Shownotes Transcript
Walk in the money for the rest of us. This is a personal financial on money. How IT works, how to invest IT in, how to live without worrying about IT.
I'm your host, David stein. Today is episode four eighty eight. It's titled should you invest in an a theoria etf.
Last week, nine new spot, a serum etps, launched in us after approval by the security and exchange commission. These etherium etf own either. Either is the native coin that resides on the a theme black chain.
Leading providers of these T F include eyeshades by blackrock, fidelity, vanek, Franklin. Collectively, they brought in over a billion dollars, is an assets in the first four trading days. But if we include gray scales, a theory on trust which existed previously but converted into tf had a very high pressure tio of two and a half percent.
There was about a billion and a half dollars of outflow from that etf. So collectively, with that trust is now in etf. The other eight etf, there was an outflow at three hundred and forty billion dollars.
The other ethic, the expense ratios ranged from fifteen basis points to twenty five basis points or zero point two five percent in this website, we're going to look out should we speculate by buying and a theme tf. A theoria launched july twenty fifteen was based on a White paper and concept developed ed by attack butterine. In twenty thirteen I first discussed a theory um on money for the rest of us in plus episode one sixty that was released june twenty seventeen.
I didn't know much about ephemeris brought into my tension is that had gone from ten dollars per either in early twenty seventeen to two hundred and fifty dollars by mid year. And we looked at what IT was that IT differs from bitcoin, bitcoin being primarily designed for peer to peer payments, although bitcoin has evolved into a more digital gold. And there's definitely payment activity on the bitcoin network, but many just hold IT as a store of value as fiat currencies are debased over time.
Either is different. IT was structured as a network to allow applications to run on called depth. These decentralized applications run because the either the native token allows for smart contracts basically meet da data that's attached to the specific token.
And so we can simplify by thinking of a theory um as a network and either being the coin that tied to that networks that facilitate these decentralized applications that run on the etherium network. In the same way, there are many different web applications that run on the internet. Either is is used to pay fees, transaction fees, known as gas, to deploy these smart contracts, to interact with these decentralize applications.
Now either is a coin because it's native to the theory, an black chain. Many of these decentralized applications have tokens because tokens are often associated with these smart contracts. And they'll use one of the they could use, for example, the E R C twenty token standard that runs on the a theory book chain example, the tokens that are associated with the serum black chain or nf, a non fungible token.
We discuss that back in march twenty twenty one, episode three thirty five, but are a good example of something that runs on the a theoria black chain. They are digital asset that represents ownership. Proof that they own a piece of content can be be art, music, videos.
The nfs are governed by a smart contract, and they run on the theory, an blockchain. When can trade these nfs iron a few? It's called idols. Nf t, but there an example of an asset that runs on the theory, an black chain. Now, back in twenty seventeen, I knew little about a theoria, but I invested in IT, just like I had invested in bitcoin back then.
Just to see how to work out a complete speculation, in April twenty twenty one, we released an episode on decentralized finance and talked about these applications that run on a thorium and other blockchain networks. Now all the episodes related to theory um or list in the show notes so you can find them. But defy essentially there there are building blocks, financial building blocks to build different apps.
These apps could be landing. They could be trading apps. The prominent example of defy would be stable coin, something that we talked about in apps of three seventy eight in february twenty twenty two.
Stable coins are digital assets, a kind of private money. There are true stable coins that are backed by real assets, could be us dollars, could be ery bills or other collateral. The largest is tether, ticker is usdt, and the second largest is U.
S. D. C. What I ve found surprising is back in february twenty, twenty two, the total amount of stable point outstanding was about one hundred and seventy billion dollars.
That's about what IT is today. Tether was the largest back then at seventy eight billion. Now there's one hundred and fourteen billion invested. USD c had forty nine billion dollars back then, but now there's only thirty four billion. partly.
I think there's been less interest in stable coin because much of the stable coin was used to place assets with some of the ecrite pto currency lenders like black fire, which went bankrupt. And so there was less lending of crypto currency. There is more regulation and less demand for stable coin.
At the same time, interest rates, you've gone up dramatically where one can earn five percent in the money mark of mutual fund account. And I have to worry about the black chain and stable coin. Stable coin though many of them run on the etherium network, but they don't just have to run on the theory um there are other networks, tether and and USD c.
They also run on the block chain. They run on the infinite smart chain. They run on salona, which is a major competitor to the theory, and they run on other block change, including baLance.
But there an example of a decentralized finance application that runs on the theory black chain. Before we continue, let me POS and share some words from one of this week. Sponsors net suite quick math.
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Other organizations or applications that that run on a black chain network are decentralized, autonomous organizations or deals. We, them and epsom, three sixty nine of the park. Yes, these are digitally native communities.
They sent around that a shared mission, their member controlled off. And there's a token associated with him. A governance token that be a crypto token is a smart contract that describes how the organization is run, how decisions are made.
But there are another example. I'm reading a book by Christian titled read right own picks in a general partner with on recent horse adventure capital. He's been there since twenty twelve.
He founded in leads a sixteen eeco pto, which invest in web three technologies, crypto and other aspects. And one of the things that he describes in his book is the casino culture of cyp to currency. Were many of these and other apps were really focused on short term gains, not all of them, but many of them.
He contrast that with the network as pect of IT. And the analogy he gives is of a city something like the black chain in theory um he creates to road in the city. There are simple generally speaking, but it's what happens around the road in the city, the restaurant, the shops, the neighborhoods.
He think social network should be similar sort of a thin utility like roads. There's a network aspect to IT, but it's the users that create value and build interesting things around that social network. But that's not how it's evolved.
When we think about meta, think about how facebook works, twitter, tiktok, most of the value is a crowing to the corporate sponsors. Where is on the black chain, the there this network, most of the value can crew to the creators of these applications that run on the network are these tokens. Nf, one of the terms that digs on is the take rate.
The percent of value could be revenue or fees that go to the network itself. In the case of facebook, at one one hundred percent youtube, they share almost half of the ad revenue with the creators apples apple store. Apple gets fifteen thirty percent dicky and compares that to open sea, which is A A network that allows for the creation and trading of nfs.
Take great theirs two and a half percent. Uni swap is a trading platform, point three percent. The theory, the the fees for the APP is around point o six percent, so much less.
IT was very, very early in twenty seventeen in terms of we had this network. What would be built on top of that would IT be things that people would use in twenty twenty one. It's still see more casino like with N, F, T, trying to see which ones would go up the most in value in twenty twenty four.
IT still seems early when we think about investing in an a serum etf. I don't have anything that I use a thereon for. I own the coin either.
I own a couple of nfs. I own other coins on salona, which is a competitor to a theoria. But I am not doing anything on the network.
I jd stein, that ef, I own a name out there, but IT IT does seem that the promise of these black chains with smart contract ability, you apart from bitcoin, a bitcoin to me is digital gold. There is a limited amount of coins and there's the institutional acceptance of IT. And he has told IT as a way ahead against the debasement fiat currency.
The theory um is more like a start up. It's a network and we can paid in its growth. IT has competitors and it's one reason I sold half my either exposure in february of twenty and twenty two, i'd got ten over to three percent of my network and I saw other competitors the time.
The theory an black chain was getting congested because of the interest, but that drove up the fees. And these other network salona had had much lower fees and they're through put the a number of transactions that they could run could be part of each block was much higher. And so IT IT seemed at the time that a theory um was at a competitive disadvantage.
Bia theoria has some other aspects that make IT interesting. When the theory im was launched, IT was a proof of work mechanism like bitcoin, which means that there were validators of the actions. They were using huge amounts of energy to make sure there was no double spending within the black chain, that transactions were valid, that they're there to secure the block chain.
And that's how with syrian ran. But in september twenty twenty two, they did what's known as the merged, where they merged and this proof of work blockchain to a separate proof of stake theory black chain that we've been running in the background with the anticipation of merging IT with proof of stake, the validators stay clatter capital. They put skin in the game to be able to be validate if to put up thirty two either to be part of that.
These validators then confirm the transactions. They maintain the security of the network, similar to proof of work. They get some of the fees from the transactions that are verified, but they also get rewards of new either that is mitted.
Unlike with bitcoin, whoever solves the algorithm, there's always one winner for every block either. These rewards shared, distributed among all the villages, and anyone could be evaluated if they want to put up the collateral to do that. Before we continue, let me pause and share some words from this week.
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But with the merge, there was a protocol put in place in terms of how the theory black chain is run, that the base fees for transactions are collected by the network and then basically destroyed. It's called burning the either and and if you look at a chart, you can see the number of either outstanding growing about three and eight percent a year up until this merge took place in september twenty twenty two. In that case, basically, there has been flat in terms of the number of either outstanding.
It's been a good change because dramatically less energy is being used. Chris dixon in his book as a chart showing the analyzed energy consumption in terror hours of different entities. So for example, of the banking system, two hundred and thirty nine terrible hours per year.
Bitcoin, one hundred and thirty six terrible hours. Gold mining, one hundred and thirty one proof of work at theoria before the switch was twenty one tell what hours per year and with proof of stake, the new one is zero point zero zero two six. So much more for energy efficient.
The way this proof of stake works is as owners of a theory um if we choose, we can also stake our theory. We can do IT directly by becoming a validator, which is a bit complicated. We want to talk about how to do that here, but we can also do something called liquid staking.
And with liquid staking we basically deposit our theory um with a an application that runs on the thean black chain and we get a token in return and then we get part of the rewards because we participate in the staking of a theory um what can you earn staking a theory um well, not a time. The current reward rate on an annual basis is just over two percent. It's been as high as three percent and about twenty eight percent of the theory, an outstanding his state at this point, the less amount of of a theme that stake to hire the reward rate because the amount of reward gets read among fewer entities.
But right now, with about twenty eight percent of either outstanding stake, the words only about two percent per year. One of the risk of investing in a thorium, which is outlined in the perspectives, and I looked at the one from black rock, is the centralization of the theory with some of these liquid stakers. And they specifically mention leto. So leader is an application, runs on the theory, and people can basically commit their either to little and little gives a token in return. The individual that stakes with leader then gets a portion of the rewards.
But then leto now has control of more a theory and by some estimates leto is the largest liquid staker IT suggest that they control a third of a theory um and it's like this with any block chain, if one entity controls more than fifty percent of the black chain, they can change the rules and make sure they pass and the rules could be passed to give all the money to to one entity. And so centralization is one of the risk with any block chain, it's there with bitcoin. It's there with the theory.
Um it's less of an issue with bitcoin now because the high Price of bitcoin is right now at at sixty thousand or so. IT would be tremendously expensive for anyone entity to gain control also because of the proof work mechanism with the theory given the way staking is IT is possible. Perspective points out that that's not necessarily leaders mission, but IT is one of the risk.
Z, E, T, S, the body T, S will not participate in staking. Now one of the other issues with the theory um that has been a criticism is as IT become more popular, there were limits constraint capacity constraint to verify transactions as part of each block and as a result, they took longer to get transaction verified, the fees went up and with all these to centralize applications, IT became much more difficult. And just as a bit coin can be expensive to send bitcoin, there are additional layers.
Layer two is what it's called. There's the same for theory. We have the same for traditional finance.
The base layer layer. One of the financial system in fiat currency world is the central bank. As users of money, we don't interact with central banks, we interact with other laid.
Now we can own the native coin. In the case of the U S, S, U. S. Dollar, we can own a dollar bill, but electronically we can't. We don't interact with the central bank.
We use the the banking system and use their private money we can send, we can wire money, he said. We can use vmu, another layer on top of the base layer of central banks. It's the same with crypto currency. There are other layers that can group together transactions, and then they can eventually be validated at the base layer, in this case, a theory. One of the chAllenges though, even with that, I was still congested on the a theoria network.
And so this year in march, the theory um did that what's known as the don upgrade and IT allowed for a new type of temporary data pack IT called a blob, which is part of the theory an black chain only temporarily. And so they basically opened up capacity to run layer two transactions, these aggregated transactions that can get verified on the black chain, but the only their temporarily. And that significantly reduced the congestion on the theory um blockchain and LED to a dramatic drop in the fees.
And so the network became much more efficient. And in IT is critical to do that because there's other blocks change out. There is salona.
For example, it's through put per second is up to sixty five thousand where as a theoria was fifteen to thirty salona had much lower fees. SAlina was created in twenty twenty. Looking at some of the chAllenges with a theory.
So when we think about should we invest in a theory um etf one, we need to understand what IT is when we have tried to to do that in this episode. It's basically a black chain network that allows for to centralized applications to run on top of IT could be define applications. IT could be N F T.
One of the the most interesting developments this year is there are funds. There's one created by black rock that invest in treasury bonds is the blackrock us dollar institutional digital liquidity find tickers. B U I D L is for institutions.
IT settles on the authorities blockchain Franklin templeton n has a similar fund. There are other options, financial products that invest in real world assets, but the trade and settle very efficiently and much more quickly on the blockchain. So that's one opportunity.
And I I think about what is the opportunity with theoria or i'm personally not using IT. There is the toggle zan aspect. We didn't abid earlier this year where the U. S. Is gone for t plus one trading or settlement of security, transaction security get settled much more quickly like these new funds on the blockchain within minutes, not a day.
And so there is the potential for toga ization of other real world assets, non fungi ble tokens by and large or digital assets that could be digital art, but the financial assets they could they could trade on the black chain and that that is one potential opportunity. Why would a theory um go up in Price over time? When I originally bought a IT was around two hundred fifty per either now over three thousand.
Crystal in his book outlines the case for a theory he right to recall how the system collects fees, a sterling blockchain on transactions or network uses, and how IT uses these funds these fees to to buy and burn. Either taking them out of circulation to that reduces the supply of tokens that can increase the value, the existing tokens so that benefits everybody the same time as more applications are written for a theory um there's greater use of the if they're token there, there's just more demand for. And so the fees are generated because of that and the the these fees are paid in either.
And so if there's more activity on any network and more demand for the native coin in order to facilitate activity than increase demand, will increase the value of either or any other crypto currency, simple supply and demand. The same time, there has been this mechanism in place to burn neither as part of the fees, again, as part of this murder, to proof of stake. That's what we drive appreciation of the theory, the network case for driving.
It's only going to go up over time if there's things built on this, the network, the theory um black chain and there's definitely competitors. The theory has advantage because IT is the only smart contract blockchain that now has institutional acceptance as as a approve spot etf. There's futures that trade in IT.
If institutional service allocate more to the gypt or currency space, typically they allocate to those that have been around the longest and have the largest market, and that would be bitcoin. And a theory there is the opportunity for more toga ization. And in many applications are written most you've been written on the theory um black chain, but there are other competitors.
There is no guarantee that the theory um will go up in Price. In my case, it's about one and eight percent of my network. My allocation into a bitcoin IT is meaningly higher than that because IT serves a different use in my portfolio.
Bitcoin is a currency hetch. We don't have the bitcoin protocol changing very much, not like we've seen major changes in a year. The the protocol for bitcoin is much simpler.
It's appear appear payment mechanism that has evolved into essentially digital gold, something that valued for its own sake as a storage value over time. It's portable and I can be used to spend. But IT depends on other people trusting IT and believing IT has value.
The theory um is more useful. There's more things you can do with a theory, there's things you can build on a theory um and the network can grow over time. But there's also more competition for what IT does.
I hold a theory um for this network aspect, promise to participate in this growing infrastructure but I also when I feel skeptical, it's I don't use IT for anything yet. It's not impacting my daily life. Where's A I? I use everyday and I can see the benefit there, the theory and the other crypto networks.
I'm still waiting for how I will use IT a bitcoin store value that I get not i'm confidence is going to work out. I'm more confident than I was eight or nine years ago when I started investing in bitcoin. But a serum, we're wait and see how would of all what the use cases will be.
So IT IT clearly is a speculation. But now it's much easier to buy. You can just buy in a theory, mt.
F, and see how things work out. That episode three, eighty eight. Thanks for listening. You may be missing some of the best money for the rest of us content. Our weekly insider guide email newsletter goes beyond what we cover in our podcast episodes and helps elevate your investment journey with information that works best in written in visual formats.
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