🎙️ Episode #3 - Economic Bandwidth

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 hey david how are you doing this morning doing pretty good doing pretty good really excited for this episode the first two episodes of this podcast i feel have really just led right into this topic that we're going to talk about today economic bandwidth a really important topic uh another phrase that

you coined which the community seems to have run with so i'm really excited to appeal back the layers with this one yeah so my this is a a fantastic topic so we are recording this on thursday morning and there are other events at hand what is going on in the market my friend what's happening with crypto what's happening just with corona what's happening in general well what's happening is that the economic bandwidth of these systems is going down uh big time which uh we will explain in the in this later part of the episode but uh it seems that coronavirus is a real

thing and it's impacting all markets equally across the board yeah so so what's gonna happen like so uh part of me wrote a post in bankless um earlier this week on not panicking but positioning how should we start positioning ourselves like um is this a risk-off market what what should we what should we do what should we expect is going to happen right well when people get fearful people de-risk and so people flee into safer and safer

assets and so people that have leveraged positions or closing them people that have open vaults with maker are are lowering their liquidation price if not closing them entirely people who are moving to a less risky position which is going from from leveraged and from you know smaller cap coins into safer coins like ether or or bitcoin and then at large people are also moving from these uh from the large crap cap cryptocurrencies to dollars away from you know what is a pretty volatile asset like uh bitcoin or ether

and moving into the asset that they that they that causes them to feel security which is the us dollar so everyone is fleeing away from risk and making sure that they have the resources that they need to make it through this pandemic yeah i think that's exactly what's happening i think we are in the midst of shifting from a risk on environment for all assets to a risk off environment and people are fleeing to those classic safe haven assets i think there is an idea or there was an idea in

the crypto community that crypto specifically bitcoin and uh possibly ether would kind of catch a little bit of that be a safe haven asset i've never been of that belief personally i think that in certain conditions say monetary policy you know inflationary conditions conditions where the fed is pumping money into the economy then crypto assets like ether and bitcoin uh can and may exhibit some of

some of the quality of gold where people flee the us dollar or treasuries and and go to those crypto assets um but we're not there yet we're in sort of the the first inning uh and this is the time where everyone kind of gets out of what they perceive as as risky assets um what i think could happen uh and again like who knows but what i think could happen is we continue to see stocks drop central banks around the world they drop interest rates uh to zero many are

already at zero maybe even into the negative territory and then we get into some really exotic money printing central bank stuff uh where you know where central banks around the world try to prop up their economies by injecting cash by injecting liquidity into them um i think with that backdrop crypto may be poised to do a bit better um but we're probably a couple innings away from that and it could take some time so as i as as i posted earlier this week

you position yourselves um for this uh hopefully you've done some of that already but um you know this could take some time for recovery and look look for those next signs when you know the fed starts printing uh funds starts injecting liquidity into the economy that might be a sign that um that crypto could could start some recovery um but i am looking at gas on the ethereum network and it is as high as i have ever

seen to get a fast transaction out it's 101 gray and a low low transaction is 80. um for the folks that don't know what gas is can you maybe explain that a little bit gas is the fee that you pay to the miners to get included and if you want to get included faster than everyone else you need to be paying a higher fee than everyone else and so what is happening right now is that ether has gone from you know 170 down to

125 now back up to 140 and everyone who has a risk on position immediately needs to make some transactions on the blockchain to take that risk off the table and be create a safer portfolio so you know closing leveraged longs lowering the liquidation number on people's faults and everyone needs to make these transactions all at once and so people are gonna have to pay a premium to get their transaction included um people people are fleeing away but everyone's doing it all at the same time so the

network is congested and probably these fees are about you know 10x what we typically see i would say so um you could see sort of the strain happening in the network and um the panic as people are transacting and and try to close out positions and try to shore themselves up uh so we'll be monitoring that situation let's get to the topic at hand today which is economic bandwidth but before we do i want to give a shout out to our sponsors um the first is rocket dollar i love absolutely love the

rocket dollar product um i use it myself for my ira um i looked just this week and if you were to buy ether on a brokerage say your schwab or your fidelity account the cost of that there's an asset called e that you can type and you could buy it's trades at 400 percent more than what it trades on at coinbase so if you're to buy it in your brokerage you're paying 4x more than the market price on coinbase i think this is complete retail rip off

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2016 2017-ish called the fat protocol thesis all right so economic bandwidth is a little bit related to the fat protocol thesis which you may have heard of but but let's define that for everyone really quickly david what is the fat protocol thesis the fat protocol thesis is this idea that as more and more things get built upon the same protocol that base layer l1 protocol becomes fatter

it's a way of illustrating how things grow when other things are built on top of it so the idea is that platforms like bitcoin that have many many different companies building products and services on top of it and also ethereum with many different applications and projects being built on top of it as more things are built on top of these chains these layer one chains and these layer one assets the value of that l1 protocol grows and becomes fatter all

the things built on top way down on the l1 protocol and and make it fat make it a fat protocol yeah absolutely and i i think one thing that joel was was trying to do with uh the fat critical thesis in this post was to explain the what was going on with bitcoin to people in silicon valley to venture capitalists so venture capitalists uh they they they'd gone through the internet revolution they knew it very well that

was kind of their frame of reference and what they saw in the internet revolution was that the protocols at the very base layer of the internet and remember from episode one guys what we mean when we say protocols that's just you know rules in a set of code that that software needs to abide by um so the the protocols of the internet are things like tcpip which is a protocol that moves data across networks or smtp which is a

protocol for email these things are you know standards maintained by by standards body there's no companies there's no stocks there's no assets that you can buy around the core internet protocols they're just free they're public they're available to the world everyone uses them but they don't accrue any value you can't buy them you know there's nothing investable about them well the vcs and silicon valley was kind of scratching their head and looking at bitcoin and um seeing that bitcoin is it's a

protocol so it's it's like the internet protocol but somehow it's accruing all of this value and and why is that the case and how is that the case and so joel's thesis uh was basically that protocols like bitcoin uh and in the future possibly other protocols that we could build in this in this crypto system would be the primary value accrual uh mechanisms for everything that's created in these crypto systems versus the

applications so in the internet world the vcs were used to the applications accrued all of all of the values so applications like google which sat on top of those internet protocols or applications like facebook they were very investable you could buy them and you know they could 10 100 x you know 1000x they could ipo they were very investable the fat protocol thesis says maybe those applications are actually going to be skinnier so they won't accrue as much

value and and maybe the protocols themselves at the base layer in crypto um are going to accrue all of the value they're going to be fat that was the entire thesis uh and that was a complete paradigm shift i think for for many who had watched the internet revolution um so it sort of played out in in 2017 when all of these new protocols uh started coming about in in something called the the you know the ico craze as we sort of call it now so that clearly shows a

difference between the internet and crypto uh but there on if you go to coinmarketcap.com there are thousands and thousands of different coins uh so why how are these all going to be fat protocols yeah i mean so that's exactly what happened in in 2017 is people just started creating all of these coins all of these assets and they they sort of used the the fat protocol thesis to say well this asset is is clearly going to be massive in

value and they they benchmarked the price of their asset to the price of other assets like like bitcoin and eth and you know eath was rising in value bitcoin had grown into billions by that point uh and they assumed that value would accrue to their protocol and it could have been a a cloud storage protocol or a vpn protocol or all of these decentralized protocols that that were investible and they they basically put out the the idea and the narrative that uh these

assets themselves would accrue value like the monetary assets of a bitcoin uh and ether but um i think they they got it wrong right because um the fat protocol requires some some more subtlety just because you put a an asset out there and a coin out there um doesn't mean it's necessarily going to accrue value it doesn't mean it's a protocol even that is going to accrue value there has to be something else

there and so what was happening in 2017 is everyone was putting out these these coins uh and expecting them to be used as a medium of exchange within their system and be expecting them to be used as a currency within their system but the problem is the these were sub-par currencies um they weren't good mediums of exchange they weren't good money protocols at all and there were better protocols out there people would prefer to use ether instead of you know a token money inside

of some application people would prefer to use a stable coin like usdc or dye these assets inflated in value tremendously during 2017 and then kind of all came crashing down in 2018 when people realized the fat protocol thesis you know doesn't apply to everything and i think some people took it a little bit too far and said the the fat protocol thesis is completely false you know protocols do not accrue value uh and maybe bitcoin is the only thing that

will accrue value that's the only protocol that we've seen be successful so in 2018 i started noticing this notion that um ether even was just just a utility coin just a medium of exchange just gas within its own economy uh and completely disagree with that because that's not what we're actually observing you know what what are we actually observing david when we look at how ether is used

in in the economy because it's more than just gas it's more than just a utility coin how are people actually using ether i think the big takeaway from 2018 was should have been not that the fat protocol thesis is dead but just that the fat protocol thesis is much harder than people thought it would be to achieve when the for example the basic attention token is this erc20 token that is used for payment for attention on the brave browser that's a much

that's a very niche ecosystem that's very hard to build a bunch of things on top of but at the end of the 2017-2018 mania people fled up the market cap up the up the risk just like they're doing today with coronavirus they fled up the up the scale of risk into safer and safer assets and the reason why people landed on mostly bitcoin but then also started to to keep their eat is because of the ecosystem that is being built on

top of these individual platforms and so that's what these open protocols have that all of these other you know niche assets don't have is they have an agnostic platform for anyone to build anything upon and that's where the fat protocol thesis really kind of stuck after 2018. and it's so it's a bit less fat protocol and it's a bit more like a fat money thesis it it's the money assets that are accruing the value not just any protocol the protocol has to be a money protocol

in order to uh accrue value and i think that's the that's the correction that the fat protocol really needs and what we observe in at least the ethereum economy is that ether is used as money in various ways um it's used sometimes as a medium of exchange to to buy icos in 2017 fundraising it's used as a store of value it is the most liquid most saleable asset inside of the ethereum economy it's used as a

unit of um of account so things are priced in ether including the gas that we talked about the opening of this this this podcast and it's also used as collateral and that's where we really get into this concept of economic bandwidth which we're going to spend the rest of the episode talking about because i think it is it's almost the successor to the fat protocol thesis the idea of economic bandwidth being the rate capacitor for

the entire money system that's built on top of it particularly a rare form of economic bandwidth that we're going to talk about which is trustless economic bandwidth eth and bitcoin are both trustless economic bandwidth on their respective systems so but before we get into like what economic bandwidth means and the ramifications of it i think we should probably define it for a minute so economic bandwidth is is actually

pretty simple economic bandwidth is the liquid market cap of an asset so the way i define economic bandwidth is it is just the equal and alternative to uh you know data bandwidth the web 2.0 the internet revolution was all about how can we pass more and more data around the world and as the internet has developed you know the bandwidth has increased uh there was no no point in time where we could have

ever passed you know people's 4k streaming netflix in the 90s that was never ever going to happen but we innovated and we figured it out and so now we can send basically infinite data for our needs throughout the entire entire global ecosystem because the bandwidth for for data has increased now these internet protocols like bitcoin and ethereum these are similar protocols except their bandwidth isn't data it's value

when it comes to sending and receiving value economic bandwidth is this new thing that maps on to the old internet the old revolution of the internet but now it's in this digital form which is you know digital value how much digital value can we send across the world and so bitcoin has a market cap of 150 billion ethereum has a market cap of 20 billion and so these are the the limitations these are the bottlenecks the maximum possible amounts of value that we will ever be able to send and say actually

even smaller than that what ryan said was right it's really the liquid market cap how much is available inside of these protocols to send and so the the total value bandwidth the total economic bandwidth that these systems have available to us is you know billions of dollars but the world is much much bigger than that the billions of dollars is minuscule compared to the rest of the world so we'll get this to get to this subject and then later on in the episode where we talk about how we're going to get there but right now the the economic bandwidth is small just

like at the very beginning of the internet we were never ever going to be able to stream 4k through through multiple devices under your home wi-fi uh but we're gonna get there absolutely yeah i love how you framed that that that's exactly the analogy to use the the value of assets like bitcoin and the value of assets like ethereum their total market cap that is the size of the pipe that is the capacity of of trustless value that we can build on top of these systems as that gets bigger

it increases the bandwidth and the trustless applications money applications that we can build on top of the system it's really a rate limiter and right now we're in the you know 56k modem days of bitcoin and ethereum there's only a few 100 million excuse me few hundred billion worth in economic bandwidth in these systems but that's that's a lot more than there used to be you know five years ago it was only it was only 10 billion so we're increasing in

economic bandwidth and i expect as economic bandwidth increases we'll see more and more sophisticated money applications on top being used by more and more people now we keep using this term not just market cap which of course is is the total value of an asset you take number of bitcoin outstanding and you multiply that by the the price of bitcoin that's market cap uh same with ether of course but we keep using this term liquid market cap and i

i wanted to find that a little bit for folks so liquidity is basically um how much an asset will move if you sell it at a given uh price point so the folks at missouri put together a really interesting um screener on this so david i just sent you a link and this links you to a screen on masari.io it's on chain fx dashboard and it's like an economic bandwidth screen and what this

does is it sorts various assets by not only their liquid market cap but the percent the assets themselves the crypto assets themselves would move if you went and you sold one million worth of that asset you can look at this and we've got a column called percent to clear one million right uh and and folks can can see this screen we'll include it in the show notes but when you sort it in this way you can see bitcoin is clearly number one if you sold one million

dollars worth of bitcoin you would only move the price of bitcoin by point one three percent just point one three percent uh that's a fairly liquid asset um if you go down the second slot is actually tether so it's not ethereum uh tether is a stable coin of course and if you sold one million worth of tether it it doesn't move the price very much either it only the price would only slip by 0.15 percent um ethereum is in third place here and it

has um you know it would slip farther than bitcoin so it would slip probably four times farther than bitcoin if you sold a million the screen here is showing if you sold one million worth of eth you're gonna slip by point four four percent now you keep going down and you could see the slippage increases so something like xrp well if you sold a million worth you're going to slip an entire percent in terms of of the price and your sell rate and it gets a lot worse from there so if you sold something like chain link

a million worth of chain link the price would slip almost four percent so that's what we mean by liquidity it's it's really the slippage of these various assets uh at a given sale price does that make sense 100 and i really think that illustrates what happened in 2017-2018 as as the mania concluded people wanted to move into the things that are acting as money the things that are acting on as economic bandwidth whether they understood economic bandwidth or not

it's not really something that you need to understand to really be incentivized to move there when it comes time to take risk off the table and so people don't want to when they when they want to hunker down and and hold for the long term you don't want to hold an asset that is going to shift six percent when you sell you know your your stack of it and so no one's going to hold cardano when you know a million dollars drops the price by six percent people are going to move up the stack into something that has guaranteed liquidity

available to you when you need it and that's what a risk off position is and so that's what people are doing right now with coronavirus they're moving to risk off positions which means that they are going to be you know moving up the stack of economic bandwidth exactly so you want to move to the most liquid asset as possible because liquidity gives you an option it gives you the option to sell exactly what you're saying is people moving to risk off assets those assets are things like cash dollars that's a risk-off asset or

treasuries that's a risk-off asset and the liquidity for dollars and uh treasuries um i mean they're basically the most liquid assets in the world the most liquid assets available and that makes them the most money-like and so you can see this idea of liquidity is is very related to this idea of money uh in fact i think liquidity is if you were to ask me what's the the number one attribute you look for in money right the economists say medium exchange you don't have account store value we've

talked about that but i would also say it's liquidity liquidity makes a money a money and the moneyness of a money increases as you increase liquidity as you increase the assets economic bandwidth and so here's the thing that i think many of the the new ethereum killers and new crypto networks are are missing it's a a similar flaw that i think was in in like the popular investing ideas in in

2017 um it's this idea that that uh crypto networks are all chasing um scalability but but they're chasing scalability in terms of transactions per second so a popular knock against bitcoin and a popular knock against ethereum is bitcoin can only you know um send bitcoin transactions at three to four transactions per second uh ethereum can only send it at 15 transactions per second but i've got this incredible new

crypto eth killer that can do it at 100 transactions per second or a thousand transactions per second so you should buy my asset because this is going to kill bitcoin and kill ethereum and finally be the thing crypto needs to to scale up and beat visa but the fatal flaw of this is not only do many of these networks sacrifice decentralization and trustlessness when they scale up in that way you know they they basically aren't increasing

trustless transactions per second they're just increasing transactions per second in general but they're also not paying attention to the true limit capacity of scale and that limit capacity is economic bandwidth the value of the underlying asset the moneyness of the underlying asset that's what you need to scale in order for this crypto system to be a money platform for the world it's not enough to have high transactions per second you have to have high trustless

economic bandwidth and you only get that when the underlying asset in your network becomes the money increases in liquidity and increases in moneyness and this is just a fatal mistake that people have brought from the evolution of the internet and tried to apply it to the crypto revolution which is just the wrong thing to apply it to people understood that the internet needed to scale in bandwidth in data bandwidth and then they took that model and then they tried to apply it to crypto being like

oh my crypto network literally has more bandwidth and the mistake they made is they chose the wrong bandwidth to optimize for the bandwidth you need in the crypto world is economic bandwidth it's moneyness you need to maximize for being money not for being a scalable platform the scalable platform is the internet we already have that what's new and what's revolutionary is the money on the internet not the not the data throughput of the money protocol but the economic throughput of

the money protocol absolutely and and and here's the thing i i think a lot of folks get get tripped up on um and i i like to say this all the time the asset is not the network the asset is not the network so there's bitcoin as an asset right we know that that is you can send and receive bitcoin it's an asset but then there's also bitcoin the network now bitcoin the network is the blocks used to transmit bitcoin the

asset around they're named the same thing but they're completely different things so bitcoin the asset that can have economic bandwidth that's the value of bitcoin and it should have trustless economic bandwidth because trustlessness is the entire point of this whole crypto thing this whole crypto experiment if you want trusted economic bandwidth go back to the traditional financial system we already have it so um bitcoin it's as an asset can have trusted uh trustless economic bandwidth now bitcoin the network um that needs

trustless transactions per second right so you're measuring these things differently uh and i think because they're named the same thing bitcoin the asset and bitcoin the network at least in bitcoin people get tripped up on that and they say things like well bitcoin is a digital gold and ethereum is a smart contract platform that statement is completely wrong because you're comparing two things that aren't alike it's it's like comparing you know gold and fed wire bank settlement network right these are