36 - The DeFi Blockspace Cycle | Nic Carter

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 how you doing feeling a little bit more educated about block space and fee markets after this podcast with nick carter nicardo recently put out this article called public blockchain fee cyclicality and negative feedback loops

and we kind of go into what the significance of what nick discovered when he was researching for this piece uh i thought it was a very interesting piece and to the point where i actually read it on the bankless youtube and so if you are the type of listener that likes to hear things as you would be since you are hearing this podcast i've read this article on the bankless youtube and there's a lot of implications in there about what this means for d5 because d5 specifically has a lot of implications for what nick is talking about in this

feedback loop so in addition to all that we get him on the bankless podcast to go through some of these concepts with him together yeah i feel like we've never actually done a deep dive episode david on ethereum block space and particularly gas fees like gas prices like why do they rise and why do they fall i think a lot of folks who are going bank lifts experienced that this summer and have over the past few months like you wake up and sometimes gas prices you know 20 way or 80 way and other times it's 500

and you're wondering why and you actually feel the downstream implications of that like you know what transactions are you willing to do at a fee of 20 might be completely different than the transactions you're you're unwilling to do i suppose at a guy fee of 500 and nick provides some analysis i would say of the the the cycles of this gas fee supply demand primarily and the implications of that demand so if you've

never really understood um gas fee markets why price goes up price goes down uh and how that's even related to the price of eth this is the perfect episode to level up on and i think we just had a very strong example of what nick is talking about in this article in d5 where you know yield farming started with comp things started to get a little bit crazy and then urine came around and it got even crazier and then yams came around and got super crazy and then it kind of spiraled out

of control to one day we woke up and gas prices on ethereum were three to four hundred gray and the ether price was pushing up into five hundred dollars and at that same time uh p the with the gas fees so high people stopped transacting and the thing kind of all fell apart to where we are now with ether you know trying to hold its head above water above 300. and nick nick contends that all these things that the gas markets the gas fees the blockchain congestion and the ether price along with defy and

how some of these protocols like unit swap and and iron depend on transactions in order to generate apy and so that's that's kind of why we brought him on to the episode today to have some holistic conversation between the link between defy economic activity block space demand and block space fees so if you're ever wondering why gas price goes up if it will ever fall again what these cycles mean for the innovation of ethereum will we have a only a whale

layer level one or will normal folks be able to transact in a trustless way this is a fantastic episode for all of that and we can't wait to bring it to you but before we do we want to tell you about our fantastic bankless sponsors one of the tools i've started to use recently is zapper for those of you that were part of the 2017 bull market it was characterized by just opening up block folio and refreshing it over and over and over again and also anytime you ever made a trade you would have to go into blockfolio and manually input that trade

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nick carter who is a frequent bankless guest now he is a crypto writer of course a venture capitalist at castle islands ventures his current twitter bio states that he is that proof of reserves guy we're going to talk a little bit about proof of reserves hopefully near the end but nick how are you doing sir welcome to bankless i'm doing great thanks for having me back on thank you for making me your your most frequent bitcoiner guest i don't know if that's actually true but i'm just gonna assume that well last

time we started with that power question of like are you an etherean and i think you kind of said yes ish right so so you belong in both can't you made us define our terms first i i pre-barricaded heavily on that question as long as you haven't gone back on it all right so um on on that podcast speaking of that podcast in june that we did uh you talked a little bit about this and this was a title of a recent article but you predicted that ethereums or ethereum writ large would have to choose

whether ethereum is going to be a world computer or a financial network were you right about that do you think not to get all technical but technically i didn't write that headline so you know that's like the classic thing that happens uh when you have an editor um what would the headline have been had nick carter wrote it um you know i can dig it up i had like a great great headline somewhere i i it might take me a second to find it i

don't know if we want to do it uh but yeah i actually thought the the like my draft headline was great um coindesk had it that was a good click bait headline i mean yeah we clicked but that was like the source of some like discontent among you know a few ethereums that read it it's like you know like with the implication that you like have to choose obviously like you know ethereum doesn't have to choose anything it kind of just is um my draft headline which i liked was resurgent fees are a stark reminder of

the monetary primacy of blockchains which i can understand that they didn't think that would like have like popular appeal much more tempered though well exactly and it's like it's like you know it's kind of neutral and that's like my objective like you know these are like the first couple articles i've probably ever written about ethereum and my objective is to be fair you know like that's i want to be seen as a neutral operator i don't really have a strong agenda here i just want to describe things well i for one

like both of us uh have really enjoyed that you're writing more about ethereum it's like it's really great stuff like thanks for adding to the uh to the to the writing pool here but like what if we take that straw man that uh that was the title world computer or financial network do you think ethereum really has to choose one or the other are there elements of truth in that straw man headline i would say so yeah i never really knew what world computer meant to be honest so to me it's like a kind of incoherent term but like 100 i think blockchains

optimize by their very nature to be um you know financial networks and really to be like settlement style financial networks as opposed to payment networks so like a narrow breed of financial networks but yeah i i am very strongly of the opinion that the financial use cases just by sheer force of gravity tend to win out with time so i i seem to remember this from reading the article it was basically like kind of written um partially to aetherians saying hey guys there are

trade-offs here and you can't have it both ways is is that sort of the premise of of the article that you can't have scarce block space and also have like non-financial low economic density uh you know transactions at the same time or what would you say the premise of that that article was yeah so that's exactly right um and i mean it might be possible i mean it is possible to kind of like mercalize data and and you know can use a time stamp

method to compress lots of data and then commit to it and publish a small digest of that data so you can still kind of commit to arbitrary amounts of data but if you want the really nice qualities you know the nice settlement and atomicity and kind of base layer qualities that you get with base layer transactions um you know i think that's going to be challenging so i'm i generally tend to believe that to the extent that fee pressure exists and to the extent that block space is capped which i think is prudent of course to cap block space

then you're going to just get this relentless optimization for the largest transactions which are happiest to be fee bearing and are willing to outbid other transaction types me and ryan before we started recording we were also talking about how the the world computer metaphor or analogy it's just somewhat like nonsensical maybe maybe it fit the times in 2015 when we didn't really know what ethereum was was going to be but comparing a world computer versus a financial network doesn't really seem like a viable comparison in the first

place uh and and i i i think you would agree with this statement nick that like any and every blockchain that is successful must become a monetary or financial based blockchain there's no such thing as a blockchain for like social media or something like that because because of the inherent scarcity of block space because you can't have infinite block space because then you just turn into a database because there's block because there's block space scarcity it therefore con forces the convergence of

all economic activity on that blockchain to be financial in nature would you agree with that take or would you amend it somehow and i mean entirely i mean you're bidding against every other global user that wants access to the to the ledger and uh whomever is willing to pay the highest price maybe they're super irrational and they really want to insert some arbitrary data but most likely it's if they're willing to pay a high fee for inclusion that's because they're making a large transaction

so the fee is proportionally very small part of the transaction like i sent a wire today wire cost me 35 to send which is preposterous of course i hate legacy finance uh let's go bank list guys um but uh you know i was happy to pay 30 i was happy to pay 35 bucks for the wire because it was like a fair amount of money you know and i needed you know instant settlement and all those guarantees so in that same um vein you know someone who's making a

100 million dollar tether transaction is willing to pay you know probably 500 bucks plus for inclusion in the next block in final settlement and so on they're gonna outbid someone deploying you know an aragon dao on chain right that's just financial gravity when we were in 2015 2016 talking about like the world computer or you know ethers gas before we understood these things as we understood them today uh what you're

saying is that ethereum was destined to be a financial network from from day one simply by nature of what it is it was something that you probably could have predicted um although in fairness you know back in 2015 we didn't even really understand the nature of bitcoin that well you know a lot of bitcoiners thought we would get these trustless side chains and then we kind of figured out later on that you had to make all these additional assumptions about proof-of-work and you know sidechain operators not misbehaving and you know we didn't

really understand how lightning would would play out and so on so i guess to a certain degree this whole thing is a process of experimentation but you know i think a lot of bitcoiner's early objection to ethereum was hey like some of these promises are overcooked um especially in light of uh of you know of the effects of the emergent effects of of scarce block space would you say the evolution from bitcoin as like a a payments rails or a payment vehicle to bitcoin as a store of value

reflects the same dynamic as well oh yeah i mean that's a big issue with bitcoin historically is that a lot of bitcoiners kind of had misperceptions about about what bitcoin was suited for and there were all these startups that got built with the assumption that p2p base layer transactions could scale up to a global audience and that's why we had the block size war so we're really all talking about the same thing here this is a kind of recurring theme uh you know just conflicting visions of what these networks can be and it's

afflicted bitcoin and now ethereum's having a reckoning with it although it doesn't seem to be you know dividing the community as starkly like we saw with bitcoin but it's all the same concept it's hey what are the constraints here where realistically should we draw the line what are we trying to optimize for and what's our kind of time preference you know do we want to unlock you know a marginal extra of 50 of block space or do we just kind of bite the bullet and keep black space capped and then try and build a layered layered approach which

seems to me ethereum's going for the ladder now instead of you know incrementally adding block space which i think is probably a good call so there was this reckoning for the bitcoin community in uh 2017 as it realized bitcoin would not be a payment network and like there were forks that that thought maybe maybe it would be yet what's interesting about ethereum is that i i feel like there are still uh large numbers of the ethereum community that will still tell you no ethereum is also meant for non-financial

transactions like what what would someone like vitalik say about about your post yeah but i was interesting i'd vitalik answered my my post uh a series of tweets um i don't think i i interact with vitalik much so i was kind of taken aback by that but yeah i mean he he told me that uh my interpretation of his words was kind of wrong and that uh he really did earnestly want to you know get the internet of money or whatever down back to cents for

transactions as opposed to dollars and fees for transactions and he still wanted to create super abundant quantities of block space and uh that it was just a matter of waiting for eth2 and then maybe with rollups being kind of intermediate solution uh but vitalik seems to be uh defending uh his his kind of original position on this which is that um that you know there's like a teleology to blockchains like transactions should be cheap in absolute terms uh and so

it yeah in contradiction to what i wrote in the post i don't think he's actually evolved his stance that much seems like he still really does want to produce uh you know really cheap transactions and lots and lots of block space uh through these kind of different like r d initiatives why do you think he wants that well it's a good question because i mean maybe it's like the unconstrained versus constrained vision uh kind of thing that uh yeah arjun wrote about in a blog post a while back you know he

uh has this uh progressive streak to him not in a politic not a political sense but you know he has a vision about what blockchain should be for and their the amount of inclusion that they can offer to people um and i guess i'm probably just i would say more pragmatic maybe or more realistic um not to not to you know express a pejorative or anything but i tend to to believe in uh in trying to optimize uh what we have and what we understand

what we kind of know as opposed to you know uh putting all of our our eggs in in one basket of you know sharding maybe um or relying on you know significant computer science breakthroughs to kind of take us to the promised land kind of thing so i i do think it's just like fundamentally a conflict of visions i would say that i think if you and vitalik got in a room and fleshed out some some terms and some parameters and some some bounds as to what you guys are

talking about that you might come to more of an agreement than than what we've uh you know what you know 280 characters on twitter can can express uh i i would say that vitalik you know couldn't couldn't disagree with and i think i remember him talking about his agreement with a thesis that you know heavy valuable transactions push out lighter less valuable ones but what vitalik sees is optionality with scaling and optionality with packeting of data into smaller and smaller packets where like even though you're still

transacting on the main chain you are doing that in kind of like you you're on a highway but you're on a bus with like seven seventy other people on in instead of you're on a car with just just you right and so you get bundled up or and and because of that you know you come off with some trade-offs where instead of being dropped off at your home you get dropped off at the bus stop and you have to walk the rest of the way or something something trade-offs like that where vitalik kind of counts it as an l1 transaction but there are still some

other other trade-offs that as a result of the lack of density of said transaction that this transaction has to then therefore go through yeah and i i think that is that's a view that i share i mean my view of scaling blockchains it involves removing data that's registered to the main chain as opposed to producing more data that the block that the main chain can offer um and you know so to that end it i think that we're pretty firmly in agreement there

um you know i like that's why i advocated for uh for batching which is a very simple thing uh but it has kind of the same effect um you know putting lots of payments together in a single transaction bitcoin saves you a lot of that overhead um and uh that's why i'm still optimistic about side chains i mean tbd if i look at roll ups roll ups kind of resemble side chains in some respects but yeah i think that's fundamentally how blockchains scale they don't really scale arbitrarily by um you know forcing more data through

the network that obviously has really significant externalities what's kind of interesting to me is i feel like at some level the ethereum 2 roadmap has sort of evolved a bit more with like that notion in mind nick and you might call it a bitcoin or notion that there is kind of one main chain for settlement even a um an eth research post that vitalik put out um two weeks ago a week and a half ago maybe it depends when listeners are are listening to this about the eth2

roadmap like almost an alternative kind of a an eth 1.5 one and done and basically if for folks that aren't familiar with the eath roadmap what that kind of means is less urgency on a full sharded eth2 with like evm capabilities and state execution and maybe you just get basically um proof of work a data a proof of stake a data availability layer and you kind of scale in these roll-ups instead and you

keep almost like something similar to the eth1 dot chain as a as a settlement chain um which which has been an interesting evolution and feels a lot more like the kind of the bitcoiner feel on this have you have you read that post or like are you familiar with kind of the the evolution of the eth2 roadmap i have yeah and i can't say i'm as familiar with it as you guys are i kind of dip my toes into the eth2 roadmap every six months or so to see what's

going on um this time i finally wrote about ethereum so i figured that i had to actually learn about it a little bit better so people wouldn't you know just immediately dismiss what i wrote by saying that i was an uneducated bitcoiner which like totally pisses me off so much uh so i i did my homework you know um and uh i honestly learning about rollups was very challenging um it was it was uh there's a lot in there there's kind of a lot to it um but uh it

is very interesting to see this and i often say this i think kind of ethereum ideology is sort of bitcoin ideology with a 24-month delay um not to be right or kind of uncharitable but you do notice these um you notice certain ideas which are popular in the bitcoin community which then are manifested with ethereum so i would say you know acknowledging that governance is extremely challenging maybe on-chain governance isn't the best idea that's something

uh which ethereans in the last couple years have adopted um you know believing in in the quality of fees as a really important stabilizer and a way to retain scarcity in kind of the units of the network uh you know believing this layered model um uh you know avoiding um protocol funded uh slush funds to pay you know finance developers stuff like

that um all these things are features which i've sort of we you know bitcoiners were sort of preaching for a while and then you know later on you see them manifest in ethereum which is either encouraging or perturbing i don't know what the interpretation is but i i see ethereum culture as like slightly downstream of bitcoin culture not to to be like unfair about it it's just like an observation i feel like there's maybe two points of pushback on that which is i i largely agree with what you're

you're saying with many of the points that that that you raised on sort of the convergence there but one area of of non-convergence has been ethereum has always been steadfast on having some programmability and smart contracts on the base layer which um you know does not seem to be a a a bitcoiner kind of uh notion like that's that's always been rejected on on from bitcoiners and another thing i think uh aetherians would say is they they they might say like it feels

like bitcoin has kind of given up on the vision of a peer-to-peer money at all they're kind of scaling with with crypto banks that would be almost like the the bankless editorial criticism of bitcoin even though at bankless we love bitcoin as well um but it's basically like ethereum has not given up on that scalability vision hence pursuing technology like like rollups uh and you know plasma and all of the various ways it has evolved whereas whereas bitcoin just kind of has feels like anyway only one uh bullet in

the chamber which is lightning um and that hasn't quite taken off yet any any reaction to that yeah i think that's fair i mean ethereum has always been less encumbered when it comes to vision and uh bitcoiners are very adamant about uh you know not including tokens on the network you know that's definitely bitcoin i say bitcoins interested in cultivating its own utxo set and very little else um you know so it's kind of discouraged um the insertion of

third-party tokens on the network and then of course uh discouraged um excessive uh complexity or expressivity at the base layer for kind of safety reasons so yeah bitcoin optimizes for one thing and ethereum is uh is much more aggressive in pursuing different value propositions i think that's very fair and that's the chief distinction between the two um on the lightning front i think this isn't acknowledged that much among bitcoiners lightning was like a very convenient kind of um sorry this traffic outside it

was a very convenient sort of rhetorical stick to bash big blockers with as you know the token layered scaling system i was never convinced that lightning would be a panacea or salvation for bitcoin or that even it would be the predominant popular scaling method employed in the future for bitcoin and uh there's going to be some disillusionment i would predict you know that if lightning continues to not really

take off uh in the coming years people will say well you know as a red herring um you know you guys falsely advertise lightning is the panacea here and uh to a certain degree i think it was it was wrong to over index on lightning rhetorically as a way to ward off the big blockers the correct approach should have just been to say look we don't know exactly what you know layered scaling solution is but we do know that constraints are the mother of all creativity and eventually we'll

develop some some you know good layered light systems and lightning will be one of them but it's probably not suited for all second layer uh you know models um unfortunately i think there's gonna be some you know like a slight realization that you know clearly lightning is not gonna take bitcoin of the promised land again i mean i could be wrong on that but it's always the issue of managing expectations when it comes to blockchains you never want to oversaw a

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