The 3 Most Important Crypto Developments in October 2022

We discuss Ethereum issuance, regulation, MEV, stable coins and more

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Timestamps:

02:10 Ethereum Issuance

06:53 Fidelity entering Ethereum, risk free rate and validators

14:56 Regulation and MEV

24:22 Stable coins

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Transcript

Polto: 0:06

Tether As USDC are present on multiple different blockchains. And these different blockchains have slightly different properties. for example, liquid has, something called confidential transactions. It makes it, completely out of the scope of being regulated. Like technically it will be impossible to do this is where, these stable coins are competing with the CBDCs If they're replicating the same thing as CBDC then they. Only competing for the best jurisdiction Because they either competing to be permissionless, censorship resistant, and, uncontrollable by any entity or they compete with regulators.

Didier: 1:03

Welcome to the Swiss Road to Crypto monthly review for the month of October, 2022. I am joined as usual by Alex Pulter, co-founder of Huddling sa and by Mao Capello, co-founder of Blockchain Innovation Group. ODing SA offers a completely non-custodial multisignature wallet solution for storing large amounts of Bitcoin for institutional holders, family offices, and in. Blockchain Innovation Group enables companies to run their businesses faster, cheaper, and safer by using technologies like blockchain and distributed ledger technologies. In this episode, we will review major headlines relating to the following subjects, Etherium and Etherium issuance, Etherium, custody and regulation, flat flash bots and E, maximum extractable value. And finally, stable coins, notably U S D C and Tether. So, good afternoon, gentlemen. Good afternoon, Maro.

Mauro: 2:02

Hi, Didier. Hi Alex.

Didier: 2:04

Good afternoon, Alex.

Polto: 2:06

Good afternoon, Didier. Good afternoon, Mauro.

Didier: 2:09

Okay, let's start with the first subject, Ethereum issuance. So now it's, the merge has happened from proof of work to proof of stake. So Ethereum issuance is down apparently 94%. So let me read you a headline. After the successful Etherium Merge and the blockchain switch from proof of work to proof of. The issuance of new Etherium has been greatly reduced before the merge. Two E were paid out to miners every 13 and a half seconds. Validators, the new miners now receive rewards every 6.4 minutes looking at the old at ultrasound money, only 8,745 E have been created since the merge. That news is about two weeks old, so if the proof of work, were to continue, this number would've already reached 150,000 E the result of the 94% decrease in the inflation rate of Ether Supply, Buterin, the founder of eum, now hopes, now hopes that more blockchains will follow, in particular Zcash and Dodge Coin. So let's start with Alex. Does that, what does that remark inspire you?

Polto: 3:20

Well, on the issuance, my, my point is that you either can change the issuance or you can't, if you can. Then there are some people who, who have this political power and who can change it back to infinite issues or to whatever issues. So I'm not sure it's a good thing to be able to change the, the monetary policy, the issuance policy on the proof of stake side. Definitely many will follow. Ethereum is not even the first proof of stake. Many other proof of stake blockchain existed prior to Ethereum passing to proof of stake, and the experimentation will certainly continue. So, yeah. But this is kind of, detached from the issues

Didier: 4:13

Yeah. The. One of the, the principle properties of a store of value is that the rules don't change. And in Ethereum, the rules change all the time. So,

Polto: 4:22

But maybe you need both things, but yeah, they're different. Definitely. My, my point is that we already had databases, sorry,

Didier: 4:35

Maro.

Mauro: 4:37

Obviously put a, put a minors and validate that is maybe. I guess less good news in the short term. The question for me is obviously, and, and Alex you may know that, is it just standard reward? Do they get other rewards, but on the other hand, I think if Bitcoin would do that, that would probably, maybe be the end of Bitcoin. but I see Ethereum more of a, transaction engine as well. So, I kind of see it as well as a service provider. And for, for all these other businesses. That's why I'm kind of less, concerned them about them changing or, making updates to their infrastructure. Right. I'm less curious about Ethereum changing and doing than if a Bitcoin would do these kind of changes. Right. Which they won't. They wouldn't. Right. But it's also different, kind of a little bit of a different scope of, of service at the end of.

Polto: 5:35

Sure, sure. even Bitcoiners, like Bitcoin maxes say, Thanks God, Ethereum exists so that these people cannot experiment this on Bitcoin.

Didier: 5:47

Okay. All right.

Polto: 5:49

No. It gives some space for experimentation, but without endangering Bitcoin and definitely all the,

Mauro: 5:56

For me, it's a different scope, Alex, right? Because I think it has evolved in a different scope for me. you're gonna do everything on Ethereum, many transactions, whatever business model you create, you are obviously gonna do on Ethereum. So it just has a different client base and, and everything.

Polto: 6:13

At the end, I, I'm not sure it's a different client base at the end. It, it's, it's looking for. defining its value proposition, and if the value proposition is censorship resistance. If it's, like all of the criteria that we like in, in the Bitcoins blockchain, then I'm not sure that we will have, like too many of them. We will define some niches and yeah, and then it's all open. Programs, open source networks and functionality from one can migrate to another relatively easily.

Didier: 6:52

Okay, so, let me read the following headlines. Fidelity Investments Digital Asset Arm is looking to offer institution institutional investors the ability to buy, trade, sell and custody ether. Mirroring its current Bitcoin products Validators they say can earn a subsidy of roughly 4% transaction fees at about one and a half percent maximum tract value. Yield is one of the core pillars of traditional finance and crypto finance and Ether yield will represent the risk re rate of the crypto ecosystem. Just like the treasury yield represents the risk free rate for traditional finance, A few more headlines relating to this. More than half of the Ethereum network is currently excluding us. Sanctioned. Let's. Lido, which is a validator in Etherium. Lito's co-founder chappel Valoff, says that home staking is for hobbyists. liquid staking, giant lido has come under fire after the co-founder and chief technology Officer BA said that the hardware used to secure Ethereum should be professionally managed in infuriating an army of enthusiasts who operates such hardware at home, as well as several prominent Etherium influencers. And, and let me just finish up with the last headline relating to, regulation. A recent Bloomberg article says that crypto is more attractive as the s e C gets aggressive. Investors say they're referencing a poll, and among the poll among almost 60% of the 564 respondents to the latest M L I V pulse survey indicated that they view the recent state of legal action in crypto as a positive sign for the asset. Major interventions include the US regulatory investigations of bankrupt firms like Three Arrows, Capital and Celsius Network, as well as the s e C probe into Yuga Labs. the creators of Board APE Collection. and people in the survey when they were asked to choose one word that best describes the space, the two most popular answers were evenly split between Ponzi and the future And so there you go. So, um, ma. Do all these headlines and all this sort of confusion about regulation and so on. Does that sort of have your clients more sitting on the sidelines or Vivi defi, Ethereum or

Mauro: 9:21

I think I'm, I'm actually surprised Fidelity. Is only now starting doing Ether because they are providing services since I think 2018 or so, or even before when they announced that they would start providing services. Um, but honestly, what I've seen in the financial intermediary world. If they are interested to provide this crypto to native to clients, they obviously start with Bitcoin and Ether. I think these are the two which people know most. And, and they, this, the others are kind of like a viewed as potentially more, dangerous

Didier: 10:01

Less trustworthy. Yeah.

Mauro: 10:02

So that, that's trustworthy. That's, I think that's the right way to say it. So, I think, they're looking at it actually more positive, I think, or they're engaging to, to provide the service right. Ether as well as Bitcoin. Um, then I think to the point that, all the infrastructure that, of Ethereum should be regulated. Professionals. I think that the contrary of what the whole idea was, right? that, everybody could stake. And I think there's. There's value in everybody providing services because, it provides, validation power. I'm not gonna call it censorship power anymore. I'm gonna call it validation power. And that's the whole thing, right? Because if we start having professionals doing that, then we, we will go back to a couple who have the infrastructure and we'll be on the, on the turn on, on turn off button. So. I think that would be totally wrong, and then, yeah, scc. um, I think I can see, um, and, feel that lawyers are really so many places Switzerland too. They are scared of what SCC does any project they do, they don't want to go anywhere close to the tc. because it's kind of like a little bit unpredictable, right? what will happen. Um, so I think, in terms of defi. Probably they're much more, waiting to see what happens with defi. They are, I think, more open to, to provide ethereal services, but they're not necessarily doing it themself, right? They will go to brokers, right? They will go to other financial intermediaries. So that way they also, reduce, why their exposure or reputation, I should say. if something fail,

Didier: 11:49

Okay.

Polto: 11:50

something shock me in, in what you said. Did you, you mentioned risk free rate, like What? What's that? What's that?

Didier: 12:03

Well in defi, in Defi, fidelity seems to be suggesting that the staking yield, the, the return you'll get from staking E will become the risk-free rate in the crypto ecosystem. So

Polto: 12:16

Okay. So I, I think it's a good, it's a good way to, to talk about it. so, either it, it's risky, there is some risk involved and this is why there is a potential of free word, or. There is no risk. Probably there is no reward at like, no any reward for doing something with absolutely no risk. And if you outsource the risks, then maybe there is someone who can money print for you. And this is sold as being risk free. But there is, like risk on this, third party. To whom you outsourced your risk. So it's maybe a more difficult to understand risk, but there, there is definitely risk. And, about the blockchains run by professional. We already have many. We have X R P, we have, copycats of Bitcoin, even that run as, professional infrastructure. Bitcoin cash for Bsv. like all of them have this vision that you, you need to be professional to run them. So we. We already have these blockchains for data centers. Bitcoin is really to be run its own users, and it's written even in the abstract of the white paper, that the advantages disappear as soon as you outsource either the key management or network participation.

Didier: 13:55

Okie Doki.

Polto: 13:57

And, and recently you, I don't know if you've seen, but recently even Vitalic was, concerned about attracting too much of, institutional money and attention too early for Ethereum past proof of stake. So like, if you remember Sathi Naka in, I believe it was 2011 when, Bitcoin first attracted, WikiLeaks, attention where someone proposed to WikiLeaks to accept, donation in Bitcoin. And Satoshi said, It's too early. It will destroy, it may destroy Bitcoin to attract this kind of attention. And I believe that, all of these. All of this institutional money can really change the, the governance over Ethereum, especially because it's, it's changeable, It's subject to change compared to Bitcoin.

Didier: 14:55

Absolutely. I think we agreed on a previous podcast that the real criteria for decentralization is how difficult is it to change the, the consensus rules? And that was the real criteria. And we see the. Than in Ethereum, it's a lot easier than in Bitcoin, that's for sure. Yeah. Okay. All right. Let me read to you a headline it's about me, v me the. Now the, now the, the abbreviation of me is maximum extractable value. It used to re relate to Etherium and Defi, but the previous definition was minor extractable value but now mine and Etherium have become validators, so we no longer say mine extractable value a quick definition, mine are extractable value. For anybody like me who comes from finance means front running. It means getting in front of somebody else's trade and then selling'em the product. So for example, if I know that you wanna buy this share, I'll quickly go buy it and sell it to you and sell it to you slightly higher than where I bought it, and I'll make a quick profit. And it's because I have an advantage of being a market maker and knowing that you wanna buy it. there's an arbitrage of information and I'm able to step in front of you. And in the past the miners had this, but now miners are called validators, so we don't call it minor extractable value anymore. Now we have a little bit more of a more diplomatic term called maximum extractable value. And There's,

Mauro: 16:17

There's, um, the DTM minus had the, had obviously the choice to, to see the transaction, selected transaction. Is that what, what do you mean by that?

Didier: 16:26

Yes, exactly. So they, I

Polto: 16:28

they, they are the one who select the transaction for the

Mauro: 16:31

Based on the profit they, they provide

Didier: 16:34

Exactly. And this applies much more to to Ethereum than to Bitcoin because Bitcoin, there's really just, there's a lot more going on in Etherium with smart contracts. So let me read to you this long headline and which shows to you the problem of maximum extractable value now in, in Etherium, so, one of the most critical issues that Etherium has been grappling with, has been maximum extractable value. To recap, m e or maximum extractable value is the process by which validators increase their profit, their profits by reordering transactions within blocks They. Transactions within proof of stake and proof of work systems are usually queued up in a me pool, which allows mins, val and validators to reorder transactions as they wish for maximum ex potential gain. Since it relies on an action based model, unfortunately me maximum extractable value can cause what is known as a sandwich attack, where a user's transaction is front run with another order, buying the same asset, but with a higher gas fee resulting in higher. So the person with a higher gas fee is gonna be executed first, of course, resulting higher slippage and executing less of the original intended transaction As the asset prices hike, the attacker follows this step by a back run order where they sell their position, the one they just bought at a higher fee, and earn a profit. Based on this quick, um, on this quick artificial price increase. A workaround, to this predicament is allowing users to send transactions directly to miners without being stuck in a me pool, which is what Relay Group flash bots introduced with their protected RPC endpoints product. However, due to its ease of integration and usefulness, the adoption of the solution skyrocketed it over the past year. Nonetheless, its growth was matched with increasing concerns around centralization. This issue became relevant after Flash Bots announced that they would comply with OFAC sanctions that were, that were issued in the aftermath of tornado cash back in August. Fast forward to today, more than 50% of Ethereum blocks are now processed through E layers like flash bots, which produce OFAC compliant blocks. This increasing figure can be credited to the merge as validators, where preventative with lu. Lucrative economic incentives via me booth. To reroute the block production process to e relays such as slash bots in the wake of the proof of stake switch. So, we're going through these growing pains and we're trying to define this new, this new medium, which is Ethereum. And we're having all these sort of same problems that have existed in finance before in traditional finance that have been resolved in traditional finance before. So first come to you. Does this scare off, your clients, do you think it

Mauro: 19:33

It It do. It does. It does. Right. So, as you perfectly said, in the investment banking or trading space, infrastructure have been adapted, Rules have been adapted. I know you can select the trades you want, but effectively at some point, why would you allow that? if you wanna do this for everybody in a fair way, everybody should transact, the available transactions. And not just go and select and doing this and just the principle of being able to select what you wanna, transact and which one not is a bit for me, a bit difficult. Right? Because it should be same for.

Polto: 20:10

It's technically not possible, unfortunately, to force, everyone to, to select all transactions. Also, if you are in a position of being, um, intermediary like these, med bots, You are sensible. You like you have a legal entity. This legal entity receive some transaction and relay them. So at some point the regulator come to you and say, Hey dude, you are relaying transactions that, are on our sanction list. Stop doing this. And obviously the legal entity will stop doing this. And for, for now, unfortunately, Ethereum choose the way, the path to like, every time you have a problem, you create more complexity that create more problems that you will solve with even more increasing complexity.

Mauro: 21:04

Help me out. Alex. Help me. Is it the same with Bitcoin that you, that the minor? I think so. Right. Can select which transaction he wants to.

Polto: 21:11

the, the big difference with, so first, we have to admit, and it's a good critic of those who are criticizing me on Ethereum. it's there because there is volume of different, financial operations, which are not simple. so with all of this defi, it creates like huge, huge, huge opportunity for arbitrage. And this is why this, me is happening on Ethereum. Now, the Bitcoiners, they try to construct things in extremely different way where, what is visible on chain. Doesn't reveal what you are doing within the transaction. So in a Ethereum transaction to, let's say, make Maker Dow or to any smart contract, The entire world in immediately see what this transaction will do, what it will transform, how the state of the blockchain will change, and how the economic, outcomes for everyone are immediately visible while in Bitcoin. For now, there is no, like Oracles and all of this stuff, but the design so far is trying to hide these things behind the top root transaction, which looks, as a, like identical traditional transaction. So you wouldn't be able to censor or to selectively pick this transaction from the other one.

Didier: 22:52

That's a good explanation. In my, to my mind, the main reason we don't have that on Bitcoin is because in Bitcoin we're still basically just sending money and there's no smart contract with complicated logic in the background. But as you say, when, if that happens, it could be hidden behind. basically tap root transactions that make more complicated logic. Appear the same on the blockchain. It's just a simple payment. That's also a good, good point

Mauro: 23:16

but still, What would Alex, if you could, what do you want to have regardless of the blockchain? not giving the option to manage to select the transaction and just process what's there.

Polto: 23:29

Yeah, so, you, you, you cannot do this, but you can do some stuff. For example, lfm have. built in, like LFM is one of the, let's say more later blockchain. So they, they already seen me, at work and, were able to think about some mitigations. And so it's not like completely removing the problem, but at least when the minor peaks some transaction, then he doesn't have the choice of the ordering. They are deterministically order. And that's the same rule for all miners, all, nodes. So it mitigates slightly the problem because you, you cannot easily sandwich a transaction between two, transaction of yours.

Didier: 24:21

And the final subject of the week. stable coins. So, U S D C, market cap cap slides by 10 billion since the tornado. Bans. so let me read you an article I got from, Defiant. The circulating supply of the stablecoin U S D C has fallen by almost 20% from 53 billion on August 8th to 43 billion on August 27th, on October 27th. Meanwhile, other leading stable coins like te. And bins, B U S D have expanded by 1.8 billion and 3.4 billion respectively. U S D C seems to have fallen out of favor with investors after, move to ban 38 addresses, which had interacted with the tornado cash Protocol, The US Department of Treasury levied sanctions against the privacy mixer on August 8th. And forey US based entities from interacting with the protocol. The protocol meaning tornado cash, in contrast. Tether said that it will not preemptively ban any sanctioned addresses unless specifically asked to do so by law enforcement agencies. So basically, stablecoin money is coming out of U S D C and into Tether and other stable coins I have to say, last weekend I was at a the Plan B conference in bano. And several people, were pushing Tether as, as sort of an alternative to the dollar. So people who seem to be pushing Tether were, well, a back from black block stream. Um, Palo Weno, I think, So it seems that all these people had seem to have a sort of, hidden agenda with Tether that I couldn't quite figure out, so,

Polto: 26:11

what, what, Why would it be hidden? It's, it's very obvious.

Mauro: 26:15

the blockchain,

Polto: 26:16

block. Yeah, it's on the block chain. Block stream. Block stream has his, their network. Um, Which is a side chain of Bitcoin, one of the side chains. Um, this one is, built and run by, Blockstream and, Teter is operating there. So more teter adoption is partially more liquid adoption. For now. There is very low usage of, um, teter on liquid, but, by the way, Tether As USDC are present on multiple different blockchains. And these different blockchains have slightly different properties. Like, for example, liquid has, something called confidential transactions. I'm not sure, I haven't looked if this is available with, U S D T. but if But if it is, then it makes it, um, completely out of the scope of being regulated. Like technically it will be impossible to do so. Um, this is where, these stable coins are competing with the CBDCs If they're replicating the same thing as CBDC then they. Only competing for the best jurisdiction on the best management of this, C B D C, token If,

Mauro: 27:43

What, Why is that? Why is that

Polto: 27:45

Because they either competing to be pure, permissionless, censorship resistant, and, uncontrollable by any entity or they compete with regulators. Between different regulators. So, in today's, scope of, stable kinds available on regulatory perspective, I prefer U S D C. Like that's the one I'm the most confident in the stable coin, arena.

Mauro: 28:17

And why is that, Alex? Because they're, they're monitored, audited by pwc and because, they're afraid of getting in trouble.

Polto: 28:25

Yes, and it's very, very, like bad guarantee, but it's, already way better than the internal memos provided by, U S D T. So, here you compete like for the best of the guarantees provided by some legal entity and so by the jurisdiction of this legal entity. And the other side of the spectrum is like fully decentralized, fully permissionless, censorship resistant where you cannot apply this, sanction. And obviously at some point, if, for example, tetter, if the regulator understand that they're issuing on different blockchains that one of these blockchains allows for confidential transaction, they should go to U S D T and say, stop issuing on these blockchain because you cannot control. And enforce our regulations on these blockchain. So if you want to be regulated by us, stop doing this and only choose networks that are censorable. Yes. Yeah. So this is why for, for most stable crane, I believe that CBC will win the race for the permission less stable coin, whatever it means.

Mauro: 29:46

Whatever is left.

Polto: 29:47

Yeah, yeah. yeah. not, not much. yeah. I believe that it will end up on Bitcoin because that's the only network that, all of them can trust, Them can trust, that no one can manipulate.

Mauro: 30:00

People have different views on that, I can tell you because they think, Okay, so, um, then, obviously you are right, Alex, but. This powers between the US or the Western world, the eastern world, the Asian world, whatever you wanna, how you wanna mix them together. This is, this is another ball game, Which I

Polto: 30:21

Yeah. But if you remove the G seven and all the rest of the world use, the Bitcoin rails, it'll be largely enough to force them into.

Mauro: 30:31

maybe we are not gonna live anymore. Or maybe yes, if we get 200 years old and then we'll see how that works.

Didier: 30:38

Okay, gentlemen, so we'll leave it there and we'll be back when we're 200 years old. Okay? All right.

Polto: 30:45

Great

Didier: 30:45

Thank you very much, gentlemen. Bye-bye.

30:54

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