Welcome back to the show. Today we have Clouted from ETH Strategy. Welcome to the show. Thank you for having me. It's good to be here. Now, I'm going to begin with the copy on the homepage. I often find that that's a good place to start because it shows what your positioning is and exactly kind of like the audience you're trying to serve. And then maybe we can use that as a jumping off point. So on the ethstrat.xyz website, it says, eth strategy, Ethereum's first autonomous treasury protocol to reimagine Saylor's MSTR in a DeFi native context. Okay, there's a lot going on there. I think we'll have to explain like who Saylor is, what MSTR is, what a DAT is, and then like your, and then ETH strategies approach to that whole kind of TradFi approach, but in a definitive way. Yeah, definitely. We really need to update that copy. actually think we haven't updated that copy since we were rushing to ship this a couple months ago. So that was the most left curve explanation that we could think of to put there as the main copy on the website. ah But yeah, I'll quickly try and dissolve this into what it means. Well, it is a on-chain protocol, so it's all done through smart contracts on Ethereum. And essentially what it is is a strategy is a protocol and a protocol that kind of does what a digital asset treasury in TradFi like MicroStrategy does, but does it from first DeFi principles using financial engineering in smart contracts. That's basically what that tries to encapsulate. I can delve into that deeper if you like. No, that's great. um Maybe like a, I think a contrast to Saylor's approach with MSTR, um I think would be helpful for the audience. Yep, definitely. So Michael Saylor, basically has a company that wants to accumulate as much Bitcoin as possible because he and his equity layer, which is the MSTR holders are very bullish on Bitcoin for a very long, over a long period of time. Right. um And the way that Michael Saylor went about doing this initially and what actually inspired our entire development of this protocol was um Well, firstly, when you're very bullish on an asset, what is the best way to increase your exposure on this asset over a long period of time? The best way is to take out debt to buy this asset. That's generally what people do in markets. Now this has two problems fundamentally, which everyone knows. Firstly, when you take out debt, you have risk of margin calls or liquidations. So if the asset that you're purchasing doesn't succeed, it goes down in price first or whatever, the lenders will come and try and claim their their debt back because they have risk of loss. And that's very normal across all markets. And the other thing that comes with taking out debt is funding rates. So there's always an interest rate to pay. Sometimes it's higher depending on the type of debt that you take. Sometimes it's lower, right? Now, uh Michael Saylor, I believe, found out very quickly that no one in Wall Street was going to lend him money to go and buy Bitcoin and hold it for a very long time. What he had to do was give something of value back to the market. And that's when he started this convertible note strategy to raise money to buy Bitcoin. And what he did with this convertible note strategy was he basically issued out corporate bonds, which are debt instruments that people lend money to a corporation. This is very common in TradFi, except because instead of a normal bond where you lend money and you get your principal back, plus any interest that was on the one, two months, a convertible note gives you the option to, instead of getting your principal debt back, gives you the option to convert to the equity of that principal. So instead of getting paid back the debt that you lent them, like let's say you bought a million dollars of a bond, instead of getting your million dollars back plus any interest rate, you would choose to get paid back in MSTR stock. That's the conversion right that is embedded in this convertible note. Saylor actually stumbled upon some unique financial engineering where he realized these conversion rights are basically options on the stock. And because his stock became a proxy for Bitcoin, which is like it does nothing other than hold Bitcoin. He's essentially able to print these pseudo options on Bitcoin, right? If you view that MSTR is a proxy for Bitcoin. And so the way he priced these options in these convertible nodes was that he priced them a lot cheaper. than what a normal option on Bitcoin would be. So if you were to go on Deribit or Drive and you were to buy like a four year option on Bitcoin, it would cost a lot of money. And if you were to buy a convertible note from Saylor, it would be a much cheaper way of acquiring that call option. And so he used this to his advantage to raise money. So Wall Street actually loves buying cheap options. They went and bought all these convertible notes and gave him all these dollars so that he could go and buy Bitcoin and hold it for a very long time. And the reason why Wall Street wanted to buy these options or these convertible notes was because when you get a cheap option on an asset, you have a certain type of trade that you can do, which we can get in later on this podcast, but it's essentially the ability to farm the volatility of that asset. That's what options allow you to do. They allow you to trade volatility. And in a whole, Saylor's convertible note trade was in our opinion, a very genius way of manipulating assets. And we believe that being deep max is when we took a look at this for team of quantum engineers. And the first thing that occurred to us was, this should happen for Ethereum. And secondly, this should be done on chain. you know, as, as DeFi people that we are. So that was basically what spurred each strategy into existence was to rebuild this convertible note trade that Saylor has done. ah as a DeFi protocol where people could take both sides of the market. And I'll just leave that there for now. Well, I think that's genius. I you've effectively taken the MicroStrategy BTC Playbook and now it's on chain, but for ETH. And it sounds like you've done a lot of research on Saylor's approach. and some of the strengths and weaknesses of it. And maybe we can talk about like, are some things that MicroStrategy has done that you have adopted and what are some improvements to it that um ETH Strategy is making? Yeah. So it is very interesting. I think that this, this volatility trade that's able to be done with the convertible notes, you know, being a defy person, believe that defy should democratize all of finance and we see the value in that. such as Athena, for example, democratize the basis trade and allowed people to access the basis trade from just buying a token. We were very inspired to kind of democratize this volatility trade that Saylor was enabling in, in TradFi for Bitcoin. We wanted to democratize that for everyone in DeFi on ETH. Now, a few things to answer your question that Saylor has done and we've adopted is crucially the convertible arbitrage, which is the main engine of our protocol. A few things that TradFi in general, other DATs can do that we can also do, but it's a little bit harder or slower to do in DeFi is at the market issuances. So there's two ways to raise money. Obviously, one of them is the debt that I explained. And the other way is to actually sell equity to raise money. But it also makes sense to sell your equity when your equity is trading at a far premium. And that's what we see with these other debts, such as SBIR or Bitmine, when there was this irrational bullishness in the market and they were bidding these stock prices very high. what SBET and Bitmine would do is they would print shares and they would sell it into the market to raise money. And then use that dollars to go and buy ETH for them. And now it's, it's a lot harder to do that in a DeFi context because you own your liquidity pool and it is very hard to bootstrap and manage a liquidity pool. And if you sell into it, you kind of, you know, you're really taking it from your right pocket and putting into your left. And it's a bit different as to the way that liquidity works in TradFi where they have, you know, market makers and funds that actually want to provide that liquidity and do those ARBs and. and run trades on, on like, you know, the brokerage platforms themselves. So they are able to do that in size in defy. You need to scale differently to get to the point of being able to do at the market issuances. I believe you need to get a fundamental premium first. So you need to show the market that you can issue a lot of bonds. You can bring this uh leverage to your equity layer, which for us is strut. And then the market will price in. future bond issuances and future leverage and ETH growth. And that will act as an irrational premium in the market, which you can then capitalize on in the form of at the market issuances. So that's something that's different in DeFi would have to be done further down the track as opposed to the first thing like many DATs have done. Got it. You mentioned strat. Maybe we can go into what the, I guess the mechanics are at ETH strategy. um There are, maybe we can talk about strat, ESPN, and kind of maybe walk us through the process. If I were a depositor, what happens after I deposit my ETH? Yeah, definitely. So, Strat is our representation of the treasury layer, so the equity layer, if you will. It's basically our version of the MSTR stock or the SBET stock. And we have kind of, on the other side, it's very hard to sell kind of what we like to call permissionless bonds, like naked convertible notes to the market. They're usually non-fungible assets. And in DeFi, you have to tokenize and make everything very fungible. So, we tokenize the entire bond strategy behind this vault, which is called ESPN, which stands for ETH strategy perpetual note. And basically we automated the entire bonding to a point where people can bring us dollars and deposit it into ESPN. Then the ESPN vault will take those us dollars and bond it with each strategy to, to loan it to the protocol. So it can go in by ETH and in return get those long dated call options. And then we've partnered with an options platform called Derive, where, you know, at the smart contract layer, this vault can take those long dated four year call options and use them as collateral to sell short dated daily or sorry, weekly or monthly, uh, ETH call options against this as collateral banking yield every week and month. Um, and this gives a very high. Yield annualized. I think it's been running for about two months now. and it's been averaging about 19.5 % annualized returns of real yield that comes from options premiums without any leverage or looping in the system. And that's basically the automated version of that convertible arbitrage that I was speaking about before. So that's ESPN actually. So when you say option premium, does that mean so the user is buying these at a higher price because they believe that the value will accrue over time and they want access to that yield? that uh kind of a decent way of understanding that? I guess where's the premium coming from is what I'm trying to ask. definitely. So what's happening is the ESPN user, the USD depositor is buying long dated call options on, on basically ETH, um, four year call options on ETH from ETH strategy for cheap and then selling at the market rate, short dated call options on derive for the normal market rate of premiums and taking those premiums in. And the arbitrage is basically the pricing difference between how cheap you get your long dated option and how you can sell. Now that you have a cheap option, you can now sell at market rates on derive normal call options and get normal premiums. But because of that arbitrage, you're making a lot of money. So the options premiums come from normal weekly and monthly calls that get sold on derive on ETH. So if you go to derive right now, you'll see a weekly call option that expires next week. It has like a, options premium cost of like, you I don't know, it's like 10 % annualized or whatever it is off the top of my head. And then you can basically sell that option because you now have a long dated, like one, a four year long call option holding from strat. You can just sell this every week and you're basically hedged. So it's Delta neutral on USD terms and you're, you're just trading, you're arbitraging options premiums. And from a user experience perspective, when I buy a call option on each strategy and then it sells it on the derive, do I, am I in the same interface or does it happen automatically underneath the underneath the underneath everything? Yeah, so from a user perspective, all you do is they actually just buy ESPN. Well, you, mint ESPN tokens on our website. And as long as you're holding ESPN, ESPN itself compounds that, that yield in the token. So you can just mint ESPN, hold it over like, you know, a couple months or a year or whatever, and then go and kind of redeem or sell ESPN. And you basically get back your dollars plus the, the premiums that have accrued ever since you minted. Got it. Okay, so let's go to the beginning. you mentioned USD. So I imagine the protocol, um I deposit some stable, is that correct? Yeah, I think the front end makes any stable depositable, but at the contract level, we take USDS, which is the sky stablecoin. Okay, so deposits are stable and then I can mint ESPN. And then automatically ESPN um is sold at market rate on derive. And then that premium becomes part of the yield for having minted ESPN. uh So when you mint ESPN, you kind of have a vault token. So you can think of it like when you go to Morpho and you put your USD into like the MEV or the Gauntlet or the, you know, what's the other one? Stakehouse like kind of vault. You kind of get a receipt token. And then what Stakehouse and Gauntlet go and do is they take your USD and they go and do all these strategies and they make all this yield and they give you back the yield in the form of, um you know, your token being compounded. So ESPN is the exact same. Except behind the scenes, what it does is instead of having a fund kind of go and like do all these TVL deals and looping strategies on Pendul. ah What actually happens is it takes the USD lends it to our eStrategy protocol, gets this long dated call option on ETH, a four year call option, uses that as collateral to sell call options on ETH every week and month on derive and the options premiums that it gets from selling these calls every week and month. It basically uses to compound back into the ESPN token, which is how the ESPN holders feel the yield of selling these options. Okay, this is pretty ingenious what you guys have created. ah What led you to, like, I guess what was going on in your mind that you decided to, you know, maybe we need to build something like this. Yeah, I mean, it goes deeper. think personally, I've been hunting in DeFi for a very long time. And I've been involved with Ethereum for like, I think it's nine years now. I don't even know anymore. um yeah, ever since DeFi started, that was like, that was the moment for me. I've always been fascinated with finance and, and kind of the financial engineering. And I've always tried to build something that has to do with expanding credit in DeFi. Because I believed that credit, and I still do believe that credit is the biggest unlock to bring in more users. um So after many years of hunting in this space and trying to build primitives and whatnot, around 2024, looking at what Saylor did with his convertible note issuances, uh it of like amalgamated all my research and all these attempts at building something that can be like, I was trying to hunt into the non-liquidatable leverage space or the the insured leverage space or the kind of like permissionless credit creation space. And I believe that his convertible notes were pretty like ingeniously structured. um And I also separately have a friend for a very long time who is actually uh one of the core team members. So Nap Enjoyer, he's an options quant. and he's always tried to find a way to sell options in DeFi. His previous job was doing this investment banking and he's always known that if he could find a way to sell options. you can basically like eke out this amazing yield in this real yield. And I think like these two sides together kind of coalesce to being like, well, this convertible node strategy actually enables you to acquire a a leverage effect that, you can't or is very hard to be margin called on and also allows you to sell options to be able to create this this trade on volatility of it. And at its core, the financial engineering of ETH strategy basically kind of amassed to becoming this protocol that does a volatility swap. You have on one side, have strut holders that are very long-term bullish ETH like myself, and we want to kind of go leverage long. but not get liquidated on like a week, like I have many times on purpose or whatnot. um And then on the other side, you have a bunch of USD people that just want very high yields in DeFi. And ETH strategy takes uh the volatility from the people that are very long-term focused, because if you think that ETH is going to 10K, 100K over the next five, 10 years, you don't really care what it does in the middle. So you're able to swap your volatility, your implied like... implied volatility to the debt providers to give you this extra leverage so you can have more exposure. And the debt providers are happy to take this implied volatility because they can or this strategy can automate this yield option strategy for them using that. that's basically at its core is a volatility swap. And this is not uncommon in TradFi. I actually know that TradFi does a lot of financing by creating exotic options products and selling them uh to companies. So a quick tangent, like let's say an energy company is going insolvent and they need like, you know, $50 million to stay solvent by the end of the year. They go to an investment bank and an investment bank would kind of structure an exotic option that, you know, implies that they have a call option on future energy production above a certain amount. And that call option would cost, you know, $50 million and they would would buy it off of the company. the company doesn't care how it gets its financing. If it doesn't get its financing, it dies. The investment bank would structure this option and buy it off of the bank. And by buying it, know, the bank is sorry, the company is selling the call option on their future energy production to the investment bank. The investment bank gets this really nicely, you know, cheaply uh created call option on energy that they can go on the energy desks and do this like energy swap with it. And then the energy company can actually keep operating because they just sold a call option for $50 million. Yes, they cap some of their future energy production, et cetera, but that's the trade off they get for their financing. And the investment bank gets this ability to trade energy in the same way that like ETH strategy gets the ability to trade the volatility of ETH. And this exotic options is basically what investment banks do. So I think ETH strategy is just... really pushing the bounds of investment banking on chain as a decentralized protocol. That's pretty cool. right now it says the treasury holdings, there's 12,486 ETH. And that's actually in the treasury right now. That's not in the form of future call options. Yeah, that's the eighth that we hold and uh majority of that is staked as well. So it's earning some yield. Okay, so that's an additional layer of yield there. Okay, and so is it correct to say that if I were to describe ETH strategy in one sentence, it's to receive stables to buy ETH. And then the depositor of these stables gets some kind of yield and the protocol continues to accrue ETH because it's a very long bullish ETH and it has a very long time horizon and it wants to continue to accumulate ETH like forever. Is that like a dramatic way of saying that? that is, yeah, there's like a few key points that I always use as one-liners. I kind of say it's a giga long on ETH that cannot be liquidated. I also say it's a decentralized investment bank. I say uh it's a volatility swap protocol. eh I say that it's, yeah, these are like the one-liners that I use. yeah. Now, as a depositor into ETH strategy, um I'm expecting that the protocol, it has one job and that's to buy ETH. And there's been a lot, especially November, November, 2025, there's been a lot of, uh I think not criticism, kind of, I think some of the risks have been exposed around like curators of these vaults that there's been, I think what it's called like a strategy shift. They say that some of these curators say one thing, but then they behave in a different way that's not aligned to the depositor's understanding. um Because this is based on smart contracts, um is there a chance for a strategy shift? Or is it immutable that the protocol's only job is to buy ETH? So we, as builders, it's very hard to come out the gate with something in DeFi that's fully immutable and decentralized from the start because there's slight iterations and pivots and the market usually gives you feedback. And it takes some work to get to like a PMF, for example. um And so each strategy has a vision to move towards being a completely autonomous immutable protocol. But as it stands, uh there is still a lot of knobs that we have, ah multi-seq actions that we can do to change and iterate certain things. But um it cannot, as a team, don't have the ability to really change the strategy to the point of it can no longer be an ETH treasury accumulation protocol. It's still at its core those contracts are those contracts, but how we get there, for example, we can iterate ESPN, we can change the option strategy slightly, we can... um change what we do with the treasury is this and that but like at its core, it is still a what cannot be changed uh is basically, it's a massive ETH treasury that has an equity layer um that wants to accumulate more ETH through these financial engineering methods that we can kind of tweak a bit if needed. um And then ultimately, when we find a flywheel, which you know, that's the work that we've been putting in for the last couple months, when we find that like, key flywheel that kind of kicks off. We're happy to move those contracts towards being more and more and more kind of like locked down. And then the idea, the way that I like to design DeFi protocols is that everything is a market based action. So if it's a bullish environment, people are naturally economically rationally incentivized to do certain market actions on this protocol that will result in the protocol, you know, let's say increasing ETH treasury or whatnot. ah And then if it's in a bearish environment, people are economically rationally incentivized to do other market actions on this protocol, uh which like, you know, winds it down gracefully or, you know, reduces risk, like takes down the debt levels, et cetera. And that's where I like to hunt. So this kind of balanced protocol that is autonomous because it is only based on market based actions from economic, economically rational actors. and can kind of control itself through market fluctuations. And that's ideally where I like to get to with eStrategy. um I think the first step before that, like we're a bit far from that, but first step is to kind of get the flywheel going. you know, really get both sides of this. So both the strat side and the ESPN side kind of happy with like the way that they're playing the game. And then we can, we can kind of head towards that North Star that we And I think that's a reasonable approach, especially as a builder, you you want to find product market fit, whatever the growth flywheel looks like, and you have to iterate towards that. My sorry, just to touch on what you were saying before us, what we won't be able to do is kind of, yeah, like those vault curators, we can't just act as anything fun. So we won't be able to just take all of these dollars and these ETH and go in like, know, perpetrated and like, try and get like returns and then blow ourselves up and this and that. um So, and that's not something that we want to do anyway. We want to build towards a very transparent open strategy. that people like to bet on. if you're bullish on ETH or you're bullish on the volatility of ETH, you know this clear strategy is here to capitalize on it, as opposed to Vault curators where you're more betting on the fund itself. You think that this Vault curator has a good trading desk or has good access to TVL deals and can get very high yield and you kind of take that risk. But I think in the Vault space, and this is something I tweeted about recently, a lot of people kind of underestimated skew risk in that scenario. And one thing we found with our ESPN scaling at least was we are a bit too transparent actually in crypto because we lay out the risks very well. We tell people what the strategy is. We tell people how the money's made and this and that. And then suddenly, you know, they actually analyze the skew risk on it and they're like, well, this other person is giving me 30 % without any risk, but they don't actually know the skew risk on the other thing. that's, yeah, it's been a very weird ride. Yeah, I think the transparency is really refreshing because the I think that whatever's been happening, at least in the last month or so, November 2025, mean, it exposed a lot of kind of risks that people didn't know that these vault curators, for example, that some of them didn't stick to a specific mandate that they said that they would. And so hence the strategy shift, which sometimes is not aligned to the goals of the depositor or the initial understanding of the depositor. And I think people kind of have, they want to have some level of confidence that whatever the mandate is of like, you know, what's the job to be done by the vault, that it actually does that thing. And um then it's like, then the risks are kind of, they're known and uh then, know, grown adults can make their own decisions. But then if, uh you know, the vault does something, you know, contrary to what the depositor understands, then it's like, then you have issues. And so that's kind of what I was trying to get to is like, we want some level of like confidence in a mandate that, know, TradFi has this and it's supported by regulation, but in DeFi, we don't necessarily have that. And so we kind of rely on these smart contracts to kind of do what they're supposed to do and then the actors behind them to support that. um And that's all I was trying to say. And it's actually a really, really interesting kind of psychological kind of a... observance is that some of these curators are, they are, what are they motivated by? And what are some of these kind of incentives and motivations that could lead them to do that's contrary to the depositor's goals? And that's actually kind of an interesting coordination problem. that, yeah. Okay, well, okay, let's talk now about what are some, so your long giga bullish ETH, um which is great, I love the phrasing. m But if we're to like, you know, step back and objectively look, okay, if I'm long bullish, you know, ETH, you know, one way I can express that point of view. is to deposit into ETH strategy because it supports kind of what I believe. ah What are some, I guess, weaknesses in, you you make a couple of assumptions that, you know, ETH, for example, will be here a long time. And another assumption might be that, you know, over the long term, ETH will probably just continue to go up in price, though there's going to be fluctuations in between. What are some other assumptions that ETH strategy is making that um And what are its possible weaknesses, I guess? Yeah, no, definitely the core assumption. There's two assumptions that if you don't believe these things, then in all honesty, this is not a protocol for you. So the first one is you believe that it is going to not only be around, but it is going to trend up over time. like, you know, obviously it can be down some years up some years, but like over, when you zoom out on the chart, you believe it's up and to the right, like over five, 10 years, you think that it is going to be at a higher price than that. So. you're not fundamentally bearish uh on ETH. That needs to be true. If you think that, you know, ETH is going to trade at a hundred dollars in 10 years time, then yeah, ETH strategy is definitely not a protocol for you. ah The other thing that needs to be true um is you need to believe that ETH will remain somewhat volatile. And when I say somewhat volatile, just basically like it needs to not become a stable coin. Like so... if it trends up into the right and it goes all the way to $100,000, but it goes there by doing 0.05 % daily increases every single day for the next 15 years, that's actually not ideal for the strategy. Because the way that the strategy kind of gives the debtors yield is through trading. So if there's low volatility, we're a bit weaker in our strategy. So the other thing you need to believe to be true is that ETH kind of remains as retardedly volatile as it is. And it can reduce dramatically. Like I'm not saying it has to be actually as brutal as it is these days. I don't even want it to be, but um it just shouldn't become a stablecoin as per se. Those are the two things, the core assumptions. um Those are black and white. Then there's obviously on top of this, there's uh the blanket smart contract risk. Whilst we are experienced DeFi builders and we have actually have multiple audits on our smart contracts and we'll continue to get further audits as well as uh implement other security measures and just to the best of our ability to do this stuff, there's always a level of smart contract risk that you'll have to accept because this is endogenously on-chain. There is nothing that is off-chain with this. So that's the risk you take. And then one step higher than that, which is the main risk, to be completely transparent is execution risk. So obviously there is a world where ETH is still successful, but ETH strategy is not, unfortunately. And that happens if, you know, over the next however many months or years, the protocol simply fails to gain adoption. ah If we cannot sell any bonds at all, if users are not interested in this type of trade, if, you know, there's all these other execution risks that come with any other protocol per se. I would say that actually competition risk is a lot lower than execution risk because it takes a lot of effort to get to a lot of effort and a lot of like finance experience to get to where we have so far in this period of time. And to be able to do it on chain, it is not easy to do something like this. So, but I think the execution risk is real in terms of. of getting adoption, getting that flywheel going, getting both sides of this trade kind of happy and feeding into each other. That's really the work. That's really the big bed. That's the asymmetric side of all this. Because you can go and buy that on and you could probably reduce that execution risk, but then you increase all the other risks ah like... You no longer have a permissionless, censorship-resistant access to that trade. You probably need to do some serious KYC through your brokerage account to get into that stuff. Maybe some people can't even access it. And you can't even buy the convertible notes that these DATs will issue. Well, only Saylor has ever issued these converts. um I think some of the smaller ones might be starting, but the other bigger ETH ones like Bitmine and SBET, they haven't even issued a convert. And if they do, they'll likely go to a select handful of Wall Street funds. So you don't actually have the democratization of that either. Yeah, that's probably my take on like the risks and the transparency. Yeah, I think I agree with you on the volatility. continue to see, you know, ETH as a very volatile asset, is very positive for ETH strategy. I am curious, though, about some of these Ethereum ETH DATs. And the more they accumulate ETH, I wonder if that's going to continue to maybe reduce volatility. Or I guess, put another way, what are some conditions for which ETH becomes less volatile? Like, what would cause that, I think? you think. I just think normal markets, the bigger the market becomes, um the more liquid it becomes and the less volatile it becomes. eh Yes, think distribution has a big part to do with it too. Not only that, but institutions and even probably nation states and governments will probably slowly start to accumulate things like ETH and Bitcoin. And as they become bigger and bigger in market cap, they just do become less volatile. It's just uh the function of liquidity. Although I... I also kind of share this other thought that like the markets in general have become so connected to human emotion and the speed of news and emotion that like, you you even see gold, is a literal almost $30 trillion market and it's pulling like some decent volatility, which is insane, right? Like it's a huge market, but I think that yeah, that's, that's also another thing I share. Like I do believe volatility will dampen naturally as asset becomes bigger and bigger and bigger. who knows maybe like by the time ETH is a $30 trillion asset, know, inshallah it is, I believe it will be but like, by the time it gets there, maybe it's like significantly more volatile than what you would expect a $30 trillion asset to be. Yeah, so Yeah, what's your view on kind of shifting topics a little bit on maybe a little bit related to the volatility piece? What's your view on L2s and the criticism that L2s kind of are mercenary or they extract value from Ethereum and also ETH, which and if that's true, that could actually help the thesis that volatility is a good thing for each strategy. What's your thoughts on that kind of general kind of, I guess, discussion that's happening right now? Yeah, I generally like the L2 uh roadmap or like per se model. I do like it as a, I have like my own criticisms of it and I do think that, you know, it can be abused a bit and used against, you know, the greater good of Ethereum, if you will. But I generally like the idea of kind of becoming more market based than uh not. Right. So I like that Ethereum is basically like, yeah, you can be a chain on top of us or you can be a daft. It doesn't matter. And if you are a chain, you get all these extra benefits and we're fine to like provide that to you and all this. And L2s really do, they do two things that I think are extremely bullish for Ethereum. Firstly, they immediately become competitors to all the L1s. So like your reasoning to start an actual direct like each competitor on the same level. is significantly lower. Like you have to go through all this cost, this network bootstrapping, like you just don't have any economic security or distribution or, or decentralization of nodes and all of this stuff. And it costs a lot of money to incentivize proper nodes to run a network and this and that. So yeah, L2 is just bootstrap like they issue it like with a gas fee, they can get access to the best economic security there is. And they can, they can be permissioned or they can be permissionless. They can be private like Aztec. I think it opens up the kind of innovation window, which I'm always for. And yeah, I generally like the L2 roadmap. I just think that a little bit of interoperability and UX needs to be improved, but it will happen eventually. um So generally I'm quite bullish on L2s as a whole. Like I said, I have some criticisms, um but yes, I think it's generally better than worse. Yeah. I heard this once, there's a phrase called the orphaned mother and philosophy has often been called the orphaned mother because what it does is it, uh a lot of these disciplines like physics and biology and other disciplines that are now kind of like very discrete disciplines were originally called philosophy and then philosophy gave birth to them and then they left her. And so philosophy has been called the orphan mother. And I've heard that analogy for uh Ethereum is that it gives birth to all of these L2s, but then the L2s kind of leave her. And then they kind of focus on their own ecosystems and they give very little value back. Do you think that analogy holds any truth? ah It's an interesting one. Maybe. Yeah, I think it's too early to say. I think it is too early to say like, realistically, L2s have only been a proper thing for, I would say, two years. um I think before that, were so like, I remember talking to people in the Ethereum ecosystem and really we had like, arbitrary optimism, like those two stacks. ZKSync was trying to do something, it wasn't there yet. um And yeah, people were like, no, like, I can't like build on it's like, it's not good enough. But now like the OP stack is like amazing, right? Like, like, and you know, the other L2 stacks are even like, awesome, like they're getting better and better and better. So I think like, um it's come a long way, and it will still go a long way. think ZK will go even further, like the technology, it's, it's gonna really open up some stuff that we never thought would be possible, architecturally speaking. And I'm not too much of an infrastructure guy. I just like, I just like have been involved with like, Ethereum for so long that I kind of know a bit about a bit, but not a lot about a lot of much more of a finance type of guy and a money guy. um But I do think that, you know, one, one, I'll quote one of my teammates, says like, Ethereum is like America, and the L twos are like all the vassal states. And like, we can enforce like, you know, like things through our economic security and like our military and like our rights and this and that. because they're so reliant on us. um I actually don't mind that kind of analogy because he also says like, and if you start an alt L1, you know, it's like socialist because you have to like subsidize all the nodes and all of this. like, you know, so like, I don't know, I think it's more free market kind of model. And I think that free markets usually win in the, or at least I would hope that free markets win. And I prefer to contribute to a free market type of. And I think the L2 model is more towards that than not. Although on this note, I will say, I've shared this many times to people on publicly, like I've written thesis on this. I think the most important thing for ETH, in particular, token, it is not so much its infrastructural architecture. It is very much so the way that it gets positioned and treated as actual store of value and collateral. I very much still buy into the ethos money thesis and I think that the most valuable uh kind of ah like, what's the word? Like the value add of this entire crypto space, why it should even exist is so that we can have a sovereign form of money and finance. And Bitcoin is not that because Ethereum, like money on its own is actually useless. Money needs to have finance to empower it to actually be useful. um And Ethereum has the endogenous financial system. And I think Vitalik has only just come around to this with his latest blog post of like, well, maybe like boring DeFi is the Google search of Ethereum. But in reality, it is. You need to have an endogenous financial system that's also permissionless and censorship resistant to empower this sovereign form of money that can be collateral. that can be credit that can be productive in many, many ways that can get used to be sliced and diced in some financial engineering like a strategy. Like this is, um this is like the real reason why crypto would even be valuable is because you can now own an asset and you can do things with it crucially without needing any permission or middleman risk or dependence or anything. And I think that DeFi and the financial applications around ETH are much more important than the L2s and what they're just methods of scaling this financial endogenous system. Let's shift back to ETH strategy um and talk about the ETH that ETH strategy is accumulating. You mentioned that one strategy is to stake that ETH to earn additional yield. Are there other strategies that ETH strategy is doing with that ETH? um At this stage, it's not doing any of these things, but it's what we have in mind. So I have a vision for strat the token to be much more interesting than just like an equity layer token. I see a future where we can build kind of like vaults or like permissionless kind of strategies so that you can stake your strat on this vault. And it's almost like you're delegating If you have like 10 % of strat supply, let's say it's a lot, but like for example purposes and someone comes around on chain or someone builds a vault that is like, Hey, I can make like 20 % prime them on this ETH. If I do this strategy and I built this vault that does it. And you can like verify this stuff. I see a future where like strat can be staked on that almost like restaked, which delegates the ETH that's backing that strat to be like put into that strategy. And that vault kind of runs that. if, if that vault has any problems that that strat can get slashed. It's like, it's like a, it's like a governance of where this ETH goes to do what. And it's interesting because if you actually own a lot of strat, because you know, it's a good token to hold the in the future, it's doing this flywheel very well. It's always increasing its EPS, ETH per strat. Like it's better than an LST or whatnot. You can now also like, let's say you're a VC and you invested in this new protocol. you can kind of just like use your strength power of like all this heat that's been used to try to remove all this heat into that protocol. But like you actually have like much more governance rights over that heat than what you would then use simply. exposure through the treasury layer. That's a very hard kind of thing to implement, but that is a vision I have in terms of like being an actual decentralized investment bank because you actually have that like power to move those assets around and you take on that risk. So like existing strat holders, they don't care if you go and do something with that ETH that like, you know, it's not ideal because your strat will get slashed and the remaining people will be better off. um I do think obviously there's nuances to this, but yeah, that's generally like the vision. And we've actually taken the first step of this yesterday. So um what we've done uh as a very cute first thing is we just did a very simple strat staking contract where instead of the normal treasury yield that gets like compounded on the treasury. All the extra yield that our treasury makes from staking goes to stake strat only. So this actually gives an amplified staking yield because in a world where not all strat is staked, you will be getting amplified ETH staking rewards. And because you have like ETH staking rewards from a $50 million treasury going to say $20 million of stake strat. And that's like, That's like over 2x amplified. So instead of getting 3 % per annum, you're getting 6 % per annum in ETH. And the reason why all strat wouldn't be staked here, getting that yield is because, you know, we plan on rolling out other kind of strategies that you can do what I said, like delegate your ETH into, which have maybe more risk, maybe some slashing risk, et cetera. So even the people that go into the boring ass, like, you know, just ETH staking goes here, they'll get amplified ETH staking yield. So that's the idea that like what... can happen and what we would like to kind of work towards and are working towards with this for the strat side too. got it. So you see a world where each strategy maybe will work with partners like LRTs or LSTs or other kind of strategies like that. Well, doesn't actually even like the beauty of this type of model is it's so market based that like no strategy itself doesn't need a partner with anyone. It's just the strat holders, the strat holders can dictate what they do. It's all market based. So if you, if you want to have influence over the East treasury, you need strat. And then once you have your strat, you can move that East and dictate what is done. If you, if you want to put it into an LST, you can do that. If you want to put it into your new DeFi protocol, you can do that. If you want to go and sell call options against it and take that risk. because it's extremely high yield, you can do that. And that's like, that is a decentralized investment bank idea that we like to push towards at scale. But yeah, definitely the first step for us is getting this flywheel of this debt, ah coiling the spring of leverage behind strats so that people actually really feel the ETH per strats kind of increasing and realize it's a good token to kind of put a portion of your ETH into. And then that's like the ultimate vision is to have this strat stuff happen. And ultimately we just like doing this because people don't do much with Ethon chain. And I think that's a big reason why it hasn't done so well. Like going back philosophically, I think like the most important thing is not scaling or like this and that. Like don't get me wrong, it has to happen. But what's more important is is innovating in what like has direct impact to Eth's value, which is again, endogenous finance. So. If you find ways that can, you know, slice and dice ETH to become a different sort of productivity or, you have awesome utility that it doesn't have, you're significantly contributing to the value of ETH as compared to being another L2. Like ETH is supposed to be a productive asset. What is the productive thing that you can do with it right now? It's stake it or lend it. And both of these things give you three to 5%. Why is no one come around to do a little bit like slightly riskier things? Obviously you've got lot of curators and stuff, but I'm talking about like proper on-chain finance, not technically off-chain funds that like take care you and do things. um I think like actual on-chain financial products is what we need to innovate on. So that's also why we're doing all of this. Yeah. Okay. So looking forward, let's say 12 to 24 months, if everything goes right, the way you expect it to and the way you and the team have planned, like what will that world look like for each strategy? Uh, the metrics that I would love to see is, uh, a big treasury. Let's say like, I don't know, 30,000, 40,000, 50,000, a hundred thousand nice. Um, and I would like to see, uh, EPS growth on strat obviously. like the, the ETH that's backing each strat has increased significantly, maybe at a 20 % per annum rate instead of like what you would have got in holding an LST, you know, so strat is becomes this very attractive kind of ETH exposure asset to hold. And um our convertible debt flywheel kicking off. And we have a whole bunch of USD people owning very high real yields that they really like. And there's more demand on the USD yield than there is on on the ETH side of like, you know, buying strat. That would be a very good successful place to be on um for us. And at that point, we would have had a few very interesting vaults and strategies for people to use their strat to get even more like kind of eh ETH denominated returns. So that's, and we would have changed a lot of these to be much more market-based actions because we would have already offloaded some of this stuff to be completely market-based. You don't need to ask permission or need the team to do anything. You just do this thing and you get that reward. That would be awesome to be out in one to two years time. And that would be a very heavily revenue generating protocol too for all the users. Okay, well, Clouted, thank you so much for taking the time to speak with us. That was Clouted from ETH Strategy. You can learn more at ethstrat.xyz and follow at CloudedMind and at eth underscore strategy on X. Thank you so much. Thank you.