About this episode

In the midst of a market collapse as a result of the Coronavirus, Andrew Keys joins this episode with host Samuel McCulloch to discuss the current situation. Even though millions of dollars in capital has been wiped out, the fundamentals of Ethereum remain strong.

Andrew's Links

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DARMA Capital

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What to listen for

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• Why we are currently living through a 'Black Swan' event that no one could have predicted.
  
• How this creates a risk-off bear market that will be hard on everyone.
  
• How Crypto went through a two-year bear market, but the good building continued at protocol, tooling and application layers.
  
• Why this development in Ethereum was really about building the 'moat' over the past two years.
  
• Why there is no quick monetary or fiscal policy fix for the global drop in demand across all asset classes.
  
• Why Andrew can't get comfortable with risk-return at the application layer right now because of the protocol risk that the 'protocol roadmap' won't even be built.
  
• Why Web 3.0 in its entirety is a play on the future of work.
  
• Why you can't just send value across the network; you need smart contract functionality that works and programmability in order to have functional business logic.
  

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Show Notes

This is a black swan event this market turmoil.  The media is exacerbating the epidemic through their coverage.  We are now finally seeing this in Crypto markets now.  People are scared.

When I saw what they did in China, locking people in, I am in Florida in the south with you.  From what I read, the difficulty is in the ability of hospitals to take care of everybody.  Obesity and heart problems make you more susceptible to the virus. We only have 2.8 ICU beds per citizen in the USA.

There are serious side effects of having coronavirus.  The best thing Puerto Rico could do is close their borders.

Has your market view changed over the past few days? There are two hats Darma wears. As a fund, we do a lot of evidence-based modelling. We basically chop the market into daily weekly monthly quarterly annual risk regimes, and we look at those in the context of fundamentals.  Everything on the fundamentals side I am extremely bullish on; I am completely bullish on the core stack.  You are like J Powell. The American economy is strong; ETH is strong. I would say that it just went through a two-year bear market and corporate treasuries had declined; but a lot of very good building has been built at the protocol layer, at the tooling layer, at the application layer, and I honestly thought what the last two years was really building a moat. I am not yet sold on any competing smart contract layer 1. There are trade-offs, and nothing is completely decentralised yet. I have been very bullish on the developer and investor ecosystems and their growth over the past two years.

ETH has taken a beating in this black swan event.  If you have three to six months, that is a long time. We have seen the destruction of the idea of Bitcoin as digital gold because it has not held its value.  Gold has not fared well in all this either. Gold typically declines in recessions; it is down 4 to 5%.

The engine of the world, China, has stopped. China shut down for the last quarter, and they are still shut down. You can see this in their traffic rates; there is no rebound yet in China. They are not back to work. I think when you have this kind of closure of the global economy.  I think this is a bigger issue than in 2008.  It was limited to the banks.  Most people did not see the carnage in the banking structure.  This is a much more tangible fear that people are going to have to get used to.

What is the appropriate monetary and fiscal policy for the next three to six months? That is the magic question.  When the bond yields when under 1% the other day, to see the 30year US treasury bond trading at .8 was just incredible. I never thought I would see that in the next few years.  It went there in a day, and it declined 40% in one day. I don't think any level of monetary support or stimulus will do anything at this point. What we need now is a combined governmental response, essentially what South Korea did, inputting everybody into quarantine and shutting down the whole country and making it easy to get access to testing kits. The CDC has only tested 500 people in the USA. We can pump more money into the system; where is all this money going to do? This brings up my stagflation worries for me.  I have always thought, call it libertarian, or anti-central banker, our $4 gallon of milk will be $8 in the next five years. The worst part about this, the systemic hedge funds were out cash three weeks ago.  Main Street freaks out, and they go into cash.  They lost 20% of their net worth. I worry about the husband and wife who is living on $200,000 a year and the analytics and research that sophisticated investors do. I am on a base worry for normal people. Schools get shut down for six weeks, and you have to stay home with your kids, then that spells disaster and bankruptcy for minimum wage workers.

We are already working from home. We have strategy meetings and risk meetings weekly. We are already working remotely. This will further the evolution of working remotely and the future of work.  We can sync via Zoom. You used to be at Consensys. They are cancelling their New York event. Consensus the CoinDesk conference is still going ahead. Sam: I think both of them will be cancelled. There are already cases in New York. The doubling rate is five days.

Across all asset classes, the global drop in demand will affect everything.  I guess the only counter to that is looking at China; China has been able to contain this.  Infection reporting there is going down. The USA is capital.  We should be able to learn through WHO; there should be a playbook. You have the summer months, and hopefully, there is seasonality. If there is one year, we needed global warming; this is it.

When it comes to Web 3.0, I want to buy a lot more Zoom stock.  Is there something in the Web 3.0 stack I should be looking at.  What we are learning right now, the web 3.0 protocols are risk-on plays. There are still 100x left in ETH and Ethereum, and there is so much farther to go. Right now the pending transactions are 120,000.  I made a withdrawal from CoinDesk today, and it still hasn't hit my private key.  In a risk-off environment like we have now, investing in the application layer or in part of the protocol layer; I am not comfortable with risk-return at the application layer because you still have protocol risk. This means that I don't want to invest in the next Tesla or Ford because the road isn't even built yet. You don't get paid for the risk you are taking that the protocols that the application layer is built on will finish in a certain amount of time, or will finish without governance issues.  We see the governance issues around protocols.

Something like Zoom I put in the enterprise/ SAAS/ application layer for investment. When I think about the value accrued for Web 2.0, your google, Facebook, Amazon, etc., I would think that we have similar to the fat protocol thesis, we will have a thinning at the application layer. If blockchains do really work, you should move the value that has accrued from the intermediary to the counterparty of trade. I believe in the evolution of crypto commodities in different layers of the protocol stack; we need to look into these layers.

I think Web 3.0 in its entirety is a play on the future of work: we will go to a decentralised peer-to-peer web, we will have more of a gig economy, and we have more of a remote workforce. But if there was one silver bullet, you may be better with Zoom, but now they are somewhat proving their valuation. I am surprised that google hangouts did not eat Zoom's lunch, considering how many people use the Google Suite of products. I bet right now there is a team in Mountain View: figuring out stronger bandwidth to go up against Zoom.  I think you are competing against a much bigger tech company from Zoom's perspective.

I want to talk about Web 2.0 for a moment:  The FAANGS have all built their businesses on surveillance, they track all of their user data to derive new products not for the users, but for their advertisers and other third parties that pay for that data that is being processed through Google Facebook etc.

My questions for someone like yourself that sings the praises of Web 3.0 does Web 3.0 break the cycle of surveillance economy and is it even necessary? I hear a lot about the different positives of owning your own data; I just don't understand the transition process moves away from this process where companies are making trillions of dollars off of extracting user data.

First and foremost, none of those companies are going to give that user base or revenue away; they will continue to extract that value indefinitely. For Web 3.0 to work, there is a small amount of extremely intelligent people that are betting and creating an environment for the user experience to be as good if not better than Web 2.0. 99.9% do not care about self-sovereign identity versus logging in through Facebook. If it takes extra time to hail your uber, and especially in times like this, that user experience will not satisfy commercial users of the internet. The user experience has to be as good as Web 2.0. The only thing that is going to nudge people from Web 2.0 to Web 3.0 is behavioural economic incentives. Bond yields are less than 1%, but you can get 8% versus 1% return; until you get paid by Facebook to pay attention to advertising, people will choose BAT.  This is a ten-year play; we are at year zero now.  Facebook will continue to seed their incumbency through their own advertising revenue. Where is the value creation for the application layer engineers to build a business?  Uber is not a technology play; it is about owning the fleet of the future so they can rent them out to us. We have a surveillance economy that has been built. These companies build algorithmic models about people, and they make predictive value judgements about them. They can drive them toward real actions in the real world like 2016 political value. I think it is scary we let so much power go away to these corporations.   There is no oversight by we the people.

There is a certain endpoint; lots of people are stupid and cannot care for themselves. They don't know any better. Big Tech is feeding off of these people, without a code of conduct to be fiduciaries of the human race.  I do think social media causes a cell phone addiction; in addition to the amount of money, they make off of it. I don't think we really understand what happens when you have a developing brain that goes onto Instagram 100 times a day. We don't know what that does to people's brains or employee efficiency etc. I think we need more empirical research, but there is no incentive to do this research.

Web 3.0 is transparent, and this is the long term factor that drags us away from these companies. There is a shift needed; like in the global reserve currency transition to the dollar, it took 50 years. It was slow and took a long time to happen. Maybe for Web 3.0, it is the same – it finally becomes the new normal. There is no one place where this was the end of Google, Facebook, etc.

You sign up using an email; you have no idea you are using Ethereum.  A UI/UX developer could design their front end; you can trade assets which remain on Ethereum. This is where we are going; the user experience has to be as good as or better than Web 2.0 to get people to move toward Web 3.0 usage.  This is the moat that Ethereum developers have been building for the last two years' bear market. Ethereum has a head start on moving value on-chain. If you are a business, you want stable expenses. DAI is a great first step. Its interest rate has fluctuated a lot in the past few days. I agree there are stablecoins. People, in the end, will need dollars to pay their rent and buy food for now. USDC serves a purpose. The one to one relationship between a dollar and a USDC token and its no-fee structure is very appealing. We made money on our last transfer from DAI to USDC.  We are not doing that with large amounts. USDC is amazing, and I think it is the greatest thing Coinbase did in 2019. As a centralised exchange, you are an asset gatherer, and you want to get as many assets as possible. For them to be taking in all these dollars and issuing USDC, I am sure they are putting all these dollars into treasuries to earn a return on them.

Coinbase offering one-to-one exchange is great for us as a business; these fiat on-ramps are what I have been praying for.  I am a liquidity maximalist; I want to move back and forth between assets with as tight a spread as possible. The cheaper you can make those transactions, the more possibilities you can create for payments, services, etc.  Micropayments are interesting; if you can make it cheap enough for everyone to use it.  The only variable is that I have not seen business logic embedded into the network yet. You can't just send value; to really make a material difference, we need to make smart contract functionality work and to have programmability.  This is the long term argument for Ethereum, and the developers work in the community. The fundamentals are great, but we are at a black swan moment right now.