🎙"Ethereum is About Six Months Away from Proof-of-Stake:" Preston Van Loon
In today’s episode, we interview Preston Van Loon. Preston co-founded Prysmatic Labs, one of the main teams building Ethereum 2.0, and has been leading that team for the past three years. On top of that, he recently founded a DeFi project which bundles the...
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In today’s episode, we interview Preston Van Loon. Preston co-founded Prysmatic Labs, one of the main teams building Ethereum 2.0, and has been leading that team for the past three years. On top of that, he recently founded a DeFi project which bundles the entire crypto market cap in one token to allow anyone to easily buy something like a crypto index. We talk about how the desire to make a bigger impact inspired him to leave his job as a Google engineer and work in crypto full time. And how it was a spontaneous donation via Twitter from Vitalik Buterin what pushed him to finally make the jump.
Preston talks about the latest in ETH2 —he says Etheruem’s big migration into its proof-of-stake chain is about six months away, give or take two months. He says Ethereum may be at a disadvantage relative to other Layer 1s, which are launching with more scalable technologies. But he also believes it will be hard for other chains to build the community Ethereum has, faster than Ethereum will upgrade.
He talks about why he found the time to start Cryptex with its TCAP token, he explains how the fully collateralized token works, how traders can mint it, add liquidity, and even yield farm it. But ultimately, the main goal of TCAP is to give people who are interested in buying cryptocurrencies and may not know the difference among the thousands of tokens out there, to simply get exposure to everything. He also said they’re not stopping with TCAP and that more tokenized indexes are coming up.
The podcast was led by Camila Russo, and edited by Alp Gasimov. Transcript was edited by Owen Fernau and Dan Kahan.
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Preston Van Loon: So I'm Preston Van Loon. I'm a career software engineer, interested in tackling high-impact and difficult problems. So I was working at Google for some time, and in 2017, I was introduced to Ethereum. It was really the first time I had taken blockchain seriously, and really looked at what it was and what it could be used for. I'd heard of Bitcoin, but it didn't seem as interesting to me.
I just saw this bubble thing, price goes up and down, and didn't seem to really fulfill some of its core goals of being peer-to-peer money. So looking at Ethereum, where it's really more of an application platform, and really has more use cases than just peer-to-peer money, or sound money, or however you want to think of Bitcoin.
So 2017, this was the time, just last market cycle, ICO craze, things are going crazy, CryptoKitties, stuff like that. We're seeing the blockchain, Ethereum, really max out its throughput for the first time with all this public activity. And I said, wow, this is really interesting technology. But it's actually not quite ready yet for the level of activity it’s getting. If CryptoKitties, if a single application can really cripple the throughput of Ethereum, well, it really has a long way to go.
I started trying to get involved, just trying to see how can I contribute to open source technology, it's really a fulfilling thing to do. And I found that there’s this effort called Sharding, that can take Ethereum and split it up into multiple independent shards that increase the capacity by the number of shards that you have. And I saw that a specification was kind of there, but no one was really making substantial progress.
I met Raul Jordan online. He and I were asking the same questions around the same time, of why is nobody building this and who wants to build it with me? So we linked up a couple days later in New York City, and said, you seem like a cool person. And you think I'm a cool person. You know, it's kind of like a first date.
“I see this tweet from Vitalik that he had sent us 1,000 Ether, which was around $100,000 at the time, with just the word ‘YOLO’ in the tweet.”
But we went from there. We said, this is a really great opportunity. We're both hungry for some high-impact work, let's just start building it and see what happens. We ended up getting a great group of people by asking around on Reddit and in the Go Ethereum forums and things like that. And since then, we thought, okay, this will be a cool moonlight project and we'll do it just for fun. But we started to see opportunities where it can be grant funded.
So we started to receive grants, and we said, wow, this is crazy, we’re really interested in it. But it wasn't quite enough to leave Google, you know, Google’s a pretty heavy anchor to be moved from. But towards the end of 2018, we had been working on it for about a year and taking it very seriously, really producing content and showing the community we were serious about it.
I think one of the big driving factors was we were talking on Twitter, as we do. People were complaining, what’s taking so long? And I said, well, we are all mostly at Prysmatic Labs working on it part-time, we still had full-time jobs, because we're not crypto rich or anything like that, we just want to work on it. And I was making dinner, and then my phone starts blowing up. And I see this tweet from Vitalik that he had sent us 1,000 Ether, which was around $100,000 at the time, with just the word ‘YOLO’ in the tweet. And now it’s like a really famous thing that he just sent us this crazy amount of, I don't even know what it's worth now. But that was a huge signal of support from Vitalik, the founder of Ethereum, and the community in general that we're getting these grants.
Escaping the Titanic
Camila Russo: I remember being on Twitter at the time and seeing Vitalik do this. It just completely blew up , that YOLO tweet, It's kind of in the meme Hall of Fame now. He gave Prysmatic Labs 1,000 ETH, and a couple of other projects working on ETH 2.0 1,000 or so ETH, or something of that magnitude. Was that the final push to leave Google?
PV: Yeah, at that point, with the combination of the grants from the community, like random donations, the Ethereum Foundation starting to give us substantial grants, the Ethereum Community Fund, and then this final push from Vitalik, I stuck around Google for just a few more months. I think the YOLO grant was in October. I stuck around to the year end to be eligible for Google's year-end bonus.
But as soon as that, I was out the door. You know, I think I was out the door as soon as I saw that happen, but I had to stick around and finish out a few things. And we've been working full time ever since the beginning of 2018, so basically two years at this point. And it's been just an incredible journey building ETH 2.0, very fulfilling as well.
CR: Okay, so I definitely want to know more about the latest on ETH 2.0. But just to dive a little bit on your transition from Google to full-time crypto. First, what inspired you to leave this job that most software engineers would kill for? What was it about open source or Ethereum or crypto that really inspired you?
PV: I love this question. Because I thought Google was really an end-goal for me. I got there and I said, I'm going to stick around here for a really long time. The longest job I had was a year and a half or two years, something like that, pretty common in tech.
“The analogy I had conveyed to some people at the time is that I felt like I was working on the Titanic, this great massive ship, but I was redesigning the doorknobs, which already worked, and they were fine. And once I had replaced them with more efficient door knobs, it didn't really feel like it was high impact.”
But at the time, Google was maybe 70,000-80,000 current employees. I think it's maybe like a quarter million now, it’s grown significantly. And I was working on ads which are not that interesting of a problem. But when you get to that scale, you stop feeling like you're making a big splash. You feel more like you're a cog in this great machine.
The analogy I had conveyed to some people at the time is that I felt like I was working on the Titanic, this great massive ship, but I was redesigning the doorknobs, which already worked, and they were fine. And once I had replaced them with more efficient door knobs, it didn't really feel like it was high impact. Whereas something like building ETH 2.0, which seems like an incredible and global impact, that was just extremely attractive.
Just from working with a lot of new people, smart people, and solving really unique and novel problems in computer science that really only exist in a place like Ethereum or a decentralized application platform.
ETH 2.0 Roadmap
CR: That makes a lot of sense. The potential to make a big impact with something that's so new like Ethereum, and also that has the ambition of being the base layer of everything, a new internet, that is pretty compelling. Good selling point. So then, from that time in Prysmatic Labs to here, how has the ETH 2.0 roadmap evolved? Because there have been so many changes along the way on how ETH 2.0 looks, and when it will be shipped, and all the different phases. So I guess it would be a lot to dig very deeply into all the transitions, but maybe if you can go through in broad strokes what the idea was back then and where we are now.
PV: Okay. I'm going to try to remember all of it as best I can, because it's changed so many times in the last three years. But when we started, Proof of Stake was actually on the cusp of becoming its own thing. There was an early test net with Casper. And that was actually getting ready to launch independent of sharding. So the early designs were really sharding only, and then we were finding that a lot of the design patterns were shared with the Casper Proof of Stake that existed at the time. So those things started to emerge. I think that was the first complete rewrite of the spec.
And then we've had a couple more iterations of the spec where we had to start over from scratch with Prysmatic. At Prysmatic, we were always trying to stay ahead of the curve. And a few times that meant that we had to rewrite everything.
So it's changed a couple times since then. When we launched mainnet, the Beacon chain in December, we had three distinct phases and then a fourth one was added. Those four, phase zero being the Beacon chain, phase one being introducing the shards as a data layer, then phase two being the state execution within the shards, and then we inserted a fourth thing called Phase 1.5, which was, okay, let's merge ETH 1.0 and ETH 2.0 before we get to phase two. And then the most recent update was we said, you know what, we're not going to call it phases anymore, because we keep changing things, right, we're not going to call phases anymore, because they really could be done in any order. And they're kind of independent.
But now what we have is the first part, which is Beacon chain. We have the Merge, which is the big thing coming this year. We have the introduction of the shards as the data layer. And then we have this optional thing where we could add the state execution and have each of the shards operate as its own independent Ethereum space. But we're thinking that now, with some of the recent breakthroughs in Layer 2 scaling that would leverage the security of Ethereum, we may not need that anymore. We can commit these connections between Layer 1 and Layer 2 with just the data layer of sharding and still get the incredible throughput that's required without having to go through even further ETH 2.0 development.
“But we're thinking that now, with some of the recent breakthroughs in Layer 2 scaling that would leverage the security of Ethereum, we may not need that anymore.”
Transitioning to Proof of Stake
CR: Okay, wow. I definitely want to dig into that last part. I have a great mix of people listening to the podcast, some are complete newcomers, some are really deep into the space. So breaking it down a little bit, ETH is transitioning into ETH 2.0, which now has a new consensus mechanism called Proof of Stake that's a lot less energy intensive compared to Proof of Work, and hopefully more decentralized because anyone can participate just by holding ETH in the network rather than by running these crazy mining rigs.
So that's already out there, that's already launched, which is a pretty big deal, launched in December. You can already stake your ETH. So what's happening, this Merge step is bringing the current ETH 1.0 chain, like the application layer, and having that merged with the Proof of Stake chain, and have this new consensus base layer. Is that the right way to explain it?
PV: Yeah, absolutely. The big thing is getting rid of Proof of Work. It's expensive. It's difficult to do. If you're not on the forefront of basic technology, you're at a huge disadvantage. With Proof of Stake, everyone has a level playing field. If you can stake ETH, you can do it with any hardware. That's the exciting part.
CR: Right. I recently interviewed Vitalik for the Ethereum conference and he was pretty optimistic on when the merge would happen. He was saying, end of the year optimistically, but at the latest, beginning of next year. Is that what you're seeing as well?
“The big thing is getting rid of Proof of Work. It's expensive. It's difficult to do. If you're not on the forefront of basic technology, you're at a huge disadvantage. With Proof of Stake, everyone has a level playing field.”
PV: Yeah, I think that's a really fair assessment, given that there are testnets happening today. This is May of 2021 right now, and we've already had a few small testnets, and they're getting bigger in an effort called 'Rayonism', which is a multi-month long hackathon between ETH 2.0 client developers where we're actually testing the Merge out. And given some of the history from launching the Beacon chain, I would say that we're about six months away if everything goes well. And that's a big if. This is computer science and software development, so things could be different. But I would say six months, plus or minus two months.
“I would say that we're about six months away [from the merge] if everything goes well. And that's a big if. This is computer science and software development, so things could be different. But I would say six months, plus or minus two months.”
Difficulty Bomb
CR: So effectively, what would that mean? What would happen to all the Proof of Work miners? How do you just switch the consensus mechanism?
PV: That's the tricky part. I mean, the technical details are there in the spec. I'd have to refer to it to explain exactly how it works. But the gist of it is that at a certain point in time, ETH 1.0 or Ethereum as we know it today, has a block that we're going to consider to be the transition point from the current Proof of Work mechanism to Proof of Stake. And there's this concept of a “Difficulty Bomb,” and I believe that has something to do with the upgrade module, where if miners were to continue mining that chain, it would just become exponentially more difficult to do so, to the point that it's not profitable, and that chain just dies off.
That's always been the plan with the “Difficulty Bomb,” that we need to switch over to Proof of Stake at some point. So let's have this ticking time bomb, “Difficulty Bomb,” to get it done. It's been pushed back several times. But this merge is the effort to finally switch to Proof of Stake.
“There's this concept of a “Difficulty Bomb,” and I believe that has something to do with the upgrade module, where if miners were to continue mining that chain, it would just become exponentially more difficult to do so, to the point that it's not profitable, and that chain just dies off.”
CR: So then mining becomes unprofitable for Proof of Work miners, and then the application layer connects with the Proof of Stake chain somehow?
PV: Yeah. So, it really won't feel that different for the application layer. You can think of ETH 1.0, or Ethereum as it is now, continuing in its current state, but instead of Proof of Work miners producing those blocks, it will be a tightly coupled connection between the Beacon chain. So we really still have Beacon chain and ETH 1.0 running next to each other in tight coordination.
So you're still interacting with your favorite Ethereum client if you're using Go Ethereum or open Ethereum, or whatever you're using today, it's going to be the same when the merge happens. You're just going to see blocks being produced by stakers or validators rather than mining pools or Proof of Work mining organizations.
The Basics of Sharding
CR: Got it. And then the next step will be sharding. Maybe you can explain the basics of that?
PV: The idea behind sharding is, in computer science, we have this concept of horizontal scaling. When you have a single machine that is no longer able to process the throughput that you need, or the capacity that you need, you add another one, a second computer or machine, and then you have two times the capacity, right? In this case, we're talking about storage. So you could imagine that if we have one hard drive, we add another one, and so on. In this case, we're going to add 64 of them.
And the machine that controls all of that is the Beacon chain itself. So when things are written to each of these shards, it's committed in some way to the Beacon chain, which is where all the validators are doing the Proof of Stake work. The validators are also responsible for validating the shard chains. But an individual validator won't need to validate all 64 shards. They will only be validating a small subset of the shards at any given time. So that's the gist of it. It's adding additional data layers to ETH 2.0.
“When you have a single machine that is no longer able to process the throughput that you need, or the capacity that you need, you add another one, a second computer or machine, and then you have two times the capacity, right? In this case, we're talking about storage. So you could imagine that if we have one hard drive, we add another one, and so on. In this case, we're going to add 64 of them.”
CR: And the goal of that is increasing scalability for Ethereum? Basically, increasing the throughput?
PV: That's exactly right. Yes.
CR: So that's after the Merge, sharding is the next step. And then you were mentioning there was this optional additional step. Can you talk about that?
PV: Yeah. I guess the original idea with this was called phase two, which is now that we've set up the 64 platforms with storage layers, now we can start doing meaningful state executions. So those layers will have a world state that will have accounts and balances and contracts and all of these kinds of things.
And the idea there was, if we create all of these new independent machines, 64 of them, we could, in theory, process 64 times the throughput, the idea being that there's a little bit of overhead between cross-shard communication. If you're transacting between shards, it gets a little bit complicated there. But now we're leaning more towards if these Layer 2 technologies are able to leverage the shard capacity, the data capacity there, to achieve this incredible throughput, then we may not need to go through all the effort of adding more state execution modules and things like that with ETH 2.0 core protocol.
CR: So you'd be using things like Optimism, say, like the different rollup solutions, to have that be the place where Ethereum applications are running, and then they can maybe use leverage shards as well, but it isn't the shards themselves that are hosting these applications?
PV: Yes, that's for the most part. The shards will be hosting the data, or maybe that's the storage, but the execution part, perhaps happens off-chain in some Layer 2. Which maybe that's Optimism or ZK rollups, or something like that. It's still being defined, and I'm certainly not on the forefront of that research. But that's my understanding today, is that we may not need to go through all this effort if there's already some better solution out there that we can just leverage in that way.
Ethereum’s Disadvantage
CR: Okay, that's really interesting. I imagine it'd be like this multilayer system, that you have the ConsenSys layer Proof of Stake chain, then you'd have shards to scale storage capacity, and then on top of that, you'd have Layer 2, but maybe in this case, it would even be Layer 3, where you have the execution environment. And it's like all these different pieces working together to sustain this incredibly active Ethereum environment.
PV: Yeah, it sounds right. And we think about these layers, but if you look at all the layers that go into the internet itself, there are many layers there. So, thinking that Ethereum is only three layers deep is actually not too bad. I'm pretty excited about that new model.
CR: It's a good way to look at it, because I was going to follow that up with how this more complicated system compares with some of the competing Layer 1s. Do you think that they might have an advantage over Ethereum by just coming out of the box with technology that is able to scale without all these different additional layers or technologies?
“It seems like it would be really hard to build the community that Ethereum has faster than Ethereum can continue to grow and roll out these critical upgrades to the network.”
PV: Absolutely. Ethereum is at a slight disadvantage, or maybe a major disadvantage. We have to consider that it’s already out there running and we need to have a migration path. And it makes things a lot more difficult, because with blockchain technology, it's really hard to undo mistakes, especially ones that are at the protocol level. So other chains that are developing similar technology, or let's say they were developing exactly the same idea, they're at an advantage because they can deploy it right away.
However, Ethereum has this incredible momentum, right? Everyone's really on Ethereum. All the major DeFi protocols that I see people talking about, they're on Ethereum first, and maybe they go to other chains, cross-chain interaction. But it seems like it would be really hard to build the community that Ethereum has faster than Ethereum can continue to grow and roll out these critical upgrades to the network.
Total Market Cap Token’s Origin
CR: Yeah, I think that's been the most bullish thing for Ethereum, at least this year, is that despite all the scaling issues with ETH 1.0 and really super high fees, you know, high fees are high for a reason, it's because of all the demand to use Ethereum even as other Layer 1 chains are launching on promising better throughput. In the end, everyone is on Ethereum and it's just really hard to get that sort of community and activity, just like money Legos connecting together. It was a huge first mover advantage for Ethereum to be the actual first smart contract chain.
Okay, now I'm really curious to hear, all this amazing foundational work that you're doing with Prysmatic Labs, how are you able to find the time to work on another project? I’d love to hear how Cryptex came about?
PV: Yeah, sure. I think that it's a little bit of a lack of sleep, and a little bit of quarantine. I'm very antsy. I want to be doing something all the time. And in a time when we're all staying home more and have less to do in the real world, it seems like a great opportunity to focus my idle energy on another project that I believe can have a significant impact.
“I couldn't stop thinking about it. I thought why can't I stop thinking about this, like, I have a lot of cool stuff going on? But I cannot stop thinking about this total market cap thing.”
So I first met Joe Sticco, who's the original idea guy behind Cryptex and the total market cap token. We had met in between the YOLO tweet and my exit at Google. We met in that time and he was telling me that he had this idea for a token, some kind of ERC-20 token where the price is directly correlated with the total market cap of all cryptocurrencies, all thousands of them, and I thought, okay, that's a really cool idea, it would be great for retail investors. It's kind of the S&P of crypto, where you can bind to this one thing and get exposure to everything. So you don't really have to go unicorn hunting. You know, if Dogecoin goes way up and you weren't holding it, but you're holding some index where you get a little bit of the gains there.
Joe had this idea, but he didn't really have a solution for it. He just said, I see a gap in the market of some product that could exist, but I don't know how to do it. And I thought it wouldn't work. But I couldn't stop thinking about it. I thought why can't I stop thinking about this, like, I have a lot of cool stuff going on? But I cannot stop thinking about this total market cap thing.
And over two years, we've been going back and forth, just occasional phone calls and emails, not really committing a lot of time to it. ETH 2.0 had been my biggest focus. Especially when I was at Google, I would be waking up early before going to work to work on Prysmatic Labs, go to work, come home, work some more, eat some food, go to sleep, and the next day was the same. I didn't really have time for another project.
But after I left Google and after ETH 2.0 had launched in December, I had a little bit more time to focus on this. So I kind of use the same strategy that I had when I say Google, which is just very carefully focus your time and energy and your sleeping pattern, and making sure that you, first of all, are taking care of yourself, but finding this balance of what is the limit of burnout and not getting burnout.
So we were able to design the total market cap token and have Chris Espinoza as a smart contract developer do most of the development on that. And then we had it audited by Quantstamp, and we were able to launch it this April of 2021.
TCAP Token’s Mechanics
CR: So why did you initially think it couldn't work?
PV: Well, it's an index of everything. And you can't really hold everything right. You can't. My immediate idea was like okay, so it's a basket and you want to have 1000 cryptocurrencies in it or more, but some of those are very difficult to get. And it seemed really complicated, and Joe’s more of a finance guy and not really a technical guy. So it was like, I don't know about this idea. It's a little bit crazy. But we were able to come up with a solution that kind of makes sense. So I'll explain how TCAP comes into existence.
It is a crypto-collateralized synthetic asset. So let's say the total market cap is $2.4 trillion, we basically divide that number by 10 billion to come up with a number $240. And that's the price of total market cap, right? That's what it's supposed to be. But the way we do this is that we use a co-op collateralization method where we back it by something with real value. So in this case, we have allowed TCAP to be backed by ETH, or DAI, the stablecoin. And it's over collateralized by 200%, so you need for every dollar in TCAP that you create or exists, there's $2 to back it at a minimum.
And with this, we're ensured that well, we're not just making up money, right? There's something that's backing it. It can be redeemed for that backing collateral at any time by one of the vault owners and it really borrows some of the ideas from early MakerDAO CDP vaults or collateralized debt position vaults. You lock up some collateral, you draw out TCAP, which you can freely do whatever with, you still owe some TCAP back to your vault. And you'd want to pay that back at a later date to be able to draw out your collateral.
“And with this, we're ensured that well, we're not just making up money, right? There's something that's backing it. It can be redeemed for that backing collateral at any time by one of the vault owners and it really borrows some of the ideas from early MakerDAO CDP vaults or collateralized debt position vaults.”
So why would you want to do this? So you'd want to do this because you may be long on ETH relative to the total market cap. So I can borrow TCAP by creating it into existence, and then I can sell it right away for ETH and later, as the price of ETH rises relative to the total market cap, I can go buy those back at a later date, kind of at a discount. And then ideally, if I was correct, then I had paid my debt back in TCAP and I have extra ETH leftover.
The other opportunities that these assets provide is that total market cap trades on secondary markets where there isn't a true price provided by some oracle, it fluctuates based on human behavior. So you'll see that maybe TCAP is trading too hot, people are buying it up, it's a bull market. The true price is 240. But it's trading on Sushiswap at 280, well, there's right away a $40 value capture if you're able to sell the TCAP at the higher price, and then it just drifts back to its pegged price, and you're able to then pay back your debt later realizing basically a $40 gain on those TCAPs that you sold.
So that's how TCAP comes into existence and why it's not really this funny money thing. It actually has something backing it.
CR: Oh, that's interesting. So it offers, besides the ability to hold this index fund of crypto, it also by minting it, it allows you to effectively go long ETH versus the rest of crypto?
PV: Yeah, that's the use case for being a vault owner or minting TCAP into existence. If you're somebody who's long on all of crypto, you just buy it up in the secondary market. That's really the primary use case. But we have these basically engaged individuals who want to enable the protocol to do this. And there's also a little bit of money to be made then if the secondary market is trading differently than what it's supposed to be, you're able to essentially close that gap.
“If you're somebody who's long on all of crypto, you just buy it up in the secondary market. That's really the primary use case.”
CR: Right. And so how do you maintain the price of the token?
PV: Yeah, exactly. So the vaults have a true price that is derived from the total market cap. And this value comes from a set of on-chain oracles, these happen to be powered by Chainlink. We have five sources of data they come from, and I can never remember them off the top of my head, it's like CoinGecko, CoinMarketCap, and Nomics and a few other ones. And that is committed on chain by nine individual oracle operators. And we take the median value of that and that's the true price that we consider for the total market cap.
CR: Okay. Okay. So CoinGecko, CoinMarketCap, Nomics, all these sources, they are reporting, say 2.4 trillion is the total crypto market cap, oracles get that, commit that on chain, and then that communicates to the token, and that's what sets the price of the token but that's divided by… Because the token’s price isn't actually 2.4 trillion, right, it's 240, so it would be that divided by 100 billion?
PV: Yeah, exactly right. It's divided by 10 billion, we call that the divisor. And that makes TCAP a more digestible price. If TCAP was literally the price of the total market being 2.4 trillion, nobody could ever own the whole thing or even close to that. It would be such a small value, it'd be kind of silly to think about. But we can really reason about it, if it's $240 it's a really easy, digestible number. And when we started this, it was $30, when we started talking about it. So it's come quite a long way.
CR: That’s crazy.
PV: Yeah, for sure.
Farming TCAP
CR: And then the other option I saw on the website is to farm on TCAP and we had a tutorial on The Defiant as well on how to do that, so you can go check that out. But if you can talk about that as well?
PV: Yeah, so the goal with Cryptex is that we wanted to launch this thing and do it in true decentralized fashion. We wanted it to be trust minimalized. We wanted it to be decentralized. And we wanted to be an open organization, right. So, TCAP launched with the Cryptex DAO. So we have a DAO voting token called CTX or Cryptex. And this gives you basically voting rights for governance proposals to make decisions within the DAO.
So the Cryptex protocol is run by community members, the CTX or Cryptex tokens are distributed to community members through various incentives. At the moment, we have incentive programs with Sushiswap, where if you provide liquidity of TCAP and ETH on Sushiswap, and stake those liquidity positions with the Cryptex protocol, you're earning CTX. And at the time of recording, this is about 60% APY for ETH and TCAP.
And there's a second program where if you didn't take those rewards that you've earned, and put those towards the liquidity pool for CTX and ETH, you can stake those and be earning as much as 250% APY. And those APY's are paid out in Cryptex as some of them vest towards the end of the incentive programs, which run about six months. The goal there is to reward people for providing liquidity and making TCAP accessible for those who want to buy on the secondary market, but also, to distribute these voting rights and really build the community. We want people to help run Cryptex. It’s not run by the Cryptex team. We did build the original stuff, and we have a lot of really exciting ideas coming out. But ultimately, it's an open organization. And we want the community to be as involved as possible.
“We want people to help run Cryptex. It’s not run by the Cryptex team. We did build the original stuff, and we have a lot of really exciting ideas coming out. But ultimately, it's an open organization. And we want the community to be as involved as possible.”
Token Holder Capabilities
CR: So what kind of governance decisions can token holders make?
PV: So token holders can influence any changeable aspect of the system. So let's say for example, the collateralization ratio is currently 200% for our ETH vaults. We have a proposal up on the forums, so a non-committal proposal, where we're suggesting, should we lower this to 150%, meaning that you're able to draw out more TCAP for your collateral. And since ETH and TCAP move pretty similarly, you're not going to see one significantly drop without the other also dropping. They move in the same direction. So maybe we don't need as much of a safety margin. So that's one thing we're voting on.
Other things we can consider are what should the next incentive programs be? The Cryptex development team has some ideas of upgrading the vaults to make them more efficient, more useful, more interesting. And we also have ideas for other types of products that can leverage the same framework that we've built with TCAP. So other synthetic assets that are built with some oracle price, have true price, and that are collateralized in some kind of vault.
“...we also have ideas for other types of products that can leverage the same framework that we've built with TCAP. So other synthetic assets that are built with some oracle price, have true price, and that are collateralized in some kind of vault.”
CR: So you're considering making other tokened indices?
PV: Yeah, that's the idea. I can't really reveal anything just yet. But that's the idea. We know that there are a lot of really interesting things out there that people want to get exposure to, maybe that's because they're interested in a long term bet. Or maybe they really just want to gamble with some short term aspect of something in the blockchain. But I can say that we have several ideas we're working on and we're working on fleshing out a formal roadmap. Those ideas for the second, third, fourth, fifth product will be coming out in the near future. Yeah, the Cryptex development team has a lot of cool ideas in the works.
CR: Nice. And then do token holders get a percentage of trading fees? How does the development team token holders make money from this?
PV: So in the current vault design, there's a flat fee for burning TCAP, and that's 1% of the value paid in ETH. And those fees go directly to the DAO’s treasury. So if you think about it in that way, that the token holders own the DAO and the DAO owns the treasury, they're getting paid in that manner. And those fees can be used for a number of things. I haven't looked in a little while, but the fees earned so far are something like three quarters to a million dollars already since April. So it's not a small amount of money for something that's still in its early phases. So definitely CTX holders are at an advantage by being able to direct what should we do or what should be done with those funds that are in the best interest of the protocol.
TVL and Broad Accessibility
CR: Very cool. How much TVL do you have?
PV: Let's see. So when we launched this in early April, it peaked out at almost $100 million in TVL. Since then, some early incentive programs have ended and the price of ETH is going a little crazy, I think it's around 30 million, or maybe a bit lower around 15 million. I don't recall a moment. But it's definitely at its earliest stages. So we're not too focused on TVL. What we're really focused on are the number of holders of TCAP, and bringing more liquidity to the program.
The end goal here is to make this accessible to everyone so that your retail investors, people who are interested in buying cryptocurrencies, but they don't know the difference between Ethereum and Ethereum Classic, so they buy both, but really, they only were interested in Ethereum, they just say I know Ethereum, I know crypto so I want to buy into that. That's what TCAP is supposed to solve, is help those kinds of people get exposure to everything.
“The end goal here is to make this accessible to everyone so that your retail investors, people who are interested in buying cryptocurrencies, but they don't know the difference between Ethereum and Ethereum Classic… That's what TCAP is supposed to solve, is help those kinds of people get exposure to everything.”
Layer 2 and Expensive Gas Issues
CR: It makes sense. So right now the main thing preventing more people becoming involved is the gas fees. Did you consider going to Layer 2? How are you thinking about that problem?
PV: Yeah. Well…
CR:I mean, all of your job is thinking about that problem, but for Cryptex?
PV: I will say these gas fees, they suck. And I'm sorry it’s taking so long with ETH 2.0, but we're going to do it right, and ETH 2.0 is going to help with the gas. But in the meantime, yeah, we are thinking about what can we do to make this a little bit more enjoyable and less expensive. So Layer 2 is certainly something we're looking at.
I think Polygon is a good solution. There's a lot of big projects going there. Gas is 400 Gwei right now and with ETH reaching all-time highs, just creating a vault without having done anything yet, is just too expensive. Even swaps, if you wanted to buy $100, $200 worth of Cryptex or TCAP, you’re spending almost an equal amount in gas.
So it's a difficult time for dapp developers or DeFi developers. And we're all going through this learning process of how do we get more users?And how do we make it more interesting for them without having to pay so much for gas? So we don't have anything in progress yet. But it's something we're really thinking about. We did have a time last week where gas went back down to like, $30, $40, and we're like, oh, it's over, it's over. But then I don't know what's going on. Some meme tokens are launching and now it's 400 Gwei. So we're really feeling the gas problem.
“So it's a difficult time for dapp developers or DeFi developers. And we're all going through this learning process of how do we get more users? And how do we make it more interesting for them without having to pay so much for gas?”
CR: I also thought, oh, my God, Ethereum is back. And now, it's worse than ever.
PV: It's so crazy because I remember a time when I refused to pay more than 10 Gwei for a transaction, and I’m looking back, and I was like here's one where I paid 1.15, and I thought that was a pretty good deal. And now I'm like, oh, it's under 100 Gwei, I’m going to do it. It's just wild.
Uniswap v3 and Providing Liquidity
CR: Yeah. I also wanted to ask you… I think one of the main innovations that this DeFi cycle brought on has been these liquidity incentives, and you're using them as well for Cryptex and TCAP. I would love to hear your findings on that. How do you think liquidity mining and yield farming will evolve? Is it here to stay? What are your initial insights?
PV: So as a DeFi developer, we're trying to figure out the right pieces of game theory to make this work. Because in the end, it all relies on human behavior, right? We have developed this thing, which has a price, but someone has to be willing to lock up this collateral. And there has to be some incentives to do that. So liquidity is very valuable to a DeFi project. It helps people get a piece of it without incurring a lot of slippage, getting the appropriate rate for something they're buying.
“So as a DeFi developer, we're trying to figure out the right pieces of game theory to make this work. Because in the end, it all relies on human behavior, right? We have developed this thing, which has a price, but someone has to be willing to lock up this collateral. And there has to be some incentives to do that.”
But what's really been interesting is the launch of Uniswap’s v3 model of liquidity, where you can have a focused capital around a certain price. And when it comes to something like TCAP where it's supposed to have a certain price, that makes a million dollars of liquidity go a lot farther if it's focused around a narrow band around that price. So at Cryptex, we're really trying to figure out how can we leverage this new model of Uniswap, where we say, alright, we want to provide incentives for liquidity and encourage people to have the most narrow and efficient band that is practical to keep TCAP around its true price, the oracle price.
So I think that we're trying to solve this problem. I'm sure other projects are trying to solve this problem. And I think that if Uniswap v3 becomes the new standard as Uniswap v2 became the standard, that's going to really revolutionize how any price-pegged token, any stablecoin, is going to work with yield farming and liquidity providing.
“...if Uniswap v3 becomes the new standard as Uniswap v2 became the standard, that's going to really revolutionize how any price-pegged token, any stablecoin, is going to work with yield farming and liquidity providing.”
CR: Is the idea there that you can still incentivize liquidity, but the amount of capital required to achieve the same volume or stability is much less? So you can do a lot more with less capital?
PV: So with the Uniswap v3 model, you can deploy, let's say a million dollars of capital in, and let's say TCAP is 240, I can put it between 230 and 250. Meaning that if you wanted to, and if that was all the capital that was there, drive the price down below 230, you'd have to eat up all that liquidity. If I had put in a million dollars liquidity in ETH and TCAP, it would be a lot easier to go lower than 230, because I’d only need a portion of those funds to move the price.
So what you get out of this is that I put up the same amount of collateral, but it made it harder for the price to move, which means that people who want to buy it are going to be able to get at the correct price. And it makes it a lot easier for a stablecoin. And if you think about TCAP as a stablecoin, it's stable relative to the total market, it’s supposed to stay with that total market. It should make it easier for it to stay closer to that price.
Now the problem is okay, well, we can tell people please go do this but without some kind of incentives and with gas fees being the way they are. It has to be somewhat profitable or a light at the end of the tunnel that it will be profitable beyond just the swap fees. So we’re trying to figure out what's a good liquidity incentive program on top of v3. It's a cool new challenge in the DeFi space, I think.
“...we’re trying to figure out what's a good liquidity incentive program on top of v3. It's a cool new challenge in the DeFi space...”
CR: Yeah. The fact that LP tokens are now NFTs also makes everything different. It'll be really interesting to see how that whole space and framework evolves.
PV: Yeah, it was easy when they're all fungible, you say, put your LP tokens here, and I count how many LP tokens you had over a certain amount of time, staked, and I can calculate rewards based on that. But when it comes to this NFT, a different capital efficiency model, it's a lot trickier. So another cool problem to solve, that’s why I like working on this stuff.
Ethereum’s End Game
CR: So many complexities, but yes, it’s fascinating stuff. Okay, we're already at the hour, but wanted to get your big picture thoughts to end this on. On Ethereum since you've been at the core of Ethereum for years now, what do you see this network achieving in the long run? Like what's the end goal do you think? 10 years from now, if Ethereum made it and it's successful, what does that look like to you?
PV: The end goal is that we want to make Ethereum a thing. Right now, some people know about it, and they think of it as a highly speculative asset. And they’re like, it's not for me, I don't know what it is, it's a little tricky. And there aren't really a lot of use cases outside of DeFi and a few blockchain specific programs. But what it could be is something that we all use, and all have, and it's accessible, just like a Visa card or MasterCard or some kind of physical payment transacting.
Before those things came out slowly, it was a very different world. And I think that we're in that different world now. And when Ethereum reaches its potential to be a truly global platform for decentralized applications, that's when we've achieved the final stages. And that's how we know that Ethereum has made it. I think that we're still super early. There are a lot of interesting problems to solve, both in the DeFi space at the application layer.
“...when Ethereum reaches its potential to be a truly global platform for decentralized applications, that's when we've achieved the final stages. And that's how we know that Ethereum has made it.”
But at the protocol layer as well, being someone who's interested in computer science problems, it's just a very fascinating world. And I would say that if you're thinking about a switch in careers, and you're tech-oriented, or even not tech-oriented, there's a lot of things you can do, definitely think about it for a long time, right? Work on it in your spare time if you can, really get involved and see where that initial curiosity will take you.
Because for some people like myself, it took me all the way, it changed my life. I'm here working full time. It's all I ever think about. It's all I ever do. And it wasn't ever, and still really isn't about making a lot of money, it's about changing the world till I’m done.
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