← Galaxy Brains
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- [00:01]
A
Welcome to Galaxy Brains.
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B
An infinite amount of cash.
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A
Cash. I'm your host, Alex Thorne. The US banking system is sound and resilient. Bitcoin meeting new all time high.
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C
If you're not long. If you're not long, you're short.
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B
Satoshi is going to come on there, laugh hysterically, go quiet. All bitcoin's gonna be erased. Bitcoin. Bitcoin's the best crypto.
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C
Bitcoin is going to zero.
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A
Welcome back to Galaxy Brains. As always, I'm your host Alex Thorne, head of Firm Wide Research at Galaxy. Bitcoin's not zero. Great episode for you this week. Zach McCorny from Galaxy Research joins us. A long interview with Zach. Zach is looking at a lot of interesting things and we sort of break this discussion up into four parts. We talk about the lending markets. He's the author of our quarterly, excellent, widely read lending report and he'll give us some details on the new numbers. That report comes out next week. Then we talk about how AAVE governance and governance in defi and how autonomous organizations are able to act in the real world. It's actually quite similar to the problems that AI agents have acting in the real world. Then we'll talk with Zach about prediction markets and base Coinbase's roll up, taking its code base in house and what that portends. Of course, we'll also check with our good friend Bimnet, a BP from Galaxy Trading. As always, talk a lot about geopolitical tensions and the AI impact on markets. Great conversation. Before we get to any of that, I need to remind you to please refer to the link to disclaimer in the podcast notes. And note that none of the information in this podcast constitutes investment advice or an offer recommendation or solicitation by Galaxy or any of its affiliates to buy or sell any securities. We've got a long episode for you here. 20 minutes with BIM net and 55 minutes with Zach. It's a great one though. So let's hop right into it with bim. Let's go now to our friend Bimnet AB from Galaxy Trading. As always, Bimnet, welcome to Galaxy Brains.
- [01:52]
C
Thanks for having me.
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A
We're basically in the same spot as we were last week. Bitcoin slightly higher, which we'll talk about. But again, in the range. Fear is still about AI. Will it take all the jobs if it's successful? Actually, is it not likely to be successful and we've been overspending in Capex to build it out or crap, we need to spend a lot More to build it out. And is there enough capital to keep building all of this? Very anxious and other things. But is that those fears haven't changed this week, right?
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C
They have not. In fact, the biggest kind of talking point this week was a piece put out by Citrini, kind of thinking about what the world looks like in 2028. And he's talking about S&P down 30, 40% and the unemployment rate at 10% plus and you know, all kind of intellectual capital becoming kind of like worthless.
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A
Yeah. And he said all payments companies down huge because the future uses stablecoins.
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C
Yeah, absolutely.
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A
But that was he. That was a good. It was sort of like satire. It was fiction. Yeah. It was a research note from 2028 that Imagine might be sent about the economy. And he did say it was not there. It specifically wasn't there. But isn't their prediction. It's just a.
- [03:05]
C
That is a version of the future and you have to put a reasonable probability on it. But I think the labor side of things is super clear to me. Right. Like you will need less people between robotics and AI. And AI that is exponentially getting better.
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A
I mean, yes.
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C
Like month on month it keeps getting better. And so what is it going to look like six months from now? What is it going to look like two years from now? It will make people obsolete. And you combine that with robotics, it's really hard to see a future where you don't need a lot fewer people employed.
- [03:44]
A
Yeah, I agree. And the markets. It was funny that went around on X and on Substack, the Citrini research piece, but actually I hadn't been. Between the storm in New York and other stuff that I've been busy with this week. I didn't see a lot of mainstream content earlier this week, but I caught a glimpse of CNBC the morning after that came out where they were directly blaming the down market of the day on. On that piece. So apparently a lot of people.
- [04:11]
C
Yeah, I mean, I. I think the nerves were already there. I mean that the Friday. Yeah, you know, Claude came out with this thing for cyber security and all the cyber security stocks like took a huge hit. And on that Monday, you know, Claude came out and said they could do the Cobalt stuff. Yeah, Cobalt and IBM sold off like 10% and it's just like, wait. And on that Monday, you also had financials selling off aggressively and that seemed like more of a positioning dynamic around private credit and some concerns there. But yeah, there are pockets of the market that are an unchartered territory.
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A
It's kind of crazy. The market shouldn't be playing whack a mole every time one shouldn't it be broadly pricing in. It's pretty clear that you know, today then it was. It was COBOL and then it was, you know, this other industry, cybersecurity. And then it. Then it's going to be some other. Like, shouldn't we just broadly be repricing anything that involves labor? Like at this point, which is most.
- [05:14]
C
I mean that is effectively what's happening. And like the companies that are doing best are the companies that apparently are going to eat market share from the existing companies. Right. So the. The Googles of the world. Right. And everybody's going to be using Asset.
- [05:28]
A
I literally vibe I've been paying 299 $2.99 cents a month for like seven years for this great app on iOS called Mematic. Just that makes it really easy to do memes, meme imagery and stuff. And I just vibe coded myself one this weekend in cursor and now I don't need it. I literally canceled it. Literally. It's the exact same app, like I made the exact app like basically for myself. Well, not for free, but you know.
- [05:54]
C
Yeah, again, this is where the world's headed. And I think these tensions culminating with the geopolitical risk that's present in the market leads to a lot of nervousness. And that's why you've got VIX reasonably elevated. It was on a 20 plus handle. It's come off a little bit, but there's a lot of stuff that essentially should increase the variance of the market or the distribution of outcomes is so crazy that the pricing right now, it might not be reflecting truly what that distribution looks like.
- [06:38]
A
It's so interesting. We said this in our bitcoin prediction, which I consult with you weekly on this show. I declined to put out a bitcoin price prediction for this year. And one simple way to point to us is looking at the options market in bitcoin and showing that there were like equal likelihoods traders were pricing at the time, an equal likelihood of like 50 or 250 by the end of the year. And I'm like, that's just too wide a band. It's like too chaotic of an environment. Let's talk about the geopolitics you brought up. Of course, we're talking about this massive move of American military hardware into the Middle Eastern theater and the anticipation that Trump, President Trump may or may not order some military action against Iran in this ongoing dispute about its nuclear have we had any meaningful developments. I mean, talks right in Geneva.
- [07:29]
C
There are supposed to be more talks tomorrow. And the administration has been putting different timelines depending on who you talk to, but it was like 10 days, a week ago. It was a couple days at some point. But actions speak louder than words. And the actions are we have deployed a ton of military resources into the area. We have warned people, have warned citizens in Syria and other places in the region, get out. And
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A
they seem high, seem high.
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C
And then the other headlines are, I think the Iranian response to a limited strike is more aggressive than it has been historically. At least that's kind of what we're really anticipating.
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A
What US Bases in the region, type of stuff like that.
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C
It used to be like, oh, you know, you strike my military target. Oh, I strike your base when there are no people there.
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A
Proportional attack, proportional response.
- [08:32]
C
Correct. And I think at this point in time, at this point in time, you know, the Iranians are like, no, we need to have like, you know, a significant response to a limited threat.
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A
They're claiming more deterrence, trying to be more deterrent.
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C
And then on top of that, like there are headlines being like, the Chinese might sell them their anti aircraft carrier missiles. And then apparently the Iranians did a $500 million arms deal with the Russians. And so it just gets really weird. And if you really think about it from the standpoint of Israel really does want to go in super aggressively, I think it's understandable to have a large nation, this military arm that funds people doing awful things.
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A
It's reasonable to see them as a threat. No doubt.
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C
Yeah, it's super reasonable. And yeah, I just don't see all this military buildup and nothing happening.
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A
It seems like a lot of pieces. I mean, again, we don't know, but there's a lot of the open source intelligence, you know, accounts and websites that have been showing substantial movement. You can see them on flight radar and stuff like that.
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C
I mean, it's a lot. I have all the alertings and stuff,
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A
groups in the region, two, which is,
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C
I mean, one of them has a toilet problem.
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A
I saw that story. Yeah. So that the market is. Is what?
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C
I don't think it's properly appreciating that because like the, you know, S and P being like essentially at all time highs. Again, like guys, like there is a major conflict in the Middle east that is brewing and like all it takes is like, I know, like one bad
- [10:07]
A
comment or one wrong action, misstep or miscalculation. It's so true. I studied conflict A lot in college when I was studying political political science and international relations. And even in the case that both sides intend not to escalate, too bad. Escalatory conflict spiral is very possible and even likely to occur once these things get going. A lot easier to start a war than end one. So very risky.
- [10:35]
C
To be honest, I don't know what the US calculus is. I understand that a nuclear armed Iran is not something that anyone wants, but I also think that a huge Middle east conflict is also not something people want. So you're stuck between a rock and a hard place. And in terms of what markets do on this type of stuff, it's hard to say because as long as it's offshore, it's not gonna impact everyday Americans. It's just not. People are still gonna buy all the Nvidia chips that Nvidia is able to produce. Right. Like people are still gonna need healthcare, people are still gonna need.
- [11:15]
A
You know, this is something presidents have made use of for. That's why they like the missile so much. Right. Like it's obviously you start sending people's sons and daughters in a harm's way, like that has major domestic political ramifications. But if, you know, you're just drone striking here and there. Like presidents have gotten away with this type of activity even in cases without the approval of Congress because it's sort of out of sight, out of mind for the average American.
- [11:39]
C
No, but, but it's just like, you know, you know, there's the tail risks of, of this stuff is just. That's right, you know, like the Chinese and like there's already existing trade tensions and you know, like I, I don't think the Europeans are really on board with like a. I think the UK apparently was like, you don't use our military bases for, you know, Iranian operations like they did. It is, it's tricky, very hard situation. And you know, like could you be talking about like massive mines going into the straight of Hormuz and.
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A
Right. Like worst case scenario is definitely straight or moves like that disrupts all global oil.
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C
And 20% of oil goes through there.
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A
That's enough to destabilize the entire market.
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C
The price forecast I've seen are like over $100 a barrel.
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A
And like where are we now?
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C
Like like 70 or like 60s depends on Brent crude.
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A
Yeah, but that's a major increase, a 30% increase potentially if a bad conflict. So that further uncertainty in the market.
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C
There's just a lot.
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A
All right, real quick on bitcoin.
- [12:41]
C
Yeah.
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A
Let's go to Bitcoin. So we got about as low just a day or two ago. As in like the 63. Yeah, 63. I think I'd say 62s didn't quite retest the February 60k low, which was really the flat, I think on coinbase it was 60,000.00 was the 50 Feb 5 low. It we're now drifted higher. Today we were up about 5% almost to 70K. That's on a day where stocks were green. Crypto stocks were all up as well. Pretty much, yeah. Is that just drift? Is that. That's just in the range, that noise?
- [13:19]
C
I think it's noise. I mean, a lot of like the alt charts, for example, it's like, oh, you know, something goes from like, you know, $16 to like $2 and goes from $2 back to 230 or 240.
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A
Yeah, like 40%.
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C
Like 20 in this.
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A
From a very low.
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C
Yeah.
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B
Right.
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C
And so you have 20%.
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A
Yeah, from a base.
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C
Base effects at play, you know, because stuff is sold off so much. And same thing on the crypto equities. Right? Like, oh my God. Like, yeah, like Coinbase is up a lot today. Well, did you see where it was to start the year?
- [13:50]
A
Yeah, like it was down a lot.
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C
It was down a lot. Right. So these moves look like huge moves percentage wise and that's totally reasonable. But for people that were long, this stuff, it's not really like if you
- [14:02]
A
were long at 100 for Bitcoin, you're not feeling that much comfort that it went from 62 to 68. Yeah. Basically means nothing.
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C
Where was Solana to start the year? Yeah, you're back to 88 bucks.
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B
Yippee.
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C
I think you probably started the year like 130. Yeah, 120 and change.
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A
So no material change in your mind from what we're seeing right now?
- [14:21]
C
I think right now. Right now it's a range. And historically in bear markets, in crypto, you've had periods where you've rallied 20 to 40% at times off the lows before ultimately making lower lows. And so I do think that if you're trading from the short side, these are not great levels. Right. Even if you're of the view that you're going to 50 or lower eventually, you just have to know where max pain is at any point in time. And so I think it's feasible to get a rally as high as like 80, 85 even. It's totally possible. And what you'll see happen is narrative will follow price.
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A
Right.
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C
And so the moment, you know, you start getting back in the 70s, people will be like, oh, it's back. I risk on 75k, like, oh my God, it's digital gold. The Dats flywheel starts again and etc. Lower. And then.
- [15:17]
A
Yeah, yeah. And so you think it's more of a. To the extent it goes lower, it's more of a drift and a chop. It's not a. You know, we don't see it. I mean, I guess the main one being of if all of a sudden equities correct, like significantly lower, then you could get it.
- [15:33]
C
But ultimately, like the way this market works is like you need to have like people start to get long again. Yeah, right.
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A
That's right.
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C
In order for you for it to
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A
actually there probably have been people playing this volatility, buying a 62, thinking that's too cheap, and then selling the 69 to clip some money. That's a good trade. Right. But that's not the type of activity that carries us higher in the long term. Right. Structural long.
- [15:59]
C
Structural long. And to be honest with you, right now, all the like, there's so much volatility in the equity complex and so much dispersion. Right. That being a stock picker right now, it's a phenomenal time. If you're good.
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A
Yeah, yeah, obviously.
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C
And if you're in the sectors that do well. But it's like there's so much to do that like crypto, like for a lot of like Main Street.
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A
It's not the most interesting thing right now still. It's what happened the last year to AI, Quantum gold. These other things took mind share. Now stocks, you're right.
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C
You have days where IBM moves 10%.
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A
IBM, yeah. It's crazy. Like, and Microsoft, tons of them.
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C
By the way, the volume has been insane. And so it's like, why do people like Alts and tokens?
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A
It's usually because the volume, the Vol.
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C
And so like this.
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A
All right, well, that's very interesting. This is a great one with you Bimnet. I hope you have a great week and we will see you next time. Thank you, Bimnet.
- [16:53]
C
Amazing. Thank you.
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A
Let's go now to our guest, Zach McCorny from Galaxy Research. Zach, welcome back to Galaxy Brains.
- [16:59]
B
Yeah, as always, happy to be here.
- [17:01]
A
Yeah. You've been working on a bunch of interesting stuff, so I thought it'd be cool to give our audience some discussion and insight into what those things are. I wanted to ask you about lending in general. You're the author of our excellent and widely read Quarterly lending report and the new the Q4 update from 25 comes out within the next week. And I also want to talk about prediction markets. You're an avid user and follower and author about prediction markets. Bunch of interesting stuff's been happening. And then also wanted to talk to you about Base Coinbase's optimistic roll up that they are now removing from the OP stack. The op stack and the superchain want to own it themselves, the code base and whether or not more things that portends more changes coming for that. So let's start with lending. What is the update here on the numbers? I mean I think last quarter was the biggest ever. Right. It eclipsed all prior in terms of the amount of loans outstanding to both centralized and decentralized lenders. What happened this quarter?
- [18:03]
B
Yeah, I mean last quarter we hit an all time high upwards of like $80 billion. This quarter we obviously came down a bit just with.
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A
So that was Q3.
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B
That was. Yes, last year Q3, 2025 was the biggest quarter for outstanding loans we've ever had. Primarily driven by on chain lending. Yeah, we kind of had a positive reflexivity loop with trading activity being so high prices appreciating people doing these yield based looping strategies, it created a big not bubble, just a lot of demand and economic possibility for these types of loans. But in Q4 we had 10, 10 negative price action. So it was really a story of negative reflexivity on chain and off chain resiliency. We actually saw CEFI loans continue to climb, which is actually something we mentioned the last time I was on here in a bear market or bearish conditions. We thought it was likely to see CEFI lending continue to grow while on chain kind of falters. That's just the reflexivity loop of on chain lending in the nature of it. But yeah, we only came down about $8 billion. So like 10% and then CEFI lending kind of filled the gap.
- [19:14]
A
So what? Mostly flat quarter over quarter down like 10%.
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B
We lost like $8 billion worth of open loans, but still nothing crazy. I mean we obviously saw the defi share fall a little bit, but that's just.
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A
Yeah, I mean the value of collateral
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B
goes down, people use people close loans, people get liquidated.
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A
Yeah. One of the biggest stories we've talked about now for a while in the lending space has been the ascendancy and resiliency of defi as a primary. Is defi still the bigger than cefi? I know it has been for a quarter or two at least. Right. Like is it, is it still Leading in terms of share versus the centralized lenders.
- [19:50]
B
Yeah, it still has about a 57% market share, give or take. So the majority of loans are still really incredible. Yeah, I mean it makes sense. There's no gates to entry. The applications can be way more nimble than centralized lenders. The whole Pendle PT looping phenomenon can only really originate on chain.
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A
Right.
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B
I mean maybe some CEFI lenders are starting to do that stuff or thinking about it, but it can't just become a thing and then get implemented off chain. On chain is where the experimentation happens. And all of these assets for the most part are native to blockchains. Like we're starting to see some RWA looping stuff. But these are primarily crypto native synthetic assets that people are using here.
- [20:32]
A
Yeah, but the resiliency too, like when you look at the, like in 22 and 21 when we had all time highs and spot prices and in lending that was mostly cefi. Right. That was the blockfi, Celsius, Genesis, Galaxy. Right. Et cetera. And now first of all, very few of those are still around. It's a different cohort of centralized lenders. Obviously Galaxy's still around, but defi wasn't that big then what has changed? What has supported its rise? The composability you're describing makes sense, but it's trust, right?
- [21:10]
B
It's trust. And like you mentioned, all of the major CEFI lenders got wiped out.
- [21:14]
A
Yeah.
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B
So it was like anybody who wanted to borrow against their Bitcoin or their ether, whatever, where were you going to
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A
go for a big period? Yeah.
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B
The largest applications made it through the bear market, no issue for the most part. Whereas all the CEFI lenders got crushed. And that was kind of the interesting thing I was looking at when I was putting all the data together. It was like, it really was like 1/4 CEFI lending just evaporated.
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A
Right.
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B
And even in the wake of super negative price action, the biggest liquidation event in perv's market history, we're seeing it continue to climb. I think that's a testament to the practices of a lot of these CEFI lenders. The industry's ability to self regulate in the absence of actual rules and even maybe hostile rule makers. But yeah, the resiliency of off chain lending has been huge. And I mean maybe there'll be some decay in Q1, but I anticipate it to be more steps down not taking the elevator.
- [22:13]
A
Smart. Interesting. I wanted to ask this a little bit of adjacent, but you also put out a report a couple Weeks ago. Now, talking about the correlation or connection between staking and lending on a network, would you just give the high level of what the thesis is there and the conclusion you came to?
- [22:32]
B
Yeah, I mean it's really a story of collateral asset access. Like all the lending on chain is collateralized or over collateralized. So without quality collateral assets, you really don't have lending markets. And every user on chain who holds like Eth, Sol, whatever, which are the bedrock of each of their respective chains, they can stake for yield, they can deposit into DeFi, whether that's just directly lending through like a pooled lending app or whatever, or through some kind of synthetic yield bearing product like Athena to create new collateral. So when they choose staking, you essentially just cut down on the pool of available collateral and lending markets struggle to kind of grow in that setting.
- [23:15]
A
Oh, so it's like you can get a, I don't know, make this up. If the chain is paying 5% in inflation and rewards for staking, then but the borrow market for that for your asset is only paying three. You wouldn't lend.
- [23:31]
B
Yeah, you just have less incentive. Like staking is relatively less risky. The yield is much more stable. Like it's programmatic and known and you're just not taking the application risk.
- [23:43]
A
Yeah. It seems to make the argument though that if you want more robust lending markets on your chain, you should have lower inflation. Right. Lower staking rewards, basically.
- [23:58]
B
Yeah, it certainly helps. I mean there's ways to get around it. You can try to import assets from other chains like Bitcoin, obviously.
- [24:04]
A
I know, but then those. I was thinking that. But your collateral point, like a Bitcoin on Solana is much worse collateral than a Bitcoin on Bitcoin. Right. You think you have other wrapper issues and whatnot.
- [24:16]
B
Yeah.
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A
I mean, or have those been solved?
- [24:18]
B
Yeah. People are working on getting loans on like Ethereum and Solana against native Bitcoin. But I think the issue is mostly like there's only so much Bitcoin circulating that wants to be deposited right into a lending application.
- [24:32]
A
Not very available.
- [24:33]
B
Yeah. And just the nature of lending activity, it's, it's very sticky. Like if I have a USDC loan out against my Bitcoin on my application, it's going to be very hard for you to dislodge it. Especially if I have a lot of trust in that application which we have with AAVE and some of the Ethereum based applications, like they're not actually incentivized, even if it were cheaper elsewhere.
- [24:55]
A
What is you Mentioned aave. I continue to get diverted here, but what is going on with AAVE governance? Can you explain what's happening?
- [25:03]
B
Yeah, I mean, we've kind of been seeing this revolution in the way people look at DAO structure and what the tokens actually are. It took a few years of super negative price action to come to this conclusion. But essentially people are asking like, hey, like, what do I actually own? Is it the underlying application? Is it the Treasury? Like, are the people who I trust to run the application build out the protocol? Do I have like legal recourse against them? Like, does my voice even matter? And I think what people found for the most part was that the token isn't really connected to anything and you don't have much of a voice. Like there's no legal contract that says like, oh, me as a token holder wants this implemented, we pass the vote, like they have to go do it. And it's also an asset control thing. We kind of seen this bifurcation where you have these legal entities that hold like IP intangible assets and other things which we're learning are very valuable. Like in all of these acquisitions we've seen from Tradfize and otherwise they're buying the equity and the IP and the marketing type assets. They're not actually buying the tokens and the tokens don't have any connection to those things. But now what we're starting to see is Token holders and DAOs say like, wait, we actually built this entire thing. We have like maybe some legal wrapper that helped us build like front end product, but they didn't actually build the protocol, which is like the big money making thing. Like especially in the case of AAVE, the protocol is making like $120 million a year. Labs is doing much less than that. And the DAO is starting to ask like, hey, why don't we own the IP and all these other things? So super healthy conversation to be having. I think this is going to be significant in terms of getting us out of the bear market and making tokens investable. But it's very disruptive and we're just going to have to work through those growing pains. But healthy otherwise.
- [26:54]
A
Very interesting too. Aave, the most important lending defi app.
- [26:59]
B
The biggest, most important lending application.
- [27:01]
A
Yeah. So having a major. But where is that landing now? In the sort of ins and outs of that debate. Right. So the lab's what owns the IP and they control the treasury, but the token holders are the DAO and technically they want to own the IP and The Treasury?
- [27:17]
B
Yeah, I mean the DAO already owns the treasury and AAVE tokens allow you to vote on allocation and protocol direction and stuff like that. But they want the IP and that's the part that people who would go acquire AAVE equity, that's what they're going for.
- [27:34]
A
Are they going to give it over? Like is there any sense of a compromise emerging?
- [27:39]
B
I mean the two sides seem to be talking to each other. There's like maybe a stroke of hostility, but I think that's just the nature of this game. But yeah, with AAVE it's interesting because they have V4 coming out, which for like any application migrating from a previous version to a new one is already challenging. Like Uniswap, I think is a testament to that. Yeah, they launched V4, they couldn't get really any activity.
- [28:03]
A
Yeah.
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B
Or liquidity to migrate to V4 from V3. So they're also going to be going through that at some point in the not so distant future.
- [28:11]
A
Adding the governance debate complicates it.
- [28:14]
B
But I mean I think AAVE as a protocol is so trusted and so widely used that most people who use the application probably don't even hold the token. So as long as the application works, I think you may not see too much disturbance in that regard. But nonetheless, the main dev shop that develops the AAVE protocol announced that they weren't going to renew their contract and they're walking away. So that does bring some kind of uncertainty into maybe not v4, but beyond that, who's going to fill that role? Because they've literally built the biggest.
- [28:50]
A
And then is it labs, the labs organization paying devs or grants for devs or is it the dao?
- [28:57]
B
That's the dao, yeah.
- [28:58]
A
No, but I mean like. Right. I mean that's the. Is some of that bifurcation. I think it's regulatory in origin. They said, oh, the token, it can't be too good or might be an illegal security. And separately we'll decentralize like control of the token or whatever. But the LABS is the equity entity that venture investors probably invested in.
- [29:20]
C
Right.
- [29:20]
A
And they're trying to keep the tokens separate from the venture backed equity, which is a security, private security. And maybe the regulatory reforms that have been happening in crypto make it much more palatable and less risky to have your token actually have the equity like features.
- [29:40]
B
Yeah, I mean I don't think it's a coincidence that this is happening right now. Yeah, like bad regulation or just the complete absence of, of any regulation is what landed US on the current design and the more forgiving regulatory environment is definitely giving people some Runway to experiment. And at the end of the day, this is a legal regulatory thing. Most of the innovation happening around this whole deal is a legal thing and novel legal structures for DAOs and giving them legal recognition and letting token holders actually have binding rights to the treasury and the people who are running the protocol.
- [30:17]
A
It's very interesting how people wonder how bad really was it say under Gary Gensler at the sec. Right. I mean Bitcoin made a new all time high actually right after he became chairman in 21. Okay, but your business survived. Not all of them did. But one of the counters is you have to understand the downstream effects to regulatory decisions and like how it warps people's behavior and people follow incentives. And one great example that's been talked about a lot that I've talked about is that like FTX setting up offshore is kind of directly the result of it being effectively illegal to run a very useful exchange in the US at the time. And that de facto unenforceable prohibition, it just. They literally move 90 miles offshore and set it up there. Americans used it. Whereas if they had made workable rules that a business could genuinely come in and get and follow, then you would have had better investor protections. Here too is another one. Because of fears of ICO and enforcements against 2017 ICOs, later token launches formed in Switzerland or other jurisdictions or offshore bifurcated their tokens or only sold the tokens to inside investors, you know, elite VCs. Right. So you had much more centralized networks and weird structures where the tokens not connected to the applications revenue, like in the case of aave, very. You know, you hate to see it. This is a good example of just bad regulation that by the way didn't stop AAVE from launching a coin and didn't stop FTX from launching offshore. So. Also didn't work.
- [32:02]
B
Yeah, I mean AAVE launched like, like nine years ago. I know it was a long time ago, but.
- [32:08]
A
But again those structures, it didn't stop the L1s from being launched and the tokens trickling from the professional investors ultimately into the retail. It doesn't even work if you were trying to ban it or not allow it. You failed at that also.
- [32:23]
B
Yeah, I mean we had probably tens of millions of tokens built over the last five years, but yeah, the ICO component of it I think is under discussed. A big issue with like token price and what kind of brought us to the mindset we have now is like the down only price action, which partially is a result of divergence in value that the private market assigns. These things versus the public market.
- [32:47]
A
Yep.
- [32:49]
B
So like applications or protocols can go to the private market and raise $500 million for this crazy idea that they have. But maybe if they had a token and it was an ico, the public market would effectively say like actually you probably only need like $50 million.
- [33:03]
A
Yeah. And the discrepancy too with the lockups and stuff and the opacity of the private sales create all these overhangs. Whereas you can just take Ethereum. Right. You pre bought the Ethereum tokens in Bitcoin, by the way, and there's not a giant pile of who's holding what. Technically all those people can sell ether over the years. If it goes up, there's overhang, but it's not the monthly unlock. You wouldn't need a website like Tokenomist or Tokenomist or whatever it's called. Right. That tracks unlocks. And the whole meta of VCs dumping on us, quote unquote, is like a direct result of the water on pavement pathways that token launchers had to find. Because if there had been a regulated way to sell safely to retail, both safe for the issuer and the retail, that's a much more decentralized and egalitarian structure that widely disperses the coins. Much better than selling, you know, 2/3 of your network tokens to three VCs.
- [34:05]
B
Yeah. Or I mean even worse, projects sell their equity and then they also give the same investors tokens.
- [34:12]
A
Yeah.
- [34:12]
B
So the token is like the effectively like the exit liquidity on the equity in the event that like you can't sell it or it doesn't get acquired.
- [34:20]
A
Yeah.
- [34:20]
B
So you also had the dual structure where like you actually might have been more incentivized to push the value to the equity. And the token was just kind of like my quasi liquid representation of my stake there.
- [34:30]
A
Yeah.
- [34:31]
B
But Yeah, I mean VCs I think it kind of demonized and unlocks do as well. Like I think inherently you need both of them. Like without people to fund crazy ideas, you don't get any of what we have.
- [34:43]
A
Yeah.
- [34:44]
B
And at the end of the day you need to incentivize the people to build the stuff. So like teams should get token allocations, they should unlock on some cadence. But maybe there should be like a KPI based unlock where it's like, hey, maybe you get 10 tokens, five of them unlock over the next X number of years. But then the other five, the other 50% you need to actually create value. Maybe it's like a market cap threshold or a user threshold or a revenue threshold, like whatever it might be, which we're actually starting to see with a lot of these projects that are raising under these new frameworks now. It's like the team may get a little bit of linear unlock, but at the end of the day, if the token price doesn't go up, you don't actually get paid. So it's like a. Yeah, it's like an incentive alignment.
- [35:26]
A
It's pretty straightforward because you don't want giant amounts of supply hitting while like in a bear market. Basically when coins are going down like
- [35:34]
B
we have right now. Yeah.
- [35:34]
A
They'll just reflexively cause more dumping. Is that ownership coins, the new frameworks you're referencing or metadao or other similar.
- [35:44]
B
Yeah, exactly. I mean, metadao kind of trailblazed the idea and have at least the first working implementation of it. But we're starting to see forks and clones and people experimenting with the idea across all the ecosystems now. And there's just so many cool, moving parts of this. Like Futarkian decision markets are so important. So we're seeing a lot of innovation around that stuff. Like we used to just have these binary. Yes, no decision markets, and now it's like we can actually have 10 outcomes and we can price things more effectively and find the most optimal decision. So purely using markets to decide outcomes, not just words in a written proposal. And then, yeah, people are also getting creative with the legal structures themselves. Internet capital markets are, I think, proving to be a valuable thing and they're leaning on them. But they also acknowledge that we're not purely living in the world where all value exists on the Internet just yet. So building novel legal structures that let people launch on chain as like an ownership coin or whatever we want to call them, and then go launch into the real world and be like a regular LLC or whatever it might be. So it's kind of getting interesting in that regard. It's like legal innovation.
- [36:56]
A
Yeah. I don't know if we'll get to the other topics because this is very interesting too, but we've talked about that. That's been question, particularly in the context of daos, how they might be recognized in the real world as an entity or legal entity if they solely exist on chain. Right. And I think Wyoming had an interesting Dao law. Gabe Shapiro and Metal X have an interesting way of doing this. I think even Delaware law, where many companies are incorporated, actually does also recognize Daos entity type. But this brings me to the second question and there's I think tons of innovation still happening there. Don't AI agents face the same problem? Like because they aren't. Like, don't we need a structure for AIs to have legal personhood? Theoretically, yeah.
- [37:47]
B
This is something we've been talking about on the desk. It's like a world where companies are just purely run by agents. I don't think is like that crazy, right? Like somebody just prompts an agent, tells it to go build an app. A company, like do the whole thing. Who's legally responsible for that? Like am I like an agent of the agent and like whatever it goes and does, like I'm responsible for.
- [38:10]
A
I'm not. Yeah.
- [38:11]
B
Or can I just disperse like thousands of agents and they're all legally liable for something and you sue the agent?
- [38:17]
A
Like does the agent have money? Can he have to forfeit it?
- [38:20]
B
Like, I mean, I have no idea.
- [38:22]
A
If you think about it, even just like viscerally like for people who aren't deep in the like the of virtual AI agents, like Rabbit Hole, which is an amazing one by the way, that you should be learning about and using. But think about like a humanoid robot. Like let's say I was to get like one of the first Tesla robots or something and it's mostly inside my house. The first one, let's be real, I'm gonna have it fold laundry most of the time, right? But like then I send it out to get the mail. Now it's walking out there, neighbors see it, could they become scared? Okay, but it's still on my property. Can I send it around the, you know, down the street to Target to pick up some batteries and some paper towels? Is it allowed to walk into the building at all? Can it go in the self checkout and pay? Are they going to call the cops? Is it going to be arrested? Like what is the framework for like agents operating or robots in the physical sense? Like just in the real world, like are they allowed to do that? I don't know. Maybe Waymo and those guys and SF with those cars have figured this out a little bit, at least in the context of those cars. But like not even just like can it be legally responsible, which is obviously very important as well. What is it? Is it a person? Like can it steal, let's say it decides to steal from Target, will it be arrested? Are they going to put it in the car and drive it to the police station? Society has not actually made a lot of progress at all. In figuring out, let alone the legal questions, but also the societal questions on this.
- [39:41]
B
Yeah, I mean, I think the capabilities of AI, especially over the last couple weeks, has. I mean, we just never thought about these things. Like up until this point, like maybe we have been like in our own
- [39:52]
A
not much bubble, but consider us pretty early in things about it. But it has been recent.
- [39:57]
B
Yeah. Like, I don't think we've had much of a reason to actually think about these things, but now like Claude and ChatGPT are just one shotting everything. And it's like, well, actually like this thing could build like a real product and if it does that, like, and it starts its own company, because even on like the legal innovation side, like they're making it so that you could just go spin up like a boilerplate legal document or like an operating agreement for a company with like stable coins on a blockchain, no human intervention at all.
- [40:27]
A
Right.
- [40:27]
B
Technically, these things can go start launching real companies.
- [40:30]
A
They can.
- [40:30]
B
And then in that case, what is the agent?
- [40:33]
A
I mean, you literally just handed an LLC and give it control over the documents.
- [40:38]
B
Yeah. And the product that it builds.
- [40:39]
A
If you have a personal llc, you can just assign it to the agent to work on. In fact, then you still own the llc. So it's actually your company. The agent just does all the work and. And that you can do today, like that's. That you could easily do. The question, I guess. Yeah. Is if the agent itself wants to own it itself, is that even possible? Would a court even recognize that? I don't know.
- [41:00]
B
Yeah, I don't think anybody. I don't think anybody knows, but it
- [41:03]
A
seems like we'd have to figure that out. And anyway, it's interesting with the ownership coin, it's actually quite a similar trying to take something that's virtual and such, like a DAO or a virtual AI agent, and give it legal standing. Do we need laws for that? And the other thing I was thinking is if I vibe code an agent or a bot that steals Bitcoin as a business model, which is one thing people have talked a lot about because the AI is pretty good at smart contract vulnerabilities and stuff like that. Surely if I create it and send the bot out to do it for the purpose of getting me Bitcoin or Ether, then I would be responsible if it does that. Just from a first principle standpoint seems to make sense. However, we're largely not saying that like in the rest of society at the moment. Right. Like if you upload code to GitHub but you don't do it. It's not. Usually you're protected if you make an encrypted messaging app that a terrorist happens to use. Like it's not your job. You're not capable of intercepting or prohibiting their access if it's open source. Right. And there's the Blockchain Regulatory Certainty act, which is the protections for developers, presumably. Like with how if an agent is doing it on your behalf and you programmed it like you can't be protected in the same sense. I don't. Either way, we need some clarity here.
- [42:29]
B
Yeah, I mean, I think eventually it's going to become like a real question and then it's also like, what if your agent makes another piece of software that does something. Yeah. Negative. Like your agent makes an agent and then that one. What if you do know two hops away from you is going and doing some crazy stuff?
- [42:44]
A
Yeah. Like what if you didn't know at all and, and because you didn't know, you couldn't have had intent. Either your agent farms out work that it came up with that you didn't observe and that work is illegal or breaks the law. It's. I mean, one, I don't think you should be held accountable. If you didn't knowingly do it with the intent to do bad, how can you be guilty? But two, society doesn't want to have now these semi guiltless bad actors. If AI agents do start creating them, we still want to prevent that from happening. The best way we typically prevent bad things from happening is by creating consequences for the people who would do the bad thing that disincentivize them from doing it. But if you don't even know if it's happening and you passively, even by mistake, enabled it. Right. Like that, that is, you can see where the backlash to AI is going to. One of the many areas that's going to come is going to be. It's almost like the three laws in like Minority Report or iRobot. Right. Like thou shall not hurt a human or whatever. Like, is that even something we can encode? I'm pretty sure that's straight fiction. And we can't uniformly encode these types of rules.
- [43:56]
B
I mean, maybe you can, but again, it's still software and things can go wrong and all that stuff. But yeah, I think these questions that might sound crazy today are likely to become relevant in the future, especially as the technology progresses and it gets implemented more widely. I don't think we've seen massive AI penetration into companies and businesses just yet.
- [44:22]
A
There was that graphic going around you probably saw.
- [44:25]
B
It was like, oh, it was like the chatgpt of the world.
- [44:29]
A
So almost nobody is using it. Like.
- [44:32]
B
Yeah, and that was just like, I think individuals personally, that wasn't like organizations and companies that were doing things for commercial purposes where like right now I
- [44:41]
A
feel like it's especially in terms of like the societal understanding of these issues and possible desire to get into a policy conversation, whether it's backlash or promote promotion of it or whatever is not really happening because you're not seeing it in your everyday life. You might be seeing it at work. It's mostly like enterprises and startups and professionals that are seeing how much can be done. Like we use AI a lot here already. Making bots, scraping data, right. Analyzing documents. But that's why I kind of feel like I like to use the humanoid robot example because surely when you start seeing robots walk around, if it hasn't already, that will be a catalyst for. Holy shit, we need to have a big giant policy discussion about AI, right? I mean you're seeing some backlash to like data centers among the degrowthers and anti energy people, but no big conversation yet on what should AI and robots be allowed to do?
- [45:37]
B
Yeah, no, I think it's only a matter of time, honestly.
- [45:41]
A
Yeah. Let's talk about another gray area we love to talk about and cover prediction markets. And over the last several weeks alone there have been some interesting questions about market manipulation or insider trading. Probably most famously at the Super Bowl, I think the market was whether or not was it cardi b or someone,
- [46:03]
B
it was like, who's going to be
- [46:04]
A
like the first celebrities would appear on stage during the halftime show because there usually are many who appear but aren't listed as being. And I guess what somebody who was a dancer, like had knowledge and voted. They used that knowledge and voted for someone. I can't remember who it was. They appeared. There was also the guy that ran on the field and many people, he had previously apparently done event markets like through Vegas about running on a field. It's not actually clear if he bet on this one, but had he bet whether someone would run on the field and then he did it himself to cause the market to resolve in his favor. That's an interesting one obviously of mentioned markets. Brian Armstrong listing out all those words at the end of his Q3 earnings call, which just happened to be the words that people were betting on whether or not he would say. And then they had the IDF soldiers who knew, presumably knew inside information about when Israel would attack Iran. And profited off of it. All of these slightly different, but like, maybe before we debate some of the. Like, which ones are bad and which ones aren't. Oh, and last one I'll mention is there was the guy who sat outside the Super Bowl. Where was that? In Santa Cruz. Santa Clara.
- [47:21]
B
Santa Clara.
- [47:21]
A
Santa Clara. And heard them practicing the halftime show and the other parts of it. And there was a market. For exactly how long would the national anthem be? Well, he sat outside and could hear it while they were practicing days before and was able to bet correctly. All of these different. But before that, maybe you've written about how surfacing information that might otherwise not be available to the public is a huge benefit of prediction markets. Can you explain what you mean by that?
- [47:52]
B
Yeah, I mean, that's kind of their purpose is to incentivize people to bring forth information that would otherwise just. Or, yeah, I mean, the purpose of the markets is to provide incentive for people to service information that you just can't otherwise do through mainstream news outlets or otherwise. I think the guy sitting outside the super bowl stadium is the perfect example of that. If he couldn't have made any economic gain on knowing how long the national anthem would be, he wouldn't have gone and sat outside and then no one
- [48:25]
A
would know and then nobody would know except for insiders.
- [48:27]
B
Yeah, yeah, exactly. Like, it's kind of a silly example, but.
- [48:30]
A
Well, it's only silly because, like, there's not necessarily a huge societal need for us to know the exact number of seconds that the national anthem would be. But you could imagine this in much more interesting and also not nefarious ways. Like you could say, like, you know, what would the price of oil be? And people could look at open source satellite imagery and see where the oil tankers are, which they do. Right. Like, and find information. Smart people could actually learn that. Again, for an open global commodity, smart people might have a view and express it, which could move the market and thereby tell the market that there's something happening with oil. Right. And that's useful information for the average person. Your gas might go up, you know, and I could probably think of other more societal beneficial ones, but. Yeah, but that obviously has a conflict with this concept of insider trading because oftentimes the people that are in a position to know then betting. Right. Like that's for the most part restricted in other markets, like securities markets. But that's the people you want to come out and do the bet so that the market will learn. Right?
- [49:39]
B
Yeah. And I mean, these markets are also Just so different. Like mention markets is like not something
- [49:44]
A
that like is Trump going to say the word bitcoin during the State of the Union?
- [49:47]
B
Yeah. And then when you.
- [49:48]
A
There was like a 30% chance at one point last night.
- [49:50]
B
Yeah. People were making funny jokes like, oh, if he says like jester maxing, like, I'll be able to retire my family.
- [49:55]
A
Yeah, yeah. Bringing that information forth, you're saying there are new types of ones where there's probably no societal benefit, like a mentioned market. I mean, I don't know. Maybe it's. There could be some actually.
- [50:06]
B
Well, I mean, with the mentioned markets, it's interesting because there is like the First Amendment that protects you from saying those things. So there's like actually other like maybe superior laws that protect you from.
- [50:17]
A
Let's talk about that Brian Armstrong one where he said all these words, they happen to be, you know, I don't know if he was aware. I don't have that knowledge. I think many people assume he was aware that these were words. In the poly market of. There was a market that said, what words will Brian Armstrong say during the earnings call? And at the end of the earnings call, he said something like, I just before I want to wrap, I want to say the following words. Bitcoin, staking web3, Ethereum, etc. Right. And it caused a bunch of those to resolve a certain way. Now, I assume he didn't have a position in that market. I'm assuming also it's hard to get historical poly market data, so I can't pull it up on my phone now because this market has long expired. But there probably wasn't a lot of volume on that market either. But if we assume he was aware of the market, we know that he explicitly caused it to resolve. In certain ways he was absolute as the market was about whether he would say something, he was uniquely in a position to manipulate the market. I'm putting that in air quotes because I don't really think it can be. But on the other hand, if he didn't profit on it and it's imposed upon him, he didn't make the like create the market. Can you really say, oh, well, because saying the words intentionally would cause it to resolve. Now he can't say the words. Now you can say, I could open a market right now that says Zach Pokorny will answer this question as soon as I stop talking. And because you're aware of. Yes, you're not allowed to answer.
- [51:49]
B
I just have to sit here silently.
- [51:51]
A
Right. It imposes. To prevent. To make it illegal to do what Brian did would impose serious first amendment restrictions on him. Right?
- [52:00]
B
Yeah. And I mean, in some cases these markets can also be produced permissionlessly, like Kalshi and polymarket regulate what markets go up, but there can be any number of other platforms that spin up. And then what if every single application covers every single word that ever exists? He literally just can't say anything. Yeah, I mean, it's a very nuanced and interesting thing, but I think the biggest takeaway from all this is that prediction markets are so unique that they just push the definition of insider trading and market manipulation to its limit. Like maybe it requires new regulation, maybe it doesn't.
- [52:39]
A
Right.
- [52:40]
B
But we are certainly pushing the limit of the definition.
- [52:44]
A
Yeah. You have to assume. Part of the reason we've been thinking a lot about this is Mike Selig, the CFTC chairman, has come out and said they will do rulemaking on prediction markets. And of course he's also claiming that the CFTC has sold an exclusive jurisdiction over regulating prediction markets, where prediction markets are in a dispute with the states over sports gambling or sports event contracts and who controls those. And he joined a suit. So he will have to rule make. And you have to imagine intent is going to have to come into here because it's like if Brian just did it for fun, to be funny, maybe he knew about it. He didn't profit, so he knew about it and he did it anyway. But he didn't do it to manipulate. Like his intent was to promote prediction markets by. You know what I mean?
- [53:32]
B
Intent is like hard to prove.
- [53:33]
A
Very hard to prove. But I think it matters because like, let's say he didn't know and didn't have intent, but he did cause it to. I mean, they'd have to prove that he knew. I mean, like, you know, again, you can't. If there's a market I'm not even aware of and I don't have the intent, you can't restrict my speech, obviously. I think that's obvious somehow. Intense standard, but very hard to prove. One last one I think is worth talking about too is the IDF soldiers. So they bet on a date that Israel would strike Iran by. So they used classified information, clearly a misuse of that information, but they didn't
- [54:06]
B
actually have the ability to dictate.
- [54:07]
A
Yeah, they weren't the general pushing the button though. Right. So while they profited from insider information, they didn't really manipulate the market the way a person resolving their own mentioned market did. Or the man running on the field causing the market to. So more of a question, more of like an equivalent to like mnpi. Like if you're at a company and you happen to know the financials, but you're not in a position to affect them, but you trade on it, which is illegal in securities markets. Yet a different situation with nuance and a standard, they're gonna have to figure out, like how they want to handle that. To me, that's not a problem for the market. And if anything, it's the exact thing you're saying the market's good for. The world has an interest in knowing if and when an attack on a country will occur.
- [54:55]
B
Yeah. And allows people to actually express an opinion in a meaningful way.
- [54:59]
A
Right.
- [54:59]
B
Like, I go back to, like, election polls on this one because it's just such a clean, easy example.
- [55:05]
A
Yeah.
- [55:05]
B
Like, no poll wants to be wrong. Like, elections are essentially always called 5050 until states start being called as it's happening. And then at that point the information is useless. Like, I want to know, like an opinionated stance.
- [55:16]
A
Yeah.
- [55:17]
B
Three months, six months, a year out
- [55:19]
A
and putting your money where your mouth is, which is what prediction markets require.
- [55:22]
B
I mean, that's what it lets you be. Lets you be opinionated because you can
- [55:26]
A
make money, you can profit. But also as an observer of the market, you know that, that, that market is people who cared enough to actually put money where their mouth is. Right. And so you assume that it's incentivizing better information. Right. So you have an interest, but if you can't. So that's why, like, for the IDF guys, I don't think they can. That isn't really a question of market integrity that the CFTC should look at. I don't think. It certainly may be one that the government of Israel wants to punish them for misusing the classified information.
- [55:57]
B
It's like loyalty to your.
- [55:58]
A
Yeah, that's fine. Or if I was at a company and I don't move the market on a prediction and I do use inside information, well, the company can be mad at me and I might be in violation of my employment contract or confidentiality, but it's not quite a question for the market regulator. I don't think if they're not disrupting the market, in fact, they're kind of doing exactly what the market wants.
- [56:21]
B
Yeah.
- [56:21]
A
And I mean, tricky questions, though.
- [56:22]
B
Even making the assumption that, like, the regulator will view it as disrupting the market, then it's like, how much do I need to move the market in order for it to be meaningful? Like, do the Odds going from like, yeah, 5 to 10% constitute like, meaningful disruption. Or is it just like a 1%? Yeah.
- [56:37]
A
And if the IDF soldiers, obviously, if they, you know, mail, email the information directly to Iran's leadership, that's literally leaking the information. That's treason. Leaking it directly to the enemy. But if they merely bet on it, and let's say the price didn't even move after they bet. Have they even given the information away,
- [56:56]
B
they gave away no signal and just maybe made money.
- [56:58]
A
If it was that, you're quite. Yeah, but let's say they did move it substantially. Is that giving away. Is it now a leak? Because they move the market 20, 30%, whatever it is.
- [57:07]
B
Yeah. And then the definition of substantially is very arbitrary. Like finger in the air, like, oh, it's 2% today.
- [57:14]
A
Yeah. You effectively told the world because you moved the market so much. Okay, where's that? That's why I think when we were talking about having this discussion, like, you were saying you're not an expert in securities MNPI laws, nor am I. And I was like, I think we really just have to think of this from first principles, like the regulator. And by we. I also think Mike Selig and the cftc, they really just have to try to game out what they think the market should look like and write the rules from there. I mean, maybe where they land on certain aspects of it will take info and comps from other commodity or securities laws in our country or others. But, like, there's a bunch of weird nuance here. If you want to promote the good growth of prediction and information markets, which are very good for hedging. We were even talking about this even sport, they say, well, sports gambling. Sports markets are surely not a good example because that's just pure speculation. That's not true. You know who has a huge interest in whether the Patriots or the Rams win the super bowl or the Seahawks win the Super Bowl? Like T shirt vendors in Boston, people that sell jerseys, sports equipment, Anyone that sells hot dogs near a game. Right.
- [58:26]
B
Yeah. They're very unique hedging instruments that apply to literally any event.
- [58:31]
A
No, there's a lot of people. The Patriots organization itself, theoretically, might want to hedge its future income based on by shorting its own self. Theoretically.
- [58:41]
B
And I think even some people already
- [58:42]
A
make or lose billions of dollars.
- [58:44]
B
Yeah. And I think people already do that through, like, Vegas. Like, I think there was like, the mattress guy in Houston.
- [58:50]
A
Yeah.
- [58:50]
B
Who like, did the, like, if the Astros win the World Series, like, I give away, like, mattresses for free or Something like that. So yeah, so what's it called?
- [58:58]
A
Mattress Mac. Let's go.
- [59:02]
B
Yeah, good shout out.
- [59:05]
A
Yeah, but like if they win though, like a lot of people might go out and buy more mattresses or something. Yeah, it's the same thing too. Whereas like you know the guy there was, there's a guy and I forget what business it is in Boston. You remember it was like if you hit the logo on the Green Monster you get give away a ton of stuff and it's like, but it would have to be during a playoff game or something. But the thing is it's kind of right way risk because if the Red Sox win then everyone's going to go out and celebrate and buy stuff too or something. Interesting markets there.
- [59:35]
B
Yeah, I mean people are also starting to build even more sophisticated, more information rich products on top of prediction market.
- [59:43]
A
What are they building? What are you seeing out there?
- [59:45]
B
The most fascinating one I've come across is impact markets which is essentially just using the same sort of structure. Like if this event happens, like what does it mean for asset prices? So instead of looking at, oh, this event has a 50% probability of happening, it says this event has this impact on the price of Bitcoin. But what will be interesting is you will need prediction market probabilities to feed into the models to price these things.
- [60:14]
A
So it's actually a secondary market built on top, not a replacement for the binary outcome.
- [60:19]
B
Yeah, I mean there are just going to be sources of information for models of more sophisticated, more direct asset information rich instruments. And if you put in some regulation that degrades the signal of the prediction markets, you actually kind of kill a decent amount of innovation for all the things that are being built on top of it. Mostly markets related stuff. But I think at the end of the day if people watching the election can have a super opinionated stance beforehand, I think that's important. And it kind of highlights the flaws with traditional sources of.
- [60:56]
A
Polymarket was very accurate in the 24 presidential. Very.
- [61:00]
B
Yeah, I think it was like 60, 40 or 65, 35 for a while, but that's still infinitely more signal rich and opinionated than 5,248. 5,248 doesn't. It doesn't mean anything to me.
- [61:15]
A
Yeah.
- [61:18]
B
And then when you have opinionated signal underneath, you can kind of let it flow up to the top. And now we can actually price assets better, we can hedge our risks better. And I tend to think that's where this is going just given the success of obviously like Poly Marketing, Kalshi and all that, but also decision markets and people's willingness to use these things in
- [61:40]
A
an alternative use case to guide their actions. And yeah, you've written a lot about that. So go check out Zach's stuff on Futurchi and prediction markets on galaxy.com research before we wrap. I know we said we would talk about this, although this has been plenty fascinating already. Let's talk about one last topic. Base. It's the biggest Ethereum L2 by volume and users I think potentially by a lot. Right? I mean I think, yeah, I think
- [62:02]
B
by like almost every it was like
- [62:03]
A
80% of all transaction value on rollups or sorry on Ethereum L2S is onbase. They put out announcement Coinbase saying they were leaving the optimism tech stack and what they call the super chain which is the what the federation collection of people of rollups that use the same tech stack together. Makes a lot of sense by the way, because part of the idea is anyone can spin up a rollup and we'll give you the full tech and you get upgrades from us when we upgrade them all. They all stay safe together and blah blah blah. Sort of abstract out the technology aspect of the actual L2. But Coinbase says they're going to bring the code base in house. They're going to develop it themselves is what they're saying. But they haven't. I don't. It seemed like they haven't said it says they want to own the code, ship upgrades on their own cadence, perhaps faster. They haven't actually said if they plan to materially change the design, have they?
- [62:55]
B
I mean their blog posts said that they were going to remain in an Ethereum roll up. Yeah, and just migrate away from the op stack to the base stack for the exact reasons you said. They want to control shipping cadence, they want to control feature implementation and all of that stuff. But I think what's most important here is like in what they didn't say like one what was the reason? Like was it Vitalik's blog post about the future of rollups for scalability? I think that's probably the least likely one. But then we also have clarity coming down the gauntlet in Congress and other exchange backed rollups. Moving to decentralized like Kraken I think is the most notable one in that regard. Moving to the most decentralized structure you could have as a roll up which is base sequencing. Like in that event you're as decentralized as the Ethereum L1 validator set in effect. So there's a number of reasons why they might have done it.
- [63:51]
A
But they didn't say any of those.
- [63:52]
B
But they didn't say any of those.
- [63:55]
A
If it's true that they're going to stay in quote Ethereum roll up, then maybe the base sequencing is the way they'll go. I think the reason you and I have been following this and we were, I would say mogging them pretty hard over the last summer on Twitter. It's not decentralized base and single sequence optimistic worlds. They're not decentralized.
- [64:16]
B
Yeah, it's not a base specific issue.
- [64:18]
A
No, it's not. It's not. But that doesn't mean they're not necessarily safe. People always get mad at me. They're like somebody was comparing it to a WI fi router. Like first of all that's a terrible comparison. But I get that like there is the forced inclusion unilateral exit capability from this. So like it can't steal your money in that sense. But like they can, they could be sandwiching for all they know. I mean we know they're not. But like they control ordering. They can set fees on the, on the roll up. Right. They could censor you could get around it, but with some effort. But take the context of securities entities that charge fees and transaction ordering and can censor your transaction are like brokers and dealers and exchanges and all of them are heavily regulated. Right. And so that's why I wonder if they intend to become more decentralized just to further, I don't want to say avoid regulation. Obviously Coinbase is out here calling for regulation as are we, but they don't want that protocol to have to be regulated. The actual layer two in this case. But the blockchain quote unquote, they don't want, I think rightly so, but they risk. I think you mentioned Clarity. There's a section 302 in the clarity act which defines a non decentralized finance trading protocol. I think is the thing which is basically saying well if. And it's. I think it's pretty reasonable overall. They're like it's got all these exemptions to registering with either the SEC or the CFTC or whatever if you're truly decentralized. But they're saying if you're not truly decentralized then you're centralized. I think a lot of some commentators have wondered among other types of apps and you know, centrally controlled defi or whatever, perhaps centrally sequenced optimistic rollups might actually be considered a non decentralized and thus subject them to Regulation. But no indication or anything about whether seeking more decentralization was the cause here?
- [66:13]
B
No, I mean the entire thing was essentially around developer control being able to use what seemed to be like AI more effectively with reducing the developer surface area and all that stuff. But yeah, not much in that regard. Also no indication of what's going to happen with the fees they pay to the super chain.
- [66:31]
A
How much, how much was those fees? Like over like we looked at this once.
- [66:35]
B
Yeah. I think it was at one point like a few million dollars over the course of like a quarter or a half year.
- [66:40]
A
Like nothing like it was like 200k a day. one point we saw yeah, that's how
- [66:43]
B
much like they make and then like the super chain that's like 12% or whatever might be which I mean so percentage.
- [66:51]
A
They don't pay that now to Optimism. Once they leave they wouldn't be paying.
- [66:55]
B
Yeah. I mean if they're not using the tech anymore is that also like what
- [66:59]
A
does that do to Optimism? Like how big of clearly the biggest roll up they had the most volume so they were surely paying the most fee and the biggest share of fees that they're receiving. You know I don't know the state of their of Optimism's, you know, treasury or whatever but like from a revenue standpoint of licensing their tech, that's gotta be a massive loss for Optimism, right?
- [67:18]
B
Yeah. And they were actually just working on a buyback proposal so using some of the revenue to buy back the OP token. But it seems like now their revenue might have got rugged.
- [67:28]
A
What are the big optimist Optimism Superchain members obviously. OP or whatever they call it. OP chain.
- [67:34]
B
Yeah. OP Base. I think maybe Zora and a few others. But there is so many roll ups
- [67:41]
A
and nobody really wasn't it other related to Base. I mean Base has a lot of apps on by the way a lot of the AI stuff, AI agent stuff is built on base. But ZORA is moving to Solana, right? Oh yeah, they announced that.
- [67:56]
B
Yeah, I totally forgot about that.
- [67:57]
A
Me too. I did too. Just remember.
- [67:59]
B
Yeah I'm not like super plugged into like all the social fi stuff.
- [68:02]
A
No, me neither. I think Will on our team is probably the guy for that.
- [68:04]
B
Yeah, that's more his lane.
- [68:05]
A
But then wasn't also what's the Dex like not is it Aerodrome?
- [68:10]
B
Aerodrome is an application on base but they also I think announced that they were going to launch an instance of on the L1.
- [68:15]
A
That's right. And there was actually not leaving base. Maybe but like I don't know, just you put these things together. Yeah. Like the two of the biggest apps on base are either leaving or going elsewhere as well. And then base announced this like potential big change. Or you know, the first step is just we're taking control of the code but to me the second step's like okay, what are you going to do with it now? You wouldn't need to take control of it just to ship little tweaks more quickly like I wouldn't think.
- [68:41]
B
Yeah.
- [68:42]
A
Presumably that lays the foundation for a much more substantial change. Yeah.
- [68:45]
B
I mean even in like the weeks leading up to it, there was like a lot of posts from people on Twitter like oh, like I'm leaving base to go like do this other.
- [68:51]
A
There were. Right.
- [68:51]
B
Yeah. Then there was like the aerodrome thing I also actually kind of forgot about.
- [68:54]
C
Yeah.
- [68:55]
A
That's like the main like Dex application powering swaps on. On base.
- [69:00]
B
Yeah. And they announced that. I mean they're not like leaving base but replicating well.
- [69:04]
A
And Jesse Pollock, the who runs bas had a whole post about how like kind of like I was wrong more that I was. He's still early but remember he had been big in promoting social trading. There was a Jesse Token or something. Right. That was made that type of stuff that basis for creators. And he had a post in the last few weeks also being like actually we probably were early on that it's probably basis for trading like all blockchains mostly are today. Right. So you just put all this together. It seems like a bunch of spinning uncertainty possible changes in the base world which is quite interesting for the largest Ethereum L2. None of it necessarily like existential or catastrophic or even bad for base just all seems like a lot of things change.
- [70:00]
B
Yeah. There's just a lot of things going on and I mean you could even make the argument that it's. That it's good like if they do move to decentralized, just have one less centralized chain.
- [70:08]
A
I mean we've been calling for it. Basically we praised Inc. Krakens for doing based roll ups and I mean I directly accused it of being too centralized to avoid securities laws in the case that they launched tokenized securities on it. So I think they absolutely should decentralize. I don't but again that's what's so interesting. Like really it's tricky. You know they, I, I think if they could solve decentralization in a way it would grow base, you know.
- [70:36]
B
Yeah, absolutely. And like the products that it's this
- [70:38]
A
catch 22 I think that centralized businesses feel which is like, if we give away control, like, don't we lose money control, power over it, whatever. And it's like, but you could make more money. Like, it could become that more widely adopted. Like, would Ethereum have been as big if it wasn't as decentralized with proof of work on its launch? Almost certainly not. Right. Stellar existed, made Safecoin existed. Like there were other. I don't know. Coinbase surely knows that decentralization is good.
- [71:09]
B
Yeah. I mean, in the blog they also mentioned that the use of the optimism stack was maybe always kind of like a temporary thing.
- [71:17]
A
They were like expediency.
- [71:18]
B
Yeah. This let us get to market way faster than if we were to build this from the ground up ourselves. And now we're migrating, so there's also that element to the whole thing.
- [71:28]
A
Maybe it was always the plan. Yeah, totally fair. And I don't want to accuse them of doing it for one reason or another. Just hard. With very little information about what appear to be pretty big moves happening.
- [71:40]
B
Yeah. You're just kind of left to speculate.
- [71:42]
A
Is there a prediction market on what will base switch to an L1? Well, because also people have been waiting for like a Coinbase coin or like base coin. Yeah, base coin, and there isn't one. And like, presumably it's a lot, at least based on our past historical regulatory setups. Like, a more decentralized blockchain tends to, you know, not have its L1 asset be considered a security. Whereas if it's just like, oh, what's the blockchain? Oh, it's just one computer in our basement. Like, pretty hard to argue in my mind that that's its token. If it had one, wouldn't be a security. So, like, maybe that would also be a reason they should decentralize, if that's something they're considering, which they've never confirmed
- [72:21]
B
nor denied or denied.
- [72:23]
A
I don't think there should be a prediction market about whether or not they're going to launch a coin. There must be a base coin prediction market. Is there?
- [72:29]
B
Yeah, there's got to be.
- [72:29]
A
Yeah, yeah, yeah. Well, we could go on and on, but this is great, Zach. We talked about lending, we talked about AAVE and governance and for DAOs and AI agents, and we talked about prediction markets and impact markets. And now, of course, Base and Ethereum and Coinbase a lot in there, I think. You know, Finn, I think we're have to chop this. We got to put the markers. You know, it's kind of like three separate conversations with Zach. This is great, Zach. Thank you so much. Zach McCorny from Galaxy Research.
- [72:56]
B
Yeah, thanks for having me.
- [72:57]
A
That's it for this week's episode of Galaxy Brains. Thank you to my guest, Zach McCorny from Galaxy Research and my friend Bimnet Abibi from Galaxy Trading. Everyone have a safe, happy weekend. We will see you next week.
- [73:08]
B
Foreign.
- [73:13]
A
Thank you for listening to Galaxy Brains, the weekly podcast from Galaxy Research. I'm Alex Thorne, head of Firmwide Research at Galaxy. Follow me on X at Intangible Coins. Follow Galaxy Research on X at GLXY Research. Read our written reports@galaxy.com research and don't forget, if you like Galaxy Brains to like and subscribe on your favorite podcast platforms like YouTube, Spotify, Apple Podcasts and more. We'll see you next time.