ETH Is NOT Ultrasound Money with Jon Charbonneau

ETH is not ultrasound money. I can't believe I said that. Almost choked on the words. David!

Why is that the subject of today's episode? What in the world are we talking about? Isn't this sacrilege?

Yeah, so we have a new framework on the scene for understanding ETH the asset. And this is coming from John Chobonell Charbonneau, uh, who uh is proposing this alternative uh perspective on understanding ether the asset. And these that he is starting to push back against some of the frameworks that you and I have proposed, Ryan. Uh things like blockchain profitability, inflation versus deflation, eth as ultrasound money. So there's a new framework on the scene uh that John is bringing to the table. And so John perhaps has a thing to teach us about Ether the asset, our beloved asset, Ryan. And so we're going to investigate this new framework, this new model for understanding Ether, uh, as put forth by John. And that is the topic of today's episode.

I'm not sure I'm ready, David.

Yeah.

Um I'll have to really open my mind on this one. Um but uh yeah, really looking forward to someone who's been down the rabbit hole and gone pretty deep pretty quickly. I remember the last time we had John on, he taught us a thing or two about Ethereum's roadmap, talked about the different um execution, uh the different layers of Ethereum, data layer, execution layer, consensus layer, and kind of the roadmap for each. So um he's definitely gone deep down the rabb rabbit hole with Ethereum, and he's someone whose opinion I've come to respect about this. So I'm excited to hear what he has to say. So stay tuned for that, Bankless Nation. Why ETH is not ultra sound money? Oh, I said it again. Uh it pains me, but we're gonna get right into that topic.

Right after we tell you about some of the fantastic sponsors that made this episode possible, including Kraken, which is our number one recommended exchange for 2023. Go open an account. These guys are the best.

Bankless Nation, I want to introduce you to John Charbonneau, formerly research at Delphi Digital, but now a recent co-founder of DBA, doing business as a New York-based crypto investment firm. John here, I think, holds the record for the fastest person, perhaps down the crypto rabbit hole, going from the entrance of the frontier of crypto to the uh going from the entrance of the rabbit hole to the frontier of crypto faster than I've ever seen anyone go before. And now John is at the point of making new definitions and new contributions to the frontier of crypto knowledge. And he thinks that he's got something to teach us about our beloved ETH. And so, John, you recently put out an article titled Ether is not ultrasound money part one.

Subtitled Why You're Wrong About Blockchain Profitability.

So first, John,

how dare you?

Second, what is the high-level argument that you're putting forth in this piece? Can you kind of give us a roadmap of your arguments?

Sure. Uh so as a good level set, I love the starting place that you guys have uh used for like the triple point asset. I reused that in here. I definitely agree with that.

Um so the simple idea being like something like ETH is this weird new mix of it's capital asset, like stocks and bonds,

consumable, transformable asset, like commodities,

where people analogize either Ethereum or similarly other blockchains and protocols to a company.

Um, so I think that is uh I we probably all agree. I think the company kind of analogy is

almost entirely accurate for a lot of stuff like DAOs, which have like a very simple model of, you know, we run this protocol, we take a certain amount of fees, you know, a DCF is like that kind of framework is a very accurate way of effectively full of assessments.

Discounted cash flow.

Yes, discounted cash flows of like that's a pretty sufficient way to measure those things.

Um

I would say for something like Ethereum, that is a helpful component of looking at it and understanding it, valuing it.

But I think we would all agree that's only part of

it. So my disagreement has been over that portion of when you do analogize either Ethereum or something else to a company.

The notion of profitability that most people have, I think, is incorrect.

Where most people would basically generally say

certainly it's the ultrasound money type argument of if you're looking at the profit of this, you know,

decentralized company, you have income either in the form of fees, or some people only consider burn.

Um, as effectively the income and then the cost, the expenses to this company or the issuance that it puts out, like to its validators as block rewards.

Um, so that's the generally understood. And then to be sustainable, you know, it's a business, you need to be profitable. So eventually you need to get to a point where, you know, you're not net inflationary. So you're offsetting whatever issuance you have such that, you know, you're a profitable, sustainable business.

Um, I just that's the portion of everything that I disagree with.

Um, so on the income side, I think everything is effectively revenue that comes from external to the protocol actors.

So any form of fees, whether they are burned or not,

um, and any other forms of MEV that accrue to validators, I consider all of that revenue. Like that is all being paid by outside actors who are

not um accruing to the who the all of that is accruing to token holders and um to stakers

in one form or another.

However, you want to distribute it between stakers and token holders. And then on the cost side, I disagree that the issuance is an explicit cost in like if you're analogizing it to a company.

It's rather different. And I think the simplest example to understand it

is let's imagine I have a chain and I own all of the tokens, I have all of them staked.

Over the course of the year, people are paying transaction fees.

So for simplicity, I'll say that in my chain, I charge transaction fees in USDC. So that's what you use as the gas token or anything else that you want to pay with. So over the course of the year, I take in a million dollars in USDC as revenue from transaction fees because I'm the only one who's staking all that goes to me.

Because I am the only person who staked and I have 100% of the token staked,

whether the issuance is 0% or 1% or 10% of my token, it doesn't actually make any difference to me. It's not tokens

versus if I played out that same year, made a million dollars and I issued a bunch of tokens.

The only difference is from the beginning of the year to the end of the year is that

there are more tokens in the second scenario that exist, but the market cap of the asset should effectively be the same. It's effectively acted as a stock split. You diluted the shares, but I still own the shares. So the price per token should go down, but the market cap should be unchanged.

So effectively, my profitability as that operator at the end of the year is very simple as I made a million dollars in USTC.

And then what did it cost me on the physical cost side to like literally run the boxes?

So, what did I have to pay in hardware costs, compute costs, et cetera, to like actually run that network? That's the profitability that I'm going to make.

And in this case, I am the network because I own all the tokens and I have all of them staked.

So that's an important distinction. And it is, I would note, very different also than the issuance in something like proof of work,

or a bit similarly for like a DeFi protocol that pays out, say, token incentives to LPs.

In the corporate context, what that looks much more like

is effectively stock based compensation, where you are paying out to employees.

And those additional shares that you're giving out are not going to existing shareholders. So you are forcibly diluting all of them and you are effectively just paying that out as a non cash expense, like via gap accounting. So that is very different. And that was a very big change when Ethereum moved to proof of stake that I think people actually like underappreciate,

which is an interesting part of this, is while I have

Probably upset a lot of ETH people with the title. The core of my argument is actually something like ETH is significantly more profitable than I think most people have been saying it is by that traditional framework.

Because I consider all of it revenue and I don't consider that issuance to be like an explicit cost for something that is analogized to a company in this scenario.

See ETH Bulls, uh, John tricked you right there. You you thought you were getting uh, you know, somebody who is um anti-ETH uh profit value accrual and r and really he's actually more bullish than than we are, and and than we should be. Um, John, you said a lot there, and I think that was like um you you encapsulated kind of the core of the post and the core of the argument. But I think probably some people um listening to this and watching this might be like, whoa, like they feel like they just we just waited all the way down into the deep end of the pool, 400 level content. I want to like go through this a bit more methodically and kind of break this down. So even for people that um

Maybe start at the beginning, okay? The triple point asset thesis. This is an idea that I think um we played some hand in helping to popularize. Actually we kind of