Debate: Is Ethereum Ready for Real World Assets? | Omid Malekan vs Austin Cambell (Crypto Professors)

Omid:
[0:00] The people, the users, the assets, the companies who issue those assets, and the governments who regulate those companies will find themselves on a decentralized

Omid:
[0:09] network because it's the worst option except for every other one. And I think ultimately, decentralization will win by default.

Ryan:
[0:18] Austin?

Austin:
[0:19] I don't think we could ever get away from the real world or the constraints of the real world and humans are going to human. I think as a result, if we want to bring the majority of real assets on chain, we're going to be forced to acknowledge that reality. But I think the value of decentralized store of value systems is by providing people an opt-out.

Ryan:
[0:41] Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is Brian Sean Adams. I'm your only host today, David's out. So I'm here to help you become more bankless. We have a debate episode today. I always love these. The debate is on the question of, is Ethereum ready for real world assets? Got two professors. I'm going to tell you first what they share in common because I think that's interesting. They are both previous bankless guests. They are both crypto advocates and they are both longtime friends and also coworkers. So why is there a debate? Why is there daylight between these two guests? Well, Austin, on the one hand, doesn't think Ethereum is a good home for real world assets like stable coins and tokenized equities and all of the things we expect to come on chain. He thinks the attributes that make Ethereum decentralized, things like immutability, the element of code is law, these aren't so much features for real world assets. They're bugs. And he simply doesn't think Ethereum is the right architectural fit.

Ryan:
[1:44] Omid, on the other hand, thinks that the decentralization and the neutrality of Ethereum are exactly why the largest financial powers in the world are selecting and will select Ethereum. These are the institutions. These are the sovereign countries. They're going to trust Ethereum with their assets and liquidity because without decentralization, after all, all we're left with is a system like the one we already have. It's just TradFi.

Ryan:
[2:08] This is a fascinating debate. I think it's a good point in the cycle to talk about this as we continue to onboard more and more financial institutions and traditional finance. Now, before we get into the episode, a quick shout out to our friends over at Ronin. Ronin wants you to know that they are coming home to Ethereum. They are Ethereum's Nintendo.

Ryan:
[2:30] Already today, the Ronin chain has seen 4.5 billion in NFT volume. That's like 30 million wallet downloads. And actually a fun fact, you may know Ronin as the Axie Infinity chain of yesteryear. Today, the Ronin chain actually has more on-chain activity than at the peak of the Axie boom in 2021. So they have grown fast during the bear market and into this bull market. Now they are launching the Ronin Layer 2 on Ethereum. So Ronin is coming home. That's the news. It's going to be 12 times faster because it borrows all the security and decentralization from Ethereum. Plus, there are staking rewards in the form of the RON token. That's R-O-N. And this will now reward builders and their communities programmatically for adding value to Ronin. So you got to go check it out. Download the Ronin Wallet, get a taste of the on-chain Nintendo.

Ryan:
[3:22] There's a link in the show notes or bankless.cc slash RoninWallet. All right, let's get right to that debate episode with Omid and Austin. It's coming right up.

Omid:
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Omid:
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Omid:
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Ryan:
[5:18] Bagless Nation, I've got a debate for you today. Everyone loves debates, and I think we're all going to enjoy this. The question I think we're putting forward to the two gentlemen on this episode is how much does decentralization matter? That's the wide-sweeping question. What are the implications for real-world assets, for traditional finance, for government regulations, for crypto-native assets?

Ryan:
[5:39] And I have the perfect debate opponents to talk about this. Austin Campbell is a professor at NYU Stern. He's a big stablecoin advocate, and he's a repeat Bankless podcast guest. Austin, how are you doing?

Austin:
[5:51] Doing quite well, thank you. And excited to do this because as you get to Omid's intro, you'll find there's some significant overlap between the two of us.

Ryan:
[5:59] Well, we get to see what you agree on, what you disagree on. So that'll be interesting. Omid Malekin is a professor at Columbia. He is also a longtime blockchain crypto evangelist. Omid, welcome back to Bankless.

Omid:
[6:11] Thank you.

Ryan:
[6:12] All right. So I think the genesis for this conversation was like all great conversations. It started on Twitter or the platform formerly known as Twitter on X. And there was some back and forth with you guys. I'll read a few quotes. Austin, I think this was maybe a podcast video clip that was put forward on X. You said this, I don't think Ethereum is ready for primetime real world asset issuance. And then you gave an example of the Bybit hack. We're in a place where the Ethereum validators aren't willing to do something about exploits. Omid, you pushed back a little bit. You said a blockchain that isn't perfectly neutral is a terrible database, worse than anything TradFi has today. The neutrality that Ethereum has optimized for more than any chain is the reason it's likely to become the global settlement layer and attract endless trillions in capital. Okay. First, since I put you on the spot, Austin in a defensive position, you said Ethereum is not ready for real world assets. What did you mean by that?

Austin:
[7:11] Yeah, so there's this central problem that you run into when you're thinking about RWA, and it's something I used to think a lot about when I was running a stablecoin, of you're fundamentally stuck between two worlds in terms of the masters that you answer to. And maybe the best way to make this distinction clear is to start with something like Bitcoin. Right? And what I mean by that is Bitcoin is like stateless, non-sovereign, purely programmatic money. And that's kind of fine in that there's no physical representation of Bitcoin in the real world that is answering to a sovereign government. This is purely an electronic construct and the network behaves in the way the network wants to behave. And fundamentally, as somebody who owns Bitcoin in ETF format before somebody tries to rob me, I think this is actually a very good invention for the world and I'm in favor of it. The problem though is to go the other way. Let's take the example of like, if we tokenize ownership of houses and grandma's house title, right, is tokenized and somehow it gets hacked and the North Koreans end up in possession of it. Like, so like my grandmother lived in Connecticut. Do you think the United States is going to let the North Koreans evict her and move into her house? The answer is no. And so there's this inherent tension with real world assets between what are the programmatic rules on a blockchain?

Ryan:
[8:36] And what are the

Austin:
[8:36] Actual factual rules in the real world of how this asset is going to be adjudicated? And the tension that you run into is if you can't make your ledger ultimately responsive to what is going on in the real world, I would suggest that on a

Austin:
[8:51] long enough time frame, it is certain that your ledger will eventually break.

Ryan:
[8:54] Okay, does that get into the Bybit hack? Why is that a relevant example that you brought up?

Austin:
[8:59] Okay, so the Bybit hack starts to become a relevant example for two reasons. One, I was using it as a demonstration of there is currently no real coordinated way within the Ethereum community to handle these sorts of nation state level expropriations, right? Like put differently, the Bybit hack this time was ETH. How would it have been handled differently if it was, you know, a real world asset of some sort? But specifically, the interesting part about the Bybit hack to me is less the individual token targeted and more the sophistication of the attack, right? Which is to say they got into Bybit systems themselves and compromised the people actually managing what was going on internally. And this time it was Bybit, but thought experiment for the crowd. What if that had been Tether, right? What do you do if Tether loses control of their own smart contract?

Ryan:
[9:50] Right, right, right. So in this case, it was a hack of Ether, I believe, primarily. That was the asset that was taken. And of course, you know, no government, I suppose, could intervene. And you're saying, what if this was the Tether smart contract? What would happen in that case or something?

Austin:
[10:05] Yeah. As a guy who ran a stable coin, and this is the nature of like rolling discussions on a podcast, they can be a little bit disorganized at times. But my core concern is... InfoSec is never perfect. It is a matter of time on a long enough timeline until people get hacked. And the question is how much damage it does and how do you recover from it? And so my concern is if we're living in a world where it is obvious that there are actors sophisticated enough to compromise people's internal security systems, what, like, genuinely, like, what is the response if, like, Tether or USDC has their smart contract compromised? And how do you do that in a way that doesn't then subsequently, as you roll down the chain, brick like, you know, 95% of things that are currently deployed in the world on Ethereum?

Ryan:
[10:49] Well, I mean, those are some arguments for you. What do you say?

Omid:
[10:52] I say that the ByteBit hack is actually the best possible advertising Ethereum could have because the overwhelming shrug that the community gave to calls of doing something about it, even though it was clearly big and was clearly some kind of a very sophisticated actor. It wasn't one of those, sometimes there's an issue on chain where somebody makes a mistake or one person claims a hacking and then the other person says, no, this was a legitimate transaction. The Bybit hack was a great test case because it was like the perfect boogeyman scenario that anti-crypto people and anti-Bitcoin people have been telling us for like a decade, which is that, well, what are you going to do when literally North Korea steals a billion dollars worth of money?

Omid:
[11:40] And Ethereum's response was absolutely nothing. And I think that's great because neutrality is the only thing that blockchains could do well. They don't do simplicity well. We all know how complicated they are. They don't do performance well. They don't do cost well. Despite the efforts of my friends at Solana, they don't do bandwidth and throughput well, not by the standards of Web2 and TradFi. But the one thing they can do well is to say that we have a network or a platform here that is always going to do exactly what it's supposed to, regardless of whatever legal, moral, or political order somebody else wants to put on it.

Omid:
[12:26] Now, clearly, the Bybit hack was a bad thing. So I don't think this needs to be said, but I'll say it anyway. It's bad that it's happened. It's overall, it's clearly bad for Bybit, bad for their customers, bad for the price of ETH during that period. But to me, the north star of all of this is to build infrastructure that the rest of society could organize around. Because it is neutral and predictable in a way than very few things, if anything, in the world currently is.

Omid:
[12:58] And I think the example that Austin gives is a really interesting one, Ashley. I got to give you credit, Austin. I never thought about the potential consequences of somebody like hacking Tether or Circle's smart contract. I guess they could just mint a trillion USDT, USDC, and that would definitely be catastrophic in DeFi, it would be problematic everywhere. And far worse of an example than the ByteBit hack. So I appreciate you throwing that out there. But the question I have for you is like, what do you propose to do about it? That risk is out there, however small it might be. So given you, we know what my point of view is, given your point of view, what would be the solution?

Austin:
[13:46] I think this gets into why I started with Bitcoin, because with what you're saying about something like Bitcoin itself or maybe ETH, though, in ETH's case, because of proof of stake, there may be a long term governance question like, OK, the Bybit hack happened. The North Koreans appear to have.

Omid:
[14:03] Sold most of

Austin:
[14:04] The ETH and moved on with their life. But if they kept it and staked it and now we're participating in governance and then continue hacking people over time, at some point you have a structural problem. So let's leave that aside, but just acknowledge that, you know, we'd have to think about that at some point, but that's a pretty extreme scenario. I think what I am ultimately advocating for and why I've raised this point is that there probably needs to be a different set of rules of the road at the network level for what I will call crypto native tokens like Ether Bitcoin and real world asset tokens, right? Right. And the reason for that is that ETH like itself, definitionally, I mean, to your point about what's valuable about it, is not going to be like responsive to a federal judge.

Austin:
[14:48] Right. Like somebody in the Southern District of New York can write an order, ordering all the ETH validators to do something and post it on the Internet. Then the ETH validators can totally ignore that person and like move on with their lives. So there's basically nothing that's going to happen. On the other hand, if Tether's smart contract gets hacked and that same order gets written to seize all the assets because the North Koreans appear in control of it and they show up at Cantor Fitzgerald's office, who, by the way, is managing Tether's reserves, and are like, here you go, guess what happens there? Cantor hands over all the reserves. So my point is, because there are two very different legal structures behind, call it crypto native things and things that are grounded in the real world and definitionally not decentralized, I think the network probably needs to be willing to roll back or have some sort of way to handle a hack of Tether in a way that it does not need for ETH. Because, you know, actually, you raised this point earlier, which I think was very astute when you were speaking, is if Tether's smart contract gets hacked and the pat answer that you'll get from a lot of people as well, Tether could just drop a new smart contract. What's the problem? Repudiate the old one, drop a new one.

Austin:
[15:59] I would point out to everybody that nukes basically every single DeFi protocol that has Tether integrated into them in the current design of the ecosystem. Like Uniswap is not robust to that. Aave is not robust to that. Compound is not robust to that, right? Like you now have pools that are immutable that exist that people can transact against that have a thing in there that's now completely worthless in sort of a one-step jump.

Austin:
[16:23] And this is where I get to the requirement of network controls, like for the audience, by the way, Omid and I go back like a decent ways at this point. We both worked at Citi. And so I would like to make the point that holding traditional financial or really any human institution to the standard of not making mistakes can be easily refuted by our old employer. Because while we were both there, they sent, I mean, what was it, like $800 million to the wrong people in the Revlon thing? Like a hilarious, like, error. Um and by the way anybody if you trust that your bank knows what they're doing boy are you wrong and so like my my point is even if we leave malfeasance aside like it is a matter of time until somebody just fucks some shit up right because i posed like what if tether's smart contract gets hacked but maybe here's a more hilarious one what if somebody just loses the private keys right like you need obviously i think tether please has better controls than that but Like, you need ways to, like, recover from these sorts of human error things as well. And again, if somebody loses the keys to their private wallet and it's ETH, so be it. That was the deal that you made to use this product. And I agree with Omid, by the way. The value at the base layer for that token is the decentralization. I think the problem is, again, you can't be like, well, grandma lost the key to her NFT. She can never sell her house again. Like, the woman's dead. We can't settle the estate. 500 years from now, nobody lives there.

Ryan:
[17:46] So Austin, it almost seems like you're saying for immutability on the layer one in particular is a bug for real world assets where it's a feature for crypto native assets. Amid, what do you say to this?

Austin:
[17:59] That is exactly what I am saying, right? Is that real world assets are not immutable at all. Just let Amid go.

Omid:
[18:05] I don't know who's ever argued that we should turn houses into bearer assets, but I'm clearly not one of them. So I know that to me is a bit of a straw man argument like no one There was this idea back in the day, like eight years ago, that we're going to put deeds on the blockchain. This was really one of the endless manifestations of the blockchain, not Bitcoin thesis. But like even back then, nobody said, oh, well, we should have it be an NFT that anybody could hack and steal. But I like this Tether example, because if I understand you correctly, Austin, you're saying that because the smart contract is vulnerable to hacking, we should introduce a mechanism at the network layer to undo certain kinds of hacking. Is that right?

Austin:
[18:53] I'm going to be very careful with what I say about network layer here. I think there are multiple like potential solutions to this problem. But I think the thing you need to introduce at the network layer is the requirement to have one of those solutions in place if you're going to put RWA on the network. Let me posit two worlds. One option, and by the way, this exists, like you could create an avalanche like subnet or L1 or whatever you want to call it with this technology. We've got a permission validator set with a hard boundary and like delays to get something off the chain. So in that case, if somebody had deployed a stable coin and the smart contract gets hacked, the validator set can be like, whoa. And that I think, Omid, you would classify as a network level control.

Austin:
[19:40] Another one, for instance, could be theoretically, if we build the DeFi ecosystem properly so that every smart contract that adopts a token has sort of call it a kill switch built into it. And if some Oracle that we've all agreed upon throws the kill switch, the smart contracts just freeze. You can no longer transact with them and all you can do is withdraw assets. That might be an adequate response to something like the Tether smart contract risk as well. Because again, my concern is this, like, let's right now go look on like Uniswap and be like, how much ETH versus USDT is there on there? I also think it's very dangerous to live in a world where if USDT gets compromised, and we agree the old contract is worth zero, somebody just goes and drains that pool, right? That would be telling LPs, like you have systemic risk to this ecosystem. And basically, Tether getting hacked sends ETH to zero, which I think is bad for ETH. And thus, my point is, it's not just the validators where the solution could reside, but I do think it's probably the validators that need to enforce, you need to have some kind of solution, guys, here. Don't just put ticking time bombs on our chain.

Omid:
[20:48] So what happens when North Korea hacks the permission validators on an avalanche subnet or the agreed upon oracle that triggers the kill switch on important smart contracts? Because the way I'm hearing you, you're worried about a specific risk for a specific coin, tether smart contracts, and your solution is to introduce a universal risk to the chain or a universal risk to literally every smart contract that has this hack switch. And by the way, permission chains have been hacked, oracles have been hacked. So these are not theoreticals. The Tether one is.

Austin:
[21:25] Simple answers to some of those things. I actually, on the first one, go back to something that I learned way back in the day in catastrophe risk, which is an area where I would say blockchains have currently failed pretty badly, which is what is your fail statement? Right. So like the reason I raised an Oracle specifically only with a kill switch is my fail state there is, OK, well, we can't transact with those LP pools, but everybody can withdraw damaging in some form. Like somebody throwing that is really fucking annoying, but it doesn't fundamentally like destroy things in the way that actually continuing to transact with the smart contract itself got hacked would. Right. And the reason I raise this is it has to do with how you think about engineering in general, like a good example of this principle gone wrong. Was Fukushima, right, where you should be building your nuclear reactors such that if you lose power, they shut down, not cause like a completely out of control chain reaction.

Austin:
[22:19] And, you know, if you look at like modern designs of nuclear reactors, they're going to hold your control rods that'll stop a nuclear reaction with electromagnets so that definitionally, if you lose power, they drop the rods. Yeah, it breaks your nuclear reactor, but you don't have an uncontrolled meltdown. Okay. And I'm arguing if you want to think about risks in smart contract world, you should probably be building things that way. Because yes, it would be painful to wake up and have been an LP and be like, well, I expected my LP would be working. And instead, like everything is frozen and all I could do is withdraw my assets. Okay, I guess. But that's way less painful than just losing all your assets. So one of those is thinking about fail states.

Austin:
[22:58] Two, if the North Koreans are able to hack an entire permission validator network and you had a large enough permissioning set with differential security protocols, so be it, right? And what I mean by that is at some point, the financial system is financially systemic. You can have some amount of redundancy, but like equivalently, if the North Koreans can hack like Zelle for all of the major banks simultaneously and then start sending themselves money,

Austin:
[23:26] there's probably not a lot you could have engineered to stop that. But that feat is significantly harder than hacking nearly one bank. So I agree with you. At some point, the risk is non-diversifiable, right? Like, for instance, ETH is always catastrophically exposed to a meteorite striking the planet and destroying Earth, right? Like the value goes to zero. Okay, I get it. But I am saying there are like well-known things we can do here to build a much more resilient ecosystem and thus one that also isn't inevitably probably in like a decade period as opposed to like a thousands of year period, like going to brick itself when we get into a fight with the real-world legal system. Because all of this, Omid, to go back to the original point, comes down to when I'm running a stablecoin, in the back of my mind is always, my custodian is going to respond to the U.S. government whether I like it or not.

Omid:
[24:18] Sure. Ryan, correct me if I'm wrong, the Ronin hack was a majority multi-sig validator set that, was it the Lazarus Group that hacked and stole hundreds of millions of dollars?

Ryan:
[24:33] Yeah, I believe so. That's what's been reported, 400 some million. The Bybit hack, by the way, for listeners, this happened in February 21st, 2025. This was a 400,000 ETH hack of the Bybit cold wallet. So that's about 1.4 to 1.5 billion at the time. So these are pretty large hacks.

Omid:
[24:53] Yeah, so I bring that up because I just want to point out that Austin's Tether smart contract example remains theoretical. The having a permission chain be hacked by North Korea example did happen and was quite costly. And if I recall correctly, a lot of it was a social engineering hack, which is very, very, very, or a lot easier to do when you have a permissioned validator set of any kind and you know who they are, you know where their computers are, you know who their employees are, and you can figure out the backdoors that way.

Omid:
[25:26] Now, if the argument is that DeFi protocols should be more thoughtful about what kind of fail-safes they integrate into their smart contracts to handle with certain scenarios, I think that's a different argument. I still think the most important DeFi protocols will not do that. I would encourage Aave, for example, or Uniswap to never do that because at the end of the day, the guaranteed outcomes that they provide, the 99.99% of their users and transactions that are not problematic is not worth bastardizing in order to deal with a black swan event. But if other non-fundamental DeFi protocols want to say, hey, our smart contracts actually have some kind of a fail-safe built in, like Austin's nuclear example, I think that would be an interesting experiment. In the long run, I think they would end up attracting a lot less capital because the people who would use them would sit there and say like, okay, but what if the back door is hacked, which happens?

Omid:
[26:35] Or what if the back door is somehow weaponized to harm my transaction? And so planning ahead, as Austin said, I think one of the things we both agree on is that we are headed to a future when one way or another, trillions of dollars will live on chain of native assets and RWAs and other things in between. And in preparing for that world, I think the infrastructure that says you can always expect reliable outcomes will win over the ones that say most of the time you can expect reliable outcomes. But sometimes either one of our engineers gets socially hacked or a government compels us, everything goes out the window and you have no idea what protections you're going to have.

Omid:
[27:26] That's not a bad thing. That's just a TradFi thing. That's a Web2 thing that the world already has. So then the people who would bring their capital on chain, they would say, wait a minute. I thought the reason why I'm coming on chain is I'm going to get censorship resistance. But now you're telling me, actually, no, there is a censorship mechanism. They're going to think, I thought the reason I was coming on chain is because I'm going to have composability. But you can't have composability if the smart contracts of one DeFi protocol have a switch that can then deny access to the transactions required from another protocol, right? And then they're going to say, I thought we're going to have transparency. If I use a completely permissionless, no failsafe switch Aave, I know exactly what the code is and how it works and what it's going to do. But it would be prudent if you do have a failsafe to not advertise exactly how it works, because then the hackers would figure out how to hack it. So then the would-be DeFi users are going to say, OK, so you're going to tell me that it's something that may or may not do what it's supposed to and has some mechanism that I cannot know that might be triggered to stop a transaction, which I would have been the beneficiary of. Again, that's not a bad thing. I'm not here to argue against the world being this like cold, mechanical, libertarian, everything's a bearer asset.

Omid:
[28:49] The smart contracts do whatever they're supposed to do, even if like the end of humanity is upon us.

Ryan:
[28:54] Code is law.

Omid:
[28:55] Yeah, I'm just saying that the assets that want or need neutrality are going to optimize for that. And if they don't want to need those things, they should really not be on any of these permission chains because those are just bad databases and we have much better databases off chain.

Ryan:
[29:13] Well, let's get to that in a second. I want you to strengthen the argument of Austin's more extreme example of not sort of a failsafe on smart contracts, but a more extreme example would actually have Ethereum validators do something about some of these exploits. Amit, I think you're pretty against that. And tell me why. Why are you against that? The idea that Ethereum validators or any validator of a layer one system can kind of roll back the chain or interfere in some of these transactions. Why is that a bad idea? Yeah.

Omid:
[29:42] So it's one thing to talk about that in the abstract, like in a magical world, it would be great if that was a feature that worked, right? First, I question how you would implement it because we've all seen firsthand how messy and often broken governance is on decentralized systems, right? And this is effectively going to be a new governance mechanism, except it's a governance mechanism where like the fate of the chain and maybe a hundred trillion dollars are in its hands. So I would put that back on Austin to explain to us exactly what this solution looks like, who decides when action is taken, is there voting? Is there on-chain coordination? Is there off-chain coordination? Because part of my sort of like do nothing recommendation, Ryan, is based on the fact that when you say, no, no, no, do something, and you start getting into the weeds of what the something might be, you open up a whole new can of worms.

Ryan:
[30:41] We'll get Austin to weigh in in a second, but I want to add this, get your thoughts on this, Omid, which is maybe what Austin is arguing, and we can ask him. He's right here. But maybe what he's arguing is not so much, you know, you want to have validators be able to kind of reverse transactions on the chain. Just ignore that for a second. What he's saying more is if you have a completely immutable, permissionless, decentralized chain, maybe that's not the place for real world assets. That's another, you know, tactic you would take. And in fact, this is sort of what Bitcoin does. You know, Bitcoin, what is the Bitcoin network? Well, it's just for moving Bitcoin, essentially, and everything else goes off chain. Ethereum has this blend where it has all sorts of tokens, some real world tokens, some crypto native tokens, any token you want to deploy, you can put and you inherit the properties of Ethereum.

Ryan:
[31:25] So maybe he's just saying real world assets don't belong there on Ethereum.

Omid:
[31:28] Are you Austin?

Austin:
[31:30] I mean, I do think, what's the right way to say this? There is some internal hypocrisy in the current arguments around Ethereum that there is not in Bitcoin for exactly the reasons that Ryan just raised, right? If I were to take these concerns to the Bitcoin community, the answer that I get from the Bitcoin people is, cool, then don't put that shit on our chain, to which I'm like, well, you know what? That's intellectually honest, right? I think that may put in the long term an upward cap on Bitcoin prices, but what you've said to me is completely intellectually honest of like, get that shit out of here. Because I mean, like the core point I would make to you is real world assets. It's not a backdoor. It's the front door, right? Like the responsiveness to real world legal systems is the core feature of the product. And you have to deal with that whether you like it or not, because essentially here's what I'm saying and where I sort of bring in the hypocrisy here. Like if I'm running a stable coin and my reserves are U.S. Treasuries, the number one group of people I am responsive to is U.S. Lawmakers, regulators, and like judicial persons. Period. Full stop. Like no judge, none in the United States is going to be like, well, you know, some random anonymous validators say that the North Koreans own your money now. So we're going with that. They're going to be like, absolutely fucking not. Like we have OFAC. I understand what the concerns are. We have sanctions. We'll seize those assets. The coin is bricked.

Ryan:
[32:52] Okay, but can we go into that, Austin, too? It's like, let's describe what that means, too.

Austin:
[32:57] Yeah, let me finish the bridge and then we'll come back to that, which is to say.

Ryan:
[33:01] I am asserting this,

Austin:
[33:04] Which is if you want on your chain to have tokenized real-world assets, you really, really, really need some multiply redundant mechanisms to make sure that your chain can be responsive to the real-world legal frameworks that govern those assets. Because if you do not have that and you do not have, call it like error catching around that, take the tether example, it is a matter of time until you brick the asset. because the real world like legal process will win. There's a lot of people with a lot of guns who are going to enforce that.

Omid:
[33:36] Whose legal process?

Austin:
[33:37] So if you're doing, this is the problem is, the answer to that is it depends on your real world asset. If I'm talking about like a US dollar stable coin, it will be the United States of America. If I'm talking about gold that is custody of the London Metals Exchange, it's the United Kingdom, right? If I'm talking about like, you know, call it tokenized deposits for a bank in Hong Kong, it's fundamentally China. And look, I don't have an answer to the fact that the real world is messy. The real world is messy. But I'm saying if you want to inherit real world assets onto your chain, you have to have a reckoning with the fact that that is the case. And there are many, many disparate views on that. Again, this is not a refutation of like, do it this way for the ETH token or Bitcoin. But it sure as hell is to say, if you have a US dollar stable coin and the US government disagrees with you, I don't think your blockchain is going to win.

Omid:
[34:26] So I think the appeal of going on chain is that the asset regulated in the U.S., the asset issued out of custody in London and the asset controlled in Hong Kong could coexist with the natively issued asset like ETH. I think that is a killer application because all of these parties, for the first time ever, except maybe when they ship gold back and forth to each other, could use a way to interact with each other economically that no other party could impose their will on it. that the U.S. Users will say, you know what, I am going to use this neutral blockchain because China doesn't control it. And the Chinese users are going to feel exactly the same way.

Omid:
[35:13] And this is not an East versus West thing. And the London tokenized gold issuer is going to be like, hey, look, here's a blockchain that has a trillion dollars and a trillion yuan. And that's where I want my tokenized gold to be, because then people could borrow and lend against it.

Omid:
[35:27] When you talk, Austin, about, well, the real world asset legal systems, plural, are not going to tolerate this, right? And that's why the chain to attract their assets should have some kind of a control mechanism or exception handling, error control, whatever you want to call it, right? Then what I think is you are headed for a world where some transaction involving a U.S. Party and a Hong Kong party happens, and then the Chinese authorities go to the chain and say, this is an invalid transaction. You must stop it. And then almost immediately, President Trump tweets, no, it's a valid transaction. It must go through. And now you have destroyed your censorable or failsafe blockchain because it's become completely politicized. So my argument is if these assets are going to go on chain, they are going to go on the chain where everybody's treated equally. And that treatment is we don't care. You get hacked here. You get robbed there. You make a mistake there. The Chinese government wants us to do something. The US government wants us to do the opposite thing. we have no power to change any of it. I think that is going to attract far more users and assets than it's going to repel.

Omid:
[36:53] Because by the way, also, as you know, better than most of our listeners, most of the world's most valuable payment systems already work that way, right? Whether it's Fedwire or its counterpart in almost every other country,

Omid:
[37:05] These RTGS or real-time gross settlement systems have a rule, which is that the intermediary, which in this case is literally or almost always the central bank, is not getting involved in dispute resolution, which is why the example that you brought up,

Omid:
[37:22] From Citibank is they accidentally wired out hundreds of millions of dollars. The only way they could get it back is to go to court and use the legal system to sue the recipient to give him the money back. And first they lost, and now I think they won on appeal. But the most important thing is the Fed's position, right? The mother of all centralized, tradfi, Jekyll Island intermediaries who processes trillions of dollars in payments a day. Their position is we are neutral. Not our problem. You make a mistake, not our problem. The Central Bank of Pakistan was hacked and the money was routed through Fedwire. And the Fed's response was, not our problem. So given TradFi recognizes the importance of neutrality when it comes to important transactions, I actually don't think it's that far of a reach to say that, hey, that's how the blockchain is going to work. Unlike Fedwire, though, it's going to be for different currencies and tokens and NFTs and whatever. And I think the TradFi mind, if we could call it that, will be like, oh, OK, you're doing the same thing that every central bank does, but in a more universal way. Well, for the same reason that I'm glad the central bank is neutral, I'm glad that the blockchain is neutral. I'm going to move my assets on there.

Austin:
[38:36] Well, so I'm going to say I don't think this is a correct description of how the Federal Reserve operates, because I agree with you. They are neutral for the people that they choose to let on their network and boy does Caitlin Long have some things to say about that for instance and also if people are repeat offenders they will totally kick them off their network so one of the things that the Fed is doing and I think we should both.

Ryan:
[39:00] Say this for the listeners is they are highly permissioned as to who gets to use the Fed infrastructure to send payments in the first place.

Austin:
[39:08] So part of why they can be like, well, you made a mistake, you made a mistake, is it's big boys only who are there by permission. Like you had to be led into the club by the bouncer.

Ryan:
[39:17] Right?

Austin:
[39:17] The bouncers being the group that gives master accounts at the Federal Reserve. And then to boy, do they do bank supervision, right? Like these are people going into all of the members and like observing them, auditing them, setting rules and procedures like this is not just you show up and you get to do what you want. So I will concede if you were to create like an L1 blockchain where the validators and the people using it were permissioned in the way that the Fed does, I'd be a lot more chill about neutrality, but we've just eliminated 99.999% of users for blockchains because now it's just big banks. So part one there. Part two, I think the hypothetical world that you have proposed where there are these permissionless trades on blockchains and nation states can't intervene does not exist and is not the world we live in. I think the hypothetical you gave of what if Donald Trump starts shouting about this is valid or not valid is unfortunately the one we are already in with real world assets. Because again, I will go back to the point of the unfortunate reality that we face is, actually, let's take your example because I think it was a really good one. We have a world where we have ETH, we have tokenized gold in London, we have a Chinese stable coin and we have an American stable coin, right? I'm going to use Chinese and American because the assets just need to reside there. Like you could have a weird like Euro American, fine, whatever, but there's a Chinese and American one.

Omid:
[40:38] Here's what I'm

Austin:
[40:39] Saying is the way the chain ultimately functions, whether you like it or not. And the question is just, does your code reflect the real world reality? London controls how the gold token operates. China controls how the Chinese stablecoin operates. And America controls how the American stablecoin operates. Because if you could brick the reserve and brick the issuer, you control the coin. And I agree with you, Omid. There are things governments can do that would destroy the value proposition of the chain, or at least using that specific asset on the chain. But the problem is, yeah, like that's just the way it is. I don't like that, right? I do think there could be better real world frameworks, but I think that requires a lot of legal.

Omid:
[41:19] Right?

Austin:
[41:20] And regulatory reform that has not occurred yet because here's the fundamental problem with your system. Let us say that China says, no, this trade did not occur and goes and enjoins the issuer from like ever withdrawing the money for those tokens and just confiscates it.

Omid:
[41:34] Now what, right?

Austin:
[41:35] It's just broken on chain forever if you cannot represent that reality on your blockchain. And so what I am fundamentally saying here is that decentralization is a feature in situations where there's lack of trust and people want neutrality. I agree with you on that, but it is a bug in situations where the underlying asset itself is not decentralized. And by creating this fiction that something can be decentralized that does not interact well with reality, all you're doing is stuffing a live grenade into the system.

Omid:
[42:07] That almost sounds like you're against stable coins, though, because they have the freeze and seize capability. And even if like Circle doesn't want to implement it, the U.S. Government could always jail Jeremy Allaire, which, you know, we hope not. We like Jeremy.

Austin:
[42:22] Well, the U.S. government has never jailed anybody in crypto for like sanctions or money issues or trumped up charges.

Omid:
[42:30] So, but that's to me. Ironically, another reason why we want neutral infrastructure, because neutral infrastructure creates a competitive playing field for different kinds of assets, including ones that are issued from off-chain, RWA, stablecoins, etc. And ultimately, if you do have a world where Aave becomes the repo market, which I think it could, but you have tokenized treasuries and tokenized dollars and very large financial institutions all over the world are borrowing and lending against each other.

Omid:
[43:05] The stable coin that ends up dominating that market is going to be the one that has the most perceived neutrality. It is not going to be the one that has the most built-in fail-saves and kill switches because everybody in TradFi understands that that could be weaponized against them, right? Like counterparty risk is something that's drilled into the DNA of risk managers, like you actually, when you used to be one, right? So they understand that. And they're going to say, I'm not worried about me being hacked, and then not having a way to stop the hack, because I can address that problem by making my infrastructure, my wallet, my custodian more robust. They're going to think, I am more concerned about a counterparty weaponizing

Omid:
[43:55] Some kind of an error resolution system to undo a trade where I made money, or that was vital to me. And because of that, they're going to be more attracted to the RWAs that are the most neutral. I think they're actually going to be the ones that advertise this. Just like Apple has made a fundamental part of its brand to be privacy, they put up billboards that say, we protect your privacy. And they even stood up to the U.S. government after an actual terrorist attack, right? And they say, we will not help you break that iPhone because we protect privacy. I think there are going to be real world asset issuers that advertise themselves on neutrality.

Omid:
[44:36] And then they win. So whether it's dollars or euros or renminbi or gold, whatever it is, we'll see how the balance of global asset preferences shift over time too. If you have a neutral blockchain, it's going to attract more neutral assets, including the ones that are issued off chain. They'll never be fully neutral, but there will be a CEO of a stablecoin issuer who advertises himself as willing to go to jail in order to fight against some kind of a court order from some government. And then the market will ultimately attract more and more of these assets. And then you're like the little smaller London tokenized gold issuer. You're going to think, I want my gold token to be the winner because that's how I make money, right? My vested personal interest is to make my gold token neutral. So you get this sort of like network effect of the RWA is becoming more and more resilient. And the final boss in all this, I think we all agree, is the government, right? I think the governments that want their currency to be more widely adopted, which is all of them, well, almost all of them, maybe not the Swiss.

Omid:
[45:47] And the asset issuers, whether it's they're tokenizing commodities or equities or whatever, right? They're all going to want to win the neutrality race. And then the governments who want their businesses to win, who want their currencies to win, who want their version of the US Treasury or the actual US Treasury bond to win, they're all going to say, you know what? We want to win the neutrality Olympics because then we get more money, more spending. More jobs, more taxes. So if you start with this base infrastructure that is neutral, I think it creates a cascading effect where the assets become neutral. And then the issuers of the assets become more neutral. And the final boss, the governments that issue those assets are going to be more willing to be neutral than they are today.

Austin:
[46:40] So I would say, I don't think as of yet, that's been shown to be the true revealed market preference for real world assets. Like I actually think you've just made an exceptional argument in favor of Bitcoin, to be totally honest with you, right? Like I know all three of us like believe in Bitcoin to some extent, in addition to ETH as an asset. So like, I think this one we're preaching to the choir on, but I would tell you like, you could create a stable coin like that, but the costs of it are very high, right? Like I would need to find some sort of relatively neutral offshore jurisdiction And the assets I'm going to need to hold are like physical fucking bills in a vault so that they're not responsive to judicial procedures. And then I'm going to need a bunch of people to defend the thing, like Eric Prince and I are going to need to have a contract, right, so that we could keep this stuff secure. And by the way, all of that is actually doable. And in fact, Omid, I think you and I both know a lawyer who's thought about the joking idea of a central bank physical currency, right? Like you could, if you want to like descend into like levels of madness, go like Hideo Kojima Metal Gear style, like let's create a like offshore military contractor that holds all the currency type behavior.

Austin:
[47:48] The costs of that are high and the market has showed zero adoption preference for that. It just wants shit that's highly liquid globally. And I think what I'm getting at here is like asset preferences are not monolithic. And there appear to be a lot more people, I think, than you would like who are willing to make the trade off to have liquidity. I also think government is final boss is something we will never get away from. Like government is just a word.

Omid:
[48:12] For the things

Austin:
[48:13] We do together. And, you know, in many ways, like we're talking about reordering how we think about human civilization, which maybe, maybe down the road this will occur, but it is not a decades thing. That is a centuries thing. And so I'm saying in the world we live in today, like it or not, the revealed preferences are for highly liquid centralized stable coins and crypto exchanges. And that these are responsive to real world like legal systems, whether we like it or not, and to live in that reality without breaking shit, it's going to be a matter of time until blockchains need to find a way to be responsive to real world legal procedures. By the way, I think the rubber is about to meet the road on this globally for stable coins in a way it has not because of the passage of genius. Like if you go read that bill, there are some serious hooks in there with regard to like ecosystem monitoring and responsiveness to court orders and like law enforcement.

Austin:
[49:06] And I'm going to tell you, knowing something about how U.S. Regulators regulate foreign banks, they're going to tell you if you want to have a U.S. Issued token, that means your foreign entity is also responsive to us on all of those things. So you are going to find explicitly U.S. Dollar stable coins responding to U.S. freeze and seize orders going forward. And I think my point is we live in a world where, oh, me, your negative case is actually just the base case. like that is what's going on right now. And I'm not endorsing that as good.

Austin:
[49:37] But I am saying that's the world we live in. And so the reason I would say to bring this all the way back around to Ryan's initial question, because like, unsurprisingly, with you and me out here sent us down a rabbit hole immediately, which is amazing, is the core reason I said I think ETH is unprepared is.

Austin:
[49:55] What is the right way to say this? I think you think some of these concerns are highly speculative, They may be less speculative than you think, and people may have already been fighting about them in private. It's a matter of time until one of them happens.

Omid:
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Ryan:
[51:57] Austin, just to follow up on this, right, this point that Omid is making with respect to neutrality, one thing we have seen with the Genius Act is, of course, nation-state support.

Ryan:
[52:07] Of a stable coin in the US.

Ryan:
[52:09] We have not seen the EU move. We have not seen India move. We have not seen China move. What's very interesting to me about this is we already have the SWIFT network, essentially, which is kind of a US controlled, I know it's a European sort of entity administered, but it's basically a US controlled payment apparatus. China is creating their own payment network, something called SIPS. That's sort of the China controlled ability to freeze whatever they want done on SIPs. We don't have a credibly neutral third player that has entered. Maybe part of the argument that Omid is making is, well, that's Ethereum. That's the layer one here. And so, yeah, the question for China or the EU or India or any sovereign country is, which set of chains are you going to deploy on? And it seems to be the case that you'd want to deploy on a chain, on a payment network, essentially, that couldn't be freezed by another sovereign country and potentially your adversary. When it comes to the EU and making a decision in terms of which chain to issue their currency, wouldn't you think neutrality would be a factor? When it comes to China, don't they want to deploy to something that the US can't intervene in, can't censor in? What do you make of that argument? Because we've started to see the rubber meets the road, but that's only in the U.S. Once we have geopolitical adversaries and interests, you know, colliding, won't they prefer neutrality to Omid's point?

Austin:
[53:37] Well, I would remind everybody Europe has moved. They have Mika. It's just terrible and broken because in the classic European fashion, they misunderstood the problem and so created basically bank captured tokenized deposits that can only function within Europe. So golf clap guys could work. So, right, I might argue Europe's revealed preferences. Actually, no, we just want to control things that don't want to be a blockchain at all. And we'll just, you know, essentially take it in the face economically for that choice. Europe has clearly not been prioritizing growth for a long time. And this goes back to kind of the point I was making that you were saying about where is the credible neutrality? I agree with you. They want a blockchain that cannot be unilaterally dominated in all ways by their nation state adversaries. But here is the problem that you're going to run into, for instance, with China, is they're going to tell you, we don't want to be on a chain.

Ryan:
[54:27] That the United States is in control of,

Austin:
[54:30] Like unilaterally. But we also aren't deploying on a chain where we can't control our own currency, because that will obliterate our currency controls. So you get into this sort of prisoner's dilemma, or if you will, Mexican standoff, if we start incorporating the EU too, where like everybody wants to have control over their thing, but they don't want other people to have control over their thing, right? So like China doesn't want the U.S. to run their currency. The U.S. doesn't want China to run their currency. The EU is not OK with either of them running their currency and so on and so forth. But also all of them want like a place to transact. And this is sort of why I'm coming back to if you want a blockchain that can simultaneously be the warehouse of the majority of RWA and actually trade, call it more freely amongst each other, certainly more freely than the current very sort of siloed global network, but you also want it to be something that people will actually use, what you're getting into is a system where it's local responsiveness to local tokens only, right? Like China can't tell the US how a US token works, and the US can't tell China how a China token works, but they need to be able to tell themselves how the tokens work. Because if you don't do that, while I agree with you that ETH will have some value, it's essentially going to become the trading venue only for limited forms of FX and maybe certain forms of physical commodities.

Austin:
[55:53] Securities will not be on there. Derivatives will not be on there. Many forms of trade finance will not be on there, so on and so forth. Because like once things start breaking with real world legal systems, like you're just done, right? Like congratulations, I have a token that's non-representative of the economics of the real world. It has no value to me. And so this is back to like, I think there's some nuance to this argument that's very important, which is I'm not fighting with people about the properties of ETH or Bitcoin, and I am not saying we should have a chain where the U.S. Just gets to dictate everything, but I am, to go back to the real world is messy point, saying if we want to tokenize the maximum number of assets, and maybe that's not your goal, we can come back to that in a minute, but if you want to tokenize the maximum number of assets, you're going to need a real world system where you can revert some of these things. Because like simply put, to go back to the basic examples, like the North Koreans are not moving into grandma's house in Connecticut, and they're not getting a board seat on Apple if they somehow like hack the Apple stock contract and steal a bunch of it. Like it's not happening. And so you would need a chain that can reflect those legal frameworks one way or another.

Omid:
[57:02] I still don't understand what your solution is. You just made a more eloquent argument than I could as to how messy legal frameworks are in an international geopolitical setting. And then you're saying, and I want a blockchain that's accountable to all of them. Like, I really like, how does it work? What's the consensus mechanism? What's the governance? Like, in the event that China wants to dispute a stable coin transaction, do they file a form? Is there a website? And then where does it go? You're going to have validators, right? And you tell me what consensus mechanism you're running. What is the process by which they decide that this messy Chinese request that is now being disputed by a messy American request is going to resolve in the chain something simple, like we're going to freeze the transaction. How would that work?

Austin:
[57:55] I think the punchline on how you make those things work is unfortunately relatively simple. and I think most crypto people are not going to like this. Back to your pre-specifying systems. If I were designing a blockchain and I were thinking about tokenizing real assets at scale on that chain, I would want for each asset when it's deployed, to have to specify who does it think it's answerable to and to have the network agree with that definition for the thing to exist. So I guess what I'm fundamentally saying is I think the permissioning might need to exist at the do you get to put your token on here layer, which is probably an unsatisfactory answer to a lot of people in crypto. And I understand that, but would solve this problem pretty well, which is to say USDC would drop and say we are responsive to like the US government, US states, and that is the answer. And if you want us to do something, go to them. And if you don't like that, fuck off, because that's how it works for us, right? Like deal. And then it would be relatively simple. Again, obviously, you want to get the security model properly. Don't just do this with like a single point of failure, one to have some sort of Oracle network that like reposts US court orders and the chain will enforce whatever those are. Code them properly, right? Like we could have standards here. That doesn't bother me. But like we need some way to communicate effectively in this vector. And so if China comes and says, well, we have a problem with this USDC transaction, the answer that the chain gives, because it's already set these rules in advance, is cool, go to a US court, get an order, fuck off.

Ryan:
[59:21] Right?

Austin:
[59:21] But it will also work the other way with China, is my point. It's like the United States, Donald Trump, can't just stand up and be like, I don't like that transaction that happened with the Chinese CBDC on this chain, so reverse it. They'll be like, dog, go get a court order from China. It says it right there. That's the only thing we can enforce. So I'm not against even, Omid, to your point, like immutability with regard to those rules. My point is just what the rules are probably needs to reflect how the real world works, because if they don't, you have a problem. And again, what we may be getting around to here is an argument that actually most assets should not be tokenized.

Omid:
[1:00:01] Yeah. You just proposed SWIFT.

Ryan:
[1:00:04] Yeah, I was going to say, to what extent is what you said different than what we have today in TradFi?

Austin:
[1:00:09] Okay, so here is actually a core point where I think a blockchain is vastly superior to what we have in TradFi and something that I think people under discuss, which is... I know decentralization is a buzzword for a lot of people in crypto, but I'm going to make maybe the hot take here that I'm not sure that's the most important feature of blockchains. I actually think it may be the open access and composability that matters more. Because one of the problems, like let's go back to Omid's example of the Federal Reserve. The Federal Reserve system works like this conditional upon you being allowed into the system. And that conditioning is the point of a huge amount of corruption and like political contention and like arguments.

Austin:
[1:00:55] Blockchains don't operate like a private club. They operate like a public park. Right. That is to say your default is you can come in here and if you start doing shit we don't like, maybe we can kick you out. Some of them are not even like that. They're just like, even if you're doing shit we don't like, you can stay forever. But at least some of them are designed in the way of like the default is you get to come in and then we have to kick you out for bad behavior.

Austin:
[1:01:18] That change alone is a dramatic and extremely important difference compared to the traditional financial system. The second part is that blockchains kind of function as like a layer cake, right? Again, back to what Omid and I have been talking about here. And I think the two of us intuitively understand this. So let me expose it better for like the people at home just to drive the point home. And I mean, pile in if you disagree. But like one of our complaints with the current system is also that it's incredibly fragmented and toll gated. Like for me to get a bank account in like Singapore and get a bank account in Switzerland and get a bank account in Dubai, get a bank account in the United, it fucking sucks, right? And like a lot of people functionally cannot do it, right? But again, with a blockchain, you now have all of these like in a single layer cake where people globally can transact in ways that previously they were not. So that's part one. Part two, the composability. Like, let me propose a hypothetical for people. If you have a great business idea that would be value additive for the world and consumers, on which you're not going to charge egregious fees, but the problem is you need to build it on top of the Chase banking app at the Apple Store, what do you think your odds of success are?

Ryan:
[1:02:29] Right?

Austin:
[1:02:29] It's basically zero because Chase can just block you or brick you at any point they want. And so the other part of blockchains that I think people have really under discussed and sort of like, undervalued as the composability component, right? Like part of what's so fucking cool about DeFi primitives like Uniswap, like Aave, is not just that they exist on a standalone basis, it's that we can start frankensteining them together and using money in new ways that were not possible previously because of the centralized control of a lot of intermediaries. And so what I am fundamentally saying here is while decentralization may be a bug with regard to responding to legal norms in real-world assets, and that is the heart of my critique of the current structure. I think it is, as Omid and I have agreed upon elsewhere, a feature in a lot of other ways. And I actually think one of the most important features of blockchains existing and why I've gotten so interested in them is breaking down a bunch of walled gardens and access controls around these things, more than sort of back-end responsiveness to judicial orders.

Omid:
[1:03:33] The system that you propose has no composability. Because if I understand correctly, what you're saying is we're going to permission the asset issuer at the network layer, right? Do I have that right? That like in the chain that you envision, the future circles and tethers would have to get permission from governance to issue an asset, but then anybody can hold their token. Do I understand that correctly? Should we?

Austin:
[1:03:59] I think essentially, if you want RWA to work properly, yes. And the question becomes, what is that permission and condition, Don? Because the good part about a blockchain, like I know you and I agree on this, is we can kind of set the rules of governance in advance in a transparent way, as opposed to having like four dudes in Jackson Hole in a private room decide whether Caitlin gets a master account or not.

Omid:
[1:04:20] But how? Again, like in your system, the validator set for a blockchain will somehow publicly and determine whether Circle gets to issue USCC on that chain or not?

Austin:
[1:04:34] Vote. How?

Omid:
[1:04:34] That's a legal governance thing. It's not a consensus thing, right? Are they going to have voting? Who's going to decide?

Austin:
[1:04:42] Yeah, my answer to that is ultimately, Omid, this all comes back to social consensus and voting with real world assets. Whether we like it or not, that is what the current system is. Because again, to go back to the root of my critique, if the ETH validators say a transaction is good in USDC and the U.S. government says it's not, the U.S. government wins.

Omid:
[1:05:03] Yeah, I mean, that's the present state. And my point was that because the ETH validators are not going to get involved, Circle is less likely to want to do something, which then in the long run will make the U.S. Government less likely to do something. Now, you're saying that, no, the U.S. government is always going to want to flex its muscle. And we should design the system to give the U.S. government what it wants. I say, no, we shouldn't. We should design the system to optimize for mitigating counterparty risk, giving guaranteed outcomes, whichever one of us turns out to be right remains to be seen. But I just want to point out, in a system where the validators get to permission the issuer of an asset, there is no composability. Because just as easily as the validators could permission a stablecoin issuer, they can de-permission that stablecoin issuer. And you would have to be insane to build a massive Aave-like lending market on a stablecoin that the validators could decide tomorrow is no longer allowed on this chain, right? The risk is there always, and this is a fundamental problem in DeFi,

Omid:
[1:06:12] The circles of the world could do that too, right? If circle wanted to tomorrow, they could break all of DeFi. However, if they did that, it would destroy their business. Their 30-ish billion dollars in market cap would go to zero. The personal wealth that the executives have built, particularly recently as the stock went public, would collapse. So the way the system is designed today, they have a very strong financial incentive to leave things be in DeFi, which by the way, they have, right? You know this better than me, that Circle has historically actually been resistant to when governments come and knock in and say, we need you to permission this and de-permission that. But what you want to do is take that risk, which I concede is already a liability for DeFi, and integrate it at the consensus layer, which to me means that we've just blown up the whole thing. And if that's what you want, then I would like to introduce you to a New Jersey-based firm named DTCC. They already permission everyone and everything for you. They are quite good at it. They've been around a long time. Never been hacked by North Korea, as far as I know.

Austin:
[1:07:21] It's hard to hack paper share certificates. Can't be hacked.

Omid:
[1:07:25] They have been demobilized and dematerialized lately. So actually, it's mostly now just electronic ledgers. But the overall point is like, it might be that what you and I disagree on is whether the neutrality of an actual permissionless blockchain is desirable in and of itself, even for non-permissioned assets. I think it very much is, but I think it's valid. We don't know yet, right? It's still, as you've pointed out on other podcasts, the size of crypto is still a rounding error to the size of TrapFi. So we'll see what it is. My point is, if you think that is all the world will tolerate, then please, for the love of God, use a database. Do not use hash functions that serve absolutely no purpose. Do not incorporate public key cryptography that serves absolutely no purpose other than to slow everything down and make it needlessly complicated.

Ryan:
[1:08:24] And do not use words like composable.

Omid:
[1:08:27] Composability at the end of the day is only possible if the infrastructure is as neutral as the laws of physics, right? And you might turn out to be right. I disagree, but you might turn out to be right that that's not what the world is going to tolerate. But if that's the case, then sorry, Bankless guys, the podcast is not pointless. Blockchains are not useful for anything other than just like meme coins and niche degen activity. Also, Austin and I are going to have to find new topics to teach and become experts in, because it turns out that the actual TAM of public permissionless networks is limited to just what Bitcoin does.

Austin:
[1:09:08] All right. So I have two points on this where I think it's a little more nuanced than what you've said, though I appreciate the rhetoric. You're like, you're good at what you do. One, I think some of the argument is actually more about the volatility surface of errors. I would tell you in the current space, the problem that we have with blockchains is they're incredibly fragilized, which is to say, when you have a system where Circle is, call it incentivized in the current way they are, which is to resist as long as possible, the problem is what you have there is your volatility is none, none, none, none, none, oops, right? That is to say, at some point, the United States shows up at Boney Mellon and it's like, give us the entire reserve. And you're just broken.

Austin:
[1:09:50] Because if they find severe enough issues, they're not going to do the thing of like, oh, you know, I'll negotiate a little. It's like, we see like $4 billion in the hands of the Iranians. We're just freezing everything and we'll sort this shit out in bankruptcy. And it does all go to zero. So it goes from fine to fucked, right, is how I would describe it. I am arguing we might be better with a system that has medium amounts of volatility at all times because those tend to evolve towards stronger outcomes. Like, Omid, I think part of our disagreement is I think we are more likely to... To get to a future where we force governments to chill the hell out about like the extreme degree of control that they currently want by putting these things right in their face and like revealing to everybody the consequences of what they're doing. Right. I think the current system is kind of trying to trade away from it disguises.

Austin:
[1:10:42] Like call it the malfeasance of that. I think it may be better a little bit like, you know, when your dog like pees in the house to bring the dog over to it, be like, see what you did.

Omid:
[1:10:50] But you want to put it at the protocol layer, right? It already exists at the asset issuer layer. Circle is already heavily regulated, but you want the blockchain to incorporate.

Austin:
[1:11:00] And again, I'm not saying that the validators need to enforce specific transaction restrictions, but they should probably enforce some degree of redundancy if we want to do it this way. Because again, like there is a non-zero chance that in 2027, we wake up and 100% of Circle's assets are freezed. And then what happens? again like in the current system you're a very binary like it's great we're fucked and I'm arguing it would be better to have moderate levels within there is one part of it two to get to your other point I actually do disagree with you on the composability thing because DTCC is a great example here there are middle states.

Austin:
[1:11:40] Between a fully decentralized blockchain where we have tens of thousands to hundreds of thousands to millions of anonymous public validators and five dudes in a broom closet in New Jersey, right? Like being the controllers of all of this stuff. I do think there is a pretty good argument as somebody who spent a lot of time thinking about financial market structure, that something like a blockchain, because again, none of you trust each other, composed of like, call it the 500 largest financial institutions in some jurisdiction or set of jurisdictions that are willing to cooperate is significantly better than DTCC. Right, because they're the ability for individual entities to exert outsized influence or compromise the system goes out dramatically. So I think it's less binary than like you've laid it out. I think, again, it's like the problem with TradFi people is we like binary options, like we want a zero or one in a fixed outcome. And this is more of a volatility surface problem. But I think blockchains are usable for significant improvements. I do not think private, like, unilateral blockchains are, though. Like, I think Omid and I both agree that, like, private bankchains are absolutely a bridge to nowhere. Why are you doing this? Please, for the love of God, just use a database. Yeah. Right. Like that's pointless. But a blockchain of like the 500 largest, call it American financial companies in the world to move all these assets around, even if we're only talking about local to America is probably better than the current system.

Omid:
[1:13:07] I love this example because first of all, having both worked at banks, I like to think about the sausage making of creating such a chain because every bank of 500 institutions, they're all going to have to have a bunch of lawyers involved. They're all going to have to have a bunch of risk people involved, biz dev, reputation. And of course, this is going to be the global clearing layer for everything. So then management and the board is going to have to be involved. So now we have like, I don't know, 2,000 to 10,000 bureaucrats in a room, and they have to decide how to design a consortium. Great. Good luck with that. I think that's literally impossible. But for the sake of argument, I'm going to say that, Austin, you might be the one person who can pull it off. You're very connected in that world. You're extremely witty and charming. So you corral the bankers, and they agree on a consortium that they're going to do this. Great. One of the things I love about permissionless, public permissionless chains, is that they provide very simple answers to the most fundamental questions. Who owns it? Who controls it? Who gets to use it? Who gets the data? Who profits from it, right? And if I ask those questions about Ethereum, who owns it?

Ryan:
[1:14:23] Nobody.

Omid:
[1:14:23] Who controls it? Some very diffuse group of stakers, nodes, token holders.

Austin:
[1:14:29] I've heard it's a single podcast that controls that thing that is in fact driving the entire area.

Omid:
[1:14:37] Right. And then like who gets to use it? Everyone. How are fees determined by the market? So forth and so on. In the consortium chain example, you've corralled the bankers. They're all going to agree. Okay. Who owns it?

Austin:
[1:14:49] Okay. So one, let me be very clear here. I think if it's just banks, it fails because you have like a specific stripe of narrow interests, right? You need many kinds of regulated institutions.

Omid:
[1:15:02] Okay, even better. Who owns it?

Austin:
[1:15:04] Hold on. Let me finish. Two, I think the way that you end up getting there, and this goes back to the ownership question there, I actually agree with Omid, there's zero chance, like zero, you're going to get bureaucrats in a room and they're going to decide on this. Like, what was the median time to launch a new product at Citi was probably like two years. And that's just us making a decision.

Omid:
[1:15:25] I was going to say never, but you're being more generous.

Austin:
[1:15:28] Probably about two years. As somebody who launched one, it was two years.

Omid:
[1:15:32] So fat tail outlier.

Austin:
[1:15:33] Yeah. Well, again, as you said, I'm uniquely qualified here. But like joking aside, I don't think they're going to be able to do it. This goes back to my point of when you incorporate these things and start forcing people to look at the consequences of their action. Do you know what does actually dramatically change things is legislation. I think you have to hold the feet to the fire of the people. It's a little bit like, okay, I'm going to reveal that I'm a like OG internet degen, but I was around for like the creation of the malicious compliance subreddit. I would suggest to people that this is like my inner spirit animal of like, you've got to say to people, hey, if these are the rules you said, we're actually going to do the thing that you said the rules do. So like, look at what's happening, you idiots. It's I would tell you, I think deciding chains to operate in this way will force governments to start having to respond to, oh, shit, all of this stuff is broken.

Ryan:
[1:16:26] Right.

Austin:
[1:16:27] Like, actually, we need to fix it. And the answer as to how you get to this sort of state of the world, Omeed, is that people will put pressure on them to bring the hammer down. And I think I have way more faith about that than many people, because like, I've been personally involved in the United States and like talking to politicians and lawmakers and legislators and regulators and watching the ball move from like the hysteria of like the anti-crypto Biden admin to like degrees where they were like trying to ban all public blockchain. And like committed perjury in a court in Utah to try to destroy a product, debt box versus SEC, if anybody doesn't believe me, to the point where we're like passing legislation on this stuff and grappling with these things. I maybe have more faith in the political process forcing people to come to these conclusions. And then you have much more unification between real world governance and what's happening on a blockchain than the two of them, like in sort of like the Cartman versus Jimmy fight from South Park to determine like whose ledger wins.

Omid:
[1:17:28] Once again, you have reinvented TradFi. And even if the government compels it, which by the way, it's maybe for you, but not for me. I'm here for something fundamentally different. And most people might not know this, but the core infrastructure of Wall Street and TradFi was created in the exact process that Austin just spelled out. Whether we're talking about clearance systems, settlement systems, payment systems, DTCC, to the Chicago Mercantile Exchange, to Visa and MasterCard. They all began as regulatory blessed consortiums where people in suit said, you know what we need? We need the responsible executives of large corporations to get together and build some kind of important infrastructure that they all share. And by the way, to be fair, At the time, great that they did that. It's very important that we have the kind of TradFi infrastructure up until this point, right? My argument is that with crypto, we can now go categorically better, but I'm not arguing that we never should have done this because the result would have been that we would not have the great capital markets that we do today. That's one of the things that I think Austin and I agree on that many other crypto people underrate. We should give credit where credit is due. But we should also study the history of the exact consortium model that was just proposed.

Omid:
[1:18:48] And what ends up happening over time is the consortium entity realizes that it's more powerful than any one of its founding members. And then it systematically begins to screw most of them. The NASDAQ stands for the National Association of Securities Dealers Automated Quotation System, right? It began as infrastructure for members of the NASD to trade with each other over the counter, right? But now it is a public corporation that is probably more valuable and far more powerful than almost every single one of its founding members, right? There is a lawsuit outstanding against the floor traders from the good old days in Chicago, I believe, of the Merck. And they used to be the owners. Most of the TradFi infrastructure was mutually owned, a.k.a. a consortium. And they're suing that they're saying when the exchange went electronic, it screwed them over.

Omid:
[1:19:44] It started preferencing new kinds of financial entities. And it probably did, right? I don't know about any of the details of it. But the point is, and it's the same with like Visa and MasterCard, Visa's market cap and MasterCard's market cap is larger than I would guess 98% of the companies that initially founded them. And they're clearly far, far more powerful, right? They're more powerful than some regional bank that issues cards on their network. So what I'm saying is that while today, if we think about what Austin is proposing, it would solve a lot of problems. Today, it would probably get like more no-coiner executives to join it and issue assets on it. Jamie Dimon, I'm sure, would be all over it because JP Morgan is already one of the largest owners and participants of the TradFi infrastructure. So give him fake crypto infrastructure to control and own too, and he's going to be all over it. But I don't think we're achieving anything. So the question then is,

Omid:
[1:20:44] If we do things my way, is it going to work or not? And Austin made a great point about reveal preferences that I think is actually there is more data there than we know. Because when I first started talking about Bitcoin in 2013, the most common response I got, particularly from people who worked in finance, was the government will never allow it. A non-sovereign, decentralized money or store of value, whatever you want to call it, that they don't control. Governments the world over will ban it. And here we are today, the president of the United States is the biggest Bitcoin bull, and we're debating about whether we should have a strategic reserve or not. So the reveal preference there was that the decentralization became something that even governments gravitated towards, possibly because as we experienced during the Biden administration, when you try to kill it, you only harm your own people, right? And then with stablecoins, I think I wrote my first blog post arguing something like stablecoins are going to be a killer app in 2018.

Omid:
[1:21:45] And again, there too, specifically people like at Citibank, who Austin and I both work with, said the government will never allow a non-KYC permissionless dollar to exist. They said, I don't care about your freeze and seize capabilities. I don't care about your arguments that more money laundering happens through TradFi. I don't care about how good chain analysis data is to try to catch the bad guys. The government will never allow this to happen. And here we are in the aftermath of the Genius Act, where the government has actually enshrined the fact that you are allowed to own a...

Omid:
[1:22:25] Let's call it semi-permissionless dollar because there is the freeze and seize capability, which, by the way, all the bankers out there, if you're not freaking about what this means for you, you should be because this is going to be a huge problem. And that's another thing Austin and I agree on. So I actually think the revealed preference on the neutrality and decentralization has been that eventually people come around to it. A lot of things have to get tried in the meantime. A lot of experiments have to fail in the meantime. I think the fact that many, many, many consortium chains have been attempted and like hundreds of millions of dollars spent and years later, they have nothing to speak of has led us to the world where more and more people are sort of being like begrudgingly dragged to my point of view, including governments.

Austin:
[1:23:11] So one, Omid, I just think you've made a great argument for my incremental change idea of like, hey, if we put this in the government's face, eventually they have to start doing things about it. But two, and this is an important point that I think there's an area of a lot of agreement on. The reality is we will always be building these castles and then the next generation of Omids and Austins and Ryans will have to lay siege to the castle that we built. They'll build one and then the next generation is laying siege to that. Like there will always be this process of building things and then they get corrupted and you have to destroy it. You have to build the next thing. That is the nature of reality. I think what is important and why I'm less concerned about the permissionlessness of real world assets is having something like Bitcoin or ETH existing now acts as a check on the behavior of those things in a way that did not previously exist because you have an alternative, right? Like, I don't think you have to fully co-opt the castle so long as people have the option to leave the castle and use something else. Right. Mass adoption of permissionless systems is not required. The existence of permissionless systems that people could mass adopt if the current system is profoundly corrupt is all that is required to keep them behaving much better.

Ryan:
[1:24:24] Okay. Now, as we move to closing arguments here, one reflection I have in listening to both of you, and it was a fantastic debate, we appreciate you coming on,

Ryan:
[1:24:33] Is that it seems to be the case that we're already, we're in the process of letting all of these experiments play out, and we're letting the revealed preference

Ryan:
[1:24:43] of the market sort of decide. It seems to me with crypto, there's like kind of three things going on. There's TradFi over here, but there's three things going on in crypto. One, of course, is the store of value type of case. Another is DeFi, decentralized finance. And the third might be more what you were talking about, Austin, which is open finance, right? We see all of these experiments at play. We see the store of value case with a Bitcoin and an Ether. We see the DeFi case with something like Ethereum, some other ecosystems as well.

Ryan:
[1:25:12] We also see the open finance case, you know, Stripe. They didn't decide to deploy a layer two. They didn't go on Ethereum. It's a Stripe layer one. This seems to be sort of the open finance maybe that you're advocating, though we haven't seen the details. So as we close out, I mean, I think for the listener, we're letting all of these experiments play out, right? And who wins the debate or if it's a combination of winners will probably play out over the next five to 10 years because it's all happening right in front of us right now. And I want to throw this to Omid for your closing arguments. So I think we started the question of why does decentralization matter? The two of you both agree that it does matter very much for store of value. For this open finance use case and real world assets, Omid, you're still of the opinion that it greatly matters for that, whereas Austin differs with you on that. Omid, make your closing arguments for this debate.

Omid:
[1:26:06] I wrote this blog post not that long ago that vectors of centralization for any on-chain solution are like the exhaust ports of the Death Star. Eventually, the rebels will find them, not because they're easy to find, but because the incentive to find them is so high. And if Austin's version of a semi-permissioned future or consortium future becomes true, it'll blow itself up. So to me, at the end of the day, the people, the users, the assets, the companies who issue those assets and the governments who regulate those companies will find themselves on a decentralized network because I'm going to garble this, but it's like the quote that Churchill said about America or democracy or something.

Omid:
[1:26:51] It's the worst option except for every other one. And I think ultimately decentralization will win by default.

Ryan:
[1:26:58] Austin.

Austin:
[1:26:59] I'm going to go back to sort of the beginning of this, which is I don't think we could ever get away from the real world or the constraints of the real world and humans are going to human. I think as a result, if we want to bring the majority of real assets on chain, we're going to be forced to acknowledge that reality. But I think the value of decentralized store of value systems is by providing people an opt out. Right. So the way I would think about it is this way. Bitcoin is now your floor. Right. You have to do better than Bitcoin in order to be more valuable than people just owning Bitcoin. If ETH works the same way, ETH is now your floor. You have to do better than ETH to actually create significant value above that. And where I think I differ with Omid is I don't think transaction preferences are monolithic. There are some areas where like speed and controls and error reversal are significantly more valuable than others. I care less about mistakes if I'm buying a $5 sandwich than I do if I'm clearing like $5 trillion of overnight reverse repo.

Omid:
[1:28:00] For sure.

Austin:
[1:28:01] Right? And so I don't think this is a monolithic system. And I think the real legacy of blockchains is going to be doing two things at once, and they don't need to be done in the exact same way at the exact same time, which is, one, raising the floor on global conduct in financial markets, which I'm just going to strictly say is a massive, massive improvement in human rights on average over time. And I think what's happening here is incredibly important. But that number two, it will lead people to have to cooperate in different ways because now there is a credible alternative and sort of raise the standard even above that in many things that may themselves be more centralized over time. So I think what we're really looking at here is a governance revolution where, again, I've said I think the value of decentralization writ large is overvalued, but that's just because it will force better behavior elsewhere.

Ryan:
[1:28:49] Very good. We'll end it there. Of course, bankless listeners, none of this has been financial advice. As you know, crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.

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[1:29:09] Music