Future of Blockchain Infrastructure with Zane Glauber and Harry Austin

0:00Alex Thorn:Welcome to Galaxy Brains.

0:25Alex Thorn:Welcome back to Galaxy Brains. As always, I'm your host, Alex Thorne, head of firm-wide research at Galaxy. Bitcoin's not zero, and we have a great episode for you this week. Zane Glauber and Harry Austin from Galaxy's strategic operations team join us to talk about Galaxy's staking operations, trends in staking and blockchain infrastructure, whether we'll see ETFs in the U.S. that can stake their holdings, and much more. It's an interesting conversation. Those guys on the Galaxy's strat ops team doing a lot of interesting work that I know you might want to hear about. We'll also check in with our good friend, Bimnet Abibi from Galaxy Trading, to talk about markets.

0:59Alex Thorn:It turns out it was not or has not been sell in May and go away. Indeed, equity markets nearing all-time highs. Bitcoin approaching another all-time high. And in general, the risk impulse appears to be back. We'll get into it with Bimnet. Before we get into all that, I need to remind you to please refer to the link to disclaimer in the podcast notes and note that none of the information in this podcast constitutes investment advice or an offer, recommendation, or solicitation by Galaxy or any of its affiliates to buy or sell any securities. Let's hop right into it. Let's go now to our friend Bimnet Abibi from Galaxy Trading.

1:33Alex Thorn:As always, Bimnet, welcome back to Galaxy Brains. Thanks for having me. It's been an exciting time. I say this every time because markets stay exciting. But here we are on Wednesday, July 2nd, heading into July 4th weekend. Bitcoin knocking on the door yet again of all-time highs at like 109.5 as we talk. Stocks at all-time highs, effectively. I mean, made new all-time highs again. Maybe start with the macro and the stocks. I know Trump also likes the Vietnam deal and some other stuff. What is the market broadly? It doesn't seem like it was sell in May and go away. Here we are at the beginning of July and stocks and markets are up.

2:11Beimnet Abebe:Yeah, no, I mean, it's a combination of a couple of different things. The monetary backdrop is really strong and supportive. That's been a function of weakening data and more a function of pressure being applied on Powell to cut rates. And so there's some pretty strong actions that the government can take to get rates lower. And that essentially means appointing a shadow Fed chair to a new governor's seat and just constantly deriding Powell in public. So that will probably lead to us cutting rates sooner rather than later. And in terms of current pricing, you have about 65 bips out to December and like three full cuts by January.

2:58Beimnet Abebe:So in essentially seven months, folks are expecting the rate market to have come down by 75 basis points, and that's material. And then the other main driver of markets is the fiscal impulse in markets. We just passed the Senate's version of the big, beautiful bill that is going to add anywhere from$3 to$4 trillion to the debt over the coming years. But by and large, it's a ton of spending. By historical context, it's like emergency levels of spending. And yet, the economy is doing just fine. So throw in an easy monetary policy with a very strong fiscal backdrop and you get higher risk markets.

3:46Beimnet Abebe:And that's what you're seeing here in equities. To add to that, there's still strong momentum behind the AI narrative. uh so you know names that are going to benefit from you know ai becoming a much more uh dominant part of you know how folks operate on on a day-to-day basis robotics analyzed data all that stuff you know that those companies are continuing to to perform well so yeah you know and and the trade stuff folks seem to have put less weight on the potential consequences of of tariff policy and And so, you know, folks are willing to look through a lot more on the trade stuff just because it feels like yesterday's news and like people are like, oh, we're going to have tariffs and we'll kind of figure it out.

4:35Beimnet Abebe:So, yeah, trade policy, easy, strong fiscal, easy monetary, risk markets higher. But there are some, you know, pockets that are worth watching because, again, you can't just spend like trillions of dollars and have no consequence to it. And so we've seen a reasonable, like the yield curve is pretty steep right now. And it looks like it's probably going to go steeper. FX-wise, Euro this week touched 118, broke above briefly. So you've seen a roughly 14%, 15 % depreciation in the dollar versus the Euro. And so that kind of seems like where the release valve is for markets at the moment. And, you know, I don't see that trend stopping.

5:25Beimnet Abebe:Like we are very adversarial on trade policy, military policy. I think that's up for debate. And then on top of that, we're just printing a ton of money. And so the natural kind of response function to that in the marketplace is that the value of dollars on a relative basis needs to decline. And that is what you're seeing happening in global FX markets.

5:53Alex Thorn:So let's talk about the flows on the Bitcoin side, because obviously Bitcoin getting a bit of a bounce or at least supported by a supportive risk environment. But also huge flows. I saw Coindesk reported that the public Bitcoin companies have taken in much more in capital than the net inflows of the Bitcoin ETFs in Q2. Is that what you're seeing? And is the rise in Bitcoin we're seeing at the moment, is it these publicly traded treasury companies in the market? Yeah.

6:25Beimnet Abebe:So in terms of the flow analysis we've done, there's been about$20-ish billion worth of buying between these publicly listed treasury vehicles and the ETFs. And I think the ETFs account for$1.5 billion of Bitcoin inflows. But the story is pretty clear. You're talking about net buying in the ballpark of$20 billion. Year to date. from year to date from known vehicles. And you're talking about, you know, Bitcoin supply that's, you know, call it 50 ish million dollars, you know, per day in, in, in sell pressure. You know, I think it's probably a little bit less because, you know, some of these miners keep, keep their BTC balances.

7:13Beimnet Abebe:But, you know, when you break down that 20 billion number, you're talking about like an imbalance you know that's around like 70 million bucks of net buying pressure per day uh which is a lot for for any market to absorb um but ultimately over time uh if these trends persist that does mean that bitcoin will be at you know all-time highs much sooner rather than later uh and especially with this you know supportive risk backdrop you know the debasement you know fiscal narrative, you know, staying strong and getting stronger by the day. In fact, you know, I think that's going to bode well for crypto.

7:53Beimnet Abebe:And then, you know, away from the flows, you know, you're seeing a regulatory landscape that is unprecedented for crypto. You know, the approval process for ETFs, you know, getting faster, tokenization of equities, increased issuance of stable coins, right? And so we're finally starting to see the wheels of government actually, you know, supporting crypto. And over time, you know, I think that should help crypto price appreciation, XBTC, simply because, you know, it's a narrative that, you know, a lot of folks can latch on to pretty easily. Now, there's still some doubt over the value accrual that happens in non-Bitcoin area.

8:48Beimnet Abebe:But by and large, when you have all these constructive developments, it should really keep the narrative alive and well. And as long as there's a healthy backdrop, I think that could lead to price appreciation.

9:03Alex Thorn:There you have it. Our friend, Bim Netabibi from Galaxy Trading. Thank you so much. Thanks for having me. Let's go now to our guests, Harry Austin and Zane Glauber from Galaxy's Strategic Opportunities team, also known as the Blockchain Infrastructure team. Harry and Zane, welcome to Galaxy Brains. Thank you very much. Thank you, Mr. Thorne. We've got the three-person interview. We don't do this setup very often. I think the only time I've done it was with Mike Novogratz and Dan Moorhead. So this should be an equally exciting episode. We would hope. Let's talk about – we're going to talk about staking.

9:35Alex Thorn:We're going to talk about new regulatory changes and catalysts that are making it more palatable or exciting for institutions to come into staking. And then also just like what other blockchain infrastructure things there are, what it's like to, you know, how hard is it to run one of these Solana nodes? I hear it's a big pain in the ass. Is that true? What does the future of blockchain infrastructure look like in your mind? How is Galaxy positioning for it? I don't know. So, you know, when we start saying we were talking about earlier, we were talking about this new guidance from the SEC that says that staking as a service, that service is not a security.

10:11Alex Thorn:They had sued the SEC under Gary Gensler had sued Coinbase and Kraken both saying that they're staking as a service program itself. The program was a security offering. The SEC now under Chair Adkins says, no, it's not. What do they say? And what does that mean for staking? Yeah, sure. So absolutely critical watershed moment after many years of advocacy down in D.C., a lot of institutional industry groups, et cetera. But, yeah, the punchline is exactly what you just said, which is the thoughtful, legitimate provisioning of staking services is indeed ministerial and therefore not security-like or is a security.

10:52So gone are the yesteryears of enforcement actions and all that other stuff. It's a complete 180 and frankly really good for institutions who I think have very much been – this is a tale as old as time but very much have been waiting on the sidelines before deploying a meaningful amount of capital into staking and also the provisioning of staking services on their platforms. So that's massive, but I think what's really interesting is if you read the letter penned by the SEC, they also roped in or ring-fenced some ancillary services around the provisioning of core staking services, which included slashing insurance, the early unbonding or instant liquidity product, also the modification of the reward streams, and also they call it the aggregation of core stake.

11:44It was called pooling in a prior paradigm, which, again, was very much targeted in terms of enforcement actions but now deemed not security-like. And I think that's really critical for a lot of the folks who are thinking about increasing the utilization ratio while not only just incorporating core staking into the spot ETF to make it a total return type product, but also taking that stake ratio, that utilization ratio from zero to 50 maybe as a starting place and then optimizing from 50 all the way up to 100 using things like an instant liquidity product to help manage the asset liability mismatch or the liquidity mismatch of locking and staking versus any underlying redemption flow in the fund.

12:33So very exciting time. It's all happening. And I said this before with you earlier, but, you know, one indication that we look at in terms of just a groundswell of staking activity is the Ethereum activation queue. We are now north of seven days. It ballooned out to like 45 days or something like that post-merge. Last time we saw this level of activity was April of last year. And so I think that shows that people are voting, frankly, with their stake. There's a lot of new entrants in the market. A lot of Ethereum is being staked, and I think we're excited for what's ahead. This means probably the proliferation of hopefully staked ETP and ETF product here in the U.S., but then also maybe the proliferation of TradFi platforms incorporating staking into the user experience.

13:29Interesting. Yeah, I was just going to add, kind of what Zane touched on at the very end, is one of the most interesting things I think we're going to see unfold in the next 12 to 18 months. I think we'll see the market completely change in who is actually staking, where are staking services even available. Generally, what we've seen with the traditional financial players is they start with spot, right outside of the ETF complex, start with spot, move to staking, move to LSTs, and then maybe dabble in the DeFi space. So that's generally what the arc would imagine. We're somewhere between spot and staking.

14:02And so I think you're going to see a lot more major traditional names being a distribution channel for staking services. And then I think the actual stakers themselves, the composition of those and counterparties is also going to change. So I think the research will be really interesting to see how that moves. And then from the business side of the house, this is where I think it's going to be the most exciting 12 months for us. and hopefully we get some guidance here on liquid staking tokens as well.

14:29Alex Thorn:Yeah, that was excluded from the SEC's guidance, right? What do we think about that, Darrell? I mean, we know we're not the SEC and none of the three of us, I believe, are lawyers, but is it because it's like maybe it's not purely ministerial? Maybe the entity that's doing the wrapping to make the staking token liquid, maybe they are entrepreneurial and their capabilities of actually doing the underlying staking? Is that, I mean, that's what comes to my mind as a reason why maybe it was excluded for the time being. I think there's probably more of a practical reason. This is just my personal take, is walk before you can run a little bit.

15:05Get the guidance out for physical staking, which is the native protocol use of the blockchain and the whole incentive structures, and then move to the more eloquent, capital-efficient structure, which is an LST. And I think we'll see, hopefully we see some guidance come in the near future. And then once that comes, I think you'll see an even a larger shift in the market itself.

15:27Alex Thorn:That makes sense. I think walk before you can run makes sense. I think all of those guidances we've seen mostly from the corporate finance group at the SEC division has sort of been like picking off low-hanging fruit, right? They said mining pools. If you submit hashes to a mining pool, like that's not a securities relationship. Like I think most people knew that, but like they're just, you know, one by one. They said meme coins. If they're literally just meme coins, probably not a security. So I think that makes sense. We talked about ETFs. When are the ETFs going to have staking? I mean you have Ethereum ETFs, ETPs in the US.

16:05Alex Thorn:They could stake today. You don't quite yet have Solana ETPs, but it sounds like they're coming. When do you think the SEC will get over this hurdle and let them stake? I think I saw last week there were some comments back from the SEC to a number of filers. I don't have a great prediction, but I'm hoping some portion this summer or maybe early fall will get one of the first ones to do it. Europeans are obviously ahead. There's a lot of staked ETPs in the Europe complex today. And they're actually paving the way for how to structure these. Structuring is actually probably one of the most critical components of any staked ETF only because you have the liquidity mismatch based on the structure of the chain on entry and executes.

16:49People really need to make sure that they can meet their redemptions. And so there's a lot of discussion, and I think you were involved with some of this, around how should regulators think about how much stake can – what's the percentage of assets that can be staked? We have products in our product set that help bridge that liquidity gap, And I think you're seeing a lot of innovation in servicing those asset managers who are trying to structure the most efficient and best products. And it'll be very interesting to see what percent of stake these allocators are targeting and how that all unfolds.

17:25Alex Thorn:Do you think it's going to be distributors like ETF providers or big asset managers that pull the capital? Are they not going to just run the staking themselves or is it too complicated, specialized? And I guess stake on most networks has native delegation most. So it's quite easy to actually just use a provider and not lose a lot of the economics. But like, does that like will BlackRock be staking or will BlackRock always be partnering with a powerful staking firm? I think my intuition tells me that there's going to be a separation of roles and responsibilities up and down the entire staking transaction lifecycle.

18:06Right. You've got a core custodial element. Right. Part of that is just, frankly, you know, RIA type type rules. but qualified custodians that have the correct licensure, the correct security posture, the correct insurance policies and all kinds of other stuff. So you have assurances around the spot element, right? For – and you were kind of hinting at it earlier. Like running blockchain infrastructure at scale is very, very difficult. It's – in most cases, you're using publicly sourced code bases and stuff like that. But you run into unique issues at scale that you can't just, you know, learn in a classroom, so to speak.

18:46So a lot of it is experiential. A lot of it, frankly, is onboarding the right infrastructure technology and stack, having the right staffing and tooling. it's a lot more difficult than people would, you know, it might look at, you know, at first blush. And so I imagine that a BlackRock or, you know, massive asset manager allocator XYZ, for them to also in-house staking might be a leap too far. You know, focus on the core product and what you do really well and let the subject matter experts along the supply chain support in doing what they do best.

19:25Alex Thorn:And it evolves, right? I mean, the code gets updated. Sure. And they're all different, right? I mean, you can presumably be a home staker on Ethereum. Can't be a home staker really on Solana, a home validator. Not a current state. How much – we heard this for a long time. It was very in vogue in like 2020 and 2021 to calculate the level of a proof-of-stake blockchain's decentralization partially by how costly it was to run a node. How costly is it to run a Solana node? It depends on the organization. For organizations like ours and our competitors, hundreds of thousands of dollars or$100 ,000 a year.

20:05I mean, it's tough to quantify just because of the engineering. It's engineering time. It's actual hardware. Solana, you have to run on bare metal, right? The vast majority of Solana nodes today are run on bare metal, sitting in data centers. They're not virtualized. They're not cloud-based, right? Running a Solana validator. So you've got servers. Servers in data centers around the world that you have to have failovers for in multiple data centers. So there's a lot of business continuity that goes into enterprise scale.

20:27Alex Thorn:Because if you're selected to propose the next block and your server is screwed up, you just miss it. Or do you even get slashed? Yeah, like business continuity matters. Like let's say you have – But that's money out of your delegator's mouths and out of yours. If you have ISPs go down and let's say you're up, you want to have another setup somewhere else. Yeah. Right, like that, you know, just general supply chain issues that you get. I do want to go back to something. We've had the question before because I can play the other side of the card here. I think crypto M &A is going to be very interesting.

21:05And I think that you might see – I agree with Zane in the fact that technical talent is a little sparse on blockchain infrastructure, SREs, or engineers that really know how to run highly efficient, highly profitable blockchain infrastructure businesses. But there might be consolidation that happens where big asset managers and or just big traditional financial institutions say, can't go hire it, can't build it ourselves, we'll buy it. I think you could see that. But I do believe in the short term, it'll be a lot of third-party providers because it is very special.

21:39Alex Thorn:And it is today, right? It's mostly big third-party providers, the galaxies and figments and i don't know who block daemon kiln p2p there's a number of them yeah but i've when we've looked at like you know what are the big validators on xyz network you often see like the same parties right the coinbase because they are technically excellent and they have completely covered everything that harry was just saying which is it's not it's not just enough to run highly performant blockchain infrastructure you need to have the support system around it to ensure up like uptime is everything proof of stake is liveness right Right.

22:14And, you know, to extend that analogy further, sure, there might be consolidation in all these major asset holders or, you know, influential traditional financial firms. However, in the spirit of prudent risk management, there's still going to be an argument to be made for diversifying the cohort of infrastructure providers. Right. We think about disaster recovery, business continuity in terms of geographical redundancies and all kinds of other stuff. But still, I think the value proposition of building a really good product at crazy, like billions of billions of scale, then it would probably make sense to not just have one centralized entity running the entire infrastructure for that product.

22:54Alex Thorn:That makes a lot of sense. But just – and I don't want to harp on Solana's expensive note. Although 100K a year is not that bad. It's out of reach for like a home person, but it's – Individual validator. Right. One machine, one bare metal. Plus oversight. What is it, bandwidth? I've heard things like that the Solana blockchain produces the entire Bitcoin blockchain's worth of data per day. Is it storage of data? Do you even store that data or do you discard it? Is it just the speed? You need so much compute because you're, I don't know how fast Solana blocks are. Solana blockchain is 400 milliseconds, right?

23:30Compared to other blockchains, that's lightning fast. And I think the goal was 100 transactions per minute, transaction per second. So is it the compute?

23:39Alex Thorn:a second like what what makes it expensive like just the actual hardware yeah i mean you need high-end hardware that can has high compute right with good bandwidth with good bandwidth it's the salon is like the nasdaq of of the future they want to be they want to be that um salon is the most interesting one of the most interesting networks that we work with i think uh someone said earlier that like running salon of auditors is like uh driving f1 um highly competitive Everyone's tuning. And it's a great network to be involved with. And we spend a significant amount of time in it. And when we talk about the future of blockchains, right, or blockchain infrastructure, we're spending a lot of time talking to institutions, not just on blockchain infrastructure, but like, okay, where are they going to build applications?

24:24Where are they going to settle transactions? And we're, you know, we hear Solana, we used to hear Ethereum, Ethereum, Ethereum. Now we hear Ethereum and Solana and others as well. But there's a lot of discussion now around Solana really being solidified as the third chain. And it will be interesting to see where, if QSIPS come on chain, where will they settle? I think you probably get them on multi-chain. Yeah, I mean, it's just a little bit easier to understand than the Ethereum complex with L2s and whatnot.