Why Coldcard's 5-Year-Old Bug Let Hackers Take Over $100M in Bitcoin: Uneasy Money

Transcript

because suddenly your yield goes down to you know 20 basis points which is probably you know where it'll end up like okay so now you're going to have tens of billions of dollars of ETH unstaked and you know out there in the in the market so clearly like if you're worried by ETH price which is one of the arguments that this is going to be worse this is actually going to be much worse I think the argument and I would not again I would not make the argument to increase issuance but the argument to increase issuance is in my mind actually stronger than the argument to to decrease it but the strongest thing is Just don't [ __ ] with them. >> Hey everyone, I'm Kane Wark and welcome to Unas Money because what happens on chain never stays on chain. Before we begin, here is a word from the sponsors

that make this show possible. >> This episode is brought to you by Cape, America's privacy first mobile carrier. Same premium service you'd expect from any other carrier, but designed so your number, your location, and your data actually stay yours. Get 33% off 6 months at cape.co/ cochained. >> All right. Hey guys, I'm here with my co-host, Taylor Monahan, security expert, and we have a special guest this week, Son Kim, co-founder of 3F Labs.

Welcome. Um, all right. Our first segment, let's jump straight into it. Uh, the cold card tearown. So, um, for those of you who are not aware, I'm going to I'm going to hand this over to Tay in a second to give us the full, uh, full debrief here, uh, cuz she's been deep in in this. But, um, cold card, uh, is was a, uh, hardware wallet, um, one of the minor hardware wallet uh, players out there. Um, and, uh, they had a small issue which basically wrecked everyone.

Um, so yeah, Tay, why don't you walk us through the the details of exactly what are all here? >> Yeah. So, the most I guess basic way I can put this is that uh one of the critically important jobs of the wallet is to generate a secure private key or seed phrase. And the way that you do that is with a thing called entropy, which is just randomness. It's just it has to be like truly random. And this is just like a cryptography math thing. It's not super important you understand exactly what it is. It is important to know that you absolutely need it, like desperately need it. Um, for those who have been around for a while, you you

might have heard of like the profanity bug. That was also like an entropy issue. And so basically, if you don't do the math good enough, then everyone gets wrecked. >> And like this is this is not even like profanity was another one. Uh there's been a ton of them, right? Like there's been a ton of these these things and like you Yeah. >> Yeah. It happens quite a bit. >> It used to happen more It used to happen more when we were still like, you know, rolling around crypto and doing weird stuff. Um but this thing goes back to 2021.

>> And that's what makes this incident, I think, different and crazier than all the rest. >> First off, it's cold card is a hardware wallet. So they screwed up this uh the way that they were getting randomness. They screwed it up in 2021. It that in the in the codebase it was used for 5 years before someone just discovered it. Once that first attacker discovered it and started to exploit it, it's basically that was like six days ago, seven days ago now. um it's been a free-for-all since because there's basically five years of seeds and private keys that that the various attackers are are basically mining. Um and so like how do I explain this? So uh

when you don't have enough randomness, you don't have enough entropy, what happens is they uh they they have to like mine, they have to like literally like throw massive amounts of compute at this stuff in order to get it to go. Um and once they do that then they take all the funds but it takes time it takes energy it takes compute in order to do this. So that's why we've seen >> the thing the thing that I I think I was uh like the last time something big like this happened and and maybe it was profanity um we you know I was trying to explain it to my team at the time right and um you know when you get a uh vanity address right yeah um if you say I want

you know and and we've talked about the uh the like address poisoning attacks where they like make an address that looks like yours or whatever Um, and you know, the first four, last four might take them like, you know, 10 seconds to to cook, right? Um, but if they wanted to have the exact same address as yours, like with just one digit removed, it would take like, you know, a trillion years or whatever. >> Um, and and so, you know, if you want uh 0x, you know, whatever, uh, dead or or some address like that, right? Um it takes the long the more you want the the like more of the address that you're trying to get, right? Yeah. Um the

longer it takes >> and and you can go to like these vanity addresses and be like, "Hey, I want like 0x Tay is the best." And it'll be like, "All right, that'll take a week, right?" Yeah. >> Um and then if you're like, "Tay is the best and the smartest." It's like now it's going to take >> like a century. >> It's like a century. It's like, "Ah man, I really wanted that like vanity address." Right? Um, and this is this is kind of the same thing where like they're reverse engineering >> you you only got 0x tape >> and like that's not enough because that would take like a minute to um and so they're just like cycling through these things and waiting until they hit something.

>> Yeah. Exactly. And so that's why I always say like entropy issues and wallets are the worst vulnerability. like the absolute worst. One reason is because the attacks play out like this where we are going to see losses for the coming weeks and even months, right? The other reason is that these are non-custodial. The cold card users specifically are like pretty hardcore Bitcoiners. Cold card specifically deleted all of their data. Uh this was like a marketing thing, right? Like they were like, "We're not Ledger. We don't keep any data." So now they have this 5-year-old bug that's wrecking everyone and they have no way to warn people to like move their money, right? Like

it's just so painful. We're I think Okay, so to talk about numbers really quickly, Galaxy Research has been doing Alex he has been doing an amazing job. He's been doing what I usually do. I'm just onlooking this one. Poor guy. He's been doing so good though. Um, so he's collecting victim reports on the one side and then he's also doing some crazy onchain analysis to find all these different clusters and they they're calling them waves. At this point we're looking at like um Okay, so last check I think we have four waves. So the a wave is sort of like a set of of movements. And we're kind of assuming at this point that each wave is like a distinct it's a distinct

cluster of activity. They're probably they're probably I won't say probably it's possible that it's four separate threat actors, >> right? >> But it's also possible that like waves one and two are the same threat actor. We're not like 100% sure yet. Um and so he's doing he's doing like you get victim reports, you find the pattern, then you find the other things, you combine it, you find all these waves. Total numbers right now are is it's like over hund00 million stolen. It's like 1,600,800 Bitcoin. Thousands and thousands of addresses, probably thousands of victims. Um, uniquely like these are all super hardcore Bitcoiners who believe in self custody and cold

storage and hardware wallets and safety and that makes it painful. >> Like I it's, you know, it's funny uh like I was I was a Bitcoin maxi in the old days, right? And like you know hardware wallets like of course like you know there there was definitely a a segment of like the hardcore Bitcoiners that were like you should have a hardware wallet. They were the more pragmatic ones. Like the actual hardcore ones were like you should you know get out a deck of cards. Yeah. Get out a deck of cards and like sit there for eight hours like generating your own entropy. chisel it on a tablet and like you know put it in

in a safe or something right like and throw away the key. Um like you anything that was like anything that touched the world or had firmware or whatever was like very much like not acceptable. Um and and so you know like yeah like definitely it's Bitcoin Maxis for sure because they were targeting that that group but like >> um yeah it's still it's still >> you're still relying on someone else's software and and and and um but yeah the the the like bad seed phrase generation stuff is just so bad.

>> It's so bad. So, if anyone, by the way, let me just say, if anyone listening to this has a cold card, uses a cold card, knows someone with a cold card, please call them on the telephone like a boomer and >> make sure they're >> [ __ ] >> Yeah. Like, don't mess around with this. Take your time doing so. They do not panic and go click the first Google result, but like, you know, like do it, please, because this is this is literally an ongoing thing. We are going to see losses from this continue to grow over probably like this week and this month, but even like far into the future as people like continue to use their their uh basically these weak ass hardware wallets at this point. Um, and

then I think it's also just worth talking about the other conversation or the other half of this is like who's behind the attack? Is it AI? All of those fun question. Is it North Korea? All those fun questions. Oh, he's North Korea. It's not actually North Korea this time, guys. This is not a North >> How do we know? >> Yeah. How do we know? >> Okay, so uh North Korea just doesn't do these types of attacks. It takes a massive amount of compute and there are guys that have been like cracking and mining these things for ages. My best guess based on the sort of distinct waves of activity and what I know about like prior entropy attacks, I think the first wave um was probably someone who found the

issue in the codebase maybe with AI, maybe not. Um, some people are like saying that AI can find this, but once the once the exploit's like public, the AI tends to learn from public reporting. So, it's not as reliable to say like, "Oh, it can find this." Like, there's a big post on Reddit right now that said Claude can find it in two minutes. It's It's actually not finding it in two minutes. It's It's finding other Reddit posts about 10 seconds, right? Like Yeah, >> exactly. Well, I I saw H's post though.

There was there was a post saying like, you know, put uh because you can you can put an agent in sandbox like run it in PI like strip tools or whatever. Uh and and see and I think even then when pointed at the codebase someone was like yeah like stripped in a sandbox. It took 10 minutes or something like that for it to find it. So I don't know. I haven't tested that. Um maybe I'll test that. >> Yeah, you should test it and let me know because I would trust you. Um, it's a it's a weird one cuz like the where the exact vulner basically the vulnerability is.

God, this codebase was a mess, guys. Go look at your code bases that you're relying on. >> What's it written in? This is an old This is old code. What's it written in? >> Python. I think there's like some >> Oh, okay. Yeah, >> there's something else though too. Python and C or go or something. >> Okay. >> But it hops. So basically you have you have basically one repo and it hops to a whole another repo and so you have to follow this chain. You have to be like okay it's getting the randomness from here. It's going to hop over here and then you're like oh what's this? And it's like oh okay this is actually a completely different language and repo library and you have to hop over to that.

>> You have to then traverse the whole thing >> and that's where the that's where the confusion happens, right? is like it's supposed to go here and it goes >> this one thing that I saw right like gave like gave me like chills right because >> I work with agents all the time and one of the things that I have in all of my repos like it's like number three is no fallbacks right um because they will make a chain of fallbacks that >> makes it impossible to see what's going wrong >> it looks like it's fine but you don't No, right. Um, like even when you're reading the code, it can be hard, right?

But if you're not reading the code, it just you look at the thing and it's like, okay, you know, they're like, h, we'll show an a here. Uh, you know, if something goes wrong, right? Um, and then the thing goes wrong and it's like built a fallback so that like, oh, well, actually, you know, we won't show it because we're just going to like hide that thing with with and like especially codeex it will put in like five layers of fallbacks, right? And it's funny because um it's one of those things where I'm like these [ __ ] agents, but they learned from us.

>> This is the first time that I >> most times. So this is the thing. There is like an old old quote. I think it's a Matthew Green quote from 2015 after the True Crypt audit. The True. So True Crypt was like another like super hardcore over a decade ago thing encryption cryptography thing, right? that ended up having a a pretty nasty vulnerability in it that allowed because you were like, "So, this is supposed to be secret and then the randomness was screwed up." And he has a great quote in there that has always stuck with me where he goes like, "If your code cannot get the randomness necessary or initialize the process like with any amount of confidence, then it should barf and catch fire." Yes. like VM

>> 100% 100% throw an error stop hard like you know uh >> exactly over >> um and in this case and we're going to see it with AI code as well but humans do it too that's actually kind of the opposite of what you want with code most of the time most of the time you don't like error messages are bad that's a bad UX you want fallbacks if the API call doesn't work fall back to the other API so that people can get their balances whatever but with cryptography you do not want that you want it to be dead simple Well, it either works or it doesn't and you want to know when it doesn't work. And in this case, that's definitely one of the things that happened.

>> Yeah. The fact that it fell back to this like >> pie library that like >> and nobody noticed like you know there's conspiracies that the team did this and they were insiders and they did this on purp I I have a question. So, I don't have any background in security or cryptography, but as like a user of a hardware wallet, this really concerns me. And, you know, >> DeFi founder, we've gone through like a whole host of attacks this year. Um, Alrech being kind of the new vector. Are you worried at all about hardware wallets being like the new vector that this is maybe like one of the first that

we're seeing, but then there'll be like more and more waves of other providers that might be vulnerable to either this specific um attack or like some others that we may not even be aware of. >> Um I'm not too worried. I think this one definitely caught me off guard just because of how long it's existed. I think this is a it is a bit of a perfect storm type situation. You have a complex code base. You have a small developer team.

They seem to have antagonized a lot of security researchers and engineers. But like there are people that are now coming out, very well-known Bitcoin devs that are coming out and saying like, "Yeah, I tried to talk to them because I didn't understand the codebase. I was trying to understand the codebase and they were dicks and so I didn't like keep looking or whatever." Um, but I don't know like I I'm still in terms of like general broad risk, I would say you're mo you're more likely you're more likely to lose money from like an OPSAC failure fishing >> social engineering um than like this specific bug. This specific one is just scary because you

can't it's very hard for like it's very hard to give end users any advice and that's why it is painful. Yeah. >> Right. Because I can tell you like >> Sonia don't get on random Zoom calls with North Koreans. Okay. And you can you know you can you can take that advice and uh improve your life with that advice. with hardware wallets like I you know and especially this vulnerability it's like >> go read the codebase right like that's what Bitcoiners are saying right now read the code base I'm sorry that's like completely illogical >> you lost me there already >> yeah exactly exactly I would say I guess maybe one piece of advice that's like more realistic is

um ask your teams about their audits right these guys didn't have a single security audit and then actually read those audits, >> right? Um, look at even non-technical people can have discussions and look at code bases and notice things like like if it's one person committing directly to Maine and without any peer review, without any process, usually a very bad sign. Um there's a lot of like signals like this that um that even if you don't see the the the like the literal issue or find the literal issue hidden in the firmware, there's a ton of signals and a ton of red flags.

Um and if you were to go look at Treasure's codebase, Ledger's codebase, they don't like they do not operate like this. These are large teams. It's organized. They have processes. their processes in terms of how they commit code, how they comment their code, how they peer review their code, how the build system works, right? On and on and on. Um, and they, you know, that it's it's required when you're predicting billions of dollars, like that's >> like bare minimum. And the fact that this team wasn't doing that and nobody noticed is >> it sucks. But I think it's also a failure of just like the community for for trusting that these guys because they're such hardcore Bitcoiners or whatever that they had it unlocked and

they clearly did not at all have it unlocked. Like not at all. Um yeah. Uh oh, and I didn't answer why we know it's not North Korea. North Korea, they do social engineering. That's it. They're very good at it. It makes them billions of dollars. They're very happily doing that. The guys that have the major compute and like GPUs to crack these types of things have been doing so for decades. They don't only crack private keys and bad entropy. They crack databases. They crack passwords. They crack like they're just doing this 247.

They're very good at it. um their scripts are all like super optimized and they're just like sort of like turning knobs on the um they'll like write the exact script for like this new type of entropy issue but then it's just a matter of turning the knobs on how much compute right to make sure that they're profitable. Um, so yeah. So that's a in terms of like like who it is, I would say there's a possibility the first wave is like a normal type dude like Lone Wolf found this with AI. It's possible.

It's also possible that it's, you know, someone that's hunting these for a living and has been for a while. Um, I think the later waves though are definitely more uh like professional crackers, like the people that just like brute force these things on and on and on and on and on. Um, so yeah, surprisingly not North Korea, but >> what the one the one thing before we uh before we um go to ads uh is >> the the the dice thing.

There was also some thing here where like they had some suggestion that like on top of the like firmware based entropy, you should also roll 50 dice to add like some offchain entropy just like classical bitcoin like you know don't trust >> like you shouldn't trust. >> So so so what's what's the deal with that? like that. >> Okay. >> So, basically what they're saying is, okay, so entropy is randomness. It's like the noise in the world, right? Um, uh, Cloudflare famously has a wall of lava lamps in their office. And this is

like one way that they generate entropy is they have this camera of on the lava lamps, right? And it's like and there's mirrors behind the lava lamps, too. basically they get the entropy from this like thing because it'll never be the same and you can't go back and calculate or whatever. Um that's entropy. So one way to do it is like you know you trust the firmware which in this case was a terrible idea. Another way to do it is you build like a huge massive wall and algorithms of lava lamps and fancy [ __ ] like that. Another way to do it is with dice. So basically if you roll you roll a set of dice 50 times and then you take that input and use that input to contribute to like the entry people the randomness pool then you're going to be

more secure. However I want to caveat this because I think almost all of the early cold card victims meaning the ones that came forward prior to the last week. So, the people that came forward had their cold cards hacked in 2021, 2022, 2023, 2024, 2025, right? They're not a huge number of reports, but there are reports. You can find them on Reddit. I've looked at them on chain. I've had these victims before, right? In almost all cases, those people were the dice rollers. Okay.

>> So, the problem with the dice rolling, and I'm not actually sure, cold card might have fixed this. problem with the dice rolling is that if you don't roll the dice enough then you still don't have enough entropy and it's right that it was trivial trivial trivial to crack those um and so I think they're saying 50 plus is probably safe probably but like do you really it like really are you the advice is to roll the dice 50 >> as a Bitcoin maxi yes like this is like the type of [ __ ] that they want like yes >> this is what they love So, everyone says roll the dice 50 times and then people like act some people like very few people but some people like actually

tried to do that and then they didn't roll them 50 times and then they got hacked before this wave. >> Amazing. >> So, you know, it's >> we have to make it easy for users. Um there are a few insane people. Uh I think there was a tweet about specifically the Korean Bitcoin community. This is like actually >> they're like they're like we're rolling 500 times. We don't care. >> Like >> apparently they were very good at actually rolling the dice. But as an American over here, >> and I know my American friends, I'm just saying if you tell an American to roll that dice 50 times, they're not rolling.

>> They're doing it three times and they're giving up. They're like, "Uh, this is actually boring. I'm done." >> Exactly. So, I don't know. Maybe like I mean we do know that Koreans are very dedicated and disciplined so you know maybe it's okay but >> as you can say see from my last name I'm actually Korean so uh >> you agree with this probably >> although I I'm a bit of a hybrid I'm a Korean Canadian so maybe the North American cultures a little bit >> yeah you're 10 times. I'll roll I'll roll the dice 10 times.

>> I'm a lazy. >> Not three. I'm not I'm not going to stop at three. I'm gonna I'm gonna go to 10 and then I'll give up. But I mean this is this is kind of the you this is exactly what we're talking about with like vanity addresses, right? >> Three letters you're like ah three letters that's fine. No, like that's not fine. That'll take you know these things are like exponential curves, right? So, three letters takes five minutes. Four letters takes 20 and you know 20 letters. Yeah, I know. It's like a day. Exactly. You know, it's funny. Uh there's a Neil Stevenson book where uh they like um in the book they describe like this way of like uh using um a deck of cards to create passwords. Um and it was actually in Korea. I was in South

Korea uh in like 2003 or something. Um uh and I was reading the book and like this is like even before like good password managers and stuff. So um so I basically sat there for like I think it was like two hours or something like so this is like so autistic and like dealt the cards out and like came up with like 10 different passwords and then memorized them so that I could like use them interchangeably for for my passwords from then on because I was like ah this entropy thing it's going to get me. So, um, >> I wasn't I wasn't secur.

>> Uh, yeah, I probably could. Yeah. Yeah, I probably could. >> Wow. >> Um, yeah, I have I have uh like and so I I used to have like variants of password like you know the core password then like five uh five extra characters or whatever variants. Um uh >> yeah, >> weaponized autism. Um so all right, let's go to ads. Uh before we continue, um let's take a quick commercial break and we will come back and talk about the another Korean thing, weirdly. Uh >> we're getting a lot of attention to >> Yeah, this is like there's a lot of uh Korean angles here to this. Um we're going to find out how Sani's Korean suit. Um all right. Uh let's let's go to

ads and we'll come back and and talk about trade.xyz. If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T, Verizon, and T-Mobile have been breached again and again, and SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Cape comes in. America's privacy first mobile carrier. Same premium service, but Cape rotates the identifier on your SIM every 24 hours, deletes your call and text metadata after a day, and protects against SIM swaps with a 24word recovery phrase that only you control. You also get two middle toend encrypted secondary

numbers for banking and signups, so you stop handing your real number to every app that asks. Go to cape.co/chained co/chained and use code unchained for 33% off your first 6 months. >> All right, we are back. Um, so there was a uh per issue um an Oracle issue, art or articles and per um one of my favorite topics uh last week where um SKHEX uh per on trade XYZ fell from uh 1128 to 917 $917 um and then uh almost uh immediately recovered. Um, so, uh, this was like

some thin pre-market print, um, that happened. It was a real trade. Um, and then, uh, a bunch of people got wrecked. Um, which again, like um, uh, actually, um, we have a special guest, another special guest, uh, who's going to just join us, uh, Mike from, uh, Ether. So, um, let's pull him up on stage. We're going to we're going to talk Ethereum later. Uh, so, um, so I think let's let's get this, uh, get this rolling.

So, um, welcome. Um, thanks for thanks for joining us. Um, so yeah, trade.xyz. Um, I think the the, uh, the maybe um, most interesting part about this is that they were like, uh, actually, sorry, we're going to make you guys whole. Um, and then they were like, well, but just this one time, like never again. This is not a precedent. Like, don't come crying to us if this happens again, which it absolutely will. Um, so uh yeah, I don't know. Uh, takes on on uh this um this Oracle problem. But yeah, so so um I think you know the other thing that was quite interesting uh that um this was a

Kobe post that uh that came out around about the same time as this um where he's like uh trade.xyz is not raising money which is always like a weird like whenever Kobe tweets something randomly like you know that there's some like chaos going on in the background that uh like some some crazy [ __ ] going on. So, so basically, uh, the the setup here is you have Hyperlquid and then you got trade.xyz um, and trade.xyz is a call it ecosystem participant that offers RWA per right um, and you know, RWA per maybe like

a little in in the gray if if that still exists in this day and age. um in terms of like what you can get away with doing. Um so uh so you know, Hyperlquid has like core crypto assets and then they've got all of these like other ecosystem partners that offer like different um different other uh asset classes and and uh trade types, you know, options, etc. Um but again you know the the challenge with RWA that you don't have uh to the same extent with like Bitcoin is someone has to tell you what the price of this thing is and RWA stop trading at random times for random reasons like when Synthetics was

building this like this took us like a year of dealing with oracle providers like chain link and and a bunch of people chain links people that they were talking who had no they're just not you they're like when the market is shut down the market is shut down like why would we care about the like outside of market times right um but pre-market closed markets um it's it's a really challenging thing uh to manage and and so like a real trade happened in pre-market that someone dumped all of their SKHEX uh which maybe was a good trade actually in hindsight um and uh and you That's the price, right? Like and and

and so there's, you know, even the fact that trade XYZ was like, okay, we this probably shouldn't have happened for reasons, whatever, even though it was a real trade, is like itself a pretty opinionated take on asset pricing, right? And you know uh whenever I mean this like you know to Mike like what is the price of ETH versus RAPD? Is it the same thing? Like what about when it dislocates for some weird reason like is it still that price? Like um you know or like LST LRTs, right? Like um you know this is this is a thing that you must lose sleep over, right? like, you know,

not all flavors are >> I mean, we're uh somewhat of a preview. We're going to uh make trading a lot better in uh in Etherfi over the next uh couple weeks. Uh and it is something actually right now, you know, we're beta testing and um uh some of this functionality. And yeah, we we actually had the exact same situation where a couple of trades went through where, you know, not massive sums of money, but like users lost a bunch of money because uh they were allowed to do something that I think um uh reasonably it reasonably uh we should have not allowed them to do. Now, if somebody goes to unis swap, right, goes to the UI uh picks some, you know, low liquidity

token, you know, this happened not that long ago, right, with a someone went to the UI >> thing. Yeah. Yeah. I want to sell 50 million eat for 500 bucks, >> right? It's just madness. Now, on the one hand, you could say, "Look, sorry, bro. This is, you know, permissionless smart contract, like you you press the proof that you saw in the UI." >> Um, but like I think if you're hosting the UI, uh, and you're, you know, um, uh, I don't want to say facilitating the trade because, you know, we're not facilitating the trade, but you're you're playing some role.

Yeah, you're involved. You're playing some betrayed, right? >> Yeah. >> I think ethically, and and I do mean ethically, like you have a responsibility. I mean, you have a responsibility to prevent the user from doing something that's just like wildly insane. I think that's how brokerages operate. Again, not that, you know, we're we're a brokerage, but if I go to Interactive Brokers, uh, and I do try to do some insane thing, it does, you know, these plays stop me. And I think I think unis swap should do that. I think uh u you know we're planning to do that as we roll some of this stuff out. Um and and I think trade XYZ should have should have done that. Like this isn't you know this isn't rocket science, right? It's

actually it's not that hard to know, hey, somebody tries to do a trade with 70% price impact or some crazy slippage. You probably should just shouldn't let the user do that. Forget warnings and red text. Like you shouldn't let them do that. Um uh what if they really need this is you know this is the the thing right like what if that guy really needs >> and they can do it somewhere else go to ether scan go to ether go to ether scan yeah >> like contracts right >> yeah this feels like the same conversation that we've had before with >> we have it all we have it like every few weeks >> oh okay so it is it's not this is this is literally the same >> this is like what is there's like a philosophical epistem logical question

of like what is the price of something, right? Yeah. Like there is no price. The price of SKH Highix was like was it the closing price like 12 hours before? Is that the real price or is that like what some idiot on a Saturday wants to sell because they're like getting liquidated on something else and they need to, you know like >> they need to >> there is no such thing as the price of an asset, right? It is like a a some kind of a construct. So you need to have a set of rules that says and you know the the like if someone is willing to sell enough SK Hinx at $1, like is that the price for that fiveminute period where they're like just dumping into the

market, right? Um and and like these are these are like non-trivial problems. You can't solve it because markets just do weird [ __ ] right? Um and so you know uh I think trade.xyz XYZ like part of the UX is like if something goes wrong as the venue and you know NASDAQ does this right like we were supposed to have a you know uh like stop triggered on this and it didn't or it happened three times and we're just going to roll back the trades or like this thing happened someone fat fingered a thing it's not the real price we decide what the real price is the the challenge for for DeFi is like you're not even supposed to be involved in this right like it's supposed to be contracts and stuff and

all of a sudden you're like making post hawk judgments about what the real price was. Um it's okay for the NASDAQ to do it. I don't know about uh about like trade.xyz that's >> well could say like if you're operating a wallet right like whether it's let's say meta mask or phantom and a user tries to interact with a known malicious contract like it's the same kind of argument. You could say, well, listen, it's permissionless, man. Like, just the user should be able to do whatever they want. But the fact is, look, you you're operating an app. You have a list of malicious contracts. Uh, at minimum, there should be a multi-stage thing that tells you if you do this, you're just absolutely going to get destroyed. And then in the end, I I think it's a

discretionary call to say, "No, we're just not going to let you do this. No matter what someone steals your phone, tries to do something, we're just not going to let you do that." And I think either decision is right, but uh sort of throwing one's hands up in the air and saying like, "Hey, listen, it's it's not our responsibility." Like look, just objectively to some extent it is. Um you're running the site. Exactly. I mean, you know, let's not let's let's be realistic though. Like part of the reason that people were like, "H I have no responsibility or like I can't do things or whatever."

Like we talked about this latte is like, you know, if you said yes, I'm going to stop people from doing something. There was a guy called Gary Gendler who would show up at your house and blow your brains out. >> And so everyone >> maybe some Bitcoin maxis who are going to like >> Yeah, there were like two two groups of people that would come >> philosophers are going to come and philosophers who come and get you. Um but yeah so all right let's let's uh let's go >> I was gonna add one thing this actually reminds me of when when I was at stakehouse we implemented this thing called metaoracle um Mike you might be familiar with this so remember >> um

>> you know in lending protocols when you integrate an asset um there's a question of do you use the fair market value um which can you know whiplash around like we've seen here or do you use the primary redemptor value. Um, or do you use both and try and figure out when there are deviations? So, it's it's a real um I mean, you know, in different lending protocols, stable coins, stable coins have been hardcoded at $1. Is that right? You know, there's so much different opinions around this. And um I think it's quite prudent to have you know uh like a meta oracle like the one

that stcast implemented on uh on morpho um where you actually get notified and there's a deviation when there's great enough deviation that um you can kind of switch off between the two. So um >> the the challenge is right with articles everything you do creates like downstream consequences right like you make that design decision right and it's like oh that's got to you know okay we don't want people to get wrecked in this case which is like let's call it you know the like two sigma case right but then you switch that thing on and then in the three sigma case everyone dies right like there's just you know like like it's like ah okay I see why that was a mistake now right like It's it's

really really hard to [ __ ] with oracles and not have layers of consequences that are like built into all those decisions that like as you get further out into the tail >> of like you know uh possibilities like increasingly bad things happen, right? Like you know we we used to talk about this all the time of like what happens if everyone tries to get out and the you know exit queue meanwhile it was actually the problem is like the entry queue was the was going to be the like limiting factor right you're like ah like people are going to want to get out of staking right now we're we will talk about this in a second right now we're like actually what if we stop this entry queue this

entry queue is actually like really annoying there's too many people trying to get in right um and so often times the thing that you're trying to prevent ends up not actually being the real thing. It's some other thing that you didn't think about and then the consequences of that are like significantly worse than the thing that you were worried about and trying to prevent. So, um yeah, mechanism design is hard I guess, right? Um >> so let's let's go to uh let's go to this uh next topic. Um, >> hey Kane super I gota I got to hop off uh >> because real life >> real life is hitting me. Uh >> oh. Okay, >> but I want to say thank you to both the

guests for for being here obviously. Uh and definitely like keep talking about this crazy [ __ ] I'll be listening. I just have to go deal with some life [ __ ] really quick. No worries. All good. All good. Uh >> but I'll see you next week. Thank you guys. All right. See you. Usually it's like some horrible hack is going on, right? Um when when Tay when Tay gets dragged when Tay gets dragged off stage, it's like uh usually someone's lost a lot of money. Um >> maybe we'll hear about it on CT. >> Yeah. Yeah. Hopefully it's not hopefully it's not that. Um so so let's talk about uh these two uh these two topics here that are both kind of tied to Stanny from Ave. Um so a has started to pull

back >> um from the you know be everywhere play that they that they were running. One of I think the first projects and I think it helped them right that like they were um kind of operationally capable enough and and organizationally capable enough to like very rapidly roll out to new chains in a way that like a lot of other protocols struggle with. and and you know um they were able to kind of uh be everywhere the the like fullcore press mode that that they uh had you know where like every L2 random you know L1's that you never heard of and and you go there for the first time and like Sy's

like hey welcome how's and you're like what the why what are you doing here um so so they've now I think gotten to the point where they're like okay uh this is negative EV to be everywhere there's a bunch of like risks that we're taking by being on these chains and you know the the trade-off is not worth it, right? And and starting to pull back. Um but I think there's uh maybe the more interesting Stanny related story was um him uh pushing back on EIP 8361. Um, so, uh, Mike, maybe you can you can walk us through what is ERP 8361? Why why should we care about it? What what's what's

going on here? >> Uh, yeah. So, I mean, just every aspect of this was was terrible. Um, >> there's this so there's this EIP. So, let me actually let me start with this. There's been a lot of discussion over a long period of time. I don't know years really about ETH issuance and is this a problem like in other words uh in particular around stakers who you know deposit their ETH help secure the network uh and the reward they get on that is about I guess like two and a half% these days that's a blended rate of uh you know MVV and actual staking rewards um uh but whatever let's let's call them about two and a half%

>> two and a half% risk-free rate is two and a half% Yeah, I mean I wouldn't call it risk-f free, but objectively the risk is quite low. >> Sorry. Sorry. That was a joke. That was a joke. >> People get very sensitive when you call it the risk-free rate. Um but look, objectively it is low risk. >> That's why I do it because it's fun. >> Um I you know very low risk rate uh is you know two and a half%. Um >> and you know I I guess for some people this is just a burning issue like this is the big problem of Ethereum. It's not that there's no privacy or the interop is non-existent or block times are ridiculous, you know, 12 seconds or gas prices are still probably 10 times higher than they No, these are No, the

main problem is that there's like an extra like 1% of issuance. >> Exactly. uh just you know so anyway so there's the CIP that's been proposed with a 48 hours to provide comments before it basically goes into you know consideration or vote uh for inclusion you know the next or the the upcoming hard fork of Ethereum which in itself was just I don't know I want to say offensive uh you know like I'm >> whatever I'm you know I'm a random guy but hey I'm like you know myself my team are builders in Ethereum or one of the more important protocols I would say in the in the space. Uh but not just us, but nobody was consultant on this. Like

not like not not a single, you know, DM message. Nobody was asked like, "Hey, do you think this is a good idea? What are some consequences that might happen here?" Uh but just, you know, 48 hours notice this thing goes up. And so that rubbed people the wrong way. A lot of people were were just flabbergasted like, "Hey, if you gave us a month's notice, okay, like fine, that that might be reasonable, but this is just, you know, uh just just madness." And it just it also speaks to a level of um frankly just immaturity. Like this is a serious this is a what $500 billion network you know tr not trillions but many billions of dollars of assets are secured on this thing and like this kind of behavior. I

mean, can you imagine any serious institution, financial or otherwise, just with this level of uh you know um whatever >> Soviet Russia is the good >> that would be apparently like hey the new plan guys what do you think >> yeah that's an app comparison sorry yeah go ahead >> for what it's worth my former colleagues at steakhouse and I had been weighing in on this issue um since 2024. So I don't know if you guys remember but there was a whole debate about at that point it was called MVI minimum viable issuance >> and uh at the time stakehouse was contributing to LIDO so we were you know

very privy to um the potential negative downstream impact of um you know issuance being reduced. Uh I think you know LIDO would be very much impacted and the price action today really shows um shows that uh you know Ether LFTs would be lending protocols would be impacted because uh ETH looping would be you know killed overnight and ETHOP in many cases uh you know make up a big part of the um the DAP revenues. So the fact that you know we've been weighing on this weighing in on this over two years ago and then there was no

consultation last two years and then I woke up to just a you know a like a tag on uh Twitter from who said thank thank you for weighing in on this issue. Um so it really did feel like it came out of nowhere. Um and you know this is worse than like um at least FOMC has like a right structure and uh process and um signaling uh that makes a whole system much more reliable. Okay. And as you say this is just I don't know what I make I make the joke about Soviet Russia, right? Um but >> correct me if I'm wrong. Um this is what

we asked for, right? Everyone was like the EF too concentrated etc etc. Everyone leaves the EF, starts their own organizations, and those organizations are supposed to be like more commercial, thinking about things, whatever their mandates were. And one of the first things that one of those new orgs does is say, "Let's slash issuance." Right? So again, I would file this in like the be careful what you wish for. Um, and and you know, like to your point, Mike, like why do they not care about other things? um because they're allowed to care what about whatever they want because they formed their own org, right? Like this is no

longer the EF where they have a mandate to care about all of the things in Ethereum, which effectively means caring about nothing. Um but uh but now you have people that are like opinionated, caring about specific things that have their own orgs that can like you know make proposals and and drive things through. Um, which means I think you know from a from an Ethereum perspective which is good like the fact that people are up in arms talking about this stuff like you know agitating there was a there was a um kind of apathy of governance that had crept in through the last couple of years of the EF being both more active but also like setting the narrative as well I think um where

it didn't feel like if you you know if you're outside the EF you really felt like you had no chance. But now it feels like anyone can say things, right? Um, and so there there is now more of a debate that's that's open. Um, and whether this like proposal is is good or bad or accurate or or dumb or whatever, um, people can just say things now. So we are in a a new era, right? You can write your own proposal and be like, actually, let's jack issuance up to 5%. Like, you know, treasuries are 4.5.

That's the real risk-free rate. we need to be above that, right? Um, you know, there's there's uh there's an argument that 2.5% is too low to justify the risks of let's not forget you have to hold ether, which is why I make the joke, right? Like the risk for like you you can hedge it, I guess, >> which is actually a very important point. I mean there's there there are two sides of this where there's an argument and I wouldn't make this argument but there is an argument to be made that issuance should be higher and there's a credible you know you can say a number of things that it actually improve defi it'll make ETH staking more attractive which actually is helpful to ETH price because ETH stakers don't sell ETH like that's this is the the brain the particularly brain damaged aspect of

this uh proposal that somehow reducing the issue >> happened to that Eve that gets >> Yeah. like suddenly your your is your yield goes down to you know 20 basis points which is probably you know where it'll end up uh like okay so now you're going to have tens of billions of dollars of ETH unstake and you know out there in the in the market. So clearly like if you're worried by ETH price which is one of the arguments um that this is going to be worse this is actually going to be much worse. I think the argument and I would not again I would not make the argument to increase issuance but the argument to increase issuance is in my mind actually stronger than the argument to to decrease it but the strongest thing is just don't [ __ ] with it. This is just not frankly the

most important thing by a long shot. >> unintended consequences, right? Like people uh you know there there's a reason why the status quo was the status quo which is not to say you shouldn't try things of course right but given the smores board of trying things opportunities that we have in Ethereum land trying things with the like monetary policy feels not smart. Um so when there's nothing obviously broken it's like fine. Yeah. I mean to your point out of this issue right we can achieve effectively the same effect by generating fees because the fees get burnt. So that's a subtraction on the

number of shares. Um I actually come from Chadf so it's instructive to think about it you know >> I mean but we had this let's not forget we had this narrative right like the the the EIP559 burn narrative like ultrasound money >> we had that for a while >> but if you think about who the marginal buyers are going to have to be and tradi loves yield um trafi loves the growth story of like where do revenues come from loves buybacks So these things are all achievable not through an austerity measure like reducing issuance and potentially you know um risking the security budget of Ethereum but we can solve it by having a

growth mindset of how are we going to onboard new users? Um do the block fees need to be revisited? You know, I was actually going back um to Re uh Rebbit Capital did a Ethereum uh thesis at the SA investment um conference 2024. This was before protodank sharding. So Ethereum was >> rip. >> They called it owner's earnings, right? It's how much the network is making net of the reinvestment it has to make to sustain itself. owner earnings was like north of 7 billion. Um what is 7 billion over the current ETH market app? Um it's

like >> like 3% or something. >> Yeah, 3% exactly. So if all of that is used to burn ETH then we can achieve the same effect without you know like uh rugging solo stakers and you know kind of the downstream implications of um the austerity measure um which is centralization and compromised security budget. So I think yeah >> sorry I would also argue that there's not a lot of economists out there hard hardly any that would argue that a 0% increase in the money supply per year is a good idea.

>> Like that's that's a Bitcoin brainworm. That's not that's not sound economic policy. >> I've got some Bitcoin friends who who >> like the money supply should expand with the growth of the economy. That that's how money supply works. as more goods and services are produced, you need more money to account for them. Otherwise, you get deflation and deflation is bad. Like this ultrasound money thing is not I guess it's not in line with any economics Austrian or or otherwise. So, so the whole thing just makes no sense. So like let's just talk about like the the practicalities you know uh like staking ratios um I think are uh something that people

it's really hard to reason about right like how much ETH should be staked um and and you know we we're just about to uh like Lido is about to like collapse all their validators to like five valid you know making it easier to not have to run one validator for every 32E like you know we are making it easier to to stake but there is a question of like how much ETH should be staked >> is it you know 20%, is it 50%, is it 80%. Um you know the more the more ETH you have staked the less there is to sell to your point Mike right so um you know and and the fact that I I would argue a significant majority even today of ETH stakers are not financially

motivated. There are there are ETH maxis that like my validators like I I I made this joke on on uh X last night. Like I think my yield has been like 0.5%. >> Over over the because my validators have gone offline and then they go back offline. I've been slashed whatever, right? So like my yield has not been the like 5% or whatever that that you know. Um but it hasn't stopped me from staking because I'm like h whatever. What else am I going to do with that ETH? Like I might as well stake. I don't I don't think that your marginal ETH staker is sitting there going the the yield is is like the primary driver, right? Obviously at the at the margins, you know, there's going to be a bunch of

people that if you lower yield will unstake or if you increase yield will probably come in and stake. Um but but it it is like a a really strong question of like should we have 50% staked 60% 80% like >> I mean most cryptoeconomic networks would kill to have more people stake their token like they view that as a positive like I don't I don't understand this argument again if you view and and some of this seems to be driven by this frankly bizarre dislike of liquid staking you know assets. if you view those as just intrinsically evil for some reason. Okay, fine. I don't understand. I think there's a lot of value that's actually created by by these assets. Uh putting aside, you

know, my position and it frankly staking isn't even like a material part of our business anymore. Um but putting that aside, um if you like if you view those as intrinsically bad, okay, then I can see, okay, let's just like let's really crunch this down. I don't even think it's going to have that impact. like yeah, you might kill the LSTs, but like okay, at the cost of like centralizing the network much more uh dramatically than than before. So, I just I don't uh I don't see the you know the argument there. Um but as I said, most cryptoconomic networks would uh would want like it's a representation of people actually buying into the asset, buying into the network, you know, your north

>> like if it goes to 80% stake like what is the problem with that? Like why is that a bad thing? I'm not like how much how many dollars and you know imperfect analogy but if how many dollars are just sitting there passively you know as like physical cash or in checking accounts like not that many most dollars are put to work they're either invested or they're in T bills or they're in bonds or something like what having ETH put to work so to speak securing the network and getting some small share of the fees of that network just seems like a pretty reasonable uh you know system to have in place. I I don't like I'm not I don't understand the >> I think there's like part of this comes from uh again you know like most like Justin Drake like the you know Jerome

these guys uh came from like you know EF land right like and and you know um what's interesting to me is you see what the internal tensions must have been like at the EF when they're inside there you know there's a group of people that's like agitating for like we should be more efficient >> like And I I genuinely think this is like an argument for efficiency, right? Like Ethereum should have the absolute minimum amount of ETH staked that is required to secure the network. Like genuinely like I I like that's the philosophical direction of where this is coming from, right? That like we shouldn't leak value. We shouldn't be paying more for security. Um you know

and and uh like this like what's the security budget, right? Like what is the cost to secure the network? how much are we paying? Um, and a lot of people have this view, right? Like, you know, Bitcoin pays like a billion dollars a day to secure the network for, you know, $100 million of transa or like some some like very distorted number, right? And people look at that and go that's doesn't make sense. You know, there's not enough economic activity to justify the security budget. Um, but but I think that the the efficiency kind of argument uh I see how you get yourself there, but it ignores so many other considerations in the real world >> of like incentives and why people do

things and like you know the directionality of incentives that it just it's a bit nonsensical. >> Oh yeah. And again going back >> I hope not. >> No no way. So, like I I do think I think that like again this speaks to here's what happens if you fragment what was the unified front is now fragmented. You've split out all these people. You've ejected them out. They're now out in the world doing things, agitating for things, whatever. Um you will get more chaos. You'll get more dissension.

You'll get more, you know, of these things where everyone's like, "Whoa, what the [ __ ] are you guys talking about?" Right? And you know, like there's no way that these guys weren't in the EF being like, "We should do this, right?" And you know, whoever it was, like, you know, I or someone being like, "We should do nothing." And they're like, "Ah, [ __ ] it. Fine, whatever. We'll do nothing. We'll keep doing that." Um, but now they're like, "Oh, no, no one can stop us from doing things. Let's go and do some stuff." So >> yeah, I would really encourage those involved to get out there if if the overall goal is to get ETH price to go to the moon. I think some consultation from the you know the people who are already bought in as well as some you

know consultation with the people who are likely to be the marginal buyers would be very helpful. I think it's not okay for academics to hide behind their computers, run some numbers, um, and have a theoretical, you know, answer uh, to influence the downstream applications. You know, I'm reminded of the the saying by either Charlie Mer or Warren Buffett, which is it's, you know, better to be roughly right than precisely wrong. And I think issuance is not correct. Like there is no such thing as correct. But I feel like it's just roughly right.

>> And to try and be precisely, you know, um like turn the knob and be precisely right could result in it being precisely wrong. Um and then so what if we do this upgrade and then realize that there's not enough security or you know we don't like the the second the change that we made then what right then you have to keep updating and what does that mean >> again like yeah >> like let's not forget 1559 was not supposed to be about ultrasound money it was a really good idea to make the fee market more stable in Vitalik's idea right by the way you know and and took

like two year like the people who were agitating for this including me um you know I helped raise money for like the the audits that that we ran on on 1559 when we were all poor back in like 2018 2019 and um you know the goal of it was the the UX of a fee market that like oscillates wildly is terrible. We need to stabilize it. And then we launched it and this like burn mechanism that was like not the primary thing became like the like primary narrative, right? So like again, you know, if you touch something, be prepared for it to touch you back is is basically the thing that I would say. And so, you know, again, I

I think it's very unlikely that uh that this passes just given but my my my other hot take is I think like more chaos in Ethereum and and less kind of uh you know this um monoculture um is probably good because people are talking about ETH, they're talking about Ethereum, they're talking about things like even to your point, Mike, like okay, you guys care about this. This is dumb. there's like 10 other things we could care about. Let's go. You you probably wouldn't have that conversation today if it wasn't for this to be like, hang on a second, like why don't we focus on something that's actually going to be impactful for Ethereum the network, you know? Um and and so I think all of this is is probably a good thing

um in the end. >> Yeah, it's a positive positive way to look at it. I agree. >> Yeah. Yeah. >> Yeah. My hope I mean it would be pretty crazy if they uh if this ends up getting jammed through but I do think it'll keep coming back because I mean bottom line is there's clearly >> people that care about this and they're just going to keep pushing it. Uh yeah, I don't know. >> Uh >> all right, thank you very much guys. Um I think we can wrap it up here. Um appreciate you uh both joining the show. Um and uh we will see you guys next week. Thanks for joining us on this episode of Unneasy Money. Remember, what happens on chain never stays on chain.

We will be back with Tay. Hopefully, nothing too horrible went wrong. Um although I'm sure something horrible will go wrong in the intervening uh 7 days. It always does. Uh but until then, do your own research before aping in. See you guys next week. Nothing you hear on Uneasy Money is financial advice. We're just three builders talking about what's happening on chain, and we want you to always do your own research before aping in. You can find all our disclosures at unchained crypto.com/ unneasymoney.