Should Protocols Share Revenue With Token Holders? | Roundup

Transcript

all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-host today are their personal views and they do not represent the views of any organization with which the co-hosts are associated with uh nothing in the episode is construed or relied upon as Financial technical tax legal or other advice you know the deal now let's jump into the episode valora is the easiest way to send swap collect and grow your crypto on the velora blockchain download the app and start exploring dapps like jump task today at valoraapp.com forward slash Empire all right everyone welcome back to

another Roundup of bell curve today we've got some some new faces we got uh miles who's been on the show before of course welcome back miles we've got uh two of our senior analyst Dan Smith and Sam Mart bells welcome appreciate it happy to be the B team today likewise yeah yeah I thought this is gonna be a good one we've met we shed the dead weight and we uh we got the All-Stars here so this is gonna be a fun one um it's been it's been a spicy week actually we got a lot of a lot of good content and maybe it makes the most sense to start with Lido because that made quite a bit of waves so um there was a forum post that appeared earlier this week uh the title of the post is introducing ldo staking tldr is to introduce an ldo staking module

buyback program it allows token holders to staple it out in exchange for a proportion of Lido Dow Revenue via an LDL buyback and distribute program the idea is that this is going to increase ldo utility and having stakers basically serve as sort of a Insurance Fund of Last Resort against some sort of slashing event um I guess the caveat before we get too far into this is just to say it seems like at this moment in time that if this was probably proposed by a couple of trading firms potentially working in conjunction it's all speculation so when don't need to name any names on the show but you can kind of do your own sleuthing on Twitter to to find out um who's being implicated here so

probably this was a little bit of uh you know maybe pump and dump kind of action but I think there is still it merits an interest it's an interesting idea right it merits some discussion so um whoever wants to take it first like what do you guys largely sort of think about this yeah I can jump in um maybe just to touch on the last point I think you know it speaks to the need to be you know very very uh wary of of some where these proposals are coming from especially in you know like a bear market like this where there's limited opportunities and you know and generally you want you know these decisions to be driven by long people who have you know long-term vested interests in these

protocols um and you know as as much as you know as much [ __ ] as the VCS get like typically I mean that that is typically why it's you know sometimes good to have a lot of the voting power you know with with Market participants like this rather than you know potentially participants that are looking to hold lito for a much shorter period of time and have have ulterior motives um so I would say use that lens especially especially now in the bear Market as you kind of look at some of these proposals um but then maybe just transitioning to putting that aside the merits of The Proposal itself um

I I guess I am I'll just say I'm strongly opposed to the proposal um and my two main issues were I guess one is just in the the context of The Proposal I think the the author said that you know Lido has 17 years of Runway uh based off of the Assets in its treasury um and of course you know Lido is probably as one of the more Diversified treasuries in of deep five protocols but that the majority of that you know quote unquote Runway is in ldo tokens um and to be able to pay you know I think a very significant contributor

base at this point of around 70 or 80 people you know they need stable coins they need cash or at the very least they need ethereum you know I think ldo you know plays into their comp for long term you know incentives but that's just very very wrong uh to be using you know native tokens as as to calculate the runway um I think we can look back to I think it was hosu and Monet Supply wrote a great you know managing treasury as well uh piece I think a while ago um so that was my issue number one is that you know they need this Revenue uh to pay for expenses um and they have about I think 30

million dollars of you know non-ldo expenses next year and roughly 30 million dollars of Revenue coming in so if you send out half of that revenue or whatever was proposed to token holders now you're you know operating at a loss and you have to go sell more Lido on the open market or find more VCS to buy it in order to extend that Runway so that's number one and then number two is even if Lida was profitable um and you know you kind of put these Runway issues aside um I think there's just far better ways to allocate Capital um to maximize long-term token value at this point for Lido then to start returning Capital to token holders

um my general mental model for these things is that you know if you are profitable uh you will use the revenue to pay for your expenses for the next year and then whatever you have left you want to invest in basically the highest Roi opportunities um you know for Lido this could be you know investing in the staking router um really helping bootstrapping some of these new validator sets uh you know really building out the Dual eth or steith a Lido governance um these are the things that's going to maximize Lido's you know long-term market share um and then once you get to the point where you you can pay for all your

expenses you've you know allocated Capital towards the highest Roi opportunities and then you still have you know Revenue left over just like a traditional company that's when it starts to make sense to start returning that Capital as dividends um and so I don't know why maybe it's just the nature of tokens being you know highly liquid um but people tend to to want to distribute Capital back to token holders very in the very early stages of these protocols um and you know I just generally think that it's poor Capital Management um or Capital allocation management so yeah we'll stop there but

yeah no I I strongly agree with your takes on that Miles and around the uh the treasury Runway thing absolutely that's like super clear to me um and I really don't think most people would have an argument around that I think the real debate really comes around like Revenue distribution that's like where I see kind of two clear camps and you know I'm firmly in the belief that the model you just described is perfect in reference to Pure governance tokens like if the token doesn't play a direct role in the ecosystem whatever that may be there are plenty of different ways that we've already seen protocols design and token uh an ecosystem around a token um you know like even in the most basic

sense which might not may or may not be a great model I'm not supporting the model but like curve uses their token to create this like liquidity incentive program um and they kind of like pull from the Bitcoin model all right so like that is one example of where this could make sense but if in a pure governance token model returning Revenue to the token before it's like matured and to your point like has no better places to reinvest the capital is like nothing short of mental illness it makes no sense that like I can't figure out a way to justify how that makes sense and in the case of Lido more specifically um you know after they take their five percent of all staking Revenue that like right currently is annualized at about uh 14 million dollars and you know

obviously each Place either price fluctuations affect that and um the current heat staking rate affects that as well but let's just use that 14 million dollar number for now and the proposal suggested that up to 50 of that 14 million could be redistributed to the Token so that's seven million dollars going to a two billion dollar token like why what what is the why are we doing this it doesn't make any sense like please go use that Revenue to pay developers to expand your protocol to improve your protocol to improve the ux to create a new service offering literally anything like this is their job and it needs to be kept within the protocol to fund future growth

yeah strong agree with that Dan I also just think a good analogy for that is like what if A bank's only business model was to take customer deposits and put them in short-term t-bills like they wouldn't be making that much money it's like the same with lighter like they're gonna have to diversify that product offering I personally would love to see like a an LST backstable with that's like kind of like governance minimized in uh most the excess Revenue actually flows to an insurance fund because like down the line 10 20 years you could actually do some interesting things like with that stable coin after you have proper reserves backing it so I don't know I think just in general they need to focus on growth and then also like I don't know if you guys remember a little while ago they were talking about giving

steath holders governance rights over Lido because it's so intertwined with ethereum security but this is exactly the opposite of aligning incentives this is literally trading eth for ldo like it's value extractive for the ldo token so very against this proposal I think there's a lot of interesting things they'll be able to work in down the line but I just don't think that time is now yeah yeah totally agree and you know I think the the faulty narrative that is you know used to support some of these ideas is that if you start paying out dividends or returning capital in some way that's going to you know pump the token price and now all of a sudden the ldo and your treasury is worth more so

you can you know have a longer Runway and that's why it's like a good Capital allocation decision but if you just look back at protocols that have implemented these models um you know there's typically like a a token pump narrative driven token pump you know in the month after the announcement comes back comes out the actual amount of Revenue distributed to is typically negligible uh in reality and then the token you know declines back to to the norm um and so I think that's that's generally the way these things work but I would say Lido actually does have a road map to returning Capital um you know I think

their goal is really to ossify the protocol um over time and at you know once they have really reached maturity and and if they reach market dominance and they start you know basically ossifying these core components of the protocol then it's basically just maintenance and at that point it probably makes sense to start you know minimizing governance uh as much as possible which could you know be like removing this idea of capital allocation and just Distributing you know the the revenue back to LDL holders um so yeah I think I think we're in full agreement here hey everyone we'll get back to the show

in a minute but just wanted to let you know that we've got our permissionless conference coming up this is the one that we do with bankless it is the biggest and best conference in D5 it's going to be in Austin Texas this year September 11th through the 13th if you've been in crypto for a while you know that bear Market conferences are the best conferences because those are the one that all the Alpha's at this year we've got a phenomenal lineup of speakers and the topics that we're covering are insane we're going to be talking about ZK Tech roll ups account abstraction Mev app change the whole Suite of stuff I cannot wait myself so because you're a listener of this podcast you're also going to get a discount type in pods20 and you're going to get 20 off your ticket click the link at the bottom of this episode and go get

it now because prices go up every two weeks yeah you know what I was there was a great thread you know he did it as a semi-joke but sort of poking fun at a real problem Joseph Delong uh put together this thread on the dowel run lemonade stand and it was semi-hyperbole but definitely a real grain of Truth and what a dowel run lemonade stand would be like it's not like take your lemons and your water whatever your raw materials and sell it's like well what if you know we voted and like dumped out four-fifths of the of the lemonade to create scarcity and the liquidity sink and you know when if your friend like lobbied you to move over to the other sidewalk and this was just the living manifestation of that and there there's like two arguments here which is do you have this model that you know Corporate

Finance is kind of perfected which is reallocating profits uh back into the business until you don't have a better use for those profits and that is when you distribute uh dividends in the most the most Capital efficient way which in tread buyers share BuyBacks it's like what is the time for crypto protocols to do that I think that's a matter of debate it's definitely not when you're not profitable that's definitely when you should not be returning uh Capital to shareholders haasu wrote a great uh great response to this where he gave probably more realistic numbers he's an advisor to light out and the numbers that he gave or were projecting light out to make 30 million in gross margin at the current price of Youth spend 30 million in cash and spend 15 million in token incentives so basically 45 million

in total expenses that comes to a net loss of 15 million dollars so if you're losing 15 million bucks a year what you should not be doing is returning Capital to shareholders but there is like a debate of when that is the problem with these sorts of like a focus on tokenomics in ecosystems where it doesn't necessarily make sense like eats to economics like the valuable mechanism the burn I think is great curve is probably a good example but it distracts from Focus which should be directed towards the product and you get you're trying to create these weird Ponzi Loops that in this instance actually take away from the business drivers of Lido salido is a two-sided marketplace right with people that want to stake and deposit Ethan node operators creating a you're

like raising the uh barrier to entry for node operators by creating a bond right that's additional friction so not only is this this isn't even like net neutral this is net negative uh in a proposal of tokenomics which I feel like often happens when you're not focused on the drivers of the business and the financials so I would also like to to poke at that scarcity narrative um because typically these types of proposals either are let's buy back and distribute uh you know the native token let's distribute whatever the profits are just you know as is in kind um or let's take our you know Revenue let's buy back and burn

uh what just this general idea of like when you're an application uh and you're not trying to be a store of value or money in any way while you're literally lighting your revenue on fire um has never never resonated with me and I think it's just you know well or while we're on the topic I would like to extend it to these burn you know ideas as well because you can just look back it just hasn't been successful in it and I think ethereum is a very you know unique case where they don't want governance to be you know react they don't want governance period right that's that's actually part of their value prop and and you know be incredibly neutral um and so if you don't want any sort of governance

um and your asset actually is you know you're trying to have moneyness around it then some sort of burn could make sense um but when you're building a product that makes no sense yeah I I want to I want to dive a little deeper on this smile so I I strongly agree that like the youth burn mechanism to try to be money to be the base layer of an like an economy built on top of it like there's something to that and like let's leave that aside but strictly looking at like these buy back and burn uh sort of this Capital redistribution from protocol to token method um if you think about like traditional finance and you know that's that Capital redistribution is commonly done in the form of like cash dividends or share repurchases and if you think about like

a buyback and burn as a share you purchase I'm curious to get your takes around that because in Trad fi everyone has the same models that have like slightly different assumptions that all get to like the same ballpark value and that's generally how stocks trade um that's significantly oversimplifying it of course but generally um and then when you look at crypto I guess to go further on that like so that's why Share repurchases work when the last thing you do on that model is get the Enterprise Value divide by the shares outstanding and you just change that shares outstanding number then that's like how the capital allocation flows from the company to the shareholder so like if you get have a 50 stock and you get one dollar dividend in cash now you have 51 or if I do a share

report repurchase yours uh that one share goes from fifty dollars to fifty one dollars and you still end up with the 51 but in a slightly more tax advantaged way and with buyback and burn methodology in crypto like there are no models so there is no changing that last number on the denominator that effectively redistributes that uh revenue from the protocol to the Token holder so I'm kind of curious to get your takes around that like will that model ever work in crypto um sorry to say like just looking at the traditional side like when does this when do these BuyBacks like make sense and when do they not make sense um and I'll maybe just give like two examples of um you know so in one area where one

company where it has actually made sense is Apple um right and and it's only this is very you know probably the past five years that they've started doing this um and think about Apple's market position and the amount of cash that they hold I mean it is orders of magnitude you know more than we could ever imagine with a protocol at this point um and you know it's it's been fairly successful but they're in a very privileged position to be able to do that um and where it doesn't make sense is basically you know kind of what we're talking about here is when there's just better Capital allocation decisions um you know Bill Gurley I'll have to dig up some tweets but he he's he's written about this a lot um and if you look at like I don't know

just taking a crypto company um I know dcg bought back a ton of shares uh when they could have eventually used that right for um the hole in their balance sheet that they created so these things you know if you're again it is a little bit short-sighted and some in most scenarios um but yeah I think I think maybe at some point we could get to the point where that that makes sense uh you know if you know swap has 95 market share of all like you know Dex trading and they want to start you know burning uniswap because there's really nothing else to invest in then that that could make

sense but I just think we are years and years away from an application this making sense for an application that's building a product well one of the other differences as well so outside of the like Capital allocation question is one of market dynamics and the whole the reason why share purchases work in traditional markets is they're actually relatively efficient right so it's kind of this idea if you have a pie and you cut it into four pieces or eight pieces you don't change the slice of the pie but in crypto markets just aren't that efficient you just don't have that many sophisticated investors and I don't think that the way that investors react to share repurchases and travel markets are the same way that

they react in crypto markets I just don't think they are a consequence the other consequence of share BuyBacks is you restrict the float um that's like not the explicit aim of a of a share buyback but that is a consequence of it and I do wonder if the reason why buyback and burn models in crypto get implemented are less about returning Capital to token holders and more about intentionally constricting the float and pumping the price of the token like it's just that's a suspicion that I'm always sort of had and wondered about I think I think that's the general thinking is that you yeah you take these shares off the market you know but you're also like applying you know buy

pressure as you're taking them off the market um and that makes the token price go up which makes your treasury go up and you know it just hasn't totally played out like that yeah yeah I wish we would see more of a like a revenue share model like kind of like gains Network so like they do a revenue share model but they also make sure 20 of all revenue or something like that actually goes to a a protocol Dev fund so like they've been you know incentivized since day one to keep shipping good products and and building out their offering and when they do that they generate more Revenue like that that incentive makes a lot more sense to me than than you know the one with Lido that we're discussing yeah I maybe we've got a bunch of other

stuff to to cover so I want to make sure we move on a little bit past slido but one thing that I think would be worth getting into is the history of just why Steve holders deserve some say in light of governance and there have been a lot of sort of hot takes on Twitter about how I think well we'll get his take I think I saw Vance tweet this out actually that uh Steve is gonna surpass what he said he had some take about this but basically just rapid growth of steep and that it might be I think history was there will be the more common base pair than e on LP pools so that's a bit of a hot take um I've kind of come around to it but I know whoever wants to take any miles you were sort of involved in the um the uh

governance aspect of Steve holders and then if we could get into like how rapidly you see it expanding yeah absolutely so I think it's there's two drivers I mean liquid staking protocols in general um and you could argue you have this kind of a principal agent problem um where you know you could you're delegating your stake to a validator right um You don't necessarily have a choice of who it's delegated to because that's controlled through governance um and like a white list in Lighthouse case um and you know these validators are Enlighten us a particular situation not actually putting up collateral and so if there was a malicious one you know destroyed their reputation and their business

um but that's really what you're banking on um okay so that's kind of like the risk here uh and second piece I would say is you know lydo's goal is for steith to become as ubiquitous as eth itself right um and to do that you really need to break through kind of what I think about as like social scalability issues which is getting the ethereum community comfortable with with that sort of road map um because you know that that is what will lead to market share domination um and to do that you really need to do two things you need to you know give skeath holders like the ability to veto super malicious proposals that um you

know could destroy the value of of their skeath by having you know some sort of attack right um and second over time you want to like ossify or cement parts of the protocol and remove governance you know governance's ability to change it um and so these are things like you know the withdrawal contract at some point in a perfect world that would just be completely ossified and so you know as a steath holder you don't have to worry about you know some sort of Lido governance attack that could you know rug all the all the what all the Steep or something like that and so this is to me is is you know it's like you're you're you're trying to solve this

principle agent problem in order to you know maximize the the total ceiling of possible market share that you could capture um and it was at a point where I think they had reached you know 30 of all staking uh market share and obviously we're like in the 90 of of market share uh within liquid staking and so ethereum Community starts to get nervous and saying you know this is going to look like kind of like a cosmos chain if this is what you know the status quo is where we have maybe 100 150 validators but that's against our you know principles that's that's not how we designed ethereum um and so

you know I think all of this like the Dual steep eth or the Dual Steve Lido governance um the ability to you know add new validator sets with the staking router including permissionless ones um this is all going towards you know okay what do we need to do in order to get the community comfortable with you know having Steve basically as the the canonical liquid staking token uh with winner take all market share and I think they're on the right track honestly and I have to put advance in the hot seat but he uh that tweet stated that stake to either be the more common base pair by year end bold take my friend um but I totally agree with with Miles

sentiment there like you know staked eth is lydo's product and they're just trying to improve the utility of that product and give the token holders more rights in the system and I I think that's broadly kind of a good way to go about this but um yeah I'm curious like to watch Lido grow obviously it'll grow with the market share of total staked but I'm curious if that like 30 33 market share number kind of like access this Stonewall for their growth like that because to Miles point right like do we really want one ecosystem member and sure there's you know 28 I believe is the number total validators operating on behalf of lydo's total stake but do we really want to shrink uh the total amount of validators to that number and

I I don't know I generally think the ethereum community will kind of push away from that um so I'm I'm kind of really interested to watch Lido's growth and whether or not that 33 percent of total stake number becomes an issue going forward and right now just for context uh they're sitting at about 31 so I have a question to you guys let's just say let's remove the sort of social scaling problem um and whether or not ethereum would accept that let's also move the factor that there might be some sort of catastrophic slashing event or technical bug in Lido or something like that by the way we didn't even it's kind of a shame we're talking about this because V2 actually ended up shipping this week which is uh super cool so Props to Lido um there was I heard Ren on the Xerox

research podcast which Michelle Dan and Sam here they put together some great contents you should go over and listen uh but there was a there was a nut statistic so there are nine different audits that were conducted on V2 and each audit up to the last one found a new bug which Ren said he didn't know how to feel about that I know how I feel about that which is not particularly great you would hope by like four or five there wouldn't be finding these stuff so let's just but let's remove the social scale scaling risk and let's remove the fact that there might be a bug I think in that world you'd rather hold steep than eth right like why wouldn't you it's just that Steve gives you some form of Interest right like uh staking

rewards and eth doesn't give you staking rewards and the eth roadmap and monetary policies clearly favoring stakers overholders right um everything for one five five nine to the burn and those are all done for reasons of credible neutrality not like you know number go up reasons but those are the reasons uh so I think to um maybe defend Vance's point of view a little bit like I I think by end of year that's a pretty bold prediction but I do see the relative demand of Steve over eth yeah it's going to go up over time it's like bonds versus dollars like you've had the whole money that gives you interest but the CounterPoint in that example is the US government's the only

issuer of like what gets deemed as risk-free bonds but there's multiple protocols that issue liquid staking derivatives of eth uh that use different models just very clearly and um you know Lido's the winner today they kind of had a huge first mover Advantage with being the first liquid staking token listed on uh Ave if you pull up the chart of outstanding staked eth and then map over like when it got listed on Ave it is very very clear the impact that that had um and so I'm curious like you know we've kind of like adopted this as the the safest liquid staking derivative as as a market and um I don't know like I'm just really interested to watch this Market play out as other players get a little more

mature and have a slightly different offering whether that be like um you know frax built this kind of ponzanomic model where it has a two token model that provides higher yield or coinbase has like a higher fee but it's you know super easy to onboard new people you get to do it directly through the coinbase app there's like these different trade-offs with all these different models so um I don't know like that's that's my issue with how does one staking liquid sticking derivative become the de facto uh base pair is there's just so many different offerings that like ultimately I fear that we're going to get this like liquidity fragmentation in that world yeah I I I I totally see that I I do think that there's also a lot of

forces that push it towards winner take all though right because the liquidity you know basically begets more liquidity it gets liquidity yeah one and so on and there's a lot there I think one one thing that you know uh been thinking about and we work closely with the liquid Collective team and you know there is a part of the market that just from a you know compliance standpoint can't really touch light out um because in order you know maybe they're like a centralized custodian that is a fiduciary on behalf of their their customers and they cannot you know basically support stapling to non-kyc validators and and and they don't kind of reach their their levels of

compliance and sell it and and then there's another part of the market that just ideologically you know would prefer like a rocket pole sort of you know um model and I think that that's why the staking router is so important because you can you basically have your existing set of whatever it is like 30 validators or something like that um and 100 of deposits are going there today but you could also see them adding different validator sets that cater to those other parts of the market um and then splitting how the deposits are allocated across those different validator sets as well as within them um interesting yeah and so I and I do think that there's it's a big question

here you know I would say that the the coinbase success has been both ease of access as well as compliance which I don't think a lot of people think about and that kind of like ties together this whole conversation of go use that 14 million dollars to build out the staking yeah that was the first thing miles yeah seriously you know what else they could use it for so I saw a d-gen Spartan tweet this I didn't realize this but by bit they're a liquid staking program they just convert you directly into intest teeth I mean if they're just like a front-end distribution for go do more of that that's that's phenomenal go do that with um well it's that's like like coup coin or whatever other like kind of

tier two exchanges will have you basically kraken's got some problems with their state can go do that let them be a front end I mean I don't know there's a lot of stuff like that um even even if there was a synthetics proposal to uh onboard onboard steith I'm pretty sure as well was that synthetics or was that some crafty BD work I don't know that that is what that is what they should be doing they should be opening up new distribution channels pipelines like they should they should be this is a winner take all Marketplace and we want to be the winner we want to get critical mess that's what they should be doing yeah another thing I'd love to see would be uh kind of the use of account abstraction with steath on l2s like as you mentioned Mike like obviously you want to hold Steve like barring contract

risk like over regular eth so if I could pay for you know transactions on arbitrum or optimism uh in Steve like that would be fantastic I would always have a steep balance in my wallet so that's another thing they could work on sorry this wasn't even on the roadmap or the notes for today but I got a shout out ethereum I saw Kai Sheffield at um at uh sorry geez at Visa tweeting out the some of the tinkering that they're doing on a cat abstraction and acting as a paymaster and I was blown away by that that they are understand what that is and they understand that like the opportunity for Visa you know you've seen a lot of like proof of Concepts from Banks talking about tokenization of

real estate I'm just sorry my eyes just glaze over I've heard that so but this like Visa as a payments giant understanding account abstraction of where they fit in the ecosystem is freaking cool I would be long sorry not Financial advice but Visa yeah they're like the they're probably the largest institution acting crypto today that like I really think actually gets it and has a super cool like approach to it so huge shout out to Kai and the team of Visa just awesome couldn't agree more it's you know very much a signal over noise there um and I do think it'll be interesting though because we have you know so many of these uh very early stage kind of

account abstraction you know infrastructure providers that have really been kind of pioneering um everything about this this new development with 4337 and then you have you know incumbents like coinbase uh and and Visa that that could also be extending their capabilities and there will be interesting to see how they think about like a bipartner build with um you know how to deal with this infrastructure especially the ones that are not as sophisticated as Visa yeah guys I want to make sure that we have some time to talk about Stacks um got to give a shout out to Sam here wrote that I think the 100th report on blockworks research and it was a pretty much a blowout on on Stacks which uh

like you personally Sam uncovered some some pretty critical bugs uh in that ecosystem that hadn't necessarily been there before by the way big fan of would need and stacks in general definitely pulling for them but it was fascinating um Sammy B could you just give us kind of like an overview of what you found in the in the stacks ecosystem yeah for sure I'll do my best to kind of teal the art as quick as I can so essentially uh Stacks uses a what's called a proof of transfer consensus mechanism basically miners on the Bitcoin layer can send Bitcoin to two different Stacks stacker slash Staker they call it stacking that's probably my least favorite part of stacks to be honest out of all this I really don't like that term but anyways they uh send it to two random stacker

addresses and then dependent upon how much Bitcoin they send um in relation to other people who are submitting bids they have a higher chance of mining the next Stacks block and then STX stackers are able to earn native Bitcoin yield which is actually really cool I love that aspect of the proof of transfer design but the problem is uh there's actually three problems uh the first one was there was a critical bug discovered in the proof of transfer stacking mechanism that allowed a stacker to trick the contract into thinking they had more STX stacked than they actually did so they wound up earning 15 and a half or so Bitcoin over a 20-day period uh basically stealing their share of Bitcoin in relation to

other stackers so that's pretty bad because um STX stackers are going to be charged with signing peg in and Peg outs when they launch S Bitcoin like so to date they don't have like a native Bitcoin bridge but they're looking to build that out because they think it's been kind of one of the growth uh hurdles for their ecosystem like their main goal is really to onboard that 500 billion dollars of idle Bitcoin Capital into defy and making it productive but had this uh this bug occurred with s Bitcoin live all of the Bitcoin in the bridge would have been at risk so that's the first bug the second one is bitcoinmev related basically F2 pool the mining mining pool that has a 15 share of Bitcoin hash power has been

excluding or ignoring other Stacks mining bids and including only their own so that way they can send as little Bitcoin as they want to to STX stackers and still win the block since they're the only uh competition for that block so that's really outright censorship and kind of the first example of bitcoinmeb that I've really seen so it's it's super interesting but yeah F2 pool over the last six months has pretty much had 70 to 100 percent market share over block building on Stacks so obviously that's that's a problem that needs to be addressed um and then lastly uh Stax has been experiencing more reorgs as of late and there isn't really a kind of a root cause known by the team

they think it's kind of just connectivity issues but this is really bad just because Stacks is going to undergo the Nakamoto upgrade and they're going to introduce fast blocks so they'll have blocks in between different settlement blocks so that way the block times are faster and they're not plagued by bitcoin's time to finality but I'm not so sure how this is going to impact that so definitely something to to keep an eye on but yeah reorgs are obviously bad because they're going to reduce Network throughput potentially like have some nodes drop off the chain make it less secure so there's definitely a lot of problems that Stacks needs to combat but it's cool that they're trying to tie their chain closely to bitcoin because me personally like I'm very excited about the prospects of bringing the D5 to bitcoin

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send swap collect and grow your portfolio download the app and start exploring today at valorapp.com forward slash Empire that's velora app.com forward slash Empire yeah it was it was interesting just um you know we're yeah concluding this Meb season with haasu and frankly I didn't even think to look at Bitcoin as the source of Mev or just understand what was going on from lining perspective and Bitcoin but maybe we should have I mean this is a super interesting exploit by one of the larger um mining pools out there so

my understanding is not huge dollars but it's still worrisome right it's just some good old-fashioned censorship and Med extraction so yeah it was just just interesting it also I think shows the challenges of you know it's not I mean Stacks has been called roll up at this point I'll just say I'm not even 100 sure I know what a roll-up is but yeah that the art the design architecture between you know Stacks as opposed to some canonical like optimistic or ZK Roll-Ups on ethereum is it's definitely different and I I admire the work because I'm I'm a lover of Bitcoin I want Bitcoin to succeed I think all this stuff is super cool too but there are definite challenges like the super small lock size and the 10 limit

um or the 10 minute you know block times that Stack's gonna hurdle I hope you guys any other thoughts or conclusions one thing to to note honestly because it does sound bad for Stacks but at the same time you know it's really no different having one Stacks block Builder is really no different than having an L2 with a centralized sequencer so they're kind of in the same position in a way so I think that's worth pointing out it's just a little bit more worrisome because obviously in the case of optimism or arbitrum they're directly incentivized to operate it in an honest manner but this is an external party so who knows how it you know the incentives get switched up um once that's Bitcoin goes live yeah it's like if optimism you know gave that

centralized sequencer to a Searcher you know or like a trading firm right they're obviously going to extract value from it um I think that's I think that's all right and yeah I really appreciate you digging in because I don't you know spend a ton of time in that area of the space um but it does speak to kind of the challenges of you know it's like we've talked about like Bitcoin as an app chain and I think this is kind of deviating from really what would be considered like bitcoin's original purpose but I still think that there's a lot of really interesting space to explore and it's just a question of whether you know bit like bitcoin's role in D5 is is kind of truly like being exporting Bitcoin to other D5

ecosystems that are maybe better suited for it um or if there is a way to kind of you know achieve what Stax is trying to do um it's unclear to me if that's you know kind of them trying to get you know a square into a round hole um because it's it's it's just you know very very uh different than than the design of the base layer yeah yeah no kidding and uh one interesting thing from this though was the nefarious actor was F2 pool in the in the case of stacks and we've also seen them you know do uh have a little nefarious activity on eth uh back in the proof of work days and they were like kind of messing around with time stamps

on the uh consensus layer and if you uh actually had a credit to a guy named Alex on Twitter maybe we can link this thread in the show notes but um he actually found a address on eth Main net that's a tied to the founder or what I believe to be the founder of um F2 pool nonetheless it seems to be an F2 pool address and this person is the withdrawing s and X the token to ethereum mainnet bridging it to optimism and then redepositing it back into finance and then just like looping that process um so I don't I can't come up with any good reasons as to why that is um but given their previous behavior in the space I think that's kind of something to keep an eye on as uh the

this event develops likely not good whenever they're doing it's like I don't know maybe they're just bored in their trolling Finance I have no idea but that seems like uh that's generally not the case there must be some Financial incentive here yeah maybe just uh before we and maybe we can close with tether and the announcement that they're gonna start uh their own little Bitcoin purchasing program but do you what do you guys think in general about just ordinals and BRC 20s and I guess there's kind of like the ordinal nft inscriptions and then there's also like a it's part of a wider attempt to actually build out robust defy on top of Bitcoin um I'm kind of two minds about it I I

actually I'd love to get your guys opinions on it but I've thought a little bit about it myself this at first I thought it was a bit odd or like this is just kind of a fun experiment but I don't know the more I've thought about it I guess you know again back to this like framework because Bitcoin has an app chain and and really a place like their their product is this extraordinarily censorship resistant asset right um you could those same properties actually make for like nft storage pretty and minting um you know somewhat attractive and I guess I would not expect there to be like nft Phi on on bitcoin um just because it's not like you know

if it's just people holding nfts there and buying and purchasing occasionally then that makes sense um but I wouldn't expect any you know maybe where it becomes like high volume trading of these things that happens somewhere else um but yeah I think I think they also overtook you know ethereum uh nfts and volume this past week so there's something there that's at least speculation yeah I'd say fad I don't think it sticks around for that long like I do love the one thing I like about it is obviously the immediate immune ability of Bitcoin like a lot of nfts on ethereum aren't as you know immutable and censorship resistant as a lot of people think um but I don't think there's any legs to

it for specifically static images that was so bad last bull run at this point like I think the the fun part about nfts at this point is just the program at a programmatic ability God I can't talk right now but you know what I'm trying to say is of the nfts like Bland like I'm not saying that's actually a good product or not but I just think the interesting part of nfts is is the ability to add utility to them on like a smart contract enabled platform yeah I think I leaned in your direction Sam um but I I kind of like the the idea of ordinals um I mean if we like take a step back Bitcoin has a fee problem it needs to generate organic fee Revenue at some point like I'm not saying its model

won't work but that is just a problem that it's going to have to deal with at some point in the future and at least with the rise of ordinals we can point to this and be like okay maybe we can innovate something because prior to that they'd be like well I don't I don't know we'll come up with something eventually but and that was that was the thick of it and now at least we have something to point to be like okay maybe this you know the whole speculation side of this not great but let's try to like build this out into a more sustainable ecosystem and that's kind of how I'm viewing it so tend to agree the speculation side of things is a fad it's just like it's it's clearly not built properly right so like when you trade these brc20s you like buy it

you're creating an nft that says like this is for 3241 tokens and then if somebody wants to buy 5 000 they'd buy that at nft and then and keep buying nfts of other token Lots until it added up to five thousand like that's never going to work that's not scalable that's ridiculous yeah I couldn't agree more um it's a lot more than just you know jpegs right um that make it nfts a lot more interesting I mean even Lidos I think the withdrawal process just involves an nft which is just another example right you see nfts and you know swap V3 um there's a lot more that can be done here than but it is you know a vehicle for speculation and they needed one

strong agree and just to give one more quick example of like a cool useful nft was The Interchange scheduler in the atom 2.0 white paper the idea of tokenizing future block space and those are obviously non-fungible each block is unique with an nft was super interesting like I think we're gonna get really cool use cases for nfts I personally believe those use cases will be brought more so on chain than off chain right like to Mike's point like I also fall asleep when you talk about tokenizing real estate but I I tend to think the the technology unlock of an nft is really huge we just don't know what to do with it yet but I think we've already started to see some exciting examples arise and that also flows to Sam's Point like when

nfts get more programmatic and like more use case around them um I tend to think that won't be on bitcoin yeah I I've kind of thought about this a decent amount and I think ultimately I'm first of all I kind of just am more in favor of like Market type planning than Central planning and like if the market wants to do this I don't know I just think central planning goes wrong very often and I didn't love I kind of had a knee-jerk bad reaction to the Bitcoin high priest saying that maybe miners should censor these transactions when ordinals were originally taken out that just really rubbed me the wrong way so who knows and eventually Bitcoin had to figure out their monetary policy because once the block rewards went away like they had low transaction fees and that

was not going to be enough to secure uh a network that they were hoping to grow at the size set yeah like to really grow so I think this is like an interesting solution I don't love defy on bitcoin but I do like nfts I think nfts like it's been interesting to watch nfts on ethereum like when are these gonna move to polygon or arbitrum or something like that they don't because there's a Providence there's like a little bit of cachet for like minty on a more expensive chain Bitcoin fits that to a T and Bitcoin has culture too like they've got culture they've got a they've got a fan base so I don't know I think I I like the ordinals I'm a little bit less of a fan of uh do you find Bitcoin but still worth paying attention to um let's transition here to tether and

maybe we could close on this topic and uh frankly I would love to get your guys a lot so we just got the latest uh attestation report from Heather um and this I think man you were the one who pointed out that this I would say I guess this came from BDO which is uh which is not top four uh one of the big four but it's number five it did come from the Italian branch and I say this is an Italian so I mean a slight against the good folks of Italy but I would like to see this come out of America I'm not gonna lie um but yeah I mean there was uh it looks like everything is sound in terms of their balance sheet they did announce that they were going to be basically reinvesting 15 of that operating profit into Bitcoin buys

um and in gold as well so I would love to just sort of get all your guys thoughts about this what do we think good idea bad idea how are you thinking about it I mean tether is a business and they want to make money so I get it um as long as that's with the profits and not my deposits I would greatly appreciate uh if deposits are backed one to one we don't need any more fiascos like that so um yeah I agree this is I think this was their first attestation with BDO um I think that's a huge step in the right direction I I hear your sentiment on the Italian branch of it like all right what's going on there

um but oh Dan do you not trust Italians hey with a name like Dan Smith you could never believe it but I also got some deep roots in the Italian Heritage um but yeah I don't know I think it's cool I think these like people were threading about uh the buy pressure on bitcoin and this is like a fraction if you if you like annualize the revenue they made in q1 and assume that they continue that out I forget the exact number so I'll ballpark it at like 400 million dollars of Bitcoin buy pressure there's an absolute fraction of the annual minor issuance or minor subsidies um so it's cool but you'd probably need to see like usdc and circle and uh like the issuer paxos of usdp and like all these

other stable coins as well kind of participate in this but you know tether is largely the largest stable coin uh so I don't know it's it's cool but that's about it for me I got a question for you guys how in the world is tether not in any way impacted by the banking problems in the U.S like their liabilities are US dollars they have to hold them somewhere and those Banks likely have exposure to U.S dollar denominated debt which has been the you know obviously the root cause of the banking crisis so I just don't understand how they haven't been affected at all yeah and I just let me layer on because there was a worry a little while ago I don't know if you remember a Chinese

real estate developer called evergrant coming under an enormous amount of stress and the worry was because the word has been you know Bond Traders uh they don't trade anything on like tether's behalf they don't know any other traders who who uh like they don't know anyone who trades on tether's behalf so the speculation was always that they must be trading Chinese commercial paper then ever Grant imploded and they said um we're not impacted by this at all so Sam I think the only logical answer to your question is that they were in China they dodged it perfectly then they went to the US and invested in U.S treasuries they knew the banking crisis was coming another back in China I think that's a perfectly logical explanation that's definitely what's going on

uh yeah I know that was the funniest part about everybody fleeing usdc during the d-peg to usdt tether and it was like the implication is there that there's no exposure to the U.S uh banking system which I guess at that time was probably a good thing but um you know broadly you probably do want exposure to the largest financial uh economy in the world so I don't know I don't think that's up to them I don't think any banks are servicing tether I think they've got uh yeah some some red flags would come up on a you know a conservative bank's compliance departments DD um but yeah I have no idea I think I think you could like we've had tether

fun for for years now right um and it comes and goes and waves and you can spin up a story for exactly you know the worst case scenario here that makes a lot of sense and you can also you know just kind of continue to blissfully ignore it which is basically more or less what we've been doing um and who knows what the truth is um yeah I would be very uh disappointed if this was another you know lfg approach to uh diversify you know some sort of the collateral into into Bitcoin um which we've seen can go poorly especially I mean all this remember what happened with that it was like Yay all

this by pressure on bitcoin and then it blew up and we're like no all this cell pressure on bitcoin so you know you could see could see that too um but I don't want to build very strongly in either direction I think I think at this stage I think it's okay to demand transparency especially for something as impactful as tether as it is e two billion dollar market cap I don't understand the justification for being so opaque it simply should not be this difficult to get more insight and transparency into their balance sheet and I don't know if I feel like to be honest with you my like knee-jerk response to

this was yeah dokwon was like a year ago um if like this Bitcoin like is buying Bitcoin now gonna end up being a poor financial decision probably not like we all work in crypto like I'm pretty bullet I'd be bullish at this at this price level and they'll probably it'll probably end up being a good financial decision I guess my question is what's the reason why they're doing this because if it's an Optics and marketing decision then I really don't like it to be honest with you because just pattern matching I you know have sort of negative associations with who's done that in the past so I don't know I I think it's something that's interesting to watch and I would love to

see the sort of pressure just rash it up on tether to just be more transparent with their books like they could be yeah I don't understand why we don't insist that they are more transparent I just think they should be yeah I think we have insisted I think the obvious answer is they don't really want you to know exactly what time um or that's like the skeptical view obviously um and then on like why they're doing this like I I would have to I don't know a ton of background on like the history of like the team that runs tether but you know they could be like OG bitcoiners that just this could be like some sort of ideological thing um or you know it could feel like it's a

hedge on kind of some tail risk you know Black Swan event with with a lot of their you know the credit backing their collateral yeah I think the reason if I'm the tether founder to do this is either a make it all back in one trade or B like I'm trying to position myself as the future global bank you know because obviously if you think crypto if that's part of your thesis you're going to need Bitcoin liquidity so I guess it makes sense to like start buying now as opposed to later um but yeah those are the only two reasons I could come up with I feel like everyone on this call is going to know this but do you know which blockchain settles the most amount of tether

oh yeah it's an extremely highly reputable uh please no more questions like these good old Justin's son's Tron with like what is it 50 some odd billion yeah yeah yeah yeah yeah it's uh the Gap is actually widening you can see uh yeah it's the it's the amount settled on Tron is growing faster than ethereum so the gulf is winding there but just I don't know what's up with that I've been wondering for for too long I need to go listen to his uh Empire podcast with with Jason but some I want to hear his answer because like why I need answers there's no economic activity over there outside of

Justin's two billion dollars in their version of Ave so like I don't know I don't know man yeah I don't know yeah in this podcast with more questions than answers it actually it actually is crazy one last thought that just two months ago usdc was sitting at a similar market cap to tether and now it's less than half of tether's market cap like what an absolute botched you know result of all this banking problems in the US like we had Circle such a good entity fighting the good fight and now it's just yeah gone the other direction so that's unfortunate to see I would bet that's temporary

I'd have to bet that that's temporary yeah I actually thought uh miles on reverie's podcast I pledge allegiance that was a great interview with Diogo and um and uh Nathan and they talked about these sort of Market distortions that can actually exist for multiple years so let's say you were a competitor against Celsius and you were just watching these these guys the models like the numbers didn't work but it just worked for like six years and they ate up all the AUM it looked like they were winning for so long it's like a thousand days in the life of a turkey and then boom you know the head gets chopped off and there you are being served on the platter and I

think in crypto that's especially true I mean these Distortion Fields can run for it's not like weeks or months it's years and it makes you question all these decisions and I think it's a good reminder it's just a good reminder when you see something that you're just like scratching your head over and just can't make sense of you're just you're not crazy you know so yeah it makes me feel great all right well turkeys this has been a lot of fun uh guys thanks for thanks for standing in this was a super fun Roundup yeah yeah cheers Mike yeah for sure thanks guys cheers foreign [Music]