Dialogue with “V God”: In the future, cryptocurrencies will fluctuate like gold and the stock market

Dialogue with “V God”: In the future, cryptocurrencies will fluctuate like gold and the stock market

Original author: Financial writer Noah Smith

Original source: Substack

Compilation: Yangz, The Way of DeFi

As we said, Ethereum, which powers most of the smart contracts and other complex structures and products in the crypto world, is undergoing an epoch-making transformation. In a process called a “merger” that is scheduled to be completed within two weeks, Ethereum is switching from proof-of-work to proof-of-stake in the way it validates transactions. This will allow it to significantly reduce energy use and carbon emissions.


In this interview, financial writer Noah Smith and Vitalik Buterin discuss proof-of-work vs. proof-of-stake, the recent crypto market crash, cryptocurrency security, decentralized governance, the “startup society,” and more.

NS: So, I think we should start with some current events. Almost all coins have crashed badly in recent months. Why do you think this happened? Will this have implications for the long-term future of the crypto/blockchain ecosystem?

VB: Actually, I’m surprised this crash didn’t happen earlier. Typically, a crypto market bubble lasts around 6-9 months after surpassing the previous top, and then quickly declines. This time around, the bull market lasted nearly a year and a half. People seem to have gotten used to this mentality that higher prices are the new normal. All along, I knew the bull market would eventually end and we would go down, but I just didn’t know when. Today, there seems to be too much reading about the ultimate cyclical dynamics that cryptocurrencies have been and may continue to be for an extended period of time. When prices go up, a lot of people say it’s the new model and the future, and when prices go down, people say it’s doomed and fundamentally flawed. Reality is always a more complex picture somewhere between the two extremes.

I do think that falling prices are good for revealing problems that were there from the start. Unsustainable business models tend to be successful in good times, and because everything is going up, so is the money people have at their disposal, so things can be temporarily propped up by the constant influx of new money. But during crashes, as we saw with Terra, this pattern no longer works. This is most true in extreme cases like high leverage and Ponzi schemes (2017 veterans will remember “BIT-CONNE-EE-ECT!!!”), but also in more subtle ways like protocol development in a bull market It is easy to sustain in the medium, but when the price collapses, it is often difficult for the newly expanded team to sustain financially. I can’t think of a good solution to these dynamics, other than my usual advice that one should remember the history of the field and take a long-term view.

NS: Well said. Now, I want to talk about interesting technical issues…but first, let’s talk a little more about the financial side. For Bitcoin – the most widely held and traded cryptocurrency – we’ve seen this cycle with repeated, fairly regular bubbles and busts, but each boom has a lower percentage return than the previous one. To me, this looks like an adoption curve – as more people hold some cryptocurrency, the financial gain from new users gets smaller and smaller. Are we going to reach a stage where Bitcoin adoption saturates and returns drop to gold-like levels?

VB: I definitely think that in the medium term future cryptocurrencies will stabilize and only be as volatile as gold or the stock market. The main question is at what level the price will stabilize. In my opinion, a lot of the early volatility was related to the uncertainty that existed: in 2011, when bitcoin fell from $31 to $2 in six months, people really didn’t know if bitcoin was just a one-off boom and then collapse forever. In 2014, this uncertainty is less than before, but it still exists. Then beyond 2017, the uncertainty shifts to whether it will gain the level of mainstream legitimacy it needs to support higher price levels, and that’s still roughly what we’re facing in 2022, although we’ve come a long way road. Over time, these existing problems will be gradually resolved. If in 2040, cryptocurrency has firmly entered several niches: it replaces gold as a store of value part, becoming a kind of “financial Linux”, an always-available alternative financial layer, and finally becoming the real thing. Backend, but doesn’t completely replace the mainstream, then it will disappear in 2042, or the chances of it taking over the world entirely will be much smaller, and individual events will have less of an impact on that possibility.

Mathematically speaking, the price of a cryptocurrency is stuck within a bounded range (between 0 and the price of all the wealth in the world) within which the cryptocurrency can only remain highly volatile until repeatedly high Buying low and selling low becomes an arbitrage strategy that mathematically almost certainly wins.

NS: Also, estimates of Bitcoin’s energy use suggest that the network’s energy consumption is fairly closely linked to Bitcoin’s price. That’s not the case for stocks, houses or gold – none of these other assets require increased energy usage to support higher prices. Will this depress the price of Bitcoin in the long term?

VB: I generally see the question of how Bitcoin’s demand and supply curves interact and how supply arises as two separate issues. The difficulty adjustment ensures that the number of bitcoins minted is fixed according to the schedule. 6.25 every 10 minutes today, 3.125 every 10 minutes starting around 2024, and so on. This timeline remains the same regardless of total mining power or price. Therefore, from an economics point of view, it does not matter whether the protocol distributes these coins to miners, core developers or not. That’s why I disagree with the idea that mining supports Bitcoin’s value to some extent.

A consensus system that consumes a lot of electricity unnecessarily is not only bad for the environment, but also requires hundreds of thousands of BTC or ETH to be issued every year. Of course, eventually, issuance will decrease to near zero, and at that point, that won’t be a problem anymore, but then Bitcoin will start to deal with another problem: how to make sure it stays safe…

And these security motives are also a really important driver of Ethereum’s move to proof-of-stake.

NS: Let’s talk about these safety issues. A lot of people seem to think that if a token is to be called a “cryptocurrency,” the protocols that govern the transfer and ownership of that token must be secure. But judging from your last answer, you seem to be more concerned about security, at least when it comes to Bitcoin. Can you explain it?

VB: Efficiency and safety are not separate issues. The question is always: how much security can you buy for a dollar a year? If the security of a system is too low, you can increase security at the cost of minting more coins, at which point you regain security by sacrificing efficiency. I mentioned some deep economic reasons in this post why proof-of-stake can buy about 20 times more security for the same cost. Basically, miner participation as proof-of-work has moderate ongoing costs and moderate entry costs, but validators as proof-of-stake have low ongoing costs and high entry costs. It turns out that your level of security is only determined by the cost of entry, because that’s what the attacker has to pay for the attack. Therefore, you will want your consensus system to have low ongoing costs and high entry costs, and PoS excels at that. Furthermore, the two also differ in their options for dealing with attacks: in PoW, you can only deal with it by changing the PoW algorithm, which would burn all existing mining hardware, for better or worse, but in PoS, you can make the protocol Only the attacker’s assets are burned, so even if the attacker pays a lot, the ecosystem can recover quickly.

In the case of Bitcoin, I am concerned for two reasons. First of all, Bitcoin’s security in the long run will come entirely from fees, and Bitcoin just hasn’t managed to get the level of fees it needs to secure what could be a multi-trillion dollar system. Bitcoin fees are around $300,000 per day and haven’t really grown in the past five years. Ethereum is far more successful in this regard because the Ethereum blockchain is designed to be more conducive to support usage and applications. Second, proof-of-work provides much less security per dollar of transaction fees than proof-of-stake, and Bitcoin migration from proof-of-work does not seem feasible. What will the future look like when there is $5 trillion in Bitcoin, but only $5 billion is needed to attack the chain? Of course, if Bitcoin does get attacked, I’d expect the political will to move to at least hybrid proof-of-stake soon, but I expect it to be a painful transition.

NS: Anyway, your argument about the security per dollar that proof-of-stake provides makes perfect sense; Bitcoin’s high energy cost is actually a high security cost. But let’s talk about the political issues that make Bitcoiners reluctant to accept any alternative to a proof-of-work system. Does the idea of ​​proof-of-stake allow large stakeholders to modify network protocols to their own advantage at the expense of small network users? Is it true that proof-of-work creates a large class of miners who are motivated to protect their ongoing income, even if these represent ongoing costs to users?

VB: There are several arguments in favor of proof-of-work. In my opinion, the strongest argument is the “no-cost simulation” problem. Basically, the idea is that in a proof-of-stake chain, an attacker could reach out to the owner of the tokens at some point many years ago and buy their old keys at a very low price (because the coins were later transferred) to an address controlled by a different key) and use those coins to create a different chain and fork from that point. A node that only knows the rules of the protocol, connecting to the network from scratch, will be unable to distinguish the actual chain from this simulated chain provided by the attacker. In PoW, on the other hand, creating such a simulated backup chain requires redoing an equal amount of proof-of-work.

In PoS, this problem is solved by adding a period of weak subjectivity: nodes need to connect to the mainnet for a period of time (e.g. once a month), nodes syncing for the first time may need to ask some source they trust (no need is centralized, can be a friend), what is a valid chain. Pledgers are required to keep their tokens locked during this time, and if anyone sees a pledger supporting two conflicting chains, they can send a transaction that “slashes” them, burning most of them or all funds. In this mode, it makes perfect sense. However, PoW proponents are not happy with periods of weak subjectivity; they prefer a purist approach where you should need nothing but protocol rules.

My take on their argument is that I don’t think the purist approach really works in practice. You need trusted sources to give you protocol rules, especially considering that you get occasional software updates to improve efficiency or fix bugs. And I think the attacks that purists fear are unrealistic: you have to convince a whole bunch of people that everyone who says they see a hash of a recent block is wrong, except the attacker Other hashes that no one has seen are correct. This doesn’t seem very feasible once you start working on the details.

There have also been attempts to claim that PoS allows large stakeholders to control the protocol, but I think these arguments are completely false. They are based on a false notion that PoW and PoS are governance mechanisms when in fact they are consensus mechanisms. All they do is help the network agree on the correct chain. A block that violates the rules of the protocol (for example, if it tries to mint more coins than the rules of the protocol allow) will not be accepted by the network, no matter how many miners or administrators support it. Governance is a completely separate process involving users freely choosing to download software, and BIPs and EIPs talking to all core developers and other bureaucracies to coordinate which changes are proposed. Interestingly, Bitcoiners (who tend to be the most pro-PoW supporters) should be well aware of this, as the Bitcoin Civil War of 2017 was a good example of how powerless miners are in the governance process. In PoS, the situation is exactly the same; minters don’t choose the rules, they just enforce them and help order transactions.

One possible argument is that PoS has stronger centralization pressures than PoW, because the digital nature of stake makes it easier to centralize, or because optimal PoW mining involves exploiting local limited-scale opportunities to obtain electricity cheaply. These are definitely things I worry about, although I think people exaggerate them. In particular, Ethereum Proof of Stake today does not yet have the ability to withdraw your ETH. This creates pressure to join the pool, because if you stake in the pool, whenever you want to get your money back, you can sell your share directly to someone else, so the pool provides liquidity in terms of Great competitive advantage. But this will no longer be the case when deposits are enabled next year. Another problem with staking today is that pool stakers cannot easily switch pools (or switch to single staking) due to the same lack of withdrawal capabilities, but next year they will. As for the decentralization of mining, let me just say that I doubt that these highly decentralized small scale mining opportunities are that meaningful. Mining is a highly industrialized activity, and the large mining farms outside the US (~35% of global hashing power) seem to have close ties to various governments, so the censorship-resistant story of PoW in the future is largely contingent. The highly democratized early proof-of-work era was good, and it was a huge help in making cryptocurrency ownership more equal, but it was unsustainable and it’s not coming back.

NS: Let’s talk about governance. To me, governance seems to have always been the most promising and interesting thing in blockchain technology – a potential way to bypass the tedious business formation process and create fluid, ad hoc economic cooperation, especially Cooperation across international borders. I’m a big fan of the science fiction novel Rainbows End, and most of the economy in the book is based on this kind of collaboration. But in practice, there seems to be a lot of problems with the way people have tried to achieve this so far – in fact, you have a series of articles critiquing rigid blockchain governance systems that try to remove all human judgment and trust. Can you briefly describe your own views on how blockchain governance should work?

VB: One of the reasons blockchains are interesting is that they share a lot of properties with a lot of things we’re already familiar with, but not quite like any of them. Like companies, blockchains have a token that you can buy in the hope that it will go up. But unlike a company, blockchain is more like a country, not relying on external agencies to resolve internal disputes. Instead, the blockchain is its own “root” of adjudication; you could even say that it tries to be a “sovereign state” (of course, blockchain is not really independent of existing nation-state infrastructure, but honestly, the big Majority states are also not truly independent). Blockchain is highly open and transparent, as democracies aspire to, and anyone can verify that the rules are being followed. Blockchains often generate what appears to be a religion, the kind of enduring and devout craze that inspires among their followers, but they often have a more complex economic component than religion. The blockchain is like an open-source software project, both in its egalitarian ideals and more importantly in the freedom to fork: if the “official” version of the protocol goes astray and violates some of the What people consider to be their core value, they can coordinate around their own chain, split from there and continue, and then they can compete with the original version for legitimacy in the court of public opinion. But blockchains are not quite the same as open-source software projects: In blockchains, where billions of dollars of capital are at risk, the cost of a split going wrong is much higher. If the cost of a fork becomes too high, as some believe, its role in governance becomes more like a nuclear deterrent than a regular part of the process that is intended to actually happen.

All of this means that the blockchain is not only a strong basic bottom layer that can be used to carry the governance logic of other applications, but also a complex thing that itself requires a new and different form of governance. We’ve seen various forms of “constitutional crises” in both Bitcoin and Ethereum, most notably the Ethereum DAO fork and the Bitcoin block size debate. In both cases, there are groups on both sides with strongly different beliefs about what value the project should embody, and both cases are ultimately resolved in a chain split. Interestingly, both Bitcoin and Ethereum eschew formal governance; there is no specific person or council or voting mechanism with an established legal right to decide which protocol changes become official. There is an All Core Devs call in the blockchain, but even there the rules for what constitutes a sufficient objection are not clearly defined, and for anything really controversial, the core devs tend to step back and listen to the community Views.

Of course, it is often argued that this quasi-anarchist design looks ugly and that it needs to be replaced by a more “proper” formal system. But they almost never succeed. It seems to me that there is actually a lot of wisdom in our current “unstructured tyranny.” In particular, it nicely captures the idea that a relatively small core group of developers should be able to independently make detailed technical decisions that don’t really affect the core vision, but for some philosophically big event like saving the coin hard fork, or switch to proof-of-stake, you need a deeper understanding.

Managing applications on the blockchain is a different challenge. Here, there is also a disagreement about how “forkable” an application is: is it like ENS, if governance collapses, you can do a fork with different rules and convince all the infrastructure to move to that fork, or something like Like the DAI stablecoin, is it simply impossible to safely fork DAI without forking everything else due to its reliance on reserves of other assets like ETH? If an application is forkable, that’s fine; it gives you extra support that you can take advantage of (like Hive does). If an application is not forkable, then you do need some fully formalized and trusted governance.

My main take on this topic for a long time is that the current popular token-driven governance technology, governance through token holder voting, has been broken and we need to move to something better, Especially something that is not so “financialized”. Token-driven governance naturally benefits the rich, and there are various long-term ways in which this governance can be easily disrupted. In one of my articles last year, I described an example of a smart contract that would allow token holders to automatically accept bribes in a very friendly way to vote from the highest bidder in a specific way:


This would turn every governance decision into an auction, resulting in only the wealthiest participants having a say. At best, this will lead to ruthless profit maximization, and at worst, it will lead to a high rate of utilization followed by a rapid project collapse.

An alternative to token holder governance that I prefer is some form of multi-stakeholder governance that tries to formally represent people, not just tokens. Optimism does this through the concept of “citizenship,” which is intended to be distributed to contributors and participants in the ecosystem and is intentionally non-transferable. But we’re still in the very early stages of figuring out how these things work.

NS: Let’s talk more about the alternative forms of human organization that blockchains might enable. I really like your unique review of Balaji Srinivasan’s The Network State. Are there any promising attempts to create a “startup society” with crypto as a component so far?

VB: I think one of the reasons this is not really happening at the moment is that there is a fundamental difference between a blockchain ecosystem and a fully entrepreneurial society. A blockchain ecosystem survives economically by persuading many people to participate, or at best indirectly. You only need a few core developers, and even they don’t need to make a lot of personal sacrifices. They can live in a “normal” city all the time, often looking like any other job. But on the other hand, the entrepreneurial society is more profound. You need people to risk moving to a specific place, and possibly an unconventional place, that comes with big downsides that can only be overcome by the upsides created by the community itself. Balaji is right that getting people to do something like this requires a deep moral narrative.

I think cryptocurrencies do have deep moral narratives, they were very important in the ecosystem from 2009-2014, when people didn’t even know if cryptocurrencies would survive, crypto people had almost no offline crypto social circles, even legal issues Not sure either. The concept of cryptocurrencies is a continuation of the big online libertarian movement, the spiritual successor to PGP, BitTorrent, Tor, Assange, Snowden, etc. It is very strong, and these strong ideals serve as ideological and moral glue , allowing people to make huge sacrifices and risks for the industry. Recently, the industry has matured, and with that maturation there has also been a degree of dilution. This dilution favors mainstream adoption, in fact, newer blockchain projects often intentionally downplay their quirks in order to achieve mass adoption goals. NFTs are extending the appeal of cryptocurrencies to groups farther from their original user base.

But at this point, this growth also makes existing blockchains too “skinny” to be a good network state. Ethereum has so many diverse user communities, many of which are deeply divided with each other (for example, there are definitely “awakened” and “anti-awakened” Ethereums, not to mention international disagreements). As we have seen recently with communities coming together to stop on-chain censorship, there is a strong, overriding consensus around securing the integrity and functioning of the chain, but these solidarities are not enough to form a nation.

Furthermore, attempts to form a native crypto community have so far failed. The problem I see is that they basically use some form of “low taxes” as their main propaganda, and while low taxes are a benefit from a personal standpoint, if your goal is to attract really interesting people, they Just a bad filter. When low taxes are the main reason to come to a community, that community is really boring, it sucks. Network effects are about quality, not just quantity. I do think there is room for some startup societies now; there is a lot of need for a brick and mortar community oriented towards certain values, providing an outlet to express those values ​​constructively, not just through a zero-sum twitter war, which combines There is a pragmatic need to escape the high cost of living in the United States and the growing, not just theoretical, authoritarianism of many other great powers. But so far, the projects I’ve seen haven’t done well.

A key point about this answer is that much of it has to do with culture; whether we have on-chain land registries, smart contract property rights, Harberger taxes, or anything else is secondary. I think the start-up society should try very different ideas from what we are used to. For example, I would try not to emphasize absolute ownership of specific land, houses, and apartments, but instead to emphasize economic alignment with the community through things like city tokens. But I think the value of innovations like this is more in the long term, and that by itself is not enough to attract people in the short term. In the beginning, the alliance with cryptocurrencies and blockchain technology was mostly symbolic, and over time it will evolve into something more practical.

NS: Another question: In that article, you disagree with Balaji’s emphasis on the importance of a single core leader for online startup societies. So, do you think your role as Ethereum founder and “spokesperson” has been overemphasized by the media and crypto enthusiasts?

VB: I wanted from the beginning that Ethereum would grow into something that my influence could gradually decrease as so many other amazing voices started to grow and express themselves. I think this has been happening for the past two years! In 2015, I basically did 80% of the “research” on Ethereum, and I even did a chunk of Python coding. In 2017, I did a lot less coding, but maybe 70% of my research work. In 2020, I’ve probably only done a third of my research and very little programming. But I’m still doing most of the “advanced theory”. But over the past two years, my work in high-level theory has also been slowly, exactly, diminished. We have a lot of great new Ethereum influencers like Polynya who has been doing a lot of thought leadership around Layer 2 scalability. The Flashbots team has been leading the entire field of MEV research. The likes of Barry Whitehat and Brian Gu have taken responsibility for zero-knowledge proof technology, while Justin and Dankrad, initially hired as researchers, are also increasingly claiming to be thought leaders.

This is a great thing! I don’t think the public is aware of this, but I expect over time they will.

NS: Okay, as always, one last question: which of the projects you’ve been working on recently excites you the most?

VB: I would say that what excites me the most is not any single project, but the whole ecosystem of many interesting ideas. This is true on a technical level, Ethereum is approaching its merger, and huge improvements in blockchain scalability, usability, and privacy are coming soon. The same is true at the level of social and political thought, many ideas about decentralized organizations, radical economic and democratic mechanisms, Internet communities, etc. are maturing at the same time. Advances in biotechnology and artificial intelligence in fields far from the frontiers of encryption have been amazing—some might say, in the latter case, a little too amazing. We’re starting to understand what the politics and technology of the 21st century will look like, and how each piece we’re working on will fit into that picture. In 2022, cryptocurrency finally feels useful; many mainstream organizations and even governments are using it as a way to send and receive payments, and I think other applications will appear soon. The future is still uncertain, but we have more ideas than ever about how this will all play out.

(The above content is excerpted and reprinted with the authorization of our partner MarsBit, link to the original text | Source: The Way of DeFi)

Disclaimer: The article only represents the author’s personal views and opinions, and does not represent the objective point and position of the block. All content and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and transactions, and the author and blocker will not be responsible for the direct and indirect losses caused by investors’ transactions.

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