🎙️ #7 - Ether’s Value Mechanisms

welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david we've got a super interesting topic today i think it's uh i think it's pretty ambitious as well what are we going to talk about we are talking all about scarcity mechanisms scarcity games and value accrual for ether but i think

we're going to put this into a larger context which in the context of the outside world where you know the fed is printing 2 trillion dollars it seems every other day this is really going to fit well in in contrast to what is going on uh with coronavirus with the world with our current financial system we're going to compare the different uh scarcity mechanisms that ether has and i think that's going to going to contrast well with the scarcity mechanisms that the dollar perhaps does not have yeah it and

it certainly seems to um have the the quality of scarcity less and less these days so this is going to be a really fun topic you know a lot of people talk about ether as a utility coin with an inability to accrue value over time i think in today's episode we're really going to take a wrecking ball to that notion because ether has some really interesting scarcity games and and properties built into the ethereum network and three in particular

we're going to focus on so this is going to be an ambitious episode lots to cover but i think super useful for bankless listeners to understand the scarcity games in crypto relative to the traditional financial system and then specifically to the ethereum economy and and ether relative to other assets and other networks like bitcoin but before we do that uh let's let's talk about some big picture stuff that's going on you know one place i want to start david is let's

let's talk about what the the fed is doing these days i mean i i hear the sound of the the money printer more and more how about you yeah they just refuse to turn it off uh and it's just become more and more salient what exactly is going on uh the the big the big thing that everyone needs to understand at least the takeaway message that i have is that we are printing so much money that we have now begun to nationalize money uh and maybe in the crypto space the bitcoiners uh

the bitcoin community has always been talking about how like basically the fed has its hands around you know the the money spigot the money printer but now this is really really obvious and it's really a down to a political decision as to who lives and who dies who gets the bailout money and who doesn't because when you can print you know 10 trillion dollars over the course of two weeks to bail out certain companies like you start to really back yourself into a corner with regards to what who and what you bail

out and who and what you don't like there's 1.5 trillion dollars of u.s student debt in in in the united states and we just printed 10 trillion dollars to give to corporations and companies and so like it's becoming harder and harder to justify uh not bailing people out which means it's harder and harder to justify just not printing more money and and every time we print more money the world becomes a little bit less fair because money is supposed to be fair and printing money is not that yeah we've talked on previous episodes i think episode 2

where we talked about monetary policy about this this idea of the cantillian effect and you had a great definition of what the cantillian effect is but it basically means that those that are able to position themselves in front of and right underneath the money spigot are the ones that that benefit and the money is really coming from a very small group of individuals in the u.s government right now they're they're the ones deciding you know folks like jerome powell for instance they're the ones deciding where the money goes in this economy and so if

you can position yourself uh close to the money spigot you win and that's a much less fair notion of of what money is it starts to erode even the the game of of capitalism and it turns it more into a game of money and connections you know one example i think we we saw just last week so on thursday the fed actually um started buying uh more junk bonds so they had been purchasing

bond etfs previously and now they're actually buying really low quality corporate bonds actually efts j and k like junk bond efts uh directly and they're they're doing that to in their words you know try to stabilize the economy in in the coronavirus epidemic but of course what this inevitably occurs to happen and what this inevitably causes is the bailout of companies and balance sheets that don't necessarily deserve to

be bailed out so we can contrast that with you know basically what big companies get if you're a big enough company to have bonds and even junk bonds for example listed on public exchanges then the government's going to buy your debt directly right if you have if you're big enough to have a good banking relationship then you are first in line for some of the loans that are coming down the pike if you're a small business now the government is also in the u.s rolled out some programs for small business under sba loans um you have to you have to

wait in line effectively so first you know you have to have a bank account with an sba lending bank and they're going to prioritize the businesses that already have loans with them but if you don't have a bank account with an sba loan designated bank then you're the low man on the totem pole you're effectively unable to get a loan in this sba program you're too far from the the money spigot to really benefit you're kind of last in

line in the whole process and that is unfair it rewards connections and money and the the size of the company uh over traditional credibly neutral capitalist market forces uh and that's a massive unintended consequence of all of this money printing as well massive unintended consequence and i i think that those three words are the things that really sum up what is what we're all really worried about here

because it's it's a really enticing to press print on the money printer right it saves us from going into a very deep recession it keeps us free it keeps us at bay yeah it feels good now people get to keep their jobs the airlines that we know get to keep keep on shipping people around even though they're not making any money a lot of things we get to continue our old way of life that's what the money printer does is it prevents change but economics and finance and money and

business is constantly constantly evolving it's a darwinian process and the money printer go bur instantiation is is getting in the way of that it's really playing god with the economy and it's really something closer to central planning you know the reason why the united states won the cold war versus the soviet union was because our economy was not centrally planned but since since there is no more cold war we've been able to move into a centrally planned system and that's what we see here that's what the money printer go bur is it's a centrally planned economy which

you know in other contexts we as as americans we absolutely loathe yeah have you ever read that book red notice yeah yeah oh i've talked about that actually literally last night with my parents talking about how uh red noticed the the story of a bill browder and his capitalist endeavors in post-soviet russia it was it was not about good business it was about how how do you play the game of politics yes yes which which kleptocrats uh do you know and whom can you bribe and whom can

you be in favor with that that's how to that was how to win the 1990s uh stock market in in in russia had nothing it had very little to do with the fundamentals of companies or free market competition had a lot to do with who those in power and government power specifically chose to reward or to penalize um and you know i don't think we're saying david that the us is immediately going to like 1990s russia like that i mean that's not

happening overnight but um is this a step in that direction is this an erosion of the credible neutrality of the u.s capitalist system um is this a reward for those who are closer to the money spigot versus those who are farther away absolutely i think that's pretty undeniable and just as you said i mean that is an unintended consequence of these bailouts and the way that they're

structured and it's why i think it's important for us to have an alternative universe an alternative game of of of scarcity and monetary system that we can fall back on one that is transparent and credibly neutral which i think is going to be the the focus for today's episode uh but before we get there david you had something interesting happened to you last week you were called a bitcoiner what was that about i had a nick carter on my other podcast pov crypto where if you want to listen to a place where only the

hosts disagree i would go recommend pov crypto we brought uh we brought nick carter on to talk about um kind of what his position is in the space and we talked a lot about what we were just talking about right now with uh bitcoin being an instantiation of values uh and a lot of what the values that we were talking about we were just talking about very recently with unfairness with regards to money uh and so we were talking about that and you know i wholly agree with the concept of crypto instantiating these these uh fair values

inside of all of us and uh in the twitter comments as i was uh tweeting this video out this i i hadn't seen this twitter account before so i don't know who this person is but he goes oh three bitcoiners talking about why bitcoin is so great get ryan sean adams on there and we'll have a real conversation and i'm like wow i've never been called bitcoin or so directly before yeah i mean so okay so that brings up an interesting question because look there's some vitriol between the communities bitcoin and ethereum

um you know so my question is can you be both an etherean and a bitcoiner at the same time is this a bit like you know liking korean food and also sushi you know they're both great great foods um and there's no kind of tribalism between them or is it a bit more like being a democrat and a republican at the same time like that's that's fairly difficult to do or being like a christian and a muslim at at the same time those are

tribes that uh have had a history of not getting along what about being an etherean and a bitcoiner can you can you be both yeah it's actually i think a really interesting question um the obvious answer is obviously you can be both but at the same time even though that is the answer you can be both no one really seems to choose that answer like i think you and i definitely identify as ethereans however i definitely also have the same values as bitcoiners however calling me a bitcoiner is odd

because of how much time i spend in the ethereum world um also in this episode that we were recording with nick uh he was talking about how these cryptoeconomic systems are political systems they are the the code is a an instantiation of values uh and and values is is kind of where what you rally behind when you rally behind a political party so like to some degree these are political parties that we kind of adopt and you can't really be one or the other even though they aren't

all that opposed to each other like the difference between bitcoin and ethereum in my opinion is not all that great they're actually pretty aligned politically speaking um but since there's only these two political parties in the crypto universe like that what else do you have to fight and debate against and so like you you you were pushed to one end of the spectrum either way uh it's a really interesting concept that i keep on coming back to you over and over and over again yeah i totally i totally agree that there's a ton of overlap in that you can be both an etherean and a bitcoiner

though it's true i think most people end up identifying themselves more as one over the other some folks of course will will say they're exclusively one or the other you know i think vitalik um said uh you know recently that ethereum effectively has moderate bitcoin values right so um there is a ton of overlap in the underlying value system of both communities it seems like in some ways bitcoiners are a bit more extreme on one end of the spectrum uh whereas maybe

ethereans take a more pragmatic approach and there's lots of different lenses you could you could compare these two social movements um you know under but uh one is one is certainly that we talked about monetary policy in the past that's uh that's certainly another one i think emphasis on security versus fixed scarcity of the asset itself is another um and i think in a lot of ways the bankless podcast is is about exploring um some of these underlying

differences how both of these social movements contribute to the wider movement of going bankless and this alternative money system that where that we're standing up so you can be both bankless listeners don't don't get stuck in the idea that you have to be in one camp or another i think both david and i would say look we're we're ethereans we're bitcoiners uh we're both we're here for the bankless social movement uh that's what this entire cryptic movement is uh

is about in our minds and so it's um it's okay to be part of both communities certainly it's uh it's encouraged because at the end of the day we are all here for computer driven code uh code that is run on the internet that is credibly neutral with that is completely fair and without uh human beings involved that's the values that we really overlap and that's really also the topic of today's episode which we're which we're totally going to get into right after these sponsors first we're going to talk about ave

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second is ether and the value mechanism scarcity mechanisms it employs and then thirdly how usd will fare against these crypto money scarcity mechanisms but let's start by talking about scarcity mechanisms and fair games in general i mean we talked in the intro and the big picture portion about the fed uh and its money printing and its ability to arbitrarily give to to

anyone it wants to um that's not the case with crypto money systems and i think that comes from the value system we're talking about value systems with the value system of austrianism austrian uh money that really enables these scarcity games can you talk about that a little bit david why is why is this austrian philosophy so important the austrian attitude towards money is an attitude of fairness about money you know a good austrian money is not something that is engineered by human hands but rather

discovered or emergently used organically gold as austrian money gold is really nice because it was evenly distributed across the world and so as different civilizations came into maturity no one civilization had all the gold right it was it was fair uh and because it was this natural element in the earth's crust like no one was able to play god with gold no one no one could mint gold and so when we talk about fairness and money you know he like like i said in a

previous episode humans have a very strong fairness meter fairness radar if they see something that's not fair everyone picks up on it and it's really important with our money because what money is is a measurement tool of value money is like this meter stick that measures value of different things ryan if you want to sell me your house and i am an apple farmer how many apples will you take for your house like how do you even make

that comparison that makes no sense uh like you can't compare like okay well this house is worth 20 000 apples money is this tool that we use to to measure the value of different things and when you are able to distort that that measurement you are able to print new money what you are doing is you are changing that measurement that measurement stick like what if we all had meter sticks and then this this entity just kept on changing what a meter meant like how long a meter is it would mess up everything and that's

that's what austrian money is all about it's it's saying that everyone has the same uh measurement tool equally across the world and we're all using the same measurement tool to to make value judgments and so fairness is really important in that context yeah and i think one thing that that um you get when you have money systems and economies that aren't fair in the in the crypto world when that sort of thing happens when the community doesn't accept it socially um there's a network

fork that means basically people take the underlying network and they create their own version of it so they might create an entirely new kind of side asset and they fork out unfairness uh to to me that's kind of akin to what happens when monetary systems of of nation states or of kingdoms go awry is the people have a tendency to fork we call we don't call those forks necessarily we call them them revolutions though and that's what can

happen to a society that pollutes and allows corruption and unfair decision making to its underlying monetary and economic system and if you look at you know just the world that that's going on and i know you know investors like ray dalio have compared um this sort of era that we're into the 1930s there is a level of of unrest uh going on there is this feeling that um things aren't fair uh and certain parties in

power are bending the rules in in favor of the establishment and in favor of those people who will continue to keep them in power and um to me those are early seeds for social unrest for a potential revolution whether that's an actual like physical revolution or if it's a social revolution and i think bankless and crypto money systems are all part of that revolution it is a way to opt out of the existing financial system where a

few people can bend the scarcity rules of the underlying money system and certainly that's the perspective that austrians were coming from uh their perspective is hey you know a few folks shouldn't have the ability to bend the rules of the money system because if they do they will bend it in their favor and the system will become unfair and not only unfair but also inefficient because the the top-down system cannot compete with a bottom-up system from

a innovation perspective from an efficiency perspective from a you know price reliability perspective so decentralized systems and markets have worked really well throughout history and i think that's very much where the austrians are coming from so you know i think we would both say that big bitcoin is uh a type of scarcity game too it's almost a type of austrian scarcity game wouldn't you say absolutely uh bitcoin is one massive game uh and in in the

context of what's going on today i remember you bringing this up a couple times in the very first episodes where you talked about gresham's law where people will keep the good money and spend away the bad money and we've seen this uh with regards to previous community forks or aka revolutions in argentina in venezuela where people spend the bad money and keep the good money which is dollars and that puts us in this very unique position where the federal reserve is there's no other fiat money to run to right so the federal

reserve is like well we're just going to print more because there's no other money out there like what are you going to do run to gold well bitcoin and its game is the alternative that they do not see coming and this game that bitcoin has is a pretty fun and fair game and it's much more fun in my opinion than than the game of the federal reserve money printer gopur and why i'm referring to this as a game is because that's kind of how these austrian money systems work bitcoin is this large game of chicken where no one wants to be

caught with their pants down there's this very large prisoner's dilemma going on between everyone in the world where if you are the last person to buy bitcoin you lose like everyone no one wants to be the last person to buy bitcoin and anytime money printer goes bur you increase that incentive to buy bitcoin early are you saying so are you saying bitcoin is a ponzi p bitcoin is a ponzi game yes and that is very very different than a ponzi scheme a ponzi scheme has a one

central operator who is ready to run away and disappear and fake a death with all of his new money uh there's a backdoor in ponzi ponzi schemes a ponzi game is entirely different where you know everyone benefits at the bottom uh if everyone else at the top buys after them you want to be first in this ponzi game it's this it's very much a pyramid structure but that's how that's how these monies bootstrap the the incentive to play the bitcoin scarcity game how many bitcoins can you own which is

really just the if you if you look into the memes shared by bitcoiners it's really just a signal of playing different games stacking sats is a very famous bitcoiner meme and it's really just about hey like you know increase your points get up the point scale like get up the value meter stick of bitcoin uh because if everyone else starts using bitcoin as a value system like well then you you are you got ahead when the when the points were cheap uh and and so that's the big bitcoin game it's really how many of the 21 million bitcoins can you

get and uh can are you going to get them before everyone else yeah it it it strikes me that what you're saying is uh okay yeah uh bitcoin crypto money systems in general are a ponzi game right but but so it so is gold that's very much a ponzi game and that's different from a ponzi scheme which might be more like the the fiat system where a few a few folks can essentially reward their friends and run away from the money but you know i'm writing this quote by peter thiel and uh he says you

know money is the bubble that never pops it uh it's essentially it's its value is based on a bubble a social belief we've talked about this in our memes episode and and previously so check those out but ethereum is a little bit different so it has some of those uh scarcity ponzi game type characteristics that you're talking about um with respect to bitcoin but um it also has some in-game mechanics ether is almost like a point

system for these in-game in you know in-game money games that are played on top of uh ethereum and i think you've done a really good job talking about the three pillars of scarcity in ethereum and these are effectively because scarcity and value go hand in hand these are effectively value accrual mechanisms that are built into the ethereum protocol for ether the asset

so maybe we should talk about the three pillars of scarcity why don't you just like you tell us what they are first david and then maybe we can hit them one by one absolutely and and these three pillars i i believe is where ethereum gets its political differences from bitcoin where bitcoin has one large single pillar which is 21 million now and 21 million forever ethereum has three smaller pillars that each are represent their own scarcity mechanism their own little game of chicken of

sorts each pillar represents its own additional scarcity force for ether and so the first one is the one we all know and love eath in defy the famous term eath locked in defy or you know one billion dollars locked in defy that is ether being used in this defy ecosystem as collateral as a store store-value asset and the more eath in defy the less east there is everywhere else uh and so maker

has 2.3 percent of all eth out there compound has like 0.5 percent of all eth the more defy applications there are that are good defy applications good being defined as how much ether is inside of them the less ether is there there is you know in the rest of the universe uh so this every time every d5 team every defy company d5 protocol that comes into existence represents some amount of incentive to deposit ether into that application to

use that application for whatever that application is so the more the bigger defy is the more defy protocols there are the more incentive there is to take ether from wherever it is in the world and deposit it into defy and so that's that's the first pillar uh we'll talk about the other two pillars in in just a minute but maybe we should we should camp on ethan d5 for just a second because what these protocols are on top of ethereum are almost forms of um ethereum

banks where eth the asset is the reserve asset as the most trustless uh asset for economic bandwidth so these d5 protocols these crypto these these internal banks ethereum banks effectively are using uh ether to back loans as trading pairs in you know protocols like uniswap and it really reminds me of the the fourth attribute of money that is much less talked about so when we talk about money and we've defined money

before in the bankless podcast david as three things a store of value a unit of um account and a medium of exchange so those three things but it's also a fourth thing a guy by the name of william stanley evans talked about the fourth attribute of money which is money as a standard of deferred payment so money is a standard of deferred payment what that effectively means is the monetary denomination of a loan so if you have a

mortgage for instance and if you're in the u.s it's it's generally going to back be denominated your loan your mortgage that is is going to be denominating u.s dollars well um that aspect of debt denomination the standard of deferred payment is a fourth very important attribute of monetary systems and just to kind of like look at the big picture of what's going on in the market today there is an absolute rush to liquidity a rush to dollars around the