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MEMO W13 MAR 2024

The differentiator in life is whether you can pickup on the fundamental truth within a story being told to you, without being distracted by its surrounding noise. - xh3b4sd

Imagine two lines on a chart expanding over decades. The lower line increases by 5% per year. The upper line increases by 30% per year. Both lines increase, but there is a catch. What is increasing on those two lines has two different implications. The lower line represents currency debasement and price inflation. This lower line shows how much poorer you get over time. The upper line represents liquidity injections and asset appreciation. This upper line shows how much richer you get over time. The two lines on our imaginary chart drift farther and farther apart every year. And here is the catch. The delta between the lower and the upper line is the wealth gap. The people not owning hard assets get diluted by their own government, which is destined to print more money eventually. Everything gets more expensive while wages do not rise accordingly. The people owning hard assets get lifted up by liquidity, which is the money that the government injects into the system. All we need to know is how wealth is generated and destroyed in the financial system of our time. And all we have to do in order to generate wealth over time is to own hard assets. The question is now what a hard asset is, how to identify it and how to own it. I wrote an essay that describes what hardness is in the context of finance and why hardness matters. This post has not yet been published on the Powerlaw blog, but it is online already for anyone who can find it in my content repository. The essay on hardness will be published here some time the next quarter. In the meantime it is up to you to find and read it, if you are interested. Let's call it an easter egg of some sort, dear reader. Let me say this much now. There is no silver bullet to get rich or make or keep a lot of money. Anything worth doing will always imply to do the work. And somehow the hardest part in life is to pay attention to the things that truly matter along our way. All we need to know is available for free online and onchain. And as we go about our day we make distinct decisions to pay attention to this, that and the other thing. For better or worse, you have the choice. This is all on you. And I wouldn't change it.

The Bitcoin spot ETF flows have turned positive again on a net basis. And yet, GBTC, expensive as it is, has 9 figure outflows every single day. And I think we can expect those outflows to persist for quite a while, because there are still 23 billion USD caught up in that particular fund. So far the new ETFs capture parts of the outflow and in aggregate account for more inflows than GBTC can bleed on most days. This dynamic can be expected to persist for a while as well. The long term prospect of the current situation is solid. A look on the XAU / USD chart shows the price of gold over time. In March 2003 the gold spot ETF got launched in the USA. At that time gold traded around 350 USD. In September 2011 gold traded around 1800 USD. That is a 5 times increase within 8 years. All we need to know is that Bitcoin is touted to be digital gold. And while digital gold is not all that interesting to me personally, the information presented above is basically all we need to know in order to understand where the future is headed.

I had an interesting thought recently about the ratios of ETH / BTC and SOL / ETH. At the moment they are both around 0.05 and it would somehow be funny if the relative distance from ETH to BTC and from SOL to ETH would remain similar over time. That for me would say something about powerlaw distributions. It is highly likely that we are fooled by randomness here again and that the equal ratios today are not more than coincidental on the timeline. Regardless, the thought was interesting to me and the implication would certainly be telling.

This week inscriptions made it into the blobs on Ethereum, causing blob fees to spike. Blob space was intended to allow L2 rollups to post data to L1 mainnet as a separate fee market, distinct from all other transactions. That way blob space is supposed to be cheaper and L2 rollups are supposed to scale further. Seeing blobs to be abused for other purposes speaks to the composability and second order effects of decisions in system design. We keep running experiments onchain. What a time to be alive!

Ever since the Dencun upgrade, the Base TVL grew to ever more new hights. Base is now ranked third by TVL with roughly 8% market share. Blast is now ranked fourth with about 6.5% of TVL market share. And while Base is an L2, Degen Chain got deployed as L3 on top of Base. What we are seeing here now is something I would describe as fractals. We are building networks upon networks and scale Ethereum layer by layer. In other news, there was some weird exploit on Blast for over 60 million USD this week. Somehow the money has been given back after some onchain sleuths seemed to have identified the attackers. All kinds of accusations have been thown around about the attackers' identities, ranging from North Korean hacker groups to inside jobs within the exploited protocol. Recently there have been cases where people thought that some onchain mistakes and certain exploits had been coreographed marketing stunts. That idea strikes me as oddly reasonable in this space. In more happy news, the scaling factor for the Ethereum ecosystem has now crossed 10x the first time according to L2Beat. And that means we are scaling Ethereum with the rollup centric roadmap. Jevons Paradox is in full effect. The cheaper blockspace becomes, the more it is sought after. Happy days!

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