Fat Protocol Thesis, Web3 Consultants, Fei's Controversial Shutdown | Roundup

Transcript

[Applause] [Music] [Applause] this episode is brought to you by core the brand new non-custodial wallet that offers a seamless and secure experience on avalanche you'll hear more about core later in the show all right everyone before we jump into today's roundup with santiago quick announcement next week on tuesday you are going to see a a new podcast show up in your empire feed the show is called bell curve it's hosted by myself and mike my co-founder of block works it's two episodes a week one episode is mike and me exploring a new thesis every single season each season is going to have seven episodes and we're going to explore a big thesis at the end of the season we will revisit the thesis uh to figure out if we were right if we were wrong

and and and just explore our curiosity there uh the second episode of the week we'll be with michael and vance the two founders of framework ventures really excited to have them on we're going to focus the roundup on different governance proposals and should be really interesting so when you see that come out it'll come out in your empire feed it'll also come out in the bell curve feed uh when you see it go over to the bell curve feed click subscribe if you want to get plugged into that show too now let's get back into empire welcome back to another episode of empire we got the roundup we got santi back in action santi my man how are we feeling today feeling good you know we just recorded a fantastic episode with two of my favorite people in the space rebecca and jake on a topic that is very front and

center now which is regulation and i know a lot of times it's like people don't want to talk about regulation but it is a topic that i think is super important and can be actually i get the feeling that a lot of people don't want to talk about it because it's daunting it's like stressful but the more we talk about it and we get comfortable i think there's a lot of interesting takes that people appreciate in that episode that you know regulation doesn't have to be like the lord voldemort of the space that you cannot topic that must not be named and talked about so i thought that was a great episode and so coming really refreshed and optimistic about yeah yeah i agree it's phenomenal episode well santi you um i mean there's

a lot of things to cover today uh we've got uh fey and rory we could talk about that we could talk about eth merge uh in like six weeks coming up no one uh no four weeks three weeks three weeks i think coinbase staking like uh coinbase world.cbe um but i actually want to start with ave retroactive funding oh by the way before we jump into that your dad is killing the twitter game your dad is hilarious on twitter crushing the game i didn't know i didn't know you were a junior i didn't know you're santi jr the fourth or something but

yeah uh all right man here's what i want to start is actually about um ave's retroactive funding so monet supply posted something um i'll just read what he said he said i think ave v3 is a huge advance for the protocol and overall lending space but would just like to point out that if uh for example uniswap labs had made a proposal like this crypto twitter would have completely lost their [ __ ] have not heard a single peep about ave v3 retroactive funding uh and then you you commented my issue with ave my you know what you tell me what you commented and why and and your thoughts on this so basically just to set up general context ave company has been developing v3 which is

a huge improvement to v2 and so the object companies um you know this is where most of the development is happening and so the context here is they develop v3 that included you know obviously employing a lot of engineers on the technical side and also doing security audits from folks like sir torah trailer bits much for drill bits but like you know and so all of that carries some costs right and so i think the the question here is ave is now out with companies from putting a proposal for governance to be retroactively paid for all that development work which span over over a year and the cost is to the tune of 16 million and they provide some sort of

breakdown and so i think this idea of retroactive funding is pretty interesting the idea of having service providers and development companies contribute to a dao is where is transitioning to whereas you think of a centralized company if you're google you have your google is deployed like developing code deploying it that's it in these dials historically of course you had ave pure just ave which was the team stani and co building the lending market protocol and then deploying the code now of course since they've launched and restructured a bid from land to ave

and transitioned to a dow model you have ave the token which is governance token where voters can influence and vote on and comment on propose certain things and as part of that there have been proposals by hey let's let's bring on a company like you know gauntlet to do security simulation and analysis and you know that's discussed and voted upon and approved and so i think you're seeing these kind of it's a transition that ave is trying to do you have a company which is rastani and co and a lot of the engineers reside they're developing a lot of the code actually most of the code and they also and there's also grants all of that's now being

part of this like governance forum if you will um and so my point was his point when i supply saying well like you know uniswap there's game swap labs and there's a unison protocol um and so my take is well obvious kind of like uh i would characterize the d5 1.0 company like it uh it was initially called lan it did an ico back in 2017 right 18. and then a lot of the tokens it's just been restructured a lot right um from land to ave and so yeah my my point there is it's an interesting precedent on a number of fronts one a developing studio like of a company contributing to the

dao and how that is compensated and retroactive funding which is a pretty novel idea um and it sets the stage for other dows and how you see this evolution of so you invest in a startup that then tries to decentralize by creating a dao and then you have kind of this ecosystem of anyone can actually contribute and make proposals to the dao and then you know get remunerated for that based on the treasury so yeah two really interesting things here in my mind one is like where does value accrue actually in the ecosystem i think you i think this is part of that conversation the second is retroactive funding so the way i understand retroactive funding is um

or like the core principle behind the concept of retroactive funding is it's easier to agree on what was useful and has been useful then what will be useful right so like the idea of venture capital funding is uh you you make these big bets on what you think will be useful most of them fail one or two of them is successful and like the current grants program kind of follows that same model you throw a bunch of money at different things uh and and a couple of those will have these like outsize returns retroactive funding looks at what was successful in the past and what made the biggest impact and then you allocate capital to them is that is that right yeah of course yeah i know that's fairly accurate the the issue of course is anyone might be wondering well how did

they even pay for it in the first place i mean right how did a company have the funds to spend as they say 16 million and the answer to that is while they've raised they've sold some of their treasury to fund this ongoing development right because of a company has some funds in their treasury whether it's stable coins or ave tokens so they use that to fund the project and then they say well reimburse me for that um the issue that i i think there's two two issues here one is there is seems to be some confusion around the relationship between ave protocol and ave company two different things and this idea that the avi company does

not get a part of the protocol fee you know because the avi protocol does accrue some value to your point but the avi company is not getting that fund in the same with uniswap the protocol is earning a fee per swap but that doesn't go to uniswap labs which is hayden and co they're developing you know then future upgrades to the protocol um and then the second idea is it is a bit difficult i think in this case where there seems to be some concerns that um mna supply raises it would have been nice to know kind of an initial scope of work if you're going to do retroactive funding i think it's great but it can work

but at least give some indication of a proposal hey we're going to develop v4 so okay v3 is out we're going to develop v4 we have some understanding these are kind of things we want to focus on this is the core team we kind of estimate this is the scope of work we're going to probably spend 10 to 20 million based on what costs us to develop e3 we'll keep everyone posted um have a cell phone yes no and i think that at least you try to and i think it will be increasingly important for daos and especially as it relates to funding to be very transparent in in the intention of the particular service provider or contributor to the dao and then having kind of ongoing monitoring of what is it that is being

done how are fonts being used um now cynical response to this might say well have a company does not have any kind of requirement to be super transparent in how they've used funds there's a skeptic might say wait a minute this 16 million well how do i know what's actually being spent like how are you going to disperse that how do you know you're not jacking up prices like there seems to be some concern around the lack of transparency so it's a fine line like i don't not of the mind that like a service provider like gauntlet or these guys should be total open book around how they are running their company

but at least you need it's a little bit of a trust and reputation game here which is you need to trust that obvious company has best interest at heart for avi the protocol because you have a lot of ave tokens in their treasury and gauntlet in a similar manner gets paid in kind not stables but also in kind like in the ave token and so it's a matter of incentives and playing the long game and reputation game for any contributor to anything is ave a company essentially a consul like a service provider consulting firm in this instance i think that's what they're trying to move towards right in this decentral in this transition to further decentralize what they're the move as i understand it and standing can come on and correct me is avi

company is trying to be just like gauntlet and sertora and it's just a contributor to the dao it doesn't have control over the dao and ultimately it's up to ave token holders to decide if they want to pay for the work that our company is doing um on the audi protocol let me make an analogy here and you tell me if it's a good one or not so sales salesforce one of the biggest you know software platforms in the world they have a they have a platform where people can build on top of the salesforce platform right and they there are hundreds probably thousands of these businesses that are you know five ten sometimes hundreds of people inside of these companies they're basically service providers they're basically

consulting firms that do some dev work some consulting work help people migrate onto salesforce help people build on salesforce this feels kind of like that but if salesforce had spun out a consulting firm and salesforce was and that consulting firm was like there was like employee crossover and i don't know i feel like it kind of creates this like anti-competitive market um where yeah i don't know is that an air analogy well i think it is the it would be as if like when you implement salesforce in your organization there's a lot of professional services and there's these companies like accenture and pwc and consultants that like do that

uh and they get paid in this case like i think your point's a really good one which is well who really has an incentive to compete against the ave company to develop before uh obviously going to win that yeah yeah probably um but you know these are early organ young organizations so i think you need to look at also what's going on in unifor land they just approve this company of sorts llc actually that is going to receive a fairly sizable chunk of money to then promote and sponsor and give funds kind of like a venture phone corporate venture fund plus grants to support the develop ongoing

development of the key here uniswap protocol uh not uniswap labs and so it's a different entity and i think these all these different protocols are trying to spin up these kind of credibly neutral dowels that uh will then administer some of the treasury to fund the development uh kind of like a corporate venture arm if you will it's interesting i feel like it's a yeah it's part of a just a much bigger conversation about like where does value accrue right like if value isn't accruing uh you know we had jake uh this reminds me that not jake travinsky jake uh jake from coin fund jake bruckman i would jake jake on talking about public goods and like our protocols public goods or common goods or private goods and you know if if these protocols are

public goods well it's like well then value doesn't accrue to public goods necessarily so then it's you have to find out figure out other ways to accrue value one is by spitting off capital into the token uh back to token holders but another way is by creating these type of like ave companies service providers on top of the protocol that you know that those you can spit off you can make hundreds of millions of dollars by winning almost like quote unquote consulting projects yeah i mean to be fair though like gauntlet has profited quite a lot from consulting and uh supporting the ave protocol by doing simulation testing on b2 and v3 and got paid and ave tokens like there's a lot of value golem's a billion dollar service

provider there you go yeah so so like i would put that in as a data point to say there's a lot there's value that is being accrued um in this ecosystem that is not just going to the ave company now if you were to ask me i think to me it feels like this retroactive funding is an interesting experiment but i would almost favor a model where and this is maybe like unit swaps doing it where maybe you just set aside a specific percentage of the protocol fees to certain buckets of critical core ongoing development of the protocol similar to how companies allocate 5 10 20 15 of r d as a percentage of revenue and i think that ultimately is good

because that's what you want to see right i don't want to necessarily be up to the whims of a vocal minority or vote from a dow to ensure that like there's a lot of uncertainty with retroactive funding like you just don't know like there could be a governance attack there could be just i don't know like like i tend to find that developers can be really risk averse and so it's uncertain like if your avid company is well capitalized but maybe gauntlet in its early stage or some hey you're a great developer and i don't know somewhere and you want to contribute to the dao from a competitive standpoint it's really hard because you don't have any resources unless you go out and raise venture funding but if you're a venture capitalist you're probably not going to give money

to them you'd rather just buy the ivy token if you will right and so from a competitive standpoint i would almost want to see a specific percentage of protocol fees diverted towards a bucket an independent organization that then determines and funds projects to go and build and do an rfp an rfq whatever like there are ways to fund r d uh somewhere how bitcoin is done um but just how professional like companies do it and do a competitive process to invite developers to say hey if you're going to develop v4 have a v4 how would you do it and you do a contest and then and then like you know that to me feels like a more sustainable way of funding products which is

actually how public goods are fun like a lot of public goods are funded right if you look at um like big statues or you look at uh something like like let's take central park for example in manhattan uh the olmsted didn't win that project didn't it wasn't just like they went to olmsted and said hey go build central park they said hey we we want to build a big park anyone can submit a proposal they got like dozens of proposals and one that won that proposal right so absolutely yeah yeah there's a pretty good precedent on on the ave side and uniswap side of proposals yeah for i mean gauntlet for instance and other sertora and other service providers where if it's a big fee a couple million bucks of

service fee then yeah it's a it's up for a proposal and the community can comment and ask more questions and request information and i think that to me feels like pretty good what's called dow governance yeah let's move on um on wednesday coinbase announced their new erc20 eth staking derivative dubbed cb eath similar to st eath steak eath lido's steak teeth product um obviously this makes coinbase a major player in the staking wars i think whenever you have a company as big as coinbase coming in to a new product they're inherently a major competitor i'm curious to your thoughts on this one yeah i mean it's uh i see it as quite positive um

there's been concerns around concentration of lido having like up to a third of all kind of deposits and so this just increases the competition i mean you have to assume we talked about in a prior episode of coinbase um and their role in staking and growing different business lines it's healthy ultimately not healthy for the space if you have a centralized entity where a lot of institutions are going to stake or would want a stake and them having the possibility to stake and then having this derivative product where they can you know that facilitates kind of withdrawing and having liquidity on the state to eat so ultimately i think it's quite positive um and this goes back to coinbase early

acquisition year to go around bison trails and providing like infrastructure like infrastructure services for you know staking and validation and so i think this is quite positive because because it just you want to always like if they didn't support this then institutions might be on the fence on the margin of not staking and this i think moves us closer to a direction where it makes it more convincing for an institution to stay because it provides that liquidity that they might need if um when they're staking very easily yeah i think it's interesting i mean you have this conversation around lido being like so light the conversation on lido was this amazing product right but steath is a a little bit like monopolistic and

they've just gained a massive market share very quickly and and and there are arguments that it erodes uh ethereum's decentralization that's the argument about lido then the argument for uh coinbase is steath or i guess cb eth is that it's highly centralized then you've got um like rocket pools or eth which you can't even really use in the us i'm pretty sure um i don't know just i i just think they're i think there's so much more room to grow in the liquid staking derivatives space i think there's uh i think the market is not one yet i would argue no absolutely not um and i'm gonna send you a chart we should post here on on the forums but uh yeah you'll see at the concentration of

um of where the deposits are and ultimately um having another player in there is healthy for decentralization purposes which charge i mean i got it pulled up if you look at these two depositors um you have if you scroll all the way down okay there's like a pie chart that shows kind of the distribution of each state and lido obviously which one which one of these keep going you're going to see no it's a bit hop actually keep going up oh i know oh i see lido kraken

steak fish finance bitcoin sweets figment celsius abyss yep i see this okay so this is the chart that uh i think is one of the more important ones this this dashboard by the way this doing dashboard is fantastic on the on the merge uh some really cool stuff so this is where i'd be monitoring kind of the concentration of deposits of eth2 deposits and so the more diversity you have there the better it might yeah this is really interesting okay we'll uh we'll throw this one in the show notes i think it's um it's really on the community the the the success of um i'm curious to see whether or not cb eats will be integrated into a bunch of different d5 protocols and the way that steeth pretty

quickly got integrated yeah um i would i'd probably say no you don't think it should be or you don't think it will be uh i guess both yeah uh well you could argue that it's like someone like usdc right uscc technically is seized and censored but it's it's a really important stable coin in d5 for better or for worse um some people might disagree and so in a similar manner i think i think coinbase might want to implement it uh i would probably think it will uh but yeah i don't know i'm unclear about this one yeah if you have an opinion uh i mean all right so what like how does a

liquid staking derivative accrue value right they accrue network effects from market cap right which is like a factor of popularity and trust liquidity aka like being able to exit at par and then also i think it really comes down to d5 integrations right like stacking the d5 yield on top of on top of the staking yield i think the question becomes for the eth community especially around what's happening with tornado cache and stuff like that is like do d5 protocols want to endorse and integrate into into defy and like recommend to the mass market this like quote unquote centralized staking derivative if you have a lot of liquidity behind it

which is likely going to be the case given the amount of assets that coinbase custody has um then it could be interesting for a few market participants looking for yield right ultimately this is like factoring like it's like there's a duration game that you'd want to use as derivative because if you're staking then you're you're putting your heath and committing to keeping it a certain amount of time and some participant might not want to do that might want to capture the yield but might want the liquidity of the help so ultimately you want to be using a solution that has deep pools of liquidity lido has them but you know depends on the yield and i think they're more often than not i have i'm of the opinion that a market and a free-flowing

market as crypto is as eric's kind of described in our podcast is the solution because it's self-ordering right so there's liquidity and yield like people are gonna there's gonna be uptake and so ultimately yeah i mean at the end of the day competition in any of these markets is a good thing right competition to light up is good we now have like the trifecta of staked derivatives we've invited maximum market participation and i think that's a good thing i will say there were two things that weren't in the announcement that should be talked about which is the fees and the taxes right the fees uh coinbase is charging like i think it's 25 on user staking revenue uh which is yeah highest in the industry obviously ultimately that comes down over time and i would assume that comes down

decently quickly and then on the tax side of things i thought they had an interesting claim which is that coinbase claims that their derivative is a utility token that you wrap and so when you wrap a state eth that's not taxable they argue unlike minting or swapping and to stake into lido's steak teeth which is taxable so they're trying to i think play this like actually it's like rap bitcoin although yeah i'm not sure wrapping your bitcoin like with uh bitco's like solution like uh next or bitcoin guess is a consortium if that's right it's like wrapping something is not taxable but minting and swapping minting and swapping is taxable so like i think that's correct what

they're going for here is like okay the smart money that one and the institutional capital that like is probably more focused on their taxes than the retail side of things this is the you know the the safe staked asset for them yeah right the same yeah that's a that's a great that's a fantastic point actually yeah so uh it's it's rare that i make fantastic points but sometimes i get them in there i do most of the talking here but yeah i i think uh i'm just gonna maybe we i know you have a big big night ahead of you my friend so i know we don't have too much longer here i want to make sure that we talk about um uh i want to i'm curious do you want to talk about faye and rory yeah let's talk about that because i think it's been

yeah let's talk about that okay um i will try to give a little background i haven't been paying as much attention to it but i think it's important so um last friday fey labs announced their plans to stop participating the tribe dao with a proposal to dissolve the protocol due to like technical and financial and regulatory risks um if you if you look back to tribe uh the tribe dao like six months ago is worth half a billion uh six months later today it's closing shop right uh a surprise um i think it is a surprise to some people so not a surprise to others but that's uh sam chasmane i forgot i was botched the pronunciation of his last name the founder frax called the proposal

outright outright fraud and so i'm curious to get your take like if you fall out more with sam if you think the proposal is good i'm curious to get your takes on it well i i i've been following it because it has impacted a few of my portfolio companies full disclosure i was an investor in faye which you know is operates because tribe then merged i'm also investor in frax and i i'm also an investor in another company that suffered meaningful losses because of the fuse hack and so they've been on the other side trying to get funds recovered um it is a i'm just going to call it as i see it i think it has been a pretty

embarrassing situation for what governance should be and and what it all means for token holders because my understanding is that there was an initial proposal to um to pay back um and reimburse the affected users as part of the hack and then somehow that vote got invalidated uh like crickets it passed to reimburse the affected folks like you see in other instances and then that vote somehow got invalidated by the court team so no no no we're going to vote again for no good reason that i can think of and then then it didn't pass

um and so it's been this like decentralization theater of like what governance really means like you pass something that is and then you don't honor it then what's the whole point of all this and so now you fast forward to now which i think is the third instantiation when you of trying to like get some funds to affected users and it seems like there is the contention here is how they are distributing so they now i guess retracted and say we're going to pay back some of the the affected users but in a very in a way that i can't seem to understand why they would do it um

and so did i mean we're not talking about chump change here this this was a 80 million dollar hack uh tribe holders have voted time and time again to overwhelmingly reimburse victims because they have the funds to do it yeah um and the the idea that the decision was a month later reversed um and then we go back and say no no we're actually going to do it i mean total loss of confidence in in the team and the maturity of them you know i know them personally i think there are good people but somehow i don't understand the rationale of delaying and not honoring the community and more importantly like if you're a founder out there and you have the ability to pay back

effective users and restore reputation of you as a developer as a team but also a protocol because you always place consumers first it is important there there's a lot of risk here in any defect protocol but when this happens and importantly you have the ability to do so like why wouldn't you because because then i think it gives you a fair shot of continuing to build and for this protocol to persist and actually build confidence and restore confidence yeah and the last point i'll make is it is unrealistic to assume that you will never have a security breach or a fault i think the operating assumption for a foundry should always

be things can go wrong let's try to make sure that we built in sufficient protections insurance funds to make sure that if things go wrong we always will put the consumer first it's like this is like the operating mantra of why i think u.s businesses are great like amazon the consumer is always right right so just embrace that and so i don't know what the situation will be or how the payout will actually happen but uh that's what i'm paying attention to because i hope that they i hope that they understand and just do it in a way that is what most sensible which is just payout pro rata if you're going to pay out 80 cents a dollar just

equal to everyone equal instead of saying okay we're only going to do two percent of fraxes 13 million three percent of olympic doubt i'm struggling to explain it because i don't understand the rationale and it's just like confusing so anyway you want to know my first thought here was um you know i remember being at the solana conference and i was at a in lisbon november 2021 and it was like pico top right like time the top by like a week and i was at this party and you know everyone was talking about like the young founders like the you know 19 year olds and 20 year olds building on solana and things like that and uh i will say some some of the folks who have built faye and rory kept getting brought up it's these like you know

gigabrain folks uh and i will just say i don't want to talk poorly about anyone but like this is what happens sometimes if you look at who's running faye and rory and tribe it is some some of the team is still they're still in college right and so i'm like this is this a byproduct of having a space that gives 100 million dollars and 500 million dollars to 19 year olds like this should maybe be expected by the way i think it's amazing having a permissionless world where you can where where 19 year olds who are still in college can can build these things but like when when capital gets involved and this much capital gets involved and you have 19 year olds making these decisions all right folks this episode is brought

to you by our friends at avalanche and ava labs they have just dropped a new crypto wallet called core you're going to be hearing a lot about it over the coming months you can now be one of the first to try it out here's the reason i'm excited to partner with them on empire right now crypto wallets and browser extensions they feel clunky they feel non-intuitive that's why ava labs built core it's a free non-custodial browser extension that gives avalanche users a seamless and secure web through experience across the entire avalanche ecosystem here are a few reasons to try core here's what i'm experimenting with number one core has intuitive dashboards with a unified display for all of your nft collections all your crypto assets you can execute

asset swaps directly inside the wallet it's a really nice experience uh maybe you want to earn yield or borrow against your bitcoin but you don't want to do it on one of those c5 platforms right now core's native bridging functionality makes it really easy to bridge your bitcoin to avalanche's robust defy ecosystem last but not least core makes on-ramping super easy you can convert dollars to crypto right now using the moon pay integration just takes a few clicks download core today using the link in the show notes it's really really nice uh if you are interested in the avalanche ecosystem at all you have to be using core download core using the link below

now let's get back to the show i think age is a really bad construct of intelligence and ability to build but i think the maturity again this is not a good precedent for folks that have been critical what's his name uh i'm blanking on he's constantly critical of like yeah and he actually attacked the fate too the the tribe uh the the rory team um i forget what his name is he's like an outspoken twitter personality and he attacked like the the crypto person yes he's on twitter um but like this again you're giving him [Music] all the reasons to continue to attack and be like yeah these kids should never be managing this money regardless these

are well-funded teams a16g other funds have invested in fey i'm wondering where they are to drill good sense into this is what a good investor does is like you're ultimately there to provide support and sense as a board member or as a investor like um so i'm saying no i mean i think i can't seem to understand why faye would pay again two percent the frags of the 13 million laws three percent to olympus style 8.9 million lost 19 and 27 percent the balancer and vesper fly i can't seem to come to sense of why that is

um and it's not a good precedent um right i think i mean they said this is one of the most egregious dow and d5 situations i've ever seen there's quote i mean i don't know d5 drama stuff but this is a new logo yeah absolutely and so look i this is my take on the surface i haven't spoken with the fade team so i'm putting out an invitation if they want to come on the pod to talk about this rationale they're welcome to do so i haven't followed the governance forms in to the depth that i feel comfortable being absolute here they want to come on and explain the rest now by all means joey or whoever's listening from the fade team come on yeah and explain it to us because i can't seem to understand it yeah i also think there's a bigger

conversation here about not just faye and rory and tribe and things like that but uh our newsletter writer byron had a good good paragraph he said if you're a depositor to a d5 protocol you have no rights you have no real rights as a creditor right beyond what is hard coded into the smart contract if you own a token that's issued by a protocol you have no legal claim on the protocol's assets no court to appeal to there's really only this like social contract that exists right now yeah i definitely agree again it is a totally agree there uh i think this is an interesting point this is probably the number one point when people talk about reimbursing when there's a hack and loss of funds yeah because you don't you don't want to perhaps set the precedent their creditors ain't going to treat them like

that um but if you look at historically most protocols and protocols that i think continue to endure the test of time are ones where they come up with some sort of solution to make users partially whole like meaningfully whole or or fully hold um on their last fonts because ultimately that restores confidence and continuity in the protocol yeah uh like i think it brings me interesting question of like are liquidity providers of a protocol the creditors or like is it protocols token token equity and debt and like is it is it some type of mezzanine type instrument or is it something that doesn't even exist yet and maybe the deeper rabbit hole is like uh

this is a reminder of just how d5 projects don't have a court to settle disputes and like bad debts which then makes you think about is like doubt a dao and like real world assets at scale is that even possible before we have this right this isn't going to be the last incident yeah absolutely i think the things that are important to understand is who controls governance and a lot of times the users of the protocol are earning the governance token but it never comes to a point where they earn enough because given the inflation schedule and it's most of the time either investors and or team that have a pretty controlling stake and say in governance in the early days think about unit swap like you know most

investors and team if they and a lot of times the team likes not to vote for obvious reasons and delegates their vote to someone else like student organizations or you know folks like monet supply or you know whoever like people that are smart i guess hot soup or whatever um so it is uh it is interesting um but you're most certainly right i mean i if you're a defy user you shouldn't expect to be treated like a creditor uh and have no right in anything other than perhaps governance if you're earning governance token or want to buy the governance token to influence an outcome in this case yep yeah santi i would usually keep going we can keep going for another 20 minutes if you

want oh i thought you're a big night ahead of you i'm prioritizing this over other stuff [Laughter] because of this because i missed i missed last week so so i i'm trying to make call here folks all right good good um one of our analysts uh block works research analyst by the way block works research if you guys haven't read it yet very very good uh byron's newsletter is the only newsletter other than like i read his consistently it is dense but it is packed with just the robin stuff so it's really good chat with the buyer he's great we should have a big shout out to byron yeah yeah barnes legend um research uh block works research is amazing uh we've had like some big alpha pieces recently but we have one of our

analysts westy he put out a tweet thread on tuesday claiming that the fat protocol thesis is dead the fat app thesis is here to stay by way of background obviously i'm sure you remember this that protocol thesis coined by joel monegro in 2016 highlights what he believed to be the big difference in value accrual between the internet and crypto applications right so if you look at if you look at how the web developed you have like these protocols and then apps built on top and the value so like a protocol could be smtp or http the value accrued to gmail and microsoft outlook the apps built on top of smtp it didn't accrue to smtp his thesis was that the value in crypto accrues to the protocols not to the apps so far this thesis has kind of

actually held true a little bit though there's been a lot of pushback but with you know if you look at a lot of the l1 tokens those have accrued a majority of crypto's value kind of trading like an index token of of each ecosystem uh what westy claims is that this paradigm is changing as apps mature investors begin to prioritize cash flow this is what kane at synthetics has been talking a lot about too where you know the next bull run will be kicked off or the main metric in the next bull run will be fees that these protocols generate i'm curious just like how you're setting up your how you're thinking about this from an investment thesis lens fat protocol thesis fat apathy somewhere in the middle what do you think about this it's a fantastic question and probably one of the more important ones if you're

investing in the space and we talked about it i think to some extent um during the podcast with um uh the coin coin fund jake jake yeah um and i don't the answer is i don't know but i like most things think probabilistically historically i skewed more towards investing in lower level parts of the stack meaning things like ethereum in the episode with kyle somani from multicore and i think he brought up an interesting point which i generally ascribe to which is if you think a lot of the value that's being created for instance in d5 is when you're swapping or when you're doing a transaction is meb minor extractable value and most of that is going to the

base layer um and so like miners get bribe or tipped especially after eip1559 and so the idea is well that benefits you as an ethereum holder like the best way i guess the best way to play mev if you're not really sophisticated and technical to run like a bot if you will like flashbots is to probably just own the base layer token and returns of for the most part like contribute to this idea uh like owning the base layer like the solana at avax you know cosmos like atoms in ethereum um obviously for someone out there listening might say well look at d5

tokens they've totally been crushed like d5 has been in this bear market long before bitcoin e took a hit and you were coming off of like a pretty high which is defy summer um i guess like looking forward before we're looking like i do think that part of the reason why i haven't invested in something like a wallet like dharma for instance a rainbow wallet is because i think that we're urgent because i've struggled to one see meaningful users and and how they kind of it's more of like i felt that this industry for a long time has been just pure infrastructure build out and we haven't really hit any mainstream

kind of application but of course that changes with gaming because as i've said before i think something like axi [Music] is a hybrid and a mix of everything it's kind of vertically integrated because it has ronin their chain it also is for all intents and purposes sky maybe it has a front-facing application where people come play the game and then they do other stuff they have a marketplace they have run at the chain and so they're capturing value on different parts of the stack and that's ultimately like the golden i guess the like the golden goose is finding something like that like stefan for instance where it started off with a front-facing application people want to walk and there aren't nfts and but now they've become the most popular decks in

solana because they have the users and they're built you know i mean so they are building out other products and integrating with other things in the ecosystem then it's easy with composability and so long-winded answer of saying i think not because i haven't invested in front-facing applications doesn't mean that they're not going to accrue value i think increasingly you're going to find things like games that become like the everything app like a wechat that's my thesis of why i'm so interested in games because i think they're huge funnels they take us closer to mainstream adoption and then they are probably because it is an attention game they are the ones that are in a privileged position to ex

extract is probably a negative word but to capture value from users by offering all these different services um and so i'm excited about perhaps investing more on the top of the stack now of course you could also say wait a minute you could just invest in ftx finance and coinbase you would have made a killing if you did like the early stages of that and look exchanges are highly profitable businesses they're not decentralized right they're like a different category in their own kind of right but i'm curious how you think about it uh just on i was actually going to tell you about this this gaming breakfast that i had i had a breakfast with um an ex executive

an ex-facebook executive who's now ceo of a crypto gaming company um i'll have to connect you with him is really interesting breakfast so to me everything i don't pay attention to gaming space too much i know that's you're super deep into it i'm just not i'm not like a huge gamer i'm like very deep into the weeds of a lot of what's happening in d5 right now to me d5 is booming right now to me d5 like the innovation i'm seeing it it almost feels like six months before we had d5 summer like i'm getting really really really excited about d5 again um this guy he's like oh yeah d5 is dead right now gaming and like gaming is the hottest place in crypto i'm like gaming like gaming's dead right now he's like he's like oh no he's like you are so missing this he's like there's an

absolute he's like the most interesting thing in crypto right now is the battle that's going on between polygon and immutable uh to win the gaming companies that are leaving solana and are have been forced to leave tara right so you had all these games that were built on salon ontario they've left they're either going to polygon or immutable there's an all-out war and then you've got like avalanche near kind of in the background like winning some of these but really it's kind of polygon and immutable so that was just fascinating like i didn't i didn't know that there's this all-out battle going on absolutely yeah i think it's uh look i don't have a strong view i i allocate in different place i am of the thesis that

i continue to believe that there's going to be one game that is a killer game and a parody with a web 2 game that is fun to play go listen to the podcast with brooks from noor and he talks about this in a very clear and cogent way which is a game there will be a game in that is going to be equally as fun to play as a web 2 game super addicting with all the nice benefits of web 2 nfts being you know having the ability to own a token and the property in the game and the xrp that's being created not ripple but like the experience and leveling up and then being able to translate that and use that across an ecosystem a very highly composable integrated system that touches so many different other types of

things like playing other games and you know earning yield and using d5 and i think ultimately a game like that is going to crack that nut and build a whole suite of products to give that user no reason to leave their app and i think look in many ways you web 3 is really exciting because it enables i think really unique business models many of which we haven't really seen and started to understand but i think what is probably clear is that user behavior may not change that much or just on the margin because users like really value convenience um and and and even though you have less like barriers up to entry and perhaps

stickiness like of consumers right it's super easy to switch from salon to ethereum by bridging watch out the bridges but it's easy right it's easier like the mo you switching from bank of america to wells fargo is a royal pain in the ass you're switching from ave to compound like no it's just clicking the button and so that being said i think users always stick around and i think there is still the most are you know protocols that are safe secure and easy to use and have lindy built in and baked in and have liquidity and all that it's flywheel because i think it's a hard question and i'll my final thought on this is it's really hard

question they're like 10 users on d5 and like you know a couple thousand hundred thousand gaming that's nothing so we're all beta testers and so it's really difficult because you i think have to invest with the idea of net cycle you will probably reach a couple hundred million users and you have to build towards that and assume that that's going to be the case and invert and then say okay well is a wall like argent going to take one percent fee out of all the activity that happens across nft swaps d5 swaps any token swap and any type of activity well that's huge massive um and so but yeah

given the whole context of historically it's been really really really hard to outperform heath in the long run extremely hard yeah well that's because i mean yeah eath is right if the fat application thesis it's like money is the largest application in the world so that's why youth is going to have built the fat protocol thesis and the fat application analysis in some capacity yeah like so i was driving that day and we were stuck in traffic and there was like these tall boots operators and a friend of mine was next to me and said god it'd be so nice to own these like toll booths i'm like that's kind of ethereum imagine like owning a toll booth a highway

as you're constrained by geography and physical like you know deploying these roads but not very scalable and capital intensive but now i think owning ether none of this is illegal financial advice i'll say it because i have to say number episode east to me is having an ownership into the rails of the internet like web 3. and it's a it's a very generalized bet on this idea that people are going to come and build stuff and the number of cars flowing through that highway is going to go from five today to five billion in five ten years and you're gonna collect the fee every time there's any type of activity going on in the network and you don't have to place a bet on what that

activity is gonna be you don't have to think about electric cars or not electric cars or the brand of the car as the analogy all you have to say is this is where most people are going to come and visit and traffic through these rails because because they are just way better and it's like a nicely paved road and the analogy is wep2 is a dirt road and you'd much rather go on the nicely newly paved road because it's faster it's better and cheaper and so underneath or some of the old ones is like that so you could argue that i don't know it may be totally wrong i invest across all layers of the stack but on a ratio basis sometimes like i would say i've been morally heavily skewed towards bottom parts of the stack that i think are that

infrastructure let me ask you this when you hold eth do you hold steath or just eat like are you are you allocating to liquid sticking dirt yeah both yeah and why not just why not put it all on why not put it all in liquid staking and just earn earn four percent um just for diversification reasons liquidity duration like all these different variables since you construct the portfolio um sometimes i borrow against my yeast yeah and use it to do other stuff um and so again while these state east derivatives are composable they're not as perfectly composable as eath itself

and so you know you never want to allocate the like one thing fair enough yeah i will leave you uh i will leave you with this one question and then we can call it call it a night which is yes what do you think is the biggest missing piece of crypto right now across the entire ecosystem across the industry you're seeing all these new angel deals i know you're really active right now like what is the one thing that you just still feel like is missing um maybe it's just really fresh in my mind because we just recorded it but i think regulatory clarity i think is is super important right now because every conversation that i have with

um you know institutions and and pretty much everyone out there is like they're on the fence they're on the margin i think that what's really exciting is most people now truly kind of believe that this is where the puck is going this is where the internet is involved it's the next frontier of the internet you want to capture it it's super exciting i think the narrative of like exploding existing institutions and replacing them is gone away and it's more like even centralized institutions are seeing the benefit of interacting with this open promotion this ecosystem and networks because they also stand a benefit the missing piece is just the regulation and so i think i'm optimistic that hopefully we can

reach some sort of uh sensible just clarity that allows us to then really kind of open the floodgates for a whole new wave of developers and institutions and liquidity that comes in and starts using these things because i think that then really is the missing piece in the flywheel to increase the efficiencies of l2s build all these different products and i can just sense because founders are nervous they always have been it's a constant persistent thing and so if you just remove like i'm not saying all of it but if you at least like divert a third or forty fifty percent of the energy that is thought and even resources that are being put

to get some sort of like not really good legal strategy and you invest those in pure innovation and tech and business development like i think that that that attention and resources have a much much bigger yield um and so hopefully we can do that um so it's really that and the other one i think like if if you weren't if it's not regulation i just think that uh i was just coming off of like a really good session uh last week with uh a potential like someone that i really um like he's super smart he's like 64. he's built and managed and operated

many different companies he's been at the forefront of technology and innovation and it's really exciting to see someone like that like be so bullish on crypto and we were just like having this discussion it's like for the first time like you have a con like a convergence of information is moving the speed of light capital is now moving increasingly at the speed of light untethered unbounded by like historical restrictions man-made historical artificial restrictions and like everything is now happening in an open source context which like if you didn't see web 2 and you didn't see how the smartphone was going to have such a huge impact in everything that you do like think about like you're like 18 hours of the day you're touching this

device that 10 years ago people are saying it's going to go nowhere and it consumes and controls your life in sometimes good and bad ways most people didn't even imagine that and that all kind of happened in like 10 years imagine now the pace by which new different use cases and business models is going to evolve and like my imagination doesn't stretch that far this is why i'm not a builder i'm not investor i just want to give money to people that are like way smarter and visionaries but like think about the pace of in the acceleration of innovation and all the different kind of use cases that are going to evolve it's it's actually like incredibly exciting that we're living in this moment that i don't think we've ever humans have never been on where the pace of innovation is just

like vertical all we need is my friend you please you keep me bullish can you keep me bullish i can't look uh i'm i'm a perennial bull sorry folks i have to be a bull in this episode it's hard not to i'm just inherently optimistic um an optimist well it's been great um i guess well before we go i guess i'll flip the question to you like from your perspective what is it the thing that you think is kind of missing so just gonna take us to the next next level um sorry i'm wildly distracted i'm sitting next to a hotel and there's like some

crazy stuff going on in this hotel room next to me um uh i think i think so i think uh i'm looking right now in within d5 i think if you look in d5 right now uh all interest rates are variable um and there's like not a fixed rate there's no there's no there's the only way to basically raise capital right now and defy is through equity or in crypto like equity financing is through like what looks like venture um but if you look at traditional capital markets debt plays a much bigger role than equity actually we get so focused on equity because of

venture but like debt is much much much bigger than equity issuance to raise capital uh in traditional markets and i i think the reason we haven't seen that yet in crypto is because everything is based on these variable rates so if you look at traditional capital markets fixed rate lending makes up like 90 of lending and variables like 10 percent and crypto it's all variable so i think we need a much bigger fixed rate lending market which then relies on like underlying things like interest rate swaps markets um and stuff like that and you know there are companies that do a great job of this like notional shout out to notebook uh to be fair to yeah we were the same

investor there was a paraphrase i think they're doing some really cool stuff but to be fair like you you could technically you could technically like create a product where like you deposit on hobby you borrow fixed you can borrow effects you can buy like right now in ave did uh i borrowed on ave last night actually i think it was like one and a half percent or two and a half percent variable and then 10 fixed um yeah i guess it's the interface it's it's really the what you're saying is it exists yeah it's like that's too big of a that's too big of a spread um okay and and it'll come down as you start introducing things like derivatives and interest rate swaps and things like that so i'm excited for that it's like pretty maybe to most people pretty boring but i think that unlocks this big like no but

i think you're absolutely right it's like yeah you look at a lot of the ideas for good investments are you look at what's happening in traditional financial markets say hey look the derivatives market the options market is like 10 times larger than the notional spot market why is it that that's not the case in define you say god why haven't options and derivatives like really exploded and it's because like well then i think like i think it's just a cool idea if you're fixed rate lending because then you could like let's say you're a down you're spitting out like let's say uniform turns on the feet like let's say you're a protocol you're generating a bunch of revenue then you could programmatically lend or excuse me programmatically borrow against the revenue that you're spitting off and it just creates a really exciting market where it's a hyper efficient debt market

um yeah so yeah it'll happen it will happen all right my friend i'll give you a full hour i promise that 40 so i'll give you something so i'll give you more credit for watching points my friend and uh thanks everyone for listening thank you so much [Music] you