The Bull and Bear Case for the Merge: Anthony Sassano, Ep. 210 - Transcripts

August 30, 2022

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The Merge, which marks the official transition to Proof-of-Stake, is slated to occur around September 15 - 16th and is possibly the largest crypto event to happen in a long time. The transition to Proof-of-Stake is supposedly a bullish event, but...

Transcript

Ladies and gentlemen gentlemen, welcome to the Block Crunch podcast. They go to podcast for investors and builders in crypto and before we get started, just a reminder for you guys out there. The Block Crunch podcast is intended for informational purposes only. Neither the host nor its guests or licensed financial advisors and nothing discussed should be construed as financial advice views held by blah crunches, guests are their own and sponsorship messages do not constitute financial advice or endorsement with that out of the way. Let's jump right in now before we get started with today's episode, I've got some great news for you now. A lot of you have been asking for how I analyze projects that I bring on the show. That's why I decided to create Block V. I. P. To share with you all the heavy research that goes on behind the scenes now. Every week or so our team prepares an in depth research memo with things like sector analysis, technical concepts made simple in depth, competitive breakdown and even interactive models. So you can learn about the most important projects before they become important.

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I. P. Or click the link in the show notes below to sign up. Alright, Hey everybody, welcome back to another episode of the Block Crunch podcast. Now the merge which officially transitions ethereum from proof of work to proof of stake is upon us and it's slated to occur around september 15th to 16th and this is probably the largest event to happen in crypto in a long time. And if you're a founder building on ethereum or an investor in crypto, it's time to ask yourself if you have a strategy to prepare for it. And there has been a lot of discussion that there might or might not be a contentious fork and throw yet another wrench into what is already a massive technical challenge. The Office of Foreign Assets control, which is O. Fac an enforcement agency in the US recently came down pretty hard on crypto by banning the use of tornado cash which is the privacy preserving tools on ethereum. And this couldn't have come at a worse time because it has material implications on whether proof of stake validators will start censoring transactions and also raises questions about how large staking providers like little and exchanges like Coinbase can and should response. So joining us today to decipher all of this and way through all of that noise is an ethereum community O. G.

The independent ethereum educator, investor and advisor and also co founder of Anthony Sissano who you know as zero X on twitter. So Anthony has a special gift for distilling and simplifying extremely in the wheat information and ethereum to his massive audience of 200,000 on twitter. So I'm incredibly excited to have Anthony on and to learn from him. So welcome to the show man,

hey Jason, thanks for having me on. Super excited to talk about the merge and I guess like everything ethereum like you mentioned the fact stuff that's definitely something that I think people want to know more about. So I'm super excited to talk about it all.

Yeah definitely. And it all kind of blends together with this kind of merch narrative. So before we even jump into it, what is the merch and why is it important for ethereum?

Yeah, so I think you you kind of gave the highest level right? Where you said it's basically the transition from proof of work to proof of stake. Now this has been coming for quite a long time for a theory and proof of stake has been spoken about since the day metallic published their theory and white paper, it has always been on the road map. It's gone through many different iterations over the years. You know people thought that it was coming as early as 2017 but that didn't pan out unfortunately or fortunately depending how you look at it. I I personally think that the kind of extra time that was taken to get proof of stake to where it is today was much more beneficial than trying to rush it in 2017, which probably would have ended in disaster to be honest. So it has taken quite a while to get here. But the murder itself is basically that event that does this live hot swap of of proof of work into proof of stake. Now, essentially what happens is that there is not a block number that this happens out, there is something called T T D, which is a number for the total total terminal difficulty on on the ethereum network and once that number is reached, basically the transition happens live and it should, if it's successful means that users don't feel anything really at the end of the day, like their transactions will process as normal because we're just hot swapping out the consensus mechanism there instead of doing anything that kind of interrupts user transactions or does anything like that. So it really is and really should be a very smooth process once the transition happens and then ethereum will no longer be a proof of work network at all. There'll be no more mining, no more proof of work, it will be a full proof of stake network for the forever basically. I mean, I don't think we're ever going to go back to proof of work.

So yeah, it'll, it'll finally be be done after many, many years of research and development.

So it's really interesting to use this term hot swap and I think for a lot of outsiders from crypto it might seem really strange that this transition is such a long drawn out process with like multiple test, net score lee and a few other steps after the merge. So I guess for the people who are not very familiar with how consensus works, what are the key things that make this transition different from say, just like a software patch and web two?

Yes. So I think the key difference is just how much value is at stake and the fact that we want for a successful transition to happen, we want it to happen as you, as you said, like in a hot swap fashion where there is no interruption to service for users. So that's what I guess the terminology that's using the web to world is you know, a service interruption or kind of like some some downtime. We don't want that to happen at all because there are a lot of different consequences that play out if the the chain was to go offline for example and we've seen some other chains go offline recently and there are definitely implications there with regards to price is moving and the value on the network kind of moving around that. So we just wanted to be as smooth a transition as possible now has is no stranger to this ethereum regularly does what's called a hard fork or a network upgrade, which is all done live, there is never any downtime. It basically means that when a block number is hit, then the chain upgrades or hard fox to this new set of rules, which is usually upgrades to the network of features that are added to the network. And as I said, the reason it's done in a live fashion is because there's a financial network is a very large financial network and the consequences of of it being, you know, having downtime, it just doesn't work, it's not something that is palatable for the ecosystem and pretty much like all the networks work like this or at least should work like this, all the crypto networks out there. But theorem is 11 of the only high profile ones that does regular upgrades. Obviously, Bitcoin does not do hard forks or any kind of like upgrades. Any upgrades they do is through a soft fork, which is the same kind of concept where there's no downtime, it's really just done in a, in a fashion where people can choose to upgrade their nodes and then it's kind of like soft forks, those rules into the, into the protocol. So that's why we want to do it in kind of like a live transition, but in terms of getting us to the stage where we can do that. Yes, it has been a monumental task.

It has been a very, very heavy lift. There has been a ton of different test nets and not just not all tests are created equal either. There have been a short lived test nets transitioning from paperwork to prove steak, which are basically just tests that are spun up for the purpose of running through the merger transition. Then there are the public ethereum test nets, as you mentioned girly, there is a polio and rob stone which have gone through the transition and these are things that essentially mirror the ethereum network but our test net, so there's no real value on there just for developers to test all their applications and different things on there. But those things have been around for for a longer period of time. They're not just spun up for the merge itself there there there for developers to kind of take advantage of. Then there's been these other things called shadow Fox, which is basically similar to a short lived test net where essentially we take the, I guess like all the state of maine ethereum, so we take as it is, we fork it. So you fork off into a basically a new chain and then we run the merge transition on that and the reason why you do that is so you can test the most transition on a main net like implementation because obviously on the test nets, it doesn't reflect may not at all. It's it's basically it's own separate network for all intents and purposes, but with a shadow for we actually do test it as well as we can using main net parameters now, what these test nets don't do and and this is one thing that I think that that you can't really test for is that because they don't have the same infrastructure, the same user base, the same kind of value on them. It's it's it's basically impossible to test for those sorts of things. So for example, with the main emerge transition, we are relying on all the infrastructure providers to have upgraded their notes and to be ready for the merge and there's been a very long process of getting those people ready. There's calls with core developers and researchers and community people that have happened for, I think a year now or something like that where they could ask the researchers and developers and and the relevant people, hey, how do I prepare for the merge and there's been tons of documentation put out all that sort of stuff because for us to make it to that point where we can do the merge transition on main and for everything to run, you know, as smooth as possible during the transition.

It requires a lot of coordination and planning. So for those who haven't paid attention until maybe now, I do know that this has not just kind of come out of nowhere, this has been planned for a very long time and on top of all that, the proof of stake network that is being merged with the ethereum uh, existing ethereum network has actually been live since december 1st 2020 as something called the beacon chain, which people may have heard of. So it's not like we're just all of a sudden saying, hey, okay, you know, proof of stake now, we're just gonna launch this thing and we haven't tested it or anything like that. No, it's actually been tested in a live environment for a long time. People have been staking for a long time and we're just basically swapping out that mining algorithm or the proof of work algorithm for proof of stake and everything should act as normal as I said before, the users shouldn't feel any difference really. The only thing that would change for users is that block times go from around 13 seconds to 12 seconds, which is negligible. Users aren't really going to feel that and their transactions should process exactly the same as they would approve of work and they just, they won't even know, but if they're not paying attention to work,

this is actually a really great segue to my next question because you mentioned that this has this whole thing, this whole merge has been in the works for many, many years and you know, people minors especially already know that this is going to happen now, but as with anything in the theory and there are things that could go wrong especially with externalities. So today we'll go hopefully go through most of them. And I love to start with this one, which is the most relevant, which is some people have suggested that post March, there could be a minor revolt and just to give some context here, you know, I think kevin from Deloitte Capital who is a fund that kind of correctly called out the collapse of luna before and got a lot of attention for that suggested recently that after the merch, there can actually be to ethereum chains, one supported by miners, which has continued to be a proof of work the other by validators and that exchanges and so on are gonna be really torn as to what to do and the community will be fractured. So I'm curious, you know, what do you think of this argument? And where did this even come from?

Yes, So this has actually been talked about for a long time now. I remember talking to some friends even in maybe even 2018 or 2019 about this possibility that because we're basically firing the miners from the network, right? We're cutting them off their revenue, like 100% of their revenue that they're getting from mining is going to zero post merge, like they will no longer make any money from mining, the ethereum network. So naturally you would expect some kind of revolt or some kind of opportunism opportunistic thing that they decide to do. So it's not anything new. And and and this is the reason why is one of the reasons why instead of using a block number two do the transition. We have done that, we have used T. T. D. Which is supposed to be resistant to anything that minors can do. Now minors can't really do much. You know, this is probably a much larger discussion around the game theory that miners have to adhere to or that they do naturally adhere to.

But essentially the worst thing that could happen. Um besides the approval workforce, which I don't think are consequential for the ethereum main chain, but I'll get to that in a sec. But the worst thing that could happen is that like a lot of miners just shut down their rigs and it takes us longer to do the transition because as I mentioned before, it's based on the total total terminal difficulty, which essentially means that we reach a certain number of mining difficulty and then the transition happens. Well, if 50% of the network goes offline before that happens, then it will take longer for that T t D. To be reached. It could push into even october right, but it doesn't mean the merger isn't going to happen and technically it would eventually happen even if there was only one minor on the network, but I fully expect the miners that we currently have most of them not to drop off until the murders happened because of the fact that it's still extremely profitable to mine ethereum and there is no other coin out there right now a chain out there that you can mind that shares the same hashing algorithm as ethereum for anywhere near the profitability. I think the next most profitable is ethereum classic and it's nowhere near as profitable as ethereum for these miners. So they have really no incentive to to swap over until obviously they have no choice right? Once the merge happens as for the fox themselves, I've seen like two or three of these things. I think there's only one of them that really seems to have any sort of plan. But essentially what they can do, they're being the miners is at the point of the transition from proof of work proof of stake. The private work chain doesn't like go anywhere like the work chain or the existing one, the one that we know today comes along with with us as, as the theory may just on proof of stake instead.

But if you want to, at that exact point of the transition, you can actually fork off into a new chain right and continue that as proof of work. Now I say new chain, but it's just the existing chain without proof of stake. So it's the same thing that we've all been using. But the problem is is that's not ethereum that's a copy of the ethereum change. Yes it has all the same state and all the same balances and you've got all the same addresses and everything on there. But all the assets on there are not real ethereum assets. The is not really it would be proof of work for example it would be a separate token on the exchange is it would not be trading as the same for every single token. And then when things get really interesting is things like stable coins circle the issue of U. S. D. C. Is not going to honor the redemptions for two sets of the same stable coin because they don't have double the money just because the four cap and they can only honor one and they've already publicly committed to supporting the proof of work proof of stake chain but they wouldn't not do that anyway because the whole community wants these people of steak chain, the proof of work fox are really just opportunistic things.

So all the all the all that kind of stuff will be worthless basically are worth very very little logically US D. C. On the proof of work chain should be worth zero because you can actually redeem it for usd from from circle they're not going to honor that redemption. Same with U. S. D. T. Saying with the U. S. They look any centralized stable coin that has assets backing it up they're not going to be honored then something like die. Well what's backing up die is and if you have a fake or a proof of work that is not really it's not gonna be worth the same, it's gonna be worth much less. So dies naturally gonna fall off peg.

Then the entire defi ecosystem is gonna blow up too because all the values go out of whack all the m M's are gonna go crazy trying to readjust for the new values, you're gonna have MTV everywhere like crazy because it's gonna be smarter people than you taking advantage of the chaos. There's gonna be no oracle supports, everyone's gonna get liquidated like on these money market probably not gonna work. And on top of that you actually need infrastructure to talk to. So for those who don't know right now when you use meta mask, you're using what's called in fewer in the background which is a service where basically they relay your transactions. So there's what we're not gonna be anything for that for this proof of work change, you're gonna have to run your own node in order to actually get transactions on that chain. So realistically I foresee this proof of work chain basically having a few smart people on it, extracting as much value as they can. A lot of people just dumping everything they can for real at the end of the day and it just fading into obscurity. I don't think this chain is going to have anything going for it, developers aren't gonna build on it. The miners are probably going to leave once the profitability goes down. They're gonna probably stay for a little bit to see if they can you know get some profits from it. But eventually because the token is not gonna be worth very much it's gonna become very unprofitable to mine. Probably gonna leave to go somewhere else.

So I mean the T. L. D. R. Is that like this fork and any of the work force that come, I expect them to exist for a little bit but I don't expect them to be worth very much. Nor do I expect them to have any consequence on the ethereum main chain now where they could have a consequence is if they don't implement something called relay protection which basically means that your transaction on the ethereum proof of stake chain could get replayed on the ethereum proof of work fork or vice versa so that the same transaction can be done. So technically uh in in the worst case scenario if you were to sell your teeth on the proof of work chain, say you sell it on uni swap then that transaction could technically be replayed on the proof of stake change by anyone to sell your really. Now that's not a concern for the major one that I've seen the major fork, the one that everyone has to be talking about. They're going to implement replay protection, they're gonna basically and also have a different chain I. D. Which means this can't happen. So that's not a concern.

But that's really the only consequence that there possibly could be. And you can avoid that by just not interacting with the proof of work a theory and fork, right? Just don't touch it. Yeah, maybe you miss out on some money. I don't know, like I have no idea if it's gonna be worth anything but that is, you know, there's no risk there. So all in all, I don't believe this thing has any bearing or consequence on a theory. It is not an ideological driven for like the Bitcoin. Bitcoin cash fork. Like it's all it is is opportunistic miners trying to inch out some money at the end of the day and I don't expect it to have any bearing on the ethereum proof of stake chain.

Yeah, so this is really interesting because from what you're saying, it sounds like the best case scenario for the proof of work chain is gonna be a bunch of like very small kind of minority trying to force this work, but it's not even gonna be as consequential as like Bitcoin cash or Bs vi or ethereum classic because there's not even an ideology to really create a community around it, it's literally just gonna be a few guys. Um so I I do um when I first saw the news, I had the same reaction, I didn't think too much of it. But what I did think a lot of was what we're going to discuss next, which I think is the stuff that a lot of people are tuning in for the implications of the ofac sanctions on proof of stake by extension to merge, you know, and how things like flash pots fit in there and we're gonna touch on all of that. But you know before we dive into the weeds here, can you just help us understand, you know what the hell happened with? Like why is everybody suddenly you know freaking out over a fac?

Yes. So I mean you mentioned what was before, they're very I guess powerful organization in the U. S. Because they have the power to sanction individuals and entities, but this is the first time they've sanctioned a set of smart contracts or a set of I guess like addresses on on ethereum. Now the reason why I think people are so concerned about this is because of the fact that it may not be constitutional in the U. S. Which is obviously a very big deal for people in the US. And also if you are caught or prosecuted breaking sanctions, you face up to 30 years in prison or massive fines, right? So you can imagine that as a U. S. Citizen, you definitely want to avoid getting caught up in any of this. You don't want to use tornado cash at all because if you do your breaking those sanctions technically and as a business or an application or adapt whatever you wanna call it, you don't want to be court interacting with this at all.

But where things get complicated is that technically you can interact with these contracts without you yourself engaging in that interaction. So for example over the I think it was shortly after the sanctions happened, someone sent 0.1 from the tornado cash addresses or from the tornado cash um really out to my public address which is cecil dot now technically I mean I'm not a US citizen, I'm an Australian citizen but technically I have now broken the sanctions right? Because I've interacted with tornado cash and this is where things get money because the sanctions themselves do not fit how tornado cash works, they're not workable. Like imagine you send that amount of every single ethereum address out there, Does that mean everyone that uses a theory and now is breaking these sanctions right? Or like they're not gonna be able to interact with applications because they're gonna end up on some blacklist which I actually did, when are there on their front end? They implemented uh there's something called TRM labs which produces this software in order to blacklist certain accounts that have been sanctioned or whatever else. And the I think the strictest policy they have blacklist anyone that has touched these addresses no matter in what way. And I think they even go further and it depends on the amount of hops away from it. So if you have interacted with an address that interacted with tornadoes you could be blacklisted as well. So I was blacklisted from the other front end, which to be fair the centralized front end, the smart contracts I could still interact with but I was blacklisted and then I shouted this out on twitter, I said like like this this is ridiculous, like I didn't actually interact with it plus I'm not even a U. S. Citizen so technically I'm not breaking any sanctions here.

Like the Australian government hasn't sanctioned the tornado cash addresses. So I'm actually not doing anything illegal. But I didn't even interact with tornado cash after the sanctions, It was someone else doing it. I think as a form of protest, they didn't just do it to me, they did it to a bunch of public ethereum people with the public DNS name, but I wasn't able to use it. And then it got backtracked and I think that they remove that, removed that and uh even removed it for the addresses themselves that were that were sanctioned because obviously there's no clear guidance on what to do. Like do you block these addresses because they want hop away from tornado cash or do not block them. Do you only block the ones that have been sanctioned? So it opened up this whole can of worms and then it started this discussion around censorship because at the end of the day it doesn't matter if it's proof of work or proof of stake or whatever else. These networks are only censorship resistant. They're not censorship proof. You can never guarantee uh in total inclusion of all transactions. And these networks actually give the inclusion, uh sorry, give the choice to minors and to block producers to include whatever transactions they want.

You know, block they don't get, they don't have to include your transaction. The reason why they do is because you're paying a fee to be included, right? And they obviously this game through behind it as well that they want to include it because they don't want to, I don't want the network to be engaging in censorship because that's bearish for the price. Everything like that. But ethereum miners, ethereum stake is Bitcoin miners. It's all the same thing I I as a as a minor or as a steak, I can choose whether to include your transaction or not. That is a form of censorship, right? Like that is clear cut censorship there but you could choose not to include it because people didn't pay you a high enough fee. For example, you just say, well I'm going to drop your transaction because you didn't pay me a high enough fee. So it doesn't have to be censorship. But the I guess like the community views that as as censorship. So if you're just censoring from that point of view, it's not as serious as the other point of view which is basically so I should explain how this works specifically improve of steak ethereum, so improved steak ethereum, you have blocked proposes and then you have all the validators attesting to.

Now as a as a validator, you might propose a block once a month, once every two months, it's it's very random and you don't know when you're gonna propose a block and it's not gonna happen very often but you will eventually propose a block. Whereas you will be attesting to basically everything constantly. Like you're testing two blocks constantly. And what a testing does is basically it's part of the consensus. So you're basically coming to consensus on these blocks with the rest of the network. So where it gets dangerous is that you're you're fine to include whatever transactions you want in your block when you eventually do propose a block or not include whatever transactions you don't want to. So say your validator has a rule that says, well I don't want to include any transactions that hit the tornado cash addresses. Well then you you won't include that where it gets murky is when you start where your validator says, well I'm not going to attest to any blocks that contain tornado cash transactions in them or that are building upon a chain that contains tornado cash transactions in them and that why that gets murky is because not only are you you're you're participating in censorship, but you're also at at the like if enough people are doing this, it could actually lead to a fork in the chain. Because if if half the chain for example is saying that, well, you know, this is not the correct chain because it doesn't, I'm not attesting to it because of the fact that this is uh contains censor transactions or contain sanctions, addresses. And the other half is you can lead to a fork in the chain. Then what happens is that the community has to come together and say, okay, what's the what's the real chain now? Like is this one the real change because it's not containing any sense of transactions or is this one?

And that's why we're all the discussion around social slashing has come from. It's like, okay, well if these big staking providers such as coin base and cracking and buying it, if they all get together and say we're not going to test to these blocks and then they go for cough into their chain or whatever. I'll be going to slash them on the main chain or we're going to basically kick them out of the network on the main chain? And it gets very murky then because then you have to introduce the social layer, which is something that you only want to use as like a nuclear option because if you slash coin bases validators, right? That's not theirs, that's their users. So you now have a lot of collateral damage coming from that where the users are the ones who get hurt now, they should expect this in a roundabout way because at the end of the day staking is not meant to be risk free if you're staking your taking on some level of risk and you are at risk of getting slashed anyway, not for censorship, but for other things, maybe for example, Queen based stuffs up and they double sign on on the network and that's that's a form of getting slashed and the protocol will automatically slash you for that and kick you out. So there is all these kind of things at play here. But in terms of censorship and slashing for that, that's that cannot be done by the protocol itself. It has to be done by the social layer because there's no way for the protocol to tell what where you know, where censorship is coming from or if their censorship occurring at all, especially if if it's like the the the block proposals not including transactions. The protocol can't know that because the protocol doesn't see those transactions not being included. So at the end of the day, it relies on the social layer. Um and just finally on the on the block proposal front, even if like 90% of the network is censoring you.

And what I mean by censoring you is that they're not including your transactions in a block. And 10% of the network still are including your transactions, you just have an extra few minutes for your transaction to be included. Like yes it's not gonna be included as it normally would which is in a 12 2nd block if you paid the right fee to be in that block, but you just have to wait until one of those 10% of steak is picks up your transactions and proposes a block. So I think the math is like a few minutes or something like that. So at the end of the day you're still able to get your transaction in even if 90% of the network is not including them. But as I said it gets very messy, very murky when a big part of the network stops testing two blocks that contain those transactions because they're basically saying, well this isn't the real chain, this isn't the chain that I think is the canonical one as we talk about in crypto. Uh And you know, this is the clinical one that's where you possibly get a fork of ethereum and nano faca theory. Um And then it gets

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So if any of that sounds interesting to you, I highly recommend that you head on over to DY DX dot exchange to learn more and I thank them for sponsoring this episode. Mm I think there's a lot that we will unpack here but even before that I'm curious why people are raising these questions now is are these kind of censorship fears mostly just um I guess applicable to a proof of stake ethereum or if ethereum had stayed proof of work with the risk for this kind of chain level, censorship be lower.

Yeah I mean it's it's a big discussion because this sort of stuff has been talked about in the ethereum community for a very long time. It's just that it's obviously very topical now right and I think there's an element of tribalism here as well where there's been a certain group of people that have said that ethereum proof of stake will never happen and now that it's undeniable that it will happen, they kind of seem to have shifted their narratives a bit and basically have latched onto this and being like well ethereum shifting to stake is dangerous, right? It shouldn't happen because there's more risk of censorship. So I think there's an element of that, but that doesn't take away from the fact that some of these concerns are very real and obviously like they should be met with with with the discussion around them and there should be a healthy debate. Hat now I think a lot of people have talked about this already, there's been plenty of talk about this on twitter in various podcasts, I've talked about it a lot of my videos but it really boils down to the fact of the matter is that like do you believe that censorship is or the chinese more prone to censorship under proof of stake versus proof of work? And the reason around that is because with proof of stake a theorem right now There are large stickers on the network as I said Kraken coin based finance lidar but litter is a bunch of independents takers litter isn't just one monolithic entity, there is 29 independent validators within that or validating services within that. Um and people often will often say well if coin base is forced by the US government to essentially not to block everything from their validates, not even a test, two blocks that contain these sanctioned addresses in them. Will they follow that or will they may be shut down their validates and just stop staking on ethereum or will they risk getting slashed? So that's the kind of kind of worms that gets open now because we're not only dealing with coin basis choice what they wanna do, we're now dealing with them being forced to do something because at the end of the day they are U. S. Registered business, they traded on the new york stock exchange. They have to legally abide by these sanctions.

They cannot interact with tornado cash. They can you know but that's that's really where it stops right now? There's no there's no obligation for them to censor at the validator level right now that as far as I know a fact hasn't said that there is no regulations that say that but obviously they themselves as as a US company are not allowed to interact with with tornado cash. So what happens when the U. S. Government goes to Coinbase and cracking which are both us based exchanges. Obviously finance isn't but you can have a large share of the validators lighter? A lot of the providers in in lighter are us based as well. What happens if the U. S. Government goes to all of them or just makes up a law or regulation that says well you are no longer allowed to include these transactions at the validator level. Uh And you're no longer allowed to attest the blocks that contain these transactions.

Now obviously this is getting technical but let's say they flew into that and they know what they're talking about and they do this. Well there are only two choices that these exchanges and service providers have adhere to those. Uh there's regulations or shut down they're staking services. Now the whole point of I guess like talking about the social slashing and talking about the fact that the community is not going to stand for this and they're going to slash you because that form of censorship is considered an attack on the network is to make sure that these providers shut down their services rather than try to attack the network. If faced with that kind of with that kind of I guess like that kind of regulations from the from the U. S. Government that that kind of pressure I should say from the U. S. Government. Will it play out like that? I mean no one knows right. Like I mean there has been some signals I think brian Armstrong from Coinbase basically came out and said they have to follow the law but that doesn't mean they have to center, they could just shut down, they're taking operation right?

So they have choices but the choice none of the choices are good like the staking operation for Coinbase is a cash cow. They take they take one of the highest Fees, so they take a 25% cut of all staking rewards on ethereum staking. And they have, they make hundreds of millions I think, in rewards, depending on the price of it, of course. So there's obviously a very big revenue driver for them and that's just as it exists today, and as it keeps growing and growing, it obviously become a bigger revenue driver for them, especially if each price goes up. So they, but at the same time, do they risk adhering to these regulations and then getting slashed right? Like getting socially slashed and losing customer deposits, Which could potentially lead to a crap ton of lawsuits and potentially like their business going under. I mean, this is how serious it is, right. Like if they have millions of customers potentially staking their eat with them then, and and all those customers take a haircut coin base would have to make up for that haircut out of their own pocket or face the lawsuits at the end of that they're gonna get sued by, by their users. And I think that that's like a bad outcome for everyone. So in my mind, if they were forced to do these things, they would have to shut down their staking operation. Um because of the fact is like that, the alternative is basically losing their customer deposits, which is, which is much worse, I think, than losing potential revenue from, from, from ethereum staking. So that basically, I guess is the worst case scenario and that's why a lot of people harp on about the fact that proof of stake is more centralized than proof of work post, you know, obviously after the merge because you have these large staking providers in saying that you have large mining pools as well, right?

Like I know mining pools and staking providers, they're not 1 to 1 because of the fact of the matter is like miners can easily change pools. It actually is like something that they can just point there -2, 1 pool and then change over to another pool if that pool is doing something that they don't agree with. But on both ethereum and Bitcoin, I think three mining pools control over 50% of the hash rate, so that is obviously still quite centralized. Um and also with, with mining, it is very easily identifiable where miners are situated because they use so much power that you can easily identify them if you were a government or a nation state and go after them if you wanted to. Whereas the staking, it's a bit harder to, for homestake is you can't really identify them. It's it's quite, quite a bit harder, but that's I guess like orthogonal to to the decentralization discussion, I think that immediately post merge, I would agree that proof of stake is more centralizing than proof of work on ethereum and there's more censorship risks because actually for those who don't know, you can't actually unstable when you post merge, there is a separate network upgrade or separate hard for coming 6 to 12 months after the merge, which will enable withdrawals from from staking. So you can't actually exit staking, you can withdraw your teeth and you can't choose a different staking provider after the murder. You have to wait for that upgrade to come in. And then once that happens, there's another catch where you can withdraw but there's a queue to withdraw. Uh and then there's kind of like a timing so you can't just like instantly withdraw your teeth and shut down your validator and go validate with someone else. If the queue is empty, I still think it takes about 18 hours for you to be able to to steak. And then if the queue is full, it could potentially take months depending how full the Q is for you to be able to stake on top of that as well.

You also, if you're sticking with a coin base, you you have to get the permission to unstick, they have to allow you to stake because they're the ones running the validators. So if they say, well no we're not gonna allow you to do this and they lock your account well then you can't do anything right? Like you don't have control over that. There are other solutions coming for all of this. There are kind of like ways to stake with these providers while not giving them access to your funds or your keys. So they'll run the validator for you. You'll still still keep custody of your funds and the keys to your funds but you'll just kind of like I guess delegate the validated responsibilities to these services and they'll still take their fee and everything. But that way you can exit staking whenever you want and they can't prevent you from doing that. So there are solutions but I would say that I agree with the critics immediately post merge but once those withdrawals are enabled, I have been talking about this a lot myself but I expect it to be like this great re shuffling of each stake where people are aware of the risks and they'll go and stake with the minority providers or they'll just do solo staking or these solutions will come online which will allow them to do like hybrid centralized taking where they can still control their custody of their funds but delegate this, they're kind of validating responsibilities to one of these solutions. So it is very nuanced as you can imagine and you can go in any direction here with a lot of these things um and I will say one more thing which is the consequences of of attacks on both proof of work and proof of stake as I mentioned before you have this social slashing which is like a surgical punishment for just the validators that are doing something wrong that only the validators, they're attacking the network. Whereas in a proof of work scenario, if valid if the miners were attacking the network or doing censorship, you can't actually surgically punish anyone minor. In order to punish these miners.

You would have to change the hashing algorithm on the chain which punishes all minors. And then basically what you do is you reset your chain security to zero because now everyone's got to go out there and get new hardware to mine with this new hashing algorithm or they have to mine on their CPU or GPU again, which obviously collapses the security of the chain. And you've now basically punished all these honest miners who have invested hundreds of millions of dollars if not billions of dollars into mining equipment that no longer works on on the chain just to punish those Attackers. And look if it's an existential. And if this happened on Bitcoin, they, you know, they would have to do it like if it really is existential and their changes keeps getting overwritten by this um this attacker, they would have to do this. Whereas in proof of stake ethereum. Yes, there'd be a fallout of social slashing but at least the honest actors don't get hurt by this. Only the dishonest actors do. That's where the major benefit comes from. And that's where I think a lot of people uh miss is that like yes, there are tradeoffs here and yes, there may be some points of extra centralization, but in return, we get this very, very powerful tool of punishing the bad actors instead of having to punish everyone just to punish a few few bad actors. The analogy I use is that say there is a part of a city where you know that there's bad guys and you want to go, go arrest them, but on proof of work, your only tool is to level the whole city to find them. You literally have to destroy the whole city just to find those that, that those kind of people to arrest them, right?

Whereas the people of steak, you can go there surgically, you know, you can surround the building, arrest them in that building and the rest of the city remains untouched. So that's the scenario that is at play. So what would you prefer burning down the whole city to find just these, these kind of like people in one building or a few buildings or surgically going after those people and keeping the rest the city intact. So that's the kind of trade off that exists. Um, and that's what I think a lot of people don't talk about when they talk about centralization risk is that yes, maybe, maybe there is arguably a bit more centralization in proof of stake versus proof of work, but in return, we get this incredibly powerful tool to deal with anyone that attacks the network that we don't have under proof of work. So in the worst case scenario I would argue that proof of stake is still better than that proof of work from that perspective.

Thank you for that really comprehensive answer. And I just want to double click on that point. So when it comes to you know censorship for proof of work in theory and versus proof of stake why is it easier for to go after you know violators of the sanction in a proof of stake ethereum. Like why isn't it just as easy for them to go after miners that you know maybe process blocks that included sanctioned transactions.

Yeah I think it's it's easier just because like for example coin base has a large amount of validators and you know the US based so the U. S. Government could just go after coin base themselves and say hey like you control these validators, you need to do this based on such and such rules. Where is the proof of work these miners? It just depends like where they are. As I said before, it's very easy to determine where they are. Just based on power usage. I mean the only things that use that much power are drug operations and and mining right? Like it's a lot of power that really at the end of the day okay I should say like things that that are not viewed as kind of like legitimate depending on your view of things, right? So it's either a drug operation or it's a it's a mining farm now that that makes it very easy to to spot the big mining farms in terms of spotting the people that are like home miners. There's not that many hobbyist miners anymore because it's just not profitable to be. But those are probably you know harder to spot but probably not because you could just look at the energy usage as well.

So it's relatively easy to spot large mining operations. Um But with proof of stake, I mean it's it could be arguably more easier because there's just one less step. You don't have to go to the energy company and request all this data and request like all this information. You could just be like well I know that coin base has this many validators because I can just see it on. There's plenty of websites that show this. I'm just gonna go tell coin base this or go tell crack in this. I'm not trying to pick on Coinbase but the obvious example that everyone is familiar with but um and that's why it might be easier to to kind of like target these sorts of things but I still think it would work like just because it's I guess more anonymous where it doesn't exist in any one place. It's not kind of like a y. C from these customers who are using the staking service or anything like that On a. On a coin base. There are still ways to identify them through that energy use. Which is undeniable.

I mean you can't argue around that like miners use lots of energy. I mean Bitcoin is will always champion that as well. They'll say oh well mine is using lots of energy. It's good it's good that they're using lots of energy because it turns it into Bitcoin and it's what gives Bitcoin value. The flip side of that is that they're very very easily identifiable. And we saw with china recently they banned the miners right? Like and the miners had to move out of china and that was actually bullish for Bitcoin because it distributed the hash rate out of probably a more hostile environment. But at the end of the day like that that doesn't mean that the U. S. Couldn't do the same thing. They could easily tell miners but we don't want you here with your band and then they have to go find a new home and they wouldn't be able to hide. There's there's no way for them to hide.

Whereas this whereas we're staking for example if a coin base gets this order well then their customers could take their eat out of coin base and go steak with someone else. Maybe they stick with the validators. Their overseas maybe they are not not in the U. S. Not overseas. Um I'm talking like an Australian right now. Everyone is overseas to me but but they could take you know somewhere else or they could solar steak and it's just much harder to track down solar stake is because the energy footprint is basically non existent. There's ways to kind of like hide your your you know not expose your I. P. Address and things like that as well when when when doing certain things. So yeah it's kind of like it's it's hard to argue either one side because you can find fault like as I said you can find the energy usage fault and proof of work which is easily identifiable or you can find the service provider fault with proof of stake which are easily identifiable. But I think I still go back to the fact that just because they're easy to identify doesn't mean that it's necessarily a bad thing.

It's all about like what if you know there's an attack on the network, How do we punish the Attackers? And that's what I always look at it. Like what tools do we have to punish the Attackers and how do we prevent them from attacking more than once in proof of stake? We slash them which basically means burning there each day, kicking them out of the network and kicking them off the net and keeping them honest actors in there with a bit of work. As I said like you can only change their hashing algorithm, you can't actually do anything else. Like you can ask them to stop attacking the network, but I mean it's not going to really work if they're attacking the network, they're not gonna listen to you. So you really do have to change it and then you punish everyone. So that's my general view on it. I don't think it really matters That much. And I, you know, it's funny, I wrote a piece about this in my newsletter a while ago now, I think it's gonna be, it's not two years, maybe it's 18 months something. But I, I basically, uh the point of the piece was like I learned to love centralized service provider staking because of the fact that we have these tools to punish them and only them if they do something wrong, right, we don't have to punish everyone whereas work doesn't have those tools. So the centralized versus decentralized discussion is much more nuanced than just like where people are staking or where people are mining.

I think it's got to do with the punishment aspect of it as well, which is obviously something that doesn't get spoken about that much because we haven't had to enact it yet. There are people who get sly on the ethereum network for doing something like, as I said before double signing and there has been instances of that, that's an objective thing that the protocol can basically say, hey, you're not supposed to be doing that whether it's an attack or not, which usually isn't usually it's someone that's running to validated instances at the same time, which means that they're double signing, which is not allowed by the protocol, they get punished for that. Um where's the proof of work? If someone attacks the network like you, you'll know but you won't be able to do anything to stop it. If someone has more than 50% of the hash power, there's no way for you to stop them except changing the hashing algorithm. So that and that hasn't happened yet for Bitcoin. And the 51% attacks that we have seen on like ethereum classic. I mean no one cares about that, right? Like no one, no one cares about that. The consequences there. And uh I think that's why people don't think about it is because we haven't actually seen it play out on these major networks yet

and I'd love to touch on social slashing as well. So obviously what you just described is slashing of validators who double sign is built into the protocol, social slashing seems to be the solution proposed to counter potential censorship at this validator level. And just to synthesize for listeners basically, if you know, evaluator is refusing to include transactions that are sanctioned, then you know us as a community. We can actually vote to slash that um slash validator and it seems like even himself had voted in favor of something like this on an informal twitter poll, but to me it was quite troublesome because we're introducing this kind of new social layer on top and you know, once introduced social, you introduce things like populism, you know, and and it's not rules that are baked into the protocol, which I'm pretty scared about. So I'm curious what are your thoughts on social slashing like is this something that we should rely on as a community? Are there kind of drawbacks to this?

So the term itself, maybe not the best term here, but in terms of like what it stands for. So the social layer is what holds up all of these networks um to give an example of something that tries to reject the social layer but it exists is Bitcoin right? They try to reject it by saying, you know, Bitcoin runs autonomously based on code, there is no kind of like subjectivity to it, there is no social layer involved. That's true. For the normal case. Okay, what is the worst case scenario happens? What if there is a major bug on the Bitcoin network that requires the social layer to step in and fix the bug and then update their nodes in order to to fix that bug and requires a hard fork for example. Right, That would happen. There's no way and how that the critical bug that exists in the Bitcoin network would be allowed to continue existing, they would fix it, they would roll back the chain if they had to in order to fix this and they would hard for me to do this right? That's all social layout, that doesn't happen on its own. The debs would have to fix the bug in the client and then the people that one nodes and the miners that mined the chain that would have to choose to mind the fork chain in order for that to be the chronicle one and they will all have to go along with this. So the social layer exists regardless of anything, it's always there because at the end of the day the humans are the ones mining staking running the nodes.

It's not just like an ai doing all of this, it really is humans at the end of the day and it's all social consensus about what is the real chain. There's a reason why people don't consider Bitcoin cash. The real Bitcoin chain is because they came together as a, as a social layer and said Bitcoin is the real Bitcoin. Bitcoin cash. Bitcoin cash at the end of the day. So for people to say that the social layer is something that maybe, I don't know, muddies the waters a bit and makes things murky I think is inaccurate because the social layer is always there and it's actually the reason why, I mean in the face of all these other layer, ones that are available. I remain bullish on ethereum like yes, the theory doesn't have the best technology doesn't, it doesn't have the most scalability right now. They're our roadmap items for that. But at the end of the day, ethereum has the social layer, has an incredibly strong social layer and the social layer isn't just to respond to attacks. It's also things like the class of developers that are building on the network, what they stand for if they actually believe in the mission and the values behind these chains, right? Bitcoin has a strong social layer as well. Yes, they I guess like have a toxic part of the community to which we all know about.

But so does the theory and so does every chain really. But it's more about like the balance of I guess like toxic people, you know, crappy people versus good people. And at the end of the day like ethereum has the best social out of all the smart contract change by by a very long shot, I think at least in my opinion. And it's also got one that has been around for a very long time, which counts for a lot as well. So the social layer exists, like I just wanted to have ladders like a baseline here in terms of something like social slashing well that would be this, it's kind of like the same concept as a critical bug in Bitcoin that has to be fixed by the social layer. We would consider an attack on the ethereum network or a censorship attack on the ethereum network to be a quote unquote critical bug, right? Something that needs the social layer to step in in order to fix now. The reason why we can't do this in protocol and we need the social layer is because the protocol itself, as I mentioned before, can't actually tell when censorship is occurring because it's it's a subjective thing. As I said, the protocol doesn't know if a transaction is being included in a block or not. It only knows about the transactions in the block. So if I'm not including the transaction in the block because of some sanctions, the protocol has no idea about that. The protocol doesn't know what a sanction is.

There's no way for it to know what a sanction is without us feeding an oracle data into it. But then that becomes subjective again, like the oracle could be corrupted and manipulated. So the protocol itself, what the protocol knows objectively is just the rules of the ethereum network that's all it knows. It doesn't know anything outside of that unless we feed it to it. Like for example, oracle, the price of it is only known by the protocol is not known by the protocol, but it's only known on chain because we feed it to it from an oracle for example. So there are objective things that the protocol nose and then there are subjective things. The objective is only the protocol rules only that the code of the ethereum network itself is what the protocol knows anything outside of that has to be fed in by sea something, whether it be a smart contract or the social layer or anything like that has to be fit into it. And even then the protocol doesn't know it objectively. It's being told it by some other external factor and and and and that external factor has to abide by the rules of the protocol and if it does that's fine. But again the protocol itself doesn't know that it is worth x amount of dollars. It only knows that 1/8 is 1/8 at the end of the day and the dollar price is read in by the oracle into a smart contract and put on chain. Um but then the protocol still only sees that as a transaction.

It says the bike code at the end of the day, it doesn't see the dollar value, it doesn't see the subjective nous behind it. So that's where why censorship is very very hard if not impossible to punish at the protocol. They are because it can't see that it is blind to it without our help. Now there are ways to I guess like make it so that the protocol not doesn't see it but but like that and doesn't punish actors for it but it behaves in a certain predictable way as I mentioned before if people aren't attesting to blocks because they don't want to test the blocks that contain sense of transactions or the network itself will fork off into two separate networks because he basically says, well, you know, I have this half of the network on, I mean this is kind of getting really complicated. I'm trying to trying to simplify it here, but basically the reason why it splits off is because then the network only sees what it sees at the end of the day, like the network only see who's attesting to one set of blocks and whose attesting to another set of blocks and then that will lead to a fork in the road. Because there's no No consensus really, that's where consensus comes from. There is no consensus in the network, but there's only consensus in, you know, say 50% is attesting to sanction blocks or sanction transactions. 50% isn't. Well then those 50% or a consensus within themselves, but they're not a consensus with each other. So they fork off into their own chains. That's probably the simplest way I can I can kind of explain it there. So that's why we need the social layer to step in and say, hey, okay, well you are not following the protocol protocol rules, but the protocol doesn't know that, but we know that.

So we're going to socially slash you and kick you off the network because you have not followed the social contract, the social layer. Um And and if we could do that in protocol, we would if we could do that without human intervention, we would but we can't at least right now do that. Um and I don't think we'll be able to ever. I think the best we can do is put um this upgrades coming to the to the network in order to make it very, very hard to censor. But we can't ever, I believe in protocol punish people for censorship, it's just not possible as far as my understanding goes. So that's why we need the social ladder step in. Now, as I said before, there are strong social layers and there are weak social layers and I said that Bitcoin and ethereum have strong social layers, a lot of the other chains out there have relatively weak ones. So if we had a weak social layer and ethereum well then what would happen is that we would never actually be able to come to consensus on who to punish you not to punish. It would be very, very messy. It would fracture. And the theory um kind of like a whole ecosystem would fall apart I believe. But because the theory of social area is strong because we have this existing contract that says we're not going to tolerate censorship on the network, we can potentially enact this social slashing even though its objective to punish these actors in saying all of that, I still consider social slaying to be the nuclear option.

It is the option of last resort resort. It should not be used until every single other option to punish these actors or to make them abide by the protocol rules has been explored. And even at that point, like the nuclear option has fallout, right, has collateral damage. It's not like everyone honest is gonna come out unscathed, Not at all. Like the price could go down if you're sticking with with with a centralized provider and you don't know anything about this, you could get punished because that centralized provider has acted in a way that goes against the network and maybe you don't even you don't agree with this, but you didn't know about it. So this fall out here. Um and I should also clarify that I personally only support social slashing for people or for validators that are not attesting to blocks. I don't actually support it for validators that are not including transactions in their blocks because I actually think that Because the protocol gives these validators the ability to do that they're playing by the rules technically right, they're still playing by the Protocol rules that were given to them of being able to include or not include whatever transaction they want. Whereas I mean that get that also gets murky like say 90% of the network is is censoring certain transactions and say its transactions that a lot of people interact with. You know, not all transactions are created equal if 90% of the network is censoring one form of transaction that gets used once a month. Then you know, I'm really going to care enough to to punish these actors. Probably not right.

But let's say 90% of validators a censoring unit swap. Well, okay then everyone's going to be like, well, you know. Yes, okay I can get my transaction and eventual but this has led to severe degradation of performance of the theorem chain because to do anything on the swap would require waiting a few minutes which would just break everything. You can't wait a few minutes to do a transaction on swap. The MTV would be crazy. It would just break everything right. So then the network would come together and punish those actors for that. So it gets very nuanced. But in terms of my own belief, I believe that instead of threatening validators with social slashing. If they don't include transactions, we should force them to include transactions through the protocol or we shouldn't give them plausible deniability over what the transactions are. So for example you can have privacy on the base layer or you could have transactions that are shielded and that you only know that what the transaction is once it's been mined or proposed in a block. Not while it's in the temple which is like the waiting area.

So if you do that then the validator can say, well I don't know about what transactions I'm including until they're included. So anyone that tries to tell them, you can't include these transactions in your block. Well you can tell them, but I don't know. So how am I supposed to feel throughout these transactions if it's all hidden from me? Um, and then obviously if they go into the, into the chain and then you can see what those transactions are, then it becomes at the tester level. Then you can basically say, well you can't attest to these blocks because they've got those transactions in them. That's when I believe social slashing should should come into play because that is literally what's going to lead to a fork in the network, which is not gonna be good for anyone. So we need to punish those actors and we need to get them off the network so the network can actually continue as normal.

Mm And I think, I think we we agree on the fact that social slashing should be a nuclear option. Um, and I think before I move on to the final part, I also want to kind of touch on this really important thing called flash bots and without getting way too deep in the weeds basically there is this and feel free to correct me if I'm not explaining this as well as I can, but there's just something called MTV boost, which is this software package developed by the company flash, Which allows validators to construct blocks in a certain way that uh, you know, in results results in them boosting the rewards by I think about 60%. So suffice to say most of the validators will probably use this. But the thing to focus on is that flash bots recently has mentioned that they will be ofac compliant. So in reality does this mean every validator that's using using flash bots will get social slash at some point?

Yeah, So you've explained that Well, MTV boost is basically what's referred to as kind of like the sidecar piece of software that you can run alongside your validator in order to submit your transactions to what's called a relay. Er, so Flash watches, the company MTV boosted the software and a relay er is a kind of like block builder, so to speak. That then these relays usually mind what these players are kind of like miners um and and and in the future stake is to include your transactions in a block. This is done for tv purposes. And as you said, the rewards are boosted for doing this. So I think over 90% of the ethereum network network is using this software right now. As you said, flash bots who develops MTV boost basically said that there really are, is going to be compliant, which means they're going to be censored, bring any transactions that try to hit the tornado cash addresses. So if 90% of the validators post merge are using this relay are using flash boxes relay, that means that 90% of the network will be censoring those transactions right. But in response to this, flash bots has open sourced MTV boost. So now anyone can build a real layer. So there are already two confirmed companies blocks throughout and what's the other company remember the other company's name? But they have both said that they're going to be developing their own re layers and one of them is going to include, I believe a flag or include an option that basically says you can censor or not, it's up to you and the other one is not going to include that all the other one is not going to to censor it at all.

So because MTV boost is now being open sourced, anyone can build their own own relay er and that that means there's going to be probably more than three of them, there's gonna be a lot of these re layers and you can choose which one you want to use. So that problem has mostly been alleviated, but it does bring into a view, this kind of upgrade that we've been working on for a while and ethereum called PBS or propose a builder separation along with cr list. So basically what, what PBS would do, it would allow the validator role to be split up into two different things, you would have like block builders or block uh and validators. So essentially you would have a separate set of people building blocks. So including the transactions in those blocks and sending those two, I guess the network or two validators and then the validator would be a separate set of people as well. So technically coin base with using their validators, they don't have to build the blocks, They can just be proposing to blocks, whereas the block builders could be based somewhere else and they don't have to be compliant and then they could just send their blocks to these proposals to propose to the network. So that way you get around this kind of like censorship risk here. That's coming relatively soon I think. And then as I mentioned, cr lists which are censorship resistant list is another way to ensure that you can kind of get around this censorship as well. I won't go into the details of of those. As I said, it's it's still like in research phase and it's still kind of like being developed. So it's not 100% clear on how that will actually come to the network.

But in terms of MTV boosts, um, there's the fact that they open source the code means that these other relays can be built, which means that you don't have to use the flash bots relay anymore. Well, I mean, I don't think these things alive yet. The other re layers, I think they hopefully will be alive in time for the merge, but that alleviates that kind of issue there, but it's still an issue. I mean honestly I kind of like I'm very disappointed by this because of the fact that as far as I know a fact hasn't actually said that you can't include transactions to to cash in your blocks as a block proposal or as a minor or as a relay. Er from my reading of the sanctions it basically just means that no U. S. Entity can interact with the contracts themselves right? It doesn't mean that you can't process the transactions as a as a validator or block producer. Um And I don't think that that has been I don't think even from a legal standpoint that would that would kind of like hold up but because The punishments are potentially very severe right? 30 years in prison or up to 30 years in prison or massive fines the us-based companies are being over compliant on purpose and I don't blame them for this. I mean I would probably do the same thing if I'm being totally honest. Like if I was risking going to prison for a long time I would be over compliant as well.

But from what my understanding of the sanctions themselves, they do not stipulate that block proposals validators, miners have to do this. They don't have to censor but I think they just kind of like getting ahead of that because maybe that will come next. So that's why they open sourced it so other people can build re layers and that you don't have, you don't have to use the compliant one, which is obviously better for the health of the network.

Yeah. Actually when I saw that flash pots open source their code, I thought they were so lucky to have these kind of altruists running flash bots. But the more I think about it, the more I realized it's actually economically driven because if they don't do this, then you know, it could be very detrimental the ethereum, which means, you know, they might not have a business. So at the end of the day I think the incentives kind of aligned and it kind of all worked out. Um but for the purposes of time, I think we've covered a lot of things that could go wrong with talk about contentious hard forks, which you know, I think we both see as unlikely a censorship in the chain level which you know, a short term, I think it's probably likely um in social slashing complications and all that. So let's flip the script a little bit to talk about the bull case, like why can we be excited for the theory and post merch.

Yeah. So I love to talk about this obviously and there are so many reasons to be bullish on ethereum post merge. So I mean I'll start with the most obvious one. The switch from proof of work, proof of stake means that there's going to be a massive issuance reduction happening. So the amount of issued yearly right now is over 4% under proof of work. Uh, and, and that's obviously quite high. Bitcoin is about half of that I believe right now. Um, and uh, about 2%. But, but yeah, it's quite, quite high, which means obviously there's more sell pressure from miners because they have to sell to cover costs, like they have to sell a lot of it to cover their huge electricity costs and other maintenance costs. So there's going to be about an 80 to 85% I believe issue introduction coming instantly post merge and also, as I explained before, there's not gonna be withdrawals for 6 to 12 months. So no rewards, staking rewards can be withdrawn either. The only thing that can be accessed fee Fees.

So as a validator, you will earn fees and those fees aren't new issuance, it's basically existing issuance being paid to you by people doing transactions on the network. So there will be a period of 6 to 12 months where zero new issuance will be hitting the market, zero new, it will be hitting the market. Um, and obviously that could potentially be bullish for the price because there's no cell pressure coming from those entities that have traditionally sold a lot of new eat and put downward pressure on the price. So that's the most obvious, I guess like catalyst of why you should be excited as an eat holder going into the merge. And this is why people say the merger isn't priced in, this is why people say, you know, post merge is going to trade lighter than it does because it has that massive sell pressure just evaporated overnight based. And we can, we know objectively the miners have to sell like this isn't a guess or anything like that. This isn't an assumption. We know for a fact that miners are forced to sell lots of eight to cover their costs. It's not a kind of like a low cost business, it's actually a high cost business. Um, whereas even when withdrawals are enabled for steak is they don't have to sell very much of their eat because they don't have huge electricity costs, they don't have huge hardware costs. Uh, they only really have, I mean, the only four selling for steak is, is taxes, like, and, and, and that's only for a subset of steak is not for everyone. Obviously, some of them exist in, in kind of like tax free places, but that's really the only force selling that you would need.

I mean, you could cover the electricity cost just from your normal job. Like it's not, the electricity cost is extremely minimal. It's basically just keeping a Pc on 24 7, which I think most people do if they have a pc anyway. So really like it's, it's, it's kind of like negligible over over the course of a year compared to the rewards that you get. So that's the most obvious one. Secondly, I think it's going to shift the narrative around ethereum pretty dramatically because we're going from energy intensive proof of work to green proof of stake. Now, I say those terms not as a crypto person, I said them as a quote normal or a non crypto person that we've seen it, everyone hates paperwork because of the energy usage outside of crypto. That narrative is not going away right or wrong. It doesn't matter what matters. Is the narrative, the narrative against proof of work is really, really bad. It prevents companies from running to adopt the technology, prevents companies from running to work with the technology because the user base yells at them about basically it says you're killing the planet and as I said, it doesn't matter if it's right or wrong, that is the narrative post merge ethereum no longer has to worry about that at all. Right, ethereum is now a green network under proof of stake.

It is objectively green because it no longer uses mining and we can explain that to people now whether they understand that or not is another thing, but I think that companies will understand that and that's what matters because we want more adoption of the chain developers that are maybe very against proof of work, will want to develop an ethereum now because it's proof of stake. So that's a huge kind of thing coming as well, I believe that a lot of people are actually underestimated how powerful that is because I think a lot of people are black mind to just how much the outside of crypto crowd hates mining. Like I think it's coming more into view because of N. F. T. S. Obviously a lot of people outside of crypto don't like N. F. T. S. And a big reason they don't like them is because of that proof of work mining that's going on that's using a lot of energy. Climate change is coming into focus more and more these days.

It is definitely a huge issue for people. So in my mind that is a huge catalyst for a theory and the fact that we are able to put all that to bed and basically be a green network as viewed by the outside outside of crypto kind of people there. So I think those two would be the biggest things that that I I think are the things that make me most bullish the next to I think they're more kind of like I guess secondary effects but probably make me just as bullish. So there is the staking rate right, that kind of like real yield that you can get from staking teeth which will be I think post merge including fear of a new, even though it is relatively low right now, it should be about 56%. Um And then including M. A. V. On top of that could be even higher and that's an denominated real yield right? Like the real yield is kind of like, so the inflation that's being paid out, Maybe I have to explain this to people. So the rewards of the validators are getting 5-6% right 4% of that or around 4% of that is pure block reward. So that is obviously new being issued to the network but that 4% doesn't mean that that issuance is 4%. The issuance is network wide about 0.6%.

So basically the 4% being paid to stake is is not 4% inflation at 0.6% inflation. And then then that's only being paid to a subset of because only a subset of it is being staked. So you have like an actual real yield there which I think is absolutely massive for institutions, that's going to be something that institutions look at and big players look at and be like, well I can get a real yield is denominated um And and and and I and it's variable based on the revenue but just looking at the block awards which are also variable with how much it is staked um but less volatile. Of course they're gonna, I think pile in because of that. There's going to be a lot of traditional finance firms that wrap the staking product up into a nice little package and sell it to their customers, they're going to take a cut and all that sort of stuff. So I think that is going to be a huge catalyst, it's more of a secondary thing, but it's gonna be a huge catalyst for more demand and more lockup of faith. The second thing is that emerge itself is a huge de risking event for ethereum and for people buying, there's a lot of people who probably don't want to buy it right now because if something goes wrong with the merge, maybe the price falls and maybe it kind of like leads to a lot of messiness and it's, it's maybe they consider the risk to be too high. I totally understand that totally get that if the merger goes well, which we expect it will because the last test nets went went very well, there was no major issues or anything like that, if it goes well, excuse me, sorry, there will be a massive de risking event for ethereum and it will show the world that a theorem can execute on massive roadmap items because the merge itself is actually for the foreseeable future, the biggest ethereum upgrade in its history. There is no other upgrade that is as big as complex, as many moving parts as the merge. Everything else that is coming shouting, vertical trees, statelessness, PBS let's break out before, that's all relatively much simpler than the merge. So if ethereum can execute the merge and it can do so successfully with no interruptions to the network, it will be a huge de risking event and I think we're gonna see a bunch of people by eight because of that, because the risk of the merge is now gone, it is running just fine, and that will lead to not only regular users, but also more big money institutions to pile into it as well. So those are the two primary and two secondary.

There are other reasons as well on top of that that I could go into, but maybe they're getting like too into the weeds. But I think that those things alone make for a very, very bullish case and a very bullish ethereum case going forward. And you know, I think when you're looking at things being priced in or not, it's kind of like depending on your time frame, like obviously if your time frame is short to medium term, like it's impossible to kind of like say how priced in something is I mean for example, people were saying, well the mergers and priced in when it was like $3000 to $800. And people say, well, emerges in price then now it's like, okay, well there are a million different factors that determine the price. The merge being priced and not to me is a long term thing I've been writing about this issue. Introduction that came with the merge since january 2019. So for me, for someone like me who has a decade long time horizon emerges not priced in, but if your time horizon is 3 to 6 months, well, I mean, you could argue that there is some pricing in going on right now because maybe it's a sell the news event, for example, maybe that happens because it's run up so much and then people are like, well the merge happened, let's sell the news. So it's kind of hard to know and I don't really speculate on that. As I said, my time horizon is very, very long term, like I I haven't sold any of the that I that I bought and I don't plan to sell any of my thigh steak at all. But other people are playing this as a trade and they're like, okay, well yes, the merge is potentially bullish because of the narrative aspect of it, but once it happens, you know, I'm just gonna sell my eighth because the narrative is of the merge is finished, that it's done. But then in my mind it's kind of like, okay, well you can have those sellers, but now you have no more selling from miners, you have the extremely positive narrative of a theory. And moving from workgroup steak, you have a de risking event massive de risking event that has just happened and you have a real yield increased, I think it's gonna be the only real yield encrypt or at least one that's relatively high, that to me offsets all of that short medium term noise and that's why I'm so bullish on Ethan.

My people may see me on twitter talking about it all the time and why I'm stacking it all the time is because when you take in an aggregate, there are so many reasons to be excited about not only the merge, but all the consequences of the merge after and how it all leads to kind of like the second order effects and even the third order effects in the downstream effects there as well.

Yeah, definitely. And I definitely wanted to in our interview on the more positive note because I know we spent the better half of an hour talking about everything that can go wrong. So let's get that out of the system in terms of the positivity side. Um and again, as a reminder to listeners, you know, we're not providing financial advice. You're really trying to show two sides of the argument, right? Things like to go wrong in detail and also, you know, potentially some positive catalysts as well. And I'm really excited that you decided to come on the show. So to wrap us up for people who want to continue to follow your coverage of the merch and everything happening in crypto what are the best channels for them to do this.

Yeah, I mean, just twitter is probably easier because I have links to everything on there so they can go to C zero X, which I'm sure you'll probably linked to in the, in the show notes as well. Um I not, I mean I'm kind of active on twitter, I have like my, my, my moments, but I have a daily Youtube show that I run, I basically do a 30 minute video on ethereum every day I write a newsletter as well and that's at the Daily Guay you mentioned up to. But yeah, the daily Ways where I spend most of my time, but you can find links to all that on my, on my twitter,

awesome. Well thank you so much for coming on the show. This has been really fun and I'm sure people are gonna have a lot of questions to expect to get a lot of messages.

Yeah, I'm always happy to answer questions. May be the best place to reach me is the Daily Great Discord Channel, which you can find links to on the daily way. Um and then, yeah, I'm happy to answer any questions people have, but this has been really awesome. Thanks for the great questions Jason. It's actually interesting cause I don't talk too much about the negative side of the very often and I think that it's good to talk about that because people obviously have questions. Um so I'm glad I got to spend most of most of the time talking about that and how I kind of like view it as well as I said there are negatives but there's also kind of like a positive to the negative and there's ways to to kind of work around that as well

definitely. And I think that's a great note to close this out on. So thanks for coming on again.

Thank you.

All right. That's it for this week's episode of the blockage podcast. So thank you so much for tuning in. If you enjoyed this episode, please make sure to subscribe on your favorite apps and in case you didn't know this interview is also available as a video on Youtube. And if you attack the block french on twitter this week and tell us what you liked about this episode, I'll be sure to respond to you as well. Now if you'd like to go even deeper we have a V. I. P. Tier where every week or so we write an in depth research brief or investment memo on a project and we'll have exclusive ams with myself where I answer all your questions as well. Now we already have analysts from some of the top funds and companies in crypto Ask subscribers. So if you're serious about getting an edge in crypto, head on over to the block punch dot com slash V. I.

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