Went through the a16z 2023 State of Crypto and pulled out some interesting slides + my own notes. I also recorded a podcast episode about it (as part of the 5 minute daily update):
Here we gooo:
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Web1 was decentralized (email protocol, web protocol) but limited functionality, and no value accrual
Web2 was centralized into Google, Facebook, etc, advanced functionality, but value accrued to big tech
Web3 is decentralized again, community governed, and value accrues to participants
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Web2 take rates are something like 30-100%
30% for services like Spotify and Apple App Store
100% for FB, Twitter
Web3 take rates are much lower – or even pay participants (like ETH’s PoS)
OpenSea is 2.5%, Uniswap is 0.30%
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With each cycle, the market gets larger
-higher price
-more usage
-more developers
-more projects
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ETH is scaling through rollups
In 2022, L2s paid less than 2% of all ETH fees
Now it’s closer to 7%
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The big brands are all here – from mass consumer brands like Starbucks and Adidas and Budweiser to luxury brands like Tiffany and LV and Porsche
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DAO governance is growing
From barely 50K monthly proposals in 2021 to more than 200K today
2M unique DAO voters
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More than 50K monthly crypto developers on Github
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Active addresses steadily growing
From less than 5M in 2018, to more than 15M today, across all blockchains
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What A16z expects in the coming years
-Zero knowledge tech will accelerate
-On chain games will grow in popularity
-Light clients will accelerate web3 and mobile
-in the US, bipartisan crypto regulation will pass
Hosts: Hasu and Mike
Hasu – advisor to Flashbots, Lido
MEV value chain
-money from reordering / censoring transactions
–any value a privileged actor can extract – eg, Central Bank printing money, can be considered MEV
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People use crypto to escape MEV in real world
Should build crypto systems resilient to MEV
Principles in reducing MEV
-more competition = lower fees, less MEV
-more private = harder to extract MEV
-more user control
MEV is invisible – even looking at transaction data in Etherscan, won’t see sandwich attack
MEV schools
1. Democratizing MEV – hard to minimize MEV, isolate builders role, make it competitive
2. Minimize MEV –
User/wallet layer – order flow auctions – users don’t send to public mempool or block builder, auctions off right to execute your transaction, if there are competing bidders, the price rises, and value goes to user (instead of to MEV capturer)
Mike: “Payment for order flow” – Robinhood offering zero fees, selling order flow to Citadel / hedge funds
Mike: In past, equity brokerages would charge you for trades – now people have opted for free trades / invisible fees (eg, Robinhood)
We can do better in Defi – especially the transparency
World of Cosmos and Ethereum are converging – ETH community has been better at executing Hard to say in future if X project is ETH or Cosmos project – there’s increasing convergence
MEV accrues to whomever gets to order the transactions
Mike: MEV will accrue to execution layer
L2 sequencers today are centralized – with plans to decentralize – will eventually face same MEV problems as ETH L1
L2s all need PBS (proposer builder separation)
Sequencers today in L2 does 4 things
-receive transactions
-decide on ordering of transactions
-give user a receipt
-send order batch to data availability layer — that’s what creates finality
MEV should not be counted towards security budget — that’s how core devs think about it, want to minimize and not enshrine it
Minimum security should be paid from inflation + base fee
“MEV is very hard to track”
Different forms of MEV
-arbitrage – different prices on different exchanges, or underpriced asset
-sandwich attacks – buy before a user, then sell it to the user at higher price
-liquidations – searchers typically do this
Statistical arbitrage – take balance sheet risk, small period of time where you have to hold asset before selling it
Many top Defi traders are also block builders – want to maximize inclusion guarantee, greater control over trading strategy – can make trade at last moment, can see all other transactions and order / cancel them
In systems we build, must make sure they’re not sensitive to latency — otherwise there’s incentive to colocate near each other, more centralization
Phil Daian post on this: https://collective.flashbots.net/t/decentralized-crypto-needs-you-to-be-a-geographical-decentralization-maxi/1385
Turn latency into price / auction, auctions are generally more fair, and price (ability to pay) is easier to decentralize than geographic proximity
Users love Robinhood because good feature is very visible (free trades) and bad feature is very invisible (selling user order flow)
Mike: Optimism and Arbitrum have very different approaches to MEV
“Solana is case study for why to not build low latency blockchains”
1 of 2 Solana block builders is operating liquid staking protocol
If you don’t have robust mempool and fee market design, get a lot of spam 58% of Solana transactions are failed arbitrage transactions
What’s novel in Cosmos —
-Osmosis doing something very interesting – onchain block building and searching
-Noma (sp?) & Penumbra – intent based transaction framework
Mike: Cosmos has very different opinions, diversity of ideas
Hasu: Big drawback is everyone has different validator sets, but as shared security grows, what compromises will be made?
How does regulation bump into MEV?
Crypto is about fair and equitable markets for users with less manipulation and exploitation Execution on public blockchains is continually improving
Regulators are largely pragmatic
“If a single regulatory regime can make rules in crypto, then crypto has just failed”
Lucky to have Imran Mohamad, Kyber’s marketing lead, to discuss in his words:
What happened with $ARB? What's going on with @CreditSuisse & QE? How did Kyber back to being in the top DEXes? What's our longterm ecosystem strategy? My fav NFT? All and more here, thanks @habits + @bridgexplore for having me on your podcast! https://t.co/xQ34wGqNLh
— Imran.knc | KyberSwap (@imranfaststart) March 27, 2023
And in a separate episode, Jorge and I catch up on all the latest crypto shenanies and macro hankies and bank bailout pankies. Yup.
Put up the BitSignal – pay $1M to 1000 contributors for memes and stories
Made public bet that BTC will be worth $1M USD in 90 days times
“This is the crisis Bitcoin was built for”
Sounding covid alarm in January 2020, covid hit (the US) in March
On covid
Mental chessboard in his head, if X happens, then Y, Z, etc will happen
Viruses are exponential
Background in genomics
Same frame of mind now – “we’re in the fiat crisis”
All the centralization and opacity of fiat – it’s all blowing up
Will have wrenching transition to crypto economy
RSA: “fiat fire alarm that you’re pulling”, “the all at once moment”
Exact state of world in 90 days will be very different Not bet on Bitcoin price but on falling value of US dollar
Today USD is no longer too big to fail – there’s RMB, there’s bitcoin
Financial engineering led to house of cards, “the money is gone”
If today, all depositors withdrew money, banks can’t liquidate assets to give them enough dollars
Time bomb was growing, regulators were aware of it
“Uncle Sam Bankman Fried”
Reality: Fed Reserve gave guidance to banks to buy certain assets that then dropped in value (due to rate hikes)
Fed gets lagging data, changes single parameter, highly political process
“Fed bankrupted the banks”
“There are 333 banks where the money is gone”
Also foreign banks who bought US treasuries – global Central Banks using emergency USD swap lines
These banks’ insolvency intentionally hidden in a footnote
Now the can can’t be kicked
Holding a flaming bag of dog poop
Every crisis powers them up – failures mean they get bigger – “more failure more funding”
Do you have an alternative regulator? Don’t you want one that will tell you if your money is still there?
New era, final era – can’t hike rates anymore – printing tons of money to give to banks through BTFP, swap lines
Initially said $25B injection, now it’s up to $2T, it will effectively be infinite
All the small banks, tech banks, will get wrecked
Big banks w/ Fed help positioned as saviors – “both arsonists and firefighter” At end, will only have 4 giant banks in US, govt rolls out CBDC – now “too big to fail banks” become “too big to escape banks” – government now has control
On other side of this – bitcoin is gold, ethereum is the financial system
Lot of people will be converted overnight into bitcoin maximalism, will be bitcoin jurisdictions
Bitcoin is ONLY thing that Fed does not directly or indirectly administer
Tradfi – Fed has root access – can stop or delist any financial product (except bitcoin / crypto)
One honest signal that they can’t fully fake is Bitcoin – which is an expression of peoples’ desire to exit the (existing financial) system
Thus Operation Chokepoint / fog of war – kill the crypto connected banks like Signature, Silvergate
Lot of fiat banks will go to zero, or become like fiat flytraps
2008 Financial crisis
Rest of world paid for it through inflation, food price spikes Democrats effectively taxed Republicans, and foreign dollar holders, to pay for the bailout
“Cost was shunted to the invisible”
Foundational macro view is a little inflation is good, deflation is very bad
Bitcoin’s view is deflation is good if caused by Moore’s Law (technology making things cheaper), even a little inflation is bad
American Keynesianism is bad, just like Soviet economics, but it’s just less bad
David: “Bitcoin during times of war, Ethereum during times of peace”
Bitcoin will be protected by enough governments, bitcoin is well understood
“Final digital devaluation of the dollar is coming”
This is not the make money time – everyone will be a lot poorer soon “America is new Argentina” is not a bad mental model
Dollar holder is bag holder
Many countries (like India) will become gold backed after this
David: Ray Dalio’s macro cycles, 4th turning, all lining up There are only two banks – Fed Reserve, and Bitcoin
Bitcoin is Schelling point
Hyperbitcoinization is collapse of all fiat currencies against bitcoin
Speed of transition will be shocking, even to Bitcoin maximalists
Most empire transitions happen gradually – eg, Britain > America Internet is next America
Powell has turned America into Argentina
People will learn you can’t trust the state
Important to understand severity of situation, take calm conscious steps to insure yourself against it
Americans are running old scripts – Powell is doing 80s formula of Volcker hiking rates
Lot of countries that trusted Fed – holding a lot of Treasuries, US dollars – the money is gone
(US citizens) paid for all the regulation but got none of the protection
Hiding bank insolvency in a footnote – it’s a corrupt regime, it’s a betrayal
Russia and China will be unleashed
Taiwan could be captured without a shot
Hi, I’ve been recording podcast episodes 1-2x a week with my cohost George (crypto OG, started WeTrust and CitaDAO), and in the latest episode we invited our friend Steven to discuss web3 gaming, state of the market, AI, and a grab bag of miscellany.
Let me know what you think. Still a long way to go to improve our comfort level and my skills as a moderator (which is totally the opposite of my ADD-ness), but we’re enjoying it and we have a lot planned!
