Eth Is Money?
In this episode we are joined by David Hoffman, Chief of Operations at RealT, a company which tokenizes realestate assets into security tokens. He is also well known for numerous pieces he has written on Ethereum and DeFi and is co-host of the POV Crypto podcast. Hear us as we talk about his writings, how tokenizing real estate assets works, Bitcoin on Ethereum, the feedback loop problem and effects of the USD in DeFi, and a debate on whether Ether is an asset.
Topics discussed in the episode
- What RealT is and how tokenizing real estate assets works
- Using the Uniswap protocol for trading
- The thesis behind David’s “Defining Ether as an Asset” post
- The crypto-economics economics of Bitcoin on Ethereum (tBTC, wBTC)
- The feedback loop problem in DeFi
- The effects of the USD price on volatility in DeFi
- The argument that Ether is a ”triple-point asset”
- The utility value of Ethereum
- Rebutting the argument the Ethereum will eat all of the world’s value
(5:36) David’s background in crypto
(8:53) Getting started with RealT
(10:48) Real estate security tokens
(14:21) How they will be traded
(17:09) Creating Derivatives
(19:11) Legal jurisdiction for RealT
(20:24) What you get when you buy the token
(24:35) Ether as the best model for money
(29:31) The base currency of DeFi
(34:59) Feedback loops
(39:34) ETH locked in DeFI VS staking rate VS USD
(42:42) Ether as a triple point asset
(49:03) Sunny on the 3 different asset types, and memecoins
(53:59) The claim that USD is based off a meme
(57:07) Why open finance will consolidate to Ethereum
(1:01:18) The jurisdiction of the internet
(1:04:12) The Internet is a network of networks
(1:08:04) Is stability a requirement for money?
(1:10:27) Monetary theory
Sebastien: We’re here with David Hoffman. David is the Chief Operations Officer at RealT. He’s the host of POV crypto, and he’s written two pieces that I’m sure many of you have heard of, and one of which is the origin of the meme “Ether is money”. David joins us today to talk about RealT, but also, I think we’ll get into the weeds a little bit about this idea that Ether as money and Ether as equity. Thanks for joining us today.
David: Hey, really excited to come on here. I’ve been a long-time fan of the show. It’s a huge honor to be here with you guys.
Sebastien: Yeah, so we met in Tel Aviv. I think this is around the time that you released “Ether is money” or shortly after, and you were pitching me about this idea, I think it was the Ethereal party or something like that. Back then, I think I was somewhat skeptical of this idea that Ether is money. I still hold quite a bit of skepticism there. But yeah, we’ll get into it and hash it out here on the podcast. Tell us a bit about your background and what got you involved in crypto?
David: Yeah, so middle of 2017 a bunch of the gaming subreddits were complaining as to how high the prices for GPUs were. I was thinking, what’s going on here? About a month later I find myself mining Ether on my one GPU making $4 a day, which is pretty good. I’m on my way to physical therapy school and about to go into a bunch of debt. I’m really looking for some passive income. I scale that mining operation up to 24 GPU miners, in my dad’s bathroom. That was my plan to have some passive income while I’m going through graduate school. I just find myself more and more reading white papers, watching videos, watching Dan Finlay’s talk at DEVCON0 in Seattle, watching Vitalik talk on wherever. At some point I realized that all of my time I was supposed to be spending working on my GRE and my applications. I was instead learning about crypto.
In March of 2018, I went to ETH Denver just on a whim. The plan was to go and hang out in Denver and see the community there and then also go to a PT school, in Boulder. I just never left ETH Denver. On the plane ride home, I realized that basically my behaviors are not lining up with physical therapy school anymore, and it’s time to get into crypto full time. When I got back into Seattle, I didn’t really know what to do. I just started writing, that was the very beginnings of turning into somebody that produces a ton of writing for the community. It’s also where I got my foot in the door in the crypto space at large.
Sunny: Really quick why in the bathroom?
David: Yeah, so, it’s not as scary as it sounds. They were very well protected. It couldn’t be in my room because it was really hot and loud, I needed it to be close to me, but also separate and that was the room next door. But yeah, they were just tucked away and inside. It’s also a funny meme.
Sunny: After ETH Denver you decided. I’m done with physical therapy school, and I want to just jump in. Is that when you started RealT, or were you just more exploring the space and doing other stuff before that?
David: Yeah. The first job I got was as a community manager at New Alchemy, which was an ICO advisory firm. When I say I got my foot in the door, I really got my foot in the door, in a very interesting way. Going into the crypto space during the ICO boom, I had a warped idea as to what this whole entire space is. But it was just me using my writing skills to write blog posts and to send it out into the cryptosphere and hopefully capture some people and bring them into the Telegram.
After four months of that, obviously, that business model didn’t work out. I got brought into this company called Bunker Capital, which is a security tokens agency. Instead of many small ICOs, Bunker Capital was focused on a few large clients interested in doing security token offerings. One of those was RealT. RealT is basically a security token offering company, we just confine it to real estate. The way that RealT works is that you put a house into an LLC, and tokenize the LLC. That’s a security. RealT contracted with Bunker, and I got assigned as the project lead for RealT. Also, like New Alchemy, the ICO industry didn’t work out too well, the security tokens industry, not so hot. But for RealT, for specific security tokens, it worked out pretty well. I hopped onto the RealT team and that was in roughly September of 2018, when we first started to kick off RealT. Then I came on to the company full time in early 2019.
Sebastien: Let’s talk a little bit more about RealT. Can you describe what is this platform? This is a security issuance platform, what it does, and how come you went for the Real Estate Market? What are some of the challenges that you’re trying to solve?
David: Yeah, so the juxtaposition between an ERC20 token on Ethereum, and a real estate property is a stark contrast. A token is highly divisible. It’s very easy to trade, it’s very easy to send, and it’s low cost to produce. Real Estate, on the other hand, is not divisible. They’re extremely valuable, extremely illiquid. They’re pretty much landlocked to wherever they are. When you combine these things, the marriage between these two things works out pretty well. There’s a lot of synergy there. Real Estate, as an industry, is in my opinion, a backbone of the human species at large. If there is industry and if there are cities, if there is commerce then real estate is valuable, and so you can’t have a valuable productive society without having a valuable productive real estate. It’s really a staple, a backbone, to industry and investment and in finance at large. That makes it really valuable.
Real estate is one of the most valuable industries in the whole entire world. As an investable opportunity, getting people that can’t buy an entire piece of real estate, as an investment, we need to be able to break these things down so they can access these things. It’s unfortunate that such a backbone of human industry is only accessible to people that can pay cash for a very large property that produces cash. Fractionalizing these things, and getting them into the hands of people that can only buy 100 200 $300 worth of real estate, and then also getting them their rental income on a daily basis is, in my opinion, pretty powerful. We chose real estate versus any other security for that reason. Everyone thinks that real estate is coming to Ethereum. We wanted to capture that market first.
Sunny: But today, you do have real estate trusts that do allow you to invest partially in real estate. What makes securitizing individual properties different than just investing in a real estate trust?
David: Totally. That’s definitely a model that we thought of, at the very beginning. But if you start with a trust, you haven’t gone all the way down to the basement, it’s not the base layer. If we want to build out this tokenized world, if we want to tokenize everything, then we really need to start with the individual assets. Part of a system that we’re building out with RealT, that we’re hoping to have fleshed out and launched by the end of 2020, is something like a tokenized trust or tokenized REITs. We just wanted to start at the very beginning, which is the individual properties themselves. That’s where the infrastructure is. Start at the foundation, the very deepest, the lowest level, and then you can go up from there. In this new model that we’re building out, people will be able to take individual properties and bundle them up as they see fit and create their own trusts or create their own REITs. If we hadn’t tokenized the individual properties, we wouldn’t be able to create that system.
Sebastien: Just to take a step back here, basically, what this platform does is tokenize an LLC, which owns a property. Then these properties are issued as security tokens. They’re regulated securities, and they can be traded on securities exchanges that might accept crypto, not that those really exist, I think. What’s the outlook there for how these things are gonna be traded?
David: Well, they’re on Uniswap. We also seeded Uniswap with our own liquidity. People, if you buy a token, you can go to Uniswap and buy and sell it through the exchange. Uniswap is a really awesome piece of infrastructure for us. Because all Uniswap is, is another address. If you go down to the list of token holders, you’ll see token holder A, token holder B, token holder C, Uniswap. It’s just one of the addresses that we whitelist. The way that we remain compliant is that these tokens operate on a whitelist. You can’t send them to somebody else that isn’t on the whitelist. All we had to do is whitelist Uniswap, and that allows the Uniswap piece of infrastructure to be a part of our offering.
Sebastien: Recently, we had Gabe Shapiro on the podcast. He’s a lawyer, and he’s written extensively about tokens as securities. From what I understand from that conversation is that in the US, there are such things as securities exchanges. These exchanges are the only types of exchanges that can trade registered securities. Does Uniswap fall outside of that category? Could these things be traded on Coinbase? Or would they have to be a registered security exchange?
David: The term I’m familiar with is ATS (Alternative Trading System). That’s something like Openfinance or Templum, or these other exchanges that specifically are dealing with tokenized securities. There are other ones as well.
Since Uniswap is a protocol. It’s an algorithm. There’s no company behind the scenes to manage this. No one has talked or created legislation about this. When we talked with our lawyers, we told them hey, there’s this thing. It exists on Ethereum, it’ll exist without any human input, no one can stop it. It’s just a protocol. No one is ever going to be able to file filings because it’s just an application, and when we told them that they thought it was okay.
Sebastien: I think one of the interesting things about tokenizing things like real estate, tokenizing anything, is that you can easily create derivatives. What kind of derivatives could one build on top of RealT? Maybe a basket of real estate in a certain geographic area, or that caters to high value rentals, or commercial rental?
David: Yeah, so this is all being fleshed out and built in the background right now. The system for this is the goal for 2020, with RealT. It’s a pretty ambitious system, but there’s another team on Ethereum that we’re working with to build this out. We’re not really talking too much about it, because we’re just at the very beginning stages, but it basically does what you’re describing. There are individual properties on the RealT platform that have their own tokens. Going through the system will allow you to deposit one token, pull out a different property. Then simultaneously, if you want to, you can take properties, 1, 3, 7 and 10, and create a basket out of them. You can create these things, anyone else can also buy into this creation that you’ve made, and really allow the community to package up and basketize all of these properties as they see fit.
The first properties that we’re in are all Detroit properties. That’s simply because they are all low price tag, high rental producing income. Hopefully. Maybe by the time this podcast comes out, our Chicago properties will have been announced. Then people can basketize Chicago property, and put them into a basket. We really want that to be a community led endeavor, we really want to give the keys to that system over to our community so they can build what they want.
Sunny: What legal jurisdiction are these based in? I’m imagining these have to have some kind of peg to the real world.
David: Yeah. There is a Delaware LLC. The way this works, there are two companies, there’s RealToken Inc, which is the for-profit company that I work for. Then there’s RealToken LLC, and Real Token LLC, is the LLC that all the properties are inside of. RealToken Inc, is the managing member of Real Token LLC. We’re the custodians, the fiduciary. We are the individuals that are managing all of the properties and so we coordinate the property management companies. If a house goes up in flames, we coordinate the insurance payouts to the token holders, stuff like that. We also manage the rental income from the property to the token holders, and so the Real Token LLC is a Delaware LLC.
Sunny: One of the questions I have about fractional ownership of real estate, in general. What does it even mean to own 10% of someone else’s house?
David: It’s your house. There’s no one else.
Sunny: I guess the question is, Real estate, it is a store of value thing, but at the same time, it’s a capital asset. You’re usually trying to generate some rental income from it. Let’s say the house that I currently live in that I own, I decided to securitize it, and sell 25% of it. Now, when I sold the 25% of it, what does that 25% that someone else owns entitle them to? Do I have to now start charging myself rent to live in the house that I was previously living in?
David: Yeah. A specific example like that is an unanswered question. There’s always going to be edge cases. The main case, and this is why we send out rent on a daily basis, because when we were first talking about how we were going to market and sell this product, well, it’s just a token on a Ethereum, I can make a token and sell it to you and put it on a website, say that there’s a house behind there. When you buy this token, and it shows up in your wallet, what do you actually get? The answer to that is the rental income.
This is why we send rent out on a 24 hour cycle. Because it’s tangible. It makes you feel there’s actually a house there on the other side of the token. Now obviously, we provide every one of our investors with the documents to be able to link the token to the property, but it’s really the rental income, that is the tangible benefit that you get. Right now, it would be a lie to say that these tokens prices on Uniswap and on the secondary market are actually reflecting the value of the property in the real world. But that’s just a function of liquidity, of how many market participants. There are information asymmetries, and the difficulty of, if you buy all the properties, then actually going to Detroit and taking the keys to the house, which is all possible. If you have all the tokens.
Sunny: What if I have 51% of the tokens?
David: We can code that into future properties. Right now, we don’t really want anyone to be able to buy every single one of the tokens, or 51% of the tokens. We want them to stay as tokens on Ethereum. We made the limit as 100% of all the tokens. But yeah, people have asked us that question, because there is a governance process. Token holders have a say on what they want to do with the property and we as RealT are the custodians and fiduciaries of that. If there isn’t consensus, we will take over, but there for managing, if a tree fell on the house and the roof needs to be repaired, some decisions need to be made. In theory, the governance of these properties is something that we need to enable. We’re not really there yet. I think I lost track of your question.
Sunny: Essentially, at some point, let’s say I have, I buy a 51% of the tokens of one of the properties, I can go ahead and take over that governance process, basically say, Alright, I’m going to charge myself zero dollars a month for rent, and I will rent it out to myself for free.
David: Right, so that’s only if we put governance rights over that particular LLC at 51%, right now as 100%. Which means that no one really gets total governing rights except for RealT. We’re a centralized company, we don’t pretend to be decentralized. It’s not what we want. We intend to act in the best interest of every single one of the token holders and not maybe one person that’s trying to attack the governance. But yeah, it’s an interesting thought experiment.
Sunny: Who sets rent, you guys, or the token holders?
David: The property management company sets the rent at the market rate. The RealT offices are in Florida, our properties are in Detroit. Future properties will be in Chicago, future properties will be all over America, we can’t be the property management for every single property. We just hire local property management companies to do everything for us. They understand the local markets and set the rent.
Sunny: Yeah, so I think that talking about real estate as a capital asset is maybe a good segue into the piece of writing that you’re pretty well known for, which is your Ether is the best model for money.
David: Actually, that’s the title that Camilla Russo gave when I put it into substack, that was her title, not mine, but I think it’s true.
Sunny: Oh, well, what was your title?
David: My title is “Ether a new model for Money.”
Sunny: Ether “A New Model for Money”. Okay? Are you the one who started the ‘ETH is money’ meme?
David: No. That was actually Ryan Sean Adams. He was the one that aggressively pushed it, and then we, me, Eric Connor,
Anthony Sassano, we all hopped right on board with him.
Sunny: You had this thing that you mentioned just a few days ago about being an Ethereum influencer. Can you explain what does that mean? And in a serious way, what does that really mean to you?
David: Yeah, so that was actually supposed to be a farce. This was in the context of the progpow debates where the ethereum magicians and core devs gitter, we were talking about how they were surprised to get a lot of pushback from Twitter. I think that the tweet I made in response was, crypto and money are inherently social systems, and so the social systems need a public square to talk and communicate. That social square has been Twitter. A Twitter influencer or a community leader is really just somebody that a lot of people listen to get signal from what’s going on.
I think it was ironic that some of the resistance from the anti progpow movement was coming from people that actually weren’t on Twitter listening to the community. There were some negative words, not too negative, not anything crazy, but just some displeasing words from the core devs. I can’t remember who, even if I did, I wouldn’t name names. We were just talking about how the the Twitter moms are briganding the gitter and making a bunch of noise and I thought that was a misalignment with how these crypto systems work because, as I said, crypto systems are social systems and social systems need a place to communicate and converse, and that is Twitter.
Sunny: Yeah, a lot of people do listen to you and have read your posts. I think it’s been pretty influential to a lot of people. Yeah, maybe could you start by giving us a very brief summary of what your main thesis from that post is?
David: The main thesis of that post is that the most important point, or perhaps the only point of crypto, of the crypto revolution is to produce a decentralized finance ecosystem. I include Bitcoin in that. Bitcoin is a component of DeFi. It is itself a single DeFi application for the DeFi ecosystem, which are applications that can act on the spectrum of trustlessness, on the spectrum of decentralization. All these things can be built, and in order to be a financial application, they need to have money, and the only truly trustless asset inside of the Ethereum DeFi ecosystem is Ether. On day one of Ethereum, at the Genesis block, there was nothing except for the 60 or 72 million Ether, whatever that number was that was minted from day one. There was nothing except for Ether. If any other assets want to come to Ethereum, RealTokens, for example, you would have to trust the company RealT to actually honor the link between the token on Ethereum and the house in the real world. That’s not true for Ether.
Ether is built into the system. If we want to have DeFi applications, and DeFi protocols, in this decentralized financial ecosystem, if we want to have a financial layer that envelops the world in a trustless manner, you need a trustless asset to go into those trustless applications. If you can’t have a trusted asset inside of a trustless application, you get this hybrid thing that’s not totally what we were looking for. If we want full trustlessness you need to use Ether as the money. That’s what we have seen happen in 2018, in 2019. That was the story of the Ethereum bear market, as Ether was being placed into these applications, starting with Maker DAO, which launched in December of 2017. It got kick started during the bear market of 2018. More and more Ether was pouring into Maker DAO to be the collateral for DAI. Our mental model for Maker DAO is something like a central bank. I like to call it the D central bank.
Sunny: I feel it’s more a decentralized commercial bank, where it gives out loans and assetizes them into some stable asset. Central banks usually don’t.
David: Yeah, I would agree with that. That’s a more nuanced take, and I would say that’s more accurate. In 2018, when we were first really chewing around these things, Maker DAO is being put in that context, and banks need collateral. They need something in their vaults. All of these central banks in the world own all the gold. What’s really the money of the world? Is it the dollars that the Fed puts out? Or is it the gold that the Fed has in their banks. In the crypto application landscape and the DeFi landscape, all of the collateral in DeFi is Ether, to a large degree, 95%+ If we want to have this trustless ecosystem of applications, it has to be that way, because Ether is the only trustless asset on Ethereum.
Sunny: There are some classes of assets that are pegged to the real world, like RealT assets. But, there are other trustless assets on Ethereum as well. Let’s say the Augur rep token, that’s an Ethereum native token, or even tBTC, which are coming from another chain, but the way they’re designed is in a relatively pretty trustless way.
David: I love that point. Augur is awesome. Maker is in that same realm. MKR and REP. These are two assets that are trustless assets. But the difference is that rep is a token that earns you fees from the markets on Augur. Those fees are denominated in Ether today, in v1, and then in v2 they’ll be denominated in DAI. DAI is just a claim on Ether in Maker DAO. So really the road all roads go back to Ether. So we got this trustless asset, but the only reason why REP has any value is because it pays you Ether, which is money. Then the same thing is true with tBTC. If tBTC needs to come to Ethereum, it needs to have collateral. That’s how everything in DeFi works. Because it is trustless and trustlessness comes from collateralization. In order for tBTC to come to Ethereum, there needs to be Ether collateralized on the Ethereum contract. For every one Bitcoins worth of one’s Bitcoins worth of tBTC. On Ethereum, there’s 150% of one Bitcoins worth of Ether as collateral. In my head, in Ether versus Bitcoin, Ether won that some more because Ether is being used by Bitcoin as collateral, not the other way around.
Sunny: But that’s only because of the current design of tBTC, right? Where the key holders are essentially having to run a multi SIG on the Bitcoin side. If you get into a system, the designs that we use more in the Cosmos world, the equivalent design here would be as if Bitcoin was using a drive chain that was acting as the peg to Ethereum. In that case, then you don’t need that over collateralization. I think that’s probably the end goal for tBTC. In that case, you would still be able to get BTC over without requiring ETH collateral?
David: That starts to get out of my realm of expertise with technical know how. I’ll take your word for that. That’s how it works. Then once tBTC gets on Ethereum it will be one of the many other tokenized versions of Bitcoin on Ethereum. WBTC, tBTC, the Ren protocol Bitcoin. All of these things are fighting against each other for their own liquidity. Probably one will win, and then that will be the one de facto tokenized Bitcoin on Ethereum. Then once that is in place, well then that tokenized Bitcoin on Ethereum is then going to have to compete for Ether for liquidity.
We saw this problem with the attack on the bZx exchange during ETH Denver. The reason why that worked was because of how illiquid WBTC was. And so if WBTC or tokenized Bitcoin comes to Ethereum, it is going to need to fight for Ether’s liquidity inside of Ethereum in order to have any amount of meaningful displacement of Ether as the main collateral for Ethereum and that’s a hard fight. This is the fight that Bitcoiners often criticize Ethereum for saying why would anyone use Ether as money because Bitcoin has 100x liquidity, 10x the market cap?
Now inside of DeFi the roles are reversed, when Bitcoin comes to Ethereum. Now Ethereum has way more than 100X of market cap versus tokenized Bitcoin, in Ethereum, and way more liquidity. All of the liquidity inside Uniswap, that belongs to Ether, not to tokenized Bitcoin, and so once tokenized Bitcoin does actually consolidate into one protocol, that’s just the first step now to compete to collect the collateral of the DeFi ecosystem. It has to compete with all of the same things like Bitcoin, or say that Ether has to compete with Bitcoin on the outside.
Sebastien: This idea that ETH is money, you talked about this at the beginning where you said that in order for all of these things to have collateral, whether it’s DAI or any collateralized asset tBTC, we need Ether as that collateral. Ether needs to be money. It’s this descending statement where you get to the bottom and you have Ether, where I’ve always taken issue with the idea that ETH is money. To me, ETH is more a representation of what people think Ethereum as a network is worth. The value of Ethereum, to me, is derived from or should be derived from the value that is created in the applications itself, that are being built on Ethereum. It really comes back to this idea of utility.
The value of Ether represents the utility that people derive from the Ethereum platform. Now, if Ether itself is used as liquidity to build all of the DeFi ecosystem, and to give value to the DeFi ecosystem. That is the value that is being created in Ethereum. There seems to be this recursivity there, where essentially DeFi ends up being worthless. Because if you’re using Ether as that, as that collateral asset, and you need Ether to be the collateral asset to give value to the system, and to give value to the system, you need the collateral asset, it loses all of its meaning it loses all of its value. I don’t know if you’ve heard this argument before, how you would address that.
David: Yeah, I’m not sure I 100% followed, but I think it has something to do with the feedback loop nature of the Ethereum economy, if that resonates.
Sebastien: Yeah, I guess that that’s a good way. Yeah, there’s some recursiveness there or a feedback loop, if you will. Yeah.
David: Feedback loops are both really awesome and really dangerous. There’s this old meme I think was from Kevin Pham from forever ago where proof of steak is a power strip. But the power cord coming out of the power strip is plugged back into itself. Which is a funny joke. But where that joke is missing is that what’s actually going on is that before it’s plugged back into itself, there is this other component that’s missing. That’s that is DeFi, which is the energy generation machine. It goes from just a power strip trying to get power from itself to a megaphone in front of a microphone that goes back into the megaphone.
The combination of proof of stake, locking up Ether, pulling it off of the secondary market and paying rewards, and then also Ether, locked in DeFi, which is also Ether being pulled off the secondary market to achieve the utility of all these DeFi protocols. Then there’s also things like the fee burn from EIP 1559. Basically all of these things end up ultimately contributing to the scarcity of Ether. That turns into a really big game, it turns into a scarcity game in the same way that Bitcoin’s 21 million is a big scarcity game. It’s a game of chicken as to who’s going to move over to Bitcoin last.
Ethereum is also this big scarcity game, and it’s really about okay, where’s all the scarcity gonna come from? And when’s it gonna come from? Or when is it going to come? And so this feedback loop, this FOMO cycle, is the thing that powers the growth, the growth of Ether as an asset and then we’ll also power the growth of DeFi, because Defi is a function of how valuable Ether is, and this is a reference to Ryan Sean Adams, Economic Bandwidth.
When Maker DAO pulls out 2.5% of all Ether in circulating supply. Well, by the laws of supply and demand, the Ether price must go up. Imagine if we have just five or six more Maker DAOs over the next five years, pulling out two and a half more percent from the total supply of Ether. Well, the scarcity game is on. This is why proof of stake is so incredibly powerful is because it pulls so much Ether off of the secondary market. There’s such a strong incentive there. That is one of the big players in this massive scarcity game. This is the positive feedback loop that is created. That’s really the thing that generates the power, the internal power generation system, of Ethereum.
Sunny: In your posts, you have diagrams talking about this, where it’s this triangle, and one direction pulling is ETH locked in DeFi, and other is the staking rate. Then the third one you said is USD price. You said quote, “the only mechanism is, the US dollar has to generate its equal and opposite pull on the above forces, to increase in price”. I just don’t quite understand what that means. It seems a bit wonky. I agree that you’re decreasing the amount of available ETH on the market. But that’s not necessarily increasing the price that’s just making it less liquid on the market and makes it more volatile. But yes, that means it can increase in price faster, but it can also decrease in price faster just because you’re making something more scarce isn’t increasing the price by nature, it’s just making it more volatile in general.
David: I would disagree with that. I think it’s always easy to talk about Bitcoin here, because Bitcoin’s so simple that it illustrates this pretty well. Bitcoin prides itself on having an inelastic supply. Whenever there’s any more demand, because supply is not elastic. So with $1, if there are more demands from the dollar, the supply of the dollars is elastic. The Federal Reserve just prints more, and Bitcoiners are the opposite. Whenever there’s demand for Bitcoin, no one’s printing anymore. Price has to go up.
Sunny: The problem is that it assumes that the demand for Bitcoin and also for ETH is going up. But what happens when the demand for those is not going up?
David: Right. When demand for Ether is not going up, Ether leaves Maker DAO, it leaves Uniswap, it leaves staking and it goes to the secondary market. Then the equal and opposite force of the US dollar that has to pull on those two things goes down. The image that you’re citing, I have three ropes, and they’re going in three different directions. Proof of stake is competing for Ether from the secondary market, and from Ether in DeFi. DeFi is competing for Ether from proof of stake and the secondary market.
Then the secondary market has to respond to any amount of Ether that is leaving the secondary market and going to proof of stake, or to DeFi, and you say that these things become more volatile and more illiquid. But I think liquidity is actually a function of price. When something goes 10X in price, it’s also going 10X in liquidity. When things leave the secondary market, I’m not saying that there’s less supply on the secondary market, I’m saying the value of the price of the thing on the secondary market goes up. The total US dollar denominated value on the secondary market stays the same, or it goes up, even though Ether is leaving. That’s because value is generated. More Ether can go to DeFi more Ether can go to proof of stake while keeping equal or more value of Ether on the secondary markets.
Sebastien: I’d like to address this point you made in one of the posts where you argue that Ether is a triple point asset, but can you first briefly remind us what is a triple point asset and why you think Ether fits this description.
David: A triple point asset is not a real thing. It’s a metaphor. If you go out to the old finance world and say, “sell me on your triple point assets”, they’re gonna look at you weird. Triple point is a reference to chemistry where if you balance pressure and temperature in a particular substance, well, it can be both, or it can be all three. Gas, liquid, and solid. You can go to YouTube, type in triple point asset of water, and you can see somebody with a cool chemistry set that’s making water boil, freeze and be liquid all at the same time.
In the context of assets, this was an attempt to define Ether as an asset. There are three main asset types. One is a capital asset. This type of asset produces cash for you. This is the rent you get from a property. It’s the revenue that a business generates. It’s a taxi medallion, something that produces cash. Then there’s a store value asset, which is something that’s used as collateral. This is gold in a vault, your house, when you take out a loan against your house. Those are those two great examples. Then the third is a consumable asset. I call these one time use assets. That’s a commodity like wheat, or coffee, or oil. I think the most accurate comparison is energy. Energy is a great commodity asset, it can only be used once, and then it turns something that you have into something else, that’s better.
Ether is really all of these things. It’s the collateral inside of DeFi, it’s the collateral inside of staking, it also produces fees for you inside of DeFi, it also produces fees for you from staking. Then it’s also gas. It’s also the narrative of Ether, was gas for Ethereum. That’s talking about one of the three pillars of Ether as an asset. When you combine all these things, Ether can be all of these things inside of one single transaction, and that’s why I call it a triple point asset, because it can act as all three asset types, at the same time.
Sebastien: Ether could have some of these properties, but it’s a bit of a stretch to say that it’s a store of value and that it’s a capital asset, and that it’s consumable. These things traditionally have been very different from what is Ether. I wonder if, instead of calling it a capital asset, a consumable, and store of value, we don’t need a totally different new type of nomenclature. For instance, on the store value side, the argument that you make in your posts, was Ether is a store of value because you can lock it in DAI and you can use DAI as a store of value. I think we agree that the instability of Ether, of cryptocurrencies in general, don’t make them great stores of value. To say that Ether is a store of value because you can make it a store of value by locking it in DAI implies that US dollars would only be a store of value if you were to lock them into something some other vehicle or invest them in some vehicle or locked them away somewhere. The comparison doesn’t really line up for me there.
On the capital asset side, Ether can produce capital in the same way an investment does, perhaps, but not in the same way that a tractor produces something of value that you can then sell as a business, or in the same way buying a computer allows me to produce a podcast that I can sell to advertisers or something like that. The comparisons there fall apart. I wonder if it doesn’t make more sense to try to figure out what a new type of nomenclature is for these things. This goes back to my initial point, that I tend to feel that Ether is more of an investment. Who bought Ether or hold Ether expected to go up, because they expect the value of Ethereum as a platform to grow. Because of people using Ethereum to build all kinds of things, much like you would invest in a startup or invest in a company and expect the value of your stock to grow because you’ve invested in it.
David: When you say that People buy Ether because they expect the value of Ethereum to grow. I think what you’re really saying is that the three pillars of what makes Ether a triple point asset are all growing. That the net sum of those three things growing is Ethereum becoming more valuable. When it becomes more valuable it’s because these three different ways that Ether captures and accrues value are also growing. I think a lot of people would contest that something being stable or not, losing 95% of its value does not actually disqualify it as being a store of value.
A store value, and this is the Bitcoiner in me coming out, is something that no one will inflate away from you. Even though Bitcoin goes from $20,000, down to 3000, you still have the same number of Bitcoins you had before and it’s really about what is your anchor. What’s your reference point? I think we would all say that gold is a store of value, but it goes up and down in price versus the US dollar, and it’s really all about relativity. It’s really all about what starts to be the thing that everyone uses as money or as a store of value. When I say Ether is money, or Ethereum is the economy Ether is a money in commensurate way to how Ethereum represents the total share of the world’s economy. Now Ethereum is less than 1% of the total world’s economy. Therefore, Ether is less than 1% of the total world’s money, but to the degree that everyone is using Ethereum as an economy, they are also using Ether as money.
Sebastien: Is this in your mind as the current situation, or a hopeful future situation where people are using Ether as payment?
David: Hopeful future situation in the same way that the internet in 1995, everyone knew that the internet was going to take over the world. I’m of the same opinion that in 2020 Ethereum as a financial platform will blanket the earth and then everyone will be using Ether as the store of value to operate inside of the Financial fabric that is DeFi.
Sunny: I think I want to try to maybe discuss each of these three claims here, one that it acts as all three of these asset types. I think the best way to approach this is to break these down and discuss each of them independently. I’ll just start by saying I completely 100% agree with the capital asset classification. In cosmos, that’s how I define Atoms. I have a paper describing this where I say that atoms are digital ASICs, they entitle you to earn a portion of the fees that are paid on the cosmos network. Those fees can be paid in any token you want, you just have to earn those fees.
Let’s focus on the other two. The first one is the store value. The post started off with what I thought was a good definition of what a store value asset is, but then I think you generalize it to mean that store value could be anything that has value. I’m not sure that was what Chris Burniske’s post was originally trying to say. I think maybe a better term, you might be trying to go for, something that is an inherently valuable asset. I like to call these shelling point assets, where I see gold today as a shelling point asset, where it’s just the shelling point that everyone has agreed. When the rest of the market is tanking, we’re all gonna buy gold, and it has value based on common belief. That’s what the meme coins are.
Here’s a question I have. In an old Epicenter episode, Brian and I got into a debate about Litecoin. I said that having a pure meme coin is great, because it’s a religion, where if you have an asset that’s both trying to be a utility, and trying to be a meme coin at the same time, the problem is its purpose as a utility gives you a rational way to price the asset, but for mankind, for religion, you don’t want people to be rational. You want them to be utterly alien.
That’s what’s interesting about Bitcoin, it’s we’re gonna sever all links from actual utility and giving people a rational way to figure out what the value of this thing is supposed to be. It’s just running off pure religious fervor. Don’t you think that actually separating out, and you can think of gold as being the same way, Right? There’s no rational way to calculate the value of gold. It is so severed from its use in electronics and whatnot. Isn’t tying it to a utility almost diminishing the meme, the religious fervor that could go into Ether’s value.
Sebastien: Yeah, I love this conversation. I think instead of talking about Litecoin we should just talk about Bitcoin because that’s what that is. Bitcoin is one massive meme.
Sunny: I use Litecoin as an example, because it’s more shocking to people. Litecoin has its own meme, which is it’s silver to Bitcoins gold. What does that mean? I don’t know. But saying it makes the price go up.
Sebastien: But at the end of the day, money is a meme, right? The dollar that I have in my wallet is a piece of paper that somebody else will give me, whatever is one dollars worth of something that they have. Money itself is built into a meme. The meme also comes as a result of utility. Bitcoin is a huge meme, it’s a meme coin. The whole going to the moon thing is part of the meme. At the end of the day, you can’t steal anyone’s Bitcoin, and you can’t roll back the chain, and there is utility there at the bottom of the stack. You can’t have zero utility.
It’s also worth saying that some of the meme comes form a positive feedback loop where liquidity begets liquidity, and value begets value. The what money is, when markets were born, somebody came to the market with apples and somebody came to the market with shoes and they needed something to go in between, because the person that had apples didn’t want shoes. The utility of money is being salable, being liquid, being universally able to be accessed and bought and sold. That is the utility. I don’t think you can actually get away from utility.
What Ether is doing is it’s finding ways to both create utility inside of DeFi, create utility inside of staking while also generating the liquidity premium, the monetary premium of the meme at the same time. When we talk about money as a meme, the money is valuable because it’s universally bought and sold. Well, that’s what Ether is inside of Ethereum. Ether is universally used inside of DeFi. It’s the only thing used inside of staking, is the only thing that EIP 1559 is buying back and burning. As a result, it is the substrate asset, the go-between asset for all other things. That is the thing that gives it its monetary premium. It’s inherently useful for all purposes and that’s what money is.
Sunny: I don’t know if I exactly agree with the claim that US dollars are also based off of a meme, I think that US dollars primarily get their value from their utility purpose, which is your ability to pay taxes.
Sunny: Okay, maybe let’s move on to the second point about the utility value. I think one thing that makes Ethereum extremely different from US dollars, is it’s very easy for me to leave Ethereum. Ethereum is just a BFT computer. That’s what it is. If Ethereum becomes too expensive to use, I don’t have to stay on Ethereum. I will just switch to Ethereum classic, or Tezos, or something, right? I can’t quite do that with the US dollar. The US government says you can go anywhere in the world you want, but you still have to pay US taxes and they do that by force. If any country in the world tries to help US citizens evade their taxes, the US government will sanction the country.
Ethereum being a permissionless system can’t really sanction other block chains, it can’t enforce other block chains make their users pay transaction fees and ETH. Otherwise, we’re going to sanction your chain. If you can’t do that, then if you don’t have that enforcement capability that the US government does, I don’t know if you can get that same utility in Ether, what do you think about that?
David: It’s the exact opposite. If there is an opt-in opt-out system, and the reason why we all have to use dollars inside of the United States government is because of the authority of the government to say so, and there’s one currency. There’s one peso, dollar, yen, Euro, depending on the region, and so for all the countries out there, there’s hundreds of different currencies. Instead of there being one money, because everyone wants to just use one money. It would be dumb if I went into The shop down the road and ask do you accept the money a and then shop says no, I only accept money B. That’s what the world is like.
It’s more efficient if we just use one money. Ethereum doesn’t have any authority over the rest of the world. When you go to the internet, there’s just one jurisdiction. That’s why we only see really two monies these days, there’s only Bitcoin and Ethereum. I don’t think the fact that Ethereum can’t force other chains, or other countries, or the protocols, or whatever to use their money is a detractor for why Ether will be valuable.
If Ethereum is a permissionless platform, the US government can’t stop you from using it. You can be inside of the US government paying taxes in dollars to the government. When you’re on the internet, on DeFi, you’re paying taxes to the Ethereum protocol, and so is the rest of the world. Ethereum as an opt-in system is going to take over the internet, as the internet’s financial platform because what other protocol is going to have the capability of doing that? Because anyone can opt into the system and leverage the value and utility of DeFi, they will.
Sunny: Long term, why will all DeFi and all open finance be staying on Ethereum? My prediction is an open financial spread across as many chains as possible. My claim is that BFT computers are a commodity. It will be very easy to spin up a BFT computer for your purposes and so there’s no point of paying taxes on someone else’s BFT computer.
David: The claim that DeFi is going to be spread across a bunch of different ecosystems and a bunch of different chains is not what we are seeing. In the same way that liquidity begets liquidity and money begets money, composability begets more composability. Ethereum’s big value proposition, why DeFi is so cool, is because if you are building on Ethereum you are just one transaction away from everything else that is also being built on Ethereum. The big competitive advantage for RealT is that tokens are one transaction away from Uniswap. It would have taken us millions of dollars to build out an exchange for our tokens. But Uniswap was there just next door. Composability is going to lock everyone into one ecosystem because that particular ecosystem is 100x more useful and more valuable than any other chain elsewhere.
Sunny: Do you think we can do composability across chains?
Sebastien: That remains to be seen. It’s not what we are seeing today. This is why the fight for scalability and reduced transaction fees on an Ethereum is so important because it makes the incentive to build anywhere else so much less.
Sunny: Why would composability across chains be any different than composability across shards? They seem to be the same technical problem.
David: Because of the complication. That’s so much more complicated than just building on L1 Ethereum.
Sunny: All the current DeFi products will break on Ethereum 2.0 because they’re all designed for synchronous transactions, but my claim is that having composability across Ethereum shards is no different than having composability across Ethereum and Ethereum classic, they’re the same exact technical problem.
David: We are now out of the technical realm of what I can keep up with.
Sebastien: Your claim is that Ethereum will be the world’s monetary platform. Tell me if I’m wrong. All value exchanges will happen on Ethereum in some form or fashion using the tokens on the Ethereum ecosystem, and Ethereum will basically eat the world of value. If that’s the claim, I think, it’s sorely lacking in realizing, that’s not how the world works. There are many examples in which this falls apart. The fact that there are many national currencies is a prime example. The fact that in all types of software, open-source software.
There have been multiple attempts to standardize and bring people onto one platform. But that’s not how it works, because there’s always people that think they can do it better some other way. The entire crypto space itself is a demonstration that this is not the direction in which things are going, where there are a number of blockchain platforms and asset platforms that are increasing and valuing the capture value in some specific niche use cases and things like that. Name one thing that has been able to capture 100% of utility or use, I don’t think there’s one thing. It doesn’t exist in the real world.
David: Wikipedia and the Internet. The rules change when we are on the internet.
Sebastien: But that’s not true. Wikipedia is one place where you can get information. There are many places where you can get information, I can go to a whole bunch of other places.
David: But when we talk about information at large, the collective information, Wikipedia has a monopoly on that.
Sebastien: It might have a monopoly but it’s not the only place. There are many other places where one can come to YouTube, for example, as a place where I can get authoritative information. One could argue that YouTube is a fine place to get authoritative information. But in terms of money in terms of open-source software, especially, that’s just unheard of. I don’t think that it can go that way. Also because of national and cultural interests, it’s a misguided view in my opinion.
David: You started off by saying that we haven’t seen this in the real world, every government has their own currency. Well, there’s no government on the internet. The rules change, when we talk about the internet, and we talk about open source. There’s one money per jurisdiction, in the legacy world. There’s only one jurisdiction on the internet, which is the internet itself. We have these network effects. There’s only one Facebook, there’s only one Wikipedia, there’s only one internet, there’s only one YouTube where there’s only going to be one money system. There’s only going to be one internet economy.
Sebastien: If you compare things in their own categories, YouTube is not the only platform on which people download video, I can name five platforms where people download video, including blockchain platforms, and also in different countries. China doesn’t have YouTube, for example, it has its own thing.
Sunny: That goes to the point that the internet is not jurisdictionless. The internet is subject to real world jurisdictions, just as I imagine blockchain systems will be as well.
Sebastien: When talking about the internet of money, there are network effects of the platform itself. But then you have to also compound the network effects of money itself too. Liquidity begets liquidity. On the internet data begets data. Ethereum is the combination of data and money. I’m of the opinion that these two extremely powerful network effects that we’ve seen exist, in both worlds, are going to be combined on Ethereum and it’s actually going to be compounding network effects. The incentive, to be on the same platform as everyone else, is the same incentive to use the same money as everyone else. When you talk about creating videos, creating content, you go to YouTube. Sure there are other platforms to create and host and download videos, but what has 90% of the traffic if not more?
Sebastien: You as a podcaster should understand this perfectly because podcasting is such a complex ecosystem of platforms. When you post something, you’ve got to post it in 17 different places. Same thing with social media, you have the community over on Telegram, you’ve got a community over on Twitter, you’ve got another one on Facebook, another one here. There’s a contradiction in this that I think you should see, but you’re just not seeing it.
Sebastien: Nothing ever totally is replicated. All things are always different from previous examples. So, part of the vision of me and my co-hosts on POV crypto is to talk about historical examples and how they can illustrate the crypto industry moving forward. I don’t think we’re ever going to have one perfect model. It’s always going to be different. Podcasting is weird, I wish there was one single platform, but for all of the internet traffic, it’s niche. At the end of the day, everyone is locked in. The industry of podcast hosting is an industry of solving that problem for you. Because we all know it’s a problem.
Sebastien: And I would argue also that the internet is not one thing. The internet is a name that we give to a network of networks. There’s this level three network and you get other networks and they all connect together in this mesh of networks, because everyone thinks they can do better than the other. If there was only one internet, essentially, what you’re saying is all the traffic would go to one data center, and all our connections would just go there. The internet analogy also falls apart for me.
David: Because Ethereum is not a data center, it’s a protocol.
Sunny: Right? You have that internet layered stack, right? The internet is everyone having standardized on the TCP IP layer, while allowing you to use different underlying physical and link layers, right? Everyone’s using the same layer one. That means that everyone is using the same physical layer and same link layer. The better analogy to the internet would be something like Cosmos IBC, where it’s saying the upper layers are standardized. We have a way of allowing different blockchains, which are the physical link layers, to communicate with each other using a standardized upper layer, but not requiring everyone to use the same bottom link layer. You see what I mean there?
David: Yeah. Does that mean that Cosmos is that bottom link layer? Is that the analogy?
Sunny: No, no, I’m saying that IBC is just the TCP IP. It’s just a protocol. There’s no physical blockchain at all. Anyone can go build their own physical blockchain, which is making your own version of Ethernet, as long as it speaks the common IBC protocol, that’s all that matters.
David: We’re talking a lot about data and information transmission, and that does tend to converge to some degree. It doesn’t converge all the way, as you guys are illustrating, but we also need to layer back on the monetary convergence. People converge to the same money. These two things are being combined here. We haven’t seen that before. This is uncharted waters. This is a new frontier, what happens when we create the incentive to generally confine yourselves or converge upon a low number of information transmission systems, and there’s also the incentive to converge upon everyone using the same assets. We haven’t seen those two things ever be combined before ever, and on Ethereum, they are being combined. I wouldn’t want to stand on the sidelines and say, let’s see what happens when those two things combined. I want to be in the middle of that.
Sunny: Another question I have, to continue with internet comparison is one of the things that made the internet so powerful was it was so neutral. Do you not think a tokenless platform, something that didn’t place one above all others would be probably more welcoming to build upon, than Ethereum, which does try to, it’s trying to act like a neutral protocol, but at the same time, is trying to instantiate a single asset above all others.
David: That exactly is the point I’m making when we talk about convergence on one money. These applications or these systems like Bitcoin or Ethereum would be useless without their one native token. What I think you’re saying is that well, IBC doesn’t doesn’t have that restriction. From what we’ve seen with the explosion of DeFi in the last 6-18 months, that doesn’t seem to be stopping anyone. Ethereum is doing it’s best to be completely agnostic. But you can’t rid Ether or the native currency from that. It’s integral to the operation of the platform. With that concession, it doesn’t seem to have stopped all of these DeFi platforms, and these applications, from being built on Ethereum.
Sunny: Okay, I guess we’ll just have to see as it goes. Your whole triple point asset thing, that’s great. I think ETH could be a great asset. The part that I take the most issue with is saying something that’s a good asset is now suddenly money. Money is something that people want to use as a medium of exchange, and thus you want it to be somewhat stable. Problem is Ether is not stable, it’s built on its own. It isn’t good money. It can be a great asset. Real estate is often a great asset. But it’s not money. No one would ever go around and say real estate isn’t money.
David: There’s this huge fight in the crypto space usually between Bitcoiners and others is, does something need to be stable in order to be money? I want to separate what is the medium exchange, between what is the store of value. The medium exchange on Ethereum is mostly DAI, and DAI is basically stabilized Ether. If you want to send value between people, you can use DAI. But if you want to have value in the back, to collateralize, for that DAI, you need Ether.
Sunny: Doesn’t Maker use multi collateral, now?
David: Guess what is overwhelmingly the collateral inside of multi collateral DAI? Ether.
Sunny: Right now?
Sebastien: Yeah. Don’t get me wrong, I want my Real tokens inside of Maker DAO, and I’m on a mission to get them there. But I’m not ever going to pretend that Ether isn’t always going to be the optimal asset inside of Maker DAO, because it’s always going to be the lowest risk asset, because it’s always going to have the liquidity guarantees that Real tokens won’t really ever get to have. The theme that is money, is the thing that is most saleable, is the thing that is most liquid. That’s what I define as money. If you have this thing that is in your pocket, that you can’t really sell to anyone, and it’s stable, then it’s not money, even though it’s stable. Whatever is money is the thing that is most liquid across the world, the most saleable and it doesn’t matter what the price is. It’s the fact that you can get your value for it at a moment’s notice. That’s what money is. It’s really generating a monetary premium. Whatever is money is the thing that has monetary premium and to whatever the degree that Ether has a monetary premium inside of Ethereum, then Ether is money for Ethereum. To whatever degree that Ethereum is the economy for the world at large than Ether is money for the world at large. It doesn’t matter that it’s stable or not.
Sunny: I think Ether will become a minority of the collateral and Maker over time. I think things like RealT are going to eventually become the primary collateral. I think at least a lot of the Maker team sees it that way as well. From when we did our Epicenter episode with Rune, I think he sees it that way.
In the case that what you’re saying is correct, doesn’t that turn into a really scary situation? Imagine there’s a recession and Ether is the money for the global economy. There’s a recession, the Ether price starts to go down a little. When the Ether price goes down, that means the supply of DAI now contracts. Which is usually the exact opposite of what you want to do in a recession. In a recession, you want the Fed to expand the money supply to counteract the recession. But the feedback loop here seems to make the recession worse and worse. I feel that using this as the basis for a monetary system, it doesn’t have all the learnings of monetary theory that we’ve built up over the last 150 years, and it just throws them all out the window to probably make something more fragile than what we currently have.
Sebastien: I don’t pretend to be an Austrian economist, or believe necessarily in wholly the Austrian world. But I think what an Austrian would say is that the Fed or the manipulation and control of the supply of dollars on the secondary market in order to balance out recessions is actually something contributing to long term fragility and risk. I do understand your concern of Ether price dropping, therefore less DAI, therefore less value, therefore less liquidity, therefore, more recession, that’s real.
I generally have the opinion that no one really should be managing the money supply. If that is something that is happening organically, then so be it. But the difference is, with Maker DAO, it’s fully collateralized 150% minimum. At the end of the day, there are always assets there. While there is less and less liquidity, there’s never ever going to be insufficient liquidity, because of the rules of over collateralization inside of trustless applications. This over collateralization is the big thing that protects a doomsday scenario from happening on Ethereum. Everybody’s safe because of the collateral, so long as the risk parameters are set accordingly.
Sunny: I just don’t see it as organic. I think it’s engineered, as in the design of Maker is not an organic thing. I feel that we should be spending more time engineering for better monetary policy designed systems. I think that algorithmic monetary policy is something we should be trying to move towards not push against.
Sebastien: But the rest of what we were talking about earlier, there is something to be said about the anti-fragility. I think of having multiple systems competing against each other in constantly improving. This is where I take the most issue with this idea that there should be one money, one monetary system, one financial system is that it lacks that antifragility aspect that exists today in the monetary system, right? If the US falls tomorrow when something else can pick up and take its place.
Sebastien: David, thank you for joining us today. It was a fascinating conversation. Got a little heated but it’s cool. I like these debates on the show. We don’t have these very often. Epicenter is much more of an interview style. It was fun to experiment with this more conversational style. Thanks.
David: Oh, that’s funny cuz coming out of POV Crypto Pod, where we only have Bitcoiners and Ethereans yelling at each other this was actually pretty tame.
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