Are The ETFs Bad For Crypto?

Space Summary

The Twitter Space Are The ETFs Bad For Crypto? hosted by QuaiNetwork. The Twitter space delved into the intricate relationship between ETFs and the crypto market, alongside the groundbreaking development of decentralized energy dollars on a scalable blockchain infrastructure. Discussions highlighted challenges such as scalability in Proof-of-Work blockchains and the significance of regulatory frameworks for sustaining energy-based crypto projects. Community involvement, DeFi's transformative potential in finance, and transparent governance emerged as critical themes, with an outlook towards innovative trends in energy-efficient blockchain solutions and evolving investment strategies.

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Questions

Q: How do ETFs influence crypto market dynamics?
A: ETFs can impact price stability, liquidity, and institutional participation in the crypto market.

Q: What sets decentralized energy dollars apart in the blockchain space?
A: Decentralized energy dollars offer programmability, scalability, and sustainability features compared to traditional cryptocurrencies.

Q: What challenges do Proof-of-Work blockchains face in scalability?
A: Scalability issues stem from network congestion, energy consumption, and transaction processing speed.

Q: Why is regulatory clarity crucial for ETFs and energy-based crypto projects?
A: Regulatory frameworks provide guidance, legitimacy, and investor confidence in emerging crypto assets.

Q: How can communities contribute to the growth of innovative crypto projects?
A: Community feedback, partnerships, and adoption drive continuous development and utilization of new crypto technologies.

Q: What advantages does DeFi bring to traditional financial systems?
A: DeFi enables borderless transactions, automated processes, and financial inclusivity beyond traditional banking systems.

Q: Why is transparent governance important for blockchain projects?
A: Transparent governance ensures accountability, trust, and consensus among network participants.

Q: How can investors diversify their crypto portfolios effectively?
A: Diversification through various asset classes and risk management strategies helps mitigate volatility and improve long-term returns.

Q: How does blockchain technology contribute to energy efficiency?
A: Blockchain optimizes energy use, promotes renewable energy initiatives, and enhances traceability in energy consumption.

Q: What future trends can we expect in ETFs and blockchain-based energy solutions?
A: Anticipated developments include increased regulatory oversight, tokenized energy assets, and integration with smart grid technologies.

Highlights

Time: 00:15:42
Influence of ETFs on Crypto Market Exploring how ETFs impact crypto price movements and market dynamics.

Time: 00:25:18
Decentralized Energy Dollars Innovations Discussing the unique features and benefits of decentralized energy dollars in blockchain ecosystems.

Time: 00:32:55
Scalability Solutions for Proof-of-Work Blockchains Addressing challenges and proposed solutions to enhance scalability on PoW blockchains.

Time: 00:40:09
Regulatory Landscape for ETFs and Energy Crypto Projects Analyzing the importance of regulatory clarity for ETFs and energy-focused crypto initiatives.

Time: 00:50:30
Community Engagement in Crypto Innovation Highlighting the role of communities in supporting and fostering innovation within the crypto sector.

Time: 01:05:15
DeFi Disruption in Traditional Finance Exploring how DeFi applications are reshaping traditional financial systems.

Time: 01:20:40
Importance of Transparent Governance in Blockchain Discussing governance models to ensure transparency and trust in blockchain projects.

Time: 01:35:22
Crypto Investment Diversification Strategies Strategies for diversifying crypto portfolios to manage risk and enhance returns.

Time: 01:45:11
Blockchain's Contribution to Energy Efficiency Examining the role of blockchain in promoting sustainability and energy optimization.

Time: 01:55:29
Future of ETFs and Energy Blockchain Solutions Predictions and trends shaping the future of ETFs and energy-related blockchain innovations.

Key Takeaways

• The implications of ETFs on crypto market volatility and mainstream adoption.
• Advancements in decentralized energy dollars and their role in sustainable blockchain ecosystems.
• Scalability challenges and solutions in creating programmable Proof-of-Work blockchains.
• The importance of regulatory frameworks for ETFs and energy-based crypto projects.
• Community engagement in driving innovation and adoption within the crypto space.
• The potential of decentralized finance (DeFi) applications in transforming traditional financial systems.
• The significance of transparent governance models in blockchain projects.
• The evolving landscape of crypto investments and diversification strategies.
• The intersection of energy efficiency and blockchain technology for sustainable development.
• Exploring the future impact of ETFs on blockchain ecosystems and energy conservation.

Behind the Mic

Introduction and Overview

Welcome. Welcome, everyone. Appreciate you all joining us. Just allowing for some time to get everybody in here who's speaking today. If you're planning on speaking, you should already been notified and should have just gotten an invite from me to come up as a speaker. It. All right, I think we have all our speakers now. So topic for today are the ETF's bad for crypto? We're going to try something a little different this time around. If you've been following our spaces, I have a series of questions here to help get us kicked off and kind of set the baseline, and then I'll pass the torch around, allow everybody to give a quick intro with their answers, and we'll see how this goes. Sound good? If somebody's answering a question and you want to comment, feel free to raise your hand and answer once they're finished. All right, so to get us started, I think it'd be a good idea to kind of like set some baseline knowledge for everybody to follow along. First question for tonight, how do cryptocurrency ETF's differ from directly holding the cryptocurrency asset?

Expert Opinions on ETFs and Crypto

I think either David or it looks like we just lost Alan. Poor guy. David, is that something you can take? Yeah, sure thing. I'm David COO of dominant Strategies, one of the development companies helping build quad network. In past life, I was at other companies like Kraken Circle Fidelity, and actually built and ran grayscale investments for the first few years of its existence, which is from one of the biggest digital asset managers in the world and runs one of the bigger bitcoin and other crypto ETF's. In the US, ETF's are just exchange traded funds. In other jurisdictions like Europe, they're called eTns or exchange traded notes. Sometimes they're basically just a blended instrument or fund that is meant to track an indices. Usually it's like a basket of stocks that is thematically or sector based. But in these cryptocurrency ETF's, many times they're single asset and they just track an index of an exchange price across exchanges. Some of them are now becoming multi crypto asset, but ultimately they're just a fund that you can buy, generally speaking, through normal traditional finance infrastructure, through a brokerage or other house.

The Purpose of ETFs in Cryptocurrency Access

And they just are a synthetic or derivative style product that tracks an index of crypto prices. The main purpose of them though, is so that certain types of accounts and customer sets can access them. It's so that retirement funds or certain institutional funds or RIA registered investment advisor channels can access them by their mandate. They cannot access or hold, by and large, cryptocurrency by themselves. So usually that's why, at least that's why many of them were originally created. Now, of course, a lot of retail gets access to them just because. Hey, look, I got my brokerage account. This is where I buy my Tesla stock, my Facebook stock, my Nvidia stock. This is also where I can buy crypto. It's real easy. I don't have to open up a separate account in exchange or otherwise, but that's basically all it is. And there's a manager that basically manages those funds. So it's a little different than. Certainly different than holding it yourself via some paper or software, hardware, wallethood.

Managed Holdings and Security Considerations

And it's a little different than holding it at Coinbase or another exchange where you hold, basically they hold it on your behalf. This is like a managed pool that's usually held at a custodian, sometimes also Coinbase, but is managed under a strict automated structure of tracking that price. I do think it's interesting with David's definition to maybe get a little bit more specific and actually talk about some history with grayscale because of sort of the treatment of ETF's and sort of the reticence to adopt or allow what you might call. I don't want to get the wording wrong here, David, so maybe you can help me out. But effectively, an open fund where you can create and destroy shares in ETF, they didn't want to allow this for years. Right. It was interesting. What grayscale did is they basically created a fund where you could enter, and then after a year of holding the shares, you could circulate them on what they call the pink sheets.

Grayscale's Innovations and Regulatory Dynamics

But it effectively created a fund that you could get exposure to bitcoin, and it was the first one that you could really do in the US. However, the implication is you can't necessarily destroy or create shares on demand. So oftentimes the shares will trade above or below their nav or net asset value. And the principal thing that changed for GBTC when the SEC sort of did the approval through lawsuit, they lost the lawsuits they had to approve. It was allowing the creation and destruction of shares. So the fund actually traded. I believe the classification at that point would be more like an ETN than an ETF, but the implication being that on a day to day basis, the shares would track the change in the net asset value. Yeah, that's an interesting historical anomaly. You're right to point out, obviously now, that's no longer the case. Now the SEC has approved them. They operate by and large like normal ETF's. But it is correct that for a long period of time, they were created as a private investment fund that had basically a dual market structure where you could create private placements to invest in it.

ETFs and Market Dynamics

But it's correct that you couldn't just immediately create and redeem shares. You needed to wait for a year holding period, because the 19 B four was not approved by the SEC for a long time, and it created a massive dislocation in price. Usually, historically it's the premium, but then correct, after a period of time and after some of the shake out and people were doing that Delta neutral carry trade, and that blew up, it was at a discount for a while. And yeah, there's a long history there of trying to get the SEC to fulfill its mandate of protecting investors, which sometimes it seems as if it's not so interested in, but now it's a little different. Yeah, well, great. Grace go is actually the one. It looks like Gabriel has his hand up. Wanna make sure we get to him. Hey, guys. Yeah. Thank you for giving me the opportunity to come up here and speak.

Discussion on Cold Storage vs. ETFs

I just wanted to address the initial question, which was, you know, what's the difference between ETF's and crypto? So, addressing the idea of cold storage or, you know, versus an ETF, I guess you could say you're balancing on an individual's level, their counterparty risk. So obviously, when you're holding your own keys, you have no counterparty risk, aside from you being negligent with your keys and losing them in a boating accident or something. So that kind of stuff. But on a macro level, I'm a bitcoiner. I'm a bitcoin guy on Twitter. That's how I kind of found you guys. And on a macro level, for bitcoin, ETF's really act as a scaling solution, which isn't ideal. Obviously, we can get into that. I would definitely like to talk about that. That's kind of where ETF's are at in my mind, because from practical level, that's what they do for bitcoin.

Self-Directed IRA and ETF Considerations

And then one thing I'd like to caveat. David, you mentioned that ETF's are great for crypto, holding crypto in your IRA, but I'm pretty sure companies like Unchained.com allow you to hold an IRA with your own keys, which I'm not sure many people are aware of. Pretty surprising to me, but I find that to be pretty interesting. I don't know if you had any thoughts on that, but, yeah, there's a. Concept of a self directed IRA or retirement account that you could actually, if you go through a bunch of extra hoops, you can hold almost anything in an IRA if you're willing to work for it. Any, like, private fund, even like. Even like, your own business holdings. So, yeah, that's open, but it's a pain. But yes, it's doable. Interesting.

Further Discussion on ETF Accessibility and Implications

Yeah. Cause I just wanted to caveat that totally. Just to maybe give a little more history before we get into some of the less regulatory, esoteric sort of discussion here. To give Grayscale credit. I believe they were actually the ones that sued the SEC, that forced the SEC to finally approve the bitcoin ETF. So kudos to Grayscale. I will also say that for years, I actually had exposure in an ETN that was incorporated in Gibraltar, trying to remember the name of the company that did it. But it was one of the competitive ASIC producers there since I've gone bankrupt. But they created an exchange traded note that traded in swedish kronors, and I actually had exposure in that for quite. Quite some time. And then in, like, late 2017, I just decided to sell it.

Market Volatility and Regulatory Approaches

And then interactive brokers and the us regulators decided they didn't, like, want to let me buy it back, which is super interesting. Right? Because they're supposed to be protecting us, but they force you into these closed ended funds that can trade above or below Nav where foreign jurisdictions had etns for years. I mean, I guess this ETN goes back to, like, 2015. So it almost took them a decade before they gave access to etns to us investors, obviously not fulfilling their mandate to protect us investors, which is pretty amazing. Yeah, I think it was called, like, bitcoin tracker one or something like that. Yeah. They launched around the same time as Grayscale in Europe and had a little bit of a different regulatory regime. But, yeah, I mean, Grayscale filed for an ETF. I don't even know, like, 2015, I think, 2016, but, like, yeah, battle the SEC forever to get it listed.

Grayscale's Legal Challenges and Success

It was. It was a process. Oh, but it was. It was grayscale that ultimately won that court case, right? Yeah, yeah, I think. I think a number of them did sue it, but, yeah, Grayscale was the first one to, I think, like, bring suit and try to force the FB's hand on it. Really appreciate it, guys. It kind of doves tails into something that I've been thinking about and is actually on our list of questions here. Honestly, I think a lot of people believe these ETF's are finally bringing a new level of legitimacy to crypto. Would you guys agree or disagree that ETF's are a mechanism that can bring some additional legitimacy to crypto? I guess anybody can take that one.

Legitimacy and Market Dynamics

I'll chime in first because I missed a bit of the prior question. I think obviously ETF's caught the spotlight earlier in the year. That's pretty much all everyone talked about, pretty much from January until everything was approved leading into the ETH ETF. And I think it was actually more impactful for bitcoin than Ethereum. And that's even just kind of reticent in the ETH BTC chart as well as just the net inflows for BTC as an asset. And it really does legitimize bitcoin as the perception of a store of value. It's actually interesting to see the market response and the take for ETH in the light of an ETF and not being well received. Even. It has kind of different metrics now and people are evaluating it in different ways and it's even being used in different ways as an asset. But bitcoin has kind of been the thing that people are like, yeah, we're cool with this.

ETFs and Their Impact on Bitcoin

And its properties being a store of value and being more attractive from an ETF standpoint and getting those net inflows. Overall, I think it's good. And I think we're going to continually see people push for more ETF's in the broader crypto sphere. And of course you go down the totem pole in the ladder of what assets next people are like, well, when Solana ETF, when other ETF's for all these other cryptos, is XRP going to get ETF? And then you get all of that speculation. But ultimately, as long as we continue to legitimize crypto in the tradfi sense, I think it's useful. And then we can also use that as a trojan horse to bring people on chain and have them transact on these decentralized platforms rather than purely holding an ETF in your fidelity account or in your other sort of broker accounts.

Debate on ETFs and Their Philosophical Implications

Thanks, Alan. Anybody else have anything to add to that? That kind of makes me want to go on a side quest and like what's happening with Ethereum, but before we go that way. Yeah, I didn't mean anything else. Yeah, definitely. I mean, I think ETF's are good for the limelight. I mean, maybe not good in terms of like philosophically holding your coins. But, I mean, if we look at where we want crypto to go, we want people having these assets. Yeah. So I guess I'll be the anti ETF person here. So, I mean, from the perspective of bringing in capital and awareness, they were obviously good in that regard.

Volatility and Centralization Concerns

Having more people be able to access assets like this, sort of restricted accounts like 401s, also very positive. However, I personally think that ETF's are sort of the Achilles heel of decentralization in many ways. And there's several points that I'll just highlight to make my case. If we look at the custodianship right now, of the assets that are in the ETF's, Coinbase is the custodian for the majority of them. I think Coinbase has more than 2 million bitcoin at this point, which is over 10% of the total supply. So they're quite the honey pot in terms of wanting to be hacked. The other issue that I would bring up is the concept of sort of not your keys, not your coins. Obviously, that goes along with a custodian risk and risk that they potentially get hacked.

Concerns Over Fractional Reserve Practices

Now, I think the thing that's more nefarious, though, is if we look@the.net. effect that the LBMA has had on gold markets, specifically with the hypothecation of gold paper, ETF's, the price of gold went up initially with the issuance of paper. They didn't actually have gold traded paper until 2000. At that point, the price of gold was about $200. It would be, there's many people that look at the LBMA accounting rules, and just for clarity, the LBMA is the London Bullions and Metals association, but they're effectively the trade group that manages the exchange of gold. And they have accounting rules for the gold holding houses on, effectively how they can sort of allocate and manage their sort of allocations versus liabilities.

Regulatory Implications of Paper Gold

And they have this interesting loophole that they call unallocated accounts, which allows people to sort of have a demand one of their sort of member vaults. But it doesn't guarantee that there's a one to one ratio in the number of demands to the amount of physical in storage. And I would argue that although gold paper kind of caused the price of gold to skyrocket, I think at this point it's actually being used to suppress the price of gold. There's very credible reports that there's much more gold paper floating in the world than there is gold to back it up. When you have assets that are settled in dollars based off these paper liabilities, it effectively gives the people with the paper an infinite ability to leverage and control the price, as well as potentially fractionally reserve it. And to further this, although there hasn't really been any legal adjudication of what's going on with gold, there certainly has been with silver.

Lessons from Silver Manipulation Cases

And the large trading houses have paid fines, including JP Morgan, for manipulating the silver price and the silver market. And the reason they can do that is because it doesn't actually physically trade. So I guess my fear is that with the introduction of large amounts of paper bitcoin floating around, that at some point we will actually see it be fractionally reserved. And although it may have a positive short term impact on price, it's the mechanism by which you can fractionally reserve bitcoin. Yeah, I would suggest, like, one, there's a difference between gold and bitcoin. And that, like, gold is, like, also hard to. Hard to individually access at scale, just like its physical nature and how heavy it is and difficult to store and, well, let alone, like I say, and prove its authenticity.

Market Structure and Centralization

So bitcoin does have an advantage in the ability to do it also because of, like, the market structure. And like you're referencing, Carl, like, some of the centralizing forces in the gold. Gold miners and gold producers ability to, like, conduct cartel like behavior. Maybe that happens eventually in bitcoin, but, like, certainly we're not to the level where gold is yet. And then as of now, I think there's only, like, I want to say, like 60 billion aum in like, bitcoin ETF's versus, like, what is it? Like 1.2 trillion, in total bitcoin. So it's still not a massive supply.

Current Risks and Market Dynamics

You're right. You could see the risks, like, for sure that could. That could, you know, metastasize, so to speak. But we're definitely, in my opinion, at least a long ways away there. and as I mentioned before, like, I'd be interested to see, and I haven't seen, I probably should have done more research. The breakdown between, like, who's holding these ETF's? Like, is it people that could otherwise hold, bitcoin assets directly, or is it through like, Ria channels or other means whereby, like, they literally, they're. By their mandate, they can't. I don't know. So, yeah, I don't know. It's like, it's just something that exists. And, like, in my mind, like, bitcoin needs to be strong enough to withstand it.

The Implications of ETF Hacks

Otherwise, bitcoin hasn't fulfilled its promise. I mean, on a completely almost unrelated point, I mean, you spoke about it briefly, Carl, what would happen if these ETF's got hacked? Like, sure. Like with proof of stake, we've gone down that rabbit hole where like these ETh ETF's, they have influence on the chain, but like for bitcoin, they don't have influence in the coordination. So what do we even do if like a Coinbase ETF, I mean, I'm assuming they have it across many different accounts. From the labeling on the explorers, it actually looks like a lot of these ETF's are just one in one address, most likely in multisig. But I. That’s kind of an interesting thought experiment that at least prompted my mind whenever you were outlining some of that.

Potential Consequences of Hacks

Yeah, I mean, in terms of what would actually happen as a hack. And just for reference, I think David is correct in that it's only about 5% of the bitcoin is actually in the ETF's, but Coinbase itself holds about 10% of the bitcoin total. Bitcoin. Yeah, I mean, in terms of hacking, who knows what would happen at that point. You might get a Dow hard fork sort of situation. Situation take place in bitcoin because if you have enough concentrated ownership, there becomes a larger incentive to do it and more parties are kind of agreeable to it. And that's really kind of what drove through in referencing Ethereum, the hard fork for the Dal hack.

The DAO Hack and Its Implications

Basically. For those of you that don't know, within the first few months of Ethereum being launched company, I believe it was slock, it created a Dao and it was just like the first DaO that existed. And they're like, put your money in, we're going to sort of automate everything. Something, right? And everyone's like, oh, this is super cool. Smart contracts, autonomous organization. Let's go. So 15% of all eth at that point got put into the dao. But then a hacker kind of found this recursive bug and was able to basically drain the DAO. So someone stole effectively 15% of total supply. And sort of the argument was the reason you want to fork that is because that's a nefarious person, they control too much of supply and sort of single point.

Forking as a Response to Centralization Threats

So they literally had a fork where they just said, we're going to zero out these addresses basically, and go forward from there. And so that was the sort of ethereum Dow hack. I think you'd probably actually see a similar situation in bitcoin. And the majority of miners and bitcoin holders, given that amount of bitcoin in the market, would probably actually be incentivized to go along with it because of the potential of very negative price pressure it could put on the coins or just the market. Yeah, it's an interesting thought experiment. I can see it going a bunch of different ways. I would just say, and Carl, to the statistics you were putting out, and I think the broader question is, this is not ETF specific.

Centralized Exchanges and Their Risks

This is centralized exchanges and custodians in general. Yeah, I mean, ETF's are like a magnet, right? Right, yeah, totally. But they're a bigger form of magnet that already sort of existed. You're absolutely correct. Like this exists in exchanges. But for whatever reason, with ETF's and sort of the regulated custodial services, it's a smaller number of people that can do that. So it's a worse magnet than exchanges in some ways. Well, I think even more so those people that are maybe in ETF's aren't aware of that risk because it's not like a stock can get hacked. Right. But crypto gets hacked all the time.

Investor Awareness and Systemic Differences

So you're maybe talking to a different clientele that's not aware of the fact that there is heightened security depending on the setup for these crypto assets compared to more redundant social like security for stocks or other instruments. Yeah, right. If you look at SVB, right, someone goes under, the Fed steps in and they just bail everybody out. So the fact that it's a more economically like pure system on an immutable ledger that actually sort of settles is different than what we currently have in the financial world. That being said, I think the concept of just a rote hack, honestly, is somewhat low. I think Coinbase does a pretty good job.

Coinbase's Security Measures and Market Predictions

They've demonstrated they can do a pretty good job for a pretty long period of time. I think actually what you're more likely to see, and which is more maybe interesting to discuss is with the ETF's. There's actually a very specific line that all of the ETF's had, which is if bitcoin forks, the ETF's have the sole discretion to determine what fork you get your bitcoin in. And there is no requirement for them to give you the value in a fork if it takes place so effectively as the ETF's control. More and more bitcoin, they have effectively like an RWA in a way. Right. Because they have these notes. The people that have these notes have invested real money and then they have the bitcoin that sort of backs that money.

Forks and Their Potential Impact

So they have a lot of sway because they're controlling that much of the assets that exist on chain in determining the outcome of a fork, which I think is the bigger issue. I would actually argue that at some point, companies like Blackrock have expressed interest in ESG. And if everyone is saying that ETF's are sort of a way to scale bitcoin, and we're sort of trading these off chain between trusted, regulated entities, I think it's going to be very easy at some point, as the amount of that bitcoin goes up, to make the argument that we're just wasting energy doing the proof of work anymore, because we're already effectively proof of stake, given who holds it, how they hold it and the relationships they have.

Concerns Over Bitcoin's Proof of Work

Ergo, we're just going to fork bitcoin, make it proof of stake, and only honor the proof of stake form of bitcoin versus the proof of work form, which then would completely sort of centralize the system. I think that's far more likely than something like Coinbase getting hacked. Yeah, yeah. I wanted to jump in real quick as a bitcoiner in regards to the hacking. I don't think that there's a large number of hardcore bitcoiners that I don't think would really care if the people's bitcoin and ETF's and Coinbase was hacked. I mean, it would be really terrible, like you mentioned, for the price, and maybe it could have some unforeseen consequences, but a lot of people, like, they just don't believe in the idea of a bailout or interacting in that way.

Perspectives on Bitcoiners and ETF Hacks

Your point about the fork as a clause in the ETF's that was all over my twitter for, like, whenever someone discovered that and was posting about it. And it's definitely very significant. One thing I will say, and I don't know how much you guys have talked about this, because I speak with a lot of bitcoin miners and I've spoke with them, interviewed some of them in person, like doing natural gas, stranded natural gas and turning that into bitcoin hash rate, you know, all sorts of people. And the argument is like Blackrock has been saying, yeah, they're ESG this, ESG that in 2021 they were saying bitcoin takes too much energy up.

Blackrock's Stance and Bitcoin's Energy Consumption

And we need to. We need to not let that continue because it's bad for the environment. Now, in 2022, 2023 and so on, they've come to the conclusion that which is this is true. I mean, both things can be true. Right? They've come to the conclusion that bitcoin is a great tool for demand response. It provides stateless compute on demand that can be turned off or turned on at any time. It can balance grids, and it can also incentivize sources of energy that are almost competitive to the marketplace, but maybe geographically inconvenient. So I would say, like, just looking at what Blackrock is saying, like, I'm not a huge fan of Blackrock, but I have to respect their assertion from a marketing standpoint to allow themselves to just sequester so much bitcoin.

Blackrock's Influence and Market Position

That's where my thoughts are with it. On the topic of Blackrock. They've publicly gone on tv and have said they want tokenize everything. I think they're an ally to bitcoiners, but they're also an ally to this future in which everything is moving on chain. And they're doing that actually with not only just their words, but they're funds as well. They have the biddle fund that's at over half a billion in TVL. And they're going on making these statements, telling their customers to start allocating into crypto. And that's not just an ETF thing. It's broader than that, and it's across these different funds.

Institutional Interest in Cryptocurrency

And so I think, of course, Blackrock and ETF's aren't directly related, but you are starting to see these institutional players take these assets more seriously. Bitcoin being something that does drive a lot of that renewable energy, that energy capture in remote areas, driving energy prices lower and lower is a good thing. But I do think there is room for competition. But yes, overall, great points on the bitcoin side. I did want to pivot real quick back to Matt and see if there's anything in terms of the conversation you wanted to make sure we touch on for the agenda or if we're headed in the right spot.

Agenda Review and Market Considerations

Appreciate it, Alan. No, I think you guys are headed down the right path. The one thing you did touch on briefly that Doctor K was speaking to, but he brought up two great points, and so we took it down one path. I'm just curious out loud here. It sounds like based on what Doctor K is saying, ETF's could potentially bring more price volatility to that space. Did I understand that correctly? So I guess that's the question. Can the ets bring more price volatility or more stability to the space? Yeah, I mean, so I'll just like parlay.

Market Stability and Investor Reactions

So one, like I would suggest, like Blackrock and like, these other firms, they're not like allies to, they're allies to their balance sheet and their profits, like, just like any good corporation and, like, rightfully so. And, like, so when they say, like, ESG, like, they don't care about ESG because they care about some, like, ridiculous notion that ESG helps the environment. Like, that was good for marketing, and a bunch of their, like, clients are like, sovereign wealth funds and, or, like, pensions and, or what. That, like, that was a hot thing that they cared about. So, like they said, like, that has died down significantly, right?

Blackrock's Marketing Strategies

And they, like, have a window to be like, well, we're gonna make a bunch of money over here. We can cool it on this ESG stuff, or we can recategorize as to, like, what is ESG and what is not. So, like, they're just, look, they're just following where. And rightfully they should, they have a fiduciary obligation to their shareholders to do so. So they're not naturally an ally to anything except for their balance sheet and their cash flows. But, like, I think that actually is beneficial for bitcoin in the ways that Gabriel and others here described. In terms of the volatility that it brings. It cuts both ways.

Long-Term Outlook on Bitcoin Volatility

Over time, it should lead to less volatility. The larger the monetary base is, the larger that you can absorb big flows in and out. And this is why derivatives around commodities through the CFTC were created, was to help the market get more liquid and more stable for productive assets. Now, bitcoin is a little different than like, pork bellies, right, or OJ or corn, but it's the same thing. But we're just entering the beginning of this cycle. And so I think they're like, set to. I think they recently approved options on bitcoin, ETF's. And because they're just now approving that, you would expect something like that to actually add volatility.

Implications of ETF Options

But over time, once you add options, you add futures, you add all these derivative contracts on top, and you grow the monetary base. In theory, or at least what we've seen empirically historically with other similar assets, is it a should tamper volatility? Now, that may be a pro or a con. Bitcoin also has the natural. At least its proponents will argue that over time, like, it's, you know, it's halvings over time and stuff. Theoretically, it should be good. It should get less volatile if, as the monetary base grows, we'll see whether that comes true.

Volatility and ETFs

So, TBD, it could go a lot of ways, but in the interim I think it's naturally just going to be volatile and the ETF's are going to have a big change to that one way or the other.

Comments on ETFs and Scalability

So there are two comments that I want to respond to. So Gabriel brought up the ETF's being a scaling mechanism and David just brought up the concept of haveitings. So I guess you guys can see where I'm going here. My concern is that maybe the ETF's, obviously they do bring in more money. They are centralizing the custodianship, they're centralizing the influence, but they're also creating a system. If this is the way that we're going to quote unquote scale bitcoin, I think that there is a sort of a centralizing fee structure that is going to become emergent.

Fees and Bitcoin Security

Specifically, if we look at how bitcoin secures the chain. At present, a majority of the fees are derived from inflation, but that inflation for the happenings sort of gets lower and lower with time. Now to offset that, then in the long term you need the fees to rise. And if bitcoin doesn't scale on chain and we use an off chain scaling mechanism like ETF's, those fees actually have to rise quite precipitously. It might be $1,000 of transactions at the current bitcoin market cap. And if it goes ten x, you would expect the fees to also have to go ten x to achieve the same byzantine security.

Binary Outcomes for Bitcoin

So we either have one of two worlds. One is we don't have byzantine resilience security, at least not economic byzantine resilience security. Or we do. And if we do, that means that the fees have gone up quite a bit. And if everyone's just sort of holding these in ETF's, the ETF holders aren't paying fees. They're going to be paying for movements in very large quantities between the banks and the coinbases that hold these things. But they're not going to be actually participating directly. They're going to be participating indirectly and the fees themselves are going to be so high that individuals won't be able to directly participate.

Concerns about Centralization

So I would posit that saying the ETF's are a scaling mechanism is basically saying that the banks will own bitcoin and individuals will lose access. Preston pretty sure Im following you Doctor K, but Im going to pass it over to Gabriel. Hes got his hand up. I think hes going to help me out here.

Skepticism About ETFs

So I mean, I wouldnt say that etfs for bitcoin? No, I would say that its a scaling solution, as I had mentioned. I wouldn't say that's necessarily a positive connotation or that it is ideal. However, it's just where we're at for now. And I don't think down the road, I would think about it this way. BlackRock is probably the most powerful company in the world. Even though they don't have the largest market cap or anything like that, they control the largest number of assets between them, Vanguard and State street.

The Influence of Major Asset Managers

It's like 88% of all stocks trading. S and P 500 are controlled in a majority by their voting shares. You know, obviously underneath certain regulatory standards, like, I think if you go beyond a certain percentage point, you're given some responsibility. So they have to stay below that. But these companies have massive influence. The beauty of bitcoin is that the consensus and distribution of bitcoin, which is true of all proof of work networks and the, you know, the custody and ownership of that bitcoin is decoupled because of the proof of work nature of the network.

Comparing Ownership Dynamics

So, I mean, if I hold my bitcoin off chain in self custody, then, I mean, it can't be acquired unless you can find a way to break the encryption algorithm. That's, like, not possible. And so, like, if you're thinking about it like Apple stock, or compare Apple stock to bitcoin, if BlackRock is able to sequester a large number of Apple shares, and they're able to sequester a large amount of bitcoin, which can they affect more? And the answer is apple stock because they have voting rights to it. Bitcoin just may not be scalable long term, and that may lead to massive deficits in 20, 30, 40 years.

Concerns about Long-Term Scalability

And that could be a huge opportunity for other proof of work systems to come on the rise. That's kind of the way I see it. I don't know what else it could really do, but, yeah, I don't know. I think it's pretty resilient, but it's not like the most powerful competitor in the long run. So I'll just make two follow-up comments. So I guess when I'm looking at your statement of, okay, they're my keys, they're my coins, so I have them. Would you still feasibly have them in a meaningful way?

Transactions and Accessibility

If transactions were $10,000 ago, bitcoin becomes a lot less useful for a lot fewer people. True. If that is the case, then I would also say in the model where people are being paid transactions are $10,000 ago. Effectively, what's happening at that point is the blackrocks and their analogs are the ones paying the miners through the fees. And then I would then posit at that point, who feasibly is controlling the miners is the one paying the fees. So in a situation where you don't scale off chain and you don't have democratized holdings, you don't have democratized, like, general use, generating high volume on low fee, you're going to end up in a system that will ultimately get co-opt.

The Future of Bitcoin's Economic Resilience

It's just a matter of on what timeframe. Yeah, yeah, definitely. That's interesting. I mean, personally, I would measure fees and sats per v byte as opposed to dollars. I think that's really interesting. I've never considered the idea that they could capture the fee market. I'd have to. I definitely would like to bring that up. I don't think. I've been on a lot of bitcoin spaces. I don't think anyone's ever brought that up before.

Potential Capture of Fee Market

Yeah, I mean, certainly that's possible. I would also, I would argue or posit that bitcoin miners and bitcoin people are just like, really, I don't know, focus on freedom, let's put it that way. And if they can do anything to prevent that co-opting, I hope that they do. But, yeah, no, I completely see that point. Yeah. So when I think about co-opting, right, I'm always thinking about economic incentives and economic resilience.

On-Chain Scalability Challenges

So I'm just looking at the system, and the question is, if we don't scale on chain, can we long term create an economically resilient system? And every time I circle back to that question, I always come to the answer no. Yeah. I'd also like to throw it back to this point. And then I want to relinquish the mic to Kawhi network. But earlier we talked about this idea of rehypothecation and then using the bitcoin to do that paper bitcoin. Like, that's where the SEC is supposed to step in.

SEC's Role in Bitcoin Regulation

Like, if they're going to do paper bitcoin, okay, that's fine, but you need to, like, have disclosures to. That can't be some random clause in a 500 page document that you've put out that allows you to do that. So, like, the SEC, I'm speaking for myself completely, but to an extent, it's definitely captured and it needs to do its job where it's. It's not being, you know, co-op co-optable. So, Gabriel, real quick on that one.

Reserve Requirements and Economic Norms

What is the reserve ratio requirement of banks currently in the United States? So this is very interesting, actually. It used to be 10%, but my understanding is, didn't they switch to a liquid coverage ratio system? Yeah, it's 0% right now. Yeah. Yeah. Yeah. So it used to be 10%. Dude, this is so interesting. So I just got confirmation on this. So I actually was talking to my economics professor, who put that on the slides for a lecture, and I spoke to him, and I'm like, that date is September of 2019.

The Shift in Banking Regulations

And I'm like, okay, I looked it up on Google because I remember following the news in 2020, March of 2020. The Fed suspended that, and then I was looking it up and it's converted to some new system called a liquid coverage ratio. So, yeah, we're completely not reserved right now. It's not. Not good. So I don't know, what are your thoughts? Well, I mean, I think we've beat bitcoin to death on this topic. Honestly, we're running under a limited amount of time here.

Shifting Focus Towards Ethereum

So actually, I'm going to can the rest of my questions and hopefully we can go on a successful side quest here. What's happening with Ethereum? How is the ETF impacting Ethereum? What's the long-term implications there? You don't necessarily have the same economic incentives in the proof of stake system. So does anybody want to take that or have any thoughts on how this is impacting Ethereum? No, I'm going first.

Ethereum's Identity Crisis

And the one thing I'm going to say for Gabriel. Doctor K, let's be kind to our guests. Go ahead, Gabriel. Well, this is Alan, but I was. Going to say for Gabriel. Oh, my God. No need to say you're going to relinquish the mic back to the quiet team. You're a quimaxy now, so no need to feel in this space anointed. Yeah, but on ETH.

Ethereum's Historical Context

So with the asset for being a network token and being something that now has an ETF and has emerged is pretty much number two. It's the first ever programmable blockchain with contracts that can run and it's running complete. Wait. Huge first mover advantage and has now gotten to the point where they really have an identity crisis. In my opinion, you have OGS saying, we really didn't really know what ETH was going to be.

Challenges with Ethereum's Vision

We created this thing because we thought it was cool and we could do smart contracts and you have new people in the system saying, well, ETH needs to be money because we have ETF's and we have this institutional market and this monetary base that we need to support. And so not only that, but from a technical standpoint, it's limited in its function as money, and it's actually falling back into its function as purely just a data layer or something that's more of a network asset rather than a monetary system.

Layer Comparisons and Market Position

And so in its application of a data layer, we have direct comparables to something like Celestia. And Celestia is valued way, way lower than Ethereum is. And so people are looking at the actual revenues in terms of data that's being published, and they're saying, well, I can get a better deal on Celestia if I'm a layer two. And if Ethereum's whole business is layer twos now, well, we're kind of screwed for a monetary base.

Centralized Exchanges Impacting Ecosystem

And so you have really people trying to fight for execution on Ethereum still and looking at what this evolving market looks like in terms of blob pricing, who is actually publishing data, what value is being captured by l twos? We talked a little bit about custodians on the space already. I think this is a huge market for these custodians to go and launch these layer twos, take all of the value, pay Ethereum nothing, and get all of that revenue back to their companies that are centralized and already operating centralized exchanges.

Ethereum's Future Prospects

And I think we'll see more centralized exchanges continue to do that, which is net negative for the space. So ultimately, as I kind of led with Ethereum again, identity dilemma, identity crisis, maybe midlife crisis, who knows what it will look like in the next, you know, five years, five, seven years, as it's been, you know, almost a decade now since Ethereum has launched.

Bitcoin versus Ethereum

Yeah, okay, so Ethereum, guys, so what Ethereum did is, okay, so let's talk about what bitcoin did. Bitcoin was an amazing invention, and it proved something. It proved that we could have trustless digital value transfers. That's what it proved. And it did a great job of it. And if the sort of ideal characteristics of bitcoin are manifest, as they have been manifest at certain points in the past, where it's decentralized and you have a large group of miners, everyone sort of independently custodian their tokens and they're doing on chain transactions like bitcoin is great in that context.

Ethereum's Compromise

It has good economic design, it has good economic resilience. What Ethereum came in and said it wanted to do is it said, well, we're going to sacrifice some of this decentralization and we're going to do that so that we can try to get to some degree of scale. And they basically said, we're going to slide down the slope from objective towards subjective. And they introduced a term called weak subjectivity.

Sharding and Proof of Work

And they said, okay, it's very hard to scale these systems in a sharded way, so we're going to kind of give up on that. The reason they give up on it, as a side note, is because it's very tricky, if not impossible, to do it using proof of stake. You basically can only construct sharded systems using work as the consensus mechanism. But that's an aside. So what they did is they slid down the slope from objective into the weakly subjective.

Decentralization versus Performance

But they said, hey man, we still want to be decentralized. We're going to have this proof of stake system. We're going to have, everyone's going to run their validators at home in a rasp pie. That's how we're going to achieve decentralization. Then where they ended up is they ended up in a situation where they don't have the objectivity of bitcoin, but they don't have the performance of Solana.

The Barbell Concept

And anybody who cares about objectivity doesn't want an inferior user experience to Solana in a weekly subjective environment. So effectively what they've showed us is that there's a barbell in crypto. On one end of the barbell there's centralized systems that are controlled and nobody gives a shit because they're casinos. Then on the other side of the barbell you have these truly decentralized, economically resilient systems like bitcoin in its best days.

Ethereum's Market Struggle

And there's really not room for products that are in between, because once you go from one end and you get in the middle, you're kind of into no man's land. And I think that's really what Ethereum has demonstrated, is the concept of a fractured, heterogeneous, weak subject environment with weak subjectivity is not a product offering that anybody wants. And that's reflected in the fact that there were exactly zero inflows to the Ethereum ETF today.

Resonant Value Propositions

Yeah, I think I agree with a lot of that in principle. Yeah, I mean, bottom line is, in my view, is just like bitcoin has the best, cleanest, like memer narrative of its like value prop. It's like sovereign sound money. And like that resonates, especially like in an ETF context where as I mentioned, like you're going out through RIA channels and to like institutional folks and it's like, well, yeah, I see everybody starting to go back to zero interest rates and everybody's like pumping their monetary supply and like financializing everything.

Ethereum's Lack of Clarity

Yeah, it makes a lot of sense. Bitcoin, right? It's clean, it's easy. And so despite, you know, you can point all these flaws in its inability or lack of desire to change or potential future hurdles it has around like the fee markets and things like that, it has just such a clean and resonant message with the recipients and channels through which an ETF goes. Right. Whereas Ethereum tried to have its cake and eat it too, and get the best of both worlds, ended up with maybe neither, as you guys are saying.

Ethereum's Messaging Challenge

But yeah, it tried to do its ultrasound money thing, but it ultimately didn't even know what it was talking about. I don't think it even had the heart in saying that. It's like, oh, we're going to burn more than we get, not realizing that the actual credibility, basically you're talking about a credible, neutral, predictable monetary policy. You're not really saying like, oh, we may or may not burn more or less given on our like, utility or usage.

Complexities of Ethereum's Direction

And so they kind of tried to get the best of both worlds. They didn't really have their heart in it. I will say, though, Ethereum still has like a massive base and in fact an incredibly vibrant developer community. And so, like, there is still a lot there, in fact, like a ton there. You're right though, like at the end user. Yeah.

User Experience in Blockchain

If you're just coming into the space, you're like, I don't care. I just want to deploy something and get to the casino or use an app and I don't care about anything else. Yeah, Solana works pretty well for that. And so you're right that it is a little bit twisted between. It does, though have a pretty robust developer community, and we'll see if it can parlay that, whether it's its rollup-centric roadmap or otherwise, or Celestia style.

Competitive Landscape

Or maybe you could say Celestia is its biggest competitor now and maybe it all moves that direction. We'll see. But I think with respect to ETF's just given the nature of its user base and the channels through which it flows, bitcoin benefits immensely by having just a clean and resonant value prop. I agree with that in a lot of ways.

Ethereum's Ecosystem Fragmentation

Just to comment on the dev environment, though, in Ethereum, there's a lot of development that's happened on the EVM, but within the layer twos, I think a lot of the development has fractured. It's still in the. But it's not strictly in the ethereum ecosystem, unless you class all of the l two s operating on Ethereum, which are really l one s that are competitive to Ethereum as part of that ecosystem because its fee mechanisms cause the pricing to be too high and lack of scale means that you're paying high on chain fees when people are quote unquote developing.

Fragmentation of Development

Now they're developing on arbitrum, they're developing on avalanche, they're developing on optimism. Fragmented, right. What's that? Fragmented. Right. Yeah, it's very fragmented. And then one other point that I'll make is my concern is I get there's sort of these ethereal ideas about economics and centralization, control and resilience that I brought up with BTC.

Concerns Over Bitcoin's Direction

My concern is that over time, if there's enough of them and they become severe enough, it will move bitcoin away from that objective end post that it currently has and put it in the middle just like Ethereum. And I think that's what we principally have to be concerned about over a mid to long term time horizon. Go ahead, Gabriel.

Getting Clarity on Ethereum

Yeah, so I think I'm definitely going to be getting my ethereum news from the Kawhi network, because anytime I speak to any ethereum person, they cannot in any cogent way explain to me what's going on. And then I just kind of want to pick it apart. So, like, for example, Alan, I think it's your pin post. Like it's a thread. But there was least one, there was one graphic in there that I found really interesting, which was vertically scaled blockchains, whereas there are horizontally scaled blockchains.

Comparative Scaling Modalities

And then, you know, obviously in the far right quadrant is Kawaii network, which is like both vertically and horizontally. So I mean, just based on, like, inference, I would say, like horizontally scaling is either l two s or sharding. Whereas, you know, Doctor K was just saying l two s are a weaker version of scaling horizontally, and sharding is like a better version of that.

Ethereum's Scaling Solutions

And then when it comes to, like, the vertically scaling, like, I noticed Monad was like way at the top there. So that's just number of just pure, like, I don't know all the terminology, but I guess parallelized just ramming through compute of a bunch of different nodes, a bunch of different like transactions or actions, I guess you could say. And yeah, I don't think Ethereum picked a niche well enough, and now they've just made themselves like this very spread out hub for I don't even know what, like, it's just a lot of different stuff.

Summary of Concerns on Ethereum

And then I think I really like David's comments in regards to the ETF that kind of summed it up. Yeah, it's just not marketable as a product like that. Yeah, we're now the. As the resident climax these, right? Like we can dunk on bitcoin, Solana theorem, you name it, we get that. We get the free.

Challenges in Narratives

You'll never get me to dunk on bitcoin. Yeah, bitcoin. That was a slick move. Barbell is easy to. I'm with you. I'm with you. Carl introduced the barbell here on the call. But yeah, on that graphic, Gabriel, specifically, you're looking at these layer twos and this ability to move horizontally.

Complexities of Scaling Strategies

And that is kind of the approach that you're really limited to when you can't scale the base layer anymore, either due to competence or to the ossification of the protocol. So bitcoin, I would say more to ossification, ethereum, maybe more towards competence. And you're looking at these newer protocols that are able to focus highly on that vertical nature. You have the Solana suite, Monad, and I even put them in that order.

Evaluating Scalability Strategies

And I responded to a comment on that saying, well, like, what was your logic there on choosing some of those? And really that's kind of what people are duking it out over is how vertically scalable can we be and not more so horizontally scalable, because the horizontal part is kind of easy if you're offloading the layer twos, it's very difficult if you're doing it natively in the system. And I'm sure Carl's kind of chomping at the bit here to expand more on that point.

The Importance of Scalability Ventures

But that is the hardest part to achieve is the horizontal scalability natively from day one in the same place that's accruing value without sacrificing that mind share or that value leakage to these layer twos or to these other networks that are launching their own tokens or I competing for that execution space and that bandwidth. So, you know, both systems should be able to do that vertical scalability, but adding that vector of horizontal is also incredibly important.

Concluding Thoughts

Thanks, Alan. Yeah, that thread and the way you analyze those chains really helped me compartmentalize for myself, and I'm happy to find out that Gabrielle also got some value out of that. I know we're coming up on time and a few of us have to drop at the top of the hour, but I really want to ask one more question that's been burning for me at this point, and maybe we could try to keep it short.

Mainstream Adoption Concerns

But do we think ETF's are really a step towards mainstream adoption and or is there a risk. Actually, I'll just focus on this. Do ETF's pose a risk in just turning crypto into another Wall street product? Yeah, I'll start there. So ETF's are definitely a catalyst for mainstream adoption, but it's also the casket that is the funeral procession of crypto and the ideals that started it.

Diverging Perspectives on ETFs

Thanks, Doctor K. Agree with the sentiment, I think. Less extreme. It's an open question. It's an open question. It is correct that, yeah, if it becomes totally, like, enough, people just want to hold it and don't value holding it themselves or using it and don't value the underlying values of the bitcoin system.

Long-Term Implications

There's definitely a long-term risk there, no doubt, amongst other long-term risks, but it cuts both ways. You get a bunch of people who. That clean message and value prop that I discussed earlier, that resonates with. That's good. That's a good thing. Can you convert them like, I view it as like a top of the funnel type thing.

The Gold ETF Analogy

Right. Can you convert them further to, like, oh, maybe I do want to check out bitcoin directly and use it and hold it. Or maybe it's like, fine, I just want to hold it in this mechanism, but, like, I'm. But I still, like, I'm learning about and come to support the underlying ideals and values of this movement or if it totally gets whitewalled.

Gold Market Dynamics

So how much. How much has that happened with gold? Man? When someone buys a gold ETF, do they, like, get decoyed? Gold, I think, is like a. Is a pretty differentiable. Like, gold is like, it was start, like, again, the physical nature of it makes it very difficult to, like, deal with directly to.

Contrast Between Gold and Bitcoin

It's always been run just like, given the capital commitment of, like, miners and stuff. It's always been run like the diamond market, like a cartel, and then even more with, like, the London. The London market. So, like, I think that's, like, that started that way, whereas bitcoin's coming from the opposite direction.

Cautions and Risks Involved

So I hear your points and I agree, like, long term, they're risks, but it's not just as immediate as gold is. But yes, you're right. Like, those are real risks over the long term. No doubt about it. Yeah, I wanted to jump in real quick not to open up. I know we have to close here in two minutes.

Reflection on Market Trends

Not to open up, like a complicated macroeconomics discussion, but gold is, like, accrued, like $5 trillion to their market cap since beginning of year. And, like, no one's been paying attention to that. Kind of came up from someone I was speaking with, and I'm like, wow, you know, that's Nvidia.

Observations on Market Dynamics

And 66%. Like, that's one in two thirds of Nvidia. Like, it just went from 13 to 18 trillion. And, you know, to your point, doctor K, like, that's a. I agree. That's a completely captured market. And like David was saying, it's always been captured. It's always had been paperized or papered over, or the miners have always had such a massive advantage controlling the price and whatnot.

Insights on Bitcoin’s Position

So I just think that just more the talk for bitcoin. But, I mean, gold is absolutely ripped. You're right. And I will say there is ornamental use of gold. And people do, in many ways, actually get into the hobbyist of coins. I'd say relatively smaller than it maybe used to have been. Maybe people moved on to nfts and trinkets and other things rather than holding onto coins.

Cultural Aspects of Gold Ownership

But it is a notorious hobby. Hold on, though. But gold, right? 97% of gold is monetary, not decorative or numismatic. Sure. But how much of that in comparison to bitcoin? If you look at bitcoin as an asset with the emerging use cases on bitcoin, in terms of, like, ordinals and other things, we're opening up the can of worms there if we start talking about those use cases.

Preparations for Future Discussions

But, yeah, I'm taking notes for follow up spaces. We're going to get Gabriel and Doctor K back here to talk on that. Definitely. And I am curious what's happening with gold. And I think it's a good story to compare to crypto, especially in the context of kuai as we move forward.

Tracking Global Gold Flows

But put in your notes for the next one, how the Chinese and the Americans are using very intense radar over Switzerland to look at, like, very slight changes in the landscape because they're trying to track how much gold is flowing out to Saudi Arabia and other countries that you could actually see changes in the topography.

Contributions to Ongoing Dialogue

Put that weird grenade in your next space. I was before I knew where that was going. Hey, Alan, I think my next commitment doesn't start till eight, so I think. They bumped it from seven to eight. So we're glad to keep ripping. I'm glad to help you. If people want to keep going for a little bit, that's fine.

Flexibility on Timing

If people need to drop, that's also fine. I wouldn't drop that grenade. I wouldn't have dropped that grenade. I was trying to get out of there quick. Let's do it. Let's explore that. Well, we could go whatever direction we want.

Discussion on ETFs and Innovation in DeFi

Yeah, maybe we'll save that one. Yeah. Okay. All right. Well, that's all right. I got some other questions here, actually, that kind of, like, play off of, I think, what you guys were discussing earlier, probably more focused on the Ethereum space, but how do we think ETF's really help the innovation space and the growth of defi? Maybe it actually enables some additional investment to solve some of the issues that the l two s are seeing. Maybe not. I don't know. What do you guys think?

Bitcoin Banks and Off-Chain Solutions

Maybe. I think, yeah, there's like, the bitcoin question around scaling stuff is so, there's so many different ways you can take it. One of the things that I like to go back to is, like, I mean, way back in the day, the bitcoin talk forums, you see, like, some of the ogs talking about the notion of bitcoin banks as like, an off chain scaling solution. And the idea being that, like, oh, can you have these, like, third party custodians that be like, in an ideal world, like, automated and autonomous or at a minimum, verifiable? And you kind of have that. I mean, you had, like, Alan referencing. Well, I looked at the addresses of, like, behind the scenes of these, like, ETF's and stuff. So even that is a market improvement over historical tradfi system constructions. And so I'm intrigued that you could have this spectrum of, like, verifiability and trust minimization and various assurances that you can get and, yeah, I. But there are some real challenges to getting a totally programmable and infinitely scalable trust minimized layer on top of bitcoin, for sure. In addition to the trade offs, you may have to make that affect your lendiness of hardened of the l one.

Mechanisms for Scalability in Bitcoin

But I do think that there's this really interesting. Drive chains are a great example. There's a whole spectrum of mechanisms that bitcoin has yet to really go down, but I think that are interesting, that kind of strike a balance between the totally trust minimized totally verifiable, totally top assurances versus can we make market improvements over the comparable or analogous tradfi services that are dealing with other assets. And I think that's where you can make real progress. It's more pragmatic and less idealistic. But I do think that there will be mechanisms over the next couple of years by which there's ETF, like investment vehicles or other custodianships, that are conducted in a more like real time, verifiable and automated, autonomous way. And that's a space that I think is interesting. And maybe that's where some of these bitcoin l two s are going.

Concerns Over Centralized Financial Practices

I haven't really seen a great one, whether it's like the OpCAt or the BitVM structures that get there. And maybe I'm being overly idealistic or optimistic because, like some of them do require changes to the l one that just like, are not going to get pushed through if history is any evidence. But there is this like, whole, I guess, spectrum of design space that people can talk about in between, oh, a perfectly trust minimized and like verifiable and like great assurances versus like, hey, is it just better markedly, than what the alternative in the traditional finance world is? And so there, I think bitcoin can do stuff and already has done stuff.

Centralized Exchanges and System Improvements

I mean, you think about right now, centralized exchanges and these other things like proof of reserves, which are very not robust. But maybe we could make improvements on those kind of adjacent things without proving out the ability to expand the l one in terms of atomic composability and scalability. Go ahead, Gabriel. Yeah, yeah. So I'm really glad that you mentioned bitcoin banks and some of the things that are being built on bitcoin, David, because, like, you definitely know what you're talking about, because you're mentioning bit vim as bit vim, right?

Emergence of New Banking Systems

Like, there's a lot of individuals out there who are using some of these new advancements as a means to capture lots of liquidity, maybe without, I'm just saying, like, a lot of people are doing this without the due diligence. They're taking on a real degenerate crypto approach to things. And the technology underlying is very interesting. So bitvim is definitely one thing where you can create these many computers that settle on chain, and that's very complicated, very hard to understand. There's obviously the lightning network, which is familiar with a lot of people. So in my opinion, probably the lightning network will serve as a fed wire or a fed mastery that's hard to censor, but can be done between banks, which I think, to your point, David, would be a markedly better system than some of these federal fed wire or fed mastery accounts that are at the moment literally being choke pointed.

Concerns About Censorship in Financial Systems

And no one really seems to be talking about that. So, like, that's a market improvement. Another thing that this is way out in the weeds for bitcoin development. It's this thing called Xiaomi and e cash. And like I said, I mean, I'm talking to bitcoin core developers. I'm not talking to people who are building on bitcoin. I'm talking people who are building in bitcoin. And this whole system, from my best understanding, is a way to take satoshis and perform sort of like an ordinals tactic. But. But like, not. That won't necessarily make the satoshi's heavier, but it will allow for, like, new banking ecosystems to be built on bitcoin. And that's something that's way out in the future.

Reflection on Financial Sovereignty

It could even have implications on, you know, safety in custody, like Alan was saying. And we had this discussion earlier about hacking. It's like if you have a Shamian mint, you know, in order for that mint to move any real bitcoin, a large number of guardians of that mint would need to do so. And then it would just create, like a lightning network sort of system where it can accept and then send lightning out. But, you know, I'm not an expert on it. I just. These are some of the things that are being built that I thought were pretty interesting. So I'll jump in here. You know, I get your guys argument that doing better than the financial system is better than the financial system.

Exploration of Endpoint Equilibriums

However, I don't think those are endpoint equilibriums. If you can do better outside of the financial system, like completely on chain. So when I think about these systems, the question is, obviously, bitcoin has a tremendous network effect. It has good marketing. There's questionability around its long term economic sustainability and the ability to sort of maintain its decentralization with time because of that. That being said, obviously there are innovations. Lightning has issues, but arguably is better than swift, to Gabriel's point. But the question is, if you can build a system that has all of the characteristics you want in the layer one is that the long term equilibrium solution?

The Quest for Digital Monetary Systems

Because at the end of the day, individuals want basically cash. They want to use it at the lowest cost possible. They would like to be able to save and have those savings go up in value over time. And at some level, they would like the money to be theirs and not somebody else's. So when you kind of speak to those needs of people, you're looking at systems that are homogeneously scaling in an l one. And when you move away from that, you preserve some of those properties and you lose others. So the question is, can lightning be fruitful in a system that scales in the l one? My answer to that would be probably not.

Innovating Beyond Traditional Financial Institutions

So that's really kind of the goal at qui, right, is that we're trying to scale the l one through a sharded topology so that we can create a digital monetary system. So we're trying to completely displace the banks, completely displace the blackrocks, or at least the requirement for them. Not that they can't participate, but they're not sort of a key component in the system, that you must have to make it work. And that's really what we're trying to do. So with that, hopefully, then everybody can actually have true financial sovereignty and independence, where they control their own assets, they can't be confiscated, they can't be censored.

Concerns Over Lightning Network Implementation

You know, and I guess that's kind of our thesis here at qui. Dude, I don't know. You say lightning is more successful than swift. I'm not even entirely sure that's anywhere close to accurate. Every time I've seen lightning used two times, two distinct times, one time in Nashville, at Bitcoin Nashville, they were trying to use lightning at the merch booth. Every single time someone tried to buy a shirt with lightning, the person selling the shirt would look at the QR code, would see the payment on the phone that got sent, but then they wouldn't know how to track it. So I don't know if that's a lightning issue, a point of sale issue, or just, like, the exact app they were using, but they're like, well, basically, I don't know if this went through, but I'm going to give you the shirt.

Challenges Faced by Lightning Network

And then the other time, I think, was whenever Trump was doing it at pub Key in New York, at the bar to buy, I guess, a burger or beer or something, and they got it recorded, and they were all just like, yeah, you scan the QR, but we don't know if lightning even worked. So I think every time swift gets sent, though, you know, there's pretty high assurances, of course, visa. Hold on. And I do. Hold on. Gabriel has his hand up, so I'll let him jump in there.

Clarifying Lightning Network's Status

Hold on, hold on. Alan, you said that. I said that lightning was as good as swift. I said it could be as good as swift, per Gabriel's point. So somebody should be defending lightning. It's going to be Gabriel here. Yeah. Yeah. So what I will say, you know, lightning. Yeah. Is not super robust at the moment. I do have a friend who is a lightning developer, and he is my best resource in terms of, you know, information and content. And then I also, you know, I have interacted with a lot of lightning companies on spaces.

Interviews and Experiences with Lightning Network

I interviewed a company in Nashville. I believe it was the same conference, if it was this year, Alan. Yeah, it was. Yeah. Yeah. Yeah. So, like, I mean, I'm not gonna say it's perfect, but, you know, back to a previous point, I kind of inferred this. I didn't really, like, explain it, which was, you know, banks using lightning. Now, I'm not saying that banks exclusively are gonna use lightning and that's how it's gonna work. I'm just saying that due to the scalability constraints of bitcoin relative to, like, other networks, that's just. That's the way I see it being used in the future.

The Future of Banking with Bitcoin

And I would push back on your point, Doctor K, in terms of, like, the homogeneous or integration of all these features. L one, that is fantastic, and it's great, and it's why I really think Kawhi is cool. But what I will say is, in terms of bitcoin, a huge tenet of it is that it's permissionless. So let's say that the. Let's say the lightning network is operating in the future and all these banks are using it instead of the Swift system. Well, I can run up a node, and if I, you know, perform it properly, if I keep it online all the time, if I follow all of these conventions that are required, you know, as a noose, they're a nuisance, really, with the lightning network, and it's really going to work in the future, I can join the swift system of the future.

The Challenge of Joining the New Financial Systems

Can I do that today? The answer is no. The answer today is, hey, we don't like Russia for some random reason. Like, well, obviously not a random reason. We knew why that they censored Russia, but for some, you know, arbitrary reason, we can just take them off the network. And that's an abstracted system. It's not a real system. Bitcoin is a real system, and it's also permissionless. So that's. That's where I would caveat back. But, you know, well, the one thing I'll say.

Layers of Trust in Financial Systems

So just. Just to bridge these two conversations, so I think we agree, like, lightning's certainly not prime time ready now, but like, I think the disjoint and Doctor K, what you're suggesting you're working towards and what we're talking about here is the layers and how the financial system works today and how we're talking about bitcoin working is bitcoin being fed wire at the lowest level, but then having layers above it with different kind of trade offs in terms of scale and speed versus assurances and trust minimization. And you'd have swift or the Visa Mastercard network above it versus what I think you're suggesting is being able to collapse all of those and achieve all of those goals.

A Journey Through Bitcoin and Ethereum

Yeah. So let me just kind of speak about my journey a little bit to maybe elucidate something about lightning. So been in the space since 2012, so very much started out in the bitcoin world. And when lightning was first proposed, it was great idea, needed to be implemented. It eventually got implemented, but everybody at that point in time thought lightning was great. It's effectively just sort of like chaining state channels together. This is like a good idea. And nobody really thought that it was sort of trusted in any way. However, what then happened is I kind of moved away from bitcoin a little bit and got more involved in the ethereum ecosystem.

State Channels in Different Ecosystems

And in the ethereum ecosystem, there are these other concepts of how to do this. Well, and I use the word state channels. If you're going back to bitcoin days, I think we refer to them just as payment channels, but they're analogous in the bitcoin and ethereum worlds from a cryptographic and trust standpoint. Now, the interesting thing is, in ethereum, they said, okay, let's chain the state channels together and we're going to do raiden. That was like, kind of like one evolution of it, which is the analogous form of lightning for Ethereum. But then what ended up happening is people started talking about this concept of layer twos, and it was only with the more rigorous development of layer twos, in my understanding of layer twos, that I actually came back and relooked at lightning, and I saw it in a completely new light.

Economic Models and Trust Structures

If you look at lightning and you look at the trust model, you look at the economic model, you look at the capital model, it's almost identical to optimism. Identical. It's not different. It's not sort of wholly untrusted, uncensorable, unfettered access. It is a rent seeking thing that is parasitic to the l one and has some degree of weak subjectivity in it or trust. It is almost identical to optimism. And when I first saw lightning, like, I didn't see that, I thought it was like this perfect system. It's not. It is. You have to watch your channels. You effectively have to have like a watchtower, or you have to run your own node.

Challenges with Lightning Network Management

And then if you do, you're putting up something that looks a lot like a fraud proof. It is almost identical to optimism. So I don't think lightning is a panacea. I think it suffers from the same issues that, like, the l two suffer in Ethereum. And I think that bitcoiners who class it as like this perfect solution don't fully understand it. But I was in that boat at one point. That makes sense.

Optimism and Challenges in the Bitcoin Space

I just want to pause it. Something I'm going to try to put on my bitcoin maxi hat here. It's very rudimentary, so bear with me. Totally. Where quiet network solutions to all this. And when we think about the ETF's, if I'm a bitcoin maxi, I'd probably be in Doctor K's camp concerning the ETF's and how they could potentially ruin my asset long term. But I want to find some hope. And it feels like maybe the mass adoption and the potential additional investment that the ETF's could bring to bitcoin could actually light a fire under some of the dev teams to take a second look and start to, I don't know, maybe actually implement some bips or start refactoring lightning network so we can maintain the velocity of transactions.

Transaction Fees and Centralizing Forces

Transaction fees have to go up on an l two, whether it's lightning, whether it's something else. Do we think? I'm wondering if the panel thinks the ETF's could potentially invigorate innovation to help push back against some of those centralizing forces, especially if transaction fees skyrocket. Anybody want to take that one? So I want like to clarify, are you saying like, the ETF's would reduce centralization? Like reduce the centralization? I didn't catch that part.

The Potential Impact of ETFs on Bitcoin Centralization

No, I would. I would imagine the ETF's could actually activate some of the centralizing forces that Doctor K mentioned earlier. Oh, I see. So, like, they would, yeah, they would push innovation. Got you. I don't know, David, do you have any thoughts on that? Yeah, so, yeah, I was going to abstract question, like, more broader. I don't think it's like the ETF's in particular, but it's like an interesting thought experiment to be, like, under what cases would bitcoin kind of change its current trajectory of openness to development more so, because, I mean, right now I get the difficult choice and trade offs they have to make where it's like, yeah, we don't want to change.

Bitcoin's Openness to Development

Like, this is our whole, like, value prop is this like one singular thing, and every little bit that we think we consider to change has massive potential downside risk, and we want to be the most robust, resilient cockroach that exists. And so you get why bitcoin as a system is resistant to change. And so it's an interesting question, like, under what circumstances and what risk vectors or threat models might bitcoin be spurred to change its, like, trajectory and velocity than that it's been, like, pursuing historically. And it's interesting. I don't know the answer. I don't think it's ETF's in particular, outside of the broader question of some big centralizing force that has a disproportionate control over supply or something.

Long-Term Economic Sustainability of Bitcoin

So I don't know the answer to that. I think it's an interesting question, but I think nothing in the near term, because that is its value prop and its primary function, and it's doing pretty well with it right now. It doesn't seem to have the incentive and all the long term risks that most reasonable bitcoiners like myself realize are there are longer term. But. So you're right. Will it be too late by the time those risks get realized? Will those risks ever get realized? I don't know. It's an interesting thought, you know, experiment. I don't have the answer to that. Appreciate it, David.

Impact of the Satoshi Documentary

Go ahead, Gabriel. Yeah, yeah. So I really like the way you put that, David. I think that's the way a lot of, at least the way I think about it. You know, I did run a panel once with lightning network experts and the CaspA team, which I think you guys met them on the other space that we ran, and that was very interesting because they were really, they really focused a lot on the scaling issues of the lightning network. And, you know, like, it was like, hey, we'll just take it at your word that you're going to be able to get every single one of these things done.

The Road to Implementation and Trust

And yes, there are watchtowers, and yes, you know, like, there's. You got to encapsulate certain parts. Like, I wasn't able to follow all the technical jargon, but, you know, this idea of the lightning network being the savior. Yeah. I mean, for me, I can only go off of the fact that serious bitcoiners, I know, respect it a lot and really want to push it forward. I mean, I couldn't. Like, Doctor K, I would love you to expound upon what you were saying in regards to it. Like, are you saying it could be captured or co opted? Is that kind of the idea?

Concerns Over Trust in Network Systems

Or can it be censored? Because, I mean, I would like to. I'm not an expert on it. I just would like to know more. Yeah, so my previous statement. Right. Is when you compare lightning to optimism, I think they're analogous. I think they're analogous from a technical model. I think they're analogous from a trust model. I also think they're analogous from an economic model.

Discussion on HBO's Contribution to Bitcoin Lore

Or. I get why. Who cares? Like, it's. I don't think that HBO is going to be the right people to do it or add anything new to the conversation that like, ten to 15 years of like, the most passionate people in the space have, like, uncovered. Certainly not h. I doubt HBO is going to have anything, but it's a great story. But I think, like, there's a small subset of people that most people in the space for a while kind of like, are like some group, some number amongst these folks that include, you know, the names that have been mentioned here. Finney, Zaba, Beck, way, die, you know, Sassmande, NSA, CIA, IDF, which like, I like as my favorites. I like the Nick Carter has like the lab leak theory of like, hey, with some people, like, I don't know, maybe Zabo and some buddies from Fort Meade or Langley, but, you know, who knows? I don't think that there's anything like, catastrophic. I don't think it's like, I think it's like a fun. It's a fun exercise. I get why people like it and why it's entertaining. I don't think, like, HBO is going to add anything to the narrative, but it is a great story. It's part of bitcoin lore and the fact, and like, I don't think anything will come of it. I don't think there's any existential risk or it's very minimal at this point, but, you know, we'll see. It's fun. It's like, it's reality tv.

Importance of Satoshi's Departure

Yeah, I'll just weigh in. I think one of the greatest things that Satoshi did was step away. I think he probably did it like a year too early. But that was very smart. You can kill a man, but you can't kill an idea. So removing the man from the question makes a more resilient system. And that's certainly been a very palpable and strong benefit that bitcoin has had. I did want to just say a couple other things about bitcoin. One of the cool things that it did is it actually economically incentivized learning. It was like this sort of like this first system where if you sort of knew something, you understood how the very complicated banking and federal reserve system worked. You could understand cryptography, distributed systems, game theory, and you were an early adopter. It sort of rewarded you for identifying that it created novel and useful solutions to real problems using these ideas. So it sort of forced you to learn about that. But then the other thing that it did is it actually introduced this concept of sort of anti fragile evolutionary economic system, which I think is the crypto ecosystem. And bitcoin is potentially going to benefit from it.

Bitcoin's Ecosystem and Innovation

So, like, sure, it's the redwood in the forest, but the other trees and flora and fauna, maybe they sort of spark a fire, which causes that redwood to have to adjust over time. I think there's been a ton of innovation that has grown from offshoots of bitcoin. And when that innovation catches up against the objective pole position that bitcoin has in terms of decentralization and proof of work, I think it's going to have a positive impact on everybody. So, yeah, I can definitely second that. I am a victim full stop of the inspiration to learn all about our financial system and also cryptography and all of the above. I kind of want to push back a little bit, though. You know, leaving aside whether or not cancel culture is real, you think in our times today, with the social media narratives, if they actually did identify Satoshi, there wouldn't be a potential figure that could have a negative impact or potentially a positive impact on either adoption or continuing innovation in bitcoin. I mean, they could, but what Satoshi demonstrated is that he left, and he left purposefully.

The Risks Involved with Satoshi

So whoever it is, I don't think would ever provably admit to it one way or the other if they're still alive. So I don't think it matters. The fact that he's done it and he's stayed out of the mix for so long is proof positive that he's not going to just show up one day and be like, hey, guys, look, I signed the early blocks with the key. I'm actually Satoshi. It's just not going to happen. The choice has already been made. I don't think it's get reversed. So, like, I don't really think that there's a risk that Satoshi comes forward in a provable way. I don't think that's the individual that he is again, if he's even still alive. So, you know, I see that maybe there's only upside. Yeah, I mean, like, I guess, like, if you're thinking about what the, like, the risk vectors are there, it's like, I guess, yes, they find him and then they, like, he has, he or she has somehow not, like, failed to do away with the private keys.

Concerns Over Private Keys and Identity

He has them, like, handy somewhere, and they torture him and get the private keys and try to, like, use those in a nefarious way, all underground. What are you doing to Satoshi, man? Like, I mean, like, I guess, like, that's what you're talking about, right? Like a real tangible, like, risk vector. Like, but I fail. Like, I have a hard time seeing that someone who took all those steps to, like, cover his tracks wouldn't, like, would still have ready access to those assets. I find that hard to believe, let alone the fact that, like, right. Like, as Carl says, like, it was such a, it's such a great move to, like, step away both from, like, a lore perspective and also from like, a. Now, even if you did nail the person and set aside the asset access part, like, he's so far removed that it's like the system doesn't need him. And sure, you could try to, like, get some cancel culture.

Absence of Satoshi in Bitcoin's Future

Like, well, this person's beliefs and this is what bitcoin stands for. They already try to do that, right? So, like, I mean, I don't know. I don't see that either. Yeah, I don't think Satoshi comes about unless Satoshi reveals himself. I mean, there's been so many people who just come out and, like, try to claim to be Satoshi or what have you. But I mean, like, no one can prove they are unless, like, you guys mentioned, they have the private keys and they can sign something with those keys. Except Craig Wright. Yeah, exactly. Craig Wright. Who, you know, when he, I think the funniest thing, I don't know if it's like, the dagger and Craig Wright was when he released the latex files that had updates that were more recent than the white paper. Like, that's. I think that's like, what was the, like, the, like, nail in the coffin? But that's so funny.

Reflections on Craig Wright

Just a joke. Everything he said was, like, ridiculous at its face. I'm completely joking. No, yeah, I know. It's crazy. Yeah. But yeah. I don't know. That's interesting. Really, really appreciate you guys entertaining that question. I definitely enjoyed it. I just want to bring it right back to ets real quick. And since we're over time and going on a bunch of side quests and we have Doctor K and David here, I figured it might be a good idea to ask, can we imagine a future world where Kwai, or maybe even potentially qi, is rolled into an ETF? And how would that be potentially different than what we're seeing in how they're managing the bitcoin and the Ethereum ETF today? Is that even a valid question?

Possibility of ETF Inclusion

I guess you want me to go first or David to go first. Let's go with David. I want to get David's opinion. Yeah. Well, I don't know. I guess, like, I. Sure, anything that's, like, anything that's valuable and the finance industry can wrap it up and take their vig on it, like, they'll find a way to do it right. The financial system, for better or worse, is incredible at, like, filling in gaps and it has improved, like, the welfare of life for a long period of time. And now you can say, wow, there's. There's a lot more, like, tar and tarnish around what they're doing than historically, and it's maybe not as good as it once was. Fine. But, like, they're. They're pretty good at finding ways to make money on stuff.

Financial System and Value Creation

So, like, yeah, if they can find a way to make money on whatever the asset is, they'll find a way. And if you're a system like a, you know, crypto system that is meant to be kind of robust, resilient trust, minimize all that good stuff, you're going to need to withstand that. So. Yeah, sure. I mean, like, any valuable cryptocurrency, except it's like, far enough in the future that the tradfi system is broken down or capital markets have broken down in the way that we know them today. That's going to happen. That's going to happen. Right. So. Yeah, of course. But a system, if it wants to be resilient, especially adversarially, like, it's going to need to withstand that.

Resilience in Crypto Systems

Cool. I have some thoughts here. Yeah, go ahead. First thought is we can't control directly if they do it or not. Right. Kawhi is a decentralized system, so if somebody wants to create an asset around it, they can. My job as a protocol designer is to minimize the reasons that individuals will need that. Right. And I've done everything in my power to do that. Right. So that's why we have Kwai as a store value and chi really as a unit of account and a medium of exchange. Because what we're actually trying to do is we're trying to invert the dependency. If we look at USDC in Ethereum, USDC causes Ethereum to be dependent upon banks.

Dependency of Crypto Systems

You've taken something that, if we want to argue, is a decentralized system and you've made it dependent on a centralized system. And we saw that when Chokepoint 2.0 was in full effect and they forced Silvergate and then quickly, SVBH following to go bankrupt. And with that, you saw the de pegging of USDC because it was collateralized by assets that were held by SBB or Silicon Valley bank. So when we build rwas that are dependent on dollars, even if we're in decentralized systems, you're actually causing the decentralized system to then sort of be dependent on the centralized system, which then all potentially is also going to make them controlled by the centralized system. If there's enough USDC on Ethereum, the people that control that USDC can kind of control ethereum by proxy of value.

Creating Independence from Centralized Systems

The other thing with it too is USDC. Even though we class this as TBL in the system isn't really in Ethereum. It's a receipt that's worth nothing outside of this bank deposit. And Ethereum is really just an interchange layer like visa. It doesn't actually have USDC in it. So what we're trying to do with QI is we're trying to create an endogenous token we call an energy dollar, so that it's in the network itself. It exists because of and by the protocol, and it doesn't have any centralized dependencies or pegs to any external factors or assets that are held in the banking system. And if you do that, the idea here is that you can invert the dependency.

Features of the Endogenous Token

So if there are ETF's created, or if there are hypothecated assets created, the native asset is in the chain, the hypothecated asset is in the financial institution, and then the financial institutions become dependent on the decentralized protocol. And that's a good outcome. That's a fine outcome, but you need to design the system to invert the dependency, and that's what we have done. Yeah, 100%. I kind of wanted to throw this idea out there to connect this point to the education point you were mentioning earlier. Getting people from zero to one in crypto, or like I would say bitcoin specifically, and even Kawhi, because it's a proof of work network, which in my opinion is massively differentiating from anything else, is helping them understand, helping people understand the difference between an energy backed system and an abstracted system.

Understanding Energy-Backed vs. Abstracted Systems

As Jack Mahlers puts it. I dont know how synonymous his name is, but he runs a very good bitcoin company called Strike. He talks about this idea of abstracted versus real systems, where basically Doctor K, which you just described, is a great example of an abstracted system. Theres a group of people who have authority over that system that no one else could get even with permission or trying to even figure out where you need to get permission to open a bank is absurd. It's absurdly complicated for a reason. Choke pointed everywhere. So I think people, if they understood that they were living in an abstracted system as opposed to a real system or an energy backed system, they would definitely go from zero to one. That's the thing I think we need a lot of people to understand.

The Complexity of Real Systems vs. Abstracted Systems

But yeah, what if I played devil's advocate and was like, well, so much of the world is abstracted systems. And in fact that's how most of the great infrastructure systems that we rely on a day to day basis. I mean, like the Internet, right? Like look at like the DNS system where you get human readable names and like IP providers and stuff, where they are basically like, yeah, it's a pretty small group of folks who can kind of control that conversion from human readable to not. And they've got, and like it works pretty well. So I mean, what would be the argument to say, well look, maybe we're entering a new era now, but I guess if I were to say like, oh look, we kind of do a run on all abstracted systems that do have a choke pointable area somewhere.

Success Stories in Abstracted Systems

And like, I don't know, maybe it's like the great success story here is that like, but so far we've gotten them to work. I mean I'm kind of putting that as like a weak devil's advocate argument out there. But I mean you could say that. Yeah, well what I'd argue is money is the stored time and energy and it's accounting system for people's effort. And so I don't think people would want their effort to be abstractly moved away from them, which, you know, I think is differentiating. If you look at the Internet, the most important thing that's disseminated on the Internet, as you mentioned, is speech. And unfortunately in recent times we've had instances where speech has been kept away or censored.

Free Speech and the Internet

And it takes brave people like Elon to drop $44 billion to purchase this platform and then allow people to speak freely. So it takes an equal and opposite force. I'm not arguing that anytime you want to use the DNS or TCP IP, you need to pay some energy toll to do it. Definitely we want there to be reasonable use cases for that. But open source, I guess you could argue, is a energy backing system. Not really, it's an information backing system for the Internet. That's what I would say that's the differentiating part for me. Gabriel, you're circling around some interesting ideas that I think I might have had a. A little bit longer than you to try to refine.

Refining the Ideas of Energy vs. Abstract

You mentioned energy versus abstract. I would actually say that you have. What you're really trying to get to is objective or subjective. So is this something that's tangible? Is it something that's real? Is it something that's verifiable versus something that's not? And to David's point, as humans, we've actually benefited immensely from abstract systems. Language would be an example. Religion would be an example. Right? Golden rule and the ten Commandments probably got us away from hordes killing each other in the forest at some level. And sort of having language and religion as sort of a bootstrap to create some form of civil society was probably a good first sort of approximation, even though it was incredibly abstract and what have you.

Benefits and Corruption of Abstract Systems

Now, I will say that over time, the difficulty with abstract systems is because they are not objective. People are far too self serving and enterprising to not corrupt an abstract system. And if that's religion, if that's banks, if that's language, if that's politics, like time and time again, you have an abstract system. You run it long enough, it becomes corrupt and inefficient. And what really bitcoin introduced is this idea of, how do we take math and the objectivity of math and create a useful coordination tool at sort of human understanding and scale that can work globally. So it was introducing this concept of an objective coordination tool for mankind.

Bitcoin as an Objective Coordination Tool

So it's fundamentally like a step change in the concept of how humans can organize in groups larger than a few hundred. And one key aspect of that you're getting to is energy via this proof of work consensus mechanism. And really what we're doing in bitcoin, I would say maybe it didn't form a new language, but it formed the first vowel of a new language. And if we can scale these systems and we can create better monetary economics around them and sufficient utility, we can actually create a. A fully objective human language.

Exploring the Future of Human Coordination

Yeah. No. Yes. Saying that's the first vowel, and talking about can coordinate groups beyond many, like, yeah, that's really interesting thing to think about. But so would you say then that you would agree that objective or real, or however you want to put it, that's the best system for a monetary system? Because, like, for me, I don't know if I'm working a job. I agree to partake in certain tasks and have certain responsibilities. I expect to know how much I'm going to get paid or, like, have some, like, way of determining that. You know what I mean? Like that. That, to me, makes sense, but I don't know.

Monetary System Expectations

Yeah, I mean, that's why qui is a proof of work system, right? Is proof of work. I haven't seen any other objective system that can be open in participation and tie things back to reality, and that's why we're using proof of work and figuring out how to scale it. Just an aside, when you look at proof of stake, most people think proof of stake is an open system, but that's just immediately untrue, sort of. By the definition of proof of stake, what you're doing in a proof of stake system is, if you want to become an entrant into the system, to stake and validate blocks and get paid interest for staking, etcetera, all of the currently existing, or at least the plurality of the currently existing stakers have to agree to your participation.

Proof of Stake vs. Proof of Work

Whereas with something like proof of work, if you can just produce the hash, no one in the system sort of has the ability to say your hash is any different than anybody else's hashes, because all the hashes are the same, and the economic game is designed correctly to force the longest chain to be produced. So even in what we class as a decentralized system that might use proof of stake, I would argue that's a permission system. You just have a high set of actors, hopefully, that are hard to coordinate, to create censorship. But it's clearly a permission system, and it's actually very analogous to the DNS system and how TL's certificates are used to create domains and subdomains.

Reflections on Permissions in Decentralization

Yeah, absolutely. Great thoughts and threads for me to think about later. Yeah, it's just something I really like to think about, especially, like I mentioned, it was Jack Mahlers who kind of brought this thought paradigm. Like, obviously, I was already pro bitcoin before watching the talk, but it's very interesting. So, yeah, interesting stuff. All these systems have to continually reinvent themselves. I mean, I got to run with this space. I'll just leave you with the Franz Kafka quote. Every revolution evaporates and leaves behind only the slime of a new bureaucracy. So even crypto itself is going to have to reinvent itself here.

The Evolving Nature of Crypto

But thanks for the space, guys. We'll talk soon. Appreciate it. Thanks, David. Appreciate you coming by. David, later. Yeah, man, we've really hammered home the value of ETF's. I think we dug deep into the differences between bitcoin and ethereum, and I'm going to, you know, bitcoin as a first vow in a brand new language. I'm going to be geeking out on that one for quite a while, I think. I mean, I'll try to put, like, another spin on that. Okay.

Insights on Human Coordination

You know, one of the reasons, arguably, that homo sapiens became the dominant form of sapiens on Earth is because we had language. So if we can figure out. And that allowed us to coordinate, that allowed us to make tools, that allowed us to have groups and tribes that were efficient and effective, so that we became the predominant evolutionary outcome. My argument is, if you can objectively coordinate at scale, this is potentially on the order of a human evolution. Yeah, yeah, definitely a big thought to think about.

The Future of Coordination Tools

So with two things. First off, I wanted to. A note came back from, like, early in the space, like I had remembered. I wanted to ask this. So, Doctor K, I think you mentioned that merging shards is more viable in a proof of work system. I was wondering, just because I know someone who works with this protocol, I don't know a lot about it, but my understanding is that, like, near protocol is a sharded proof of stake system. Not sure if you have any insight on that, but is that the case? Yeah.

Exploration of Shard Protocols

So I'll speak generically and a little bit specifically. So there's two things that underline my previous statement. The first thing is that for you to come to consensus in a deterministic way, you need to have broadcast only mechanisms of reaching consensus. Okay, so proof of work is close to a broadcast only system, but every time you get a fork block or an orphan block that naturally takes place, because you have delays in propagation of information through the network, it becomes a system where I'm sort of going back and forth to sort of decide on the outcome. So what we've done with qui is we've modified the mechanism by which you measure work and incentivize the production of longest chain with the introduction of proof of entropy minima.

Consensus Mechanism and Its Implications

What that does, though, is that actually allows us to fully achieve the concept of broadcast only consensus. Another way to put that is that the consensus becomes time invariant. So no matter when or in what order you receive a block, you will always make the same choice. And this is kind of like the key property that you need to make the following statement. If I have a causally invariant consensus mechanism, that's this broadcast only idea. The consensus is guaranteed when somebody starts a node running the same code base with the same genesis block. Everything after that is them trying to become consistent with the rest of the network. But when they are consistent, they will always be in consensus.

Ensuring Consensus Across Nodes

So there's a causal result that we will be in consensus if we have seen the same data. Okay, so that is the property that you need to get distributed consensus at scale. And with that property, you can do things like sharding. Now, if I were to contrast that with something like proof of stake is a quorum based process. So I have to sort of propose a block, I have to sign a block. I have to start sending it around the network. Somebody else has to sort of validate it. They have to say, I agree with this validation. I also have signed it. And it has to sort of keep circulating and propagating till I sort of collect signatures.

Understanding Quorum in Consensus Mechanisms

This not only is not a broadcast only process, this is a many round process of coming to consensus. So it is only a statistical outcome with time. But the number of rounds and interactions that I have between parties, the longer it takes to get that statistical certainty. Okay, so when we talk about a system like near, when I create a shard, before I transmit data between the shards, I have to sort of have statistical certainty about what is finalized in the state of one of the shards before I transmit it to another. Or I have to have a relatively complicated mechanism to resolve sort of interchard conflicts in terms of consensus.

Challenges in Sharding with Proof of Stake

And this is really sort of the Achilles heel that surrounds systems like near. So you can indeed shard proof of stake, but it's going to be very slow, and you're only going to get statistical guarantees because there's not going to be a good mechanism for cross coordinating resolution of any conflict of between the shards with something like poem, though if there's ever a problem in the shards, the mechanism by which they are merge mined together using this broadcast only consensus means that any differences are also instantaneously resolved regardless of the number of shards that exist.

Broadcast Only Consensus Mechanism

So again, the system is in this sort of broadcast only state, where as long as we can all get the information to each other on some reasonable time frame, we will always instantaneously agree once we see it. And that is what quiet is doing. Wow. Okay. Yeah, that is a great definition. Broadcasting versus a quorum voting system has a lot of implications on the bloat. I mean, I know I'm simplifying a lot when I say that, but that's really interesting.

Simplifying Complexity in Consensus

Good summarization. Yeah, I mean, I know it's pretty complicated, but like, it gets into concepts of like, the FLP impossibility theorem and us sort of violating that. In some ways, there's a fundamental innovation going on here in the concepts of consensus, sort of distributed systems with the statement that I just made. But that is the statement by which we can shard kwai with effectively no limit. Yeah. And I just want to say, I know we're wrapping up here as a bitcoiner.

Innovations in Consensus Frameworks

You know, like, it's really interesting you mentioned the education aspect of it earlier. Like, this is so interesting to me because I really want to try and grok the poem, you know, like all the things you've just said, because it makes so much sense in terms of scaling horizontally and vertically. It's very interesting. So do what I can to grok that. Well, I appreciate you coming, Gabriel. I think we'll try to wrap it up here. But that was a fun conversation.

Closing Thoughts

I. Yeah. Yeah. That was a blast. Absolutely. We'll follow up. Gabriel, really appreciate your time. Appreciate everybody joining us here. I think it was a great conversation. I won't rehash what I stated earlier, but I also really appreciated the side quest went on. I think they added as well. So with that, we can let the panel drop. I'll just plug the quiet network Twitter. Doctor K. Gabriel, go give them a follow.

Announcement and Appreciation

Check out this tweet by alan that Gabriel shared. Appreciate that. And keep your eyes peeled out for some more spaces. Quiet network has some other announcements coming out soon that we're super pumped about, so keep your eyes peeled, everyone. Appreciate all the time tonight and look forward to a whole lot more. Yeah. Thank you, guys. I see you guys later. Thanks, guys.