# Ultra Sound Money by Justin Drake | Devcon Bogotá

- Speakers: [Justin Drake](https://streameth.org/speakers/justin-drake)
- Channel: [Devcon](https://streameth.org/devcon)
- Date: 2023-10-07
- Duration: 28:38
- Watch: https://streameth.org/watch/yt-2ZuGVLhhxQo
- YouTube: https://www.youtube.com/watch?v=2ZuGVLhhxQo

## Description

Visit the https://archive.devcon.org/ to gain access to the entire library of Devcon talks with the ease of filtering, playlists, personalized suggestions, decentralized access on Swarm, IPFS and more.
https://archive.devcon.org/archive/watch/6/ultra-sound-money/

This talks paints a big picture for ETH the asset and its macro cashflows. We discuss unique dynamics arising from:

* **fee burn** (ETH for blockspace payments)
* **issuance** (ETH for validator incentivisation)
* **staking** (ETH for economic security)
* **defi collateral** (ETH for economic bandwidth)

Speaker(s): Justin Drake
Skill level: Beginner
Track: Cryptoeconomics
Keywords: ETH,ether,economics

Follow us: https://twitter.com/efdevcon, https://twitter.com/ethereum
Learn more about devcon: https://www.devcon.org/
Learn more about ethereum: https://ethereum.org/ 

Devcon is the Ethereum conference for developers, researchers, thinkers, and makers. 
Devcon 6 was held in Bogotá, Colombia on Oct 11 - 14, 2022.
Devcon is organized and presented by the Ethereum Foundation, with the support of our sponsors. To find out more, please visit https://ethereum.foundation/

## Transcript

foreign [Music] on the assets not so much ethereum the protocol and it turns out there's only one Defcon talk about ether the asset and that's the one right now and I'm hoping that this time next year we will have multiple talks about E30 assets because in my opinion E30 asset is critical for ethereum to be successful in its mission in becoming the settlement layer for the internet of value we need to understand it we need to nurture it so yeah with without ether there's no ethereum and if ethereum becomes the settlement layer for the internal value then de facto if thermal ether will become some becomes something very special namely uh money the internet sorry money for the internet internet money and there's this deep and um you know friendship between IFA and ethereum that I'm going to try and tell you about today but before we get there I want to give you a mental model around the temperature of money or some people call it the velocity of money I'm going to invite you to think of money as water which can be in multiple States it can be liquid it could be solid if it's cooled down and Frozen and it can be in this gas state if it has extremely high velocity and this uh this is interesting because at layer one we have mechanisms that explore these extreme temperatures so you can take ether water and at layer one you can freeze it you can stake it and in the process of staking you're reducing the velocity of that ether because it's kind of put in a black box and can't move and something similar happens with the burn the burn is all about in you know destroying if consuming it vaporizing it and turning it into into gas vapor and something very similar happens at Layer Two so at layer one all of this is enshrined in the sense that ether has a monopoly um and at Layer Two there's something similar happening but it's more of an emergent ecosystem it's more competitive so what happens at layer 2 is that ether or other forms of money get bonded and get used as collateral in the context of decentralized finance and money could also be used as currency when you're transacting for example when if it flows through the pipes of uniswap and what the word currency comes from the word current um and it's basically money that is moving and most of the time when people hear the word money they think currency and they only think about the high velocity use cases but it turns out that especially for ethereum we shouldn't be discounting the low velocity use cases as those are extremely important as well using ether as collateral is a use of of of of money so just to recap we have ether programmable money which can be programmed to do various things that contribute towards ethereum a little bit like a stem cell it can be fully programmed to be a brain cell or heart cell or liver cell and ether could be programmed to be stake contribute towards security it can be programmed to be base fees and contribute towards the sustainability of ethereum as a project economic sustainability Economic Security it can contribute as economic bandwidth in the context of D5 and it can contribute to economic activity that is that is on top of of ethereum within the decentralized ecosystem and one thing that I want to highlight again is that there's these two different economies there's the cold economy of of money mostly collateral money and that's the hot economy and both are extremely important and in this talk we're going to go through the various uses of uh of of of of ether that kind of help ethereum become a settlement layer for the internet of value starting with security so if if ethereum is going to settle the um the internet of value it shouldn't get crushed by the economic weight of it because the internet of value is going to be massive it's going to be tens of trillions of dollars and we can't have the economic the internet of value be be secured by like a tiny amount of ethereum Economic Security and so there's this important concept of the security ratio which is simply the total value secured divided by the economic security that ethereum has and right now we're at a point where the security ratio is very healthy it's only 20 the lower the better and ethereum is securing roughly 400 billion dollars of value in the form of if erc20s and nfts and because it has roughly 20 billion dollars of Economic Security that gives us the security ratio of 20. 20 billion dollars of Economic Security is that a good thing is that a bad thing well in a way it is a good thing especially for a theorem that is such a nascent project and it's especially good that it's become a film today is the most secure blockchain even surpassing its older brother Bitcoin by a factor of 2x so if you want to do a 51 attack on ethereum that's going to cost you 20 billion dollars if you want to do a 51 attack on bitcoin that's going to cost you roughly 10 billion dollars but 20 billion dollars in the grand scheme of things is that a lot no it's not we I would argue that we want trillions of dollars of Economic Security for ethereum partly because we want to keep that security ratio relatively low but also because we don't want any attacker even the most sophisticated ones like like nation states to be able to attack ethereum and if we have so much economic activity then we'll be protected now the economic security comes from these Eve deposits and in the last two years we've had a very healthy continuous stream of deposits on the order of 20 000 if every single day for roughly two years and so now we're at a point where we have 14.2 million each state and we can ask ourselves how much if can we expect to be staked in in the in the long term and the way that I think about it is by looking at what incentivizes people to stake which is issuance so there's two parts to staking there's the cold economy where you you're freezing money at stake but there's also the hot component which is when you're issuing uh ether as incentives for validators and it turns out you can have a look you can look at the the yield from issuance and there's this relationship which is that every time the amount of if stake Grows by a fact of 4X the yield from issuance decreases by a factor of two so with 4 million if State the yield from issuance would be eight percent with 16 million if staked it would be four percent and with 64 million if staked it would be six percent 32 and now it turns out that what we should expect is that the yield from issuance is going to have an equilibrium with the cost of money and if the cost of money is let's say three percent then we should expect something between 16 and 64 something like 30 million if State now this brings us to the importance of the eve price because we have let's say 2x increase in the amount of Eve staked um like how are we going to get trillions of dollars of Economic Security so today we have 20 billion dollars of Economic Security we want to get let's say to one trillion dollars that's a 50x increase we can get a 2X increase from each state to 40 billion dollars but we're going to need more than that and specifically we're going to need the price of ether to go up 25x in order to get this really robust uh amount of Economic Security Now one thing I want to mention in this in this first at the end of this first section is this idea of minimizing the cost of security so issuance is has negative externalities because it dilutes all the holders and at Genesis we were issuing a lot of if roughly 12.5 million if every single year and now we're at a point um at the merge where we've decreased that by roughly a factor of 20x and we've reached a point where the the issuance is extremely small and is essentially optimal and that because we can't improve it this is actually a forcing function for us to essentially ossify it because we've reached the best possible design great so now let's now that we understand that if it's like critical to the security of ethereum let's talk about sustainability now what do I mean by sustainability we can think of ethereum as a company and the product that it's selling is block space specifically secure blog space extremely secure blog space and as a as a project it has income and it has expenses and that leads to profits and we want profits to eventually be positive we want the project to be successful to be sustainable so income is the block the the block space sales expenses is the security budget and that's basically for ethereum is the burn minus the issuance and we can go further than that we can actually look at P ratios for example and analyze ethereum almost as if it was a tech stock now since the merge despite the massive reduction in cost of security we are still not sustainable in the sense that ethereum is still not able to pay for its security to compensate that with the income that it gets from selling block space but the good news is that the amount of unsustainability is absolutely tiny it's less than 0.1 percent per year if we were to to zoom out a little bit um because right now we're with a moment in history where where the depth of a bear Market and the the transaction fees are very low but if we were to zoom out even just a little bit um then we'll see that actually ethereum is in a position to burn much much much faster than it is issuing so if we take all the data that we have since eip1559 we're burning roughly at a rate that's 3.5 times the amount that we're issuing today and so the supply growth is expected to be negative and so we have this shape of the supply which we should have which is that during the first seven years of um ifa's existence the supply has grown very very fast from this extremely high issuance and the peak is this inflection point around the merge after which the supply will start decreasing and finding a new equilibrium and this is what birthed the ultrasound money meme if you know we call monies that you know strong monies that can't be debased artificially because they have a cap Supply sound money then surely something that has a decreasing Supply where the money becomes stronger and stronger every single day should be called ultra sound money and it turns out that bats produce ultrasounds and David who's with us here kind of innovated here at the memetic level and said let's wear the bad signal to spread the ultrasound money meme and this is where he started we now have thousands of accounts on Twitter that are spreading the ultrasound money meme with the bad signal and there's a there's a community that is being built as as we speak okay so ethereum needs security it will almost certainly be sustainable thanks to all the fees that it's collecting and burning compensating for the cost of security what about the the application layer what about economic bandwidth so if is used as economic bandwidth for decentralized applications so two examples would be maker which uses 1.4 million if as collateral to power its decentralized stable coin and Ave which is consuming roughly half a million if for its decentralized loans and the reason why if is such a good choice as a collateral asset is because it's pristine and what we mean by pristine is that it doesn't have a lot of these tail risks that other assets might have it has no contract risk no custodial risk no Oracle risk no Bridge risk and no governance risk but there is one downside to if which is that it is pretty damn volatile and so one of the things um that we can try and do is stabilize if and this is exactly what stable coins are specifically decentralized stable coins that are backed by Ether and here are three different projects that are using ether to back that decentralized stable coin and right now we using about 2 million if specifically for collateralizing decentralized stable coins now I believe that we're at the very early days of ether being used as a collateral in my opinion ether is the perfect collateral money and so today we may only have let's say 16 million if that's used as collateral but in 10 years time it could easily be you know four times more it could be something like 60 million if that is used as collateral now again I want to emphasize the importance of the eve price here in the context of economic bandwidth right now we have about one billion dollars of decentralized stable coins that are collateralized by Ether which is almost nothing and really we want to be in a position where we have trillions of dollars of decentralized stable coins right we don't want to see a future where the economic activity is denominated in in usdc or usdt which are centralized stable coins now let's say we want to get to one trillion dollars of decentralized stable coins we need to grow a thousand X from where we are today we can grow the amount of collateral quite a bit by 15x but that would only give us 15 billion dollars we need the price to go up essentially we need ethereum to be successful so that we have a lot of economic bandwidth for decentralized stable coins now one of the concepts I want to talk about here is the is the notion of illiquidity multiplier so you know how I I kept on emphasizing that there's two economies without within ethereum there's the liquid economy which is hot and the illiquid economy which is cold and really all the cash flows happen within the illiquid the liquid part so if you think of the burn it's liquid if that is burnt to to pay for for Block space and if you think of the issuance that's like fresh uh if that is liquid that is added to the liquid portion and so really what I what I one one way to think about the ethereum market cap is to focus on the liquid portion for which we have models we have the discounted cash flow we have PE ratios Etc and then once we understand how much this liquid portion should be worth the portion which is basically ethereum as a business as a tech company then we can scale that out to the whole market cap and the scaling factor is this in liquidity multiplier and where we are today is that most of the Eve is liquid and so the liquidity multiplier is actually tiny it's just noise it's like 25 which is you know roughly the the monthly volatility of of of ether but things change quite a bit once most of the Eve is used as collateral menu let's say that 80 of is used as collateral money and only 20 is liquid here then the liquidity multiplier is pretty big it's 5 5X so if the ethereum cash flows if the business of selling block space is worth let's say one trillion dollars then the whole market cap of E30 assets should be five five trillion dollars great so we understand security sustainability bandwidth all of these things are critical to the success of ethereum and they all are tied with E30 assets what about the last Point activity so by activity I just mean the amount of flows that are happening on top of the film I'm thinking fluidity liquidity diversity Vitality like all sorts of applications millions of transactions per second something very vibrant and the only way that we can get there is with scalability now the good news is that I believe we will be able to scale if I'm roughly a million x we have this massive wave of scalability coming we have the search is coming and um just to give you a little bit more detail there's basically three technologies that Compound on each other each of which give us roughly 100 x and scalability so we have Roll-Ups that will bring us to 1 000 transactions a second we have shouting which was going to bring us to 100 000 transactions per second and we have Nielsen's law which is going to bring us to 10 million transactions a second Nielsen is always basically the equivalent um law to to to most law but for bandwidth and it turns out that bandwidth is the only fundamental resource um that that blockchains need to to to to to to consume now as we scale the ethereum by a million x there's this concept of the ultrasound barrier which is how much each single transaction needs to pay for a film to remain sustainable basically for ethereum to have enough income to pay for its Security expenses and so the ultrasound barrier is going to decrease by roughly a million x so right now we need to burn in base fees roughly 3 million gray for every single transaction but once we scale things up a million x we only need to pay per transaction three three way to to be able to be sustainable and the good news is that three-way is an absolutely tiny amount of money it's three billionth of an ether and even if this ether is widely successful even if it's worth a million dollars let's say three way would be still less than one cent it would be 0.003 basically one third of a cent and so basically we we're going to be in a position where ethereum to remain sustainable requires transaction fees which are essentially noise essentially just dust now one of the exciting thing about ethereum as a business is that the secure block space is is Big Business and it's been growing extremely fast and this is the basically the the daily blocks block space sales since the very beginning of ethereum and the the y-axis is is a logarithmic axis so as time progresses um even though the transaction the per per transaction fees might go down the in aggregate the the income um should increase and this is partly due to a concept called induced demand as you improve things as you reduce costs then more on more and more users will come in more and more decentralized applications will be will be built and you're unlocking more and more activity and I expect this to continue to happen of course the um the block space is a very you know volatile resource and so these Peaks and troughs you know they're highly correlated with with bass and bull markets and you know it could look like you know the the the aggregate fee volume has dramatically decreased by a factor of 100x and it has the 100x in the grand scheme of things is actually not much okay so here's my last slide and it's basically trying to give you a big picture summary um you know talking in terms of orders of magnitude in terms of where I see a potential future for ethereum so I expect the supply to be roughly a hundred million dollars in in the long term so right now we're at a 120 million dollars and the the supply should should decrease slowly and eventually in the equilibrium reach 100 million dollars now where will these 100 million ether live so they will live um you know partly at stake securing ethereum partly as collateral providing economic bandwidth for defy and partly as currency you know for example IFA within exchanges like uni swap or even centralized exchanges if we have roughly 30 million if staking that's going to lead to roughly 1 million Eve per year of issuance and if ethereum is going to be sustainable as a business then the burn must match that at also one million if per year now the income what I expect is remember the previous graph I expect the the income for ethereum to be billions of dollars every single day in selling block space even though the per transaction fee will be less than the Cent so this is the success for ethereum where we can get the best of both worlds on the one hand we get tiny transaction fees it for one single transaction but in aggregate because we're doing 10 million transactions per second actually ethereum has a huge amount of income and that allows it to have a huge amount of Economic Security and then again in the success scenario I'm expecting tens of trillions of dollars of economic bandwidth for defy and correspondingly tens of trillions of dollars of stable coins that are being traded on top of ethereum and I think if we do reach this potential future then undoubtedly if VM will have succeeded in becoming the settlement layer for the intent of value thank you hey Justin uh thanks so much for uh uh one making this a talk highly approachable thank you for that um so I had a question with respect to from your talk what I would Now call the iliquidium eLiquid premium and I think it was actually in David's talk where he had a friendly ultrasound debate where he gave up essentially the point that liquid staking derivatives then I guess would reduce this illiquidium illiquid premium could you uh potentially speak to that a little bit yes so I wouldn't have given up so easily for a couple of reasons like the the first reason is that one of the the main uses of the the the liquid sticking token is to have leverage and so what you end up doing is you end up locking this liquid sticking token and so that that liquid sticking token is itself not liquid but there's maybe another reason which is more important which has to do with the cost of money that I mentioned so let's assume that the cost of money is fixed over time let's say it's three percent the cost of money is going to dictate how much if is being staked and what the liquid sticking tokens do is they allow you to unstake immediately as opposed to having to go through the exit queue and you get this privilege of unstaking immediately by basically paying a very small fraction to to market makers or arbitragilists who will go through the pain of unstaking on your behalf so you're going to sell let's say you're one uh staked e for 0.9999 if paying a little fee for the privilege of not having to go through the execute now what will happen is that these arbit Treasures they will go through the process of unstaking but when they do that someone else will come in and compensate for this for this removal of stake and the reason is that in in the equilibrium the amount of staked if should correspond to the to the cost of money and so even if there's like a large amount of Eve that on Stakes then in the equilibrium more if will come in to bring to to bring things in and so really you can think of the total amount of if really as being this illiquid iceberg um that that is essentially impossible to melt because if you melt a small portion another amount of of ice grows on the other side awesome we'll move on to our second question so in in your future um why would there be tens of trillions of dollars of stable coins instead of ether just having much less volatility and becoming like a stable coin right so you're really thinking ahead so I'm I'm thinking 10 years into the future and I think you know it's going to take a long time you know to transition from Fiat currencies that live in you know in in central banks to and and and Commercial Banks to basically uh stable coins that are that are settled on on ethereum but I think you're right if you want to think much further than 10 years if you want to think 20 years 30 years 40 years then maybe there is a case for IFA the asset to kind of be the stable money I mean one possible counter argument here is is gold in the sense that gold never really managed to become this like perfectly stable asset and it's possible that there will always be like too much volatility relative to you know baskets of goods that people want to buy for E for the assets um so I think at the minimum we have to go through a transition period where we have these decentralized stable coins and it's possible that even in the end game IFA won't be stable enough uh this is just extrapolate on on the last question the debate was that um ether locked in this taking contract has always been a fundamentally like bullish pillar of ether it's like the more ether that's locked in the contract the more scarce it is uh more that more value it has and then Jordy in the debate was like well all these things are going to become staking derivatives so that you can easily sell so there's no such thing as locking anymore um but the counter argument that I heard that I want to check with you Justin is that it doesn't matter whether you can easily sell it on a secondary Market because the incentive to hold has always been through the yield and you can always you can always withdraw out of the staking contract so it does so is the the four percent five percent three percent yield of ether equivalent to just like straight raw demand for holding this taking token regardless of whether you can unlock it or not are you saying that it completely nullifies that that in my opinion it does yeah awesome well please give Justin a big round of applause thank you so much thank you