Ethereum’s Path to Centralisation

Hi, you're listening to Stephan Livera podcast, a show about Bitcoin. So today I am in Dallas, and, yeah, the last few days I've been in Austin and in Dallas. It's been great to meet the Bitcoiners out here. I've met many listeners as well. And so, yeah, I'm here for Bitblock Boom, and so today is the workshop day, and then tomorrow is the actual conference day, so I'm looking forward to that also. So today- For episode three hundred and three, we have Alex B joining me, and we're talking about Ethereum's path to centralization. So, being honest, yeah, I think Ethereum is a shitcoin, but are there ways that Bitcoiners can offer intelligent critique? And so today we talk about a range of things like MEV, can it be stopped? The interaction between MEV and staking derivatives, Ethereum as the MySpace, and why Ethereum cannot be ultrasound money. So these are some of the ideas that we get into in this show. The show is brought- Brought to you by Swan Bitcoin, and one interesting and important aspect of Swan is the education factor. So Swan is actually focused on trying to teach your new coiner and pre-coiner friends about Bitcoin. So for example, Jan Pritzkir's book, Inventing Bitcoin, which is an excellent resource, it's a short read, and it gives people a little bit of a technical explanation of some of the concepts behind Bitcoin, and Swan is providing that for free. So if you want that, go to swanbitcoin.com/freebook. So make sure you send that to your family and friends so they Learn about Bitcoin, and then obviously they can set up an auto-stacking plan, or if they're a high net worth individual or a company or a business, they can sign up with Swan Private. So if you're interested in that, send them to swanbitcoin dot com slash freebook. Are you interested in peer-to-peer Bitcoin lending? Lend at HodlHodl is a peer-to-peer Bitcoin-backed lending platform, so you can lend out stablecoins, or if you have Bitcoin, you can borrow against your Bitcoin, it's the collateral as part of the loan. So this is a global You don't have to do KYC. So think of it like this, you don't, if you've got Bitcoin and you need some liquidity, you don't have to sell now, you can actually borrow against that, and you still hold one key in that two of three multi-signature. You know there's been no re-hypothecation, and you can see that the money literally hasn't moved. So HodlHodl doesn't hold your funds. Lend at HodlHodl is a peer-to-peer lending and borrowing platform, so you go there, you set your own

But you're not sure where to get started. Compass Mining can help you. So Compass Mining helps you by making ASICs available for you to purchase, as well as having vetted facilities that they have looked into, so you can select an ASIC, select a hosting facility, and join a mining pool and start receiving SATs. So you'll pay upfront for the miner and pay the hosting costs and electricity, but otherwise, this is an easy way to get accessible costs of entry into the Bitcoin mining world. So if you're interested, go to compassmining dot io and sign up. Onto the show. Alex, welcome to the show.

Hey Stefan, happy to be here, excited to do this.

Yeah, so Alex, I've been following you online for a while. I know you've been around the Bitcoin space as a, you know, commentating on things and writing as well, and, tweeting about, out about things. do you wanna just give a bit of a background for listeners who don't know you?

Yeah, for sure. Yeah, I've been pretty involved. I, I would say, I guess I started my journey around two thousand Pretty active on, the related social medias and forums, I guess Bitcoin Talk and, and Reddit early on, which eventually actually led me to, all, obviously all of that ramped up as, the sort of block size debate, started picking up, and that's when I started getting very, very, very, very active, and, that actually eventually led me to an opportunity in the, in, in the industry as the, the first, Official Troll for Hire at Blockstream. so I had, I had a bit of a short stint there, but I think it was very productive, did a lot of good, in terms of, helping with the community effort, at, with regards to the block size debate and all that, and sort of producing documentation and, some write-ups about, the entire debate. So that was, that was definitely interesting. After that, I had a bit of a hiatus, for a couple of years. The 2017, sort of bubble came along that allowed me to kick back a little bit, and I, I started getting a little more active again. I guess last year, you know, COVID and all that, we were all kind of stuck in front of our computer with nothing much to do but start shitposting again. so here, here I am. I, I got involved again with the industry with company I'll keep private, but, yeah, it's good to That's happening, the way the growth, the industry's been growing, very exciting, yeah.

Yeah, yeah. And I'm curious, would you put yourself in the Bitcoin Maxi camp or kind of where, where are you situated?

Yeah, definitely Bitcoin Maxi camp. I, I tend to have a more, I think a, a bit of a more open mind, than, than others. I, I actually believe, and this is what led me to, some of the stuff that we're, we're talking about today, is like if, if we Other parts of the ecosystem, I think we owe it to ourselves, you know, to have a better understanding, I think, of, some of the other shit coins that are around, at least to the extent that they, they make a claim to some of the properties that, that Bitcoin has. So, you know, we've seen that with Ethereum sort of switching the narratives to, to their ultrasound money. and so there are a lot of people that are, that try to refrain from entertaining these debates, they make the argument, of course, that Bitcoin and Ether aren't competing Fair, ultimately, I, I do believe that as well, but unfortunately they're, they're sort of, trying to hijack the narrative that, that Bitcoin's built. A-and so, the new people that are coming into the ecosystem, I think are owed, some kind of explanation as to, as to how both systems differ. And if we're going to get into that, and if we're going to come across as sort of rational observers, you wanna have a, at least a decent grasp of what's happening on the, on, on the other side of the field and be able to put forward, put forward better arguments. so, so here I am, yeah.

Yeah, great. So, yeah, today we're gonna chat a little bit about why there are certain centralizing tendencies inside Ethereum. So maybe you wanna just give us a bit of a high level overview. What's the, what's your thinking here?

Well, I, I guess it all began, you know, with that massive Twitter thread that I put up. I mean, it's been a couple of months now, I guess I don't know exactly how I, came around to this write-up. I, I think I had followed this, this idea of the, staking derivatives, particularly the, the Lido implementation, and I had a sneaking suspicion that this was going to have a massive impact on the dynamics and sort of the incentives around, around the, the proof-of-stake proposition that Ethereum has. And then I, then I encountered, or at least started digging a little deeper into the, the whole MEV thing, as this was becoming a pretty hot topic, i-i-in the Ethereum community, and I, what I found was, I think pretty ugly to say the least, a-and I also, I also realized that some of the concepts behind it, and this was sort of validated, by, by me putting this thread out, is there aren't a lot of people, in the Ethereum ecosystem that are actually aware, of, of what's going on here. I mean, obviously the more technical circles are are, are keenly aware of it, to the extent that they, they've fully recognized it as a challenge and, and some of them are actually pretty worried about it. But, outside of these circles, although it's, you know, it's been talked about in some podcasts, people have been putting out some articles on it, it seems very clear to me after putting out that thread that the larger ecosystem really didn't fully, recognize, the challenges that, that this whole, this entire concept, brought about. So ended up just browsing through, through Twitter, digging through a couple of threads and, and sort of highlighting, what were those dynamics and how that could eventually play out, a-and ended up realizing that, the combination of, of, of staking, the combination of, of those derivatives, and the combination of, of MEV led to pretty grim sort of, centralized, forces that it seems to me will be dictating the future in Ethereum. Ethereum in some ways. A-and so I-I thought that was worthy to share and, given the reactions, I mean, this, this tweet's gotten almost two million prints now, it's still running, people are still retweeting it nowadays. I mean, I've had now, I don't know that I'm a Ethereum influencer now, but like I have had so many people, probably four thousand more followers just from that tweet alone, and, and a lot of them were actually seems, or at least seems to be, Ethereum followers. On those things, not that I'm some kind of expert, but I guess it's worthy to, you know, bring, bring some balance.

Yeah. So I mean, let's break that down. You mentioned three main ideas, which I think maybe it would be good to explain what those are, and then we can dive a little bit further into those. So you mentioned the, let's call it the interaction between three different things that are all combined in a way of centralization. So you mentioned staking, you mentioned also liquid staking or the staking derivatives perhaps, and also finally the If p- for people who don't know what this is, like if they just have only ever used Bitcoin and they've never heard anything about proof of stake, what are, what are these ideas? The staking, liquid staking, and MEV?

Yeah, sure. Maybe we can start with MEV.

Yeah.

So MEV stands originally for mined extracted value. They flipped the, term a little bit for it to mean sort of maximally, maximally extracted value or maximal extractable value. and it's, and people that are within Bitcoin only might not be too familiar because the fact of the matter is there's not many MEV opportunities within Bitcoin. MEV opportunities are essentially arbitrage opportunities. That are offered mainly because of the nature of these smart contract in the system, the EVM type, such as Ethereum, or really any platform that offers, you know, large scale smart contracts, decentralized, those decentralized exchanges and whatnot. And, the nature of it basically is this, this is made possible because some entities have the opportunity to order transactions in a way that allow for them to, essentially front run other- Participants in the ecosystem. So obviously if you've got a decentralized exchange, then if, if you're able to, place and given the transparency of the, of these network, you're able to sort of observe and monitor any transactions that are going through these systems, and if you find an arbitrage opportunity that allow you to capture a certain amount of value, then if you, if, if you sit in, in a place where, as a miner, obviously, or anyone that's willing to outbid the other parties Participants, and get your transaction in a block and confirmed before the other, and you're able to capture that value, sometimes to the detriment of the other participants. I think there's some arguments that some, some of the MEV is actually positive, it makes the markets more efficient, and I believe that that's, that's a reasonable argument. But there are also some, other concepts such as, such as, the sandwich attack, for example, that directly target, users of these, decentralized exchange, for example. And And essentially create a situation where they're a victim of slippage, whereas the, the sandwich attack w-would basically be that a, an MEV extractor, targets a user that wants to make a certain transaction on these, the centralized exchange, initially front runs that transaction so that the price of the asset that the user is willing to buy goes up, because the, his transaction, the ex- the MEV extractor transaction goes in before his, then the user obviously ends up paying a higher price for, for the transaction. He was orig- originally, willing to make, a-and on, on the other side of that, it could very well be that the, people that initially bumped the price of that transaction by front-running him is actually the one that is selling him back the token at a higher price, capturing that inefficiency in, in, in the market. And because of that, you also have the, this, this dynamic where the people that are being front-run sometimes, there's, there's this entire sort of concept in, in Ethereum where unfortunately if your transaction doesn't go through, you Fees nonetheless, a-and so, I mean, given the state of fees on Ethereum at the moment, which can be pretty high, especially on, when doing those sort of swap exchanges regularly from fifty dollars to two hundred dollars, then people are victims of failed transactions, people are paying fifty to hundreds of dollars, for transactions that aren't, aren't going through, specifically because they're being targeted, by these, sort of MEV opportunists. So that's, I guess, the basis, of- Of an EV, it, it's a pretty, pretty, pretty interesting issue. It, it is one that has effectively no limit in, in the way that it can be gained because the more applications that are brought about on, on Ethereum, the, the more, different games and systems that are being developed then arises more opportunities for MEV, and it's not very clear that there's, that there's really a solution for that. And so, yeah, I, I think that's-

Yeah, I say. So let me, I guess maybe w- it's, it sounds, as you were explaining it there, it sounds similar to what people might have seen that whole Flash Boys story or, the whole, idea of those, like people who set up there trading right, really close to a stock exchange, and they try to front run the incoming orders and they try to basically beat, sort of profit off of that. It almost seems like an Ethereum version of that, and like the certain tendencies that are being created by these opportunities because now everyone's trying to go for some M- So let's talk a little bit about why it's not possible for them, like, is it possible for this to be fixed?

I mean, it's a, it's a sort of a, I, I think that's one of the biggest question, that Ethereum is facing at the moment, and if you actually read some of the work, of some of the people that are most involved in, in, at least this, so to, to your comment, they're, they're fully aware that, there, there are parallels here to the extent

In the Ethereum ecosystem, it's been released under a white paper that they call, Flashbots, literally, or, anyway, the, I, I guess the ultimate-- what, what came out of it was this concept of Flashbots, which is, which is one of the solution that they've brought, forward, and it is a, solution that allows for people to essentially bypass the, the, the public blockchain, the public, public mempool of Ethereum, and that came about because as these MEV opportunities- These started to arise, a-and mostly they did, when DeFi, started really picking up s-uh, steam back in, I guess, last year. Then what happened is you had these people that, started spotting those opportunities and started writing bots that would essentially try and outbid each other for those, you know, those front-running, those arbitrage opportunities. And what this, essentially created is really a, an absolute bidding war on, on Ethereum. Where the network started getting very quickly at full capacity, the fees started ramping up because those bots would obviously, broadcast their transaction and consistently outbid each other. And so Flashbots was created to, sort of work around that by creating this new, auction system for MEV products, MEV, extractors to essentially bundle transactions, and propose them directly to the miners in a essentially off-chain. so they've created this, network, they've created this sort of off-chain mempool, if you will, that allows people to, that allows these extractors to share the, their transactions, their bundled transaction, and, and bid for them, without essentially, filling up the Ethereum blockchain, with those transactions and incidentally, you know, raise the fees. It has achieved probably, to a certain extent, the, the purpose, that it was designed to. So it has definitely, at least for a while, decreased the fees and the activity of the xPots on, on the public Ethereum chain. But that doesn't, without consequences, because obviously now what you're left with, and, and, and this, this Flashbot idea, this sort of Flashbot protocol, if you will, has been adopted widely by pretty much all the Ethereum miners. I think last time I checked, there was like Ninety-eighty-five percent uptake could very well be a hundred percent uptake, at this point. And obviously the danger here is you've got a very permission network, so to be able to participate into the Flashbot network or, or protocol, if you will, it is completely permission, and it is also a, an obvious sort of central point of failure. I mean, this whole thing is ultimately, hosted probably on AWS servers, and so you have this par- Parallel sort of mempool that's running on Ethereum that's managing a significant amount of the Ethereum, current sort of transaction economy, but that is fully controlled by a certain group of individuals. Obviously they'll say like their incentive is for that network to keep running and, and, and, and, and be running in a sort of, in a way that's beneficial to, to the Etherium ecosystem, but it's, it'll be interesting to see how that scale, i-i-that scales in the future. Now, obviously they've came- and they're still working on, on other potential solution to MBV. they've-- there's been talk of, of trying to make that network a little less permission and integrating it with, for example, Intel's GX, sort of secure enclave so as to make it a little more, I, I believe, so as to make it a little more difficult for people to game, that network so that there would sort of be a, a cost, of attack, is my understanding. And while that might be a sort of viable solution, you also have a problem where, I mean, it seems to me like it's the long running story with Ethereum is that they, put forward solution sometimes in a haste because they uncover a problem that needs fixing now, and by putting together that solution, they don't fully understand or study or care about the long- Long-term incentives or the long-term consequences of these solutions, and by implementing those, then later down the road they realize that they've only created more problems.

Right.

I think generally the con-- the consensus within, the Ethereum community, or at least some of the, some of its leading researchers, is that MEV is something that will be present, that will be present possibly forever. There's no sort of catch-all solution to it. So this is definitely something that they'll have to, deal with for the foreseeable future, yeah.

So then, I guess, is the argument essentially then that it causes this centralization? It, like, I guess, bringing it back to what's the problem, right? So I think centralization of the cryptocurrency is obviously an issue, and I think maybe this is a good point here, just to kind of spell out, in twenty seventeen, there were big debates being had about Bitcoin and whether there would be centralization pressure. Maybe you could spell out some of those, even, some of the different arguments I heard, where, for example, that minor-- the additional latency caused by- Larger blocks would cause miners to have a centralizing pressure because they might wanna be in the same location, which again is another centralizing force. Did you wanna elaborate on any of those ideas in the Bitcoin context for, say, twenty seventeen before we then compare it back to what's going on in Ethereum?

Yeah. So that, that was definitely obviously one of the concern, back then. There was a lot of work that was done in sort of trying to reduce that, that latency, and Bitcoin also had its sort of-- also had for a while its, its sort of parallel Broadcasting network for blocks, although the transaction broadcasting was still done on chain at the, you know, L1 level. But certainly, yes, as, as blocks would have increased, in, in size, then it would have created this, this issue where less well-connected miners could have had their, their blocks orphaned because of the lack of better connectivity, and so it would obviously favor larger pools, and so it would ultimately lead to consolidation of this, hashing power Power. The obvious, sort of other danger there was that by creating these larger blocks, you would make it sort of, resource intensive for validating no-notes for the individual that are running the validating nodes, a-and thereby again, sort of compounding decentralization by making it more and more difficult. Obviously, the, I g-I guess the small blockers won that debate, and we're well past that nowadays. I think it's pretty well recognized that the way we're-- we'll be able to scale Scale its two layers. The, the, the situation is, although not entirely dissimilar, certainly a little different, in terms of how these all, how MEV and, and the staking derivatives thing, would play out. So maybe to introduce, the staking derivatives idea, if, if you want me to go there, is- Yeah, sure. So obviously with, with Ethereum, considering or considering-- Probably actively, moving towards the proof-of-stake implementation. Not clear exactly when they'll get there. It seems like it's getting pushed back every other month, but that's ultimately their target. And, the idea originally with staking is that you would, it would require a sort of minimal capital amount of thirty-two Ethereum for an individual to be able to, to stake. And by staking, what we mean is that you essentially lock up, quote-unquote, your, your capital into this contract that allows you to effectively-- What they're trying to do is replicate the, the concept of proof of work really, but using capital rather than proof of work energy expenditure. And so by staking, by allocating your capital to those staking contracts, then you get the opportunity to validate those blocks, those transactions of the network, and of course, because of that, you earn, you earn a reward, the reward being the issuance and, and the fees that come from the transaction activity on the network. Now, this obviously creates This situation where, it, it, it, you know, it, it obviously be-- it, it obviously becomes a little prohibitive for, for staking to be done if, you absolutely need thirty-two ETH, which is what, about a hundred thousand dollars at this point in time. And, so people came up with ideas to sort of democratize, I guess, the, the staking activity. And one of these ideas are just staking pools. Staking pools are the first order, solution where, just as with mining pools in, in the Certain way, whatever amount of ETH you have available for staking, you contribute, contribute to, essentially a fund, pool of funds, and, the, this pool of fund is, sort of maintained by a infrastructure, solution, that runs their own validators, and so they'll use whatever stic- wha-whatever ETH you have available for, for you to be able to participate in this activity. But people, obviously, Ethereum being, being Ethereum, people quickly wanted to, to see if they could come Up with a sort of more, again, quote unquote, decentralized solution to this. And I, I think last-- I mean, it's probably been a work in progress for, for a couple of years, but what they came, what they came up with is this idea of this decentralized, staking protocol. So you actually have a contract that effectively, does the same, thing that a, I guess, a centralized staking pool would do, and so they, they collect the Ethereum into this contract and they allow for anyone to be staking. Probably the most important or popular implementation of this in Ethereum is the Lido protocol. And so the Lido protocol has, in-- on one hand, yes, this, this staking contract that people can contribute to, but they also are governed by a-- the Lido DAO, the Lido Decentralized Autonomous Organization. The Lido DAO has their own token, which is used for governance purpose, which allows the, participants of- This Lido ecosystem to sort of vote on proposals, but most importantly, the, Lido sort of governance organization is the one to, to effectively select who are the validators that are sort of allowed to use the capital that is staked to, the Lido contract and distribute that for, for staking. So there are several validators right now, not clear exactly what the amount is, but certainly half a dozen, half a dozen, dozen that are Or, but they're effectively, you know, hand-picked by this DAO organization. Obviously, we'll, we'll get into how this becomes, very challenging, going forward. But this is generally the idea, right? Is that you, allow for dem- democratization, of staking by, enabling anyone in the Ethereum ecosystem to be able to do this. Now, one of the other innovation that they've, that they've brought about is this idea of the staking derivatives, and the staking derivatives is, is a- Probably a game changer really in, in terms of the security infrastructure and the security dynamics of, of Ethereum, because the initial idea with staking is that you would freeze up your capital and this, this Ethereum that is, staked, into, validating contracts obviously cannot be used for other purposes, it is, quote unquote, dead capital. And so, they quickly realized though that if you have this contract, then you can use the Ethereum That is, that is, staked into this contract and issue one of, or one derivatives, so they have this wrapped token that whoever deposits into the Lido contract gets in return, one, they call it S T E, and so this unlocks the liquidity. Obviously, this allows for people to not only participate in the staking, but then get a token in return that they can use to gamble away and, and use for all the DeFi purposes, so as to try and, you know, Compound the yield that, that they're getting.

So it's almost like they wanna, it's like having your cake and eating it too. And because the craze is all about yield and DeFi is just, it's like fiat degenerate gambling, but just put into the crypto world. That's, yeah, that's like a weird way that this whole thing is growing, isn't

it? Well, it is, and I think, well, from my reading, I think a lot of people sort of anticipated those, those contracts, those taking derivatives to come along. it seems pretty clear to From day one, probably at least the smartest people in the room sort of realized that there were, very real challenges to this, because in a certain way, you know, there's been this talk of, there's always been this talk with proof of stake of this sort of nothing at stake issue, and, this really reintroduces this, I mean, staking derivatives really reintroduces this problem where, you know, it really brings down the actual cost of, staking on the system to the extent that they are- Are potentially effectively negligible. And so a lot of the security, design that was put into proof of stake, a lot of the sort of economic, I think, reasoning that was done initially always sort of accounted for the fact, or always sort of made the assumption that, you know, only a certain proportion of people in the Ethereum e-ecosystem would be willing to stake, because obviously because it freezes up their capital. So you have this narrative that, like, all, the, this only the strongest bulls will We'll be staking, and whatnot, and this sort of really flips the script on it said, where you've created this opportunity for practically every single person, every single Ethereum token owner, to be staking. And I think it's not well understood what the full outcome, of this are from, from sort of a game, game theoretical, standpoint. But I guess ultimately this realization, I guess this combination, of the staking Making derivative incentive this dynamic and what I had previously also observed in, in the MEV, sort of challenge really sort of reinforced my belief that it was, inevitable, it seems to me, that proof of stake could potentially even be more centralizing than even sort of if its strongest opponent would have, would have anticipated. And we can go into how exactly that, that would play out.

So yes, a proof of stake could be even more centralizing than its- Strongest opponent may, may have argued. So what are, I guess, some of the consequences of that staking centralization?

there are a lot. There, there obviously there are a lot. And so- Maybe before we, we, we go into exactly how, or the, the consequences of it, I think it's worth highlighting again how these two, these two concepts sort of compound, the interaction aspect exactly. And so starting with MEV, the problem with MEV is that it is a very, very, very specialized activity. I've explained, I've sort of laid out the case before that, as more applications come around in the Ethereum ecosystem, there's always New MEV opportunities that are being created. And for someone to stay on top of these MEV opportunities, it is a full-time job. It, it is, it, it is an activity that requires deep knowledge of the Ethereum protocol in a way that very, very, very few people in the Ethereum ecosystem actually have. And so, I think I, I, I put this, this quote in the, the original thread where, it, it was an excerpt, Of a comment that Vitalik made on an article on Medium that sort of decry or at least complained about the sort of MEV situation, and I mean, maybe to quote him, but Vitalik himself said, "I mean, the extraction is naturally a highly high economies of scale and centralization pro activity. It involves writing and constantly maintaining advanced software. It's arguably even more high fixed cost than mining itself, and definitely more so than proof of stake. So obviously, given that fact, and given that MEV ultimately nowadays is what makes the difference between a usually profitable, Ethereum miner and a less so pro-profitable one. And so the, the, the actors that, will become experts at MEV and that will have the resources to constantly reinvest into this MEV activity will ultimately come out on top Taproot, and that will be even more true, and so one of my reasoning is that will be even more true, in, a proof of stake, ecosystem and one of the reason why that is so is that the larger, the larger your stake is, in Ethereum, the more opportunity you have to, be able to capture this MVD. there's this sort of variance concept where, you know, the, the larger, obviously the larger miners have an opportunity to, create, more, more blocks. There's this sort of randomized, within proof of stake, there's this sort of Sort of randomized selection of validators that are adding blocks to the chain. Obviously, if you have more stake, then you're more likely to get picked, and then you're more likely to capture more MEV. And also within proof of stake, when they actually delegate the sort of at the stage, when they actually delegate the, the block producers within a certain round, if you will, there's not only one validator that's selected, there's a, a couple of validators that are picked within a certain round, and if you actually- If there's relations between those, those validators, there's opportunity for them, there's this sort of, opportunity that's created within proof of stake for them, that's not present within the, the current proof of work ecosystem that allows for them to coordinate around sort of MEV opportunities that can be, executed across different blocks. And it, it re- so it really introduces, sort of a new, not necessarily a, attack vector, I guess some, some people wouldn't be happy for me to- to call it, that way. But certainly, ultimately, a, a way for larger centralized validators that are able to coordinate between each other to, to capture more MEV than their con- their, than their counterpart. And that is especially true within a staking derivatives environment.

Let me just try and explain that and make sure I've understood that. So the idea is there's this MEV, so this idea that by a block producer or a miner selectively reordering transac- actions, they could potentially benefit themselves by also concurrently going and doing trades on some of these, quote-unquote, decentralized exchanges that, allow them to front-run the Ethereum transaction, you know, user at that point. And so what you're saying here is also that given the way the system is set up, it's very possible, and maybe we'd argue even probable, that those block producers might then start collaborating with each other to pro-- to start doing multi-block MEV opportunities So taking advantage of those, correct?

That is correct. And obviously, the, the obvious argument, at least from Ethereum proponent would be, well, this would be detrimental to the, to the system. This would, you know, potentially bring the value, of the asset down if, if people, i-i-if you know, the, the block validators do, perform those kinds of activities in, in, in a way that's too malicious. But I think there's a, there's a very fine line between sort of the pro- Incentive that is made available by these opportunities and the way, or at least the extent to which the sort of ecosystem, the Ethereum ecosystem, is willing to tolerate it. And it's, it's been increasingly blurry, and there's a lot of debate on, between some people in that ecosystem as to whether or not, even just something like Flashbox is a, Flashbox, sorry, is, is actually beneficial or detrimental, to the ecosystem. But yeah, I mean- Overall, the underlying bottom line is that the larger, the, the, the larger validator, validator you are, the more stake you have within the proof of stake, the more MEV opportunities you capture, especially if you have, you know, i-i-if you're sort of able to coordinate or collaborate or, or if your, staking infrastructure is created in partnership with, you know, people that are very close to the protocol, and that's what we're seeing play out. Lido, for example. Lighto, for example, one of the main proponent of, of the Lido protocol is Paradigm. Paradigm is pretty well known, at least within the Ethereum ecosystem, they're not as active, in Bitcoin, although they do, to their credit, I believe, sponsor a couple of Bitcoin developers. But all that to say is Paradigm actually bought ten percent stake into the, the Lido DAO, and Paradigm, has hired, has within its team, you know, some of the most Proficient Ethereum de-developers, some of the people that are closest to the core protocol, and so, this allows them the ability to very, have a very, deep understanding of MEV and the opportunities that might arise. And so you have, you know, this introduces to proof of stake a sort of, dynamic where you're not only concerned with your staking infrastructure and maintaining those computers on top of which the staking contract, run but you need to, spend capital on this expertise of MEV, and obviously this capital might not be available to everyone, but the scarcity is very, is very much in the, in the resources that are available, the people that are actually able to write, and execute the code that can capture this MEV. so that's the, so that's the centralization dynamic for, for MEV a-and then the relationship that it has with, staking derivatives. Is basically that by allowing for a staking derivatives contract to be issued, in exchange for staking Ethereum, you create a network effect, create a liquidity network effect, and so it isn't beneficial for, people that are interested in those staking derivatives, to be using derivatives for different providers. Obviously, if you have, so the- Or maybe to just to jump back a little bit, like how the, does the, staking, ecosystem looks like nowadays? Well, to be perfectly fair, Lido itself, the protocol, is still a small fraction of the, Ethereum that's currently staked into sort of this, the, the, the beacon chain they call, is this sort of pre-merge, proof of stake contract. So it's still a very, small fraction. It is the fastest growing pool of funds for, for Ethereum. I, I believe that I've read, that in the last thirty days, fifty percent of the ETH that were staked into this, Beacon Chain, were actually staked into the Lido protocol. And, but nevertheless, right now probably the most significant entities are, exchanges. Kraken does a lot of staking, they have a significant portion. And if Kraken were to offer their own- Staking derivatives, then there's this situation obviously where, the, the staking derivatives from Lido and the staking derivatives from Kraken, they're not fungible, and so no one is, better off by, using those different derivatives. It's, it's, these derivatives are essentially becoming the money, that is available within the economy for Ethereum. So obviously liquidity begets liquidity, and so there's this very, very, very strong, network, network effect incentive playing out, and if that holds true And if the, Lido, the Lido protocol through their, through their proficiency, and their, their expertise, you know, in being able to, to capture the MEV, become the sort of de facto, staking protocol for Ethereum Then there's very little reason for, anyone that's willing to stake to use anything other than Lido. and so I, it is my feeling that this sort of growth in Lido, and for people that are holding Lido token, that's probably very bullish. but, there's, it seems to me like there's this very, very strong incentive for people that are interested in, or all the capital that is available for staking to affect Effectively converge, with time into the Lido contract because it has all the benefits of staking, it has all the benefits of sort of ecosystem integration where they have, you know, they allow you to, use your ledger to be able to stake, they have all these integrations with all, all of the DeFi applications, but ultimately, you know, their, their biggest value proposition is the liquidity that is created By their, staking derivatives.

Yeah, interesting stuff. And so it's like, it reminds me of how, our friends Marty and Matt over at Rabbit Hole Recap, they often talk about the centralizing pressure that proof of stake has even in the exchanges, because the exchanges might be holding lots of coins and giving incentives for their customers to leave their coins on the exchange so that exchange's staking does better. And so in what you're outlining here is like that on steroids, right? Because it's that another level because now Oh, it's staking derivatives, which causes even more of a centralization pressure. So, yeah, would, would you say that's an accurate summary then? Or definitely.

And I think originally that was one of the concern, right? And that's how people were seeing, the, the proof of stake centralization playing out is obviously you've got these massive amounts of ETH on, on centralized exchanges, and, and they're able to sort of offer that yield to their customer without their customer having to do much of anything. And it's not obvious, at least, that, some Taproot would necessarily leave, tho-those exchanges, but I feel, it feels to me like the incentives are, are very much there for them to do so. And, and obviously, these exchanges, one of their biggest downside is that they're not able to offer-- they're certainly able to offer, sort of a similar derivative, in, in the sense, that they, can allow at least even just within their own exchange for people to have, that it collateral in the stake In the staking contract, but potentially offer that derivative, product on exchange. They could also have their own, on-chain token, but obviously It's not as, quote unquote, trustless as, the, the staking derivatives that, that, that's offered by a, a non-chain contract such as, such as Lydor. Something else also that's, that's, that's very interesting, and sort of, it just, it really just only dawned on me in the last couple of days, i-i-that compounds the centralization effect i-is that, you know, you have, I think it's always been very known that, this notion that, the largest holders of this, of this staking ecosystem, you know, this sort of rich get richer, effect, where they only have to sit on their coins and then And they continue to earn that yield without having to do much of anything. That's actually compounded by offering that derivatives, because then you unlock that capital that was originally, set to be sort of dead capital, and you allow those people to use that capital and go back to the DeFi ecosystem and, you know, potentially lend that, that capital on, on, things like Compound, which is a DeFi app. And And obviously, the more capital you have available to lend, the more profit, the more yield you earn, and by, and so by the same effect, the more, the more that profit you get, the more you can reinvest into staking, the largest your, share of the pie grows. And so, yeah, it, it's, it's, it's a very, very, very, I mean, it'll be interesting to see how it plays out. I can't, claim that I, predict the future, but I think there's a strong case to make that ultimately this all converges into a lot of the capital, being-- and this is not only my opinion, funny enough, the people at Paradigm have actually put up a, blog post in the last few months that outline this, A sort of decentralized, staking protocol infrastructure, and they make the exact same case. They make the exact same case that there's network effect at play that could very well lead to up to almost a hundred percent of the Ethereum being staked within the Lido contract. And they make that case, I think, without, at least in this article, without fully sort of acknowledging, acknowledging the sort of systemic risk that this introduces. And one of the one that I think they're aware of, they're definitely aware of it because they've just put forth, a couple of weeks back, a, a new article claiming how, they would address this problem. And the problem is that if you have a majority of the stake that is, allocated to the Lido contract, then the people that own the actual DAO token, the Lido, governance token, are effectively the ones that are hand-picking the validators For the entire Ethereum ecosystem. Right, and that could be

a problem, right?

That is a massive problem because this introduces even regulatory risk because the, some of the owners of, of this DAO contract are public-facing, entities, a-and so by voting, and by, you know, by, by voting using their, their capital, they're able to decide who gets to potentially ultimately validate the Ethereum chain, and so to be fair, I- Again, they have a knowledge at risk. They, they claim to have a plan to sort of, to sort of diminish, this, this control that the DAO would have on, on, the, validator, selection. they claim that they will use on-chain metrics to create a reputation system across the validators, that will then sort of make it almost permissionless. I think if it works out, it's a pretty decent idea, but from my perspective, it's- It's not within the incentives of the DAO token holders to enable that, because if, you create such a permissionless system, then the actual DAO loses all of its purpose Because the government, the governance ultimately of, of that protocol, the value that is, is, it, it is essentially this curation of, of the validators. But then when you put, this curation out of the hands of the DAO token, what's the value there? Why would, the validators, this group of validators, decide that, hey, we don't wanna pay any more fees to the, DAO? Why would we share our revenue of the pie with people that are effectu-effectively providing almost no value at all? And so they might, and, and, and given obviously that these smart contracts are all public, anyone can copy and paste them, you know, you've seen that with Uniswap and with, the, the Sushi centralized exchanges, like why would, the validators decide, hey, we don't need the And then we'll implement this sort of permissionless curation system, a-and then all the DAO token holders are, are left with nothing, with something that's worth nothing, so, you know, I, it's not clear to me that it's incentives compatible

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Yeah, well, obviously at face value some of the consequences are, are pretty obvious. You have this organization, like I said, that, it is, it effectively devolves, Ethereum into, what is essentially called a sort of a DPoS system, a, delegated proof of stake system. delegated meaning that those who, you know, those who hold the coin actually gets to vote on who is, validating the chain. we have some experience with, these DPOS systems. They're not very decentralized. they're, they're, the, the target that is put on the, token holders is a lot more obvious and a lot more pervasive, than they are, within a sort of, or a At le- at least the current sort of proof-of-stake implementation, of Ethereum. And one of the danger, one of the main danger probably is that this very strong potentially challenges the claims of Ethereum, with regards to their monetary policy.

So it's not ultrasound money?

Well, I mean, exactly. Like, they already have this, But you know, this history of, switching their monetary policy around, in, in different ways. now their claim is that, they always have targeted a sort of more deflationary, issuance. they have this concept that they call the minimum viable issuance, which is Sort of hand-wi-very hand-wavy, i-implementation of something that has actual no inputs. There's, you know, it cannot be codi-codified. I-it's something very, very vague, but obviously their target and the narrative that they want to entertain is that you will end up with a system that's deflationary, and, their, at least their argument lately has been that, this H- it has been that this EIP one five five nine that has been introduced is, you know, the late, the last change, ultimately. Its probably the argument is that the monetary policy of Ethereum will calc- calcify after this, because we have all the tools that are needed for us to probably go into the long term and have an incentive-compatible monetary system. the problems that I see with that obviously is that if you concentrate the validator set, especially if you allow For most people, potentially a hundred, percent of the people on Ethereum, to be able to, to, to validate, the more p- the more people that are validating the less stake they act-- the less, the less issuance, the less rewards each individual player actually, actually, is rewarded with. And so you could come to a point, in, in that sort of, dynamic, down the road where the validators aren't too happy anymore, with their, rewards. they might get to claim that the issuance isn't enough for them to incen-- to be incentivized to- To, actually, you know, stake, they probably are earning more stake, within potentially DeFi activity, and so they will say, "Well, you know, we're, in, in this, by consequence, the Lido, set of validators that potentially is very centralized will say, 'Hey, guys, we've gotta flip the monetary currency, around a little bit.' Like, you know, let's increase that, by, a couple percentage point. Like what?" What's the big deal, right? you're, you're going to incentivize us to continue staking, and eve-everyone will be happy. And if the history of Ethereum is to be trusted, I guess It's not clear that, by the time this happens and the scale at which the Ethereum community will be, it's not clear that, everyone will sort of raise up and, and work against that, because there's a very real danger that you're effectively raising up, Against the overloads, o-overlords of, of the system. By the time the validators become that big, especially if it's concentrated, against such a small set of validators or even just a single protocol It becomes a very risky business to say like, "Hey, just, you know, f off, like you're not gonna get what you want," because then, you know Then they might decide, the validators might decide, okay, well, we're not gonna get the, the issuance, change, but then watch for your, sort of MVD, watch for your transactions, you know? Like we're gonna be, doing, like we, we had previously sort of a-avoided, doing, detrimental MVD activities, but we need more revenues, so now we're going to do whatever we need, to get those revenues. so it's a challenge. And also, like one of the things that the validators do, one of the things that, that is an obvious, downside to Ethereum that's always been, very clear to me is that the miners in Ethereum actually control the block size. they get, and what's, what they call the gas limit, is effectively decided, by, by the miners. historically, it's been, something that was done in coordination with the Ethereum Foundation, the Ethereum core devs, the, the Ethereum core devs Would say like, okay, we feel that it's safe to increase the block size a little bit, and the miners would be compliant and say, okay, let's do that. but then if you, and to, to my knowledge, this isn't going to change, with, with proof of stake. And so obviously, if you have, again, this usually centralized i-entity, that control the block size, like what's to stop them from increasing, increasing, and increasing, the, the, the gas limit, thereby not only con- Concentrating the validator set, but also it's important to, to remember that, although there are vali- these validators within Ethereum, there's also supposed to be this sort of dynamic, this balance of power where you also have the Ethereum nodes, the validating nodes, the ones that supposedly everyone is able to run. Obviously, we all know that that's a big challenge within Ethereum itself already at this point, and but down the road, You know, this, the, the validators, the validators are giving the opportunity to blur this sort of bal-- to sort of, diminish this balance of power and concentrate, their control even more by slowly, slowly, slowly, pushing out at the edge the, the validator set so that, I mean, down the line, who knows? Maybe they'll be the only ones, like the validators themselves, will be the only one able to run Ethereum nodes, at which point there's effectively no, no distribution of power. It is, you have this one single entity that, that controls all the rules, within Ethereum.

Yeah, it, it just seems to me like it's recreating the fiat world. It's just recreating all the problems that we don't like about fiat, and it's just-- Well, I mean, look, the ETH, the, the ETH huffers might have some counterargument here, so, but fine, whatever. and now one other idea as well, so related to this centralization idea. What about in the case of some big failure, if there were to be some big systemic failure or some kind of, you know, network split, could you elaborate a little bit on that and what the centralization of Ethereum might mean for that?

Well, I think that's one of the biggest downside of, of proof of stake, and it's, it's funny, this, this topic of, this topic came up, last night, so yeah, Dennis Porter had a bit of a debate with, David Hoffman, from, from From the Bankless podcast, and, the, this exact conversation came along, and, it was a little astounding to hear, David's reply, and effectively for proof of stake, there's no answer, because if you dig a little bit into this entire concept, if you dig a little bit into, the proof of stake implementation, it's, it's sort of a weak, they refer to it as weak subjectivity, so it doesn't actually secure, the past. It- Only really, secures, the present. And so at a certain point in time, if the network forks, and especially if the network splits The longer the network split, the harder it is, for the network participant to be able to ascertain exactly, you know, which, which chain is the valid one. And so by that effect, if ever this hap- this happens, and obviously, so, so David's answer to that basically yesterday was, "Well, the community will just get together and we'll make a decision as to which chain is the valid one." Well, first off, obviously, if you, if you're going to do that, you need to be validating the chain. You need to- Maybe actively running a node, which might get, further and further more difficult, down the line with Ethereum. But also, like, a-and I guess this is one of the answer that comes along every time that an issue is brought, is brought up with Ethereum, is the community will figure it out. Everyone is, Working within Ethereum's best interest, and so its participants will figure it out. And it's very obvious to someone that sort of studied the, the, the, these systems and un- actually understand why they were created in the first place is that because the concept of community doesn't scale. You can't reach, there becomes a certain point in time where the community becomes too big. It's like saying, you know, if the internet breaks, well, the community is gonna figure it out, you know? Who exactly is the key? Who's the, internet community here? Like, it, it, it will start losing value, sorry, it will start, losing, losing sense, in, in the future. It is already sort of, i-it's already happening, you know, even within the Bitcoin ecosystem, like, you have different, different factions, people are getting, interested or excited about certain projects, people, some people aren't, and that's good, that's healthy, that's decentralization playing out. But decentraliz- Centralisation ultimately brings, about an inability to coordinate, and so obviously then what happens if something, if, if a split happens within, proof of stake? Well, since there's no sort of, objective, measure of, that you have with proof of work, with the weight of the chain, if there's no objective measure of what is the valid, which one is the valid chain, then it all comes down to a sort of You know, popularity contest. It becomes, who holds the most ETH gets to decide who are the biggest validators again. They get to decide which one is the, the valid chain. And it doesn't matter if, if it isn't, basically, if they're the provider of all the infrastructure, you really have no choice but to, play along with them, because otherwise, you're left with a chain that has very little security or very little actual capital dedicated to them. So that's, that's a major concern. I don't know how they get around this one. I think the, it'll become increasingly obvious that the community answer isn't going to cut it, and so yeah, yeah,

especially if there's competing interests, because there might be people like, if, if, like, supposedly if Ethereum's gonna be the whole smart contracting, so on, and there would be people on different sides of the argument saying, "Hey, I've lost this much money," and the other one would be saying, "No, I'm gonna lose all this Decide, and then it just, it-- what are they even protecting at the end of the day?

Exactly. And I, I think it's interesting that you bring, that you bring up this argument because we're, from my perspective, we're seeing that split already sort of occurring, in, in the Ethereum community where, they've introduced this, the sound money narrative, this ultrasound money narrative, because they see how well it's working for Bitcoin, the number go up, that's working well. but on the other hand, you've got this dynamic The actual original utility use case of Ethereum, you know, the ability for people to perform economic, economic activity on the chain through whatever DeFi app or whatever it is, it's become challenged or, or challenging because of the fees on the network Obviously they'll claim that they have, solution to the, to the fees on the network, but you're seeing this divergence already from people that are just interested in, you know, minting those NFTs, trading those NFTs around, using those, those, those DeFi applications, speculating in, in such a way that, it, it is becoming uneconomical to do so on the Ethereum chain, and so that is why you're seeing this emergence of these alterna-alternative, layer one Binance Smart Chain, Solana, Polkadot, and all of that. And so you have this divergence in interest within the Ethereum community already of the sound money proponent, and for the sound money proponents to be, correct or for the, for their claim to be validated, you sort of need high fees. They, they really want higher fees, 'cause the higher fees they have, you know, the more Ethereum gets burned, and so the more deflationary it becomes. But then on the other hand- And you've got these other guys that just wanna be able to transact for as little fees as possible, they want their activity to be as efficient as possible, and so they'll gladly move their activity across different chains if it allows them to do that. And so, like you said, down the line, competing interests, what happens is if, if there's a fork, it's not clear that everyone will sort of reconcile together. So you might be left with ultimately two different chains.

Yeah, and that's just not, that's not a winning outcome for them. And it, it potentially, like you Touching on this before, that it might be painting a regulatory target on the back of, you know, Ethereum, companies and Ethereum entities as well.

Definitely. I, I, I think there's a lot of ways you can conceive how this could happen. I think one of the obvious way, and I'm, you know, I'm not one for, Supporting regulators to, to attack, these networks because, of

course,

you don't wanna play favorites, obviously if they start, Being adversarial, adversarial towards one network, nothing's stopping them from being adversarial towards Bitcoin. But the target is just there, for, for Ethereum, and it's increasingly the case, if you know, if you consider the DAO organization, because it's very clear to me that the DAO token is obviously a security, it is, inarguably a security, it is something that allows, a claim on future rewards that is offered by, I mean It is offered by a, ultimately in the beginning, centralized team. Of course, now that's the whole idea, you know, they, they sort of, distribute this token within the, ecosystem and then they get to claim that, "Oh, well, it's decentralized, there's no centralized issuer, so it's not really security." I don't think that's a very convincing argument for the regulators. But ultimately, even if it's not a matter of, of securities, you expose through, through these organizations, through those validators, you know, the validators in the Ethereum. These are keys, the, these are, this, this is capital that's held on, on servers that needs to be online a hundred percent of the time, twenty four seven, because if there isn't any downtime to their activity, there's immediate, repercussions for them. They get sl- there's this concept of slashing. If you're a validator and you go offline and somehow that has an effect, on the network, well, then you, you get, you get to pay for that. So they need-- So, so It becomes a little hard to, be able to manage that without putting a regulatory target on your back. They'll, they'll-- Some people will say that it's the same for, for mining. Obviously, mining being large operations, they're subject to, sort of government enforcement. You, we've seen that with, with China, and it's gonna be interesting to see how exactly it plays out. But the one major difference really is that with mining, well, the government might come along and say, okay, well, you gotta burn your mining, facility down. I'm sorry, there's nothing we can do. Ultimately, yeah, obviously the miners are affected, the, the, this exact miner is affected, potentially the security to a certain extent of the network is affected, but ultimately, you know, alt- other miners will, will come up to pick up the slack. The problem with, the Ethereum staking nodes is that you hold the private keys there, and if, if this gets compromised, and that's why some of the arguments about, potential proof-of-stake attacks From the validators, the argument is always that, well, you know, like miners, they don't have the incentive to attack the network, and so they'll play along, they'll, and they'll be, they'll be nice to everyone. But the problem is that if you paint a regulatory or sort of a adversarial target, on, on your Ethereum staking nodes, well, if someone comes along, not only can they burn down your infrastructure, they can actually steal, you know, they can actually compromise your private key, at which point they control directly the capital and they get Again, they can sit on that capital perpetually, sort of reinforcing their control, their, their control over Ethereum.

Yeah, yeah, that's, it's, it's pretty concerning stuff for-- Well, it should be very concerning stuff for any, ETH person or proponent. and so I think to contrast with Bitcoin as well, because obviously this is a Bitcoin show, and I think the idea is to give people some context or give them some ideas on what are the differences there to understand how is Bitcoin- Bitcoin structured differently. So maybe one area would be to contrast with Bitcoin miners, and so obviously Bitcoin is openly a proof-of-work system. Do you want to outline any differences there?

Yeah, well, there are very major differences, and this comes back to, to, to what I just, I just said is there's this notion of, especially true, you know, you said the exact, same thing earlier, especially true with, staking derivatives where there's kind of a free lunch, dynamic playing out. With, with staking where, you know, you capture this capital over time, you might already have this capital from, you know, ICO days, like how much percentage of the Ethereum that's been allocated to certain entities and that they've been sitting on, since, essentially the ICO, and not only probably have they been sitting on them, but this, this was essentially free capital for them to down the line leverage during the, the ICO boom, the DeFi boom. So Obviously you have this concentration of, this concern about the concentration of capital, and what happens is that the way it's taking its design is obviously that you have no expenditure, to maintain that validating infrastructure. You sit on your capital, again, increasingly true with the derivatives, you sit on your capital and you earn, you, you earn more, rewards. It's a bit of a, it, it, it's a bit of a Cantillon effect, at, at play really, and something- That Bitcoiners will be, obviously very familiar with, but like you said, it, it really creates a very strong parallel between Ethereum as it is designed, to, to, to turn into and, the fiat system. And the obvious difference, as you point out, is the permissionless aspect of, of, the proof of work. we've seen that throughout its history, you know, the biggest miners at a certain point in time are, the biggest miners at a certain point in time, if you, if you look Look at the ecosystem four years, afterward in the future, they might not even exist anymore. They, you know, like there was this entity back in two thousand thirteen or something, like G-Gash, they, they controlled up to a point almost fifty-one percent of the actual m-ashing power. And you look at it, you look at it today, there's no Gash on the network anymore. And I mean, you had Bitmain, for, for sever- like a very long period of Bitcoin history, Bitmain through,

the, end pool mining infrastructure. Well, who's the leading miner, nowadays, the le-le-leading mining pool? it's probably just play-- it's probably moving, it's a little volatile obviously, but recently Foundry, the, the, the mining init-initiative from, from DCG, from Barry Silbert and all, actually be-be came probably the first mining pool, the first American mining pool in Bitcoin history to actually hold the number one place. So it's a very competitive environment, and it's increasingly the- Case given, and it will actually, sorry, become increasingly the case in the future where, when margins will probably go down. Nowadays, miners are increasing, are enjoying a very, very, very preferential sort of dynamic. That's especially true because of what happened with, the mining shutdown in China, where the difficulty went down so much, the existing miners, the margins are ridiculous. It's not going to stay the same for, For a long time. Down the road, as mining further and further professionalizes, the margin will be razor-thin, and then so it becomes, it becomes a game of who's got the cheapest power, who's got the, who's got, the lowest CapEx, who's got the most efficient machines. And so it's a situation that's always in flux, and so you never have this one miner that will have, a stake on the network that they can never repla- be, that where no one can replace So it's, I mean, it's, to me, it's a very, it's a massive, it's a very beneficial, aspect of, of proof of work. It's actually how it thrives toward further and further decentralization, is it becomes this very capitalistic system where people have to become, you know, specialized, they have to continue to expand capital to be able, to, stay, in this game and earn the rewards of, of-

of Bitcoin mining. Yeah, yeah, excellent point Saul. There, essentially it's, you know, Bitcoin mining is a hyper-competitive environment. You need to be, and, and it's constantly changing. And as you were saying, it's constant, it's constant expenditure, right? So, capital expenditure and operating expenditure, because you're buying new machines, you're, you're paying for power, you're paying for rack space, you're paying to, you know, to get all of the things done, to get maintenance, all of these aspects, it just requires So that element is further decentralizing over time compared to Ethereum, which is further centralizing over time. And then even, with Bitcoin being formed with that twenty-one million from the start aspect, I think that's also an important point that, you know, people maybe are taking that a little bit for granted in this conversation and just thinking, "Oh, well, see, ultrasound money, I'll just make this money that's going down, to try and, you know," but ultimately the point is that you're not changing it. Like Bitcoin's supply isn't gonna change.

Exactly, I think this point cannot be emphasized enough, and I've actually lately been sort of, trying to, introduce this, this different, Framing with regards to, to, to Bitcoin, to Bitcoin's distribution, because I think it's very valuable in terms of contrasting it with, Ethereum's monetary policy. and, and the idea is that Bitcoin doesn't really have a monetary policy. Bitcoin was built with a distribution schedule. Satoshi decided there's going to be You know, it's a first, it's, it's more of like a first principle design, axiom where Satoshi decides that there will be a hard cap, decides how many coins there will be in, in Bitcoin, Throughout its history, and then builds a distribution curve ar-around that. And it's very important because it's sort of, to me it sort of really defeats the argument, that a lot of pe-people in Ethereum make where, oh, well, Bitcoin has this monetary policy, you know, it's not guaranteed that in the future it'll work because what if the fee revenue isn't too high, the fee revenue being sort of an uncertainty, then it's likely that Bitcoin changes its monetary policy to adjust potentially with more inflation. But really, that's a non-starter. Like I said, it's the first principle design that Bitcoin was built with a hard cap, and the assumption is made that Bitcoin, if Bitcoin is to succeed It will obviously, as the standard for transfer value across the world, generate a ginormous amount of fees for miners to be incentivized to secure the network. And if those fees aren't enough, if miners aren't incentivized, it isn't a, it isn't a reflection of the security model, it would simply be a reflection of Bitcoin failing to monetize. And so the assumption that, Somehow there's a flaw in the security model, and the fee-based security model is wrong. It is only true if you assume that Bitcoin fails, and if Bitcoin fails, it's not because it, it's because as a store of value, it has failed to build a network effect and to, to monetize into the real world. so you have this, this fee-based market meca-mechanism, there's no, right amount of security. That's another major misconception that people always make to me. you can't say whether or not Bitcoin's got too much security or not enough security. It has just as much security as the market is willing to pay for. If the market, doesn't value Bitcoin to the extent of the hashing power that is active on the network, the value of the asset will go down. The miners will be disincentivized, will, will have to turn off their machine, or, you know, people will be paying less fees. So it's not a problem. Like, again, this comes back to the argument, if there is low fees on the Bitcoin network and the pe-pe- and miners aren't incentivized to mine, It's because ultimately there's low demand for Bitcoin, that's where it ends. And so, to contrast that with, with Ethereum, You know, rather than having this distribution supply, this distribution schedule in Bitcoin, where there's a very strong commitment made to distribute the monetary, asset within the, the, the ecosystem and then let the market figure it out, well, with Ethereum Like you said, they've made this sort of, commitment to a policy, and policies aren't set in stone. Policies will depend on inputs, outputs from, from the system, and it seems, I, I mean, it's a bit bewildering to me, whenever you hear Ethereum, most Ethereum proponents really talk about this, is that it, it's very much a fiat mindset. It's total Keynesian, arguments really that are being made. made were they will adjust according, to, what the result of their experiment is, and again they make the argument, "Well, if it doesn't work, the community will figure it out." The whole point of Bitcoin, the whole point why we have this system, is that we want to remove the human element from this conversation, because the human element has failed us repeatedly through history. And so it doesn't matter that they claim that the current policy that they have is deflationary, because they've created this opening for them to be able to change it down the line. And if it can be changed once, it can be changed, it can be changed twice and more and more and more. And the point I wanna make also, and I think it's, I think people might understand it better also, or at least to bring it back to Bitcoin, there's this, there's this notion, you know, there's this notion, that's always talked about of, what if Bitcoin was built with a one percent sort of emission schedule, an eventual one percent inflation schedule? Would it be as- Sound money as it is, without the, you know, the, with, without the hard cap that it has today. And a lot of people make the argument, well, it doesn't matter, as long as the rules are set from the beginning, if it's one percent, five percent, whatever, the market will decide whether it, it accepts this proposition, and it will, as long as it stays set and there's no historical precedent of it changing, then it will remain the same. I reject this notion very strongly. And the difference between zero And one percent or half a percent is all the difference in the world, because the one percent introduces a monetary policy, right? The one percent says that we cannot rely on market functions to be able to value the asset and the demand for the, transaction on the network to be able to secure it. So by introducing this monetary policy, then you open the Pandora, Pandora's box for it to be able to, you create a sort of shelling point where it becomes Easy to open an argument against down the line where people might feel, okay, well, you know, turns out one percent isn't enough, we have an inflation rate, so might as well play around with it, you know? So, I think it was a non-starter from the beginning. I think Satoshi very much understood that notion, and that's why the hard cap is fundamental to the design of Bitcoin. I, I believe it wouldn't have garnered the adoption that it has up to this day without a hard cap

Yeah, yeah, really interesting stuff, and I think it's like, it's like just that discovery of the number zero, and I think, Breadloaf has written about this, it's kind of like this idea that even in maths, people weren't necessarily like It was like, it was, it was an interesting, like, article that he wrote about the discovery of the, the number zero, and I think it's, that's, that's pro-- that's very related to the point that you're making. and so I guess summarizing things in terms of what's the future looking like for Ethereum and its centralization, what do you, what do you see for that?

Well, one thing I see that people, or Bitcoiners won't really be happy about is I expect Ethereum to, stick around for for a while, because the way it's designed is sort of this same, a bit perverse design that this, the fiat, the, the fiat system is built, right? Where you know that it's fundamentally flawed, but it takes a while for these incentives to ultimately play out. But what I see as the real danger, and I think we're, like, we've discussed that, and we, we're, we're seeing that emerge, and I'm, I'm also observing people that are all, that are usually like the flag bearers of, of Ethereum some of the influencers, within Ethereum, they're starting to have this, sort of sneaking suspicion that they're put themselves between a rock and a hard place where, like I said, either they entertain the store value narrative, but if they fail to do that, and ultimately, I think we agree that they'll, they will fail to do that, I don't think the market ultimately will buy the, the, this argument. They might sort of be able to entertain it for a while by, by, you know, having so much of these fees being burned. A bunch of the Ethereum being burned, so from a supply perspective, it's absolutely possible that for at least a short, amount of time, the supply be, becomes constrained and the number goes up, and then, you know, they can play along with that narrative. But the issue is, is that if they actually-- so if they fail to establish the s-- the sound money narrative, all they're left with is the utility narrative. All they're left with is the application layer narrative, and the application layer narrative is a dead sentence, because the application layer narrative is a technology narrative. And so when people, you know, used to say in the past that, Bitcoin is the myspace of money, I mean, we all know why that's wrong. But Ethereum on the other hand, and it's funny, I think you have- Yeah, that, I think you had, who is it? I think it was Paul Tudor Jones, that was on Bloomberg, or who's the one, anyways, one of the major, sort of trad-tradfi, in-investor that actually owns, Bitcoin, and he was making the exact same argument, is that actually Ethereum might just be the MySpace of its ecosystem, you know? Because if you're hanging on to technology, if you're hanging on to technology as, your only value proposition, then that's It's a very, very sort of weak grounding, you know, because as we all know, technology is improving, it's, it's iterating every single day, and so you've all-- you already have the Solanas of this world, you already have the Binance chain. Now people might say, "Well, Binance chain, obviously very, very centralized, so potentially not a, a viable competitor to Ethereum." Same could be said about Solana. Well, who knows how-- who knows, sorry, it was Drunken Miller. It was Drunken Miller that made the exact, same, analogy to,

Drunken Miller, yeah.

Yeah. Anyways, and so, so there will be better, better technology for the DeFi applications that will come along. There will be better technology for the NFTs application that will come along. And so this will inevitably dilute the market cap of, of Ethereum, because if they don't monetize, if the monetary premium is removed from their, value proposition, then it's who gets the bet, who gets the be-best bet. And as we all know It's pretty much impossible to hold that lead forever. And if you create a precedent where you lose that lead, then you create a precedent where people won't be willing to invest. You know, it's the, it's the flipping argument. and, and, and the Ethereum people think that the flipping argument would be good for them, but, but obviously the, the obvious res-response to that is that if, if Bitcoin can be flipping, then so can Ethereum. And at this point, who will be willing to- Trust their money into any of these systems because they might always be at risk of being flipped and, and then you've got this sort of musical chair around where who's the last that will be left holding the bags, you know? It's not a very favorable scenario, especially if tech is your only value proposition. So ultimately, I see that, I see that, as, how it plays out. I think Ethereum stays around for a while, I think it enjoys- Yeah, really interesting. I think it enjoys, some, some temporary success for, for, for probably several years, I mean, success in terms of like, you know, money being tossed around and, and sort of, I mean, they're, they're enjoying the same, in a way, they're, they're enjoying the same byproduct of the fiat system that, as Bitcoin is, where there's so much liquidity around. So why wouldn't you, you know, buy, a picture of a rock for, five hundred thousand dollar for you Someone else for a billion dollar. But when ultimately, I think when that liquidity dries up, that's when, I think that's when Ethereum will be on very, very shaky grounds.

Yeah, really interesting way to summarize it, because I'm thinking now back to some of the early writings of the Nakamoto Institute, where the, the boys there were writing articles like "Appcoins are snake oil" or pointing out the problems of utility tokens. And as you were rightly saying, Ethereum doesn't have a chance at winning the store of value, quote unquote. I mean, that's what kind of the The shitcoin people, oh, that store of value, but really it's just money, right? We're just trying to win, we're, we're just trying to create money, like reliable, open money. Anyone can run a node, anyone can use Bitcoin, anyone can va-validate the full twenty-one million coins. Like that's, that's really what is, you know, that's what, that's the Bitcoin project. And of course, there are different ways you can use Bitcoin, but that's the broad idea of Bitcoin,

where, you know, there's this twenty-one million So it's not, they're just not gonna, they're never gonna win that, they're never gonna become that. And then on, if they're just trying to be a utility, well, there's a lot of already well-documented and known problems with utility coins because somebody else can just go and make a technology that does it cheaper or does it more centralized and faster or better or some different new way. So there's really a lot of problems there in that way. And I, I love the, myspace of Ethereum is the myspace. Actually, while we're here as well, critique of proof of stake, which is the "Nothing at Stake" paper, and I believe it was Andrew Polstra who wrote that in, I wanna say 2014. Do you have any thoughts on that or do you think, how well do you think that paper holds up now?

To my knowledge, and I'd have to revisit, I, I, I haven't read that one in a while. To my knowledge, it's, it doesn't hold up as well, for the fact that it, it didn't account back then for the sort of implementation of slashing that Ethereum is with, like it didn't account for the proof of stake implementation that Ethereum is now proposing. So there's still, I believe, some, some value to it, and I'd- Encourage anyone to, to read it because it, it, it certainly gives a, a sort of very intelligent perspective on, on, on, on the challenges of, of proof of stake. But I think some of the arguments break down a little bit, especially when it comes to how Andrew proposed that there isn't necessarily a cost to attacking, to attacking, the, the system. It's not clear that like what Ethereum has come, has come up with is, a perfect solution for it, but it's a different sort of scenario. So, I, I don't- I don't know that we can evaluate it under, under the same lens, yeah.

Gotcha. And I mean, in fairness, it is what, seven years old or something like that now, so that was quite a while back. But I think the arguments that you've presented today certainly make a lot of sense to me around centralization pressure that is simply there in Ethereum. So did you have any, I guess, final comments you wanted to make on, on this whole topic?

Well, I mean, ultimately, I think I've said all that needed to be said. I think I would encourage-- Is that I would encourage, and this is what I said in the, in the very beginning, is I would encourage people to start, if you're going to get into these conversations, I think you owe it to yourself to get a little more knowledge, about, exactly, how these systems are, are designed. I mean, you might think that it's not worth your time, which is perfectly fair. I would encourage anyone that's working, you know, on anything productive within the bi- Bitcoin ecosystem system, and that's just not, that's not just like shit posting on Twitter like I am every day to not bother with that, you know? continue doing what you're doing, you're doing well, continue writing code, we don't need you. I, I'll, I'll handle the, the, the arguments on Twitter, on Twitter. But for anyone else that sort of gets into this conversation, I'm afraid a lot of times we end up looking a little bit silly. The, the Bitcoiners, and, I mean, there's, there's a guy called, This Norwegian guy, I think, he, he, often makes the argument, sorry, he's made the argument in the past that, a lot of Ethereum people actually probably know more about or understand Bi- Bitcoin better than Bitcoiners give them credit for, and the same isn't true. A lot of people, and, and especially unfortunately, like from this sort of last batch of Bitcoiners, they've been ingrained, you know, with this ethi- with this idea that Ethereum is evil, but they actually understand none of it. And so Come around to discussing it, there, especially if there's an audience, you know, there's people that are, cut-new to this ecosystem that end up, overhearing those conversations. From my perspective, and if I was that person, I would think that, Ethereum's definitely got something, going for itself because the arguments that I'm hearing from the average Bitcoiner on Clubhouse, not very convincing, sometimes pretty embarrassing. So again, if you're going- To sort of critique those systems, you really should just dive a little more deeper into, into them so that you can actually have, you know, an intelligent conversation. I mean, I, I, I've been getting into arguments, lately with, with people in the Bitcoin, Bitcoin Maxis, because, I think there's some value to, the NFT, idea. I think ninety-nine percent, ninety-nine point nine percent of it at the moment is completely speculative, it's a bubble, it'll pop. And also it's worth pointing out You know, NFTs ultimately is not a mode for Ethereum, and people associate it, with Ethereum so much that, they don't think for themselves and, use sort of a, a rational mindset where they evaluate the idea on its own, without, you know, immediately saying, "Ah, well, it's from Ethereum, it's total shit, there's no interest here." Personally, I think some of it is pretty tenable, but then I'm always, like I said, I'm always faced with these conversations of, people just being blind, for, for no reason that, you know, they've been, it's sort of a This conditioning that we've created, throughout the years with people that are, new to this ecosystem, this sort of toxic maximalism, and I'm all for toxic maximalism, but I'm also all for sort of, critical thinking. I need people to not trust the oracles and not trust me or someone else to tell them like, "This thing is bad, don't believe in it, don't trust it." No, you need to come to these conclusions on your own. You need to think for yourself. And, and so, whenever- If you encounter a subject like this, yeah, just bring some rational thinking to the table. You'll be better off for it, everyone will be better off, and your audience, if there is any, will benefit.

Gotcha. Yeah, so I think, and for look, for listeners out there who just think, "Look, all I care about is sound money, that's fine, then just don't worry about anything else, just focus just on Bitcoin." And then I think maybe one of the lessons of this episode might just be that, here are some ways to think about a more like

Theorem, maybe if you can offer a more intelligent critique, that's probably the, the better way to go about it. So that's probably a good spot to finish here. Alex, where can people find you online if they wanna follow you or see your work?

Twitter. Twitter is the, probably the place where I'm most active. So you can find me at, bergalex4, that's B E R G E Alex four. I'm happy, al-always happy to chat with, you. You'll see I'm pretty active. I mean, I'll, I have some comments, some tweets that'll, rub people the wrong way, but, that's the nature of this, of this, of this ecosystem.

Fantastic. Well, thank you, Alex. It's been a pleasure chatting with you today.

Same. Thanks, thanks for the time, it was very, very, very interesting chat. Have a good one.

Get the show notes at stephanlivera.com/303 and you can also find a transcript there shortly. Thanks for listening, and I'll see you in the citadels.