Tornado Cash Banned, USDC Blacklist and KYC DeFi | Roundup

Transcript

little thought experiment you take all of today's d5 protocols uniswap ave synthetics you take all you take all the blue chip d5 protocols or screw it you take all of them you fork them you add a kyc requirement what happens to the flow of capital 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 we're back with another round up of empire santee my man how we doing today that's a nice that's a nice blue collar shirt are you traveling today you're looking like a little happier than usual looking nice why thank you is this your way of

telling me you're excited to see me or uh yeah i'm excited i'm excited to see you hopefully this time the airlines don't rug us um but uh nonetheless um i'm going through heathrow and heathrow as uh uh i don't know complicated airport nonetheless but yeah i'm excited time for the roundup excited to to see you out there and so anyways yeah a lot of good things good little good little sushi din lined up i'm excited uh although mike just rugged us mike just bailed on the dinner so you and me have a cute little date there we go can you uh can you see my nose i don't know if you can see this i got so sunburnt my nose is completely peeling so that's my uh that's my

i need to tell me to moisturize it's like tell me you've been on vacation without telling me you've been on vacation exactly exactly so uh all right man uh we're recording this on wednesday morning instead of thursday uh afternoon because you are traveling uh eth is pumping kryptos pumping because cpi came in below expectations at eight point five percent just kind of funny that uh an eight point five percent cpi print will actually make things uh the market sees that as a good thing but eth is right now at its highest levels since early june i think i know you're how you're going to respond to this question but i will ask what i ask you on every round up which is how you feeling today i'm feeling very excited um i

i've seen really good quality teams um on the early stage side come back and and it's always great to see really talented founders i keep seeing it in every episode but i always i'm truly amazed by like these are founders with multiple level exits valuations super compelling the use case i think is super interesting um you know people there's i guess a lot of reasons why founders in web 2 land would still be on the fence to come into this kind of wild west uncertain space but you know it's it's still um i think it's uh the most exciting thing from my perspective um obviously um you know you combine that with

there's been a very eventful week uh with hacks and um you know the tornado situation but i think overall i'm feeling um i was reflecting on kind of my call which was uh that i felt that the bottom would be close to a thousand if you know around that range we're obviously up to 1800 now so like it has rallied 80 percent or plus since that kind of bottom uh i'm not prepared to say that we've it's the local top local i don't know but um it's um yeah you know it's it's always good to see that yeah yeah um i mean you've been you've had a hell of a last two weeks right what six seven eight angel deals in the last two weeks

uh does it feel like things are is this just because you're seeing a higher quality of teams does this become the is this because the valuations have finally come down to levels in the private markets that you've been waiting to see why has your i mean you had like two or three months where you're pretty quiet on the on the angel side of things why has it ramped up i think it's a combination of really quality teams at very attractive evaluations um you know sub 20 sub 15 million um valuations uh for a really good team i mean you're almost in the money in human capital uh like um so that to me is always really exciting um you know yeah i don't have like a favorite deal i just you asked me this before the show it's just um i i just

get incredibly excited when i see a two-time founder who's exited to like google facebook or what have you say hey you know what i've been thinking about web3 i've been thinking about crypto since 2014 2016. it captivated my imagination i want to go i want to i want to finally build something now because i've observed the last year all the nft stuff all the gaming stuff it's not perfect but i think i can fix it and to me that's like it's pretty cool yeah it really sets us up for the next cycle where a lot of core infrastructure is being built like i was talking to one of your reporters who reached out and she was she asked a good question which was like hey why why what three like like you know what is this like our digital experiences like why are we spending so much time online i'm like

look the concept of the metaverse is not new but there are certain things that are really enhanced by this idea of being creators going directly to uh you know their audiences content the quality of the contents that will be produced is higher because you don't have to think about you know rent seekers taking a huge toll and so i think all that sets up really nicely for the next cycle and she's like why do you get so excited about gaming and i said well because like really good games are gonna take two three four years to develop and that's gonna coincide really nicely with you know scalability technology really being battle tested and supporting a billion users so yeah cool it feels like in terms of the markets it feels like we on on one hand

it's like this david versus goliath moment we've got uh david in one corner which is the eth merge uh and then in the other corner you've got record inflation sanctions on crypto tornado usdc blacklist ukraine uh taiwan rising interest rates gas shortages food shortages massive credit card debt in the u.s uh but just like david versus goliath i think david can pull this one out so yeah the crypto space has always had i mean this is nothing new necessarily you know in crypto we always have these regular these walls of worry that we constantly need to climb uh and every sequential wave feels like worse than the prior one

uh more real more in your face but yeah it's just kind of i don't know maybe for newcomers i don't mean to be dismissive maybe some some of these things are actually pretty relevant and i don't want to like i just want to put them in their proper perspective because you almost always invariably feel it like the problem that you have in front of you is worse than anything you've ever felt and you know it's like is it really um i had my own takes on tornado and some of this stuff which i i think on the margin is quite positive um if you look at it but uh we'll save that let's get into it then i want to hear those takes so here's here's what i want to cover today uh first things first start with

tornado cash second get into usdc and the blacklisted accounts third coinbase earnings fourth uh maybe touch on a couple of uh smaller things like the curve front end hack uh uniswap approved a 10 protocol fee for three different pools and then eth uh proof of work chain this like uh remaining pow chain that's uh kind of hanging on from the uh uh before the merge as we lead up into the merge so we'll see if we get to those last few things but definitely want to talk about tornado cash on monday the ethereum privacy protocol tornado cash and 45 related eth addresses were added to the us treasury's ofac list what this means is that all assets that belong to or interact with any of those

addresses are going to be frozen it becomes a federal offense to engage in any transaction with that with that address so the statement stated that tornado cash has been used to launder over this is the reason why ofac is coming down and adding them to this list is that uh uh tornado cash has been used to launder over seven billion dollars since its creation uh just two or three years ago 455 million from lazarus uh lazarus growth um uh 96 million from the harmony bridge hack uh seven million from the nomad hack basically what happens is like hackers uh in any of these hacks when you get the capital you end up sending it through a mixer something like tornado cash um

and that's that's kind of the argument here i know that you and me will have some good counter arguments to this i think i think you'll have some interesting counter arguments i would assume but basically this executive order uh followed by usdc blacklisting kind of opens up this pandora's box in terms of like regulation in terms of d5's future permission d5 kyc aml d5 but before we get into that um i just want to get your take on on this whole situation i think if it's helpful i can also get into maybe a little bit of background in like in terms of tumblers and mixers and privacy coins and like tornado caches history but at a high level i just want to get your take on on the situation before going into some of the details yeah i mean i understand the motivation given all the hacks and um

as you point that out as soon as the hack happens they totally use tornado to try to you know mix the coins and then eventually cash out um and so i understand the motivation although the actual implementation of it is going to be tricky because then of course what happens like every pool every protocol every wallet that has touched you know funds that are basically tainted is that does that now mean that they're going to be frozen or frozen until kyc or um and so of course crypto always finds a very immediate response to it and there was

someone who a madman out there who was sending uh you know tornado eth to a lot of the known um dot eth addresses of public figures like ben horowitz from a16z and a lot of the crypto kind of um you know notable personalities in crypto and so what does that mean then are you gonna you know blacklist that wallet too and like everything it's a very tricky situation like i think you know sometimes you feel like this policy is like taking a chainsaw to do a micro surgery um and so i am quite curious to see what the second order effects third-order effects are of this order and what that means for

you know other stuff like rent for instance uh you know the rent pools um you know to my knowledge a lot of the bitcoin that is being sent using ren you know has been okay and exchanges can receive that does that mean now that they won't um what happens like openc now for instance is all also taken action there's a whole host of other companies that have taken very quick action um as a result of this order so you know most notably uh github taking down all the repos of the contributors to tornado um that puts into question kind of free speech and open source code and a prior ruling i think um and so yeah there's going to be a lot to

unpack here um and we'll save a lot of this discussion for our regulatory debate that we're going to have with jake and rebecca later this month yeah yeah yeah there are a couple um constitutional rights here that are that are actually interesting to to think about one is uh what is it the the fourth um i think it's the fourth which says um which talks about like seizure of assets so that's that's an interesting one the other the other kind of interesting topic here is like is code uh free speech right and so like can you re uh can you restrict freedom of code um and can you restrict someone's like just basically writing code and is that freedom of speech and you're right like some of these other what you're seeing is like the second order implications i

think we don't even know right if someone you mentioned someone's getting like oh fact or like tornado cashed right like point one eth is getting sent to these big doc's wallets like shaq and people and randy zuckerberg and ben horowitz and brian armstrong what about if someone deposits eth that's been transferred from tornado cash into an lp pool on uniswap where you have tokens you've never put your capital into tornado cash but like you're in that pool are you now at risk right uh what if you um if you're a miner and like you're a validator like exactly a deposit and then all of a sudden you validate a blog does that mean you're you know what does that mean um and so yeah the the the obvious pushback here is

not everyone that has used tornado is a criminal um you know when i i didn't end up investing in tornado i looked at the round because you know i think privacy is something that is i think an enable human right i think it's important to have that in in crypto um and privacy preserving solutions that are also regulatory compliant are possible and you know to my knowledge tornado has if you for instance send funds that have been interacting tornado back to an exchange i think there is a way to prove the the proof there's like a proof that tornado generates if coinbase says hey wait a minute where are these funds coming from there is a way to de-anonymize that and trace back the origin of funds

to my knowledge um there is and chain analysis also has ways to do it elliptic has ways to do it yeah and so for me to me then then that's sort of the solution like i don't see necessarily a problem with uh the functionality here meaning if you're not willing to provide that record then you kind of assume that that is uh criminal fraudulent or suspicious behavior but otherwise i think you need to allow people to to produce that proof and show in the same manner that you know sometimes when you send a wire how many times does a bank freeze it it never goes through they call you they ask for more documentation

i think we need to think about the what those protocols and procedures look like for funds that have used these privacy preserving solutions because hey tornado is not the tornado is not the first or the last one that will exist um and so you know again um it you know i think there is a future where you have privacy encrypt in crypto and at the same time regulators and law enforcement feels comfortable with that um because you can prove origin of you know funds and and and whatnot yeah so let's give a little bit of background just on privacy protocols and tumblers and mixers and privacy coins and things like that because i think

it's important just to understand what they are and and and so that if we can understand what they are and what they're actually doing right now and kind of what the landscape looks like then we can start to think about okay well in the next bull run will privacy actually be a big trend um and maybe what are the pros and cons of investing in different privacy related protocols so i mean privacy has really been a topic in crypto since the release of bitcoin right so from bitcoins pseudonymous accounts uh people trading cash for like hard-filled hard drives zcash launch in 2016 different privacy chains protocols they really come in they're really two different primary privacy techniques right mixers and then privacy coins privacy coins are like um zcash monero

they include yeah like zero knowledge proofs stealth signatures ring signatures things like that um and then there's tumblers and mixers right so tornado cache is a tumbler or mixer right so a tumbler mixer service is a service in which you can actually uh for anyone who hasn't used tornado cache you basically mix traceable coins with other you know kind of like quote unquote clean tokens in an effort to make it harder to trace the original source of those tokens so you can kind of think of it like a blender you put in the coins that you want to anonymize those coins get kind of chopped up into different pieces mixed with a bunch of other coins and then it gets sent to a new address and then to make it even harder to trace a lot of the tumblers actually randomize the amount that they pay you back so

you'll still get your your full value back so if i put in one eth i'm still going to get one eighth back but instead of being sent one each it might be like four or five or six different transactions of eth in separate transactions and because these mixers work by distributing coins kind of at random there's really no telling where where your coin actually came from and with tornado cache it launched i mean it's been around for like three years it's would you say something it's the most popular mixer protocol which ethereum yeah i mean i think generally yes i think in general right so it's a mixer protocol on ethereum it accepts ethan usdc token deposits basically it's the goal is to break the link between the source and the destination of token of token deposits

reason being if you so i think i think maybe what the government would say here is that if i am sending my my capital into a mixer uh i'm doing something illegal but there's a lot of different reasons why because everything is public on the blockchain and traceable if i pay for a service in eth like let's say i go buy something and i spend 100 bucks for my metamask wallet now someone knows what my now someone knows my wallet and they can basically see all of my financial history because everything's on this public ledger let's say i want to anonymously donate some eth like vitalik did vitalik used tornado cash to have to donate his eath or he would have been doxed ultimately he'd end up

getting docs there uh if you get paid in krypton you don't want your employer to know all of your financial details right something like tornado would would come in now i think what ofac would point to and i think what they what they did point to with this offec list is there was a report by chain analysis that was released last month it said that illicit addresses account in 2021 accounted for 12 of capital sent to mixers this year that's doubled it's now 20 about 25 or 24 of funds that have been sent to mixers are from illicit addresses so that's a quarter of addresses going into these mixers is actually uh kind of illicit and an elite from illegal addresses so i think that's probably the argument however

any time one of these it's it becomes a game of whack-a-mole right you knock one of these down you pick them back up we saw that with things like pirate bay back in the day uh there's this one user quote i remember the user says i remember one time when they took down the original pirate bay url the dot org site the next day you could go on google and find a hundred identical pirate bay mirror sites with the same torrents so i think the the same thing will end up happening here with tornado cache but i don't know i'm i'm already seeing a couple of kind of copycat tornadoes popping up but i mean importantly the smart contracts still work so you can't take that down yeah you could i mean of course right now the code the code for anyone that has access can just be copy pasted

and redeployed on underneath too if it's taken down so um i guess it's more complicated because users now know instead of something like a pirate bay or like a did you ever use limewire or like frostwire now because there's capital involved users know they're kind of playing in riskier waters uh if they interact with a mixer the thing that is required for all of these mixers is a certain amount of capital to support the like sufficiently n if you will to support the anonymity like proof if you will because if you don't have enough you like pools if you will

then it then it becomes easier to you know i guess it becomes harder to anonymize um so the analogy being like there's a scale right the the the efficacy efficacy of a privacy protocol is completely dependent on the number of users uh it's like if this if you're in a baseball stadium the stands are full of fans it's really really really hard to pick out a single person uh in in that stadium but if you haven't got like seven people there yeah it's a very easy right to to find a fan so yeah my intuition is that you know the regulators are just simply saying look it's being used by a lazarus group which is tied to north korea that's an enemy of the state

that's in the sanctions list and so let's just take it down it's more uh even though technically you can you know you can use tools like chain analysis to to d-mix to kind of you know understand where these funds are going and and also you know put pressure on exchanges to make in the off-ramps to make sure that you know it's harder for criminal activity to to um you know to cash out if you will but uh yeah i mean i'm not candidly not not very surprised yeah so after the announcement github suspended accounts associated with tornado cash including the the co-founder roman um infura alchemy uh these kind of like

centralized infrastructures of service companies and crypto uh that are used by the majority of eth wallets blocked the tornado rpc endpoints meaning that these wallets could no longer interact with the tornado contracts um it i i think you said uh openc is shutting down folks um who uh shutting down accounts who've had capital related to um that has gone through tornado i think you sent this tweet out it makes you realize how much of crypto infrastructure is actually reliant on on some of these central centralized service providers that can just make these these decisions by you know some executives in a room yeah let's talk about i mean this i think is a reminder let's talk about the dependencies on aws

for a lot let's talk about the dependencies on dns i mean technically you know dns is quasi decentralizing i'm not but but still like you know in many ways like curve finance got hacked uh and a few other front ends have been hacked because whether it's an inside job or just some careless security measures of of these like of these webtoon companies uh they're that are hosting the domain then just it just becomes it's just further like i think puts i'm glad i'm not saying is i'm glad this happened but i think it's just a reminder that we their needs there's a whole lot of parts of the stack that still need to be decentralized if web 3

is going to be resilient as we want it to be not because we want to go against you know like and do criminal activities just purely because you know the road to decentralization is is a difficult one and it's going to take years to accomplish 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

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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 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 yep yep move on to uscc or anything else on tornado no i think we discovered it pretty much cool uh circle the issuer of the us of usdc froze i think it was like 75 000 worth of usdc that feels small but maybe is just 75k big hoopla for just 75 000. but uh 75 000 worth of usc that was linked

to about 81 newly blacklisted addresses on monday one of the addresses belongs to tornado caches usdc pool this means that those who deposited their uscc on tornado cash may not be able to withdraw their funds um jeremy olaire came out with a the ceo of circle came out with a post kind of explaining why he said yesterday u.s treasury designated for sanctions eth addresses associated with tornado cash as a u.s regulated financial financial institution subject to the bank secrecy act requirements circle together with our partner coinbase restricted the movement of usdc funds in these sanctioned addresses it is likely that nearly all responsible registered virtual asset service

providers also took steps to block customers with transacting with these addresses or face charges of willfully avoiding u.s sanctions compliance obligations which can bring up to 30 years in prison big federal offense right there um and so that so that's the reason that they did it um i did some research and and shout out to garrett our producer did some research into blacklisting tokens because i realized i didn't fully understand what it means to blacklist a token um and i thought it'd be interesting to share here so how can addresses be blacklisted from receiving or sending certain tokens here's how it works tokens like usdc uh this is a good reminder that they're just uh they're just simply numbers stored on an ethereum token contract right it's we kind of have these ideas of like you've

got your meta mask you almost have an image of like tokens sitting in a metamask wallet that is obviously not how it works the token contracts using like erc20 standard contain parameters and data like token supply and inflation rate and the state of ownership balances aka which addresses own how many tokens when you send a token to another wallet so i send you a bunch of uscc the token there's not a token that actually leaves my metamask wallet there's not like a there's not some token that's that sends it that moves across the ether and gets into your wallet instead your private key signs a transaction that calls the transfer function of a token smart contract which then updates the ownership balances uh via just debiting and crediting different accounts right

so your metamask wallet kind of looks like it contains these tokens but that's not actually the case the wallet has a public private key pair your metamask pings each address token to uh or token contract to find ownership balances that match your public address so that's i think that's important understanding because what what a blacklist means is that because the tokens are contracts you can add different parameters and that's how uscc has the ability to blacklist addresses every time an address is about to make a transaction involving uscc this usdc token smart contract checks a list of addresses to see if the sender or the receiver is on the list and if the transaction if so if they're on the list the

transaction gets blocked and this in effect freezes the balance of the listed account so i don't know i think that's just an important reminder of like here's how this stuff actually works here's how it can get blacklisted um and yeah i don't know i'm curious if you think that this usdc blacklist is you know a lot of people in d5 were panicking and freaking out and like the impact on maker is massive and on the unit swap pools really really big impact i i for one think it's kind of overblown but i'm curious how big of a concern do you think this is well you don't know until it happens i think i'd say i think that's a short-term overblown i don't think anything's gonna short-term overblown long-term we should be very cautious in

making uh doing things to move away from from these regulated entities yeah i mean like you know crypto's always been a story a tale like two cities one where we value decentralization but we continue to use a lot of centralized solutions and candidly like i'm not i'm not saying that in a facetious manner i think it's just sort of the state of affairs and at some point there's you know there's a practical component of it um you know usdc is a widely used stablecoin uh it touches so many protocols across d5 basically if your cc were to shut down then you killed defy then and there um maybe you reset with some sort of

decentralized stable coin it does place emphasis again on what is the achilles heel of the space which is central like sensor it presents censorship not like sends seizure um non-seizure resistant coins and you know yeah i mean if circle blacklisted all if of if the treasury came after circle told them that they had to basically blacklist all of the protocols that had interacted with any kind of like quote unquote dirty dirty usdc uh that that would probably be the best attack on d5 they could do yeah yeah i mean it would probably it would destroy 98.99.8 of of defy use cases right now and i'm

sure we would rebuild but um this is the chokepoint and so well you look at other solutions um rye and and a few others you know maybe for acts but practices usdc and uh that's part of and so again it's it's something in the long term we need uh truly decentralized stable coins um so i don't know how much to say here i i i i'm in sort of wait and see mode i'm really curious what uh what the second third order effects are here and and yeah a lot of times they might issue uh some sort of you know action but

sometimes maybe they're not seeing the full implication of it and i think the crypto community has been good at like addressing these like front on like immediately there were concerns or that you're listing what happens to xyz and you know we don't really know and so again it's it's sort of a wait-and-see mode the best we can hope is for you know constituents within crypto that are in in touch with regulators can explain to them perhaps a bit more of the technology and help them see kind of the folks like jake rebecca um the blockchain association those guys do coincided they do great work to explain the technology to these folks and make sure that maybe instead of using it you know like a chainsaw they they use a finer knife to

really cut through and and and regulate and and you know crack down on on criminal activity i so i think it's um with with regards to decentralized tables i think it's a reminder that ofac can can really sanction anything right they can sanction a smart contract a dow an entity a protocol a thing they can make it illegal to use to own to help to maintain uh like they do with drugs and and tornado this can apply to really anything i think the key piece of this is like whether or not there is someone to actually sanction behind the scenes right so like with uscc they go to the executive team at circle and they go talk to jeremy lair and they say hey you're facing time in prison for this uh the question is whether or not the stable coin or the

protocol actually has the ability to blacklist the contracts whether or not there's someone or something to go after behind the scenes and i think that's why you see a lot of these protocols racing to decentralize form dows and foundations and things like that and get get get away from having a core a core team yeah let me just put all this in perspective like the sanctions recently on russia you know how much of a mess that was and still continues to be uh for pretty much everyone that trades commodities grain uh gas like it it's super hard to the implementation of these things is very hard like like even today like you know they're still

on so much uncertainty that like you know ships are not leaving the dock you know pipelines are at 20 30 40 of their capacity because there's just not a way to like for a bank to like like process a a payment or a fee on top because then they fear that they're going to like violate these sanctions in a very idealistic case i'm just going to put it out there if you had everything flowing through crypto rails programmatically like through programmable money identified wallets then it'd probably be easier to enforce sanctions probably easier to see flows and monitor activity than what you have in the traditional

financial system which is a patchwork of things that are not don't communicate very easily with each other it's sure the swift network we had a great episode talk about that way back it is very hard and so that's kind of like you know we'll get there at some point but i would if i'm a regulator i would much rather i think what i'm trying to say is sanctions are easier to enforce in a perfectly transparent financial system with programmable money and that's not a bad thing kendall no true true i mean how uh how bad is this for someone like maker right a huge percentage of their collateral is usc i think

this is how it works but again i mean there's this is a kind of classic u.s regulator there's so much uncertainty so like there's not i'm really not sure how this works but you know if some you tainted usdc gets into the smart contract that deposits uscc and mints the die can that not be used at exchanges now yeah but i i think maybe i'm being too optimistic here but like i think regulators have increasingly understood that this is a pretty impactful technological revolution and they want to take their time to regulate in a sensible manner but what is the motivation to shut down maker like or to me you know i mean like i think i i don't want to or like start panicking because i do think tornado is

just it's just front and center it's it's it's a it's like at the edge right it's easy to perhaps they think to chop off but like you're left wondering like what is the motivation for a regulator to come in and try to shut down something like maker i don't know i i don't see i don't see like it it happening well but i mean i'm sure maybe they wake up one day they want to do it but yeah if there's like a tainted wallet and you already have identified that then there's not much you can do other than say wait a minute the smart contract you can't shut down you maybe can try to do something on the front end level but you know as we know that it's not the solution the real kind

of solution really is whenever these entities need to pay real world costs well try to monitor and put pressure on the end on the off ramp to me that's always been i get i i think defa is going to be permissioned mostly kyc at some point and so you identify these funds and then you regulate the end the the entry points of this transparent system because if you really do a good job at that point then you understand exactly what's going on and it's almost like if you're a criminal sure if you're like a a hacker group like yeah these are honey pots you're going to try to go after them cashing out is where i think you should

really put emphasis in the same way that you know you regulate banks you know folks like hsbc and start standard chartered and deutsche bank like they get inspected there's rules there's regulations it still happens right i mean you know they get fined all the time for money laundering you know that's a human fault uh humans can be corrupted i guess but but you see what i'm saying like i think that like if i were talking to a regular right now i would say wait a minute let's put pressure on exchanges absolutely let's focus on that make sure that it's very near impossible for these wallets you've already identified because oh by the way it's a perfectly transparent system you kind of can use these tracing solutions like chain analysis

the problem of course is the tornado you see now in in that flow they're like oh wait a minute but tornado makes it really hard because if you bring back funds back to the exchange you can kind of get away with it but it's like wait wait a minute with tornado i think the fault in the logic is with tornado you can create a proof that says here's where my money comes from and it's clean legit and i think that's where they use that again the analogy a chainsaw to go after this as opposed to saying go to the exchanges and say maybe you you can't accept funds that come from tornado you just need to make sure that you check these boxes that they provide this proof and unless someone comes in the pot and says that's not possible i don't see why the version of continuing to allow

privacy preserving solutions and mixers that allow for this proof to be generated they can they can they can unveil and and reveal the origin of the funds as long as that's true then then these two worlds coexist and law enforcement is happy i think but tell me where i'm wrong i mean let's let's play this out let's do a little thought experiment and eric peters from uh one river talked about this on the podcast recently we'll throw a link in the show notes to that episode it feels like we're on this inevitable path to kyc right so little thought experiment you take all of today's d5 protocols unit swap ave synthetics you take all you take all the blue chip t5 protocols or screw it you take all of them you

fork them you add a kyc requirement what happens to the flow of capital do you think that increases order magnitude or two because finally entities that want to operate in the system are going to feel comfortable people like eric will want to use these things in a permission context because if the pool is is kyc'd you know your counterparty there's so many people that are on the fence how much capital do you think is is waiting to interact in this system but hasn't because of the same reason that eric you know what this is santi this is a this is a uh standoff right now between the folks who were in crypto for the last decade folks who believe in

self-sovereignty libertarian ideals uh uh and anti-kyc aml pro privacy things like that this is a standoff between kind of the the the anarchist crowd of crypto that i have a lot of sympathy and empathy for and the the new crowd who's coming in saying look this is not about ideals this is not any of that kind of libertarian and anything like that this what this is about is just a better technology and and improving the system and saying that our traditional capital market system is broken and that we don't have the right technologies in place uh to introduce things like scarcity uh to to a digital environment into a a global first world

and those are the two camps that are battling right now it's not really going to matter right because i don't see a world where this doesn't happen um i mean there always perhaps will exist this this wild west of defy but it is going to be such a small corner in the grand scheme of things um look if you really want to the the privacy hack right now is send your coins to an exchange and then and then send them back to another wallet if you want to continue to operate on chain and you know i personally have not used tornado ever thinking that there was a possibility

that said differently i've heard of funds that have shielded their zcash and feds come knocking on their door because only a very small subset of people are shielding and so if you're shielding it you're giving you're sort of like it is suspicious right right if you buy z cash even on something like coinbase you are there's no privacy right there no you need to shield it right or i guess before they upgrade like it was not shielded by default and so if you shielded it it raised rightfully so right it was going to raise it it's like if you walk in a store right now and pay with cash like a ten thousand dollar handbag or whatever well you know like with wads of 20 i'm sorry but this is going to raise all kinds of alarms

and you're going to report that and it's the same way right i mean if people want to do privacy send it to an exchange and send it to another wallet and so i think that's also perhaps perhaps that's i don't want to say perhaps that's what regulators are seeing which is most of the activity that's happening on tornado is from people that you know had the option to send it to an exchange where they would be easily identified but instead used tornado yeah now i'm not saying it's not super accurate because there are counterparty risk their risk of sending it to an exchange you're taking some level of risk can understand some people may not want to do that may rather interact the smart contract but still as sitting in the investors see in in in your seat right now santi does this help

or hurt privacy focus chains does this make you more or less likely to invest in privacy focused uh things like l1 and l2s i still want to explore and invest in things that um our layer like our privacy layer on top of a very popular l1 lego theory um and and i think we should just place a ton of emphasis on the ability to have privacy while at the same time being able to unshield it and reveal origin of funds and be regulatory compliant i don't see these two things as mutually exclusive i see them coexisting it's just a matter of

education it's a matter of i think the technology is there like a zero knowledge proof or or some sort of ring or some sort of signature anyways what i'm trying to say is it is possible we just need to have the right dialogue and look these things sometimes need to happen and i think tornado got big enough and and because of these recent hacks was put into question and a lot of times you know i think we can go back and now directly talk to regulators because it is opened up a discussion and that's i think the the the bright side of all this is it's going to force a discussion between people within crypto and regulators to talk about privacy to talk about these solutions and some of these things are pretty technical and hard to understand

and so it's just going to take time coinbase earnings curve front end hack or update on the unisop v switch where do you want to go or eat the proof of work chain where do you want to go uh i mean the the curve hack is quick to cover and then we can do coinbase and then the rest i guess great yeah uh curve two minutes on curve just update folks curve confirm reports that its website had suffered a front-end attack on tuesday uh basically hackers apparently compromised the curve website or the curve domain name to kind of redirect users or or their transactions to a malicious destination this is called dns spoofing they cloned the site they

made the dns point to their ip where the clone site is deployed they added approval request to a malicious contract i think they made off with about a half a million in each that they then sent to speak of mixers um i actually no i think they sent it to a centralized exchange fixed float exchange i don't actually know the fix float um but fixed flow said it froze about 200 thousand dollars of the of the half million um the curved twitter account tweeted last night that the issue had been found and reverted um yeah i don't i mean it's great there's a lot of hacks these days a lot of little things like this and they they they there's so many different uh vectors for for and points of attack whether it's

the front end whether it's a smart contract risk but it does remind you that we're running these d5 protocols but you know 99.99 percent of users access access it through web pages that are hosted on traditional centralized infrastructure so um long way to go until all this is uh not run by the centralized product reminder if you're ever approving something new on a protocol front end that you constantly use immediate red flag like immediate and always check whatever it is the contract that you're interacting with always always always always say that again say that in more detail any time that you go to a bookmarked site front end of a protocol that you're using curve unit swap whatever sushi

maker anytime there's a new pop-up if you will on metamouse it says approve new contract immediate red flag like like stop everything do not click go to twitter go to their comms and ask why am i being asked to sign this new contract approval anytime you're signing a new approval you have to inspect the contract and if you're not technical enough to understand what you're signing don't sign it it can wait always it can wait ask go to discord and it's literally in five minutes you'll get an answer and if you don't get an answer don't sign right write these things down put them on the

left side of your screen notes whatever you want to do bigger just don't approve stuff if you don't know what you're approving and ask play dumb it never it never goes to your advantage in this phase to act like you know what you're doing it's always better to act though or be dumb like preach coinbase coinbase has had a volatile year between uh just the market crashing it stocks down like 60 70 on the year one point is down like i think 80 percent the market sentiment asking if crypto has missed or if coinbase kind of missed its first mover opportunity uh they just released earnings yesterday here's the deal coinbase announced q2 earnings on tuesday they missed projections again with 803 million dollars in revenue on the quarter down from 1.2 billion in q1

so 400 million dollar uh decrease from q1 to q2 in revenue um revenue from some interesting stats here revenue from subscription and services came in at about 150 million down three percent from q1 uh up 44 year-over-year uh it's interesting to see just coinbase even though it's only uh it's a small percentage of their of their revenue it's a seems to be a big emphasis for coinbase probably smart due to the volatility of transaction fee revenue um what else is interesting 9 million monthly transaction transacting users down from 9.2 in q1 and 11 in q4 lost 1.1 billion dollars uh uh they've got about 5 000 full-time

employees paying roughly 4 billion a year for them uh this was an interesting one retail represented only represents about 20 of trading volume yet 94 of their trading revenue nothing new here uh but just a reminder that the exchanges make a lot of their money from retail again 20 of the trading volume came from retail 94 from uh of their revenue was from retail so um i i mean not many not too much that's interesting in my mind um interesting takeaways would probably be like similar to our conversation about uniswap like fees eventually trend towards zero for all maybe maybe take unit swap out of this because i know you disagreed with me there but like for all the centralized uh crypto infrastructure

providers fees eventually trend towards zero not just for crypto but td ameritrade e-trade charles schwab robin hood cash app fees trend to zero over time it's clear that coinbase is fighting to make their wallet services coinbase cloud staking subscription a much larger percent of their revenue um you can kind of think about this as like media companies today like i saw the new york times charter the new york times revenue used to be all ad based no subscription now all media companies are racing to get subscription revenue while their ad revenue continues to fall it feels similar to what financial services companies are doing so yeah absolutely if you're doing like a new model updating your model on coinbase i think you have to factor in most importantly new

new streams of income because as you point out there is going to be a race to the bottom especially on the institutional side of the house where it's more competitive you know folks like fdx and finance are increasingly competing and try to lure business um and and you know i think the value is still columbus has is it is synonymous with crypto at least in the us it has i think you have to there is value in those users that um brand recognition regulatory modes and what have you licenses um i'd be paying attention to uh how much particularly staking revenue grows over the next year uh if you believe again proof of stake ethereum migrating to proof of stake a lot of institutions might want to stake their eth earn the yield on that um

seeking awards and so i think uh that might become and to my knowledge coinbase charges 20 of staking rewards and so that is and they acquired bison trails and so that is perhaps going to be a big line item the similar manner that aws became such a such a profit generator for amazon which wasn't very profitable on on kind of the retail front facing side of the house but aws has been a a monster for them and really has helped them grow and and reach profitability and so i think that's the similar evolution that coinmaze and other exchanges might go through um you have to believe that they sort of add on different kind of business lines and again they've captured attention they have the user

how can you cross upsell them in other lines of businesses gaming create other stuff uh the question of course is what the hell are these all employees doing at coinbase my god they have terrible customer support like literally have i don't know what these people are doing it feels like a bloated it feels like a bloated organization and uh so look i mean i have obviously some sympathy for the people that have been laid off but you know that to me is just puts in a question leadership like time and time again these people get really caught up and and over higher and to really capture the market i'm like what are you doing like it feels it feels like a very bloated organization so uh maybe an activist shop is gonna

come knocking on their door and saying hey guys like bring in a new management team bring in more professionalism and and um i wouldn't be surprised if someone like elliot comes knocking on their door yeah i went i went on a walk um i went out what is it i went on a walk with uh with a senior coinbase person on this on monday of this week went on a walk around uh in brooklyn for like an hour just got a little coffee and and cruised around uh and this was the day before their earnings came out and he was just i was just talking about the culture at coinbase and what it's like to work there he said it you and he's been there for a while he said it used to be a lot of just like ship products don't worry about how good a product is

like get the mvp out the door ship ship ship and you used to see that like coinbase used to roll out new products all the time and now it's much slower and obviously that's the nature of growing a company but he said it's a lot of slide decks now a lot of strategy decisions a lot of like these big kind of esoteric conversations about like who is the user for different products they need to get back to just ship ship ship mode so i do his feed his feedback too was brian's on that page but a lot of the maybe executive team it doesn't feel like is on that page so that's the problem when you bring in a bunch of big fancy web two execs yeah i mean a lot of mbas you know just uh doing porter five forces and all this

crap i mean they've never used d5 before and just or bought an nft and they're just you know opining about the crap that they learn mba courses and you know what it is like there's nothing like using these things uh my group of jp morgan was was a nice one because we never had associates or vps it was just you directly dealt with an ed or md and you know it was a lot of work but it cut all that fat all that middle layer which is in my opinion this is fat i mean those are usually the first folks to go and uh when banks lay out folks is are the vps i mean no associate in investment banking they don't want to it's like it's like it's like you're in the middle of a but it's like the butt crack right you don't want to get your hands dirty

and look at the model but you feel like you're like you know i don't know like a god because you came out of yeah and you know everything there is to know about the life you got to figure it out but then they don't it's just like look guys at some point you have to go up the ladder i get it but can you just like go from i don't know it comes right like point a to point z c and skip the b part like i don't know associates are worthless i think in investment banking but i don't know how the coin is culture works that's it for coinbase uh two other things to pay attention to and then we'll wrap this up the unit swap fee switch trial governance proposal was approved on tuesday adding a 10 protocol fee to three different unispot pools

test pairs diane eath are five bips ethan usdt uh 30 bips usdc eth one basis uh 100 basis points um so i mean this is just something to pay attention to unit swap is obviously playing around with what the fee model looks like all accrued value is going to remain in the protocol until governance agrees on the best use of funds via votes a second vote to turn off the fee switch will be submitted 120 days four months after this vote passes uh so this just i mean this is a smart move on uniswop's behalf i think i really like this move uh just basically testing the model get it out ship a minimum viable product see what works

three four months later review it and see if see what they think here and then there's another i think uniswap governance which is another proposal to allocate 74 million in uni to create and fund a foundation uh this is also i'm sure going to pass but just another thing to pay attention to yeah yeah i do like this iteration process um a lot of money 74 million i read the proposal i think there's some good elements to that but it does feel like a lot upfront maybe it should be a bit staged and uh it will be interesting after 120 days how governance is going to determine what the best use of funds is going to be and uh who weighs in on that who's

active on that maybe it's part of also creating this foundation and bringing in more leadership that can be stewards of these capital and create certain pods that can um you know receive some of this capital and uh but yeah like i wasn't like particularly like the uni swap i think education right they created a fund earlier this year to divert towards like lobbying efforts and they were dispersing pretty significant sums of money to organ different organizations that were advocating for you know crypto and lobbying efforts um and so yeah uh we'll we'll have to track this and you know see how after 120 days how this goes down creating a foundation this is basically just helps them be able to ship faster

gives that it provides grants to builders researchers organizers academics analysts just basically anything that will help grow the protocol and they don't have to go through any sort of voting process is that correct through a foundation it's more like it's like a dell it's a delaware c-corp right it's like a delaware corp they've got like a team of people who vote internally it operates more like a company um kind of yeah so like his just for context like there is this like the unit swap grants program um that was created um um i think in 2020 so when when uni launched kind of the token and sort of like hey here's the grants program community you vote um you have

responsibility and as members of this endow you you can influence how we you know give out these grants that program has been fairly successful i think like they've granted like 120 over 120 grantees uh i think over 22 different governance proposals and so i think a lot of those have been proposals and projects that are going to amplify uh you know uniswap and your experience using the protocol tooling solutions like you know how to visualize like impairment and permanent loss and all these different things so um that that has been pretty interesting their argument now is there is still a lot of friction that

goes on in that process and giving those grants and so they want to create perhaps a more autonomous organization foundation that has more degrees of freedom to kind of have a set kind of discretion over funds bring on good leadership and then just kind of execute on particular kind of missions and and proposals and projects and so um yeah again it's the same the same objective here is to continue to give grants to builders anyone that wants to kind of support and build around the unit swap ecosystem um and and so i think it's just more removing some of the friction that you've seen historically in governance

like it's not very realistic to have every unit like all uni holders discuss like governance forums can be a bit of a mess and be very kind of uh disparate and so i think this is just bringing in some sort of hierarchy some sort of independent organization that can take more responsibility more leadership other than uniswap labs if you will to support and grow the protocol with these funds that are being collected yeah last thing and then we'll wrap it up with the merge coming up there's a growing debate about what's going to happen with the eth proof of work chain are miners going to continue on the chain how much value is the market going to assign to eath proof of work will exchanges add eth proof of work or keep

it usdc has already stated that they're only going to redeem usdc from the eth proof of stake chain after the merge um uh this feels like a pretty silly conversation it feels like they're the miners are just trying to to milk the last bits of uh a value out of the out of the eat proof of work chain um i feel like it doesn't really have any technical merit they're gonna try to frame it as this like ideological battle uh despite the eth road map being pretty clear uh feels kind of like some like bitcoin maxi stuff going on right here but curious if you think the uh the eat proof of work chain is has any merit i don't and historically i think a lot of these forks haven't had merit okay you could argue uh ethereum classic

you know has still eight billion dollars market cap but that's chump change relative to ethereum proper that we know today 225 million mark like million market cap um i think it's a distraction um and and i think some of them will take it as an opportunity to make their cash grab um so anyways i i think uh yeah i'm not not really supportive of it actually not supportive of it yeah i'm firmly not supportive of it um i think the way to think about something like and like some of these uh some of these forks that actually don't the the minority chains the way to think about minority chains is imagine an accounting team that has created an

excel to project a company's revenue next year so you've got this like the master doc at the company any team member at the company can basically just copy the excel create a new version so you've got like v1 v2 v3 v100 v200 change a few parameters try to convince the team to use to use the new excel sheet all these excel sheets can exist simultaneously but really the only valuable excel sheet is the one that the majority of the team agrees to use and i think you're just seeing this like this minority chain is like v97 just uh like no nobody nobody cares about this thing except for a small minority which is like a small team at the company it's a small minority which is really just the miners here who are trying to extract value that's my take

would be would be curious about why i'm wrong if anyone's listening and doesn't agree yeah like i welcome all kind of criticisms i'll tell you one thing this is why i've historically when i first learned about purpose steak to me it felt like a more natural balanced way to reach consensus where proof of work i understand look at i don't think it goes away i think there's only probably one proof-of-work dominant network and that's bitcoin but the idea to have a force within the community within the ecosystem that is constantly selling to recoup uh their capex investment to minors to me i feel like miners don't necessarily have the best interest at heart long-term interest

of the protocol whereas to me it just felt more natural to have the people that are securing the chain also are long-term believers i token holders that are willing to stake for a certain period of time to secure and validate blocks to me that is all to me that this feels more intuitive more sustainable uh model um and if you look back you know a lot of times in the bitcoin case in the ethereum case miners have been i i think they're like vocal shareholders and i always welcome criticism and a vocal shareholder but they historically haven't been the most aligned with the community and and right look i understand why because

they need to you know they have their own interests at heart and they want to you know make sure that they're profitable organizations i get it but yeah to me just further reinforces the transition to proof of stake is the right one uh because i think it just puts more into harmony uh the people that want to believe in the protocol long term that are also securing the network long and and so to me that's always felt like a better more symbiotic relationship agreed agreed shall we wrap sir uh one last thing i want to point out uh pretty interesting arbitrary launched uh nitro i think it is um and on in conjunction with that pretty interesting reddit uh is rolling

out these kind of community points um and and so it's a pretty cool use case i think um these that's coco community point system awards users based on the quality of their posts uh it's kind of like a steemit but like now with reddit uh but it's interesting that obviously they chose ethereum and then they chose arbitrom um and so it's um it's going to be interesting to see how this all plays out and it always from nova that just launched and so uh yeah i think you're seeing important to note that i bring this up because you're seeing a lot of activity in these l2s um and you know bringing on a giant like reddit and being able to support that in their um

uh is pretty pretty impressive uh and something to monitor um if the chain can support it if if that experience is smooth then what does that mean right you're all of a sudden bringing on this community points to millions of users um look i would be really curious to understand what else may they want to do after they start running these community points yeah yeah it's interesting i mean i i i'm glad that you called this out right you remember in the early days like in 2016 2017 2018 like people would oftentimes point to would use reddit points as the example of this like web 2 product that should get tokenized and then you know here we are five years

later reddit points are launching on on arbitrary nova it's really cool it's just an example of like it may be that a lot of the things that we thought were really cool to be implemented in a web3 context or too early and it is worth revisiting not just totally discrediting it in the similar manner that pets.com was a great idea terrible execution at the wrong time and now you have or petco you know now you have you know a pretty successful business right and so i think we'll see a lot of that in in crypto um yeah and i think the tech will be increasingly ready for gaming for social for paint micro payments or a lot of these things that

haven't necessarily worked before but are starting to work and will increasingly so as scalability solutions become more robust agreed let's wrap sir uh if anyone's listening and has not bought a ticket yet to the digital asset summit block works has institutional conference macro conference crypto conference coming up september 14th and 15th i want to say i better get that one right um it's in new york it might be 17th and 18th i'm going to really screw this one up so go ahead and the man doesn't need to get the date for it all right hold on hold on hold on this is bad this is going to be really good yeah it's third september 13th and 14th the glass house new york city a thousand people get out of here santa you haven't

attended anything i'm not even going but shame on you you've got a code yano 250 piano 250 go get it the reason i'm plugging this so hard i've got a competition going internally whoever's got the most people registering with their code gets a free dinner if you register with yano250 ping me and i'll i'll take you out to dinner or something there you go oh there we go the bribes have begun all right thank you so much thank you for watching tuning in uh stay safe everyone and uh yeah keep enjoying the summer i guess you