Where do the Yields come from in Crypto? - with Su Zhu and Hasu

Transcript

welcome to uncommon core where we explore the big ideas in crypto from first principles this show is hosted by suzu the ceo and chief investment officer of three hours capital and me hasu a crypto researcher and writer hey sue it's good to see you again it's been a while hey you too so um we have a topic for today that's related to market structure and it's also a question that is relevant for anyone that's coming into crypto now which is true for a lot of people or who's maybe already been in crypto for a while but um it's mostly engaging in sort of buy and hold strategies and um the topic is uh yields

and crypto where they're coming from and um the yields in crypto um whether that's on u.s denominated or crypto denominated but especially us they are far higher than what you can get in the traditional financial system where the yields are either zero or even negative in europe and when something looks too good to be true then smart investor usually thinks there's a hidden risk they're not seeing and that prevents many people from touching these opportunities so we want to talk about today so where do these yields come from sure i think there's i'd categorize three broad types of yields in the market

i think the first being the demand for leverage and that's the same type of yield that you might see in a commodity market where if a gold future is trading above the spot market then people can sell gold future buy gold spot or gold physical and then store that gold in a vault somewhere and capture that carry so the demand for leverage uh in crypto is very high both across d5 as well as c5 exchanges so whether that's people borrowing stable coins while posting btc and eth and other crypto assets as collateral or via buying perpetual swaps buying

futures to get a similar type of leverage exposure so so because we're in a bull market that demand has been astronomical throughout the bull market and that sort of is the main reason why we see these dollar yields that are quite comfortably over 15 pretty much always and sometimes spikes uh well over 100 um i think it used to be that people would say that there's an exchange counterparty risk being priced in here with the with the carry and i think that does play out to some extent like not all exchanges have the same dollar rates um but you you also see this contango this carry yield even on cme which has relatively low

counterparty risk so it's nice to say that i think it's a it's a it's a key primitive of the crypto markets in a bull market and you've seen this in a lot of traditional asset markets too i think the one i know best probably the the india stock market when modi got elected stock market went absolutely nuts because he they thought he was going to be a reformer and the contango went very high for almost a year similar things in the h share market in hong kong so in equity markets people are already used to this concept in emerging markets where the derivatives are always going to cost more because people will pay for that leveraged access that's first i think second the main type would be the native token in d5 so what that means is that when people

are using the d5 protocol whether that's supplying liquidity or trading on it they're receiving in kind the native assets of the protocol they're using so a good example of this would be compounds where by supplying assets into compound you get comp tokens from from doing so and and so this kind of activity um is is sort of also not a ponzi because what what's actually happening is that people are getting a percent of the network by participating in it so it comes back to the idea of users

owning the network and how do users come to on the network well they must be given tokens as the protocol grows so kind of like an early user reward system for for helping bootstrap the network effects and third would be just the actual protocol activity and the fees and you see this in something like a sushi swap or or something like a bank or where what what's happening is that uh you're not necessarily being paid a native token you're being paid based on how much trading actually occurs on the exchange so this kind of is more analogous to like equity or like owning um

owning a percentage of of uh of an exchange right if you own shares of cme or ice then every so often they'll pay your dividend or they'll have earnings on the balance sheet and that comes from the fact that people are trading on that exchange so here's the same thing there's activity on it and as a result by by by holding some some of these uh assets which are entitled to these cash flows you can then also get a yield uh on those assets so i think this kind of shows that there's i mean all these things come down to sort of supply and demand sort of a natural need uh and i think the yield opportunities now are probably big enough to catch the attention of a lot of

investment banks as well because of the high contango people were wondering should we be using our balance sheets to go and provide liquidity into these markets i see um okay so those are the three categories and um let's try to unpack those a little bit maybe starting with um well sort of the source of leverage um so um that the demand for leveraging crypto is is really high who would be basically the parties who um demand the most leverage so i think speculators probably first foremost these are people that um think the bull run is

is a super cycle and they want to get some leverage exposure so they want 1.5 x 2x maybe 3x maybe 5 10x exposure into the market and so they will um trade it in this manner and have a net long exposure um sometimes people too when they buy a token they don't want to like just buy token bdc pair anymore that's kind of what people used to do in 2016 17 where people were like i buy the token and i sell my edc or i sell my eth now they're like okay well i buy the token because there's no leverage on that token let's say but i also then immediately open an eth long usd long so so in their mind they they feel

like they're keeping their ether long while also buying a token so you get this multiplicative effects i think one of the big reasons for the success of ftx is that you can use any coin almost as collateral uh on the exchange so if you own some weird d5 coin and then you want to get quickly long a lot of bitcoin or ether you deposit it and then you go buy these perps so um that's i think the biggest user of the leverage i think secondarily you when the contango was lower you would have other people that would use it like for instance if you're a lender of btc or if you're sorry if you're a borrower of btc you can sell bdc usd buy bdc usd derivatives

and then you've especially converted a btc deposit into a dollar deposit so when the content goes low enough people will do this and then they'll be able to unlock let's say the use case of that collateral as as fiat or as ether or as something else but basically the transformation of one asset to another is also a big use case uh for why people might buy this so when people want to go margin long on an exchange how does that translate into yields and completely other places of crypto because at first it seems kind of isolated to that exchange sure so when there's big leverage buyers on on any exchange the the cost of their leverage will go

up and through that cost going up people will come in and arbitrage that right so people have dollars sitting around what they'll do is they'll buy a bitcoin usd spot and they'll sell the derivative that's paying a lot of funding or paying a lot of contango and then they'll lock that in and that incrementally pushes up the dollar the cost of dollars everywhere right because dollars are flowing from one place to another dollars generally flow toward the market with the highest yield in it so through this process the dollar rates will roughly reach some kind of equilibrium where uh it's it's quite high at the moment and

people will will go into the market saying okay i can come in i can have my dollars and deploy the into the market and get this so you you would think in an efficient market right that if the funding rate is very high in one exchange and lower on another another way that gets equalized is people will sell the derivative on the high exchange and buy it on the lower one and have kind of a spread trade on and so people will also do this kind of trade um and then from that capture some edge but of course with that you then have liquidation risk on both legs and that's something that you have to manage yeah so so okay to summarize basically if there's larger demand or if if a futures product trades like very high

in contango or even remotely incontango then this creates an incentive basically the longest pay the shorts of that trade or you can you can pay to to take the other side of that and in order to um to hatch that um you want to uh you want to long spot and sell the the derivative and in doing so right you've you've basically provided that exposure that the margin long wants the margin loan wants to be long but he doesn't have enough dollars so the way he does it is he enters the market and buys and is happy to pay whatever that cost ends up being and then the natural sellers are you know for one people who want to be short but in a bull market nobody wants to be short on anything so yeah that that's why the funding is

high because nobody wants to be short on anything uh the only people who are sellers are people who are dollar denominated who want to capture uh yield in dollars so they'll come in and they'll sell these derivatives and they'll buy a spot they'll have basically done that service for people and so you know if you're an investment bank this also looks attractive to you if you have you know normally in the dollar funding markets you may be deploying dollars and earning two percent over uh libor which is considered a extremely high uh extremely attractive yield i remember back when i was at a bank um you know people will build billion dollar books of like emerging market equities if they can earn two two percent

because they can borrow from central banks at much lower rates and they can also borrow from each other at lower rates so that that kind of yield spread is very attractive to them if they can get it um and so i think definitely as the market continues to grow and mature you're going to see this kind of poll factor be too big to ignore for a lot of financial institutions and that's probably the biggest reason why this beginning of this year i predicted that you're going to have a lot of investment banks open up desks and open up either prime brokerage or their own trading desk facilitation desk just because this business will be too lucrative for them to ignore yeah this was would have actually been my my next question so um how is it even how is it possible that these yields persist for so long

because wouldn't you think that when you can get two digit returns on stable coins and even more if you're willing to put in some research then shouldn't there be massive inflows of fiat denominated capital into crypto pushing the i think there has been i think there has been a massive inflow of usd in the system you've seen that in usdt growth also in usdc um so that inflow has been coming but the crypto markets themselves have grown much faster than the stable coin growth so you know when the market goes 10k to 60k or you know 200 to 2000 as in case of ether um the corresponding amount of dollars in the system to kind of provide that liquidity doesn't grow as quickly quite often

so so that that fuels a lot of the that that's why you know i always tell people the the leveraged demand always far exceeds supply uh in any bull market no matter where it is whether it's in crypto or traditional markets because at the end of the day there's still uh being a dollar denominated supplier of of assets uh you kind of have to be a little more institutional and you have to be sort of viewing it as you have a large amount of capital that you can borrow dollars from a very low rate and then you can supply because actually for retail right or for a lot of even bigger traders they're not that attracted by the stablecoin yields

because they just say well look these assets are going up like 3x in a week sometimes like i'd rather research what the next gem is right yeah that's how i make the real money so and um you know i think arthur hayes had a article recently where he just compared the return of dollar denominated uh funding yields versus just owning bitcoin and and of course owning bitcoin just beats by a lot right it feels like it shouldn't be during like some windows or like during a year or two but it beats it really fast in just a matter of days in a matter of weeks so so that that kind of reality you know does make resell not kind of like this trade as much just because for

them it's like well i have a once in a lifetime opportunity to participate in the hyper monetization of assets why would i uh collect my double-digit stablecoin yield because they don't have infinite capital they have a fixed amount of capital right exactly exactly right because i mean it's it's a wrong way to compare a portfolio of ten thousand dollars in btc versus a portfolio of ten thousand dollars in stablecoin because they have completely different sharp ratios right and they do like what the institutional investor would do or what the intelligent investor would do is they would leverage up dramatically on the stablecoin trade or basically the the far less risky one but that's something that maybe the smaller investor can't do because they

don't have access either to capital at all or to leverage at all or not to as cheap of capital as the institutional investor has that's right that's right on a bit of attention but do you think that do you think that the average crypto participant or maybe even like the average top 20 crypto participant uses too much or too little leverage well that's a tough question because i think leverage is all about preference i guess it's kind of a utility curve and i hate using the word preference here because it's very hard to define exactly what that means but i think broadly it means what is the goal of money to someone what is the goal of trading

so if someone's goal is to make as much money as possible then and they don't care about risk of ruin then yes they sometimes should use large leverage if they think uh if they have high confidence especially if they um especially if they're good at risk management in general so i think um there have been very big success stories in crypto from people using pretty high leverage i do think that that's like a double-edged sword though because there's always things that can happen that you never really can account for so you know during the march 2020 kovid crash that wiped out people that were on like 2x long which is quite which is quite conservative

consider it should be considered quite conservative or 1.5 x long even on bit max those guys got liquidated uh pretty rapidly so i think i think for for for folks like that um there's no free lunch basically there's no free lunch in the market um so you know if if they're playing with a defined pool of capital that they're going the markets like a professional thinking like a professional meaning they have strict risk management of losers and winners then i do think crypto does offer some unique asymmetric opportunities right i mean for instance if you had just you know when sailor first announced his

buys uh i think with prices around like 10.8 k um 11k ish and then you would have said okay i think market more likely to go up 5x then i go down 20 then you just you can go quite big right and you can say that's a great trade and just go in and you do it um but then you know people thought the same thing before the having and then they were wrong so i guess what what makes a good or bad decision is very much about the result actually it's not necessarily about the process like even in in the cases of high leverage the path dependency goes through the roof right yeah the the path dependency and you won't have the chance to play it twice or three times or ten times it's not like

poker or it's not like those kind of games where you know you can it's like a repeated iteration game here you know if you were in cash going into covid going into like the post having environment uh the the prehabbing environment then and then you have the chance to buy the lows below 6k below 5k then you know that that decision the path dependency of that allows you to take more risk down the line so i mean that's kind of what makes markets exciting right but i would say the the leverage should be based on the style of trading that you think has an edge for you like if you think you are good at picking those turning points then yeah you you you should be using some

leverage and to capitalize on those moves if you really just want to own assets uh then finally you can just buy a spot but i do think there is something to be said where like i think especially on crypto twitter you generally see kind of like two sides of the market like either people are hunting for like one day one week moves or they're like oh you never sell anything you never trade anything you just hold forever and i think you don't even use block fi and so on because it's too risky right you don't yeah we wouldn't even lend your btc yeah and i think that you know there there's no right or wrong answer but i will say that like for the latter uh clearly the markets have shown that people very much do want to trade it around all day um and

you know whether that's on durable exchanges spot exchanges in d5 that's kind of the whole lifeblood of the market right so i do think some of the folks to say like uh no one should ever trade it's kind of it's kind of ironic because some people may also then own a coin that derives its revenue from people trading so you kind of you kind of you know you kind of say well nobody should trade but it's like you need that to happen for there to be any activity and for there to be any liquidity either so i do think that the market needs all types of participants for sure yeah that makes sense makes sense um yeah pivoting a bit to uh gbtc and blockfi um so gbtc uh grayscale bitcoin trust uh

dipped into a discount to naf um like of almost 10 percent lately and has then stayed there and um so i want to unpack that a bit what that means for the market so how is it even possible that gbtc trades below net asset value sure i guess to understand that you have to first understand what gbtc is gbtc is a is a closed end trust in the us and what's happening is you can create shares of it by subscribing into the trust whether that's with bdc or with dollars which they then use to buy bdc and after six months people can then sell that in the market if they want to

or they can hold it so gbtc has been around for many years now i think almost five years now um and its purpose is to offer folks in the stock markets a way to own bitcoin exposure by selling one stock and then buying gptc instead so versus gbdc is now i think a top five holding of millennial portfolios so it's like very very high penetration into the market um and historically has traded at premiums anywhere from you know five ten percent to over a hundred percent at some point um and it and it has traded a slight discount before

although very briefly i think when the winklevoss etf back in early 2017 when they were applying for that some people in gbc really panicked and they said okay i'm gonna sell like just to get out whatever that didn't end up happening so i think so knowing all that i think that um last year people as institutional money has been coming into the system i think a lot of people have been seeing the persistent premiums and being like well if i have bitcoin assets i might as well put them in the trust because then i can harvest the bitcoin yield right and for some time this was feeding the yield and i think what ended up happening is that it became quite a crowded trade

where people just assume that there's no risk and they can just subscribe right and it turns out that because i think a few things are happening now i think one is that people have more ways to buy bitcoin than ever before right they have no whole host of new funds or they can buy on more and more spot exchanges more more ways to own so that kind of diffuses the ownership uh story and then i think too is that the crowdedness of the supply side and then kind of the panicky nature of it they were just like okay it's unlocked it's at a discount let's just sell before it goes to more discount right and i think too you have

also like a tax selling involved where because it's march april it's kind of it's kind of a general time period you know if you're sitting on a lot of gains if you're mark to market capital gains or whatever you need to sell some gpc just to pay taxes uh you need to you know there there's kind of a natural profit taker in the market for some of these holders who have been holding it uh you know it's now five six seven eight x for them so i think i think those are the broad reasons that it's gone into discount now mm-hmm oh yeah so just to summarize that the trade would be you subscribe to the fund you put in btc and then you have to hold it what is it six or 12 months it's six months and then you six months and then you hope to

sell it at the premium um basically right so you get one share for one btc okay um so block five was uh like the market thought at least that block file is one of the largest participants in the gbtc trade and and then when dbtc dipped to to 10 minus 10 then um so a lot of people started panicking right in the in the general market so uh what what risk does this discount pose for an institution like block fire but also other participants in the trade i think it posed very little risk to block fly just because the thing you have to remember is that the bitcoin are still in the trust it's not

like the bitcoins are not there so it's very much the backed backed asset um and the cost of carry is known the management fee is you know two percent a year that fee is known also not that much higher even than some of the new competitors that are coming out with with you know like like other funds so i think that that that kind of means that you know when it goes to 10 discount that also is a buying opportunity for some people right if they if they think that if they think that um that uh the discount will come in because the assets are worth indeed that much then they'll sell bitcoin spot and buy gbtc uh if they're set up to do so so i think

that's that's also why you know you i think the panic went to as low as 15 discount and then intraday and then it bounced back the same day to like 78 percent i think that's around six seven percent discount you know i kind of think that um the market likes to find things to panic about in general on crypto and that and i think that this is something that like sounds big they don't really totally get it so but but it sounds like something that they can panic over um i do think that um that the the other thing people don't understand is that if there were to be an etf then there's a very high chance that grayscale products would be first to

apply to convert to an etf right because you think about you think about the way that that will work is people at the end of the day they just want to own bitcoin that's all they want right so gbtc already has all the volume it already has all the liquidity if given that there are bitcoin etfs allowed grayscale will convert to an etf and then maintain its entire its entire market share volume and possibly even grow assets right because once people don't have fear that it's going to go in discount then they'll just hold it like any other tracker product right they may pressure the management fee to go lower

they may push for these kinds of things but at the end of the day they just want to own bitcoin right so i i think that that that that mechanism is is something that's quite um it's quite compelling and i also think that like there's still still not guaranteed we even get an etf this year um there there's quite a few there's quite a few etfs applying but there's still not that much movement on that front so i think that um you know block fight having the backers that they do uh you know their their series d i think had some of the biggest names in crypto participating they have the assets they have the

capital to weather the storm they won't be the ones who need to sell it at 10 discount to raise money to pay people is the only way for gbtc to turn on redemptions to turn into an etf or other other ways there are other ways too i think in the case of xrp they did a redemption as well they can always sell the assets and pay out of the cash dividend as well but they probably unlikely to do that in the case of gbc because it would just be enormous but there's there's a couple other mechanisms also um just a matter of if they think it's necessary right like let's say there is no etf for two years there's no need to turn on redemptions just need to

have the panic sellers finish selling the taxol or cell and then it's back to normal again so that that um still has a high probability of happening yeah and so you you you have that is the high probability and then you also have the fact that when there is an etf there is a very large chance that the gbtc will convert to an etf at which point there will just be daily redemptions happening if it's trading at discount right arbitragers can buy it can buy it deliver the shares to the trust and the trust gives them btc so i mean i think i mean unfortunately too i think part of the panics from the

fact that like in december traded at quite high premium and traded at almost 40 40 percent and there there there's a lot of people that like say well you know i bought at 40 now 10 discount like it's so bad i just get out of it i don't know what's going on here you know so um but um that that kind of that kind of stuff i mean a lot of participants who trade these things they don't really know what the premium is they just traded on price as well so if they don't like the way the price is moving then they also will go and sell it and so i think i think it's it's tough it's tough to say that um like i've seen some people say like that this will go to 50 his scan or whatever

and i would just say that like it's quite insane uh the answers are the asks are actually in the trust and and there's a there's this concept where where it's a confidence game right if everyone thinks it will go to 50 discount then and then they all run over each other to sell it then yeah that's that's always nonzero chance that's always possible but for every seller there's also someone who's like wait a second i can now sell btc and buy gbtc and like double my bitcoin why not right unless i really think that you know they're they're that they're going to scam everyone forever all right so i think that that that's

the there's gonna be a lot of info asymmetry there that's gonna be interesting to see how it plays out um but yeah i mean i would recommend people if you own gbtc you just pretend you don't care and you just like hold it as btc like don't try to time the premiums don't try to time anything you just you just don't think about it too hard because think about it like the like the more it's one of those things like the more you think about it prob probably the worse your decisions will be because you're not thinking with enough knowledge you don't have enough of the of the details right yeah and it sounds like um you said that if an etf is being delayed then it's good for gbtc because it has less competition and if there's an etf

then it forces them to actually turn on redemption and that's also would also cause the discount to uh yeah to basically normalize yeah sure so moving on to native tokens and this is probably something that um people from outside crypto even from outside defy like even anyone almost you talk to in like who's in bitcoin or someone who's not deep in in d5 struggles with like enormously how is it possible that this uh like a project that launches let's say like sushi swap for example that they pay uh customers like such high yields to use the platform well sushi swap just taking that as an example people are valuing the the protocol based on

its growth as well as its team and also its current cash flows so they look at all these three things and they say what should the value of one token be worth and they go through that math and they say and they go through that analysis and then they go and they bid for this asset in the open market so that's where the demand side of these assets come from right the the supply side is coming the users they're getting given sushi tokens and then they can decide if they want to hold it uh if they want to sell it um and and that that kind of decision is based on how much they believe in the long-term growth as well right so that that kind of is actually one of the

most powerful parts of d5 which is that if you are a power user of a protocol there's some correlation there with your belief of its token as well you probably also think it's token is not bad you probably think that the code is safe you probably think that the team is good so that alignment generally has meant uh throughout d5 that the people who supply liquidity the people who use the product also tend to hold a large amount of the tokens they're given from this process and so i do think that we we should clarify though between i guess when d5 projects have a token that has some tied to cash flows and

some type of growth you get this versus let's say entirely new token with no real code behind it let's say like a pure fork just like a pool two game and what do i mean by a pool two game right it's like the the basic idea of pool one pool two is so pool one would be the assets you use to earn that new token so let's say you stake your ether or you take your ether usd and usdc as a pair or wbdc and eth whatever it is you stake some assets into a pool and then you get given the native token and if this is a proper vaporware project then this native token they won't tell you what it does they

won't tell you what it's gonna you know be used for that they'll just say you need to value this because uh because we're all thinking about it like a mind share concept basically right yeah and then and then the way they pre the way they create liquidity for this is through pool two where once you get this token you can then supply this token versus usd t or usdc in a pool two and by supplying it there you're basically being forced to buy more of it as the price goes down right because you yeah so you're you're supplying two assets into a amm pool so through that they create a demand for the asset

um and so you could say like pull one pull two games like when the underlying token doesn't it's not known yet what it'll be used for and it's not known yet how strong the team is or if there's any team these are kind of what you know more i would call like pure policies or like pure ponzi nominees so not that they can't go up 10x because they absolutely can uh but just that um you are very much um you are very much requiring more people to enter the game whereas for a lot of d5 now nobody new has to enter the game people just have to keep trading on it right like there it doesn't it doesn't require ever larger amounts of new money

for it to sustain the way it is kind of like a restaurant you know if you own a restaurant you don't need constantly like new people showing up at your restaurant even you can just if you just have your existing customers then you get natural organic growth and even if you lose some customers you can still run because you have a profit margin and you have a like an ongoing business right what they call an accounting like a going concern you have a going concern your costs are zero uh your costs are very low and your revenues are what they are so yeah that is why like i would separate like the two types because i do think there's a fair point that these are now getting to the point where they're very well designed ponzi games um and it's important to recognize that

these are ponzi games there is not if there's not a team that's gonna you know really play out a road map if there's not a clear differentiation uh then then rugging is something that um you have to be aware of so yeah i like that you kind of distinguish between like actually legit projects and sort of uh yeah more ponzi-like ones where you have a way higher risk of failure but i'm actually more interested in like the legitimate projects and um i think there's a lot to unpack uh there because like when you are one of the participants that we mentioned then what you really

or you can think about market structure and so on and you you don't really grasp that that what's different compared to traditional markets which is more a huge difference in ideology right wherein whereas in traditional markets like a new company that's very promising they might sell some of the equity to a small group of high-profile investors and keep the rest of the equity and they'll try to grow the company maybe raise like a second citron or round a round beer on c and so on eventually they go public and um the way that sort of crypto projects work is really different and so they they tend to explore new ways of growing i don't want to say companies because they are more

protocols right it's actually a completely new form of organizing human cooperation uh if you will and so what they do is they they give away actually a lot of their equity right from the start and they don't necessarily give as much to investors though they might that so they would actually give a lot more to their users and um they do they do this on the one hand to basically give people an incentive to to use their product early but on the other hand it's sort of necessary because a lot of defy sustains itself on sort of the value proposition that it's sort of uh legal arbitrage regulatory arbitrage sort of a parallel

financial system that offers people some things to do that the traditional financial system can't and then you actually need this sort of uh robustness you want the ownership of the protocol to be in the hands of as many people as possible and that itself uh creates value for the protocol absolutely and i think on the one hand you can see it as the natural the natural conclusion of years of of of big tech subsidization right where it's already been a big growth story in in the traditional space to say if you have a product uh i'm going to offer it to you at below my cost because i want you to buy it i want you to use it i want you to come into my ecosystem

that kind of is the tried and true uh model that that big tech uh has basically grown with uh since facebook yeah that that growth model uh but i think it's taking it like you said to to uh to to a higher plane because it is then recognizing well well through this process of giving tokens away to subsidize early usage i also am accruing intrinsic value from from the decentralization of ownership and i'm also creating a ultra fast community feedback loop right where in in normal products like the only way you really give your

feedback is you type in something like customer support like here's your feedback and in practice like companies have to spend a lot of money to get that feedback they have to do these like a b testing they have to go and hire a q a hire people like community liaisons they have to go and search out that feedback because the customers are not going to give it to them readily and it's going to be difficult to source that kind of stuff whereas for for for d5 uh that's community owned there's not that problem at all if anything you know people are constantly thinking about how do we improve it how do we contribute to it so that process of open source applied to the primitives of

decentralized finance i think that's a very powerful primitive and that's one of the biggest reasons why it's done so well is because in fact for many of these applications this is the best way that they develop uh as opposed to a siloed uh like command center type of an approach yeah totally so i think that if someone looks at the yields that you couldn't get in d5 i would call this like usage mining or something where you you start you get incentivized to use a new product for the first time and the way that you get rewarded is with basically a ownership share of uh of their protocol that you're using and i think when someone compares that

to using like traditional finance and so on then i think it's important to recognize that this is really a new paradigm like of how we do like economics how we do like growing businesses and so on and that's what makes it i think very legit um some of these native tokens and that's sort of the third category that you touched on in the beginning they also pay they also pay cash flows and might be kind of curious how you think about um like comparing um cash flows across different d5 protocols and maybe different defect categories because like what we see a sort of revenue and profit seems to vary

a lot by protocol yeah there's first of all there there aren't that many coins that have cash flows yet but the ones that do they have pretty substantial ones so probably a few categories like bar on lending cash flows so you have maker ave compound and then on the on the trading side obviously the deck side that's where the main cash flow amount is so so we have generally liked d5 products with cash flows just because we can then say this by growing we get these cash flows but uh it it's something where right now with with

the way that ethereum congestion is and with the way that you've seen a big growth in volume on bsc finance smart chain which is an ethereum fork uh which with almost no fees because the validator set is smaller um you you see that the volumes as high as they are now they can easily go another 100x because right now only whales can use it right you have to be actually incredibly wealthy now to use ethereum main net uh like you get you have to be legitimately wealthy like even if you have 150 k or something if you use ethereum i made it every day you're gonna be broke in a year like you just can't afford it so like i'm really looking forward to seeing that process where

uh whether that's on ethereum or on you know like other chains as well of of then really onboarding a ton of users and all that fee space then will go toward these applications so i think that the applications being the being the direct user interface between the user and his desire and and his wish and the product i think that that that is something that um that that is incredibly powerful and he will he or she will will find it incredibly natural to pay fees into that kind of a system so

i think that the cash flow the the cash flow kind of reality of of these t5 products too is also the main reason why we've seen a lot of institutional investors come into the space because in the past they would have possibly said you know what bitcoin is a ponzi like ethereum is icos but now they say well okay like i actually get now that some people are supplying liquidity some people are then trading from one asset to another that that now is a real thing because that has a parallel to the same thing but not an unchained so off chain and once you have that then they're simply

asking which cash flows will grow faster and how will they grow and what will be the catalyst for this future growth and so that that's why i think the the cash flow bringing cash flows bringing intrinsic value into the crypto asset sphere it then also makes people realize okay well then you have this trading activity you have this financial activity and then the system also then you know that activity then generates kind of intrinsic value for ether right because it because ether is the native token of the entire protocol that it sits on and also generates intrinsic value for bitcoin bitcoin being the uh cap supply uh first coin uh the idea that there needs to be a

digital scarcity kind of makes people makes people understand it better as well because people see that wow it's actually much more useful to do things on chain uh than than i thought well this lends a lot of credence to the idea that we need digital scarcity and we need digitally native assets yeah exactly i think most like people a lot of people will uh start to see bitcoin in a more even more positive light when it's actually has more applications as sort of pristine collateral right right now there's not a whole lot that you can actually do with bitcoin in terms of financial services but i think that's going to change very rapidly in the next uh two

to three years um so one question about um cash flows in in d5 protocols do you think it's actually good that protocols pay so much um profit to investors today or should they should they think more like a traditional company should they keep it in a treasury and maybe reinvested into constant growth that's a good question i think i think there's pros and cons right on the one hand paying out cash flows gives intrinsic value and the users can always invest back into the protocol too but but

the the one problem with keeping a treasury is like the bigger the treasury gets the more people will now fight over how to distribute this treasury again and you may end up in a situation where then there's non-stop governance fight over this huge treasury right i mean we saw that with digix dao where there's like over like years that there's like votes on like okay we need to pay out the we need to pay out the eighth treasury to all the the dgd holders and these votes like they almost succeed and they fail almost a seat and they fail so i kind of see like a very big treasury as it got like kind of like a honeypot where it's now like governance attacks like people just focusing on how do we you know do this thing um damn that's so good i'd never thought

about that before but it makes total sense and if the feedback loop between like making a suggestion implementing a new feature that creates value for users and then that immediately creates new cash flows to the token holders if if most of the the revenue is paid out to the talk holders then that feedback loop is incredibly short yeah which can create very positive incentives yeah in the case of sushi you know there there's been a lot of users that have spent money to improve the system you know they've they've given grants they've they've done investments um they've they've also used that capital to invest in other coins and then do synergy with the coins that they like the most so that kind of the kind of like thin layer

approach that the kind of thin treasury approach i generally think is is is is advisable for most defy i think for some defile with like really high r d costs uh where you have a large investors set then i think it does make sense that i mean nothing will make sense or not but that it'll be inevitable that you do have a treasury of a lot of native tokens and you probably also do have a treasury possibly a fees but um you know that that is something that they have to slowly move away from over time not lean into so i think that kind of already shows that what the idea would be but then you know if you if you do need to spend a lot of money to to get to the product to where it needs to be then you know

you you do have that kind of to consider okay i think that was a a fascinating discussion made to summarize it all like what would you tell someone um looking into crypto from the outside or someone who's only like in bitcoin was only buying and holding like um thinking these returns are too good to be true do you have any like last statement about that sure i kind of think the recurring theme i'd impress on you is the idea of the internet of value being being such that the the massive profits that have been made by financial intermediaries by by financial activity

um all all that fundamentally is still derived from peer-to-peer activity in the first place right just that that activity is being obscured in the traditional world because you know when someone deposits to a bank then mystically somewhere else someone then you know the bank then lends for a mortgage and the bank may also do the this and that but the bank kind of like you know it kind of has a balance sheet it has borrowing lending um trading and it kind of makes its own determination on what people should get based on the markets and so so what dfi has done via the power of the internet and the power of open source is it has harnessed

that energy and brought it into um brought it into crypto and so so the it's changing the very structure of how finance is done and that's why i i think i also think the future of finance meme is quite a it's quite a good one because it really is the structure that you can imagine the entire financial system eventually going toward because because all the you know just think about how many employees are needed for a bank versus for a fintech startup versus now for

d5 and that efficiency gain coupled with astronomical you know growth rates it kind of tells you everything you need to know already which is that we are in a paradigm shift in finance yeah and not just like the amount of people you need also i'd say the regulatory barriers like how many people do you need to ask for permission how much money do you need to put up yeah how long does it take to get licenses and whatnot and what markets can you serve right all around like in india actually like someone from you know their parents bedroom can create like a billion dollar uh uh market cap project that serves users in the entire world without asking

anyone for permission and without raising uh any money from venture capitalists and banks so i think that alone yeah i totally agree i think it really is a paradigm shift and it makes sense that we see the extreme growth rates and that we see the demand for leverage that we see and that then in turn feeds back into the yields across the space so oh just as we are concluding this barry silbert has tweeted out great skills intentions for a bitcoin etf and they have made public their uh desire to convert to an etf and they say that they have they and they say that they have been trying

since 2016 to be an etf so so the whole so the whole meme of yeah the idea that greyscale will want to sit on everyone's bitcoin forever is kind of is kind of not based in reality in my opinion uh yeah sue thanks so much for the discussion we will see what happens to the gbtc premium then later today alrighty take care you