Macro, Regulation, Staking — ETH's State of Play

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1:36what's up guys it's ash bennington welcome to real vision crypto daily briefing joining me today is andrew keys co-founder and managing partner at dharma capital andrew welcome back to the show always a pleasure to have you with us thanks for having me ash pleasure to be with you excited to get this one underway. But before we start, we have an important announcement. If you're a Real Vision member, today is the last day to lock up your current membership price. You can do so for up to three years. You can also try a higher tier membership for the next 30 days and revert back if you don't like it.

2:09To level up and lock it in, go to realvision.com forward slash level up, all lowercase. That's realvision.com forward slash level up. Andrew, Drew, always a pleasure to have you on the show. I'm always thrilled when I see you on the calendar. Let's start out big picture. You're someone who's been involved in the Ethereum ecosystem for a very long time. Your eyebrow deep in it. Give us a big picture sense, 50 ,000 foot overview. Where is ETH right now? So I think the Ethereum community is still building at the infrastructure layer. Big picture, applications still aren't ready for mainstream. And I would say that not only for Ethereum, but basically all blockchain applications on any of the competitive stacks like Solana or Bitcoin, et cetera.

3:03And the reason I say that is that basically we have to kind of build the foundation of a house before we add the plumbing, before we add the beautiful windows, before we add the nice chimney and the patio, et cetera. And in terms of the foundation, I think there are kind of three points that we can really drive down into. One is scalability. We've seen the beginning of what I would call layer two scalability. And there are two facets of layer two scalability. One are called optimistic roll-ups and the other are zero-knowledge roll-ups. And recently, the WorldCoin announcement basically revealed that they'll be using the optimism stack.

3:53We're seeing a lot out of the optimism group and Arbitrum in terms of the optimistic side of the house. Andrew, let's explain those two terms for people who haven't been familiar with the difference of them, because they do represent different use cases and certainly very different technologies. Sure. So the simpler one to explain is zero knowledge. and I always use the example of a young lady going to a bar. If someone is a 21-year-old female or male for that matter and they're going to a bar and they're going to have a cocktail, they show the bouncer of that bar before they walk in, not only their...

4:49date of birth, but where they live. Simply put, they should be able to just have a proof that they have indeed been verified by some type of regulatory body, maybe the Department of Motor Vehicles in that example, that they are over 21 years old. They shouldn't even have to show their date of birth, and they shouldn't definitely have to show where they live. Same idea with the concept of Amazon delivering a package via FedEx, where you live, and FedEx shouldn't know what you bought. And as we go to these kind of modular architectures, you're going to see these cryptographic proofs of every micro part of a transaction.

5:44Because right now we're showing everything. Right. In that bar example or in that delivery example. I think of it as maybe, you know, and the math is really interesting, zero knowledge proof math. It's fascinating. I've done a show about it with Silvio McCallie. If you'd like to go and check it out, if you're a Real Vision member, it's fascinating how the math works. But the sort of simplest explanation for it is it allows you to demonstrate that you know something without revealing what that thing is. So what you're talking about in your example of the person going into the bar, it lets you show the bartender, yes, I am in fact 21.

6:16Yes, no proposition. I know that data. There's a trusted third party somewhere that knows the data, maybe a state, maybe a country, a licensing authority, some kind of who issues an ID. But I'm not going to tell you any of that information because you don't need to know it. You don't need to know what my birth date is. You don't need to know how old I am today. You just need to know, is this guy or gal over 21 or under 21? If you're under 21, you can't come in. If you're over 21, you can come in, but we don't need any more of your information than that. Exactly. And then on the optimistic side, the optimistic nature of a roll-up more relies on the validity of the transaction.

6:53So basically what this means is that we are going to be optimistic that the actors in the transaction are indeed benevolent actors and not trying to game the system. But then there is a certain waiting period where there can be a rebuttal, whether it's one day, seven days, 30 days, depending upon how the arbitrarily complex logic of that optimistic roll-up works. But basically, it's a way of expediting transactions and then assuming there are no objections, we can employ the speed of the optimistic agreement and then have this kind of seven or 30-day look back, for example. But basically, your trade-offs are kind of speed in the optimistic layer or in the optimistic direction versus this privacy and confidentiality, which takes a lot more computation and a lot more mathematics.

7:53So I think the optimistic roll-ups are kind of training wheels. And interestingly, we've seen both optimism, which is kind of the vanguard optimistic roll-up, and Polygon, which started with a sidechain and an optimistic roll-up, both add to governance proposals recently to add zero-knowledge roll-ups. So I do foresee a world where we'll probably be transitioning from optimistic roll-ups wholeheartedly to zero-knowledge roll-ups. Hey, everyone. We're going to take a quick pause and hear a word from our partners. We'll be right back.

8:39That's very interesting. I don't think I've ever heard anyone make the case that it is almost this training wheel scenario. It's easier to implement something to get rolling with faster and then moving into a true mathematical cryptographic proof of zero knowledge proof. It's also interesting talking about optimistic rollups. And one of the interesting things about digital assets in general is this idea that you need different levels of validation. For example, if you're buying a cup of coffee, it's a very different level of trust, a very different level of anxiety for the person who's buying it than if you're purchasing a house.

9:10or a$50 million portfolio of digital assets. Maybe the challenge period for a cup of coffee can be 24 hours. And if you lose the 250, you're not happy about it, but you're not devastated. So all these sort of weird things that need to be worked out. And one of the cool things about software when you have these abstraction layers is that essentially you can build in all this really interesting logic into the system itself so that maybe you have a different level of verification validation windows, So as for example, for an optimistic rollup, depending upon the nature of the transaction value being just one of them, maybe it's a different level.

9:46I trust my mom probably is not going to, you know, decay on a transaction with that I have with her. Maybe someone who I've just met someplace else in the world be a very different scenario. Agreed. Yeah. So it's really interesting to talk about these ideas. I mean, I'm fascinated by the software development aspect of it, all the things that are happening in this space. And it is moving very quickly in the Ethereum space in particular. I'm curious also to shift gears here a little bit to think about what you see in the political climate, the legal regulatory component of this. Obviously, what's happening right now with Ripple, the ruling from Judge Annalisa Torres in the Southern District of New York.

10:27Very interesting to people in the Ethereum space. Yeah. So I would say big picture. We had some horrible incidences of fraud last year with, let's call it, FTX, Celsius, et al. And those perpetrators, or alleged perpetrators, presumed innocent until guilty, are going through the legal recourse process. But I know, you know, without legal until proven guilty, I know a lot of people that lost a lot of money, retail, institutional, and based on blanket misrepresentations of risk management. And frankly, what I saw before that was the current SEC not having the eye on that ball. They did a great job of finding Kim Kardashian, but they completely missed Celsius.

11:32They completely missed BlockFi. They completely missed FTX. and frankly, I think there was some egg on the face. And I think the powers that be within the political spectrum wanted to throw some ice on the entire industry. And unfortunately, they conflated, in my opinion, fraud that could happen in any industry and wire fraud and all sorts of material misrepresentations with a burgeoning database technology. And one of these examples, so we saw a lot of enforcement recently by kind of trying to prove people guilty. It was almost like issuing speeding tickets was kind of how I looked at it. There were lots of kind of enforcement actions that were kind of thrust upon people to try to set a legal precedent in the court of law in that direction.

12:41But where I think we're going, and to get to your point of the Ripple case, I thought with Ripple being this kind of closed network that didn't have something like Bitcoin or Ether that was kind of intrinsic to the operation of the actual permissionless blockchain. Ether, for example, is a fuel that is needed to run smart contracts. Ripple really is a token that can represent a security or a fiat-backed asset for real-time gross settlement. I thought if there was any digital asset that could potentially be misconstrued as a security, Ripple or XRP would be pretty close to the sun in that regard.

13:41And with this landmark precedent, they kind of bifurcated the decision. But for all intents and purposes, XRP was declared mostly not a security. And there are certain caveats to that where they said, you know, if something's sold on an exchange, you know, as a tertiary sale, that may be considered more of a security. But in and of itself, it's not an investment contract. It's this token. And so first and foremost, my takeaway from that is that if XRP is not a security, it's going to be very difficult for the SEC to go down these paths with other potential assets and declare them not securities.

14:31So I would say that was my first consideration with respect to kind of the ripple precedent being set. Secondarily, I think we're starting to see something change within the SEC. within a couple of days, I don't remember if it was a couple of days before or a couple of days after, we saw about 10 Bitcoin ETFs, including one from BlackRock. They all reapplying for the ETF seemed way too coincidental to me. So if I'm reading between the tea leaves or reading between the lines, I believe that we're actually seeing a neutering of the power of the chairman of the SEC at this point. And there's no dummy to tell you that we're going into an election year.

15:35And the people in power typically juice the economy going into the election year. And America does not want to be seen as anti-competitive. America 1, Web 2 with the Facebook, Amazon, Netflix, Google, Microsofts of the world. And by all intents and purposes, under proper regulatory guidelines, I think that there should be disclosures. I think there are some tokens that do represent securities and they should be treated as such. I think there are some that represent commodities. And then I do think that there are kind of new rules that need to be applied to these types of assets that don't necessarily need clearing and settlement based on kind of 1940 security laws.

16:21So I think that there's a lot of work to be done, a lot of learning and collaboration between the regulatory bodies and the private sector that needs to happen. But if I'm reading between the tea leaves, the XRP not being a security, and the myriad of Bitcoin ETF applications going into an election cycle, I believe we are going to see a favorable crypto environment through the election. And that's not to say, and I'm sorry, one last piece, and that's not to say that it shouldn't be regulated. I think that there are ways to regulate this. I think that there does need to be AML-KYC. I think there does need to be disclosures.

17:15I do think that some of these assets do operate as securities and should be regulated as such. And the ones that aren't still should have disclosures and be part of some type of regulatory consideration. It's really interesting that you frame it that way. I've always believed that the aspect of this that was the most easily settled or settleable was what you were talking about at the end there, the question about what is or is not a security, what is or is not a commodity. I think there's some way that I can at least envision or imagine or hallucinate what a path forward on those points may look like.

17:53But you mentioned AML-KYC and the need for reasonable regulation in your view in this space. One of the things that I think is probably the stickiest wicket here is the idea of AMLKYC. When you go up to the Ethereum Foundation homepage and you read about the two phrases are anonymity and credible neutrality, I wonder, in your view, how does that jive with a regime that looks like a traditional AMLKYC regime that a traditional financial institution in the United States might see? because that really seems to be a pretty wide gulf at this point, at least in my view, between where the community is and ultimately where the government is on this.

18:33So I'll start with the credible neutrality first, because I think that that more talks to the playing field of what a public permissionless blockchain should be. It should not have a decision point. it should be able to adjudicate the transition of tokens across smart contract planes. Let's define it first, because I know there are probably a lot of people who are scratching their head with this phrase, credible neutrality. In my understanding of it, and you can correct me if you see it differently, Andrew, is it's this idea that all actors on a network get treated equally without regard to who they are, where they are, and what the transactions they're doing are.

19:14Is that sort of roughly how you understand it as well? Yeah, I think that's perfect. And I can give you a quick kind of anecdotal story of uncredible. So what's the opposite of neutrality? Unfairness? Whatever the antonyms to both of those words are. I had a friend, lived in Los Angeles, purchased Los Angeles Laker tickets. through StubHub. And basically, it was what he thought would be the last game of the season, because he had a hunch Kobe Bryant, God bless him, God rest his soul. This is 10 years ago, but this sticks to my head. It may be his last game. he indeed declared that he was going to retire and this was a month after he uh my friend purchased the tickets on stub hub my friend who purchased the tickets on stub hub was not playing on a credibly neutral database.

20:24StubHub, that day, refunded the money that my friend paid for those Kobe Bryant tickets and then put those tickets back up for sale at four times the price. And this is just one of those examples. We weren't on a credibly neutral playing field. We were on StubHub's playing field. And that's the difference between something like a public permissionless blockchain, like Ethereum or like Bitcoin, or when you're playing on a specific vendor or a specific business's database. They can arbitrarily change those rules. And I feel like that was a good retail explainer for me. So that's kind of a credibly neutral concept.

21:26When we talk about the AML KYC aspect, I do think that people should be able to access and transact, let's say, for buying the Lakers tickets or buying the sneakers. But I do think what you're going to see is some type of gated entry. And back to our notion of zero-knowledge proofs, a wallet is going to hold tokens. And they can be tokens of value, like US dollar tokens. But they can also be these zero-knowledge proofs that say, I have proven that A, I'm over 21 years old, and B, I am an accredited investor. And then if I'm over 21 years old and B, an accredited investor, I'll be able to enter into a venue to potentially trade, where that trading venue has rules by which they must comply with and disclosures.

22:36You can't open a Goldman Sachs account without a$5 million minimum. I'm just making this up hypothetically. But if you held these, what I would call badges, which are kind of, I try to differentiate like a badge, which is like an attestation to you versus like a token, which may be an asset. So you can have a badge that says you are indeed over 18 years old. You have indeed complied with the accredited investor rules, which is, you know, a certain income or a certain net worth that's been proven by some type of third party. and you do indeed live where you say you live and you've proven that by a bank statement or a utility bill.

23:21So those are kind of like three examples of things that you need to pass AMLKYC. And then you'll be able to enter into, let's call it Uniswap compliant and then participate in the same type of trading having been AML KYC with other AML KYC parties. Hey, everyone, we're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision Crypto Daily Briefing.

23:56Yeah, it is really interesting to sort of hash through some of the details. I guess one of the things that comes up is this idea of Ethereum as a base layer remaining a neutral playing field. Are there then sort of other layers on top of, below, beneath that begin to enforce some of the types of things that you're talking about here, whether it's AML, KYC on the one hand, or securities regulations on the other? Does it get sort of structured out into an end tier architecture where you have these things happening at different layers of the stack? Exactly. What I look at it is Ethereum is this global settlement layer, and you're going to have thousands of layer twos.

24:40And like an example, like the example I just gave, you can have, let's call it exchange layer two. Let's just call it compliant Uniswap. And that compliant Uniswap may have 10 ,000 participants that are all trading within that order book. But all of those 10 ,000 participants had to enter into it by showing the badge of their AML KYC, proof of location, proof of funds, et cetera. And then basically every hour or every day or every quarter, depending upon what's needed, those transactions get batched and then anchored to Ethereum. And the simple analogy that I've used before for this is the bar tab.

25:34So basically, if Ethereum is the restaurant and Uniswap is the waiter and you and I go and we have a salad and then we have an appetizer and then we have cocktails and then we have dinner and dessert, we basically started a zero tab and at a$200 tab. And basically, the zero and the 200 get batched and sent to Ethereum. But those 10 microtransactions are what's used at the layer two. And it is the layer two. Let me ask you this. I mean, one of the questions that comes up about crypto in general is the question. You mentioned this at the top of the show about how early we are in this process. I think we're actually coming up on Ethereum's anniversary.

26:27It's July 30th at the launch date, I believe. The skeptics of the space say, hey, you guys have been at this for a really long time. I still don't use crypto in my daily life. What does the trajectory look like in your view before the technology becomes a little bit more mainstream? Yeah, so the interesting thing about this versus let's call it Web 2 is with this

26:55iteration of the internet, there was a speculative asset associated with it or speculative assets. The notion of having this ether as this digital commodity that every time you need to run one of these transactions or every time an L2 needed to settle, you would need this micropayment of ether versus, you know, back in the 80s or the 90s when there was AOL, there wasn't like there was AOL stock for sure. And we saw that boom and bust. And then we saw, you know, Fang be the largest companies in the world. So what I would say is that, first off, we had with this, let's just call it Web3 broadly, we had the benefit of already having the internet speed of light communication of Web2.

27:57So lots of people could read about things like Ethereum. They had seen kind of Bitcoin go up in price, and they could pattern recognize, oh, Bitcoin did X, maybe Ethereum does Y. And in some instances, people were right about that. In some instances, people were wrong when there were a bunch of like Ethereum copycats that ended up going to zero. So basically what I would say is there weren't kind of speculative assets that could go alongside the growth of this ecosystem. So I would say that that's kind of one one key differentiating factor. And secondarily, I think the most important part was that everyone could see the potential of having a decentralized peer to peer World Wide Web.

28:48And everyone could see that Uber extracts 50 % from the driver and the passenger. And if we could do it peer-to-peer and the 50 % could go to the driver and the passenger instead of Uber extracting that much, maybe they deserve 1%, 5%. I think it was a logical jump that made sense. But I don't think what the layman's understood is this tradeoff of having decentralized trust for speed. You know, having a Kafka database on Amazon and UX that is lightning fast versus having to verify and validate these transactions on these blockchains is just a different, I would just say, computer science paradigm.

29:41And these things are speeding up with layer two evolutions. They are incorporating privacy. You can't have HIPAA sensitive data, medical healthcare data on a public permissionless blockchain right now, which is where I think a lot of that will go on to these zero knowledge layer twos. And frankly, it was just building the infrastructure before the plumbing, before the windows, before the patio, before the marble. Andrew, it's always a pleasure when you come on the show. It's always a pleasure and it's shocking to me how fast the 30 minutes goes by when you're here because we get involved in these conversations and I just go down the rabbit hole.

30:24Thank you so much for joining us. Before we go, final thoughts, key takeaways that you'd like to leave our audience with.

30:32Really interesting work that's going on in what I would call the restaking world. A prime example of that is a protocol project called the Eigenlayer. And the concept behind that simply put is that rather than creating another, let's call it small cap token that may not be necessary, may be deemed a security by Gary Gensler, et cetera, being able to harness the security, the public permissionless, large$20,$30,$50 billion pot of Ethereum security to secure middleware. So basically, you can stake Ether to secure Ethereum, and now you can stake Ether to secure other layers of the stack. I think that that's going to be a very interesting project and kind of further solidify what's going to, you know, the strength of these kind of proof-of-stake networks.