adcv_ from Steakhouse Financial on Financial Reporting for DAOs

[00:00:00] Umar: Welcome to The Accountant Quits, brought to you by the Web3 CFO Club, a community by Request Finance. With a curated community of Web3 CFOs from companies like Aave, The Sandbox, Binance, ConsenSys, Ledger, and many more, joining this club will allow you to network and learn best practices on Web3 financial operations.

[00:00:24] Umar: On The Accountant Quits podcast, we discuss how blockchain will impact the accounting professions and how accountants should prepare themselves for the future of work. My name is Umar, your host, and even if some might refer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge that you need that will be relevant for the accounting industry as a whole.

[00:00:47] Umar: Welcome to Episode 70. There is no current standard framework on how transactions within DAOs should be structured and accounted for. Transactions on the blockchain, or so called block explorers, are cash based and do not comply with accrual based accounting. 

[00:01:04] Umar: Today, many companies having on chain transactions use crypto sub-ledgers.

[00:01:09] Umar: But the essence of DAOs is to reduce the financial asymmetry of information and instead offer real time and transparent accounting records. One company making a significant contribution to advancing the state of on chain accounting is Steakhouse Financial, a web3 consulting services firm which has developed a methodology to offer real time and independently verifiable financial statements for DAOs.

[00:01:37] Umar: The team is composed of seasoned crypto native collaborators with diverse backgrounds such as finance advisory, strategy, investment banking, analytics, accounting, legal research, and coding. 

[00:01:50] Umar: Steakhouse contributors collaborate with industry renowned names, such as MakerDAO, ENS, Lido, Morpho, Badger, and more.

[00:02:02] Umar: To help us understand this novel way of accounting and reporting of on chain transactions for DAOs, today I have the pleasure of welcoming adcv_, the Co-Founder at Steakhouse Financial.

[00:02:14] Umar: In this episode, you will learn DAO accounting in real time, using Dune Analytics to build dashboards for DAOs, implementation of AI into crypto accounting, measuring performance for DAO treasuries, should DAOs use crypto sub-ledgers and much more! 

[00:02:34] Umar: As a heads up to the listeners, there are no employees at Steakhouse Financial. Rather, the contributors are referred to as chefs. And you might hear me referring to adcv_ as chef. 

[00:02:46] Umar: adcv_, welcome, and thanks for making the time to be here.

[00:02:50] adcv_: No worries. Thanks for having me. So my name is adcv_ the dog you heard in the background his name is Pistache.

[00:02:55] adcv_: So he might have opinions from time to time

[00:02:59] Umar: adcv_ could you share a little bit about your personal background how you first became interested with blockchain and the story that then led you to co-founding Steakhouse Financial. 

[00:03:10] adcv_: Yeah! So personally, I came in reasonably late. I dove into crypto around 2019, 2020. And I had bought part and parcel the story that sort of Bitcoin was going to zero in 2017, 2018, like the same sort of tired establishment narrative.

[00:03:25] adcv_: And then in 2019, I saw that it didn't. So I started to reevaluate my priors. And then in 2020, I think the moments of I remember distinctly the day that, for example the futures price of oil went negative, the airlines all got beached. And Angela Merkel announced that she was going to bail out the equity holders of Lufthansa, which was, I think, a moment where I realized that everything is a lie.

[00:03:50] adcv_: And you can do what you want. And crypto is a way to be able to do that in between consenting individuals without the need for a trusted intermediary between them. That's when I really understood the power of cryptographic security for executing any sort of transaction. And then I think Maker was probably the protocol that opened my eyes to the possibilities of doing this or programmatically. It started off with a forum post and, I found a core unit.

[00:04:17] adcv_: I was looking for contributors, the strategic finance core unit. And I started contributing part time with who would later become my co-founders, Mark and Seth. And, I dove head first into the balance sheet of a stable coin. And it's funny because the, yeah I worked briefly as an investment banker in consumer retail, covering sort of consumer retail companies.

[00:04:38] adcv_: And this is like meats and potatoes companies cost of goods, like tangible. And I remember thinking, like, all of my colleagues who are in the financial institutions group. It was a relief not to be in the financial institutions group doing M&A for banks or doing, rolling capital raises for banks and so forth.

[00:04:53] adcv_: But I realized now I missed an opportunity there because through stable coins, you get to look at finance from first principles and stable coins are really a sort of type of narrow bank. And I think it's a very useful way to learn about how banking works also. And it opened my eyes to, monetary history to dust off all of the economics textbooks that I had relegated to the bookshelf. Discover new facets of banking history that I had neglected or ignored such as the period of free banking in Scottish banking history, for example, where, banks issued private script without the need for a central bank and everything was fine.

[00:05:31] adcv_: So yeah, it opened up a world of possibilities and it's been, super interesting and I've been super passionate about it ever since. 

[00:05:37] Umar: And Steakhouse Financial, the company. It's been how long you guys started the project? 

[00:05:43] adcv_: About two years. So as a result of the type of work that we were doing as the strategic finance core unit, we realized that, we had found a strange niche where ourselves as co-founders, as core unit members, we were relatively technically literate.

[00:05:59] adcv_: So without being developers or protocol engineers ourselves, we were able to understand how the smart contracts of the Maker protocol functioned quite intimately. But at the same time, we also brought in sort of TradFi background. And more importantly, I think the open mindedness to look at, TradFi axioms and to think about things.

[00:06:19] adcv_: Again, from scratch, and I think this fits a really nice intersection because a lot of development teams in crypto are very technically focused and they often neglect very basic analysis from an economic perspective of the impact of their protocols. A salient example of this is the way that DAOs treat their native token, for example.

[00:06:39] adcv_: Which it takes a cursory examination to look at it and realize that economically, although it is not equity economically, it shares many characteristics of equity and should be treated as such, where you had teams instead of, firing millions of dollars into the void of native tokens with no rhyme or reason.

[00:07:00] adcv_: And I think being able to help teams answer specific questions, such as how many of tokens should we blitz into the, into the nothingness! I think is a very unique niche and it's one that's clearly found an interested market of protocols that are happy to work with us.

[00:07:17] Umar: Perfect. So I want to start with one of them, MakerDAO. So the ethos of blockchain is to offer open and transparent access to financials of a project. But today, not all projects having on chain transactions comply with that narrative. However, when I went through what Stakehouse Financial does, and in your own words, the reports you prepare for DAOs will not reconcile to US GAAP or IFRS, nor should they aim to. Hence you take a principles based approach to your choice of accounting standard. So you and the other chefs are contributors, like you mentioned at the Strategic Finance Core Unit at MakerDAO.

[00:07:54] Umar: And this is where I want to start the conversation for today. So for the listeners first, I'd recommend checking the financial report of MakerDAO for 2023 that you prepared, which is available on your guys' website. So I want to ask you if you could walk the listeners through the methodology that you use, how you use Dune Analytics to prepare the financials and the challenges you encountered doing that.

[00:08:19] adcv_: So we started off making aggregate analytical dashboards for MakerDAO financials in a global sense. And the reason this was easy was because Dune Analytics is critical to our work and the fundamental value that they bring is that they decode these smart contracts and they make it very easy to query and to build more complex analytics on top. So you have a set of smart contracts that run the Maker protocol. And Dune Analytics will essentially have decoded every single transaction in the history and made it available as an SQL table. And what we started off doing was basically aggregated views. So we would like sum over a period and more or less guesstimate the interest revenues and the profits and so forth.

[00:09:06] adcv_: And over time we went deeper and deeper, and we realized that what we actually needed was a fully auditable set of financials that could stay updated in real time, out of which we could then produce our reports in a more scalable way. And what we did was basically take every smart function contract code and assign it to a chart of accounts.

[00:09:28] adcv_: And doing this over time, you end up essentially with a general ledger that tracks, every movement into its corresponding account. And this is basic accounting, right? So to my point earlier about revisiting things from first principles, it's easier than with a company because you don't need to do any sort of complex recognition when you have a smart contract that's deterministic and a function only does one thing.

[00:09:51] adcv_: Every transaction that emerges out of that function can be easily classified into its corresponding place. And so that's how the financial report was born. In the financial report and the PDF glossy version, we tried to replicate the glossy investor relations style presentations that traditional companies would use just out of a sense of people's familiarity with the format, but the real product, the real IP of our work is basically a Dune Analytics project that anyone can build on top if they want to.

[00:10:17] adcv_: And for example, Blockworks research. They have a subscription based research product that offers access to protocol financials. And the MakerDAO section of their analytics is based on our work and they've derived their own insights on top of that.

[00:10:31] adcv_: So that's how , we built it up. So if you take, for example to get specific with, you would identify a contract that does something like open a vault or open a CDP position or mint DAI. If you mint DAI, you can immediately recognize the CDP position in the assets and the liability on the other side.

[00:10:48] adcv_: And those are the two accounts that get tagged. And you essentially track them as deltas. So that when you sum them up, you end up with a picture that's a period-wise P&L and a rolling sum in time as a balance sheet. And what's missing there is the reconciliation to the cash flows. And this is necessary when you track native token expenses.

[00:11:15] adcv_: So coming back to my earlier point, we count a native token expense as an actual realized expense at its historical price. But obviously there's no sort of contra accounts. Within the ledger, we have a contra account that holds the negative sum on the asset side so that everything stays in balance.

[00:11:33] adcv_: And then we have a third statement, which basically reconciles down to cash. And this is like accounting, the way, whatever someone in Mesopotamia would have done for sea shells or grain, right? Like it's simple, it's cash based. It's impossible to do any sort of accrual, and this is why we mentioned that we don't try to reconcile to IFRS or GAAP, like the rules don't necessarily match, there's no like paper contracts that would allow you to recognize revenue.

[00:12:00] adcv_: The CDP position is opened on call and closed at the user's discretion whenever they want. You can't really keep track of this sort of thing. And then with the interest accrual also there's a sort of off chain gap because the interest in Maker, for example, accrues by the block, but is only recognized whenever there's a smart contract function that updates the balance of the vault.

[00:12:23] adcv_: And so that's when we would recognize the change, but we wouldn't necessarily worry too much about keeping track of the interim periods. So we only recognize anything that gets written to the blockchain essentially. 

[00:12:35] Umar: Yeah so, the accrued interest you cannot, account for it, right unless it's realized.

[00:12:41] adcv_: Yeah, correct. In practice, because Maker is such a heavily used protocol, there are smart contract functions that update the balances practically every minute. So in reality, there is no major discrepancy. I remember having a discussion early on with members of the community who wanted us to not recognize interest revenue until the user had closed out their vault.

[00:13:03] adcv_: On the basis of making a proxy mapping to some sort of revenue recognition criteria, where the interest is not really claimed by Maker, unless the vault closes. I think that to be fair, they have something of a point and, one way in which this could go wrong is, for example, if a liquidation fails, so.

[00:13:23] adcv_: When Maker locks collateral into its system, our accounting system assumes the value that gets locked by Maker through interest accrual will eventually land in Maker because we assume that the liquidations are efficient. There have been moments in Maker's history when the liquidations have not been efficient, right?

[00:13:40] adcv_: In 2020, in March, was it Black Friday or like Black Day of the Week, there was a bug in the liquidations that basically rendered the Maker Protocol insolvent, because people were able to buy user collateral at a heavy discount or for free. And this essentially nuked the solvency of the protocol and had to mint new MKR to recapitalize.

[00:14:04] adcv_: You can read about these, historic DeFi OG events through some of the earlier Coindesk or Cointelegraph articles from the time, but since then we assume that the protocol basically functions as advertised. And so we don't really worry a lot about whether a user has closed their position or not. And we think that provides again, like the principle is does this provide a useful picture of what the state of the protocol economics to a user or not?

[00:14:30] Umar: And the methodology that you developed, is this also commercialized as a product? 

[00:14:36] adcv_: We thought about it a lot. We realized that it's very difficult to like, what can we do? Sell the Maker reports, right? At the end of the day, the contributions that we make to the DAO, we don't really own the IP, like this is work that we do for the community.

[00:14:51] adcv_: So the Maker tables that we published on Dune, they are a sort of public good. And the way that we capture value out of the equation is by charging for the time that it takes us to create it and then updating and maintaining it and keeping it current over time and then you know eventually producing glossy reports every now and again. We have monthly protocol financials, for example that people refer to quite often. 

[00:15:13] adcv_: The other challenge is that it's super unscalable as an activity. So, every smart contract based protocol is different, every developer writes it in a different way. Every time you start on a new protocol, you have to start from scratch. We face this difficulty with Lido, for example. You can't just copy paste the SQL into Lido and hope that it works.

[00:15:30] adcv_: You have to go in and learn a new protocol from the ground up and figure out how it works and then, do the work. A lot of the work was literally pen and paper. What would happen in a Lido if the user mints ETH and then what account would this go in and so forth. And then translating that into the Dune SQL queries, basically into spells, actually.

[00:15:49] Umar: Yeah, I agree. That's problematic. Now, you mentioned Dune Analytics a little bit earlier. I want the listeners to have a more thorough understanding of it. So dune Analytics, it's a blockchain analytics platform that allow users to query, analyze, and visualize data from many blockchains on their website.

[00:16:10] Umar: Right now it's written 60 plus blockchain networks. So EVM chains, but also non EVM chains like Solana, Polkadot, Tron, Bitcoin. Now the chefs at Steakhouse have developed many kinds of dashboards as you mentioned earlier. Those provide an on chain financial overview of the different projects you work on.

[00:16:29] Umar: Now, for the listeners not familiar with the power of Dune Analytics, could you explain how it can be used to create financial dashboards for DAOs, including metrics like treasury balances, token distribution, on chain revenue streams. Maybe give some examples of the dashboards you've created so far. 

[00:16:48] adcv_: Yeah, definitely. So I think one, we have many dashboards for Maker. For example, if you go to our Dune web page on Dune.com/steakhouse, you'll see an overview of many of the different types of dashboards that we produce. There's also thousands of queries that we have in the archives because we'll use Dune Analytics just to answer simple questions.

[00:17:07] adcv_: And, what has been the whatever revenue over a period for such and such protocol, and we'll just whip up a quick query. Recently, we published one on the HHI index of Ethereum validation as part of a question within the context of LidoDAO that we asked ourselves, what has been the impact of Lido on the decentralization of Ethereum validation?

[00:17:29] adcv_: And the question was, is really: what is the impact on the market concentration of Ethereum validation of having, 40 node operators within Lido gain 30 or so percent share. 

[00:17:40] adcv_: And so, I had to relearn how to calculate the HHI index with the sum of the squares, and then we had to figure out a way to identify all of the different entities in Ethereum and validation for this query in particular, we relied on the work of others. So @hildobby_, for example, he has a very famous dashboard about market share of ETH staking and we relied on one of his queries where he went through the work of tagging and identifying all the different entities and showing their market shares over time.

[00:18:09] adcv_: And then the contribution that we made to that was to calculate the impact of Lido by correctly allocating the number of independent node operators within Lido rather than treating it as one entity, and then calculating an HHI index on top. 

[00:18:22] adcv_: So for someone who was looking to start, I would say, ask yourself a simple question that you, whatever, what has been the revenue of ENS, what have been the swap fees of a particular unit swap pool, that's quite a good one.

[00:18:35] adcv_: Then figure it out. Dune has a lot of helpful docs that can help you navigate how to understand a contract. The quickest way to get fluency is to understand how smart contracts work. And to know how to read them and to understand what the functions do. So, we went deep in the case of Uniswap, anytime that we had to value like, a Uniswap V3 pool. Y ou have to get lost in the weeds of, you know, UniswapV3 math, with all the ticks and all of this insanity that they do to make it more gas efficient. They have like their own number system, Q96. And you have to go and understand how that works. And a lot of the time you'll see that you're actually spending a lot of time just reading docs and then making a simple query more and more complex over time as you gain fluency and how the protocol works.

[00:19:23] Umar: So what are the prerequisite skills to let's say start using Dune Analytics, like understanding SQL is one of them. 

[00:19:30] adcv_: I think SQL is the fundamental one. Dune Analytics is basically a pure SQL product. And I had learned SQL once at university, like 15 years ago.

[00:19:39] adcv_: And so I had to relearn it and it's fine. Like it's a slightly more complicated version of Excel for people who are used to doing things in Excel. And also, if you think of, if you want to stay in the Excel mentality, it helps to think of things in terms of relational tables, those sort of flat tables.

[00:19:59] adcv_: Because those are the outputs that Dune Analytics produces. Like you're not going to have the flexibility of a spreadsheet where you can customize what a table looks like. Dune Analytics for what it's worth, doesn't even have pivot tables, which is like a pet peeve of mine for two years, I've been asking them for pivot tables, they're amazing, but they don't have pivot tables.

[00:20:14] adcv_: It's like the last thing that's missing. So, yeah, you don't even have pivot tables. So now you have to think of how would you manipulate a flat table over and over again until you get to the inside that you want? And yeah, SQL is the most fundamental, like building block for that. Then the other part is being passionate about smart contract based protocols and figuring out how they work, like really work.

[00:20:36] adcv_: In this regard, I think starting at Maker was a huge benefit because the Maker smart contracts are super well written. They're really easy to read. Actually, they have their own like vocabulary called Daiwanese. I don't know for the life of me why, but every variable name and function name has to have four letters.

[00:20:54] adcv_: So you have function names like flip, flap, flop, wag, poke, kiss, blow, like a million different things. And then the smart contracts are like cryptic also with like jug, pot, fat, burn. Once you get, this is very specific to Maker. I think other protocols are a bit more clear, but when you get past that vocabulary and you learn Daiwanese.

[00:21:16] adcv_: They're just really well written. There's no proxies, there's no like proxy ABI that you have to figure out where it's pointing out and decode that instead of the, whatever they're flats. They're simple. You read through the function and it's reasonably easy to understand what's happening.

[00:21:33] adcv_: It's well commented. It's very well documented. It's complex, but you can get your head around it eventually. I would say, yeah, pick a protocol that you're interested in, again, Uniswap is like a really good place to start because it does one thing, swap tokens. You have two tokens and it swaps one for the other.

[00:21:49] adcv_: And so that's a really good place for someone who has never used Dune Analytics to start. Maybe in Uniswap v2 to not go insane with the v3 maths. 

[00:21:57] Umar: Perfect. Thanks for sharing that. Now there's a new feature that Dune released called Owner Labels and you guys at Steakhouse Financial contributed to develop this feature alongside other projects like Polygon and Blockworks.

[00:22:11] Umar: I'll ask you to explain what is this new feature and how it improves financial reporting of on chain transactions. 

[00:22:18] adcv_: Sure. So this is a feature that we've collaborated with Dune and with the others, with Blockworks Research and so forth. This was work that was led by our Head of Analytics.

[00:22:27] adcv_: So we have a specific Analytics team within Steakhouse. Led by @SJuanati , also known as Wintermute, and Shogun (@jamescliffyz), who is a kangaroo, based in Australia. And they both worked with the Dune team to help them build out this feature. The main thrust of this feature is basically providing labels to addresses and keeping that database updated over time.

[00:22:47] adcv_: You'll notice a similar feature when you go on Etherscan and you look at a, an address and it's labeled like whatever, Binance 10. That's because somebody has identified that this is a smart contract that accepts deposits for Binance and they put the label on so that you understand what you're looking at when you follow a transaction through the hashes.

[00:23:04] adcv_: And Dune has basically created a public way, a public repository of address labels. So the more that people contribute to it, the more useful it gets for everyone. This is something that everybody does under their breath. We had a Google sheet with like addresses and labels of things that we suspected were the IDs of the addresses or like the funds or what have you and Dune just brings that to the forefront for people to query and use. @hildobby_ for example, like the earlier dashboard that I was mentioning about ETH staking is a type of owner address labeling. @hildobby_ goes through all of the staking addresses and the staking smart contracts and does the work of trying to identify who they are, is this Coinbase, is this Figment, is this Lido?

[00:23:45] Umar: So what does that mean? It's identifying the wallet address. Then when you're using Dune Analytics, you can know right away, who's the owner of that wallet, right? You have to use Dune for that. 

[00:23:56] adcv_: Yeah, at the end of the day, it's still a speculation, but you, for some addresses, you can know with a reasonable degree of certainty what they are.

[00:24:03] Umar: So using Dune is one tool for DAO accounting. And I wanted to ask you, what are some of the other tools that you use? Those could be web2, web3, like the emerging web3 tools. For example, when it comes to payroll process for DAOs how does the process look like?

[00:24:22] adcv_: Well on more operational financial management for DAOs bear in mind, they're not, so it depends on what you mean.

[00:24:29] adcv_: So when we do like financial statements for DAO, we mean the protocol, the set of smart contracts that does a certain thing, ENS, Lido, Maker are good examples of protocols that are actually DAOs, like they really are pure on chain entities and any contributors around them are independent third parties like us. They're just a company that does a thing like protocol development.

[00:24:55] adcv_: They have their own accounting and that's fine. So I can speak for example Steakhouse's own accounting. We are a company registered in the Cayman Islands with, founders all over the world and chefs all over the world. And we don't use banks. We don't have bank accounts. We function entirely on chain and we run all of our payroll, basically with the help of a tool called OnchainDen, this is a multisig wrapper that used to do, they used to do like telegram notifications for multisig signers to pester them until they signed. And then they rolled out this insane new iteration of the product. We helped advise them on like the features that we wanted to see. And we had a lot of requests. We specifically requested financial statements and chart of accounts, and I was really happy to see that they did this. So, Onchain Den now allows you to create your own chart of accounts, tag transactions as you make them. And it essentially means that in a similar way as we do protocol economics, you can basically do cash based accounting for your company provided it's done onchain and have a balance sheet and P&L view for any arbitrary period that you pick.

[00:26:03] adcv_: And they even track like capital gains in dollars and stuff and do like market to market valuations of different tokens. It's really very good. I understand that there's like other software for hedge funds and things like this. Steakhouse is a very simple business. We don't do many transactions.

[00:26:19] adcv_: We pay chefs and we buy steaks and occasionally pay for Dune Analytics as well. So it's very simple.

[00:26:26] Umar: Okay. Now I wanted to cover whether you've implemented some AI tools into your workflow as well maybe to automate some repetitive accounting tasks. And if you did, could you share some examples?

[00:26:41] adcv_: So we're rolling it out more and more within the organization. It's not something that we mandate or force people to use. I can speak only for myself when I say that AI is basically a springboard to writing a basic query very quickly. So if I want to get into the weeds of a specific protocol to answer a question, and I don't want to spend a lot of time like decoding the smart contract or figuring out how to do a particular manipulation, I'll usually start in AI.

[00:27:09] adcv_: And then eventually it hits the ceiling very quickly. So it's very difficult for AI to follow along the more complex a query gets. You'll see, yeah, if you try, you'll find that the GPT output just gets more and more wound up in the mistake, instead of, and you can't make it undo the mistake.

[00:27:27] adcv_: So just builds on worse and worse outputs. So I think it's useful to go from 0 to 1 very quickly, but then you need to take over and do the thinking and write the query. And then the AI can be more helpful for like, hey I want to do X thing with this, for example. How do I make a pivot table in Dune without a pivot table function and not lose my sanity?

[00:27:48] adcv_: So I can be helpful there as well. 

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[00:29:33] Umar: Now moving on to the next topic measuring performance for DAO Treasuries. So you co wrote this article titled Benchmarks and Performance Attribution for DAO Treasuries. For the listeners, it's available on Steakhouse Financial's website. And that article is aimed at helping DAOs make better decisions by taking some of the learnings from TradFi, let's say.

[00:29:57] Umar: Now, the framework you propose starts with setting a benchmark, weighing the risk, and finally doing a performance attribution analysis. I wanted to ask you if you could briefly expand on the above and provide us some examples on how DAOs could set benchmarks as part of their risk management framework today.

[00:30:16] adcv_: Definitely. I think here it's important to stress that this is written for DAOs in mind. And the framing that we have for DAOs, I think we quoted @StaniKulechov from Aave because he had a tweet thread where he said something like that Aave DAO is a net positive DAO, which means that after expenses, it has a surplus, but it's not a business.

[00:30:37] adcv_: It's more like governing utilities or something like a water system, and I think that it's an important distinction to make, because I don't believe I don't know the 1st thing about investments. We don't do investment advice. We don't venture into that area. We're really thinking about protocols.

[00:30:52] adcv_: From the basics, right? Maker has an accounting surplus. Lido has a surplus as a result of the way the protocol functions. And the surplus has a role in that protocol. It's not a retained earnings. It's not a company. It doesn't make investments. And so DAOs, I think we're lacking the vocabulary to explain.

[00:31:11] adcv_: Or think through how to make different choices with, how do they work with this surplus? Another thing that we introduced, we wrote an earlier report called the risk management framework for protocols as well. This was inspired by the type of work that we were doing with asset liability management recommendations for Maker, where we suggested that a DAO could benefit from setting itself up with a simple but clear strategy.

[00:31:37] adcv_: So, Lido's objective is to, for example, is to decentralize Ethereum validation. And the strategy is to, make a very good Staked ETH product and allocate to as many validators as possible. That's sort of it. You can't do more than that. And these things are important to bear in mind because it speaks to the limitations that DAOs have in making active decisions. And in many instances, they really shouldn't. There are very few instances where a pure protocol based DAO can actually benefit from an active manager. In the case of, for example, ENS, I think the, there's the governance process that they did.

[00:32:14] adcv_: So ENS has what's called an endowment and in the context of that endaoment, they basically reserved through a governance process, they voted through the approval of reserve a certain amount of surplus with the express purpose of funding operating grants in the future. And then, find a manager to help manage it in a whatever sustainable way.

[00:32:38] adcv_: And I think this is the kind of what we're getting at. Like they started off understanding that the DAO itself has limitations on its ability to do anything. In the case of ENS, they decided to create a specific endaoment rather than manage the surplus as a whole. And so anytime the endaoment increases, decreases, gets spent, or whatever, that's a governance process for the endaoment, not for ENS.

[00:33:03] adcv_: In other words, the endaoment went to zero, or if it went to 10 billion, it wouldn't change how ENS works. And I think that this is a good illustration of kind of, the limitations that we had in mind when we wrote this article. And then the other thing that we wanted to contribute with this was the notion of a benchmark and so in other words, the notion of performance attribution and also the notion of risk management.

[00:33:28] adcv_: And for this, we partnered with a DeFi hedge fund called Dialectic. They're based in Zug in Switzerland. It's founded by Ryan Zurrer, an early Maker contributor actually. What they've done that we were really impressed with was develop a very systematic way of analyzing the risk in DeFi. So their entire business is to take investor capital and invest it in DeFi on chain yield opportunities.

[00:33:53] adcv_: And they'll do liquidity mining, they'll arbitrage the prices of different trades, they'll get into new protocols, established protocols, and they'll take on a certain amount of risk in order to earn a reward. And what they've done really well is make systematic frameworks for evaluating what risks they're taking.

[00:34:11] adcv_: And the reason that this is useful is because it helps you size the bets that you make. So you could say you could allocate the entire investor capital into some, long tail asset in a Pendle, whatever vault and farm the points and what have you and that could result in a very lucrative strategy, but if you account for the risk on an expected value basis.

[00:34:34] adcv_: You've probably not actually generated that much excess return in relation to the risk that you took. In other words, if you did emerge with a profit, you're very lucky. And we wanted to take a sort of simplified version of this framework and bring it into a language that a DAO could understand in the moments where it really wanted to make sort of active allocation decisions.

[00:35:00] adcv_: And then on the benchmark piece, again, thinking through this in a very minimalistic perspective, we try to keep it as simple as possible and give DAOs a way to basically make a low commitment the you know,, MVP surplus allocation so that if, for example, they are USD indexed, for whatever reason, they might be a lending market and all of their accounting is in dollars, then the simplest possible allocation they can make is probably something like sDAI. 

[00:35:30] adcv_: As a result, any other choices that they make, in other words, any additional risk that they take should be measured against that as a benchmark, like SDAI has risks of its own in DeFi has the particularity that, there really is no risk free asset.

[00:35:45] adcv_: Everything has some amount of risk. You don't really see this in traditional investing, where if you buy a US treasury, you buy it with the certainty that it's risk free and that it won't default. And there's no real proxy in DeFi except maybe holding just Ether without staking. So yeah, I've rambled on a little bit, but I think I've touched on, DAOs are very minimal and we wanted to make a very simple way of determining how much risk exposure they take and also help them build an MVP treasury, so to speak, so that if you did nothing and you just did this, you could at least feel comfortable okay, we've taken on the smallest possible increments of risk and we are at least earning the sDAI rate or the stake ETH rate. 

[00:36:30] Umar: All right, so to summarize for the listeners if these DAOs are holding these three asset classes, so USD, ETH and BTC. So for DAI, it would be to invest in sDAI.

[00:36:44] Umar: So sDAI for the listeners who are not familiar, it's basically a tokenized representation of DAI, which is held in the DAI savings rate contract, I believe. For BTC, it would be wrapped BTC. So in wBTC. 

[00:36:58] adcv_: The three choices of assets that we make are suggestions.

[00:37:01] adcv_: We're not trying to say this is the ultimate whatever. We're just trying to say. If you're a DAO, you probably exist in one or a combination of these three universes. 

[00:37:11] adcv_: For Badger it's BTC very clearly. For Lido it's ETH very clearly, for Maker it's dollars very clearly, for ENS it's a mix probably because a lot of the revenue is in ETH and a lot of the expenses are in dollars and they hold both in the endaoment and so the proposal is just to say identify the universes that your DAO is exposed to as a protocol. And then pick the lowest possible risk combination of assets that you can actually execute on.

[00:37:37] adcv_: And our suggestion is wrapped stETH sDAI, and wrapped Bitcoin. There are ways of generating yield on Bitcoin, but these added too many layers of risk for our taste. And if you are exposed to Bitcoin, presumably, most of the, let's say, dollar based return will be just through price appreciation of Bitcoin. And if you're in Bitcoin already, just holding Bitcoin should make you happy, because that's what Bitcoin people like.

[00:38:05] adcv_: And then if you generate yield on top of that, you should at the very least understand the risk that you're taking to do that. 

[00:38:09] Umar: Alright, very clear. Now, moving on to this research paper I came across so it's called DAO accounting I'm going to share it in the show notes for the listeners. It was co-written by a previous guest on the podcast Kevin Ngo, who we had on Episode 29.

[00:38:26] Umar: I want to extrapolate some of its remarks about crypto accounting software for the listeners. So as we very often refer to as crypto sub ledgers, so the likes of Bitwave, Cryptio, TRES, who we previously had on this podcast. Now it points out that the sub-ledgers are fundamentally not very different from traditional accounting solutions, such as QuickBooks.

[00:38:47] Umar: They are clones of web2 SaaS accounting solutions, and they don't answer DAO native issues. Like I mentioned in the intro, such as reducing financial information asymmetry, where management has more insight than public stakeholders. Now, we've been speaking about the methodology developed by Steakhouse Financial to provide real time and independently verifiable financial information, but I wanted to have your opinion about these emerging tools like these sub-ledgers.

[00:39:19] Umar: For example, in the course that we offer, I had a student contributing at a DAO ask me whether he should be using a sub-ledger or rather implement the approach you guys did at Steakhouse Financial, because we went through the financial report of MakerDAO briefly in the class. 

[00:39:35] Umar: Now, in your opinion, should a DAO be using a sub-ledger?

[00:39:40] Umar: And if not, how should contributors report to its community? 

[00:39:44] adcv_: So again, it's worth sketching out the perimeter of what you were referring to. I think if you were referring to a DAO grantee, and in other words, an independent company, that's run, whether it's run for a profit or not, it can be a not for profit company. It can be a foundation, what have you.

[00:40:00] adcv_: I think the sub-ledgers, Tres Finance makes a really good tool. Cryptio is available. A lot of these tools are coming onto the market. They're, developing their features very quickly. Like I mentioned earlier, Steakhouse uses OnChain Den it's literally our accounting solution.

[00:40:14] adcv_: Like I'm perfectly happy with the outputs that it makes because we're very straightforward. More complex companies that have more transactions may well prefer something else. So I think for company accounting, like you can't go wrong with these offers it fulfills many of the same criteria that we value.

[00:40:29] adcv_: So like you open one of our company, P&Ls, and you can audit it down to the transaction. So if you have a question about an expense, you can dig into the chart of accounts, find the transaction hashing and get into it. 

[00:40:39] adcv_: For DAOs, in other words, for protocols, personally, I feel like these tools are not fit for purpose.

[00:40:44] adcv_: It's just not, it's just not what they were made for. Like these DAOs are not multisigs that are executing token transfers one way to the other. They're doing complex accounting manipulations. Like at the end of the day, Maker is basically an accounting engine. It's not doing anything magical and it's not transforming the tokens or anything like this.

[00:41:01] adcv_: It's, holding collateral, issuing liabilities, keeping track within an internal accounting ledger. And all we're doing is making this internal accounting ledger visible to the public and we develop it in a framework, that people are used to like dual entry accounting has its value. Like it's useful.

[00:41:17] adcv_: You can spot mistakes very quickly and it lends itself extremely well to having a transaction hash attached to it. I think some of the early, I forget the names now, like I won't be able to source this, but this is the concept of so called triple entry accounting, where you not only have the two sides, but you also have an independent verification, like a hash, and this is like behind some of the early thinking of cryptographic money even before Bitcoin, like in the early 90s, back in the RSA days and stuff. So I think protocols lend themselves much better to that, because they are, generally, protocols are just accounting ledgers, actually. And the work that you need to do is to bring out that accounting information and translate it into something that everybody's used to, right? Like you can't go to a DAI user and talk to them about VAT, FROG, MOVE, JUMP, ILK, THAT. I had a colleague two years ago who told me that he was in business school and he was taking a, like a finance class or something. And he referred to collateral as ILK in the middle of the class and nobody understood what he was going on.

[00:42:13] adcv_: Until he realized like, right, only Maker people talk about ILKs. So it's just a way of translating these already accounting ledgers into a format that people are used to. And I think that this is more suitable from a community perspective. Also, because it's auditable, like the smart contract functions are deterministic. If the protocol is written well, they do one thing. So once you understand what that one thing does, you can explain it to the community from an economic perspective as well, you don't need to understand the address that it sends to, you just need to understand what the contract does and how it keeps track internally.

[00:42:47] Umar: Now we are recording this episode before ETHcc in Brussels. I saw you'll be a speaker at the Restaking Summit where you will provide a presentation on how to build a focused and high performance, liquid restaking tokens. Not sure if I got the name right. So this can be quite a complex topic to digest.

[00:43:05] Umar: And given I've not covered restaking much on this podcast, I just want to start simple for the listener. So the first question I wanted to ask you is if you could briefly explain the concept of rebasing, what is stETH and why would one wrapped stETH for wrapped stETH? 

[00:43:24] adcv_: Rebasing, okay. So Staked ETH is a token that rebases. This means that once a day there's an accounting oracle that runs as part of the Lido protocol that calculates the shares of each Staked ETH token, and then changes the balance slightly.

[00:43:41] adcv_: In other words, if you have one Staked ETH today, because of the validation activity that the node operators do on the other side, so to speak, once a day you'll get an update, and that update will take the form of a little bit more of that Staked ETH token. So on one day you have one Staked ETH, the next day you might have 1.001, the next day you'll have 1.002, and so forth. 

[00:44:02] adcv_: Now the transaction that executes this change is not native to the token or the holder. So it's not a balance of update necessarily in the way that it might be for whatever a token transfer, for example. 

[00:44:15] adcv_: This makes it very difficult to integrate with DeFi applications and developers really hate it.

[00:44:20] adcv_: It's annoying because it's actually from my perspective is way better user experience. It's super easy to understand. You hold one Staked ETH one day, you hold 1.1 Staked ETH the next. You understand exactly what's happened. USDM is a Fiat backed regulated stable coin issued in Bermuda, regulated by the Bermuda Monetary Authority.

[00:44:38] adcv_: That also rebases. So on day one, when you buy, when you swap one USDC for one USDM, you will have one USDM and the next day you'll have 1.001 USDM, it will rebase as well. It will also face the same constraints of Staked ETH. So there are very few venues that will understand how to manage the balances of rebasing.

[00:45:00] adcv_: So for notably, for example, you can't, Use Uniswap with this to make a pool between Staked ETH and another token. Because of this balance change that happens. Once a day, essentially, the LPs that hold Staked ETH will get their rebases wiped by arbitragers. The pool accounting won't be able, won't understand how to keep track of the rebasing.

[00:45:24] adcv_: And similarly, with USDM, you won't be able to have a pure Uniswap pool with the native USDM token. There are some pools that do support rebasing. So Curve, for example, notably supports rebasing for some reason on one side of the trade and not two. I have no idea why... like, I haven't gotten that deep into Curve to understand why not. But that's the reason that you can have a Staked ETH curve pool or that's the reason that you can have an sDAI USDM pool. Because the curve pool LP accounting is able to keep track of those rebates.

[00:45:56] adcv_: So the reason that you would wrap it, I lost track of the terminology. I think they were called A token or C token or something like this. Basically it means that the token is the standard ERC20 and the balance of that token never changes, but the exchange rate of how many underlying rebasing tokens does. 

[00:46:13] adcv_: In other words, if you have one wrapped Staked ETH, one day, you'll be able to swap on day zero, you would be able to swap it for one Staked ETH. 

[00:46:20] adcv_: And then the next day you would be able to swap it for 1.1 Staked ETH, but you still hold one wrapped Staked ETh. It's a gimmicky little accounting change that makes developers happier. It's much worse from a UX perspective for the user, because then they're not able to see what the changes from looking at the number of tokens, but they have to know how to look up the exchange rate, which is the thing that changes. But, you know, it is what it is like developers at the end of the day are the ones that are actually making these and, for good reasons or bad integrating, rebasing is difficult. 

[00:46:55] Umar: Accounting wise as well, like accounting wise such a headache!

[00:46:58] adcv_: So funnily enough, I think it's more of a headache with Wrapped Staked ETH, with Staked ETH, it's very clear. It's like, you know, OnChain Den does this very well. Like once a day on the Steakhouse wallet, you'll see a little line item that says rebasing and whatever.

[00:47:11] adcv_: Okay. So it's rebasing income. We tag it with the right charter accounts, set a rule. It does it automatically. Everybody's . 

[00:47:17] adcv_: With Wrapped Staked ETH, it turns into a capital gain, because you have one Wrapped Staked ETH and the amount of underlying Staked ETH tokens that it represents goes up in time.

[00:47:25] adcv_: But the number of tokens doesn't change. So it's more like a capital gain. Anecdotally, and, God forbid, I get into trouble for saying this, but if you're in a jurisdiction that has a capital gains tax or a dividends tax, you can basically do one or the other. 

[00:47:40] adcv_: Don't take my word for it. Consult a tax advisor. I might be talking shit. But the reason that a person may hold Staked ETH over wrapped Staked ETH is, could be something as banal as the tax treatment of dividend versus capital gains. 

[00:47:52] Umar: All right. Yeah. Now my second question on this was, I was looking at DeFi Lama, the TVL on Liquid Restaking on Ethereum went from $285 million at the start of January 2024 to currently around 13 billion US dollars. You've recently launched the Steakhouse Resteaking Vault now, Resteaking is spelled like how you spell Steakhouse Financial for the listeners. 

[00:48:18] Umar: Now let's say, there is a Web3 CFO listening to us who has ETH sitting at their company's treasury. I wanted you to briefly provide an overview of the advanced DeFi strategies that person could have with the restaking. 

[00:48:33] adcv_: Sure. So again, I'm not providing sort of investment advice, but I would start from the beginning and, would suggests that the company understand what its objective is.

[00:48:41] adcv_: Let's imagine that for whatever reason, they're happy to take on more risk. If they were holding native ETH, they're only exposed to the price appreciation of ETH in their local currency. And they may well be doing their balance sheets in ETH as well. In which case just holding ETH is like the safest thing you could possibly do.

[00:48:58] adcv_: If they wanted to take a little bit more risk, they could stake either with a staking provider or by using a liquid stake token, such as Lido. 

[00:49:06] adcv_: If they wanted to turn up the heat a bit. In terms of risk, they could restake this token. What they're doing there is participating in a new type of marketplace for decentralized security.

[00:49:18] adcv_: So the concept of restaking briefly spoken and Steakhouse has a report on the subject also available on our website called Restaking and The Price of Trust. Where, we were getting overwhelmed with the growth of restaking, we were trying to understand it and we saw that it was absolutely impenetrable because it's a world that's dominated by academics and academics are very intelligent, but they're not very clear a lot of the time.

[00:49:40] adcv_: And so we try to explain restaking firstly to ourselves because of our low intellectual capabilities. And then maybe hopefully for other people who share the same low IQ and restaking essentially boils down to. If you have a proof of stake blockchain, is basically incentivizing the emergence of a secure layer of validation.

[00:50:02] adcv_: In other words, a lot of people running the same software so that the consensus algorithm can finalize. In a decentralized way and a cryptographically secure way. 

[00:50:12] adcv_: In other words, there's no centralized entity that can coerce the consensus algorithm to do one thing over another. This is the reason that people value Ethereum and bootstrapping.

[00:50:21] adcv_: One of these, in order to have this, you need to have a very large network of people running the software and computers all over the world. And to get people to that state, it's very difficult to incentivize. And it's very expensive. You see a useful proxy with the Cosmos chains. For example, each new Cosmos chain is a new instance of a proof of stake chain.

[00:50:39] adcv_: And typically their issuance rates are very high, which means that they are paying a very large cost to incentivize people to run this little software on their computers. Ethereum has reached a stage where it can afford to pay as little as 3. something percent to attract new users to this chain.

[00:50:56] adcv_: In fact, there's a debate going on at the moment about whether decisions should be reduced even further. Which I personally don't believe it should be the case, but that's another topic. 

[00:51:06] adcv_: And so the concept of restaking is that you could find a way to restake staked collateral to allow a software that would otherwise have been a layer one proof of stake chain to basically rent security from Ethereum validators and avoid having to bootstrap a network of validators altogether.

[00:51:26] adcv_: In other words, from the perspective of a service and network. If you want, you can also call them AVS's: actively validated services. Let's call them network for simplicity. So from the perspective of a network, you're building this network and it needs cryptographic security for whatever reason you face a buy versus build choice with restaking.

[00:51:44] adcv_: In other words, you could build your own layer, one chain, similar to what DYDX has done for example. 

[00:51:49] adcv_: They have their own chain, their own validators. their own monetary policy that's suitable for them. That's fine. That probably works for them, but it probably took, I don't know the first thing about DYDX, but it probably took them a considerable amount of investment to get to a level of decentralization where DYDX could be set to be secure. 

[00:52:06] adcv_: Or you could use restaking and rent the cryptographic security of Ethereum instead.

[00:52:13] adcv_: And instead of paying this enormous cost Quote unquote capital expense to build the validators. You could instead transfer it into a quote unquote operating expense and rent this on an ongoing basis. The reality is that there are no networks at the moment that are actually doing this.

[00:52:29] adcv_: Like for the concept of restaking to function well. It has to have slashing conditions. In other words, if a validator misbehaves, their collateral must be able to get slashed. This is the additional element of risk that we discussed. So an Ethereum validator faces the risk of slashing as a result of a malicious proposal, for example, or double signing or what have you.

[00:52:51] adcv_: They further expose themselves to new slashing conditions in order to validate a new network. And this is the additional incremental layer of restaking. So to land back on earth and to come back to the Steakhouse Resteaking Vault, this is basically a liquid restaking token built on top of Symbiotic that allows people to deposit collateral and participate in the validation of a network. 

[00:53:16] adcv_: At the moment, plainly, this restaking token is not doing anything like the entire strategy Is to hold wrapped staked ETH. That's it. And people are depositing into it because they're getting points, frankly. And these points come from Mellow, which is the builder that makes the protocol for issuing liquid restaking tokens and from Symbiotic, which is the builder of the restaking middleware.

[00:53:39] adcv_: What we thought was attractive structurally is that this is actually a very good separation of concerns. So from an industry structure perspective, what we find works best in crypto typically is focus on specialization. In other words, protocols that only do one thing, but they do it extremely well. The reason is that crypto has very low barriers to entry.

[00:54:02] adcv_: Anyone can make a protocol. Anyone can issue a token. And that means that capital is very twitchy, can move very quickly from one place to the other. As you mentioned, restaking has grown to like 13 billion dollars in what seems like overnight. And this is something that would be, very rare to find in a traditional context.

[00:54:19] adcv_: So this approach to restaking that Symbiotic has produced, we find very attractive because it's very focused. It doesn't try to do native staking necessarily, it doesn't try to take an opinion on collateral, doesn't try to do, it's just restaking middleware where users can select the collateral that faces additional slashing conditions and it separates the staking from the restaking.

[00:54:40] adcv_: I think that this makes things a lot easier to understand this space. In other words, when you deposit into one of these LRTs, you'll be able to understand very clearly that your original collateral faces the slashing conditions of the staking service that you use. Could be Wrapped Staked ETH, could be anything else.

[00:54:54] adcv_: And then on top, a curator is picking networks to restake to and to validate. And I think that this just makes things more transparent and ultimately will make a higher performance LRT. The choice of collateral, which is where we do take an opinion is Wrapped Staked ETH, which first and foremost, it helps Ethereum decentralization.

[00:55:14] adcv_: And secondly, it also happens to be a very good product because it's very liquid. When you have Wrapped Staked ETH and you deposit it into a Mellow LRT and you withdraw it, you can be sure that it's still Wrapped Staked ETH. You can sell it very quickly at a very low price impact and what's relevant for a liquid restaking token is that you can take God forbid people leverage loop or liquid restaking token, then you would be able to liquidate it very easily because you can withdraw the wrapped Staked ETH on relatively short notice and liquidate it and close the position rather than, get slammed and accumulate bad debt because you can't withdraw.

[00:55:53] adcv_: So all of these features are crucial to building what we consider a high performance LRT, although the talk is a bit tongue in cheek because, like I mentioned earlier, the Steakhouse Resteaking Vault literally just holds Wrapped Staked ETH. 

[00:56:06] adcv_: From a security perspective, if you just want to hold Wrapped Staked ETH and you're not worried about points, you probably shouldn't use.

[00:56:12] adcv_: Don't take the smart contract risk. Just keep holding Wrapped Staked ETH and be happy.

[00:56:16] Umar: Well, thanks so much for sharing. Not sure, it's very easy to follow through everything you've shared. If people are not very familiar with restaking.

[00:56:25] adcv_: Look, it's very promising. As a space in DeFi it's very promising because this is a problem.

[00:56:30] adcv_: Like the problem of bootstrapping and network validators is really annoying. It's very costly. So restaking, if it works well, should allow the emergence of new secured services to emerge that inherit essentially the security of Ethereum. And that's great, but it's still very much alpha software. No matter how you cut it. Like it's developing very quickly. I don't think slashing conditions are even alive. In any of these services yet, so it's not even real restaking, so to speak, and a lot has to happen. And I think a lot of froth has to come out of the market for restaking to really make a difference in my view. 

[00:57:08] Umar: Now it's time to speak a bit about the services that you guys provide at Steakhouse.

[00:57:13] Umar: So I want to ask you if you can provide an overview of these services. And maybe you share some examples of the work you've been doing at you already said we went through MakerDAO, but let's say other companies like ENS, Lido. 

[00:57:26] adcv_: Certainly. So I think the simplest way to understand is that we are a boutique consultancy firm.

[00:57:32] adcv_: We're a crypto native and we help organizations harness the power of public blockchains to build open and transparent finance. For DAOs, this usually means being a sort of a quote unquote CFO for the DAO. So different DAOs have different needs. We are a consulting firm. I like to say that we are a fundamentally uninvestable company because it's super unscalable.

[00:57:54] adcv_: Like you need, consultants to do the work and, you can't scale a day and you can't scale a person. There's only so much they can do in a day. For Maker, we have a very specific remit as what's called an ecosystem actor.

[00:58:07] adcv_: And we look very closely at financial reporting. We look at real world asset underwriting or economic reviews, let's say, and selection and curation and asset and liability management, let's say projects. So what recommendations can we get to the community about how to change the parameters so that the MakerDAO, that balance sheet is more robust.

[00:58:28] adcv_: With Lido, we do a lot of things like it's very different to MakerDAO in many ways, in many respects, it's very similar. We take on more like financial reporting activities. We do a lot of economic research. We look at liquidity a lot. One of the first things that we did was look at the amount of liquidity incentive spends that the DAO was making.

[00:58:46] adcv_: So again, I want to come back to this idea that stop valuing the native token, please, in the treasury, because it's not an asset. It's just not an asset. Like I don't want to have this argument with people endlessly, but whenever people count it as an asset on the balance sheet, it's not, it's a mistake because as soon as it comes out of the treasury, you'll find the market value is not what you said it was.

[00:59:08] adcv_: And LidoDAO was spending a lot of liquidity incentives and it's native token to curve pool liquidity miners, essentially. And that's actually initially what drew our attention to the contributions that we can make to Lido for what it's worth. With ENS, we take a narrower remit where we're doing like the accounting and reporting for the endaoment and Karpatkey is the active manager, I think.

[00:59:31] adcv_: And then, with Morpho it's more sort of general support and advice. Which ultimately turned into vault curation. So this is like a new business for us where we are running and curating these vaults, where we select the collateral and lenders deposit their liquidity. And we, allocate to real world asset tokens and to blue chip crypto.

[00:59:50] adcv_: And we also increasingly work with off chain companies, regulated stable coins, banks and so forth, where, they're typically at a loss for how to enter DeFi, how to understand it, how to make use of it. Where we are helpful is in helping them shape product design, overall strategy, go to market, and understand the power of public blockchains.

[01:00:11] Umar: This is exactly what I wanted to ask you next, whether you only work for protocols or DAOs so there could be any, web3 startup using crypto need help with the accounting and you would be able to assist. Much more simpler accounting than protocol accounting or DAO accounting. 

[01:00:28] adcv_: So plainly, no! We're not accountants. We don't notarize the accounts or whatever. I usually send them to Bassil Eid, you know at Detof. 

[01:00:34] Umar: Yeah 

[01:00:35] adcv_: An accountant I hold in very high regard. He actually knows what he's talking about there are many like him. I happen to like him Yeah when we refer to like off chain companies, it's it really is like regulated stable coins, major banks.

[01:00:48] adcv_: Other companies, payment service providers and payment companies that need help from a strategy perspective on how to leverage the power of public blockchains and less so the accounting side. 

[01:01:01] Umar: Yeah. Basil, you mentioned he's actually also an instructor on the course we provide where he shares how to use a sub ledger that he and his team developed called Breezing.

[01:01:11] adcv_: Yes. I know this. Yeah. Very good. 

[01:01:14] Umar: Now adcv_, we've been speaking For quite some time. There's a last topic that I wanted to go through with you is career opportunities for accountants. So a recurring theme on this podcast is on how should accountants upskill for blockchain. It's the first time on this podcast I'm speaking with someone as proficient as yourself, building Dune Analytics dashboard.

[01:01:34] Umar: So I wanted to ask you, where would you recommend accountants to upskill themselves if they were to let's say the need to remain relevant for the next 10 years. 

[01:01:44] adcv_: I think for the next 10 years, I have no idea. Crypto changes so much. It's part of the reason that I love this space, so much. You have to learn something new every day. It's really wild. It's very much a firehose. And yeah, so for the next 10 years, you're not safe. I think you have to just keep learning and figuring things out. Well, look, as another example, at the moment, we mostly work with EVM chains, mostly Ethereum.

[01:02:05] adcv_: I don't know personally the first thing about Solana, I heard about Boden and the meme coins and that's fine, but I don't know anything about how it works, the validation requirements, the decentralization, what have you, if there comes a day where Solana as a network matches Ethereum on transparency, on security and on autonomy.

[01:02:23] adcv_: Why not use Solana? So, so God damn it. Like now I have to learn like Rust and how a smart contract to work on Solana. Of all things. You have to keep nimble, I think, and adaptable to, to all of these market changes. The simplest way for me as someone who came in with a sort of vaguely technical background with an engineering education, but no real practical experience as an engineer or software engineer. It really was diving headfirst into Dune Analytics and trying to solve simple questions, because that rabbit hole takes you down the path of, learning how smart contracts work, learning how protocols fit together, understanding the differences between different types of tokens, different types of smart contract functions, different types of transfers.

[01:03:06] adcv_: You can go as deep as, order books and PBS and MEV and how to arrange the transactions in the block. How this impacts the output of a transaction or the output of a swap on Uniswap, for example. 

[01:03:17] adcv_: So I think Dune Analytics is a very good first start to upskill, at least on SQL and then fall down the, follow the trail and learn more and more about the protocols that you use.

[01:03:29] adcv_: And then obviously to use DeFi, like for God's sakes, like I've spoken to a few people who've like never used DeFi and it's like, where are you? Where are you in here? You have to lose some money and do stupid shit from time to really learn. 

[01:03:40] Umar: Yeah, of course. That's how you get to learn.

[01:03:41] Umar: And then it's just a matter of curiosity of how deep you want to go in that rabbit hole. You've gone pretty deep . 

[01:03:48] adcv_: I've gone irreparably deep, I think. 

[01:03:51] Umar: adcv_, thanks a lot for your time today. I've learned a ton preparing this episode. I'm sure the listeners did as well. 

[01:03:58] Umar: As closing thoughts on the main topic of today, which was on financial reporting for DAOs, has there been anything that we maybe we didn't mention, or if you had some last thoughts to summarize this episode today. 

[01:04:12] adcv_: No, just I think it's been quite comprehensive. You've had the pleasure of hearing my skits around for over an hour. I hope that at least some of it was useful. If you're building a protocol and you're curious about building out financial reporting infrastructure, if you're launching a stable coin, if you're a company and you want to understand blockchains, definitely reach out to us.

[01:04:28] adcv_: Like we're way over capacity, for the projects that we think that can actually have an impact on the space we'll find a way to make it work and, 

[01:04:35] Umar: And what's the best way to reach out to you? 

[01:04:37] adcv_: Twitter, probably. I'll be sharing your Twitter handle. 

[01:04:40] Umar: Yeah, 

[01:04:42] adcv_: that works. It's mostly garbage, but I think you can send me a DM if you have something.

[01:04:47] Umar: Alright. There's a last question which I usually ask my guests before they leave. Do you have a favorite quote or maxim that you live by? 

[01:04:56] adcv_: No, goodness, I would have to live by it, but for a blockchain, I think some of the more impactful readings, and I'll send you a link so you can put it on the show notes, are Nikolai's presets on how to build a DeFi protocol.

[01:05:07] adcv_: I think it's very easy to forget some of these. This was a person who I hope I'm not mistaken, but my understanding is that he was the developer of the Wrapped ETH contract. And if you look at the Wrapped ETH code, you'll notice that it's called WETH9. And the reason is he used the version naming technique that basically starts with the number 9.

[01:05:27] adcv_: And then with every new version, it was supposed to go like 9, 8, 7, 6, 5, 4, 3, 2, 1. And if you ever reach 1, you're supposed to stop and bin it. Cause it's it doesn't work. And the principle is that you have to build something that's fully immutable, fully autonomous, like truly decentralized. That doesn't have any secret back doors, multisigs, anything like it.

[01:05:46] adcv_: Nikolai was really good. And, Wrapped ETH9 is the number nine because he wrote it on the first go and he got it right on the first go. Now it's like one of the largest places that people put their ETH. It's just like wrapping it in the ERC20 token, right? He was also a key developer behind MakerDAO.

[01:06:01] adcv_: You can see his fingerprints all over the smart contracts. Like each smart contract is independent and monolithic of the others. There's no proxies. There's no pass throughs. It basically works. It's very rare to see a protocol that builds in this way.

[01:06:14] adcv_: Morpho, I would say is one that matches it. These Morpho smart contracts have been, formally verified, which is like a type of smart contract audit, which is even more rigorous and uses mathematic and logic principles to demonstrate that the smart contract does exactly what it's programmed to do.

[01:06:31] adcv_: And it's very difficult to do this with protocols that are more complex. So I think Nikolai's writings and thinking on how to develop smart contract protocols are very important because it's, as the space gets more and more complex, it becomes more and more tempting to stray from them. And the more we stray from them, I think the more we find that, if you're building a shadow hedge fund with a multisig attached to it, it's worse than the TradFi equivalent.

[01:06:56] adcv_: And you're not really adding any value to the world. Like the benefit of these public blockchains is building infrastructure and infrastructure needs to be rock solid. It in theory shouldn't necessarily even be something that consumers are aware of. It's just something that's written, simply plainly in an immutable way and as decentralized as possible from the outset.

[01:07:16] adcv_: And, he had some views around this that were a bit where I find them to be a little bit extreme and impractical, but. I think as a collection of sort of sayings there's very little to disagree with. 

[01:07:28] Umar: Well, thanks for sharing. I'll be asking you to share the notes of Nikolai with me so that I can include it in the show notes of the episode.

[01:07:36] Umar: adcv_, again, thanks a lot. And hopefully I'll see you next week at ETHcc in Brussels would be great to meet in person as well. 

[01:07:44] adcv_: Yeah. We'll be there. Look forward to meeting you. 

[01:07:46] Umar: I would like to thank everyone for listening to this episode. You will find all the links of the episode, show notes, and transcript on the website of The Accountant Quits at theaccountantquits.com. Please note that this content is for general information purposes only and is not a substitute for consultation with professional advisors.

[01:08:06] Umar: If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them. All the episodes are available on Spotify, Apple Podcasts, and Google Podcasts. And by leaving us a review and rating, you will support the channel and all your fellow accountants. In order to be notified each time we release a new episode, do follow us on Instagram and LinkedIn.

[01:08:30] Umar: We hope to have you with us next time. 

[01:08:32] Umar: Bye for now.