Motion: Ethereum is too early for institutional money (Lyn Alden vs. Qiao Wang)

Guests:

Lyn Alden (twitter.com/lynaldencontact)
Qiao Wang (twitter.com/qwqiao)

Host:

Richard Yan (twitter.com/gentso09)


Today’s motion is “Ethereum is too early for institutional money.”

Quite a few institutions have voted with their feet on Bitcoin. This ranges from corporate treasuries to money managers. At what point will Ethereum catch the attention of non-crypto native capital allocators? Our debaters today are Lyn Alden and Qiao Wang, both well known in crypto circles. Lyn wrote a well-researched article arguing that from an institutional perspective, Ethereum feels like an unfinished product and isn’t likely to pick up significant interest in the short run. Qiao has been looking at Ethereum as an investment in its early days, and it’s fair to say he has been a perma-bull.

If you’re into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We’ve featured some of the best known thinkers in the crypto space.

By the way, we're planning episodes on CBDC, centralized lending versus de-centralized lending, the fad of NFT or non-fungible tokens, whether Bitcoin is good for America and whether Bitcoin is good for the environment.

So if you're interested or know someone that would be interested in debating, please feel free to DM me at @blockdebate on Twitter.

Please note that nothing in our podcast should be construed as financial advice.


"Listen-along" transcript: https://share.descript.com/view/aDjpT7gmJCn


Source of select items discussed in the debate (and supplemental material):

• Lyn's investment strategy website: https://lynalden.com
• DeFi alliance: https://defialliance.co/
• Grayscale ETHE trust: https://grayscale.co/ethereum-trust/
• John Pfeffer paper on crypto value accrual: https://medium.com/john-pfeffer/an-institutional-investors-take-on-cryptoassets-690421158904

Guest bios:

Lyn Alden runs an investment research service for both retail and institutional investors at LynAlden.com. Her focus is on fundamental investing with a global macro overlay, with a specialization in currency differentials and equity valuations. She also manages financial operation of an aviation simulation research facility.

Qiao Wang is a macro and crypto investor. He is one of the founders for DeFi Alliance, an accelerator for decentralized finance projects. Previously, Qiao Wang helped build Messari, a startup aiming to create Bloomberg for the crypto markets. Prior to that, Qiao was a quantitative trader. He ran R&D teams and helped build two trading businesses at IMC and Tower Research.

Transcript

Motion: Ethereum is too early for institutional money

Richard: [00:00:00]  Welcome to another episode of the blockchain debate podcast, where consensus is optional, but proof of thought is required. I'm your host Richard Yan. Today's motion is: Ethereum is too early for institutional money.

[00:00:20] Quite a few institutions have voted with their feet on Bitcoin. This ranges from corporate treasuries to money managers. At what point will Ethereum catch the attention of non crypto native capital allocators? Our debaters today are Lyn Alden and Qiao Wang, both well known in crypto circles. Lyn wrote a well-researched article, just recently, arguing that from an institutional perspective, Ethereum feels like an unfinished product and isn't likely to pick up significant interest in the short run.

[00:00:52]On the other hand, Qiao has been looking at Ethereum as an investment in its early days. And it's fair to say he has been a perma-bull and he's more optimistic on the institutional interest front. If you are into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We featured some of the best known thinkers in the crypto space. 

[00:01:11]By the way, we're planning episodes on CBDC, centralized lending versus de-centralized lending, the fad of NFT or non-fungible tokens, whether Bitcoin is good for America and whether Bitcoin is good for the environment.

[00:01:26] So if you're interested or know someone that would be interested in debating, please feel free to DM me at @blockdebate on Twitter. 

[00:01:34] Please note that nothing in our podcast should be construed as financial advice. I hope you enjoy listening to this debate. Let's dive right in. 

[00:01:44] Welcome to the debate. Consensus optional, proof of thought required. I'm your host, Richard Yan. Today's motion: Ethereum is too early for institutional money. To my metaphorical left is Lyn Alden, arguing for the motion. She agrees that Ethereum is too early for institutional money. To my metaphorical right is Qiao Wang, arguing against the motion. He disagrees that Ethereum is too early for institutional money.

[00:02:05]They were both traders/investors in the traditional finance world before venturing into crypto. Incidentally, they are both prolific article writers in our space. L astly, I previously had both of them on the pod. They're both sensible and logical. I'm excited to hear them draw upon their broad background in making their cases.

[00:02:22] Welcome back to the show, Lyn and Qiao! 

[00:02:24]Lyn: [00:02:24] Hey, thanks for having me.      

[00:02:26] Qiao: [00:02:26] Thanks for having me, Richard. 

[00:02:27]Richard: [00:02:27] Here's a bio for the two debaters: Lyn Alden runs an investment research service for both retail and institutional investors at Lynalden.com. Her focus is on fundamental investing with a global macro overlay with a specialization in currency differentials and equity evaluations. She also manages financial operations of an aviation simulation research facility. 

[00:02:47] Qiao Wang is a macro and crypto investor. He is one of the founders for DeFi Alliance, an accelerator for decentralized financial projects. Previously, Qiao helped build Massari, a startup aiming to create Bloomberg for the crypto markets. Prior to that, Qiao was a quantitative trader. He ran R&D teams and helped build two trading businesses at IMC and Tower Research. 

[00:03:10] We normally have three rounds: opening statements, host questions, and audience questions. Currently, our Twitter poll shows that 34% agree with the motion, and 52% disagree with the motion - so most don't think that Ethereum is too early for institutional money. After the release of this recording, we'll also have a post-debate poll. Between the two polls, the debater with a bigger change in percentage of votes in his or her favor wins the debate. L et's go ahead with your opening statement please, Lyn. 

[00:03:35] Lyn: [00:03:35] Thanks for having me. I wrote a paper several weeks ago about Ethereum and that's because I've been bullish on Bitcoin for awhile and so naturally I got a lot of questions from readers about Ethereum. I shared my, my pros and cons about Ethereum gave an overview of why I can see why many people want Ethereum as a part of their portfolio but also explained a lot of the risks I see, and why I generally prefer Bitcoin as th e digital asset portion of my portfolio. Of course, since then, I've been invited a couple of places to share those thoughts or debate those thoughts with others. As for the motion of institutional money, I guess it helps to define what institutional money is. Obviously there are pockets of institutional money that may find Ethereum worth while, and, an obvious example would be market neutral arbitrage.

[00:04:18]If a hedge fund can engage in ways to   not take a directional view on Ethereum but express or basically close the gap between different types of premiums that are variable between different types of products, then they'll certainly engage in that type of activity. I think around the margin, you'll see a smaller number of hedge funds that want to have a little bit of Ethereum exposure, because they want to express a bullish view. Those are generally very small portions of the global market. And when we look upstream towards larger pools of money for example, we're going to see non-crypto corporations put Ethereum on their balance sheet, or we're going to see endowments or insurance funds invest in Ethereum. Sure around the margins, perhaps, but, so for example, if you look at, the major companies on exchanges that have put some degree of their corporate balance sheet into a digital asset, so far that's been Bitcoin. Whether it's Micro Strategy, Tesla, Square, w e've seen, for example, it's it's kinda funny news because the publication, the Motley Fool, which has generally been an editorial, they've generally been somewhat bearish on a lot of digital assets. They announced they were going to put $5 million of their corporate money in Bitcoin.  

[00:05:18]It's a general trend that's playing out and so overall, I think that we're at the point where Ethereum, might be viewed as a speculation by some, and certainly hedge funds could get into that. You might have a case where a couple of endowments or something like that want to put, say 80% in Bitcoin and 10% or 20% in Ethereum. But overall for large pools of money, viewing these as a store of value clearly it's been shown that Bitcoin has been the preference. I expect that to continue for some time, at least until we see changes on Ethereum that address some of the issues that might make it less moneyness than Bitcoin regardless of other things that it might do that are better than Bitcoin. 

[00:05:54]Richard: [00:05:54] Okay. Great. Thank you, Lyn. I think it's it's hard to dispute the fact that almost all of the corporate announcements at this point, whether it be balance sheets for publicly traded companies or asset allocation for money managers, it's been pretty much exclusively Bitcoin. I'm really interested to hear your thoughts,  Qiao. So go ahead.    

[00:06:15]Qiao: [00:06:15] Appreciate the thoughts. I certainly don't disagree with anything you said, Lyn, and in fact, I think the first point I brought up is that we need to define what institutional money is. I certainly agree with you that the institutions that have been battling to Ethereum are the more adventurous hedge funds and family offices, and absolutely not the corporations or even nation States where probably very far from the latter, maybe still a few months away from the former. But I also want to touch on a couple of things. One is it's indisputable that we've seen the Grayscale ETHE products having a lot of inflow. Especially over the last few weeks since Bitcoin w as consolidating below 40,000, right at the inflow into Ethereum, we saw a massive spike since then.  That's an indisputable fact, we don't know from public information, who's buying that, but it is institutions. But most likely, it's, to her point, it's hedge funds and family offices. 

[00:07:10]Richard: [00:07:10] I'm sorry to interrupt. Are you talking about ETHE? Is that what you're talking about? Grayscale.

[00:07:14]Qiao: [00:07:14] Yep. Grayscale.  We also know from just talking with the OTC desks, some of the largest OTC desks th at are handling institutional money, that Ether is the -obviously it's the second largest asset of interest for these institutions. These are indisputable facts.  The other thing I want to touch on is Lyn, the last point that you brought up that, we need to wait for some of these issues which you described in your article to be fixed for Ethereum in order for institutional interest to increase.

[00:07:45] You mentioned especially about the moneyness aspect of it. I wanna, maybe mention two things here. Number one is viewing Ethereum or Ether as sort of a money competitor to Bitcoin may not necessarily be the right way to think about Ether. Because if we think about ether as a money or as a competitor in the money space to Bitcoin, then there's absolutely no reason to really own Ethereum.  

[00:08:10] Bitcoin is good enough, right? Bitcoin has a fixed supply and it's disinflationary. It's solving a immediate problem right now in the world, which is the fiat money debasement.  There's almost no need for holding Ethereum. I think that the right way to think about ether or Ethereum is that it's a tech play. It's a tech platform. It's like the internet itself, but with an asset that you can speculate on, and once you start thinking about Ethereum as a tech platform you want to think about not the moneyness, but rather the metric effect the user base, what are some of the applications that are built on top of Ethereum?

[00:08:45] I think, obviously like these things are super subjective, right? But I think over time, people will realize that Ethereum, viewing Ethereum as a tech play is the more rational way to view Ethereum, and it's the most differentiated way to view Ethereum - differentiated from Bitcoin.  That's my general counter argument. 

[00:09:03]Richard: [00:09:03] Okay. Cool. Just to latch on to the latter argument you mentioned, Qiao, about Ethereum basically should be framed in a different way than Bitcoin. H ave you seen signs of evangelists similar to someone like Michael Saylor, for example, trying to basically educate institutions to think about Ethereum in this way? Ethereum is way more complicated than Bitcoin and also I think the way you were thinking about it, might not necessarily be the way a lot of these other family offices that are investing . So I'd love to hear your thoughts on that. 

[00:09:35] Qiao: [00:09:35] That's a really good question. This is something I think is really frustrating about th e Ethereum community. I think they've just not done a great job of really evangelizing Ethereum to institutions, I think that people that did a good job are basically Paul Tudor Jones and Mike Novogratz. Paul Tudor Jones said something very interesting about Ethereum a couple months ago, he said something about crypto in general. There are two types of crypto assets: one is precious crypto, and then there's the industrial crypto.  This kind of wording p eople from the macro world can immediately relate to because precious crypto i s basically the analogous to precious metals, which is gold. Bitcoin is the precious crypto. And then you have the industrial crypto, which is analogous to industrial metals like silver and copper or whatever. Then Ethereum is the industrial crypto. I thought that was a very interesting way to frame Ethereum. I think traditional institutions immediately relate to this kind of framing. 

[00:10:37]Richard: [00:10:37] Okay. Great. So that's actually a great segue into our round two. When you talk about Ethereum and more acting like oil, for example, versus BTC, more acting like gold, that is definitely a line from Lyn's article as well. But I think there's an issue about the value accrual of this utility protocol. Lyn, would you be able to speak a little bit about that? I think that you cited an article by John Pfeffer in your pod with Laura Shin. When you debated against Raoul, just maybe a few weeks ago, and you were talking about the difficulty in these utility protocols in capturing value. If you could elaborate on that point, that'd be really helpful - and any other points you want to counter. 

[00:11:19]Lyn: [00:11:19] Yeah, absolutely. I actually agree with a lot of what Qiao said in the sense that Ethereum is less about being money and more about being a tech play and someone can have a bullish or bearish view on the tech play.

[00:11:30]That's why you'll see around the margins, some degree of hedge funds wanting to make a bet on that tech play, whereas when it comes to corporate balance sheets, w hat is their reason for going all into Bitcoin?  They can have a couple of different reasons. The biggest reason overall is that corporations have these cash piles and, some corporations are cash light. Other ones want to hold a ton of cash and that gives them all sorts of advantages. They have basically a rainy day fund. They can save it for an acquisition or a strategic opportunity or a new project.

[00:11:56]Whereas, if we're in an environment where you're going to have money debasement, so you're going to have a negative real interest rates for quite a while, which if you look back for the past 10 years, the average money you get on T-bills or on bank deposits has not kept up with even official measures of inflation.

[00:12:12]That poses a problem to some of these corporations that want to hold a sizeable amount of cash on their balance sheet, and they can either drain their cash and say, okay, we're going to, we're going to pay it out in dividends and share buybacks, and we're going to be a lot more cash light. But of course that in some ways sabotages their strategic opportunity if they feel it to their best interest to have a lot of savings, because if at a later date, they want to do an acquisition or a project, they need to then either access equity or debt markets, maybe at unfavorable times and basically be reliant on strangers in a sense.

[00:12:42]The other option is to then store some of their wealth in something that they believe has a high probability of holding its value over the long-term. From there you have a couple different options. If you look at Micro Strategies, they're published thought process, they looked at gold, they looked at Bitcoin, they looked at other assets and they chose Bitcoin for theirs. Now they went all in enough that you could argue that they're speculating on the value of Bitcoin and they're not just using it as a store of value. Whereas if you look at how Square did it, or how Tesla did it, or how Motley Fool is doing it, they're putting a smaller percentage of their holding in Bitcoin.

[00:13:13] And so that kind of serves as an anchor, so you have this larger cash pile that is very liquid and by definition h olds its value in dollar terms. And then you have this other part that is no longer term, more price volatile but it ensures against some of the tail risks for the rest of that cash position. You won't see, generally corporations just deciding to buy stocks in other companies. They won't say, okay, we want to protect our cash against debasement and so we're going to go and buy shares of Amazon and put some of those in our corporate balance sheet. Instead you say, okay they basically want to hold something that they view as money.

[00:13:48]And in a sense, th at's why we've seen corporations gravitate towards Bitcoin as that part of their portfolio. They don't say I want to go and I want to put a small percentage of my portfolio and Ethereum as a tech play, they say I want to have Bitcoin for that purpose. And so that's two separate pools of money. Same thing with say, an insurance company like Mass Mutual. They're putting a tiny percentage of their assets in Bitcoin as that kind of store value hedge rather than as a tech play. That kind of in my view limits Ethereum's speculation to hedge funds or family offices that say, okay, I want to invest in this tech play, which is a very different thing than corporate balance sheet management.

[00:14:22]Another point is, if you look at GBTC and ETHE, for both of them we don't know perfectly well how much of that is pure long exposure. With both of those, you can engage in market neutral arbitrage. That applies in large part to the ETH, the Grayscale ETH Trust and also to the Grayscale Bitcoin Trust to at least a certain extent. We see companies like say, Arc, they hold GBTC out of it, just long bullishness on Bitcoin, or whereas we see other firms use that as a market neutral arbitrage where they can short Bitcoin, they can then go into the trust, and then as their lockup expires, they capture the premium, and so that doesn't necessarily showcase a directional view on the protocol itself. Going back to the original point of the question, I think that does frame it well, where you have Bitcoin as the store of value asset in the space, and some of these others are like the copper of the industry where they were used to perform work, they're used to perform some activity. If you look at how corporations manage their, their non precious resources, they generally want to minimize them as much as possible. They don't want to have excessive working capital.

[00:15:24] You don't want to store more copper than you need to at any given time, you have some degree of buffer and then you use that for what it is. That's why, there are speculators that are long-term bullish on Ethereum tokens and they want to hold the tokens but if you say over time, see more and more economic activity happen on the Ethereum blockchain, a lot of that is the working capital type rather than the store value type. 

[00:15:46]Going back to John Pfeffer's paper, basically what he argued was that even if he's bullish on the ecosystem growth of utility protocols, he's not necessarily bullish on the token appreciation potential of those protocols. To his point, some people have said that paper has been discredited, whereas I'd argue so far it's actually quite on track in the sense that if you look at Ethereum settlement value, over the past three years since he wrote the paper in late 2017, that's tripled last I checked whereas the market capitalization has not caught up with that.

[00:16:15] And the point I made- 

[00:16:16] Richard: [00:16:16] That has changed recently a little bit though, right? 

[00:16:18] Lyn: [00:16:18] Yes, but it has tripled compared to that point. It's gone up, we can call it maybe one and a half times, whereas settlement values tripled, by now that's probably a couple months old so now it's probably more than tripled, but it is not keeping up the same rate as the, I guess you could call it, the ecosystem growth of that utility protocol. Of course from an Ethereum bull, you'd argue that's undervalued, that Ethereum therefore is going to catch up more and certainly during a bullish cycle in Bitcoin, you see a lot of these other alt coins do very well.

[00:16:44]But long-term, the question is as Ethereum grows into whatever it's going to grow into, will the token value keep appreciating up with that, or will it do what it's done more, since the past several years and not grow as quickly as the ecosystem? Because it doesn't have that moneyness in the same way that say, all of Bitcoins - most of the use case for Bitcoin is about using it as money and therefore, almost by definition, it's value grows along with its adoption. 

[00:17:08] Richard: [00:17:08] Okay, great. To be honest, the way I sometimes think about how these institutions will make up their minds when it comes to purchasing something like Ethereum, I feel that the valuation aspect, the fundamental analysis aspect that Lyn pointed to your analogy with copper, your citing of John Pfeffer's paper about utility probe protocols, not necessarily capturing as much value - I feel that fundamental analysis is much more secondary, the sentiment and herding effect is much stronger, which is why I keep coming back to the point of whether there's a evangelizing figure from the institutional world on Ethereum's behalf, right? So far, it sounds like Paul Tudor Jones is the only person.  Qiao, feel free to respond to any of these points, but I think one other thing that's interesting to point out is, Ethereum's main use case right now is unarguably DeFi.

[00:17:59] Would it be possible for institutions to try to hoard up on Ethereum to basically get onboarded onto the DeFi world for whatever reason. Either because t hey see themselves also pushing themselves into the DeFi world somehow incorporating those protocols into their business models, or just seeing DeFi play out in a very competitive way, and as such, basically buying out some Ethereum similar to your companies with buyout - their smaller rivals, so to speak. Just thinking out loud there. I'm not sure that's actually very a sensible logic, but, anyway, Qiao feel free to respond on what Lyn has said about value accrual, about whether these institutional players will actually hold Ethereum as a potential tech play, and whether DeFi is a potential booster for Ethereum to catch on for institutions.

[00:18:45] Qiao: [00:18:45] Yeah, on the value accrual side of things. Let's start with John Pheffer's paper. Obviously I think the paper has some merit. I remember reading it back in the day and I thought it was fairly well argued, but the biggest missing piece from that paper in my mind from a theoretical point of view is that he treated Ethereum as a utility token or as a utility platform. In actuality, that's not where the market is presently at. Ethereum was purely a utility token, according to his paper, Ethereum would be valued at $15 million or something along those lines, something in that order of magnitude, even if Ethereum was being used in the same transaction density as AWS.

[00:19:27]According to that paper, Ethereum will be basically worthless, but what's happening right now is Ethereum is worth way more than that. Obviously, to Lyn's point, Ethereum's value has not caught up, has not gone up as much as the transaction volume has gone up. I think the Ethereum community is working on ways to capture the value from the growing transactions, growing usage of Ethereum. And to me, the main one, the main product that Ethereum community is working on is EIP 1559, which is burning Ethers that are being used in transaction fees. The transaction fees, instead of going to the miners, they will be burned.

[00:20:04]That over time we'll create some deflationary pressure on the supply of Ethereum and, at least in theory, that could increase the price of Ethereum. That's probably the most important value accrual mechanism that the Ethereum community is working on right now. 

[00:20:19]Another one that  is unintended, but I think it's still pretty relevant is the fact that Ether itself is used as collateral in DeFi. And it's probably the most interesting and the most I would say... actually, I don't know what the split is currently between Ether and a stablecoin. I can imagine that stablecoins are being used a lot in those lending platforms, just because of the stability of the asset. But none of these stablecoins are as trustless and censorship resistant as Ether itself. In a lot of native users' eyes, Ether is the best collateral for DeFi for using those lending platforms and providing liquidity in those AMMs and so on. So as DeFi grows, you can imagine that Ether will be used more and more in those DeFi platforms. 

[00:21:14] And as Ether is being locked in those platforms, the amount of ether in circulation will go down over time. That also could add some value accrual pressure on the price of Ether. 

[00:21:24]Sorry, Qiao, could youRichard: [00:21:25] elaborate on that point just a little bit? I understand that if Ether gets used more and more as collateral, right? It gets staked more. That will b asically provide some kind of a constraint on supply and put upward pressure on price, but why did you say that the fact that Ether is more decentralized than say it's stablecoin counterpart makes it a better collateral ?

[00:21:46]Qiao: [00:21:46] Because it's more trustless. Like when you hold Ether, you're not really trusting anyone else other than the market mechanism for the value of the Ether. When you're holding a thousand dollars in Ether, you're really holding a thousand dollars of Ether. You're not relying on any one central entity, but when you hold 1000 USDC, you're not only relying on the Ethereum network, but you're also relying on Coinbase and Circle.

[00:22:10]Richard: [00:22:10] So it's not if you stake Ether versus a stablecoin, you would get better rates or something. It's... 

[00:22:16] Qiao: [00:22:16] No, the rates are determined by some other mechanisms. That's different. 

[00:22:20] Richard: [00:22:20] Alright. It's just that the ownership of Ether is preferred to ownership of stablecoins due to the decentralized nature.

[00:22:27] Qiao: [00:22:27] For some people. Yeah. For some people.  The last thing I wanna mention is proof of stake. And I think Proof of Stake can potentially have some upper pressure on the price as well, because people are going to stake their Ether and lock it up in order to earn some additional block rewards.

[00:22:42]Again, the proof of stake will decrease the circulating supply in a similar manner as the Ether that's being used in DeFi, being logged in DeFi. A nyway, all these things, again, I don't disagree with what Lyn said, these are things that are awork in progress, actually, so Ethereum is not truly ready yet. Like Proof of stake is being worked on a EIP 1559 it's being worked on. The value of accrual mechanisms are not ready yet, but it doesn't mean that people or institutions cannot speculate on the future progress of these things, right? You don't want to buy something when everything is ready, you want to buy something when things have a good chance of being ready in the next few months or years. Those are my high-level points. 

[00:23:21]Lyn: [00:23:21] Yeah, I agree with that point. That's what makes it more of a tech play than a money one in a current time, because it is a speculation that even though the aspects that would make it money, in the future are not really in place yet.

[00:23:33]Furthermore, it's a bet on the developers because they're betting that it's going to make all these major underlying transitions without giving up its network effect to some of the competing utility protocols. For example, we're seeing that Ethereum is currently plagued by very high fees, which affect Ethereum more than say Bitcoin, because the average transaction is smaller and more complicated and therefore it's more cost sensitive to the types of things you're doing with Ethereum, because Ethereum is just inherently a higher velocity, more active network.

[00:23:59]It has to basically navigate this turn and do the things we're trying to do to increase throughput, and reduce fees, and increase decentralization, and add these liquidity sinks, and things like that. Without say some of these utility protocols coming over and having some of the DeFi activities or stablecoin usage and things like that spill over onto these other protocols.

[00:24:19]If a hedge fund makes a cost benefit analysis and they say, okay, we think for reasons X, Y, Z maybe we are bullish on the development team, we're monitoring progress. We think they're going to make these changes, here's why we don't think the competitors will take their market share, and that's why I say we're bullish on Ethereum. That's a very different thing than saying, we're a corporation and we have this big cash hoard, we want to invest into hard money and therefore we're going to invest in Ethereum. That's why there's a very big difference at the moment between the investor profiles between Bitcoin and Ethereum, whereas that Bitcoin is largely finished and the base layer this in the same sense that any sort of finished software product, whether it's Adobe Photoshop or Microsoft word, where they're still being updated, there's still, active things, but they're not undergoing rapid transition on the base layer. That's why that kind of store of value goes more towards Bitcoin's side. Whereas some people that are speculating on Ethereum's development are interested in buying and holding those tokens. 

[00:25:10]For example, in my paper, I wrote good things about EIP 1559. I said that is a fairly elegant solution for some of the issues that Ethereum faces, but it still doesn't necessarily guarantee that the ecosystem volume accrues to Ethereum tokens and the reason for that is because, In the current environment where you have a limited throughput gas fees are high because you have to somehow separate the different types of users that want to use it and only go with the high value users.

[00:25:37]Whereas, if they succeed on a lot of their their purposes where they want to do sharding or roll-ups and all these different technical solutions to expand throughput on the base layer. Then one of the overarching goals on that is to keep fees quite low, so on one hand, you'd have an inflationary force from the validators creating new tokens. Another hand you'd have this deflationary force of the base fee being burned, but in general, if Ethereum works out as promised, you'd expect those fees to be pretty low and therefore you'd have, maybe a very small, positive, inflationary level. Maybe a very small deflationary level. You shouldn't see massive Ethereum destruction, like a massive deflationary force, because that would imply that fees are very high and that's a problem.

[00:26:16]For that protocol to succeed, you'd expect to have very low fees, high velocity, and the overall kind of value of Ethereum is moneyness is largely a separate question from how big it's protocol can get. You can have a scenario where the GDP of the ecosystem, like the overall settlement value goes up 10X from here, whereas tokens might go up 2X from here because the amount of people that want to buy and hold Ethereum has say doubled, whereas say the usage of stable coins and DeFi protocols have gone up tremendously.

[00:26:45]I think the final concern I have on that front is that DeFi has done very well in this environment from a very low point in cryptocurrencies, in general - Bitcoin, Ethereum - and as we've had a couple years of rise now is done very well because a lot of DeFi is inherently about speculating on the value of tokens. DeFi is about, using leverage using decentralized exchanges to speculate on the value of these different tokens. And so when we go over this w this bull market that we're in. And during any kind of the past bull markets a lot is alt coins, often outperform Bitcoin.

[00:27:18] And then the big question is whenever we get to the top or whatever we're doing for this cycle, what is DEFI going to look like on the other side of that, when a lot of these alt coins are losing value and that overall the space is a lot less interesting. And the question is, I think how sustainable and longterm is a lot of that use case. When we start, over the course of many cycles, weeding out a lot of these alt coins that are not particularly valuable. 

[00:27:38] Qiao: [00:27:38] Yeah. I want to touch on the last two points that you brought up then. I think, that you were pulling regarding the EIP 1559 that's probably the first major point that I strongly disagree with you on because you're point being if I understand correctly, is that Ethereum work on the s calability, reducing the fees, then you know, that sort of reduces the amount of deficient or pressure because there's less fees to burn.

[00:28:01] I think that argument is isn't valid because it's like saying if Amazon works on their own technology and ultimately passes on l ess cost to their end users, then Amazon makes less money. That's not it, that's not a valid argument because when you pass it as fees onto the user, it also means that more users can use our product.

[00:28:22]You do decrease the fee per user, but by doing that, that you can massively increase the number of users and therefore you can increase the total fees that you generate on the platform. I think that's probably what's going to happen to Ethereum. When Ethereum becomes more scalable and the fee per user decreases, more developers will start building on Ethereum because more developers will see .Ethereum as a viable t echnological platform, and therefore they'll build better applications and more users are going to start using Ethereum, and then that creates a nice flywheel. That's my first point on EIP 1559. The other point is DeFi.  That's actually a very good argument. I agree with it. I said this last summer during the DeFi Summer that the value accrual of DeFi platforms is highly reflexive, highly circular. I absolutely agree with that because the more people speculate on these altcoins the more DeFi fundamentals improve, right? Because the fundamentals are basically like trading volume collateral, like lending volume and all that stuff. And then if the fundamentals improve, then the DeFi assets will improve in value. But then if the price increases, then more are going to speculate, right?

[00:29:34]We're going back full circle. It's a circular value accrual mechanism. That's definitely a valid argument. However, I think the way I view Ethereum and DeFi is that right now everything is a toy. Everything is a toy for relatively rich  people. By rich I mean like people who are in the top 10% of the world and having some free time to speculate on DeFi. I would also view Ethereum as a proof of concept for many other types of applications that can be built in the future. As a proof of concept before composability, as a proof of concept for permissionless innovation. if you look at the history of technology, every single world changing technology started being a toy, started being a very expensive toy for a small set of people, a very expensive proof of concept for a very small set of people.

[00:30:26] And that's what I think is exactly happening on Ethereum and DeFi right now. And I think this circular logic is not going to last forever. I think at some point in the next five to 10 years, we're going to start building applications that really bridge, this digital world, the crypto economy, and the real economy in such a way that activities that are on the Ethereum network or in crypto in general, are not just based on this reflexive value of accrual mechanism, but really linked in real world economic activities. We're seeing a glimpse at that currently, with projects like Terra which is a stablecoin payment platform. It's not built on Ethereum by the way, but it's one of the very few products that that serve non-speculative,real world use cases. So my view is that basically to summarize, we're going to see more and more non-speculative DeFi products in the next five to 10 years. 

[00:31:19] Lyn: [00:31:19] So I, one thing I guess I counterpoint, but it's also a question. And so if you view, if we look at decentralization so it comes with a cost.

[00:31:28] And so if you have a centralized thing, it could be highly efficient, but of course it's very reliant on that center source. If we take that application and decentralize it, it's generally a more expensive version of doing that because we're paying a cost for decentralization. With Bitcoin, for example, you obviously have the energy costs and the limitations inherent with the network.

[00:31:46]With Ethereum, for example, an application is more expensive when run on Ethereum than if you do it in a centralized way. Especially with the current one, which does have throughput issues, for example, it's very costly to execute a trade on these DeFi exchanges compared to on centralized exchanges.

[00:32:01]The main use case now is you can go around KYC issues, you can do all sorts of things like that. Regulators have been very slow to keep up with all of this which is common. When we get past this circular flywheel we're on now of speculation and we get more towards real use cases, what things do you see that kind of pass the test for benefiting from the decentralization, despite the higher costs?  The argument with Bitcoin is that, having an international money is one of the things that  inherently requires decentralization and that users are willing to put up with the higher costs associated with that because it's trustless, it's self custodial, in a world with persistently negative, real rates.

[00:32:37] There's that demand for that. Whereas when it comes to all these other applications, what things do you see having enough persistent value of being decentralized, that they might be willing to pay those higher costs associated with that? 

[00:32:48]Qiao: [00:32:48] That's a really good question. I think the only way to really appreciate the value proposition of DeFi products is to really use them. I actually spent a ton of time last summer during DeFi summer, just spending all my time and trying different DeFi products. And the thing I realized was that at the end of the day, DeFi is actually all about user experience. It's not about decentralization, the decentralization is a means to an end.

[00:33:13] It's not the end itself. The end is to provide a better user experience. Now, the fees, the transaction time, the block of time, all these things are impediments to a good user experience, but I think they can be solved over time. Fees will go down. Sediment time will go down over time.

[00:33:30]What is then the benefit of or why is DeFi why does DeFi provide a better user experience? I think if you are a Bitcoiner and you start trying DeFi products, you'll get it immediately because the value proposition is exactly the same as Bitcoin. It's the ability to control your financial assets, to interact with financial products in a way that you have full control, that is entirely frictionless that you're not depending on anyone else. Like when you send Bitcoin from your own custodial wallet, you're not asking permission from someone else to send your money. You're not asking your bank. Like whenever I had to do a wire transfer with my bank, I just got really pissed.

[00:34:10]Every time I send over $10,000, I get a call from the bank asking me why I'm doing these things. Not only is it a threat to my own privacy, but also it's a waste of my time. With Bitcoin, you can send a transaction without anyone else's permission. It just saves our time.

[00:34:25] It's exactly the same value proposition for DeFi products. It's the fact that you can lend money, you can borrow money, you can trade assets. You can buy insurance on your financial assets, through those DeFi products in a way that you don't have to ask anyone else's permission and you can move money very frictionlessly between various DeFi products, various DeFi platforms. The experience is just really amazing. L et's say you have a brokerage account, a stock brokerage account, and you try to move some money out of the brokerage account back into your checking account, it takes at least yeah a few hours to get permission from your broker and then probably another at least a few hours for the money to get to your checking account. Then again sometime for that money to clear if it's a large enough amount of money. With DeFi, it's instantaneous. If you have some money parked in Yearn which is yield generating or a yield optimizer, let's say, and you want to move that money into your own wallet, your own address, and then trade that money, trade the asset with something else, this entire process shouldn't take more than a three block time because it takes exactly the three transactions, right? Three blocks worth of time is less than a minute. So I think for me, that's really the value proposition of DeFi, it's frictionless user experience and full control. Full freedom, not asking anyone else's permission.

[00:35:50]Richard: [00:35:50] I suspect that the counter argument to that is the regulatory arbitrage. Some people are concerned with all t hose value propositions that you've brought up, Qiao. The reason why the traditional finance world has been difficult to work with and creating all this friction, partly it's because it's a legacy system, maybe banks, and these other organizations are slow moving vehicles.

[00:36:12] They just haven't caught up with the times, or maybe they have high barriers of disruption, so they're less incentivized to innovate, but partly it's also because there are all these rules and regulations and compliance that they have to deal with. I think one reason why you get these phone calls about sending money. I don't know how much of that is just genuine concern about money moving and how much of it is just the compliance department saying you have to fill X number of calls in order to pass their SOC 2 or whatever regulation the regulatory agencies have put out.

[00:36:43]So the thing about the DeFi ecosystem is that they've bypassed all of that. None of the DeFi banks have a banking license, none of the lending places have a lending license. Some of the insurance things are regulated. Part of the UX seems to be taking advantage of the fact that regulators are not paying attention to all that yet.

[00:37:02]I'm curious on your thoughts if regulations were to take place, the benefit of the UX would actually get reverted as a result. The number two question is related to all this, and it's a very short one, and that is there's a lot of other FinTech out there now, right?

[00:37:17]Mercury is a new bank. You have RobinHood as a good trading app, a good broker dealer. You have InsureTech and you have Plaid that's trying to make basically banking transfers a little bit of an easier enabler of FinTech companies. Why do you think those companies have been unable to catch up and offer the same kind of UX that you desire in DeFi?

[00:37:39]Qiao: [00:37:39] Yeah, I think this is a really good question and the regulatory argument is once again, a very valid argument against DeFi. I think at some point, the US regulators basically have proven themselves as totally destructive to the entire crypto and DeFi space, but I think a lot of regulators, especially... 

[00:37:59] Richard: [00:37:59] Sorry, how so? They haven't really touched this space, have they? 

[00:38:02] Qiao: [00:38:02] Let's start with the beginning. One of the very obvious things they did, when you tax crypto transactions like crypto trading, you immediately kill the use case of using crypto as payment because after time you pay for something, you have to do all the accounting and pay tax on it.

[00:38:17]This is just one of the many examples that US regulators have done to create friction in the in the entire crypto system. They haven't done anything specific to DeFi, but they will. The only reason why they haven't done anything yet is because DeFi is still so early, they will do something and the industry will have to fight back.

[00:38:35] But my point is, I think there are also a lot of other regulators around the world that are very friendly to crypto. I think a lot of DeFi products can thrive in those jurisdictions. That's the only thing I want to say on the regulation side of things, but that's absolutely a valid argument against DeFi .

[00:38:54] I think the other thing I want to mention is that the reason why crypto and DeFi can ultimately provide a very different user experience, a fundamentally interesting user experience compared to traditional FinTech is that you can think of crypto as a global database, a global ledger internet based ledger. Before, crypto will never have something like this. Before crypto, the internet never had a global state machine. The internet was never a global state machine. You always had a bunch of databases that are siloed, right? Every company has their own databases. But with crypto, for the first time, you have a global ledger that anyone can access and anyone can update the state of.

[00:39:36]That's what makes DeFi fundamentally interesting is because when you try to move some financial assets from one product to another, you're updating this global ledger, this global database frictionlessly. Whereas when you try to move money from one traditional financial service to another, two different databases need to be updated by two different groups of people. That in itself creates a lot of friction, right?

[00:40:02] Both the technology friction, as well as internal bureaucracy coordination friction between the two parties. This global ledger is what fundamentally makes DeFi or it gives DeFi a fundamentally interesting u ser experience, if that makes sense. 

[00:40:13]Lyn: [00:40:13] I want to jump on the regulatory question because I think that's a key point to DeFi's appeal. If you have two exchanges, right? Two crypto exchanges, and one says for regulatory reasons, we're gonna track all your trades, we're going to send your account to the IRS every year to make sure that they follow up and make sure your tax results show up on the returns and we're going to do all that.

[00:40:33]The other one says, we're not going to do any of that. We're going to just flaunt regulations and we're not going to do it. Then of course, we would see the second one grow in popularity. Like I would, pretty much I would rather use that other one. But when regulators catch up, that arbitrage goes away.

[00:40:47] Then that second one is either shut down or forced to then comply with those regulations. If regulators catch up to the fact that a lot of these other things can happen off major changes that users might not be reporting taxing events that they're happening in these DeFi environments with those centralized sources sending paperwork to the IRS about them, then when they cracked down on that, they can do it and say, okay we're getting increasingly sophisticated and say, tracking blockchain transactions and we have better ways of linking it to you. We can increase the penalties if you're caught doing something without paying tax on it and all sorts of things like that. Then that appeal diminishes to a particularly hardcore subset of people that are willing to take the risks and go around that.

[00:41:29]I agree that there's certainly a use case in the world for decentralized exchanges and liquidity providers to exist. I would say that when that arbitrage is closed between one being essentially taxable, one being used often for tax avoidance, the percentage of people that are willing to put up with higher cost trades and worse user experiences in order to have that kind of centralized environment likely goes down over time.

[00:41:51]I think that's a key risk to be aware of going forward, we're seeing this fast bloom in inactivity in an environment because it's benefiting from that lack of regulation compared to the more centralized peers. Even if you had an improvement let's say you had a country say we're not gonna, we're not gonna tax capital gains on digital tokens. Then suddenly even though centralized exchanges look a lot better too, because then that IRS reporting issue pretty much goes away. You still have some things like privacy laws and things like that, but overall, whether they crack down on it or whether they lift it, the arbitrage can then narrow and make the decentralized ones less attractive compared to the more centralized ones, at least for the majority of users that are not kind of power users or hardcore anti privacy people. Because the funny thing is, even with Bitcoin, the majority of people hold it through a custodian. The percentage of people that hold it in their own hardware wallet is pretty small. Whereas the majority of people just want to have exposure to the speculation.

[00:42:46] And so when we are thinking about the total adjustable market of DeFi, when these arbitrage gaps close between regulations, and when the fullness of time when this is sorted out, I think there remains an open question about how big these will be compared to their more centralized peers.

[00:43:02]Richard: [00:43:02] I think one thing that's come up in this discussion is that a big part of the value proposition for crypto, Bitcoin and Ethereum included, is to provide a way to store value and a way to play with money for the top 10% of the world. They want to be unshackled by the state.

[00:43:21] They basically want to quote-unquote, no longer pay their dues to the bottom echelon of society, if you will. If you really think about it, it's basically a way for them to say no to all these constraints to them, whether it be taxation or just friction, and they do not care about this.

[00:43:40]For example, the fact that the money transfer is non-reversible, the fact that you are self custodying and not. You're not, relying on this nanny state or institutional assistance. That's very much a statement of: "I can take care of myself. Thank you." This philosophically is a Status versus Libertarian sort of ideological difference.

[00:44:01]Basically the bottom line is crypto is in a way I think helping the smarter people escape their responsibility, moral responsibility to the rest and it's questionable how much responsibility needs to be, and whether that moral responsibility is moral to start with. Anyway, just some rambling, actually unrelated to what we're talking about.

[00:44:21]But going back to some of the reasons why institutions might be a little skeptical about Ethereum, I think there's a few other points that we haven't raised today. Number one is Ethereum's lack of decentralization. I know, Qiao, you mentioned that people don't care so much for decentralization in DeFi ,it's more about the UX, but the issue is that I think even from a regulatory standpoint, if these DeFi applications want to purport that it's okay for them to operate without a central license, because they're not a centralized entity anyway, like if compound were to stand up to the government, when the government wants to shut them down and say, you know what, we're not really in control of anything. You can't shut us down. There are actually central points of failure, Infura b eing a big one right now. The heavy reliance of DApps on services of no operators, such as Infura was a big issue at the end of 2020 - an Infura o utage was causing problems for Metamask, for instance.

[00:45:13]Can you, Lyn, elaborate on this entire issue somewhat because you've mentioned this in your in your article? How do you think money managers or corporate treasury would think about this problem? This is number one. Number two is that Ethereum's monetary policy, that's also a sticking point. They've been changing so much. Even though 1559 might potentially be helpful. There's no saying that the monetary policy is not going to undergo changes again because of the norm and the culture of Ethereum. We'd love to hear your points on a few responses to these two points, Lyn. 

[00:45:44]Lyn: [00:45:44] Yeah. If you look at Bitcoin, especially after the big Fork Wars or block size Wars it had after 2017, it's proven itself as a pretty decentralized protocol.

[00:45:53]People can talk about where the mining's located and things like that, but overall the node distribution is such that there's really no one in control of that network. One of the concerns with Ethereum is that we've had some degree of acceptance from major governments where they say, okay, you can hold tokens, we just want to know who's doing it so we can get our taxes and things like that. We've had Bitcoin and Ethereum and certain other tokens kind of grandfathered in whereas other ones like Ripple have run into issues, but overall they're saying, okay, it's fine to own them, but we want to make sure that   just like other assets they're being taxed to a certain degree.

[00:46:24]If one of them, the entire purpose is, the big benefit of DeFi is for a lot of users to go off this KYC grid and do trades that are not really reported anywhere, then the government is going to have eventually an interest in figuring that out and going after that.

[00:46:39]If they say, okay, it's fine to hold it, but we want it to be taxable and if they were to crack down on Ethereum, my argument is that Ethereum has more targets to go after, to make it much harder  f or people to run, it's not necessarily they can shut Ethereum down, but they can go after all the kinds of things that make it more usable and render that a lot less attractive.

[00:46:58]In some ways we're already seeing that kind of doing it to itself just in high fees should eventually, especially after we got out of this bullish cycle where the majority of tokens are going up, that could put a lot of pressure on, I think some of those systems.

[00:47:09]Overall, Ethereum still has a lot of changes to make in order to further decentralize itself and to have fewer kind of centralized attack surfaces. For their monetary policy, t hat's another big sticking point, Bitcoin has unchanging monetary policy, since inception.

[00:47:25]I don't really go after that 2016 issue that Ethereum had as much because even Bitcoin back in 2010 had a soft work they had to do to avoid an inflation bug. Things that are really early on in the protocol can be excused if it's in say the first couple of years, but overall just monitoring how decentralized something is, Bitcoin's overall monetary policy is just completely unchanging since inception. Whereas Ethereum, you have these changing monetary policies over time. I think that the 1559, if that goes through, is certainly the most elegant conception that Ethereum would have in terms of monetary policy so far, but even then there's no proof that would be permanent. There's no kind of strong reason to believe that would be unchanging, especially given the track record so far of the number of changes that have occurred. 

[00:48:06] Now, once it's in place for several years, I think people have more confidence that it's not changing, but then again, that goes back to the difference of viewing it as money versus viewing it as a tech play. Generally for your money, you don't want the underlying thing to change that much. You don't want to say, for your money, we're going to be driving the car and replacing the engine while it's driving, and we're going to switch from Proof of Work to Proof of Stake, we're going to change the monetary policy, we're going to do all this, our roadmap is still unclear, but we're making progress. That's generally something you don't want to hear for your money. But it would be something you generally want to hear for your tech investment to say, okay, we're rapidly innovating.

[00:48:37] We don't know exactly where we're going to show up, we have faith in our developers and here's our reasons why we think it's going to go well. I think that ties back into the point of one being existing money and the other one being a tech play?

[00:48:49] Richard: [00:48:49] Okay. Qiao, would you like to respond to any of the points? 

[00:48:52] Qiao: [00:48:52] Again, I definitely agree if your team doesn't have the strongest credibility on monetary policy. This is something I've been very frustrated about since the very early days of Ethereum. I can't believe the community is not working on also finding the monetary policy, prioritizing everything else over monetary policy.

[00:49:12]If you want to get rich off your Ether, ossify your monetary policy for us. That's been my argument for five years, but I do think that even if the monetary policy is not the most credible, it doesn't mean that you cannot accrue value, right? Like company stocks they don't have the most credible quote-unquote monetary policy because they can issue new shares if they think that the new shares can add value to the overall company, to the overall market cap. Now the same thing applies here with the Ethereum community. If the Ethereum community thinks that if they changed the monetary policy that can increase the value of Ether itself, then it will all be justified.

[00:49:52]Basically what I'm saying is monetary policy, full credibility of monetary policy, is not a necessary condition. It's an ideal condition, of course, but it's not a necessary condition for value accrual. This once again goes back to the moneyness versus the tech play.

[00:50:05]Richard: [00:50:05] Okay. Let's move on to audience questions here real quick. We could come back to the topic at hand a little bit later as well. Someone was asking about NFT. That's one of the newest games you can play on the the Ether ecosystem. Actually, it's not one of the newest, but it's definitely one of the hottest right now. I can just see Bitcoiners seeing this with a chagrin on their face. So I would love to hear your thoughts. What you think the future of NFT is? What do you fundamentally see this as other than let's say a game of musical chairs, as some would say? Maybe you go first, Qiao.

[00:50:41]Qiao: [00:50:41] Sure. I think the first thing we need to do is to define NFT because in a lot of people's minds, right now NFT equals digital collectible or gaming or like assets in gaming assets. I think it's fine to equate these two, but technically NFT just stands for non-fungible tokens and non-fungible tokens can have a lot of other applications, but let's start with the gaming and digital collectible.

[00:51:06] I'm personally not a collector. I can't say I fully appreciate this new world, but if you think about digital collectibles from a first principle, I think the value accrual of NFTs or digital collectibles and gaming assets are exactly the same as Bitcoin. It's entirely based on intersubjective belief. If people find this thing valuable, they will value these things. I t's super subjective and there's no reason why a lot of people are skeptical about NFTs, but t he value accrual is so subjective that y ou cannot argue against it. Digital collectibles and Bitcoin they all fall under this intersubjective value accrual mechanism. Same thing with gaming. The gaming assets they find the assets valuable because they use those assets in their games because they derive pleasure from the gaming itself.

[00:51:54] So once again the value accrual mechanism, you cannot really argue against it. Obviously, If you think about the future, whether it's collectibles, whether it's digital or physical and gaming, they both have a massive total addressable market. I 'm obviously very bullish on this niche, this sector.

[00:52:11] Now I also want to go back to the first point that I brought up that NFT is not just digital collectibles and gaming. You can't have a lot of other applications. Because at the end of the day NFT just stands for non-fungible token. One of the most obvious applications I can think of is actually in DeFi because currently most of DeFi involves fungible tokens because fungible tokens means less fragmentation and therefore more liquidity and therefore fungible tokens are the most obvious kind of tokens that are using DeFi, but much of finance itself is actually non-fungible. There's a ton of individualized contracts, financial contracts between two parties. Especially in the insurance world, right? Or some exotic derivatives between two parties. These contracts are not common, they're individualized between the two parties and therefore they can be easily represented as non-fungible tokens within crypto.

[00:53:13]I think in the near future, we're going to see a lot of applications, NFTs in DeFi as well. 

[00:53:18]Richard: [00:53:18] Let's give the mic to Lyn and have her opine on this NFT phenomenon and where she thinks this is going.

[00:53:24]Lyn: [00:53:24] One thing that we see in the kind of the macro environment we're in now, which is that money is cheap, essentially. It's near zero there's very little time value associated with money. Conditions are very liquid, so we have broad money supply going up very rapidly, and in that sort of environment, you tend to see a lot of speculation of things or alternate uses of storing value. We've seen, for example, over the past decade with quantitative easing and things like that, a strong uptick in fine art prices, fine wine prices, collectible car prices, I have Magic: The Gathering cards, basically pieces of cardboard that trade for more money than they should, based on their cardboard component. So there's certainly collectible value associated with something that's scarce. Now the question is if you get into an environment where you're not in this very easy money environment, right? So we're by most macro standards, this is near the peak level of kind of no time value of money that we've ever seen in history. 

[00:54:12]So if you get back into a more normalized environment, either because inflation comes and central banks are forced to reign that in or other factors, then that can drain some of the valuation premium and some of the frivolity we see in, in a variety of markets, not just digital markets, but the vast majority of this capital I'm talking about as in all these non-digital types of collectibles. So I think that can end up applied to the digital space as well, where there's clearly going to be some degree of persistent collectibleness associated with digital tokens. There's always going to be a demand for that. But then the question is how big does that market get over time, especially if we're not in these extremely favorable conditions for them.

[00:54:47] And some of these digital art pieces that are worth tens of thousands of dollars, if we look back at this five years, will this look like the ICO boom, or will this look like, Oh, these are really good investments that a lot of people made and that remains to be seen.

[00:54:58]But I think I'd be careful about extrapolating this current kind of environment where things are new, there's fads versus something that's going to have a lot of persistent use case. Now, and again, when it comes to the non-collectible type, so the kind that involves contracts, again, I think when regulations catch up, it really comes down to which type of things are worth it enough to decentralize that they're willing to pay the extra costs associated with decentralization. Whether it's fees of doing it or things like that, and so some things will be better to do on the blockchain because you benefit from that decentralization in some way or whereas other ones you prefer to go to a more centralized group because you don't need the added insurance for blockchain.

[00:55:36]Richard: [00:55:36] Okay, thank you. So the next audience question, this is the final audience question. What do you think of BTCs declining block subsidy problem? This is basically inherent to BTCs monetary emission schedule. The fact that the block rewards are going down more and more, and frequently we see mempool being completely empty with no transactions, maybe not in this bull market, but that has certainly been the case maybe a year prior to today.

[00:56:03]Are institutions worried about something like this? Is this something worthy of worrying about? The Ethereum maximalists tend to mock BTC for having this problem and the more inflationary monetary schedule on Ethereum's site has been cited as an advantage as a result. So maybe starting with Lyn, what do you think of this problem with BTC?

[00:56:24] Lyn: [00:56:24] I actually have an article coming out probably in about a month and it analyzes the transition, because it is going to be a transition that Bitcoin will make from relying on block subsidies to relying more heavily on fees. The fee market already exists, but in most periods of time, it's small.

[00:56:37]Now over time, the advantage of having a limited block space is that it creates a persistent amount of demand for fees, and so that's actually a really big concern I have for some of the derivatives of Bitcoin, like the hard forks that came off of it that have a much bigger block space, because when they run out of block subsidy, the probability that they're going to fill up their block space enough where people are willing to pay anything more than a trivial fee is very low.

[00:57:02]So I actually think that's an existential threat to some of these other hard fork tokens. Now Bitcoin limits itself in, in terms of the block space, and overall, if you do back of the envelope numbers, it's like a hundred million transactions a year, maybe 150 million.

[00:57:16]So there's really only a finite amount of space in the blockchain, so when it comes to moving around high value transactions, we've seen a willingness to pay fees. if the Bitcoin bulls are right about Bitcoin reaching a certain degree of market capitalization. Let's say it persistently stays a 1 trillion or a $5 trillion market capitalization, then its ability to sustain a multi-billion dollar per year fee market would be quite easy on that perspective. Combined with the fact that, Bitcoin relies on specialized hardware, which has real supply chain limitations compared to say, buying GPU space to attack a GPU based blockchain gives Bitcoin certain advantages in that front.

[00:57:52]Overall, my view is it's something to watch to see how navigates this, because if Bitcoin doesn't get to sufficient market capitalization or usage, and then it encounters the problem of diminishing block fees, that could be an issue. On the other hand, if it reaches several trillion dollars in market capitalization, by the time this becomes more of an issue in another halving cycle or two then the fee market really doesn't have to be a lot of money per transaction or would actually give the overall protocol a multibillion-dollar persistent secuity. 

[00:58:19] Richard: [00:58:19] Okay. Sounds good. So, Qiao, I don't believe you have a problem with BTCs' future here given that you're also bullish on BTC, but if you would like to opine, feel free. 

[00:58:29]Qiao: [00:58:29] If I wanted to win this debate, I had to say something negative about BTC, because we're talking about Ethereum, but no, I don't have any issue with that the declining monetary policy. I think the fees will take care of it. If Bitcoin becomes successful - Bitcoin is already successful, but we're not fully there yet, I cannot see a case where the community and the market cannot find a way to subsidize the network with fees. I just can't see it, the market will take care of itself.

[00:58:57]Richard: [00:58:57] Okay. 

[00:58:57] Lyn: [00:58:57] As a back of the envelope calculation, if you have a hundred million transactions a year, and the average fee is a hundred dollars because they're fairly large transactions. The average Bitcoin transaction is quite big. If you look at Bitcoin as a large scale settlement network, that gives you a $10 billion annual security budget.

[00:59:12]And so that's a rough order of magnitude to think about. Then of course you say, okay, what about smaller users? And that's where you have second layer solutions. The funny thing is one of the biggest, the biggest secondary layer is actually just the centralized exchanges and stuff.

[00:59:24]A lot of people are fine to hold, their small amounts on an exchange or some sort of provider. Where they don't have to pay, they're not settling their individual transactions on chain, and then for people that want to do smaller transactions, but they still want to have full self custody of that, that's where the lighting network can be helpful in batching multiple transactions together and having a very low per transaction cost. Overall, I agree that it's something to watch, but it's something that I don't really foresee as an insurmountable problem as far as the economics of it.

[00:59:54]If you look at what market capitalization could Bitcoin reach compared to what kind of fee market would be required in order to sustain a reasonable security budget to protect that, I don't really see any sort of mathematically insurmountable problems. 

[01:00:06] Qiao: [01:00:06] - And also that's just so far into the future, right? We have so many years until that actually may become something that the community needs to worry about. So any concern around that potential problem right now is pure thought. 

[01:00:19]Richard: [01:00:19] Sounds good. So in the interest of time, let's move on to concluding remarks. So this will be the time to synthesize your thoughts. Maybe talk a little bit about what you've learned from the other side. So again, the motion is Ethereum is too early for institutional money, what are your final words? So maybe starting with Lyn. 

[01:00:37]Lyn: [01:00:37] I would say, it's funny cause we didn't really disagree that much. Compared to my debate with the previous person on your podcast where we obviously had more disagreement, this one I think there's less core disagreement and it ultimately the debate is less about is Bitcoin ready for institutional money and more a question of what type of institutional money? It focused more on the question of is Ethereum, a good tech investment or not. I think that's a separate question from, is it ready for institutional money? I think overall, I would argue it's certainly not ready for  for corporate treasury allocations because it's primary use case is someone speculating on Ethereum's future development, their ability to fix existing problems, how bullish they are on the development team, what they think a total addressable market is of these different use cases. And so you're unlikely to see large, non-crypto native corporations decide, Hey, we want, we view a Ethereum as money any time in say the next two years, and we're going to start putting a sizeable chunk of our treasury into Ethereum. 

[01:01:36]Then as you go down into kind of more adventurous pools of capital, you'll have some hedge funds and family offices willing to speculate on Ethereum. I think a much larger use case, even among them, however, will be just taking advantage of market neutral arbitrage opportunities, and taking advantage of the Grayscale Ethereum trust premium over NAB and things like that which is what many of them are doing with GBTC as well. And so overall my positions on change is that I think it's too early for most types of institutional money, other than ones that want to speculate it as a tech investment, similar to how they would speculate on some other sort of tech investment.

[01:02:09]Richard: [01:02:09] Okay, sounds good. Yeah, I agree. There's a lot more conversions in this discussion. So Qiao, go ahead with your closing remarks. 

[01:02:15] Qiao: [01:02:15] Yeah. Again, I agree with Lyn's conclusion. The only thing I would add is I think a lot of what happens in the institutional side of things in the institutional world is that they all look up to each other. They all have career risks and that's exactly what happened with Bitcoin. Bitcoin was ready well before this year, before last year. But corporations started buying Bitcoin when basically a couple of super high profile and reputable ones started buying. That immediately removed the career risk of owning Bitcoin. They all look up to each other as peers and to put it, frankly, there's no independent thinking. It's all animal spirit. This is not unique to retail. It's the e xact same thing on the institutional side.

[01:02:57] Now, why is this relevant for Ethereum? Because Ethereum is the second largest asset, a crypto asset, and it's by far the most used crypto asset, even more used than Bitcoin.  Therefore, Ethereum is going to be the next thing that these  institutions that have already bought Bitcoin to look at. They're going to look at Ethereum next and in fact, they're already looking at it. I think,at the moment one or two - two at the moment - two of them have bought and announced their ownership in Ethereum, everyone else will join. Everyone else will pile in, and this can happen tomorrow, or it may not happen until a year later, but things can move. Things can change very quickly.

[01:03:36]Richard: [01:03:36] Yup. Sounds good. Thanks for joining the debate today, Lyn and Qiao. How can our listeners find both of you, starting with Lyn? 

[01:03:42]Lyn: [01:03:42] I am at lynalden.com and I'm on Twitter @LynAldenContact. Thanks for having me here. 

[01:03:46]And Qiao?  Qiao: [01:03:47] 

[01:03:47] I'm on Twitter at @QwQiao and that's mostly it. 

[01:03:52]Richard: [01:03:52] Great. Thank you. so listeners, we'd love to hear from you and have you join the debate via Twitter, definitely vote in the post debate poll, also feel free to join the conversation with your comments on Twitter. We look forward to seeing you in future episodes of the Blockchain Debate Podcast. consensus optional, proof of thought required.

[01:04:05]  Thanks again to Lyn and Qiao for coming on the show. To summarize, there's a lot more agreement between Lyn and Qiao than previous debates. Ethereum is a tech play and not yet being perceived as money. At least it's not the first digital asset that comes to mind when institutions think about alternative money. That said, we're living in a time where a tweet from ultra influencers like Elon Musk can move markets, and hedge funds are recruiting for analysts. well-versed in memes . So maybe the more risk seeking capital allocators will look to move out on the risk curve and get some exposure beyond Bitcoin. 

[01:04:43] What was your takeaway from the debate? Don't forget to vote in our post-debate Twitter poll. This will be live for a few days after the release of this episode. And feel free to say hi or post feedback for our show on Twitter.

[01:04:53] If you liked the show, don't hesitate to give us five stars on iTunes, or wherever you listen to this. And be sure to check out our previous episodes with a variety of debate topics, Bitcoin's store value status, the legitimacy of smart contracts, DeFi, POW vs POS, and so on. 

[01:05:09]By the way, we're planning episodes on CBDC, centralized lending versus de-centralized lending, the fad of NFT, or non-fungible tokens, whether Bitcoin is good for America and whether Bitcoin is good for the environment.

[01:05:25] Thanks for joining us on the debate today.

[01:05:26] I'm your host Richard Yan and my Twitter is @gentso09. Our show's Twitter is @blockdebate. See you at our next debate.