Dialogue Framework Co-founder: Can Cryptocurrency Survive an Economic Recession?

Organized & Compiled by: Deep Tide TechFlow

Guests: Myles O'Neil, former employee at Fidelity; Vance Spencer, Co-founder of Framework Ventures; Michael Anderson, Co-founder of Framework Ventures

Host: Michael Ippolito

Podcast Source: Bell Curve

Key Takeaways

In this episode, the Roundup team and Myles O'Neil delve into the hot topics of a tumultuous week in the market. They discuss the recent governance attack on Compound Finance, the first week of Ethereum ETF trading, and how teams should handle token unlocks. Additionally, they inquire whether cryptocurrency is now a bipartisan issue and how governance tokens should be classified. Finally, they speculate on whether we are entering a recession.

Trump's Speech at the Bitcoin Conference

• Michael Ippolito mentioned that Trump's speech at the Bitcoin conference garnered significant attention. His remarks covered various topics, some of which seemed tailored to the Bitcoin community's needs. He promised to fire Gary Gensler on day one and stated he would "free" Ross Ulbricht, which elicited enthusiastic applause from the audience. Although Vance expressed skepticism about Trump's authority to fire Gensler, he noted Trump's surprise at the audience's reaction.

Proposal for Strategic Bitcoin Reserves

• The host noted that Trump's mention of strategic Bitcoin reserves in his speech sparked widespread media coverage. Compared to the more comprehensive proposals put forth by Cynthia Lummis and Robert F. Kennedy, Trump's commitment was relatively simple: to stop selling the Bitcoin already held by the U.S. Michael pointed out that while this commitment is positive, the U.S. has actually begun selling Bitcoin again.

Future of Cryptocurrency Policy

• Michael believes that Trump will become a candidate supporting cryptocurrency, and if other candidates try to cater to this trend, they may appear insincere. He mentioned that although Trump's commitment is simple, if it can be translated into actual policy, it would positively impact the cryptocurrency market. The guests discussed whether the government should buy Bitcoin and how to allow crypto businesses to operate in the U.S. without triggering unfair prosecutions.

Government-held Crypto Assets

• Vance stated that the government may hold various crypto assets without disclosure, but the specifics are unclear. Overall, while Trump's speech sparked heated discussions, the guests were more focused on how to achieve a clear policy framework in the future to promote the healthy development of cryptocurrency.

Is Cryptocurrency Now a Bipartisan Issue?

Bipartisan Issue of Cryptocurrency

• Michael mentioned that recent efforts aim to promote cryptocurrency as a bipartisan issue, but he expressed skepticism about this possibility.

• Vance pointed out that while Trump may take a positive stance on crypto policy, if Kamala Harris were president, the differences in crypto policy might not be significant. He believes that the future legislative framework will affect the market structure of cryptocurrency.

Political Stance and Votes

• Myles stated that an anti-crypto stance negatively impacts votes, especially in election years.

• The host added that the Democratic Party's current attitude towards cryptocurrency may not be as open as it once was, but he also believes this remains an uncertain factor. He mentioned that attempting to confront major political parties is not a wise choice and that interactions should be constructive.

Election Impact on the Market

• Michael believes that market fluctuations are not entirely due to election factors; about 70% of the changes may stem from structural factors like liquidity and government sales, while 30% may relate to election-related sentiment. He likened the current election situation to the final stages of a race, emphasizing that market reactions may be influenced by uncertainty in the absence of a clear platform.

Kamala Harris's Political Prospects

• The guests discussed Kamala Harris's political prospects, noting that her current rise in support is partly due to comparisons with President Biden and former President Trump.

• The host mentioned that Harris proposed a $10 trillion climate change plan during her previous campaign, but it remains unclear what her specific policy positions are now. The guests agreed that in the absence of concrete policy information, the market's reaction to Harris may be volatile.

Waiting for More Information

• Finally, the guests reached a consensus that market participants should remain cautious until more information about future political platforms and policies is available. Michael summarized that this is a waiting game, and everyone needs to patiently observe future developments.

Governance Attack on Compound Finance

Governance Attack on Compound

• The host discussed the recent governance attack on Compound, involving a participant named Humpy, who has years of experience in the crypto space. Humpy voted to allocate $25 million in COMP tokens to himself, a proposal that had been rejected in April but unexpectedly passed this time. The host noted that Compound's governance activity has significantly declined, which may have contributed to the proposal's approval.

Progress and Challenges in DAO Governance

• Myles shared his experiences with DAO governance, pointing out that although interest in DAOs surged for a time, most innovations and progress in DAO tools have stagnated during the bear market. He believes that while some DAO projects have failed, there are still efficient DAOs like Maker and Lido. He emphasized that improving governance frameworks is not complex, but there is a lack of innovation in the current market environment.

Reflection on Voting Mechanisms

• The host raised the "ve (vote-escrowed)" mechanism regarding locking tokens for governance rights, which aims to encourage long-term holders to participate in governance. However, this also raises concerns about aggressive investors who may influence governance decisions by purchasing tokens.

• Vance added that DAOs face more challenges in governance due to differences in legal protections compared to traditional corporate governance.

Role of Aggressive Investors

• The guests discussed the role of aggressive investors in crypto projects, suggesting that Humpy's actions may be an attempt to revive a struggling project through governance means. Michael noted that while the involvement of aggressive investors may bring short-term benefits, the lack of a legal framework and governance consistency makes this model difficult to sustain.

Impact of Political Environment on the Crypto Industry

• The host mentioned that the future political environment could have profound effects on the crypto industry. If a new government can provide friendly regulatory policies, it may foster more innovation and experimentation.

• Michael added that the current slowdown in market activity is closely related to changes in the political landscape, especially with the upcoming elections.

Future Outlook for Cryptocurrency

• The guests discussed the potential impact of different political stances on cryptocurrency, believing that if the Democratic Party can establish a reasonable regulatory framework, it will benefit the crypto industry. Michael pointed out that the Democratic Party needs to find a balance between regulation and innovation to attract entrepreneurs who have left due to uncertainty.

If Governance Tokens Are Not Securities, What Are They?

Classification Dilemma of Governance Tokens

• Myles raised a controversial question regarding the legal definition of governance tokens. He asked what governance tokens would be if they are not considered securities in five years. He believes that while some tokens may be viewed as commodities, the nature of protocols like Compound, which involve dividends and fee switches, complicates their classification.

Comparison of Exchanges and Governance Rights

• Vance noted that while some tokens are traded on exchanges (like CME), they do not possess the characteristics of traditional commodities, such as voting rights or the right to receive dividends from product revenues. This sparked further contemplation on the essence of governance tokens, especially in the absence of a legal framework.

Relationship Between Political Environment and the Crypto Industry

• Vance mentioned that the current relationship between the crypto industry and politics is changing, and he believes that communication channels with Kamala Harris may be smoother than with Biden. He thinks that while Harris's policies may not be as proactive as Trump's, they will generally improve compared to the current situation.

Public Perception of Cryptocurrency

• The host emphasized that despite the technological and economic potential of the cryptocurrency industry, negative public perceptions still exist. He believes that while pushing for political change, industry participants need to be mindful of external perceptions and advocate positively.

Balancing Struggle and Advocacy

• The host mentioned that industry participants should strive for fair treatment while avoiding overly aggressive rhetoric, which could deepen negative public impressions. He suggested engaging in a more constructive struggle to win public support and understanding.

Future Outlook

• The guests unanimously agreed that despite the many challenges facing cryptocurrency, there remains an opportunity for growth through appropriate advocacy and policy efforts. Michael added that more information about political platforms may emerge in the coming weeks, which will impact the industry's development.

Are We Heading into a Recession?

Current State of the Stock Market

• Vance mentioned the current performance of the stock market, particularly the 5% drop in the Russell index, which is unusual. He stated that the NASDAQ also fell by 3.2%, which could signal the beginning of a recession. The unemployment rate has risen to 4.3%, and the market expects a 50 basis point rate cut in September.

Crisis in the Japanese Stock Market

• The host noted that the Japanese stock market is experiencing its worst trading day since 1987, with a drop of 6%. This reflects the instability of global markets.

Performance of Cryptocurrency

• Despite the decline in the U.S. stock market, Bitcoin's performance remained relatively stable, even slightly increasing. The host believes this indicates that cryptocurrency may be starting to decouple from traditional stock markets, reflecting different market dynamics.

Changes in the Economic Environment

• Vance mentioned that the current economic environment is changing, with the unemployment rate potentially rising further to 5%. He believes that the sense of economic weakness is gradually becoming apparent, which will significantly impact the upcoming elections.

Impact of Fiscal Spending

• The host pointed out that despite market pressures, government fiscal spending still provides some support. This means that although there is a risk of recession, the economy may not suffer severe blows due to government spending.

Outlook for the Crypto Market

• Vance emphasized that rate cuts could positively impact Bitcoin and the crypto market. He believes that the current economic conditions may provide a good opportunity for cryptocurrency, especially in the face of uncertainty in traditional markets.

Future Outlook

• The guests unanimously agreed that despite the risk of recession, government spending and the upcoming rate cuts may provide support for the market. Vance called for rapid rate cuts to promote recovery in the economy and the crypto market.

First Week of ETH ETF Trading

Initial Performance of ETH ETF

• The host mentioned that the first week of ETH ETF trading has concluded with positive market performance. He pointed out that although there were outflows from GBTC previously, recent days have seen inflows turn positive, particularly with BlackRock's ETF product performing well and attracting significant capital inflows.

Capital Flows of Bitcoin and ETH

• Vance noted that the recent capital flows of Bitcoin and ETH have been roughly balanced. He expects that BlackRock's ETF will drive capital inflows for both assets, with approximately $1.7 million flowing into Bitcoin and about $970,000 into ETH yesterday. He believes this liquidity will continue to increase.

Impact of Grayscale

• Vance pointed out that the outflows from Grayscale still impact the market, but this influence is diminishing with the success of ETFs. He stated that mini trusts are also helping to absorb outflows, leading to an overall positive market sentiment.

Outlook for the ETF Market

• The host added that BlackRock and other ETF providers are responsible for ensuring the success of these products, which is a positive signal for the entire market. Their performance will significantly impact market confidence.

How Should Teams Handle Token Unlocks?

Background on Token Unlocks

• The host mentioned that Namada (a privacy-focused L1 project) proposed to unlock 100% of the token supply all at once during the token generation event (TGE). He explained the background of this approach, noting that many are weary of low liquidity and high fully diluted valuations (FDV) in token issuance, which often leads to continuous selling by investors or teams during unlock periods over one to two years.

Different Views on Unlock Timing

• Vance pointed out that the current token unlock methods are not ideal. He believes that the project's value and appeal are the key factors. If successful projects like Ethereum (ETH) or Solana choose to unlock 100% or 0%, the outcomes may not differ significantly; the quality of the project is what ultimately determines its value.

Market Self-Repair

• Vance mentioned that the market is self-repairing, with low-quality projects facing higher listing thresholds, and only more valuable projects gaining support from major exchanges. As the market rethinks token economics, low liquidity and high FDV projects will lose their appeal.

Challenges of Listing Pricing

• The host added to the discussion about listing pricing, noting that many projects set their prices too high at listing in the crypto market, leading to significant post-listing price drops. He pointed out that this situation is unsustainable, and the market needs to find a more reasonable initial price discovery mechanism.

Balancing Early Investors and Retail Investors

• Both speakers agreed that the market needs to establish a better balance between early investors and retail investors. Early investors want to recoup their investments quickly, while retail investors hope to participate at reasonable prices.

Future Outlook

• Vance emphasized that the market will continue to adjust, reducing investments in low-quality projects while hoping to avoid losing investor confidence in the crypto market. He noted that the high attrition rate of many "meme coins" is concerning, and efforts are needed to attract these investors back to the market.