📺 SotN #44: Modeling Ultra Sound Money | Justin Drake

all right bankless nation welcome to another state of the nation episode david what are we talking about today what's the theme we are modeling out ultra sound money we put out the episode with justin drake uh a while ago and so now we are getting justin drake back onto the show to get into the granular details of what makes ultrasound money ultrasound money there are numbers to discuss and so we are going to discuss all of them there are numbers to discuss there are models to discuss there are four

different pieces to this david you tweeted this out pre-episode uh and we're gonna get into all of them 25 staking annualized ap terms each supply maybe it peaks at 121 million and never gets higher than 121 than 120 million kissing kisses 120 million and comes back down long-term eat supply target possibly 100 million so that's the coming down part and the potential for cell pressure to

be reduced by 90 justin drake has brought the models behind some of those astounding facts that i think very few people have actually looked into i mean the first exposure to uh eip 1559 and uh to the merge the staking merge in a comprehensive way i feel like was was almost the podcast that we did with justin ultrasound money now that was very metaphor driven that was very high level to help people understand the narrative now this is the supporting data this is the supporting numbers the supporting um

financial projections behind all of this so i'm super excited to dig into this and david all-time high eth coincidence i don't know i think not sir i think i knew it this episode was coming i i choose to believe that as well all right david uh what's new in the community before we get to justin gotta talk about badges if you are a bankless premium member pick up your badge we've been saying it for two weeks definitely do it pick up your badge this is the week we're doing more raffles this week so check your email for that email from lucas

banklesshq.com if you have issues with that email support banklesshq.com also david we've got a killer episode coming up on monday um you want to just give a taste of what we're going to cover in that episode yeah this this episode makes some very very bold claims we like to make bold claims on the bankless podcast but this one uh is br brand new uh josh rosenthal uh who is probably a name that most people don't aren't familiar with but he is a historian of europe european art

money wealth history and we make the claim that we are on the cusp of a digital renaissance that is equal to or larger than what the renaissance that came in the 1400s uh and the connections here are in the 1400s we invented uh the uh gutenberg uh pres the the the wedding address pretty impressed thank you uh and also double entry bookkeeping and in the modern day the printing press is now the modern day internet and the modern day double entry bookkeeping is blockchain

uh and that actually is unlocking a brand new renaissance a crypto renaissance and uh he did a fantastic job just going through the history and drawing the parallels we talked about renaissance meme culture meme culture actually started perhaps in the 1400s we talked about the parallels between martin luther and satoshi and we talked about what so cool so cool and so there's a lot of awesome through lines here and it's actually one of already been one of my favorite episodes come out of the baby when we were recording that david i just like goosebumps almost almost the entire

time when josh was speaking just talking about these these various parallels between the kind of the old renaissance in this renaissance so be sure to check that out bankless nation as well david uh dharma is still cooking some things up they wanted us to let you know that they have now rolled the dharma app out they have a direct connection to your bank account in all 50 states in the us and david when people ask like me about defy especially my friends who don't know much about them i'm increasingly pointing them to start with

the dharma app because that is a great onboarding experience direct from their bank account to defy in one tap super cool anything else you want to say about dharma yeah we know retail season is coming and dharma is probably the best place to send retail who are still looking for like that kind of tradfy experience of like you know just good ux but it's defy in the back right and so one tap one tap separates you between your dollars and your bank account and ultrasound money on ethereum

dharma.io guys check that out download the app all right david i'm gonna ask you the question i ask at the beginning of every state of the nation what is the state of the nation today sir the state of the nation it was going to be bullish ryan but i was like we've been but we've used that before and i was chatting with justin uh before the show and he asked him for inspiration or ideas about what the state of the nation is and he said ultra bullish and so the state of the nation today is ultra bullish as you can see if you go and look at the eth price chart and as

well what will be an ultra bullish episode coming to your ears in just a moment it was crazy dude i have two emails waiting for me one is a 80 page report on a why why ether is sound money and the other is an institutional report these just came out today an institutional report i should say around ether as an asset um ultra bullish that the narrative is spreading both in the institutional side and the story of of ether the asset is is

spreading among analysts too so i've got tons of reading to do but like it's all ultra bullish news and it all feeds back to what justin presented uh to us the first time around with ultrasound money right so much of those reports tie into the ultrasound money thesis and so you know tip of the hat to justin for really pioneering this message and i'm absolutely stoked to bring him onto the podcast in here in a second this is what bankless is doing helping to develop the narrative layer the meme layer also helping to spread the education of what

these bankless systems are doing in the real world we're going to get to justin in just a minute but before we do we want to thank the sponsors that made this episode possible vinclas is proud to be supported by unit swap uniswap is a new paradigm in asset exchange infrastructure instead of a cumbersome order book system where trades are matched with other humans uniswap is an autonomous piece of software on ethereum which is what ryan and i call a money robot no human counterparties or centralized intermediaries just autonomous code on ethereum input the

token you want to sell and receive the token you want to buy something brand new in the uni-swap ecosystem is the uniswap grants program is now accepting applications for grants we have been saying this for a while and we'll say it again dows have money and they are in need of labor if you think that you have something to contribute to the uniswap dow apply for a grant to uniswap just look at the size of the uniswap treasury it's almost three billion dollars this mountain of capital is looking for labor do you have something of value to contribute to the

uniswap dal no matter how big or small your idea is you can apply for a uni grant at unigrants.org and help steer uniswap in the direction that you think it should go that's exactly what we did to get uniswap to be a sponsor for bankless and you can do the same for your project thank you uniswap for sponsoring bankless balancer is defy's most powerful automated market maker typical amms just have two tokens inside of one liquidity pool which can lead to fractured liquidity across the many pairs in d-pi with balancer you can access the full power of multiple tokens

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balancer pools at pools.balancer.exchange bankless nation welcome back we have justin drake back on the podcast again this is the third podcast video show recording that we are doing with justin he of course is an ethereum researcher he uh was on two podcasts with us previously one is on ultrasound money the other was on cryptography both incredibly important episodes for you to listen to and understand part of the bankless canon now justin how are you

doing today i'm doing great we are excited about this episode and we're going to be sharing um some models that you put together in a few minutes around some of the concepts that we really dove into uh quite deeply in the ultrasound money podcast we're gonna put some like numbers behind some of the concepts we were talking about but before we do i feel like we need to uh maybe ground the audience again in understanding ether as an asset and of course

we talked about the properties that are coming online for ether soon in particular eip 1559 which adds a fee burn component uh and also the advent of of full proof of stake in the shutting off of proof of work we're calling that the merge those are all important concepts in the the case for ultrasound money but there's also another analogy that i think bankless listeners are are familiar with that we want to want to get into here and that is the analogy

of eth as a triple point asset that david and i have used so often before and the concept of eth as a as a triple point asset is similar to sort of the the states of matter that people might have learned about in you know in science i don't know uh seventh grade science eighth grade science where wherever you learned about that perhaps lower as well so and the concept is that matter can be one of three states it can be a solid it can be a liquid and it can be a gas and ether as

an asset can also be one of three states it can be a solid so it can be staked as a capital asset um it can also be liquid so it can be used as a money and uh it can also be used as a gas so it can be used as a combustible uh consumption good to purchase uh ether block space so that is the the triple point asset thesis and the the triple point asset model for money which which we have used and it's kind of cool because it maps very directly to the

asset super classes like an asset can either be a capital asset or a money or a commodity and ether can be all three of those you have now extended that metaphor a little bit with a new analogy adding sort of this this temperature dimension to ether as a triple point asset can we start there can we dig into that so tell us about the temperature analogy you want wanted to share with the bankless community yeah so i think the the temperature

metaphor is as you said a generalization of the triple point asset so not only can we look at the the individual state of let's say water that will represent uh money ether but we can look at more fine-grained temperatures so you know for example money you could have money as a long-term investment which is kept cold in the fridge so that's kind of cold money or you could have hot money which is for example

if you're a day trader or if you're in exchange processing lots of withdrawals and deposits in a hot wallet um and i think the the the the reason why this this temperature of money uh metaphor is useful in the context of ultrasound money is that really there's there's three big consequences of eip1559 and the merge and they each affect a different state of water so there's one key

innovation that improves the kind of liquid money as it were there's one which improves the characteristics of the solid money and one that improves the characteristics of of gas money and one of the interesting things i guess is that as you say ethereum is this this unique asset it's a triple point asset in the sense that in addition to being this this this uh money in this narrow band you know between zero degrees celsius and 100 degrees celsius it's capable of breaking

boundaries which were not previously broken so it can break down the the zero degree and kind of freeze itself but it can also break down the 100 degree kind of threshold and and vaporize so that you know that's the analogy of of um having gas and literally vaporizing it just like you would vaporize gasoline when you consume it it leaves the system uh into the ether um so yeah um looking forward to kind of explain

what are these these three key changes to the to the cash flows right so in the previous episode we had the energy metaphor right we had energy in the form of electric energy um going through the various components and the reason why i chose the electricity metaphor is because i wanted to focus on the components right there was these three components there was the battery that was the engine and there was a solar panel but here i really want to focus on on the asset and on the cash flows and as you said i think this this

episode is all about um modeling the cash flows and understanding how big they are and and how they circulate and what are the consequences maybe for total supply what are the consequences in terms of cell pressure et cetera et cetera so justin let's hash out this uh this temperature metaphor just a little bit more so we have um ether as a capital asset we have ether as a store of value and we have ether as a transformable consumable asset what how do these map on to the three phases of

uh matter right so the maybe the easiest one to understand is the the solid state right so when you have ether and you you lock it you're essentially freezing it because you're really reducing the the velocity of money you're putting it in in deep freeze and one one great example of this is staking in the context of the beacon chain right it um when you want to on stake there's a defrosting period if you will a following period right

a foreign period exactly thank you um and you know we're also seeing this in the context of defy where right with where you have the notion of total value locked like the locked at the l kind of suggests that there's some some freezing going on you know it it's it's a spectrum like different um d5 applications might have different temperatures so for example um you know uni swap might be you know somewhere maybe close to the freezing point or you know just past the freezing point in the sense that the

efer in in uni swap technically can be removed with a single transaction and actually if you want to sell erc20 for if you you can do that immediately but what we've what we've observed kind of on a on a holistic standpoint is that um the the collateral is is sticky right so we did have things like the vampire attack uh with with sushi swap where liquidity would go from one place to another but it still stayed within the realm of dexes or the realm of defy

if you look at you know total value locked on on d5 polls it just goes up up only um and we also talk about the metaphor of maker dow right so like ether is collateral inside of maker dao and in theory you know ether and maker dao is also just one transaction away from becoming liquid on the secondary markets but as a when we look at a systems level perspective maker dao has three over three billion dollars worth of dye preventing that ether from becoming thought right so that ether and maker dao is stuck behind a three billion

dollar die supply that is keeping that ether being used as a cold store of value it's frozen in its place right and so in the ether in maker doubt we would be frozen ether very cold ether right not liquid not available to the secondary market and definitely not being burned because it's not being used as transaction money it's just cold ether frozen right yeah that's exactly right i mean if you place your e4s collateral and you take a die loan for example to buy a car or to buy a house

right your income is going to allow you to gradually repay that loan but you know it might take a decade for you to repay your your make a loan um so if we're painting the holistic picture here right so we're almost looking at this whole spectrum of like temperature mapping to ether the asset and on the far left side of the spectrum what we're talking about is um ether for if we're thinking of ether as like say water it's below zero degrees celsius so

it is frozen but there are degrees of how frozen it can be and i'm guessing that you might say uh justin that like that the far side the coldest ether can actually get is when it's staked right that is like sort of it's not it's it's not slushy it's not in this in between area it's like deep freeze very cold locked inside of the staking contract and maybe um ether locked in d5 might be a little right to that so it might be like yeah negative 10 degrees

celsius or so and getting close to the to the to the to the thawing point something like that so actually you can go even more extreme than than staking so you could for example artificially put some sort of of time lock on your if you could say i'm i'm going to lock my e for 10 years i'm going to create a smart contract that does that they're kind of artificial and no one really does it but inferior you could do it but there's something that does happen naturally and that's the process of losing coins or accidentally sending them um you know to the zero address so

that's kind of zero degrees kelvin you know you it's like maximum um you know um negative temperature and um it's it's interesting because it's you you've taken money and you've made it so cold that you've denatured money it's no longer money right it's technically it's a balance somewhere but it's no longer money it's denatured because it you can't move it anymore it's frozen um forever and you could say the same thing

for example for the the parity um multisig wallet so there's this very famous bug where there's basically over half a million if which is provably at zero degrees kelvin and yeah it's it's basically no longer money and the interesting thing is that when you go at the opposite end of the spectrum you have a very very similar behavior because on the on the hot side of things on the boiling temperatures you're basically destroying

if you're vaporizing it um and removing it from the supply so you kind of have this the spectrum and it turns out that on on each extremes you have very similar behaviors you're basically improving the monetary qualities of ether right because on the on the cold side of things you're kind of taking liquidity like literally liquid liquidity and you're you're kind of freezing it and slowing it down and on the other hand you're kind of vaporizing it

and and having it leave the the supply and this is kind of a geeky kind of math analogy but you know i study mathematics so i'll share it so when you do projective geometry you know you have you have a line that goes negative infinity you know all the way to on on that side and that side and you introduce this to one point called the point at infinity where basically these two lines meet at the point of infinity so you can kind of make think of it as a circle and kind of the from a monetary um standpoint the the two

extremes are are really um the same place and the interesting thing about um ethereum is that you can think of it as a machine to take this liquid money and push it to the extremes on the one hand you're incentivizing this liquid money to become frozen and on the other hand you have this other mechanism where you're incentivizing this liquid money to vaporize and so these are two very strong kind of scarcity engines that

will suck out all the liquidity uh in its liquid state and um and by vaporize uh what you're talking about is essentially literally being burnt through eip-1559 that's that's it becoming vaporized right yeah so this is what i mean by vaporized [Laughter] brought his own sound effects that was the sound of ether being vaporized in eip1559

okay so go ahead justin yeah post eip1559 every time you make a transaction you should imagine this sound uh in your head and that's one of three sound effects that we have on on standby and i want to make sure the listeners are are up to speed with why we're talking about this temperature metaphor because we're about to go into excel sheets and and perhaps talk less about metaphors and talk more about numbers but the metaphor is really really useful in to hold in

our brains as we model this thing out both as a model with numbers but also a model for understanding these these things and i think what we just finished on right there is a fantastic through line we have me i'm picturing like a a cylinder like a test tube cylinder and we have the hot water at the top and we have the frozen water at the bottom and then the liquid water in the middle right and that composes like the ethereum system as a whole right boiling water up up at the top which is the ether being used as transaction fees uh and then some of that being vaporized and leaving the

system and then also we have ether being deep in deep uh deep freeze state you know in cryo at the very very bottom which is east lost and defy and eats being staked and the met of the the through line here is that currently in ethereum we have a very very liquid center and it and there's not that much boiling off the top and there's not that much frozen at the bottom but that's what is all about to change when we introduce eip1559 which really starts to turn on the boiler at the top and a lot of

ethers being vaporized up at the top and we are also introducing staking which is freezing a lot of ether at the bottom of the cylinder by incentivizing ether to be locked locked in the staking contract and then there's also something to talk about with being locked in defy that's like the slushy ether the half half melted half knot but what's really changing is that this liquid center where there is a what uh justin you've called a fire hose of water being being added into the system which is ether issuance from proof of

work is actually going to be constricted into perhaps just a much more modest garden hose and that liquid center is actually going to become much smaller in relationship to what is being boiled off the top and what is being frozen down at the bottom and so this temperature frame of reference is we're going to come back to this throughout the rest of this episode as we talk about some of these numbers more explicit numbers as we model out ultrasound money um justin you want to add anything to that yeah so i kind of want to highlight the

three cash flows that are i think important for this this discussion the first cash flow you mentioned it is issuance so issuance is you have just new liquidity that comes out of the sky and right now it's a huge amount of issuance it's like as you said it's this fire hose of of liquidity and you know the market has to bear with it is like this huge amount of cell pressure it's costly to run proof of work you know one of the big innovations of proof of stake is what i called economic

efficiency in the in the previous protocol where we're reducing by let's say 10x the cost of of consensus so that's cash flow number one issuance cash flow number two is related to this this warm side this hot side of the spectrum the burning it's its supply right so we have a new mechanism to reduce supply and this is kind of where you know ultrasound money meme came from right because we have deflation um

but you know really the the ultrasound money is a very holistic meme you know with strong fundamentals with many pillars you know this deflation aspect is you know just one of them uh one which is easy to communicate in this kind of catchphrase you know if if bitcoin sound money then if is ultrasound money um so that's cash flow number two supply cash flow number one was issuance now um cash flow number three is basically the if as collateral and like how much

if will be drawn out from this liquid center and kind of frozen and basically what we have here is um when when we have the merge the the transaction fees will be in two parts one of it one part will be burnt we've already talked about this but another part which is the tip is not burnt and that goes directly to the validators and so that will go that will increase the the staking apr and and that's basically

going to increase the power of the freezer right we're gonna go from minus five degrees to minus ten degrees or i guess you know the the apr could be like the the the degrees that you're targeting so we're gonna set it let's say at minus 25 degrees right so that's a 25 apr and it's gonna be so cold that is going to like freeze like a lot of the neighboring uh liquidity um so yeah these are the the three cash

flows that we could highlight one by one before we get uh to all of that so can we talk about the the part that we haven't talked about in depth uh very much which is sort of the this liquid piece right in the middle so we talked about the free side that is steak teeth frozen eath ethan collateral we talked about the burn side that is it being vaporized by eip 1559 and of course uh we use that analogy of new liquidity is coming into the system

via issuance right now and right now there's a lot of issuance like 4.2 percent or something issuance annualized per year is coming into this this squishy middle part there's not a lot staked and there's nothing being burnt so we don't have the engine and we don't have the the deep freezer let's talk about this this middle portion because um that's mostly what we mean when when uh we talk about money right it's it's kind of liquid it can be used as a store of

value it could be used as a medium of exchange it can be used as a unit of account it can actually be spent is there anything more we need to talk about in this in this liquid phase or do we just need to hear the sound effect justin you tell us yeah i think the sound effect is very important so let's go ahead this is the phase yes so we have a hundred million each roughly which is in this liquid phase um you know if we remove the

the three million so four million now in in the deposit contract and and uh the ether locked in in indeed five so we have this 100 million pool which is which is slashing and as you said you know ether is used as as money is used as money in the context of nfts is used as money in the context of of trading it's a unit of liquidity right on uni swap like 95 percent of the of the volume is this is is eve pairs

um it's you know and one of the interesting things is that um you know the this this traditional um power of being money is what bitcoin has explored right so you can think of of bitcoin as exploring this this range from from 0 to 100 and with ethereum we can really you know push the limits uh um as i mentioned but um yeah the within this this this liquid phase you know we have all all the various use cases for ethereum but we have this this

kind of uh ex internality this this this externality i guess which is that that the issuance is this this this necessary evil that we have to deal with and it's flooding us and we're drowning in liquidity at the moment and this this issuance is is representing a huge amount of cell pressure you know we're talking tens of millions of dollars every day and so one of the things that uh one of one of the things for which we have a spreadsheet is is looking at the

cell pressure and and how much it will be reduced and we're talking billions of dollars of relief from this the cell pressure okay guys so that's the metaphor going into the models and just quick recap and we'll do it with sounds so right now justin you said there's about a hundred million or so of the total supply of eth and i don't know the total supply of top of my head 115 million 150 yes okay let's say 115 million total supply of eth right now 100 million is liquid what does that