you see them so focused on this because that is the endgame is where you have that regulatory mode where there's a couple folks that are scaled. Think about the different industries, Pepsi, Coke. You just see it happen over and again particularly with regulated industries. Now maybe it's not two, maybe it's three or four, whatever,

but that keeps out the competition. That's probably the endgame that they're seeking. And look, there's a lot of folks that are very focused on regulation. I go back to what we talked about previously with hacking. There are laws. New technology doesn't change the law. Like you still got to follow the law. But for some reason, every time we throw new technology out, we're like, "Oh, no, no, the law doesn't apply. It doesn't matter. You can go hack and like rip people off." And so I think maybe those laws adapt over time. Maybe the regulations adapt over time. But until that point, like we have laws. So yeah, maybe that's the endgame here is we get that regulation, we get that and then just the compression of fees and scaling out.

>> For me, I think part of what I'm looking at here is it may be the case that the winners in this space are the people provisioning the hardware and the compute capacity. Like this is an inversion of some of the previous things we've seen, but it may be that the physical atoms become the driver of this, right? One of the things, you know, with plenty of investors yelling at him about it that Zuckerberg has been focused on is just compute, compute, compute, compute. And he's been focused on that for years.

>> And now they have a mode and that mode is not regulation. It's physical capacity. >> 100%. Yeah. Yeah. I mean, compute's not going away anytime soon, my man. And if anything, maybe they you see it getting changed when we have the quantum systems online and there's a lot of investment going in there as well. >> So, applicant. >> Yeah, it's creating this framework where you need to have bet not just on something on the frontier, but the right thing on the frontier because I see a totally plausible future where five years forward, open AI is bankrupt, anthropic is bankrupt, and AI is taking over the world.

>> Picks and shovels, my man. Picks and shovels. >> Exactly. It is a totally possible outcome that Nvidia remains a winner. You know, Meta is a winner. Google is a winner, right? Data services becomes the thing that wins. And the other part that's really interesting to me about this is we're starting to see more model tuning and like specialized models to pull on two threads in the Muse drop for Muse Wonder today. They had a specifically tuned legal model, right, that they're starting to use that is increasing specialization within these frontier models. And Brian Armstrong was tweeting about tuning an instance of Quen, which is Alibaba's openweight

model, >> where they were able to host that themselves, train it on Coinbase data, and greatly improve fraud detection. So it may also be that it's not so much moving the entire frontier because that takes more and more parameters and ever more complex models, but instead starting to specialize the models for specific tasks and making them more agile. And this kind of goes back to what we saw with the development of the internet in general, right? Like things start to fragment, things start to specialize. It's not the all singing, all dancing, everything that wins. I see in that last set of comments you're able to channel Rom and say something about OpenAI like and you know had a deference to him. But look, I I'm not as down on

Open AI as you guys are apparently. >> Well, my point is look, do I see worlds in which they succeed? Yes. I think what's understated is I also see plenty of worlds in which they fail. Go back and look at the 90s at all the big tech names and how many made it to today. Right. Not a comment specific to open AI. It's just it's hard to predict the distribution of future outcomes. >> Yeah, but value does acrue to applications and those applications that win win. And so it's still early. We'll see what happens.

>> True. But a lot of that's distribution. >> Wait, Austin, but they have distribution. >> Do they? >> H how does OpenAI not have distribution? How many users do they have? >> I mean, they have an app and they have tens of millions of users. I agree with that level, but that is a disruptable level of users. They are not like Apple which has billions of users locked in. >> That's fair. >> Yeah. And Yep. 100%. And they were quick to start disrupting Google when they came out. I remember all of a sudden I started using chat GPT instead of Google and I was like, "Wait a second. You're right. This stuff can move quickly in either direction." And what are we seeing from a value perspective?

Distribution rules. As time marches forward, I think more value is being accured to distribution more and more every single day. Like if you got distribution is valuable. >> Agreed. All right. Cool. >> So, on that note, thank you for joining us for this episode of Bits and Bips. Please subscribe to our channels and we'll see you next week. >> Thank you for watching and hope you enjoyed this episode of Bits and Bips. Just remember, nothing we say here is investment advice. And please check unchanged crypto.com/bitsandbips for more disclosures.

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