Nothing tests your conviction like a bear market. This is an opportunity to test what you think you know, refine your thesis, and make your bets for the next leg up.
 Avichal and Sanjay are long time crypto investors and at VC fund electric capital. What are they betting on during the bear market?
 We discuss 5 of the most pressing questions facing crypto investors during the bear market including…
 1) L2 tokens - Are L2 tokens they worth something or they just worthless governance tokens?
 2) AltL1s…Will the ETH killers make a comeback?
 3) Multichain world - Millions of L2 chains or a few big winners?
 4) Restaking - big deal or overhyped?
 5) What Avichal things are this cycle’s alt-coins.
 Episodes like this are an opportunity to sharpen your insights as a crypto investor. Don’t take these ideas as gospel. Wrestle with them. Test them. Make them your own. We’ll have other Bear Market Bets episodes with other perspectives, so this isn’t the last.
 ------
 🚀 Join Ryan & David at Permissionless in September. Bankless Citizens get 30% off. 🚀
 https://bankless.cc/GoToPermissionless 
 ------
 BANKLESS SPONSOR TOOLS:
 
 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE
 ⁠https://k.xyz/bankless-pod-q2⁠
 
 🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE
 ⁠https://bankless.cc/MetaMask 
 
 ⚖️ ARBITRUM | SCALING ETHEREUM
 ⁠https://bankless.cc/Arbitrum
 
 🛞MANTLE | MODULAR LAYER 2 NETWORK
 ⁠https://bankless.cc/Mantle
 
 👾POLYGON | VALUE LAYER OF THE INTERNET
 https://polygon.technology/roadmap 
 
 ------
 Timestamps
 0:00 Intro
 8:00 L2 Value Capture
 15:12 How Rollups Make Money
 20:20 Harmful vs. Good MEV
 25:00 Transactions Fees & L2s
 38:05 Are L2s Valueable?
 40:00 Multichain L2s or Few Winners?
 43:05 Multichain Applications
 49:09 Multichain Friction
 59:02 Are NFTs Dead?
 1:06:45 Investing in NFTs
 1:10:00 RSA’s Worst Fear
 1:15:10 Ethereum Killers & Modular/Monolithic Chains
 1:19:22 L1s Playing the Monetary Premium Game
 1:22:00 RSA vs. Avichal Moneyness Debate
 1:24:30 Is Restaking Overhyped? Risky?
 1:29:35 Crypto’s Antifragileness & Are We Lost?
 1:33:40 Closing & Disclosures
 -----
 Resources
 Avichal Garg
 https://twitter.com/avichal 
 Sanjay Shah
 https://twitter.com/sanjaypshah 
 Read
  https://mirror.xyz/electriccap.eth/SD0wT7qSSfis9gLT_Ki1gY6_oTYEqgwcGE0hDw7kMDY
 https://www.developerreport.com/developer-report 
 ------
 Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research.
 Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here:
  https://www.bankless.com/disclosures⁠ 

You can only really generate value as an investor if you have a deeper understanding of what's happening than anybody else.

Like effectively alpha in a market comes from depth of understanding.

If you can see the actual value of the thing and there's a disconnect between perception and reality.

So if the world thinks something is worth X, but it turns out to be worth 2x And there's that that's a delta between perception and reality And so what you really have to do as an investor Across all of the categories that you mentioned picks and shovels if you're an early stage equity investor You know NF T's themselves if you're more of like an art curator What you really have to do is understand the thing better than anybody else You have to have some perspective on it that says actually reality is different than perception and and that's fundamentally what you're betting on

Welcome to bankless where we explore the frontier of internet money and internet finance.

This is how to get started, how to get better, how to front run the opportunity.

This is Ryan Sean Adams, and I'm here to help you become more bankless.

No David, he's off escaping to the mountains.

If the AI tech was a little bit better, maybe he'd never miss an episode.

The topic today is about bear market bets.

Investor conviction during the bear market.

And 1 thing I'll say at the outset is nothing tests your conviction as an investor Like a bear market in particular a crypto bear market.

I think they can be particularly deep and sinister But if you look at this from the right angle, this is actually an opportunity It's an opportunity to test what you think you know, to refine your thesis, your ideas, and to make your bets for the next leg up at a lower price point.

Avichol and Sanjay are longtime crypto investors.

And I ask them, what ideas are they betting on during this bear market?

We discuss 5 of the most pressing questions, I think, that are facing all crypto investors during this bear market, including number 1, L2 tokens.

Are layer 2 tokens actually worth anything?

Are they just worthless governance tokens?

Secondly, we talk about alternative layer ones.

Will the ETH killers make a comeback this cycle or not?

Number 3, we talk about what a multi-chain world really looks like.

Will we have millions of layer twos and app chains or will there be a few big winners?

Will it pose an existential risk to Ethereum?

And number 5, Avichail explains why he thinks NFTs are this cycles altcoins and what he actually means by that also toward the end of the episode I get in a quick debate With avicil on the moneyness of ether ether the asset he disagrees with me on that I wish we had some more time for that debate, but we touch it briefly.

Perhaps in another episode we can get into it in more detail.

Last thing I'll say before we begin, episodes like this are really an opportunity to sharpen your insights as a crypto investor.

So you don't have to take these ideas as gospel.

Not everything that these investors say will be right.

You of course have to wrestle with the ideas, you have to test them, you have to make them your own.

And we'll have other bear market episodes with other perspectives.

All right, guys, we're going to get right to the episode on bear market bets with Avichol and Sanjay from Electric Capital.

But before we do, we want to thank the sponsors that made this episode possible, including our number 1 recommended crypto exchange, Kraken.

Kraken Pro has easily become the best crypto trading platform in the industry.

The place I use to check the charts and the crypto prices, even when I'm not looking to place a trade.

On Kraken Pro, you'll have access to advanced charting tools, real time market data and lightning fast trade execution.

All inside their spiffy new modular interface.

Kraken's new customizable modular layout lets you tailor your trading experience to suit your needs.

Pick and choose your favorite modules and place them anywhere you want in your screen.

Whether you are a seasoned pro or just starting out, Join thousands of traders who trust Kraken Pro for their crypto trading needs.

Visit pro.kraken.com to get started today.

Mantle, formerly known as BitDAO, is the first DAO-led Web3 ecosystem, all built on top of Mantle's first core product, The Mantle Network, a brand new high-performance Ethereum layer 2 built using the OP stack, but uses Eigenlayer's data availability solution instead of the expensive Ethereum layer

Not only does this reduce Mantle Network's gas fees by 80%, but it also reduces gas fee volatility, providing a more stable foundation for Mantle's applications.

The Mantle treasury is 1 of the biggest DAO owned treasuries, which is seeding an ecosystem of projects from all around the web-free space for Mantle.

Mantle already has sub-communities from around web-free onboarded, like Game7 for web-free gaming, and Bybit for TVL and liquidity and on-rails.

So if you want to build on the Mantle network, Mantle is offering a grants program that provides milestone-based funding to promising projects that help expand, secure, and decentralize Mantle.

If you want to get started working with the first DAO-led Layer 2 ecosystem, check out Mantle at Mantle.xyz and follow them on Twitter at 0xMantle.

Arbitrum is accelerating the Web3 landscape with a suite of secure Ethereum scaling solutions.

Hundreds of projects have already deployed onto Arbitrum 1 with a flourishing DeFi and NFT ecosystem.

Arbitrum Nova is quickly becoming a Web3 gaming hub and social dApps like Reddit are also calling Arbitrum home.

And now, Arbitrum Orbit allows you to use Arbitrum's secure scaling technology to build your own Layer 3, giving you access to interoperable, customizable permissions with dedicated throughput.

All of these technologies leverage the security and decentralization of Ethereum and provide a builder experience that's intuitive, familiar, and fully EVM compatible.

Faster transaction speeds and significantly lower gas fees.

Are you a dev but you don't know Solidity?

With Stylus, Arbitrum's upcoming proposal for a programming environment upgrade.

Developers can write smart contracts in Rust, C, C++, and many more coding languages.

Arbitrum empowers you to explore and build without compromise.

Visit arbitrum.io where you can join the community, dive into the developer docs, bridge your assets and start building your first app on Arbitrum.

Bankless Nation, I'm super excited to introduce you to our next guests, Avichal Garg and Sanjay Shah.

Avichal is the founder of Electric Capital and Sanjay is 1 of the investors at the VC firm called Electric Capital.

You probably know them from their incredible annual crypto developer report they put out every single year.

The most recent I think was put out in January.

Measures all of the dev and dev activity across crypto.

I'm excited to do this episode here and now in 2023, summer of 2023, when we are, I think most listeners would agree, we are in the bear market.

And the reason bear markets are interesting to me is they are this fiery crucible where our investment ideas actually get tested, where we actually have an opportunity to kind of rebuild our ideas from the ground up and place our bets accordingly.

I've got 5 teed up and then maybe some bonus questions if we get some time And I think these questions are some of the biggest most important questions that crypto Investors are asking during this this bear market.

So I want to get your thoughts on this the thesis that you're sort of Rebuilding during during the bear market and really get a sense for your conviction, what you're convicted on.

Actually, and maybe before we get into all that, we can do the standard disclaimer of.

You should not listen to anything we have to say basically about anything.

Yeah, none of this is financial advice and beyond.

This is not advice, this is not life advice.

And so a few of the conversation starters then amongst friends.

And some of these questions are I think controversial questions actually, which is among the most interesting, but I'm going to tee these up, the first 5 to give listeners a sneak peek into where we're headed All right.

The first question I want to ask is about layer 2 tokens.

Are they worthless governance tokens is the question?

Second question want to get into eith will the eith killers make a comeback?

Number 3, I want to talk about layer twos.

Are we going to live in a world where there's millions of chains or just a few big winners?

Number 4, I want to talk about restaking.

Is restaking, eigenlayer, all of these things, is it a big deal or is it over hyped?

Is it an existential crisis for Ethereum?

And then number 5, NFTs, man, they've been down bad recently.

I don't know if you guys have noticed, but are they dead or will they make a comeback?

I got some surprise bonus questions for you as well.

Why don't we start though with the big question.

I think part of the reason I wanted to have you both on the podcast is Sanjay, you wrote a fantastic blog post about layer 2 value capture.

And let me just frame the question and you put it nicely at the beginning of your post.

The question is, these layer 2 tokens worth many billions of dollars, double digit billions of dollars, I don't think triple digit billions of dollars, are they actually worth anything right now?

Or are they just worthless governance tokens?

How do you think about this question right now?

Yeah, so to me, the way I sort of think about it is, it always comes back to cash flows at the end of the day.

So you always have to say, okay, Let's look at this from a fundamental perspective and where the cashflow is going to come from.

And I think that if you really dig deep into layer twos, there are very concrete sources that they can actually generate sustainable cash flows and sustainable profits.

And so there is a real and happy to sort of dig deeper into this, but just based on that idea alone, there is a real fundamental basis for why these tokens should have values based on cash flows.

So there's cash flows, just like a company, just like any type of business, these layer twos actually have a product that they're selling.

Yeah, well, I would add 1 thing to that too is, I mean, this is how we model things internally, is ultimately cash flows, because if there's no cash flow coming out of the thing, then like it's, you know, what is the thing actually worth?

And in finance in general or investing in general, that's like the great normalizer It's like what are the cash flows coming out and what kind of discount rate do I apply to that cash flow and I can Start to normalize across things like bonds and stocks and tokens And so I would add maybe 2 or 3 Nuances or dimensions to this so 1 just because the thing has cash flow.

It doesn't make it a security And I think this gets into a lot of nitty gritty about regulatory and, but we firmly believe that there are ways to have cash flows coming out of these without necessarily making them security.

It gets into, yeah, it gets into sort of how we test and there's a lot we could go there.

But I think there are actually I think it's important people not necessarily conflate cashflow with security.

Second is I think What's really interesting about crypto is the global nature of it.

And so the fact that there's so much capital all over the world that would like to be able to invest in cash flow assets or any sort of asset outside of their local fiat regime.

And that's actually for most of the world is not possible.

Like most of the world can't easily access US equities, for example.

And so our belief is there's actually a lot of latent demand all over the world for these kinds of assets that are sort of, they exist outside any singular jurisdiction.

Like ETH doesn't exist only inside the United States.

And that's actually what makes it so compelling too, from like a global perspective, is that there are a lot of people who otherwise would not be able to participate that can participate.

And I think, you know, kind of back, I think the framing that you had around conviction at the front end was really compelling.

And I think 1 of the things that we have, we personally have not lost conviction on, but I think in the bull market really gets lost in the noise and tends to come back in the bear markets, is that that's fundamentally what this stuff is about.

It's about empowering people all over the world to participate in these open systems.

And that's what's so interesting about the L2s is there are actually ways for people to participate all over the world and capture value in that in a way that doesn't make them security, but still has cash flow.

Which I think is actually, that's 1 of the interesting

By the way, just on the cash flow, but not security, just as a brief segue here.

So there are other real world assets like this, right?

Well that is a cashflow producing asset, that's not a security.

I don't have to register that thing with the SEC.

There are tons of categories in the real world, pre-crypto, that actually fit this mold of being a cash flow but not a security.

Yeah, well, it goes to this general problem of like, our regulatory frameworks tend to have been designed with certain use cases in mind.

This is why you have to be really careful with the regulation, I think.

I spent a lot of time on the regulatory side.

I think some people know this in conversations with senators and congresspeople and people at the White House and so on.

And there are a lot of good people in the ecosystem that spend a lot of time behind the scenes on this stuff.

And I think 1 of the challenges is that you don't want to bake technology solutions into the regulations.

And every now and then, every 50 or 100 years, like a new technology comes along and it sort of breaks your mental model of what's possible.

I think AI and crypto are kind of, are gonna both face this right now because I'll give you 1 concrete example, right?

Like this stuff doesn't really exist inside a singular jurisdiction.

And that creates a whole new dimension of challenges from a regulator's perspective.

ETH is not a thing that exists only in the United States or only in Europe.

It exists cross-jurisdictionally because it lives in the cloud.

So anywhere there's a server, this thing can exist.

And I think that creates a whole host of challenges because our entire regulatory framework has been based around the notion of a nation state with physical geographic boundaries and capital controls.

And this really starts to break a lot of that.

AI is similar in all sorts of ways, right?

And if it pays taxes, who does it pay taxes to?

Because it can run on any server anywhere.

And I've talked about this in other contexts, but to me, crypto, the idea of this non-jurisdictional coordination mechanism, the last time we really had to face something like this was with the invention of the joint stock corporation, which was like 1650.

It was like, oh, we can put money together and take risk without it being my personal property at risk.

And before that, you just had the cottage industry.

And so between like 1650 and 1850, we put a lot of regulations in place around how that should work.

And it used to basically be that only Kings could give you a charter to go start a corporation.

And around 1850, we said, wait a second, that doesn't make any sense.

Anybody should be able to start a corporation.

And so we created an entirely new regulation that said, oh, here's what it means to register a company.

And that unlocked the Industrial Revolution.

The reason railroads could get built is because a bunch of people could pool capital at a scale that wasn't previously possible from 1 human.

And I actually think a lot of crypto and AI, it's like the first time in 150 or 200 years that we've had to face this kind of a problem, which is like, it just breaks our existing model of regulation in a lot of fundamental ways.

I know that's like super high level meta, but like that to me is what makes this so interesting, because the properties of this stuff are truly internet native in a way that I don't think we've ever experienced before.

And that creates a whole host of challenges downstream.

1 of which is, well, how can you have a cash flow entity that a bunch of people participate in that I can track, that I know exactly what my cash flow stream is gonna be, but it's not a security.

And I think that's 1 of the side effects of this new technology.

Well, regulatory is gonna be 1 of the bonus questions we offer to you, Joel.

There's so much to unpack there, but I don't know that it's exactly comforting that it took us like about 200 years from the joint stock company, first joint stock company to get the regulation in order.

I hope crypto can happen at a faster pace.

So a bull case, I think what you just gave was sort of the bull case for maybe these capital assets that are tokens in general, right?

Which is, they're global, they're digital, they're cashflow producing assets that aren't security.

Anyone with an internet connection can own 1 of these things.

But so there's another piece here though, that I want to get to is just because there is a token out there that can accrue value doesn't mean it's sort of set up to actually accrue value.

So This idea of cash flows is like, where does the revenue come from for a layer 2?

Maybe you guys could give us a refresher, Sanjay.

You could give us a refresher on how rollups make money today.

Yeah, so today rollups, so in the future, rollups I think will generate value from sort of 2 different streams, MEV and transaction fees.

Today rollups don't actually generate any revenues from MEV because the sequencers are centralized.

So Optimism, Arbitrum, and of course, they don't want to be extractive to their users.

So they've decided, hey, we're not going to extract any MEV.

So they've just turned it off, basically.

just- as a centralized sequencer, they could charge some fees for MEV and for transaction fees, but they've just set it to 0 right now.

And then of course they are charging transaction fees.

And so that's the primary source of revenue today for layer twos.

And in the future, so I think there's a, so let's speak to both sides of those.

So for the MEV, that can be turned on in the future.

And I think that could be a sizable form of revenue for roll-ups.

And so in the blog post, I sort of put a little bit of a framing around this.

So there's sort of like good MEV and bad MEV.

And good MEV, sort of harmful MEV, is anything that's sort of harmful to the user.

So let's say a sandwich attack, et cetera.

And then sort of bad MEV is, good MEV is something that actually helps the ecosystem.

So for example, an arbitrage helps keep prices consistent across different DEXs.

And so sort of my view is that as far as MEV, I think the harmful sort of MEV will ultimately be sort of either mitigated or rebated back to users and sort of like, why do I say that?

Well, 1, you know, businesses, there's not like a line I have in the post, which is like, typically businesses don't really gain adoption by screwing their users.

And so I think it's the same way with blockchains.

And so there's sort of incentive at every layer of this, whether it's talking about wallets, whether you're talking about the rollups themselves, whether you're talking about shared sequencers, hey, let's figure out a way to get rid of these sandwich attacks.

Let's figure out a way to mitigate this harmful form of MEV.

And I think right now there's 12 different projects that are working on trying to do this.

And so I think with so many people sort of working on this, I feel fairly good that we're gonna figure out a way to sort of combat that.

Okay, so let's break this down a little bit for people and spend some more time on kind of definitions to make sure we've got everyone with us today.

So you think that the sources of revenue for rollups, the way they make money are 2 forms, MEV and transaction fees.

And then we just went into MEV for a second.

Defining MEV for a second, This is basically block ordering.

There's some value for anyone who's sending a transaction or doing something on-chain on 1 of these Layer 2s and getting their transaction in first.

And it turns out that we can sell that value and Layer 2s indeed can in the future start selling that value.

I believe that's what you're saying here.

And there are 2 forms of not the selling of that value, but I guess maybe the effect of blockchain ordering.

Maybe you can find better words for this.

1 is there's harmful blockchain ordering.

And what you're saying Sanjay is you think that the harmful MEV will actually be mitigated over time so that the layer 2 designers will effectively try to minimize that as much as possible and or rebate it to users.

So if you're a user in Metamask you're committing a transaction there's some future world where you actually receive some of the proceeds of that transaction in the form of a rebate.

That's what you think will happen to harmful.

The good MEV, you think these layer twos will effectively take in the form of revenue under that MEV category.

What would you add to that definition, those definitions?

And also, can you give us some examples of harmful versus good MEV?

So let me give you an example of harmful MEV is like a sandwich attack So for example, you want to go and you want to buy an asset on a DEX, let's say ether someone sees you're gonna your trade incoming they're gonna actually put in in order to trade that asset ahead of you.

See all Bankless transcripts on Applepodcasts

180 - Top 5 Bear Market Bets with Avichal Garg & Sanjay Shah of Electric Capital