🎙️ #4 - Ether: The Triple Point Asset

welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better how to front run the opportunity i'm ryan sean adams i'm here with david hoffman and we're here to help you become more bankless hey david we're in corona era now how are things on your end yeah man it seems like we're at a huge turning point in where this world is about to go uh in times of crisis in times of volatility the future becomes obscured and we're

all kind of flying by the seat of our pants you know taking it one day at a time crypto markets have hit a resurgence lately while the equity markets have stayed flat uh people are still worried that the coronavirus has just begun uh a lot of things are changing um so we're gonna talk a little bit about that and then we're gonna get right into the meat of the episode how about how about like your friends and family how are they reacting to this are you finding everyone's on the same page as you that we've got to buckle up and get through this uh i have been sounding the alarm

in my social media feeds and with my family so i'm the one that's taking it the most strict uh my mom and my dad uh the two the two boomers are just finally hunkered down for the first time thankfully like three days ago uh so i'm happy i finally convinced them well absolutely so um we could talk about corona a little bit more but we should talk about what the focus of this episode actually is which is eth as a triple point asset so ether as a triple point asset why is that so interesting

why is that so exciting this triple point asset which is a term that i created which is a terrible meme but somehow people still use it it's it relates to the outside world there are three main asset types in the world one's a commodity asset one is a store value asset and the last is a capital asset and these are like the three most significant types of assets that you find in the world uh outside of crypto uh and so they they correlate to real world things like the bond market uh the

equities market and also cash uh and so the cool thing about this topic the cool thing about how these three assets are found all at once inside of ethereum inside of ether produces new characteristics the fact that they're all happening so closely together it makes things really interesting and we're going to get into that all right before we dive in let's talk about our sponsors today we've got some fantastic sponsors first up is rocket dollar this is for our us listeners primarily if you

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you break your retirement account out of brokeragedale the jail they handle the paperwork you can go to rocketdollar.com you use the code bankless you get 50 off and you can start buying crypto in a tax free retirement account today in this episode ryan and i are going to talk a ton about different d5 protocols also different ways that ether operates inside of them and also the different forms that ether comes in if you need a

place to view all of these things at once go to xeron.io xeron is the comprehensive portfolio viewer for the d5 ecosystem if you need a summary of all of your activity you need to go to xeron they can integrate multiples of wallets and they have many different d5 protocols all in the same spot so if you want to buy sell trade trade on unit swap lend on compound put assets inside of uniswop you can do all of these things all at once inside of

xeron it is the one stop shop for all of your defy activity so if you want a summary of where your position is as this coronavirus has moved markets up and down xeron is the place for you every significant d5 app that exists is available inside of xeron and i only expect them to include more as more come about there's really no need to go to anywhere else you don't need to go to compound.finance to go to compound you don't need to go to uniswap.exchange to go to uniswap you don't need to go to

the maker cdp page to get your vault under management you can just go to xeron.io and access everything in one spot switching back to corona for just a second then we'll get into the meat of the episode which is ether as a triple point asset um you know a few things that i i think uh i'm expecting to see wrote a post about this yesterday on bankless like kind of the the covid 19 prep plan if you're if you're in kind of crypto or if you're in in bankless i

expect these four things to happen first i think things are going to get worse uh for a little bit that's because western nations primarily have underestimated the virus we've been slow to social distance ourselves this morning i noticed california has just gone full locked down it's like 50 million people the cases will increase probably exponentially i think that deaths will increase as well unfortunately and things will get worse for a while in the markets as we're all trying to sort

that out and in the process the second thing that's probably going to happen is that central banks are going to print a whole lot of money uh we've already started to see to see this with with uh fiscal stimulus plans but then also the fed going directly to to qe uh announcing that they are injecting i think close to a trillion dollars into the economy or into just issuance of money last week so central banks will need to

print their way out of this crisis that seems to be the approach that they're taking but the weird thing about it and this is the third thing is that in the meanwhile it seems like people are going to still want dollars the first stage of a crisis like this is usually a liquidity crisis that's what we're seeing we're seeing everyone fly to the most money asset there is the most liquid asset there is dollars are the money that you panic into it's partially because a lot of debt is

denominated in dollars across the world oil in particular that is generally usd dominated so when people have debt denominated in dollars and they're panicking and the world's crumbling around them they want to make sure they can pay their debt so euros eurozone is good for that yen isn't as good for that other currencies aren't as good for that so they buy dollars we're seeing things like the australian dollar you know suffer and diminish 15 relative to the us dollar so i think we'll see that

flight to liquidity continue as people want dollars but then on the back of this and here's kind of the bet and the expectation that we are making and that is crypto will rise that's that's the fourth thing to expect in this world where central bank systems are printing money non-stop when i just noticed this morning venezuela has actually closed their banking system they're saying it's to stop the spread of the virus there's probably deeper reasons that they are closing their banking system but 30

million venezuelans no longer have access to banks this is what crypto and the bankless revolution was was made for we're not fully ready now we've got a ways to go on you know scaling on economic bandwidth uh but by the end of this decade i expect crypto will rise crypto will will fill the void that central banks uh are leaving and traditional finance is leaving and the internet for the people by the people as you like to say david

will have its day this decade so those are a few things to expect you can read more about it in the bankless article that we published last week interesting times to say the least are they not absolutely anytime the federal reserve prints money is just rocket fuel for crypto uh maybe short-term prices aren't don't reflect that maybe they do we don't really know but we haven't really seen money printing since you know 2008 where bitcoin was invented in the first place uh and so this second wave of money

printing of quantitative easing of bolstering the economy of humans controlling what the future of the economy should look like that's just rocket fuel onto the narrative of crypto uh so you know the the idea is that we're about to see a bunch of new entrants into the crypto markets because of this same narrative like the fed printing money doesn't isn't just a narrative for crypto people that's the narrative for the world economy at large uh and so the crypto is here to serve that need of being a asset that cannot be printed i i totally think so too i

mean this decade belongs to crypto 2020s belong to crypto and you know this is the crisis to kind of kick that off um all right well let's let's dig into it this is a super important subject ether as a triple point asset um so when when we talk about triple point david and the three asset types maybe we should take a minute to go over the three types of assets and this doesn't just apply to crypto right this is this is any asset what are the three types of assets yeah

so the three types of assets are a capital asset a commodity asset and a store of value asset and where we get the term triple point is from the term that you get when you combine a substance and the right pressure and temperature so that all three phases of matter are happening at the same time so you can go look this up on youtube type in triple point of water on youtube and you can see water being ice liquid and gas all at the same time it's just because of the right parameters that this

intersection of these three phases emerges it's actually a pretty cool experiment and so the triple point asset is an idea that the ether can be all of these three asset types at once and so again a capital asset commodity asset store value asset now a capital asset is an asset that produces capital it's something that produces dividends it produces cash for you so like if you are renting out your apartment or your house you get rental payments and that's cash if you have your money in a t bill in a

in a bond it produces cash for you over time uh companies stocks these are capital assets the main purpose of a company is to generate revenue and generate cash flow and that is supposed to be returned to the owners of the company in by in cash in some way or another the next asset commodities i call these one-time use assets these are generally things that you that are valuable because when you use them you can take something into something better

so like wheat is a is a asset you can only use it once but you can turn wheat into bread and people need to eat bread or you can take oil and you can put it in your car and you can move yourself from one place to another and that's good for you um and so yeah one-time use assets the big analogy that we're gonna get into later is energy energy is the biggest commodity asset there is it allows us to take things and produce better things with it we all need the energy to do that and then the last one is store of

value that's stuff like gold that stuff like cash like the dollar things that are inherently scarce they don't very they don't do very much they're not meant to be useful necessarily but they are meant to be scarce and be exchangeable for other things at a moment's notice so interestingly a house can also be a store of value people use their house to rent out for cash but people also use real estate to hold their value across time

art has been used as a store of value the reason why our pieces go from millions and millions of dollars is because they are partly art but they are also partly a way for people to store their wealth across time uh so these most pretty much all assets in the world fall into one or multiple of these categories yeah i used to collect magic the gathering cards you know hoping that they were a store of value for me um didn't quite work out that way but would that be called a speculative store of value i think it would i mean

collectibles certainly fit under historic value so you mentioned art some people collect old cars you know old old money uh it could be a store of value a lot of things collectibles have kind of that that emergent quality where they start as a collectible and then can become a store of value you know what th this this uh this these three asset types the capital the commodity and the store of value that you're talking about um funny thing is i you know considered myself kind of an investor and you know somebody in finance for for a while but

i like just learned that the world could be divided into these three asset types in the past couple of years like that was a newer taxonomy to me when exploring crypto and and the reason i i stumbled upon it i think chris berninski actually um he pointed it out in a paper and he found it from from another paper yeah robert greer the man 1999 there he is 99. um he figured this out that the world's assets could be fit in these three different buckets but it's super important because um

it has to do with valuation and in 2017 uh we've talked we talked about this on the last episode the economic bandwidth episode but we had an ico mania where there was you know tokens everywhere and people didn't seem to know how to value these various tokens these various crypto assets and this framework that the capital the commodity and the store of value really helped uh cement how to value crypto assets to me as well because you can value them in these

three different buckets so the capital assets that you were talking about like rental income and stocks those are super easy to value you just value them based on profits the net present value of future cash flows that's how stocks are valued they're based on how much you pay for the earnings per year that's where price to earnings ratios come from you can get even simpler than that how much does it cost and how much money is it going to give you over time exactly that's

exactly right super simple capital assets most of the assets that we kind of know and trade or in our brokerage accounts these are all capital assets um commodity assets are a bit different though these are valued based on supply and demand and what you're saying you're talking about oil and energy as a primary commodity um you know it's it's really based on what you can produce on the other side of that commodity so if i can produce um you know some sort of

asset based on oil then oil is going to be valuable to me to a certain extent and if everybody else is is buying oil as well that increases the demand for oil and since there is only a scarce supply of above ground and below ground oil that increases the value of oil so it's really just supply and demand dynamics right store of value assets those those are really unique and really different so most of us think a lot

about you know capital sometimes we think about commodity assets but store value assets they don't generate any income at all at least pure store value assets they're just used as money so dollars are a great example of a store value asset you're not earning anything on your dollar you're not getting any interest or income unless it's in a savings account as a dollar it's just meant to store value for tomorrow or for next week or for when you want to pay your rent

you know at some point in the future store value assets are just used as money and and the thing that i think is important to realize is that these assets can be more than just one at the same time i think you mentioned that earlier with with houses and with real estate david that real estate can be a capital asset but it can also be used as a store of value asset you know what we should do we should go through some of the common assets and

talk about um how they can be where they fit you know so let's take stocks what are stocks are they are they capital are they store value are they commodity are they all three yeah so people will give you different opinions as to what a stock what the role of a stock is a share of a company is in someone's portfolio uh the the genesis of a company is always about cash flow right like you always start a company thinking about how you're going to get more revenue how are you going to sell things and make more money but at some point it turns from just a

capital asset into also a store of value asset and some austrians would argue some austrian economists would argue that the reason why stocks on the stock market are treated as store values is because the store of value the dollar is actually not that great of a store of value and so because the dollar is targeted to lose two percent of its value every single year people take their their store value dollars and buy stocks on the stock market in order to

maintain their wealth across time so it's a capital asset because it produces revenue but people also use it as a store of value at the same time because it theoretically in you know in bull markets holds its value better than the dollar does it's interesting that you said uh theoretically david because um part of this is is somewhat of a generational thing so stocks have done really well since the mid 1950s you know the era the baby boomers grew up in you know gen x

uh millennials stocks have done well for most of our lifetimes but the era before that if you talk to some of the folks that grew up during the the great depression stocks crashed in 1929 and they didn't recover to all-time highs for 25 years for their generation stocks were not a good store of value asset so a lot of times we kind of you know retrofit the model of what a store of value asset is based on even

generational preference and generational experience it might not be the case that stocks remain a good store of value moving forward for the next 20 years the next 30 years the next 50 years um but part of it is a generational preference which i think is is super interesting but let's take another let's take gold for example uh what is that capital commodity store value uh so gold is largely a store value asset the majority of the world's gold is held in central banks somewhere and like you

said on a previous episode all of the supply of gold of the world can fit inside of like an olympic swimming pool so there's not that much gold but sometimes gold is used in electronics it's a really good conductor of electricity which makes it a good thing to carry data across across distances in wire it's also extremely durable which is actually kind of one of the reasons why gold became money in the first place because it doesn't tarnish it doesn't decay it's very it's very um inert it's very dependable uh and so

people use it you know in in dentistry in industry uh but because other things can do that as well gold has primarily been a store of value maybe maybe it would be useful to contrast that with silver right because silver has some of those same commodity like properties but it's less of a store value now right right yes and so silver is what was once a store of value and perhaps it still is but comparing silver as a store of value to gold as a

store value just is two completely different stories uh if the price of gold doubles there really can't be a much a larger increase in the production of new gold however if silver of the price of silver doubles then a lot more silver is going to be mined and pulled out of the ground uh and so that inflates the total supply of silver and that makes it a poor store value in comparison to gold and so that's why silver is much more used in industry to

do different things in lieu of gold absolutely and at different time periods it would have been different at different time periods silver would have been a stronger store of value so it seems like the store of value point on the on the triple point asset side of things is is the thing that we decide we want to become money collectively as as as a a social collective as a society as a civilization that's the thing we all select and settle on as the money and to me it's it's not too much more

complicated uh than that although it is quite a path and quite a journey for a commodity asset to become a store of value uh can take decades maybe we should talk about crypto so how do the various crypto assets fit inside of those three different asset classes how about bitcoin yeah bitcoin as an asset that cannot be uh minted or printed when the price goes up is one of the big bold cases for why bitcoin is such a good store of value if the if the

bitcoin price goes 100x there still isn't more bitcoin that is being minted there's still just 21 million and that's a feature that bitcoin has even above gold uh and so bitcoin is is is held as the premier store of value simply because of this rule uh this is why bitcoiners love it so much this is why there there is an absolute restriction on changing the monetary supply of bitcoin that is its big role um but different people have different opinions as to whether bitcoin is just a store of value or also something else

ryan what's your opinion so my opinion is that bitcoin is a store of value absolutely but it's also a commodity uh and i think a lot of people miss this so the reason it's a commodity is because it's used to pay for block space on the bitcoin network so in that way it acts as a commodity the way you transmit one bitcoin from a bitcoin address to another is by paying transaction fees and those fees are denominated in in

bitcoin so essentially there is this um supply demand scarcity if you if you want to do stuff on the bitcoin network directly you want to send transactions around you need bitcoin and bitcoin almost acts as a as a commodity to pay for those transactions in that way because just like other commodities a transaction on the bitcoin network is potentially an ingredient into another good uh there was a time for instance when uh and and

still is where usdt was kind of pegged or was kind of based on the bitcoin network and usdt through a protocol called omni actually had to pay fees in bitcoin so it used bitcoin as a commodity in that way so i think it straddles both of those sides both commodity and store value though others have different opinions but what about some of these d5 protocols david like like a maker yeah mkr maker is really interesting uh it's one of my first fascinations in crypto and so talking

about it as an asset classes is really interesting to me so mkr is the asset that appreciates in value the more die there is out there and dies a stable coin pegged to the dollar and these dies come into existence when somebody puts in a an another asset not mkr but an asset like ether into a a kind of a vault an account and they are able to mint die based off of their collateral in that account now

that die that they have minted is a loan it's a loan from the maker protocol and there is a fee for having an outstanding loan and that fee goes to burning mkr now this is like a business this is like an internet bank this is like a an internet protocol bank where it allows you to mint uh money based off of your assets and then repay it at a higher price later or a larger amount of money later and that's the business of mkr it's it's a revenue generating business it generates fees

so that makes mkr a capital asset however i would also call mkr a store of value because you'd it there isn't much upside in die die is meant to be stable in fact there's supposed to be zero upside in die uh it's designed to be flat it's designed to not have upside potential and just to be a thing that other things reference for stability for price uh which means that upside potential gets pushed into mkr and so if you to

the degree that you do not want to store your value in die because there's no upside potential there is upside potential in in mkr and so the the mkr system is always burning mkr from the fees generated by the protocol and so in theory in good days in in if this whole business works out there they're at the start there is one million mkr and then the fees start burning burning burning mkr and so it's designed to be a deflationary asset so the bull case for

mkr is that you there's 1 million mkr you buy a handful of them and then in 50 years there's only half a million mkr and the total percentage of the supply that you own has doubled this is like bitcoin if the 21 million was actually getting smaller over time and so you were incentivized to buy and hold it early and wait for your share of the network to increase totally and in in what you're saying it seems to me like mkr is is almost in some ways like a like a stock so it does

throw off revenue now unlike a stock which distributes that that those profits and that revenue to shareholders it actually uses its profits to burn mkr and that makes mkr deflationary asset and in some ways like a stock is it's it's a store of value but it's not quite like a a money store value if you will you know something like die for instance or usdc that would be more like the dollar a pure store of value that you you know you're going to store

your your money in from week to week you might not want to store money in something like usdc or die for decades uh for the reasons we talked about the dollar is is constantly being inflated and losing value over time but but certainly a good short-term store of value there are other assets too one that i think is interesting in crypto or one category are these other assets that are kind of base chain assets so um the ethereum gillers fall

into this category um also assets like like atoms from cosmos so cosmos is a blockchain network it has a base asset called atoms these atoms act as a capital asset uh in in the same way that that that kind of maker does in that if you have these assets it entitles you to a right of future cash flows future transaction fees of the network um but it's a bad store of value asset

because it's constantly being inflated over time and it's not being used as a money today in the same way that bitcoin is or ether is and i think that is the flaw with a lot of these ethereum killers we talked about this a little bit in the economic bandwidth episode that they're focused on getting trustless or some of them anyway are focused on getting high trustless transactions per second but they're not focused on getting a value accrual mechanism particularly a monetary value accrual negative mechanism

on their base asset they're not focused on on making their base asset become a money and unless they do that they won't have the economic bandwidth to grow an entire open financial system on top of okay so we talked about it we talked about a lot of the assets uh in the traditional finance we talked about uh some assets in crypto but we left one out what about ether so ether is the triple point asset how is it a triple point asset david yeah this is why i get so excited about ether this

is what gives me chills uh so ether to my knowledge is the first asset to ever encompass all three asset types all at once so it's a store of value asset there is a there is a restricted supply of them no one can print any more or less the supply of them is determined by the protocol the increase of ether price does not meaningfully change the issuance of ether is a use as a store of value and people take their ether and

they put them inside of defy applications and they deposit them into open finance because of the value that they have as collateral and that's why you see ether as collateral across ethereum it is the store of value of ethereum it is the it is the thing that backs die it is the collateral inside of unit swap trading pairs it is the collateral inside of compound collateral collateral collateral that is the m0 it is the store of value for ethereum it also is a capital asset or it will be

in proof-of-stake ethereum you will be able to stake your eth inside of the protocol provide your services to the network of validating transactions and you will receive ether as payments for that service that's kind of like the dollar inside the bond market right inside a treasury bill you put your asset inside of the protocol and over time you are receiving dividends for that service for that staking and so ether is also a capital asset it returns you more ether across