Negatively Priced Blockspace

Transcript

[Music] okay guys uh my name is Mickey uh I'm going to be the MC of this afternoon part of this stage so it's an honor to be here and uh I'm not going to take much of your time because we have much more important and more interesting speaker uh now uh talking about a neg negatively prized blog space since it might not be necessarily bad it actually could be useful and I'm really honestly looking forward to uh to what we going to hear so please welcome on the stage as synchronous Phil thank you uh yeah so the title of

my talk is it's okay to be negative um yeah my name is Phil co-founder of lastic and we're exploring uh block space markets um and uh this is one of the theories we're going with uh so if you have any if this is more based on like it's a mix of economics and block space and just exploring the unique uh properties of block space that are not uh correlative of uh traditional Commodities so what is block space um uh this was I think a good point by Chris Dixon from a16z which is it's the hottest product to be selling in the 202

20s um it is the product of blockchains so any sort of blockchain uh provides its block space um it's it's not necessarily a single commodity but a class of Commodities because every blockchain produces different kinds of block space they vary in quality availability and flexibility meaning the quality is basically how secure is it uh uh the availability uh is it accessible uh all the time uh do I need to check the block space providers uptime page to make sure there's no downtime at the moment uh and how flexible is it can I just transfer tokens on a utxo block space model or can I deploy smart contracts or can I do

only data availability or what what how flexible is it and sometimes you know these these all have their uh unique uh attributes um and it could be tradeoff so having limited flexibility could be in Advantage as well so we're going to go over the supply and demand uh the fee model and issuance versus inflation um so supply and demand often uh dictates you know uh the price of goods uh and commodities uh but it's not so much the same for many uh instances of block space um and uh there's this great article by

the folks at Z Prime who were talking about this uh really deep and uh this is really good article I highly recommend it it's called Beyond layers um and they compare a block space to somewhat of a luxury good in some some aspects so despite at times being cheap and widely available there's are some resemblances of a luxury good which they compare to an economic concept called Vin Goods which is not it's it's actually pretty controversial within the economics field if this is a real thing um but there there are some clear indicators of evidence of the existence of such things and they most correlate

to luxury goods like a watch like if the price usually when the price of something goes up it it's a signal to decrease demand or to create more Supply uh with with vin Goods however when the price goes up it just makes the demand even greater so if a watch is really cool or a piece of art the price goes up it might signal to more uh luxury uh purchasers that this is something I actually want when I didn't want before when it was when it was cheaper um so they're typically high quality Goods that are wellmade and it's like a status symbol kind of thing I don't know if block space is a status symbol thing um although inscriptions could could lead

to that um uh putting inscriptions on a high highly contested block uh with with expensive gas prices may lead to more value for that inscription over others but I don't think we've seen clear evidence of that so far they're usually sought after by affluent consumers who plays a premium over the utility um I I'm not sure if if BL space is actually ablin good um but it it does establish this uh narrative for something that's even more controversial in the economic uh space which is gifing Goods where the demand increases just like before uh as the price increases but they're for

inferior Goods um an example of this would be like rice and potatoes uh if the price goes up uh the demand Also may go up because there's not really any substitute for it um it's not like I'm going to choose I'm more likely to buy caviar now that the price of uh rice and potatoes go up I may not have any options uh and in uh certain situations because it's a staple that I need if I'm adap on ethereum uh main net uh I don't really have an alternative I don't have a substitute quickly so um yeah there's yeah tend to be purchased they can't GI and goods can be uh purchased

more by low-income consumers but um and yeah they might be forced to allocate more of their existing budget to this good um instead of uh which is more important for people with limited budgets so applications are the consumers of block space there are no substitutes for the class of Commodities of block space um I mean maybe there are uh there's maybe some arguments if you think of it let me know after um within the classic Commodities there are plenty of substitutes now though so you know instead of deploying everything on Main at ethereum you can deploy certain things on rollups if you're a rollup you

don't have to use call data you could use blobs or an alternative da layer uh you might want a co-processor handling most of your execution if that's very important uh so yeah there's a lot of like substitution that's now possible um but it is difficult it's not so fluid and liquid in this in in a simple way because uh blockchains are inherently designed to be self-contained uh systems so uh there's there's a few ways like the supply and demand can affect pricing though so um for instance if you see that there's a lot of transactions in a block but the capacity has not been met

the cost per transaction will remain relatively the same before you reach that limit uh and that leads to a higher amount of total allocation of fees for the validators or miners in that system so if you have like something that's really really popular like the like a football game a college football game and uh imagine there were like 10 or 20 seats still available like the cost per user isn't going to go up there's no scalpers out there you know really really profiting they're just trying to get rid of the tickets right before the game um but as soon as it reaches that demand uh and then you have like the secondary Market that pops up or primary Market in in in the sense of like

ethereum gas uh where uh the fees can Spike drastically now it's not always the case that a block space provider will have that capacity and sometimes you know it is an arbitrary limit of Supply um not completely arbitrary but yeah there is some limit of Supply that you know you can make more uh smaller such as Bitcoin where I think that that's the case on the left uh on the right uh where you get some more appearing to be in high demand with with very little capacity uh although Bitcoin is still popular um so when you're when you're thinking about uh blocks space providers

or blockchains as a uh like a revenue generation machine to keep themselves sustainable um there there something that occurred if there's any anyone was involved in the block space block size Wars and Bitcoin or know about it yeah okay cool um there was a a debate long-standing debate uh should they raise the block size limit of Bitcoin above one megabyte um and this is one of the people who was against that and this was a very controversial email he put out to the mailing list where he was happy to see when the fees were exploding in 2017 on bitcoin that the total amount of fees per block were exceeding the new

Bitcoins being created for Miners and this in his view was a success because that illustrates that the fee model could sustain the security of Bitcoin and their idea over time where the issuance becomes near zero it could sustain itself only from fees so the the reason the fee model is important is to understand like how it could sustain itself without some sort of subsidy from the outside or constant price increases coming in uh constant influx of of capital to keep the token going up uh token price in this talk I'm kind of disregarding that for the most part um so you see uh in this chart uh where the the red line across the top is

the block size limit in Bitcoin and you know if you were involved in Bitcoin around 2012 2013 2014 you saw a lot of low fees like near near zero you could actually give zero fee and get included in blocks quite quite um easily uh and when Bitcoin uh and at this time one of the selling points of Bitcoin was low transaction fees it was part of that narrative back then as well so there caused a lot of controversy when we saw in in 2016 there's going to be an issue with the block size uh being too constrained

uh what's going to happen when when uh we reach the limit and around 2017 it did reach that limit and you see that the it was the everything was pretty much capped there's also kind of a slight downtrend after uh which relates to well let's yeah again the substitutes this goes into the substitutes so around 2017 the whole blockchain Space had was beginning to have some formidable Alternatives such is ethereum and that wasn't the case earlier on and I think there's a theory that uh that created uh an influx of a lot of capital and usage going into

these other ones where this is a correlated chart to the percentage so of dominance uh you know you see Bitcoin was around like 90% or uh for many many many years and really at the same exact time that they they started reaching the limits and the fees started spiking exponentially uh we saw a correlated event happening where the market share of ethereum and others uh were gaining market share on bitcoin one could argue this might be happening to ethereum right now with all the rollups um but I don't know let me know uh so one common conception uh or

misnomer in this space is inflation um inflation is is the actual like effect it has on people so we've seen clear inflation in in the US dollar euro and other currencies in the last four years uh because the cost of our Goods have gotten higher uh and the purchasing power of our of our money has gotten weaker uh but the Libertarians always tend to talk about you know the FED is money the treasury is printing money it doesn't necessarily lead to inflation uh it might have like blowback uh like shock wave effects years or decades later but there's it's hard to really really correlate that and it's

surprising to see when you're studying a lot of tokens as well how little it has to do with uh with like issuing new tokens you know for Miners and validators and stakers how it might it it's a very very slow impact on the price per token so a net positive token issuance does not necessarily lead to inflation Bitcoin is always going to be a net positive token issuance it might get down to near zero but it never will uh and net negative token issuance does not necessarily lead to deflation so ethereum has been net negative for the past year or so and this uh this was a year since merge so 36 64 days since

the merge and you saw a net decrease of token Supply uh to minus. 2% per year where Bitcoin saw a steady increase uh now if you pair those two values together in the open market uh it didn't lead to any clear indication that having less tokens actually creates uh more value per token this can happen maybe next year or this year and then you can tell me I'm wrong but uh you have to wait some time or it it doesn't exist so since Bitcoin and ethereum regularly reach their capacities and continue to regularly do so their block space can often be re Revenue generating

and self- sustaining I think it's pretty clear that the communities and everything that developed on bitcoin and ethereum allow it to be self-sustaining they don't need their foundations they don't need their the core Dev teams necessarily other people would would gladly step in and take those roles um it's clearly self- sustaining and the block space itself is a representation of that um so you can see sometimes the fees outpace the the token issuance such as in February and March although in April and May that that has not been the case but this is something that only really occurs in Bitcoin and ethereum and it's more in ethereum than Bitcoin recently so maybe we'll we'll see some longer term effects of of that happen so but what about the

others so uh everyone's favorite new new chain salana um is uh you know it has tons of users it's it's seen amazing growth uh objectively speaking uh in the amount of developers that have have gone on board to it and so on and uh but they have a net uh loss if you if you calculate things this way their fees are low they're meant to be low that's their entire value proposition they have to keep the fees low um they still generate quite a quite a bit so 43 million uh dollars worth of fees generated on Solana despite their low fees but the

issuance and other things um are Le leaning toward a constant consistently negative price of their block space if they choose to use the fee model as a way to generate Revenue in the future they're going to have a bad time they need to find and this is the kind of core of the talk is that you know they're subsidizing uh and many others all others are subsidizing their block space heavily those incentives are good for Builders for sure it's good for user adoption um so Solana does offchain validator subsidies as well um and then there's other subsidies such as like onchain treasuries or Grant programs or

good old Business Development and there's a lot of like found foundations that have a good to chunk of this Supply that they're not directly using for the block space and if you factor that in it's clearly negatively priced block space throughout so yeah there's this article that came out talking about the subsidies given to validators by our favorite research firm there and uh other chains such as polka dot have like this onchain treasury that people vote with with their tokens to disperse to different Builders and stuff um to pay for their costs up front uh yeah polygon has an ecosystem fund we we see you know other ecosystems have their own like kind of uh other funds that do this

polygon is is very famous for you know uh their big announcements uh with business room backro business deals which is fine um but it's just something that they're most famous for but it happens throughout the space and it's really okay we need to to be okay with the fact that other chains and modular block space providers are are have negatively priced block space in some ways we're not so different than web 2 uh there's a lot of community bootstrapping a lot of investment that needs to happen before you can call yourself a sustainable profitable Enterprise and I think that's we're no different in that respect even salana and these other M Mammoth Al chains uh have a way to go to get there

um so if you use the feed model you're going to have a bad time uh as a competitor to uh Bitcoin and ethereum um the value proposition of all alternative ones is cheap fees so we need to find other ways of generating Revenue um for these systems to be self- sustainable or ensure that those newly issued tokens get fed back into the system then other costs can can be managed quite more easily so if all the new tokens issued are actually going first to the block space users to to put back into the system we could have some novel concepts of keeping fees extremely low um especially for Builders and uh

ensuring that the token issuance is going in the right direction which is not on the exchanges but into back into the system um so why this is why it's okay to be negative because you're pre-revenue uh all the other chains are and that's okay uh there's going to be some time before these other chains really find their product Market fit and uh that's what we're doing at lastic is to find those opportunities and get people involved in benefiting from getting paid to use something so yeah that's that's my talk uh and if you have any questions I'd be happy to to address them any questions

so this is not entirely question what you said about like a more broader point this is really interesting like area of of things that I never really considered is there some like recommended reading that you could point us to like some other talks or or articles or books or something uh definitely the Z Prime Capital article uh Beyond layers z p r i m z Prime um Beyond layers that's a very good article about this um on the more block space side of things if you are interested in that that's the other article I referenced from Rob

hobber um what's it called um oh geez uh block space over blockchains block space over blockchains is is a good article um so negatively negative pricing uh rarely happens uh in practice uh it happened quickly in 2020 with oil where we had all these supply chain shocks uh with covid and uh they were producing the consistent amount of oil but all the stores were filling up because nobody was using oil for travel as much as before to the point where there was a afternoon where the price of oil went Negative they were they needed to pay people to store the oil um so

that that was like a nice uh flash crash of so you can look into negative pricing there as well as far as its connection to block space um the closest thing is the z- prime article I would say and like in more more General kind of the intersection of Economics because so my interesting like the interesting thing is that Bitcoin kind of comes from a very libertarian point of view which seems to have some fatal flaws in the economic side of things like with their assumption that you know gold is kind of a good model for things and so on but I haven't seen many talks about like this general area of like economics and and blockchain in a non like libertarian side of thing soarian some some recommendations there

um not off the top of my head let's talk later I'll I'll look into some uh some of the my bookmarks and and stuff like that we can we can get into that that sounds good [Music] thanks yeah really nice talk um so uh just wondering what's your view on reason EIP 4844 blobs the EIP 4844 blobs yeah upgrades and so essentially it's kind of block space right and widely used by R ler 2os and but it creates um I think a very interesting phen phenomenon like a lot of L to reduce fee but at the same time uh ethereum has a uh has a significant job in terms of its

fee so how would like to project the the future and potentially like what may impact the future e Ro map to upgrade EIP 444 because right now the capacity is six six per block six blobs per block but in the future may upate more but from economy side I feel I have B concern concerned like looks like right now the blob is significantly underprice for the by is what at Price sign significantly underprice for the for the L one so yeah if there was a Futures Market in in blobs I would be buying right now uh for sure because there's we're seeing uh yeah so blob space is is has slightly different

properties uh just because of the way the demand has been so far it's a new product and it hasn't uh been adopted uh but and we've seen extremely cheap prices that we're not going to continue to see for sure um there are six blobs per block you're right uh if you if three are purchased per block the price stays around the same but if as soon as it goes above three the price can steadily increase like a EIP 1559 style so um all we need to have are six rollups and there's plenty of rollups consistently using blobs uh to consistently use those blobs to drive out the price and then they they themselves would probably want to pull

out and and let the price resettle um so we're we're seeing uh uh a unique moment in in Blob space right now uh people can use it for inscriptions and so on uh I think you know it's on the road map to be adding I know it's on the road map to add more blobs uh but I still think that it's always going to be more expensive than any alternative uh da provider uh because the the load on on the nodes of ethereum ethereum nodes are are are significantly greater and the demand for the running a node uh and processing everything else alongside those blobs is

going to constrain constrain The Blob space as well hey uh thanks for the talk um could you talk a bit more about what you're doing at lastic in creating demand for this what I see as just excess block space that we don't really need um I mean I would think all block space becomes Comm modified but we're clearly seeing some block spaces more valuable than others um and now we have all these l1s and random rollups that no one uses ghost chains that why do we need to create Demand on these what is the thesis behind elastic really the the

main thesis is that I think you know it's a commodity or class of Commodities that can really be uh we can involve everyone into that doesn't it is for builders in the end um the main thesis is that there's a great dis disparity between the token price or valuation market cap of a block space provider and the utility of their block space I think there's a lot of Arbitrage surface area to get to to uh to um for people to um understand that like you can use negatively negative pricing for your advantage as a builder and also uh find ways to toay have a product Market fit and new utility for that block space the

idea is like you should be helping these uh blockchains find you know put that new token issuance back into the protocol uh at first and then finding more and more utility from there uh we we've we're heavily researching things like you know gas Futures blob Futures and so on um be happy to talk to you after a bit more about that but we are creating a sort of incentives Market uh for for data availability specifically uh based on the properties I've just mentioned thank you yeah I guess that's all thank you thank you [Applause]