Kevin Zhou, co-founder of Galois Capital, and Evgeny Gaevoy, founder and CEO of Wintermute, discuss how to trade the Ethereum Proof of Work fork, what the market is telling about the Merge, and whether the Merge affects Bitcoin.
- what will happen at the time of the Merge according to Kevin and whether there’s uncertainty
- when the ETH Proof of Work chain will emerge and how that affects trading opportunities
- the mistakes of the ETHPoW team, like repealing EIP-1559
- what percentage of ETH market cap ETHPoW will accrue
- what the first few blocks of ETHPoW will be like
- what the strategies are to earn the ETHPoW airdrop and what the on-chain activity looks like
- whether there is an “up-only” monoculture in Ethereum
- what stETH is, how it should be priced and what the futures market indicates
- where the value of a chain comes from and the likelihood of ETHPoW failing catastrophically
- how to protect from replay attacks
- the price action of ETH after the Merge
- how ETH becoming deflationary affects Bitcoin’s narrative as digital gold
- how the ESG-friendly image of Proof of Stake could affect the narratives of ETH and BTC
Thank you to our sponsors!
Previous Coverage of Unchained on the Merge:
- Preston Van Loon on Ethereum’s Merge and His Lawsuit Against Treasury
- Arthur Hayes, Former Ethereum Skeptic, on Why the Merge Makes Him Bullish on ETH
- With the Merge, Will Ethereum Take Over Bitcoin’s Title as Digital Gold?
- Why Kevin Zhou Believes Ethereum Will Have 3 Forks After the Merge
- Post-Merge, If Lido Becomes Dominant, What Does That Mean for Ethereum?
ETH Proof of Work:
- ChainID missing; and the request from Coinbase
- Kevin’s analogy
- CoinDesk article
- ETHPow Token
- Summary of Kevin’s thoughts
- ETHPoW team’s promise to abolish EIP-1559
- ETHPoW first blocks
- Tether supports PoS
- Circle (USDC) supports PoS
- Ether’s backwardation
- Eth-Flexive by Arthur Hayes
- Whether Ethereum’s Merge is priced in
- Gauntlet’s view on the Merge
- BTC correlation with stocks
ETH Post-Merge Dynamics:
- Onchain Wizard post
- Cumberland on the Ethereum dynamics after the merge
- Miles Suter on the implications of the Merge
Hey, everyone. The merge is upon us. After this show is published, Ethereum’s merge, which will transition the blockchain to proof-of-stake, will likely happen within about two days. Earlier this summer, Kevin Zhou of Galois Capital raised the ire of many people in Ethereum when he talked about the likelihood that an Ethereum proof-of-work chain would come out of the fork, and in recent weeks, it does look like there’s a movement behind this so-called Ethereum proof-of-work, or ETHPoW, fork. Though, how successful or how smooth it will be is anyone’s guess.
In this episode, Kevin and Evgeny Gaevoy of Wintermute, a larger market maker in crypto, discuss different ways the merge could play out. Honestly, they said so many things that surprised me, and we got to cover everything, from the potential ETHPoW chain, to bitcoin, to ETH itself, DeFi. We talked about NFTs and more. Litecoin, Dogecoin, and SHIB even got a mention. I hope you find this episode as thought-provoking as I did and also, that you have a happy merge week. When I catch you Friday, we should be in an Ethereum proof-of-work world. Enjoy the show.
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host Laura Shin, author of The Cryptopians. I started covering crypto seven years ago, and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full time. This is the September 13, 2022 episode of Unchained. Every other week, Unchained hosts The Chopping Block, where crypto insiders Haseeb Qureshi, Tom Schmidt, Robert Leshner, and Tarun Chitra chop up news in digital assets. Catch the latest episode now on YouTube.
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With the Crypto.com app, you can buy, earn, and spend crypto in one place. Download and get 25 dollars with the code Laura. Link in the description. Today’s topic is Trading the Merge. Here to discuss are Kevin Zhou, Co-Founder of Galois Capital, and Evgeny Gaevoy, Founder and CEO of Wintermute. Welcome, Kevin and Evgeny.
Yeah, thanks for having us.
Yeah. Very nice to meet you.
So, as we just mentioned, Ethereum’s long-awaited merge will arrive very soon, most likely a day or two after this podcast comes out. Probably the other Ethereum hard fork that was as closely watched as this one was the DAO hard fork back in 2016. Kevin, your view on the merger is somewhat known, but let’s have you give a short recap of what you think will happen at a high level for people who either missed your earlier interview with me or haven’t seen your tweets. What do you think will happen at the time of the merge?
Yeah, happy to, you know, talk about that a little bit. So, you know, I think just overall, really, sort of the contention that I have right now is that it could be a lot messier than I think a lot of people expect, and you know, I just kind of wanted to surface that with the community, and I think, for the most part, a lot of these kinds of scenarios have already kind of been playing out in the market.
You know, when the futures curve backwardated a lot less now than before, and you know, I think that there is a lot of risks that are surrounding possible technical failures on the merge, other kinds of, you know, weird griefing attacks by, you know, maybe certain actors within the space, whether that be, like, maybe some kind of third fork or exchanges behaving badly.
Now, I think for any single one of these things, the probability I think is very low, but I think when you add all of it together, at least at the time, it seemed like that there was…you know, that I think that that wasn’t really being priced in properly, and I think since then, you know, the market’s kind of played out. You know, stETH and ETH widened, that spread widened.
You know, the futures went backwardated, and then since then, it’s actually come in a bit the other direction. So, you know, it’s interesting to see the market dynamics there, but I think overall, you know, not everybody I think is so sure now, I think, that the merge is going to do what it’s supposed to do, and I think at least having a little bit of that uncertainty in the air, I think, is healthy for this space.
Evgeny, as a crypto market maker, how are you looking at the merge? What do you think will happen at that time?
Yeah, so, for us as a market maker, it’s a pretty interesting amount, obviously, and maybe even more interesting, given how deeply I am in DeFi in general, not just in Ethereum, but you know, all kinds of filters, and yeah, all kinds of skills. Scalability solutions, like, whatever you call it, and so, for us, it’s, like, three problems we have to solve. So, first, we needed to make sure that we don’t miss something and lose a lot of money, which is probably the main, like, the main thing we need, like training shop in this space, and it has to do with, I don’t know, replay attacks. It has to do with, in general, like, where we store our ERC-20 assets and how we store them and what could potentially happen.
And we’re upgrading our Gnosis Safes, for example, like, all those, like, small and big things. Second is basically any kinds of opportunities, and that’s primarily, I would say, on proof-of-work chain parts. Like, well, the ones that supposedly will, like, fork, effectively. However you call it, and like, the more…in the most basic sense is basically, once the merge happens…so once the advance of fork happens, actually, try to sell those assets which we think will be worth zero, and they’re the stablecoins.
You see it in proof-of-work and basically try to get, like, a lot of free…just fear of this news here, and the sad bit is it has to do with our DeFi operations, so it’s actually understanding how, in maybe space, like how block building space will change post-merge, and that’s actually also a really interesting topic, and that’s what we’re primarily looking at now, because, like, a lot of those issues that we initially identified through the last couple of months, they kind of subsided.
Like, some of them are still there, but like, we don’t really see that many…as many issues that can lose us money. Maybe, like, nine, would say. Opportunities wise, I don’t really think it’s going to be an amazing opportunity in general. Like, I think of lot of what…just like Kevin said, a lot of it played out in the futures market over the last couple of months already. So, it’s all about, yeah, like, if you can be the fastest during the first couple of blogs, then there’s going to be, like, a lot of mess, potentially, and also how do you manage your inventory on all kinds of centralized exchanges, which will close down or shut down also deposits and withdrawals for quite some time, I could imagine, but it’s kind of like the number one stuff for us. It’s our bread and butter.
Okay. So, yeah, let’s dive more into this proof-of-work fork, because I see so much chatter about this. Obviously, it’s funny, because I do think the longer-term impact really will b around ETH, but at this moment in time, you know, this is what a lot of people seem focused on. Interestingly, or maybe not surprisingly, actually, I see a number of developers that are deriding this potential ETH proof-of-work chain.
In particular, they’re sort of making fun of the team for not having yet, for instance, switched the chain ID or leaving it missing or basically telling them that they’re trying to change it the wrong way. Like, they’re implying that these developers don’t even know how to change it. As Evgeny alluded to, some people are saying the chain probably won’t even be ready until sometime after the merge.
So, it’ll basically be a fork of the fork, which is fascinating, or I’m not sure exactly how this works, but obviously, then, on the other hand, we have traders, like yourselves or other community members who are writing up whole newsletters and blog posts and tweet threads on how to train these ETH proof-of-work forks. So, you know, again, I flash back to what happened to the DAO where it basically seems like the developers see things one way.
They see…you know, back then, they saw that Ethereum Classic chain is not being useful. The traders were like, hey, that’s free money. So, I was just curious for your take. Given all these technical issues that the ETH proof-of-work team seems to be having, do you expect that chain to emerge right at the time of the merge or afterward, and you know, how do you expect any technical difficulties to affect how it plays out?
Yes. You know, for us, you know, I think we’ve heard all sorts of different opinions about this, whether it’ll be on time or not. You know, we’re trying to prepare for any situation. You know, certainly, if the fork is on time, there’s probably going to be a lot more training opportunities.
And I think it’s also because of, you know, these kinds of revelations about the chain ID, you know, or about, you know, whether or not it’s going to be ready on time, which is why kind of the futures basis closed in, and maybe this is also why a lot of people are, right now, dumping their ETHPoW ahead of time. So, I think, you know, generally, there’s been a couple things that I think the ETHPoW community did that I think was not strategically advantageous to them.
So, I think things like, for example, beyond just the repeal of 1559, this idea of creating a multisig to fund development, I think it’s a double edged sword. I personally think that it’s not the best idea. It’s sort of like, you know, you’re introducing this kind of layer of centralization on that chain, and there’s, like, a small group that’s in charge of some kind of dev treasury. I think it would’ve been better for them to play more along the lines of, you know, ideological purity, especially given the Tornado Cash revelations.
But at the same time, I understand why they’re doing that, and it’s because, you know, they don’t really have an Ethereum foundation on their side to go back development and you know, bring new apps to the chain, that sort of thing. So, I think it’s…you know, it’s a really tough situation for them. I don’t think it was a good idea to introduce any whiff of corruption or that it being a money grab. I mean, everybody already thinks that it’s a money grab.
So, like, to introduce more of that where, you know, people can point fingers and people can accuse them of doing that even more, I think that, you know, that that’s not the PR that they need, but you know, I think all those things, you know, taken into consideration, I think the market’s already reflecting these kinds of new expectations. You know, I think Polo yesterday traded down to, like, 1.8% from, like, roughly…it was hovering around, like, 3, 3-1/2%
You’re talking about the ETH proof-of-work IOUs on…okay.
Yeah. So, yeah, so I think that, you know, that’s already come in quite a bit. So, you know, we’ll see where the market places things. You know, certainly, the size that’s being traded on, you know, Bitfinex’s chain split tokens, and on Polo, you know, with their split tokens, is very shallow. So, there’s not that much price discovery, and you know, there could still be really large players.
You know, obviously, if you’re in the foundation, a lot of large whales that haven’t dumped yet, but who do want to dump, but the size is just too big. So, you know, I think we really need to see all of that kind of play out and wash out I think within the first week or two, maybe even quicker than that, and then, afterwards, then we can come to some kind of equilibrium price, at least in the short term, for ETHPoW, and then what happens in the long term really depends.
I think the PoS guys think that it bleeds out to zero. You know, that’s probably very likely. Also, there’s also possibilities of it’s just randomly pumping for other reasons. You know, they do some kind of deal with some group or you know, PoS completely fails for reasons unrelated to PoW. So, you know, there’s all sorts of…you know, it can go anywhere from there.
And I think it’s really we’re trying to figure out what should we do before the Merge, what should we do during the Merge, and immediately right after it in the next few blocks and then what we do maybe about a week or two out, and then, from there, we don’t really care too much, you know, because I think for these longer time frames, it’s just not as interesting as sort of like the mechanics of trading these kind of special sits and one-off situations.
Okay. One thing I want to clarify is just when you talked about repealing 1559, it’s because that drastically reduced what the miners were earning. So, by repealing it, then they would sort of boost how much they’re earning, because that was burning part of the fees, but then I wanted to ask you, so, explain how this works for the ETHPoW tokens that are available on some of these exchanges. So, for people that are trading these, does this mean that the exchange will just give them some…you know, whatever, the same number of actual ETHPoW tokens that are available after this new chain survives, or how does that work?
I imagine that’s the case. You know, I don’t have any special insight there. I imagine that there must be some exchange out there, maybe one of the smaller ones that just completely messes it up and continues to accept, like, deposits of ETHPoW as if it were ETH PoS. I mean, there’s all sorts of, like, weird edge cases, and I wouldn’t put it past somebody to mess up somewhere, but you know, according to plan, though, it would be that, you know, each token becomes two tokens. Exchanges would give it to the customers based on, right before the snapshot, what the ownership split looked like.
Okay, and Evgeny, how are you thinking about…obviously, Kevin just mentioned that there’s potential for it to be live later than the actual merge. What are you sort of either betting on, or are how are you thinking about this uncertainty?
Yeah, I guess, like, what they communicate so far is it will be almost exactly at the Merge, which will make things quite fun for a lot of people and quite difficult for a lot of people, as well. I think, ultimately, most likely that will happen, actually, because they’re just looking at the way…like, you did mention, like, a few developers, like, having problems with them on, like, ETHPoW side.
And I’ve seen, like, Coinbase has been very happy with them, as well I think today about no pushing through the chain ID or something, which, obviously, is a prerequisite for return tax being potentially possible. So, like, they still…they have, like, less…no, they have, like, a well, and they still need to deliver on a lot of things. So, I think the right play for them will be actually to maybe delay it and get it done properly. I didn’t argue.
Like, to me, there’s a whole…to me, the most curious thing is why wouldn’t they just launch proof-of-work chain all together without inheriting or there is here a mess. Like, well…and by mess, I mean, like, all the smart contracts, all the…well, this is honestly a mistake. That, to me, is the most…this is the thing I just don’t understand. Like, why not just spin off another Ethereum Classic? Give yourself some tokens and go visit just, like, so many chains that we launched over the last couple of years.
All right. So, out of curiosity, what would you both expect the value to be of these ETHPoW tokens afterward? Is it going to be less than 2% of the current value of ETH, as the IOUs on these exchanges seem to be indicating?
You know, I think, in my opinion, right now, I’m going to go with the market, and I think that let’s say after the first period of, like, pandemonium and dumping, I think it maybe just equilibrates to about maybe 2%. That would be my guess, but for myself personally, I’m not that interested in buying at fair value, or at least short-term fair value. You know, I think I might be lightly bid at, like, 1 to 1-1/2% and then much stronger bid I think between, like, half a percent and 1%, and that’s not to forecast anything about, you know, the super long-term future, but that’s the kind of, you know, levels that I would be interested in maybe taking a swing at it.
Wait, and when you say that, you mean before the fork?
I meant, like, after the fork. So, like, after this initial period of, like, DeFi pandemonium, mostly on the PoW side, but maybe a tiny bit on the PoS side, and then once that period ends and then everybody who wants to have dumped PoW has dumped it, then I think some kind of natural, short-term, you know, equilibrium price, maybe around 2%, seems pretty fair. You know, obviously, it could just be wrong. It could just be way higher than that. It could be, like, way lower than that. I don’t know, but you know, that’s kind of what my expectations are, you know, just as comparables with, like, ETC and like, you know, things that had happened before, other types of forks that’ve forked off of other tokens. There’s not too much to go off of, but that would be sort of finger-in-the-air kind of guesswork there.
So, this is fascinating to me, because, from the way you’re talking, and maybe I’m wrong, it sounds like you’re not interested in buying those ETHPoW tokens before the merge, until after people begin to dump them once the chain goes live. Is that what you’re implying there?
That’s generally my thought, but I think if it dumped ahead of time to a low enough level, I would still be interested in buying it. It’s just that I don’t want to get in front of other people’s selling. You know, even I I wanted to buy it, I’d rather buy it at a cheaper price rather than a more expensive price. So, you know, I’m fine to wait for everybody else to go first on that.
Oh, I wonder…you know, I’m not a trader, but given everything that you’ve said earlier, I find that surprising. I would have thought that you were looking to, you know, dump in the first few blocks, but while we’re talking about that, for both of you, what do you think will happen in the first few blocks? Like, you know, I saw Dan Robinson of Paradigm appears to be figuring this out, as well. He asked on Twitter, if the ETHPoW fork happens, what will be the…what will the first few blocks be like? Give me your opinion for both of you.
Maybe we can ask Evgeny first, but I just wanted to clarify one thing, which is that what I was saying about these sort of price levels I’d be willing to buy. It’s not related to stuff that we’re going to be doing, like, on-chain and you know, maybe, like, doing some MEV to, like, race for certain blocks and to, you know, dump certain types of ETHPoW ERC-20s for other ETHPoW ERC-20s or ETHPoW itself. You know, that’s, like, a different set of strategies. I meant more for, like, in the midterm where I saw fair value, that’s sort of what I meant.
All right, so, first few blocks on the ETHPoW fork. What do you guys think?
If it happens like it happened so far and basically, they don’t freeze up all the MMs, for example, like they want to do. I think it’s quite possible that a few people will rush and try to sell other valueless assets. Let’s call it like this. I think it will take a few more blocks and then just those couple blocks, because, as I was saying, those first few blocks will be very, like, busy, and that’s when we will see a lot of competition, and those competition will be even more interesting because we wouldn’t see normal players, like Flashbots, for example, helping out.
We wouldn’t see, like…well, we wouldn’t see a lot of the infras that will suddenly just stop working on people’s wallets. So, people will have to go back to the old ways, figuring out, like, how to actually submit it, how to pay miners to do all this stuff. I don’t think a lot of companies can actually figure it out properly. Like, it’s quite possible proof-of-work, devs will not do something properly, as well, and actually will be delayed. So, I think that this, like, pandemonium will continue for way more than two blocks, actually.
Also, like, important part is you can only, like…let’s say you have USDC and proof-of-work, you can only sell your own USDC. So, if you have, let’s say, 100 million USDC and you want to dump it with the proof-of-work Ethereum, okay, that’s all you can do, but you can sell somebody else’s, and they can still do it a bid later, for example, for, like, really big payment PoS, which still might have opportunity like this later on.
Yeah, I definitely agree, and you know, maybe to add onto that, you know, I think that, you know, you’re already starting to see some of this being reflected, well, you know, on the sort of like foreign lending pools where, you know, Aave, Compound, Euler, they’re all coming out with different statements about what they’re going to do. They’re all going to treat things a little bit differently.
Now, some of it is just that people want the fork token. That’s why they’re borrowing ETH, and you know, ETH borrow rates are going high, but I think also some of it is that people want to pre-collateralize their DeFi debt in a lot of these stablecoins, which cannot be duplicated across two chains, right? So, like, a lot of people are already kind of setting up for this kind of stuff. I would also say that there are some relative value trades.
So, like, let’s say that there’s, like, the first period where everybody just, like, dumps everything for ETHPoW on the ETHPoW chain, but then, like, maybe later, once everything has already kind of been dumped, all these ERC-20s have been dumped to nearly zero, now, like, maybe there’s some kind of interesting plays that you can do between the ERC-20s, right? Like, for example, if I asked you, do you think that CRV1 or UNI1 or like, let’s say, CRV PoW or UNI PoW has more value?
At some point, like, both are dumped so low, that both are kind of like, you know, free option, right, or very, very cheap options, but even then, between them, you know, you can make certain arguments about why one…I won’t say what I think there, but why one might be worth more than the other, right? So, like, once all, like, the eighth PoW has been taken out of the system, people are just kind of waiting for the exchanges to open up deposits to go and sell it. You know, and I guess some people would hold onto it, just to be fair.
Then, you know, what’s left to do on-chain? Maybe there’s, like, a second period after the initial pandemonium, which is, like, a reshuffling of the relative values of all of these coins. I think I did a poll, and most people thought that, as a ratio of the PoW version to the PoS version, they thought that SHIB would be worth the most, right, compared to some of these other coins.You know, I have some difference of opinion there, but you know, it’s possible. I mean, at least with SHIB, it’s just, you know, not a very fancy token. There’s not a lot of knock-on effects with DeFi. So it’s possible maybe they’re right about that, right, but at least, you know, it gives us some things to play around with, you know, after the initial way of ETHPoW, everything being traded into ETHPoW on the PoW chain.
This is interesting, because I’m just realizing that I had never thought about what kind of tokenship was, but I’m just realizing it’s an ERC-20.
So, we’ve been referring to this throughout, but let’s just dive into this a little bit further. What have you been seeing people do, or are doing, in advance to, you know, either obtain the ether drop or trade it in some ways? You know, some of the things we’ve been talking about have been the ERC-20s. I’ve seen people talking about, you know, moving money from Layer 2s, moving them from centralized exchanges. You know, you were talking about the futures and how those have traded. What are some of the kind of bigger signals that you’ve seen in terms of, like, how the market is thinking about this fork?
So, I think I’ll maybe just answer it in two different ways. The first thing is about whether or not the people preparing for this stuff have a lot of risk appetite or not, right? So, if you don’t have much risk appetite, probably the safest thing to do, just to dodge as much chaos as possible, is to, you know, pull all of your assets from the L2s, pull all of your assets out of DeFi, whether that’s in an AMM or in a lending pool, and kind of like, not have to deal with it, right?
That would be the safest thing to do. Now, I do imagine that that will happen, at least to some degree, and that on-chain liquidity will get a bit more shallow, and if that does happen then, there’s all sorts of knock-on effects, right? It means that, you know, as liquidity gets thinner, then liquidations become more likely, and as long as there’s enough Vol just naturally induced by the merge, right…
So, it doesn’t even have to do with ETHPoW forking, but just from, you know, Ethereum itself, you know, on the proof-of-stake side, if the merge is successful or it’s a failure, there could still be a lot of vol, right, because even on success, some people say, oh, this is a sell-the-news event. Some people say, oh, you know, now more money is going to pile in, right?
So, there’s going to be a lot of disagreement in the market, and I think Vol itself will be a bit on the higher side, and this can just cause…you know, normal day-to-day Vol, you know, maybe won’t cause that much in liquidations, you know, because it’s less and liquidity is bigger and thicker there, but now, with Lacunae shallowing out and Vol increasing, you know, we can see all sorts of things…we can see all sets of assets trade really far away from kind of short-term fair value. That’s, I think, something to keep in mind. Yeah.
And the curious thing is you also have the whole macro on top of it, which is still a pretty big thing in crypto. So, to me, the most challenging bit was it’s close to impossible to separate the price of Ethereum as it moves in the Match-News from, well, all the markers that is happening outside, and so, I mean, Ethereum can go up 50%, a token will go down 50% for all kinds of reasons post-merge, and so, from that perspective, I think will get liquidated anyway. It’s kind of like a…it’s already their destiny because, yes, the volatility will be really massive either way, and maybe it will cancel out and it will stay like this. Maybe it will go up. Maybe it will go down. I don’t know, but it’s going to be very volatile in general.
Yeah, and maybe just also add to that, too, you know, some of the other things that I’ve heard people doing in preparation for the merge…and I don’t want to say exactly what we’re doing, but some of the things that I’ve heard, you know, it’s like some people think that it makes a lot of sense to borrow up as much ETH as possible and you know, collateralize it with stablecoins just for kind of like this fork value.
But other people are saying, well, maybe doing the opposite is better, where I’m just lending ETH, because, you know, the borrow rates are so high, I’m getting compensated a lot just by lending people who want to make this play on my ETH, right? And then it goes into, like, how are Compound and Aave going to handle it? Aave is saying that, you know, they’re just maybe going to pause borrowing and lending.
Compound’s saying why don’t we make the maximum interest rate…maybe I got them confused, but you know, one of them was saying maybe make the maximum interest rate, you know, 1,000% annualized instead of capping at, like, 100%, for example, right? And then Euler Finance is saying maybe the best course of action is just to do nothing and let things play out. Really, really hard to say. You know, at least now, it does seem like the ETHPoW team is saying that they are not going to freeze things on the DeFi side on their chain, which, I actually think that’s actually a pretty good idea…
Because even though they have to go through all of this, like, crazy pandemonium and a lot of liquidations, like, it’s better to kind of rip the Band-Aid off, right? Because, like, you still have the same problem, even if you freeze things, because, like, what are you going to do? Are you just going to put it into withdrawal-only mode, like, forever, or at some point, are you going to like, reactivate it? I mean, you’re just kind of postponing the problem, and I think it’s better just to, like, flesh everything out as quickly as possible, and if they do think that there is some hope that it works out in the long run, they might as well just, you know, get beyond this chapter first, all right, and the miners have to take maybe some losses early on just to mine it, but you know, at least you can kind of like get over the hump beforehand.
But they wouldn’t take the losses, right, because, well, it’s actually in their favor to allow this, because then people will actually do stuff on proof-of-work chain. Like, if you freeze everything, like, what are people going to do anyway? Where is it going to make their fees, but now that we suddenly have people like competing for those executions, paying a lot of, like…that’s how they can actually make a lot of, ease proof-of-work for themselves, and well, increase this war chest for later on. That makes perfect sense, yeah.
Sure. Yeah. I think that’s definitely possible. Yeah, I think what I meant by taking losses is that I imagine that maybe some of them were also maybe financing the development of ETHPoW. You know, maybe they’re, like, taking losses in the sense that they actually do believe that their chain will be worth maybe not that much, but like, more than what the market is showing at 2% right now, right? So, for them, it’s like, they maybe mine at a loss given the current price, and then try and hold it until, like, maybe 4% or 6% or something like that, right?
But I agree. I mean, I think, in some ways, it is more beneficial to them in that there’s a lot of activity. I think it’s a big compounded. I don’t think it’s obvious whether or not they have to do a little bit of, like, loss leading or whether it’s still just, like, overall net positive, because, like, even if they freeze it, eventually, when they unfreeze it, they still get that activity later, right? So, it’s like, probably it’s worth more now than later, but it also depends on their own expectations of how they’re going to do, right?
And how are you seeing DeFi users trying to play this? Like, I don’t know if you’ve been watching any of those movements, but do you see that there are certain movements in DeFi where it looks like those people are trying to get the tokens or dump them or whatever on the ETHPoW chain when that emerges?
Well, I mean, I think until it…until the fork, it’s hard to say what people will do, because they can’t really do it right now. The only thing that they can do right now is split their ETH and pre-sell ETHPoW, but for all the on-chain stuff and all the tokens, you know, we just kind of have to wait and see, I figure.
Okay, but you’re not seeing any movements? Like, for instance, liquidity pools drying up or just, yeah, a lot more being created or anything like that, that would indicate there are certain ways people are trying to play that?
What I would say is we’ve noticed some things. I don’t want to say exactly. We’re so close to the merge, maybe we can…I’m happy to always come back on later after that to talk about things.
Okay. Okay. Well, you know, this actually leads me to another question that I had for you, which was that…as we mentioned earlier, for the DAO hard fork, it was just totally different. Like, the community was totally blindsided by the Ethereum Classic chain, and the fact that now you have been so open about this…like, you even mentioned that you feel that now the community seems very well prepared for this, but I was just wondering, why were you so open about it? Because didn’t that sort of cut into any potential profit you might’ve made from doing these trades in a more kind of like stealth way?
Yeah, so, I want to say that there are a lot of trades that I never talked about that we did make, one involving Litecoin, actually, using that as a hedge, but that’s a separate thing, and there’s also, I think, a lot more sort of mechanical plays that I didn’t really talk about. The reason that I did talk about a couple plays, right…so, like, two are kind of the same, which is, like, the stETH / ETH basis widening, the spread widening.
And then the back related futures basis, that was because, like, I think, overall, I thought that the risks of the merge were greater than zero. Meaning that, like, initially, when I was first talking about it, it seemed like nobody even believed that there would be an ETHPoW, right, and then now I think more the consensus has shifted to there will be…eventually, it’ll be worth zero, but there will be at least some ETHPoW, and at least it’ll have some short-term value, right?
So, I think, you know, part of it is just doing a little bit of sort of like raising the alarm that it’s a bit alarming that nobody is even talking about this, and the second thing is that I don’t think that we, as a firm, would take up all of the value there on that trade, right? There’s a lot smaller grades where it’s sort of like, I need to be a little bit more careful about, because there’s not that much money to be made anyway, right? So, it’s not really great to share. I think for this one, I don’t think we could’ve absorbed everything ourselves, so it wasn’t very costly for us to talk about it.
So, that’s, like, the first class, and then the second one was about just shorting ETH against Bitcoin, and basically shorting it for about two weeks or so, and that was just because, you know, we thought that ETH really just kind of were…they were, you know, over their skis a little bit in terms of just how bullish they were about ETH. I later thought that maybe Doge would’ve been a better hedge than Bitcoin, because I also have some concerns about, you know, the Gox coins being released.
I mean, it really is just a bad time for bitcoin, right? Like, on one hand, the government wants to regulate, you know, from in an ESG way, you know, the mining stuff, and then, like, ETH is going through this merge now, and then, you know, on top of that, the Gox coins are getting released, right? So, like, idiosyncratically, like, normally, we like using bitcoin as a beta hedge through crypto space.
But I think this time around, like, you know, maybe Litecoin would’ve been better or Dogecoin would’ve been better, you know, even though there’s all sorts of, like, idiosyncratic behavior there, too. So, you know, for that trade, we also close it out after two weeks, and I also thought that that was something that we…you know, we couldn’t take all of the alpha ourselves, and I thought, you know, it was relevant to also say that it’s not just about ETHPoW, right? Like, the fact that ETHPoW will exist, I thought, was not being properly priced by the market.
People should know, but also, I think the fact that everybody’s super bullish into the merge I thought was also a little bit scary, and I think it’s a lot healthier now, which is why I actually closed out the position. It’s because at least people are talking about that it is possible that the merge is not ultra bullish for ether, right? And I think, really, I just wanted that kind of concession, right? It could still be, but I think, like, if all of the chatter on Twitter and the entire narrative is, like, 99% of people are talking about how this is just going to be UpOnly.
That is very dangerous, and it’s a little bit reminiscent in flavor to the narrative surrounding LUNA, and I don’t want to make it sound like ETH is anything close to LUNA. I mean, LUNA’s, like, infinitely worse, right, but at least this kind of like groupthink and consensus, this, like, monoculture of Up Only feels very, very dangerous. You know, and then, obviously, ETH is less reflexive and less bad than LUNA overall, but still, it’s just it had a similar flavor, and I thought that was dangerous.
Yeah, a lot of insight there, which, you know, I agree, and that’s why I run the kind of show that isn’t just pro any particular coin in the space, but anyway, okay, so, there’s a lot still that I feel like I was trying to ask you guys that we didn’t get to unpack. We’re going to unpack that. Also talk about things like replay protection or replay attacks and then go into ETH itself, because that is the major asset that will be affected by the merge, but first, a quick word from the sponsors who make this show possible.
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Back to my conversation with Kevin and Evgeny. So, we referred to these things a few times now, but I just want to make sure we explain this to people. So, Kevin, you mentioned the stETH price widening I guess, you know, in relation to ETH. Can you just talk about what you saw there and why that…what that indicates about how people are thinking about the merge?
Yeah, so, I think that spread’s actually come in a little bit. We still do have that position on, but the original idea and why it would widen is that, like, what’s the difference between stETH and ETH, right? Like, one is that stETH gets some kind of like staking yield. Two, it’s more illiquid, and then, three, it’s not going to get the proof-of-work for, right? So, those are, like, the three main differences, right? Now, on the proof-of-work side, that’s just whatever the value of the proof-of-work chain is, right, which is the market is saying, like, 1.8% or whatever it is today. I haven’t looked, and then on the sort of yield versus illiquidity side, you know, I was pricing that roughly at, like, 2%. So, I think, like, stETH should be, like, the sum of 2% and whatever the ETHPoW fork is worth, right, and that was kind of my baseline, like, mental model of what the fair value of stETH is.
Evgeny, do you want to talk about what you were seeing with the futures market and what that indicated about how people were thinking about trading the merge?
I mean, ultimately, just like Kevin said, it’s all very…the markets are pretty efficient. Like, staked ETHs discount reflect of the futures markets and what we see is, like, interest amount where it’s also highly correlated of that. We even see people smashing the functional perpetuals, even though it doesn’t make as much sense because, like, it obviously can can change significantly more and will much closer to the merge. So, like, it just does, it happens in the trading world. That must happen.
So, it’s not esoteric by any means. It just must happen. Like, I think the status here, like, there was a bit of a fact on top of it that as a state product and there is also, like, relative value play buying some of them. So, another one of them like Coinbase just released their staked product, as well. So, there are quite a lot of plays that can be done with it, and I think also one thing that I wanted to touch upon is, like, this idea…I found it, like, really interesting, this idea that, okay, let’s say it’s 2%. Let’s say proof-of-work is here and was 2%. I don’t think it’s such a big deal, to a degree, primarily because I don’t think there is a bet in all this.
Like, okay, there is a bit of a bet. Maybe Kevin will be at, like, 0.5%. Wintermute will be at, like, 0.25% because I know, like, some other people will be, as well, but ultimately, all of us are doing it for, like, really short time, and at some point, that will…like, if it goes to 10%, that’s where you will see Ethereum Foundation selling and that’s why you will see a lot of exchanges selling. That’s why you will see a lot of market makers selling.
So, currently, there is a massive invisible offer, which will not disappear, primarily because it just doesn’t make sense for most people to sell 2%. It’s got to…it’s just not worth it. It’s almost if we all communicate, okay, it cost you 2%, but the upside is, it’s there, so it just makes sense to write about, and it’s especially true for all those, like, CRV1 or UNI1 tokens, which are also, like…I know Kevin asked me the other day, like, can I show him an offer? It doesn’t really make sense for us to sell them at 10 basis points. They’re 5 basis points because, okay, if they can go to 1% of UNI because some people think they have value, for whatever reason, that’s a value we can potentially make, and so it really doesn’t make sense to sell your asset, like, basis points on the dollars. It just makes sense to wait, but it also creates this fake illusion of something having value, which it actually doesn’t.
Yeah, so, you know, I think I mostly agree with what Evgeny said, but I would have a different opinion about what constitutes something having value. You know, as we’ve seen just in the past two days, LUNA Classic pumped like crazy. I would certainly say that this chain has virtually no value. You know, overnight, it kind of just pumped, like, 100% and now, LUNA 2, basically LUNA itself, is pumping. That also doesn’t have too much, right? And then, you know, just in the history of crypto, how much value is there in a lot of these coins, right?
I think a lot of it is just kind of like belief in a thing, like, in a GameStop kind of way, right, and I think a lot of if it is also pulling very speculative future worlds to the present, right? Like, it’s sort of like, let’s say, almost all the value of ETHPoW is now maybe contingent on ETH PoS completely and utterly failing, and then them having a really strong narrative, or maybe not even that strong, but much stronger than now kind of narrative. Like, if the chance of ETH PoS completely falling is like, let’s say…and I’m talking about, like, catastrophic problems.
Not, like, minor bugs. I mean, they’ll probably have minor bugs, and it’ll all be fine, right, but like, really, just like, it just doesn’t work. They have to roll back the chain where there’s really critical consensus failures or some kind of double-spend or the network itself completely forks and requires meatspace coordination to resolve properly. Maybe that’s, like, around, like, let’s say 3 to 5%, and then, like, if that happens, then let’s say the narrative for ETHPoW improves, like, let’s say 5x, right?
So, like, that’s a road for them to some kind of meaningful percent, at least in the medium term, because, you know, when all is said and done and after ETHPoW has been completely hollowed out, it’s basically like how ETH is today, right? And I think that they can make that as a much more convincing argument if the narrative, all of a sudden, shifts to that the Ethereum Foundation, for eight years, have been building this thing, and in the end, when they delivered, it didn’t work right.
Like, if the narrative really…and it’s like, when people get pissed on Twitter, they get really pissed, and when the mob gets awoken, they bring out the torches. So, you know, we’ve seen former sort of like leaders of projects have their entire community turn on them and kind of get burned at the stake and crucified. I would not put it past that to happen in ETH if something really, really bad happened, right? Not some kind of minor problems.
So, I do see, first, that this is kind of a massive call option and possibly something like that happening, and then the second is that if we actually look at what it is, it’s basically unforked ETH and how it works today, but where a lot of stuff has to get dumped and liquidated and hollowed out. So, kind of like what you were saying Evgeny, like, it’s like…it’s like starting a new coin, but there’s no, like, kind of like foundation treasury, and you have to deal with a lot of pain in the short term.
But it’s kind of like a vampire attack, because you put the coins into the hands of the people who were using the product in exactly the types of ways that they were using it before, and they get exactly the kind of ERC-20s that they had before, right? So, it’s almost…and I don’t even think it’s particularly bad for the Ethereum Foundation, in that it’s almost kind of like an insurance policy, right, in case things are catastrophic, then there is something there.
Now, obviously, I think they would just roll back the chain. Like, I’m not actually particularly worried about, let’s say, like, stETH in the long run, right? There could be some liquidations in the short run because, like, we’ve already seen social consensus work with in that ETH kinda beat out ETC, right? Like, ideological purity didn’t matter that much. Social consensus mattered more. Devs mattered more, right? So, like, their strongest and most true believers are the ones that have stETH.
They’re not going to let those guys take losses on their bags, right, if something just really bad happens, right, and they’re going to bail them out, right? And I think at this point, it’s a lot less bad than I think the ETH Classic days because, like, the first kind of change to code is, like, not law, is, like, much more boolean, I think than, like, the second one, because it’s already been done in the past, right? And I think it makes sense for them to do that. If I was them, I would definitely do that, right? So, you know, I think there’s, like, a lot of these kinds of considerations.
I have to say, I think the main way that I would differ from you on that is the percentage at which you think there will be a spectacular failure. So, we’ll see what happens. You know, they’ve had so many successful tests, and they have multiple clients, so we’ll see, but one thing I did want to ask you before we get into things around just, you know, ETH itself. So, we talked about how there might be replay attacks.
Can you just talk a little bit about…so, if there are people out there who, you know, are thinking about trading this, what are you seeing that they’re maybe doing to either protect themselves…because, you know, at this moment, it looks quite likely that there will be, given that this ETHPoW team hasn’t really done the necessary technical work to split the chains. So, are you seeing people, you know, protect themselves in one way or another, or how are you guys doing it?
Well, just like with the DAO fork, like, the main layers who can be affected by the lottery exchanges, and as I say, I prepared for it, but other people like, Tier 1, Tier 2, I would say are definitely prepared for it, and they will simply not…well, they’re very with those withdrawal functions, basically, simply because of that, but another one that is a really interesting one in aspect of ripple attacks that we looked on our side is, it’s basically related to, basically, all this pandemonium that will happen on proof-of-work chain, and basically, what can potentially happen is let’s say I found 100 million USDC.
I sell it all under this proof-of-work and go and sell it on Poloniex later on. Great. I made maybe about, like, a few hundred K. Who knows, but what happens if the chain IDs are the same and replace attack are possible is somebody can…like, if I have the same stake on proof-of-stake chain. Somebody can replace that and screw me over big time because I was having to sell 100 million of real USDC, and then suddenly, I’m doing, like, a really bad trade, potentially, for me because I’m doing something really big that will potentially move the press, and that can be scary.
Can I just ask you…I don’t understand your example because, like, USDC already came out and said that they’re not going to support the ETH proof-of-work chain, because, obviously, since it’s backed by real assets, you can’t just magically suddenly double all those. So, were you just making that up as an example? I didn’t understand how this could be an example.
It’s more like, so, if I do this transaction of proof-of-work, trying to basically get this free Ethereum proof-of-work from my very last USDC. This transaction will have, like, transaction, DAO Hash and everything. So, somebody can use the same transaction and replay it on proof-of-stake chain and execute exactly the same transaction, you see?
Right, yeah, because there’s no replay protection. Oh, I get what you’re saying.
And so, that basically…so, profiting from it is kind of more difficult, but you can make…you can screw a lot of people potentially, and let’s say I sell 100 million of Ubisoft, for example, into proof-of-work, that will move Ubisoft price a lot, and you can position yourself on the other side buying this Ubisoft really cheap on proof-of-stake, for example. So, that can be, like, one fun thing to do, and it can be one fun thing that people can, on one hand, try to profit from, or if they’re, like really, really malicious, just trying to, I don’t know, bankrupt, like, bit trading companies, for example. So, for us, it was one of those, like, what can go really, really, really wrong if the stuff happens? And you can protect yourself against it, but yeah, it’s quite the fun one.
How are you protecting yourself against it?
Well, the most easy way to protect yourself is not to do this transaction and proof-of-work chain in the first place. This part is the easiest. No, this is because there is nothing to replay. Other ways is because it’s a stake, right? So, the stake should be the same. So, basically, if you…during the first block, you move all your USDC from one wallet to another, and then during the second block, you sell the USDC on proof-of-work chain. Nobody can replay it because you don’t have any USDC on proof-of-stake. So, that’s, like, another way you can do it to protect yourself.
And would this apply also to NFTs?
It can apply to anything, really, yeah.
Yeah, because OpenSea said they wouldn’t support the ETH proof-of-work chain. I just imagine there might be some people who, in the NRT world, they may not know what a replay attack is. Hopefully, they’ll figure it out and yeah, not do anything that would cause them problems.
Yeah, and maybe just to also add to that, there’s a way of splitting your coin pre-fork, too. Like, there are certain contracts out there that they haven’t been audited. You know, I’m not vouching that they work or not, but basically, they figure out a way that, on-chain, you can detect which chain you’re on, and for each side of the two split coins to be only valid on…it’s basically a contract that allows you to split your coins beforehand.
Okay. Yeah, and I just want to be clear, nothing we’re saying in the episode is advice for anyone, financial or trading investment advice for anyone. Okay, so, we’ve been talking so much about the potential trading on the proof-of-work fork, and meanwhile, ETH really is the asset that will probably be most affected by this. So, let’s, you know, zoom out, and let’s talk just generally about what’s going to be happening here.
You know, Kevin, you have actually talked about how, you know, you are long ETH. You, you know, believe in ETH. I think that’s why a lot of people were, you know, not really happy with your comments, but why don’t we just sort of talk generally about, like, you know, what kind of price action do you see around the merge? What do you think will happen in terms of potential issues around selling news, and then long term, you know, where do you think the price of ETH will go because of this news event, assuming it’s successful?
Yeah, so, I think that it depends on a couple things, and I just want to clarify, yeah, I do hold a little bit ETH myself. That’s just been there for a long time, but that being said, there have been periods that, as a firm, we have both been long ETH, and we have also been short ETH and also, most of the time, just flat ETH. So, you know, just wanted to clarify that.
Overall, if the merge is successful, I think that, initially, probably, just from the hype and just from the celebration, you know, probably a little bit more money is going to pile in, but I think right now, anybody who really likes ETH is already kind of in ETH. I find there to be very few people kind of like on the sidelines that are kind of like neutral about this and want to see how it plays out and then take a long. I think, for the most part, people even on the fence have mostly bought into the narrative, and then there’s, like, a set of detractors who will just never buy this thing no matter what happens.
So, I think, really, you know, the lines are kind of drawn already there, and I don’t really see the price getting bought up to really crazy heights. Now, there are some counterarguments to this. Like, for example, that, you know, the inflation supply issuance is going to get reduced by a lot, you know, 99%, 90%, you know, and you know, that will help things on the supply kind of overhang side, but you know, I think a lot of price action is mostly driven by demand anyway. So, really, the question is, like, who are going to be the new buyers?
We know that there’s a lot of people who are, like, kind of like…it depends on, like, the demographic or, like, true believers and who can be converted to be a true believer after the merge is successful, versus how much mercenary capital was piling into the long-merge trade to begin with who will then look to exit for new opportunities, in whatever the new narrative is. So, if the former is great, then the price should go up. If the latter is greater, then the price should go down. That would be what my guess is, you know, on whether this is a sell the news event or not.
Evgeny, what do you think?
Yeah, I mean, it’s, in general, quite interesting that we are both here because our firms are both trading, but like, we’re kind of doing very different things, in a way, because if you listen to Kevin, like, it’s, I don’t know, long Ethereum, short Dogecoin, like, all those kind of plays. Well, for us, it’s much more on the automation side, just making sure that we are…then we can just provide markets continuously throughout the day.
We typically don’t hold long-term views on things. We do hold some tokens as parts of our venture portfolio. We do hold some tokens, like Ethereum and bitcoin as part of our treasury, effectively. It’s not something that can ever make us go bankrupt or even, like, jeopardize operations, but it’s something we felt was the right thing to do. Also, it didn’t really work out the last nine months or so, but we are okay, but I think, for us, the interesting thing is just how to react to different things as it happens.
So, we are much more preparing…we are not really positioning ourselves to go long ETH or short ETH or doing things like this, but we are thinking, okay, like, how us and our algorithms will react to certain things, and for example, like, one thing that we’ve been debating internally is are we going to be looking at proof-of-work Ethereum price, and what we kind of decided is not really, because, like, it’s…well, first of all, like, nobody can say what Ethereum theoretical price is at any moment because there are just so many variables.
But like, if proof-of-work goes to 10% of ETH, it’s not going to be, like, a selling signal for us for Ethereum, because we do see proof-of-work as much more of a meme coins than anything else at this stage, and I mean, like, there’s a trade that we will be doing with it. As we’d be looking at e-trading against Ethereum Classic, for example, or maybe against some other chains, but in terms of positioning, it will be, you know, wait and see, but position ourselves for massive volatility, basically, for the first few months, and just like I mentioned, focus on how the MEV game will change, provided that the merge happens successfully.
Yeah, and you know, maybe I could just add something to that. You know, I think a lot of what I’ve been talking about recently has been more about, like, sort of these long-short trades, mostly hedges, some directional, sort of like mid-frequency, you know, maybe fundamental type plays. That’s actually mostly not what we do, actually. We actually also do quite a bit of algo trading, and not to the extent that Wintermute does.
I mean, I know that Wintermute is, you know, one of the big behemoths in algo trading across, you know, DeFi and CeFi. I think you guys have, like, 2 of the top 30 accounts on FTX in volume. For us, you know, we’re much smaller. We’re at maybe about, top, 80 right now on FTX, but you know, we also do have a lot of stuff where…you know, we’re also doing market making. We’re also doing a little bit of HFT trading.
But you know, I figure that’s not going to be as interesting for, you know, the topic at hand. So, I wanted to sort of just talk about things maybe that are more relevant to the viewers and you know, things that they might be…you know, they might want to think about. Not financial advice, but maybe some things that might impact them and that they would think about, but I’m also happy to also talk about, like, you know, order book dynamics and like, you know, queue positions and ticket sizes and that sort of thing, too.
We’re going to take it in a different direction because we’re sort of running out of time, and I did want to ask, you know, we kind of talked about the narrative around bitcoin and how there’s a lot of news that, you know, has been challenging bitcoin recently, but in addition, ETH’s issuance will go way down after the merge. It may even become deflationary. So, how do you think affects the narrative around bitcoin, which traditionally has been thought of as digital gold? It has this digital scarcity, and so, if ETH is even more deflationary, you know, how does that affect bitcoin?
Yeah, you know, I think I wanted to say that…I wanted to draw the LUNA Classic example, but I’m not sure what side this supports, right? So, like, on one hand, LUNC, basically, is introducing an on-chain transaction tax, right, making it actually deflationary, and I made the joke on Twitter that, oh, LUNC must now be ultrasound money. Well, obviously, you know, the point that I was trying to make is that, you know, just because something’s deflationary doesn’t make it sound…right, like, if you tack on, like, a 1.5% transaction tax on LUNC, I mean, does it really make it that much better? I mean, this thing’s kind of garbage, right?
But that being said, what the market said is that it really liked it, and actually, LUNC, like, just pumped on that news, right? I don’t know how much of that is sustaining. I think it’s, you know, fallen off a bit since then, but the market really liked that news, the idea of just, like, imposing a 1.5% transaction tax on-chain, right? So, like, on one hand, I do feel like, you know, fundamentally, this makes no sense. You can’t just move around some numbers just because something is deflationary.
Doesn’t mean that…especially something that is so…in crypto in general that it’s so demand driven doesn’t just make it, you know, pump and price, but on the other hand, the market is actually saying, well, maybe just this cosmetic change is actually really good for the price. So, I actually have very mixed feelings about it. I think before the whole LUNC pump, I was thinking, well, you know, I think, you know, maybe it goes up a little bit, you know, because of the supply effect.
But maybe not too much, but now I’m actually…you know, maybe I’m kind of revising my opinion now, just given what’s happening with LUNC and LUNA. You know, really hard to say. I’m constantly kind of reevaluating what the market is telling me. Whether I think that that’s sensible or not, I mean, doesn’t matter as much, you know? I think it’s more about what does the market believe, and I need to figure out how it’s thinking about things.
Right, but how do you think this will affect bitcoin? Do you think that ETH will…you know, the price will be boosted to the detriment of the coin?
I think, at this point, there’s not that many new people to be won over from the Bitcoin camp to the ETH camp. Like, the camps are basically set. I don’t think there’s many people on the fence, and things have already gotten very polarized. So, I don’t think that it’s to the detriment of Bitcoin, per say, in the short term. In the long term, it could be, I think just as a competitor to bitcoin, but what I would still say that, right now, the thing that probably impacts Bitcoin the most is its own idiosyncratic events, right?
So, things like the Gox claim overhang, right? Like, if that wasn’t there, then, like…I think that’s a much bigger primary effect than what’s going on with Ethereum, but I do think, in the long-term, especially in, like, maybe, like, a bull market, a couple cycles down the line, they’re going to have to battle, right? Like, once, like, everybody has adopted crypto, then, along the borders, there’s a lot of, like…there’s a lot more fighting for territory, right?
And this is sort of why their markets are very PVP, because everybody sees the pie shrinking, and there’s no way to get a bigger pie, so everybody tries to take everybody else’s pie, right, but in a bull market, that’s not the case. The pie itself is going. Generally, there is, like, less in-fighting. Everything grows, but eventually, it grows to a point, right, in the success case of crypto, that there’s, like, full adoption, you know, worldwide adoption, and at that point, finally, the lines are drawn, and then there has to be a lot of, like, this kind of competition. So, that’s kind of how I see things in the different time frames.
Evgeny, what abut you? What do you think about how this affects bitcoin?
I would say they are very similar. I don’t see people switching from Bitcoin to Ethereum. It’s more like the narrative can change so much, that the future people will more likely buy Ethereum and Bitcoin. So, it’s more about that. It’s about those new people that will eventually buy one or another, because you cannot buy both. You can’t get…you need to make a choice. Well, they will buy Solana. Maybe they’ll buy something that is not issued yet.
So, it’s all about this, but I don’t think this here will replace bitcoin, like, completely. I think they are still playing very, very difficult…very, very different use cases, because bitcoin is all about the most basic blockchain algorithms there is, which works, which is, well, arguably, the most decentralized cryptocurrency out there, compared to pretty much everything else, and it works, like, right?
Like, so many external shocks, like, I don’t know, banning bitcoin mining in one country and other…like, all kinds of things. It still works. People are still buying it, and yes, we can have Mt. Gox. We can have, I don’t know, Saylor being liquidated because of that. There can be a lot of fun events happening, but ultimately, I think it has a brand. Like, it is the first cryptocurrency there ever was, and just because of that, I think it will have, like, pretty consistent value.
And it’s because Ethereum is just different because it’s, yeah, this virtual machine. It has DeFi on it. It’s…I don’t really understand, like…well, I guess for me personally, I don’t understand why people saying Ethereum can be such a great store of value. It’s more like oil to me I guess, as cliché as it sounds. So, it’s like oil to bitcoin gold I guess.
I just want to say I completely agree with Evgeny’s sentiments there.
Okay. Yeah. Arthur Hayes was saying similar things when I interviewed him recently, and last question. I wanted to ask about this news that…the White House recently said they’re concerned about the environmental impact of proof-of-work mining, and I wondered, again, how you thought this could affect that kind of…I don’t want to call it a competition, because I agree with you that bitcoin and ether are actually just different things with different purposes, but obviously, you know, as you said, people will come into this space, especially newbies. They’re going to be kind of looking at them maybe more just, like, as investments or whatever, and so, I wondered how you felt that the, you know, change in the Ethereum consensus algorithm towards something that’s more environmentally friendly would affect, again, the narratives between these two coins.
Yeah, so, I think it really depends on how the ETH people want to play it and whether or not they’re going to take this as an opportunity to try and take market share from bitcoin, because I do think that the narrative on this favors them, you know, pretty strongly with, you know, obviously, a proof-of-stake requiring a lot less energy, especially during a time where energy…you know, there’s energy issues around the world, and you know, you could make a case that maybe that energy would be “better spent” on, you know, heating homes and you know, growing food or whatever, all these other things, right?
So, I think, you know, I think the ball’s in their court on what they want to do. I don’t particularly mind the moral argument, like, if they were to say that, you know, ESG is just better for the planet. It’s good overall. I think what I don’t particularly like is if they would try and…I always consider a lot of the disputes within crypto to be, like, family affairs, right? Like, for the most part, you know, we all disagree with each other.
But at the end of the day, we’ll all, like, crypto-heads together, right, you know, against the outside world, against, like, fiat money, that sort of thing. So, you know, I think that, overall, like, you know, I’ve supported, you know, Tornado Cash, and we did well and started going on there. I don’t think that…I think whether or not ETH is a security, I don’t think that the Bitcoiners should go down that road, right, and I also don’t think that the Ethereum guys should go down the road of trying to have state actors enforce against proof-of-work.
I think the best situation is just to have an open market, have everybody just fight on an equal playing field, and then, you know, may the best coin win. I think you can make moral arguments. I don’t even mind, you know, Ethereum guys doing that. I think it’s just…it’s another thing to kind of have, like, an appeal to a greater authority, you know, with a monopoly on violence to try and enforce against your competition and to try and limit the scope of their competition.
I think that that would be less healthy for the space in the long run, and I think that it’s important that, at a time like now, that at least there is some level of camaraderie within the crypto space, which is also why I think, tactically, for the ETH guys, it’s better for them to focus on the tech thesis and then subvert bitcoin on the money thesis, much later rather than fighting bitcoin on the money thesis, while already having won the tech thesis, causing a lot of reaction from the bitcoin maximalists to then go attack Ethereum.
I think it’s a lot better to have some kind of truce there so that, you know, a greater war can be fought, and then, you know, later on, can deal with that…to do with that issue. I mean, Ethereum can always make the argument that US equities are, in total, worth more than gold, right, than the market cap of gold. I think that is a perfectly fair argument to make if they want to say they want to have, like, US equities plus, you know, the market capitalization on gold. I think that that is fair, but I don’t think that that’s tactically correct. Yeah.
Yeah, I’m pretty much 100% agree. Like, one thing I guess I want to say because…yeah, I mean, it’s totally political, what’s going on, like, and it’s just part of continuation of this ESG narrative that has ben there for quite some years now. I’m personally hoping, for the record, that this ESG narrative will wither and die because I think, like, the way it’s implemented, the way it’s affecting, like, how people invest their money in meatspace.
To me, it’s very stupid. There are, like, way more smarter ways how you can affect the change on the…well, with this environment and everything, and yeah, banning bitcoin is not the way to approach it. Like, banning bitcoin is not going to make our planet greener. That’s…if you think about it properly, you understand that. So, I think, yeah, I fully agree that, as crypto community, we should go and get together and like, just not use those kind of occasions to destroy our opponents. It’s, like, very, very simple.
Okay. Well, this has been a fascinating note to end the conversation on, given that I do think certain members of the Ethereum community would say that you’re, you know, fomenting chaos for them, but anyway, before we go, where can people learn more about each of you and your work?
I’m on Twitter @Galois_Capital.
Yeah, I’m on Twitter as well. It’s my first name, last name, Evgeny Gaevoy. That’s mostly why I’m writing stuff. I sometimes write articles, but not as frequent as I would like to.
All right. Well, this has been so fun. We will see what happens next week. I’m definitely excited for the merge. Thank you again. It’s been a pleasure having you both on Unchained.
I really appreciate it. Thanks for having us.
Thanks so much for joining us today. To learn more about the merge, check out the show notes for this episode. Get exclusive access to even more of my content, including all the links in the weekly news recap through Bulletin. Visit LauraShin.Bulletin.com/subscribe. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Matt Pilcher, Juan Aranovich, Pam Majumdar, Shashank, and CLK Transcription. Thanks for listening.