New Rules for New Realities with Byron Gilliam of Blockworks

Jeremy Allaire: Hello and welcome to The Money Movement. I'm joined here today by Byron Gilliam, who is a market strategist and newsletter writer for Blockworks, and I find one of the most prolific newsletter writers out there. Byron, welcome to the show, super excited to have you on here and we've got a lot to talk about.

Byron Gilliam: Thanks. It's amazing to be on. I subscribe, I listened to all your podcasts, and it's amazing to be on. You didn't play the intro music for me, so I'm not totally convinced that it's real.

Jeremy: [laughs] It's great because there’re so many ideas that fly around in the crypto land. I likewise, there are writers and there are podcasters and others, and there's just such a plethora of information. As I like to say, I've been in this for nine years, I'm pretty far down the rabbit hole, but I actually feel like I only understand like 1% of it, which is I think a good sign. Hopefully not a reflection of me, but more a reflection of just how much of a surface area there is in all this.

On that note, actually again, just a little bit more of an introduction for you and for the audience, if you don't subscribe to Byron's newsletter on Blockworks, highly recommend it. A lot of people refer to it as the Matt Levine of crypto or you as the Matt Levine of crypto. Although these days, Matt Levine is writing a lot of crypto too, so I don't know where that stands.

Byron: Yes. Matt Levine is definitely the Matt Levine of crypto and the only person who calls me the Matt Levine of crypto is myself just to be clear.

Jeremy: I've seen that, but I think there's credence in that. Anyway, really have enjoyed your writing and your journey into this space. Maybe that's a great place to start. I'd love to maybe have you share a little bit of your journey into crypto land. Obviously, in the newsletter, you touch a lot on lots of episodes from your past and relate those to the here and now to just provide the TradFi to DeFi context or whatever you want to call it. Just, maybe take a couple minutes and talk about how you got here.

Byron: Sure. Well, I was an equities' trader for about 25 years. Most of that was with a couple of large investment banks. Being an equities trader in an investment bank is making prices to hedge funds and taking some pop positions and executing some orders. That doesn't really make me a banker even though I worked for an investment bank, it just makes me a trader but people don't know that. My crypto native colleagues just assume that I know everything about TradFi because I worked in TradFi and I've not so far just disabused them of that notion.

Yes, so I was a trader for a long time. I was aging out of being a trader and also trading is not as fun as it used to be. When I started, it was you just had to be faster than the next guy and then by the end of it, you had to be faster than some computer, which is impossible. Equities trading was less fun than it used to be, and I was getting too old for it. I was poking around looking for something new to do.

I got connected with Blockworks, who was looking for somebody to write their newsletter. Specifically, they were looking for somebody who they thought could translate crypto for traditional finance people, and they thought maybe I could do that. Then I knew a little bit about crypto. I knew Bitcoin and I knew ETH. I'd gone down the Bitcoin rabbit hole in about 2015 so I was semi early to it. I unfortunately decided that it was not a very good risk reward. Although I did buy one. I bought one Bitcoin at like $2,000 and then I sold it a year later. I bought it just because I thought, well, there's the hard cap at 21 million, and then it forked off into Bitcoin Cash. I thought, “Okay, well now there's 42 million of them,” that ruined that thesis for me.

Then I did the same thing, same exact thing with Ethereum. I bought some ETH, I can’t remember how many, and then like six months later, the CryptoKitty thing happened and it just completely halted the Ethereum blockhead. I thought, “Well, if this thing can't even process pictures of cats, then what good is it?” so I sold those also unfortunately. I think that was even an even bigger mistake than selling ETH. That was the extent of my crypto experience prior to Blockworks although I was interested in it. Yes, so I've just been going down the rabbit hole ever since.

Jeremy: Yes. Awesome. Well, I think as you write often, there's a lot of entertainment in all this, but there are a lot of really interesting and sort of choice nuggets. Maybe we can pull on a few areas. As you got to spend more time and looking at things, I find in your commentary often, you're trying to reason about things and relate them. I'm curious, just stepping back, having been at it for now I don't know how long has been.

Byron: It's almost exactly a year.

Jeremy: Yes. It feels like about a year, right. From where you were then until where you are now, what are some of the biggest things that you've taken away or things that basically you feel like you have stronger belief and conviction about than maybe you did when you started writing?

Byron: Oh, yes, that's an interesting way to frame it. I'm not sure that I have stronger conviction. I probably have less conviction. There's that meme, the midwit meme on Twitter. I think I’m right at the top of that bell curve. I'm securely in midwit territory now. Yes, it's definitely-- crypto is a lot different than I was expecting it to be. I came into it thinking that all of these new protocols and stuff were basically tech companies, software. I figured they were like software companies and that tokens are stocks and protocols are companies, but they are not at all. I learned pretty quickly that the protocols are not companies, tokens are not stocks, but then everybody just talks about them that way.

If I say that to crypto people, they’re like, “Yes, they’re not,” but then they just proceed to talk about them as if they have P/E ratios and as if they're investments, or going to just naturally appreciate over time like an equity would do and that's just not what they're. Actually recently I've been surprised that it's actually become more like that when I started. When I started a year ago, Uniswap was-- airdrop was relatively recent. Uniswap was very, very careful with their airdrop to make clear to everybody that they were not a security. They were not going to earn revenues, and they were not going to pay them out to token holders. It was very clear. A lawyer had written the copy on their website.

Sushi was taking revenues, but even SushiSwap, they were really careful to say that, “We are paying them out to stakers. We're not paying revenues to token holders because that would be like paying a dividend. We're paying our revenues as a fee to token holders, as a fee to stakers for the service of staking, even though staking was not any kind of service.” There were people were trying to comply. Even if you go further way back, if you go back to the Dow, and I'm reading Cryptopians at the moment, which is great. The DAO was super careful to structure in a way that would avoid being labeled a security, even though it didn't help because SEC still said they were a security.

Anyway, now a year later, it seems like crypto has completely given up on that. The trend now is everyone is talking. All the protocols are talking about the revenue they're going to generate and how they're going to return it to token holders and how the tokenomics are going to make the price of the token go up, which is--

Jeremy: In a world where subsidized yield incentives with tokens and “yield farming” and what was DeFi 2.0, that’s kind of, no pun intended, run out of gas. I agree with you. There's been this pivot to looking at “the real utility, real economics”, which in some respects, that's good, right, that’s really what you want. I certainly was somewhat confounded by the amount of food products, [laughs] whatever you want to call it. Everyone talked about all the phenomenon of farming and the kind of ponzinomics. It was maddening when you really looked at it but it was such a big phenomenon but getting back to basics in a sense.

In so doing, coming back to what you were just saying, if you get back to basics and say here's a protocol, here's its function, here's its utility, here's its economics, et cetera, how does one think about disclosure, market conduct, risks of fraud, all the things that say a security's regulator might care about? I just came from DC for the past several days and meeting with a lot of different people. I think the big discussion is, is this sufficiently different that it needs a different set of rules? Or should you just try and say it's a security and therefore it has to be subject to registration statements and SEC Form X, Y, Z review and it only can be custodied by this person and this kind of firm? And you need to have a transfer agent, and you need to go through a dealer and the dealers can only do this, and you have to have these registered exchanges that are national?

The super structure, the market structure, and super structure that exists there, does it even make sense to try and attempt to map that to what these protocols are? I'd be interested in your take on if you tried to reason about that at any level.

Byron: Yes. Well, I mean the Howey Test stems from case law that is from 1946, I think, and- -was about orange groves and whether orange groves or the management of orange groves were securities. It's very dated and it's very not applicable to crypto.

A decentralized exchange is very different than a centralized exchange. It doesn't seem like those two things should be regulated with the same rules. I do think that cryptos should have a different set of rules, but on the other hand, like I was saying, cryptos are acting so much like equities that maybe they shouldn't. I definitely do not blame the SEC for thinking that that basically everything is a security because basically, everything is acting like a security.

Jeremy: Yes. I had a chance to guest lecture with Gary Gensler when he was teaching it at MIT and doing a class there and while he was there. I also had a chance to have him come and do a company all hands at Circle and do a fireside chat on some of these topics, not knowing of course, that he was going to become the Chair Gensler. One of the discussions that we actually had back then, and I actually, I have some blog posts about it, which I'll try and dig up and share in the show notes, but was my own belief. This was back in 2018 okay, so this is a while ago, how long ago is that? That's four years ago.

There was this phenomenon where you could have a token that simultaneously had features that would really make it seem like a security, features that would make it seem like a commodity, and features that would make it seem like a currency. It could be all three. It's like the Heisenberg principle. I don't know if that's the right thing. It depends on how you look at it or whatever. Clearly, there's this context for a token and then there's an evolution over time in-context in both. What I was arguing then, which I still feel pretty strongly about today is this is a new reality. We can't put the genie back in the bottle. This is actually an innovation. This is not just some way to skirt around laws. It's like this is a new innovation.

As you may know, my background is as a internet technologist, as an internet software technologist, and I've been digging around internet protocols since 1990. I look at these things, I look at protocols, and I look at that world and a lot of this is open specifications, open source software, or protocols, but there's economic mechanisms tied to them and there's governance around them. It is this new form and so what I've said is, what you really need is you need some new definitions. The law needs new definitions.

This is a moment in time when it's like autonomous cars didn't exist. You need some new definitions, there's now a thing, it's an autonomous car. You can't give it a driver's license, whatever the concept is. I really feel like there's got to be new definitions. Then one can have a discussion about well, as a TradFi investor, what might be important to me, whether I'm Joe retail, or Jane institutional, what might be important to me, and what would go on at tokens registration statement, and what would its ongoing disclosures need to be? If there's an assurance industry around it, what's the assurance industry that's necessary for it?

Those have been some of the thoughts. I feel like in your writing, you've picked apart some of those issues with a lot of different examples. If there's any thoughts that might come from that line of reasoning.

Byron: Yes. I think that your last point, I think, is an underappreciated one. Everybody asks, “Is this token a security?” I think that's not actually the right question to ask. The issue is really that everyone is treating them as securities. People, there's an expectation that they are going to buy them as an investment and make a profit and the SEC’s remit is to protect investors. People think that they are investing in crypto, so therefore, the SEC should protect them.

I think you could also make an argument that these are not securities in the sense that if you buy one you do not have the claim on any assets, you do not have a claim on future cash flows. You might have a vote, but if you do have a vote, it's very likely nonbinding. The votes in crypto are signaling to the multi-segment. [crosstalk]

Jeremy: Right, they’re like-- yes.

Byron: Yes. Exactly. Like, “This is what I would like you to do but you don’t have to.” There's a lot of reasons why these are not securities, but I think because we all treat them like they are we treat them as if they were equities investments. Therefore, the SEC is also going to treat them like their equity investments.

Jeremy: If you can imagine-- and there are governments doing this, who are saying, “Well, if you want to sell a token for a protocol in our country, you got to have the equivalent of a token registration statement, you got to talk about the project and the founders, is there a security other that the code,” and various things. One can imagine some form of registration and disclosure that would be relevant to people that's there. For Jane or John Q public to be able to read these and know that someone's job is to check these [crosstalk] seem unreasonable, right?

Byron: Yes. I guess I've have a couple of issues with that. One is that these things are non-geographic so if you're Uniswap, are you going to register as a security in every country in the world? Because you can't. In the US, you can only buy Apple with a US broker, if you have a US maker or something.

Jeremy: That's great. I love that point. It's fascinating. I think one of the things that draws a lot of people to this space is the inherent internet scale of it all. By definition, a software on the internet, it exists everywhere the internet exists and that's what-- there hasn't been a set of economic primitives that exist everywhere the internet exists. Now there are and so that is super powerful. I think ironically, even though there's so much of a decentralization is such a core philosophy of crypto, and so on, it's also highly globalist stick in a sense.

Even though it's this very decentralized thing, I think there is almost like a-- it's like the Solidarity Movement. I don't know what you call it. There’s something highly globalistic about it and everyone feels like, "Hey, we're building something that is truly for the planet." It's sort of like why do we have to have all these national boundaries and national laws? This just works and is a way to make things work. I'm interested at a deeper level, to hear your thoughts on, is it viable to do some bottom-p building of economic structures, because that's what some of these things are, a DAO, a protocol, and what are the implications of that?

Byron: Economic structures in what sense?

Jeremy: Well, organizational economic structures, governing structures, coordination of working capital.

Byron: Yes, I'm totally confident that there is, but I don't know what those are going to look like as of yet. I think there is some neat experimentation going on in the DAO governance world but that's a niche activity. I feel like mostly DAO so far have just been used as a regulatory arbitrage and to have hidden hierarchies and hidden power structures but there's a phrase the tyranny of structurelessness . When you have absolutely no structure, there is going to be a power hierarchy there. It’s just going to be invisible to the normal observer, which in a lot of ways is worse than having a formal structure.

DAOs, I think, at the moment, the way they're generally being used there, it's like holy Roman emperors were neither holy nor Roman. DAOs are neither decentralized, nor autonomous, and they're not even very organized. Yes, I think there's going to be a lot of fascinating things that happened in DAOs but if we just tried to make them a new version of LLCs, then I think we're not going to get very far. I think they need to be new and totally different things.

Jeremy: I agree with a lot of what you're saying. There have been a lot of lessons over the centuries about how to create a corporation, whether nonprofit or for-profit, and how to have governance and bylaws and checks and balances. There's a huge body of work that that exists there and there's a huge body of work in terms of delegation and decision-making and all this. At many levels, yes, the flat DAO with a whole bunch of token holders, and then a treasury that's hanging out in a Gnosis safe or whatever. It feels- -kind of radical and empowering at one level, like, “Oh my God, like we can do this. We can just have a bunch of people connected with our wallets and we're making decisions and we're moving funds and we're like stuff's getting done and there's worker bees and there's this thing and no one signed any contracts,” which is I think also part of the exhilaration.

It'd be interesting to see what the, I don't know, if it's a standard deviation or a bell curve or all that. But it’d interesting to look at demographics overlaid on DAOs. I know a lot of really young people who are like, “I'm in seven DAOs.” I'm like, “Wow and I’m earning and I'm making a living.” I'm like, “Why would I ever go work for a company?” Because I'm like, “I have all these DAO tokens and I'm doing this.” They may not be doing that right now because the 99% drawdown or whatever it was. There's a way in which that “economic freedom”, which is a mantra for a lot of people in crypto. That's a real thing but I think many of your observations about what it is in practice are really accurate.

I'd be interested in whether you believe that can there be really significant iteration on that and can one imagine like more sophisticated forms of on chain governance and on chain treasury management and putting more of that substance in to do things.

Byron: I am confident that there will be but I don't know what it's going to look like. At the moment, I feel like the real use case for a DAO right now is when you have a protocol that is finished software and it runs on its own. If you want to change it you can write some code and let everybody in the DAO vote on it. If it's voted in then the code is automatically implemented. That is like the very base case use for a DAO and that makes sense to me. But in terms of trying to build a business like a lot of protocols say that they are trying to do, I don't see how that's going to work with a DAO. There's a fine line between freedom and chaos.

I think it seems to me from the outside, I've never worked in a DAO but from the outside looking in, it seems like DAOs are very much on the chaos side of that line. I read a lot about all the stuff happening with Maker and I just can't understand how that's supposed to function. They don't they don't even have a budget process. Anybody can propose an expenditure at any time. There's just like a constant rolling budget process. I imagined I would think that it would be incredibly frustrating to work there. I can't really imagine what that would be like.

Especially for something like Maker where you're trying to have one foot in the real world with real world assets and you're having to deal with contracts and lawyers and things like that. It just seems like a DAO is just not fit for purpose.

Jeremy: Yes, it's definitely a layer of complexity, a significant layer of complexity. That's interesting. I'm very interested in how one might be able to build more durable institutional structures on chain execution and on chain models. I think there's various ideas that get tossed around implementing Common Law concepts in smart contracts and building tiered token models that more resemble classes of voting and preferred stock and all these kinds of things.

Coming back to the are these securities discussion. But nonetheless using this to, mirror may be the wrong word, because I don't think the goal is to literally mirror exactly what a Delaware corporation is or what have you but at least being able to bridge to that world. Anyway, it's been interesting. It's definitely a really interesting area. I'm interested as you look at the market side of this and the markets side of this, behaviorally, there's a lot of interesting behavior in this market. Do you feel like this is the same behavior that you see in the equity markets or is there some other, I hate to use word alpha, but is there some other essence to this market and how it behaves given it's like it's got this global retail participation, it's got memes? There's just a lot of other things in there that you don't get if you're say trading the NASDAQ or Russell 2000 or whatever you're trading.

Byron: Yes, it's definitely different and it's more different than I expected it to be. Like I said in the beginning, I came into it thinking that these things were going to be like higher beta tech stocks because they were softwares and it kind of seems logical but that’s not how they act at all. They're less trending than equities, which kind of surprised me. They're more meme reverting and less trending, which in hindsight makes sense because they're constantly issuing tokens for one thing but they just do. Yes, they act differently than equities. I'm consistently surprised at how expensive cryptos are. Expensive is subjective in the crypto world but--

Jeremy: You're talking about like fully diluted market cap type of measure that some of us think?

Byron: Yes. I came into it thinking like, “Wow, there's this whole universe of things that nobody's paying attention to so surely they're going to be really cheap,” but they're not at all, yes, which is still confusing to me because the pool of buyers of any given crypto to me seems very small. How many people actually know how to use MetaMask or whatever? It's not that many, right? The other side of the coin is this unlimited supply. Every protocol is constantly issuing new coins and somehow finding buyers for them, which is just surprising to me.

Especially after the crypto winter, the way market caps have held up in the crypto winter has really surprised me. You get something like Bitcoin, ETH Classic still has like a $4 billion or $5 billion market cap and it doesn't really do anything. So that's confusing to me.

Jeremy: It's confusing to me too. It really is. I've come to accept it in some ways but it's really confusing. One has to wonder will the music stop? Will the music stop? I guess, music could stop in a potentially say, a deep recession where everyone's trying to like scrape every penny out of their pocketbook. That is one way that the music could stop, which is just the level of risk off is literally like I could liquidate every freaking token I have to the last drop. That could be one way. But the kind of like sustained belief, which in a sense for many of these is kind of meme based because it's not usage based. It’s like the usage is the willingness to trade in many cases. Does the music stop?

Byron: Yes. I think probably the best analogy to is TradFi is GameStop and AMC. I was totally shocked that GameStop kept that market. Most of the market cap that it got in the wild ride up, I kind of understood that it could just go cra-- Anything can go crazy on the upside for a little while but I was totally shocked at how much of that move it retained, the same with AMC. I guess maybe that's what's happening in crypto also. Maybe there's just some meme value that's not to be underestimated.

Jeremy: Yes, it's interesting to watch. I'm curious, is there anything in the space right now, like an area where there's projects with technology or an area of the market that has captured your attention, you're intrigued by, that you think we should all be paying closer attention to?

Byron: I don't think I have anything, any surprising things there. I personally am always interested in stablecoins because I still think that payments are the best use case for cryptos even though-- That was in, I think the very first sentence of Satoshi's White Paper. It hasn't been totally fully realized yet but I feel like we're getting close to that like maybe--

Jeremy: We're working on it.

Byron: Maybe with L2s and maybe everyone's going to have a wallet where it costs a fraction of a cent to move your USDC around and that could be a real game changer. I feel like when people are critical of crypto and they say like, “How is it worth $3 trillion to the top? How is it worth a trillion dollars now?” I feel like payments alone could justify a trillion dollar market cap, no problem. I also enjoy stable coins just because it raises lots of questions about what is the nature of money and what is the nature of banking? And I think it's getting really interesting now with these cap issued stable coins like how those go and stuff like that so I'm always interested in stable coins.

I am interested to see what happens after the merge with the ETH staking yield, whether that becomes some kind of risk-free rate for a crypto. I don't think that's the clear risk-free rate but people might treat it like that. People might start building- -neat financial structures. On top of that, I'm interested to see what happens with real world assets. I don't really understand how we're going to get real world assets on chain. To me it just feels like if you can put the deed of the house on a blockchain, but to evict somebody, you still have to call the police. The blockchain is just kind of improved bookkeeping. I'm hopeful that real world assets will become a bigger thing.

I'm also just really interested to see if protocols can start developing some kind of moat that looks like what you would get in traditional finance. Uniswap has staved us, SushiSwap, pretty well and Lido seems like have some sort of moat in staving so I'm very interested to see how that develops as well.

Jeremy: Those are great observations. Well, good stuff. I appreciate you having you on and having the conversation and likewise, hope to have you back. Keep doing what you're doing because I think it's great for everyone.

Byron: Love from even here.

Jeremy: I think your insights are really strong and I think benefit the community a lot. Thanks for that too.

Byron: Right back to you. You guys do amazing work. I think Circle and USDC is realizing that original vision of payments and it's really fun to see what you guys come up with.

Jeremy: Lots to do. Cool. Thanks for coming on, Byron.